Tax returns and compliance When are tax returns due?

That is, what is the tax return due date? The Philippine Annual Income Tax Return (BIR Form 1700) is filed and taxes are due to the Philippine Bureau of Internal Revenue on or before 15 April of the year following the applicable calendar year. What is the tax year-end? The tax year is a calendar year which ends 31 December of each year. What are the compliance requirements for tax returns in the Philippines? Residents and non-residents Every individual citizen, alien residing in the Philippines, and every non-resident alien engaged in a trade or business in the Philippines, who is receiving income, whether it constitutes the sole source of his/her income or in combination with salaries, wages, and other fixed or determinable income, is required to file an income tax return on or before 15 April of each year covering income for the preceding taxable year. The tax year runs from 1 January to 31 December of each year. The tax return to be filed declares the total amount of income earned by the individual and any unpaid tax is settled at the time the return is filed. A citizen or a resident alien is not required to file the annual individual income tax return if he/she qualifies for the substituted filing. A non-resident alien engaged in trade or business, however, does not qualify for substituted filing. Substituted filing applies to citizens or resident individuals who meet all the following conditions:

the employee receives purely compensation income the employee receives the income from one employer in the Philippines the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer the employee's spouse, if earning income, also complies with all the three conditions stated earlier the employer files the annual information return of income taxes withheld on compensation and final withholding taxes (BIR Form 1604CF) the employer issues the certificate of compensation payment/tax withheld (BIR Form 2316) to each employee. Tax returns need not be filed by the following categories of individual:

those whose sole income has been subjected to final withholding tax such as interest, prizes, winnings, royalties, and dividends non-resident aliens not engaged in trade or business on their compensation income alien employees of regional or area headquarters or regional operating headquarters of multinational corporations on income from that employment alien employed by offshore banking units on income from that employment alien employees of service contractors and subcontractors engaged in petroleum operations on income from that employment minimum wage earners as defined under the Tax Code.

Tax rates What are the current income tax rates for residents and non-residents in the Philippines? As of 2011, the income tax rates on employment income and from a business or exercise of a profession are as follows. Residents Income tax table for 2011 Total tax on income below bracket PHP 0 500 2,500 8,500 225,00 50,000 125,000 Tax rate on income in bracket Percent 5 10 15 20 25 30 32

Taxable income bracket From PHP 0 10,001 30,001 70,001 140,001 250,001 500,001 To PHP 10,000 30,000 70,000 140,000 250,000 500,000 Over

Non-residents Same rates apply as Residents section above, except non-resident aliens not engaged in trade or business in the Philippines which are subject to a flat rate of 25 percent based on gross income. Residence rules For the purposes of taxation, how is an individual defined as a resident of the Philippines? For tax purposes, an individual may be classified as one of the following:

resident citizen non-resident citizen resident alien non-resident alien engaged in trade or business non-resident alien not engaged in trade or business. A resident citizen is taxable on all income derived from worldwide sources. For the other categories, the individual is taxable only on income derived from sources within the Philippines. For employment

income, the source of income is the place where the services are rendered, regardless of the place of payment, the place where contract was negotiated, or the payers place of residence. A non-resident alien is deemed engaged in trade or business if, during the calendar year, he/she stays in the Philippines for more than 180 days. If the non-resident alien individuals stay does not exceed 180 days during the taxable year, then he/she is deemed not engaged in trade or business. For resident citizens, non-resident citizens, resident aliens, and non-resident aliens engaged in trade or business, income tax is calculated on the basis of net taxable income at graduated rates ranging from 5 percent to a maximum of 32 percent. (Please see the discussion on General Deductions from Income for what constitutes net taxable income.) Non-resident aliens not engaged in trade or business are subject to tax at 25 percent of their gross income. Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer cant come back to the host country for more than 10 days after their assignment is over and they repatriate. Aliens on assignment in the Philippines for a period of two years or more are generally considered as residents at the start of their assignment in the Philippines and remain as such until departure from the Philippines at the end of the assignment. What if the assignee enters the country before their assignment begins? If the assignee arrives in the Philippines prior to his/her assignment, his/her actual days spent in the Philippines (that is, physical presence in the Philippines) will determine his/her residency/nonresidency status, notwithstanding the start date of his/her Philippine assignment. Termination of residence Are there any tax compliance requirements when leaving the Philippines? An alien who has acquired a resident status in the Philippines for tax purposes retains such tax status until he/she actually departs from the Philippines at the end of his/her assignment. There are no special requirements to be observed for tax purposes on leaving the Philippines other than those described in the section above. What if the assignee comes back for a trip after residency has terminated? If the assignee comes back to the Philippines after his/her residency status in the Philippines has terminated, the determination of his/her new residency status will commence from the day the individual actually arrives in the country. Communication between immigration and taxation authorities Do the immigration authorities in the Philippines provide information to the local taxation authorities regarding when a person enters or leaves the Philippines?

No, although the two agencies may coordinate on certain transactions such as visa renewal. The immigration authorities usually require the submission of income tax return filed with the tax authorities. Economic employer approach1 Do the taxation authorities in the Philippines adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in the Philippines considering the adoption of this interpretation of economic employer in the future? Yes, the economic employer approach is being adopted by tax authorities such that when there is a recharge to the Philippines entity, then the host entity is considered to be the economic employer and the employee cannot claim tax exemption, regardless of the duration of his/her stay in the Philippines. De minimus number of days2 Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days? None. Theoretically, the compensation charged to the local employer is taxable to the employee regardless of the number of days he/she is present in the Philippines during the fiscal year. Types of taxable compensation What categories are subject to income tax in general situations? Gross compensation income is defined as taxable income arising from an employer/employee relationship and includes the following:

salaries, wages, compensation, commissions, emoluments, and honoraria bonuses exceeding PHP30,000 allowances for transportation, representation, entertainment, and other similar items fees (including directors fees paid to a director who is at the same time an employee of the payer) taxable pensions taxable retirement pay other income of a similar nature, including compensation paid in-kind. Tax-exempt income Are there any areas of income that are exempt from taxation in the Philippines? If so, please provide a general definition of these areas. Gross income subject to tax does not include the following:

statutory minimum wage damages received by an employee or his/her heirs following a judgment or agreement arising out of or related to an employer-employee relationship proceeds of life insurance policies

1. 2. 3. 4. 5. 6. 7. 8. 9.

gifts, bequests, and devises compensation for injuries or sickness retirement benefits, pensions, and gratuities interest on tax-exempt government securities thirteenth-month pay and other benefits such as productivity incentives and Christmas bonus subject to the PHP30,000 limit certain other items specifically provided as not taxable including the following: amount received by the insured as return of premium income exempt from treaty certain prizes and awards exempted by law certain prizes and awards in sports competition GSIS, SSS, Medicare, and other contribution gain from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than five years gains from redemption of shares in mutual fund interest income from long-term deposits or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments income of non-residents from transactions with offshore banking units and depository banks under the expanded foreign currency depository system. Certain employer provided housing allowances (employers contribution to rent) Housing allowances provided to expatriates are generally considered as fringe benefits subject to FBT. If the housing allowance is higher than the actual rent, the excess is considered as part of compensation subject to withholding tax on compensation. Certain employer provided housing allowances (cost of utilities) The full amount of the utilities paid by the employer to or on behalf of the employee is a taxable fringe benefit. Living away from home allowance (LAFHA) The full amount of the LAFHA paid by the employer to or on behalf of the employee is taxable compensation subject to withholding tax on compensation. Certain employer provided tax reimbursements The grossed-up tax is included in the taxable compensation of the expatriate-employee. Certain employer provided relocation reimbursements Airfare and other transportation expenses incurred by the taxpayer and his/her family for moving from old post to new post (such as the Philippines) as well as the costs of shipment of household goods and personal effects are generally exempt from tax, subject to certain substantiation requirement. On the other hand, moving allowance or unsubstantiated expenses are taxable. Home leave

The full amount of the home leave paid by the employer to or on behalf of the employee is a taxable fringe benefit. Certain employer provided education costs The cost of the educational assistance to the employee which is borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business. The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company. Certain bonus payments Thirteenth-month pay and other benefits such as productivity incentives and Christmas bonus up to PHP30,000 are considered an exclusion from gross income. The portion thereof in excess of PHP30,000 forms part of taxable compensation. Certain interest subsidies If the employer lends money to his/her employee free of interest or at a rate lower than 12 percent per year, such interest foregone by the employer or the difference of the interest assumed by the employee and the 12 percent interest rate shall be treated as a taxable fringe benefit. Certain auto allowances A cash auto-allowance provided to the employee will form part of his/her taxable compensation income unless it is shown that the allowance is used by the employee in the performance of his/her duties, in which case the allowance is considered as ordinary and necessary business expense of the company. Health insurance The cost of life or health insurance and other non-life insurance premiums borne by the employer for the group insurance of his/her employees is treated as non taxable fringe benefit and likewise not included in the taxable compensation of the employee. Expatriate concessions Are there any concessions made for expatriates in the Philippines? Gross income received by an alien individual employed by the following entities is subject to a tax of 15 percent of such gross income:

regional or area headquarters or regional operating headquarters established in the Philippines by a multinational corporation offshore banking units service contractors or subcontractors engaged in petroleum operations in the Philippines. Moreover, an alien expatriate of a regional or area headquarter enjoys duty-free importation of personal and household effects (with the exception of motor vehicle). Salary earned from working abroad Is salary earned from working abroad taxed in the Philippines? If so, how? Citizens who are working abroad are generally considered non-resident citizens of the Philippines and hence are exempt from Philippine income tax on salary earned from working abroad as well as other income from foreign-sources. An alien individual, whether resident or not of the Philippines, is taxable only on income from sources within the Philippines; hence, aliens are exempt from Philippine income tax on salaries earned from working abroad. Taxation of investment income and capital gains Are investment income and capital gains taxed in the Philippines? If so, how? Business income, which is a broadly defined term covering all gains, profit and income of whatever kind and in whatever form derived from any source within the Philippines is generally taxable at graduated tax rates of 5 percent to 32 percent. Gains arising from the disposal of capital assets are also subject to income tax. Capital assets are defined as property held by the taxpayer (whether or not connected with his/her trade or business), but do not include stock-in-trade of the taxpayer or other similarly held property or property used in trade or business of the taxpayer, real or personal, which may be subject to allowance for depreciation. If the property which is disposed of by a taxpayer has been held for not more than 12 months, the gain is taxed in full. If held for more than 12 months, only 50 percent of the gain is subject to tax. The following capital gains are not subject to a holding period and are subject to special capital gains tax rates:

capital gains realized from the sale, exchange, or disposition of shares of stock in any domestic corporation are taxed as follows: 1. on net capital gains for shares of stock not traded through a local stock exchange, which are not over PHP100,000 the rate, is 5 percent; on net gains in excess of PHP100,000 the rate is 10 percent 2. on shares of stock listed and traded through a local stock exchange, the rate is 0.50 percent of the gross selling price. capital gains from the sale of real property located in the Philippines classified as capital assets by individuals are subject to a capital gains tax of 6 percent based on gross selling price or the current fair market value, whichever is higher at the time of sale.

Dividends, interest, and rental income

On sources from within the Philippines, certain passive income like interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements, royalties, prizes exceeding PHP10,000, and other winnings are subject to a final withholding tax of 20 percent. The tax is 25 percent if the recipient is a non-resident alien not engaged in trade or business. Dividends from a domestic corporation or the share of an individual partner in a partnership subject to tax received by citizens and residents are subject to income tax at 10 percent. The tax is 20 percent if the recipient is a non-resident alien engaged in trade or business, and 25 percent if the recipient is a non-resident alien not engaged in trade or business. Interest income from long-term deposit or investment in the term of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments is exempt from income tax. However, if received by a non-resident alien not engaged in trade or business, it is subject to 25 percent tax. On rental income, please see previous discussion under the taxation of investment income and capital gains. Gains from stock option exercises Generally, gains from stock option exercise are considered as taxable compensation if they are attributable to services rendered in the Philippines. Moreover, for migrating employees, a portion of the income from the exercise of stock option would be considered as taxable compensation subject to Philippine income tax if at any time during the period between the grant and vesting dates, the employee had performed personal services in the Philippines (such as assigned in the Philippines). Residency status Grant Resident Non-resident Other (if applicable) N N N/A Taxable at: Vest N N N/A Exercise Y Y N/A

Foreign exchange gains and losses In relation to business income of the taxpayer, only those that are realized are taxable gains and tax deductible losses. Principal residence gains and losses See discussion on capital gains from sale of real property under the taxation of investment income and capital gains. Capital losses

Losses resulting from the sale or exchange of capital assets shall be allowed as deduction only to the extent of the gains from such sales or exchanges. Personal use items See discussion on gains arising from the disposal of capital assets under the taxation of investment income and capital gains. Gifts Gifts are subject to donor's tax. The tax is levied, assessed, collected and paid upon the transfer by any person, resident, or non-resident, of the property by gift, at 2 percent to 15 percent graduated rates. However, when the donee or beneficiary is a stranger, the tax payable by the donor shall be 30 percent of the net gifts. A stranger is a person who is not a brother, sister (whether by whole or halfblood), spouse, ancestor, and lineal descendant; or relative by consanguinity in the collateral line within the fourth degree of relationship. Additional capital gains tax (CGT) issues and exceptions Are there additional capital gains tax (CGT) issues in the Philippines? If so, please discuss? None. Are there capital gains tax exceptions in the Philippines? If so, please discuss? The Philippines has tax treaties with several countries. Under these tax treaties, capital gains derived by residents of the other contracting states from the alienation of properties (other than immovable properties) are not taxable in the Philippines. Pre-CGT assets Not applicable. Deemed disposal and acquisition Not applicable. General deductions from income What are the general deductions from income allowed in the Philippines? Net taxable income is determined by deducting the allowable deductions from gross income. For individual taxpayers who earn solely compensation income, they are entitled to deduct from their gross earnings the allowable personal exemption and certain additional exemptions.

In the case of a non-resident alien engaged in trade or business, the reciprocity rule applies to the claiming of the personal exemption (that is the amount of personal exemption allowed to a nonresident alien is limited to the amount of personal exemption granted by his/her home-country to Filipinos working in that country). Moreover, non-resident aliens are not entitled to the additional exemption for dependent children. Individuals deriving business income are allowed to deduct all the ordinary and necessary expenses paid or incurred in carrying on or which are directly attributable to the carrying on of the development, management, operation, and/or conduct of his/her trade, business, or profession. Any amount of allowable personal or additional exemptions not fully utilized (that is not fully applied) against the compensation income shall likewise be allowed as deduction. The amounts of basic personal exemption allowable to citizens, resident aliens, and/or non-resident aliens engaged in trade or business for 2011 are as follows. Classification Single or married individual judicially decreed as legally separated with no qualified dependents Head of the family For each married individual Exemption (PHP) 50,000 50,000 50,000

An additional exemption of PHP25,000 for each qualified dependent, up to four dependents can also be claimed by citizens and residents. In the case of married individuals electing to compute their income tax liabilities separately, only one spouse can claim the additional exemption for dependents. An additional deduction of PHP2,400 per family or PHP200 per month paid for health and/or hospitalization insurance will be allowed if the gross income of the family does not exceed the aggregate amount of PHP250,000 for the taxable year. Tax reimbursement methods What are the tax reimbursement methods generally used by employers in the Philippines? Most multinational companies in the Philippines adopt the tax equalization policy on their inbound and/or outbound assignees. Calculation of estimates/prepayments/withholding Pay-as-you-go (PAYG) withholding There are no estimates/prepayments in the Philippines. Generally, the employer withholds taxes upon payment of the compensation to the employee based on a graduated withholding tax table with rates from 5 percent to 32 percent on net taxable compensation.

PAYG installments The Philippines adopt the pay-as-you-file system with regard to income taxes. When the tax due is in excess of PHP2,000, the individual taxpayer may elect to pay the tax in two equal installments. The first installment shall be paid at the time the return is filed and the second installment is paid on or before 15 July following the close of the calendar year. When are estimates/prepayments/withholding of tax due in the Philippines? For example: monthly, annually, both, and so on. Local employers are responsible for the withholding and remittance of the correct amount of tax from the compensation income of his/her employees. The tax withheld has to be remitted to the BIR within 10 days after the close of each calendar month, except for the withholding tax for the month of December, which must be paid not later than 15 January of the following year, to the authorized agent bank or collection agent of the BIR. However, if the local employer is enrolled under the Electronic Filing and Payment System (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon shall be five days later than the deadline set above. If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from the employer together with the penalties or additions to the tax otherwise applicable. The local employer is required to report the amount of compensation income tax withheld for the year using BIR Form 1604CF (Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes) on or before 31 January of the year following the taxable year. The amount of taxes withheld by the employer is creditable against the annual income tax due of the employee. Relief for foreign taxes Is there any Relief for Foreign Taxes in the Philippines? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on? In case of citizens of the Philippines, the amount of income taxes paid during the taxable year to any foreign country may be used as credits against Philippine income taxes. The Philippines has tax treaties with 37 countries. There are complex regulations and rates vary depending upon the status of the recipient and the nature of the income. Tax treaty relief, however, is not automatic. A tax treaty relief application process should be complied with. General tax credits What are the general tax credits that may be claimed in the Philippines? Please list below. Tax credits that may be claimed in the Philippines are:

compensation income tax withheld by the employer income taxes paid by citizens to any foreign country.

Philippine Corporate Tax Corporate income tax rate both for domestic and resident foreign corporations in Philippines is 30%, based on net taxable income. Company tax is payable by domestic companies on all income derived from sources within and outside the Philippines. Foreign corporations, whether resident or nonresident, are taxable only on income derived from sources within the Philippines. However, non-resident foreign corporations are, in certain circumstances, subject to a final withholding tax on passive (investment) incomes at rates generally higher than the applicable tax rates applying to domestic and resident foreign corporations. Resident companies are those that are created or organized under the laws of the Philippines or foreign companies duly licensed to engage in trade or business in the Philippines. The corporate income tax rate both for domestic and resident foreign corporations is 30%. Excluded from the income tax are dividends received from domestic corporations; interest on Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; and other passive income previously subject to final taxes. Interest income derived from the expanded foreign currency deposit is subject to a final tax of 7.5%. All other interest earned by domestic and resident foreign corporations is subject to a 20% final withholding tax. Regional operating headquarters are taxed at 10% on taxable income. Special economic zone enterprises duly registered with the Philippines Economic Zone Authority are taxed at the rate of 5% on gross income in lieu of national and local taxes, except real property tax. The term 'gross income' refers to gross sales or gross revenue derived from the business activity within the Ecozone, net of sales discount, sales returns and allowances, less the cost of sales or direct costs but before deduction is made for administrative expenses and incidental losses during the taxable period. For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession Amount of Net Taxable Rate Income Over P10,000 P30,000 P70,000 P140,000 P250,000 P500,000 But Not Over P10,000 P30,000 P70,000 P140,000 P250,000 P500,000 5% P500 + 10% of the Excess over P10,000 P2,500 + 15% of the Excess over P30,000 P8,500 + 20% of the Excess over P70,000 P22,500 + 25% of the Excess over P140,000 P50,000 + 30% of the Excess over P250,000 P125,000 + 32% of the Excess over P500,000 in 2000 and onward

Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in two equal installments, the first installment to be paid at the time the return is filed and the second installment 15 of the same year at on or before July the Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered.

Tax Rate 1. Domestic Corporations: a. In General b. Minimum Corporate Income Tax* c. Improperly Accumulated Earnings

Taxable Base

30% (effective Net taxable income from all Jan. 1, 2009) sources 2% 10% Gross Income Improperly Accumulated Taxable Income Net taxable income provided that the gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income Net taxable income provided that the gross income from unrelated trade, business or other activity does not exceed 50% of the total gross income

2. Proprietary Educational Institution

10%

3. Non-stock, Non-profit Hospitals

10%

4. GOCC, Agencies & Instrumentalities a. In General b. Minimum Corporate Income Tax* c. Improperly Accumulated Earnings 5. National Gov't. & LGUs a. In General b. Minimum Corporate Income Tax* c. Improperly Accumulated Earnings 6. Taxable Partnerships a. In General b. Minimum Corporate Income Tax* c. Improperly Accumulated Earnings 30% 2% 10% Net taxable income from all sources Gross Income Improperly Accumulated Taxable Income 30% 2% 10% Net taxable income from all sources Gross Income Improperly Accumulated Taxable Income 30% 2% 10% Net taxable income from all sources Gross Income Improperly Accumulated Taxable Income

7. Exempt Corporation a. On Exempt Activities b. On Taxable Activities 8. General Professional Partnerships 9. Corporation covered by Special Laws 10. International Carriers 12. Offshore Banking Units (OBUs) 0% 30% 0% Rate specified under the respective special laws 2.5% 10% 30% 13. Foreign Currency Deposit Units (FCDU) 10% 30% Gross Philippine Billings Taxable Income Gross Taxable Income On Foreign Currency Transaction On Taxable Income other than Foreign Currency Transaction Gross Taxable Income On Foreign Currency Transaction On Taxable Income other than Foreign Currency Transaction Net taxable income from all sources

11. Regional Operating Head 10%

*Beginning on the 4th year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed using the normal income tax.
Passive Income 1. Interest from currency deposits, trust funds and deposit substitutes 2. Royalties (on books as well as literary & musical composition) - In general 3. Prizes (P10,000 or less ) - In excess of P10,000 4. Winnings (except from PCSO and lotto) 5. Interest Income of Foreign Currency Deposit 6. Cash and Property Dividends - To individuals from Domestic Corporations - To Domestic Corporations from Another Domestic Corporations 10 % 0% 20% 10% 20% 5% 20% 20% 7.5%

7. On capital gains presumed to have been realized from sale, 6%

exchange or other disposition of real property (capital asset) 8. On capital gains for shares of stock not traded in the stock exchange - Not over P100,000 - Any amount in excess of P100,000 9. 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 Upon pretermination before the fifth year , there should be imposed on the entire income from the proceeds of the longterm deposit based on the remaining maturity thereof: Holding Period Four (4) years to less than five (5) years Three (3) years to less than four (4) years Less than three (3) years 5% 12% 20% 5% 10% Exempt

B. For Non-Resident Aliens Engaged in Trade or Business 1. Interest from currency deposits, trust funds and deposit 20% substitutes 2. 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 Upon pretermination before the fifth year, there should be imposed on the entire income from the proceeds of the longterm deposit based on the remaining maturity thereof: Holding Period: -Four (4) years to less than five (5) years -Three (3) years to less than four (4) years -Less than three (3) years 5% 12% 20% Exempt

3. On capital gains presumed to have been realized from the 6% sale, exchange or other disposition of real property 4. On capital gains for shares of stock not traded in the Stock Exchange - Not over P100,000 - Any amount in excess of P100,000 5% 10%

C) For Non-Resident Aliens Not Engaged in Trade or Business

1. On the gross amount of income derived from all sources within the Philippines

25%

2. On capital gains presumed to have been realized from the exchange or other disposition of real property located in the 6% Phils. 3. On capital gains for shares of stock not traded in the Stock Exchange Not Over P100,000 Any amount in excess of P100,000 5% 10%

D) On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) or Area Headquarters and Regional Operating Headquarters (ROH), Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor E) General Professional Partnerships F) Domestic Corporations 1) a. In General on net taxable income b. Minimum Corporate Income Tax on gross income c. Improperly Accumulated Earnings on improperly accumulated taxable income - In general (on net taxable income)

15%

0% 30% 2% 10% 10%

2) Proprietary Educational Institution and Non-profit Hospitals 10% - If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income from all 30% sources 4) GOCC, Agencies & Instrumentalities a. In General - on net taxable income b. Minimum Corporate Income Tax on gross income c. Improperly Accumulated Earnings on improperly accumulated taxable income 5) Taxable Partnerships a. In General on net taxable income b. Minimum Corporate Income Tax on gross income c. Improperly Accumulated Earnings on improperly accumulated taxable income 6) Exempt Corporation a. On Exempt Activities b. On Taxable Activities 8) Corporation covered by Special Laws 0% 30% Rate specified 30% 2% 10% 30% 2% 10%

under the respective special laws G) Resident Foreign Corporation 1)a. In General on net taxable income b. Minimum Corporate Income Tax on gross income c. Improperly Accumulated Earnings on improperly accumulated taxable income 2) International Carriers on gross Philippine billings 3) Regional Operating Headquarters on gross income 30% 2% 10% 2.50% 10% Rate specified under the respective special laws 10% 10%

4) Corporation Covered by Special Laws

5) Offshore Banking Units (OBUs) on gross income 6) Foreign Currency Deposit Units (FCDU) on gross income

Frequently Asked Questions

1) What is income? Income means all wealth, which flows into the taxpayer other than as a mere return of capital. 2) What is Taxable Income? Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special laws. 3) What is Gross Income? Gross income means all income derived from whatever source. 4) What comprises gross income? Gross income includes, but is not limited to the following: Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar item Gross income derived from the conduct of trade or business or the exercise of profession Gains derived from dealings in property

Interest Rents Royalties Dividends Annuities Prizes and winnings Pensions Partner's distributive share from the net income of the general professional partnerships 5) What are some of the exclusions from gross income? Life insurance Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities, etc. Miscellaneous items income derived by foreign government income derived by the government or its political subdivision prizes and awards in sport competition prizes and awards which met the conditions set in the Tax Code 13th month pay and other benefits GSIS, SSS, Medicare and other contributions gain from the sale of bonds, debentures or other certificate of indebtedness gain from redemption of shares in mutual fund 6) What are the allowable deductions from gross income?

Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationships where the only deduction provided that the gross family income does not exceed P250,000 per family is the premium payment on health and/or hospitalization insurance, a taxpayer may opt to avail any of the following allowable deductions from gross income: a)Optional Standard Deduction - an amount not exceeding 40% of the net sales for individuals and gross income for corporations; or b) Itemized Deductions which include the following: o Expenses o Interest o Taxes o Losses o Bad Debts o Depreciation o Depletion of Oil and Gas Wells and Mines o Charitable Contributions and Other Contributions o Research and Development o Pension Trusts In addition, individuals who are either earning compensation income, engaged in business or deriving income from the practice of profession are entitled to personal and additional exemptions as follows:

Personal Exemptions:

For single individual or married individual judicially decreed as legally separated with no qualified dependentsP 50,000.00 For head of familyP 50,000.00 For each married individual *P 50,000.00 Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.

Additional Exemptions:

For each qualified dependent, an P25,000 additional exemption can be claimed but only up to 4 qualified dependents The additional exemption can be claimed by the following: The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. The individuals considered as Head of the Family supporting a qualified dependent The maximum amount of P 2,400 premium payments on health and/or hospitalization insurance can be claimed if: Family gross income yearly should not be more than P 250,000 For married individuals, the spouse claiming the additional exemptions for the qualified dependents shall be entitled to this deduction 7) Who are required to file the Income Tax returns?

Individuals

Corporations no matter how created or organized including partnerships

o o

Resident citizens receiving income from sources within or outside the Philippines o employees deriving purely compensation income from 2 or more employers, concurrently or successively at anytime during the taxable year o employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return o self-employed individuals receiving income from the conduct of trade or business and/or practice of profession o individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession o individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax o individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing o marginal income earners Non-resident citizens receiving income from sources within the Philippines Aliens, whether resident or not, receiving income from sources within the Philippines domestic corporations receiving income from sources within and outside the Philippines foreign corporations receiving income from sources within the Philippines

8) Who are not required to file Income Tax returns? a. An individual who is a minimum wage earner b. An individual whose gross income does not exceed his total personal and additional exemptions c. An individual whose compensation income derived from one employer does not exceed P 60,000 and the income tax on which has been correctly withheld d. An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident aliens not engaged in trade or business) e. Those who are qualified under substituted filing. However, substituted filing applies only if all of the following requirements are present : o the employee received purely compensation income (regardless of amount) during the taxable year o the employee received the income from only one employer in the Philippines during the taxable year o the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer o the employees spouse also complies with all 3 conditions stated above o the employer files the annual information return (BIR Form No. 1604-CF) o the employer issues BIR Form No. 2316 (Oct 2002 ENCS version ) to each employee. 9) Who are exempt from Income Tax? Non-resident citizen who is: a) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein b) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis c) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year d) A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines, with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Overseas Filipino Worker, including overseas seaman An individual citizen of the Philippines who is working and deriving income from abroad as an overseas Filipino worker is taxable only on income from sources within the Philippines; provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade will be treated as an overseas Filipino worker. NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/consulate is not treated as a non-resident citizen, hence his income is taxable. 10) What are the procedures in filing Income Tax returns (ITRs)? For with payment ITRs (BIR Form Nos. 1700 / 1701 / 1701Q / 1702 / 1702Q / 1704)

Estates and trusts engaged in trade or business

taxable partnerships

File the return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) of the place where taxpayer is registered or required to be registered. In places where there are no AABs, the return will be filed directly with the Revenue Collection Officer 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 is none, filing of the return will be at the Office of the Commissioner. For no payment ITRs -- refundable, break-even, exempt and no operation/transaction, including returns to be paid on 2nd installment and returns paid through a Tax Debit Memo(TDM) File the return with the concerned Revenue District Office (RDO) where the taxpayer is registered. However, "no payment" returns filed late shall be accepted by the RDO but instead shall be filed with an Authorized Agent Bank (AAB) or Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs), for payment of necessary penalties. 11) How is Income Tax payable of individuals (resident citizens and non-resident citizens)computed? Gross Income Less: Allowable Deductions (Itemized or Optional) Net Income Less: Personal & Additional Exemptions Net Taxable Income Multiply by Tax Rate (5 to 32%) Income Tax Due: Tax withheld (per BIR From 2316/2304) Income tax payable P ___________ ___________ P ___________ ___________ P ___________ ____________ P ___________ P____________

12) How is Income Tax paid? Through withholding o Generally 10% or 15% if the gross annual business or professional income exceeds P720,000 per year o 20% - Fees paid to directors who are not employees and 20% of professional fees paid to non-individuals o Other withholding tax rates Pay the balance as you file the tax return, computed as follows: Income Tax Due Less: Withholding Tax Net Income Tax Due P ___________ ___________ P ___________

13) Is the Minimum Corporate Income Tax (MCIT) an addition to the regular or normal income tax? No, the MCIT is not an additional tax. An MCIT of 2% of the gross income as of the end of taxable year (whether calendar or fiscal year, depending on the accounting period employed) is imposed on a corporation taxable under Title II of the Tax Code, as amended, beginning on the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations

when the MCIT is greater than the regular income tax. The MCIT is compared with the regular income tax, which is due from a corporation. If the regular income is higher than the MCIT, then the corporation does not pay the MCIT but the amount of the regular income tax. Notwithstanding the above provision, however, the computation and the payment of MCIT, shall likewise appply at the time of filing the quarterly corporate income tax as prescribed under Section 75 and Section 77 of the Tax Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than that quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter. In the payment of said quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed to be credited. Expanded withholding tax, quarterly corporate income tax payments under the normal income tax, and the MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due. 14) Who are covered by MCIT? The MCIT covers domestic and resident foreign corporations which are subject to the regular income tax. The term regular income tax refers to the regular income tax rates under the Tax Code. Thus, corporations which are subject to a special corporate tax system do not fall within the coverage of the MCIT. For corporations whose operations or activities are partly covered by the regular income tax and partly covered by the preferential rate under special law, the MCIT shall apply on operations by the regular income tax rate. Newly established corporations or firms which are on their first 3 years of operations are not covered by the MCIT. 15) When does a corporation start to be covered by the MCIT? A corporation starts to be covered by the MCIT on the 4th year of its business operations. The period of reckoning which is the start of its business operations is the year when the corporation was registered with the BIR. This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year. 16) When is the MCIT reported and paid? Is it quarterly? The MCIT is paid on an annual basis and quarterly basis. The rules are governed by Revenue Regulations No. 12-2007. 17) How is MCIT computed? The MCIT is 2% of the gross income of the corporation at the end of the year. Gross income means gross sales less sales returns, discounts and cost of goods sold. Passive income, which have been subject to a final tax at source do not form part of gross income for purposes of the MCIT. Cost of goods sold includes all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For trading or merchandising concern, cost of goods sold means the invoice cost of goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold means all costs of production of finished goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. For sale of services, gross income means gross receipts less sales returns, allowances, discounts and cost of services which cover all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including: Salaries and employees benefits of personnel, consultants and specialists directly rendering the service; Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used; Cost of supplies Interest Expense is not included as part of cost of service, except in the case of banks and other financial institutions. Gross Receipts means amounts actually or constructively received during the taxable year. However, for taxpayers employing the accrual basis of accounting, it means amounts earned as gross income. 18) What is the carry forward provision under the MCIT? Any excess of the MCIT over the normal income tax may be carried forward on an annual basis and be credited against the normal income tax for 3 immediately succeeding taxable years. 19) How would the MCIT be recorded for accounting purposes? Any amount paid as excess minimum corporate income tax should be recorded in the corporations books as an asset under account title Deferred charges-MCIT 20) How long can we amend our income tax return? There is no prescription period for amending the return. When the taxpayer has been issued a Letter of Authority, he can no longer amend the return. 21) Can a benefactor of a senior citizen claim him/her as additional dependent in addition to his/her 3 qualified dependent children at P 25,000 each? No, pursuant to Revenue Regulations 2-94, the benefactor of a senior citizen cannot claim the additional exemption. 22) What is a tax treaty? A tax treaty formally known as convention or agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (and on capital) could be defined in terms of its purpose. First, a tax treaty is intended to promote international trade and investment in several ways, the most important of which is by allocating taxing jurisdiction between the Contracting States so as to eliminate or mitigate double taxation of income. Second, a tax treaty is intended to permit the Contracting States to better enforce their domestic laws so as to reduce tax evasion. These purposes are in fact incorporated in the title and the preamble. 23) What are the effective Philippine tax treaties? The Philippines has thirty-seven (37) effective tax treaties. The following tax treaties and their dates of effectivity as follows:

Effective Philippine Tax Treaties (as of June 2010) Country 1. Australia 2. Austria 3. Bahrain 4. Bangladesh 5. Belgium 6. Brazil 7. Canada 8. China 9. Czech 10. Denmark (Renegotiated) 11. Finland 12. France 13. Germany 14. Hungary 15. India 16. Indonesia 17. Israel 18. Italy 19. Japan 20. Korea 21. Malaysia 22. Netherlands 23. New Zealand 24. Norway 25. Pakistan 26. Poland 27. Romania 28. Russia 29. Singapore 30. Spain 31. Sweden (Renegotiated) 32. Switzerland 33. Thailand Date of Effectivity Date and Venue of Signature January 1, 1980 January 1, 1983 January 1, 2004 January 1, 2004 January 1, 1981 January 1, 1992 January 1, 1977 January 1, 2002 January 1, 2004 January 1, 1998 January 1, 1982 January 1, 1978 January 1, 1985 January 1, 1998 January 1, 1995 January 1, 1983 January 1, 1997 January 1, 1990 January 1, 1981 January 1, 1987 January 1, 1985 January 1, 1992 January 1, 1981 January 1, 1998 January 1, 1979 January 1, 1998 January 1, 1998 January 1, 1998 January 1, 1977 January 1, 1994 January 1, 2004 January 1, 2002 January 1, 1983 May 11, 1979, Manila, Philippines April 4, 1981, Vienna, Austria November 7, 2001, Manila, Philippines September 8, 1997, Manila, Philippines October 2, 1976, Manila, Philippines Sept. 29, 1983, Brasilia, Brazil March 11, 1976, Manila, Philippines November 18, 1999, Beijing, China November 13, 2000, Manila, Philippines June 30, 1995, Copenhagen, Denmark October 13, 1978, Manila, Philippines January 9, 1976, Kingston, Jamaica July 22, 1983, Manila, Philippines June 13, 1997, Budapest, Hungary February 12, 1990, Manila, Philippines June 18, 1981, Manila, Philippines June 9, 1992, Manila, Philippines December 5, 1980, Rome, Italy February 13, 1980, Tokyo, Japan February 21, 1984, Seoul, Korea April 27, 1982, Manila, Philippines March 9, 1989, Manila, Philippines April 29, 1980, Manila, Philippines July 9, 1987, Manila, Philippines February 22, 1980, Manila, Philippines September 9, 1992, Manila, Philippines May 18, 1994, Bucharest, Romania April 26, 1995, Manila, Philippines August 1, 1977, Manila, Philippines March 14, 1989, Manila, Philippines June 24, 1998, Manila, Philippines June 24, 1998, Manila, Philippines July 14, 1982, Manila, Philippines

34. United Arab Emirates 35. United Kingdom of Great Britain and Northern Ireland 36. United States of America 37. Vietnam

January 1, 2009 January 1, 1979 January 1, 1983 January 1, 2004

September 21, 2003, Dubai, UAE June 10, 1976, London, United Kingdom October 1, 1976, Manila, Philippines November 14, 2001, Manila, Philippines

24) What office can we inquire about the said tax treaties? The International Tax Affairs Division (ITAD). 25) What taxes are covered b Philippine tax treaties? Income taxes imposed by the domestic laws of the Contracting States, including substantially similar taxes that may be imposed later, in addition to, or in place, are covered by the tax treaties. In the Philippines, this is generally limited to Title II (Tax on Income) of the National Internal Revenue Code of 1997, as amended. 26) How is business income treated under our tax treaties? The business profits of a resident of a Contracting State shall not be taxable in the Philippines unless that enterprise of a resident of a Contracting State carries on business in the Philippines through a permanent establishment. 27) What is the concept of permanent establishment (PE) as used in tax treaties? PE is defined as a fixed place of business through which the business of the enterprise is wholly or partly carried on. The concept of permanent establishment is used to determine the rights of a Contracting State to tax the business profits of enterprises of the other Contracting State. Under this concept, profits of an enterprise of a Contracting State are not taxable by the other Contracting State, unless the enterprise carries on business through a permanent establishment situated in the other Contracting State. A list of places, circumstances, and activities which constitute a permanent establishment is provided under the different tax treaties which the Philippines has with other countries. 28) What is the Most-Favored-Nation clause (MFN)? The appearance of the MFN clause in the tax treaty means that a Contracting State will grant to a resident of the other Contracting State the same lower rate of tax or exemption the former has granted to a resident of a third State. 29) What is the tax treatment on immovable property? Income from an immovable property is taxable in the Contracting State where the property is situated. This term is generally defined under the domestic laws of the Contracting States. However, this is further defined in the tax treaties. 30) How are capital gains taxed under our tax treaties? Gains from the alienation of immovable property or movable property forming part of the business property of a permanent establishment or pertaining to a fixed base are taxed in the Philippines if the immovable property or permanent establishment or fixed base is located here. Description Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.

Frequently Asked Questions 1. Who are required to file the Estate Tax return? a) The executor or administrator or any of the legal heirs of the decedent or non-resident of the Philippines under any of the following situation: - In all cases of transfer subject to Estate Tax; - Where though exempt from Estate Tax, the gross value of the estate exceeds two hundred thousand P 200,000.00; and - Where regardless of the gross value, the estate consists of registered or registrable property such as real property, motor vehicle, share of stocks or other similar property for which a clearance from the Bureau of Internal Revenue (BIR) is required as a condition precedent for the transfer of ownership thereof in the name of the transferee. b) Where there is no executor or administrator appointed, qualified and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent must file the return. c) The Estate Tax imposed under the Tax Code shall be paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary. Where there are two or more executors or administrators, all of them are severally liable for the payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir or beneficiary. d) The executor or administrator of an estate has the primary obligation to pay the estate tax but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall in no case exceed the value of his share in the inheritance. 2. What are the procedures in the filing of the Estate Tax Return and payment of the corresponding taxes? a) The Estate Tax Return (BIR Form 1801) shall be filed and payment made with an Authorized Agent Bank (AAB) of the Revenue District Office (RDO) having jurisdiction over the place of residence of the decedent at the time of his/her death. b) If there is no AAB within the residence of the decedent, the Estate Tax Return must be filed and the payment made with the Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the RDO having jurisdiction over the place of residence of the decedent. c) If the required filer has no legal residence in the Philippines, the Estate Tax return will be filed and payment be made with: - The Office of the Revenue District Officer, Revenue District Office No. 39, South Quezon City; or - The Philippine Embassy or Consulate in the country where decedent is residing at the time of his/her death. d) Submit all documentary requirements and proof of payment to the Revenue District Office having jurisdiction over the place of residence of the decedent. e) Payment of Estate tax by installment -In case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property, the corresponding/computed tax on which has been paid.

3. What are included in gross estate? For resident alien decedents/citizens: a) Real or immovable property, wherever located b) Tangible personal property, wherever located c) Intangible personal property, wherever located For non-resident decedent/non-citizens: a) Real or immovable property located in the Philippines b) Tangible personal property located in the Philippines c) Intangible personal property - with a situs in the Philippines such as: - Franchise which must be exercised in the Philippines - Shares, obligations or bonds issued by corporations organized or constituted in the Philippines - Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is located in the Philippines - Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines ( i. e. they are used in the furtherance of its business in the Philippines) - Shares, rights in any partnership, business or industry established in the Philippines 4. What are excluded from gross estate? GSIS proceeds/ benefits Accruals from SSS Proceeds of life insurance where the beneficiary is irrevocably appointed Proceeds of life insurance under a group insurance taken by employer (not taken out upon his life) War damage payments Transfer by way of bona fide sales Transfer of property to the National Government or to any of its political subdivisions Separate property of the surviving spouse Merger of usufruct in the owner of the naked title Properties held in trust by the decedent Acquisition and/or transfer expressly declared as not taxable 5. What will be used as basis in the valuation of property? The properties subject to Estate Tax shall be appraised based on its fair market value at the time of the decedent's death. The appraised value of the real estate shall be whichever is higher of the fair market value, as determined by the Commissioner (zonal value) or the fair market value, as shown in the schedule of values fixed by the Provincial or City Assessor. If there is no zonal value, the taxable base is the fair market value that appears in the latest tax declaration. If there is an improvement, the value of improvement is the construction cost per building permit or the fair market value per latest tax declaration. 6. What are the allowable deductions for Estate Tax purposes? For Resident Decedent Expenses, losses, indebtedness and taxes a) Funeral Expenses i) CA 466 - 5 % of gross estate (up to Dec. 31, 1972)

ii) PD 69 - 5 % of gross estate but not exceeding P 50,000 (Jan. 1, 1973 to July 27, 1992) iii) RA 7499 - 5 % of gross estate but not exceeding P 100,000 (July 28, 1992 to December 3l, 1997) iv) RA 8424 - 5% of gross estate but not exceeding P 200,000 (Jan. 1,1998) b) Judicial expenses of the testamentary/intestate proceedings c) Valid claims against the estate d) Claims against insolvent person e) Unpaid mortgages/indebtedness f) Unpaid taxes g) Casualty losses h) Property previously taxed or vanishing deductions Requisites: Present decedent must have died within five (5) years from date of death of prior decedent or date of gift The property with respect to which the deduction is claimed must have formed part of the gross estate situated in the Philippines of the prior decedent or taxable gift of the donor The property must be identified as the same property received from prior decedent or donor or the one received in exchange therefore The estate taxes on the transmission of the prior estate or the donors tax on the gift must have been finally determined and paid No vanishing deduction on the property or the property given in exchange therefore was allowed to the prior estate i) Transfer for public purpose j) Share of surviving spouse k) Medical expenses - those incurred by the decedent within one (1) year prior to his/her death which shall be substantiated with receipts (NOTE: Amount allowable as deduction depends on the law prevailing at the time of death of the decedent). l) Family Home - fair market value but not to exceed P1,000,000.00 m) Standard Deduction - an amount equivalent to P1,000,000.00 (applicable only for death occurring after the effectivity of RA 8424 which is January 1, 1998.) n) Amount received by the heirs under Republic Act No. 4917 (applicable only for death occurring after the effectivity of RA 8424 which is January 1, 1998) For Non-Resident Decedent, not a citizen of the Philippines Expenses, losses, indebtedness, taxes Property previously taxed Transfer for public use Share in the conjugal property Description Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale. Frequently Asked Questions 1) What is meant by capital asset?

Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include a) stock in trade of the taxpayer or 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; or b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (F) of Sec. 34 of the Code; or d) real property used in trade or business of the taxpayer. 2) What is meant by ordinary asset? Ordinary asset refers to all properties specifically excluded from the definition of capital assets under Sec. 39 (A)(1) of the NIRC. 3) What is meant by real property? Real property shall have the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the Civil Code of the Philippines. 4) What does a real estate dealer refer to? A real estate dealer refers to any person engaged in the business of buying and selling or exchanging real properties on his own account as a principal and holding himself out as a full or part-time dealer in real estate. 5) What does a real estate developer refer to? Real estate developer refers to any person engaged in the business of developing real properties into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale or lease. 6) What does a real estate lessor refer to? Real estate lessor refers to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding himself out as a lessor of real properties being rented out or offered for rent. 7) Who are considered engaged in the real estate business? Taxpayers who are considered engaged in the real estate business refer collectively to real estate dealers, real estate developers and/or real estate lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage in the real estate business shall be deemed to be engaged in the real estate business. 8) Who are considered not engaged in the real estate business? Taxpayers who are considered not engaged in the real estate business refer to persons other than real estate dealers, real estate developers and/or real estate lessors. 9) Who are considered habitually engaged in the real estate business? Real estate dealers or real estate developers who are registered with the Housing and Land Use Regulatory Board (HULRB) or HUDCC 10)How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as follows: i) All real properties acquired by the real estate dealer shall be considered as ordinary assets. ii) All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets. iii) All real properties of the real estate lessor, whether land, building and/or improvements, which are for lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall likewise be considered as ordinary assets. iv) All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property shall be considered as ordinary assets. Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually engaged in the sale of real estate. If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six (6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government Unit or the Bureau of Internal Revenue, etc.) b) In the case of taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used or being used or have been previously used in trade or business of the taxpayer shall be considered as ordinary assets. c) In the case of taxpayers who changed its real estate business to a non-real estate business, real properties held by these taxpayer shall remain to be treated as ordinary assets. d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed to subsequently operate, all real properties acquired by them shall continue to be treated as ordinary assets. e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing proof that the same have not been used in business for more than two years prior to the consummation of the taxable transactions involving said properties f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: i) Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. ii) Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the recipients even if the corporation which declared the real property dividends is engaged in real estate business.

iii) The real property received in an exchange shall be treated as ordinary asset in the hands of the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in exchange. g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset as the case may be. 11) What is the basis in the valuation of property? The value of the real property will be based on the selling price, fair market value as determined by the Commissioner (zonal value) or the fair market value as shown in the schedule of values of the Provincial or City Assessor, whichever is higher. If there is no zonal value, the taxable base is whichever is higher of the gross selling price per sales documents or the fair market value that appears in the latest tax declaration. If there is an improvement, the FMV per latest tax declaration at the time of the sale or disposition, duly certified by the City/Municipal Assessor shall be used. No adjustments shall be added on the said value, provided that the tax declaration bears the upgraded fair market value of the said property pursuant to Section 219 of R.A. No. 7160, otherwise known as the Local Government Code of 1991 and the last paragraph of the Local Assessment Regulations No. 1-92 dated October 6, 1992. In case the tax declaration being presented was issued three (3) or more years prior to the date of sale or disposition of the real property, the seller/transferor shall be required to submit a certification from the City/Municipal Assessor whether or not the same is still the latest tax declaration covering the said real property. Otherwise, the taxpayer shall secure its latest tax declaration and shall submit a copy thereof duly certified by the said Assessor. (RAMO 1-2001) For shares of stocks, it will be based on the net capital gains realized from the sale, barter, exchange or other disposition of shares of stocks in a domestic corporation, considered as capital assets not traded through the local stock exchange. 12) What are the applicable tax rates of Capital Gains Tax under the National Internal Revenue Code of 1997? a) Real Properties - 6 % b) For Shares of Stocks not Traded in the Stock Exchange, on the net Capital Gains - Not over P100,000 - 5% - Any amount in excess of P100,000 - 10% 13) Who are required to file the Final Capital Gains Tax return? Every person, whether natural or juridical, resident or non-resident, including estates and trusts, who sells, transfers, exchanges or disposes real properties located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales or shares of stocks in domestic corporations not traded through the local stock exchange classified as capital assets. 14) What is the procedure in the filing of Final Capital Gains Tax return? File the Final Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the seller or transferor is registered, for shares of stocks or where the property is located, for real property. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer.

15) Who/what are considered exempt from the payment of Final Capital Gains Tax? Dealer in securities, regularly engaged in the buying and selling of securities An entity exempt from the payment of income tax under existing investment incentives and other special laws An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control A government entity or government-owned or controlled corporation selling real property If the disposition of the real property is gratuitous in nature Where the disposition is pursuant to the CARP law 16) Who are conditionally exempt from the payment of Final Capital Gains Tax? Natural persons who dispose their principal residence, provided that the following criteria are met: The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new principal residence within eighteen (18) calendar months from the date of sale or disposition; The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired; The Commissioner has been duly notified, through a prescribed return, within thirty (30) days from the date of sale or disposition of the persons intention to avail of the tax exemption; Exemption was availed only once every ten (10) years; and 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 will be subject to Capital Gains Tax. In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or managers check in interest-bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferors new principal residence within eighteen (18) calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of said property. In general, the term Escrow means a scroll, writing or deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of a contingency or performance of a condition, and then by him delivered to the grantee, promise or obligee.