Tax 1

AEC 402. Income Taxation

GENERAL PRINCIPLES

DEFINITION OF TAXATION

Taxation is the process by which the sovereign, through its lawmaking body, raises
revenue to defray the necessary expenses of the government.

Taxation is an inherent power of the state to demand enforced contribution for public
purposes.

PURPOSE OF TAXATION

Primary purpose - is to raise revenue for governmental needs.

Secondary purposes:
1. Regulation
2. Promotion of general welfare
3. Encourage economic growth

ASPECTS OF TAXATION

The exercise of the power of taxation involves two (2) aspects:

1. Levying or imposition of the tax which is a legislative act. Levying is the process of
determining the persons or property to be taxed, the sums to be raised, the rate thereof,
and the time and manner of levying, receiving, and collecting taxes.

2. Collection of the tax which is essentially administrative in character. The manner of

enforcing the tax obligation on the part of those required to pay the tax.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy means that the sources of revenue should be sufficient to meet the
demands of public expenditures.

2. Equality or theoretical justice - means that the tax burden should be in proportion to
the taxpayer's ability to pay. It is also referred to as the "ability-to-pay principle".

3. Administrative Feasibility - means that tax laws should be capable of convenient, just,
and effective administration.

INHERENT POWERS OF THE STATE

1. Taxation - refers to the inherent power of the state to demand enforced contributions
for public purposes.
 2. Eminent Domain - refers to the inherent power of the state to take private property for
public use upon paying to the owner a just compensation to be ascertained according to
law. It is also called Expropriation.

3. Police Power - refers to the inherent power of the state to enact laws in relation to
persons and property as may promote public health, public morals, public safety and the
general welfare of its inhabitants

LIMITATIONS ON THE POWER OF TAXATION

1. CONSTITUTIONAL LIMITATIONS - those expressly found in the constitution or implied from

its provisions.

a. Observance of Due Process of Law.

There is a recognition that a person may be deprived by the State of his life,
liberty, or property as long as the requirements of due process of law are
observed.

b. Equal Protection of the Laws

This means that all persons subject to legislation shall be treated alike under
circumstances and conditions both in the privileges conferred and liabilities
imposed.

c. Rule of Uniformity and Equity in Taxation

Uniformity in taxation implies that all taxable articles or properties of the same
class shall be taxed at the same rate. Uniformity in taxation is effected through
apportionment of the tax burden among the taxpayers which under the
Constitution must be equitable. Equity in taxation requires that such
apportionment be more or less just in the light of the taxpayer's ability to shoulder
the tax burden.

d. No Imprisonment For Nonpayment of a Poll Tax

By virtue of the provision, a person cannot be sent to prison for failure to pay the
community tax (residence tax).

e. Non-Impairment of the Obligation of Contracts

No law impairing the obligation of contracts shall be passed. The obligation of a

contract is impaired when its terms or conditions are changed by law or by a
party without the consent of the other.

f. No Appropriation for Religious Purposes

The constitutional provision specifies that no public money shall be appropriated,

applied, paid, or employed, directly or indirectly, for the use, benefit, or support of
any sect, church, denomination, sectarian institution, system of religion, or any
priest, preacher, minister or other religious teacher or dignitary as such, except
 when such priest, preacher, minister, or dignitary is assigned to the armed
forces, or to any penal institution, or government orphanage or leprosarium,

g. Exemption of Religious, Charitable, and Educational Entities, Non-profit Cemeteries,

and Churches.

Charitable institutions, churches and parsonages or convents appurtenant

thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from tax.

h. Exemption of Non-Stock, Non-Profit Educational Institutions from Taxation

All revenues and assets of non-stock, non-profit educational institutions used

actually, directly, and exclusively for educational purposes shall be exempt from
tax.

i. Concurrence By The Majority of all The Members of Congress For The Passage of a
Law Granting Tax Exemption

No law granting tax exemption shall be passed without the concurrence of a

majority of all the members of Congress.

k. Power of the President to Veto Any Particular Items in a Revenue or Tariff Bill

The President shall have the power to veto any particular items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the items to which
he does not object.

l. Non-Impairment Of the Jurisdiction of the Court in Tax Cases

Congress shall have the power to define, prescribe, and apportion the jurisdiction
of the various courts but may not deprive the Supreme Court of its jurisdiction
over cases involving the legality of any tax, impost, assessment, or toll, or
penalty imposed.

2. INHERENT LIMITATIONS those which restrict the power although they are not embodied in
the Constitution.

a. Taxes May be Levied Only For Public purposes.

Public purpose is synonymous with governmental needs. It means a purpose

affecting the inhabitants of the state or taxing district as a community and not
merely individuals.

b. Non-Delegation of the Legislative Power To Tax

The power of taxation is purely legislative, Congress cannot delegate the power
to others.

c. Exemption from Taxation of Government Entities

 Agencies and instrumentalities of the government are generally exempt from
taxation...

d. International Comity

The property of a foreign state or government may not be taxed by another.

e. Power to Tax is Limited to Territorial Jurisdiction of the State

A state may not tax property lying outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or privilege derived from the laws of
another state and therein exercised and enjoyed.

SITUS OF TAXATION -

Situs of taxation means PLACE OF TAXATION. The state or political unit has jurisdiction
to impose a particular tax.

Situs of Tax on Real Property - where the property is located.

Situs of Tax on Tangible Personal Property - where it is physically located.

Situs of Tax on Intangible Personal Property - the domicile of the owner.

Situs of Income Tax - the location where the income earner resides.

Situs of Tax on Business, Occupation, or Transaction - the place where the business is
done, or the occupation is engaged in, or the transaction took place,

DOUBLE TAXATION

Double taxation means taxing the same subject or object twice during the same taxing
period.

Kinds of Double Taxation

A. Direct double taxation means -

1. the same object or property is taxed twice

2. by the same taxing authority
3. for the same taxing purpose
4. within the same tax period
5. taxing all of the objects or property for the first time without taxing all of them
for the second time

B. Indirect double taxation

The absence of any of the elements of direct double taxation makes it indirect
double taxation which is NOT PROHIBITED.
FORMS OF ESCAPE FROM TAXATION

1. Shifting is the transfer of the burden of a tax by the original taxpayer or the one to
whom the tax was assessed or imposed to another or someone else.

2. Capitalization- means the reduction in the price of the taxed object equal to the
capitalized value of future taxes which the purchaser expects to be called upon to pay.

3. Transformation - is the method of escape from taxation whereby the manufacturer or

producer upon whom the tax has been imposed, fears the loss of his market if he should
add the tax to the price, pay the tax, and endeavor to recoup himself by improving his
process of production thereby turning out his units of products at a lower cost.

4. Evasion - the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of a tax. It is also known as "Tax Dodging".

5 Avoidance is the use by the taxpayer of legally permissible methods of assessing

taxable property or income in order to reduce tax liability.

6. Exemption is the grant of immunity to particular persons or corporations or to persons

or corporations of a particular class from a tax that persons and corporations generally
within the same state or taxing district is obliged to pay.

TAXES

Taxes are enforced proportional contributions from persons and properties levied by the
lawmaking body of the state by virtue of its sovereignty for the support of the
government and all public needs.

ESSENTIAL CHARACTERISTICS /ELEMENTS OF A TAX

1. Enforced contribution
2 Generally payable in money
3. Proportionate in character
4. Levied on persons, property, or exercise of a right or privilege
5. Levied by the state having jurisdiction
6. Levied by the legislature
7. Levied for public purposes
8. Paid at regular periods or intervals

NATURE AND CLASSIFICATION OF TAXES

1. According to a subject or object

a. Personal, poll, or capitation - imposed on all residents whether citizen or not.

● Example: Community Tax Certificate

b. Property-imposed on the property, whether real or personal.

● Example: Real Property Tax

 c. Excise - imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation.

● Example: Income Tax, Estate Tax

2. As to who bears the burden

a. Direct demand from the very person who, it is intended or desired, should pay them
off which he cannot shift to another.

● Example: Income Tax, Donor's Tax

b. Indirect - one in which the taxpayer can shift the burden to someone else.

● Example: Value Added Tax

3. As to the determination of the amount

a. Specific-imposed based on some standard of weight or measurement.

● Example: Taxes on Distilled Spirits and Wines, Fermented Liquors, Cigars, etc.

b. Ad Valorem -imposed based on a specific proportion of the value fixed law.

● Example: Real Property Tax, Some Customs Duties

4. As to the purpose

a. General, fiscal, or revenue - imposed for the purpose of raising public funds for
governmental needs.

● Example: Value added tax, Income tax

b. Special or regulatory - imposed primarily for the regulation of useful or non-useful

occupation or enterprise and secondary only for the raising of public funds.

● Example: Tariffs or Customs Duties on Imported Products

5. As to authority imposing the tax

a. National imposed by the national government.

● Example: Income tax, Customs duties

b. Municipal or local - imposed by municipal or local government.

● Example: Licenses, Real Property Tax

6. As to graduation or rate

a. Proportional- based on a fixed percentage of the amount of income to be taxed.

● Example: Percentage taxes, Value Added Tax

b. Progressive or graduated - the rate increases as the income of the taxpayer goes
higher.

● Example: Income Tax, Estate Tax, Donor's Tax

c. Regressive-the rate decreases as the tax base increases.

TAX DISTINGUISHED FROM TOLL

A toll is a demand of proprietorship, while a tax is a demand of sovereignty.

TAX DISTINGUISHED FROM SPECIAL ASSESSMENT

A special assessment is levied only on land, while a tax is levied on persons and
property.

TAX DISTINGUISHED FROM LICENSE

A license is imposed for regulation, while a tax is levied for revenue.

TAX DISTINGUISHED FROM DEBT

Debt is generally based on contract, express or implied, while a tax is based on law.

SOURCES OF TAX LAWS

1. Pertinent provisions of the Constitution

2. Legislation or Statutes
3. Presidential Decrees
4. Executive Orders
5. Tax Ordinances
6. Administrative Rules and Regulations
7. Judicial Decisions
 COMPUTATION OF GROSS INCOME

Section 32. Gross income

A. General Definition:

Gross Income means all income derived from whatever source, including (but)
not limited to) the following terms:

Compensation for services in whatever form paid, including, but not limited to fees.
salaries, wages, commissions, and similar items:

1) Gross income derived from the conduct of a trade or business or the exercise of a
Profession:
2) Gains derived from dealings in property:
3) Interests:
4) Rents:
5) Royalties:
6) Dividends:
7) Annuities:
8) Prizes and winnings:
9) Pensions; and
10) Partners, distributive share from the net income of the general professional
partnership

B. Exclusions from Gross Income

The following items shall not be included in gross income and shall be exempt from
taxation under this title:

1. Life Insurance- The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise,
but if such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments shall be included in gross income.

2. Amount Received by Insured as Return of Premium- The amount received by the

insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.

3. Gifts, Bequests, and Devises - The value of property acquired by gift, bequest,
devise, or descent: Provided, however, that income from such property, as well
as gift, bequest, devise, or descent of income from any property, in cases of
transfers of dividend interest, shall be included in gross income.

4. Compensation for Injuries or Sickness-Amounts received, through accident or

Health Insurance or under Workmen's compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received,
whether by suit or agreement, on account of such injuries or sickness.
 5. Income Exempt under Treaty - Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines

6. Retirement Benefits, Pensions, Gratuities, etc

a. Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan
maintained by the employer for at least a retiring official or employee who
has been in the service of the same employer for at least ten years and is
not less than fifty years of age at the time of his retirement: Provided
further, that the benefits granted under this subparagraph shall be availed
or by an official or employee only once. For purposes of this subsection,
the term) 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 officials or employees, wherein contributions
are made by such employer for the officials or employees, or both, for the
purpose of distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided in said
plan that at no time 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 the said officials and employees.

b. Any amount received by an official or employee or by his heirs from the

employer as a consequence of the separation of such official or employee
from the service of the employer because of death, sickness or other
physical disability or for any cause beyond the control of the said official
or employee.

c. The provisions of any existing law to the contrary notwithstanding, social

security benefits, retirement gratuities, pensions, and other similar
benefits received by the resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.

d. Payments of benefits due or to become due to any person residing in the

Philippines under the laws of the United States administered by the
United States Veterans administration.

e. Benefits received from or enjoyed under the Social Security System in

accordance with the provisions of Republic Act No. 8282

f. Benefits received from the GSIS under Republic act No. 8291, including
retirement gratuity received by government officials and employees.

7) Miscellaneous Items

a. Income Derived by Foreign Government- Income derived from

investments in the Philippines in loans, stocks, bonds, or other domestic
securities, or from interest on deposits in banks in the Philippines by (1)
 foreign government, (ii) financing institutions, (i) international or regional
financial institutions established by foreign governments.

b. Income Derived by the Government or its Political Subdivisions- Income

derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to
any political subdivision thereof.

c. Prizes and Awards Prizes and awards are made primarily in recognition
of religious, charitable, scientific, educational, artistic, literary, or civic
achievement but only if
(i) The recipient was selected without any action on his part to enter the
contest or proceeding and
(ii) The recipient is not required to render substantial future services as a
condition for receiving the prizes or awards.

d. Prizes and Awards in Sports Competition- All prizes and awards granted
to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national
sports associations.

e. 13-Month Pay and Other Benefits Gross benefits received by officials and
employees of public and private entities. Provided, however, that the total
exclusion under this subparagraph shall not exceed thirty thousand pesos
which shall cover:
(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686.
(ii) Benefits received by employees to Presidential No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986:
(iii) Benefits received by officials and employees not covered by
Presidential Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986, and
(iv) Other benefits such as productivity incentives and Christmas bonus:
Provided further. That the ceiling of thirty thousand pesos may be
increased through rules and regulations issued by the secretary of
Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the
taxable year.

f. GSIS, SSS, and Other Contributions- GSIS, SSS, Medicare, and Pag-ibig
contributions and union dues of individuals.

g. Gains from the Sale of Bonds, Debentures or other Certificate of

Indebtedness Gains realized from the sale or exchange or retirement of
bonds, debentures, or other certificates of indebtedness with a maturity of
more than 5 years.

h. Gains from Redemption of Shares in Mutual Fund- Gains realized by the

investor upon redemption of shares of stock in a mutual fund company as
defined in Section 22(bb) of this code.
COMPENSATION INCOME

In general terms, “Compensation" means all remuneration for services performed by

an employee for his employer-employee relationship, unless specifically excluded by the Code.

The following are examples of compensation income:

A. Regular Compensation

1. Basic salaries and wages

2. Transportation allowance
3. Representation allowance
4. Entertainment allowance
5. Cost of living allowance (COLA)
6. Taxable bonuses
7. Other remuneration paid regularly per payroll period

B. Supplementary Compensation

1. Fees, including directors fee's fees

2. Commissions
3. Emoluments
4. Honoraria
5. Taxable retirement pay
6. Taxable separation pay
7. Taxable money value of leave credits:
8. Taxable fringe benefits of rank and file employees
9. Taxable monetized unused vacation and sick leave
10. Other income of a similar nature

COMPENSATION PAID IN KIND

Compensation may be paid in money or in some medium other than money, as for
example, stocks, bonds,s or other forms of property. If services are paid for in a medium other
than money, the fair market value of the thing taken in payment is the amount to be included as
compensation income subject to withholding. 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 fair market
value of the remuneration received.
 DE MINIMIS BENEFITS

"Sec. 2.78.1, Withholding of Income Tax on Compensation Income.

(A) Compensation Income Defined. -XXXX

(1) Facilities and privileges of relatively small value.
Ordinarily, facilities and privileges (such as entertainment, medical service, or so-
called "courtesy" discount on purchases). Otherwise known as "de minimis benefits,"
furnished or offered by an employer to his employees, are
● NOT considered as compensation subject to income tax and
● NOT subject to withholding tax such facilities or privileges are of relatively small value
and are offered or furnished by the employer merely as means of promoting health,
goodwill, contentment, or the efficiency of his employees

DE MINIMIS BENEFITS (RR 5-2011)

a. Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year

b. The monetized value of vacation and sick leave credit paid to government officials &
employees:

c. Medical cash allowances to dependents of employees not exceeding P1,500 per

employee per semester or P250 per month;

d. Rice subsidy of P2,000 or sack of 50-kg rice per month amounting to not more than
P2.000

e. Uniforms and clothing allowance not exceeding P6,000 per annum:

f. Actual medical assistance

e.g. medical allowance and healthcare needs, annual medical/executive check-ups.
maternity assistance, and routine consultations, not exceeding P10,000 per annum:

g. Laundry allowance not exceeding P300 per month:

h. Employees' achievement awards,

e.g. length of service or safety achievement, must be in the form of tangible personal
property other than cash or gift certificate, with an annual monetary value not exceeding
P10,000 received by the employee under an established written plan which does not
discriminate in favor of highly paid employees;

i. Gifts are given during Christmas and major anniversary celebrations not exceeding
P5,000 per annum:

j. Daily meal allowance for

● overtime work and
● night/graveyard shift
not exceeding 25% of the basic minimum wage on a per region basis
 k. Benefits received by an employee by virtue of the Collective Bargaining Agreement
(CBA) and productivity Incentive scheme provided that the total annual monetary value
received from both combined does not exceed P10,000 per employee per taxable year.

Section 2.33 of KR 3-98, as amended

● C,) Fringe benefits not subject to FBT

All other benefits given by employers which are not included in the above enumeration shall not
be considered as "deminimis" benefits, and hence, shall be subject to Income tax as well as
withholding tax on compensation income.

13 month+ Other benefits

13th month = 1-month salary

+ Other benefits

P 90,000

Required of withholding
Every employer must withhold from compensation paid an amount computed in
accordance with these Regulations, Provided, that no withholding of tax shall be required on the
Statutory Minimum Wage (SMW) including

● HOLIDAY PAY
● OVERTIME PAY
● NIGHT SHIFT DIFFERENTIAL
● HAZARD PAY
of Minimum Wage Earners (MWE) in the private/public sectors.

FRINGE BENEFITS TAX

A. Fringe Benefit Defined
The term "fringe benefit" means any good, service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:
(1) Housing
(2) Expense Account (3) Vehicle of any kind
(4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than
market rate to the extent of the difference between
the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne
by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and (10) Life or health insurance
and other non-life insurance premiums or
similar amounts in excess of what the law allows.

B. FRINGE BENEFITS NOT TAXABLE

The following fringe benefits are not taxable:
1. Fringe benefits which are authorized and exempted from tax under special
2. Contributions of the employer for the benefit of the employee to retirement, laws. insurance
and hospitalization benefit plans.
3. Benefits given to the rank-and-file employees, whether granted under a Collective Bargaining
Agreement or not; and
4. De Minimis benefits (those of relatively small value) as defined in the rules and regulations to
be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner.

C. IMPOSITION OF TAX

A final tax of
thirty-four percent (34%) effective January 1, 1998:
thirty-three percent (33%) effective January 1, 1999; and
thirty-two percent (32%) effective January 1, 2000 and thereafter,

is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to
the employee (except rank-and-file employees as defined herein) by the employer, whether an
individual or a corporation (unless the fringe benefit is required by the nature of or necessary to
the trade, business or profession of the employer, or when the fringe benefit is for the
convenience or advantage of the employer) The tax herein imposed is payable by the employer
which tax shall be paid in the same manner as provided for under Section 57(A) of this
Code.The grossed-up monetary value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1,
1998;sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%)
effective January 1, 2000 and thereafter;
Provided, however, That fringe benefit furnished to employees and taxable under Subsections
(B), (C),(D) and (E) of section 25 shall be taxed at the applicable rates imposed thereat:
Provided, further, That the grossed-up value of the fringe benefit shall be determined by dividing
the actual monetary value of the fringe benefit by the difference between on hundred percent
(100%) and the applicable rates of income tax under Subsections (B), (C), (D) and (E) of section
25. The term "Rank and File Employees" shall mean all employees who are holding neither
managerial nor supervisory positions as defined in the Labor Code.

MANAGERIAL EMPLOYEES - if they meet all of the following conditions, namely:

1. Their primary duty consists of the management of the establishments in which they are
employed or of a department or subdivision thereof;
2. They customarily and regularly direct the work of two or more employees therein;
3. They have authority to hire other employees of lower rank or their suggestions and
recommendations as to the hiring or firing and as to the promotion or any change of status of
other employees are given particular weight.

SUPERVISORY EMPLOYEES - those who in the interest of the employer effectively

recommend such managerial actions if the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent judgement.
 PASSIVE INCOME

B. Rate of Tax on Certain Passive Income:

1. Interest, Royalties, Prizes, and Other Winnings

A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; royalties, except on
books, as well as other literary works and musical compositions, which shall be imposed
a final tax of ten percent (10%) prizes (except prizes amounting to ten thousand pesos
(P10,000) or less which shall be subject to tax and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings) derived from sources within the Philippines.

Interest income by an individual taxpayer (except a nonresident individual) from a

depository bank under the expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half (74%) of such interest income.
Interest income from long-term deposits or investments 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 tax. Should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5) 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 years………………………………………… 20 %

2. Cash and or Property Dividends- A final tax at the following rates shall be imposed upon
the cash and or property dividends actually or constructively received by an Individual
from a domestic corporation or from a joint stock company, insurance or mutual fund
company, and regional operating headquarters of multinational companies, or on the
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, or on the share of an
individual in the net income after tax of an association, a joint account, or a joint venture
or consortium taxable as a corporation of which he is a member or co-venture.

Six percent (6%) beginning January 1, 1998

Eight percent (8%) beginning January 1, 1999
Ten percent (10%) beginning January 1, 2000
C. Capital Gains from Sale of Real Property

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

2. Exception - Capital gains presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of which are fully utilized in
acquiring or constructing a new principal residence within eighteen (18) calendar months
from the date of sale or disposition, shall be exempt from the capital gains tax. The
historical cost or adjusted basis of the real property sold or disposed of shall be carried
over to the new principal residence built or acquired. The commissioner shall have been
duly notified by the taxpayer within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax exemption herein
mentioned. The said tax exemption can only be. availed of once every ten (10) years. 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 capital
gains tax. For this purpose, the gross selling price or fair market value at the time of
sale, whichever is higher, shall be multiplied by a fraction of which the unutilized amount
bears to the gross selling price In order to determine the taxable portion and the tax
imposed thereon.

Sec. 25 TAX ON NONRESIDENT ALIEN INDIVIDUAL

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines -

1. in General- A nonresident alien individual engaged in trade or business in the

Philippines shall be subjected to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources within
the Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a nonresident alien doing business in the Philippines.

2. Cash and or Property Dividends from a Domestic Corporation or Joint Stock Company,
or Insurance or Mutual Fund Company or Regional Operating Headquarter of
Multinational company, or Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association, Interests, Royalties, Prizes, and other Winnings- Cash and
or property dividends from a domestic corporation, or from a joint stock company, or
from an insurance or mutual fund company or from a regional operating headquarter of
multinational company, or the share of a nonresident allen individual in the distributable
net income after tax of a partnership (except a general professional partnership) of which
he is a partner, or 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, interest, royalties (in any form), and prizes (except prizes
 amounting to ten thousand pesos (P10,000) or less shall be subject to tax and other
winnings (except Philippine Charity Sweepstakes and Lotto winnings), shall be subject to
an income tax of twenty percent on the total amount thereof. Royalties on books as well
as other literary works, and royalties on musical compositions shall be subject to a final
tax of ten percent on the total amount thereof. Anematographic films. and similar works
shall be subject to the tax provided under section28 of the tax code.

Interests income from long-term deposits or investments in the form of savings, common
or Individual trust funds, deposits substitutes, investment management accounts,s and
other investments evidenced by certificates in a such form prescribed by the Bangko
Sentral ng Pilipinas shall be exempt from the tax terminate the deposit or investment
before the fifth 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%

3. Capital Gains- Capital gains realized from the 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 tax prescribed under Subsections (C) and (D) of
Section 24

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines.

● There shall be levied, collected, and paid for each taxable year upon the entire income
received from all sources within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines 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 equal to twenty-five percent (25%) of such income.
Capital gains realized by a nonresident alien individual not engaged in a trade or
business In the Philippines from the sale of shares of stocks in any domestic corporation
and real property shall be subject to the income tax prescribed under subsections (C)
and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies

● There shall be levied, collected, and paid for each taxable year upon the gross income
received by every alien, individual employed by regional or area headquarters and
regional operating headquarters established in the Philippines by Multinational
Companies as salaries, wages, annuities, compensation, remuneration, and other
emoluments, such as honoraria and allowances from such regional or area.
headquarters and regional operating headquarters. A tax equal to fifteen percent of such
gross income. The same tax treatment shall apply to Filipinos employed and occupying
the same position as those of aliens employed by these multinational companies. The
term "Multinational Company means a foreign firm or entity engaged in international
 trade with affiliates or subsidiaries or branch offices in the Asia Pacific Region and other
foreign markets.

(D) Alien Individual Employed by Offshore Banking Units

● There shall be levied, collected, and paid for each taxable year upon the gross income
received by every alien individual employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation, remuneration, and other
emoluments, such as honoraria and allowances, from such offshore banking units, a tax
equal to fifteen percent of such gross income. The same tax treatment shall apply to
Filipinos employed and occupying the same position as those of aliens employed by
these offshore banking units,

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor

● An Alien individual who is a permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor or by a foreign service
subcontractor engaged in Petroleum operations in the Philippines shall be liable to a tax
of fifteen percent of these salaries, wages, annuities, compensation, remuneration and
other emoluments such as honoraria and allowances received from a such contractor or
subcontractor. The same tax treatment shall apply to a Filipino employed and occupying
the same position as an alien employed by a Petroleum service contractor and
subcontractor.

Any income earned from all other sources within the Philippines by the alien employees
shall be subject to the pertinent income tax.

Sec. 26. TAX LIABILITY OF MEMBERS OF GENERAL PROFESSIONAL PARTNERSHIPS

A general professional partnership as such shall not be subject by income tax. Persons
engaging in business as partners in a general professional partnership shall be liable for
income tax only if their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or
constructively receive, in the net income of the partnership.