Income Tax: Nature; Criteria in Imposing 

Nature: Excise Tax

Criteria in Imposing PH Income Tax: 

 Citizenship/Nationality 
 Residence
 Source of Income 

Types of PH Income Tax 

 Individual Taxes 
o Graduated income tax and fixed tax on gross sales or receipts for individuals
o Fringe benefits tax on fringe benefits of supervisory or managerial employees
 Corporate Taxes
o Normal corporate income tax (NCIT) on corporations
o Minimum corporate income tax (MCIT) on corporations
o Special income tax (SIT) on certain corporations
o Branch profit remittance tax (BPRT)
o Tax on improperly accumulated earnings of corporations (IAET)
 Capital gains tax (CGT) on: 
o sale or exchange of shares of stock of a domestic corporation classified as capital assets
o sale or exchange of real property classified as a capital asset
 Final withholding tax 
o on certain passive investment income paid to residents
o on income payments made to non-residents

Different Tax Systems: 

 Global Tax System - 
o it did not matter whether the income received by the taxpayer is classified as
compensation income, business or professional income, passive investment income,
capital gain, or other income. 
o All items of gross income, deductions, and personal and additional exemptions, if any,
are reported in one income tax return, and one set of tax rates are applied on the tax
base.
 Schedule Tax System 
o Different types of incomes are subject to different sets of graduated or flat income tax
rates. 
o basis could be gross income or net income. 
o Separate income tax returns are filed by the recipient of income for the particular types
of income received.
 Semi-schedular or Semi-global Tax System
 o All compensation income, business or professional income, capital gain and passive
income not subject to final tax, and other income are added together to arrive at the
gross income and after deducting the sum of allowable deductions, the taxable income
is subjected to one set of graduated tax rates or normal corporate income tax. With
respect to such income the computation is global.
o For those other income not mentioned above, they remain subject to different sets of
tax rates and covered by different returns.
o The Philippines, under the NIRC, follows a semi-schedular and semi-global tax system.

General Situs Rules (Sec. 23, NIRC)

1. A resident citizen of the Philippines is taxable on all income derived from sources within and
without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the Philippines
3. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines: 
a. Provided, That a seaman shall be treated as an overseas contract worker if he is a: 
(1) citizen of the Philippines; and 
(2) receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable
only on income derived from sources within the Philippines

Taxable Period: Types; GR; XPN

Types: 

 Calendar Year
 Fiscal Year
  Short Period - Accounting period which starts after the first month of the tax year or ends before
the last month of the tax year (less than 12 months). Instances whereby short accounting period
arises: 
o When a corporation is newly organized
o When a coprpration is dissolved
o When a corporation changes accounting period
o When the taxpayer dies

GR: taxable income shall be computed based on the taaxpayer’s annual accounting period

XPN: based on calendar year only if: 

 annual accounting period is other than a fiscal year

 no annual accounting period
 Does not keep books of accounts
 An individual 

Kinds of Taxpayers 
 Individuals
o RC
o NRC
o RA
o NRA-ETB
o NRA-NETB
o Special Class: MWE
 Corporations
o Domestic
o RFC
o NRFC
 Estates and Trusts
 Partnerships 
o Gen. Partnership
o Gen. Professional Partnership (GPP)

Who are Non-Resident Citizens (NRC) 

Under Sec. 22(e) 

 PH citizen who establishes to the satisfaction of the CIR the fact of his physical presence abroad
with a definite intention to reside therein. 
 PH citizen who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis. 
 PH citizen 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 (183 DAYS). 
  PH citizen previously considered as non-resident citizen and who arrives during the taxable year
to reside permanently in the Philippines (Treated as NRC with respect to his income derived
from sources abroad until his arrival in the Philippines)

Resident Alien 
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident for
income tax purposes. 

 No/Indefinite Intention as to his stay — A mere floating intention indefinite as to time, to return
to another country is not sufficient to constitute him a transient.
 With Definite Intention but such cannot be promptly accomplished — thus the alien makes his
home temporarily in the Philippines

Non-resident Alien ETB and NETB

Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its
nature may be promptly accomplished, is a transien

Exception: Definite Intention but such cannot be promptly accomplished; 

 Engaged in trade or business within the Philippines - If the aggregate period of his stay in the
Philippines is more than 180 days during any calendar year.
 Not engaged in trade or business within the Philippines - If the aggregate period of his stay in
the Philippines does not exceed 180 days.

SPECIAL CLASS EMPLOYEES: Minimum Wage Earner (Who)

 worker in the private sector paid the statutory minimum wage; or
 employee in the public sector with compensation income not more than the statutory minimum
wage in the non-agricultural sector where he/she is assigned. [Sec. 22 (HH), NIRC]

Corporations (includes/excludes)
Includes 
 all types of corporations, 
 partnerships (no matter how created or organized), 
 joint stock companies, 
 joint accounts (cuentas en participacion), 
 associations, or 
 insurance companies, whether or not registered with the SEC.

Excludes 
 general professional partnerships (GPP); 
 joint venture or consortium formed for the purpose of 
 o undertaking construction projects or 
o engaging in petroleum, coal, geothermal and other energy operations 
pursuant to an operating or consortium agreement under a service contract with the
government. [Sec. 22 (B), NIRC]

Domestic corporations (test)

A corporation created and organized in the Philippines or under its laws (the law of incorporation test).
[Sec. 22 (C), NIRC]

Foreign corporations (RFC/NRFC)

A corporation which is not domestic. [Sec. 22 (D), NIRC]

 Resident foreign corporations – Foreign corporation engaged in trade or business within the
Philippines. [Sec. 22 (H), NIRC]
 Non-resident foreign corporations – Foreign corporation not engaged in trade or business within
the Philippines. [Sec. 22 (I), NIRC]

DOING BUSINESS 
The term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object of the business
organization

Estates and Trusts (Tax Imposed, Exceptions, How computed)

Income tax imposed on individuals shall apply to income of estates or of any kind of property held in
trust. [Sec. 60 (A), NIRC]

Exceptions: 
 Employee’s trust [Sec. 60, NIRC];
 Revocable trusts [Sec. 63, NIRC];
 Income for Benefit of Grantor [Sec. 64, NIRC] 

Taxable income of the estate or trust is computed in the same manner as an individual, subject to
certain special rules [Sec 61, NIRC]

General Professional Partnerships (GPP); who are taxed

A partnership 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. [Sec. 22 (B), NIRC]
The partners themselves, not the partnership, shall be liable 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. [Sec. 26, NIRC]

Joint venture and consortium (Essential factors) 

 There is a single business transaction.
 Each party must make a contribution, not necessarily of capital but by way of services, skill,
knowledge, material or money;
 Profits must be shared among the parties;
 There must be a joint proprietary interest and right of mutual control over the subject matter of
the enterprise;

Co-ownership (when NOT taxed; who are taxed)

Co-ownerships are not subject to tax if the activities of the co-owners are limited to the preservation of
the property and the collection of the income therefrom, in which case each co-owner is taxed
individually on his distributive share in the income of the coownership. 

Requisites for income to be taxable

1. There is INCOME, gain or profit
2. RECEIVED or REALIZED during the taxable year
3. NOT EXEMPT from income tax

Realization of Income; Test; Accounting method

Income is realized when there is a gain or profit derived from a closed and completed transaction. 

Income realized pertains to the accrual basis of accounting. It is the right to receive and not the actual
receipt that determines the inclusion of the amount in gross income

Test: No taxable income until there is a separation from capital of something of exchangeable value,
thereby supplying the realization or transmutation which would result in the receipt of income

Actual v. Constructive receipt; As if Theory

1. Actual receipt – Income is actually reduced to possession. The realization of gain may take the form of
actual receipt of cash.

2. Constructive receipt – An income is considered constructively received when it is credited to the

account of, or segregated in favor of a person. The person may withdraw the said account credited in his
favor anytime without any substantial limitations or conditions upon which payment or enjoyment is to
be made or exercised.
The “As If” Theory of Constructive Income is designed to prevent a cash basis taxpayer to delay
reporting of income. It also presumes the existence of income on transactions supposedly not subject to
tax.

Tests in Determining Whether Income is Earned for Tax Purposes

1. Realization Test
2. Claim of Right Doctrine
3. Economic Benefit Test, Doctrine of Proprietary Interest
4. Severance Test
5. All Events Test

Claim of Right Doctrine

a.k.a. Doctrine of Ownership, command, or control

In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as its own
under the claim of right that the payments are made absolutely and not contingently, such amounts are
included in the taxpayer's income, even though the right to the income has not been perfected at that
time. It does not matter that the taxpayer's title to the property is in dispute and that the property may
later be recovered from the taxpayer. [CIR v Meralco, C.T.A. EB No. 773 (2012)]

Economic Benefit Test, Doctrine of Proprietary Interest

Any economic benefit to the employee that increases his net worth, whatever may have been the mode
by which it is effected, is taxable. Thus, in stock options, the difference between the fair market value of
the shares at the time the option is exercised and the option price constitutes additional compensation
income to the employee at the time of exercise (not upon the grant or vesting of the right).

All Events Test

Under the accrual method of accounting, expenses are deductible in the taxable year in which: 
 all events have occurred which determine the liability; and 
 the amount of liability can be determined with reasonable accuracy.

“All events test” requires fixing 

 a right to income or liability to pay; and 
 the availability of reasonably accurate determination of such income or liability. 

Classification of Income (4)

 Compensation Income 
 Profession or Business Income 
 Passive Income 
  Capital Gain 

Gross Income; list NOT exclusive  

The total income of a taxpayer subject to tax. It includes the gains, profits, and income derived from
whatever source, whether legal or illegal. (Sec. 32(A), NIRC) 

It does not include income excluded by law, or which are exempt from income tax. [Sec. 32(B), NIRC]

 Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
 Gross income derived from the conduct of trade or business or the exercise of a profession;
 Gains derived from dealings in property;
 Partner's distributive share from the net income of the general professional partnership.
 (Passive Income) DRIRAPP 
o Dividends;
o Royalties;
o Interests;
o Rents;
o Annuities;
o Prizes and winnings;
o Pensions; and

The list here is NOT exclusive. The definition of gross income is broad enough to include all passive
income subject to specific rates or final taxes. However, since these passive incomes are already subject
to different rates and taxed finally at source, they are no longer included in the computation of gross
income which determines taxable income. 

Formula for Taxable Income

Gross Receipts 
Less: Cost of Goods Sold/Services 
Less: Exclusions
---------------------------
Gross Income 
Less: Allowable Deductions
Less: Exemptions
--------------------------
Net Income/Taxable Income 

Compensation Income: When Taxable; NOT  included

General Rule: every form of compensation income is taxable regardless of how it is earned, by whom it
is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it
is received. 

Exception: The term wages does NOT include remuneration paid: CADF

 For agricultural labor paid entirely in products of the farm where the labor is performed
 For domestic service in a private home
 For casual labor not in the course of the employer's trade or business
 For services by a citizen or resident of the Philippines for a foreign government or an int’l
organization. [Sec. 78(A), NIRC]

Remuneration for domestic services; furnished to an employee; 

remuneration paid for services of a household nature performed by an employee in or about the private
home of the person whom he is employed. 

The services of household personnel furnished to an employee (except rank and file employees) by an
employer shall be subject to the fringe benefits tax pursuant to Sec. 33 of the Tax Code. 

Remuneration paid for services performed as an employee of a foreign

government or an international organization (Who are they)
includes not only remuneration paid for services performed by ambassadors, ministers and other
diplomatic officers and employees but also remuneration paid for services performed as consular or
other officer or employee of a foreign government or as a non-diplomatic representative of such
government.

Income of MWEs (When Taxable and When NOT)

NOT TAXABLE: Compensation income including HONH
 overtime pay, 
 holiday pay, 
 night shift differential pay, and 
 hazard pay, 
earned by MINIMUM WAGE EARNERS (MWE) who has no other returnable income are 

XPN: if he receives/earns 
 additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of P90,000 3, 
 taxable allowance, and 
 other taxable income  such as income from the conduct of trade, business, or practice of
profession, 
o except income subject to final tax
This rule, notwithstanding, the SMW + HONH shall still be exempt from withholding tax.

FORMS OF COMPENSATION AND HOW THEY ARE ASSESSED

1. Cash – If compensation is paid in cash, the full amount received is the measure of the income subject
to tax.

2. Medium other than money – If services are paid for in a medium other than money (e.g., shares of
stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is
the amount to be included as compensation subject to tax. If the services are rendered at a stipulated
price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the
remuneration received.

Taxability of Living quarters or meals 

General Rule: The value to the employee of the living quarters and meals given by the employer shall be
added to his compensation subject to withholding. 

Exception: If living quarters/meals are furnished to an employee for the convenience of the employer,
the value need NOT be included as part of compensation income.

De Minimis Benefits; Rule; Exception; Tax treatment by employer

Definition: Facilities and privileges of a relatively small value furnished or offered by an employer to his
employees 

General Rule: NOT considered as compensation subject to income tax and therefore withholding tax if
such facilities are offered or furnished by the employer merely as means of promoting the health,
goodwill, contentment, or efficiency of his employees.

Exception: the excess of the ‘de minimis’ benefits over their respective ceilings prescribed by these
regulations shall be considered as part of “other benefits” and the employee receiving it will be subject
to tax only on the excess over the P90,000 ceiling [Section 32 (7) (e)]

Any amount given by the employer as benefits to its employees, whether classified as “de minimis”
benefits or fringe benefits, shall constitute as deductible expense upon such employer. Where
compensation is paid in property other than money, the employer shall make necessary arrangements
to ensure that the amount of the tax required to be withheld is available for payment to the BIR.

CLASSIFICATION OF GROSS COMPENSATION INCOME

 Basic salary or wage Salary 

 Wages: Backwages are subject to income tax and withholding tax on wages [BIR Ruling No. DA-
073-2008]
  Honoraria – payments given in recognition for services performed for which the established
practice discourages charging a fixed fee, 
 Fixed or variable allowances (RATA, COLA)
 Commission – usually a percentage of total sales or on certain quota of sales volume attained as
part of incentive such as sales commission.
 Fees – received by an employee for the services rendered to the employer including a director’s
fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services
rendered in the performance of their official duty over and above their regular salaries.
 Tips and Gratuities – those paid directly to the employee (usually by a customer of the
employer) which are not accounted for by the employee to the employer (taxable income but
not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1]
 Hazard or Emergency Pay – additional payment received due to the workers’ exposure to danger
or harm while working. It is normally added to the basic salary together with the overtime pay
and night differential to arrive at gross salary.
 Retirement Pay 
 Separation pay 
 Pension 
 Vacation and sick leave 
 Terminal leave or money value of accumulated vacation and sick leave benefits received by heir
upon death of employee is not taxable.
 Thirteenth month pay and other benefits - Not taxable if the total amount received is P90,000
[RA 10963] or less. Any amount exceeding P90,000 is taxable. [Sec. 32(7)e, NIRC4 ]
 Fringe Benefits and De Minimis 
 Overtime Pay
 Profit Sharing – the proportionate share in the profits of the business received by the employee
in addition to his wages.
 Awards for special services – awards for past services or suggestions to employers resulting in
the prevention of theft or robbery, etc. are also compensations.
 Beneficial Payments – such as where employer pays the income tax owed by an employee are
additional compensation income.
 Other forms of compensation – other forms received due to services rendered are
compensation paid in kind, e.g., insurance premium paid by the employer for insurance
coverage where the heirs of the employee are the beneficiaries is the employee’s income.

Deductions from Income that are part of compensation: 

 Any amount which is required by law to be deducted by the employer from the compensation of
an employee including the withheld tax is considered as part of the employee’s compensation
and is deemed to be paid to the employee as compensation at the time the deduction is made. 
 Deductions not required by law to be deducted also part of compensation 
 Withholding Tax on Compensation Income The income recipient (i.e., EE) is the person liable to
pay the tax on income, yet to improve the collection of compensation income of EEs, the State
requires the ER to withhold the tax upon payment of the compensation income.
Fixed or variable allowances (RATA, COLA): Rule; Exception;
Reasonably pre-computed reimbursements/advances
General Rule: COMPENSATION subject to withholding tax. [Rev. Regs. 2-98]

Exception: Any amount paid specifically, either as advances or reimbursements are NOT
COMPENSATION subject to withholding tax, provided the following conditions are satisfied:

1. It is for ordinary and necessary traveling and representation or entertainment expenses paid or
incurred or reasonably expected to be incurred by the employee in the pursuit of the employer’s
trade, business, or profession; and
2. The employee is required to account or liquidate for the foregoing expenses.

XPN/XPN: The excess of actual expenses over advances made shall constitute taxable income if such
amount is not returned to the employer. 

Reasonably pre-computed reimbursements/advances: Reasonable amounts of reimbursements or

advances for traveling and entertainment expenses which are pre-computed on a daily basis and are
paid to an employee while he is on an assignment or duty are NOT subject to withholding tax on wages
and substantiation requirements.

Tips and Gratuities (Taxabilility) 

those paid directly to the employee (usually by a customer of the employer) which are not accounted
for by the employee to the employer (taxable income but not subject to withholding tax) [RR NO. 2-98,
Sec. 2.78.1]

Retirement Pay (define, Taxability; XPNs) 

DEFINE: A lump sum payment received by an employee who has served a company for a considerable
period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b]

Generally TAXABLE

EXCLUDED

 Retirement benefits under 

o RA 7641: The Retirement Pay Law 
o RA 4917: Reasonable Private Benefit Plan (now Section 32(B)(6)(a) of NIRC)
o Section 60(B) of the NIRC: Estate and Donor’s Tax shall shall not apply to employee’s
trust which forms part of a pension, stock bonus or profit-sharing plan of an employer
for the benefit of some or all of his employees (see requirements)
 Terminal pay
 Retirement Benefits from foreign government agencies
 Veterans benefits under U.S. Veterans Administration
 Benefits under the Social Security Act
  GSIS benefits

RA 7641: The Retirement Pay Law

Retiring employee must be
 in the service of same employer CONTINUOUSLY for at least five (5) years
 Retiring employee must be at least sixty (60) years old but not more than 65 years of age at the
time of retirement
 Availed of only once, and
 only when there is no RPBP

RA 4917: RPBP

A 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his employees wherein contributions are
made by such employer, or employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund thus accumulated by the trust in accordance with such plan (trust
fund)

Excluded provided the following requirements are met: FAR10/50

1. It should have been availed of for the first time.

2. The retirement program is approved by the BIR Commissioner;
3. It must be a reasonable benefit plan -- fair and equitable for the benefit of all employees
4. The retiree should have been employed for 10 years in the said company;
5. The retiree should have been 50 years old or above at the time of retirement; and

Further, it should be provided in the plan that at no time prior to the satisfaction of all liabilities with
respect to employees under any trust, shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of his employees.

Separation pay (When taxable and when not; For any cause beyond the
control; substantiation; payment on account of dismissal 
 taxable if VOLUNTARILY availed of. 
 NOt taxable if involuntary - for any cause beyond the control of the said official or employee.

“For any cause beyond the control.” - The separation from the service of the official or employee must
not be: 
 asked for or initiated by him or 
 it was not of his own making. 

NOTES: 
  Sickness must be life-threatening or one which renders the employee incapable of working
 Retrenchment of the employee due to unfavorable business conditions or financial reverses is
considered as involuntary. However, resignation or availment of an optional early retirement
plan is voluntary and bars a claim under this provision.
 BIR Ruling 143-98: The “terminal leave pay” (amount paid for the commutation of leave credits)
of retiring government employees is considered not part of the gross salary, and is exempt from
taxes. 

Substantiation: Such fact shall be duly established by the employer by competent evidence which should
be attached to the monthly return for the period in which the amount paid due to the involuntary
separation was made.

Any payment made on account of dismissal, constitutes compensation regardless of whether the
employer is legally bound by contract, statute, or otherwise, to make such payment.

Pension (define, taxability) 

 allowance paid regularly to a person on his retirement or to his dependents on his death
 in consideration of past services, meritorious work, age, loss, or injury
 Pension is taxable unless 
o the law states otherwise, OR 
o unless the BIR approves the pension plan of a private company.

Vacation, sick leave, monetization, terminal leave  (Rules in taxability) 

 Taxable: If paid or availed of as salary of an employee who is on vacation or on sick leave

notwithstanding his absence from work [RR 6-82, 2d]
 NOT taxable: When considered de minimis benefits [RR no. 11-2018/RR no. 05-2011]
o Monetized value of unutilized VACATION leave credits of ten (10) days or less which
were paid to private employees during the year, and 
o the monetized value of vacation and sick leave credits paid to government officials and
employees
o Note: Monetization of sick leave credits of private employees even if not exceeding 10
days is not exempt from income tax and withholding tax on wages.
 NOT taxability: Terminal leave or money value of accumulated vacation and sick leave benefits
received by heir upon death of an employee. 

Full name and RA No. of TRAIN Law

RA 10963: Tax Reform for Acceleration and Inclusion Law 

Thirteenth-month pay and other benefit (taxability) 

Not taxable if the total amount received is P90,000 [RA 10963] or less. 

Any amount exceeding P90,000 is taxable. [Sec. 32(7)e, NIRC4]

Other forms of compensation (taxability) 

Any amount which is required by law to be deducted by the employer from the compensation of an
employee including the withheld tax is considered as part of the employee’s compensation and is
deemed to be paid to the employee as compensation at the time the deduction is made. (This also
applies to deductions not required by law.)

Fringe benefits (Persons Liable, To what types of employees imposed,

Fringe Benefits for Rank-and-File employees)
Persons liable: 
The Employer (as a withholding agent), whether individual, professional partnership or a corporation,
regardless of whether the corporation is taxable or not, or the government and its instrumentalities, 

When FBT imposed (Managerial/Supervisory/Rank-and-File): 

is imposed on fringe benefits received by supervisory and managerial employees. The fringe benefits of
rank and file employees are treated as part of compensation income subject to income tax and
withholding tax on compensation.

Fringe Benefits for rank-and-file employees are treated as part of his compensation income subject to
normal tax rate and withholding tax on compensation income

Fringe benefits (Tax Base + How Determined (inclusions), Fringe

Benefits for NRA-NETB, Tax Treatment of FBT by Employer)
Tax Rate is generally 35% 

Tax base is based on the grossed-up monetary value (GMV) of fringe benefits.

GMV is determined by dividing the actual monetary value of the fringe benefit by 65% [100% - tax rate
of 35%].

GMV represents
 the whole amount of income realized by the employee and
 the amount of fringe benefit tax 

For fringe benefits received by NRA-NETB in the Philippines, the tax rate is 25% of the GMV. The GMV is
determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%].
Tax treatment of FBT by the Employer: The employer withholds and pays the FBT but the law allows him
to deduct such tax from his gross income.

Fringe Benefits NOT subject to FBT

1. De minimis benefits
2. Fringe Benefits which are authorized and exempted from income tax under the Code or under
special laws;
3. Fringe benefits granted for the convenience of the employer;
4. Benefits given to the rank-and-file employees, whether granted under a collective bargaining
agreement or not; and
5. Contributions of the employer for the benefit of the employee for retirement, insurance and
hospitalization benefit plans;

De Minimis Benefits (Definition and List-11) 

Definition [RR No. 3-98, Sec 2.23c]

 Facilities and privileges furnished or offered by an employer to his employees 

 that are relatively small value and 
 offered or furnished merely as means of promoting health, goodwill, contentment, and
efficiency of his employees 

The following De Minimis Benefits are exempt from income tax and withholding tax on compensation
income of BOTH managerial and rank and file EEs [Revenue Regulations] EXCLUSIVE LIST 

1. Monetized unused VL credits of PRIVATE employees not exceeding ten (10) days during the year. 
2. Monetized value of VL and SL credits paid to GOVERNMENT officials and employees. 
3. Medical cash allowance to dependents of employees (P1,500 per semester or P250 per month)
4. Actual medical assistance not exceeding P10,000.00 per annum
5. Uniform and Clothing allowance not exceeding P6,000 per annum
6. Laundry allowance not exceeding P300 per month
7. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than P2,000; 
8. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent
(25%) of the basic minimum wage on a per region basis
9. Employees achievement awards
a. which must be in the form of a tangible personal property other than cash or gift certificate
b. with an annual monetary value not exceeding P10,000 
c. received by the employee under an established written plan which does not discriminate in
favor of highly paid employees
10. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per annum
11. Benefits received by an employee by virtue of a CBA and productivity incentive schemes provided
that the total monetary value combined does not exceed P10,000.00 per taxable year. 
Non-taxable housing fringe benefit
 Housing privilege of the Armed Forces of the Philippines (AFP) officials
 A housing unit, which is situated inside or adjacent to the premises of a business or factory – a
maximum of 50 meters from the perimeter of the business premises
 Temporary housing for an employee who stays in a housing unit for three months or less

Capital v. Ordinary Asset; Determinant

Ordinary Asset (exclusive list) DITS

 Stock in trade of the taxpayer/other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year. 
 Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business. 
 Property used in the trade or business of a character which is subject to the allowance for
depreciation, or 
 Real property used in the trade or business of the taxpayer, including property held for rent.

Capital Assets

Property held by the taxpayer, whether or not connected with his trade or business which is not an
ordinary asset. Generally, they include:

 stocks and securities held by taxpayers other than dealers in securities 

 real property not used in trade or business, such as residential house and lot, idle or vacant land
or building 
 investment property, such as interest in a partnership, stock investment 
 Personal or nonbusiness properties, such as family car, home appliances, jewelry.

The actual use determines whether a property is an ordinary asset or a capital asset. [BIR Ruling No. DA
212-07, April 3, 2007]

Also includes pacto de retro sale. 

Gain/Loss from Dealings in Property; Tax Treatment; When a capital

gain or capital loss is sustained by a corporation; other forms of
disposition of shares of stock subject to the 15% CGT
 Gain from sale, exchange or other disposition
o Ordinary Gain (part of Gross Income)
o Capital Gain
 Loss from sale, exchange, or other disposition
o Ordinary Loss (part of Allowable Deductions from Gross Income)
o Capital Loss
  Excess of Gains over Losses
o Part of Gross Income
o Net Capital Gain
 Excess of Losses over Gains
o Part of Allowable Deductions from Gross Income
o Net Capital Loss

When a capital gain or capital loss is sustained by a corporation, the following rules shall be observed:

 There is no holding period; hence, there is no net capital loss carry-over.

 Capital gains and losses are recognized to the extent of their full amount.
 Capital losses are deductible only to the extent of capital gains.
 Net capital losses are not deductible from ordinary gain or income but ordinary losses are
deductible from net capital gains.

For sale, barter, exchange or other forms of disposition of shares of stock subject to the 15% capital
gains tax on the net capital gain during the taxable year, 
 the capital losses realized from this type of transaction during the taxable year are deductible
only to the extent of capital gains from the same type of transaction during the same period. 
 If the transferor of the shares is an individual, the rule on holding period and capital loss carry-
over will not apply, notwithstanding the provisions of Section 39 of the Tax Code. [RR 6-2008,
c.4]

Gain/Loss from Dealings in Property (How much is deductible:

Ordinary v Capital)
If the asset involved is classified as ordinary, 
 the entire amount of the gain from the transaction shall be included in the computation of gross
income [Sec 32(A)], and 
 the entire amount of the loss shall be deductible from gross income. [Sec 34(D)]. (See Allowable
Deductions from Gross Income - Losses)

The following percentages of the gain or loss recognized upon the sale or exchange of a capital asset
shall be taken into account:
 
 If the taxpayer is an individual –
o 100% if the capital asset has been held for not more than 12 months; and
o 50% of the capital asset has been held for more than 12 months
 If the taxpayer is a corporation –
o 100%, regardless of the holding period of the capital asset [Sec. 39(B), NIRC]

These rules do not apply to:

 real property with a capital gains tax (final tax), or

 shares of stock of a domestic corporation with a capital gains tax (final tax).
  sale of shares of stock of a domestic corporation, held as capital assets, through the stock
exchange by either individual or corporate taxpayers (subject to 0.6 of 1% percentage tax based
on gross selling price) 

Shares listed and traded through the stock exchange other than sale by a
dealer in securities
Tax Rate & Base: 
 0.6 of 1%10 of the GSP of the stock or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed 
 In the nature of percentage tax and not income tax; exempt from income tax per Section 127 (d)
 Percentage tax under Sec. 127 is NOT DEDUCTIBLE for income tax purposes.

To whom imposed: assumed and paid by the seller or transferor through the remittance of the stock
transaction tax by the seller or transferor’s broker.

Shares not listed and traded through the stock exchange

Tax Rate & Base: 

 15% of net capital gains (on a per transaction basis)

 for foreign corporations TRAIN Law did not amend such provisions – so the old rate is used 
o 5% if not over Php100,000.00; and 
o 10% on any amount in excess of Php100,000.00. 

ACTUAL GAIN v PRESUMED GAIN (Scope; Tax Base & Rate; Ratio;
XPN)
Presumed Gain 

 Scope: For Real Property classified as Capital Assets

 Tax base: gross selling price or fair market value, whichever is higher. (amount realized from
sale)
 Ratio: law presumes that the seller makes a gain from such sale. Does NOT matter w/n makes
profit 
 Tax Rate: 6% CGT.
 XPN: buyer is the government (individual seller has the option whether to be taxed at the GIT 
rates or at 6% CGT

Actual Gain: 

 Scope: real property classified as an ordinary asset

 Tax base: actual gain
 loss from the sale: may be deducted from his gross income during the taxable year. 
  ordinary gain: added to the operating income and the net taxable income 
 Tax Rate: GIT rates from 0% to 35% (if an individual) or to 30% corporate tax or to 2% minimum
corporate income tax (MCIT) (if a corporation).

LONG TERM CAPITAL GAIN v SHORT TERM CAPITAL GAIN

Long-term capital gain: Capital asset is held for more than twelve months before it is sold. Only 50% of
the gain is recognized.

Short-term capital gain: Capital asset is held for 12 months or less, 100% of the gain is subject to tax.

Capital loss limitation rule (applicable to both corporations and

individuals) 

General Rule: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges [Sec. 39(C), NIRC].

Exception: If a bank or trust company incorporated under the laws of the Philippines
 any loss resulting from such sale shall NOT be subject to the foregoing limitation and 
 shall not be included in determining the applicability of such limitation to other losses [Sec.
39(C), NIRC].

Net loss carry-over rule (applicable only to individuals) 

If an individual sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the
net income for the year) shall be treated in the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than 12 months [Sec. 39(D), NIRC]. -- short term capital
loss 

SALE OF PRINCIPAL RESIDENCE (Define; Requisites for

Exemption) 
Principal residence: the family home of the individual taxpayer [RR 14-2000]

GR: Disposition of principal residence (capital asset) is exempt from Capital Gains Tax, provided:

 Sale or disposition of the old principal residence;

 By natural persons - citizens or residents 
 The proceeds of which is fully utilized in 
o acquiring or constructing a new principal residence 
o within eighteen (18) months from date of sale or disposition;
o If there is no full utilization , the portion of the gains presumed to have been realized
shall be subject to capital gains tax.
  Notify the Commissioner within thirty (30) days from the date of sale or disposition through a
prescribed return of his intention to avail the tax exemption;
 Can only be availed of only once every ten (10) years;
 The historical cost or adjusted basis of his old principal residence shall be carried over to the
cost basis of his new principal residence

Tax free exchanges of assets [Sec. 40 (c)(2)]

 MERGER OR CONSOLIDATION
 INITIAL ACQUISITION OF CONTROL

MERGER OR CONSOLIDATION
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: 

 A corporation, which is a party to a merger or consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or consolidation; or
 A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation,
solely for the stock of another corporation also a party to the merger or consolidation; or
 A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or securities in such corporation, a party to the
merger or consolidation.

Substantially all the properties of another corporation means 

 the acquisition of at least 80% of the assets, including cash, of another corporation 
 which has the element of permanence and not merely momentary holding. 

INITIAL ACQUISITION OF CONTROL

No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation: 

 of which as a result of such exchange said person

 alone or together with others, not exceeding four (4) persons, 
 gains control of said corporation

XPN: That stocks issued for services shall not be considered as issued in return for property.

Passive Investment Income (Tax Imposed; Sources)

Under Sec 24(B) of the Tax Code, a final tax is imposed upon gross passive income of citizen and resident
aliens. An income is considered passive if the taxpayer merely waits for it to be realized.
SOURCES: DRIR
The following are the sources of passive income subject to final tax

 Interest income;
o annuities/pensions
 Dividend Income;
 Royalty Income; and
 Rental Income.

Note that these incomes are NOT added to other income in the determination of ordinary income tax
liability.

Interest Income (Scope)

Unless exempted by law, interest income received by the taxpayer, whether or not usurious, is subject
to income tax.

Dividend Income; classification; exempt from taxes; subject to FWT;

subject to NIT
A form of earnings derived from the distribution made by a corporation out of its earnings or profits and
payable to its stockholders, whether in money or in property.

The following are the classification of dividends:

1. Cash dividends
2. Stock dividends
3. Property dividends; and
4. Liquidating dividends.
taxable distribution of stock dividend

1. If a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits (Sec. 73(B), NIRC); or
2. Where there is an option that some stockholders could take cash or property dividends instead
of stock dividends; some stockholders exercised the option to take cash of property dividends;
and the exercise of option resulted in a change of the stockholders’ proportionate share in the
outstanding share of the corporation.

Taxable distrubution of Liquidating dividends - The difference between the cost or other basis of the
stock and the amount received in liquidation of the stock is a capital gain or a capital loss. The income is
subject to ordinary income tax rates. 

Royalty (taxability as a property and as an income)

Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in
which case, any gain derived therefrom is considered as an active business income subject to the normal
corporate tax.
Where a person pays royalty to another for the use of its intellectual property, such royalty is generally a
passive income of the owner thereof subject to withholding tax.

Rental Income; includes; Forms; Exceptions

Aside from the regular amount of payment for using the property, it also includes all other obligations
assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans,
insurance premiums, etc.) [RR 19-86]

Rent income may be in the following forms:

 Cash, at the stipulated price

 Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the
contract of lease, e.g., real estate tax on the property leased assumed by the lessee. Tax
Treatment for VAT added to rental/paid by the lessee - 
o If the lessee is VAT-registered, treat VAT paid as input VAT 
o If the lessee is not VAT-registered OR not liable to VAT, treat VAT paid as additional rent
expense deductible from gross income.
 Advance payment 
o received by the lessor under a claim of right and without restriction as to its use, then
such payment is income to the lessor
o must be reported in full in the year of receipt, regardless of the accounting method used
by the lessor

XPN: If the advance payment is actually (NOT income)

o a loan to the lessor, or 
o an option money for the property, or 
o a security deposit for the faithful performance of certain obligations of the lessee XPN:
applied to rental

Tax Base & Rate for Lease of personal property

For personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as
follows:
Tax Rate & Base for Lease of Real Property
TAX TREATMENTS Leasehold improvements by lessee; pre-
termination; destroyed before expiration  of lease

 Outright method- lessor shall report as income FMV of the buildings or improvements subject to
the lease in the year of completion.
 Spread-out method- lessor shall spread over the remaining term of the lease the estimated
depreciated (book) value of such buildings or improvements at the termination of the lease, and
reports as income for each remaining term of the lease an aliquot part thereof.

If for any reason than a bona fide purchase from the lessee by the lessor, the lease is terminated, so that
the lessor comes into possession or control of the property prior to the time originally fixed , lessor
receives additional income for the year which the lease is so terminated to the extent of the value of
such buildings or improvements when he became entitled to such possession exceeds the amount
already reported as income on account of the erection of such building or improvement. No
appreciation in value due to causes other than the premature termination of lease shall be included
[Sec. 49, RR No. 2].

If the building or other leasehold improvement is destroyed before the expiration of the lease, the lessor
is entitled to deduct as a loss for the year when such destruction takes place, the amount previously
reported as income because of the erection of the improvement, less any salvage value, to the extent
that such loss was not compensated by insurance [Sec. 49, RR No. 2].

Life insurance (Proceeds, Annuities, Other Amounts Received)

 
Annuities: It refers to periodic instalment payments of income or pension by insurance companies
during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration
of capital paid by him. It is paid annually, monthly, or periodically, computed upon the amount paid
yearly, but necessarily for life. [Peralta v. Auditor General, G.R. No. L-8480 (1957)].

 TAXABLE: If part of annuity payment represents interest, then it is a taxable income. 

 EXCLUDED: If the annuity is a return of premium, it is not taxable.
o either during the term or at the maturity of the term mentioned in the contract or upon
surrender of the contract 
o This refers to the cash surrender value of the contract.

PROCEEDS of life insurance policies paid to his estate or to any beneficiary (directly or in trust) upon the
death of the insured

EXCLUDED: a transferee for a valuable consideration: 

OTHER AMOUNTS RECEIVED UNDER LIFE INSURANCE, ENDOWMENT OR ANNUITY

CONTRACTS

GENERALLY EXCLUDED
TAXABLE:
 if such amounts exceed the aggregate premiums of considerations paid then the excess shall be
included in gross income. 
 However, if such amounts are held by the insurer under an agreement to pay interest thereon
the interest payments received by the insured shall be included in gross income. The interest
income shall be taxed at the graduated income tax rates.

TRANSFER FOR VALUABLE CONSIDERATION

EXCLUDED: only the actual value of such consideration and the amount of the premiums and other sums
subsequently paid by the transferee are exempt from taxation.

TAXABLE: any excess

Prizes and Awards (Inclusions & Exclusions)

Inclusion: Contest prizes and awards received are generally taxable. Such payment constitutes gain
derived from labor.

Excluded: Prizes and awards made primarily in recognition of CCLEARS (religious, charitable, scientific,
educational, artistic, literary or civic) achievements are EXCLUSIONS from gross income if:

 The recipient was selected without any action on his part to enter a contest or proceedings; and
 The recipient is NOT required to render substantial future services as a condition to receiving
the prize or award.
 Prizes and awards granted to athletes in local and international sports competitions and
tournaments held in the Philippines and abroad and sanctioned by their national associations
shall be EXEMPT from income tax. [Sec. 32 B7d, NIRC]

Pensions, Retirement Benefit, or Separation Pay

Paid for past employment services rendered.

A stated allowance paid regularly to a person on his retirement or to his dependents on his death, in
consideration of past services, meritorious work, age, loss or injury. 

It is generally taxable unless the law states otherwise.

Taxable Income from Any Source Whatever

Inclusion of all income not expressly exempted within the class of taxable income under the laws 
 irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and 
 whether derived from legal or illegal sources

Example
 Forgiveness of indebtedness
  Recovery of accounts previously written-off
 Receipt of tax refunds or credit

Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness may have any of three possible consequences:

 It may amount to payment of income . If, for example, an individual performs services to or for a
creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by
the debtor as compensation for personal services.
 It may amount to a gift . If a creditor wishes merely to benefit the debtor, and without any
consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and
need not be included in the latter’s report of income.
 It may amount to a capital transaction . If a corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of a payment of dividend.

Tax Benefit Rule

If a taxpayer deducted an item on his income tax return and enjoyed a tax benefit   thereby, and in a
subsequent year recovers all or part of that item, he will recognize gross income in the year the
deducted item is recovered to the extent that the taxpayer obtained a tax benefit from the prior year’s
deduction.

3 deductions in Sec. 34 which makes reference to Tax Benefit Rule are the following:

 Taxes: Receipt of tax refunds or credit [Sec 34(C)(1)]

 Abandonment Losses [Sec 34 (D)(7)(b)]
 Bad Debts: Recovery of accounts previously written-off [Sec 34(E)(1)]

Recovery of accounts previously written-off

Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included
as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax
benefit of said deduction. 

There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser
income and hence tax savings for the company. [Sec. 4, RR 5-99]

Receipt of tax refunds or credit

General rule: A refund of a tax related to the business or the practice of profession, is taxable income in
the year of receipt to the extent of the income tax benefit of said deduction
Exceptions: However, the following tax refunds are not to be included in the computation of gross
income (also tax payments not deductible from gross income):

 Philippine income tax, except the fringe benefit tax

 Income tax imposed by authority of any foreign country, if the taxpayer claimed a credit for such
tax in the year it was paid or incurred.
 Estate and donor’s taxes
 Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (Special assessments)
 Value Added Tax
 Fines and penalties due to late payment of tax
 Final taxes
 Capital Gains Tax

SOURCE RULES IN DETERMINING INCOME FROM WITHIN AND

WITHOUT
The following items of gross income shall be treated as gross income from sources WITHIN the
Philippines:

 Interests: situs of interest income is the residence of the debtor.

 Dividends received: 
o From a domestic corporation; and 
o from a foreign corporation, 
 UNLESS less than 50% of its gross income for the previous 3-year period was
derived from sources within the Philippines [in which case it will be treated as
income partly from within and partly from without].
 PH Gross Income x Dividend = Income within Worldwide Gross Income 
o As a rule, the situs of dividend income is the residence of the corporation declaring the
dividend.
 Services: situs of compensation is the place of performance of the services.
 Rentals and Royalties
o situs of rental income is the place where the property is located. 
o situs of royalty income is where the rights are exercised.
 Sale of Real Property: situs of the income from sale of real property is where the realty is
located.
 Sale of Personal Property
o sale of personal property (NOT manufactured) is the place of sale. 
o sale of shares of stock in a domestic corporation and/or gain: Treated as derived entirely
from sources within the Philippines regardless of where the said shares are sold.
o Gains from the sale of (manufactured) personal property: treated as derived partly from
sources within and partly from sources without the Philippines when: 
 produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or
  produced (in whole or in part) by the taxpayer without and sold within the
Philippines

Exclusions from Gross Income (Concept; Rationale)

income received or earned but is not taxable as income because it is exempted by law or by treaty. 

Rationale for the Exclusions

The term “exclusions” refers to items that are not included in the determination of gross income
because:

 They represent return of capital or are not income, gain or profit;

 They are subject to another kind of internal revenue tax;
 They are income, gain or profit expressly exempt from income tax under 
o the Constitution, 
o tax treaty, 
o Tax Code, or 
o a general or special law. 

Exclusions Under the Constitution

 Income derived by the government or its political subdivisions from the exercise of any essential
governmental function
 Also, all assets and revenues of a non-stock, non-profit private educational institution used ADE
for private educational purposes shall be exempt from taxation.

Exclusions Under the Tax Code (Sec. 32(b), NIRC)

1. Insurance 
a. Proceeds of life insurance policies
b. Return of premium paid
c. Amounts received under life insurance, endowment or annuity contracts
d. Amount received through accident or health insurance (Compensation for damages)
2. Retirement benefits, pensions, gratuities, etc.
3. Value of property acquired by gift, bequest, devise or descent
4. Winnings, prizes and award, including those in sports competitions
5. Income exempt under tax treaty

Exclusion: Value of property acquired by gift, bequest, devise or descent

Subject to estate or gift taxes excluded from gross income

XPN: 
 income from such property 
 If received on account of services rendered

Exclusion: Amount received through accident or health insurance

(Compensation for damages)
Amounts received through accident or health insurance or under workmen’s compensation acts, 

 as compensation for personal injuries or sickness

 plus the amount of any damages received
o whether by suit or agreement
o on account of such injuries or sickness 

Non-taxable – compensation for damages on account of

 
 Personal (physical) injuries or sickness
 Any other damages recovered on account of personal injuries or sickness
 Exemplary and moral damages for out-of-court settlement, including attorney’s fees
 Alienation of affection, or breach of promise to marry
 Any amount received as a return of capital or reimbursement of expenses

Taxable – compensation for damages on account of

 Actual damages for loss of anticipated profits

 Moral and exemplary damages awarded as a result of breach of contract
 Interest for non-taxable damages above
 Any damages as compensation for unrealized income

Exclusions Under Special Laws

1. Personal Equity and Retirement Account
2. Under R.A. 6657 (Comprehensive Agrarian Reform Package Law), gain arising from the transfer
of agricultural property covered by the law shall be exempt from capital gains tax.
3. Under R.A. 6938 (Cooperative Code of the Philippines), as amended by R.A. 9520, cooperatives
transacting business with both members and non-members shall not be subject to tax on their
transactions with members. In relation to this, the transactions of members with the
cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on
members' deposits.
4. Under R.A. 7916 (PEZA Law), as amended, PEZA-registered enterprises are given income tax
holidays of six or four years from the date of commercial operations, depending on whether
their activities are considered pioneer or non-pioneer.
5. Under R.A. 9178 (Barangay Micro Business Enterprises Act of 2002), BMBEs shall be exempt
from income tax for income arising from the operation of the enterprise.
Deductions from Gross Income
 Deductions are items or amounts authorized by law to be subtracted from the pertinent items of
gross income to arrive at taxable income.
 partake of the nature of tax exemptions; hence strictly construed.
o Claimant must point to a specific provision allowing them
 If the exemption is not expressly stated in the law, the taxpayer must at least be
within the purview of the exemption by clear legislative intent
o Claimant has the burden of proving that they fall within the purview of such provision
o must be substantiated XPN: when the law dispenses with the records, documents or
receipts to support the deductions.

Types of deductions

There are four (4) types of deductions from gross income:

 itemized deductions in Section 34(A) to (J) and (M) available to all kinds of taxpayers engaged in
trade or business or practice of profession in the Philippines;
 optional standard deduction in Section 34(L) available only to individual taxpayers deriving business,
professional, capital gains and passive income not subject to final tax, or other income; and
 optional standard deduction available to corporations under Section 34(L) of the Tax Code
(introduced by RA No. 9504)
 special deductions in Sections 37 and 38 of the NIRC, and in special laws like the BOI law (E.O. 226).

General Rules

 Deductions must be paid or incurred in connection with the taxpayer’s trade, business or
profession
 Deductions must be supported by adequate receipts or invoices (except standard deduction)
 Additional requirement relating to withholding

Itemized Deductions
Section 34 of the NIRC.

 Expenses.
 Interest
 Taxes
 Losses
 Bad Debts
 Depreciation
 Depletion of Oil and Gas Wells and Mines
 Charitable and Other Contributions
 Research and Development
 Pension Trusts
Section 37. Special Provisions Regarding Income and Deductions of
Insurance Companies, Whether Domestic or Foreign. –
A. Special Deduction Allowed to Insurance Companies.
 the net additions required by law to be made within the year to reserve funds and the sums
other than dividends paid within the year on policy and annuity contracts may be deducted
from their gross income
 Provided, however, That the released reserve be treated as income for the year of release.
B. Mutual Insurance Companies.
 In the case of mutual fire and mutual employers’ liability and mutual workmen’s
compensation and mutual casualty insurance companies
 requiring their members to make premium deposits to provide for losses and expenses,
 said companies shall not return as income any portion of the premium deposits returned to
their policyholders,
 but shall return as taxable income all income received by them from all other sources plus
such portion of the premium deposits as are retained by the companies for purposes other
than the payment of losses and expenses and reinsurance reserves.
C. Mutual Marine Insurance Companies.
 Mutual marine insurance companies shall include in their return of gross income, gross
premiums collected and received by them less amounts paid for reinsurance,
 but shall be entitled to include in the deductions from gross income
 amounts repaid to policyholders on account of premiums previously paid by them
and
 interest paid upon those amounts between the ascertainment and payment
thereof.
D. Assessment Insurance Companies.
 whether domestic or foreign,
 may deduct from their gross income the actual deposit of sums with the officers of the
Government of the Philippines
 pursuant to law, as additions to guarantee or reserve funds.

Section 38. Losses from Wash Sales of Stock or Securities. –

A. In the case of any loss claimed to have been sustained from any sale or other disposition of shares
of stock or securities >> then no deduction for the loss shall be allowed under Section 34:
 where it appears that within a period beginning thirty (30) days before the date of such sale
or disposition and ending thirty (30) days after such date,
 the taxpayer has
 acquired (by purchase or by exchange upon which the entire amount of gain or loss
was recognized by law), or
 has entered into a contact or option so to acquire,
 substantially identical stock or securities,
 unless the claim is made by a dealer in stock or securities and with respect to a transaction
made in the ordinary course of the business of such dealer.
B. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less
than the amount of stock or securities sold or otherwise disposed of,
 then the particular shares of stock or securities, the loss from the sale or other disposition of
which is not deductible,
 shall be determined under rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
C. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is not
less than the amount of stock or securities sold or otherwise disposed of,
 then the particular shares of stock or securities, the acquisition of which (or the contract or
option to acquire which) resulted in the non-deductibility of the loss,
 shall be determined under rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.

Timing of Claiming Deductions

A taxpayer has the right to deduct all authorized allowances for the taxable year. As a rule, if he does
not within any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot
deduct them from the income of the next of any succeeding year [Sec. 76, Income Tax Regulations]

Expenses
Business expenses deductible from gross income include the ordinary and necessary expenditures
directly connected with or pertaining to the taxpayer’s trade or business.

Requisites for deductibility

1. Ordinary AND necessary (even incidental)

2. Paid or incurred during the taxable year;
3. directly attributable to the development, management, operation and/or conduct of the trade,
business or exercise of profession;
4. Substantiated by adequate proof – reflect the amount and the connection or relation
5. Legitimately paid
6. If subject to withholding tax, the tax required to be withheld on the expense paid or payable is
shown to have been properly withheld and remitted to the BIR on time [RR No. 12-2013]
7. Amount must be reasonable.
8. NRA/FC: incurred in carrying on any business or trade conducted within the Philippines exclusively.
[Sec. 77 RR 2]

COHAN Rule:
 This relief will apply if the taxpayer has shown that it is
o usual and necessary in the trade to entertain and to incur similar kinds of expenditures,
o there being evidence to show the amounts spent and the persons entertained, though not
itemized.
 In such a situation, deduction of a portion of the expenses incurred might be allowed even if there
are no receipts or vouchers.
SPECIFIC RULES:

• Bonuses are deductible when:

o made in good faith
o given as additional compensation for personal services actually rendered
o such payments, when added to the stipulated salaries, do not exceed a reasonable
compensation for the services rendered 
• Traveling expenses “while away from home”
o This includes transportation expenses and meals and lodging [Secs. 65 and 66, Rev. Reg. No. 2]
o Tax home is the principal place of business, when referring to “away from home”
• Necessary transportation expenses in its “tax home”: From office to its customers’ place of business
and back NOT from his residence to its office and back – personal expenses
• Cost of materials: Deductible only to the amount that they are actually consumed and used in
operation during the year for which the return is made, provided that their cost has not been
deducted in determining the net income for any previous year.
• Rentals, Lease and/or other payments for use or possession of property
o Required as a condition for continued use or possession of property.
o Taxpayer has not taken or is not taking title to the property or has no equity other than that of
lessee, user, or possessor.
o Deductibility depends if cash/accrual basis
o Accrual basis: If the advance payment is taxable income to the lessor in the year when it was
received. BUT NOT deductible expense of the lessee until the period is used.
• Repairs and maintenance
o DEDUCTIBLE: repairs to keep it in an ordinarily efficient working condition
o NOT DEDUCTIBLE:
o Extraordinary repairs – they are capital expenditures
o add material value to the property or appreciably prolong its life
o Repairs in the nature of replacement, to the extent that they arrest deterioration and
appreciably prolong the life of the property, should be charged against the depreciation
reserves if such account is kept. [Sec. 68, Rev. Regs. 2]
o All maintenance expenses on account of non-depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
• Expenses for professionals:
o Deductible in the year the professional services are rendered, not in the year they are billed,
provided that the “all events” is present.
o A professional may claim as deductions the cost of supplies used by him in the practice of his
profession
• Entertainment, Amusement, and Representation (EAR) expenses
o Not to exceed such ceiling as the Secretary of Finance prescribe (under RR 10-02, in no case to
exceed
 0.50% of net sales for sellers of goods or properties or
 1% of net revenues for sellers of services, including taxpayers engaged in the exercise of
profession and use or lease of properties)
o NOT DEDUCTIBLE:
 treated as compensation or fringe benefits
 for charitable or fund raising events
  for bona fide business meeting of stockholders, partners or directors
 for attending or sponsoring an employee to a business league or professional organization
meeting
 for events organized for promotion marketing and advertising, including concerts,
conferences, seminars, workshops, conventions and other similar events; and
 Other expenses of a similar nature.
• Training expenses
o When deductible
 NOT in the year they are paid or incurred (since organization and pre-operating expenses of
a corporation are considered as capital expenditures – Sec. 30 of NIRC and Sec. 20 of the RR
No. 2)
 BUT ON the year the taxpayers subsequently enter the trade or business to which the
expenditures relate
o XPN: where an existing corporation incurs these same expenditures for the purpose of
expanding its business in a new line of trade, venture or activity.
o HOW: Can elect to amortize these expenditures over a period not less than sixty (60) months.
[BIR Ruling 102-97, Sept. 29, 1997]
• For Private Educational Institutions: Expenses for expansion of school facilities, AT ITS OPTION, may
be deducted either as:
o expenditures otherwise considered as capital outlays or depreciable assets OR
o To deduct allowances for depreciation thereof.
• Advertising Expenses
o DEDUCTIBLE: if ordinary and necessary
o NOT DEDUCTIBLE: If inordinately large which were incurred in order to protect the taxpayer’s
brand franchise which is analogous to the maintenance of goodwill or title to one’s property are
capital expenditures, which should be spread out over a reasonable period of time.

NOT DEDUCTIBLE: Political campaign expenses - for political campaign purposes or payments to
campaign funds NOT deductible either as business expenses or as contribution [CTA Case No. 695, April
30, 1969, citing Mertens]

Interest
Requisites for deductibility

1. There is a valid and existing indebtedness.

2. The indebtedness is that of the taxpayer
3. The indebtedness is connected with the taxpayer‘s trade, profession, or business.
4. The interest must be legally due.
5. The interest must be stipulated in writing.
6. The taxpayer is LIABLE to pay interest on the indebtedness.
7. The indebtedness must have been paid or accrued during the taxable year.
8. In case of interest incurred to acquire property used in trade, business or exercise of profession,
the same was not treated as a capital expenditure,
Limitation: Interest Arbitrage -- The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 33% of the interest income subjected to final tax (see chapter on
taxation of passive income for interest income); effective January 1, 2009. [RA 9337]

intended to counter the tax arbitrage scheme where a taxpayer obtains an interest-bearing loan and
places the proceeds of such loan in investments that yield interest income subject to preferential tax
rate of 20% final withholding tax.

Non-deductible interest expense

1. Interest payments made between related taxpayers.

2. Interest on indebtedness incurred to finance petroleum exploration.

Related Taxpayers

 Between members of the family SAD-BS (whole/half)

 Between an individual and a corporation, where the individual owns directly or indirectly more
than 50% of the outstanding stock of the corporation XPN: in case of distributions in liquidation
 between two corporations where (XPN: in case of distributions in liquidation):
o Either one is a personal holding company of a foreign personal holding company with
respect to the taxable year preceding the date of the sale of exchange; and
o More than 50% of the outstanding stock of each is owned, directly or indirectly, by or
for the same individual; or
 Between parties to a trust
o Grantor and Fiduciary; or
o Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with
respect to each trust; or
o Fiduciary and Beneficiary

INTEREST SUBJECT TO SPECIAL RULES

• Interest paid in advance: if reporting income in cash basis, interest will only be allowed deduction in
the year the indebtedness is paid.
• Interest periodically amortized: the amount of interest which corresponds to the amount of the
principal amortized or paid during the year shall be allowed as deduction in such taxable year
• Interest expense incurred to acquire property for use in trade/business/profession
o At the option of the taxpayer, interest expense on a capital expenditure may be allowed as
 A deduction in full in the year when incurred;
 A capital expenditure for which the taxpayer may claim only as a deduction the periodic
amortization of such expenditure.
o Should the taxpayer elect to deduct the interest payments against its gross income, the
taxpayer cannot at the same time capitalize the interest payments.

Taxes
Refers to national and local taxes
Requisites for deductibility

1. Paid or incurred within the taxable year;

2. Paid or incurred in connection with the taxpayer‘s trade, profession or business;
3. Imposed directly on the taxpayer;
4. Not specifically excluded by law from being deducted from the taxpayer‘s gross income.

The following taxes are deductible:

1. Import duties;
2. Business tax;
3. Professional/occupation tax;
4. Privilege and excise tax;
5. DST;
6. Motor vehicle registration fees;
7. Real property tax;
8. Electric energy consumption tax; and
9. Interest on delinquent taxes ( as interest expense)

Non-deductible taxes

1. Philippine income tax, XPN: Fringe Benefit Taxes;

2. Income tax imposed by authority of any foreign country
a. NOT DEDUCTIBLE: if taxpayer avails of the Foreign Tax Credit (FTC)
b. DEDUCTIBLE: When the taxpayer does NOT signify his desire to avail of the tax credit for
taxes of foreign countries, the amount may be allowed as a deduction from gross income of
citizens and domestic corporations subject to the limitations set forth by law.
3. Surcharges and penalties on delinquent taxes
4. Special assessments

Foreign Tax credit (FTC); distinguished from Deduction; Who may

claim; Limitations
Tax credit
 amount allowed by law to reduce the Philippine income tax due on account of taxes paid or
accrued to a foreign country (subject to limitations) 
 Taxes are deductible from the Phil. Income tax itself
 Reduces Philippine income tax liability
 Only foreign income taxes may be claimed as credits against Philippine income tax.

Tax Deduction
 Taxes are deductible from gross income in computing the taxable income
 Effect: Reduces taxable income upon which the tax liability is calculated
 Sources: Deductible taxes (e.g. business tax, excise tax)
The following may claim tax credits:

 Resident citizens
 Domestic corporations, which include all partnerships XPN: GPP
 Members of general professional partnerships
 Beneficiaries of estates or trusts

Limitations on Tax Credit.

 [Per Country Limit] The amount of tax credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from sources within
such country bears to his entire taxable income for the same taxable year; and

 [Worldwide Limit] The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer's taxable income from sources
without the Philippines taxable bears to his entire taxable income for the same taxable year.

Losses
Requisites for deductibility

1. Loss must be that of the taxpayer

2. Actually sustained and charged off within the taxable year;
3. Incurred in TBP
4. Of property connected with the TBP, if the loss arises from fires, storms, shipwreck or other
casualties, or from robbery, theft, or embezzlement;
5. Sustained in a closed and completed transaction;
6. Sustained in a legal transaction
7. In case of casualty loss, filing of notice of loss with the BIR within 45 days from the date of the event
that gave rise to the casualty; and
8. The taxpayer must prove the elements of the loss claimed, such as the actual nature and occurrence
of the event and amount of the loss.

NOTES ON LOSSES

 Capital losses
o allowable only to the extent of capital gains XPN: for banks and trust companies under
conditions in Sec. 39 of NIRC where loss from such sale is not subject to the foregoing
limitation
o Losses from short sales of property;
o Losses due to failure to exercise privileges or options to buy or sell property.
 Securities becoming worthless
o NOT DEDUCTIBLE: Loss in shrinkage in value of stock through fluctuation in the market is
not deductible from gross income.
  XPN: a satisfactory showing of its worthlessness be made, as in the case of bad
debts.
o DEDUCTIBLE: loss must be actually suffered when the stock is disposed of.
 Losses on wash sales of stocks or securities
o GR: Not deductible from gross income
o XPN: If by a dealer in securities in the course of ordinary business, it is deductible.
 Wagering losses
o Losses from wagering (gambling) are deductible only to the extent of gains from such
transactions.
o A wager is made when the outcome depends upon CHANCE.
• Abandonment losses in petroleum operation and producing well.
• Losses due to voluntary removal of building incident to renewal or replacements are deductible
from gross income.
• Loss of useful value of capital assets due to charges in business conditions is deductible only to
the extent of actual loss sustained (after adjustment for improvement, depreciation and salvage
value)
• Losses from sales or exchanges of property between related taxpayers are not recognized, but
the gains are taxable.
• Losses of farmers incurred in the operation of farm business are deductible.
• NOT DEDUCTIBLE: from the sale of non- depreciable vehicle [RR No. 2-2013]
• NOT DEDUCTIBLE: from merger, consolidation, or control securities (where no gains are
recognized either)
• NOT DEDUCTIBLE: from exchanges not solely in kind

Other Not deductible losses:

 Compensated by insurance
 Claimed as deduction for estate tax purposes

Net Operating Loss Carry Over (NOLCO)

• GR: excess of allowable deductions over gross income for any taxable year immediately preceding
the current taxable year.
o carried over as a deduction from gross income for the next three (3) consecutive taxable
years immediately following the year of such loss,
o provided however, that any net loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be allowed as a deduction. [Sec. 34(3)(D),
NIRC]
• Exception: Mines other than oil and gas wells, where a NOL without the benefit of incentives
provided for under EO No. 226 (Omnibus Investments Code) incurred in any of the first ten (10)
years of operation may be carried over as a deduction from taxable income for the next five (5)
years immediately following the year of such loss.
• Requisites for NOLCO
o The taxpayer was not exempt from income tax the year the loss was incurred;
o There has been no substantial change in the ownership of the business or enterprise
wherein:
  AT LEAST 75% of nominal value of outstanding issued shares is held by
or on behalf of the same persons; or
 AT LEAST 75% of the paid-up capital of the corporation is held by or on
behalf of the same persons.
• Taxpayers Entitled to NOLCO:
o Individuals engaged in trade or business or in the exercise of his profession (including
estates and trusts). An individual who avails of 40% OSD shall not simultaneously claim
deduction of NOLCO.
o Domestic and resident foreign corporations subject to
 the normal income tax (e.g., manufacturers and traders) or
 preferential tax rates under the Code (e.g., private educational
institutions, hospitals, and regional operating headquarters) or under special laws (e.g.,
PEZA-registered companies)
 taxed during the taxable year with Minimum Corporate
• However, the three-year period for the expiry of the NOLCO is not interrupted by the fact that the
corporation is subject to MCIT or availed 40% OSD during such three-year period.

Bad debts
Debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the
taxpayer actually ascertained to be worthless and the corresponding receivable should have been
written off or charged off within the taxable year.

A debt is worthless when after taking reasonable steps to collect it, there is no likelihood of recovery at
any time in the future.

Requisites for deductibility

a. Valid and legally demandable debt due to the taxpayer

b. Debt is connected with the taxpayer's trade, business or practice of profession;
c. Debt was not sustained in a transaction entered into between related parties;
d. Actually ascertained to be worthless and uncollectible as of the end of the taxable year (taxpayer had
determined with reasonably degree of certainty that the claim could not be collected despite the fact
that the creditor took reasonable steps to collect); and
e. Actually charged off the books of accounts of the taxpayer as of the end of the taxable year

General rule: Taxpayer must ascertain and demonstrate with reasonable certainty the uncollectibility of
debt

Exceptions:

a. Banks as creditors – BSP Monetary Board shall ascertain the worthlessness and uncollectibility of the
debt and shall approve the writing off
b. Receivables from an insurance or surety company (as debtor) may be written off as bad debts only
when such company is declared closed due to insolvency or similar reason
The taxpayer must show that the debt is indeed uncollectible even in the future. He must prove that he
exerted diligent efforts to collect:

a. Sending of statement of accounts

b. Collection letters
c. Giving the account to a lawyer for collection
d. Filing the case in court [Phil. Refining Corp. v. CA, G.R. No. 118794 (1996)]

In ascertaining the debt to be worthless, it is not enough that the taxpayer acted in good faith. He must
show that he had reasonably investigated the relevant facts from which it became evident, in the
exercise of sound, objective business judgment, that there remained no practical, but only a vague
prospect that the debt would be paid [Collector v. Goodrich, G.R. No. L-22265 (1967)]

Rev. Reg. No. 5-1999

“Actually ascertained to be worthless” – Determination of worthlessness must depend upon the

particular facts and 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,
where there is no showing that the surrounding circumstances differ from those relating to other notes
which were charged off in a prior year.

Accounts receivable may be written off as bad debts even without conclusive evidence that they had
definitely become worthless when:

a. the amount is insignificant; and

b. collection through court action may be more costly to the taxpayer.

“Actually charged off from the taxpayer’s book of accounts” – Receivable which has actually become
worthless at the end of the taxable year has been cancelled and written off. Mere recording in the books
of account of estimated uncollectible accounts does not constitute a write-off.

EFFECT OF RECOVERY OF BAD DEBTS

Tax Benefit Rule on Bad Debts

Bad debts claimed as deduction in the preceding year(s) but subsequently recovered shall be included as
part of the taxpayer‘s gross income in the year of such recovery the extent of the income tax benefit of
said deduction. Also called the equitable doctrine of tax benefit.

Requisites:

a. Allowance must be reasonable

b. Charged off during the taxable year from the taxpayer‘s books of accounts.
c. Does not exceed the acquisition cost of the property.

Depreciation
An annual reasonable allowance to reduce the wasteful value of the tangible fixed assets resulting from
wear and tear and normal obsolescence

For intangible assets, the annual allowance to reduce their useful value is called amortization.

Requisites for Deductibility

a. It must be reasonable.
b. It must be charged off during the year.
c. The asset must be used in profession, trade or business.
d. The asset must have a limited useful life.

The depreciable asset must be located in the Philippines if the taxpayer is a nonresident alien or a
foreign corporation. [Valencia and Roxas]

No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles
which exceed the threshold amount of P2,400,000, unless the taxpayer’s main line of business is
transport operations or lease of transportation equipment and the vehicles purchased are used in the
operations. [RR No. 12-2012]

Methods of computing depreciation allowance 

 Straight-line
o (cost- salvage value) ÷ estimated life 
 Declining balance 
o (cost – salvage value) x Rate of Depreciation*
o *rate = 1÷ estimated life 
 Sum-of-the-year-digit (SYD)
o (remaining life ÷ SYD) x (cost- salvage value) ÷
 Any other method which may be prescribed by the Secretary of Finance upon the
recommendation of the CIR

Charitable and other contributions

Requisites for deductibility

a. Actually PAID or made to the ENTITIES or institutions specified by law;

b. Made within the TAXABLE year.
c. It must be EVIDENCED by adequate receipts or records.
d. For Contributions Other than Money: The amount shall be BASED on the acquisition cost of the
property (i.e., not the fair market value at the time of the contribution).
e. For Contributions subject to the statutory limitation: It must NOT EXCEED 10% (individual) or 5%
(corporation) of the taxpayer‘s taxable income before charitable contributions

AMOUNT THAT MAY BE DEDUCTED

Kinds of Contributions:

a. Contributions deductible in full;

b. Contributions subject to the statutory limit.

Contributions Deductible in Full:

a. Donations to the Government of the Philippines, or to any of its agencies, or political subdivisions,
including fully owned government corporations
b. Exclusively to finance, provide for, or to be used in undertaking priority activities in
c. Education
d. Health
e. Youth and sports development
f. Human settlements
g. Science and culture, and
h. Economic development
i. in accordance with a National Priority Plan determined by NEDA (otherwise, subject to statutory limit)
j. Donations to Certain Foreign Institutions or International Organizations which are fully deductible in
compliance with agreements, treaties or commitments entered into by the Government of the
Philippines and the foreign institutions or international organizations or in pursuance of special laws
k. Donations to Accredited Non-government Organizations subject to conditions set forth in RR No. 13-
98 – NGO means a non-stock non-profit domestic corporation or organization:
l. Organized and operated exclusively for:

1. scientific,
2. research,
3. educational,
4. character-building and youth and sports development,
5. health,
6. social welfare,
7. cultural or
8. charitable purposes, or
9. a combination thereof,

No part of the net income of which inures to the benefit of any private individual
Directly utilizes contributions for the active conduct of the activities constituting the purpose or function
for which it is organized, not later than 15th day of the month following the close of its taxable year in
which contributions are received, unless an extended period is granted by the Secretary of Finance,
upon recommendation of the CIR

Administrative expense, on an annual basis, must not exceed 30% of total expenses for the taxable year
Upon dissolution, its assets would be distributed to another accredited NGO organized for a similar
purpose or purposes, OR to the State for public purpose, OR would be distributed by a competent court
of justice to another accredited NGO to be used in such manner as in the judgment of said court shall
best accomplish the general purpose for which the dissolved organization was organized.

Contributions subject to the Statutory Limit:

These contributions are not deductible in full as specified by the law or such deduction has not met the
requirements to be deducted in full.

Those made to:

a. Government or any of its agencies or political subdivisions exclusively for public purposes
(contributions for non-priority activities)
b. Accredited domestic corporation or associations organized exclusively for
c. Religious
d. Charitable
e. Scientific
f. youth and sports development
g. cultural
h. educational purposes or
i. rehabilitation of veterans
j. Social welfare institutions
k. Non-government organizations: No part of the net income of which inures to the benefit of any
private stockholder or individual

Statutory Limit:

a. 10% in the case of an individual (individual donor), and

b. 5% in the case of a corporation (corporate donor), of the taxpayer's/donor’s income derived from
trade, business or profession computed before the deduction for contributions and donations

The amount deductible is the actual contribution or the statutory limit computed, whichever is lower

Contributions to pension trusts

Contribution to a pension trust may be claimed as deduction as follows:

a. Amount contributed for the present/normal service cost – 100% deductible

b. Amount contributed for the past service cost – 1/10 of the amount contributed is deductible in year
the contribution is made, the remaining balance will be amortized equally over nine consecutive years

General Rule: An employer establishing or maintaining a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed as a deduction, a reasonable amount transferred
or paid into such trust in excess of the contributions to such trust made during the taxable year.

Requisites for deductibility of payments to pension trusts

a. There must be a pension or retirement plan established to provide for the payment of reasonable
pensions to employees;
b. The pension plan is reasonable and actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must no longer be subject to the employer’s control or disposition; and
e. The payment has not theretofore been allowed before as a deduction.

Deductions under special laws

a. Special deductions for productivity bonus and manpower training under the Productivity Incentives
Act of 1990
b. Deductions for training expenses of qualified jewelry enterprises (Jewelry Industry Development Act
of 1998)
c. Deductions under the Adopt-a-School Act of 1998
d. Deductions under the Expanded Senior Citizens Act of 2003. [Domondon]

Optional Standard Deduction

1. Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized deductions except those earning purely compensation
income.

If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services.
Amount: 40% of gross sales or gross receipts (under RA 9504, effective July 6, 2008)

Requisites:

a. Taxpayer is a citizen or resident alien;

b. Taxpayer’s income is not entirely from compensation;
c. Taxpayer signifies in his return his intention to elect this deduction; otherwise he is considered as
having availed of the itemized deductions;
d. Election is irrevocable for the year in which made; however, he can change to itemized deductions in
succeeding years.

2. Corporations, except non-resident foreign corporations

The option to elect Optional Standard Deduction granted is now granted to corporations (domestic and
resident foreign corporations) by virtue of RA 9504. The OSD is 40% of its gross income.
The domestic and resident foreign corporation shall keep such records pertaining to his gross income as
defined in Sec. 32 of the NIRC during the taxable year, as may be required by the rules and regulations
promulgated by the Secretary of Finance upon recommendation of the CIR.

Corporations availing of OSD are still required to submit their financial statements when they file their
annual ITR and to keep such records pertaining to its gross income. [RR 2-2010].

3. Partnerships
General Co-Partnership
For purposes of taxation, the Code considers general co-partnerships as corporations. Hence, rules on
OSD for corporations are applicable to general co-partnerships.
General Professional Partnerships (GPP)13

GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However,
the partners shall be liable to pay income tax on their separate and individual capacities for their
respective distributive share in the net income of the GPP.

The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity
where its income is ultimately taxed to the partners comprising it. Section 26 of the Tax Code, as
amended, likewise provides that — "For purposes of computing the distributive share of the partners,
the net income of the GPP shall be computed in the same manner as a corporation." As such, a GPP may
claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof, it can opt
to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty
percent (40%) of its gross income.

In computing taxable income defined under Section 31 of the Tax Code, as amended, the following may
be allowed as deductions:

a. Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession;
OR
b. Optional Standard Deduction (OSD).

The distributable net income of the partnership may be determined by claiming either itemized
deductions or OSD. The share in the net income of the partnership, actually or constructively received,
shall be reported as taxable income of each partner. The partners comprising the GPP can no longer
claim further deduction from their distributive share in the net income of the GPP and are not allowed
to avail of the 8% income tax rate option since their distributive share from the GPP is already net of
cost and expenses. [RR No. 08-2018]

Premium Payments on Health and/or Hospitalization

Insurance of an Individual Taxpayer
Section 34 (M) of the NIRC has been repealed by TRAIN law. Premium Payments on Health and/or
Hospitalization Insurance of an Individual Taxpayer are no longer deductions from gross income.

Personal and Additional Exemptions

Section 35 of the NIRC has been repealed by TRAIN law. Personal Exemptions for individual taxpayers
are no longer allowed.
Items Not Deductible
General rule: In determining deductions, one of the general rules is that deductions must be paid or
incurred in connection with the taxpayer’s trade, business or profession. Capital expenditures (e.g.
acquisition cost of a building) are also not deductible, because these are not expenses, but form part of
assets.

Exceptions: In computing taxable net income, no deduction shall be allowed with respect to:

1. Personal, living or family expenses (note: they are not deductible from compensation and
business/professional income
2. Any amount paid out for new buildings or for permanent improvements (capital expenditures), or
betterments made to increase the value of any property or estate
3. Any amount expended in restoring property (major repairs) or in making good the exhaustion thereof
for which an allowance [for depreciation or depletion] is or has been made
4. Premiums paid on any life insurance policy covering the life of any officer, employee, or any person
financially interested in the trade or business carried on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary under such policy
5. Interest expense and bad debts between related parties [Sec. 36(B), NIRC)]
6. Losses from sales or exchanges of property between related taxpayers.
7. Non-deductible interest – should the taxpayer elect to deduct interest payments against its gross
income, he cannot at the same time capitalize such interest and claim depreciation on the
undepreciated cost which includes the interest. [PICOP v. Commissioner, G.R. No. 106949-50 (1995)]
8. Non –deductible taxes
9. Non-deductible losses
10. Losses on Wash Sales (except if by dealer in securities in ordinary course of exempt corporations)
These are:

a. Proprietary Educational Institutions and hospitals

b. Government owned and controlled corporations
c. Others

Related Parties [Sec. 34(B)]

1. Between members of a family (which shall include only his brothers and sisters, spouse, ancestors and
lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by or for such individual – except in the case of distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of which is
owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with
respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC]

Relevant points regarding related taxpayers

1. Payment of interest is not deductible.
2. Bad debts are not deductible.
3. Losses from sales or exchanges of property are not deductible.

Income Tax on Individuals

Income Tax on Resident Citizens, Non-Resident Citizens
and Resident Aliens
1. Coverage – Income from All Sources Within and Without the
Philippines; Exception
a. Resident Citizens
A Filipino resident citizen is taxable on income from all sources (within and without the Philippines)
b. Non-resident Citizens
A non-resident citizen is taxable only on income derived from sources within the Philippines.
A non-resident citizen is a Filipino citizen who:
1. Establishes to the satisfaction of the CIR the fact of his physical presence abroad with a definite
intention to reside therein
2. Leaves the Philippines during the taxable year to reside abroad (as immigrant or for employment on a
permanent basis)
3. Works and derives income from abroad and whose employment requires him to be present abroad
most of the time during the taxable year
4. Has been previously considered as a non-resident and arrives in the Philippines at any time during the
taxable year to reside here permanently (only with respect to his income from sources abroad until the
date of his arrival in the country)
Other considerations:
1. A Filipino citizen working and deriving abroad as an Overseas Contract Worker is taxable only on
income from sources WITHIN the Philippines.
2. OCW refers to Filipino citizens in foreign countries, who are physically present in a foreign country as
a consequence of their employment in that country. Their salaries and wages are paid by an employer
abroad and is not borne by an entity or person in the Philippines. They must be duly registered with the
Philippine Overseas Employment Administration (POEA) with valid Overseas Employment Certificate
(OEC).
3. An OCW’s income arising out of his overseas employment is exempt from income tax.
c. Resident Aliens
A resident alien is taxable only on income from sources WITHIN the Philippines.
A resident alien is an individual whose residence is in the Philippines and who is not a Filipino citizen.
An alien actually present in the Philippine who is not a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. Whether he is a transient or not is determined by his
intentions with regard 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. If he lives in the
Philippines and has no definite intention to stay, he is a resident.
One who comes to the Philippines for a definite purpose which, in its nature, may be promptly
accomplished is a transient. But if 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 of which he came has been consummated or abandoned. [Sec. 5, RR No. 2]
2. Taxation on Compensation Income
Income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for
his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It
includes, but is not limited to salaries and wages, commissions, tips, allowances, bonuses, Fringe
Benefits of rank and file EEs and other forms of compensation.
a. Inclusions
1. Monetary compensation – If compensation is paid in cash, the full amount received is the measure of
the income subject to tax.
a. Regular salary/wage
Salary – earnings received periodically for a regular work other than manual labor, such as monthly
salary of an employee
Wages – all remuneration (other than fees paid to a public official) for services performed by an
employee for his employer, including the cash value of all remuneration paid in any medium other than
cash. [Sec. 78A, NIRC]
b. Separation pay/retirement benefit not otherwise exempt
Retirement pay – a lump sum payment received by an employee who has served a company for a
considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is taxable

Exceptions:
1. SSS or GSIS retirement pays.
2. Retirement pay (R.A. 7641) due to old age provided the following requirements are met:
a. The retirement program is approved by the BIR Commissioner;
b. It must be a reasonable benefit plan. (fair and equitable)
c. The retiree should have been employed for 10 years in the said company;
d. The retiree should have been 50 years old or above at the time of retirement; and
e. It should have been availed of for the first time.
Separation pay – taxable if voluntarily availed of. It shall not be taxable if involuntary i.e. Death, sickness,
disability, reorganization /merger of company and company at the brink of bankruptcy or for any cause
beyond the control of the said official or employee
c. Bonuses, 13th month pay, and other benefits not exempt
Tips and Gratuities – those paid directly to the employee (usually by a customer of the employer) which
are not accounted for by the employee to the employer. (taxable income but not subject to withholding
tax) [RR NO. 2-98, Sec. 2.78.1]
Thirteenth month pay and other benefits - Not taxable if the total amount received is P90,000 or less.
Any amount exceeding P90,000 is taxable. [Sec. 32(7)(e), NIRC]
Overtime Pay – premium payment received for working beyond regular hours of work which is included
in the computation of gross salary of employee. It constitutes compensation.
d. Directors’ fees
Fees – received by an employee for the services rendered to the employer including a director’s fee of
the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in
the performance of their official duty over and above their regular salaries.
2. Nonmonetary compensation - If services are paid for in a medium other than money, the fair market
value of the thing taken in payment is the measure of the income subject to tax.
b. Exclusions
1. Fringe benefit subject to tax
(See Gross Income above for the discussion of Taxable and Non-taxable fringe benefits)
If the recipient of the fringe benefits is a rank and file employee, and the said fringe benefit is not tax-
exempt, then the value of such fringe benefit shall be considered as part of the compensation income of
such employee subject to tax payable by the employee. [Domondon]
Where the recipient of the fringe benefit is not a rank and file employee, and the said benefit is not tax-
exempt, then the same shall not be included in the compensation income of such employee subject to
tax. The fringe benefit [tax] is instead levied upon the employer, who is required to pay. [Domondon]
Convenience of the ER Rule
If meals, living quarters, and other facilities and privileges are furnished to an employee for the
convenience of the employer, and incidental to the requirement of the employee’s work or position, the
value of that privilege need not be included as compensation [Henderson v. Collector (1961)]
2. De minimis benefits
Facilities or privileges of relatively small value furnished by an employer to his employees and are as a
means of promoting the health, goodwill, contentment, or efficiency of his employees.
These are exempt from fringe benefit tax and compensation income tax.
3. 13th month pay and other benefits and payments specifically excluded from taxable compensation
income
Gross benefits received by employees of public and private entities provided that the total exclusion
shall not exceed P90,000 (amounts in excess are considered compensation income)

Benefits include:
1. Benefits received by government employees under RA 6686;
2. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree);
3. Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28;
and,
4. Other benefits such as productivity incentives and Christmas bonus.
c. Minimum Wage Earners
Minimum wage earners shall be exempt from the payment of income tax on their taxable income per RA
9504.
MWEs receiving other income from the conduct of trade, business, or practice of profession, except
income subject to final tax, in addition to compensation income are not exempted from income tax from
their entire income earned during the taxable year. This rule, notwithstanding, the statutory minimum
wage, holiday pay, overtime pay, night shift differential pay, and hazard pay shall still be exempt from
withholding tax [RR No. 10-2008].
3. Taxation of Business Income/Income From Practice of Profession
All income obtained from doing business and/or engaging in the practice of a profession shall be
included in the computation of taxable income. (0-35% For citizens, resident aliens & NRA Engaged in
trade or business or the 8% tax on gross sales or receipts, on the option of the taxpayer; 25% in case of
NRANETB)
Individuals earning purely business or professional income
Individuals earning income purely from self-employment and/or practice of profession whose gross
sales/receipts and other non-operating income does not exceed the VAT threshold as provided under
Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of:
a. The graduated rates under Section 24 (A) (2) (a) of the Tax Code, as amended; OR
b. An eight percent (8%) tax on gross sales or receipts and other non-operating income in excess of two
hundred fifty thousand pesos (P250,000.00) in lieu of the graduated income tax rates under Section 24
(A) and the percentage tax under Section 116 all under the Tax Code, as amended.
Individuals earning mixed income
For mixed income earners, the income tax rates applicable are:
a. The compensation income shall be subject to the tax rates prescribed under Section 24 (A) (2) (a) of
the Tax Code, as amended; AND
b. The income from business or practice of profession shall be subject to the following:
1. If the gross sales/receipts and other non-operating income do not exceed the VAT threshold, the
individual has the option to be taxed at:
a. Graduated income tax rates prescribed under Section 24 (A) (2) (a) of the Tax Code, as amended; OR
b. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income in
lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code, as
amended.
2. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual
shall be subject to the graduated income tax rates prescribed under Section 24 (A) (2) (a) of the Tax
Code, as amended.
[RR No. 08-2018 implementing RA No. 10963 (TRAIN Law) specifically Sec. 24 (A)(2)(b) & (c)14]

4. Taxation of Passive Income

Passive Income Subject to Final Tax
“Final tax” means tax withheld from source, and the amount received by the income earner is net of the
tax already. The tax withheld by the income payor is remitted by him to the BIR. The income having
been tax-paid already, it need not be included in the income tax return at the end of the year. These
passive income items are as follows:
a. Interest income
b. Royalties
c. Dividends from domestic corporations
d. Prizes and other winnings
a. Interest income
1. on any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust
funds and similar arrangements - 20% final tax
2. under the expanded foreign currency deposit system (EFCDS) - 15% final tax for residents, exempt if
non-residents15
Treatment of income from long-term deposits
On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments, which have
maturity of 5 years or more) – exempt
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be imposed on the entire
income based on the remaining maturity:
4 years to less than 5 years
5%
3 years to less than 4 years
12%
less than 3 years
20%
b. Royalties
(See summary table, infra)

c. Dividends from domestic corporation

1. cash and/or property dividends actually or constructively received by an individual from
2. a domestic corporation
3. a joint stock company
4. insurance or mutual fund companies
5. regional operating headquarters of multinational companies
6. share of an individual in the distributable net income after tax of a partnership (except a general
professional partnership) of which he is a partner
7. share of an individual member or co-venturer in the net income after tax of an association, a joint
account, or a joint venture or consortium taxable as a corporation
Rate:
1. 10% for residents (RC, RA) and non-resident citizens (NRC);
2. 20% for NRAETB (non-resident aliens engaged in trade or business)
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent that it represents a
distribution of earnings or profits. [Sec. 73B, NIRC]
In other words, stock dividends are generally not subject to tax as long as there are no options in lieu of
the shares of stock.

On the other hand, a stock dividend constitutes income if it gives the shareholder an interest different
from that which his former stockholdings represented.
d. Prizes and other winnings
1. Winnings, except Philippine Charity sweepstakes / lotto winnings which does not exceed P10,000 –
20%
2. Winnings from PCSO not more than P10,000 shall be exempt from tax.16
3. Prizes exceeding P10,000 – 20%
4. Prizes not exceeding P10,000 shall be subjected to the graduated income tax rates.
Prize, differentiated from winnings:
A prize is the result of an effort made (e.g., prize in a beauty contest), while winnings are the result of a
transaction where the outcome depends upon chance (e.g., betting).
For interest from foreign currency loans granted by FCDUs to residents other than Offshore Banking
Units (OBUs) or other depository banks under the expanded system – tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
For interest from foreign currency loans granted by OBUs to residents other than OBUs or local
commercial banks, including branches of foreign banks that may be authorized by the BSP to transact
business with OBUs - tax rate is 10% if payors are RESIDENTS, whether individuals or corporations.
Gross income from all sources within the Philippines derived by non-resident cinematographic film
owners, lessors or distributors – tax rate is 25% if payee is: (a) non-resident alien individual, or (b) non-
resident foreign corporation. The term “cinematographic films” includes motion picture films, films,
tapes, discs and other such similar or related products.
Informer’s reward given to persons who voluntarily provide definite and sworn information that lead to
or was instrumental in the discovery of fraud or violation of the provisions of the NIRC or special laws
being administered by the BIR and resulted in the actual recovery or collection of revenues, surcharges
and fees and/or the conviction of the guilty party or parties, and/or the imposition of any fine or penalty
or the actual collection of a compromise amount, in case of amicable settlement, shall be subject to
income tax, collected as a final withholding tax, at the rate of 10%, pursuant to Sec. 282 of the NIRC [RR
16-2010]
Passive income not subject to tax
Interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the BSP shall be exempt from tax
But should the holder of the certificate pre-terminate the deposit or investment before the 5th year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:
1. Four (4) years to less than five (5) years - 5%;
2. Three (3) years to less than four (4) years - 12%; and
3. Less than three (3) years - 20%.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
5. Taxation of Capital Gains
a. Income from sale of shares of stock of a Philippine corporation
1. Shares traded and listed in the stock exchange – exempt
The transaction is exempt from income tax regardless of the nature of business of the seller or
transferor. However, it is subject to the one-half of one percent (0.6 of 1%) stock transaction tax
imposed under Sec. 127(A) of the Tax Code based on the gross selling price or gross value in money of
the shares of stock sold or transferred

2. Shares not listed and traded in the stock exchange – subject to final tax
On sale, barter, exchange or other disposition of shares of stock of a domestic corporation not listed and
traded through a local stock exchange, held as a capital asset
On the net capital gain: Final Tax of 15%
Tax on income derived from sale of shares not listed in the SE Rates before TRAIN Under TRAIN 5% on
sale of stocks not over P100,000 plus 10% on amount in excess of P100,000 Final Tax of 15%
Net capital gain: selling price less cost
Selling price: consideration on the sale OR fair market value of the shares of stock at the time of the sale,
whichever is higher
Cost: original purchase price

b. Income from the sale of real property situated in the

Philippines
What property covered
Property located in the PH classified as capital assets
What transactions covered
Sales, exchanges, or other disposition of real property (classified as capital assets), including pacto de
retro sales and other forms of conditional sales of the following: citizens, resident aliens, NRAETB,
NRANETB, domestic corporations.
Tax rate
General rule: 6% of —whichever is higher of:
1. Gross selling price, or
2. Fair market value (determined in accordance with Sec. 6(E), NIRC).
Exception:
1. In case of sales made to the government, any of its political subdivisions or agencies, or to GOCCs, it
can be taxed either:
a. Under Sec. 24(D)(1), NIRC – 6% CGT, or
b. Under Sec. 24(A), NIRC, at the option of the taxpayer.
2. In case of the sale of or disposition of their principal residence by natural persons

Requirements:
a. Sale or disposition by a natural person of his principal residence,
b. The proceeds of which is fully utilized in acquiring/constructing a new principal residence,
c. Such acquisition/construction taking place within 18 calendar months from the date of sale or
disposition,
d. The taxpayer notifies the Commissioner within 30 days from the sale/disposition through a prescribed
return of his intention to avail of the exemption,
e. The tax exemption can only be availed of once every 10 years.
Tax treatment: Exempt from capital gains tax (CGT). If there is no full utilization of the proceeds of sale
or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall
be subject to CGT.
How taxable portion and tax determined: [𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑜𝑟 𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒]
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.
Computation for the basis of new principal residence:
Historical cost of old principal residence
XXX
Add: Additional cost to acquire new principal residence*
XXX
Adjusted cost bases of the new principal residence
XXX
*Additional cost to acquire new principal residence:
Cost to acquire new principal residence
XXX
Less: Gross selling price of old principal residence
(XXX)
Additional cost to acquire new principal residence
XXX

c. Income from the sale, exchange, or other disposition

of other capital assets
Other properties shall be subject to income tax
1. At the graduated income tax rates, if the seller is an individual;
2. Long-term capital gains: only 50% is recognized.
3. Short-term capital asset transactions: 100% subject to tax. [Sec. 39(B), NIRC]
Determination of whether short- or long-term: Short-term if held for 12 months or less; otherwise, it is a
long-term capital gain.
At 30% corporate income tax, if the seller is a corporation.
Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the real properties considered as ordinary assets
under Section 39(A)(1) of the NIRC.
Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Section 39(A)(1) of the NIRC, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
4. Real property used in trade or business of the taxpayer
b. Income Tax on Non-Resident Aliens Engaged in Trade or Business
A non-resident alien is an individual whose residence and citizenship is not in the Philippines.
One who comes to the Philippines for a definite purpose which, in its nature, may be promptly
accomplished is a transient. But if 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 of which he came has been consummated or abandoned. [Sec. 5, RR No. 2]
In general, a non-resident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien
doing business in the Philippines.
Intended stay in the Philippines:
1. Up to 180 days – Non-resident alien not engaged in trade or business
2. More than 180 days but less than 1 year – Non-resident alien engaged in trade or business
3. 1 year or more – Resident alien
General Rule: Subject to an income tax in the same manner as an individual citizen and a resident alien
individual on taxable income from all sources within the Philippines.
Cash and/or property dividends
The following shall be subject to an income tax of twenty percent (20%) on the total amount thereof:
1. Cash and/or property dividends from:
a. A domestic corporation;
b. A joint stock company;
c. An insurance or mutual fund company;
d. A regional operating headquarters of multinational company;
e. The share of a nonresident alien individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner;
f. The share of a nonresident alien individual in the net income after tax of an association, a joint
account, or a joint venture taxable as a corporation of which he is a member or a co-venturer;
2. Interests
3. Royalties (in any form); and
4. Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to
graduated tax) and other winnings (except PCSO / lotto winnings which shall not exceed P10,000)

Except:
1. The following Royalties shall be subject to a final tax of ten percent (10%) on the total amount
thereof:
2. On books as well as other literary works; and
3. On musical compositions
4. Cinematographic films and similar works shall be subject to twenty-five percent (25%) of the gross
income
5. Interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
But should the holder of the certificate pre- terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:
• Four (4) years to less than five (5) years - 5%;
• Three (3) years to less than four (4) years - 12%; and
• Less than three (3) years - 20%.
Capital gains
Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not
traded through the local stock exchange, and real properties shall be subject to the similar tax
prescribed on citizens and resident aliens.
1. Sale, barter or exchange of Shares of stock in domestic corporation not traded – 15% of net capital
gains
2. Sale, barter or exchange of real properties – 6% of gross selling price or current FMV whichever is
higher
c. Income Tax on Non-Resident Aliens Not Engaged in Trade or Business [Sec. 25 (B)]
There shall be levied, collected, and paid for each taxable year upon the entire income received from all
sources within the PH by every NRANETB within the PH as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equivalent
to 25% of such income.
The preferential tax treatment 15% shall not be applicable to regional headquarters (RHQs), regional
operating headquarters (ROHQs), offshore banking units (OBUs) or petroleum service contractors and
subcontractors registering with the Securities and Exchange Commission (SEC) after January 1, 2018.
[Sec. 25 (F), NIRC (this provision was added by TRAIN)]

d. Individual Taxpayers Exempt from Income Tax

Individual Taxpayers exempt from income tax are:
1. Senior Citizens (with qualifications)
2. Minimum wage earners
3. Exemptions granted under international agreements
All individuals and entities claiming exemption from imposition of taxes on income and, consequently,
from withholding taxes are required to provide a copy of a valid, current and subsisting tax exemption
certificate or ruling, as per existing administrative issuances and any issuance that may be issued from
time to time, before payment of the related income.
The tax exemption certificate or ruling must explicitly recognize the grant of tax exemption, as well as
the corresponding exemption from imposition of withholding tax. Failure on the part of the taxpayer to
present the said tax exemption certificate or ruling as herein required shall subject him to the payment
of appropriate withholding taxes due on the transaction. [RMC No. 8-2014]
1. Senior Citizens
Generally, Senior Citizens are still taxable individual. However, if they are considered as MWEs, rules on
MWE will apply.
Who are covered: any resident citizen—
a. At least 60 years old, and
b. Who are considered minimum wage earners under RA 9504 (Sec. 4 (b) RA 7432, as amended by RA
9994) and/or the aggregate amount of gross income earned by the senior citizen during the taxable year
does not exceed the amount of his personal exemptions (BPE and APE).
2. Minimum Wage Earners
Rule: they shall be exempt from payment of income tax on their taxable income.
Limit: However, if he receives “other benefits” in excess of the allowable statutory amount of P90,000,
then he shall be taxable on the exceeds benefits as well as his salaries, wages, and allowances, just like
an employee receiving compensation income beyond the statutory minimum wage.
[T]he treatment of bonuses and other benefits that [a minimum wage earner] receives from the
employer in excess of the [₱90,000] ceiling cannot but be the same as the prevailing treatment prior to
R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less. The treatment of this excess
cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by R.A. 9504.
[Soriano v. Secretary of Finance, G.R. No. 184450 (2017)]
TAXATION OF COMPENSATION INCOME OF A MINIMUM WAGE EARNER
a. Statutory minimum wage – earner shall refer to rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22 GG, as amended by RA 9504]
b. Minimum wage earner – shall refer to a worker in the private sector paid the statutory minimum
wage, or to an employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned. [Sec.22 HH, as amended by RA
9504]
The minimum wage shall be exempt from the payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax
c. Income also subject to tax exemption: holiday pay, overtime pay, night shift differential, and hazard
pay Compensation income including overtime pay, holiday pay and hazard pay, earned by minimum
wage earners who has no other returnable income are NOT taxable and not subject to withholding tax
on wages [RA 9504]
3. Exemptions Granted Under International Agreements
See RMC No, 31-2013, April 12, 2013 – taxation of compensation income of Philippine nationals and
alien individuals employed by foreign governments/embassies/diplomatic missions and international
organizations situated in the Philippines.
The Government of the Philippines is a signatory of certain international agreements and a party to
different tax treaties which specifically provide for the exemption of certain persons or entities from
taxes imposed by the Philippines.
Examples of these tax exemptions are those accorded to diplomats or ambassadors of other countries
here in the Philippines. The World Health Organization is also tax exempt upon an international
agreement [CIR v. Gotamco, G.R. No. L-31092 (1987)]
COMPUTATIONS [RR 08-2018]
Pure Compensation Income
Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists of
the overtime pay — P80,000.00, night shift differential — P30,000.00, hazard pay — P15,000.00, and
holiday pay — P15,000.00. He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health, etc.) and
P11,000 non-taxable benefits.
Total Compensation Income
P135,000.00
Add: Overtime, night shift differential, hazard, and holiday pay
140,000.00
–––––––––––
Total Income
P275,000.00
Less: Mandatory contributions
P5,000.00
Non-taxable benefits
11,000.00
16,000.00
–––––––––––
–––––––––––
Net taxable income
P259,000.00
Tax due (20% in excess of P250,000)
1,800
Mixed-income (i.e. compensation income and business income/income
from the practice of profession – opted to avail of 8% tax on
business/professional income)
Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018 of
P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience
store, with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100,000.00.
a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income
tax rate on his gross sales for his income from business:
Total compensation income
P1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max)
90,000.00
––––––––––––
Taxable Compensation Income
P1,410,000.00
Tax due:
1. On Compensation:
On P800,000.00
P130,000.00
On excess (P1,410,000 - P800,000) x 30%
183,000.00
––––––––––––
Tax due on Compensation Income
P313,000.00
––––––––––––
2. On Business Income:
Gross Sales
P2,400,000.00
Add: Non-operating Income
100,000.00
––––––––––––
Taxable Business Income
P2,500,000.00
Multiplied by income tax rate
8%
––––––––––––
Tax Due on Business Income
P200,000.00
––––––––––––
Total Income Tax Due (Compensation and Business)
P513,000.00
* The option of 8% income tax rate is applicable only to taxpayer's income from business, and the same
is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section
116 of the Tax Code, as amended.
* The amount of P250,000.00 allowed as deduction under the law for taxpayers earning solely from self-
employment/practice of profession, is not applicable for mixed income earner under the 8% income tax
rate option.
* The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax
rates applicable to compensation income.

Mixed-income (i.e. compensation income and business income/income

from the practice of profession)
Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not opt
for the eight percent (8%) income tax based on gross sales/receipts and other non-operating income:
Total compensation income
P1,500,000.00
Less: Non-taxable 13th month pay and other benefits-max
90,000.00
––––––––––––
Taxable Compensation Income
P1,410,000.00
Add: Taxable Income from Business —
Gross Sales
P2,400,000.00
Less: Cost of Sales
1,000,000.00
–––––––––––
Gross Income
P1,400,000.00
Less: Operating Expenses
600,000.00
–––––––––––
Net Income from Operation
P800,000.00
Add: Non-operating Income
100,000.00
900,000.00
–––––––––––
––––––––––––
Total Taxable Income
P2,310,000.00
Tax Due:
On P2,000,000.00
P490,000.00
On excess (P2,310,000 - 2,000,000) x 32%
99,200.00
––––––––––––
Total Income Tax
P589,200.00
* The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates.

Pure Business/Professional Income (Opted to be taxed at 8% of gross

sales or receipts)
Illustration: Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients.
In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services
of P300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter
return.
Her income tax liability for the year will be computed as follows:
Gross Sales — Convenience Store
P800,000.00
Gross Receipts — Bookkeeping
300,000.00
––––––––––––
Total Sales/Receipts
P1,100,000.00
Less: Amount allowed as deduction under Sec. 24 (A) (2) (b)
250,000.00
––––––––––––
Taxable Income
P850,000.00
Tax Due:
8% of P850,000.00
P68,000.00
* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
* Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount
allowed as deduction of P250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended.
* Income tax imposed herein is based on the total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and
percentage tax due, by express provision of law.
Pure Business/Professional Income (Opted to be taxed at schedular
rates)
Illustration: Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross
sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses
amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax shall
be computed as follows:
Gross Sales/Receipts
P1,100,000.00
Less: Cost of Sales
600,000.00
––––––––––––
Gross Income
P500,000.00
Less: Operating Expenses
200,000.00
––––––––––––
Taxable Income
P300,000.00
Tax Due:
On excess (P300,000 - P250,000) x 20%
P10,000.00

5. Income Tax on Corporations

a. Income Tax on Domestic Corporations and Resident
Foreign Corporations
Domestic Corporations
1. A corporation created and organized in the Philippines or under its laws (the law of incorporation test).
[Sec. 22 (C), NIRC]
2. Taxable on all income derived from sources within and without the Philippines; and

Resident Foreign Corporations

1. A corporation organized under the laws of a foreign country, which is engaged in trade or business in the
Philippines. [See “Doing Business” definition under the FIA above]
2. Taxable only on income derived from sources within the Philippines.
3. A Philippine branch of a foreign corporation duly licensed by the SEC is considered a resident foreign
corporation. Thus, only the income of the Philippine branch from sources within the Philippines is subject to
Philippine income tax.
4. As general rule, the head office of a foreign corporation is the same juridical entity as its branch in the
Philippines following the single entity concept. Thus, the income from sources within the Philippines of the
foreign head office shall thus be taxable to the Philippine branch.

But, when the head office of a foreign corporation independently and directly invested in a domestic
corporation without the funds passing through its Philippine branch, the taxpayer, with respect to the tax on
dividend income, would be the non-resident foreign corporation itself and the dividend income shall be
subject to the tax similarly imposed on non- resident foreign corporations. [Marubeni v. Commissioner, G.R.
No. 76573 (1989)]
1. Regular Tax
Default income tax. Except as otherwise provided, income tax of 30% is imposed on taxable income.
Applies equally to both: (a) Domestic corporations (on income from within and without the Philippines) and
(b) Resident Foreign Corporations (on income from within the Philippines)

Tax effort ratio

20% of GNP Ratio of income tax collection to total tax revenues
40% VAT tax effort
4% of GNP Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP
0.90%
At present, the OGIT has not been implemented in the Philippines.
The option of GIT is available to corporation whose ratio of Cost of Sales to Gross Sales does not exceed 55%.
The election of GIT by a corporation is irrevocable for 3 consecutive taxable years during which it is qualified
under the scheme.
Note: Gross income for GIT is the same as Gross income for MCIT [see infra] except in GIT of sale of service,
cost of services is not deducted.
2. Minimum Corporate Income Tax (MCIT)
a. Applies to domestic corporations and RFCs whenever such corporations (i) have zero or negative taxable
income, or whenever the (ii) MCIT is greater than the normal income tax due.
b. Imposed beginning the fourth taxable year from the taxable year the corporation commenced its business
operations. For purposes of MCIT, the taxable year in which business operations commenced shall be the
year when the MCIT (P300,000 x 2%)
P6,000
Normal Income Tax (P100,000 x 30%)
P30,000
Income Tax to be paid for the year (whichever is higher)
P30,000
Carry forward of excess minimum tax
Any excess of the minimum corporate income tax over the normal income tax shall be carried forward on an
annual basis. The excess can be credited against the normal income tax in the next three (3) succeeding
taxable years. [Sec. 27(E)(2)] In the year to which carried forward, the normal tax should be higher than the
MCIT.
Relief from MCIT [Sec. 27 (E)(3), NIRC]
The Secretary of Finance may suspend imposition of MCIT on any corporation which sustained
substantial losses on account of (LMB):
a. Prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months
and caused the temporary shutdown of operations), or
b. Force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or
c. Legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons).
Quarterly MCIT Computation
The computation and the payment of MCIT shall likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the tax due for the taxable quarter, if the quarterly MCIT is
higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time
of filing the quarterly corporate income tax return shall be the MCIT.
Items allowed to be credited against quarterly MCIT due: (a) CWT, (b) Quarterly income tax payments
under the normal income tax; and (c) MCIT paid in the previous taxable quarter(s).
Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the quarterly
MCIT tax due.
Annual Income Tax Computation.
The final comparison between the normal income tax payable and the MCIT shall be made at the end of
the taxable year. The payable or excess payment in the Annual Income Tax Return shall be computed
taking into consideration corporate income tax payment made at the time of filing of quarterly
corporate income tax returns whether this be MCIT or normal income tax.
In the computation of annual income tax due, if the normal income tax due is higher than the computed
annual MCIT, the following shall be allowed to be credited against the annual income tax: (a) quarterly
MCIT payments, (b) quarterly normal income tax payments, (c) excess MCIT in the prior year/s (subject
to the prescriptive period allowed for its creditability), (d) CWTs in the current year, (d) excess CWTs in
the prior year.
If in the computation of annual income tax due, the computed annual MCIT due is higher than the
annual normal income tax due, the following may be credited against the annual income tax: (a)
quarterly MCIT payments of current taxable quarter, (b) quarterly normal income tax payments in
current year, (c) CWTs in the current year, (d) excess CWTs in the prior year.
Excess MCIT from the previous taxable year/s shall not be allowed to be credited against the annual
MCIT due as the same can only be applied against normal income tax.
Manner of Filing and Payment.
The MCIT shall be paid in the same manner prescribed for the payment of the normal corporate income
tax which is on a quarterly and on a yearly basis.
3. Branch Profit Remittance Tax [Sec. 28 (A) (5), NIRC]
a. Applies to non-resident foreign corporations. Imposed on profits remitted by the Philippine branch to
the head office.
b. Collected as Final Withholding Tax [Sec.57, NIRC]
Taxable transaction – any profit remitted by a branch to its head office
Tax Rate and Base – 15% final tax based on the total profits applied or earmarked for remittance without
any deduction for the tax component (except those activities registered with PEZA).
a. The following are not treated as branch profits unless effectively connected with the conduct of trade
or business in the Philippines:
b. Interests, dividends, rents, royalties (including remuneration for technical services),
c. salaries, wages,
d. premiums, annuities, emoluments, or
e. other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
during each taxable year from all sources within the Philippines
4. Allowable Deductions
a. Itemized Deductions
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines

8. Charitable and other contributions

9. Research and development
10. Pension trusts
b. Optional Standard Deductions (OSD)
In lieu of itemized deductions, standard deduction of 40% of gross income.
5. Taxation of Passive Income
Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements and royalties
a. 20% final tax on: (i) interest on any currency bank deposit, (ii) yield or any other monetary benefit
from deposit substitutes, trust funds and similar arrangements, and (iii) royalties
b. same for Domestic Corporations and Resident Foreign Corporations
c. Collected as Final Withholding Tax [Sec.57, NIRC]
Interest Income derived by a domestic corporation from depository bank under the expanded foreign
currency deposit system [Section 27 (D)(1), NIRC17]
a. 15% final income tax
b. same for Domestic Corporations and Resident Foreign Corporations
c. Collected as Final Withholding Tax [Sec.57, NIRC]
Inter-corporate dividends
a. Exempt – dividends received from a domestic corporation by a domestic corporation/resident foreign
corporation
b. same for Domestic Corporations and Resident Foreign Corporations

6. Taxation of Capital Gains

Capital gain from sale of shares of stock not traded in the stock exchange
a. Final tax on net capital gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation not listed and traded through a local stock
exchange: 15% of net capital gains [Section 27 (D)(2), NIRC18]
b. For Resident Foreign Corporations, and Nonresident Foreign Corporations
c. First P100k – 5%
d. Amount in excess of P100k – 10% [Section 28 (7)(c), NIRC]
Capital gains realized from the sale, exchange, or disposition of lands and/or buildings
a. On the sale, exchange or disposition of lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets → On the gross selling price, or the current
fair market value at the time of the sale, whichever is higher, a final tax of 6% ; If it is a Resident Foreign
Corp., it is subject to the regular corporate income tax rate of 30%
b. The capital gains tax is applied on the gross selling price, or the current fair market value at the time
of the sale, whichever is higher. Any gain or loss on the sale is immaterial because there is a conclusive
presumption by law that the sale resulted in a gain.
c. applicable to domestic corporations only
d. Tax treatment is similar to that of individuals.

b. Income Tax on Non-Resident Foreign Corporations

[Sec. 28 (B), NIRC]
Non-Resident Foreign Corporations

1. A corporation organized under the laws of a foreign country, which is not engaged in trade or
business in the Philippines. [See “Doing Business” definition under the FIA in B.7.2. Corporations]
2. Taxable only on income derived from sources within the Philippines.
3. Income taxes on nonresident foreign corporations are collected as Final Withholding Tax under
Sec.57, NIRC.
General rule
1. Except as otherwise provided, the tax is 30% of gross income received during each taxable year from
all sources within the Philippines
2. This includes: interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains (except capital gains on the sale of shares not traded in the stock exchange)
Tax on certain Nonresident Owners, Lessors or Distributors:
1. Non-resident cinematographic film owner, lessor or distributor – 25% of gross income from all sources
within the Philippines
2. Non-resident owner or lessor of vessels chartered by Philippine nationals – 4.5% of gross rentals,
lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the
Maritime Authority
3. Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of gross rentals,
charters or other fees
Tax on Interest on foreign loans: contracted on or after August 1, 1986 – 20% [Sec. 28 (B) (5) (a), NIRC]
Tax on Intercorporate dividends
1. Intercorporate Dividend – 15% on dividends received from domestic corporations, if the country in
which the nonresident foreign corporation is domiciled allows a tax credit of at least 15% for taxes
“deemed paid” in the Philippines
2. 15% foreign tax credit represents the difference between the regular income tax of 30% on
corporations and the 15% tax on dividends (“tax sparing credit”)
3. If the country within which the NRFC is domiciled does NOT allow a tax credit, the tax is 30% on
dividends received from a domestic corporation.
Tax on Capital gain from sale of shares of stock not traded in the stock exchange
1. Final tax on net capital gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation not listed and traded through a local stock
exchange:
a. First P100k – 5%
b. Amount in excess of P100k – 10%
2. same for Nonresident Foreign Corporations

c. Income Tax on Special Corporations

1. Domestic Corporations
a. Proprietary Educational Institutions and Non-profit Hospitals [Sec. 27 (B), NIRC]
Tax Rate and Base –10% tax on taxable income (except on income subject to capital gains tax and
passive income subject to final tax) within and without the Philippines
Caveat: If gross income from unrelated trade or business or other activity exceeds 50% of total gross
income derived from all sources, the tax rate of 30% shall be imposed on the entire taxable income.
Unrelated trade, business or other activity – 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.
Proprietary educational institution – any private school maintained and administered by private
individuals or groups with an issued permit to operate from the DECS, CHED or TESDA. [Sec. 27(B), NIRC]
b. Government-owned or Controlled Corporations, Agencies or Instrumentalities [Sec. 27 (C), NIRC]
GOCCs
General rule: GOCCs are taxable as any other corporation engaged in similar business, industry or
activity
Exceptions:
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local water districts (LWDs)

[Sec. 27(C), NIRC19]

Government agencies or instrumentalities
General rule: The government is exempt from tax.
Exception: When it chooses to tax itself. Nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt
its wisdom. [Mactan Cebu Airport v Marcos, G.R. No. 120082 (1996)]
c. Depository Banks (Foreign Currency Deposit Units) [Sec. 27 (D) (3), NIRC]
Income derived by a depository bank under the expanded foreign currency deposit system from:
1. foreign currency transactions with nonresidents, offshore banking units in the Philippines, local
commercial banks, including branches of foreign banks authorized by the BSP to transact business with
foreign currency depository system units and other depository banks under the EFCDS – exempt from
income tax
except net income from transactions specified by the Secretary of Finance upon recommendation by the
Monetary Board – subject to regular income tax payable by banks
2. foreign currency loans granted to residents (other than offshore banking units in the Philippines)–
interest income subject to a final tax of 10%
3. income of nonresidents, individuals or corporations, from transactions with depository banks under
the EFCDS – exempt from income tax
4. same for Domestic Corporations and Resident Foreign Corporations
5. similar treatment to OBUs
2. Resident Foreign Corporations
a. International Carrier Doing Business in the Philippines
Tax Rate and Base – 2.5% on Gross Philippine Billings (GPB)

International Air Carriers, GPB means:

1. gross revenue derived from (a) carriage of persons, excess baggage, cargo and mail (b) originating
from the Philippines in a continuous and uninterrupted flight, (c) irrespective of the place of sale or issue
and the place of payment of the ticket or passage document
2. tickets revalidated, exchanged and/or indorsed to another international airline – part of GPB if
passenger boards a plane in a port or point in the PH
3. flights which originate from the PH, but transshipment of passenger takes place at a port outside PH
on another airline – part of GPB only the aliquot portion of the cost of the ticket corresponding to the
leg flown from the PH to transshipment point [RR 15-2002]
Air Canada vs. CIR (CTA Case No. 6572):
1. A foreign airline company selling tickets in the Philippines through their local agents shall be
considered as resident foreign corporation engaged in trade or business in the country.
2. The absence of flight operations within the Philippine territory cannot alter the fact that the income
received was derived from activities within the Philippines.
3. The test of taxability is the source, and the source is that activity which produced the income.
International Shipping, GPB means:
Gross revenue for (a) passenger, cargo or mail (b) originating from the Philippines up to final destination,
(c) regardless the place of sale or payments of the passage or freight documents.
b. Off-shore Banking Units [Sec. 28 (A) (4), NIRC]
Income derived by OBUs authorized by the BSP from:
1. foreign currency transactions with nonresidents, other OBUs, local commercial banks, including
branches of foreign banks authorized by the BSP to transact business with OBUs – exempt from income
tax 2. except net income from transactions specified by the Secretary of Finance upon recommendation
by the Monetary Board – subject to regular income tax payable by banks
3. foreign currency loans granted to residents (other than offshore banking units in the Philippines)–
interest income subject to a final tax of 10%
4. income of nonresidents, individuals or corporations, from transactions with OBUs – exempt from
income tax
5. similar treatment to FCDUs
c. Resident Depositary Banks (Foreign Currency Deposit Units)
Income derived by a depository bank under the expanded foreign currency deposit system from:
1. foreign currency transactions with nonresidents, offshore banking units in the Philippines, local
commercial banks, including branches of foreign banks authorized by the BSP to transact business with
foreign currency depository system units and other depository banks under the EFCDS – exempt from
income tax
except net income from transactions specified by the Secretary of Finance upon recommendation by the
Monetary Board – subject to regular income tax payable by banks
2. foreign currency loans granted to residents (other than offshore banking units in the Philippines)–
interest income subject to a final tax of 10%
3. income of nonresidents, individuals or corporations, from transactions with depository banks under
the EFCDS – exempt from income tax
4. same for Domestic Corporations and Resident Foreign Corporations
5. similar treatment to OBUs
d. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies
[Sec. 28 (A) (6), NIRC]
Regional or area headquarters
1. branch established in the Philippines by multinational companies and which headquarters do not earn
or derive income from the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets
[Sec. 22 (DD), NIRC]
2. not subject to income tax
Regional operating headquarters
1. branch established in the Philippines by multinational companies which are engaged in any of the
following services: (i) general administration and planning; (ii) business planning and coordination; (iii)
sourcing and procurement of raw materials and components; (iv) corporate finance advisory services; (v)
marketing control and sales promotion; (vi) training and personnel management; (vii) logistic services;
(viii) research and development services and product development; (ix) technical support and
maintenance; (x) data processing and communications; and (xi) business development. [Sec. 22 (EE),
NIRC]
2. tax of 10% of their taxable income
d. Improperly Accumulated Earnings Tax
[Sec. 29, NIRC, as implemented by RR 2-2001]
Rule: In addition to other income taxes, there is imposed for each taxable year a tax equal to 10% of the
improperly accumulated taxable income.
Applies 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.
Rationale: It is a tax in the nature of a penalty to the corporation for the improper accumulation of its
earnings, and a deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends
tax on the earnings distributed to them.
The touchstone of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation.

Effect of imposition of IAET

1. Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later
years even if not declared as dividend.
2. Profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be
subject to tax on dividends.
3. In applying the above rules, dividends shall be deemed to have been paid out of the most recently
accumulated profits (LIFO: last in, first out).
Reasonable needs of the business: The use of undistributed earnings and profits for the reasonable
needs of the business would generally not make the accumulated or undistributed earnings subject to
the tax.
Immediacy Test: The term "reasonable needs of the business" means (1) the immediate needs of the
business, including (2) reasonably anticipated needs.
The corporation should be able to prove (1) an immediate need for the accumulation of the earnings
and profits, or (2) the direct correlation of anticipated needs to such accumulation of profits.
Accumulation for Reasonable needs under RR 2-2001
1. Accumulation of earnings up to 100% of paid-up capital;
2. Definite corporate expansion projects requiring considerable capital expenditure (approved by Board
of Directors or equivalent body);
3. Building, Plant or Equipment Acquisition (approved by Board of Directors or equivalent body)
4. compliance with any Loan Covenant or pre-existing obligation (established under a legitimate
business agreement);
5. required by Law or applicable regulations to be retained;
6. in case of subsidiaries of foreign corporations in the Philippines, undistributed earnings reserved for
Investments within the Philippines
Coverage:
1. IAET applies to: domestic corporations classified as closely- held corporations.
2. IAET does not apply to:
1. Banks and other non-bank financial intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
3. General professional partnerships;
4. Non- taxable joint ventures; and
5. Enterprises registered with PEZA (RA 7916), BCDA (RA 7227), and other special economic zones
declared by law which enjoy a special tax rate in lieu of other taxes.
Closely-held corporations are those:
1. at least 50% in value of the outstanding capital stock; or
2. at least 50% of the total combined voting power of all classes of stock entitled to vote
3. is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not
falling under the aforesaid definition are, therefore, publicly- held corporations.
N.B. the same definition and rules as in Tax on IPO in Sec. 127 (B), NIRC; not the same as close
corporation under The Corporation Code]
Rules in determining if a corporation is closely-held:
1. Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by its shareholders,
partners or beneficiaries.
2. Family and Partnership Ownership. - An individual shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by or for his partner. ‘Family of an individual’ includes his
siblings (whether by whole or half-blood), spouse, ancestors and lineal descendants.
3. Option to Acquire Stocks. - If any person has an option to acquire stock, such stock shall be considered
as owned by such person. An option to acquire such an option and each one of a series of option shall
be considered as an option to acquire such stock.
4. Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the
application of (a) or (c) shall, for purposes of applying (1) or (2), be treated as actually owned by such
person. But stock constructively owned by the individual by reason of the application of (b) shall NOT be
treated as owned by him for purposes of again applying such paragraph in order to make another the
constructive owner of such stock.
BIR Ruling 025-02
The ownership of a domestic corporation for purposes of determining whether it is a closely held
corporation or a publicly held corporation is ultimately traced to the individual shareholders of the
parent company.
Where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power
of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or
more individuals, the corporation is considered as a publicly-held corporation, thus, exempt from IAET.
Determination of Purpose to Avoid Income Tax
1. Being a holding or investment company is prima facie evidence of purpose to avoid dividend tax.
Holding or investment company – corporation having practically no activities except holding property,
and collecting the income therefrom or investing the same;
2. Accumulation in excess of reasonable needs is determinative of the purpose to avoid dividend tax.
Prima facie instances of this include: (i) investment of substantial earnings and profits in unrelated
business or in stock or securities of unrelated business; (ii) investment in bonds and other long-term
securities; (iii) accumulation of earnings in excess of 100% of paid-up capital
3. The controlling intention of the taxpayer is that which is manifested at the time of accumulation, not
subsequently declared intentions which are merely the product of afterthought.
4. A speculative and indefinite purpose will not suffice. Definiteness of plan/s coupled with action/s
taken towards its consummation are essential.

e. Exemption from Tax on Corporations

Tax exempt corporations [Sec. 30, NIRC]
1. Labor, agricultural or horticultural organization – non-profit
2. mutual savings bank or cooperative bank – non-stock, non-profit, operated for mutual purposes
3. Beneficiary society, order, or association – operating for the exclusive benefits of their members;
includes: fraternal organization operating under the lodge system; or mutual aid association or a
nonstock corporation organized by employees providing life, sickness, accident, or other benefits
exclusively to the members
4. Cemetery company – owned and operated exclusively for the benefit of its members
5. Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes or for the rehabilitation of veterans, provided that no part of its
income or asset belong to or inure to the benefit of any individual 6. Business league, chamber of
commerce, or board of trade – Non-profit; no part of net income inures to the benefit of an individual
7. Civic league or organization – Non-profit; operating exclusively for the promotion of social welfare
8. Non-stock and non-profit educational institutions
9. Government educational institutions
10. Organizations of a purely local character whose income consists solely of assessment, duties and
fees collected from their members to meet expenses; includes: farmers’ or other mutual typhoon or fire
insurance company, mutual ditch or irrigation company and mutual or cooperative telephone company
11. Farmers’, fruit growers’, and like association – whose primary function is to market the product of
their members
Notwithstanding the provisions in the preceding paragraphs, the income of the foregoing organizations
from (1) their properties, real or personal, or from (2) their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed under the NIRC.
N.B. this means capital gains tax, tax on passive income, etc. applies to these otherwise exempt
organizations.

f. Tax on General Partnerships, General Professional

Partnerships, Co-Ownerships, Joint Ventures and
Consortiums
1. General Partnerships
Partnerships where all or part of their income is derived from the conduct of trade or business. It is
treated as a corporation. [Sec.22 (B), NIRC].
General rule: The partnership is subject to the same rules and rates as corporations.
Exceptions: A partner’s share in the partnership’s distributable net income is deemed actually or
constructively received by the partners in the same taxable year. [Sec. 73(D), NIRC]. Consequently:
a. such share will be subjected to dividend tax (10%) whether actually distributed or not.
b. there can never be an instance of improperly accumulated taxable income; note that RR 2-
2001 provides that IAET does not apply to taxable partnerships.
Distributable net income of the partnership is its taxable income less the normal corporate income tax
(30%).
A Partner’s contribution to the general partnership fund is a capital investment and is not taxable
income of the partnership.
2. General Professional Partnerships
Partnerships formed by persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business. [Sec 22 (B), NIRC]
Rules
a. A GPP as such shall not be subject to the income tax. It is not a taxable entity for income tax purposes.
b. The partners shall be liable for income tax only in their separate and individual capacities.
c. Each partner shall report as gross income his distributive share in the net income of the GPP, actually
or constructively received.
d. In computing the distributive share of the partners, the net income of the GPP shall be computed in
the same manner as a corporation. [Sec. 26, NIRC]
e. If the partnership sustains a net operating loss, the partners shall be entitled to deduct their
respective shares in the net operating loss from their individual gross income.
GPP is not a taxable entity
The GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of
income by, and the ultimate mechanism distribution of such income to the individual partners. [Tan v.
Commissioner, G.R. No. 109289 (1994)]
But the partnership itself is required to file income tax returns for the purpose of furnishing information
as to the share in the gains or profits which each partner shall include in his individual return. [RR 2-
1998]
The share of an individual partner in the net profit of a general professional partnership is deemed to
have been actually or constructively received by the partner in the same taxable year in which such
partnership net income was earned, and shall be taxed to them in their individual capacities, whether
actually distributed or not, at the graduated income tax ranging from 5% to 32%.

Because the principle of constructive receipt is applied to undistributed profits of GPPs, the actual
distribution to the partners of such tax-paid profits in another year should no longer be liable to income
tax. [Mamalateo]
3. Co-ownerships
There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons. [Art. 484, NCC] It may be created by succession or donation.
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited merely to the preservation of the co-owned property and
to the collection of the income from the property. Each co-owner is taxed individually on his distributive
share in the income of the co-ownership. [De Leon]
When Co-ownership is subject to tax
The following circumstances would render a co-ownership subject to a corporate income tax:
a. When a co-ownership is formed or established voluntarily, or upon agreement of the parties;
b. When the individual co-owner reinvested his share, and
c. When the inherited property remained undivided for more than ten years, and no attempt was ever
made to divide to same among the co-heirs, nor was the property under administration proceedings nor
held in trust, the property should be considered as owned by an unregistered partnership. [Valencia and
Roxas]
Automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived from them are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate
or intestate proceeding. [Ona v. CIR, G.R. No. L-19342 (1972)]
4. Joint Ventures and Consortiums
To constitute a” joint venture,” certain factors are essential. Each party to the venture must make a
contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money;
profits must be shared among the parties; there must be a joint proprietary interest and right of mutual
control over the subject matter of the enterprise; and usually, there is single business transaction.
General rule: An unincorporated joint venture is taxed like a corporation. The share of the joint venture
partners will no longer be taxable to them because they partake in the nature of intercorporate
dividends.
Exception: an unincorporated joint venture formed for the purpose of undertaking a construction
project or engaging in petroleum operations pursuant to the consortium agreement with the Philippine
Government is not subject to the corporate income tax. Only the joint venture partners will be taxed on
their respective shares in the income of the joint ventures. [Sec. 22(B), NIRC]
Two elements necessary to exempt a joint venture or consortium from tax
a. The joint venture must be an unincorporated entity formed by two or more persons
b. The joint venture was formed for the purpose of undertaking a construction project, or engaging in
the petroleum and other energy operations with operating contract with the government.

6. Filing of Returns and Payment of

Income Tax
a. Definition of a Tax Return and Information Return
Tax Return
Tax return refers to a formal report prepared by the taxpayer or his agent in a prescribed form showing
an enumeration of taxable amounts and description of taxable transactions, allowable deductions,
amount of tax and tax payable to the government.
Examples of tax returns are:
1. BIR Form Nos. 1700 and 1701 – Annual Income Tax Returns for Individual
2. BIR Form No. 1702 – Annual Income Tax Return for Corporations and Partnerships
3. BIR Form No. 1800 – Donor’s Tax Return
4. BIR Form No. 1801 – Estate Tax Return
Information Return
Any individual not required to file an income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. [Sec. 51(A)(3), NIRC]
Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the
Commissioner an annual information return containing the list of payees and income payments, amount
of taxes withheld from each payee and such other pertinent information as may be required by the
Commissioner. [Sec. 58(C), NIRC]
Every employer required to deduct and withhold the taxes in respect of the wages of his employees
shall, on or before January thirty-first (31st) of the succeeding year, submit to the Commissioner an
annual information return containing a list of employees, the total amount of compensation income of
each employee, the total amount of taxes withheld therefrom during the year, accompanied by copies
of the statement referred to in the preceding paragraph, and such other information as may be deemed
necessary. [Sec. 83(B), NIRC]

b. Period to File Income Tax Return of Individuals and

Corporations
1. Individuals
Income tax return of an individual who is not on a substituted basis shall be filed on or before April 15 of
each year covering income of the preceding taxable year. [Sec. 51 (C)(1), NIRC]
An individual whose taxable income does not exceed Two hundred fifty thousand pesos (P250,000)
under Section 24(A)(2)(A): Provided, That a citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine shall file an income tax return, regardless of the
amount of gross income. [Sec. 51 (A)(2)(a), NIRC20]
Individuals subject to capital gains tax [Sec. 51 (C)(2), NIRC]:
a. Sale of shares not traded thru a local stock exchange – file a return within 30 days from the
transaction, and a final consolidated return on or before April 15 of each year covering all stock
transactions of the preceding taxable year b. Sale of real property – file a return within 30 days from
each sale
Individuals deriving self-employment income (as sole source of income or mixed) – must file quarterly
return of summary declaration of gross income and deductions, and a final or adjustment [Sec. 74 (A),
NIRC21].
Period Due Date for Filing Return
Q1 Return
May 15 of the same year
Q2 Return
August 15 of the same year
Q3 Return
November 15 of the same year
Annual Return
April 15 of the following year
Self-employment income consists of earnings derived by the individual from the practice of profession
or conduct of trade or business, as a sole proprietor or as a member in a general professional
partnership. [Sec. 74 (A), NIRC]
Filing of these returns shall be in lieu of filing of a declaration of estimated income under Sec. 74, NIRC,
primarily for the reason that the procedure prescribed in Sec. 74 may not reasonably approximate the
correct amount of tax to be paid. [De Leon citing Rev. Regs. No. 2-93]
2. Corporations
Domestic corporations and resident foreign corporations shall file quarterly corporate income tax
returns within 60 days after the end of the calendar or fiscal quarter used, and annual corporate income
tax return on or before the 15th day of the fourth month following the close of the calendar year or
fiscal year, as the case may be [Sec. 74, NIRC].
The filing of the tax returns by a corporation using the calendar year:
Period Due Date for Filing Return
Q1 Return
May 31 of the same year
Q2 Return
August 31 of the same year
Q3 Return
November 30 of the same year
Annual Return
April 15 of the following year
Return of Corporation Contemplating Dissolution or Reorganization. – within 30 days after the adoption
of the plan for dissolution or reorganization (including corporations notified of possible involuntary
dissolution by the SEC), render a correct return to the CIR, verified under oath, setting forth the terms of
such plan and such other information required by rules and regulations. Prior to the issuance by the SEC
of the Certificate of Dissolution or Reorganization, the corporation shall secure a certificate of tax
clearance from the BIR which shall be submitted to the SEC. [Sec. 52 (C), NIRC]
Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange –
file a return within 30 days from the transaction, and a final consolidated return on or before the 15th
day of the fourth month following the close of the taxable year [Sec. 52 (D), NIRC]
PAYMENT OF INCOME TAX
General rule: The total amount of tax imposed by this Title (Tax on Income) shall be paid by the person
subject thereto at the time the return is filed.
Exception: When the tax due is in excess of P2,000, the taxpayer other than a corporation may elect to
pay the tax in 2 equal installments: the first installment paid at the time the return is filed and the
second installment, on or before October 15 following the close of the calendar year. [Sec. 56 (A)(2),
NIRC22]

c. Persons Liable to File Income Tax Returns

1. Individual Taxpayers
a. General Rule and Exceptions (Sec. 51(A), NIRC)
General Rule: The following are required to file income tax return:
1. Resident citizen
2. Non-resident citizen, on income from sources within the Philippines
3. Resident alien, on income from sources within the Philippines
4. Non-resident alien engaged in trade or business or in the exercise of profession in the Philippines, on
income from sources within the Philippines
Exceptions: The following shall not be required to file income tax return:
1. Individuals whose gross income does not exceed P250,000 except citizen and alien individuals
engaged in business or practice of profession within the Philippines who shall file income tax returns
regardless of the amount of gross income.
2. Individuals with respect to pure compensation income from sources within the Philippines, the
income tax on which has been withheld; except when such compensation has been derived from more
than one employer.
3. Individuals whose sole income has been subjected to final withholding tax (pursuant to Sec. 57(A),
NIRC).
4. Minimum wage earner (as defined in Sec. 22(HH), NIRC)
5. Individuals who are exempt from income tax pursuant to the provisions of the Tax Code and other
laws.
SPECIAL PROVISIONS
Married individuals (whether citizens, resident or nonresident aliens) who do not derive income purely
from compensation, shall file only one consolidated return to cover the income of both spouses for the
taxable year, but where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall

be consolidated by the BIR for verification. [Sec. 51 (D), NIRC]

The income of unmarried minors is a tax liability of the minor but where such income is derived from
property received from a living parent, the income shall be included in the return of the parent except
(a) when the donor’s tax has been paid on such property, or (b) when the transfer of such property is
exempt from the donor’s tax. [Sec. 51 (E), NIRC]
If the taxpayer is unable to make his return, such as when he suffers from disability, the return may be
made by his duly authorized agent or representative or by the guardian or other person charged with
the care of the taxpayer or his property; the principal and his representative or guardian assuming
responsibility for penalties for erroneous, false or fraudulent returns. [Sec. 51 (F), NIRC]
b. Substituted Filing
Applicable to individual taxpayers:
1. receiving purely compensation income, regardless of amount
2. from only one employer in the Philippines for the calendar year, and
3. the income tax of which has been withheld correctly by the employer
The certificate of withholding filed by their respective employers, duly stamped ‘received’ by the BIR,
shall be tantamount to the substituted filing of income tax returns by the employee. [Sec. 51-A, NIRC23
(new provision added by TRAIN)]
c. Corporate Taxpayers [Sec. 52(A), NIR]
All corporations subject to income tax shall render quarterly income tax returns and a final or
adjustment return, except foreign corporations not engaged in trade or business in the Philippines.
The return shall be filed by the President, Vice-President or other principal officer, and shall be sworn to
by such officer and by the treasurer or assistant treasurer.

d. Where to File Income Tax Returns

1. Individuals
Except in cases where the CIR otherwise permits, the return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in
which such person has his legal residence or principal place of business in the Philippines, or if there be
no legal residence or place of business in the Philippines, with the Office of the Commissioner [Sec.
51(B), NIRC]
2. Corporations
Except in cases where the CIR otherwise permits, the return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality having
jurisdiction over the place where the corporation’s principal office is located and where its books of
accounts and other data are kept; otherwise, the returns shall be filed and the tax paid thereon with the
Office of the Commissioner of Internal Revenue. [Sec. 77(A), NIRC]

e. Penalties for Non-Filing of Returns

• Failure to file any return and pay the tax due: a penalty equivalent to 25% of the amount due. [Sec.
248(A)(1), NIRC]
• Willful neglect to file the return: a penalty equivalent to 50% of the tax or deficiency tax. [Sec. 248(B),
NIRC]
• Failure to file information returns: P1,000 for each failure upon notice and demand by the CIR unless
due to reasonable cause not willful neglect provided the aggregate amount for all such failures during
the calendar year shall not exceed P25,000. [Sec. 250, NIRC]

7. Withholding of Taxes
a. Concept of Withholding Taxes
Withholding tax is a method of collecting income tax in advance from the taxable income of the
recipient of income. It is a systematic way of collecting taxes at source, an indispensable method of
collecting taxes to ensure adequate revenue for the government.
In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts no more than an agent of the government for the
collection of the tax in order to ensure its payment. The amount thereby used to settle the tax liability is
deemed sourced from the proceeds constitutive of the tax base. In an ad valorem tax, the tax paid or
withheld is not deducted from the tax base, except when the law clearly spells out in defining the tax
base.
The duty to withhold is different from the duty to pay income tax. The revenue officers generally
disallow the expenses claimed as deduction from gross income, if no withholding of tax as required by
law or the regulations was withheld and remitted to the BIR within the prescribed dates.
In addition, the withholding tax that should have been withheld and remitted to the BIR as well as the
penalties for non-, late or erroneous payment of the withholding tax such as surcharges and deficiency
interest are assessed by the BIR. [Mamalateo]
The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure to file the corresponding
returns and third, to improve the governments cash flow. This results in administrative savings, prompt
and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to
collect taxes through more complicated means and remedies. [Chamber of Real Estate and Builders’
Assoc., Inc. v. Romulo, G.R. No. 160756 (2010)]

b. Kinds of Withholding Taxes

IN GENERAL
1. Final Withholding tax – The amount of income tax withheld by the withholding agent is constituted as
a full and final payment of the
income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as withholding agent. Thus, in case of his
failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for the particular
income.
2. Creditable Withholding tax – Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due of the payee on said
income.
The income recipient is still required to file an income tax return, to report the income and/or pay the
difference between the tax withheld and the tax due on the income. Taxes withheld on income
payments covered by the expanded withholding tax and compensation income are creditable in nature.
WITHHOLDING TAXES IN THE NIRC
1. Withholding tax at source [Sec 57, NIRC]
Withholding of final tax of certain income – Subject to rules and regulations the Secretary of Finance
may promulgate, upon the recommendation of the CIR, the tax imposed or prescribed by the NIRC on
certain specified items of income shall be withheld by payor-corporation and/or person.
N.B. Sec. 57 contains an extensive list of taxes. This items of income include taxes on certain passive
incomes (interest, dividends), capital gains tax (shares not traded, real property), branch profit
remittance tax, and certain payments to nonresident aliens /foreign corporations.]
Withholding of creditable tax at source – The Secretary of Finance may, upon the recommendation of
the CIR, require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than 1% but not more than 32%, which shall be credited against the income tax liability of the taxpayer
for the taxable year. Provided, That, beginning January 1, 2019, the rate of withholding shall not be less
than one percent (1%) but not more than fifteen percent (15%) of the income payment. [Sec. 57 (B),
NIRC24]
2. Withholding tax on wages [Sec 79(A), NIRC]
Except in the case of minimum wage earner, every employer making payment of wages shall deduct and
withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the CIR.
3. Withholding of VAT [Sec 114 (C), NIRC]
The government (political subdivisions, instrumentalities, agencies, GOCCs) shall deduct and withhold
final VAT of 5% of gross payment on purchase of goods and services subject to VAT. If the payment is for
lease or use of properties to a nonresident owner, withholding tax shall be 12%.
Note: Beginning January 1, 2021, the VAT withholding system shall shift from final to a creditable
system. (Under the TRAIN Law)