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Income Taxation Reviewer
Income Taxation Reviewer
IncomeTaxation
Expatax
Tax advice for expats in the Netherlands
INCOMETAXATION
INGENERAL
IncomeTax
Incometaxhasbeendefinedasataxonallyearlyprofitsarisingfromproperty,profession,tradeorbusiness,orasataxona
personsincome,emoluments,profitsandthelike.
Itisgenerallyregardedasanexcisetax.Itisnotlevieduponpersons,property,fundsorprofitsbutupontherightofapersonto
receiveincomeorprofits.
Purposesofincometaxation
1.Toprovidelargeamountsofrevenues.
2.Tooffsetregressivesalesandconsumptiontaxes.
3.Togetherwithestatetax,tomitigatetheevilsarisingfromtheinequalitiesinthedistributionofincomeandwealth,whichare
considereddeterrentstosocialprogress,byimposingaprogressiveschemeoftaxation.
Income
Income,initsbroadsense,meansallwealthwhichflowsintothetaxpayerotherthanasamerereturnoncapital.[Section36,
RevenueRegulations2]
Incomemeansaccessiontowealth,gainorflowofwealth.
Conwiv.CTA[213SCRA83]:Incomemaybedefinedasanamountofmoneycomingtoapersonorcorporationwithinaspecified
time,whetheraspaymentforservices,interest,orprofitfrominvestment.
Commissionerv.BOAC[149SCRA395]:Incomemeanscashreceivedoritsequivalent.Itistheamountofmoneycomingtoa
personwithinaspecifictime.Itisdistinctfromcapitalfor,whilethelatterisafund,incomeisaflow.Asusedinourlaws,incomeis
flowofwealth.Thesourceofanincomeistheproperty,activityorservicethatproducestheincome.Forthesourceofincometobe
consideredascomingfromthePhilippines,itissufficientthatincomeisderivedfromactivitywithinthePhilippines.INBOACscase,
thesaleofticketsinthePhilippinesistheactivitythatproducestheincome.
Fisherv.Trinidad[43Phil973]:Stockdividendisnotanincome.Itmerelyevidencestheinterestofthestockholderintheincreased
capitalofthecorporation.Anincomemaybedefinedastheamountofmoneycomingtoapersonorcorporationwithinaspecified
time,whetheraspaymentforservices,interest,orprofitforinvestment.Amereadvanceinthevalueofpropertyofapersonor
corporationinnosenseconstitutestheincomespecifiedintherevenuelaw.Suchadvanceconstitutesandcanbetreatedmerelyas
anincreaseofcapital.Anincomemeanscashreceivedoritsequivalent.Itdoesnotmeanchosesinactionorunrealizedincrements
inthevalueoftheproperty.
Incomev.capital
Capitalisafundorpropertyexistingatonedistinctpointoftimewhileincomedenotesaflowofwealthduringadefiniteperiodof
time.
Theessentialdifferencebetweencapitalandincomeisthatcapitalisafundorpropertyexistingatonedistinctpointoftimeincome
isaflowofservicesrenderedbythatcapitalbythepaymentofmoneyfromitoranyotherbenefitrenderedbyafundofcapitalin
relationtosuchfundthroughaperiodoftime.Capitaliswealth,incomeistheserviceofwealth.[Madrigalv.Rafferty,38Phil414]
Capitalisthetreewhileincomeisthefruit.
SOURCESOFINCOME
Whatproducesincome?
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Thetermsourceofincomeisnotaplacebuttheproperty,activityorservicethatproducedtheincome.Inthecaseofincome
derivedfromlabor,itistheplacewherethelaborisperformedinthecaseofincomederivedfromtheuseofcapital,itistheplace
wherethecapitalisemployedandinthecaseofprofitsfromthesaleorexchangeofcapitalassets,itistheplacewherethesaleor
transactionoccurs.
Commissionerv.BOAC:Thesourceofanincomeistheproperty,activityorservicethatproducestheincome.Forthesourceof
incometobeconsideredascomingfromthePhilippines,itissufficientthatincomeisderivedfromactivitywithinthePhilippines.IN
BOACscase,thesaleofticketsinthePhilippinesistheactivitythatproducestheincome.Theticketsexchangedhandshereand
paymentsforfareswerealsomadeinPhilippinecurrency.ThesiteofthesourceoftheincomeisthePhilippinesandtheflowof
wealthproceededfromandoccurredinPhilippineterritory,enjoyingtheprotectionaccordedbythePhilippinegovernment.Thus,said
flowofwealthshouldsharetheburdenofsupportingthegovernment.
Sourcesofincome
1.SourceswithinthePhilippines
2.SourceswithoutthePhilippines
3.SourcespartlywithinandpartlywithoutthePhilippines
TAXABLEINCOME
Taxableincome
ThetermtaxableincomemeansthepertinentitemsofgrossincomespecifiedintheNIRC,lessthedeductionsand/orpersonaland
additionalexemptions,ifany,authorizedbysuchtypesofincomebytheNIRCorotherspeciallaws.
Requisitesforincometobetaxable
1.Theremustbeagainorprofit.
2.Thegainmustberealizedorreceived.
3.Thegainmustnotbeexcludedbylawortreatyfromtaxation.
Gainmustberealizedorreceived
Thisimpliesthatnotalleconomicgainsconstitutetaxableincome.Thus,amereincreaseinthevalueofpropertyisnotincomebut
merelyanunrealizedincreaseincapital.
Whenisincomeconsideredreceived?
1.actualreceipt
2.constructivereceipt
Incomeconstructivelyreceived
Incomewhichiscreditedtotheaccountoforsetapartforataxpayerandwhichmaybedrawnuponbyhimatanytimeissubjectto
taxfortheyearduringwhichsocreditedorsetapart,althoughnotthenactuallyreducedtopossession.
Toconstitutereceiptinsuchacase,theincomemustbecreditedtothetaxpayerwithoutanysubstantiallimitationor
restrictionastothetimeormannerofpaymentorconditionuponwhichpaymentistobemade.[Section52,RevenueRegulations2]
LimpanInvestmentCompanydeemedtohaveconstructivelyreceivedrentalpaymentsin1957whentheyweredepositedincourtdue
toitsrefusaltoreceivethem.[Limpanv.CIR,17SCRA703]
Examplesofconstructivereceipt
1.Interestcouponswhichhavematuredandarepayable,buthavenotbeencashed.
2.Defaultedcouponsareincomefortheyearinwhichpaid.
3.Partnersdistributiveshareintheprofitsofageneralprofessionalpartnershipisregardedasreceivedbythepartner,althoughnotyet
distributed.
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Arethefollowingitemsincome?
FoundtreasureYES
PunitivedamagesYES
DamagesforbreachofpromiseoralienationofaffectionYES
WorthlessdebtssubsequentlycollectedYES
TaxrefundNO(butyesifthetaxwaspreviouslyallowedasadeductionandsubsequentlyrefundedorcredited,asbenefitaccrued
tothetaxpayerseediscussionontaxasadeductibleitem)
NoncashbenefitsYES
IncomefromillegalsourcesYES
PsychologicalbenefitsofworkNO
GiveawayprizesYES
Scholarships/fellowshipsYES
StockdividendsNO
Teststodeterminerealizationofincome
1.Severancetest
2.Substantialalterationofinteresttest
3.Flowofwealthtest
Severancetest
Ascapitalorinvestmentisnotincomesubjecttotax,thegainorprofitderivedfromtheexchangeortransactionofsaidcapitalby
thetaxpayerforhisseparateuse,benefitanddisposalisincomesubjecttotax.
Substantialalterationofinteresttest
Incomeisearnedwhenthereisasubstantialalterationoftheinterestofataxpayer,i.e.increaseinproportionateshareofa
stockholderinacorporation.
Incometobereturnablefortaxationmustbefullyandcompletelyrealized.Wherethereisnoseparationofgainorprofit,or
separationofincreaseinvaluefromcapital,thereisnoincomesubjecttotax.
Thus,stockdividendsarenotincomesubjecttotaxonthepartoftheshareholderforhehadthesameproportionateinterestinthe
assetsofthecorporationashehadbefore,andthestockholderwasnoricherandthecorporationnopoorerafterthedeclarationof
thedividend.
However,ifthepreexistingproportionateinterestofthestockholderissubstantiallyaltered,theincomeisconsideredderived
totheextentofthebenefitreceived.
Moreover,ifasaresultofanexchangeofstocks,thepersonreceivedsomethingofvaluewhichareessentiallyandfundamentally
differentfromwhathehadbeforetheexchange,incomeisrealizedwithinthemeaningoftherevenuelaw.
Flowofwealthtest
Theessentialdifferencebetweencapitalandincomeisthatcapitalisafundwhereasincomeistheflowofwealthcomingfromsuch
fundcapitalisthetree,incomeisthefruit.Incomeistheflowofwealthotherthanasamerereturnofcapital.
CLASSESOFINCOME
Kindsoftaxableincomeorgain
1.capitalgain
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2.ordinarygain
a.businessincome
b.compensationincome
c.passiveincome
d.otherincomefromwhateversourcederivedi.e.foundtreasure
Capitalgains
Capitalgainsaregainsorincomefromthesaleorexchangeofcapitalassets.Theseinclude:
1.Incomefromdealingsinsharesofstockofdomesticcorporationwhetherornotthroughthestockexchange
2.IncomefromdealingsinrealpropertylocatedinthePhilippinesand
3.Incomefromdealingsinothercapitalassetsotherthan(a)and(b).
Ordinarygains
Ordinarygainsaregainsorincomefromthesaleorexchangeofpropertywhicharenotcapitalassets.
Businessincome
1.Incomefromtrading,merchandising,manufacturingormining
2.Incomefrompracticeofprofession
Note:Thetermtradeorbusinessincludestheperformanceofthefunctionsofapublicoffice.[Section22(S),NIRC]
Passiveincome
1.PassiveincomefromPhilippinesourcessubjecttofinaltax
2.PassiveincomefromPhilippinesourcesnotsubjecttofinaltax
3.PassiveincomefromsourcesoutsidethePhilippines
Passiveincomeagain
1.Interestincome
2.Rentals/Leases
3.Royalties
4.Dividends
5.Annuitiesandproceedsoflifeinsurance/othertypesofinsurance
6.Prizesandwinnings,awards,andrewards
7.Gifts,bequests,anddevises
8.Othertypesofpassiveincome
APPROACHESININCOMERECOGNITION
Approachesinincomerecognition
1.schedularsystem
2.globalsystem
Schedularsystem
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Theschedularsystemisonewheretheincometaxtreatmentvariesandismadetodependonthekindorcategoryoftaxable
incomeofthetaxpayer.
Globalsystem
Theglobalsystemisonewherethetaxtreatmentviewsindifferentlythetaxbaseandgenerallytreatsincommonallcategoriesof
taxableincomeofthetaxpayer.
Schedularsystemv.globalsystem
1.Undertheschedulartreatment,therearedifferenttaxrates,whileundertheglobaltreatment,thereisaunitaryorsingletaxrate.
2.Undertheschedulartreatment,therearedifferentcategoriesoftaxableincome,whileundertheglobaltreatment,thereisnoneed
forclassificationasalltaxpayersaresubjectedtoasinglerate.
3.Theschedulartreatmentisusuallyusedintheincometaxationofindividualswhiletheglobaltreatmentisusuallyappliedto
corporations.
ApproachusedinthePhilippines
Partlyschedularandpartlyglobal.Theschedularapproachisusedinthetaxationofindividualswhiletheglobalapproachisusedin
thetaxationofcorporations.
CLASSESOFINCOMETAXPAYERS
Basisofclassificationoftaxpayers
1.corporationsv.individuals
2.nationality
3.residence
Classesofincometaxpayers
1.Individuals
a.Residentcitizens
b.Nonresidentcitizens
c.Residentaliens
d.Nonresidentaliens
i)engagedintradeorbusinessinthePhilippines,or
ii)notengagedintradeorbusinessinthePhilippines
Note:AnonresidentalienindividualwhoshallcometothePhilippinesandstaythereinforanaggregateperiodofmorethanonehundred
eighty(180)daysduringanycalendaryearshallbedeemedanonresidentaliendoingbusinessinthePhilippines.[Section25(A)(1),
NIRC]
2.Corporations
a.Domesticcorporations
b.Residentforeigncorporations
c.Nonresidentforeigncorporations
3.Special
a.Proprietaryeducationalinstitutionsandhospitalsthatarenonprofit
b.Insurancecompanies
c.Generalprofessionalpartnerships
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d.Estatesandtrusts
Note:Estatesandtrustsaretreatedasindividualtaxpayers.
Whoisanonresidentcitizen?
Thetermnonresidentcitizenmeans:
1.AcitizenofthePhilippineswhoestablishedtothesatisfactionoftheCommissionerthefactofhisphysicalpresenceabroad
withadefiniteintentiontoresidetherein.
2.AcitizenofthePhilippineswholeavesthePhilippinesduringthetaxableyeartoresideabroad,eitherasanimmigrantorfor
employmentonapermanentbasis.
3.AcitizenofthePhilippineswhoworksandderivesincomefromabroadandwhoseemploymentthereatrequireshimtobe
physicallypresentabroadmostofthetimeduringthetaxableyear.
4.AcitizenwhohasbeenpreviouslyconsideredasanonresidentcitizenandwhoarrivesinthePhilippinesatanytimeduring
thetaxableyeartoresidepermanentlyinthePhilippines.
Corporation
Acorporation,asusedinincometaxation,includespartnerships,nomatterhowcreatedororganized,jointstockcompanies,joint
accounts(cuentasenparticipacion),andassociationsorinsurancecompanies.
However,itdoesnotinclude:
1.ageneralprofessionalpartnershipand
2.ajointventureorconsortiumformedforthepurposeofundertakingconstructionprojectsorengaginginpetroleum,coal,
geothermalandotherenergyoperationspursuanttoanoperatingorconsortiumagreementunderaservicecontractwiththe
government.
Residentforeigncorporation
ThetermappliestoaforeigncorporationengagedintradeorbusinesswithinthePhilippines.
Nonresidentforeigncorporation
ThetermappliestoaforeigncorporationnotengagedintradeofbusinessinthePhilippines.
GENERALPROFESSIONALPARTNERSHIPV.ORDINARYBUSINESSPARTNERSHIP
Generalprofessionalpartnerships
Generalprofessionalpartnershipsarepartnershipsformedbypersonsforthesolepurposeofexercisingtheircommonprofession,no
partoftheincomeofwhichisderivedfromengaginginanytradeorbusiness.[Section22(B),NIRC]
Personsengaginginbusinessaspartnersinageneralprofessionalpartnershipshallbeliableforincometaxonlyintheirseparateand
individualcapacities.[Section26,NIRC]
Forpurposesofcomputingthedistributiveshareofthepartners,thenetincomeofthepartnershipshallbecomputedinthesame
mannerasacorporation.[Section26,NIRC]
Eachpartnershallreportasgrossincomehisdistributiveshare,actuallyorconstructivelyreceived,inthenetincomeofthe
partnership.[Section26,NIRC]
Incomeofageneralprofessionalpartnershiparedeemedconstructivelyreceivedbythepartners.[Section73(D),NIRC]
Ordinarybusinesspartnership
Anordinarybusinesspartnershipisconsideredasacorporationandisthussubjecttotaxassuch.
Partnersareconsideredstockholdersand,therefore,profitsdistributedtothembythepartnershipareconsideredasdividends.
Oav.Commissioner,45SCRA74(1972):Unregisteredpartnership
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AlthoughtheCFIalreadyapprovedtheprojectofpartitionoftheestateofJuliaBualesamonghersurvivingspouse,LorenzoOna,
andherfivechildren,noattemptwasmadetodividethepropertiesleftbythedecedent.Instead,thepropertiesremainedunderthe
managementofLorenzoOnawhousedsaidpropertiesinbusinessbyleasingorsellingthemandinvestingtheincomederivedtherefromand
theproceedsfromthesalesthereofinrealpropertyandsecurities.ThesaidincomesarerecordedinthebooksofaccountkeptbyLorenzo
Onawherethecorrespondingsharesoftheheirsinthenetincomefortheyearareknown.
Basedonthesefacts,theCommissionerruledthattheheirsformedanunregisteredpartnershipwhichisthussubjecttocorporate
incometax.TheCourtofTaxAppealsandtheSupremeCourtaffirmed.
Fortaxpurposes,thecoownershipofinheritedpropertiesisautomaticallyconvertedintoanunregisteredpartnershipthemomentthe
saidcommonpropertiesand/ortheincomesderivedtherefromareusedasacommonfundwithintenttoproduceprofitsfortheheirsin
proportiontotheirrespectivesharesintheinheritanceasdeterminedinaprojectpartitioneitherdulyexecutedinanextrajudicialsettlement
orapprovedbythecourtinthecorrespondingtestateorintestateproceeding.
Thereasonissimple.Fromthemomentofsuchpartition,theheirsareentitledalreadytotheirrespectivedefinitesharesofthe
estateandtheincomesthereof,foreachofthemtomanageanddisposeofasexclusivelyhisownwithouttheinterventionoftheother
heirs,and,accordingly,hebecomesliableindividuallyforalltaxesinconnectiontherewith.Ifaftersuchpartition,heallowshissharetobe
heldincommonwithhiscoheirsunderasinglemanagementtobeusedwiththeintentofmakingprofittherebyinproportiontohisshare,
therecanbenodoubtthat,evenifnodocumentorinstrumentwereexecuted,forthepurpose,fortaxpurposes,atleast,anunregistered
partnershipisformed.
Forpurposesofthetaxoncorporations,theNIRC,includespartnershipsexceptgeneralprofessionalpartnershipswithinthe
purviewofthetermcorporation.
Note:Theincomederivedfrominheritedpropertiesmaybeconsideredasindividualincomeoftherespectiveheirsonlysolongasthe
inheritanceorestateisnotdistributedor,atleast,partitioned,butthemomenttheirrespectiveknownsharesareusedaspartofthe
commonassetsoftheheirstobeusedinmakingprofits,itisbutproperthattheincomeofsuchsharesbeconsideredaspartofthe
taxableincomeofanunregisteredpartnership.
Gatchalianv.Collector,102Phil140
Plaintiffscontributedmoneytobuyasweepstakesticketwhichsubsequentlywon.TheSupremeCourtheldthattheyformedan
unregisteredpartnership.Plaintiffsformedapartnershipofacivilnaturesinceeachofthemcontributedmoneytoacommonfundforthe
solepurposeofdividingequallytheprizewhichtheywin.
Pascualv.Commissioner
Petitionersboughttwoparcelsoflandin1965,however,theydidnotsellthesamenormakeanyimprovementsthereon.In1966,
theyboughtanotherthreeparcelsofland.Itwasonlyin1968thattheysoldthetwoparcelsoflandafterwhichtheydidnotmakeany
additionalornewpurchase.Theremainingthreeparcelsoflandweresoldin1970.Commissionerassessedthemcorporateincometaxeson
thegroundthatpetitionersestablishedanunregisteredpartnershipengagedinrealestatetransactions.
TheSupremeCourtruledthatnounregisteredpartnershipwasformed.Thesharingofreturnsdoesnotitselfestablishapartnership
whetherornotthepersonsthereinhaveajointorcommonrightorinterestintheproperty.Theremustbeaclearintenttoforma
partnership,theexistenceofwhichhasthejuridicalpersonalitydifferentfromtheindividualpartnersandthefreedomofeachpartyto
transferorassignthewholeproperty.
Inthiscase,therewasnoshowingofintenttoformapartnership.Thetransactionswereisolatedtherefore,thecharacterof
habitualitypeculiartobusinesstransactionsengagedforthepurposeofgainwasnotpresent.
Theessentialelementsofapartnershipare:(1)anagreementtocontributemoney,property,orindustrytoacommonfundand(2)
anintenttodividetheprofitsamongthecontractingparties.
Unregisteredpartnershipv.coownershipfortaxpurposes
Iftheactivitiesofcoownersarelimitedtothepreservationofthepropertyandthecollectionoftheincometherefrom,inwhichcase,
eachcoowneristaxedindividuallyonhisdistributiveshareintheincomeofthecoownership.
Ifthecoownersinvesttheincomeinbusinessforprofit,theywouldbeconstitutingthemselvesintoapartnershiptaxableasa
corporation.
Jointventure,howcreated
Ajointventureiscreatedwhentwocorporations,whileregisteredandoperatingseparately,wereplacedunderonesolemanagement
whichoperatedthebusinessaffairsofsaidcompaniesasthoughtheyconstitutedasingleentitytherebyobtainingsubstantial
economyandprofitsintheoperation.
Asstated,ajointventureisnottaxedasacorporation,justlikeageneralprofessionalpartnership.
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GENERALPRINCIPLESOFINCOMETAXATIONINTHEPHILIPPINES
GeneralprinciplesofincometaxationinthePhilippines
1.AcitizenofthePhilippinesresidingthereinistaxableonallincomederivedfromsourceswithinandwithoutthePhilippines.
2.AnonresidentcitizenistaxableonlyonincomederivedfromsourceswithinthePhilippines.
3.AnindividualcitizenofthePhilippineswhoisworkingandderivingincomefromabroadasanoverseascontractworkeristaxableonly
onincomefromsourceswithinthePhilippines.Provided,thataseamanwhoisacitizenofthePhilippinesandwhoreceives
compensationforservicesrenderedabroadasamemberofthecomplementofavesselengagedexclusivelyininternationaltrade
shallbetreatedasanoverseascontractworker.
4.Analienindividual,whetheraresidentornotofthePhilippines,istaxableonlyonincomederivedfromsourceswithinthePhilippines.
5.AdomesticcorporationistaxableonallincomederivedfromsourceswithinandwithoutthePhilippines.
6.Aforeigncorporation,whetherengagedornotintradeorbusinessinthePhilippines,istaxableonlyonincomederivedfromsources
withinthePhilippines.
SOMERULESONTAXATIONOFTHEVARIOUSTAXPAYERS
Whoaretaxedontheirglobalincome?
1.Residentcitizens
2.Domesticcorporations
WhoaretaxedonlyontheirincomefromsourceswithinthePhilippines?
1.Nonresidentcitizen
2.Overseascontractworkers
3.Alienindividual,whetheraresidentornotofthePhilippines
4.Foreigncorporation,whetherengagedornotintradeorbusinessinthePhilippines
Whoaretaxedbasedonlyontheirnetincome?
1.Residentandnonresidentcitizens
2.ResidentalienandnonresidentalienengagedintradeorbusinessinthePhilippines
3.Domesticcorporation
4.Residentforeigncorporation
Whoaretaxedbasedontheirgrossincome?
1.NonresidentaliennotengagedintradeorbusinessinthePhilippines
2.Nonresidentforeigncorporation
TREATMENTOFSOMESPECIALITEMS
Forgivenessofindebtedness
Thecancellationandforgivenessofindebtednessmay,dependentuponthecircumstances,amountto:
1.apaymentofincome
2.agiftor
3.acapitaltransaction.
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If,forexample,anindividualperformsservicesforacreditorwho,inconsiderationthereofcancelsthedebt,incometothatamountis
realizedbythedebtorascompensationforhisservice.
If,however,acreditormerelydesirestobenefitadebtorandwithoutanyconsiderationthereofcancelsthedebt,theamountofthe
debtisagiftfromthecreditortothedebtorandneednotbeincludedinthelattersgrossincome.
Ifacorporationtowhichastockholderisindebtedforgivesthedebt,thetransactionhastheeffectofpaymentofadividend.[Section
50,RevenueRegulations2]
Recoveryofamountspreviouslywrittenoff
Consideredasincome
GUIDEQUESTIONSINDETERMININGTAXABLEINCOME
1.Isthereagainorincome?
2.Isthegainorincometaxable?Isitexcludedorexempt?
3.Whattypeofincomeisit:incomeincludibleinthegrossincome,passiveincome,capitalgains,incomederivedfromothersource?
4.Towhatclassdoesthetaxpayerbelong:individualorcorporate,citizenornotordomesticorforeign,residentornot,engagedin
tradeorbusinessornot?
TAXONINDIVIDUALS
PRELIMINARYPOINTSONTAXATIONOFINDIVIDUALS
Howtaxed?
Anindividualcitizen,bothresidentandnonresident,andanindividualresidentalienaretaxedsimilarly.
Anonresidentalienengagedintradeorbusinessshallbesubjecttothesameincometaxratesasacitizenandaresidentalien.
Thus,onlyanonresidentalienwhoisnotengagedintradeorbusinessistaxeddifferentlyfromtheotherindividualtaxpayers.
Onwhatincometaxed?
AresidentcitizenistaxedonallincomefromsourceswithinandoutsidethePhilippines.Thetaxbaseisnetincome.
AnonresidentcitizenistaxedonlyonincomefromsourceswithinthePhilippines.Thetaxbaseisnetincome.
Analien,whetherresidentornot,istaxedonlyonincomefromsourceswithinthePhilippines.However,thetaxbaseforaresident
alienandnonresidentalienengagedintradeorbusinessisnetincomewhilethetaxbaseforanonresidentaliennotengagedin
tradeorbusinessisgrossincome.
Typesofincometaxed
1.Itemsofincomeincludedinthegrossincome
2.Passiveincome
3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange
4.Capitalgainsfromthesaleorexchangeofrealproperty
TAXONINDIVIDUALCITIZEN(RESIDENTANDNONRESIDENT)ANDINDIVIDUALRESIDENTALIEN
Itemsofincomeincludedinthegrossincome
Aschedularrateoffivepercent(5%)toP125,000+32%ofexcessoverP500,000.00by01January2000isimposedonitemsof
incomeofanindividualcitizenandindividualresidentalienwhichareproperlyincludibleinthegrossincome.
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Ratesoftaxoncertainpassiveincome
1.Interestfromanycurrencybankdepositandyieldoranyothermonetarybenefitfromdepositsubstitutesandfromtrustfundsand
similararrangements20%
2.Royalties,exceptonbooks,aswellasotherliteraryworksandmusicalcompositions20%
3.Royaltiesonbooks,literaryworksandmusicalcompositions10%
4.PrizesoverP10,000.0020%
Note:PrizeslessthanP10,000.00areincludedintheincometaxoftheindividualsubjecttotheschedularrateof5%uptoP125,000+32%
ofexcessoverP500,000.00)
5.Otherwinnings,exceptPCSOandlotto,derivedfromsourceswithinthePhilippines20%
6.Interestincomederivedbyaresidentindividual(Note:nonresidentcitizennotincluded)fromadepositorybankundertheexpanded
foreigncurrencydepositsystem7.5%
7.InterestincomefromlongtermdepositorinvestmentevidencedbycertificatesprescribedbyBSP
a.Exemptifinvestmentisheldformorethanfiveyears
b.Ifinvestmentispreterminated,interestincomeonsuchinvestmentshallbesubjecttothefollowingrates:
20%ifpreterminatedinlessthan3years
12%ifpreterminatedafter3yearstolessthan4years
5%ifpreterminatedafter4yearstolessthan5years
8.Cashand/orpropertydividends
Tenpercent(10%)finaltaxby01January2000onthefollowing:
a.Cashandorpropertydividendactuallyorconstructivelyreceivedfromadomesticcorporationorfromajointstockcompany,
insuranceormutualfundcompaniesandregionaloperatingheadquartersofmultinationalcompanies
b.Shareofanindividualinthedistributablenetincomeaftertaxofapartnershipexceptageneralprofessionalpartnershipof
whichheisapartner
c.Shareofanindividualinthenetincomeaftertaxofanassociation,jointaccount,orajointventureorconsortiumtaxableasa
corporationofwhichheisamemberoracoventurer
Capitalgainsfromthesaleofsharesofstocknottradedinthestockexchange
1.NotoverP100,0005%
2.OverP100,00010%
Capitalgainsfromthesaleofrealproperty
Generalrule:Afinaltaxofsixpercent(6%)isimposedonthegrosssellingpriceorcurrentfairmarketvalue,whicheverishigher,
foreverysaleorexchangeofrealproperty.
Optional:Ifthesaleismadetothegovernmentoranyofitspoliticalsubdivisionsoragenciesortogovernmentownedorcontrolled
corporations,thetaxpayerhastheoptiontochoosefromthefinaltaxofsixpercent(6%)ofgrosssellingpriceorfairmarketvalue,
whicheverishigher,ortheschedulartaxrateof5%uptoP125,000+32%ofexcessoverP500,000.
Exception:Thesaleordispositionoftheprincipalresidenceofnaturalpersonsisexemptfromcapitalgainstaxifcertainconditions
aremet.
Conditionsforexemptionofgainfromsaleorexchangeofprincipalresidence:
1.Proceedsarefullyutilizedinacquiringorconstructinganewprincipalresidencewithin18monthsfromthedateofsaleor
disposition
2.Historicalcostoradjustedbasisoftherealpropertysoldordisposedshallbecarriedovertothenewprincipalresidencebuilt
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oracquired
3.NoticetotheCommissionerofInternalRevenueshallbegivenwithinthirty(30)daysfromthedateofsaleordispositionand
4.Thisexemptioncanonlybeavailedofonceeverytenyears.
Iftheproceedsofthesalewerenotfullyutilized,theportionofthegainpresumedtohavebeenrealizedfromthesaleor
dispositionshallbesubjecttocapitalgainstax.
GSPorFMV,whicheverishigherxUnutilizedproceeds/GSP=TaxablePortion
TAXONNONRESIDENTALIENINDIVIDUAL
RemunerationreceivedbyanonresidentalienaspresidentofadomesticcompanytaxableinthePhilippines(Ms.Juliane
BaierNickel,asrepresentedbyMarinaQ.Guzmanv.CIR,CTACaseNo.5514dated4/29/99)
Aconsultant,presidentofadomesticcompanyorpersoninvolvedwithproductdevelopmentissubjecttoPhilippineincometaxation.
Anyremunerationreceivedwouldstemfromheremploymentascompanypresidentandthus,negatesherallegationthatsheisjusta
salesagentwhoreceivescommissions.Whilepetitionertriedtoshowthatshestayedinthecountryforlessthan180days,her
remunerationintheformofcommissionsisstilltaxableinthePhilippinessinceitisbornebyapermanentestablishmentinthe
Philippines.
Nonresidentalienengagedintradeorbusiness
Anonresidentalienengagedintradeorbusinessshallbesubjecttothesameincometaxratesasacitizenandaresidentalien.
Exception:Cashand/orpropertydividendsreceivedbyanonresidentalienindividualshallbesubjecttoafinaltaxof20%for
citizensandresidentaliens,therateis10%beginningintheyear2000.
Nonresidentaliennotengagedintradeorbusiness
Anonresidentalienindividualnotengagedintradeorbusinessshallpayataxequivalentto25%onallitemsofincome,exceptfor
gainonsaleofsharesofstockinanydomesticcorporationandrealpropertywhichshallbesubjecttothesamerateappliedtoother
individualtaxpayers.
Gainonsaleofsharesofstock:
1.NotoverP100,0005%
2.Over100,00010%
Capitalgainstaxonsaleordispositionofproperty6%ofGSPorFMV,whicheverishigher.
OTHERINDIVIDUALTAXPAYERS
1.Alienindividualemployedbyregionalorareaheadquartersandregionaloperatingheadquartersofmultinationalcompanies
2.Alienindividualemployedbyoffshorebankingunits
3.Alienindividualemployedbypetroleumservicecontractorandsubcontractor
Note:Thesalaries,wages,annuities,compensation,remunerationandotheremoluments,suchashonorariaandallowancesreceivedby
theseindividualsandtheirFilipinocounterpartsoccupyingthesamepositionasthesealienindividualsshallbesubjectto15%tax.
Allotherincomederivedbytheseindividualsshallbesubjecttothesamerateasthatofotherindividualtaxpayers.
Regionalorareaheadquarters
AregionalorareaheadquarterisabranchestablishedinthePhilippinesbymultinationalcompaniesandwhichheadquartersdonot
earnorderiveincomefromthePhilippinesandwhichactassupervisory,communicationsandcoordinatingcenterfortheiraffiliates,
subsidiaries,orbranchesintheAsiaPacificregionandotherforeignmarkets.
Regionaloperatingheadquarters
AregionaloperatingheadquartershallmeanabranchestablishedinthePhilippinesbymultinationalcompanieswhichareengagedin
certainspecifiedservices,i.e.generaladministrationandplanning,businessplanningandcoordination,sourcingandprocurementof
rawmaterialsandcomponents,amongothers.
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TaxationofOBUemployees(BIRRulingNo.14798datedOctober16,1998)
The15%preferentialtaxrateshallapplyonlyincaseswhereanalienconcurrentlyholdsapositionsimilartothatoftheFilipino
employee. Thus, this preferential tax treatment shall not apply where the counterpart expatriate is recalled to the head office or
reassignedelsewhere,whethertemporarilyorotherwise,andonlyFilipinosaretheonessoemployedbyanOBUforthetimebeingor
wherethepostvacatedbytheexpatriateissubsequentlyassumedbyaFilipinotoreplacetheexpatriate,asaresultofwhichalltop
managementpostsarenowbeingoccupiedbyFilipinos.
FilipinostaffoftheADBsubjectto15%preferentialtaxrate(NO.2999dated3/11/99)
FilipinoemployeesoccupyingmanagerialortechnicalpositionsasthoseofaliensemployedbytheAsianDevelopmentBank(ADB),
whichisnotonlyaregionalorareaheadquartersinthePhilippinesbuttheheadquartersitself,aresubjecttothepreferentialtaxrate
of15%ontheirgrosscompensationincomepursuanttoSection25(C)oftheNIRCof1997.
Generalprofessionalpartnerships
Generalprofessionalpartnershipsarepartnershipsformedbypersonsforthesolepurposeofexercisingtheircommonprofession,no
partoftheincomeofwhichisderivedfromengaginginanytradeorbusiness.
Personsengaginginbusinessaspartnersinageneralprofessionalpartnershipshallbeliableforincometaxonlyintheirseparateand
individualcapacities.
Eachpartnershallreportasgrossincomehisdistributiveshare,actuallyorconstructivelyreceived,inthenetincomeofthe
partnership.
Thenetincomeofthegeneralprofessionalpartnershipshallbecomputedinthesamemannerasacorporationforpurposesof
computingthedistributivesharesofthepartners.
TAXONCORPORATIONS
RATESOFINCOMETAXONDOMESTICCORPORATIONS
InGeneral
Rateoftax,ingeneral
199735%
199834%
199933%
2000onwards32%
Taxisimposedontaxableornetincome.
Optional15%taxongrossincome
ThePresident,upontherecommendationoftheSecretaryofFinance,may,effective01January2000,allowcorporationstheoption
tobetaxedatfifteenpercent(15%)ofgrossincome,providedcertainconditionsaresatisfied.
Thisisavailabletofirmswhoseratioofcostofsalestogrosssalesorreceiptsfromallsourcesdoesnotexceed55%.
Onceelectedbythecorporation,optionshallbeirrevocableforthethreeconsecutiveyears.
Conditionstobesatisfiedtoavailofthe15%optionalcorporatetax
1.Ataxeffortratiooftwentypercent(20%)ofGrossNationalProduct(GNP)
2.Aratiooffortypercent(40%)ofincometaxcollectiontototaltaxrevenues
3.AVATtaxeffortoffourpercent(4%)ofGNP
4.A0.9percent(0.9%)ratiooftheConsolidatedPublicSectorFinancialPositiontoGNP
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Somedefinitionsforthispurpose
Grossincomederivedfrombusinessshallbeequivalenttogrosssaleslesssalesreturns,discountsandallowancesandcostof
goodssold.
Fortaxpayersengagedinsaleofservices,grossincomemeansgrossreceiptslesssalesreturns,allowancesanddiscounts.
Costofgoodssoldshallincludeallbusinessexpensesdirectlyincurredtoproducethemerchandisetobringthemtotheirpresent
locationanduse.
TradingConcern
ManufacturingConcern
Costofgoodssoldshallincludetheinvoicecost
Costofgoodsmanufacturedandsoldshall
ofthegoodssold,plusimportduties,freightin
includeallcostsofproductionoffinishedgoods,
transportingthegoodstotheplacewherethe
suchasrawmaterialsused,directlaborand
goodsareactuallysold,includinginsurancewhile manufacturingoverhead,freightcost,insurance
thegoodsareintransit.
andothercostsincurredtobringtheraw
materialstothefactoryorwarehouse.
Taxrateforproprietaryeducationalinstitutionsandhospitals
10%ontaxableincome,exceptoncertainpassiveincomes
Theordinaryrateimposedoncorporationsshallapplytoproprietaryeducationalinstitutionsandhospitalswhentheirgrossincome
fromunrelatedtrade,businessorotheractivityexceeds50%oftheirtotalgrossincomederivedfromallsources.
Unrelatedtrade,businessorotheractivity
Thismeansanytrade,businessorotheractivity,theconductofwhichisnotsubstantiallyrelatedtotheexerciseorperformanceby
sucheducationalinstitutionorhospitalofitsprimarypurposeorfunction.
Proprietaryeducationalinstitution
Aproprietaryeducationalinstitutionisanyprivateschoolmaintainedandadministeredbyprivateindividualsorgroupswithanissued
permittooperatefromtheDECS,orCHED,orTESDA,asthecasemaybe.
GOCCs,agenciesorinstrumentalities
Allcorporations,agencies,orinstrumentalitiesownedandcontrolledbythegovernmentshallpaysuchrateoftaxupontheirtaxable
incomeasareimposeduponcorporationsorassociationsengagedinasimilarbusiness,industry,oractivity.
Exceptions:GOCCsandinstrumentalitiesnotsubjecttotaxarethe:
1.GovernmentServiceInsuranceSystem(GSIS)
2.SocialSecuritySystem(SSS)
3.PhilippineHealthInsuranceCorporation(PHIC)
4.PhilippineCharitySweepstakesOffice(PCSO)
5.PhilippineAmusementandGamingCorporation(PAGCOR)
Ratesoncertainpassiveincomesubjecttofinaltax
1.Interestfromdepositsandyieldoranyothermonetarybenefitfromdepositsubstitutesandfromtrustfundsandsimilar
arrangements20%
2.Royalties20%
3.Interestincomederivedfromadepositorybankundertheexpandedforeigncurrencydepositsystem7%
4.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange
a.NotoverP100,0005%
b.OverP100,00010%
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5.Taxonincomederivedbyadepositorybankundertheexpandedforeigncurrencydepositsystemfromforeigncurrencytransactions
10%
Note:Thisisdifferentfromtheinterestincome.Thispertainstotheincomederivedbyadepositorybankitself.
Note:Anyincomeofnonresidents,whetherindividualsorcorporations,fromtransactionswithdepositorybanksundertheexpanded
systemisexemptfromincometax.
6.Intercorporatedividendsexempt
7.Capitalgainsrealizedfromthesale,exchangeordispositionoflandsand/orbuildings6%
Saleofcorporaterealpropertythathasceasedtobeusedintradeorbusinesssubjectto6%capitalgainstax(No.2199
dated2/25/99)
Afinaltaxof6%isimposedonthegainspresumedtohavebeenrealizedinthesale,exchangeordispositionoflandsand/or
buildingswhicharenotactivelyusedinthebusinessofacorporationandwhicharetreatedascapitalassetsbasedonthegross
sellingpriceorfairmarketvalue,whicheverishigher.However,sinceintheinstantcasethetaxpayerclaimedadepreciation
deductionwhenthebuildingandotherimprovementswerenotusedintradeorbusiness,thetaxpayermustfileandamendits
incometaxreturnandpaythedeficiencyincometax,ifany,plussurchargeandinterest,basedonitsadjustedtaxableincome
resultingfromthedisallowanceofthedepreciationdeduction.
MINIMUMCORPORATEINCOMETAX
Minimumcorporateincometax
Aminimumcorporateincometaxoftwopercent(2%)ofthegrossincomeasoftheendofthetaxableyearisherebyimposedona
corporationsubjecttoincometax,beginningonthefourthtaxableyearimmediatelyfollowingtheyearinwhichsuchcorporation
commenceditsbusinessoperations,whentheminimumincometaxisgreaterthantheregularcorporateincometaxforthetaxable
year.
Carryforwardofexcessminimumtax
Anyexcessoftheminimumcorporateincometaxoverthenormalincometaxshallbecarriedforwardandcreditedagainstthenormal
incometaxpayableforthenextthreeyearsimmediatelysucceedingthetaxableyearinwhichtheminimumcorporateincometaxwas
paid.
Relieffromtheminimumcorporateincometaxundercertainconditions
TheSecretaryofFinancemaysuspendtheimpositionoftheminimumcorporateincometaxonanycorporationwhichsufferslosses
onaccountofprolongedlabordispute,orbecauseofforcemajeure,orbecauseoflegitimatebusinessreverses.
Meaningofgrossincomeandcostofgoodssoldunderminimumcorporateincometaxcomparedwithmeaningofgross
incomeandcostofgoodssoldunderSection27(A)
Section27(A)
Section27(E)MCIT
GrossIncome
equivalenttogrosssaleslesssalesreturns,discountsand
allowancesandcostofgoodssold.
Costofgoodssold
shallincludeallbusinessexpensesdirectlyincurredtoproducethe
merchandisetobringthemtotheirpresentlocationanduse.
Costofgoodssoldforatrading
shallincludetheinvoicecostofthegoodssold,plusimportduties,
ormerchandisingconcern
freightintransportingthegoodstotheplacewherethegoodsare
actuallysold,includinginsurancewhilethegoodsareintransit.
Costofgoodsmanufacturedand shallincludeallcostsofproductionoffinishedgoods,suchasraw
soldforamanufacturingconcern materialsused,directlaborandmanufacturingoverhead,freight
cost,insuranceandothercostsincurredtobringtheraw
materialstothefactoryorwarehouse.
GrossIncomefortaxpayers
grossreceiptslesssales
grossreceiptslesssalesreturns,
engagedinsaleofservice
returns,allowancesand
allowancesanddiscountsand
discounts.
costofservices
Costofservices
Alldirectcostsandexpenses
necessarilyincurredtoprovide
theservicesrequiredbythe
customersandclientsincluding
(A)salariesandemployee
benefitsofpersonnel,
consultantsandspecialists
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directlyrenderingtheserviceand
(B)costoffacilitiesdirectly
utilizedinprovidingtheservice
suchasdepreciationorrentalof
equipmentusedandcostof
supplies.
Forbanks,itincludesinterest
expense.
Note:DefinitionofgrossincomefortaxpayersengagedinthesaleofserviceincludescostofservicesinMCITbutnotinthecaseofthe
optional15%taxongrossincome[Section27(A),NIRC].
TAXONRESIDENTFOREIGNCORPORATIONS
Residentforeigncorporation
Aresidentforeigncorporationisoneorganized,authorized,orexistingunderthelawsofanyforeigncountry,engagedintradeor
businesswithinthePhilippines.
Incometaxrate,ingeneral
Ratesoftax,ingeneral
199735%
199834%
199933%
2001onwards32%
Taxisimposedontaxableornetincome.
Optional:15%ofGrossIncome
Theoptiontobetaxedatfifteenpercent(15%)ongrossincomeshallalsobeavailabletoresidentforeigncorporations,subjectto
thesameconditions.
Availabletofirmswhoseratioofcostofsalestogrosssalesorreceiptsfromallsourcesdoesnotexceed55%.
Onceelectedbythecorporation,optionshallbeirrevocableforthethreeconsecutiveyears.
Minimumcorporateincometaxonresidentforeigncorporations
AllconditionsoftheMCITondomesticcorporationsalsoapplytoresidentforeigncorporations.
Taxratesonspecificresidentforeigncorporations
1.InternationalCarrier2%ofGrossPhilippineBillings
2.OffshoreBankingUnits10%ofincomederivedfromforeigncurrencytransactionswithlocalcommercialbanks,includingbranches
offoreignbanksthatmaybeauthorizedbytheBSPtotransactbusinesswithoffshorebankingunits,includinganyinterestincome
derivedfromforeigncurrencyloansgrantedtoresidents
Anyincomeofnonresidents,whetherindividualsorcorporations,fromtransactionswithsaidoffshorebankingunitsshallbe
exemptfromincometax.
3.TaxonBranchProfitsRemittances15%oftotalprofitsappliedorearmarkedforremittancewithoutdeductionforthetax
componentthereof
4.Regionalorareaheadquartersshallnotbesubjecttoincometax
5.Regionaloperatingheadquartersshallbesubjecttoataxof10%oftheirtaxableincome
GrossPhilippineBillingsforinternationalaircarrier
GrossPhilippineBillingsreferstotheamountofgrossrevenuederivedfromcarriageofpersons,excessbaggage,cargoandmail
originatingfromthePhilippinesinacontinuousanduninterruptedflight,irrespectiveoftheplaceofsaleorissueandtheplaceof
paymentoftheticketorpassagedocument.
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Ticketsrevalidated,exchangedand/orendorsedtoanotherinternationalairlineformpartoftheGrossPhilippineBillingsifthe
passengerboardsaplaneinaportorpointinthePhilippines.
ForaflightwhichoriginatesfromthePhilippines,buttransshipmentofpassengertakesplaceatanyportoutsidethePhilippineson
anotherairline,onlythealiquotportionofthecostoftheticketcorrespondingtothelegflownfromthePhilippinestothepointof
transshipmentshallformpartoftheGrossPhilippineBilling.
GrossPhilippineBillingsforinternationalshipping
GrossPhilippineBillingsmeansgrossrevenuewhetherforpassenger,cargoormailoriginatingfromthePhilippinesuptofinal
destination,regardlessoftheplaceofsaleorpaymentsofthepassageorfreightdocuments.
Taxonbranchprofitsremittances
Anyprofitremittedbyabranchtoitsheadofficeshallbesubjecttoataxoffifteenpercent(15%)whichshallbebasedonthetotal
profitsappliedorearmarkedforremittancewithoutanydeductionforthetaxcomponentthereof(exceptthoseactivitieswhichare
registeredwiththePhilippineEconomicZoneAuthority).
Thefollowingshallnotbetreatedasbranchprofitsunlessthesameareeffectivelyconnectedwiththeconductofitstradeor
businessinthePhilippines:
1.interests
2.dividends
3.rents
4.royalties
5.remunerationfortechnicalservices
6.salaries
7.wages
8.premiums
9.annuities
10.emoluments
11.otherfixedordeterminableannual,periodicorcasualgains,profits,incomeandcapitalgains
InMarubeniv.Commissioner,MarubeniJapaninvesteddirectlyinAG&PManila.SinceMarubenihasabranchinthePhilippines,
AG&Pwithheld15%asbranchprofitsremittancetaxfromthecashdividends.SCheldthatthedividendsremittedwerenotsubject
tothe15%branchprofitremittancetaxastheywerenotincomeearnedbyaPhilippinebranchofMarubeniJapan.
Inthe15%remittancetax,thelawspecifiesitsowntaxbasetobeontheprofitremittedabroad.Thereisabsolutelynothing
equivocaloruncertainaboutthelanguageoftheprovision.Thetaxisimposedontheamountsentabroad,andthelawcallsfor
nothingfurther.[BankofAmericaNTv.CourtofAppeals,234SCRA302]
Marubeniv.Commissioner,177SCRA500
MarubeniCorporationisaresidentforeigncorporation.
A resident foreign corporation is one that is incorporated under the laws of a foreign country and is engaged in trade or
business in the Philippines. Marubeni Corporation is a foreign corporation duly organized under the laws of Japan and it is duly
licensedtoengageinbusinessunderPhilippinelaws.MarubeniCorporationmaintainsabranchofficetocarryoutitsbusinessinthe
country.
TheequityinvestmentsofMCinAG&Pareinvestmentsofthemothercorporationandnotofitsbranchoffice.
The investment was in the name of the Marubeni Corporation and therefore, the stockholder in AG&P is the mother
corporation, Marubeni Corporation, and not its branch office in the Philippines. Marubeni Corporation, therefore, and not its branch
office,isliablefortaxesondividendsearnedonitsinvestments.
Branchprofitremittancedoesnotincludedividendsoninvestmentsreceivedfromotherdomesticcorporations.
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Onlyprofitsremittedabroadbyabranchofficetoitsheadofficewhichareeffectivelyconnectedwithitstradeorbusinessin
thePhilippinesaresubjecttothe15%profitremittancetax.
To be effectively connected, it is not necessary that the income be derived from the actual operation of taxpayer
corporationstradeorbusinessitissufficientthattheincomearisesfromthebusinessactivityinwhichthecorporationisengaged.
ThedividendsreceivedbyMarubenifromAG&ParenotincomearisingfromthebusinessactivityinwhichMarubeniisinvolved.
Accordingly,saiddividendsifremittedabroad,arenotconsideredbranchprofitsforpurposesofthe15%profitremittancetax.
Note:Testofwhetherremittanceofprofitbyabranchtoitsheadofficecomesunderthepurviewoftheprofitremittancetax,the
branch itself should have made the remittance. In this case, it was not Marubenis branch in the Philippines, but the investee
corporation,AG&P,whichdirectlyremittedthedividendstoMarubeniofJapan.
Also,onlythebranchofficeistheauthorizedwithholdingagentfortheprofitremittancetax.AG&P,beinganinvesteeof
Marubeni,erredinwithholdingtheprofitremittancetaxfromthedividendsitremittedtoMarubeni.
InterestreceivedbyaforeigncorporationfromPhilippinesourcesnoteffectivelyconnectedwiththeconductofitsbusiness
notconsideredbranchprofits.(HongkongShanghaiHotels,Ltd.v.CIR,CTACaseNo.5243dated4/29/99)
InterestreceivedbyaforeigncorporationduringeachtaxableyearfromallsourceswithinthePhilippinesisnotconsideredbranch
profitsexceptwhenthesameiseffectivelyconnectedwiththeconductofitsbusiness.Intheinstantcase,theinterestincomefrom
bankplacementsisnoteffectivelyconnectedwiththebusinessofhotelmanagement,thus,itisexcludedformprofitssubjecttothe
15%branchprofitremittancetax.
Regionalorareaheadquartersofmultinationalcompanies
Regionalorareaheadquartersshallnotbesubjecttoincometax.
Regionaloperatingheadquartersofmultinationalcompanies
Regionaloperatingheadquartersshallpayataxoftenpercent(10%)ontheirtaxableincome.
Taxoncertainincomesreceivedbyaresidentforeigncorporation
1.Interestfromdepositsandyieldoranyothermonetarybenefitfromdepositsubstitutes,trustfundsandsimilararrangementsand
royalties
Interestincomefromanycurrencybankdepositandyieldoranyothermonetarybenefitfromdepositsubstitutesandfrom
trustfundsandsimilararrangementsandroyaltiesderivedfromsourceswithinthePhilippinesshallbesubjecttoafinalincometaxat
therateoftwentypercent(20%)ofsuchinterest.
However,interestincomederivedbyaresidentforeigncorporationfromadepositarybankundertheexpandedforeign
currencydepositsystemshallbesubjecttoafinalincometaxattherateofsevenandonehalfpercent(71/2%)ofsuchinterest
income.
2.Incomederivedundertheexpandedforeigncurrencydepositsystem
Thisreferstoincomederivedbyadepositarybankundertheexpandedforeigncurrencydepositsystemfromforeigncurrency
transactionswithlocalcommercialbanksincludingbranchesofforeignbanksthatmaybeauthorizedbytheBangkoSentralng
Pilipinastotransactbusinesswithforeigncurrencydepositsystemunitsandotherdepositarybanksundertheexpandedforeign
currencydepositsystem,includinginterestincomefromforeigncurrencyloansgrantedbysuchdepositarybanksundersaidexpanded
foreigncurrencydepositsystemtoresidents.
Afinalincometaxattherateoftenpercent(10%)isimposedonsuchincome.
3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange
a.NotoverP100,0005%
b.OverP100,00010%
4.Intercorporatedividends
DividendsreceivedbyaresidentforeigncorporationfromadomesticcorporationliabletotaxundertheNIRCshallnotbe
subjecttoincometax.
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TAXONNONRESIDENTFOREIGNCORPORATION
Taxationofanonresidentforeigncorporation,ingeneral
Ratesoftax,ingeneral
199735%
199834%
199933%
200032%
However,thetaxisimposedongrossincome,notontaxableornetincome.
Suchgrossincomemayincludeinterests,dividends,rents,royalties,salaries,premiums(exceptreinsurancepremiums),annuities,
emolumentsorotherfixedordeterminableannual,periodicorcasualgains,profitsandincome,andcapitalgains,exceptcapitalgains
fromthesaleofsharesofstocknottradedinthestockexchange.
Taxationofcertainnonresidentforeigncorporations
1.Nonresidentcinematographicfilmowner,lessorordistributor25%ofgrossincome
2.NonresidentownerorlessorofvesselscharteredbyPhilippinenationals4%ofgrossrentals,leaseorcharterfees
3.Nonresidentownerorlessorofaircraft,machineriesandotherequipment7%ofgrossrentalsorfees
Nonresidentcinematographicfilmowner,lessorordistributor
Acinematographicfilmowner,lessor,ordistributorshallpayataxoftwentyfivepercent(25%)ofitsgrossincomefromallsources
withinthePhilippines.
NonresidentownerorlessorofvesselscharteredbyPhilippinenationals
Anonresidentownerorlessorofvesselsshallbesubjecttoataxoffourandonehalfpercent(4%)ofgrossrentals,leaseor
charterfeesfromleasesorcharterstoFilipinocitizensorcorporations,asapprovedbytheMaritimeIndustryAuthority.
Nonresidentownerorlessorofaircraft,machineriesandotherequipment
Rentals,chartersandotherfeesderivedbyanonresidentlessorofaircraft,machineriesandotherequipmentshallbesubjecttoa
taxofsevenandonehalfpercent(7%)ofgrossrentalsorfees.
Taxoncertainincomesreceivedbyanonresidentforeigncorporation
1.Interestonforeignloans
Afinalwithholdingtaxattherateoftwentypercent(20%)isherebyimposedontheamountofinterestonforeignloans
contractedonorafter01August1986.
2.Intercorporatedividends
Afinalwithholdingtaxattherateoffifteenpercent(15%)isherebyimposedontheamountofcashand/orproperty
dividendsreceivedbyanonresidentforeigncorporationfromadomesticcorporation,subjecttotheconditionthatthecountryin
whichthenonresidentforeigncorporationisdomiciledshallallowacreditagainstthetaxduefromthenonresidentforeign
corporationtaxesdeemedtohavebeenpaidinthePhilippinesequivalenttothirtytwopercent(32%)intheyear2000.
Thisisthesocalledtaxsparingrule.
3.Capitalgainsfromsaleofsharesofstocknottradedinthestockexchange
a.NotoverP100,0005%
b.OverP100,00010%
Taxsparingrule
Involvesintercorporatedividendsreceivedbyanonresidentforeigncorporationfromadomesticcorporation
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Only15%finalwithholdingtaxoncashand/orpropertydividendsisimposed
Providedthecountryinwhichthenonresidentforeigncorporationisdomiciledshallallowacreditagainstthetaxduefromthenon
residentforeigncorporationtaxesdeemedtohavebeenpaidinthePhilippines,whichis32%by2000[Sec.28,(B)(5)(b)]
TAXONIMPROPERLYACCUMULATEDEARNINGS
Impositionofthetax
Inadditiontotheotherincometaxes,thereisherebyimposedforeachtaxableyearontheimproperlyaccumulatedtaxableincome
ofeachcorporationanimproperlyaccumulatedearningstaxequaltotenpercent(10%)oftheimproperlyaccumulatedtaxable
income.[Section29,NIRC]
Corporationssubjecttoimproperlyaccumulatedearningstax
Theimproperlyaccumulatedearningstaxshallapplytoeverycorporationformedoravailedforthepurposeofavoidingtheincome
taxwithrespecttoshareholdersortheshareholdersofanyothercorporation,bypermittingearningsandprofitstoaccumulate
insteadofbeingdividedordistributed.
Exceptionstoimproperlyaccumulatedearningstax
Theimproperlyaccumulatedearningstaxshallnotapplyto:
1.Publiclyheldcorporations
2.Banksandothernonbankfinancialintermediaries
3.Insurancecompanies
Evidenceofpurposetoavoidincometax
PrimaFacieEvidence:Thefactthatanycorporationisamereholdingcompanyorinvestmentcompanyshallbeprimafacie
evidenceofapurposetoavoidthetaxuponitsshareholdersormembers.
EvidenceDeterminativeofPurpose:Thefactthattheearningsorprofitsofacorporationarepermittedtoaccumulatebeyondthe
reasonableneedsofthebusinessshallbedeterminativeofthepurposetoavoidthetaxuponitsshareholdersormembersunlessthe
corporation,byclearpreponderanceofevidence,shallprovetothecontrary.
Thetermreasonableneedsofthebusinessincludesthereasonablyanticipatedneedsofthebusiness.
Computationofimproperlyaccumulatedtaxableincome
Taxableincomeadjustedby:
1.Incomeexemptfromtax
2.Incomeexcludedfromgrossincome
3.Incomesubjecttofinaltaxand
4.Amountofnetoperatinglosscarryoverdeducted
Andreducedbythesumof:
1.Dividendsactuallyorconstructivelypaidand
2.Incometaxpaidforthetaxableyear.
Coverage
Forcorporationsusingthecalendarbasis,theaccumulatedearningstaxshallnotapplyonimproperlyaccumulatedincomeasof31
December1997.
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Forcorporationsadoptingthefiscalyearaccountingperiod,theimproperlyaccumulatedincomenotsubjecttothistaxshallbe
reckonedasoftheendofthemonthcomprisingthe12monthperiodoffiscalyear19971998.
EXEMPTIONOFCERTAINORGANIZATIONS
Exemptionfromtaxoncorporations
Thefollowingorganizationsshallnotbetaxedinrespecttoincomereceivedbythemassuch:
1.Labor,agriculturalorhorticulturalorganizationnotorganizedprincipallyforprofit
2.Mutualsavingsbanknothavingacapitalstockrepresentedbyshares,andcooperativebankwithoutcapitalstockorganized
andoperatedformutualpurposesandwithoutprofit
3.Abeneficiarysociety,orderorassociation,operatingfortheexclusivebenefitofthememberssuchasafraternalorganization
operatingunderthelodgesystem,oramutualaidassociationoranonstockcorporationorganizedbyemployeesprovidingfor
thepaymentoflife,sickness,accident,orotherbenefitsexclusivelytothemembersofsuchsociety,order,orassociation,or
nonstockcorporationortheirdependents
4.Cemeterycompanyownedandoperatedexclusivelyforthebenefitofitsmembers
5.Nonstockcorporationorassociationorganizedandoperatedexclusivelyforreligious,charitable,scientific,athletic,orcultural
purposes,orfortherehabilitationofveterans,nopartofitsnetincomeorassetshallbelongtoorinuretothebenefitofany
member,organizers,officeroranyspecificperson
6.Businessleague,chamberofcommerce,orboardoftradenotorganizedforprofitandnopartofthenetincomeofwhich
inurestothebenefitofanyprivatestockholderorindividual
7.Civicleagueororganizationnotorganizedforprofitbutoperatedexclusivelyforthepromotionofsocialwelfare
8.Anonstock,nonprofiteducationalinstitution
9.Governmenteducationalinstitution
10.Farmersorothermutualtyphoonorfireinsurancecompany,mutualditchorirrigationcompany,mutualorcooperative
telephonecompany,orlikeorganizationofapurelylocalcharacter,theincomeofwhichconsistssolelyofassessments,dues,
andfeescollectedfrommembersforthesolepurposeofmeetingsitsexpensesand
11.Farmers,fruitgrowers,orlikeassociationorganizedandoperatedasasalesagentforthepurposeofmarketingtheproducts
ofitsmembersandturningbacktothemtheproceedsofsales,lessthenecessarysellingexpensesonthebasisofthe
quantityofproductsfinishedbythem.[Section30,NIRC]
Incomebyexemptedcorporationswhicharenotexempted
Notwithstandingtheprovisionsintheprecedingparagraphs,theincomeofwhateverkindandcharacteroftheforegoing
organizationsfromanyoftheirproperties,realorpersonal,orfromanyoftheiractivitiesconductedforprofitregardlessofthe
dispositionmadeofsuchincome,shallbesubjecttotaximposedunderthisCode.[2ndpargraph,Section30,NIRC]
Thus,thefollowingincomeoftheexemptedorganizationsshallnotbeexempted:
1.Incomeofwhateverkindandcharacterfromanyoftheirproperties,realorpersonal
2.Incomefromanyoftheiractivitiesconductedforprofit
SeeCommissionerv.CAre.YMCAcaseinGeneralPrinciplesofTaxation
Commissionerv.CA,CTA&AteneodeManilaUniversity,271SCRA605
In conducting researches and studies of social organizations and cultural values thru its IPC, is Ateneo performing the work of an
independentcontractorandthustaxableforthecontractorstax?
NO.Anacademicinstitutionconductingresearchespursuanttoitscommitmentstoeducationandultimatelytopublicservicecannot
beconsideredasanindependentcontractorwhenitacceptssponsorshipsforitsresearchactivitiesfrominternationalorganizations,private
foundationsandgovernmentagencies.
The research activity of the IPC is done in pursuance of maintaining Ateneo's university status and not in the course of an
independentbusinessofsellingsuchresearchwithprofitinmind.
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Itiserrortoapplytheprinciplesoftaxexemptionwithoutfirstapplyingthewellsettleddoctrineofstrictinterpretationinthe
impositionoftaxesitisobviouslybothillogicalandimpracticaltodeterminewhoareexemptedwithoutfirstdeterminingwhoarecovered
byaprovisionoftheNIRC.
Hornbookdoctrineintheinterpretationoftaxlaws:
Statutewillnotbeconstruedasimposingataxunlessitdoessoclearly,expressly,andunambiguously.Ataxcannotbeimposed
withoutclearandexpresswordsforthatpurpose.Accordingly,thegeneralruleofrequiringadherencetotheletterinconstruingstatutes
applieswithpeculiarstrictnesstotaxlawsandtheprovisionsofataxingactarenottobeextendedbyimplication.
GROSSINCOME
Grossincome
Grossincomemeansallincomederivedfromwhateversource,including(butnotlimitedto)thefollowingitems:
1.Compensationforservicesinwhateverformpaid,including,butnotlimitedto,fees,salaries,wages,commissions,andsimilar
items
2.Grossincomederivedfromtheconductoftradeorbusinessortheexerciseofaprofession
3.Gainsderivedfromdealingsinproperty
4.Interests
5.Rents
6.Royalties
7.Dividends
8.Annuities
9.Prizesandwinnings
10.Pensionsand
11.Partnersdistributivesharefromthenetincomeofthegeneralprofessionalpartnership.
COMPENSATIONFORSERVICES
Compensationforservices
Thismeansallremunerationforservicesperformedbyanemployeeforhisemployerunderanemployeremployeerelationship.
Compensationpaidinkind
Compensationmaybepaidinmoneyorinsomemediumotherthanmoney.
Livingquartersormeals
Ifapersonreceivesasalaryasaremunerationforservicesrenderedand,inadditionthereto,livingquartersormealsareprovided,
thevaluetosuchpersonofthequartersandmealssofurnishedshallbeaddedtotheremunerationpaidforthepurposeof
determiningtheamountofcompensationsubjecttowithholding.
However,iflivingquartersormealsarefurnishedtoanemployeefortheconvenienceoftheemployer,thevaluethereofneednotbe
includedaspartofcompensationincome.[Section2.78.1,RevenueRegulations298]
Facilitiesandprivilegesofarelativelysmallvalue
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Facilitiesarenotconsideredascompensationsubjecttowithholdingifsuchfacilitiesorprivilegesareofrelativelysmallvalueandare
offeredorfurnishedbytheemployermerelyasameansofpromotingthehealth,goodwill,contentment,orefficiencyofhis
employees.[Section2.78.1,RevenueRegulations298]
Tipsandgratuities
Tipsorgratuitiespaiddirectlytoanemployeebyacustomeroftheemployerwhicharenotaccountedforbytheemployeetothe
employerareconsideredastaxableincomebutnotsubjecttowithholding.
Fixedorvariabletransportation,representationandotherallowances
Ingeneral,fixedorvariabletransportation,representationandotherallowanceswhicharereceivedbyapublicofficeroremployeeor
officeroremployeeofaprivateentity,inadditiontotheregularcompensationfixedforhispositionoroffice,iscompensationsubject
towithholding.
Anyamountpaidspecifically,eitherasadvancementsorreimbursements,fortraveling,representationandotherbonafideordinary
andnecessaryexpensesincurredorreasonablyexpectedtobeincurredbytheemployeeintheperformanceofhisdutiesarenot
compensationsubjecttowithholding,ifthefollowingconditionsaresatisfied:
1.Itisforordinaryandnecessarytravelingandrepresentationorentertainmentexpensespaidorincurredbytheemployeein
thepursuitofthetrade,businessorprofessionand
2.Theemployeeisrequiredtoaccountorliquidatefortheforegoingexpensesinaccordancewiththespecificrequirementsof
substantiationforeachcategoryofexpenses.Theexcessofactualexpensesoveradvancesmadeshallconstitutetaxable
incomeifsuchamountisnotreturnedtotheemployer.
Vacationandsickleaveallowances
Amountsofvacationallowancesorleavecreditswhicharepaidtoanemployeeconstitutescompensation.Thus,thesalaryofan
employeeonvacationoronsickleave,whicharepaidnotwithstandinghisabsencefromworkconstitutescompensation.
However,themonetizedvalueofunutilizedleavecreditsoften(10)daysorlesswhichwerepaidtotheemployeeduringtheyear
arenotsubjecttoincometax.
IMPOSITIONOFFRINGEBENEFITTAX
Impositionoffringebenefittax
Afinaltaxof32%effective01January2000isimposedonthegrossedupmonetaryvalueoffringebenefitfurnishedorgrantedto
theemployee,exceptrankandfile,bytheemployer,whetheranindividualoracorporation.
Thefringebenefittaxispaidbytheemployer.
Grossedupmonetaryvalueisacquiredbydividingtheactualmonetaryvalueofthefringebenefitby68%effective01January2000.
Fringebenefit
Fringebenefitmeansanygood,serviceorotherbenefitfurnishedorgrantedincashorinkindbyanemployertoanindividual
employee,exceptrankandfileemployees,suchas,butnotlimitedto,thefollowing:
1.Housing
2.Expenseaccount
3.Vehicleofanykind
4.Householdpersonnel,suchasmaid,driverandothers
5.Interestonloanatlessthanmarketratetotheextentofthedifferencebetweenthemarketrateandactualrategranted
6.Membershipfees,duesandotherexpensesbornebytheemployerfortheemployeeinsocialandathleticclubsorothersimilar
organizations
7.Expensesforforeigntravel
8.Holidayandvacationexpenses
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9.Educationalassistancetotheemployeeorhisdependentsand
10.Lifeorhealthinsuranceandothernonlifeinsurancepremiumsorsimilaramountsinexcessofwhatthelawallows.
FringebenefitswhicharenotsubjecttoFBT
1.Fringebenefitswhichareauthorizedandexemptedfromtaxunderspeciallaws.
2.Contributionsoftheemployerforthebenefitoftheemployeetoretirement,insuranceandhospitalizationbenefitplans.
3.Benefitsgiventotherankandfileemployees,whethergrantedunderacollectivebargainingagreementornot.
4.Deminimisbenefits.
5.Fringebenefitisrequiredbythenatureof,ornecessarytothetrade,businessorprofessionoftheemployer.
6.Itisfortheconvenienceoradvantageoftheemployer.
Convenienceoftheemployerrule
Underthisrule,allowancesfurnishedtotheemployeefor,andasanecessaryincidentto,theperformanceofhisdutiesarenot
taxable.
Thus,thevalueofmealsandlivingquartersgiventoadriverwhoisavailableanyhourofthedaywhenneededbyhisdoctor
employerisnotconsideredincomeofthesaiddriver.
Deminimisbenefits
Thesearefacilitiesorprivilegesfurnishedorofferedbyanemployertohisemployeesthatareofrelativelysmallvalueandare
offeredorfurnishedbytheemployermerelyasameansofpromotingthehealth,goodwill,contentment,orefficiencyofhisemployee.
GROSSINCOMEFROMTHECONDUCTOFTRADEORBUSINESS
Performanceofthefunctionsofapublicoffice
Thetermtradeorbusinessincludestheperformanceofthefunctionsofapublicoffice.[Section22(S),NIRC]
INTERESTINCOME
Sourcesofinterestincome
1.interestonbankdeposit/depositsubstitutes/trustfundandsimilararrangement
2.interestfromlending/interestincomefrombonds
3.interestonuncollectedsalary
4.interestonforeignbonds/governmentbonds
5.interestontreasurybills
6.interestearnedfromdepositsmaintainedundertheforeigncurrencydepositsystem
7.interestincomeofpawnshopoperators
Interestincomeearnedbynonstock,nonprofiteducationalinstitutions
Interestincomeshallbeexemptonlywhenuseddirectlyandexclusivelyforeducationalpurposes.Tosubstantiatethisclaim,the
institutionmustsubmitanannualinformationreturnanddulyauditedfinancialstatement.Acertificationofactualutilizationandthe
Boardresolutionontheproposedprojecttobefundedoutofthemoneydepositedinbanksmustalsobesubmitted.[Departmentof
FinanceOrder14995]
RENTALS
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Operatinglease
Anoperatingleaseisacontractunderwhichtheassetisnotwhollyamortizedduringtheprimaryperiodofthelease,andwherethe
lessordoesnotrelysolelyontherentalsduringtheprimaryperiodforhisprofits,butlooksfortherecoveryofthebalanceofhis
costsandfortherestsofhisprofitsfromthesaleorreleaseofthereturnedassetsattheendoftheprimaryleaseperiod.
Financelease
Alsocalledfullpayoutleaseisacontractinvolvingpaymentoveranobligatoryperiod(alsocalledprimaryorbasicperiod)of
specifiedrentalamountsfortheuseofalessorsproperty,sufficientintotaltoamortizethecapitaloutlayofthelessorandtoprovide
forthelessorsborrowingcostsandprofits.
Obligatoryperiodisprimarynoncancelableperiodoftheleasewhichinnocaseshallbelessthan730days.
Lesseeexerciseschoiceovertheasset.
DIVIDENDINCOME
Dividends
Dividendsmeansanydistributionmadebyacorporationtoitsshareholdersoutofitsearningsonprofitsandpayabletoits
shareholders,whetherinmoneyorinotherproperty.
Kindsofdividendincome
1.Cashdividend
2.Stockdividend/stockrights
3.Propertydividend
4.Liquidatingdividend
Stockdividend
Astockdividendrepresentingthetransferofsurplustocapitalaccountshallnotbesubjecttotax.
Itshallbetaxableonlyifsubsequentlycancelledandredeemedbythecorporation.
Itisalsotaxableifitleadstoasubstantialalterationintheproportionoftaxownershipinacorporation.
Whenredemptionofstockdividendsbyacorporationisessentiallyequivalenttoadistributionoftaxabledividends(CIRv.
CA,et.al.,G.R.No.108576dated1/20/99)
Ifthesourceoftheredeemedsharesistheoriginalcapitalsubscriptionsuponestablishmentofthecorporationorfrominitialcapital
investmentinanexistingenterprise,itsredemptiontotheconcurrentvalueofacquisitionwouldnotbeincomebutamerereturnof
capital.Ontheotherhand,iftheredeemedsharesarefromstockdividenddeclarations,theproceedsoftheredemptionisadditional
wealth,foritisnotmerelyareturnofcapital,andthus,deemedastaxabledividends.
Dividendspaidinproperty
Dividendspaidinsecuritiesorotherproperty,inwhichtheearningsofacorporationhavebeeninvested,areincometotherecipients
totheamountofthefullmarketvalueofsuchpropertywhenreceivablebyindividualstockholders.
Adividendpaidinstockofanothercorporationisnotastockdividend,eventhoughthestockdistributedwasacquiredthroughthe
transferbythecorporationdeclaringthedividendsofpropertytothecorporationthestockofwhichisdistributedasadividend.
[Section251,RevenueRegulations2]
Liquidatingdividend
Whereacorporationdistributesallitsassetsincompleteliquidationordissolution,thegainrealizedorlosssustainedbythe
stockholder,whetherindividualorcorporation,isataxableincomeordeductibleloss,asthecasemaybe.
Disguiseddividends
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Thesearepaymentswhichareequivalenttodividenddistribution.
Inthecaseofexcessivepaymentsbycorporations,ifsuchpaymentscorrespondorbearacloserelationshiptostockholdings,and
arefoundtobeadistributionofearningsorprofits,theexcessivepaymentswillbetreatedasdividends.[Section71,Revenue
Regulation2]
EXCLUSION
Exclusion
Exclusionreferstoincomereceivedorearnedbutisnottaxableasincomebecauseitisexemptedbylaworbytreaty.Suchtaxfree
incomeisnottobeincludedintheincometaxreturnunlessinformationregardingitisspecificallycalledfor.
Exclusionsfromgrossincome
1.Proceedsfromlifeinsurance
2.Amountreceivedbyinsuredasreturnofpremium
3.Gifts,bequestsanddevises
4.Compensationforinjuriesorsickness
5.Incomeexemptundertreaty
6.Retirementbenefits,pensions,gratuities,etc.
7.Incomederivedbyforeigngovernment
8.IncomederivedbythePhilippineGovernmentoritspoliticalsubdivisions
9.Prizesandawardsmadeprimarilyinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement
10.Prizesandawardsinsportscompetitionssanctionedbythenationalsportsassociations
11.13thmonthpayandotherbenefitsnotexceedingP30,000.00
12.GSIS,SSS,Medicareandothercontributions
13.Gainsfromthesaleofbonds,debenturesorothercertificateofindebtedness
14.Gainsfromredemptionofsharesinmutualfund
Retirementbenefits,pensions,gratuities,etc.
Suchexclusionsinclude:
1.RetirementbenefitsunderRANo.7641orareasonableprivatebenefitplan
2.Amountreceivedbyanofficialoremployeeorbyhisheirsfromtheemployerduetoseparationfromtheservicebecauseof
death,sicknessorotherphysicaldisabilityorforanycausebeyondthecontroloftheofficialoremployee
3.Socialsecuritybenefits,retirementgratuities,pensionsandothersimilarbenefitsreceivedbyresidentornonresidentcitizens
orresidentaliensfromforeigngovernmentagenciesandotherinstitutions,privateorpublic
4.PaymentofbenefitstoaresidentpersonundertheUnitedStatesVeteransAdministration
5.BenefitsreceivedfromorenjoyedundertheSocialSecuritySystem
6.BenefitsreceivedfromtheGovernmentServiceInsuranceSystem,includingretirementgratuityreceivedbygovernment
officialsandemployees
Requisitesforexclusionofretirementbenefits
1.ItmustbereceivedunderRA7641orinaccordancewithareasonableprivatebenefitplanmaintainedbytheemployer.
2.Retiringemployeeorofficialhasbeenintheserviceofthesameemployerforatleastten(10)yearsandisnotlessthanfifty(50)
yearsofageatthetimeofhisretirement.
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3.Benefitsgrantedundertheprovisionshallbeavailedofbyanofficialoremployeeonlyonce.
Reasonableprivatebenefitplan
Itmeansapension,gratuity,stockbonusorprofitsharingplanmaintainedbyanemployerforthebenefitofsomeorallofhis
officialsoremployees,orboth,forthepurposeofdistributingtosuchofficialsandemployeestheearningsandprincipalofthefund
thusaccumulated,andwhereinitisprovidedinsaidplanthatatnotimeshallanypartofthecorpusorincomeofthefundbeused
for,orbedivertedto,anypurposeotherthanfortheexclusivebenefitofthesaidofficialsandemployees.
Separationpayandamountsreceivedduetoinvoluntaryseparation
Anyamountreceivedbyanofficialoremployeeorbyhisheirsfromtheemployerduetodeath,sicknessorotherphysicaldisabilityor
foranycausebeyondthecontrolofthesaidofficialoremployeeisexcludedfromgrossincome.
Causebeyondthecontroloftheemployee
Thephraseforanycausebeyondthecontrolofthesaidofficialoremployeeconnotesinvoluntarinessonthepartoftheofficialor
employee.Theseparationfromtheserviceoftheofficialoremployeemustnotbeaskedfororinitiatedbyhim.[Section2.78.1,
RevenueRegulation298]Theseparationwasnotofhisownmaking.
Terminalleavepay
Commutationofleavecreditsorterminalleavepayaregivennotonlyatthesametimebutalsoforthesamepolicyconsiderations
governingretirementbenefits.Thus,notbeingpartofthegrosssalaryorincomebutaretirementbenefit,terminalpayisnotsubject
toincometax.[Commissionerv.CourtofAppeals,203SCRA72]
Terminalleavepayisexemptfromincometax.[Zialcitacase,190SCRA851]
Incomederivedbyaforeigngovernment
IncomederivedfrominvestmentsinthePhilippinesinloans,stocks,bondsorotherdomesticsecurities,orfrominterestondepositsin
banksinthePhilippinesby:
1.foreigngovernments
2.financinginstitutionsowned,controlled,orenjoyingrefinancingfromforeigngovernmentsand
3.internationalorregionalfinancialinstitutionsestablishedbyforeigngovernments.
IncomebythePhilippinegovernment
1.Incomederivedfromanypublicutilityorfromtheexerciseofanyessentialgovernmentalfunction
2.AccruingtotheGovernmentortoanypoliticalsubdivisionthereof.
Prizesandawardsinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement
1.Madeprimarilyinrecognitionofreligious,charitable,scientific,educational,artistic,literaryorcivicachievement.
2.Therecipientwasselectedwithoutanyactiononhisparttoenterthecontestorproceeding.
3.Therecipientisnotrequiredtorendersubstantialfutureservicesasaconditiontoreceivingtheprizeoraward.
Prizesandawardsinsportscompetitions
1.Prizesandawardsmustbegrantedtoathletesinlocalandinternationalsportscompetitionsandtournaments.
2.SportscompetitionortournamentheldeitherinthePhilippinesorabroad.
3.Sportscompetitionortournamentmustbesanctionedbytheirnaturalsportsassociations.
DEDUCTIONS
INGENERAL
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Deductions
Deductionsareitemsoramountswhichthelawallowstobedeductedundercertainconditionsfromgrossincomeinordertoarrive
attaxableincome.
Deductionv.exemption
Deductionisanamountallowedbylawtobesubtractedfromgrossincometoarriveattaxableincome.Exemptionfromtaxationis
thegrantofimmunitytoparticularpersonsorcorporationsortopersonsorcorporationsofaparticularclassfromataxwhichothers
generallywithinthesametaxingdistrictareobligedtopay.
Deductionv.exclusion
Deductionisanamountallowedbylawtobesubtractedfromgrossincometoarriveattaxableincome.Exclusionreferstoincome
receivedorearnedbutisnottaxableasincomebecauseexemptedbylaworbytreaty.Suchtaxfreeincomeisnottobeincludedin
theincometaxreturnunlessinformationregardingitisspecificallycalledfor.[Section61,RevenueRegulation2]
Basicprinciplesgoverningdeductions
1.Thetaxpayerseekingadeductionmustpointtosomespecificprovisionsofthestatuteauthorizingthedeductionand
2.Hemustbeabletoprovethatheisentitledtothedeductionauthorizedorallowed.
Kindsofdeductions
1.Itemizeddeductionwhichisavailabletoindividualandcorporatetaxpayers
2.Optionalstandarddeductionwhichisavailabletoindividualtaxpayersonly,exceptanonresidentalien
3.Specialdeductionswhichisavailable,inadditiontotheitemizeddeductions,tocertaincorporations,i.e.insurancecompaniesand
proprietaryeducationalcorporations
Timewithinwhichtoclaimdeduction
1.Asarule,ifataxpayerdoesnot,withinanyyear,deductcertainofhisexpenses,losses,interests,taxes,orothercharges,hecannot
deductthemfromtheincomeofthenextoranysucceedingyear.
2.Ifhekeepshisbooksonthecashreceiptsbasis,theexpensesaredeductibleintheyeartheyarepaid.
3.Ifontheaccrualbasis,thenintheyeartheyareincurred,whetherpaidornot.
Whomaynotavailofdeductionsfromgrossincome?
1.Citizensandresidentalienswhoseincomeispurelycompensationincome.
Theyareallowedpersonalandadditionalexemptionsanddeductionforpremiumpaymentsonhealthandhospitalization
insurance.
2.NonresidentaliensnotengagedintradeorbusinessinthePhilippines
3.Nonresidentforeigncorporations
Deductionsfromgrossincome
1.Expenses
2.Interest
3.Taxes
4.Losses
5.Baddebts
6.Depreciation
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7.Depletionofoilandgaswellsandmines
8.Charitableandothercontributions
9.Researchanddevelopment
10.Pensiontrusts
11.Premiumpaymentsonhealthand/orhospitalizationinsuranceofanindividualtaxpayer
Somerulesondeduction
Acorporationmayavailonlyofthedeductionsfrom(1)to(10)premiumpaymentsonhealthand/orhospitalizationinsuranceis
deductibleonlybyanindividualtaxpayer.
Acorporationmayavailonlyoftheitemizeddeductionsanindividual,exceptanonresidentalien,mayelecttheitemizeddeductions
ortheoptionalstandarddeduction.
Thus,theoptionalstandarddeductionisnotavailabletocorporations.
Anindividualearningpurelycompensationincomeisnotalloweditemizeddeductions,exceptpremiumpaymentsonhealthand/or
hospitalizationinsurance.Inaddition,heisalsograntedpersonalandadditionalexemptions.
Anindividual,whoearnsincomeotherthanpurelycompensationincome,isallowedpersonalandadditionalexemptionsinadditionto
theitemizeddeductionsortheoptionalstandarddeduction.
Twokindsofdeductionavailabletoindividuals,exceptanonresidentalien
1.Itemizeddeductions
2.Optionalstandarddeduction
Note:Optionalstandarddeductionisnotavailabletocorporations.
ORDINARYANDNECESSARYBUSINESSEXPENSES
Businessexpensev.capitalexpenses
Businessexpensesrefertoalltheordinaryandnecessaryexpensespaidorincurredduringthetaxableyearincarryingonorwhich
aredirectlyattributabletothedevelopment,management,operationand/orconductofthetrade,businessortheexerciseofa
profession.
Capitalexpensesareexpendituresforextraordinaryrepairswhicharecapitalizedandsubjecttodepreciation.Theseareexpenses
whichtendtoincreasethevalueorprolongthelifeofthetaxpayersproperty.
Ordinaryandnecessaryexpenses
Anexpenseisordinarywhenitiscommonlyincurredinthetradeorbusinessofthetaxpayerasdistinguishedfromcapital
expenditures.Thepayments,however,neednotbenormalorhabitualinthesensethatthetaxpayerwillhavetomakethemoften.
Thepaymentmaybeuniqueornonrecurringtotheparticulartaxpayeraffected.
Anexpenseisnecessarywhenitisappropriateandhelpfultothetaxpayersbusinessorifitisintendedtorealizeaprofitorto
minimizealoss.
Requisitesfordeductibilityofbusinessexpense
1.Theexpensesmustbeordinaryandnecessary.
2.Itmustbepaidorincurredduringthetaxableyear.
3.Itmustbepaidorincurredincarryingonanytradeorbusinessorprofession.
4.Itmustbereasonableinamount.
5.Itmustbesubstantiatedbysufficientevidencesuchasofficialreceiptsandotherofficialrecords.
6.Itmustnotbeagainstlaw,morals,publicpolicyorpublicorder.
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Substantiationrequirementforbusinessexpense
Taxpayerneedtosubstantiatewithsufficientevidence,suchasofficialreceiptsorotheradequaterecords:
1.theamountoftheexpensebeingdeductedand
2.thedirectconnectionorrelationoftheexpensebeingdeductedtothedevelopment,management,operationand/orconduct
ofthetrade,businessorprofessionofthetaxpayer.
Whatareincludedinbusinessexpenses?
Businessexpensesinclude:
1.Salaries,wagesandotherformsofcompensationforpersonalservicesactuallyrendered,includingthegrossedupmonetary
valueoffringebenefitgrantedprovidedthefringebenefittaxhasbeenpaid.
2.Travelexpenses,hereandabroad,whileawayfromhome.
3.Rentalsand/orotherpaymentsofpropertytowhichthetaxpayerhasnottakenorisnottakingtitleorinwhichhehasno
equityotherthanthatofalessee,userorpossessor.
4.Entertainment,amusementandrecreationexpenses.
Requisitesfordeductibilityofcompensationpayments
1.Thepaymentsarereasonable.
2.Theyare,infact,paymentsforpersonalservicesactuallyrendered.[Section70,RevenueRegulation2]
Treatmentofexcessivecompensation
Inthecaseofexcessivepaymentsbycorporations,ifsuchpaymentscorrespondorbearacloserelationshiptostockholdings,and
arefoundtobedistributionofearningsorprofits,theexcessivepaymentswillbetreatedasdividends.[Section71,Revenue
Regulations2]
Ifsuchpaymentsconstitutepaymentforproperty,theyshouldbetreatedbythepayorascapitalexpenditureandbytherecipientas
partofthepurchaseprice.[Section71,RevenueRegulations2]
Requisitesfordeductibilityofbonusestoemployees
1.Thebonusesaremadeingoodfaith.
2.Theyaregivenforpersonalservicesactuallyrendered.
3.Theydonotexceedareasonablecompensationfortheservicesrendered,whenaddedtothestipulatedsalaries,measuredbythe
amountandqualityofservicesperformedinrelationtothetaxpayersbusiness.[Section72,RevenueRegulations2]
InKuenzlev.CIR[28SCRA365]andC.M.Hoskinsv.CIR[30SCRA434],theSupremeCourtdisalloweddeductionsforbonuses
giventothetopofficersoftheinvolvedcorporationsforbeingunreasonable.
Pensionsandcompensationforinjuries
Amountspaidforpensionstoretiredemployeesortotheirfamiliesorothersdependentuponthem,oronaccountofinjuriesreceived
bytheemployee,andlumpsumamountspaidoraccruedascompensationforinjuriesareproperdeductionsasordinaryand
necessaryexpenses.Suchdeductionsarelimitedtotheamountnotcompensatedforbyinsuranceorotherwise.
Rulesonrepairs
Expensesforrepairsaredeductibleifsuchrepairsareincidentalorordinary,thatis,madetokeepthepropertyusedinthetradeor
businessofthetaxpayerinanordinarilyefficientoperatingcondition.
Repairsinthenatureofreplacementtotheextentthattheyarrestdeteriorationandprolongthelifeofthepropertyarecapital
expendituresandshouldbedebitedagainstthecorrespondingallowancefordepreciation.[Section68,RevenueRegulations2]
Travelexpenses
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Travelexpensesincludetransportationexpensesandmealsandlodgingofanemployeepaidforbytheemployer.[Section66,
RevenueRegulations2]
Requisitesfordeductibilityoftravelexpenses
1.Theexpensesmustbereasonableandnecessary.
2.Theymustbeincurredorpaidwhileawayfromhome.
3.Theymustbepaidorincurredintheconductoftradeorbusiness.
Taxhome
Taxhomeistheprincipalplaceofbusiness,whenreferringtoawayfromhome.
Rentalexpense
Areasonableallowanceforrentalsand/orotherpaymentswhicharerequiredasaconditionforthecontinueduseorpossession,for
purposesofthetrade,businessorpropertytowhichthetaxpayerhasnottakenorisnottakingtitleorinwhichhehasnoequity
otherthanthatofalessee,userorpossessorisdeductiblefromthegrossincome.
Wherealeaseholdisacquiredforbusinesspurposesforaspecifiedsum,thepurchasermaytakeasadeductioninhisreturnan
adequatepartofsuchsumeachyear,basedonthenumberofyearstheleasehastorun.
Taxespaidbyatenanttoorforalandlordforbusinesspropertyareadditionalrentandconstituteadeductiblerenttothetenantand
taxableincometothelandlordtheamountoftaxbeingdeductiblebythelatter.
Thecostbornebythelesseeinerectingbuildingsormakingpermanentimprovementsongroundofwhichheisalesseeisheldtobe
acapitalinvestmentandnotdeductibleasabusinessexpense.
Requisitesforrentalexpense
1.Requiredasaconditionforcontinueduseorpossession
2.Forpurposesofthetrade,businessorprofession
3.Taxpayerhasnottakenorisnottakingtitletothepropertyorhasnoequityotherthanthatofalessee,userorpossessor
Entertainment,amusementandrecreationexpense
1.Reasonableinamount
2.Incurredduringthetaxableperiod
3.Directlyconnectedtothedevelopment,management,andoperationofthetrade,business,orprofessionofthetaxpayer,orthatare
directlyrelatedtoorinfurtheranceoftheconductofhisoritstrade,businessorprofession
4.NottoexceedsuchceilingastheSecretaryofFinancemay,byrulesandregulations,prescribe
5.Anyexpenseincurredforentertainment,amusementorrecreationwhichiscontrarytolaw,morals,publicpolicy,orpublicordershall
innocasebeallowedasadeduction
Optiontoprivateeducationalinstitutions
Inadditiontotheallowabledeductions,aprivateeducationalinstitutionmay,atitsoption,electeither:
1.Todeductexpendituresotherwiseconsideredascapitaloutlaysofdepreciableassetsincurredduringthetaxableyearforthe
expansionofschoolfacilitiesor
2.Todeductallowancefordepreciationthereof.
Treatmentofotherexpenses
1.Advertisingexpense
Notdeductiblebusinessexpense.Effortstoestablishreputationareakintoacquisitionofcapitalassetsand,therefore,
expensesrelatedtheretoarenotbusinessexpensebutcapitalexpenditures.
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2.Promotionalexpenses
Sameasadvertisingexpense
3.Litigationexpenses
Litigationexpensesthatareincurredinthedefenseorprotectionoftitlearecapitalinnatureandnotdeductible.
InGutierrezv.CIR[14SCRA34],itwasheldthatlitigationexpensesdefrayedbyataxpayertocollectapartmentrentals
andtoejectdelinquenttenantsareordinaryandnecessaryexpensesinpursuinghisbusiness.
INTERESTEXPENSE
Interest
Theamountofinterestpaidorincurredwithinataxableyearonindebtednessinconnectionwiththetaxpayersprofession,tradeor
businessshallbeallowedasdeductionfromgrossincome.
Backtobackinterest
Thetaxpayersallowabledeductionforinterestexpenseshallbereducedbyanamountequalto38%by01January2000ofthe
interestincomeearnedbyhimwhichhasbeensubjectedtoafinaltax.
Interestwhichcannotbededucted
1.Interestispaidinadvancethroughdiscountorotherwisebyanindividualtaxpayerreportingincomeonthecashbasis.Suchinterest
shallbeallowedasadeductionintheyeartheindebtednessispaid.
2.Interestbetweenrelatedtaxpayers.
3.Iftheindebtednessisincurredtofinancepetroleumexploration.
Requisitesfordeductibilityofinterestexpense
1.Theremustbeanindebtednessincurredbythetaxpayerinconnectionwiththetaxpayerstrade,businessorprofession.
2.Theinterestmusthavebeenpaidorincurredwithinthetaxableyear.
3.Theinterestmusthavebeenstipulatedinwriting.
Optionaltreatmentofinterestexpense
Attheoptionofthetaxpayer,interestincurredtoacquirepropertyusedintrade,businessorexerciseofaprofessionmaybeallowed
asadeductionortreatedasacapitalexpenditure.
Delinquencyinterestontaxpaymentdeductible
Forinteresttobeallowedasdeductionfromgrossincome,itmustbeshownthattherebeanindebtedness,thatthereshouldbe
interestuponit,andthatwhatisclaimedasaninterestdeductionshouldhavebeenpaidoraccruedwithintheyear.Theterm
indebtednesshasbeendefinedasanunconditionalandlegallyenforceableobligationforthepaymentofmoney.Withinthemeaning
ofthatdefinition,ataxmaybeconsideredasanindebtedness.Hence,interestpaidforlatepaymentofthedonorstaxisdeductible
fromgrossincome.[Commissionerv.Prieto,109Phil592]
TAXES
Whattaxesaredeductible?
Asageneralrule,alltaxes,nationalorlocal,paidorincurredwiththetaxableyearinconnectionwiththetaxpayerstrade,business
orprofessionaredeductiblefromgrossincome.
Taxesmeanstaxesproperand,therefore,nodeductionsareallowedforamountsrepresentinginterest,surchargesandfinesor
penaltiesincidenttodelinquency.
Whattaxesarenotdeductiblefromgrossincome?
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1.Philippineincometax
2.Incometaxesimposedbytheauthorityofanyforeigncountrybutdeductionisallowedonlyinthecaseofataxpayerwhoisentitled
totaxcreditfortaxesofforeigncountriesbutdoesnotavailofthesame
3.Estateanddonorstaxes
4.Specialassessmentsorleviesassessedagainstlocalbenefitsofakindtendingtoincreasethevalueofthepropertyassessed
Taxsubsequentlyrefundedorcredited
Taxespreviouslyallowedasdeductions,whenrefundedorcredited,shallbeincludedaspartofgrossincomeintheyearofreceiptto
theextentoftheincometaxbenefitofsaiddeduction.
Limitationsondeductionsfornonresidentalienengagedintradeorbusinessandresidentforeigncorporation
InthecaseofanonresidentalienindividualengagedintradeorbusinessinthePhilippinesandaresidentforeigncorporation,
deductionsfortaxesshallbeallowedonlyifandtotheextentthattheyareconnectedwithincomefromsourceswithinthe
Philippines.
Taxcredit
Taxcreditreferstothetaxpayersrighttodeductfromtheincometaxduetheamountoftaxhehaspaidtoaforeigncountry
subjecttolimitations.
Taxdeductionv.taxcredit
Intheformer,thetaxesaredeductedfromthegrossincomeincomputingthenetincome,whileinthelatter,thetaxesarededucted
fromPhilippineincometaxitself.
Intheformer,alltaxesasageneralrule,areallowedasdeductionswithsomeexemptions(enumeratedabove),whileinthelatter,
onlyforeignincometaxesmaybeclaimedascreditsagainstPhilippineincometax.
Proofofcredits
ThecreditsshallbeallowedonlyifthetaxpayerestablishestothesatisfactionoftheCommissionerthefollowing:
1.ThetotalamountofincomefromsourceswithoutthePhilippines
2.Theamountofincomederivedfromeachcountry,thetaxpaidorincurredtowhichisclaimedasacreditand
3.Allotherinformationnecessaryfortheverificationandcomputationofsuchcredits.
Creditagainsttaxfortaxesofforeigncountries
Creditmaybeclaimedbyacitizen,domesticcorporation,membersofgeneralprofessionalpartnerships,andbeneficiariesofestates
andtrusts.
Analienindividualandaforeigncorporationarenotallowedtoclaimcreditsagainstthetaxfortaxesofforeigncountries.
Limitationsoncredit
Theamountofthecredittakenshallbesubjecttoeachofthefollowinglimitations:
1.Theamountofthecreditinrespecttothetaxpaidorincurredtoanycountryshallnotexceedthesameproportionofthetaxagainst
whichsuchcreditistaken,whichthetaxpayerstaxableincomefromsourceswithinsuchcountrybearstohisentiretaxableincome
forthesametaxableyearand
2.Thetotalamountofthecreditshallnotexceedthesameproportionofthetaxagainstwhichsuchcreditistaken,whichthe
taxpayerstaxableincomefromsourceswithoutthePhilippinestaxableunderthisTitlebearstohisentiretaxableincomeforthe
sametaxableyear.
LOSSES
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Losses
Thetermimpliesanunintentionalpartingwithsomethingofvalue.
Itisusedintheincometaxlawinaverybroadsensetocomprehendalllosseswhicharenotgeneralornaturaltotheordinary
courseofbusiness.
Requisitesfordeductibilityofloss
1.Thelossmustbeincurredinthetrade,businessorprofessionofthetaxpayer.
2.Itmustbeactuallysustainedandchargedoffwithinthetaxableyear.
3.Itmustbeevidencedbyaclosedandcompletedtransaction.
4.Itmustnotbecompensatedforbyinsuranceorotherformsofindemnity.
5.Ifitisacasualtyloss,thetaxpayerhasfiledasworndeclarationoflosswithin45daysafterthedateofthediscoveryofthecasualty
orrobbery,theft,orembezzlement.
Somerecognizedlosses
1.Ordinarylosses/businesslosses
2.Casualtylosses
3.Capitallosses
4.Securitiesbecomingworthless
5.Lossesfromwashsalesorstockorsecurities
6.Wageringlosses
7.Abandonmentlosses
Note:Capitallossesandsecuritiesbecomingworthlessaregovernedbyrulesonlossfromthesaleorexchangeofcapitalassets.
Casualtyloss
Lossarisesfromfires,storms,shipwreck,orothercasualties,orfromrobbery,theftorembezzlement.
Losslimitationruleforcapitallosses
Lossesfromsalesorexchangesofcapitalassetsshallbeallowedonlytotheextentofthegainsfromsuchsalesorexchanges.
Securitiesbecomingworthless
1.Securitiesbecomeworthlessduringthetaxableyear
2.Securitiesarecapitalassets
3.Lossesareconsideredaslossesfromthesaleorexchange,onthelastdayofsuchtaxableyear,ofcapitalassets
Netoperatingloss
Itmeanstheexcessofallowabledeductionovergrossincomeofthebusinessinataxableyear.
Netoperatinglosscarryover(NOLCO)
NOLCOshallbecarriedoverasadeductionfromthegrossincomeforthenextthree(3)consecutivetaxableyearsimmediately
followingtheyearofloss.
Suchlossshallbeallowedasadeductionifithadnotbeenpreviouslyoffsetasdeductionfromgrossincome.
However,anynetlossincurredinataxableyearduringwhichthetaxpayerwasexemptfromincometaxshallnotbeallowedasa
deduction.
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NOLCOshallbeallowedonlyiftherehasbeennosubstantialchangeintheownershipofthebusinessorenterprise.
Thereisnosubstantialchangewhen:
1.Notlessthan75%innominalvalueofoutstandingissuedshares,ifthebusinessisinthenameofacorporation,isheldbyor
onbehalfofthesamepersonsor
2.Notlessthan75%ofthepaidupcapitalofthecorporation,ifthebusinessisinthenameofacorporation,isheldbyoron
behalfofthesamepersons.
Lossesfromwashsalesofstockorsecurities
Nodeductionforlossshallbeallowedforwashsalesunlesstheclaimismadebyadealerinstockorsecuritiesandwithrespecttoa
transactionmadeintheordinarycourseofthebusinessofsuchdealer.
Washsale
Awashsaleoccurswhereitappearsthatwithinaperiodbeginningthirty(30)daysbeforethedateofthesaleordispositionof
sharesofstockorsecuritiesandendingthirty(30)daysaftersuchdate,thetaxpayerhasacquired(bypurchaseorexchange)orhas
enteredintoacontractoroptiontosoacquire,substantiallyidenticalstockorsecurities.
Wageringlosses
Lossesfromwageringshallbeallowedonlytotheextentofgainsfromsuchtransactions.
Abandonmentlosses
Intheeventacontractareawherepetroleumoperationsareundertakenispartiallyorwhollyabandoned,allaccumulatedexploration
anddevelopmentexpenditurespertainingtheretoshallbeallowedasadeduction.
Incaseaproducingwellissubsequentlyabandoned,theunamortizedcoststhereof,aswellastheundepreciatedcostsofequipment
directlyusedtherein,shallbeallowedasadeductionintheyearsuchwell,equipmentorfacilitiyisabandonedbythecontractor.
BADDEBTS
BadDebts
Baddebtsaredebtsduetothetaxpayerwhichareactuallyascertainedtobeworthlessandchargedoffwithinthetaxableyear.
Requisitesfordeductibilityofbaddebts
1.Theremustbeavalidandsubsistingdebt.
2.Thedebtmustbeactuallyascertainedtobeworthlessanduncollectibleduringthetaxableyear.
3.Thedebtmustbechargedoffduringthetaxableyear.
4.Thedebtmustbeconnectedwiththetrade,businessorprofessionofthetaxpayer,andnotsustainedinatransactionenteredinto
betweenrelatedtaxpayers.
Diligenteffortstocollect
Inadditiontothefourrequisites,thetaxpayermustshowthatthedebtisindeeduncollectibleeveninthefuture.
Furthermore,therearestepsoutlinedtobeundertakenbythetaxpayertoprovethatheexerteddiligenteffortstocollectthedebts,
via:a)sendingofstatementofaccountsb)sendingofcollectionlettersc)givingtheaccounttoalawyerforcollectionandd)filing
acollectioncaseincourt.[PhilippineRefiningCo.v.CourtofAppeals,256SCRA667]
Equitabledoctrineoftaxbenefit
Thisdoctrineholdsthatarecoveryofbaddebtpreviouslydeductedfromgrossincomeconstitutestaxableincomeifintheyearthe
accountwaswrittenoff,thedeductionresultedinataxbenefit,thatis,inthereductionoftaxableincomeofthetaxpayer.
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DEPRECIATION
Depreciation
Depreciationisthegradualdiminutionintheusefulvalueoftangiblepropertyusedintrade,businessorprofessionresultingform
exhaustion,wearandtear,andobsolescence.
Thetermisalsoappliedtoamortizationofthevalueofintangibleassets,theuseofwhichintradeorbusinessisdefinitelylimitedin
duration.
Theincometaxlawdoesnotauthorizethedepreciationofanassetbeyonditsacquisitioncost.Hence,adeductionoverandabove
thecostcannotbeclaimedandallowed.[Basilanv.CIR,21SCRA17]
Depreciationisaquestionoffact
Depreciationisaquestionoffactandisnotmeasuredbytheoreticalyardstick,butshouldbedeterminedbyaconsiderationofactual
facts.[Limpanv.CIR,17SCRA703]
Requisitesfordeductibilityofdepreciation
1.Theallowancefordepreciationmustbereasonable.
2.Itmustbeforpropertyusedinthetrade,businessorprofession.
3.Itmustbechargedoffduringthetaxableyear.
4.Astatementontheallowancemustbeattachedtothereturn.
Deductionforobsolescence
Ifthewholeoranyportionofphysicalpropertyisclearlyshownbythetaxpayerasbeingaffectedbyeconomicconditionsthatwill
resultinitsbeingabandonedatafuturedatepriortotheendofitsnaturallife,sothatdepreciationdeductionsalonewouldbe
insufficienttoreturnthecostattheendofitseconomictermsofusefulness,areasonabledeductionforobsolescence,inadditionto
depreciation,maybeallowed.
Propertyheldforlife
Inthecaseofpropertyheldbyonepersonforlifewithremaindertoanotherperson,thedeductionshallbecomputedasifthelife
tenantweretheabsoluteownerofthepropertyandshallbeallowedtothelifetenant.
Incaseofpropertyheldintrust
Allowabledeductionsshallbeapportionedbetweentheincomebeneficiariesandthetrusteesinaccordancewiththepertinent
provisionsoftheinstrumentcreatingthetrust,orintheabsenceofsuchprovisions,onthebasisofthetrustincomeallowableto
each.
Certainmethodsincomputingdepreciation
1.Thestraightlinemethod
2.Decliningbalancemethod
3.Sumoftheyeardigitmethod.
4.AnyothermethodwhichmaybeprescribedbytheSecretaryofFinanceuponrecommendationoftheCommissioner.
Agreementastousefullifeonwhichdepreciationrateisbased
WherethetaxpayerandtheCommissionerhaveenteredintoanagreementinwritingspecificallydealingwiththeusefullifeandrate
ofdepreciationofanyproperty,theratesoagreeduponshallbebindingonboththetaxpayerandtheNationalGovernmentinthe
absenceoffactsandcircumstancesnottakenintoconsiderationduringtheadoptionofsuchagreement.Theresponsibilityof
establishingtheexistenceofsuchfactsandcircumstancesshallrestwiththepartyinitiatingthemodification.
Wherethetaxpayerhasadoptedsuchusefullifeanddepreciationrateforanydepreciableassetandclaimedthedepreciation
expensesasdeductionfromhisgrossincomewithoutanywrittenobjectiononthepartoftheCommissionerorhisdulyauthorized
representative,theaforesaidusefullifeanddepreciationratesoadoptedbythetaxpayershallbeconsideredbinding.
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Depreciationofpatentorcopyright
Incomputingadepreciationallowanceinthecaseofapatentorcopyright,thecapitalsumtobereplacedisthecostorotherbasis
ofthepatentorcopyright.
Theallowanceshouldbecomputedbyanapportionmentofthecostorotherbasisofthepatentorcopyrightoverthelifeofthe
patentorcopyrightsinceitsgrant,orsinceitsacquisitionbythetaxpayer,orsinceMarch1,1913,asthecasemaybe.
DEPLETIONOFOILANDGASWELLSANDMINES
DepletionofOilandGasWellsandMines
Depletionistheexhaustionofnaturalresourceslikeminesandoilandgaswellsasaresultofproductionorseverancefromsuch
minesorwells.
Determinationofamountofdepletioncost
Indeterminingtheamountofdepletioncostallowable,thefollowingthreefactorsareessential,namely:
1.thebasisoftheproperty
2.theestimatedtotalrecoverableunitsinthepropertyand
3.thenumberofunitsrecoveredduringthetaxableyearinquestion.[ConsolidatedMinesv.CTA,58SCRA618]
Basismeanstheamountofthetaxpayerscapitalorinvestmentinthepropertywhichheisentitledtorecovertaxfreeduringthe
periodheisremovingthemineralinthedeposit.
Intangiblecostinpetroleumoperations
Thisreferstoanycostincurredinpetroleumoperationswhichinitselfhasnosalvagevalueandwhichisincidentaltoandnecessary
forthedrillingofwellsandpreparationofwellsfortheproductionofpetroleum.
Depletionv.depreciation
Botharepredicatedonthesamebasicpremiseofavoidingataxoncapital.
However,depletionisbasedupontheconceptoftheexhaustionofanaturalresourcewhereasdepreciationisbaseduponthe
conceptoftheexhaustionoftheproperty,nototherwiseanaturalresource,usedinatradeorbusinessorheldfortheproductionof
income.Thus,depletionanddepreciationaremadeapplicabletodifferenttypesofassets.
CHARITABLEANDOTHERCONTRIBUTIONS
KindsofCharitableContributions
1.Ordinaryorthosewhicharesubjecttolimitationsastotheamountdeductiblefromgrossincome.
2.Specialorthosewhicharedeductibleinfullfromgrossincome.
Requisitefordeductibilityofcharitablecontributions
1.ThecontributionmustactuallybepaidormadetothePhilippinegovernmentoranypoliticalsubdivisionthereofortoanyofthe
domesticcorporationsorassociationsspecifiedbytheNIRC.
2.Nopartofthenetincomeofthebeneficiarymustinuretothebenefitofanyprivatestockholderorindividual.
3.Itmustbemadewithinthetaxableyear.
4.Itmustnotexceed10%inthecaseofanindividualand5%inthecaseofacorporationofthetaxpayerstaxableincome(except
wherethedonationisdeductibleinfull)tobedeterminedwithoutthebenefitofthecontribution.
5.Itmustbeevidencedbyadequaterecordsorreceipts.
Contributionsdeductibleinfull
1.DonationstothePhilippinegovernmentortoanyofitspoliticalsubdivisionsaccordingtoanationalpriorityplandeterminedbyNEDA.
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2.Donationstoforeigninstitutionsorinternationalorganizationswhicharefullydeductibleinpursuanceoforincompliancewith
agreements,treatiesorcommitmentsenteredintobythePhilippinesorinpursuanceofspeciallaws.
3.Donationtoaccreditednongovernmentalorganization.
Nongovernmentorganization
Itmeansanonprofitdomesticcorporation:
1.Organizedandoperatedexclusivelyforscientific,research,educational,characterbuildingandyouthandsportsdevelopment,
health,socialwelfare,culturalorcharitablepurposes,oracombinationthereof,nopartofthenetincomeofwhichinuresto
thebenefitofanyprivateindividual.
2.Utilizesthecontributiondirectlyfortheactiveconductoftheactivitiesconstitutingthepurposeorfunctionforwhichitis
organizedandoperatednotlaterthanthe15thdayofthetheirmonthafterthecloseoftheaccreditedNGOstaxableyearin
whichthecontributionwerereceived.
3.Administrativeexpenseshall,innocase,exceedthirtypercent(30%)ofthetotalexpenses.
4.Theassets,intheeventofdissolution,wouldbedistributedtoanothernonprofitdomesticcorporationorganizedforsimilar
purpose,ortotheStateforpublicpurpose,orwouldbedistributedbyacourttoanotherorganization.
Utilization
Utilizationmeans:
1.Anyamountincashorkind(includingadministrativeexpenses)paidorutilizedtoaccomplishoneormorepurposesforwhichthe
accreditednongovernmentalorganizationwascreatedororganized.
2.Anyamountpaidtoacquireanassetused(orheldforuse)directlyincarryingoutoneormorepurposesforwhichtheaccredited
nongovernmentalorganizationwascreatedororganized.
Proofofdeductions
ContributionsorgiftsshallbeallowableasdeductionsonlyifverifiedundertherulesandregulationsprescribedbytheSecretaryof
Finance.
RESEARCHANDDEVELOPMENT
Researchanddevelopment
Ataxpayermaytreatresearchordevelopmentexpenditureswhicharepaidorincurredbyhimduringthetaxableyearinconnection
withhistrade,businessorprofessionasordinaryandnecessaryexpenseswhicharenotchargeabletocapitalaccount.The
expendituressotreatedshallbeallowedasdeductionduringthetaxableyearwhenpaidorincurred.
Amortizationofcertainresearchanddevelopmentexpenditures
Taxpayermayalsoelecttotreatthefollowingresearchanddevelopmentexpendituresasdeferredexpenses:
1.Paidorincurredbythetaxpayerinconnectionwithhistrade,businessorprofession
2.Nottreatedasexpensesand
3.Chargeabletocapitalaccountbutnotchargeabletopropertyofacharacterwhichissubjecttodepreciationordepletion.
Researchanddevelopmentexpensesdeductionsshallnotapplyto:
1.Anyexpenditurefortheacquisitionorimprovementofland,orfortheimprovementofpropertytobeusedinconnectionwithresearch
anddevelopmentofacharacterwhichissubjecttodepreciationordepletion.
2.Anyexpenditurepaidorincurredforthepurposeofascertainingtheexistence,location,extentorqualityofanydepositoforeor
othermineral,includingoilorgas.
PENSIONTRUSTS
Requisitesfordeductibilityofpaymentstopensiontrusts
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1.Theemployermusthaveestablishedapensionorretirementplantoprovideforthepaymentofreasonablepensionstohis
employees.
2.Thepensionplanisreasonableandactuariallysound.
3.Itmustbefundedbytheemployer.
4.Theamountcontributedmustnolongerbesubjecttothecontrolordispositionoftheemployer.
5.Thepaymenthasnotyetbeenallowedasadeduction.
6.Thedeductionisapportionedinequalpartsoveraperiodoften(10)consecutiveyearsbeginningwiththeyearinwhichthetransfer
orpaymentismade.
ADDITIONALREQUIREMENTFORDEDUCTIBILITYOFCERTAINPAYMENTS
Additionalrequirementfordeductibilityofcertainpayments
Anyamountpaidorpayablewhichisotherwisedeductiblefrom,ortakenintoaccountincomputinggrossincomeorforwhich
depreciationoramortizationmaybeallowed,shallbeallowedasadeductiononlyifitisshownthatthetaxrequiredtobededucted
andwithheldtherefromhasbeenpaidtotheBureauofInternalRevenue.
Limitationsorceilingsonitemizeddeductions
TheSecretaryofFinancemayprescribelimitationsorceilingsforanyoftheitemizeddeductionsfrom(1)to(10).Thiscanbedone
throughrulesandregulationsissuedbytheSecretaryupontherecommendationoftheCommissionerandafterapublichearinghas
beenheldforsuchpurpose.
TheSecretaryshall,forpurposesofdeterminingsuchceilingsorlimitations,considerthefollowingfactors:
1.Adequacyoftheprescribedlimitsontheactualexpenditurerequirementsofeachparticularindustryand
2.Effectsofinflationonexpenditurelevels.
OPTIONALSTANDARDDEDUCTION
OptionalStandardDeduction
Anindividualsubjecttotax,otherthananonresidentalien,mayelectastandarddeductioninanamountnotexceedingtenpercent
(10%)ofhisgrossincomeinlieuofitemizeddeductions.
Unlessthetaxpayersignifiesinhisreturnhisintentiontoelecttheoptionalstandarddeduction,heshallbeconsideredashaving
availedhimselfoftheitemizeddeductions.
Suchelectionwhenmadeinthereturnshallbeirrevocableforthetaxableyearforwhichthereturnismade.
Anindividualwhoisentitledtoandclaimedfortheoptionalstandarddeductionshallnotberequiredtosubmitwithhistaxreturn
suchfinancialstatementsotherwiserequiredintheNIRC.
DEDUCTIONSALLOWEDONLYTOINDIVIDUALTAXPAYERS
Deductionsallowedonlytoindividualtaxpayers
1.Personalexemption
2.Additionalexception
3.Premiumpaymentsonhealthand/orhospitalizationinsurance
Personalexemptions
Personalexemptionsarearbitraryamountsallowed,inthenatureofadeductionfromtaxableincome,forpersonal,livingorfamily
expensesofanindividualtaxpayer.Theyareconsideredtobetheequivalentoftheminimumofsubsistenceofthetaxpayer.
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Whoareallowedpersonalexceptions?
1.Citizens
2.Residentaliens
3.NonresidentaliensengagedintradeorbusinessinthePhilippinesundercertainconditions
4.Estatesandtrusts,whicharetreatedforpurposesofpersonalexemptions,asasingleindividual
Amountofpersonalexemptionsallowedtocitizensandresidentaliens
P20,000singlepersonoramarriedpersonjudiciallydecreedaslegallyseparatedfromhisorherspousewithno
qualifieddependents
P25,000headofafamily
P32,000marriedperson
Note:OnlythespousederivingtaxableincomecanclaimtheP32,000personalexemptionifbothhavetaxableincome,eachcanclaim
P32,000exemption.
Headofthefamily
Itmeansanunmarriedorlegallyseparatedmanorwomanwithoneorbothparents,orwithoneormorebrothersorsisters,orwith
oneormorelegitimate,recognizednaturalorlegallyadoptedchildrenlivingwithanddependentuponhimorherfortheirchief
support.
Suchbrothersorsistersorchildrenshouldbenotmorethan21yearsold,unmarriedandnotgainfullyemployed,orwheresuch
children,brothersorsisters,regardlessofage,areincapableofselfsupportbecauseofmentalorphysicaldefect.
Aheadoffamilyisanindividualwhoactuallysupportsandmaintainsinonehouseholdoneormoreindividuals,whoareclosely
connectedwithhimbybloodrelationship,relationshipbymarriage,orbyadoption,andwhoserighttoexercisefamilycontroland
provideforthesedependentindividualsisbaseduponsomemoralorlegalobligation.
Note:Considerdiscrepancybetweendefinitionofheadoffamilyanddependenti.e.children.
Tobeaheadofafamily,oneormorelegitimate,recognizednatural,orlegallyadoptedchildrenmustlivewithand
dependonanunmarriedorlegallyseparatedmanorwoman.
Adependent,ontheotherhand,maybealegitimate,illegitimateorlegallyadoptedchild.
Both,however,defineorqualifydifferentterms.
Livingwith
Thetermlivingwiththepersongivingsupportdoesnotnecessarilymeanactualandphysicaldwellingtogetheratalltimesand
underallcircumstances.
Family
Thetermfamilyincludesanunmarriedorlegallyseparatedpersonwith:
1.oneorbothparents
2.oneormorebrothersorsistersor
3.oneormorelegitimate,recognizednatural,orlegallyadoptedchildrenlivingwithanddependentuponhimorherfortheirchief
support.
Additionalexemption
AmarriedpersonoraheadofafamilymayclaimanadditionalexemptionofP8,000foreachdependent,notexceedingfour(4).
Theadditionalexemptionshallbeclaimedbyonlyoneofthespousesinthecaseofmarriedindividuals.
Inthecaseoflegallyseparatedspouses,itmaybeclaimedonlybythespousewhohascustodyofthechildorchildren.
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Dependent
Refersonlytothelegitimate,illegitimateorlegallyadoptedchildofthetaxpayer
Thechildis:
1.livingwiththetaxpayer
2.chieflydependentuponthetaxpayerforsupport
3.notmorethan21yearsofage
4.notmarriedand
5.notgainfullyemployedor,eventhoughover21yearsold,incapableofselfsupportbecauseofmentalorphysicaldefect.
Changeofstatus
Taxpayermarriesorhaveadditionaldependents
Taxpayerdiesduringthetaxableyear
Ifthespouseoranyofthedependentsdiesorifanyofsuchdependentmarries,becomes21yearsold,orbecomesgainfully
employed
Note:Asageneralrule,interpretinfavoroftaxpayer
Personalexemptionstononresidentalienindividual
Nonresidentalienindividualengagedintradeorbusiness
Entitledonlytopersonalexemption
AmountallowedislimitedtoexemptionsgrantedtoFilipinocitizenswhoarenotresidentsinthealiensdomicilecountrybutnotto
exceedtheamountallowedtocitizensorresidentsofthePhilippinesintheNIRC.
Premiumpaymentonhealthand/orhospitalizationinsuranceofanindividualtaxpayer
PremiumpaymentsshouldnotexceedP2,400perfamilyorP200amonthforataxableyear
FamilyhasagrossincomeofnotmorethanP250,000forthetaxableyear
Inthecaseofmarriedtaxpayers,onlythespouseclaimingtheadditionalexemptionfordependentsshallbeentitledtothisdeduction.
ITEMSNOTDEDUCTIBLE
Itemsnotdeductible
1.Personal,livingorfamilyexpenses
2.Capitalexpenditures
a.Anyamountpaidoutfornewbuildingsorforpermanentimprovements,orbettermentsmadetoincreasethevalueofany
propertyorestate
b.Anyamountexpendedinrestoringpropertyorinmakinggoodtheexhaustionthereofforwhichanallowanceisorhasbeen
made
3.Premiumspaidonanylifeinsurancepolicycoveringthelifeofanyofficeroremployee,orofanypersonfinanciallyinterestedinany
tradeorbusinesscarriedonbythetaxpayer,individuallyorcorporate,whenthetaxpayerisdirectlyorindirectlyabeneficiaryunder
suchpolicy[Section36,NIRC]
4.Lossesbetweenrelatedtaxpayers.
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5.Lossesonwashsales
6.Illegalexpensei.e.bribes,kickbacks,andothersimilarpayments[Section34(A)(1)(c),NIRC]
Capitalexpenditures
1.Anyamountpaidoutfornewbuildingsorforpermanentimprovements,orbettermentsmadetoincreasethevalueofanypropertyor
estate
2.Anyamountexpendedinrestoringpropertyorinmakinggoodtheexhaustionthereofforwhichanallowanceisorhasbeenmade
3.Costofdefendingorperfectingtitletopropertyconstitutesapartofthecostofthepropertyandisnotadeductibleexpense
4.Theamountexpendedforarchitectsservicesispartofthecostofthebuilding
5.Expensesoftheadministrationofanestatesuchascourtcosts,attorneysfees,andexecutorscommissionsarechargeableagainst
thecorpusoftheestateandarenotallowabledeductions
6.Incaseofacorporation,expensesfororganization,suchasincorporationfees,attorneysfeesandaccountantschargesare
ordinarilycapitalexpenditures,butwheresuchexpendituresarelimitedtopurelyincidentalexpenses,ataxpayermaychargesuch
itemsagainstincomeintheyearinwhichtheyareincurred.[Section120,RevenueRegulations2]
Lifeorhealthinsuranceandothernonlifeinsurancepremiumsorsimilaramountsinexcessofwhatthelawallows
Generalrule:Thecostoflifeorhealthinsuranceandothernonlifeinsurancepremiumsbornebytheemployerforhisemployee
shallbetreatedastaxablefringebenefit.
Exceptions
1.Contributionoftheemployerforthebenefitoftheemployeepursuanttotheprovisionsofexistinglaw,i.e.SSS,GSIS,among
others.
2.Thecostofpremiumsbornebytheemployerforthegroupinsuranceofhisemployees.[RevenueRegulations398]
Relatedtaxpayers
1.Betweenmembersofafamily(whichshallincludeonlyhisbrothersandsisters,spouse,ancestorsandlinealdescendants)
2.Betweenanindividualandacorporationmorethan50%invalueoftheoutstandingstockofwhichisowned,directlyorindirectly,by
orforsuchindividualexceptinthecaseofdistributionsinliquidation
3.Betweentwocorporationsmorethan50%invalueoftheoutstandingstockofeachofwhichisowned,directlyorindirectlybyorfor
thesameindividual
4.Betweenthegrantorandthefiduciaryofatrust
5.Betweenthefiduciaryofatrustandthefiduciaryofanothertrustifthesamepersonisagrantorwithrespecttoeachtrust
6.Betweenthefiduciaryofatrustandabeneficiaryofsuchtrust[Section36(B),NIRC]
Relevantpointsregardingrelatedtaxpayers
1.Paymentofinterestisnotdeductible.
2.Baddebtsarenotdeductible.
3.Lossesfromsalesorexchangesofpropertyarenotdeductible.
CAPITALGAINSANDLOSSES
Ordinaryasset
1.Stockintradeofthetaxpayerorotherpropertyofakindwhichwouldproperlybeincludedintheinventoryofthetaxpayerifonhand
atthecloseofthetaxableyear.
2.Propertyheldbythetaxpayerprimarilyforsaletocustomersintheordinarycourseofhistradeorbusiness.
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3.Propertyusedinthetradeorbusiness,ofacharacterwhichissubjecttotheallowancefordepreciation.
4.Realpropertyusedinthetradeorbusinessofthetaxpayer.
Capitalasset
Propertyheldbythetaxpayer,whetherornotconnectedwithhistradeorbusiness,whichisnotanordinaryasset.
Ordinarygainorincome
Ordinaryincomeorgainincludesanygainfromthesaleorexchangeofpropertywhichisnotacapitalasset.
Capitalgainorincome
Capitalgainorincomeisanygainfromthesaleorexchangeofacapitalasset.
Netcapitalgain
Netcapitalgainmeanstheexcessofthegainsfromsalesorexchangesofcapitalassetsoverthelossesfromsuchsalesor
exchanges.
Netcapitalloss
Netcapitallossmeanstheexcessofthelossesfromsalesorexchangesofcapitalassetsoverthegainsfromsuchsalesor
exchanges.
Threerulesontherecognitionofcapitalgainsandlosses
1.Holdingrule
2.Losslimitationrule
3.Netcapitallosscarryoverrule
Note:Theholdingandnetcapitallosscarryoverrulesapplyonlytoindividualtaxpayersandnottocorporatetaxpayers.
Percentagetakenintoaccountorholdingrule
Inthecaseofanindividualtaxpayer,onlythefollowingpercentagesofthegainorlossrecognizeduponthesaleorexchangeofa
capitalassetshallbetakenintoaccountincomputingnetcapitalgain,netcapitalloss,andnetincome:
100%ifthecapitalassethasbeenheldfornotmorethan12months
50%ifthecapitalassethasbeenheldformorethan12months
Losslimitationrule
Lossesfromsalesorexchangesofcapitalassetsshallbeallowedonlytotheextentofthegainsfromsuchsalesorexchanges.
Netcapitallosscarryover
Ifanytaxpayer,otherthanacorporation,sustainsinanytaxableyearanetcapitalloss,suchloss(inanamountnotinexcessofthe
netincomeforsuchyear)shallbetreatedinthesucceedingtaxableyearasalossfromthesaleorexchangeofacapitalassetheld
fornotmorethan12months.
Gainsandlossesfromshortsales,etc.
Gainsorlossesfromshortsalesofpropertyshallbeconsideredasgainsorlosesfromsalesorexchangesofcapitalassets.
Gainsorlossesattributabletothefailuretoexerciseprivilegesoroptionstobuyorsellpropertyshallbeconsideredascapitalgains
orlosses.
Generalruleontherecognitionofgainorlossuponthesaleorexchangeofproperty
Thegeneralruleisthattheentireamountofthegainorloss,asthecasemaybe,shallberecognized,i.e.taxableordeductible.
Exceptions
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1.Transactionswheregainsandlossesarenotrecognized
a.Exchangeofpropertywherethepropertyreceivedisnotsubstantiallydifferentfromthepropertydisposedof.[Section140,
Reg.No.2]
b.Exchangeofpropertysolelyinkindinpursuanceofcorporatemergersandconsolidations.
c.Exchangebyapersonofhispropertyforstocksinacorporationasaresultofwhichsaidperson,aloneortogetherwithothers
notexceedingfourpersons,gainscontrolofsaidcorporation.
2.Transactionswheregainisrecognizedbutnottheloss
a.Transactionsbetweenrelatedtaxpayers
b.Illegaltransactions
c.Exchangesofproperty,notsolelyinkind,inpursuanceofcorporatemergersandconsolidations
Mergerorconsolidation
Mergerorconsolidationshallbeunderstoodtomeanthe(a)ordinarymergerorconsolidationor(b)theacquisitionbyonecorporation
ofallorsubstantiallyallthepropertiesofanothercorporationsolelyforstock.
Suchmergerorconsolidationmustbeundertakenforabonafidebusinesspurposeandnotsolelyforthepurposeofescapingthe
burdenoftaxation.
SOURCESOFTAXATION
Sourceofincome
Thetermsourceofincomeisnotaplacebuttheproperty,activityorservicethatproducestheincome.[Commissionerv.BOAC]
DissentofJusticeFelicianoinCommissionervBOAC
Thesourceofincomerelatesnottothephysicalsourcingofaflowofmoneyorthephysicalsitusofpaymentbutrathertothe
property,activityorservicewhichproducedtheincome.Whereacontractforrenditionofservicesisinvolved,theapplicablesource
rulemaybesimplystatedasfollows:Theincomeissourcedintheplacewheretheservicecontractedforisrendered.
Sourcesoftaxation
1.IncomefromsourceswithinthePhilippines
2.IncomefromsourceswithoutthePhilippines
3.IncomefromsourcespartlywithinandpartlywithoutthePhilippines
GrossincomefromsourceswithinthePhilippines
ThefollowingitemsofgrossincomeshallbetreatedasgrossincomefromsourceswithinthePhilippines:
1.InterestsderivedfromsourceswithinthePhilippines,andinterestsonbonds,notesorotherinterestbearingobligationsof
residents,corporateorotherwise.
2.Dividendsreceivedfromadomesticcorporationandfromaforeigncorporation,unlesslessthan50%ofthegrossincomeof
suchforeigncorporationforthethreeyearperiodendingwiththecloseofitstaxableyearprecedingthedeclarationofsuch
dividendswasderivedfromsourceswithinthePhilippines.
3.CompensationforlabororpersonalservicesperformedinthePhilippines.
4.RentalsandroyaltiesfrompropertylocatedinthePhilippines.
5.Gains,profitsandincomefromthesaleofrealpropertylocatedinthePhilippines.
6.Gains,profitsandincomefromthesaleofpersonalpropertyifsoldwithinthePhilippines.[Section42(A),NIRC]
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Interestincome
Theresidenceoftheobligorwhopaystheinterest,ratherthanthephysicallocationofthesecurities,bondsornotesortheplaceof
payment,isthedeterminingfactorofthesourceofinterestincome.[NationalDevelopmentCorporationv.Commissioner,151
SCRA472]
GrossincomefromsourceswithoutthePhilippines
JusttheexactoppositeoftheitemsofgrossincomefromsourceswithinthePhilippines.[Section42(B),NIRC]
IncomefromsourcespartlywithinandpartlywithoutthePhilippines
Gains,profitsandincomefromthesaleofpersonalpropertyproducedbythetaxpayerwithinandsoldwithoutthePhilippines,or
producedbythetaxpayerwithoutandsoldwithinthePhilippinesshallbetreatedasderivedpartlyfromsourceswithinandpartlyfrom
sourceswithoutthePhilippines.[Section42(E),NIRC]
Purchaseorsaleofpersonalproperty
Gains,profitsandincomederivedfromthepurchaseofpersonalpropertywithinanditssalewithoutthePhilippines,orfromthe
purchaseofpersonalpropertywithoutanditssalewithinthePhilippinesshallbetreatedasderivedentirelyfromsourceswithinthe
countryinwhichsold.[Section42(E),NIRC]
Gainfromsaleofsharesofstockofadomesticcorporation
GainfromthesaleofsharesofstockinadomesticcorporationshallbetreatedasderivedentirelyfromsourceswithinthePhilippines
regardlessofwherethesaidsharesaresold.
Thetransferbyanonresidentalienoraforeigncorporationtoanyoneofanyshareofstockissuedbyadomesticcorporationshall
notbeeffectedormadeinitsbookunless:
1.ThetransferorhasfiledwiththeCommissionerabondconditioneduponthefuturepaymentbyhimofanyincometaxthat
maybedueonthegainsderivedfromsuchtransferor
2.TheCommissionerhascertifiedthatthetaxes,ifany,imposedanddueonthegainrealizedfromsuchsaleortransferhave
beenpaid.[Section42(E),NIRC]
ACCOUNTINGPERIODSANDMETHODSOFACCOUNTING
Methodsofaccounting
GeneralRule:Thetaxableincomeshallbecomputeduponthebasisofthetaxpayersannualaccountingperiodinaccordancewith
themethodofaccountingregularlyemployedinkeepingthebooksofsuchtaxpayer.
Exception:ComputationsshallbemadeinaccordancewithsuchmethodasintheopinionoftheCommissionerclearlyreflectsthe
income:
a.Ifnosuchmethodofaccountinghasbeensoemployedor
b.Ifthemethodemployeddoesnotclearlyreflecttheincome.[Section43,NIRC]
Taxableyear
Taxableyearmeansthecalendaryear,orthefiscalyearendingduringsuchcalendaryear,uponthebasisofwhichthenetincomeis
computed.
Accountingperiods
1.CalendaryearJanuary1toDecember31
2.Fiscalyearanaccountingperiodoftwelve(12)monthsendingonthelastdayofanymonthotherthanDecember.
Whencalendaryearused?
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1.Ifthetaxpayerchoosesthecalendaryear
2.Ifthetaxpayerhasnoannualaccountingperiod
3.Ifthetaxpayerdoesnotkeepbooks
2.Ifthetaxpayerisanindividual
WhenCommissionerisauthorizedtoterminatetaxableperiod
1.Whenataxpayerretiresfrombusinesssubjecttotax
2.WhenheintendstoleavethePhilippines
3.WhenheremoveshispropertyfromthePhilippines
4.Whenhehidesorconcealshisproperty
5.Whenheperformsanyacttendingtoobstructtheproceedingsforthecollectionofthetaxforthepastorcurrentquarteroryear
6.Whenherendersthecollectionofthetaxtotallyorpartlyineffective
Methodsofaccounting
1.CashBasis
Income,profitsandgainsearnedbytaxpayerarenotincludedingrossincomeuntilreceived.
Expensesarenotdeducteduntilpaidwithinthetaxableyear.
2.AccrualMethod
Income,gainsandprofitsareincludedinthegrossincomewhenearned,whetherreceivedornot.
Expensesareallowedasdeductionswhenincurred,althoughnotyetpaid.
3.Mixed/Hybrid
Combinationofthecashandaccrualmethod.
4.Anyothermethodwhichclearlyreflectstheincome
Cashv.accrualmethodofaccounting
Gains,profitsandincomearetobeincludedinthegrossincomeforthetaxableyearinwhichtheyarereceivedbythetaxpayer,
unlesstheyareincludedwhentheyaccruetohiminaccordancewiththeapprovedmethodofaccountingfollowedbyhim.
Taxaccountingv.financialaccounting
Whiletaxableincomeisbasedonthemethodofaccountingusedbythetaxpayer,itwillalwaysdifferfromaccountingincome.This
issobecauseofafundamentaldifferenceintheendsthetwoconceptsserve.Accountingattemptstomatchcostagainstrevenue.
Taxlawisaimedatcollectingrevenue.Itisquicktotreatanitemasincome,slowtorecognizedeductionsaslosses.Thus,taxlaw
willnotrecognizeddeductionsforcontingentfuturelossesexceptinverylimitedsituations.Goodaccounting,ontheotherhand,
requirestheirrecognition.[ConsolidatedMinesv.CTA,58SCRA618]
Longtermcontracts
Thetermlongtermcontractsmeansbuilding,installationorconstructioncontractscoveringaperiodinexcessofoneyear.[Section
48,NIRC]
Treatmentofincomefromlongtermcontracts
1.Percentageofcompletionbasis
2.Completedcontractbasis
Note:Section48oftheNIRCprovidesthatPersonswhosegrossincomeisderiveinwholeorinpartfromsuch(longterm)contractsshall
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reportsuchincomeuponthebasisofpercentageofcompletion.
Thereturnshouldbeaccompaniedbyareturncertificateofarchitectsorengineersshowingthepercentageofcompletion
duringthetaxableyearoftheentireworkperformedunderthecontract.
Salesofdealersinpersonalproperty
Apersonwhoregularlysellsorotherwisedisposesofpersonalpropertyontheinstallmentplanmayreturnasincometherefromin
anytaxableyearthatproportionoftheinstallmentpaymentsactuallyreceivedinthatyear,whichthegrossprofitrealizedortobe
realizedwhenpaymentiscompleted,bearstothetotalcontractprice.[Section49,NIRC]
Treatmentofsalesofrealtyandcasualsalesofpersonalty
Theseinclude:
1.Casualsaleorothercasualdispositionofpersonalproperty(otherthanpropertyincludedintheinventoryatthecloseofthe
taxableyear)forapriceexceedingP1000and
2.Saleorotherdispositionofrealproperty.
Treatedeitheroninstallmentbasisordeferredsalesbasis.
Installmentbasisiftheinitialpaymentsdonotexceed25%ofthesellingprice.
Deferredsalesbasisiftheinitialpaymentsexceed25%ofthesellingprice[Section49,NIRCandSection175,RevenueRegulations
2]
Initialpayments
Theseincludethepaymentsreceivedincashorpropertyotherthanevidencesofindebtednessofthepurchaserduringthetaxable
periodinwhichthesaleorotherdispositionismade.
Theterminitialpaymentscontemplatesatleastoneotherpaymentinadditiontotheinitialpayment.[Section175,Revenue
Regulations2]
Terminationofleasehold
Lessorwhoacquiresbuildingorimprovementsmadebythelesseeaftertheterminationoftheleasehastwooptionsinreportingsaid
income:
1.Lessormayreportasincomeatthetimewhensuchbuildingsorimprovementsarecompletedthefairmarketvalueofsuch
buildingsorimprovementsor
2.Lessormayspreadoverthelifeoftheleasetheestimateddepreciatedvalueofsuchbuildingsorimprovementsatthe
terminationoftheleaseandreportasincomeforeachoftheleaseanadequatepartthereof.[Section49,Revenue
Regulations2]
Allocationofincomeanddeductions
Inthecaseoftwoormoreorganizations,tradesorbusinesses(whetherornotincorporatedandwhetherornotorganizedinthe
Philippines)ownedorcontrolled,directlyorindirectly,bythesameinterests,theCommissionerisauthorizedtodistribute,apportionor
allocategrossincomeordeductionsbetweenoramongsuchorganization,tradeorbusiness,ifhedeterminesthatsuchdistribution,
apportionmentorallocationisnecessaryinordertopreventevasionoftaxesorclearlytoreflecttheincomeofanysuchorganization,
tradeorbusiness.[Section50,NIRC]
RETURNSANDPAYMENTOFTAX
INDIVIDUALINCOMETAXRETURNS
Whoarerequiredtofileindividualreturns?
1.EveryFilipinocitizenresidinginthePhilippines
2.EveryFilipinocitizenresidingoutsidethePhilippines,onhisincomefromsourceswithinthePhilippines
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3.EveryalienresidinginthePhilippines,onincomederivedfromsourceswithinthePhilippines
4.EverynonresidentalienengagedintradeorbusinessorintheexerciseofaprofessioninthePhilippines
Whoarenotrequiredtofileindividualreturns?
1.Anindividualwhosegrossincomedoesnotexceedhistotalpersonalandadditionalexemptions.
However,aFilipinocitizenandanyalienindividualengagedinbusinessorpracticeofprofessionwithinthePhilippinesshallfile
anincometaxreturn,regardlessoftheamountofgrossincome.
2.AnindividualwithrespecttopurecompensationincomederivedfromsourceswithinthePhilippines,theincometaxonwhichhasbeen
correctlywithheld.
However,anindividualderivingcompensationconcurrentlyfromtwoormoreemployeesatanytimeduringthetaxableyear
shallfileanincometaxreturn.
Further,anindividualwhosepurecompensationincomederivedfromsourceswithinthePhilippinesexceedsP60,000shallalso
fileanincometaxreturn.
3.Anindividualwhosesoleincomehasbeensubjectedtoafinalwithholdingtax.
4.AnindividualwhoisexemptfromincometaxpursuanttotheNIRCandotherlaws,generalorspecial.
Wheretofile
1.Authorizedagentbank
2.RevenueDistrictOfficer
3.Collectionagent
4.DulyauthorizedTreasurerofthecityormunicipalityinwhichsuchpersonhashislegalresidenceorprincipalplaceofbusinessinthe
Philippines
5.OfficeoftheCommissioneriftherebenolegalresidenceorplaceofbusinessinthePhilippines
Whentofile
OnorbeforeApril15ofeachyearcoveringincomefromtheprecedingtaxableyear
Thirty(30)daysfromeachtransactionandafinalconsolidatedreturnonorbeforeApril15coveringallstocktransactionsofthe
precedingyearincaseofsaleorexchangeofsharesofstocknottradedthroughalocalstockexchange
Thirty(30)daysfollowingeachsaleorotherdispositionincaseofsaleordispositionofrealproperty
Husbandandwife
Marriedindividuals,whethercitizens,residentornonresidentaliens,whodonotderiveincomepurelyfromcompensation,shallfilea
returnforthetaxableyeartoincludetheincomeofbothspouses.
However,ifitisimpracticableforthespousestofileonereturn,eachspousemayfileaseparatereturnofincomebutthereturnsso
filedshallbeconsolidatedbytheBIRforpurposesofverificationforthetaxableyear.
Returnofparenttoincludeincomeofchildren
Theincomeofunmarriedminorsderivedfrompropertyreceivedfromalivingparentshallbeincludedinthereturnoftheparent,
except:
1.Whenthedonorstaxhasbeenpaidonsuchpropertyor
2.Whenthetransferofsuchpropertyisexemptfromdonorstax.
SELFEMPLOYEDINDIVIDUALS
Declarationofincometaxforindividuals
Everyindividualsubjecttoincometax,whoisreceivingselfemploymentincome,whetheritconstitutesthesolesourceofhisincome
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orincombinationwithsalaries,wagesandotherfixedordeterminableincome,shallmakeandfileadeclarationofhisestimated
incomeforthecurrenttaxableyearonorbeforeApril15ofthesametaxableyear.
NonresidentFilipinocitizenswithrespecttoincomefromwithoutthePhilippinesandnonresidentaliensnotengagedintradeor
businessinthePhilippinesarenotrequiredtorenderadeclarationofestimateincometax.
Selfemploymentincome
Selfemploymentincomeconsistsoftheearningsderivedbytheindividualfromthepracticeofprofessionorconductoftradeor
businesscarriedonbyhimasasoleproprietororbyapartnershipofwhichheisamember.
Returnandpaymentofestimateincometaxbyindividuals
Theamountofestimatedincomeshallbepaidinfour(4)installments.
Estimatedtax
Estimatedtaxmeanstheamountwhichtheindividualdeclaredasincometaxinhisfinaladjustedandannualincometaxreturnfor
theprecedingtaxableyearminusthesumofthecreditsallowedagainstthesaidtax.
If,duringthecurrenttaxableyear,thetaxpayerreasonablyexpectstopayabiggerincometax,heshallfileanamendeddeclaration
duringanyintervalofinstallmentpaymentdates.
CORPORATERETURNS
Corporationreturns
Everycorporationsubjecttoincometax,exceptforeigncorporationsnotengagedintradeorbusinessinthePhilippines,shallrender,
induplicate,atrueandaccurate:
1.Quarterlyincometaxreturnand
2.Finaloradjustmentreturn.
Thereturnshallbefiledbythepresident,vicepresidentorotherprincipalofficer,andshallbesworntobysuchofficerandbythe
treasurerorassistanttreasurer.
Acorporationmayemployeitherthecalendaryearorfiscalyearasbasisforfilingitsannualincometaxreturn.
Everycorporationderivingcapitalgainsfromthesaleorexchangeofsharesofstocknottradedthroughalocalstockexchangeshall
fileareturnwithinthirty(30)daysaftereachtransactionandafinalconsolidatedreturnofalltransactionsduringthetaxableyearon
orbeforethefifteenth(15th)dayofthefourthmonthfollowingthecloseofthetaxableyear.
Declarationofquarterlycorporateincometax
Everycorporationshallfileinduplicateaquarterlysummarydeclarationofitsgrossincomeanddeductionsonacumulativebasisfor
theprecedingquarterorquartersuponwhichtheincometaxshallbelevied,collectedandpaid.
Thetaxcomputedshallbedecreasedbytheamountoftaxpreviouslypaidorassessedduringtheprecedingquartersandshallbe
paidnotlaterthansixty(60)daysfromthecloseofeachofthefirstthree(3)quartersofthetaxableyear,whethercalendarorfiscal
year.
Finaladjustmentreturn
Everycorporationliablefortaxshallfileafinaladjustmentreturncoveringthetotaltaxableincomefortheprecedingcalendarorfiscal
year.
Ifthesumofthequarterlytaxpaymentsmadeduringthesaidtaxableyearisnotequaltothetotaltaxdueontheentiretaxable
incomeofthatyear,thecorporationshalleither:
1.Paythebalanceoftaxstilldueor
2.Carryovertheexcesscreditor
3.Becreditedorrefundedwiththeexcessamountpaid,asthecasemaybe.
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Carryingoverorcreditingofexcesstosucceedingquarters
Incasethecorporationisentitledtoataxcreditorrefundoftheexcessestimatedquarterlyincometaxespaid,theexcessamount
shownonitsfinaladjustmentreturnmaybecarriedoverandcreditedagainsttheestimatedquarterlyincometaxliabilitiesforthe
taxablequartersofthesucceedingtaxableyears.
Butthisisnotautomatic.Needtoapplyforcreditingofsuchexcessortaxcredittosucceedingquarters.
PAYMENTANDASSESSMENTOFINCOMETAX
Paymentoftax,ingeneral
Thetotalamountoftaxshallbepaidbythepersonsubjecttheretoatthetimethereturnisfiled.
Installmentpayment
Ataxpayer,otherthanacorporation,mayopttopaythetaxintwoequalinstallmentswhenthetaxdueisinexcessoftwothousand
pesos(P2,000).
Insuchcases,thefirstinstallmentshallbepaidatthetimethereturnisfiledandthesecondinstallmentonorbeforeJuly15
followingthecloseofthecalendaryear.
Paymentofcapitalgainstax
Itshallbepaidonthedatethereturnprescribedthereforisfiledbythepersonliablethereto.
Incasethetaxpayerelectsandisqualifiedtoreportthegainbyinstallments,thetaxduefromeachinstallmentpaymentshallbe
paidwithinthirty(30)daysfromthereceiptofsuchpayments.
Assessmentandpaymentofdeficiencytax
Afterthereturnisfiled,theCommissionershallexamineitandassessthecorrectamountoftax.
ThetaxordeficiencyincometaxsodiscoveredshallbepaiduponnoticeanddemandfromtheCommissioner.
Deficiency
Thetermdeficiencymeans:
1.TheamountbywhichthetaximposedbythisTitleexceedstheamountshownasthetaxbythetaxpayeruponhisreturn.
However,theamountsoshownonthereturnshallbeincreasedbytheamountpreviouslyassessed(orcollected
withoutassessment)asadeficiency,anddecreasedbytheamountpreviouslyabated,credited,returnedorotherwiserepaid
inrespectofsuchtaxor
2.Ifnoamountisshownasthetaxbythetaxpayeruponhisreturn,orifnoreturnismadebythetaxpayer,thentheamountby
whichthetaxexceedstheamountspreviouslyassessed(orcollectedwithoutassessment)asadeficiency.
However,suchamountspreviouslyassessedorcollectedwithoutassessmentshallfirstbedecreasedbytheamounts
previouslyabated,credited,returnedorotherwiserepaidinrespectofsuchtax.
WITHHOLDINGOFTAXATSOURCE
Twokindsofwithholding
1.Withholdingoffinaltaxoncertainincomes
2.Withholdingofcreditabletaxatsource
Fundwithheldheldintrustbywithholdingagent
Thetaxesdeductedandwithheldbythewithholdingagentshallbeheldasaspecialfundintrustforthegovernmentuntilpaidtothe
collectingofficers.
AlltaxeswithheldpursuanttotheNIRCanditsimplementingrulesandregulationsareherebyconsideredtrustfundsandshallbe
maintainedinaseparateaccountandnotcommingledwithanyotherfundsofthewithholdingagent.
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ESTATESANDTRUSTS
Taxationofestatesandtrusts
Incometaximposeduponindividualsshallalsoapplytotheincomeofestatesorofanykindofpropertyheldintrust.
Thetaxshallbecomputedupontaxableincomeoftheestateortrustandshallbepaidbythefiduciary.
Whataretheincomeoftheestatesortrustswhichareincludedfortaxation?
1.Incomeaccumulatedintrustforthebenefitofunbornorunascertainedpersonorpersonswithcontingentinterests,andincome
accumulatedorheldforfuturedistributionunderthetermsofthewillortrust.
2.Incomewhichistobedistributedcurrentlybythefiduciarytothebeneficiaries,andincomecollectedbyaguardianofaninfantwhich
istobeheldordistributedasthecourtmaydirect.
3.Incomereceivedbyestatesofdeceasedpersonsduringtheperiodofadministrationorsettlementoftheestate.
4.Incomewhich,inthediscretionofthefiduciary,maybeeitherdistributedtothebeneficiariesoraccumulated.
Exceptionfromtaxationofestatesortrusts
Employeestrustwhichformspartofapension,stockbonusorprofitsharingplanofanemployerforthebenefitofsomeorallofhis
employeesshallbeexemptfromincometax:
1.Ifcontributionsaremadetothetrustbysuchemployer,oremployees,orboth,forthepurposeofdistributingtosuch
employeestheearningsandtheprincipalofthefundaccumulatedbythetrustinaccordancewithsuchplanand
2.Ifunderthetrustinstrument,itisimpossible,atanytimepriortothesatisfactionofallliabilitieswithrespecttoemployees
underthetrust,foranypartofthecorpusorincometobeusedforordivertedtopurposesotherthanfortheexclusive
benefitoftheemployees.
However,anyamountactuallydistributedtoanyemployeeordistributeeshallbetaxabletohimintheyearinwhichsodistributedto
theextentthatitexceedstheamountcontributedbysuchemployeeordistributee.
Taxableincomeofestatesortrusts
Thetaxableincomeoftheestateortrustshallbecomputedinthesamemannerandonthesamebasisasinthecaseofan
individual.
However,thereshallbeallowedasadeductionincomputingthetaxableincomeoftheestateortrusttheamountoftheincomeof
theestateortrustforthetaxableyearwhichistobedistributedcurrentlybythefiduciarytothebeneficiaries,andtheamountofthe
incomecollectedbyaguardianofaninfantwhichistobeheldordistributedasthecourtmaydirect,buttheamountsoallowedasa
deductionshallbeincludedincomputingthetaxableincomeofthebeneficiaries,whetherdistributedornot.
Inthecaseofincomereceivedbyestatesofdeceasedpersonsduringtheperiodofadministrationorsettlementoftheestate,andin
thecaseofincomewhich,inthediscretionofthefiduciary,maybeeitherdistributedtothebeneficiaryoraccumulated,thereshallbe
allowedasanadditionaldeductionincomputingthetaxableincomeoftheestateortrusttheamountoftheincomeoftheestateor
trustforitstaxableyear,whichisproperlypaidorcreditedduringsuchyeartoanylegatee,heirorbeneficiary,buttheamountso
allowedasadeductionshallbeincludedincomputingthetaxableincomeofthelegatee,heirorbeneficiary.
Thedeductionsallowedaboveshallnotbeallowedincaseofatrustadministeredinaforeigncountry.
Exemptionallowedtoestatesandtrusts
Thereshallbeallowedanexemptionoftwentythousandpesos(P20,000)fromtheincomeoftheestateortrust.
Fiduciaryreturns
Guardians,trustees,executors,administrators,receivers,conservatorsandallpersonsorcorporationsactinginanyfiduciarycapacity
shallrenderareturnoftheincomeofthepersons,trustorestateforwhomorwhichtheyact,andbesubjecttoalltheprovisionsof
thisTitle,whichapplytoindividualsincasesuchperson,estateortrusthasagrossincomeoftwentythousandpesos(P20,000)or
overduringthetaxableyear.
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IncomeTaxation
Suchfiduciaryorpersonfilingthereturnforhimorit,shalltakeoaththathehassufficientknowledgeoftheaffairsofsuchperson,
trustorestatetoenablehimtomakesuchreturnandthatthesameis,tothebestofhisknowledgeandbelief,trueandcorrect,and
besubjecttoalltheprovisionsofthisTitlewhichapplytoindividuals.
Fiduciariesindemnifiedagainstclaimsfortaxespaid
Trustees,executors,administratorsandotherfiduciariesareindemnifiedagainsttheclaimsordemandsofeverybeneficiaryforall
paymentsoftaxeswhichtheyshallberequiredtomakeundertheprovisionsofthisTitle,andtheyshallhavecreditfortheamount
ofsuchpaymentsagainstthebeneficiaryorprincipalinanyaccountingwhichtheymakeassuchtrusteesorotherfiduciaries.
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