THE CPA BOARD EXAMS OUTLINES

by John Mahatma G. Agripa, CPA

TAXATION

INCOME
TAXATION:
INDIVIDUALS,
PARTNERSHIPS/COOWNERSHIPS,
ESTATES/TRUSTS, AND
CORPORATIONS
Supplementary discussions based on lectures
by Atty. Christopher Llamado and
Atty. Dante de la Cruz, CPA
(CPAR)

INDIVIDUAL TAXATION

Individuals are generally subject to three types of tax income

(ordinary, returnable) tax, passive income tax and capital gains tax.
Income tax is progressive, since the tax rate increases as the tax
base increases. Passive and capital gains tax are both
proportionate, since the tax is computed using a single rate
The tax base for income tax, as per the income tax return format, is
computed as follows:
Compensation income
DEDUCT: Personal exemptions
DEDUCT: PPHHI
ADD: Business/professional income
DEDUCT: Allowable deductions
Taxable income
Tax due (computed using progressive tax table)
DEDUCT: Tax credits/previous payments in the tax year/
creditable withholding tax
Tax payable

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Compensation income in the above formula should be net of all

exclusions (SSS, GSIS, union dues and others) but gross of
creditable withholding tax (CWT). Business/professional income
should also be net of VAT but gross of CWT and advances
Passive and capital gains tax are also considered final taxes, which
means once paid, they can no longer be refunded. They are not
reportable in the income tax return (for those made within the
country)
All citizens and aliens are taxed progressively, using the graduated
tax table, except for non-resident aliens not engaged in business
which are proportionately taxed at 25%. Special individuals are
also taxed proportionately at respective rates. Minimum wage
earners are generally not taxed

TAX SITUS RULES

According to tax situs, which is based on symbiotic relationship,

only resident citizens are taxable for income made within and
outside the country. All others are taxed only for income made
within
The place where the income was made is not necessarily the
criteria for determining whether such income is within or
without. The following types of income follow these test source:
o Interest income considers the residence of the debtor.
Thus, if the debtor is in Hong Kong though hes a resident
citizen, the interest income is considered income without.
Since this is passive income, this is considered ordinary
income reportable in the income tax return (ITR)
o Income from services considers where the service was
performed
o Rental income considers the location of the property
o Royalty considered the place where it is used
o Gains on the sale of real property which is subject to 6%
capital gains tax considers the location of the property.
Thus, only those located in the Philippines are subject to
the tax
o Gains on sale of personal property considers the place
where the sale was made
o Dividends received from a domestic corporation is always
considered income within. However, those received from
foreign corporations follow the predominance test:
- If 50% or more of the gross income of the corporation
for the past three years was derived from the country,
the dividend is prorated to derive income within, as
follows. The remaining portion shall be income without
Philippine gross income
DIVIDE: Total world gross income
MULTIPLY: Dividend received
Income within portion of dividends

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If less than 50% of the gross income of the

corporation for the past three years was derived

within, the entire dividend is considered income
without. Since dividends are passive income, dividend
income without are reportable in the ITR
- The three year period is important to consider. If the
foreign corporation has operated for less than three
years in the country, the entire dividend received is
income without, thus reportable in the ITR
Sale of domestic shares are always income within,
regardless of place of sale. Thus, shares of PLDT sold in the
New York Stock Exchange are income within the selling
price of which are subject to the stock transaction tax
(0.005%)
Sale of foreign shares are always income without

PERSONAL EXEMPTIONS:
BASIC AND ADDITIONAL, PPHHI

Personal exemptions are amounts provided by law to be

deduced against the gross income to cover the expenses of the
taxpayer, which maybe basic and/or additional depending on
the taxpayers status. The basic exemptions are allowed for
every citizen and alien except for non-resident aliens not
engaged in business (NRANEB) and non-resident aliens
engaged in business (NRAEB) with no present reciprocity law
The basic exemption amounts to Php 50,000; the additional is
Php 25,000 for every child the taxpayer has (maximum of 4
qualified dependents). In case of married taxpayers, the spouse
must be deriving gross income to avail the basic exemption.
Also, generally, the husband shall claim the additional
exemptions
Aside from married taxpayers, a head of family an unmarried
or legally separated person with a qualified dependent can
also claim the additional exemptions

As seen in the income tax formula, all personal exemptions are

deducted against compensation income first, then to business
income if compensation income is insufficient
A qualified dependent for claiming the additional exemption can
be a legitimate, adopted, illegitimate or foster child (not more
than 18 years old, unmarried, not gainfully employed or cannot
support himself because of a defect) or a person with disability
PWDs and those incapable of self-support are considered
qualified regardless of age as long as they are within the 4th
degree of consanguinity or affinity of the taxpayer, not gainfully
employed or chiefly dependent on him. As per BIR ruling, senior
citizens are not considered dependents
In the availing of exemptions, the tax code assumes individuals
are married for as long as possible and died for as short as
possible when a change in status occurs. This means that at any
given time within the taxable year, if the taxpayer marries, the
taxpayer is assumed married for the entire year from the start of
the taxable year. If the taxpayer dies at any time within the year,
he is considered to have died at the end of the year. Thus, he can
still have the whole exemptions in the year he died
The same principle goes for additional exemptions. If the
taxpayer should have additional dependents in the year, he can
claim the additional exemptions for those dependents in full for
the year regardless if the child also died within the year, or
otherwise. If the taxpayer loses dependents, he can still claim
the corresponding exemptions in full for the year
Thus, a married man with 4 children who dies in September can
still claim a total of Php 150,000 exemptions when his estate
files his returns in April. The following year, he can only avail Php
20,000 as per estate income taxation rules
In case the married taxpayers legally separate, the husband
generally has priority over the wife in claiming the additional

exemptions. The couple can claim only a maximum of 4

dependents between them. However, if they annulled, the
husband and wife may both each claim 4 dependents
In addition to the personal exemptions, a credit for premium
payments for health, hospitalization and insurance (PPHHI)
amounting to Php 2,400 a year or Php 200 per month is also
allowed to be deducted against gross income of families earning
not more than Php 250,000 per year (gross of CWT and other
deductions)

MINIMUM WAGE EARNERS

Minimum wage earners are those earning the statutory

minimum wage as defined by the Regional Tripartite Wage and
Productivity Board. As mentioned, they are generally exempt
from income taxation
This immunity shall cease if the minimum wage earner receives
or earns additional income such as taxable allowances,
compensation other than the statutory minimum wage and 13 th
month pay and other benefits in excess of Php 82,000, or
receives the SMW from 2 or more employees
In the above cases, his entire earnings from the time of the
cessation shall be subjected to income taxation. However, if the
MWE earns income subject to final taxes such as passive
income other than the SWE only, his earnings are still exempt
from income tax

TAXATION OF PARTNERSHIPS/
CO-OWNERSHIPS

For taxation purposes, partnerships are classified as either exempt

or taxable. All partnerships are tax-reporting entities but some are

not tax-paying entities

EXEMPT PARTNERSHIPS:
GENERAL PROFESSIONAL PARTNERSHIPS

General professional partnerships are an association of two or

more individuals practicing the same profession as a means to
do business, the profits from which to be divided among the
partners. Such entities are taxed on the individual capacity of
the partners meaning the partners, not the business, pays
income tax from their share of partnership income. This
exemption only applies to income tax
Even though exempt, the business is still required to file an
income tax return for informational purposes, to determine the
share of the partners
GPPs are subject to creditable withholdings of 10% of payments
Php 720,000 below, and 15% for payments above the said
amount. This is to be deducted against the taxes due of the
individual partners
In computing the partners tax due, he considers the kind of
deduction scheme the partnership uses itemized or optional
standard deduction. If the partnership uses the latter, the
partner cannot use any deduction against his share of the
partnership income. As to his other income, the partner may use
any deduction scheme regardless of what the partnership uses

TAXABLE PARTNERSHIPS

Composed of all other partnerships, they are subject to the

same income taxation system as corporations. General

professional partnerships may be taxed (in its whole earnings) if

it engages in other lines of business other than its profession
The share of partnership net income (after-tax) to the partners
are considered as dividends, which are subject to final tax. Thus,
they are not reported in the income tax return of the partners.
After all, the income has been already subjected to indirect
double taxation. Taxable partnerships are also not subject to
creditable withholdings

CO-OWNERSHIPS

Income derived from the co-ownership of a thing are generally

exempt, except if the co-ownership was formed voluntarily. An
except co-ownership arises mostly from donations or
inheritance of undivided property to several individuals
However, if the donated or inheritance remains undivided
between the recipients 10 years after receiving the property, the
income derived therefrom shall be subjected to tax

TAXATION OF ESTATES/TRUSTS

An estate is the mass of all property, rights and obligations existing

at the time of death and accruing since. A trust is a right over
property established by a trustor for the benefit of a certain
beneficiary. Income generated from such are taxed as individuals
Both also make use of calendar year only. Estates and trusts
managed from outside the country are not included for income tax
purposes
Note that income generated by the estate is covered here. Estate
tax is imposed over the properties and rights left behind

ESTATE INCOME TAXATION

Income tax of the estate shall be paid by the executor/

administrator or by the heirs themselves, which can be
computed as follows:
Estate gross income
DEDUCT: Estate expenses
DEDUCT: Special deductions
DEDUCT: Php 20,000 basic exemption
Taxable net income
Tax due (computed using progressive tax table)
DEDUCT: Tax credits/creditable withholding tax
Tax payable

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The estate may use all items of gross income and deductions as
allowed to an individual taxpayer. As mentioned above, the
estate could claim the basic and additional exemptions of the
deceased taxpayer in the year of death. On the succeeding
years, the estate shall only avail of a Php 20,000 basic
exemption
The special deduction above represents actual distribution of
income (except from property) to the heirs, which is subject to
15% CWT. These shares of income shall be included in the heirs
separate income tax returns

TRUST TAXATION

Trusts shall be taxed when they are irrevocable. Those

established for pension and other employee benefits are
generally exempt from income tax
Computation of taxable income of the trust follows the same
formula as to estates. The Php 20,000 basic exemption is also
provided. Special deductions are always deducted even if no
distribution of funds is made to the beneficiary during the period

 In some cases, several trusts are established for the benefit of

one entity. Data from the trusts are consolidated and used in
computing tax due for the trusts, using Php 20,000 only as basic
exemption. To determine the tax payable for each trust, the tax
due computed from the consolidated data is apportioned using
gross income after all deductions but before the Php 20,000
exemption

CORPORATE INCOME TAX

For taxation purposes, a corporation includes partnerships (except

GPPs), joint stock companies, joint accounts, associations and
insurance companies
They are classified as either domestic, resident foreign or nonresident foreign. Domestic corporations are created in the
Philippines, taxable at 30% for net income made within and
outside the country. Resident foreign corporations are those
created outside the country but operates in it, taxable at 30% for
net income within. Non-resident foreign corporations does not
engage in any business operations in the country, taxed at 30%
final
Certain specific corporations have been granted immunity from
income taxation:
o Government-owned and controlled corporations (GSIS, SSS,
PHIC, PCSO, local water districts and PDIC)
o Beneficiary societies and organizations operating solely for its
members (e.g., fraternities, sororities)
o Non-stock and government-owned educational institutions
o Non-stock religious, civic, educational and social welfare
organizations
o Philippine Red Cross
o Child-caring institutions accredited with DSWD
o Farmers associations acting as sales agents

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However, any income generated from real and personal property

owned by the aforementioned corporations shall be subjected to
graduated rates of income tax, regardless of use
The corporate tax due can be computed as follows:
Gross sales/receipts
DEDUCT: Cost of sales
ADD: Taxable other income
Total gross income
DEDUCT: Allowable deductions
Taxable income
Regular income tax (30% of taxable income)
MCIT (2% of gross income)
Tax due (whichever is higher between regular IT and MCIT)
DEDUCT: Any tax credits, excess MCIT
Tax payable

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The computation and filing of corporate income tax follow some

rules worth remembering:
o Corporations file returns quarterly. The computation of
income tax per quarter follow a cumulative computation,
meaning data from the first quarter is combined with those of
the second to compute the tax due for the quarter. Since the
tax for the first quarter is already paid, this payment is
deducted against the tax computed on the second quarter to
get the tax payable for the second quarter
o Just like in individuals, income must be reported gross of any
creditable withholding tax
o Corporations may adopt a fiscal or calendar year as their
accounting period, which is why the annual return is filed on
the 15th day of the 4th month following the close of the tax
year and not on April 15 just like in most cases

PENALTY TAXES:
MINIMUM CORPORATE INCOME TAX

The minimum corporate income tax (MCIT) 2% of gross income

is applied to all corporations subject to 30% tax rate

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(domestic, resident foreign), which commences on the 5th year

of the corporations existence. Gross income shall include
income from unrelated from the entitys main line of business
(e.g., rent income if the corporation is a manufacturer) and
excludes income subject to final tax
As seen in the formula above, the tax due for the corporation
shall be the higher between the regular income tax and
minimum corporate income tax
In cases when MCIT is greater than regular income tax, the
excess between the two can be deducted against regular income
tax within three years the MCIT was paid. The excess MCIT can
only be deducted if regular income tax was higher than MCIT in
that year. The excess is recorded as a deferred charge (debit
normal balance)
If the excess MCIT is still not emptied out after three years, the
remaining amount can no longer be credited against regular
income

PENALTY TAXES:
IMPROPERLY ACCUMULATED EARNINGS TAX

This penalty tax is a measure for corporations to declare

dividends for their shareholders 10% of the accumulated
earnings beyond the needs of the corporation, computed as
follows:
Taxable net income
ADD: Exempt, excluded and income subject to final tax
ADD: Net operating loss carry-over
Accounting income
DEDUCT: All taxes paid, including final taxes
DEDUCT: Amount reserved for corporate needs
DEDUCT: Dividend declared
Base for IAET

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 IAET shall be paid 15 days after one year preceding the tax year
for which the dividend mustve been declared, i.e., a year and 15
days after the current tax year for which dividends must be
declared
Income subjected to IAET will no longer be included in
computing IAET again, even if its still not declared as dividends

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