SYLLABUS OUTLINE:

B. INCOME TAX
i. Definition, nature and general principles of income taxation
1. Income tax systems
a. Global
b. Schedular
c. Others

2. Features of the Philippine income tax law

3. Criteria for imposing Philippine income tax
a. Citizenship
b. Residence
c. Source
4. General principles of income taxation
5. Types of Philippines income taxes
6. Kinds of taxpayers
7. Taxable Period

INCOME
● In the broad sense, it means all wealth that flows into the taxpayer other than as a mere return
of capital.

● It includes the forms of income specifically described as gains, profits, including gains derived
from the sale or other disposition of capital assets (R.R. No. 40, Sec. 36)

● It also means cash received or its equivalent. It is the amount of money coming to a person or
corporation within a specific time whether as payment for services, interest, or profit from
investment.

● Unless otherwise specified, income means cash or its equivalent. (Hernando Conwi vs. Court of
Tax Appeals, G.R. No. 48532, August 31, 1992)

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1. INCOME TAX SYSTEMS

A. Global Treatment

It is a system where the tax treatment views indifferently the tax base and
generally treats in common all categories of taxable income of the taxpayer
without any distinction as to their type or nature, and subjects them to a single
set of fixed tax rates.

Under the global tax system, the total allowable deductions as well as personal
and additional exemptions (in the case of qualified individuals), or the total
allowable deductions only (in the case of corporations) are deducted from the
gross income to arrive at the net taxable income subject to the graduated
income tax rate (individuals), or to the corporate income tax rate (corporations).

It does not matter whether the income received by the taxpayer is classified as:
● compensation income (ex. Salaries received by employees)
● business or professional income (ex. Gain from sale of inventories
received by businessmen, professional fees of lawyers and accountants,
talent fees of actors and actresses)
● passive investment income (ex. Royalty, interest, dividend)
● capital gain (ex. Gain realized from the sale of shares of stocks of a
domestic corporation
● or other income (ex. Raffle prize)

All items of gross income, deductions, and personal and additional exemptions, if
any, are reported in one income tax return.
● Individual: Form 1701
● Corporation: Form 1702

To be filed annually, and the applicable tax rate is applied on the tax base (net
taxable income).

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 The formula for computing income tax rates under the global tax system shall be
as follows:

Gross sales ------------------------------------xxx

Less: Sales discounts ------------------------xxx
Sales returns and allowances--------xxx xxx
Net sales ----------------------------------------xxx
Less: Cost of goods sold or services ------xxx
Gross Income ----------------------------------xxx
Less: Deductions ------------------------------xxx
Personal additional
Exemptions (for individual) ---------xxx xxx

Net Taxable Income ------------------------- xxx

Income Tax due ------------------------------- xxx
Less: Creditable withholding tax ---------- xxx

Special Creditable income tax --------------xxx

Quarterly income tax paid ------------------xxx xxx
Tax still due and demandable -------------------xxx

Note: Personal additional exemptions found in Secs. 35 and 79 (D) have been
repealed by R.A 10963
Note: Special creditable income tax: 5% tax credit of a qualified contributor under
R.A 9505
The pure global tax system was enforced in the Philippines from 1913 up to December 31,1981,
with maximum graduated tax rate of 70% being applied on the net income of individuals.

B. Schedular Treatment

It is a system where the income tax treatments varies and made to depend on
the kind or category of taxable income of the taxpayer. A separate tax return or
computation is required for each type of income.

Under the schedular tax system, different types of incomes are subject to
different sets of graduated or flat income tax rates.

The applicable tax rates will depend on the classification of the taxable income

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 Example:
● Compensation income
● Capital gain
● Passive income

Here the tax base could be gross income (no deductions) or net income (gross income less
allowable tax deductions)
Separate income tax return or capital gains tax return, whichever is applicable is filed by the
recipient of income for appropriate types of income received within the prescribed dates.
Note that no income tax return is filed by the recipient of passive income subject to final
withholding tax because
the withholding agent is primarily responsible for the filing of the withholding tax return and
payment of income tax to the BIR on such passive income of the investor or depositor.
There are several ways of imposing final income tax on certain incomes subject to final
withholding tax. The three general categories of income subject to the schedular tax system
are:
a. Tax base is consideration or fair market value at the time of sale, whichever is higher:

No deduction for cost and expenses are allowed.

Example:
Sale of real property classified as capital asset ---- P900,000
Fair Market vialue of real property ------------------ P800,000

Income tax due: P900,000 x 6% ---------------------- P54,000

b. Tax base is net capital gain (ex. Gross selling price less cost or adjusted basis)

Example:
Sale of unlisted shares of stocks of ABC Corp ------------- P10,000
Cost --------------------------------------------------------------- P5,000

Income Tax due:

Selling Price ----------------------------------------------------- P10,000
Less: Cost ---------------------------------------------------------- P 5,000
Multiplied by: ------------------------------------------------------ x 15%

Capital gains tax due: ------------------------------------------- P750.00

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 c. Tax base is gross income (without any deduction)

Example:
Gross interest income on bank peso deposit ---------------- P1,000
Multiplied by: ------------------------------------------------------- 20%
Final withholding tax due ---------------------------------------- P200
Gross dividend income from domestic corp
received by resident citizen ------------------------------------P 50,000
Multiplied by: ----------------------------------------------------- 10%
Final withholding tax due --------------------------------------- P5,000

The pure schedular tax system was applied in the Philippines from January 1, 1982 to December 1,
1985.
C. Semi-Schedular or Semi-Global Treatment:

Effecttive January 1, 2008, the semi-schedular or semi-global tax system was adopted
under R.A 8424.

GLOBAL IN THE SENSE THAT SCHEDULAR IN THE SENSE THAT

All compensation income,

business or professional income ● Passive investment income
capital gain and passive income subject to final tax and capital
not subject to final tax are added gains from the sale or transfer of
together to arrive at the gross shares of stocks of a domestic
income corporation and sale or transfer
of real property remain subject to
different sets of tax rates covered
by different tax returns.

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After deducting the total
allowable deductions from the
business or professional income,
capital gain and passive income
and other income not subject to
capital gains tax and final tax, in
the case of corporations, as well
as personal and additional
exemptions, in the case of
individual taxpayers; and

The taxable income (ex. Gross

income less allowable
deductions and exemptions) is
subjected to one set of
graduated tax rates (if individual)
or regular corporate income tax
rate (if corporation)

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2. FEATURES OF THE PHILIPPINE INCOME TAX LAW

A. DIRECT TAX

Income tax is a direct tax because the tax burden is borne by the income
recipient upon whom the tax is imposed.

It is a tax demanded from the very person who, it is intended or desired, should
pay it, while” indirect tax is a tax demanded in the first instance from one person
in the expectation and intention that he can shift the burden to someone else
(CIR v. Tours Specialists Inc., 183 SCRA 402 [1990]).

B. PROGRESSIVE TAX

Income tax is a progressive tax, since the tax base increases as the tax rate
increases. It is founded on the ability to pay principle and is consistent with the

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 Constitutional provision that “Congress shall evolve a progressive system of
taxation” (Sec 28 [1], Art. III 1987 Constitution).

C. CITIZENSHIP PRINCIPLE, RESIDENTS PRINCIPLE AND SOURCE PRINCIPLE

The Philippines has adopted the most comprehensive system of imposing

income tax by adopting the citizenship principle, the residents principle, and the
source principle. Any one of the three principles is enough to justify the
imposition of income tax on the income of a resident citizen and domestic
corporation that are taxed on worldwide income.
Other types of taxpayers (income of corporation) are taxed only on their income
from sources within the Philippines beginning January 1, 1998, following the
territoriality principle.”

D. SEMI-SCHEDULAR OR SEMI-GLOBAL SYSTEM

The Philippines follows the semi-schedular or semi-global system of income

taxation, although certain passive investment incomes and capital gains from
sale of capital assets, namely: (a) shares of stock of domestic corporations; and
(b) real property are subject to final taxes at preferential tax rates.

E. A LAW OF AMERICAN ORIGIN

The Philippine income tax law is a law of American origin. Thus, the authoritative
decision of the American official charged with enforcing the U.S. Internal
Revenue Code has peculiar force and persuasive effect for the Philippines. Great
weight should be given to the construction placed upon a revenue law, whose
meaning is doubtful, by the department charged with its execution.

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3. CRITERIA IN IMPOSING INCOME TAX

A. CITIZENSHIP PRINCIPLE

A citizen of the Philippines is subject to Philippine income tax on:

(a) his worldwide income from within and without the Phiplippines, if
he resides in the Philippines, or
(b) only on his income from sources within the Philippines , if he
qualifies as a non-resident citizen from sources outside the
Philippines shall be exempt from Philippine income tax.

B. RESIDENCE PRINCIPLE

An alien was subject to Philippine income tax on his worldwide income

because of his residence in the Philippines. This principle was copied from

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 the United States income tax law, but was discarded in R.A 8424 (1998) in
view of the complexity in tax administration it brings.

Thus an Alien (whether resident or non-resident) is now liable to pay

Philippine income tax only on his income from sources within the
Philippines and is exempt from sources from outside the Philippines.

C. SOURCE PRINCIPLE

An alien or foreign corporation is subject to Philippine income tax because he

derives income from sources within the Philippines. Thus, a non-resident foreign
corporation is liable to pay Philippine income tax on his income from sources
within the Philippines, such as dividend, interest, rent or royalty, despite the fact
that he has not set foot in the Philippines.

4. GENERAL PRINCIPLESOF INCOME TAXATION

Income Taxation
Definition:
● It is a tax on all property profits arising from property, professions, trades or offices, or
as a tax on a person’s income, emoluments, profits and the like. (LG Electronics
Philippines, Inc. vs CIR, G.R. No. 165451, December 3, 2014)
Nature:
● It is a kind of tax levied upon the privilege of receiving income or profit. It is an excise
tax and not a tax on property (DIMAAMPAO, Basic Approach to Income Taxation
(2018), p.3)

Section 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided
in this Code:

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 WHO TAXABLE ON

on all income derived from sources within and without

A citizen of the Philippines residing therein
the Philippines

only on income derived from sources within the

A non-resident citizen
Philippines

only on income derived from sources within the

Philippines: Provided, That a seaman who is a citizen of
An individual citizen of the Philippines who the Philippines and who receives compensation for
is working and deriving income from abroad services rendered abroad as a member of the
as an overseas contract worker complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker

only on income derived from sources within the

An alien individual, whether a resident or Philippines;
not of the Philippines

on all income derived from sources within and without

A domestic corporation the Philippines; and

A foreign corporation, whether engaged or on income derived from sources within the Philippines.
not in trade or business in the Philippines

5. TYPES OF PHILIPPINE INCOME TAXES

1. Graduated income tax on individuals

NIRC Section 24 (A)

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(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within and without the Philippines be every individual citizen of the
Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the
Philippines.

The tax shall be computed in accordance with and at the rates established in the
following schedule:
Not over P10,000………………………5%
Over P10,000 but not over P30,000……P500+10% of the excess over P10,000
Over P30,000 but not over P70,000……P2,500+15% of the excess over P30,000
Over P70,000 but not over P140,000…P8,500+20% of the excess over P70,000
Over P140,000 but not over P250,000…P22,500+25% of the excess over P140,000
Over P250,000 but not over P500,000…P50,000+30% of the excess over P250,000
Over P500,000 ……………………………P125,000+34% of the excess over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent
(33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).

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 For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses, the same shall
be divided equally between the spouses for the purpose of determining their respective
taxable income.

2. Regular/ Normal Corporate Income Tax on Corporations (RCIT)

NIRC Section 27 (A)

TAX ON CORPORATIONS

Section 27. Rates of Income tax on Domestic Corporations. –

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22(B) of
this Code and taxable under this Title as a corporation, organized in, or existing under the laws
of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%);
and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.

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 Provided, further, That the President, upon the recommendation of the Secretary of Finance,
may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent
(15%) of gross income as defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent
to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold' shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances and discounts.

3. Minimum Corporate Income Tax on Domestic Corporations (MCIT)

NIRC Section 27 (E)

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(1) Imposition of Tax. - A minimum corporate income tax of two percent (2% of the gross
income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax
over the normal income tax as computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3) immediately succeeding
taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of
Finance is hereby authorized to suspend the imposition of the minimum corporate income tax
on any corporation which suffers losses on account of prolonged labor dispute, or because of
force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulation that shall define the terms and conditions
under which he may suspend the imposition of the minimum corporate income tax in a
meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax
provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the merchandise to bring them to their present
location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
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 In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly
rendering the service and
(B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks,
'cost of services' shall include interest expense.

4. Special Income tax on certain corporations

(B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions

and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided, that if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total
gross income derived by such educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means
any trade, business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'Proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as
the case may be, in accordance with existing laws and regulations.
5. Capital Gains Tax on sale of unlisted share of stocks of a domestic corporatoion classified as
capital asset

NIRC Section 24 ( C )

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions
of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale, barter, exchange or

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 other disposition of shares of stock in a domestic corporation, except shares sold, or disposed
of through the stock exchange.
Not over P100,000……………………………5%
On any amount in excess of P100,000……10%

6. CGT on sale exchange of real property in the Philippines classified as capital asset

NIRC Section 24 (D)

(D) Capital Gains from Sale of Real Property.

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of conditional sales,
by individuals, including estates and trusts: Provided, That the tax liability, if any, on
gains from sales or other dispositions of real property to the government or any of
its political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24 (A) or under this
Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30) days from the date of sale
or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years: Provided, finally, that if there is no full

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 utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax.
For this purpose, the gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which the unutilized amount
bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon.

7. Final withholding tax

NIRC Sec. 28 B, 5, b

b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is
hereby imposed on the amount of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject
to the condition that the country in which the nonresident foreign corporation is domiciled,
shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed
to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen
percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between the regular income tax of thirty-five
percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in
1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%)
tax on dividends as provided in this subparagraph;

8. Final withholding tax on income payments made to non residents (individual on corporation)

Subject to the condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997,
nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent
(17%) thereafter, which represents the difference between the regular income tax of thirty-five
percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in

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 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%)
tax on dividends as provided in this subparagraph

9. Fringe Benefit Tax

NIRC Section 33

A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-
three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1,
2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein) by the
employer, whether an individual or a corporation (unless the fringe benefit is required by the
nature of, or necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The tax herein imposed is
payable by the employer which tax shall be paid in the same manner as provided for under
Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by sixty-six percent
(66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-
eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe
benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25
shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up
value of the fringe benefit shall be determined by dividing the actual monetary value of the
fringe benefit by the difference between one hundred percent (100%) and the applicable rates
of income tax under Subsections (B), (C), (D), and (E) of Section 25.

(B) Fringe Benefit defined. - For purposes of this Section, the term 'fringe benefit' means any
good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employees as defined herein) such as, but not limited
to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;

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 (5) Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the
provisions of this Section, taking into account the peculiar nature and special need of the trade,
business or profession of the employer.

___________________________________________________________________
10. Branch Profit remittance Tax

NIRC Section 28

Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%)

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 based on the total profits applied or earmarked for remittance without any deduction for the
tax component thereof
(except those activities which are registered with the Philippine Economic Zone Authority)
provided, that interests, dividends, rents, royalties, including remuneration for technical
services, salaries, wages premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the conduct of its trade or
business in the Philippines.

11. Imposition of Improperly Accumulated Earnings Tax

NIRC Setion 29

(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for
each taxable year on the improperly accumulated taxable income of each corporation
described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent
(10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax.
(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of avoiding
the income tax with respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed.

(2) Exceptions. - The improperly accumulated earnings tax as provided for under this
Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.

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12. Gross income tax

NIRC Section 29

The option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.

For purposes of this Section, the term 'gross income' derived from business shall be equivalent
to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold' shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold, including insurance while the goods are in transit.

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

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances and discounts.
6. KINDS OF TAXPAYERS:
A. INDIVIDUALS

A1. Citizens
a. Resident Citizens
b. Non-resident Citizens

A2. Aliens

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 a. Resident Aliens
b. Non-resident aliens

b1. Engaged in trade or business in the Philippines

b2. Not engaged in trade or business in the Philippines
A3. Estates and Trusts
a. Revocable Trust
b. Irrevocable trust

A1 . CITIZENS
The following are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution
2. Those whose Fathers or Mothers are citizens of the Philippines;
3. Those born before January 17, 1973 (effectivity of the 1973 Constitution ), of Filipino
mothers, who elect Philippine citizenship upon reaching the age of majority; and
4. Those who are naturalized in accordance with law (Constitution, Article IV, Section 1)
5. Citizens of the Philippines who marry aliens shall retain their citizenship unless by
their act or omission they are deemed, under the law to have renounced it
(Constitution, Article IV, Section 4)

a. Resident Citizen

A resident citizen is a citizen of the Philippines who stayed in the Philippines or stayed
outside the Philippines for less than 183 days during the taxable year (Valencia & Roxas,
Income Taxation, supra at 583).
Residence for the purpose of taxation refers to the permanent home, the place to
which, whenever absent for business or pleasure, one intends to return to (Saludo Jr. v.
American Express International, Inc., G.R No. 159507, April 19, 2006)

b. Non-resident Citizen

The following are considered as non-resident citizens:

1. A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad
most of the time during the taxable year.

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 2. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact that his physical presence abroad with a definite
intention to reside therein;
3. 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;
4. A citizen who has been previously considered as a non-resident citizen and
who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines.

(NIRC, Section 22 E)

TYPES OF NON-RESIDENT CITIZENS:

1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa as such has been secured

2. Permanent employee - one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis

3. Contract worker – one who leaves the Philippines on account of a contract of

employment which is renewed from time to time within or during the taxable year
under such circumstances as to require him to be physically present abroad most of
the time during the taxable year

“Most of the Time” = means at least 183 (365/2) days (R.R No. 1-79, Section
2)
Note: His presence abroad, however, need not be continuous (Ingles
Reviewer, 39)

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 Note: Citizens who work outside of the Philippines for at least 183 days in
a taxable year due to a contract of employment with a Philippine employer
are not considered non-resident citizens because they are considered
employed abroad.

Other concepts:
Immigrants and employees of a foreign entity vs. contract workers
Immigrants and employees of a
Contract workers
foreign entity
Treated as non-resident citizens from Must be physically present abroad “most of
the time they depart from the the time” during the calendar year to qualify
Philippines as a non-resident citizen

One tax status vs. dual tax status of individuals

One tax status Dual tax status

This is when a person is treated as both

resident and non-resident citizen during the
calendar year. This occurs if:

This is when a citizen has only one

tax status during the calendar year, a. At the beginning of the year, he
either as: derives compensation and/or
business or professional income
within the Philippines
a. Resident citizen or b. And sometime during the same
b. Non-resident Citizen year he departs from the
Philippines as an immigrant,
permanent worker, or qualified
non-resident citizen

or vice-versa

Citizens vs. alien individual employees of foreign embassies and international organizations in
the Philippines

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 Resident citizens who work for a foreign
Alien individual employees of foreign
embassy or for an aid agency of foreign
embassies and international organizations in
governments/international organization in
the Philippines
the Philippines
Still subject to Philippine Income Tax Exempt from Philippine income tax based on
the international agreements entered into by
the Philippines with said international
Rationale: organizations.

General Rule: Resident citizens are taxed on

worldwide income

Exception: unless there is a law that expressly

grants such tax exemption.

Overseas Contract Worker (OCW)

Filipino Citizens employed in foreign countries, commonly referred to as OFW’s, who are
physically present in a foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and not borne by any entity or person
in the Philippines.
To be considered as an OCW or OFW, they must be:
1. Duly registered as such with the Philippine Overseas Employment Administration
(POEA)
2. With a valid Overseas Employment Certificate (OEC) (Rev. REg. No. 1-2011; Sec. 23
[C])

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A1 . ALIENS
The Philippines exercises limited taxation rights over income of aliens derived from economic
activities done within the Philippines.
The “country source” exercises its taxing rights due to the territorial link on the income.

a. Resident Aliens

A resident alien is an individual whose residence is within the Philippines and who is not
a citizen thereof (NIRC, Section 22, [F]).

An alien may be considered a resident of the Philippines for income tax purposes if:
1. He is not a mere transient or sojourner (R.R No. 02-40, Section 5).

Whether he is a transient or not is determined by his intentions with

regards to the length and nature of his stay. A mere floating intention,
indefinite as to time to return to another country, is not sufficient to
constitute him a transient.

2. He has no definite intention as to his stay in the Philippines; or

3. His purpose is of such a nature that an extended stay 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. (BIR DA-ITAD Ruling No. 153-06,
December 12,2006)

There is an intention on the part of the alien to stay in the Philippines indefinitely given
the fact that:
a. He invested in the Philippines and served as a President of the company
b. He acquired a property and is actually present most of the time in the
Philippines; and
c. He registered as a taxpayer with the BIR.

(BIR Ruling No. 401-2016, November 21,2016)

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 Loss of Residence
An alien loses his residence status if he actually leaves the Philippines and
abandons his residency thereof without any intention of returning. (R.R
No. 2, Section 6)

b. Non-resident aliens

A non-resident alien is an individual whose residence is within the Philippines and who is
not a citizen thereof (NIRC, Section 22 [G]).

A non-resident alien individual may be:

b1. Engaged in trade or business in the Philippines
If the aggregate period of stay in the Philippines exceeds 180 days for each calendar
year.
AS such an alien engaged in trade or business here in the Philippines is taxed on his
income from sources within the Philippines at the graduated income tax rate of zero
percent to 35% (formerly 5%-32%), while his passive investment incomes shall
generally be subject to 20% final tax (NIRC,Section 25 [B]).
b2. Not engaged in trade or business in the Philippines
If the aggregate period of stay here in the Philippines does not exceed 180 days for
each calendar year (NIRC, Section 25, Par (A)(1))

Other Concepts:
Employees entitled to preferential tax rates
Certain ALIEN individuals who are employed in the Philippines are entitled to the 15%
preferential income tax rate on their gross compensation income from sources within the
Philippines.

These employees entitled to the preferential tax rate are the alien individuals employed by:

a. Regional or area headquarters and regional operating headquarters of multinational

companies in the Philippines (NIRC, Section 25[C])

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 b. Offshore banking units established in the Philippines (NIRC, Section 25 [D]); and

c. Forign service-contractor or sub-contractor engaged in petroleum operations in the

Philippines (NIRC, Section 25 [D]).

A1 . ESTATES AND TRUSTS

Trust is a legal arrangement

whereby the owner of property (the
trustor) transfers ownership to a
person (the trustee) who is to hold
and control the property pursuant
An estate is created by operation of to the owner’s instructions, for the
law, when an individual dies, leaving benefit of a designated person(s)
properties to his compulsory or other (the beneficiaries).
heirs

Legal title to the trust property is

vested in the trustee, while
equitable title belongs to the
beneficiaries.

Taxable estates and trusts are taxed in the same manner and on the same basis as in the
case of an individual, except that:
a. The amount of income for the year which is to be distributed
currently by the fiduciary to the beneficiaries, and the amount of
the income collected by a guardian of an infant which is to be held
or distributed as the court may direct, shall be allowed as
deduction in computing taxable income of the estate or trust, but
the amount so allowed as deduction shall be included in
computing the taxable income of the beneficiaries, whether
distributed to them or not

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 b. In the case of income received by estates of deceased persons
during the period of administration or settlements of the estate,
and in the case of income which, in the discretion of the fiduciary,
may be either distributed to the beneficiary or accumulated, there
shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of
the estate or trust for its taxable year , which is properly paid or
credited during such year to any legatee, heir or beneficiary, but
the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir, or beneficiary
(NIRC, Section 61).

However they are entitled only to personal exemption equivalent

to a single individual in the amount of P20,000.00 (NIRC, Section
6).

a. Revocable trust b. Irrevocable Trust

The income of a trust will be taxed to the The income of the trust is taxable to
trustor, where the trust executed by him is the trustee, where the trust is
revocable (NIRC, Section 63) irrevocable (NIRC, Section 60-61).

Other Concepts:

CO-OWNERSHIP
There is co-ownership whenever the ownership of an undivided thing or right belongs to
different persons.
For income tax purposes , the individual co-owners in a co-ownership report their share of the
income from the property owned in common by them in their individual tax returns for the
year, and the co-ownership is not considered as a separate taxable entity or a corporation as
defined in section 22 B of the 1997 Tax Code.

Co-ownership Due to Death of a Decedent

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 Before partition of property After partition of property
In general co-ownerships are not treated as Should the co-owners invest the income of the
separate taxable entities. co-ownership in any income-producing
properties after the extrajudicial partition of
the estate, they would be constituting
The income of a co-ownership arising from the themselves into an unregistered partnership
death of the decedent is not subject to income which is consequently subject to income tax as
tax if the activities of the co-owners are a corporation.
limited to:

The co-ownership is automatically converted

a. Preservation of the property and into an unregistered partnership the moment
b. The collection of the income therefrom the said common properties and/or incomes
derived therefrom are used as a common fund
with intent to produce profits for the heirs in
In which case, each co-owner is taxed proportion to their respective shares in the
individually on his distributive share. Before inheritance as determined in a project
the partition and distribution of the estate of partition either duly executed in an
the deceased, all the income thereof belongs extrajudicial settlement or approved by the
commonly to all the heirs. court in the corresponding testate or intestate
proceeding.

From the moment of such partition, the heirs

are already entitled to their respective definite
shares of the estate and the income thereof,
for each of them to manage and dispose of
the property as exclusively his own, without
the intervention of the other heirs.
Accordingly, the heir becomes liable
individually for all taxes in connection with his
co-heirs.

If after such partition, he allows his shares to

be held in common with his co-heirs under a
single management to be used with the intent
of making profit thereby in proportion to his
share, there can be no doubt that, even if no
document or instrument were executed for

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 the purpose, at least an unregistered
partnership is formed for tax purposes.

(Ona v. CIR , 45 SCRA 74 [1972]).

6. KINDS OF TAXPAYERS:
B. CORPORATIONS

B1. Domestic Corporations

B2. Foreign Corporations
a. Resident Foreign Corporations
b. Non-resident Foreign Corporations

B3. Partnerships
a. Taxable Partnership

b. Exempt Partnership

b1. General professional partnership

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 b2. Joint venture or consortium undertaking construction activity, or
engaged in petroleum operations with operating contract with the
government

B1 . DOMESTIC CORPORATIONS
The term “domestic” when applied to a corporation means created or organized in the
Philippines or under its laws (NIRC, Section 22 [C]).
The branches of a domestic corporation, whether located in the Philippines or abroad, are
merely extensions of the local head office. Accordingly their incomes in the Philippines and
abroad of the head office and foreign branches are to be reported by the Philippine head office
in its corporation income tax return, and the branch profits remitted by its foreign branches to
the Philippine head office shall no longer be subject to the branch profit remittance tax
because:
a. The income of the foreign branch had already been subjected to Philippine income
tax, and
b. The branch profit remittance tax applies only to Philippine branches of foreign
corporations operating in the customs territory and exempts from the tax profits
remitted by the Philippine branch operating in special economic zones to their head
offices abroad.

B2 . FOREIGN CORPORATIONS
The term “foreign” when applied to a corporation means a corporation which is not domestic
(NIRC, Section 22 [D])
Foreign corporations are further divided into two classifications:
a. Resident foreign corporation
It is a foreign corporation engaged in trade or business within the Philippines
(NIRC, Section 22 [H]).

Types of Resident Corporations:

Under the 1997 Tax Code, there are two general types of resident foreign
corporations:
1. Those that do not derive any income from sources within the
Philippines because they are not engaged in trade or businesss and
thus exempt from income tax; and

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 2. Those that are engaged in trade or business in the Philippines and
thus subject to income tax at:

2.1 preferential tax rate udner the Tax Code or special law like R.A
7916 (PEZA law) and other special economic zone laws, and R.A
7227 (BCDA law), as amended, or
2.2 Normal Corporate income tax rate or minimum corporate income
tax ratem whichever is higher.

b. Non-resident foreign corporation

It is a foreign corporation not engaged in trade or business within the

Philippines. (NIRC, 22[I]).

Test in determining the Status of Corporations

“Law of incorporation test”
The Philippines adopted this type of test, under which the corporation is
considered:
a. As a domestic corporation, if it is organized or created in accordance with or
under the laws of the Philippines
b. As a foreign corporation, if it is organized or created in accordance with or
under the laws of a foreign country.

Note: The nationality of the owners of the corporation has no

bearing in ascertaining the status or residence of corporations, for
income tax purposes.

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 “Doing business”
In order that a foreign corporation may be regarded as doing business within a
State, there must continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary
character. (CIR v. British Overseas Airways Corporation, 149 SCRA 395 [1987]).

B1 . PARTNERSHIPS
Partnership
It is a contract whereby two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves (Civil Code, Article 1767).

a. Taxable Partnership

Partnerships in general are taxable as corporations.

(Except those considered exempt) Section 22 (B) of the 1997 Tax Code considers any
other type of partnership (described here as “business partnership”) as a corporation
subject to income tax.

Indeed, Section 24 (B) of the 1997 Tax Code places a business partnership and an
ordinary corporation on a similar footing, by imposing the 10% dividend tax on the cash
and/or property dividends actually or constructively received by an individual
stockholder of a corporation, or in the distributable net income after tax of a
partnership of which he is a partner, except a general professional partnership, received
by a partner.

b. Exempt Partnership

General professional partnership and an unincorporated joint venture or consortium

engaged in construction or energy-related projects, which in reality are also
partnerships, are not subject to corporate income tax.

b1. General Professional Partnership (GPP)

Is one formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade
or business (NIRC, Section 22[B]).

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 Persons engaging in business as partners in a GPP shall be liable only for income
tax in their separate and individual capacities. Each partner shall report as gross
income his distributive share, actually or constructively received, in the net
income of the partnership (NIRC, Section 26).

b2. Joint venture or consortium undertaking construction activity, or engaged in

petroleum operations with operating contract with the government

Joint Ventures

Elements of a Joint Venture

To constitute a “joint venture,” certain factors are essential:

1. Each party to the venture must make a contribution, not necessarily of

capital, but by way of services, skill, knowledge, material, or money;
2. profits must be shared among the parties
3. There must be a joint proprietary interest and right of mutual control over
the subject mattr of the enterprise; and
4. Usually, there is a single business transaction

(BIR Ruling No. 317-92).

Exempt joint venture or consortium is an unincorporated “joint venture” or consortium
engaged in construction activity or energy-related project – The term “joint venture or
consortium,” referred to in section 22 (B) of the 1997 Tax Code that is not considered as
a separate taxable entity, means an unincorporated entity formed by two (2) or more
persons (individuals, partnerships, or corporations) for the purpose of undertaking a
construction project (P.D. 929, May 34, 1976), or engaging in petroleum and other
energy operations with operating contract with the government.
The term “joint venture” was clarified by the Secretary of Finance when he issued
Revenue Regulations No. 10-2012 on June 1, 2012. In the said Regulation, the joint
venture that is not taxable as a corporation must comply with the following requisites:
a. The joint venture or consortium is formed for the purpose of undertaking
construction activity
b. It involves jointing or pooling of resources by licensed local contractor (ex.
Licensed as a general contractor by the Philippines Contractors Accreditation
Board (PCAB) of the Department of Trade and Industry;
c. The local contractors are engaged in construction business; and
d. The joint venture itself is licensed as such by PCAB.

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 If all of the above requisites are not met, the joint venture becomes liable to the
corporate income tax.
Two Elements in order for the joint venture or consortium to NOT be considered as a
separate taxable entity:
a. Unincorporated entity (or entity not registered with the Securities Exchange
Commission)
b. For the purpose of undertaking construction or energy-related project

7. TAXABLE PERIOD
A. CALENDAR PERIOD
This refers to an accounting period which starts from January 1 to December 31. Taxable
income shall be computed on the basis of the calendar year if the:
(a) Taxpayer’s accounting period is other than the fiscal year;
(b) Taxpayer has no annual accounting period.
(c) Taxpayer does not keep books; or
(d) Taxpayer is an individual (NIRC, Sec. 43);

B. FISCAL PERIOD
This refers to an accounting period of 12 months ending on the last day of any month
other than December (NIRC Sec. 22 par. (Q)) which are allowed only for corporations
C. SHORT PERIOD

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This refers to an accounting period where income is computed in the heirs of a period
less than 12 month when the:
(a) Taxpayer, other than an individual, with the approval of the commissioner, changes
his accounting period from fiscal year to calendar year, or from calendar year to
fiscal year, or from one fiscal year to another (NIRC, Sec. 47);

(b) Taxpayer dies (applicable to the descendants final personal income tax covering the
beginning of the taxable year until his death, the income of his estate, and estate tax
return) (NIRC, Sec. 90 par (A));

(c) Corporation is newly organized;

(d) Corporation is dissolved; and

(e) Tax period is terminated by the Commissioner by authority of law; (NIRC, Sec 6, par
D)).

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