Anda di halaman 1dari 26

DISCLAIMER:

The contents of these notes were taken from the lectures in the book of Mr.
Rex Banggawan, Mr. Erasmo Ampongan, and from the lectures of Mr.
C.Llamado. This copy is for review purpose only and not to infringe any
copyright of the aforementioned.

NOTES TO INCOME AND


BUSINESS TAXATION NOTE:
Updated as to conform with the amendments of Republic Act 10963, Tax
Reform Acceleration and Inclusion Law.
A COMPILATIONS OF THEORIES, CONCEPTS AND LAWS ON TAXATION

Compiled by Leo Torres, CPA2018


INRODUCTION TO TAXATION 3. Cases that require expedient and effective administration and implementation of assessment and
GENERAL PRINCIPLES OF TAXATION collection of taxes.
A. TAXATION AS AN INHERENT POWER OF THE STATE
Power to tax is inherent in sovereignty 3. The Government is self-explanatory / EXEMPTION of the government
 the moment the State exists, the power to tax automatically exists  Taking money from one pocket to the other
 enforceable even without any delegation by the Constitution or legislation from Congress  Applies only to entities exercising government functions (acta jure imperii)
 LGUs have no inherent power to tax; but expressly granted by the Constitution or legislation  NG may tax GOCCs, agencies and instrumentalities
Lifeblood Theory 4. TERRITORIALITY – those who only benefits to our government should only be the one to be
 Tax is necessary to meet the expenses of government without which the latter cannot taxed.
operate a. Taxing authority cannot impose taxes on subjects beyond its territorial jurisdiction.
 Every person must contribute his share in the running of the government b. It may determine the tax situs
*Exception to the territoriality principle
BASIC PRINCIPLE OF A SOUND TAX SYSTEM (FiTA) 1. In income taxation, resident citizens and domestic corporations are taxable on income derived within
1. Fiscal Adequacy and outside the Philippines.
2. Theoretical Justice 2. In transfer taxation, residents or citizens such as resident citizens, non-resident citizens and resident
3. Administrative Feasibility aliens are taxable on transfers of properties located within or outside the Philippines.

STATE POWERS – enforce a proportional contribution from its subjects for public purpose 5. INTERNATIONAL COMITY – agreement between states. It is why the reciprocity rule applies.
INHERENT POWERS OF THE STATE *In case that there will be conflict between the policy of the two states on the application of
1. Taxation – power of the state to raise revenue to be used in all the necessary expenses of the tax, the law of the land shall always prevail.
government.
2. Eminent Domain – power of the state to take private property for public use upon payment *Exception to the territoriality principle
of just compensation. 1. In income taxation, resident citizens and domestic corporations are taxable on income derived within
3. Police Power – power to enact and execute law for public safety, health morals and for the and outside the Philippines.
general welfare of the people. 2. In transfer taxation, residents or citizens such as resident citizens, non-resident citizens and resident
AS A PROCESS – process of levying taxes by the legislature of the State (Congress) aliens are taxable on transfers of properties located within or outside the Philippines.
AS A MODE OF COST DISTRIBUTION – State allocates its costs or burden to its subjects who are
benefited by its spending. D. CONSTITUTIONAL LIMITATIONS
1. Benefit Received Theory–more benefit one receives from the government, the more taxes he Constitution is not the source of the taxing power. It simply defines and delimits the power.
should pay. 1. Due Process Clause (Section 1, Art. III)
2. Ability to pay Theory – taxpayers should be required to contribute based on their relative  Enforced contribution from the people cannot be made without a law authorizing the same
capacity to sacrifice for support of the Government. (Progressive Tax System) Substantive Due Process
 Vertical Equity – extent of one’s ability to pay is directly proportional to the level  Requires that the tax statute must be within the constitutional authority of Congress and that
of his tax base. it must be fair, just and reasonable.
 Horizontal Equity – consideration of the particular situation of the taxpayer.  Should not be harsh, oppressive, or confiscatory
B. PHASES AND SCOPE OF TAXATION – State allocates its costs or burden to its subjects who are  Must be for public purpose
benefited by its spending.  Imposed within territorial jurisdiction
Levy – where Congress enacts a statute to impose taxes Procedural Due Process
 Collection  Requires notice and hearing, or at least an opportunity to be heard.
Subject Matter – refers to persons, things, transaction, privilege, etc.  Mo arbitraries in assessment and collection
2. Equal Protection Clause
C. INHERENT LIMITATIONS (Section 1, Art. III)
1. Taxation should be for PUBLIC USE  Means that taxpayers of the same footing should be treated alike, both as to privileges
a. Public welfare should be the penultimate objective. conferred as well as on obligations imposed.
b. Taxation may be used to implement the State’s police power.  Power to tax includes power to classify provided:
a. Based on substantial distinction
2. Taxation is inherently LEGISLATIVE / Non-delegation of the taxing power b. Apply to present and future conditions
 Vested exclusively in Congress and is non-delegable pursuant to the doctrine of separation of c. Germane to purpose of law
the branches of the government to ensure check and balances. d. Apply equally to all members of the same class
*Exception to the rule of non-delegation 3. Freedom of Religion (Section 5, Art. III)
1. local government units are allowed to exercise the power to tax to enable them to exercise their fiscal Non-Establishment Clause
autonomy.  Covers the prohibition to establish a national or official religion since in that case, there will
2. President is entitled to fix the amount of tariffs be an appropriation from taxes paid by the people.

Compiled by Leo Torres, CPA2018


Free Exercise Clause But even so, their functions are merely intended to interpret or clarify the proper application of the law.
 This is the basis of tax-exemption granted to religious institutions. They are not allowed to introduce new legislations within their quasi-legislative authority.
4. Non-Impairment of Contracts (Section 10, Art. III) 13. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
Applications - notwithstanding the Court of Tax Appeals, which is a special court, all cases involving taxes can be
 People’s right and freedom to contract raised to and be finally decided by the Supreme Court of the Philippines.
 Sanctity of contracts - The SC is court of last resort.
 Does not apply to franchises 14. Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives,
 Not applicable to police power and eminent domain but the Senate may propose or concur with amendments.
5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III) 15. Each local government unit shall exercise the power to create its own sources of revenue and shall
- applies only when the debtor acquired the debt in good faith. Debt acquired in bad faith constitutes have a just share in the national taxes.
stafa, a criminal offense.
*NOTE: Non-payment of tax is different from non-payment of debt. Non-payment of tax comprises E. DOCTRINE OF SET-OFF
public interest while non-payment of debt comprises private interest. Non-payment of tax is similar to a Doctrine of Set-off or Compensation
crime. The Constitution guarantee for non-payment of debt does not extend to non-payment of tax,  Applies when the government and taxpayer are mutually debtors and creditors of each other.
except poll tax.  Also not allowed in the Philippines since taxes are not in the nature of contracts between
Poll tax – tax imposed on persons without any qualification (e.g. CTC); payment is not mandatory parties.
(merely permissive)  Taxes grow out of duty to, and are the positive acts of the government to the making and
6. Uniformity rule in taxation enforcing of which, the personal consent of the individual taxpayer is not required. (Republic
- taxpayer under dissimilar circumstances should not be taxed the same. v. Mabulao)
- Uniform: all articles or properties of the same class taxed at the same rate
- Equity: apportionment must be more or less just in the light of taxpayer’s ability to shoulder tax burden STAGES OF THE EXERCISE OF TAXATION POWER (LAP)
7. Progressive system of taxation 1. Levying or imposition
- tax rate increase as the tax base increases. (Ability to Pay Theory) 2. Assessment and Collection
- equitable distribution of wealth to society by taxing the rich more than the poor. 3. Payment
8. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and - IMPACT OF TAXATION or Legislative Act
mosques, lands, buildings, and improvements from property taxes. Matters of legislative discretion in the exercise of taxation
- only those properties which are actually, directly, and exclusively used for charitable, religious, and a. Determining the object of taxation
educational purposes. (Doctrine of Use) b. Setting the tax rates or amount to be collected
 Pertains only to real estate tax c. Determining the purpose for the levy which must be public use
 Test of exemption: actual: actual use of the property, NOT OWNERSHIP d. Kind of tax to be imposed
 Use of the word “exclusively” means “primary” rather than “solely.” e. Apportionment of the tax between the national and local government
9. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions f. Situs of taxation
including grants, endowments, donations, or contributions for educational purposes. g. Method of collection
- used ACTUALLY, DIRECTLY, AND EXCLUSIVELY for educational purposes ASSESMENT and COLLECTION
1) Covers income, property, donor’s tax, and customs duties - the tax law is implemented by the administrative branch of the government. Implementation involves
2) Revenue must both be assessment or the determination of the tax liabilities of taxpayers and collection. This stage is referred to
a. derived from an activity in pursuance of educational purpose as INCIDENCE OF TAXATION or the ADMINISTRATIVE ACT OF TAXATION
b. proceeds must be used for the same purpose
3) Income exempt provided it is used for maintenance or improvement of institutions F. DOUBLE TAXATION
10. Concurrence of a majority of all members of Congress for the passage of a law granting tax - same tax payer is taxed twice by the same tax jurisdiction for the same thing.
exemption Elements of Double Taxation
- In the approval of an exemption law, an ABSOLUTE MAJORITY of ALL members of the Congress, not a 1. Primary element: Same object
RELATIVE majority or QUORUM majority, is required. However, in the withdrawal of tax exemption, only 2. Secondary Elements
a relative majority is required. a. Same type of tax
11. Non-diversification of tax collections b. Same purpose of tax
- should be use for public purpose only. c. Same taxing jurisdiction
12. Non-delegation of the power of taxation d. Same tax period
- Contemplates power to determine kind, object, extent, amount, coverage, and situs of tax; Direct Double Taxation
- distinguish from power to assess and collect  All elements of double taxation exist for both impositions.
- Exemptions: a) presidential taxing powers; b) local governments Indirect Double Taxation
*Hence, implementing administrative agencies such as Department of Finance and the Bureau of Internal  One of the secondary elements of double taxation is not common for both impositions.
Revenue issues regulations, rulings, orders, or circular to interpret and clarify the application of the law. *No constitutional prohibition on double taxation. However, where there is direct duplicate taxation
then there may be violation of the constitutional percepts of equal protection and uniformity in taxation.

Compiled by Leo Torres, CPA2018


G. ESCAPE FROM TAXATION
Those that result to loss of government revenue
1. Tax Evasion - illegally reduce or avoid the payment of tax. Understatement of income and TAXES, TAX LAWS, NAD TAX ADMINISTRATION
overstatement of expenses. TAXATION LAW
2. Tax Avoidance – tax minimization. Reduces or totally escapes taxes by any legally permissible means. - law that arises from the exercise of the taxation power of the state.
3. Tax exemption – tax holiday. Immunity, privilege or freedom from being subject to a tax which others TYPES OF TAXATION LAWS
are subject to. 1. Tax Laws – provide the assessment and collection of taxes
a. NIRC
H. SITUS OF TAXATION b. The Tariff and Custom Code
1. Business Tax Situs: place where the business is conducted c. Local Tax Code
2. Income Tax Situs d. Real Property Tax Code
a. on Services – where service is rendered 2. Tax Exemption Laws – grant immunity from taxation.
b. on Sale of goods – in the place of sale a. Minimum Wage Law
3. Property Tax Situs: Properties are taxable in their location b. The Omnibus Investment Code
4. Personal Tax Situs: Persons are taxed in their place of residence. c. Baranggay Micro-Business Enterprise Law
d. Cooperative Development Act

SOURCES OF TAXATION LAWS


1. Constitution
2. Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuance
6. Local Ordinances
7. Tax Treaties
8. Revenue Regulations

TYPES OF ADMINISTRATIVE ISSUANCES


a. REVENUE REGULATIONS
 Issuances signed by the Secretary of Finance upon the recommendation of the Commissioner
of Internal Revenue that specify, prescribe, or define the rules and regulations for the
effective enforcement of the provisions of the NIRC and related statutes.
 Pronouncements intended to clarify or explain the tax law and carry into effects its general
provisions by providing details of administration and procedure. It has the force and effect of
a law, but is not intended to expand or limit the application of the law.
b. REVENUE MEMORANDUM ORDERS
 provide directives or instructions; prescribe guidelines; and outline processes, operations,
activities, workflows, methods, and procedures necessary in the implementation of stated
policies, goals, objectives, plans, and programs of the BIR in all areas of operations except
auditing.
c. REVENUE MEMORANDUM RULINGS
 Rulings, opinions and interpretations of the CIR with respect to the provisions of the tax code
and other tax laws as applied to a specific set of facts, with or without established precedents,
and which the CIR may issue from time to time for the purpose of providing taxpayer
guidance on the tax consequences in specific situations. BIR ruling therefore cannot
contravene duly issued RMRs; otherwise, the rulings are null and void ab initio.
d. REVENUE MEMORANDUM CIRCULARS
 Issuances that publish pertinent and applicable portions as wells as amplifications of laws,
rules and regulations, and precedents issued by BIR and other agencies/ offices.
e. REVENUE BULLETINS
 Refers to periodic issuances, notices, and official announcements of the Commissioner of
Internal Revenue that consolidate the Bureau of Internal Revenue’s position on certain

Compiled by Leo Torres, CPA2018


specific issues of law or administration in relation to the provisions of the Tax Code, relevant
tax laws, and other issuances for the guidance of the public.

Elements of Valid Tax


1. Must be levied by the taxing power having jurisdiction over the object of taxation
2. Must not violate constitutional and inherent limitations
TAX Vs. DEBT
3. Uniform and equitable
4. For public purpose
5. Proportional in character
6. Generally payable in money
CLASSIFICATION OF TAXES
As to subject matter
a. Poll Tax – imposed on persons residing within a specified territory without regard to their
property or occupation.
b. Property Tax – tax on property whether real or personal.
c. Excise (privilege) Tax – imposed upon the performance of an act, enjoyment of privilege, or
engaging in an occupation.
As to who bears the burden
a. Direct – demanded from persons who shoulder also the burden of the tax.
b. Indirect – demanded from person who shall indemnify himself at the expense of another.
As to determination of amount
a. Specific - fixed amount by the head number or some standard of weight or measurement.
ACCORDING TO IMPOSITION
b. Ad valorem – fixed proportion of the value of property with respect to which tax is assessed.
TYPE OF TAX ACCORDING TO IMPACT
As to purpose
Progressive System Taxation of income of individuals, and One that emphasizes direct tax.
a. General, fiscal, or revenue – imposed to raise revenue for the general purpose of the
transfer or properties by individuals. It cannot be shifted. Type of tax
government.
system impacts more upon the
b. Special or Regulatory – imposed for special purposes.
rich.
As to imposing authority
Proportional System taxation of corporate income and
a. National – imposed by the national government
business.
b. Local – imposed by local government
Regressive System Not employed in the Philippines One that emphasizes indirect
As to graduation or rate
taxes. This are shifted by
a. Proportional – based on fixed percentage of property, receipts or other basis to be taxed.
businesses to consumers.
b. Progressive – rate increases as the tax base increases
c. Regressive – rate decreases as the tax base decreases
TAX COLLECTION SYSTEMS
TAX vs. LICENSE FEE TAX vs TOLL 1. WITHHOLDING SYSTEM – the payor of the income withholds or deducts the tax on the
income before releasing the same to the payee and remits the same to the government. This
system follows the principle of Administrative Feasibility.
 Withholding tax on compensation
 Expanded Withholding tax
 Final Withholding tax
 Withholding tax on government payments
2. VOLUNTARY COMPLIANCE SYSTEM – the taxpayer himself determines his income, reports
the same through income tax return and pay the tax to the government.
 Self-Assessment method
TAX vs. SPECIAL ASSESSMENT a) Withholding tax on compensation by compensation earners
TAX vs. CUSTOMS DUTY b) Expanded withholding tax by taxpayer engaged in business or exercise of
profession.
*The tax withheld are treated as tax credit against the tax due of the taxpayer in the income tax return.
3. ASSESMENT OR ENFORCEMENT SYSTEM – government identifies non-compliant taxpayers,
assesses their tax dues and penalties, and enforces collections by coercive means such as
summary proceeding or judicial proceedings when necessary.

PRINCIPLE OF SOUND TAX SYSTEM (FAT)


Compiled by Leo Torres, CPA2018
A. Fiscal Adequacy – government must not incur deficit on its expenses for public use. Taxes associations, joint ventures or consortia and registered partnerships, and their members:
increases in response to increase in government spending. Provided, that the Cooperative Development Authority shall submit to the Bureau a tax
B. Administrative Feasibility – tax laws should be capable and effective administration to incentive report, which shall include information on the income tax, valued-added tax, and
encourage compliance. other tax incentives availed under RA 6938, as submitted by the Cooperative Development
 E-filing and e-payment of taxes Authority to the Bureau shall be submitted to the Department of Finance and shall be
 Substituted filing system for employees included in the database created under RA 10708, otherwise known as ‘The Tax Incentives
 Final withholding tax on non-resident aliens or corporations Management and Transparency Act (TIMTA)’. (Sec. 5, NIRC as amended by Sec. 3 of RA 10963)
 Accreditation of authorized agent banks in the filing and payment of taxes 5. Power to summon the person liable for tax required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books of
C. Theoretical Justice – taxation should consider the taxpayer’s ability to pay. Taxation should not be accounts and other accounting records (Sec. 5, NIRC)
oppressive, unjust, or confiscatory. 6. Power to take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry (Sec. 5, NIRC)
CHIEF OFFICIALS OF THE BUREAU OF INTERNAL REVENUE 7. Power to make assessments and prescribe additional requirements for tax administration and
1. 1 Commissioner – Chief of Internal Revenue enforcement (Sec. 6 NIRC as amended by Sec 4 of RA 10963)
2. 4 Deputy Commissioners, each to be designated to the following: A. Examination of Returns and Determination of Tax Due.
4) Operations Group - After a return has been filed as required under the provisions of this code,
5) Legal Enforcement Group the Commissioner or his duly authorized representative may authorize the
6) Information System Group examination of any taxpayer and the assessment of the correct amount of
7) Resource Management Group tax, notwithstanding any law requiring the prior authorization of any
government agency or instrumentality: Provided, however, that failure to file
POWERS OF THE BUREAU OF INTERNAL REVENUE (ACEGAPIS) a return shall not prevent the Commissioner from authorizing the
1. Assessment and Collection of national internal revenue: examination of any taxpayer.
a. Taxes - Any return, statement of declaration filed in any office authorized to receive
b. fess the same shall not be withdrawn: Provided, that within three years from the
c. charges date of filing, the same may be modified, changed, or amended: provided,
2. Enforcement of all: further, that no notice for audit or investigation of such return, statement or
a. Forfeitures declarations has in the meantime been actually served upon the taxpayer.
b. Fines and B. Failure to Submit Required Returns, Statements, Reports and other Documents
c. Penalties - When a report required by law as a basis for the assessment of any national
3. Giving effect to, and administering the supervisory and police power conferred to it by the internal revenue tax shall not be forthcoming within the time fixed by laws or
NIRC and other laws rules and regulations or when there is reason to believe that any such report
4. Assignment of internal revenue officers and other employees to other duties is false, incomplete or erroneous, the Commissioner shall assess the property
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials tax on the best evidence obtainable.
6. Issuance of receipts and clearances - In case a person fails to file a required return or other document at the time
7. Submission of annual report, pertinent information to Congress and reports to the prescribed by law, or willfully or otherwise files a false or fraudulent return or
Congressional Oversight Committee in matters of taxation other document, the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain through
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE testimony or otherwise, which shall be prima facie correct and sufficient for
1. Power to interpret tax laws subject to review by the Secretary of Finance (Sec. 4, NIRC); all legal purposes.
2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and other C. Authority to Conduct Inventory-taking, surveillance and to Prescribe
charges, penalties imposed in relation thereto, other matters arising under the National Presumptive GrossSales and Receipts
Internal Revenue Code or other laws or portions thereof administered by the Bureau of - The Commissioner may, at any time during the taxable year, order inventory-
Internal Revenue subject to the exclusive appellate jurisdiction of the Court of Tax Appeals; taking of goods of any taxpayer as a basis for determining his internal
(Sec. 4, NIRC) revenue tax liabilities, or may place the business operations of any person,
3. Power to examine books, paper, record, or other data which may be relevant or material to a natural or juridical, under observation or surveillance if there is reason to
tax inquiry (Sec. 5, NIRC) believe that such person is not declaring his correct income, sales or receipts
4. Power to obtain information from any person whose internal revenue tax liability is subject to for internal revenue tax purposes.
audit or investigation or from any office or officer of the national or local governments, - The findings may be used as the basis for assessing the taxes for the other
government agencies and instrumentalities, including the BangkoSentral ng Pilipinas and months or quarters of the same or different taxable years and such
government-owned or -controlled corporations, any information such as, but not limited to, assessment shall be deemed prima facie correct.
costs and volume of production, receipts or sales and gross incomes of taxpayer, and the - When it is found that a person has failed to issue receipts and invoices in
namesaddresses and financial statements of corporations, mutual fund companies, insurance violation of the requirements of Sections 113 and 237 of this Code, or when
companies, regional operating headquarters of multinational companies, joint accounts, there is reason to believe that the books of accounts or other records do not

Compiled by Leo Torres, CPA2018


correctly reflect the declarations made or to be made in a return required to *The termination of the taxable period shall be communicated through a notice to the
be filed under the provisions of this Code, the Commissioner, after taking taxpayer together with a request for immediate payment. Taxes shall be due and
into account the sales, receipts, income or other taxable base of other payable immediately.
persons engaged in similar businesses under similar situations or 11. To accredit and register tax agents
circumstances or after considering other relevant information may prescribe The denial by the CIR of application for accreditation is appealable to the Department of
a minimum amount of such gross receipts, sales and taxable base, and such Finance. The Failure of the Secretary of finance to act on the appeal within 60 days is deemed
amount so prescribed shall be prima facie correct for purposes of an approval.
determining the internal revenue tax liabilities of such person. 12. To refund or credit internal revenue taxes
D. Authority to Terminate Taxable Period 13. To able or cancel tax liabilities in certain cases
- When it shall come to the knowledge of the Commissioner that a taxpayer is 14. To prescribe additional procedures or documentary requirements
retiring from business subject to tax, or is intending to leave the Philippines 15. To delegate his powers to any subordinate officer
or to remove his property therefrom or to hide or conceal his property, or is
performing any act tending to obstruct the proceedings for the collection of
the tax for the past or current quarter or year or to render the same totally
or partly ineffective unless such proceedings are begun immediately, the
Commissioner shall declare the tax period of such taxpayer terminated at any
time and shall send the taxpayer a notice of such decision, together with a
request for the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, or such portion
thereof as may be unpaid, and said taxes shall be due and payable
immediately and shall be subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand made by the Commissioner.
E. Authority of the Commissioner to Prescribe Real Property Values
- The Commissioner is hereby authorized to divide the Philippines into
different zones or areas and shall, upon consultation with competent
appraisers both from the private and public sectors, determine the fair
market value of real properties located in each zone or area, subject to
automatic adjustment once every three years through rules and regulations
issued by the Secretary of Finance based on the current Philippine valuation
standards: provided, that no adjustment in zonal valuation shall be valid
unless published in a newspaper of general circulation in the province, city or
municipality concerned, or in the absence thereof, shall be posted in the
provincial capitol, city or municipal hall and in two other conspicuous public
places therein: Provided, further, that the basis of any valuation, including
the records of consultations done, shall be public records open to inquiry of
any taxpayer. For purposes of computing any internal revenue tax, the value
of the property shall be, whichever is the higher of:
(1) The fair market value as determined by the Commissioner; or
(2) The fair market value as shown in the schedule of values of the Provincial
and City Assessors.
8. To conduct inventory taking or surveillance
9. To prescribe presumptive gross sales and receipts for a taxpayer when:
a) The taxpayer failed to issue receipts; or
b) The CIR believes that the books or other records of the taxpayer do not correctly
reflect the declaration in the return.
10. To terminate tax period when the taxpayer is:
a) Retiring from business
b) Intending to leave the Philippines
c) Intending to remove, hide, or conceal his property
d) Intending to perform any act tending to obstruct the proceedings for the collection
of the tax or render the same ineffective

Compiled by Leo Torres, CPA2018


b. TNTs are not considered OCWs but are usually classified as RCs
4. Resident Alien (RA)
a. An individual residing in the Philippines who is not a citizen thereof
b. Intention to reside in the Philippines is not necessary
INCOME TAXATION (RA 8242 Tax Reform Act of 1997) 5. Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
ACCOUNTING METHODS a. Engaged in retail trade or business
General Methods b. Engaged in the exercise of profession therein
1. Accrual Basis – income is recognized when earned regardless of when received. Expense is c. Staying for an aggregate period of more than 180 days for the calendar year
recognized when incurred regardless of when paid. 6. Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
Tax Accrual Basis Income a. NRAs not engaged in business but deriving income in the country
Cash Income P xxx,xxx 7. Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
Accrued (uncollected) income Xxx,xxx THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS
Advanced Income Xxx,xxx 1. Intention
Gross Income P Xxx,xxx 2. Length of Stay
Tax Accrual Basis Expense a) Citizens staying abroad for a period of at least 183 days are considered non-
Cash Expense P xxx,xxx resident.
Accrued (unpaid) expense Xxx,xxx b) Aliens who stayed in the Philippines for more than 1 year as of the end of the
Amortization of prepayments taxable year are considered resident.
and depreciation of capital c) Aliens who are staying in the Philippines for not more than 1 year but more than
expenditures 180 days are deemed non-resident aliens engaged in business.
Xxx,xxx d) Aliens who stayed in the Philippines for not more than 180 days are considered
Deductions P Xxx,xxx non-resident aliens not engaged in trade or business.
B. TAXABLE ESTATE AND TRUST
2. Cash Basis – income is recognized received and expense is recognized when paid. 1. Estate – properties, rights, and obligations of a deceased person not extinguished by his
death.
Tax Cash Basis Income 2. Trust – an arrangement whereby a person transfers property to another person, which will be
Cash Income P xxx,xxx held under the management of a third party.
C. CORPORATE INCOME TAXPAYERS
Advanced Income Xxx,xxx
- include partnerships, no matter how created or organized, joint-stock companies, joint accounts,
Gross Income P Xxx,xxx
association, or insurance companies, except general professional partnerships and joint ventures.
Tax Cash Basis Expense - includes profit-oriented and non-profit oriented institutions such as charitable institutions,
Cash Expense P xxx,xxx cooperatives, government agencies and instrumentalities, associations, leagues, civic or religious and
Amortization of prepayments other organizations.
and depreciation of capital 1. Domestic Corporation – organized in accordance with Philippine Laws.
expenditures 2. Foreign Corporation - organized under a foreign law.
Xxx,xxx a) Resident Foreign Corporation (RFC) – operates and conduct business in the
Deductions P Xxx,xxx Philippines through a permanent establishment.
b) Non-resident Foreign Corporation (NRFC) – does not operate or conduct business
3. Special tax accounting requirements must be followed in the Philippines.
TYPES OF INCOME TAXPAYERS c) Special Corporations – domestic or foreign corporations which are subject to
A. INDIVIDUALS special tax rules or preferential tax rates.
1. Resident Citizen (RC) D. OTHER CORPORATE TAXPAYERS
a. Citizen of the Philippines residing therein 1. PARTNERSHIP
b. Citizen residing outside the Philippines without the intention of residing thereat a) General Professional Partnership
permanently  Exercise of common profession.
c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact  Not treated as a corporation and is not a taxable entity.
of his physical presence abroad with a definite intention to reside therein perm.  Only the partners are taxable with their respective shares in the income of
2. Non-Resident Citizen (NRC) the partnership.
a. Citizen who established to the satisfaction of the Commissioner the fact of his b) Business Partnership
physical presence abroad with a definite intention to reside therein.  Formed for profit. It is taxable as a corporation
b. Citizen who leaves the Philippines during the taxable year to reside abroad as 2. JOINT VENTURE
immigrants. a) Exempt Joint Ventures
3. Overseas Contract Worker (OCW)
a. Covers only those individuals with a working contract abroad
Compiled by Leo Torres, CPA2018
 Formed for the purpose of undertaking construction projects or engaging in  Such gross income must be for the 3-year period ending with the close
petroleum, coal, geothermal and other energy operations pursuant to an of the taxable year.
operating consortium agreement under service contract with the 3. Services
Government. o This is the compensation for labor or personal services performed in the
b) Taxable Joint ventures Philippines.
 All other ventures are taxable as corporations o The determining factor is the place of performance. The place of payments is
3. CO-OWNERSHIP IRRELEVANT!
 Formed for the purpose of preserving the same and/or dividing its income 4. Rentals and Royalties from property located in the Philippines.
 A co-ownership that is limited to property preservation or income collection o Use of copyright, patent, design or model, plan, secret formula or process,
is not taxable entity and is exempt but the co-owners are taxable on their goodwill, trademark, trade brand or other like property or right in the Philippines.
share on the income of the co-owned property o Use of industrial, commercial or scientific equipment in the Philippines.
 A co-ownership that reinvest the income of the co-owned property to other o The supply of scientific, technical, industrial or commercial info.
income producing properties or ventures will be considered an unregistered o The supply of services by a non-resident person or his employee in connection
partnership taxable as a corporation. with the use of property or rights belonging to, or the installation or operation of
THE GENERAL RULES IN INCOME TAXATION any brand, machinery or other apparatus purchased from such non-resident
Taxable on Income person.
Earned o Technical advise, assistance or services rendered in connection with technical
Individual Taxpayers Within Without management or administration of any scientific, industrial or commercial
Resident Citizen / / undertaking.
Non Resident Citizen / o The use or right to use motion picture films, films or video tapes for use or in
Resident Alien / connection with TV, & tapes use in connection with radio broadcasting.
Non-resident alien / 5. Sale of Real Property
Corporate Taxpayers o Gains, profits and income from sale of real property located in the Philippines.
Domestic Corporations / / o Location of the property is the controlling factor to determine the source of the
income.
Resident foreign Corporation /
6. Sale of Personal Property
Non-resident foreign /
B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.
Corporation
Any income not falling under any of the 6 above is an income derived from sources outside the
Note:
Philippines.
1. Consistent with the territoriality rule, all taxpayers, except resident citizens and domestic
C. INCOME FROM SOURCES PARTLY WITHIN & PARTLY WITHOUT THE PHILIPPINES
corporations, are taxable only on income earned within the Philippines.
The taxable income is computed by first deducting the expenses, losses or other deductions apportioned
2. The NIRC uses the term “Without the Philippines” to mean outside the Philippines.
or allocated thereto and ratable part of any expense, loss or other deduction which cannot definitely be
allocated to some items or classes of gross income; and the portion of such taxable income attributable
SOURCES OF INCOME
to sources within the Philippines.
Basic Formula: Gross Income Within
What is the relevance in determining the sources?
Gross Income World
Its relevance relates to the income tax liability of the taxpayers. RC and domestic corporations are the
= Rate X Expenses World
only taxpayers liable for income derived from sources within and without the Philippines.
= Expenses to be allowed
A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (Section 42[a])
To illustrate: Suppose the Gross Income Within is P10k; the Gross Income World is P100K; and the
Expenses-World is P50k, thus:
1. Interest from sources within the Philippines
o Interests derived from sources within the Philippines
P10k_ = 10% X P50K = P5K.
 Interest earned from domestic bank deposits
P100k
o Interests on bonds, notes or other interest-bearing obligations of residents,
corporate or otherwise.
In this illustration, only P5k should be allowed as deduction against the gross income derived in the
 The determining factor is the residence of the obligor, whether
Philippines.
individual or corporation.
D. SALE OF PERSONAL PROPERTY
2. Dividends
Guidelines:
o Any distribution made by a corporation to its shareholders out of its earnings or
1. For those produced, in whole or in part, by the taxpayer within and sold without the
profits and payable to its shareholders, whether in money or property.
Philippines, or produced in whole or in part, by the taxpayer without and sold within the
o Dividends issued by foreign corporations are considered income from sources
Philippines – the income shall be treated as partly within and partly without from sources
within provided the 2 requisites are present:
within the Philippines and partly from sources without the Philippines.
 At Least 50% of its gross income is from sources within the Philippines.
(Pre-dominance Test)

Compiled by Leo Torres, CPA2018


2. For those purchased within and sold without the Philippines, or for purchase of personal 15% (new) As amended by Sec. 5 of RA 10963
property without and sold without – the gains, profits or income shall be treated as derived B. Prizes and Winnings:
entirely from sources within the country where the property is sold; EXCEPT – gains from the  Must be derived from sources within the Philippines.
sale of shares of stock in a domestic corporation shall be treated as derived entirely from  Subject to 20% final tax on individuals
sources within the Philippines., regardless of the place where the shares were sold.  Prizes and winnings of corporations are subject to Regular Income Tax.
 Must be >P10k
 Must be pursuant to a promotion or contest
Prizes exempted from tax:
 Received primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement
 The recipient was selected without any action on his part to enter the
KINDS OF INCOME TAXES contest or proceeding
I. FINAL INCOME TAXATION  The recipient is not required to render substantial future services as a
 it relieves the taxpayer of the obligation to file an income tax return. It is also for the condition to receiving the prize or award.
convenience of the government. Winnings are subject to FWHT of 20% including winnings pursuant to gambling (except PCSO).
PASSIVE INCOME – earned with a very minimal involvement from the taxpayer and are generally
irregular in timing and amount.
C. Cash and/or Property Dividends
This is the only income tax applicable to all types of taxpayers without distinctions. The formula is: a. Only cash and property dividends are subject to 10% final income tax
Gross Income X Tax Rate = Tax Due b. Stock dividends are not taxable since such dividends are only a transfer
of the surplus profit from the retained earnings to the authorized
Notes: Under final income tax, the rate is multiplied to each income individually as each income may capital stock.
have a different rate. c. Share of an individual in the distributable net income after tax of a
This tax does not allow deductions. partnership of which he is a partner is subject to final income tax
The determination of gain or loss is immaterial since the basis of taxation is the GROSS, hence d. Under Sec. 73 of the NIRC, the net income of Business partnerships,
actual gain or loss does not matter. taxable associations, joint venture, joint accounts or co-ownerships are
An income which is subject to final income tax is no longer subject to net income tax. deemed is deemed constructively received by the partners, members
Withholding agent is responsible in filing the income tax returns. or venturers, respectively, in the same year the net income is reported.
Applicable only to passive income and income from sources within the Ph. Hence, the 10% final tax applies at the point of determination of the
If the taxpayer fails to pay, the withholding agent shall be liable. income, not at the point of actual distribution.

NON-RESIDENT PERSONS NOT ENGAGED IN BUSINESS IN THE PH D. TAX INFORMER’S REWARD


Non-resident aliens not engaged in trade or business (NRA-NETBs) and Non-resident foreign  Discovery of violations of the NIRC or discovery and seizure of smuggled
corporations (NRFCs), have a high risk of non-compliance. goods
 SUBJECT TO FINAL INCOME TAX  Subject to 10% final tax
  Definite sworn information which is not yet in the possession of the BIR
NON-RESIDENT PERSONS NOT ENGAGED IN BUSINESS General final  Resulted in recovery of revenues, surcharges, and fees and/or conviction of
IN THE PH tax rate the guilty party or imprisonment of any fine or penalty
 Must not be
Non-resident alien not engaged in trade or business 25%
a. BIR official or employee
Non-resident foreign corporation 30%
b. Other public official or employee
relative within 6th degree of consanguinity of those officials or employee in a
RESIDENT CITIZEN, NON-RESIDENT CITIZEN, OCW AND SEAMEN AND RESIDENT ALIEN
or b.
1. Final Income Tax ( for Passive income)  Amount of Cash Reward, whichever is lower of
A. Interest
a. 10% of revenues, surcharges, or fees recovered and or fine or penalty
 Applicable tax is 20% imposed and collected or
 Passive income should be derived from sources within the Philippines b. P1,000,000
 Long Term deposits or investments – exempt from final tax
Tax on pre-termination of long-term deposits of individuals E. Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange
 4 to < 5 years – 5%
 The net capital gains from sale, barter, exchange or other disposition of shares
 3 to < 4 years – 12% of stock in a domestic corporation not listed and traded is subject to a final tax
 < 3 years – 20% rate from 5% for the first P100k of the net capital gain; and 10% of the net
 Royalties derived outside the Philippines are subject to regular income tax.
capital gain of any amount in > P100k (old) to a fixed rate of 15% of the net
 Foreign Currency Depositary Unit (FCDoicU) deposits – apply 7.5% (old)

Compiled by Leo Torres, CPA2018


capital gains realized during the taxable year. (As amended by Section 5 of RA  For foreclosure sales, it is due within 30 days from the expiration of the applicable
10963) statutory redemption period.
 Documentary stamp tax on the sale of capital assets –
a. STOCKS – P0.75 for every P200 of the par value of the stocks sold.
b. REAL PROPERTIES – P15 for every P1,000 and fractional parts of the tax basis thereof
REGULAR INCOME TAX
TYPES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX
1. Compensation Income
2. Business or Professional income
3. Other income
a. gains from dealings in properties
b. other active or passive income not subject to final tax

OLD PROGRESSIVE TAX TABLE


 Elements required
1. Shares must be shares in a domestic corporation.
2. Shares are capital assets.
3. The shares are not listed and traded in the local bourse.
 For listed shares, the gains are not subject to income tax but subject to a
business tax (percentage tax) at the rate of ½ of 1% of the gross selling price.
F. Capital Gains from Sale of Real Property
 A final income tax of 6% based on the gross selling price or FMV, whichever is
higher shall be imposed on CG provided:
1. the property sold is real property Section 24 (A) of the National Internal Revenue Code as amended by Section 5 of RA 10963
2. located in the Philippines Tax Schedule Effective January 1, 2018 until December 31, 2022:
3. classified as a capital asset Basic Tax Plus % of Excess over
 Under the NIRC, FV or real property is whichever is higher of the
Not over P250,000 0%
a. Zonal Value – prescribed by the CIR for the purpose of enforcement of IR
laws. Over P250,000 but not over 20% P250,000
b.Assessed Value – prescribed by the City or Municipal Assessor’s Office for the P400,000
purpose of real property tax. Over 400,000 but not over P30,000 25% P400,000
 Presumption of Capital gains – the 6% CGT applies even if the sale transaction P800,000
resulted to a loss. Over P800,000 but not over P130,000 30% P800,000
 It only applies to individual and domestic corporations. P2,000,000
 Sale of a natural person’s principal residence maybe exempted from payment of Over P2,000,000 but not over P490,000 32% P2,000,000
the 6% CGT when the proceeds of the sale are fully utilized in acquiring or P8,000,000
constructing a new principal residence within 18 months from the date of Over P8,000,000 P2,410,000 35% P8,000,000
notarization of the Deed of Sale.
 An individual seller of real property capital assets has the option to be taxed at
either 6% CGT or RIT. it should be noted that this is permissible only when the
seller is an individual taxpayer and the buyer is the government, its Tax Schedule Effective January 1, 2023 onwards
instrumentalities or agencies including government owned and controlled Basic Tax Plus % of Excess over
corporations (GOCCs) Not over P250,000 0%
Sale of mortgaged property – taxable only if the buyer is other than a financial institution.
FINAL WITHHOLDING TAX RETURN Over P250,000 but not over 15% P250,000
FOR PASSIVE INCOME P400,000
 BIR Form 1601 Over 400,000 but not over P22,500 20% P400,000
 Monthly Remittance Return on Final Income Taxes Withheld (triplicate) P800,000
 Shall be paid on or before 10th day of the month following the month in which it was Over P800,000 but not over P102,000 25% P800,000
made. P2,000,000
FOR CAPITAL GAINS TAX Over P2,000,000 but not over P402,500 30% P2,000,000
 BIR Form 1706 P8,000,000
 Due within 30 days from the date of sale or exchange. Over P8,000,000 P2,202, 500 35% P8,000,000

Compiled by Leo Torres, CPA2018


6. Retirement Benefits, Pensions, Gratuities, etc.
THE REGULAR TAX MODEL IN EXPANDED FORM a. Retirement Pay
EMPLOYMENT BUSINESS/PRFESSION OTHERS TOTAL i. Retirement benefits under RA 7641 (retirement benefits of private
Gross Income XXX XXX XXX firms without retirement plan)
Less: 1. This is the first time availment of retirement benefit
Deductions XXX exemption.
Personal 2. The retiring employee is at least 50 years old.
Exemptions* XXX 3. He must have served the company for at least 10 years.
Taxable Income XXX + XXX + XXX = XXX 4. The employer maintains a reasonable private benefit plan.
ii. Retirement benefits pursuant to RA 4917 (retirement under private
*No longer included starting 2018 retirement plan)
NET INCOME TAX 1. Retiring employee must not be less than 50 years old.
a. Defined as the pertinent items of gross income less deductions and/or personal 2. Must have been in the service for at least 10 years.
and additional exemptions. 3. Exemption must be availed only once.
b. This is the only kind of income tax which admits of deductions, personal and 4. The private benefit plan must be approved by the BIR.
additional exemptions. iii. Retirement pay given by GSIS, SSS and PVAO are exempted from
c. Married individuals shall compute separately their individual income tax. However, income tax without any qualification
this is applicable only for individuals earning purely compensation income. iv. Retirement gratuities, pensions and other similar benefits given by
d. Married individuals who do not derive income purely from compensation, shall file foreign government agencies and other institutions, private or public to
a consolidated return to include income of both spouses, except where it is residents, nonresident citizens of the Philippines or aliens who come to
impracticable. reside in the Philippines., without any qualification.
e. RA 9504 exempts minimum wage earners from the payment of net income tax. b. Separation Pay
i. Exempted from income tax as long as the cause for separation from
Taxable Income: Gross Income service is death, sickness, physical disability or for any cause beyond the
Less: Deductions (Personal & Additional Exemptions) control of the employee.
Net Income ii. If from foreign government agencies and other institutions, tax exempt
Multiplied by: Tax Rate also.
Net Income Tax Payable c. Terminal Leave Benefits
Less: Tax Credits i. EO 291 provides that terminal leave benefits of government employees
Net Income Tax Due are exempt from tax
Note: This kind of income tax allows deduction, personal as well as additional exemptions& tax ii. For private employees, if terminal leave benefits are paid upon
credits. retirement, such benefits are exempt from income tax.
The determination of actual gain or loss is material since the tax shall be based on NET iii. However, if given annually, RR 2-98 provides:
EXCLUSIONS FROM GROSS INCOME 1. If sick leave – not exempt
 Items that are excluded; hence, exempt from income taxation. 2. If less than 10 days VL – exempt
1. Life Insurance payable upon death of the insured. 3. If more than 10 days VL – subject to income tax.
 If with interest, interest is included in gross income. 7. Miscellaneous items
2. Amount received by Insured a Return of Premium a. Income derived by foreign government.
3. Gifts, bequests and Devises i. Foreign government
 These are gratuitous in nature. Hence, exempt from gross income tax but is ii. Financing institutions owned or controlled by foreign government
subject to donor’s tax. iii. International or regional financial institutions established by foreign
 Income from such property as well as gift, bequests, device, or decent of governments.
income from any property in cases of transfers of divided interest, shall be b. Income derived by the Government or its political subdivisions from:
included in gross income. i. Any public utility
4. Compensation for Injuries and Sickness ii. The exercise of any essential government function
 Including the amount of damages received, whether by suit or agreement, on c. Prizes and Awards
account of such injuries or sickness. i. Primarily in recognition of religious, charitable, scientific, educational,
 Reimbursement on the loss of salary or profit during the accident is part of artistic, literary or civic achievement.
gross income ii. The recipient was selected without any action on his part to join the
 The law pertains only to physical injury rather than injury to rights or contest.
property. iii. The recipient is not required to render future service as a condition to
5. Income exempt under treaty receive the prize or award.
 In accordance with the principle of International Comity d. Prizes and Awards in Sports Competition

Compiled by Leo Torres, CPA2018


i. Held locally or internationally and b. Indirectly, through reduction of future taxable income through carry-over of net operating
ii. Sanctioned by national sports association loss. (NOLCO)
e. 13th Month Pay and other Benefits
i. Applied both to the government and the private sector ALLOWABLE FOR PERSONAL EXEMPTIONS
ii. Exemption covers only the maximum amount of P82,000 The exemption provided in Section 35 is available to the following taxpayers: RC; NRC; OCW & Seamen;
f. GSIS, SSS, Philhealth, and Pag-ibig contributions RA ETB; and NRA ETB.
g. Gains from sale of bonds, debentures or other certificate of indebtedness A. SECTION 35A AS AMENDED BY RA 9504
i. Maturity must be more than 5 years to be exempt For purposes of determining the net income of the taxpayer, a personal exemption of P50,000 shall be
ii. If less than 5 years, subject to final income tax. allowed for single individuals, legally separated, head of the family, and married individuals.
h. Gains from redemption of shares in Mutual fund
GROSS INCOME INCLUSIONS Note that individual taxpayers are no longer classified as such. The P50,000 exemption is regardless of
Gross income is defined by Section 32 quite broadly, as “all income derived from whatever source.” This status. For married individuals, only the earning spouse shall be allowed personal exemption
is an open-ended definition, suggestive of an intention to include rather exclude. The following items B. ADDITIONAL EXEMPTIONS FOR DEPENDENTS
comprise the gross income subject to income tax: An additional exemption of P25,000 shall be allowed for each dependent not to exceed 4 (4 x 25,000 =
1. Compensation for services in whatever form paid, including but not limited to fees, salaries, 100,000). Applicable only for married individuals and shall be claimed by only one of the spouses. They
wages, commissions, and similar items., EXCEPT for the following: must be legally married. In case of legally separated spouses, the one who has custody of the children
a. Those received by taxpayers who are subject to the Gross Income Tax can claim.
b. Those received by Aliens employed by MNCs, OBUs and Petroleum Service Dependent is a child chiefly dependent upon and living with the taxpayer,
Contractors because their compensation is subject to the 15% Final tax unless they  not more than 21 years of age,
choose pay by way of final income tax.  unmarried and
2. Gross income derived from the conduct of trade or business or the exercise of a profession.  not gainfully employed, or
3. Gains derived from dealings in property.  is incapable of self-support because of mental or physical defect.
a. If the real property is capital, the gain therefrom is subject to FINAL income tax
and not included as gross income. C. CHANGE OF STATUS
b. If the real property is ordinary, it should be included to gross income. The change of status of the taxpayers shall be effective only if such change will benefit the taxpayer.
4. Interest income Thus, the rule is the higher exemption will be the applicable exemption for the taxpayer.
a. Interests from loans are always included in the gross income. D. PERSONAL EXEMPTION ALLOWABLE TO NRA
b. Interests from bank deposits are not included since they are subject to final NRA ETB shall be allowed personal exemptions in the amount equal to the exemptions allowed in the
income tax. income tax law in the country of which they are citizens not to exceed the amount fix in this section as
5. Rental income exemption for citizens or residents of the Philippines.
6. Royalties *NRA-ETB can only claim basic exemption subject to reciprocity
a. The royalty is subject to final income tax if it is derived from sources within the Comparison of Claimable Dependent
Philippines. Children Foster PWDs
b. If the source is outside the Philippines, the net income tax (RIT)is applicable. Child
7. Dividends Dependent upon taxpayer for chief support YES YES YES
a. Dividends declared by foreign corporations including cash, property, and script Living with taxpayer YES YES N/A
dividends Not more than 21 years old YES YES N/A
8. Annuities Unmarried YES YES N/A
9. Prizes and winnings, instances to be included in the gross income: Not gainfully employed YES YES YES
a. It should be derived from sources within the Philippines and should be less than or More than one year of support provided NO YES NO
equal to P10k
Within fourth degree of consanguinity or affinity N/A N/A YES
b. The prize is derived from sources without the Philippines
Except when a relative, benefactor must be more than 16 years N/A YES N/A
c. The taxpayer is a corporation.
older to the dependent
10. Pensions (unless excluded)
11. Partner’s distributive share from the net income of the GPP
*RA 10963 omits the deduction of personal exemption and additional exemption from gross income.
ALLOWABLE DEDUCTIONS
RECOVERIES OF PAST DEDUCTIONS
This provision is applicable only to net income since it is only income tax which allows deductions.
- Past deductions that created that created tax benefit to the taxpayer must be reverted back
 Deductions are allowed because they are necessary to generate income
to gross income in the year of recovery so that the government will recover the tax lost from
 Pure compensation earners are not allowed under Section 34 for any deduction
the deduction.
 Exception is for premium paid for health and/or hospitalization insurance.
- TAX BENEFIT
The following deductions are allowed for a taxpayer under the net income tax:
a. Directly, through reduction of taxable income in the year deduction is made.
A. EXPENSES
1. Ordinary and necessary trade, business or professional expenses.

Compiled by Leo Torres, CPA2018


In General, requirements are:  Legal liability to pay interest
 The expenses are incurred within the taxable year  Paid or incurred during the taxable year
 These are ordinary and necessary
 The expenses are incurred pursuant to the trade or business or the exercise 1. The amount of interest paid and incurred by the taxpayer within the taxable year shall be
of profession allowed as a deduction from gross income.
 These should be supported by evidence.  Interest expense to be deducted is limited by the provision which provides that the
 Not against the law or public policy allowable deduction shall be reduced by 33% of the interest income which was
a. A reasonable wages and salary, other forms of compensation for personal services previously subjected to final income tax.
actually rendered, and the grossed-up monetary value of fringe benefits provided 2. By way of exception, the NIRC enumerated several instances where the interest expense
the final income tax thereof has been paid. incurred by a taxpayer is allowed as a deduction but such is subject to qualifications:
b. A reasonable allowance for travel expenses, here and abroad, while away from a. If within the taxable year an individual taxpayer reporting income on the cash basis
home in the pursuit of trade, business or profession. incurs an indebtedness on an interest paid in advance through discount or
c. A reasonable allowance for rentals and/or other payments which are required as a otherwise, provided:
condition for the continued use or possession, for purposes of trade, business or i. That such interest shall be allowed as a deduction in the year the
profession, of property to which the taxpayer has not taken or is not taking title or indebtedness is paid.
in which he has no equity other than a lessee, user or possessor. ii. That if the indebtedness is payable in periodic amortizations, the
d. A reasonable allowance for entertainment, amusement and recreation expenses amount of interest which corresponds to the amount of the principal
during the taxable year that are directly connected to the development, amortized or paid during the taxable year shall be allowed as deduction
management and operation of the trade, business or profession of the taxpayer. in such taxable year.
Conditions for an expense to be deductible: b. If both the taxpayer and the person to whom payment has been made or is to be
 The expense must be ordinary and necessary. made are persons specified under Section 36(b).
 It must be paid or incurred within the taxable year. 3. The interest expense may be treated as part of the value of the property acquired which
 It must be paid or incurred while carrying on a trade or business. property will be treated as a capital expenditure which is subject to the allowance for
Note: Bribes, Kickbacks and other similar payments are not ordinary and necessary to the depreciation.
trade, business or profession of the taxpayer, therefore not deductible! C. TAXES
2. Expenses allowable to Private Educational Institutions There are 2 ways to minimize a taxpayer’s liability:
a. To deduct expenditures otherwise considered as capital outlays of depreciable  Tax Deductions (deducted from gross income)
assets incurred during a taxable year for the expansion of school facilities; or  Tax Credits (deducted from the income tax due)
b. To deduct allowance for depreciation thereof.
NIRC expressly prohibits the deduction of: Formula: Gross Income
 Any amount paid out for new buildings or for permanent improvements or Less: Deductions
betterments made to increase the value of any property. Net Income
 Any amount expended in restoring property or in making good the exhaustion X Tax Rate
thereof for which an allowance is or has been made. Les: Tax Credits
3. Travelling Expenses Net Income Tax Payable
 Transportation expenses, meals, lodging, and laundry expenses The taxes paid or incurred by a taxpayer during the taxable year in connection with his trade
 Incurred while away from home or business, shall be allowed as deduction, except:
4. Entertainment, amusement, and recreation expenses  Income Tax
Requisites for deductibility  Income taxes imposed by authority of any foreign country, but this deduction shall
a. Paid or incurred during the taxable year be allowed in the case of a taxpayer who does not signify in his return his desire o
b. Directly connected to the development, management and operation of the trade have any extent of the benefits of Section 34(c)[3].
or business o The tax credit for taxes paid or incurred in any foreign country should
c. Must not have been paid directly or indirectly to an official of the government or not exceed the taxes from which the tax credit is taken.
private entity o Said tax should be compared with the tax to be paid in the Philippines
d. Not contrary to law, morals, public policy or public order by the taxpayer and such credit should not exceed the amount of tax to
e. Must not exceed ½ % of net sales or 1% of net revenue for taxpayers engaged in be paid in the Philippines
sales of goods and properties, or sale of services, respectively.  Estate and donor’s taxes
 Taxes assesses against local benefits of a kind tending to increase the value of the
B. INTEREST property assesses.
Requisite for deductibility  Value Added Tax
 There must be an indebtedness D. LOSSES
 Indebtedness must be that of the taxpayer Losses may be deducted from the gross income provided the following requisites are present:
 Must be connected with the taxpayer’s trade, business or profession  The losses are actually sustained during the taxable year.

Compiled by Leo Torres, CPA2018


 Said losses are not compensated for by insurance or other forms of indemnity  The rule provides that where the creditor was allowed a deduction of bad debts but said
 Losses must be incurred from the exercise of business or from property connected debts are subsequently recovered, the previous deduction will not be cancelled but the
with the business or profession recovered amount will be added in the computation of the gross income.
 Loss shall not be allowed as deduction if such loss has been claimed as a deduction
for estate tax purposes in the estate tax return. F. DEPRECIATION
 Evidenced in a closed and completed transaction Depreciation is the expense which can be deducted by the taxpayer for several years as the case may be.
 Arose from fires, storms, shipwrecks, or other casualties, or from robbery, theft or This deduction is an exception to the rule that expenses to be deducted should have been incurred
embezzlement during the taxable year.
 Reported to the BIR within 45 days from the occurrence of such loss  Incurred due to the ordinary exhaustion, wear and tear, including allowance for obsolescence
of property used in business.
Special Rules on Losses  Since the property is used for more than a year, it is only reasonable that the expense be
a. Wagering Loss – deductible only to the extent of the gains from such transactions spread over the usual life of the property.
b. Loss on sale between related taxpayers - not deductible  Every property can be subject to depreciation EXCEPT land.
c. Restoration or replacement of destroyed properties Method of depreciation allowed under the NIRC:
- Total destruction of properties  Straight line method
Tax basis of the old property shall be claimed as a loss while entire replacement  Declining balance method
cost is capitalized as cost of the replacement property subject to allowance for  Sum-of-the-years digit method.
depreciation.  Any other method prescribed by the DOF and BIR
- Partial destruction of properties
Restoration cost shall be expensed up to the extent of the tax basis of the property G. DEPLETION OF OIL & GAS WELLS AND MINES
immediately before the casualty. Any excess is capitalized subject to allowance for A reasonable allowance for depletion or amortization is allowed as deduction from gross income in
depreciation. accordance with the cost-depletion method. The provision is not self-executing. This needs approval of
d. Loss on shrinkage in value of stocks due to fluctuation in market – not deductible; only loss the BIR and DOF.
incurred during disposal of stocks H. CHARITABLE & OHER CONTRIBUTIONS
e. Abandonment Loss – unamortized cost and the undepreciated cost of the producing well or This deduction is deducted from the net income, not from the gross income since one of the bases of the
equipment used therein are deductible in the year of abandonment, but if the service is amount to be deducted is a percentage of the net income.
restored later, said cost shall be included as part of gross income. Requisites of claim for deduction on contributions:
f. Net Operating Loss Carry Over 1. donee must be a domestic institution
NOLCO RULE 2. No income of the donee institution must inure to the benefit of any private stockholder or individual
 This rule provides that the net operating loss of the business for the taxable year 3. Contribution must be valued at the tax basis of the property donated
preceding the current taxable year can be carried over as a deduction from the 4. The taxpayer must be engaged in trade or business,
gross income for the next 3 consecutive years immediately following the year the 5. The donee must issue a Certificate of Donation (BIR Form 2322)
loss was incurred. 6. Contribution must be actually paid or made within the taxable year
 For mining companies, net operating loss incurred during the first 10 years may be 7. Given to entity or institution specified by law
carried over as a deduction from taxable income for the next 5 years.
 Not allowed if there was substantial change in ownership of the business for Who is entitled to claim the deduction for charitable contributions?
corporations.NOLCO is a privilege that is not transferable.  The donor is the one entitled to this deduction since, obviously, he was the one who incurred
 NOLCO is claimable first-in-first out fashion this expense.
 Can be claimed up to the extent of the business net income in the next three
 A pure compensation earner cannot claim this deduction
years. Prior NOLCO cannot be deducted against a subsequent year net operating
loss.
There are 2 types of deduction:
 Any NOLCO which remains unused at the end of the three-year prescriptive period
 Partial deduction may be claimed if the donee is ay of the following:
will expire.
o Government of the Philippines
o Accredited domestic corporations or associations organized and operated
E. BAD DEBTS
exclusively for religious, charitable, scientific, youth and sports development,
Bad debts result from the unpaid receivables of the taxpayers from its customers in the exercise of his
cultural or educational purposes or for the rehab of veterans.
trade, business or profession. These can be deducted and charged off within the taxable year, EXCEPT in
o Social welfare institutions
the following instances:
o NGOs
 Those not connected with the profession, trade or business of the taxpayer
o Deduction should not exceed 10% of the taxable income for individuals and should
 Those between related parties not exceed 5% of its taxable income for corporations.
Tax Benefit Rule
 Full deduction

Compiled by Leo Torres, CPA2018


o Government of the Philippines, exclusively to finance undertakings in educations, - With income subject to regular income tax and special/preferential tax rates
health, youth and sports development, human settlements, science and culture  Not exceeding 40% of its Gross Income
and in economic development. Requisites:
o Foreign institutions or international organizations in compliance with treaties, a. The taxpayer signified in the return its intention to elect optional standard deductions
agreements or special laws. b. Shall be irrevocable for the taxable year for which the return is made
o NGOs accredited by the government certifying body c. Taxpayer is not required to submit with his tax return such financial statements otherwise
Conditions for deductibility: required under the code except when CIR otherwise permits, said individual shall keep such
a. utilized not later than 15th day of the 3rd month after the close of taxable year records pertaining to his gross sales or gross receipts or the said corporation shall keep such
b. Administration expenses must not exceed 30% of total expenses; records pertaining to his gross income.
c. Upon dissolution, the asset must be distributed to another non-profit domestic corporation, to the L. PREMIUM PAYMENTS ON HEALTH & HOSPITALIZATION INSURANCE
state or by a court to another similar organization This is the only deduction which can be claimed by a pure compensation earner. Life insurance premium
d. if the above conditions are not complied, contributions shall be subject to limit. is not included as a deduction it is part of the personal exemption which is not substituted by OSD.
Individual taxpayer – 10% Limitations:
Corporation – 5%  Amount to be deducted shall not exceed P2,400.00 per family per annum
The rate shall be multiplied by the taxable income derived from trade, business or profession before  Allowed only if the said family has a gross income of not more than P250,000.00
deducting the contributions. Family income – includes primary and other income from sources received by ll the members of
I. RESEARCH & DEVELOPMENT the nuclear family even a single person.
Generally, expenses incurred for R&D are treated as ordinary and necessary expenses which are not  For married couple, only the spouse claiming the additional exemption for dependents shall
chargeable to the capital account. These expenses can only be allowed and claimed during the taxable be entitled to this deduction.
year when such expenses are incurred or paid.  Employee shall present the policy contract together with the original receipt of the premium
payment for the current year to the employee
R & D expenses can be treated as deferred expenses over a period of 6o months:
 Those incurred in connection with the business or profession
 Those not treated as expense under Section 34(I)1. COMPENSATION INCOME
 Those chargeable to the capital account but not chargeable to a property of a character which Compensation for services in whatever form paid, including but not limited to fees, salaries, wages,
is subject to depreciation or depletion. commissions, and similar items., EXCEPT for the following:
a. Those received by taxpayers who are subject to the Gross Income Tax
This deduction is NOT ALLOWED for: b. Those received by Aliens employed by MNCs, OBUs and Petroleum Service
 Any acquisition or improvement of land (except for private educational institutions in case of Contractors because their compensation are subject to the 15% Final tax unless
school expansion) they choose pay by way of final income tax.
 Any expenditure related to ascertaining the existence, location, extent or quality of mineral or c. Minimum Wage Earners – employees who are recipients of minimum wage and
oil deposits. are exempt from income taxation.
J. PENSION TRUSTS Statutory Minimum Wage – rate fixed by the Regional Tripartite Wage and
The deduction refers to the reasonable amount transferred or paid by the employer into the pension Productivity Board of DOLE.
trusts of the employees. Prerequisites: P5,000 / month or P60,000 / year, whichever is higher
 Not have been previously allowed as a deduction GROSS COMPENSATION INCOME – generally includes all remunerations received under an employer-
 Be apportioned in equal parts over a period of 10 consecutive years. employee relationship.
REGULAR COMPENSATION INCOME
K. OPTIONAL STANDARD DEDUCTION as amended by RA 9504 - Fixed remunerations due to be received by an employee every period such as:
ON INDIVIDUALS 1. Basic Salary
- those under the NIRC and special laws with no other taxable income 2. Fixed Allowances such as cost-of living allowance, fixed housing allowance, representation,
- those with income subject to special/preferential tax rates transportation, and other allowances paid to an employee every payroll period.
- those with income subject to regular income tax and special/preferential income Exception rule on the taxability of allowances
tax a. allowance is an ordinary and necessary travelling, representation or entertainment expense
- non-resident alien not engaged in trade or business of employee in the pursuit of his trade, business or profession.
 Those selling goods under the accrual basis – 40% of gross sales b. The expense is subject to accounting or liquidation.
- sales contributory to income subject to regular income tax c. Any excess advances are returned to the employer.
 Those selling services under cash basis – 40% of gross receipts Paid vacation and sick leave allowances – part of compensation income
- Actuallyor constructively received during the taxable year NON-COMPENSATION INCOME
 Those selling services under accrual basis – 40% of revenue 1. FEES – retainer fees of consultants, talents, and directors who have no management function in the
ON CORPORATION business are professional income, not compensation income of the recipient.
- Exempt GOCCs and non-stock, non-profit corporations with no taxable income 2.Commissions to non-employees such as independent sales agents are business income to the sales
- With income subject to preferential/special tax rates agent.

Compiled by Leo Torres, CPA2018


3. Tips and gratuities – paid directly to an employee by customers of the employer which are not P18,000 per annum
accounted for by the employee to the employer are not considered as compensation income, but are to Uniform and clothing allowance P5,000 per annum
be reported as “other income” in the income tax return of the employee. Actual Medical Assistance P10,000 per annum
SUPPLEMENTARY COMPENSATION Laundry Allowance P300 per month or P3,600 per annum
- Performance-based remunerations to an employee in addition to the regular compensation Employee Achievement award Must be in tangible property other than cash
with or without regard to the payroll period. or gift certificates
1. Overtime pay Monetary value = P10,000
2. Hazard Pay Gifts given during Christmas and major P5,000 per employee per annum
3. Night shift differential pay anniversary celebrations
(1,2,3) except when derived by a MWE Daily Meal Allowance for overtime work and 25% of the basic minimum wage on a per
4. Holiday Pay night or graveyard shift region basis
5. Commissions
Benefits received by an employee by virtue of P10,000 per employee per taxable year
6. Fees, including director’s fees (if the director is an employee) Collective Bargaining Agreement and
7. Emoluments and honoraria productivity incentive schemes.
8. Taxable retirement and separation pay
Taxable De minimis Benefits
9. Value of living quarters or meals
 Excess de minimis over their limits
10. Gains on exercise of stock options
 Other benefits of relatively small value that are not included in the list of de minimis benefits.
11. Profit sharing and taxable bonuses
Treatment of taxable de minimis benefits
CLASSIFICATION OF EMPLOYEE REMUNERATIONS
 For RANK AND FILE EMPLOYEES – treated as other compensation income under the category
RANK AND FILE EMPLOYEES MANAGERIAL OR
“13th month pay and other benefits”
SUPERVISORY EMPLOYEES
 For MANAGERIAL AND SUPERVISORY EMPLOYEES – taxable de minimis is treated as fringe
REGULAR PAY Compensation Income (RIT) Compensation Income (RIT)
benefit subject to FINAL FRINGE BENEFIT TAX
FRINGE BENEFITS Compensation Income (RIT) Fringe Benefit (FBT)
V. 13th month pay and other benefits not exceeding from P82,000 (old) to P90,000 (new). (As
amended by Sec. 9 of RA 10963)
NON-TAXABLE OR EXEMPT COMPENSATION
13th Month Pay and Other Benefits
A. Exempt Benefits under the NIRC, as amended, and Special Laws
 13th Month Pay
I. Remunerations received as incidents of employment
 Government Employees – Christmas Bonus = one-month salary + P5,000 Cash gift
 Exempt retirement benefits under RA 7641 including exempt retirement gratuities to
 Private Employees – one-month salary
government officials and employees
 Other Benefits
 Exempt termination benefits
 Christmas Bonus of private employees
 Benefits from the United States Veterans Administration
 Cash gifts
 Social Security, retirement gratuities, pensions, and similar benefits from foreign government
 Additional compensation allowance
agencies and other institutions, private or public.
 14th month pay, 15th month pay, etc.
 Benefits from SSS, under the SSS Act of 1954, as amended
 Other fringe benefits of rank and file employees
II. Employee mandatory contributions to GSIS, SSS, Philhealth, HDMF, and union dues
 Fringe benefits in excess of their limit but did not exceed the P82,000 threshold are not
III. Certain benefits of Minimum Wage Earners
taxable.
 Basic Minimum Wage
B. Benefits exempt under treaty or international agreement
 Holiday Pay
 Employee benefits of non-Filipino nationals and/ or non-permanent residents of the
 Overtime Pay
Philippines from foreign governments, embassies or diplomatic missions, and international
 Night Shift Differential Pay
organizations in the Philippines are exempt from income tax.
 Hazard Pay *Filipino employees of foreign governments, international missions and organizations are taxable as a
IV. De minimis Benefits rule except only to employees of the following organizations:
 Facilities or privileges that are relatively small value and are furnished by the employer merely  United Nations
as promoting the health, goodwill, contentment, or efficiency of his employees.  Specialized Agencies of the UN
DE MINIMIS LIMIT (not exceeding)  Australian Agency for International Development
Monetized unused vacation leave credits of 10 days during the year  Food and Agriculture Organization
PRIVATE employees  World Health Organization
Monetized unused vacation and sick leave NO LIMIT  United Nations Development Program
credits paid to GOVERNMENT employees  International Organization for Migration
Medical cash allowance to dependents of P750 per employee per semester or P125 per  International Seabed Authority
employees month (P1,500.00 per year)
Rice Subsidy P1,500 or 1 sack of 50-kg rice per month or

Compiled by Leo Torres, CPA2018


 Convenience of the employer rule
Summary of Rules Applicable rates
Foreign embassy, Philippine Embassy or Monetary Value 68%
mission, or organization consulate office Fringe Benefit Tax 32%
In the Philippines GUMV – Monetary Value of the fringe benefit / 68%
Filipino Citizens Taxable* N/A Notes:
Aliens Exempt N/A a. The final tax is imposed whether the employer is an individual, partnership, or corporation,
Abroad regardless of whether the employer is taxable or not, or the government and is
Filipino Citizens Exempt Taxable instrumentalities.
Aliens Exempt Exempt b. The fringe benefit tax is a tax of the employee. It is a tax on the income or benefit received
*taxpayer must prove if there is an exemption grant under contract or special law. by the employee, However, for convenience, the tax is imposed on the employer. The
employer is required by law to pay the tax for and in behalf of the employee. (Administrative
C. Benefits required by the nature of, or necessary to the trade, business or conduct of Feasibility)
profession of the EMPLOYER.
 “necessity of the employer rule.”
GENERAL CATEGORIES OF FRINGE BENEFITS SUBJECT TO FINAL TAX
i. Necessary traveling, transportation, representation, or entertainment expenses that are
1. Management perquisite benefits
subject to an accounting or liquidating in accordance with specific requirements of
- Management perks
substantiation.
- Non-performance based and are given as incentives to management employees.
ii. Allowances which essentially constitutes reimbursement to government personnel for
- Not compensation income
expenses they incurred in the performance of their official duties, such as:
2. Employee personal expenses shouldered by the employer
 Representation and Transportation Allowance (RATA) of public employees under General
- Paid and assumed by employer in default of a proximate business necessity
Appropriation Act
Hybrid Expenses – expenses which is purported partly for employee’s incentive, only 50% of the
 Personnel Economic Relief Allowance (PERA)
expense representing the employee incentive is subject to fringe benefit tax.
iii. Reasonable amounts of reimbursements or advances to employees for travelling and
1. Housing Benefits in the form of rental accommodation
representation which are pre-computed on a daily basis and which are paid to any
2. Allowing an employee free use of business property
employee while on assignment or duty
3. Taxable de minimis benefits
D. Benefits for the convenience or advantage of the EMPLOYER
a. excesses de minimis over their limits
 “convenience of the employer rule.”
b. Benefits not included in the de minimis list
 Considered as business expenses
PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX
1. Determine the MONETARY VALUE
DEADLINE OF FILING AND REMITTANCE OF THE WITHHOLDING TAX ON COMPENSATION
 Taxable amount of benefit taken home or realized by the managerial of supervisory
- BIR FORM 1601-C (Monthly Remittance Return of Income Taxes Withheld on
employee.
Compensation)
 Presumed net of final tax.
- On or before the 10th day of the following month the withholding was made except for taxes
2. Determine the gross-up rate and fringe benefit tax rate applicable for the taxpayer.
withheld on December which shall be filed/paid on or before January 15 of the succeeding
year.
- BIR FORM 1604-CF (Annual Information Return of Income Taxes Withheld on Compensation
and Final Withholding Taxes) Type of Employee
- On or before January 31 of the following calendar year in which the compensation income Calendar Year Resident or Special Alien Non-resident
payments and passive income payments were made. Citizen alien
1998 66%
FRINGE BENEFITS TAX 1999 67% 85% 75%
 Good, service, or other benefit furnished or granted by an employer in cash or in kind, in 2000 68%
addition to basic salaries, to an individual employee (except rank and file employees) 2018 65%
Who is liable to pay the final income tax on fringe benefits?
The employee shall be liable because: 2. Determine the grossed-up monetary value by dividing the monetary value by the gross-up rate.
 The law admits that is the liability of the managerial employee Grossed-up Monetary Value = Monetary Value/Gross-up rate
 Those authorized and exempted from income tax under the Code, or special law 3. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the grossed-up
 Contributions of the employer for benefit of the employee to retirement, insurance and monetary value.
hospitalization benefit plans; Fringe Benefit Tax = Grossed-up Monetary Value x Fringe Benefit Tax Rate
 Benefits given to the rank and file, whether granted under a CBA or not Type of Employee
 De minimis benefits Calendar Year Resident or Special Alien Non-resident
 Necessity of the employer rule Citizen* alien

Compiled by Leo Torres, CPA2018


1998 34% Case 6 – Housing Benefits which are not taxable – the following housing benefits provided by the
1999 33% 15% 25% employer to its employees are not considered as taxable fringe benefits –
2000 32% a. Housing privilege of military officials of the AFP consisting officials of the Philippine Army, Philippine
2018 35% Navy, and Philippine Airforce.
*Includes resident citizens, non-resident citizens, and resident aliens b. A housing unit which is situated inside or adjacent to the premises of a business factory. A housing
RULES ON VALUATION OF FRINGE BENEFITS unit is considered adjacent to the premises of the business if it is located within the maximum of fifty
1. Benefit is given in CASH or paid for in cash, the monetary value is the amount paid for in cash. (50) meters from the perimeter of the business premises.
*If employer pays for rent of the residence of the employee, Monetary Value is 50% of the rental c. Temporary housing for an employee who stays in a housing unit for three (3) months or less.
payment.
2. Benefit is given in KIND = fair value or book value of the thing given, whichever is higher. B. Expenses Accounts
NOTE: The FMV of the property is the FMV determined by the BIR Commissioner or the FMV determined Case 1 – Expenses incurred by the employee which are paid by his employer.
by the Provincial or City Assessor, whichever is higher. In this case, the employee receives an entertainment or representation allowance which is subject to
3. Benefit is given in the form of FREE USE of the employer’s property, monetary value is equal to 50% liquidation.
of the rental value of the property. If the property has no rental value, the depreciation value is
used. Case 2 – Expenses paid for by the employee but reimburse by his employer.
DEPRECIATION VALUE In this case, the employee pays for the expense and gets reimbursement from the employer.
a. 20 years for REAL PROPERTIES
Depreciation Value = 1/20 or 5% of the value of the property NOTE: the above expenses shall not be taxable provided
b. 5 years for MOVABLE PROPERTIES a. The expenditures are duly receipted for and in the name of the employer, and
Depreciation Value = 1/5 or 20% of the value of the property b. The expenditures are connected with the trade or business of the taxpayer, that is, they are not
*Fringe Benefit Tax is paid quarterly, the valuation and reporting of monetary value is also done personal expenses attributable to the employee.
quarterly. In case of use of employer properties, the reporting of monetary value is also done quarterly.
In case of use of employer properties, the reporting of monetary value ceases from the month the free Case 3 – Personal expenses of the employee (like purchases of groceries for the personal consumption of
use is discontinued. the employee and his family) paid for or reimbursed by the employer to the employee shall be treated as
taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of
TAXABLE FRINGE BENEFITS AND SPECIFIC VALUATION GUIDELINES the employer.
A. Housing Privilege
Case 1 – the employer leases (as lessee) residential property for the use of the employee Case 4 – Representation and transportation allowances which are fixed in amounts and are regularly
Value of the Benefit – rental paid by the employer under the lease contract. received by the employees as part of their monthly compensation income shall not be treated as taxable
Monetary value of the benefit - 50% of the value of the benefit fringe benefits.
NOTE: such allowances are taxable as compensation income subject to regular tax rates.
Case 2 – the employer own residential property which was assigned to an officer for his use as
residence C. Motor Vehicle of Any Kind
Value of the Benefit – 5% of FMV of the land and improvements as determined by the BIR Commissioner Case 1 – The employer purchases the motor vehicle in the name of the employee
or the Assessor, whichever is higher Value of the Benefit – acquisition cost
Monetary value of the benefit - 50% of the value of the benefit Monetary value of the benefit - entire value of the benefit

Case 3 – The employer purchases residential property on the installment basis and allows the Case 2 – The employer provides the employee with cash for the purchase of a motor vehicle in the
employee to use the same as his residence. name of the employee.
Value of the Benefit – 5% of the acquisition cost exclusive of interest. Value of the Benefit – amount of cash received by the employee
Monetary value of the benefit - 50% of the value of the benefit Monetary value of the benefit - entire value of the benefit

Case 4 – The employer purchases residential property and transfers ownership thereof in the name of Case 3 – The employer shoulders a portion of the amount of the purchase price of a motor vehicle in
the employee. the name of the employee
Value of the Benefit – employer’s acquisition cost or FMV, whichever is higher. The FMV is the higher Value of the Benefit – amount shouldered by the employer
between the BIR Commissioner’s value and the Assessor’s value. Monetary value of the benefit – entire value of the benefit
Monetary value of the benefit - the entire value of the benefit
Case 4 – The employer purchases the car on installment in the name odd the employee
Case 5 – The employer purchases residential property and transfers ownership thereof to his employee Value of the Benefit – acquisition cost (exclusive of interest) divided by 5 years
for the latter’s residential use at a price less than the employer’s acquisition cost. Monetary value of the benefit - entire value of the benefit
Value of the Benefit – rental paid by the employer under the lease contract.
Monetary value of the benefit - 50% of the value of the benefit

Compiled by Leo Torres, CPA2018


NOTE: In cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of the benefit, other expenses incident thereto shouldered by
regardless of whether the motor vehicle is used by the employee partly for personal purposes and partly the employer, shall be treated as taxable fringe
for the benefit of the employer. benefits.

Case 5 – The employer owns and maintains a fleet of motor vehicles for the use of the business and H. Holiday and Vacation Expenses
the employees. Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe
Value of the Benefit – Acquisition cost of all motor vehicles not normally used for business purposes benefits.
divided by 5 I. Educational Assistance
Monetary value of the benefit - 50% of the value of the benefit Taxable Fringe Benefit Not Taxable
Cost of education assistance to the employee If:
Case 6 – The employer leases and maintains a fleet of motor vehicles for the use of the business and which is borne by the employer a. The education or study involved is directly
the employees connected with the employer’s trade, business,
Value of the Benefit – amount of rental payments for motor vehicles not normally used for business or profession;
purposes. and
Monetary value of the benefit - 50% of the value of the benefit b. There is a written contract that the employee
is under obligation to remain in the employ of
Case 7 the employer for a period of time mutually
a. The use of aircraft or helicopters owned and maintained by the employer shall not be subject to the agreed upon.
fringe benefit tax. The use shall be treated as a business use. Cost of educational assistance extended by an When the assistance is provided through a
b. The use of a yacht, whether owned and maintained or leased by the employer shall be treated as a employer to the dependents of an employee. competitive scheme under a scholarship
taxable fringe benefit. The value of the benefit shall be measured based pm the depreciation of the yacht program of the company.
at an estimated useful life of 20 years. J. Cost of Insurance
Taxable Fringe Benefits Not Taxable
D. Household Expenses
Cost of life or health insurance and other non-life a. Contributions of the employer for the benefit
1. Salaries of household help, personal driver pf the employee, or other
insurance premiums borne by the employer for of the employee pursuant to the provisions of
2. Similar expenses like payment for homeowner’s association dues, garbage dues, etc.
his employee existing laws, such as contributions to the Social
E. Interest on loans at less than market rate
Security System, the Government Service
1. If the employer lends money to his employee free of interest or at a rate lower than 12%, such interest
Insurance System, and similar contributions
foregone by the employer (the difference of the interest assumed by the employee and the rate of 12%)
under the provisions of any other existing law.
shall be treated as taxable fringe benefit.
b. The cost of premiums borne by the employer
2. The benchmark rate of 12% shall remain in effect until revised by a subsequent regulation.
for the group insurance of his employees.
F. Social and Athletic Club fees
TAX ACCOUNTING FOR FRINGE BENEFITS EXPENSE AND FRINGE BENEFIT TAX
Membership fees, dues and other expenses borne by the employer for his employee, in social and
a. The Fringe benefit expense and fringe benefit tax shall constitute allowable deductions from gross
athletic clubs or other similar organization shall be treated as tangible fringe benefits of the employee in
income of the employer.
full.
b. If the basis for the computation of the fringe benefits tax is the depreciation value of the property,
only the FB tax shall constitute a deductible expense of the employer.
G. Expenses for Foreign Travel
Provided, however, if the zonal value or FMV of the said property is greater than its cost subject to
Not Taxable – reasonable expenses of the depreciation, the excess amount shall be allowed as a deduction from the employer’s gross income as
employee paid by the employer for the purpose TAXABLE FRINGE BENEFITS fringe benefit expense.
of attending business meetings or foreign
conventions. FILING OF RETURN AND PAYMENT OF TAX
a. Inland Travel – food, beverage, and local a. 30% of the cost of first class airplane tickets; - BIR FORM 1603
transportation; b. Lodging cost in a hotel or similar - 10th day of the month following the calendar quarter which the fringe benefits were granted.
b. the cost of lodging in a hotel or similar establishment in excess of US $300 per day; - Electronic Filing and Payment System
establishment amounting to an average of US c. Travelling expenses paid by the employer for - Five days later than the deadline for manual filing. / 15th day of the month following the
$300 or less per day; the travel of the family members of the calendar quarter which the fringe benefits were granted.
c. The cost of economy and business class employee;
airplane tickets; d. When there is no documentary evidence DEALINGS IN PROPERTIES
d. 70% of the cost of first class airplane tickets. showing that the employee’s travel abroad was Classification of taxpayer’s properties
in connection with business meetings or 1. Ordinary Assets
conventions, the entire cost of the ticket, a. Stock in trade of a taxpayer or other real property of a kind which would properly be
including the cost of hotel accommodations and included in the inventory of the taxpayer if on hand at the close of taxable year.

Compiled by Leo Torres, CPA2018


b. Real property held by the taxpayer primarily for sale to customers in the ordinary For Corporate Taxpayer
course of business Regardless of the holding period, 100% of the capital gain or loss is recognized.
c. Real property used in trade or business of a character which is subject to the
allowance for depreciation Effects of Situs on Dealings in Properties
d. Real property used in trade or business of the taxpayer TAXPAYER
2. Capital Assets *Taxable on world income – apply to all properties regardless of location
a. Personal (non-business) assets of individual taxpayers *Taxable only on Philippine Income – apply to all properties within the Philippines only
b. Business assets of any taxpayers which are
o Financial Assets – cash, receivables; investments Net Capital Loss Carry over
o Intangible Assets – patent, copyrights, leasehold rights; franchise rights. Limit 1 – The amount of income in the year the net capital loss was sustained, and
NOTE: The classification of assets or properties as ordinary asset or capital asset does not depend upon Limit 2 – the available net capital gain in the following year
the nature of the property but upon the nature of the taxpayer’s business and its usage by the business. NOTE: the amount of the net capital loss carry over shall be whichever is the lowest of the actual net
capital loss, Limit 1 and Limit 2.
The revenue regulations classify real and other property acquired (ROPA) by banks as ordinary assets - NCLC is applicable for one year only and is applicable for individual taxpayers only.
even if banks are not actually engaged in the realty business. This is an apparent recognition of the fact
that ROPA are normally acquired and sold by banks in their normal course of business. However, ROPA in SPECIAL RULES IN THE DETERMINATION OF TAX BASIS
the form of domestic stocks held by banks are capital assets. A. By purchase
1. Acquisition Cost – purchase price, tax assumed, acquisition-related costs such as commissions paid in
ASSET CLASSIFICATION RULES acquiring asset.
A. Property purchased for future use in business – ordinary asset - Capital assets
B. Discontinuance of the active use of property – does not change its character - Non-depreciable ordinary assets such as land
C. Real properties used, being used, or have been previously used, in trade of the taxpayer – ordinary - Any asset purchased for an inadequate consideration or those acquired at less than fair value
asset at the date of acquisition
D. Properties classified as ordinary asset for being used in business by a taxpayer not engaged in real 2. Depreciable cost - depreciable ordinary asset
estate business are automatically converted to capital assets upon showing of proof that the same have B. By Exchange – fair value of asset received
not been used in business for more than 2 years prior to the consummation of the taxable transaction C. By way of gratuitous title:
involving such property. 1. Donation – whichever is lower of:
E. Fully depreciated asset – ordinary asset a. tax basis on the hand of the donor or the last preceding owner by whom it was not
F. Properties acquired by sale, exchange or barter, inheritance, donation, or as property dividends – it acquired by donation.
depends whether or not shall be use in business. b. fair market value at the date of gift
G. Real properties used by exempt corporation in its exempt operations – capital assets *If the basis is greater than the market value of the property at the time of donation, then for
H. Real properties subject to involuntary transfer – no effect on the classification of such property purposes of determining the loss, the basis shall be such market value.
I. Change of business from real estate to non-real estate business shall not change the classification of 2. Inheritance – fair market value of the property on the date of death of the decedent.
ordinary assets previously held. D. Shares received by way of tax-free exchanges
a. share-for-share swap – tax basis of the shares exchanged or given
Determination of Gains and Losses in Dealings in Properties b. share-swap with non-cash consideration:
Selling Price PXXX Transferor:
Less: Tax Basis or adjusted basis of asset disposed XXX Tax basis of shares exchanged PXXX
Gain or Loss PXXX Add: Gain Recognized PXXX
Amounts treated as dividends of the XXX XXX
shareholders
ORDINARY GAINS - separate items of gross income subject to regular Income Tax in full. Less: Cash and fair value of other properties received XXX
*Ordinary Losses- items of deductions from gross income in the determination of net income from Tax Basis of new shares received by the transferor PXXX
business or profession Transferee
Original basis on the hands of the transferor PXXX
CAPITAL GAINS – capital losses are deductible only up to the extent of capital gainsother than domestic Add: Gain recognized to the transferor XXX
stocks sold directly to buyer and real properties. Capital gains and Capital losses are offset. Tax basis of the shares received by the PXXX
- A net capital gains is an item of gross income subject to RIT transferee
- A net capital loss is not an item of deduction in determining the net taxable income
HOLDING PERIOD REGULAR INCOME TAXATION: INDIVIDUALS
For Individual Taxpayer
The Regular Tax Model for Individuals
1. less than one year – 100% of the capital gain or loss is recognized
2. more than one year – 50% of the capital gain or loss is recognized Gross compensation income P XXX,XXX

Compiled by Leo Torres, CPA2018


Less: Personal Compensation XXX,XXX d. Must have been issued a permit to operate from the government.
Taxable Compensation Income P XXX,XXX Note: Non-stock and non-profit educational institution is exempt from income tax
4. GOCCs, Agencies or Instrumentalities
Gross income from business/profession P XXX,XXX  The 30% net income tax rate is applicable to all GOCCs except the following:
Less: Deductions XXX,XXX a. SSS
Net Income P XXX,XXX b. PHIC
Taxable Income P XXX,XXX c. GSIS
5. Final Income Tax
TAXABLE ESTATES AND TRUSTS  Interest from deposits and yield from deposit substitutes and from trust funds and
Taxable Estate – if under judicial settlement or administration similar arrangements, and royalties from sources within the Philippines are subject
- treated as individual tax payer and subject to regular income tax and to 20% final income tax.
- is allowed P20,000 personal exemption  If these are derived from sources without, these shall be subject to the net income
- If under extra-judicial settlement, income of the estate is taxable to the heirs tax and not the final income tax.
Taxable Trust – pass-through entity, not subject to income tax
- Income is taxable to the grantor-trustor 6. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange
Income Taxable to an Estate or Trust under the NIRC  Apply rules on individuals
a. Income accumulated in trust for the benefit of unborn or unascertained person or persons 7. Tax on Income Derived under the Expanded Foreign Currency Deposit System
with contingent interests and income accumulated or held for future distribution under the  The depository bank is the income earner and is subject to the net income tax of
terms of the will or trust 35%
b. Income which is to be distributed currently by the fiduciary to the beneficiaries and income  However, when the depository bank under the system transacts with the
collected by a guardian of an infant which is to be held or distributed as the court may direct. following, its income is exempt from net income tax:
c. Income received by estates of deceased persons during the period of administration or a. Non-residents
settlement of the estate. b. OBUs
d. Income which, in the discretion of the fiduciary, may either distributed to the beneficiaries or c. Local commercial banks
accumulated d. Branches of foreign banks authorized by the BSP
e. Other depository banks under the system
 With regard to FX loans, income derived therefrom shall be subject to a final
tax at the rate of 10%

TAX ON CORPORATIONS
Under Section 22 (B) of the NIRC, the term corporation shall include: 8. Inter-corporate Dividends
a. Partnerships, no matter how created or organized;  The domestic corporation is the stockholder of another domestic
b. Joint stock companies; corporation. Being a stockholder, it is entitled to dividends. The dividends
c. Joint accounts (cuentasenparticipacion); received by it shall not be subject to tax, in other words, exempt.
d. Associations; or 9. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings
e. Insurance companies  Apply final income tax rate of 6% is imposed on the gain presumed to have
Does not include: been realized
a. General Professional Partnerships B. RESIDENT FOREIGN CORPORATIONS
b. Joint Venture 1. In General
A. DOMESTIC CORPORATIONS  Like a domestic corporation, a resident foreign corporation is subject to the
1. In General net income tax at a rate of 30%.
a. A domestic corporation is generally liable for net income tax because the NIRC  However, unlike a domestic corporation, a resident foreign corporation is
says: “taxable income.” only liable for income derive by it from sources within the Philippines.
b. The net income tax is imposed at a rate of 30% on all income derived from sources 2. Optional Corporate Income Tax of 15%
within and without the Philippines.  Tax rate is 15% of Gross Income
2. Optional Corporate Income Tax 3. MCIT
a. The tax rate is 15%  Compare the 2% of Gross Income versus net income, choose higher of the 2.
b. Immaterial since the President has not yet implemented this option. 4. International Carrier Doing business in the Philippines
3. Proprietary Educational Institutions and Hospitals  Liable to pay tax of 2½% on its Gross Philippine Billings (GPB)
 Liable for net income tax at a rate of only 10% provided:  For international air carriers, the following requisites must be present:
a. It must a stock and non-profit institutions o The persons, excess baggage, cargo, and the mail must be
b. It must be a private educations institution or hospital originating in the Philippines
c. Their gross income from unrelated activity does not exceed 50%. o In a continuous and uninterrupted flight or shipment

Compiled by Leo Torres, CPA2018


o Irrespective of the place of sale or issue and the place of payment  Exemption applies only when the lender is a foreign government or any of its GFI,
of the ticket. international and regional financial institutions (supra-nationals).
 For international shipping carriers, the following are the pre-requisites: 3. Intercorporate Dividends
o It must originate from the Philippines  Among the three corporate taxpayers, only the NR foreign corporation is liable for
o It must be up to the final destination dividends received by it from a domestic corporation at the rate of 35%.
o Regardless of the place of sale or payments of the passage or  Tax deemed paid credit rule (tax sparing rule) – The country of domicile of the
freight documents non-resident foreign corporation allows a tax credit of 20% for taxes deemed paid
5. Offshore Banking Units in he Philippines to be entitled to the lower rate of 15%.
 A final income tax at the rate of 10% Final Tax is imposed on income derived 4. CGT from Sale of Shares Not Traded in the Stock Exchange
by OBUs authorized by the BSP from its foreign currency transactions (e.g  Rules on individuals apply.
branches of commercial banks). D. ECOZONE ENTERPRISES
 Transactions of these OBUs are exempt from final income tax provided it is - All business enterprises registered with the Philippine Economic Zone Authority (PEZA), SBMA, or CDA
with the following: and operating within the Special Economic Zones shall be taxed 5% of gross income on registered
a. Nonresidents activities. Three percent (3%) shall be paid to the National Government; 2% to the city or municipality
b. Other OBUs where the enterprises is located.
c. Local commercial banks Notes:
d. Branches of foreign banks a. Except for RPTs, the 5% tax shall be in lieu of all taxes;
6. Tax on Branch Profit Remittance b. Income realized by a registered enterprise that is not related to its registered activity or activities shall
 A 15% final income tax based on the total profits applied or earmarked for be subject to the regular taxes, such as the 20% FWT on interest from bank deposits, the 7.5% FWT on
remittance is imposed on any profit remitted by a branch to its head office. income from foreign currency deposits, the 5% / 10% CGT on sale of domestic shares, or ½ of 1% stock
 If the profit remitted us nor from activities connected with the conduct of its transaction tax.
business in the Philippines., the net income tax rate of 35% shall apply. Types of Income Subject to Tax
 This tax does not apply to local subsidiaries of foreign corps. (for branch Ordinary Income
offices only) Corporate Taxpayer Source of Taxable Tax Base Tax Rates
7. Regional Area Headquarters and Regional Operating Headquarters of MNCs Income
 RAH – a branch established in the Philippines by MNC and which Domestic Within and Without Net Income 30%
headquarters do not earn or derive income from the Philippines and which the Philippines
acts supervisory, communications and coordinating center for their affiliates, RFC Within the Philippines Net Income 30%
subsidiaries, or branches in the Asia-Pacific Regions and other foreign only
markets. NRFC Within the Philippines Gross Income Final withholding
 ROH – a branch established in the Philippines by MNCs which are engaged in only enumerated by law tax of 30%
any of the following: general administration and planning; business planning
and coordination; sourcing and procurement of raw materials and Passive Income
components; corporate finance advisory services; marketing and control and Passive Income Domestic and RFC NRFC
sales promotion; training and personnel management; logistic services; R & Interest on currency bank 20% For items 1, 2, and 3: 30%
D; product development; technical support and maintenance; data deposits
processing and communication; and business development. Yield or any other monetary
 RAH is exempt from income tax’ ROH is subject to a net income tax of 10%. benefit from:
8. Final Income Tax
1. Deposit substitute 20%
 Interest income and Royalties – subject to 20% final income tax 2. Trust funds, and similar 20%
 Income derived from Expanded Foreign Currency Deposit Systems – The
arrangements
income earner is a resident foreign corporation depository bank . The tax
Royalties 20%
rate is 35%.
Interest from depositary bank 15% Exempt
 Intercorporate Dividends – The income received by the foreign corporation
under the expanded foreign
from the domestic corporation shall be exempt from income tax.
currency deposit system
C. NON-RESIDENT FOREIGN CORPORATIONS
1. In General
VII. MINIMUM CORPORATE INCOME TAX
 Liable for gross income tax at the rate of 35% on income derived from sources within
Nota Bene:
the Philippines.
 This tax is imposed on two types of corporations: the domestic corporation and
2. Interest on foreign loans
the resident foreign corporation.
 A final WHT at the rate of 20% is imposed on the amount of interest on foreign loans.
 To discourage these corporations from claiming too many deductions to avoid
 Contemplated transaction here is one where the lender is a non-resident foreign
payment of tax, the MCIT of 2% on the gross income is imposed in lieu of the net
corporation and the borrower is a domestic corporation.
income tax of 30%

Compiled by Leo Torres, CPA2018


A. IMPOSITION OF THE TAX o Income excluded from tax
 The 2% MCIT cannot be imposed simultaneously with the net income tax of 30%. Impose o Income subject to final income tax
whichever is higher! o The amount of NOLCO deducted, and reduced by the sum of dividends
 The MCIT can be imposed only at the beginning of 4th taxable year immediately following the actually or constructively paid and income tax paid for the year.
year in which the corporation commenced its operations. D. EVIDENCE OF PRUPOSE TO AVOID INCOME TAX
B. CARRY FORWARD IF EXCESS MINIMUM TAX There are 2 instanced which are to be considered:
 This is the 2nd carry over tax under the NIRC. The first is the NOLCO. o The fact that the company is a mere holding company or investment company
 Any excess of the MCIT over the net income tax shall be carried forward and credited against o The fact that the earnings or profits of a corporation are permitted to accumulate
the net income tax for the 3 immediately succeeding taxable years. beyond the reasonable needs of the business.
 Unlike the NOLCO, the MCIT can be carried over for the 3 immediately succeeding years. o The presence of either brings a prima facie evidence of the purpose to avoid
payment of this tax.
C. RELIEF FROM THE MCIT o The intention of the taxpayer at the time of accumulation is controlling to
 The Secretary of Finance is authorized to suspend the MCIT on any corporation who suffers determine whether the profits are accumulated beyond the reasonable needs of
losses on account of: the business.
o Prolonged labor dispute o Definiteness of plans coupled with actions taken towards its consummation are
o Force majeure essential.
o Legitimate business reverses X. EXEMPT CORPORATIONS
A. GENERAL PROFESSIONAL PARTNERSHIPS
RULES IN COMPUTATION OF MCIT A GPP is a partnership formed by persons for the sole purpose of exercising their common profession, no
1. Excess MCIT for the year is computed annually, that is, in the 4th quarterly return. part of income of which is derived from engaging in any trade or business. Any other partnership is liable
2. The quarterly tax shall be the higher of the RCIT or the MCIT for corporate income tax.
3. In the payment of said quarterly MCIT, excess MCIT from previous taxable year(s) shall not be allowed
to be credited. However, (1) creditable withholding taxes, and (2) quarterly income tax payments paid in A GPP may be exempted from corporate income tax if these 2 requisites are met:
the previous quarter(s) are allowed as credit against the quarterly MCIT due. 1. It is formed by persons for the sole purpose of exercising their common profession.
4. If the quarterly tax is the RCIT, the (1) excess MCIT from previous taxable year(s), (2) creditable taxes 2. No part of the income of which is derived from engaging in any trade or business.
withheld, and (3) quarterly income tax payments paid in previous quarter(s), are allowed as credits
against the quarterly RCIT due. Notes:
 If the GPP is exempt from corporate income tax, the share of each partner is subject to
income tax. Each partner is liable in his separate and individual capacity.
IX. IMPROPERLY ACCUMULATED EARNINGS TAX  If the 2 requisites are absent, the partnership is deemed a corporation and is subject to
A. IN GENERAL corporate income tax. The share of each partner, whether actually or constructively received,
 Generally, a tax of 10% is imposed on the improperly accumulated income for the purpose of is deemed as a dividend which is SUBJECT to final income tax.
avoiding the income tax with respect to its shareholders.  If there is other income but the income derived is passive (e.g. interest income, which is
 The tax compels the corporations to declare dividends. subject to final income tax of 20%), still the partnership can be exempt from the corporate
 Inclusion: only domestic corporations and closely-held corporations. income tax. Passive income is not included in the partnership’s annual return.
 Closely held corporations are those with at least 50% in value of the outstanding capital stock B. JOINT VENTURE UNDER A SERVICE CONTRACT WITH THE GOVERNMENT
or at least 50% of the total combined voting power of all classes of stock entitled to vote is The JV which is exempt from corporate income tax, is a merger of two or more corporations for the
owned directly or indirectly by or for not more than 20 individuals. purpose of engaging in construction projects or energy operations pursuant to a consortium agreement
B. EXEMPTED CORPORATIONS or a service contract with the government. The corporations must be engaged in the same line of
 Under the NIRC, the following are exempted from the application of this tax without business.
qualification: Notes:
o Publicly-held corporations  It is only the JV which is exempt from corporate income tax, not the income of each
o Banks and NBFIs corporation from the JV.
o Insurance companies  Thus, each corporation is liable for corporate income tax.
 Under the RR 2-2001, the following were added to the list with the proviso that the C. GOVERNMEN-OWNED OR CONTROLLED CORPORATIONS
improperly accumulated earnings must be for reasonable needs of the business: The net income tax is applicable to all GOCCs except the following:
o Taxable partnerships  SSS
o General professional partnerships  PHIC
o Non-taxable joint ventures  PCSO
o Enterprises located within economic zones.  GSIS
C. IMPROPERLY ACCUMULATED TAXABLE INCOME D. OTHER EXEMPT CORPORATIONS
IATI is “taxable income” adjusted by: The following are exempt under Section 30 of the NIRC:
o Income exempt from tax 1. Labor and agricultural organizations not organized principally for profit.

Compiled by Leo Torres, CPA2018


2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank - Subject to business tax
without capital stock organized and operated for mutual purposes and without profit. - the sale is not the object of taxation but the purchase of the resident buyer. (VAT on
3. A beneficiary society operating for the exclusive benefit of the members, such as a fraternal importation)
organization operating under a lodge system, or a mutual aid association or a non-stock
corporation organized by employees providing for the payment of life, sickness, accident, or 2. Commercial Activity
other benefits exclusively to the members of such society or their dependents. - Engagement in the sale of goods or service for a profit.
4. Cemetery companies owned and operated exclusively for the benefits of its members. - Even if the business operation results to a loss, business tax still applies.
5. Non-stock corporations organized and operated exclusively for religious, charitable, scientific, EXEMPTIONS:
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income 1. Government Agencies and instrumentalities
or asset shall belong to or inure to the benefit of any member, organizer, officer or any 2. Non-profit organizations or associations
specific person. 3. Employment
6. Business league, chamber of commerce, or board of trade, not organized for profit and no 4. Directorship
part of the income of which insures to the benefit of any private stockholder or individual.
7. A non-stock and non-profit educational institution. PERSONS CONSIDERED ENGAGED IN BUSINESS
8. Government educational institution. 1. Consultants
9. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation 2. Sales Agents or brokers
company, mutual or cooperative telephone company, or like organization satisfying the 3. Televisions or movie talents and artists
following requirements: 4. Cooking instructors
a. The organization must be operating within a locality 5. Martial instructors
b. The income of such organization must be used to meet the necessary expenses.
10. Farmers’ associations for organized and operated as a sales agent for the purpose of NATURE OF BUSINESS TAXES
marketing the products of its members and turning back to them the proceeds of sales less 1. Consumption Tax
necessary selling expenses on the basis of quantity of produce. 2. Indirect Tax
Notes: 3. Privilege Tax
 An exempt corporation can be held liable for corporate income tax if it derives income from
any of their property or any of their activities conducted for profit regardless of the BUSINESS TAXPAYERS
disposition made of such income. “person” – refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or
 Above corporations are only exempt from income tax under Section 30 but this same section associations
does not bar the applicability of other axes to these corporations. REGISTRATION OF BUSINESS
Any person who, in the course of trade or business, sells, barters, exchanges goods, properties, or
BUSINESS AND TRANSFER TAXATION engaged in the sale of services subject to business tax shall:
I. BUSINESS TAXATION a. Register with the appropriate Revenue District Office using the appropriate BIR form
- Consumption tax payable by persons engaged in business b. Pay annual registration fee of P500.00 using BIR form no. 0605 for every separate or distinct
ESSENTIAL REQUISITES OF A BUSINESS establishment where sales transactions occur.
1. Habitual Engagement
- Regularity in transactions Any person who maintains a head or main offices and offices in different places (i.e. branch) shall register
- Registration as dealer, a service provider, or a practitioner in particular trade or profession with the RDO which has jurisdiction over the place where the head office or each branch is located.
Not Considered business:
a. Sale by non-dealer TYPES OF BUSINESS AS TO REGISTRATION
b. Privilege Stores “tiangge” a. VAT-Registered taxpayers – 12% VAT
- To be considered privilege store, the store should engage in business activity fpr a cumulative b.Non-VAT Registered taxpayers - 3% percentage tax
period of not more than 15 days.
Exceptions to the Regularity Rule TAX BASE OF BUSINESS TAX
a. Business principally for subsistence or livelihood (Marginal Income Earners) 1. For sellers of goods or properties – taxable on Gross Selling Price
- Business with gross sales or receipts not exceeding P100,000 per year Gross Selling Price = Cash Sales + Credit Sales + Freight in – Sales Discount, returns and Allowances
Examples 2. For sellers of services or lessors of properties – taxable on Gross Receipts
 Agricultural growers or producers (Farmers or fishermen) Gross Receipts = contract price, compensation, service fee, rental or royalty, including amount charged
 Small sari-sari store for materials supplied with the services and deposits applied as payments for services rendered and
 Small carinderias or “turo-turos” advanced payments actually or constructively received during the taxable period for the service
 Drivers or operators of a single unit tricycle, performed or to be performed for another person, excluding VAT.
 Other similarly situated
*Marginal Income Earners are exempt from business tax but are subject to income tax. BUSINESS TAX REPORTING
b. Sale of non-residents are considered made “in the course of business” For VAT taxpayers

Compiled by Leo Torres, CPA2018


Compiled by Leo Torres, CPA2018