WFH Income Taxation

WORLD CITI COLLEGES
Guimba, Nueva Ecija
Introduction
Most people receive their initial exposure to the Phil. Income Tax system when first faced with
the responsibility of filing their own tax returns. As a result, tax work is sometimes viewed as a
robotized process of filing out govt forms-not a very challenging activity.
Actually, the perception of tax work as a routine clerical process is a grossly distorted view of the
tax profession. Historically, most professional-level work has concerned conceptual issues. In
today’s society, that emphasis is greater than ever with computer systems handling an ever-
increasing share of the mechanical chores of tax practice. This allows tax professionals and
business managers to devote an even greater share of their time to substantive matters.
In approaching the study of taxation, you should try to keep three (3) basic points in mind:
1.Do not get lost in the detail of tax rules. It is that ability to apply the rules of tax law to real-life
situations that is important-not just having the talent to recite such rule by rote. In studying any
area of tax law, you should be alert for possible decision making implications.
2. Keep in mind that tax rules are a matter of law. Hence, only legal authority (e.g. a statute, a
regulation, a court case) can ever be a tax authority. If the “correct application” of law to a given
set of facts results in a solution at odds with some accounting, economic, social, or moral theory,
it is still the law that controls. As a practical matter, most tax disputes arise over differences in
opinion concerning what constitutes the “correct application” of tax law to specific situations.
3. Give close attention to the use of language, particularly the wording of tax authorities. Verbal
distinctions are often critical. Terms having similar meanings in everyday speech may have been
defined differently in tax law.
Taxation is the process or means by which the sovereign, through its lawmaking body, raises
income to defray the necessary expenses of the govt. Taxation, as a power of the State, is
inherent in sovereignty.
Taxes are the lifeblood of the government and their prompt and certain availability are an
imperious need. A government cannot continue to exist and operate without financial means.
This inherent power gives the government the right to tax citizens and properties within its
jurisdiction.
Taxation is indispensable and inevitable price for civilized society; without taxes, the govt would
be paralyzed.
Indeed, the collection of taxes remains one of the primary undertakings of any govt in order to
provide sufficient funds with which a nation’s economy may be sustained and developed. In this
light, it has become the enduring goal of every tax authority, be it one that serves a developed or
developing nation, to seek and implement strategies and technologies that shall support the
continuing improvement of their collection systems. In the Phils., the primier tax agency is the
BIR.
Upon taxation depends the Govt’s ability to serve the people for whose benefit taxes are
collected. The ultimate beneficiaries in the process are both the govt and the citizens. The state
collect taxes in the exercise of its sovereign rights for the support of the govt, for the
administration of the laws, and as a means for the continued operation of the various legitimate
functions of the state.
Objectives of Taxation
Taxation is much more than just a means of raising revenue for the govt. It is also one of the
major means by which the natl govt attempts to achieve various economic and social objectives.
These objectives include shifting wealth from the rich to the poor, maintaining price stability,
stimulating economic growth, and encouraging full employment.
In its efforts to achieve these objectives, Congress tends to use tax provisions in two different
ways. First, some tax rules are enacted for the purpose of mitigating certain undesirable
economic and social conditions already existing. For instance, low-income individuals often pay
little or no national income taxes because of the elaborate system of exclusions, deductions, and
credits of current law. Second, other tax rules provide incentives for certain desirable activities.
For instance, business can claim deductions for depreciation of productive assets much faster than
the assets actually wear out. This provides incentive for businesses to invest in these assets,
leading to increased employment of low-and middle-income workers.
All too often, the incentive and mitigating aspects of various tax provisions work at cross-
purposes. Consider the two examples just mentioned. While the purpose of the rapid
depreciation rules may be to increase investments in productive facilities that will lead to
increased employment of low-and middle income workers, rapid depreciation rates may also
greatly reduce the tax liabilities of extremely wealthy individuals and thus actually increase,
rather than reduce, the concentration of wealth in society.
Perhaps it is because of these conflicting objectives that Congress so often seems to exhibit
confused behavior when writing tax rules. When an incentive provision is enacted, numerous
limitations and restrictions will usually prevent its application in many circumstances. There may
also be exceptions to the exceptions. Often the congressional process of fine-tuning incentive tax
provisions will create a maze of statutory law under which significant tax savings are possible,
but only if transactions are carefully planned to fit within statutory requirements.
State Powers
1.Taxation. The power of the state by which the sovereign raises revenue to defray the necessary
expenses of the govt.
2. Eminent Domain. The power of the state to take private property for public use upon payment
of just compensation.
3. Police Power. The power of the state to enact laws to promote public health, public morals,
public safety and the general welfare of the people.
Aspects of Taxation
4.
1.Levying of the tax. The imposition of tax requires legislative intervention. In the Phils, it is
Congress that levies taxes; and
2. Collection of the tax levied. This is essentially an administrative function.
Basic Principles of a Sound Tax System
1.Fiscal adequacy. Sources of revenue are sufficient to meet govt expenditures;

2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayer’s ability to
pay; and
3. Administrative feasibility. The law must be capable of convenient, just and effective
administration.
Limitation on the Power of Taxation
The power of taxation is, however, subject to constitutional and inherent limitations.
Constitutional limitations are those provided for in the constitution or implied from its provisions
while inherent limitations are restrictions to the power to tax attached to its nature. The ff. are the
inherent limitations:
1.Purpose. Taxes may be levied only for public purpose.

2. Territoriality. The State may tax persons and properties under its jurisdictions.
3. International comity. The property of a foreign State may not be taxed by another;
4. Exemption. Governmental agencies performing governmental functions are exempt from
taxation.
5. Non-delegation. The power to tax being legislative in nature may not be delegated.
Some Doctrines in Taxation
1)Prospectivity of Tax Laws
Taxes must be imposed prospectively. But if the legislative intent is for a tax statute to operate
retroactively, then such statute must state so explicitly and clearly. In the words of the Supreme
Court: “Taxes may be imposed retroactively by law but, unless so expressed by such law, these
taxes must only be imposed prospectively.
2)Double Taxation
Double taxation standing alone and not being forbidden by our fundamental law is not a valid
defense against the legality of a tax measure. However, if double taxation amounts to a direct
duplicate taxation, in that the same subject is taxed twice when it should be taxed but once, in a
fashion that both taxes are imposed for the same purpose by the same taxing authority, within the
same jurisdiction or taxing district, for the same taxable period and for the same kind or character
of a tax, then it becomes legally objectionable for being oppressive and inequitable.
Indirect double taxation is one other than the direct double taxation. Though this type may not
prove unconstitutional, it is being avoided so as not to bring injustice to the taxpayer. An
example of this occurs when business tax is imposed by the municipal govt prior to the issuance
of a business license to a taxpayer for engaging in an advertising business. His income from his
advertising business shall later be imposed income tax by the national govt.
When an item of income is taxed in the Phils and the same income is taxed in another country,
there is only a case of indirect duplicate taxation which is not legally prohibited because the taxes
are imposed by different taxing authorities.
The usual methods of avoiding the occurrence of double taxation are;

1.allowing reciprocal exemptions either by law or by treaty;
2. allowance of tax credit for foreign taxes paid;
3. allowance of deduction for foreign taxes paid; and
4. reduction of the Phil. Tax rate.
3)Set-off of Taxes
Taxes are not subject to set-off or legal compensation under Art. 1279 of the Civil Code. This
has been the SC ruling in Republic vs. Mambulao Lumber Co. However, the high court reversed
itself in the subsequent case of Domingo vs. Garlitos, when it decided that legal compensation
can take place when the taxes and the taxpayer’s claim are fully liquidated, due, and demandable.
In a more recent case the SC echoed the Mambulao Lumber doctrine: “We have consistently
ruled that there can be no offsetting of taxes against the claims that the taxpayer may have against
the govt. A person cannot refuse to pay a tax on the ground that the govt owes him an amount
equal to or be greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the govt.
4)Escape from Taxation
It is “not uncommon” (common) that taxpayers resort to tax avoidance and tax evasion in order to
escape from taxation. Tax avoidance happens when the taxpayer minimizes his tax liability by
taking advantage of legally available tax planning opportunities. This is otherwise known as tax
minimization ; others call it tax planning. It is the process of controlling one’s actions so as to
avoid undesirable tax consequences. Tax avoidance is a completely legal activity. Just as the
penalties of criminal law can be avoided by not committing a crime, taxes can be avoided by not
engaging in those activities that are taxed. The law is not violated in any way. Rather, tax
savings are achieved by arranging one’s affairs, and thereby controlling the facts, so as to avoid
the application of those rules of law that would otherwise trigger a larger tax liability.
Tax evasion occurs when the taxpayer resorts to unlawful means to lessen or to get away with his
tax liability. This is also known as tax dodging. Examples of tax evasion are under-declaration
of sales, overstatement of expenses and backdating an important document.
While the dividing line may sometimes become hazy in practice, the basic notions of tax
avoidance and tax evasion are conceptually distinct. Both avoidance and evasion seek the same
objective, namely saving taxes. But the means by which that goal is sought are different.
Avoidance is the legal process of not conducting taxable transactions. On the other hand, tax
evasion is the illegal process of not complying with applicable provisions of the law once the
transactions already exist.
Tax evasion connotes the integration of three (3) factors;

1.The end to be achieved (i.e., payment of less than the amount known by the taxpayer to be
legally due, or nonpayment of the tax when it is shown that a tax is due);
2. An accompanying state of mind that is described as being in bad faith, willful, or deliberate
and not accidental; and
3. A course of action or failure of action that is unlawful.
5)Situs of Taxation
The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and
collect the tax where the subject being taxed has a situs under its jurisdiction. The situs of
taxation is determined by a number of factors;
1.Subject matter – or what is being taxed. He may be a person or it may be a property, an act, or
activity;
2. Nature of tax – or which tax to impose. It may be an income tax, an import duty or a real
property tax;
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer.
The following situs of taxation apply;

1.Persons – residence of the taxpayer;
2. Real property or tangible personal property – Location of the property;
3. Intangible personal property - As a rule, situs is the domicile of the owner unless he has
acquired a situs elsewhere;
4. Income - Taxpayer’s residence or citizenship, or place where the income was earned;
5. Business, occupation, and transaction - Place where business is being operated, occupation
being practiced and transaction completed;
6. Gratuitous transfer of property - Taxpayer’s residence or citizenship or location of the
property.
TAXES
Taxes are enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of the govt and all public
needs.
Tax, in a general sense, is any contribution imposed by the govt upon individuals, for the use and
service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom,
excise, subsidy, aid, supply, or other name. Tax, in its essential characteristics, is not a debt.
Essential Characteristics of a Tax
1.It is an enforced contribution;

2. It is levied by the lawmaking body;
3. It is proportionate in character;
4. It is generally payable in money;
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purpose.
Types of Tax Rate Structures
Tax systems are often described as either regressive, proportional, or progressive.
A tax is said to be regressive if the average rate decreases as the tax base increases.
For proportional taxes (also called flat or uniform taxes), the average rate of tax remains constant
for all levels of the tax base.
Progressive tax is one for which the average rate increases as the amount of the tax bases
increases.
Notice that the definitions of regressive, proportional, and progressive are based on the direction
of change in tax rates with respect to an increase in the tax base. The widely held political view
that the rich should pay a larger amount of tax than the poor could be upheld under any of the
three rate structures – even a regressive one.
Classification of Taxes
1.As to subject matter or object
a) Personal, poll or capitation - Tax of a fixed amount imposed on individuals, whether

citizens or not, residing within a specified territory without regard to their property or the
occupation in which they may be engaged. Example: community tax.
b) Property - Tax imposed on property, whether real or personal, in proportion either to its
value or in accordance with some other reasonable method of apportionment. Example:
real estate tax.
c) Excise - Tax imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in a occupation. Examples: estate tax, donor’s tax, income tax, value-added tax.
2. As to who bears the burden

a) Direct - Tax demanded from persons who are intended or bound by law to pay the tax.
Examples: community tax, income tax, estate tax, donor’s tax.
b) Indirect - Tax which the taxpayer can shift to another. Examples: customs duties, value-
added tax, some percentage taxes.
3. As to determination of amount
a) Specific - Tax imposed based on a physical unit of measurement, as by head or number,

weight, or strength, or volume. Examples: tax on distilled spirits, fermented liquors,
cigars, wines, fireworks, etc.
b) Ad valorem - Tax of a fixed proportion of the value of property; needs an independent
appraiser to determine its value. Examples: real estate tax, certain customs duties,
excise taxes on cigarettes, gasoline, and others.
Excise taxes on certain specific goods imposed under the NIRC are either specific or ad
valorem taxes.
4. As to purpose
a) General, fiscal or revenue - Tax with no particular purpose or object for which the revenue
is raised, but is simply raised for whatever need may arise. Examples: income tax, value-
added tax.
b) Specific or regulatory - Tax imposed for a special purpose regardless of whether revenue
is raised or not, and is intended to achieve some social or economic end. Example:
protective tariffs or customs duties on certain imported goods to protect local industries
against foreign competition.
5. As to authority imposing the tax or scope
a) National - Tax imposed by the national govt. Examples: internal revenue taxes, tariffs
and customs duties.
b) Municipal or local - Tax imposed by municipal govts for specific needs. Examples: real
estate taxes, municipal licenses.
6. As to graduation or rate
a) Proportional - Tax based on a fixed percentage of the amount of property, income, or

other basis to be taxed. Examples: percentage taxes, real estate taxes.
b) Progressive or graduated - Tax rate increases as the tax base increases. Examples:
income tax, estate tax, donor’s tax.
c) Regressive - Tax rate decreases as the tax base increases. Example: value-added tax.
Tax Distinguished from Other Fees
1.From toll. Toll is a sum of money for the use of something, generally applied to the
consideration which is paid for the use of a road, bridge, or the like, of a public nature.
A toll is a demand of proprietorship, is paid for the use of another’s property and may be
imposed by the govt or private individuals or entities; while tax is a demand of sovereignty, is
paid for the support of the govt and may be imposed only by the State.
2. From Penalty. Penalty is any sanction imposed as a punishment for violation of law or acts
deemed injurious. Violation of tax laws may give rise to imposition of penalty.
A penalty is designed to regulate conduct and may be imposed by the govt or private
individuals or entities. Tax, on the other hand, is primarily aimed at raising revenue and may be
imposed only by the govt.
3. From special assessment. Special assessment is an enforced proportional contribution from

owners of lands for special benefits resulting from public improvements.
Special assessment is levied only on land, is not a personal liability of the person assessed, is
based wholly on benefits and is exceptional both as to time and place. Tax is levied on persons,
property, or exercise of privilege, which may be made a personal liability of the person assessed,
is based on necessity and is of general application.
4. From permit or license fee. Permit or License fee is a charge imposed under the police power
for purposes of regulation.
License fee is imposed for regulation and involves the exercise of police power; while tax is
levied for revenue and involves the exercise of the taxing power. Failure to pay a license fee
makes an act or a business illegal; while failure to pay a tax does not necessarily make an act or a
business illegal.
5. From debt. A debt is generally based on contract, is assignable and may be paid in kind; while
a tax is based on law, cannot generally be assigned and is generally payable in money. A person
cannot be imprisoned for non-payment of debt; while he can be for non-payment of tax.
6. From revenue. Revenue is broader than tax since it refers to all funds or income derived by the
govt, taxes included. Other sources of revenues are govt services, income from public enterprises
and foreign loans.
7. From customs duties. Customs duties are taxes imposed on goods exported to or imported
from a country. Customs duties are actually taxes but the latter is broader in scope.
TAX LAWS
Sources of Tax Authority
The 3-branches of the nat. govt are the President and his administration, the Congress, and the
Courts. Congress creates statutory law. The NIRC of 1997 is a statutory law.
The administrative branch of the nat. govt includes the Dept. of Finance, of which the BIR is a
bureau. Two commonly encountered types of administrative tax authorities are Revenue
Regulations and Revenue Rulings. Most Revenue Regulations are administrative interpretations
of the statutes enacted by Congress and tend to be somewhat more detailed than the Code itself.
Revenue Rulings are much more detailed , as they are issued in order to explain the tax results of
very specific transactions.
Court decisions occur when the BIR and taxpayers are unable to agree on what constitutes the
correct application of the tax statutes to specific situations. While Congress writes the statutes, an
administrative branch implements them, the judiciary branch has the final say on what the words
of the statutes really mean in actual application. In summary, “tax law”, in general, is composed
of all 3-elements: 1)the Code, 2)Regulations and Rulings, and 3)decisions of various courts that
hear tax cases.
Sources of Tax Laws

1.Constitution
2. Statutes and Presidential Decrees
3. Revenue Regulations by the DOF
4. rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of
Justice
5. Decisions of the SC and the Court of Tax Appeals;
6. Provincial, City, Municipal, and Barangay ordinances subject to limitations set forth in the
Local Government Code; and
7. Treaties or international agreements the purpose of which is to avoid or minimize double
taxation.
Republic Act 9282 the law creating the Court of Tax Appeals. The salient features are as follows;
1.The CTA shall be the same level as the Court of Appeals (CA);
2. It shall be composed of a presiding justice and five associate justices. For en banc sessions,
four justices shall constitute a quorum. The affirmative vote of four members shall be necessary
to render a decision or resolution;
3. There shall be two divisions (with three members each); the chairmen shall be the presiding
justice and the most senior associate. Two justices constitute a quorum for sessions of a division.
In order to render a decision/resolution, the affirmative vote of two members of a division is
necessary.
INCOME AND INCOME TAXES
Income Defined and Distinguished from Capital
Income, in its broad sense, means all wealth, which flows into the taxpayer other than a mere
return of capital. It is the return in money from one’s business, labor, or capital invested, e.g.,
gains, profits, salary, and wages. The words “income from any source whatever disclose a
legislative policy to include all income not expressly exempted from the class of taxable income
under our laws.
Income is also defined as the amount of money coming to a person or corp. within a specified
time, whether as payment for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. Income may also be thought of as a flow of the fruits of
one’s labor.
Capital is a fund or property existing at one distinct point of time. Income, on the other hand,
denotes a flow of wealth during a definite period of time. While capital is wealth, income is the
service of wealth. Capital is a fund, while income is a flow; capital is wealth, while income is
the service of wealth; capital is a tree and income is the fruit.
Income Tax Defined
Income tax is a tax on all yearly profits arising from property, profession, trade or business, or is
a tax on a person’s income, emoluments, profits and the like.
Income tax is generally regarded as an excise (privilege) tax. It is not levied upon persons,
property, funds, or profits as such but upon the right of a person to receive income or profits.
Income tax is based on income, either gross or net, realized in one taxable year.
CHAPTER 1 – INCOME TAXATION ON INDIVIDUALS
CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
1. Citizen
a) Resident citizen
b) Non-resident citizen
2. Alien
a) Resident alien
b) Non-resident alien
1. Engaged in trade or business in the Phils.
2. Not engaged in trade or business in the Phils.
3. Employed by
a) Regional or area headquarters and regional operating headquarters of
multinational entities in the Phils that are engaged in international trade with
affiliates and subsidiary branch offices in the Asia-Pacific region.
b) Offshore banking units
c) Petroleum contractors and sub-contractors.
Definition of Terms
1. Citizen. The following shall be considered citizens of the Philippines

a) Those who are citizens of the Phils at the time of the adoption of the Feb. 2, 1987
Constitution;
b) Those whose fathers or mothers are citizens of the Phils;
c) Those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitution, of
Filipino mothers, who elect Phil citizenship upon reaching the age of majority; and
d) Those who are naturalized in accordance with law.
2. Resident citizen – is a Filipino citizen who permanently resides in the Philippines.
3. Non-resident citizen means:
a) A citizen of the Phils who establishes to the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite intention to reside therein;
b) A citizen of the Phils who leaves the Phils during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
c) A citizen of the Phils who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year. “Most of the time” is interpreted to mean presence abroad
for at least 183-days during the taxable year;
d) A citizen who has been previously considered as non-resident citizen and who
arrives in the Phils at any time during the taxable year to reside permanently in the
Phils shall likewise be treated as a non-resident citizen for the taxable year in which
he arrives in the Phils with respect to his income derived from sources abroad until
the date of his arrival in the Phils.
e) The taxpayer shall submit proof to the Commissioner to show his intention of leaving
the Phils to reside permanently abroad or to return to and reside in the Phils, as the
case may be.
4. Resident alien. Means an individual whose residence is within the Phils and who is not a
citizen thereof. He is one who is actually present in the Phils and who is not a mere
transient or sojourner. But residence does not mean mere physical presence. An alien is
considered a resident or a non-resident depending on his intention with regard to the
length and nature of his stay.
5. Non-resident alien. Means an individual whose residence is not within the Phils and who
is not a citizen thereof.
6. Non-resident alien engaged in trade or business (NRA-ETB). Means that the alien is
carrying on a business in the Phils. It connotes more than a single act or isolated
transactions. It involves some continuity of action. The term trade, business, or
profession shall not include performance of services by the taxpayer as an employee but
it includes the performance of the functions of a public office. A non-resident alien who
has stayed in the Phils for more than 180-days during any calendar year shall be deemed
doing business in the Phils. If he stayed for 180-days or less, he is considered a non-
resident alien not doing business in the Phils (NRA-NETB).
SOURCES OF INCOME
Source of income is not a place but the property, activity, or service that produced the
income. In the case of income derived from labor, it is the place where the labor is
performed; in the case of income derived from the use of capital, it is the place where the
capital is employed; and in the case of profits from the sale or exchange of capital assets, it is
the place where the sale or transaction occurs.
It is important to know the source of income of an individual taxpayer-whether from within

the Phils or without-because not all individual taxpayers are taxed on all their income. The
following rules apply:
1. Resident citizens are taxable on all income derived from sources within and without.
2. Non-resident citizens and alien individuals - resident an non-resident-are taxable only on
income derived from sources within the Phils. An overseas contract worker is taxable
only on his income from sources within.
Individual Source of Income

Within the Phils Without the Phils
1. Resident Citizen taxable taxable
2. Non-resident citizen taxable not
3. Resident alien taxable not
4. Non-resident alien taxable not
CATEGORIES OF INCOME AND TAX RATES
1. Compensation income. In general, the term “compensation” means all remuneration for
services performed by an employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code.
If a taxpayer is receiving compensation income from two or more employers, he/she

must combine all compensation income received from all employers for a particular
calendar year. Taxed at the graduated rates from 20% to 35%.
Illustration: Kyla, single and a resident citizen, has a gross compensation income of
P600,000 in 2018. How much is her taxable income and tax due for 2018? A resident
citizen, who is single, is allowed basic personal exemption of P50,000.
Gross Compensation Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P600,000.00

Less: Basic Personal Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000.00
------------------
Net taxable compensation income . . . . . . . . . . . . . . . . . . . . . . . . . . . P550,000.00
=========
Tax Due:
On P400,000 . . . . . . . . . . . . . . . . P 30,000.00
150,000 x 25% . . . . . . . . . 37,500.00
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P 550,000 P 67,500.00
=========
2. Business income – arises from self-employment or practice of profession. This shall not
include income from performance of services by the taxpayer as an employee.
Taxed at graduated rates from 20% to 35%. Note that the same graduated tax schedule is
used for individual taxpayers earning compensation income, business/professional
income or both.
Illustration: Katrina, single and a resident citizen, has a gross business income of
P700,000 in 2018. Deductions related to her business is P80,000. How much is her
taxable income and tax due for 2018?
Gross Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . P700,000.00

Less: Deductions . . . . . . . . . . . . . . . . . . . . . . P 80,000.00
Basic Personal Exemption . . . . . . . . . . 50,000.00 130,000.00
------------------ --------------------
Taxable Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P570,000.00
===========
Tax Due:
On P400,000 P 30,000.00
170,000 x 25% . . . . . . 42,500.00
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P570,000 P 72,500.00
===========
An individual receiving a combination of compensation and business income shall first

deduct the allowable basic personal and additional exemptions from compensation
income. The excess, if any, shall then be deducted from business income.
3. Passive income. Passive income are subject to a separate and final tax. These are taxed
at fixed rates ranging from 5% to 25%. Examples of passive income are interests,
royalties, prizes, winnings, and dividends.
Illustration: Helena, single, and a resident citizen, has the following passive income for
the year 2018:
Interest from BPI Savings Deposit . . . . . . . . . . . . . . . . . . . . . . . . .P75,000
Royalty from Invention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Prize in a Painting Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Dividends received from a Domestic Corporation . . . . . . . . .. . . 30,000
Computation of Final Tax:

Interest (P75,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .P 15,000
Royalty (P80,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . .. 16,000
Prize (P50,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Dividends (30,000 x 10%) . . . . . . . . . . . . . . . . . . . . . . . . .. . 3,000
---------------
Total P 44,000
========
For this illustration, it is assumed that the passive income are all gross of final
withholding taxes.
Final tax imposed on income or gain shall no longer be included as taxable income
subject to the graduated rates. The final tax is imposed without any deduction and is
withheld at source. The amount received by passive income earner is net of the final
tax. The final tax on passive income is remitted by the payor who serves as the
withholding agent to the BIR. For example, if the prize in a painting competition is
P50,000, the amount to be received by the winner will only be P____?______.
ALLOWABLE DEDUCTIONS
Allowable deductions are items or amounts, which the law allows to be deducted from gross
income in order to arrive at the taxable income.
1. From compensation income

a) Basic personal and/or additional exemptions; and
b) Premium payments on health and/or hospitalization insurance.
2. From business income
a) Basic personal and/or additional exemptions;
b) Premium payments on and/or hospitalization insurance;
c) Itemized deductions under the Tax Code; and
d) Optional standard deductions. In place of the itemized deductions, the individual
taxpayer may opt for the optional standard deduction (OSD) not to exceed 40% of
his gross sales or gross receipts, as the case may be.
If the individual is on the accrual basis of accounting for his income and deductions, the
OSD shall be based on the gross sales during the taxable year. On the other hand, if the
individual employs the cash basis of accounting for his income and deductions, the OSD
shall be based on his gross receipts during the taxable year.
Note that cost of sales in case of individual seller of goods, or cost of services in the case
of individual seller of services are not allowed to be deducted for purposes of
determining the basis of the OSD.
Personal Exemptions
Personal exemptions are arbitrary amounts allowed as deductions from gross income of the
individual taxpayer from compensation, business (self-employment) or practice of profession.
Personal exemptions in a sense represent the personal, living, or family expenses of the
taxpayer.
Kinds of Personal Exemptions
1. Basic personal exemption

2. Additional exemption. This exemption is further allowed to the taxpayer by reason of
his qualified dependent children.
Basic Personal Exemptions - there shall be allowed a basic personal exemption amounting to
P50,000 for each individual taxpayer regardless of status. In the case of married individuals
where only one of the spouses is deriving gross income, only such spouse shall be allowed the
personal exemption.
Additional Exemption - An individual, whether single or married, shall be allowed an additional

exemption of P25,000 for each dependent child not exceeding four (4) children. The additional
exemption for dependents shall be claimed by only one (1) of the spouses in the case of married
individuals.
A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon
and living with the taxpayer if such dependent is not more than 21-years of age, unmarried, and
not gainfully employed or if such dependent, regardless of age, is incapable of self-support
because of mental or physical defect.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children. The total amount of additional exemptions
that may be claimed by both shall not exceed the maximum additional exemptions allowed for
4-children.
The husband shall be deemed the proper claimant of the additional exemption unless he waives
his right in favor of his wife. But if the spouse of the employee is unemployed or is a non-
resident citizen deriving income from foreign sources, the employed spouse within the Phils
shall be automatically entitled to claim the additional exemptions for children.
Rules on Change of Status
1.If the employee should have additional dependents during the taxable year, he may claim the
corresponding additional exemption in full for such year.
2.If the taxpayer dies during the taxable year, his death shall not affect the amount of personal
and additional exemptions his estate may claim. It is as if he died at the end of such year.
3.If the spouse dies or any of the dependents dies or if any such dependent marries, becomes
21-years of age, or gets gainfully employed during the taxable year, the taxpayer may still claim
the same exemption as if the change occurred at the end of the year.
A head of the family is an individual who actually supports and maintains in one household one
or more individuals, who are closely connected with him by blood relationship, relationship by
marriage, or by adoption, and whose right to exercise family control and provide for these
dependent individuals is based upon some moral or legal obligation.
Head of family means an unmarried or legally separated man or woman with:

1.one or both parents, or
2.one or more brothers or sisters whether of the whole or half blood, or
3.one or more legitimate or illegitimate, recognized natural or legally adopted children who
meet the following qualifications:
Parent/s Brother/s or Sister/s Child/ren
a)Living with the taxpayer / / /
b)Depending upon the taxpayer
for chief support / / /
c)Not more than 21-years old / /
d)Unmarried / /
e)Not gainfully employed / /
f)Mentally or physically defective
regardless of age / /
Living with the person giving support does not necessarily mean actual and physical dwelling
together at all times and under all circumstances. Thus, the additional exemption applies even if
a child or other dependent is away at school or on a visit. If, however, without necessity the
dependent continuously makes his home elsewhere, his benefactor is not the head of a family
irrespective of the question of support.
Chief support means principal or main support (such as paying for the rent and spending for the
food of the dependent). It is more than “one-half” (__%) of the support required by the
dependent.
In the case of married individuals where only one of the spouses is deriving gross income, only
such spouse shall be allowed the basic and additional exemptions.
Individual Taxpayers Allowed Personal Exemptions

1.Citizens
2.Resident Alien
3.Non-Resident Alien
4.Estates and trusts, which are, for purposes of personal exemptions, treated as a single
individual.
Non-resident alien engaged in trade or business in the Phils (NRA-ETB) is allowed basic
exemptions under certain conditions but is not allowed additional exemptions. His basic
personal exemption shall be the lesser amount between that allowed by the income tax law of
the alien’s country to Filipino citizens not residing therein and that allowed by our Tax Code to
Filipino citizens and resident aliens.
On the other hand, non-resident aliens not engaged in trade or business in the Phils. (NRA-
NETB) are not allowed basic and additional exemptions.
Premium Payments on Health and/or Hospitalization Insurance
The following conditions must be met:

1.The insurance shall be taken by the individual taxpayer himself for his family;
2.The amount being claimed shall not exceed P2,400 a year or P200 a month per family;
3.The family has gross income of P250,000 or less for the taxable year.
Total family income includes primary income and other income from sources received by all
members of the nuclear family, i.e. father, mother, unmarried children living together as one
household, or a single parent with children. A single person living alone is considered as a
nuclear family. For married taxpayers, only the spouse entitled to claim for additional
exemption is allowed this deduction.
TAXABLE INCOME AND TAX DUE
Taxable income is defined as the pertinent items of gross income less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income, by the Tax
Code or other special laws. Taxable income is the amount or tax base upon which tax rate is
applied to arrive at the tax due.
GRADUATED INCOME TAX SCHEDULE (effective Jan. 1, 2018 to Dec. 31, 2022)
Taxable Income Tax Due
Not over P250,000 Exempt
Over P250,000 but not over P400,000 20% of excess over P250,000
Over P400,000 but not over P800,000 P30,000 plus 25% of excess over P400,000
Over P800,000 but not over P2 million P130,000 plus 30% of excess over P800,000
Over P2 million but not over P 8 million P490,000 plus 32% of excess over P 2 million
Over P8 million P2,410,000 plus 35% of excess over P8 million
Illustration 1: Mr. Antonio, the taxpayer, is married, with 6 qualified dependent children.
Taxable year is 2018. Gross compensation income is P250,000. Compute the taxable income
and tax due if Mr. Antonio is a resident citizen.
Gross compensation income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P250,000.00
Tax Due . . . . . Exempt
Gross compensation income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P400,000
Less: Personal exemption P50,000
Additional personal exemption ( ) P100,000 P 150,000
Taxable income …………………………………………………………………………………. P 250,000
=========
Tax Due . . . . Exempt
Gross compensation income …………………………………………………………….. P700,000
Less: Personal exemption ………………………………………… P50,000
Additional personal exemption ……………………….. 75,000 P125,000
Taxable income …………………………………………………………………………………. P 575,000
========
Tax Due (P575,000 less P250,000=P325,000)
P325,000 x 20% ………………………………. P 65,000
=======
Illustration 4: Mr. Antonio, the taxpayer, is single. Taxable year is 2018. Gross compensation
income is P900,000. Compute the taxable income and tax due if Mr. Antonio is a resident
citizen.
Gross compensation income………………………………………………………………. P900,000
Less: Personal exemption………………………………………. P50,000
Additional personal exemption . . . . . . . . . . . .. -0- P 50,000
Taxable income………………………………………………………………………………….. P 850,000
========
Tax due: On P800,000 ………………………………….. P130,000
50,000 x 30% ………………………… P 15,000 .
P145,000
========
TRAIN LAW (R.A. 10963)
THE TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT.

President Rodrigo Roa Duterte signed into law Republic Act No. 10963, otherwise known
as the Tax Reform for Acceleration and Inclusion (TRAIN) Act, the first package of the
Comprehensive Tax Reform Program (CTRP, on December 19, 2017 in Malacanang.
The TRAIN will provide hefty income tax cuts for majority of Filipino taxpayers while
raising additional funds to help support the government’s accelerated spending on its
“Build, Build, Build” and social services programs.
This tax reform package corrects a longstanding inequity of the tax system by reducing
personal income taxes for 99 percent of taxpayers, thereby giving them the much
needed relief after 20 years of non-adjustment of the tax rates and brackets. This is the
biggest Christmas and New Year gift the government is giving to the people.
For the poorest 10 million households, the government is giving them targeted cash
transfers of PHP 200 per month in 2018 and P300 per month in 2019 and 2020, sourced
from higher consumption taxes that the rich will contribute, as well as better social
services, healthcare, and education. All these will prepare the people for better job
opportunities.
In a separate message, President Duterte has vetoed certain provisions of the TRAIN.
The vetoed five line items are the following provisions:
1. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regional

Operating Headquarters (ROHQs), Offshore Banking Units (OBUs), and Petroleum
Service Contractors and Subcontractors;
2. Zero-rating of sales of goods and services to separate customs territory and tourism
enterprise zones;
3. Exemption from percentage tax of gross sales/receipts not exceeding five hundred
thousand pesos (P500,000.00);
4. Exemption of various petroleum products from excise tax when used as input,
feedstock, or as raw material in the manufacturing of petrochemical products, or in the
refining of petroleum products, or as replacement fuel for natural gas fired combined
cycle power plants; and
5. Earmarking of incremental tobacco taxes.
The TRAIN raises significant revenues to support the President’s priority social and
infrastructure programs, which will help realize his administration’s goal of reducing the
poverty rate from 21.6 to 14 percent by 2022. Some 70 percent of the incremental
revenues will help fund the government’s infrastructure modernization program, while
the balance will go to social services.
Starting 2018, the government expects to raise funds equivalent to about two-thirds of
the incremental revenues targeted under this tax reform law. The Congress has
committed to pass the rest of the TRAIN’s provisions representing the remaining one-
third of the targeted revenues in early 2018 to help us achieve our revenue and deficit
targets.
With the people’s support and understanding, all these reforms will result in more and
better jobs, lower prices, and a brighter future for every Filipino.
WITHHOLDING TAXES
Tax credits refers to amounts allowed as deductions from the tax due.
Withholding taxes just like foreign income tax paid or accrued are tax credits. Thus,
withholding taxes on income are being deducted from the income tax due and not from
gross income. Generally, income payments are subject to final or creditable withholding
taxes at various rates.
Types of Withholding Taxes
1. Withholding Tax on Compensation is the tax withheld from individuals receiving
purely compensation income.
2. Expanded Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is creditable against the income tax of the payee for the taxable year.
3. Final Withholding Tax is a kind of withholding tax which is prescribed only for certain
payors and is creditable against the income of the payee for the taxable year. Income
tax withheld constitutes the full and final payment of the Income Tax due from the
payee on the said income.
4. Withholding Tax on Government Money Payments is the withholding tax withheld by
government bureaus, offices and instrumentalities, including government-owned or
controlled corporations and local government units, before making any payments to
private individuals, corporations, partnerships and/or associations.
WITHHOLDING OF TAX AT SOURCE

1. Final Withholding Tax. Under the final withholding tax system the amount of income
tax withheld by the withholding agent is constituted as a full and final payment of the
income tax due from the payee on the said income. The liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of underwithholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an income tax
return for the particular income.
The finality of the withholding tax is limited only to the payee’s income tax liability on
the particular income. It does not extend to the payee’s other tax liability on income,
such as when the said income is further subject to a percentage tax. For example, if a
bank receives income subject to final withholding tax, the same shall be subject to a
percentage tax.
2. Creditable Withholding Tax. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the
tax due of the payee on said income. The income recipient is still required to file an
income tax return to report the income and/or pay the difference between the tax
withheld and the tax due on the income. Taxes withheld on income payments covered
by the expanded withholding tax and compensation income are creditable in nature.
Persons Required to Deduct and Withhold Creditable Tax on Income Payments

1. In general, any juridical person, whether or not engaged in trade or business;
2. An individual, with respect to payments made in connection with his trade or business.
3. All government offices including government-owned or controlled corporations, as well
as provincial, city and municipal governments, and barangays.
Time of Withholding
The obligation of the payor to deduct and withhold the tax arises at the time an income is
paid or payable, whichever comes first. The term “payable” refers to the date the obligation
become due, demandable or legally enforceable.
Exemptions from Withholding

The withholding of creditable withholding tax prescribed shall not apply to income
payments made to the following:
1. National government and its instrumentalities, including provincial, city or municipal

governments and barangay except government-owned and controlled corporations.
2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of
any law, general or special.
WITHHOLDING TAX ON COMPENSATION

Compensation means any remuneration received for services performed by an employee
from his employer under an employee-employer relationship.
The withholding of tax on compensation income is a method of collecting the income tax at
source upon receipt of the income. It applies to all employed individuals whether citizens or
aliens, deriving income from compensation for services rendered in the Philippines. The
employer is constituted as the withholding agent.
Kinds of Compensation
1. Regular Compensation – includes basic salary, fixed allowances for representation,
transportation and others paid to an employee.
2. Supplemental Compensation – includes payments to an employee in addition to the
regular compensation such as but not limited to the following:
 Overtime pay
 Night Shift Differential Pay
 Fees, including Director’s Fees
 Commission
 Profit Sharing
 Monetized Vacation and Sick Leave
 Fringe Benefits received by rank & file employees
 Hazard pay
 Holiday pay
 13th Month Pay and other benefits
 Other remunerations received from an employee-employer relationship.
1. Mr. Antonio, the taxpayer, is married, with 6 qualified dependent

children. Taxable year is 2018. Gross compensation income is P250,000.
Compute the taxable income and tax due if Mr.
Antonio is a resident citizen.
Gross compensation income . . . . . . P 250,000
Tax Due . . . . . . . . . . . . . . . . . . . . . . . . exempt
GRADUATED INCOME TAX SCHEDULE (effective Jan. 1, 2018 to Dec. 31, 2022)
Taxable Income Tax Due
Not over P250,000 Exempt
Over P250,000 but not over P400,000 20% of excess over P250,000.
Over P400,000 but not over P800,000 P30,000 plus 25% of excess over
P400,000.
Over P800,000 but not over P2 million P130,000 plus 30% of excess over
P800,000.
Over P2 million but not over P 8 million P490,000 plus 32% of excess over
P2 million.
Over P8 million P2,410,000 plus 35% of excess over

P8 million.

Compute the taxable income and tax due if Mr. Antonio is a resident
citizen.
Gross compensation income . . . . . P 350,000
Taxable income . . . . . . . . . . . . . . . . P 350,000
Tax Due: On P250,000 . . . . . . . . . . exempt

100,00 x 20% …P20,000
=====
Compute the taxable income and tax due if Mr. Antonio is a resident
citizen.
Gross compensation income ……………P780,000
Taxable income ……………………………… P780,000
Tax Due: On P400,000 . . . P30,000

380,000 x 25% . . . . 95,000 .
P125,000
======
4. Mr. Antonio, the taxpayer, is single. Taxable year is 2018. Gross

compensation income is P940,000. Compute the taxable income and tax
due if Mr. Antonio is a resident citizen.
Gross compensation income………………………… P 940,000
Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,000
Tax Due: On P800,000 . . . . . . . . . . . . . . . P130,000
140,000 x 30% . . . . . . . . . 42,000 .
P172,000
=======
5. Rowena C, single and a resident citizen, has a compensation income of

P3 million in 2020. How much is her taxable income and tax due for 2020
using the train law taxation?
Gross Compensation Income . . . . . . . . . . . . . . . . . . . .P3,000,000
Taxable compensation income ........................................P3,000,000
Tax Due: On P2,000,000 . . . . . . . . . . . .P490,000

1,000,000 x 32% . . . . . . 320,000 .
P810,000
6. Erlinda C.,married, a resident citizen, with four (4) legitimate children. Erlinda C.
has a gross compensation income of P6 million in 2020. How much is her taxable
income
and tax due for 2020 using the Train Law taxation?
Gross Compensation Income . . . . . . . . . . . . . . . . . . . . P 6,000,000
Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6,000,000

.
Tax Due: On P2,000,000 P490,000
4,000,000 x 32% . . 1,280,000 .
P1,770,000
=======
1.Pure Compensation Earner can Claim
Old Tax Code Train Law
Personal Exemption None

Additional Exemption None
Statutory Deductions Statutory Deductions except PPHHI
Example: Single Pure Compensation Earner with four dependents and Annual Gross
Income of P200,000.
Old Tax Code Amount TRAIN Law Amount
Gross Income P200,000 Gross Income P200,000
Personal Exemption 50,000 Personal Exemption none
Additional Exemption 100,000 Additional Exemption none
The old tax law enables both spouses to claim a maximum amount of deduction to their
income at an amount of P200,000 plus statutory deduction. While in the new tax law
you might think that the only deduction is the statutory deduction if you failed to see
that in the new tax law the first 250,000 is zero rated (0% tax). It is as if 250,000 from
both of them will result to a somewhat 500,000 tax free earning (250,000 from husband
and 250,000 from wife).
2.Tax of self-employed and professionals
Self-employed are individual taxpayers whose income are solely derived from his own
business while professionals are those people that derive income from the practice of
their profession.
In the old tax law SEP (self-employed and professionals) paid their income taxes based
on normal tabular income tax only (the tax table). But this is not the case anymore with
the amendment stipulated in the new tax law (TRAIN Law).
The major change that is newly introduced is that:
Self-Employed and Professional earning NOT MORE than Php 3 million have the option
to:
1. Pay a flat rate of 8% tax base on gross sales receipts and other non-operating
income in excess of Php250,000 in lieu of the graduated income tax rate and
percentage tax (3%).
2. Pay Percentage Tax and Regular Income Tax rate using graduated tax table.
Since SEP has now the option to choose as to how they will pay their income tax, the
withholding tax for SEP had also adjusted. From 10% withholding tax for SEP earning
below Php 720,000 and 15% withholding for earnings more than Php 720,000, the new
withholding tax rateis now 8%. Flat rate 8%, Witholding rate 8%, so now it is balanced.
Example: A person that is an SEP earning Php 500,000 annual sales with Php 100,000
business expenses (single with 4 dependents):
Old Tax Code Amount Train Law Amount
Gross Income 400,000 Gross Sales 500,000
Personal Exemption 50,000 Personal Exemption none
Additional Exemption 100,000 Additional Exemption none
Taxable income 250,000 Taxable income 250,000

Income Tax Due 50,000 Income Tax Due 20,000
3.Mixed income earners are those individuals who are deriving income from
employment and doing business. He is a compensation earner and a SEP.
The Mixed Income Earner in the new tax law will be taxed accordingly:
1. His compensation income will be taxed based on the graduated table.

2. His business or professional income will be taxed like that of the SEP having the
two options if his business is earning NOT MORE THAN Php 3 million.
4.13th Month Pay and Other Benefits increase from Php 82,000 to Php 90,000.
If the benefit and bonus totalling up to 90,000 is not subject to tax. Other de minimis
benefits that exceeds their limits can be added as other benefits in the 90,000 ceiling.
(See Revenue Regulation 10-2008)
Annual Income Tax Return For Individuals Earning Purely

Compensation Income (Including Non-Business/Non-Profession
Related Income)
Description
This return shall be filed by every resident citizen deriving

compensation income from all sources, or resident alien and non-
resident citizen with respect to compensation income from within the
Philippines, except the following:
1. An individual whose taxable income does not exceed P 250,000.00;
2. An individual with respect to pure compensation income, as defined
in Section 32(A)(1) derived from sources within the Philippines, the
income tax on which has been correctly withheld (tax due equals tax
withheld) under the provisions of Section 79 of the Code: Provided,
that an individual deriving compensation concurrently from two or
more employers at any time during the taxable year shall file an
income tax return;
3. An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of the Tax Code; and
4. A minimum wage earner as defined in Section 22(HH) of the Tax
Code or an individual who is exempt from income tax pursuant to the
provisions of the Tax Code and other laws, general or special.
Filing Date
This return is filed on or before April 15 of each year covering income
for the preceding taxable year.
WITHHOLDING OF TAX AT SOURCE

1. Final Withholding Tax. Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full and final payment
of the income tax due from the payee on the said income. The liability for payment of
the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of underwithholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an income tax
return for the particular income.
The finality of the withholding tax is limited only to the payee’s income tax liability on
the particular income. It does not extend to the payee’s other tax liability on income,
such as when the said income is further subject to a percentage tax. For example, if a
bank receives income subject to final withholding tax, the same shall be subject to a
percentage tax.
2. Creditable Withholding Tax. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the
tax due of the payee on said income. The income recipient is still required to file an
income tax return to report the income and/or pay the difference between the tax
withheld and the tax due on the income. Taxes withheld on income payments covered
by the expanded withholding tax and compensation income are creditable in nature.
Persons Required to Deduct and Withhold Creditable Tax on Income Payments

1. In general, any juridical person, whether or not engaged in trade or business;
2. An individual, with respect to payments made in connection with his trade or
business.
3. All government offices including government-owned or controlled corporations,
as well as provincial, city and municipal governments, and barangays.
------------------------end of lecture 3/08/23 Alpha--------------------------

-----------------------start of lecture 3/14/23 Alpha------------------------
Time of Withholding
The obligation of the payor to deduct and withhold the tax arises at the time an
income is paid or payable, whichever comes first. The term “payable” refers to the date
the obligation become due, demandable or legally enforceable.
Exemptions from Withholding

The withholding of creditable withholding tax prescribed shall not apply to income
payments made to the following:
1. National government and its instrumentalities, including provincial, city or

municipal governments and barangay except government-owned and controlled
corporations.
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special.
WITHHOLDING TAX ON COMPENSATION

Compensation means any remuneration received for services performed by an
employee from his employer under an employee-employer relationship.
The withholding of tax on compensation income is a method of collecting the income

tax at source upon receipt of the income. It applies to all employed individuals whether
citizens or aliens, deriving income from compensation for services rendered in the
Philippines. The employer is constituted as the withholding agent.
Kinds of Compensation
1. Regular Compensation – includes basic salary, fixed allowances for
representation, transportation and others paid to an employee.
2. Supplemental Compensation – includes payments to an employee in addition to
the regular compensation such as but not limited to the following:
• Overtime pay
• Night Shift Differential Pay
• Fees, including Director’s Fees
• Commission
• Profit Sharing
• Monetized Vacation and Sick Leave
• Fringe Benefits received by rank & file employees
• Hazard pay
• Holiday pay
• 13th Month Pay and other benefits
• Other remunerations received from an employee-employer relationship.
CHAPTER 5 – TAXATION OF ESTATES AND TRUSTS
The rules in taxation of individuals generally apply to estates and trusts. The taxable
income of an estate or trust shall be computed in the same manner and on the same
basis as in the case of an individual. Estates and trusts are allowed a personal
exemption of P50,000 (considered revised per R.A. 9504, Sec. 8). The income tax rates
for individual taxpayers likewise apply. The taxable year of estates and trusts shall be
the calendar year. Just like individuals, estates and trusts are required to file a
declaration of estimated income for the current taxable year on or before April 15 of the
same taxable year.
DEFINITION OF TERMS
Estate or inheritance. Refers to all the properties, rights and obligations of a person
which are not extinguished by his death and also those which have accrued thereto
since the opening of the succession.
Trust is an agreement created by will or an agreement under which title to property is

passed to another for conservation or investment with the income therefrom and
ultimately the corpus or principal to be distributed in accordance with the directives
of the creator as expressed in the governing instrument.
Trustor or grantor is the person who establishes a trust.
Beneficiary is the person for whose benefit the trust has been created. A beneficiary
has equitable title to the property transferred to the trust, including, generally, the
possession and use of the property.
Fiduciary is the general term which applies to all persons or corporations that occupy
positions of peculiar (different from the usual or normal) confidence towards others,
such as trustees, executors, guardians, or administrators, receivers, or conservators. For
income tax purposes, a fiduciary is any person or corporation that holds in trust an
estate of another person or persons.
TAXABLE ESTATES
When an individual is alive, income on his or her property (e.g., interest income on
bonds, dividend income on stocks, rental income on an apartment complex) is taxed to
that individual. When the individual dies, future income on that property will be taxed
to those who inherit the property. However, income on property is taxable to the heirs
only after they receive the property. The receipt of the property itself is excluded from
income. Often there is considerable time lag (interval) between the time a person dies
and when final settlement of the estate occurs. Thus, a relevant question to ask is who
is taxed on income realized from the decedent’s property during this interval. The
answer provided by the Code is that the estate itself is taxed. Estates are legal entities
that exist for the purpose of managing and distributing the deceased person’s property
to the heirs. While this property is in the estate, the property might earn some income.
The income will be taxed to the estate.
Notice this discussion concerns only income taxation, that is, taxation of an estate’s
income, rather than “estate taxation.” Estate taxation has nothing to do with income
and applies when the property passes from the deceased person to the estate. The
estate tax is levied on the transfer and is based on the fair market value of the property
being transferred at the time of death. The details of estate taxation are discussed in
another text, Transfer and Business Taxation by the same book team.
----------------end of lecture 3/14/23 Alpha------------------------

--------------- start of lecture 3/21/23 Alpha
Taxable estates are estates of deceased persons under judicial settlement. Taxation of
an estate begins from the time of death. Hence, any income received after the death
shall form part of the income of the estate.
Income of estates not under judicial settlement are not taxable to the estate. In this
case, a co-ownership is created and the co-owners, after actual or constructive receipt
of the income are the ones liable to income tax in their individual capacities.
TAXABLE TRUSTS
An individual may want another family member, such as a son or daughter, to
become the owner of some particular piece of the individual’s property (e.g., stocks,
rental property). However, the individual may feel that the son or daughter is not
capable of managing the property. In this situation, the individual could transfer the
property to a trustee in order to have the trustee manage the property for the benefit
of the son or daughter. This legal arrangement is known as a trust, and the son or
daughter would be called the beneficiaries of the trust.
Trusts are a unique form of legal entity, being neither pure taxpayer nor pure conduit (a
means of distributing). For taxpayers such as corporations, all income is taxed to the
income-earning organization. For conduits such as general professional partnerships, no
income is taxed to the income-earning organization. Rather, income is taxed to the
owners of the partnership when earned, regardless of whether that income is
distributed to them. The taxation of trusts and their beneficiaries falls between these
two extremes, having elements in common with the tax treatments of both taxpayers
and conduits.
Pre-tax income earned by a trust may be either retained by the trust or distributed to
the trust’s beneficiary. If retained by the trust, the income is taxed to the trust itself,
not to the beneficiary. If the income is distributed, the trust is allowed a deduction in
determining its taxable income, and the beneficiary must include the receipt of the
distribution as taxable income at the individual level. All of the current income on trust
property is taxed to either the trust or the beneficiary, depending on which party has
current possession of the income.
For a trust to be taxable, it must be irrevocable, meaning it cannot be changed by recall

or cancellation, both as to corpus or principal and income. (corpus – the principal of a
fund or estate as distinct from income or interest).
In a revocable trust where title to income may be revested in the grantor, the trust itself
is not subject to income tax. It is the grantor who is taxable. In case of trust where the
income may be held or distributed for the benefit of the grantor, such income is
likewise taxable directly to the grantor.
GROSS INCOME
The items of gross income of estates and trusts are the same items of gross income
of individuals as provided in the Tax Code. They include:
1. Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or
distributed as the court may direct.
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate.
4. Income which, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated.
Estate or trust is allowed a personal exemption of P50,000. This is regardless of the
number of trusts a beneficiary may receive income from. Aside from the personal
exemption of P50,000 allowed, income of trust or estate may be deductible from gross
income.
Income which is to be distributed currently by the fiduciary to the beneficiaries; and

income collected by a guardian of an infant which is to be held or distributed as the
court may direct, are deductible from gross income of the fiduciary. This is so because
such income is taxable directly to the beneficiary, whether distributed or not.
Income received by estates of deceased persons during the period of administration or

settlement of the estate; and income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated, are taxable either to the fiduciary
or beneficiary, depending on the amounts paid or credited to the legatee (one to whom
a legacy is bequeathed or a devise is given), heir or beneficiary. (bequeathed – to give
or leave by will).
If taxable to the fiduciary (meaning no income has been distributed to the beneficiary),
the income is not deductible from the gross income of the fiduciary. But if taxable to
the beneficiary, such income shall form part of the gross income of the fiduciary and is
deductible from such gross income. The income thus distributed is to be included in
the gross income of the beneficiary.
The deductions just discussed shall not be allowed in the case of a trust administered in
a foreign country.
Illustration: Ms. Red Butterfly died on August 14, 2010. Her estate is now under judicial
settlement. The estate had P1,500,000 gross income from August 14 to Dec. 31, 2010.
Expenses related to this income was P400,000. There was no distribution of income
among the heirs. How much was the tax due for the year?
 Gross Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000
Less: Deductions...........................................P400,000
Personal Exemption ...............................50,000 . 450,000 .
Taxable Income..................................................................P1,050,000
==========
Tax Due:
On P500,000 ................................................................. P125,000

550,000 at 32%..................................................... 176,000 .
P301,000
========
Illustration: Mr. Henry Argos created an irrevocable trust designating his two daughters,
aged 3 and 1 as beneficiaries. Under the terms of the trust, only half of the income shall
be distributed to the beneficiaries. The other half shall be left to accumulate and be
distributed when the beneficiaries reach 21-years of age. For the year 2010, income of
the trust was P500,000. Compute for the tax due.
 GrossIncome.................................................................................. P500,000
Less: Deductions (50%) .....................................P 250,000
Personal Exemption .....................................50,000 . . 300,000 .
Taxable Income ..............................................................................200,000
==========
Tax Due:
On P140,000 ................................................................... P 22,500

60,000 at 25% . 15,000 .
P 37,500
=========
CONSOLIDATION OF INCOME OF TWO OR MORE TRUSTS

When two or more trusts are created by the same grantor and the beneficiary in
both trusts is the same, the taxable income of all trusts shall be consolidated and the
tax computed on such consolidated income.
 Consolidated Gross Income............................................................ xxx
Less: Consolidated Deductions ................................................... xxx .
Consolidated Taxable income ...................................................... xxx
Less: Personal Exemption ............................................................ xxx .
Taxable income ............................................................................ xxx
Multiply by: Tax rate in Sec. 24(A)............................................ x% .
Amount of Income Tax on Consolidated Taxable Income ....... xxx
=======
Each trustee shall compute his share of the income tax on the consolidated taxable
income based on the formula below:
. Taxable income of a trust before exemption . x Income tax on consolidated taxable

income = Income tax payable each trustee
Consolidated taxable income of all trusts
Before exemption
Illustration: Mr. Anilov maintains two irrevocable trusts that name his three children, all
minors, as common beneficiaries. The terms of the trusts provide that no income shall
be distributed to the beneficiaries until the youngest should become 25 years of age.
Following are data relative to the trusts:
Trust 1 Trust 2
Gross Income P450,000 P600,000
Deductions 150,000 200,000
The share of each trust on the income tax on consolidated taxable income in 2010 is
computed below:
Consolidated Gross Income P1,050,000

Less : Consolidated Deductions . 350,000 .
Consolidated Taxable Income P 700,000
Less: Personal Exemption . 50,000 .
Taxable Income P650,000
============
Tax Due on Consolidated Taxable Income:
On P500,000 P 125,000
150,000 at 32% . 48,000 .
P 173,000
=========
Trust 1 Trust 2
. P300,000 . x P173,000 = P74,153 . P400,000 . x P173,000 =P98,857

P700,000 ======= P700,000 =======
-------------------end of lecture 3/21/23 Alpha------------------

-------------------start of lecture
CHAPTER 4 – INCOME TAXATION OF CORPORATIONS
Classification of Income Taxpayers (Other than Individuals)
1.Corporations
a) Domestic – those created or organized under and by virtue of Philippine laws.
1. Domestic corporation, in general
2. Government-owned and controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
b) Foreign – those organized in accordance with laws of their respective countries.

1. Resident – those engaged in trade or business within the Philippines.
2. Non-resident – those not engaged in trade or business within the Philippines.
2. General Professional Partnership

3. Estates and Trusts
Definition of Terms
1.Corporation. It includes partnerships, no matter how created or organized, joint stock

companies, joint accounts, associations, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the
Government.
2. Domestic – When applied to a corporation, means created or organized in the Philippines or

under its laws.
3. Foreign – When applied to a corporation, means a corporation which is not domestic.
4. Resident Foreign Corporation – Applies to a foreign corporation engaged in trade or business

within the Philippines.
5. Non-resident Foreign Corporation – Applies to a foreign corporation not engaged in trade or

business within the Philippines.
SOURCES OF INCOME
Aside from knowing the classification of the taxpayer, the source of income is the next
important thing to determine- whether it is from within the Phils or without. The following rules
apply:
1.Domestic corporations – are taxable on income from sources within and without the
Philippines.
2. Foreign corporations – whether resident or non-resident, are taxable only on income from
Philippine sources.
A partnership other than a general professional partnership is considered a corporation and is

taxable as such.
A.Business Income – Generally, business income earned by a corporation is taxed at the

following rates:
Description Tax Rate Tax Base
DOMESTIC CORPORATION
1.
a. In general 30% Taxable income from all sources
b. Minimum Corporate Income tax 2% Gross Income
c. Improperly accumulated earnings 10% Improperly accum. Taxable income
2.Proprietary Educational Institution 10% Taxable income from all sources

3. Non-stock, Non-profit hospital 10% Taxable income from all sources
4. GOCC, Agencies & Instrumentalities (see 1a-1c)
5. National Government & LGUs (see 1a-1c)
6. Taxable Partnership (see 1a-1c)
7. Exempt Corporation
a. On exempt activities 0% Taxable Income
b. On Taxable activities (see 1a)
8. General Professional Partnerships Exempt
9. Corporation covered by Special Laws Rate specified under the respective
Special laws.
RESIDENT FOREIGN CORPORATION
1.
a. In general 30% Taxable income from w/in Phils.
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accum. Taxable income
2. International Carriers 2.50% Gross Philippine Billings
3. Regional Operating Headquarters 10% Taxable Income
4. Corporation covered by Special Laws Rate specified under the respective
Special laws.
5. Offshore Banking Units (OBUs) 10% Gross Taxable Income on Foreign
Currency Transaction
30% On Taxable income other than
Foreign currency transaction
6. Foreign currency deposit Units (FCDU) 10% Gross Taxable Income on Foreign
Currency transaction
30% On Taxable income other than
Foreign currency transaction
B. Passive Income – Passive income is subject to a separate and final tax. These are taxed at
fixed rates ranging from 5% to 20%. Passive income is not to be included in gross income
computation.
ON PASSIVE INCOME Domestic Resident Foreign
1.Interests
Interests from deposits and yield or any
Other monetary benefit from deposit
Substitutes and from trust funds and
Similar arrangements. 20% 20%
Interest income from a depository bank

Under the expanded foreign currency
Deposit system. 7.5% 7.5%
Income derived by a depository bank

Deposit system from foreign currency
Transactions with local commercial banks
Including branches of foreign banks that
May be authorized by the Bangko Sentral
Ng Pilipinas (BSP), including interest
Income from foreign currency loans. 10% 10%
2.Royalties 20% 20%
3. Dividends
Dividends received by a domestic/resident
Foreign corporation from a domestic
Corporation. Exempt Exempt
4. Capital Gains
On the net capital gain from sale, exchange,
Or other disposition of shares of stock in a
Domestic corporation not traded in the
Stock exchange
Not over P100,000 5% 5%
Amount in excess of P100,000 10% 10%
On the capital gain presumed to have been

Realized on the sale, exchange or dispo-
Sition of lands and/or buildings not actually
Used in the business and treated as capital
Assets, the higher value between
Gross selling price, and
Fair market value as determined by the
Commissioner 6%
--------------proposed end of lecture 3/21/23 Alpha----------------------
DOMESTIC AND RESIDENT FOREIGN CORPORATIONS, IN GENERAL
Generally, the pro-forma computation of the normal income tax of domestic and resident
foreign corporations follows:
Gross Income Pxxx

Less: Allowable Deductions xxx
----------
Net income Pxxx
Multiply by: Tax rate (2009) 30%
-----------
Tax Due
For domestic and resident corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall be deemed to
have been earned and spent equally for each month of the period.
DOMESTIC CORPORATIONS, IN PARTICULAR
1.Proprietary Educational Institutions and Non-Profit Hospitals

2. Unrelated trade, business or other activity
3. Government-owned or Controlled Corporations, Agencies or Instrumentalities
4. Mutual Life Insurance Companies
Proprietary Educational Institutions and Non-Profit Hospitals – The 10% tax on the taxable
income is subject to limitation. If the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived from all sources, the tax
prescribed under Section 27 (A) shall be imposed on the entire taxable income.
Unrelated trade, business or other activity – means any trade, business or other activity, the
conduct of which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function.
A proprietary educational institution is any private school maintained and administered by

private individuals or groups with an issued permit to operate from the DepEd, or the CHED, or
the TESDA, as the case may be, in accordance with existing laws and rules and regulations.
Government-Owned or Controlled Corporations, Agencies or Instrumentalities.
Subject to the provisions of existing special laws or general laws, all corporations, agencies, or
instrumentalities owned or contolled by the government shall pay such rate of tax upon their
taxable income as are imposed by the Code upon corporations or associations engaged in a
similar business, industry or activity. The following are exempt:
1.Government Service Insurance System (GSIS),

2. Social Security System (SSS),
3. Philippine Health and Insurance Corporation (PHIC),
4. Local Water Districts (LWD),
5. Philippine Charity Sweepstakes Office (PCSO).
Mutual Life Insurance Companies. These companies are now subject to the regular corporate
income tax rates.
RESIDENT FOREIGN CORPORATIONS, IN PARTICULAR
1.International Shipping
2. Offshore Banking Units
3. Branch Profits Remittances
4. Regional Operating Headquarters
5. Regional or Area Headquarters
6. Multinational Company
7. International Air Carrier
International Shipping. Gross Philippine billings in the case of international shipping means
gross revenue whether for passenger, cargo or mail originating from the Philippines up to final
destination regardless of the place of sale or payments of the passage or freight documents.
Subject to the gross Philippine billings tax of 2.50%.
Offshore Banking Units. Income derived by offshore banking units authorized by the BSP, from
foreign currency transactions with local commercial banks, including branches of foreign banks
that may be authorized by the BSP to transact business with offshore banking units, including
any interest income derived from foreign currency loans granted to residents, shall be subject
to a final income tax of ten percent (10%) of such income.
Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to
a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for
remittance without deduction for the tax component thereof (except those activities which are
registered with the Philippine Economic Zone Authority).
Regional Operating Headquarters shall mean a branch established in the Philippines by

multinational companies which are engaged in any of the following services: general
administration and planning; business planning and coordination; sourcing and procurement of
raw materials and components; corporate finance advisory services; marketing control and
sales promotions; training and personnel management; logistic services; research and
development services and product development; technical support and maintenance; data
processing and communication; and business development. Regional operating headquarters
shall pay a tax of ten percent (10%) of their taxable income.
Regional or Area Headquarters shall mean a branch established in the Philippines by

multinational companies and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Regional
or area headquarters as such shall not be subject to income tax.
Multinational Company means a foreign firm or entity engaged in international trade with
affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.
International Air Carrier – shall refer to a foreign airline corporation doing business in the
Philippines having been granted landing rights in any Philippine port to perform international
air transportation services/activities or flight operations anywhere in the world.
Gross Philippine Billings Tax -
An international air carrier having flights originating from any port or point in the Philippines,
irrespective of the place where passage documents are sold or issued, is subject to the gross
Philippine billings tax of 2.50% unless subject to a different tax rate under the applicable tax
treaty to which the Philippines is a signatory.
All items of income other than income from international air transport services shall be subject
to tax under the pertinent provisions of the Code.
Determination of Gross Philippine Billings -

In computing for gross Philippine billings there shall be included the total amount of gross
revenue derived from passage of persons, excess baggage, cargo and/or mail, originating from
the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of passage documents.
NON-RESIDENT FOREIGN CORPORATION, IN GENERAL
The basis of tax for non-resident foreign corporations is gross income from sources within the
Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains.
Generally, the pro-forma computation of the income tax of non-resident foreign corporations
follows:
Gross income P xxx
----------
Tax due P xxx
======
NON-RESIDENT FOREIGN CORPORATION, IN PARTICULAR
1.Non-resident Cinematographic Film Owner, Lessor or Distributor

2. Non-resident Owner or Lessor or Vessels chartered by Philippine Nationals
3. Non-resident Owner or Lessor of Aircraft, Machinery and other Equipment
Non-resident cinematographic film owner, lessor or distributor is taxed at 25% of gross income.
Non-resident owner or lessor of vessels chartered by Philippine Nationals is taxed at 4.50% of

gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as
approved by the Maritime Industry Authority.
Non-resident owner or lessor of aircraft, machinery and other equipment is taxed at 7.50% of
gross rentals, charters and other fees.
PASSIVE INCOME OF NON-RESIDENT FOREIGN CORPORATION
1.Interest on foreign loans contracted on or after August 1, 1986 are taxed at 20%.
2. Income derived by a depository bank under the expanded foreign currency deposit system
from foreign currency transactions with local commercial banks, including branches of foreign
banks that may be authorized by the BSP, including interest income from foreign currency loans
are exempt.
3. Dividends received from a domestic corporation is subject to a final withholding tax at 15% on
the condition that the country in which the non-resident foreign corporation is domiciled, shall
allow a credit against the tax due from the non-resident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to 15% for 2009.
4. Capital gains from sale of shares of stock not traded in the stock exchange. A final tax at the
rates prescribed below is imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock exchange.
Not over P100,000 5%

On any amount in excess of P100,000 10%
Allowable deductions are items or amounts which the law allows to be deducted from gross
income in order to arrive at the taxable income. A domestic or resident foreign corporation may
deduct from its business income, itemized deductions under the Tax Code. Or, these
corporations may elect a standard deduction in an amount not exceeding forty percent (40%) of
its gross income. Non-resident foreign corporations are not allowed deductions from gross
income.
In case of corporations, taxable income is the pertinent items of gross income less the
deductions authorized for such types of income. Taxable income is the amount or tax base upon
which tax rate is applied to arrive at the tax due. Depending on the taxpayer involved and for
purposes of computing the income tax liability of a corporation, taxable income may refer to
either one of the following:
1.Net Income. The income arrived at after subtracting from the gross income the deductions of
the taxpayer. For domestic and resident foreign corporations, in general; and other corporations
from whose gross income deductions are allowed.
Sales/Revenues/Receipts/Fees xxx
Less: Cost of Sales/Services xxx
---------
Gross Income from Operation xxx
Add: Non-Operating and Taxable other Income xxx
----------
Total Gross Income xxx
Less: Deductions
Optional standard deductions or
Itemized Deduction xxx
----------
Taxable Income xxx
Multiply by: Tax Rate x%
----------
Tax Due xxx
======
2. Gross Income. The entire or gross income from business without any deductions for either
optional standard deduction or itemized deduction.
For domestic and resident foreign corporations subject to the MCIT; and non-resident foreign
corporations not subject to the normal income tax rate.
Gross Income xxx

-----------
Tax Due xxx
=======
CORPORATIONS EXEMPT FROM INCOME TAX
1.Labor, agricultural or horticultural organization not organized principally for profit;

2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;
3. A beneficiary society, order or association, operating for the exclusive benefit of the members
such as fraternal organization operating under the lodge system, or a mutual aid association or a
nonstock corporation organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;
Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt from the
payment of income tax on income received by them as such organization. However, they are
subject to the corresponding internal revenue taxes on their income derived from any of their
properties, real or personal, or from any activity conducted for profit regardless of the
disposition thereof, e.g. rental payment from their building/premises.
6. Business league, chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stockholder or individual;
7. Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
8. A nonstock and non-profit educational institution;
The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes
imposed by the National Government on all revenues and assets used actually, directly, and
exclusively for educational purposes.
Revenues derived from assets used in the operation of cafeterias/canteens and bookstores are
exempt from taxation provided they are owned and operated by the educational institution as
ancillary activities and the same are located within the school premises.
However, they shall be subject to the internal revenue taxes on income from trade, business or
other activity, the conduct of which is not related to the exercise or performance of their
educational purposes or functions.
9. Government educational institution;

10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
11. Farmers’, fruit growers’, or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the quantity of produce finished by
them.
Corporations may also be declared exempt from income tax or any other tax under special laws.
Any amount given by the employer as benefits to its employees, whether classified as “de
minimis” benefits or fringe benefits, shall constitute as deductible expense upon such employer.
Example: For taxable year 2009, DBA Corporation presented the following details for its two
employees to be able to compute the tax to be collected for December 2009:
Mr. Tuazon, married with two qualified dependent children, received the following
compensation for the year:
Basic monthly salary . . . . . . . . . . . . . . . . . . . . . . . . . . . P45,000.00

Overtime pay for November. . . . . . . . . . . . . . . . . . . . . . 5,000.00
13th Month Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000.00
Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000.00
Withholding tax (Jan-Nov.) . . . . . . . . . . . . . . . . . . . . . . . .98,082.27
Received
Compensation For the Year Non-Taxable Taxable
Basic Salary (P45,000 x 12) P540,000 P540,000
Overtime* (Nov.) 5,000 5,000
13th Month Pay 45,000 P30,000 15,000
Other benefits 12,000 12,000
---------------- ---------- ----------------
Totals P602,000 P30,000 P572,000
======= ====== ========
Total Gross Compensation P572,000

Less: Basic Personal Exemption P50,000
Additional Exemption (P25,000 x 2) 50,000 100,000
------------ ------------
Net Taxable Compensation P472,000
=======
Tax Due **
On P250,000 P 50,000.00
222,000 x 30% 66,600.00
-----------------
Total P116,600.00
Less: Tax withheld from previous months (Jan.-Nov.) 98,082.27
-----------------
Tax to be collected in December 2009 P 18,517.73
==========
*With a basic salary of P45,000 a month Mr. Tuazon is obviously not a MWE so overtime pay is
not exempt as will be discussed in Exclusions from Gross Income.
**Tax due is computed using the rates prescribed in Sec. 24 (A), NIRC.
Mr. Sy, married, whose wife is also employed, with two qualified dependent children, received
for the year:
Basic Monthly salary P 16,500.00

13th Month Pay 16,500.00
Other Benefits 16,500.00
Withholding tax (Jan.-Nov.) 12,924.23
Received
Basic Salary(P16,500x12) P198,000 P198,000
13th Month Pay 16,500 P16,500
Other Benefits 16,500 13,500 3,000*
------------- ------------ --------------
Totals P231,000 P 30,000 P201,000
========= ======= =======
*Excess of 13th month pay and other benefits over the P30,000 ceiling under Sec. 32 (b)(7)(e).
Total compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P201,000

Less: Personal and and Additional Exemptions (ME2) . . . . . . . 100,000
----------------
Net Taxable Compensation Income . . . . . . . . . . . . . . . . . . . . . . P101,000
=======
Tax Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,700.00

Less: Tax withheld from previous months (Jan. – Nov.) . . . 12,924.23
-----------------
Amount to be withheld in December 2009 . . . . . . . . . . . . . .. P 1,775.77
=========
4. Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the
employer which are not accounted for by the employee to the employer are considered as
taxable income but not subject to withholding.
5. Pensions, retirement, and separation pay. Pensions, retirement and separation pay constitute
compensation subject to withholding, except those provided.
6. Fixed or variable transportation, representation and other allowances.

a) In general, fixed or variable transportation, representation and other allowances which are
received by a public officer or employee of a private entity, in addition to the regular
compensation fixed for his position or office, is compensation subject to withholding.
Representation and transportation allowance (RATA) granted to public officers and
employees under the General Appropriations Act and the Personnel Economic Relief Allowance
(PERA) which essentially constitute reimbursement for expenses incurred in the performance of
government personnel’s official duties shall not be subject to income tax and consequently to
withholding tax.
b) Any amount paid specifically, either as advances or reimbursement for travelling,

representation and other bona fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance of his duties are not compensation
subject to withholding, if the following conditions are satisfied:
o it is for ordinary and necessary traveling and representation or entertainment expenses

paid or incurred by the employee in the pursuit of the trade, business or profession; and
o the employee is required to account/liquidate for the foregoing expenses in accordance
with the specific requirements of substantiation for each category of expenses pursuant to
Section 34 of the Code. The excess of actual expenses over advances made shall constitute
taxable income if such amount is not returned to the employer. Reasonable amounts of
reimbursements/advances for traveling and entertainment expenses which are pre-computed
on a daily basis and are paid to an employee while he is on an assignment or duty need not be
subject to the requirements of substantiation and to withholding.”
7. Vacation and sick leave allowances. Amounts of “vacation allowances or sick leave credits”
which are paid to an employee constitute compensation. Thus, the salary of an employee on
vacation or on sick leave, which are paid notwithstanding his absence from work, constitute
compensation. However, the monetized value of unutilized vacation leave credits of ten (10)
days or less which were paid to the employee during the year are not subject to income tax and
to the withholding tax. Then President Joseph Estrada in Executive Order 291 granted the
exemption from income tax of monetized leave credits of government officials and employees.
8. Deductions made by employer from compensation of employee. Any amount which is

required by law to be deducted by the employer from the compensation of an employee
including the withheld tax is considered as part of the employee’s compensation and is deemed
to be paid to the employee as compensation at the time the deduction is made.
9. Remuneration for services as employee of a non-resident alien individual or foreign entity.

The term “compensation” includes remuneration for services performed by an employee of a
non-resident alien individual, foreign partnership or foreign corporation, whether or not such
alien individual or foreign entity is engaged in trade or business within the Philippines. Any
person paying compensation on behalf of a non-resident alien individual, foreign partnership, or
foreign corporation which is not engaged in trade or business within the Philippines is subject to
all provision of law and regulations applicable to an employer.
10. Compensation for services performed outside the Philippines. Remuneration for services
performed outside the Philippines by a resident citizen for a domestic or a resident foreign
corporation or partnership, or for a non-resident corporation or partnership, or for a non-
resident individual not engaged in trade or business in the Philippines shall be treated as
compensation which is subject to tax.
--------------------------start of lecture 5/06/23 Bravo--------------------------------
Deductions from Gross Income
Deductions from gross income as discussed in this chapter apply to individuals and corporations
engaged in trade or business; and to individuals in the exercise of profession. Deductions are
amounts allowed by the Tax Code to be deducted from gross income to arrive at the taxable
income for purposes of computing the income tax liability under Sections 24(A), 25(A), 26(A.c)
and 28(A)(1). As a rule, if a taxpayer does not within any year deduct his expenses, losses,
interests, taxes or other charges, he can no longer deduct them from the income of any
succeeding year.
1.Itemized Deductions. The following deductions are called itemized deductions. Note that item
“k” is available to individual taxpayers only.
a. Expenses
O Ordinary and necessary trade, business or professional expenses.
O Expenses allowable to private educational institutions.
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of oil and gas wells and mines
h. Charitable and Other contributions
i. Research and other development
j. Pension trusts
k. Premium payments on health and/or hospitalization insurance.
2. Optional Standard Deduction (OSD). In place of items “a” to “j” above, resident citizens, non-
resident citizens, resident aliens and taxable estates and trusts, may deduct a standard
deduction in an amount not exceeding 40% of their gross sales or gross receipts. Domestic and
resident foreign corporations may also elect a 40% OSD of its gross income.
If the individual is on the accrual basis of accounting for his income and deductions, the OSD
shall be based on the gross sales during the taxable year. On the other hand, if the individual
employs the cash basis of accounting for his income and deductions, the OSD shall be based on
his gross receipts during the taxable year.
Note that cost of sales in case of individual seller of goods, or cost of services in the case of
individual seller of services, are not allowed to be deducted for purposes of determining the
basis of the OSD.
ITEMIZED DEDUCTIONS
A.Business Expenses
In general, all the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the development, management, operation
and/or conduct of the trade, business or the exercise of a profession are deductible. For an
expense to be allowed, the reasonableness of the amount being claimed is a prime
consideration. Payments, which constitute bribes, kickbacks and others of similar nature, shall
not be allowed as deduction from gross income.
An expense may either be treated as a capital expenditure or a revenue expenditure. An

expenditure that benefits only the current period is a revenue expenditure while an expenditure
that benefits current and future periods is a capital expenditure. Generally, additions,
improvements, alterations, rehabilitations, replacements and repairs to a property should be
capitalized when they appreciably extend the life, increase the capacity or improve the
efficiency and safety of the property. When a capital expenditure is capitalized, the company’s
assets increase. On the other hand, if such an expense is considered a revenue expenditure,
then it is deducted outright as expense in the year it was incurred from the gross income.
Business expenses allowed as deductions include the following:
1.Compensation payments. Compensation payments must be for personal services actually

rendered by employees under an employer-employee relationship.
2. Fringe Benefits. The grossed-up monetary value of fringe benefit furnished or granted by
the employer to the employee is deductible provided that the final tax has been paid.
3. Travel expenses. Travel expenses here and abroad while away from home in pursuit of a
trade, business, or profession.
Deductibility of Travel Expenses and Freight Charges – The amount of expense to be
claimed by International Air Carriers shall be the actual cost incurred for the purchase of the
plane ticket/airway bill which is the net amount of the ticket fare/airway bill after deducting the
corresponding fare/freight adjustments. If plane tickets are purchased from travel agents, travel
expenses as claimed by the passengers shall be validated on the basis of the sales invoice/official
receipt issued by the travel agent representing the actual cost of the ticket and the reasonable
margin added by the travel agent as payment for services.
4. Rentals. Rentals include other payments required to be made as a condition to the
continued use or possession, for the purpose of the trade, business or profession, of property to
which the taxpayer has not taken or is not taking title or in which he has no equity other than
that of a lessee, user or possessor.
Where a leasehold is acquired for a business purpose for a specified sum, he may take as a
deduction an aliquot part of such sum each year based on the number of years the lease has to
run.
Taxes paid by a lessee to or for a lessor for business property are treated as additional rent and
constitute a deductible item to the lessee and taxable income to the lessor. The amount of tax
paid by the lessee is deductible by the lessor as tax expense.
Leasehold improvements by a lessee (i.e. erecting a building or making permanent improvement

on land) shall be treated as capital investment and not deductible as a business expense.
In order to return to such taxpayer his investment of capital, an annual deduction for
depreciation may be made from gross income for an amount equal to the cost of such
improvement divided by the number of years remaining of the term of lease. If the remainder
of the term of lease is greater than the probable life of the buildings erected or of the
improvements made, this deduction shall take the form of an allowance for depreciation.
5. Entertainment, Amusement and Recreation Expenses (EAR). Expenses during the taxable
year that are directly connected or related to the operation or conduct of the trade, business, or
profession, or that are directly related to or in furtherance of the conduct of his/its trade,
business, or exercise of a profession not to exceed such ceilings prescribed by rules and
regulations. Revenue regulations 10-2002 authorized the imposition of a ceiling on EAR
expenses.
Definition of terms:
Entertainment, amusement and recreation expenses – includes representation expenses and/or
depreciation or rental expense relating to entertainment facilities, as described below.
Representation expenses – shall refer to expenses incurred by a taxpayer in connection with the
conduct of his trade, business or exercise of profession, in entertaining, providing amusement
and recreation to, or meeting with, a guest or guests at a dining place, place of amusement,
country club, theatre, concert, play, sporting event, and similar events or places.
Entertainment facilities – shall refer to 1)a yacht, vacation home or condominium; and 2)any
similar item of real or personal property used by the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees. To be considered an entertainment facility,
such yacht, vacation home or condominium, or item of real or personal property must be owned
or form part of the taxpayer’s trade, business or profession, or rented by such taxpayer, for
which the taxpayer claims a depreciation or rental expense.
Guests – shall mean persons or entities with which the taxpayer has direct business relations,
such as but not limited to, clients/customers or prospective clients/customers. The term shall
not include employees, officers, partners, directors, stockholders, or trustees of the taxpayer.
6. Repairs. Repairs are expenditures to restore assets to good operating condition upon
breakdown by replacing broken parts. Extraordinary repairs are material replacement of parts,
involving large sum of money, that extend the useful life of the asset. Repairs of this type are
usually capitalized by debiting the corresponding allowance for depreciation. Ordinary repairs
are minor replacement of parts, involving small sum of money, and are frequently encountered.
Ordinary repairs are normally charged as expense when incurred.
ITEMIZED DEDUCTIONS (continuation)
B. Interest
Interest shall refer to the payment for the use or forbearance or detention of money, regardless
of the name it is called or denominated. It includes the amount paid for the borrower’s use of
money during the term of the loan, as well as for his detention of money after the due date for
its repayment.
Said regulations define taxpayer as a person, whether natural or juridical, engaged in trade,
business or in the exercise of profession, except one earning compensation income arising from
personal services rendered under an employer-employee relationship.
Requisites for Deductibility
1.There must be an indebtedness;

2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s trade, business or exercise of
profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related taxpayers;
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a capital expenditure.
Rules on the Deductibility of Interest Expense
In general, the amount of interest expense paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s trade, business, or exercise of profession shall
be allowed as deduction from the taxpayer’s gross income. However, in case the taxpayer earns
interest income had been subjected to final withholding tax, the interest expense paid or
incurred shall be reduced by an amount equal to the following percentages of the interest
income earned depending on the year when said interest income was earned.
Interest on Unpaid Taxes
Interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully
deductible from gross income and shall not be subject to the limitation on deduction. Interest
on delinquent taxes is considered as interest on indebtedness and not as taxes.
Non-deductible Interest Expense
No interest expense shall be allowed as deduction from gross income in any of the following
cases:
1.If within the taxable year, an individual taxpayer reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance through discount or otherwise. Such
interest shall be allowed as a deduction in the year the indebtedness is paid. But if the
indebtedness is payable in periodic amortization, the amount of interest which corresponds to
the amount of the principal amortized or paid during the year shall be allowed as deduction in
such taxable year;
2. If both the taxpayer and the person to whom the payment has been made or is to be made
are persons specified under Section 36(B) of the Tax Code of 1997; and
3. If the indebtedness on which the interest expense is paid is incurred to finance petroleum
operations in the Philippines. The non-deductible interest expense herein referred to pertains to
interest or other consideration paid or incurred by a Service Contractor engaged in the discovery
and production of indigenous petroleum in the Philippines in respect of the financing of its
petroleum operations, pursuant to Section 23 of PD 8, as amended, otherwise known as “The Oil
Exploration and Development Act of 1972.”
Interest Expense on Capital Expenditure
At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire
property used in trade, business or exercise of a profession may be allowed as a deduction in full
in the year when incurred, the provisions of Section 36(A)(2) and (3) of the Tax Code of 1997 to
the contrary notwithstanding, or may be treated as a capital expenditure for which the taxpayer
may claim only as a deduction the periodic amortization of such expenditure.
Reversal of Accrued Interest Expense When No Tax Benefit was Derived
If a company did not derive a tax benefit from accrued interest because it operated at a loss
even without the accrual, a reversal of the accrual in subsequent years arising from the
condonation of the interest payable shall not result in any income being recognized and taxed in
the year such reversal was made. The “tax benefit doctrine” provides for the inclusion in gross
income of amounts deducted in earlier taxable years and recovered in later years only to the
extent that such deductions resulted in tax benefits in those earlier years.
C. Taxes
Taxes deductible from gross income are taxes proper only. Interests and penalties incident to
tax delinquency are not deductible from gross income. As a general rule, all taxes, national or
local, paid or incurred within the taxable year in connection with the taxpayer’s trade, business
or profession are deductible from gross income.
Exceptions
The following are taxes not deductible from gross income:
1.Philippine income tax.

2. Income taxes imposed by authority of any foreign country. But in case a taxpayer does not
signify in his return his desire to avail of the foreign tax credit, this may be deductible from gross
income.
3. Estate and donor’s taxes.
4. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.
Taxes when refunded or credited shall be included as part of the gross income of the year of
receipt to the extent of the income tax benefit of said deduction.
In the case of a non-resident alien individual and a resident foreign corporation both engaged in
trade or business in the Philippines, deduction is allowed only if and to the extent that they are
connected with income from sources within the Philippines. If the non-resident alien and foreign
corporations are not engaged in trade or business in the Philippines, the rates of income tax are
to be based on their gross income.
D. Losses
Losses of property arising from fire, storms, shipwreck, other casualties, robbery, theft or
embezzlement; and other losses, if incurred in connection with trade, business or profession
actually sustained during the taxable year and not compensated for by insurance or other forms
of indemnity, shall be allowed as deductions.
The taxpayer shall submit a declaration of loss sustained from casualty, robbery, theft of
embezzlement during the taxable year in not less than 30-days nor more than 90-days from the
date of discovery of such loss. No loss shall be allowed as a deduction if at the time of filing of
the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax
return.
E. Bad Debts
Bad debts shall refer to those debts resulting from the worthlessness or uncollectibility, in whole
or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible
amounts of income from goods sold or services rendered. Before a taxpayer may charge off
and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of
certainty the uncollectibility of the debt. The determination of worthlessness in a given case
must depend upon the particular facts and the circumstances of the case.
Thus, accounts receivable, the amount whereof is insignificant and the collection of which
through court action may be more costly to the taxpayer, may be written off as bad debts
without conclusive evidence that the taxpayer’s receivable from a debtor has definitely become
worthless. The taxpayer may strike a middle course between pessimism and optimism and
determine debts to be worthless in the exercise of sound business judgment based upon as
complete information as is reasonably ascertainable. The taxpayer need not have perfect
discernment.
Requisites for Deduction
1.There must be an existing indebtedness due the taxpayer which must be valid and legally
demandable;
2. The same must be connected with the taxpayer’s trade, business or practice of profession;
3. The same must not be sustained in a transaction entered into between related parties
enumerated under Section 36(B) of the Tax Code of 1997;
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of
the taxable year; and
5. The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to
demonstrate with reasonable degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the
collateral, if any, securing the debt and the financial condition of the debtor in determining
whether a debt is worthless, or the assigning of the case for collection to an independent
collection lawyer who is not under the employ of the taxpayer and who shall report on the legal
obstacle and the virtual impossibility of collecting the same from the debtor and who shall issue
a statement under oath showing the propriety of the deductions thereon for alleged bad debts.
Thus, where the surrounding circumstances indicate that a debt is worthless and uncollectible
and that legal action to enforce payment would in all probability not result in the satisfaction of
execution on a judgment, a showing of those facts will be sufficient evidence of the
worthlessness of the debt for the purpose of deduction.
In the case of banks, the Commissioner of Internal Revenue shall determine whether or not bad
debts are worthless and uncollectible in the manner provided in the immediately preceding
paragraph. Without prejudice to the Commissioner’s determination of the worthlessness and
uncollectibility of debts, the taxpayer shall submit a Bangko Sentral ng Pilipinas/Monetary Board
written approval of the writing off of the indebtedness from the bank’s books of accounts at the
end of the taxable year.
Also, in no case may a receivable from an insurance or surety company be written off from the
taxpayer’s books and claimed as bad debts deductions unless such company has been declared
closed due to insolvency or for any such similar reason by the insurance commissioner.
----------------------proposed end of lecture Bravo----------------------------

F. Depreciation
Property, plant and equipment are normally usable for a number of years. A point will
be reached when such property may not be useful anymore in the business due to
exhaustion, wear and tear. The difference between the cost of the property and its
value when worn out or retired (salvage value) is the amount which shall be subject to
depreciation considering the estimated useful life of the property. Depreciation is that
portion of the cost of the property allocated or charged as expense for a specific period.
In general, there shall be allowed as deduction for depreciation, a reasonable allowance

for the exhaustion, wear and tear, including reasonable allowance for obsolescence, of
property used in the trade or business.
1.In case of property held by one person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant.
2. In case of property held in trust, the allowable deduction shall be apportioned

between the income beneficiaries and trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of such provisions, on
the basis of the trust income allowable to each.
Methods of Depreciation
1.Straight-line method
2. Declining balance method
3. Sum-of-the-years-digit method.
Agreement as to Useful Life and Rate
When the taxpayer and the Commissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any property, the rate
so agreed upon shall be binding on both the taxpayer and the National Government in
the absence of facts and circumstances not taken into consideration during the
adoption of such agreement. The responsibility of establishing the existence of such
facts and circumstances shall rest with the party initiating the modification. Any change
in the agreed rate and useful life of the depreciable property as specified in the
agreement shall not be effective for taxable years prior to the taxable year in which
notice in writing by certified mail or registered mail is served by the party initiating such
change to the other party to the agreement.
However, where the taxpayer has adopted such useful life and depreciation rate for any
depreciable asset and claimed depreciation expenses as deduction from his gross
income, without any written objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and depreciation rate so adopted by
the taxpayer for the aforesaid depreciable asset shall be considered binding.
Illustration: Assume that a taxpayer acquired a computer equipment for P180,000.

Shipping charges were P2,500; installation and programming amounted to P7,500. The
equipment is expected to last for four years. It has a salvage value of P30,000. If the
taxpayer uses the straight-line method of depreciating its equipment, how much is the
annual depreciation deductible?
Under the straight-line method, the annual depreciation is cost less salvage value all
over the estimated useful life of the asset, or
Cost of machinery
(P180,000 + P2,500 + P7,500) P190,000
Less: Salvage value 30,000
----------------
Depreciable cost P160,000
Divide by: Estimated life 4 years
----------------
Annual depreciation deductible P 40,000
==========
If after two-years, it has been estimated that the computer equipment has four more
years of useful life, the annual depreciation shall be recomputed as cost less
accumulated depreciation divide by useful life, or
Cost of machinery P190,000

Less: Accumulated depreciation
(P40,000 x 2 years) 80,000
-----------------
Book value P110,000
-----------------
==========
G. Depletion
Wasting assets or natural resources usually include coal, oil, ore, precious metals like
gold, silver and timber. Wasting assets are physically consumable and irreplaceable.
Only nature may be able to replace the same. The allocation of the cost or other basis
of a wasting asset over the period the natural resource is extracted or produced is
called depletion. Depletion allowance enables the taxpayer to recover that capital
interest-free from income tax, at its cost or some other basis.
Definition of Terms
Intangible costs in petroleum operations refers to any cost incurred in petroleum

operations which in itself has no salvage value and which is incidental to and necessary
for the drilling of wells and preparation of wells for the production of petroleum. Said
costs shall pertain to the acquisition or improvement of property of a character subject
to the allowance for depreciation except that the allowances for depreciation on such
property shall be deductible.
Any intangible exploration, drilling and development expenses allowed as a deduction in

computing taxable income during the year shall not be taken into consideration in
computing the adjusted cost basis for the purpose of computing allowable cost
depletion.
Net income from mining operations means gross income from operations less allowable
deductions. Allowable deductions which are necessary or related to mining operations
shall include mining, milling and marketing expenses, and depreciation of properties.
Exploration expenditures means expenditures paid or incurred for the purpose of

ascertaining the existence, location, extent, or quality of any deposit of ore or other
mineral, and paid or incurred before the beginning of the development stage of the
mine or deposit.
Development expenditures means expenditures paid or incurred during the

development stage of the mine or other natural deposits. The development stage of a
mine or other natural deposit shall begin at the time when deposit of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall end
upon commencement of actual commercial extraction.
Cost Depletion Method
In general, in case of oil and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method shall be granted
under rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation by the Commissioner:
1.When the allowance for depletion shall equal the capital invested, no further
allowance shall be granted.
2. After production in commercial quantities has commenced, certain intangible
exploration and development drilling costs shall be deductible
a. in the year incurred if such expenditures are incurred for non-producing wells
and/or mines; or
b. in full in the year paid or incurred; or
c. at the election of the taxpayer, may be capitalized and amortized if such
expenditures incurred are for producing wells and/or mines in the same contract area.
Election to Deduct Exploration and Development Expenditures

In computing taxable income from mining operations, the taxpayer, may at his option,
deduct exploration and development expenditures accumulated as cost or adjusted
basis for cost depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year on these conditions:
1.The total amount deductible for exploration and development expenditures shall not
exceed 25% of the net income from mining operations computed without the benefit of
any tax incentives under existing laws.
2. The actual exploration and development expenditures minus 25% of the net income
from mining shall be carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures is
irrevocable and shall be binding in succeeding taxable years.
Depletion by a Non-resident alien individual or Foreign Corporation
In the case of a non-resident alien individual engaged in trade or business in the

Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells
or mines shall be authorized only in respect to oil and gas wells or mines located within
the Philippines.
H. Charitable and Other Contributions
Contributions Deductible in Full
1.Donations to the Philippine Government or to any of its agencies or political

subdivision, including fully-owned government corporation, exclusively to finance, to
provide for, or to be used in undertaking priority activities in education, health, youth
and sports development, human settlements, science and culture and in economic
development.
The activities must be according to a National Priority Plan determined by the National
Economic and Development Authority (NEDA) in consultation with appropriate
government agencies, including its regional development councils and private
philanthropic persons and institutions. Donations not in accordance with the annual
priority plan shall be subject to limitations.
2. Donations to certain foreign institutions or international organizations in compliance

with agreements, treaties or commitments entered into by the Philippine Government
and the foreign institutions or international organizations or in pursuance of special
laws.
3. Donations to accredit non-governmental organizations (means a non-profit domestic

corporation) organized and operated exclusively for scientific, research, educational,
character-building and youth and sports development, health, social welfare, cultural or
charitable purposes, or a combination thereof. The following conditions shall be
satisfied:
a) No part of the net income of the NGO inures to the benefit of any private
individual.
b) The contribution must be utilized not later than the 15th day of the third month
after the close of the NGOs taxable year.
c) The level of administrative expenses of which shall, on an annual basis, not
exceed 30% of the total expenses for the taxable year.
d) The assets of which, in the event of dissolution, would be distributed to another
accredited NGO organized for similar purpose or purposes, or to the State for public
purpose, or purposes, or would be distributed by a competent court of justice to
another accredited NGO to be used in such manner as in the judgment of said court
shall best accomplish the general purpose for which the dissolved organization was
organized.
4. Under special laws, donations to the Integrated Bar of the Philippines, Development
Academy of the Philippines, Agricultural Development of Southeast Asian Fisheries
Development Center, National Social Action Council, National Museum/Library Archives,
Museum of Philippine Costumes, Intramuros Administration and Lungsod ng Kabataan.
Contributions Subject to Limitations

subdivision exclusively for public purposes.
2. Donations to accredit domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development, cultural or
educational purposes, or for the rehabilitation of veterans, or to social welfare
institutions, or to NGOs.
Donations, contributions or gifts actually paid or made within the taxable year shall be
allowed limited deductibility in an amount not in excess of 10% for an individual donor,
and 5% for a corporate donor, of the donor’s income derived from trade, business or
profession as computed before the deduction for charitable contributions.
The amount of any charitable contribution of property other than money shall be based
on the acquisition cost of said property.
I.Research and Development
Research and development costs are cost of materials, equipment, facilities, personnel,
purchased intangibles, contract services and a reasonable allocation of indirect costs
that are specifically related to research and development activities and that have no
alternative future uses. Research activities are those undertaken to discover new
knowledge that will be useful in developing new product service or process.
Development activities involve the application or research findings to develop a product,
service or process.
In general, a taxpayer may treat research or development expenditures which are paid
or incurred by him during the taxable year in connection with his trade, business or
profession as ordinary and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as deduction during the taxable
year when paid or incurred.
J. Pension Trusts
An employer establishing or maintaining a pension trust to provide for the payment of

reasonable pensions to his employees shall be allowed as a deduction (in addition to the
contributions to such trust during the taxable year to cover the pension liability accruing
during the year which is allowed as a deduction) a reasonable amount transferred or
paid into such trust during the taxable year in excess of such contributions, but only if
such amount:
1.has not been allowed as a deduction; and

2. is apportioned in equal parts over a period of ten (10) consecutive years beginning
with the year in which the transfer of payment is made.
Any amount paid or payable which is otherwise deductible from, or taken into account
in computing gross income or for which depreciation or amortization may be allowed,
shall be allowed as deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance
with the provisions of the Code.
ITEMS NOT DEDUCTIBLE
1.Personal, living or family expenses.

2. Any amount paid out for new buildings or for permanent improvements, or
betterment made to increase the value of any property or estate, except that intangible
drilling and development cost incurred in petroleum operations are deductible. This is a
capital expenditure.
3. Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made. This is a capital expenditure.
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on by
the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. Losses from sales or exchanges of property between related taxpayers.
CHAPTER 6 – INCOME TAXATION OF PARTNERSHIPS AND PARTNERS
In a contract of partnership, the partners agree to contribute money, property or

industry to a common fund with the intention of dividing the profits among themselves.
Classification of General Partnerships in Taxation

1. General Professional Partnership. One formed by persons for the sole purpose
of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
2. General co-partnership (compania colectiva). A general partnership which is not
a general professional partnership.
GENERAL PROFESSIONAL PARTNERSHIPS

A general professional partnership (GPP) shall not be subject to the income but is
required to file annual income tax return/annual information return for the purpose of
furnishing information as to the items of gross income, deductions, and the names, TINs,
addresses and share of each of the partners. Partners in a general professional
partnership shall be liable for income tax in their separate and individual capacities.
Where the result of partnership operation is a loss, the loss will be divided as agreed
upon by the partners. If there is no agreement as to division of losses but there is as to
profits, the losses shall be distributed according to the profit sharing ratio. Such share in
the losses may be taken up by the individual partners in their respective income tax
returns.
Section 26 of the NIRC provides that – “For purposes of computing the distributive share
of the partners, the net income of the GPP shall be computed in the same manner as a
corporation.” As such, A GPP may claim either the allowed itemized deductions or the
OSD allowed to corporations in claiming the deductions in an amount not exceeding
40% of its gross income.
The net income determined by either claiming the itemized deduction or OSD from the
GPP’s gross income is the distributable net income from which the share of each
partner is to be determined. Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the partnership.
GPPs, unlike corporations and general co-partnerships, do not pay national income
taxes. Rather, the GPP serves as a “conduit” or “pass-through” entity where its income
is ultimately taxed to the partners comprising it.
In computing taxable income, all expenses which are ordinary and necessary, incurred
or paid for the practice of profession, are allowed as deductions. Since the taxable
income is in the hands of the partner, as a rule apart from the expenses claimed by the
GPP in determining its net income, the individual partner can still claim deductions
incurred or paid by him that contributed to the earning of the income taxable to him.
Itemized Deductions or OSD for GPPs

Section 2 of Revenue Regulations 2-2010 amended Section 6 of RR 16-2008 with
regard to the determination of the OSD for GPPs and partners of GPPs. The following
rules shall govern the claim of the partners of deductions from their share in the net
income of the partnership.
1. If the GPP availed of the itemized deduction in computing its net income, the
partners may still claim itemized deductions from said share, provided, that, in
claiming itemized deductions, the partner is precluded from claiming the same
expenses already claimed by the GPP.
In fine, if the GPP claimed itemized deductions the partners comprising it can
only claim itemized deductions which are in the nature of ordinary and necessary
expenses for the practice of profession which were not claimed by the GPP in
computing its net income or distributable net income during the year. Examples
of these are representation expenses incurred by the partner where the covering
invoice or receipt is issued in his name; travelling expenses while away from
home, which were not liquidated by the partnership; depreciation of a car used
in the practice of profession where said car is registered in the name of the
partner; and similar expenses.
Hence, if the GPP availed of itemized deductions, the partners are not allowed to
claim the OSD from their share in the net income because the OSD is a proxy for
all the items of deductions allowed in arriving at taxable income. This means
that the OSD is in lieu of the items of deductions claimed by the GPP and the
items of deduction claimed by the partners.
2. If the GPP avails of OSD in computing its net income, the partners comprising it
can no longer claim further deduction from their share in the said net incomefor
the following reasons:
a) The partners’ distributive share in the GPP is treated as his gross income not
his gross sales/receipts and the 40% OSD allowed to individuals is specifically
mandated to be deducted not from his gross income but from his gross
sales/receipts; and,
b) The OSD being in lieu of the itemized deductions allowed in computing
taxable income as defined under Section 31 of the Tax Code, it will answer
for both the items of decution allowed to the GPP and its partners.
3. Since one-layer of income tax is imposed on the income of the GPP and the
individual partners where the law had placed the statutory incidence of the tax
in the hands of the latter (i.e., the individual), the type of deduction chosen by
the GPP must be the same type of deduction that can be availed of by the
partners. Accordingly, if the GPP claims itemized deductions, all items of
deduction allowed under Section 34 can be claimed both at the level of the GPP
and at the level of the partner in order to determine the taxable income. On the
other hand, should the GPP opt to claim the OSD, the individual partners are
deemed to have availed also of the OSD because the OSD is in lieu of the
itemized deductions that can be claimed in computing taxable income.
4. If the partner also derives other gross income from trade, business or practice of
profession apart and distinct from his share in the net income of the GPP, the
deduction that he can claim from his other gross income would follow the same
deduction availed of from his partnership income as explained in the foregoing
rules. Provided, however, that if the GPP opts for the OSD, the individual partner
may still claim 40% of its gross income (author’s note: R.A. 9504 specifically
states that for individuals, the basis of the 40% OSD shall be gross sales or gross
receipts) from trade, business or practice of profession but not to include his
share from the net income of the GPP.
Illustration: For the taxable year 2010, Noy and Nay, partners of a general professional
partnership agreed to divide profits and losses 50:50, respectively. Both are married
without qualified dependents. The following are the details of the accounts:
Sale of Services, GPP P2,500,000

Cost of Services, GPP 875,000
Itemized Deductions, GPP 825,000
Partner Noy Partner Nay

Travelling expenses (not liquidated by the GPP) P 34,500 P 16,500
Cost of Car, to be depreciated over 5-yrs (used in the
Registered under the Partner 750,000 580,000
Representation expenses (personal credit card of Partner used) 14,250 23,500
Salaries from the GPP 360,000 300,000
Lotto Winnings 900,000
Interest on Bank Deposits 25,000 20,000
Book Royalties 250,000
The distributable net income of the GPP, share of each partner and taxable income are computed as follows:
GPP if OSD... GPP if itemized...

Sale of services ................................................................. P2,500,000 P2,500,000
Less: Cost of services ...................................................... . 875,000 . . 875,000 .
Gross income .................................................................. P1,625,000 P1,625,000
Less: Deductions
40% OSD or ........................................................... 650,000
Itemized Deductions ............................................. . . . 825,000 .
Distributable Net Income P 975,000 P 800,000
=================================
Share of Each Partner (50:50) P 487,500 P 400,000

=================================
GPP if OSD, then... GPP if itemized, then

Partner Noy Partner Nay Partner Noy Partner Nay
OSD OSD Itemized Itemized
Share of Each Partner in the GPP (50:50) P487,500 P487,500 P400,000 P400,000
Less: Additional Itemized Deductions-
Travelling Expenses - - 34,500 16,500
Representation Expenses - - 14,250 23,500
Depreciation of Car . - - 150,000 116,000 .
Net Share of Each Partner in the GPP P487,500 P487,500 P201,250 P244,000
Add: Salaries from the GPP . 360,000 300,000 360,000 300,000 .
Taxable Income P 847,500 P787,500 P561,250 P544,000
======================================================
Lotto winnings is exempt from income tax, interest on bank deposits is subject to a 20% final tax while book royalties
to a 10% final tax. This comprehensive illustration applies the rules as stated in the regulations except the last where
the partner also has other gross income apart from his share in net income of the GPP.
GENERAL CO-PARTNERSHIPS
Partnerships (other than GPPs), whether registered or not, are considered as
corporations and are therefore taxed as corporations. Consequently, the partners are
considered as stockholders and, therefore, profits distributed to them by the
partnership are considered as dividends. The share of an individual partner in a taxable
partnership is subject to a final tax of 6% in 1998, 8% in 1999 and 10% in 2000.
The distributive share of a partner in the net income of a partnership is equal to each
partner’s distributive share of the net income declared by the partnership for a taxable
year after deducting the corresponding corporate income tax. Such share shall be
included in the individual returns of the partners, whether actually distributed or not.
The taxable income declared by the partnership for a taxable year shall be deemed to
have been actually or constructively received by the partners in the same taxable year.
If the partnership sustains a net operating loss, the partners shall be entitled to deduct
their respective shares in the net operating loss from their individual gross income.
Illustration: Garri, single, is a partner in GR Partnership, a taxable partnership. Garri for

herself, derives income from her profession as an Architect. It is agreed upon that
Partner Garri is to receive 75% share in the profit and loss of GR while Partner Rocky,
25%. With the following pertinent data, compute for the tax due on Garri’s share in the
net income of the partnership and on her professional income for the taxable year 2010.
 Gross Income of GR ................................................. P1,000,000

 Gross income of Garri from Profession .................. 300,000
 Income tax withheld on Professional Income ........ 30,000
 Expenses of GR ....................................................... 300,000
 Expenses of Garri in Profession............................... 80,000
GR Partnership
 Gross Income of GR ................................................ P1,000,000
 Expenses of GR ......................................................... 300,000 .
 Net income before Income tax .............................. P 700,000
 Less: Income Tax (P700,000 x 30%) ......................... 210,000 .
 Net Income after Income Tax ................................. P 490,000
 ===========
Partner Garri
Final Tax:
Share of Partner Garri in GR (P490,000 x 75%) ........... P 367,500

Multiply by tax rate ........................................................ 10% .
P 36,750
==========
Income Tax Liability (Sec. 24(A)):
Gross Income from Profession .........................................................P 300,000

Less: Expenses ......................................................... P80,000
Basic Personal Exemption............................... 50,000 .
Total allowable deductions . 130,000 .
Net Income....................................................................................... P170,000
=========
Tax Due: On P140,000 . . . . . . . . . . . . . . . . . . . . . . . .P 22,500

30,000 at 25% ................................. 7,500 .
P 30,000
Less: Tax Withheld .................................................. 30,000 .
Tax still payable....................................................... P -0-
==========
CO-OWNERSHIP
A co-ownership shall not be subject to income tax if the activities of the co-
owners are limited to the preservation of the property and the collection of the
income therefrom. Such being the case, it is the co-owners who are taxed
individually on their distributive share in the income of the co-ownership.
However, should the co-owners invest the income in business for profit, they would
be constituting theselves into a partnership and as such shall be taxable as
corporation.
Classification of Income Taxpayers (Other than Individuals)
1.Corporations
a) Domestic – those created or organized under and by virtue of Philippine laws.
1. Domestic corporation, in general
2. Government-owned and controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
b) Foreign – those organized in accordance with laws of their respective countries.

1. Resident – those engaged in trade or business within the Philippines.
2. Non-resident – those not engaged in trade or business within the Philippines.
2. General Professional Partnership

3. Estates and Trusts
Definition of Terms
1.Corporation. It includes partnerships, no matter how created or organized, joint

stock companies, joint accounts, associations, or insurance companies, but does not
include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government.
2. Domestic – When applied to a corporation, means created or organized in the

Philippines or under its laws.
3. Foreign – When applied to a corporation, means a corporation which is not

domestic.
4. Resident Foreign Corporation – Applies to a foreign corporation engaged in trade

or business within the Philippines.
5. Non-resident Foreign Corporation – Applies to a foreign corporation not engaged

in trade or business within the Philippines.
SOURCES OF INCOME
Aside from knowing the classification of the taxpayer, the source of income is the
next important thing to determine- whether it is from within the Phils or without.
The following rules apply:
1.Domestic corporations – are taxable on income from sources within and without
the Philippines.
2. Foreign corporations – whether resident or non-resident, are taxable only on

income from Philippine sources.
A partnership other than a general professional partnership is considered a

corporation and is taxable as such.
A.Business Income – Generally, business income earned by a corporation is taxed at

the following rates:
Description Tax Rate Tax Base
DOMESTIC CORPORATION
1.
a. In general 30% Taxable income from all
sources
b. Minimum Corporate Income tax 2% Gross Income
c. Improperly accumulated earnings 10% Improperly accum.
Taxable income
2.Proprietary Educational Institution 10% Taxable income from all

sources
3. Non-stock, Non-profit hospital 10% Taxable income from all
sources
4. GOCC, Agencies & Instrumentalities (see 1a-1c)
5. National Government & LGUs (see 1a-1c)
6. Taxable Partnership (see 1a-1c)
7. Exempt Corporation
a. On exempt activities 0% Taxable Income
b. On Taxable activities (see 1a)
8. General Professional Partnerships Exempt
9. Corporation covered by Special Laws Rate specified under the
respective
Special laws.
RESIDENT FOREIGN CORPORATION
1.
a. In general 30% Taxable income from w/in
Phils.
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accum.
Taxable income
2. International Carriers 2.50% Gross Philippine Billings
3. Regional Operating Headquarters 10% Taxable Income
4. Corporation covered by Special Laws Rate specified under the
respective
Special laws.
5. Offshore Banking Units (OBUs) 10% Gross Taxable Income on
Foreign
Currency Transaction
30% On Taxable income other
than
Foreign currency
transaction
6. Foreign currency deposit Units (FCDU) 10% Gross Taxable Income on
Foreign
Currency transaction
30% On Taxable income other
than
Foreign currency
transaction
B. Passive Income – Passive income is subject to a separate and final tax. These are
taxed at fixed rates ranging from 5% to 20%. Passive income is not to be included in
gross income computation.
ON PASSIVE INCOME Domestic Resident Foreign

1.Interests
Interests from deposits and yield or any
Other monetary benefit from deposit
Substitutes and from trust funds and
Similar arrangements. 20% 20%
Interest income from a depository bank

Deposit system. 7.5% 7.5%
Income derived by a depository bank

Deposit system from foreign currency
Transactions with local commercial banks
Including branches of foreign banks that
May be authorized by the Bangko Sentral
Ng Pilipinas (BSP), including interest
Income from foreign currency loans. 10% 10%
2.Royalties 20% 20%
3. Dividends
Dividends received by a domestic/resident
Foreign corporation from a domestic
Corporation. Exempt Exempt
4. Capital Gains
On the net capital gain from sale, exchange,
Or other disposition of shares of stock in a
Domestic corporation not traded in the
Stock exchange
Not over P100,000 5% 5%
Amount in excess of P100,000 10% 10%
On the capital gain presumed to have been

Realized on the sale, exchange or dispo-
Sition of lands and/or buildings not actually
Used in the business and treated as capital
Assets, the higher value between
Gross selling price, and
Fair market value as determined by the
Commissioner 6%
DOMESTIC AND RESIDENT FOREIGN CORPORATIONS, IN GENERAL
Generally, the pro-forma computation of the normal income tax of domestic and
resident foreign corporations follows:
Gross Income Pxxx

Less: Allowable Deductions xxx
----------
Net income Pxxx
-----------
Tax Due
For domestic and resident corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific date when
specific sales, purchases and other transactions occur. Their income and expenses
for the fiscal year shall be deemed to have been earned and spent equally for each
month of the period.
DOMESTIC CORPORATIONS, IN PARTICULAR
1.Proprietary Educational Institutions and Non-Profit Hospitals

2. Unrelated trade, business or other activity
3. Government-owned or Controlled Corporations, Agencies or Instrumentalities
4. Mutual Life Insurance Companies
Proprietary Educational Institutions and Non-Profit Hospitals – The 10% tax on the
taxable income is subject to limitation. If the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income
derived from all sources, the tax prescribed under Section 27 (A) shall be imposed
on the entire taxable income.
Unrelated trade, business or other activity – means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or
function.
A proprietary educational institution is any private school maintained and

administered by private individuals or groups with an issued permit to operate from
the DepEd, or the CHED, or the TESDA, as the case may be, in accordance with
existing laws and rules and regulations.
Government-Owned or Controlled Corporations, Agencies or Instrumentalities.

Subject to the provisions of existing special laws or general laws, all corporations,
agencies, or instrumentalities owned or contolled by the government shall pay such
rate of tax upon their taxable income as are imposed by the Code upon corporations
or associations engaged in a similar business, industry or activity. The following are
exempt:
1.Government Service Insurance System (GSIS),

2. Social Security System (SSS),
3. Philippine Health and Insurance Corporation (PHIC),
4. Local Water Districts (LWD),
5. Philippine Charity Sweepstakes Office (PCSO).
Mutual Life Insurance Companies. These companies are now subject to the regular
corporate income tax rates.
RESIDENT FOREIGN CORPORATIONS, IN PARTICULAR
1.International Shipping
2. Offshore Banking Units
3. Branch Profits Remittances
4. Regional Operating Headquarters
5. Regional or Area Headquarters
6. Multinational Company
7. International Air Carrier
International Shipping. Gross Philippine billings in the case of international shipping
means gross revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination regardless of the place of sale or payments of the
passage or freight documents. Subject to the gross Philippine billings tax of 2.50%.
Offshore Banking Units. Income derived by offshore banking units authorized by

the BSP, from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the BSP to transact business
with offshore banking units, including any interest income derived from foreign
currency loans granted to residents, shall be subject to a final income tax of ten
percent (10%) of such income.
Branch Profits Remittances. Any profit remitted by a branch to its head office shall
be subject to a tax of fifteen percent (15%) which shall be based on the total profits
applied or earmarked for remittance without deduction for the tax component
thereof (except those activities which are registered with the Philippine Economic
Zone Authority).
Regional Operating Headquarters shall mean a branch established in the Philippines

by multinational companies which are engaged in any of the following services:
general administration and planning; business planning and coordination; sourcing
and procurement of raw materials and components; corporate finance advisory
services; marketing control and sales promotions; training and personnel
management; logistic services; research and development services and product
development; technical support and maintenance; data processing and
communication; and business development. Regional operating headquarters shall
pay a tax of ten percent (10%) of their taxable income.
Regional or Area Headquarters shall mean a branch established in the Philippines by

multinational companies and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets. Regional or area headquarters as such shall not be subject to
income tax.
Multinational Company means a foreign firm or entity engaged in international

trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and
other foreign markets.
International Air Carrier – shall refer to a foreign airline corporation doing business
in the Philippines having been granted landing rights in any Philippine port to
perform international air transportation services/activities or flight operations
anywhere in the world.
Gross Philippine Billings Tax -

An international air carrier having flights originating from any port or point in the
Philippines, irrespective of the place where passage documents are sold or issued, is
subject to the gross Philippine billings tax of 2.50% unless subject to a different tax
rate under the applicable tax treaty to which the Philippines is a signatory.
All items of income other than income from international air transport services shall
be subject to tax under the pertinent provisions of the Code.
Determination of Gross Philippine Billings -

In computing for gross Philippine billings there shall be included the total amount of
gross revenue derived from passage of persons, excess baggage, cargo and/or mail,
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of passage
documents.
NON-RESIDENT FOREIGN CORPORATION, IN GENERAL
The basis of tax for non-resident foreign corporations is gross income from sources
within the Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains.
Generally, the pro-forma computation of the income tax of non-resident foreign

corporations follows:
Gross income P xxx
----------
Tax due P xxx
======
NON-RESIDENT FOREIGN CORPORATION, IN PARTICULAR
1.Non-resident Cinematographic Film Owner, Lessor or Distributor

2. Non-resident Owner or Lessor or Vessels chartered by Philippine Nationals
3. Non-resident Owner or Lessor of Aircraft, Machinery and other Equipment
Non-resident cinematographic film owner, lessor or distributor is taxed at 25% of

gross income.
Non-resident owner or lessor of vessels chartered by Philippine Nationals is taxed at

4.50% of gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry Authority.
Non-resident owner or lessor of aircraft, machinery and other equipment is taxed at

7.50% of gross rentals, charters and other fees.
PASSIVE INCOME OF NON-RESIDENT FOREIGN CORPORATION
1.Interest on foreign loans contracted on or after August 1, 1986 are taxed at 20%.
2. Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with local commercial banks,
including branches of foreign banks that may be authorized by the BSP, including
interest income from foreign currency loans are exempt.
3. Dividends received from a domestic corporation is subject to a final withholding
tax at 15% on the condition that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 15% for 2009.
4. Capital gains from sale of shares of stock not traded in the stock exchange. A final
tax at the rates prescribed below is imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through
the stock exchange:
Not over P100,000 5%

On any amount in excess of P100,000 10%
Allowable deductions are items or amounts which the law allows to be deducted
from gross income in order to arrive at the taxable income. A domestic or resident
foreign corporation may deduct from its business income, itemized deductions
under the Tax Code. Or, these corporations may elect a standard deduction in an
amount not exceeding forty percent (40%) of its gross income. Non-resident foreign
corporations are not allowed deductions from gross income.
In case of corporations, taxable income is the pertinent items of gross income less
the deductions authorized for such types of income. Taxable income is the amount
or tax base upon which tax rate is applied to arrive at the tax due. Depending on the
taxpayer involved and for purposes of computing the income tax liability of a
corporation, taxable income may refer to either one of the following:
1.Net Income. The income arrived at after subtracting from the gross income the
deductions of the taxpayer. For domestic and resident foreign corporations, in
general; and other corporations from whose gross income deductions are allowed.
Sales/Revenues/Receipts/Fees xxx
Less: Cost of Sales/Services xxx
---------
Gross Income from Operation xxx
Add: Non-Operating and Taxable other Income xxx
----------
Total Gross Income xxx
Less: Deductions
Optional standard deductions or
Itemized Deduction xxx
----------
Taxable Income xxx
----------
Tax Due xxx
======
2. Gross Income. The entire or gross income from business without any deductions
for either optional standard deduction or itemized deduction.
For domestic and resident foreign corporations subject to the MCIT; and non-
resident foreign corporations not subject to the normal income tax rate.
Gross Income xxx

-----------
Tax Due xxx
=======
CORPORATIONS EXEMPT FROM INCOME TAX
1.Labor, agricultural or horticultural organization not organized principally for profit;

2. Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes
and without profit;
3. A beneficiary society, order or association, operating for the exclusive benefit of
the members such as fraternal organization operating under the lodge system, or a
mutual aid association or a nonstock corporation organized by employees providing
for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or nonstock corporation or their
dependents;
4. Cemetery company owned and operated exclusively for the benefit of its
members;
5. Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person;
Organizations enumerated under Section 30 of the Tax Code of 1997 are exempt
from the payment of income tax on income received by them as such organization.
However, they are subject to the corresponding internal revenue taxes on their
income derived from any of their properties, real or personal, or from any activity
conducted for profit regardless of the disposition thereof, e.g. rental payment from
their building/premises.
6. Business league, chamber of commerce, or board of trade, not organized for

profit and no part of the net income of which inures to the benefit of any private
stockholder or individual;
7. Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
8. A nonstock and non-profit educational institution;
The exemption of non-stock, non-profit educational institutions refers to internal

revenue taxes imposed by the National Government on all revenues and assets used
actually, directly, and exclusively for educational purposes.
Revenues derived from assets used in the operation of cafeterias/canteens and

bookstores are exempt from taxation provided they are owned and operated by the
educational institution as ancillary activities and the same are located within the
school premises.
However, they shall be subject to the internal revenue taxes on income from trade,
business or other activity, the conduct of which is not related to the exercise or
performance of their educational purposes or functions.
9. Government educational institution;

10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization
of a purely local character, the income of which consists solely of assessments, dues,
and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers’, fruit growers’, or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back to
them the proceeds of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them.
Corporations may also be declared exempt from income tax or any other tax under
special laws.
CHAPTER 7 - GROSS INCOME
Gross Income as defined in the Tax Code means all income derived from whatever
source including but not limited to the following items:
1.Compensation for services, in whatever form paid, including but not limited to
fees, salaries, wages, commissions and similar item;
2. Gross income derived from the conduct of trade or business or from the exercise
of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions;
11. Partner’s distributive share from the net income of a general professional
partnership.
Gross income as discussed in this chapter may appropriately be referred to as gross

taxable income, in the case of a corporation or gross taxable business/professional
income, in the case of an individual taxpayer engaged in trade, business or
profession. For clarity, even passive incomes were included in the succeeding
discussions. But note that passive incomes subject to final tax shall not form part of
the gross income for purposes of computing the taxable income (gross income less
allowable deductions) subject to income tax liabilities of individuals under Section
24(A) and corporations under Section 27 and 28.
Pursuant to Section 44 of the Tax Code of 1997, the amount of all items of gross
income shall be included in the gross income for the taxable year in which received
by the taxpayer, unless under methods of accounting permitted under Section 43 of
the same Code, any such amounts are to be properly accounted for as of a different
period.
Compensation income. In general, the term “compensation” means all

remuneration for services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the Code. The term
used to designate the remuneration is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commissions (e.g. transportation,
representation, entertainment, and the like); fees including director’s fees, if the
director is, at the same time, an employee of the employer/corporation; taxable
bonuses and fringe benefits except those which are subject to the fringe benefits
tax; taxable pensions and retirement pay; and other income of a similar nature
constitute compensation income.
The timing or the basis upon which the remuneration is paid is immaterial in
determining whether the remuneration constitutes compensation. Thus, it may be
paid on the basis of piece-work, or a percentage of profits; and may be paid hourly,
daily, weekly, monthly or annually.
If services are paid for in a medium other than money (e.g. stocks, bonds or other
forms of property), such is to be treated as compensation in kind. The fair market
value of the thing taken in payment is the amount to be included as compensation.
1.Payroll Period. The term “payroll period” means the period of services for which a
payment of compensation is ordinarily made to an employee by his employer. It is
immaterial that the compensation is not always paid at regular intervals.
2. Employee. The term “employee” is an individual performing services under an

employer-employee relationship. The term covers all employees, including officers
and employees, whether elected or appointed, of the Government of the Philippines
political subdivision thereof or any agency or instrumentality.
In general, an employer-employee relationship exists when the person for whom

services were performed has the right to control and direct the individual who
performs the services, not only as to the result to be accomplished by the work but
also as to the details and means by which the result is accomplished.
In general, individuals who follow an independent trade, business, or profession, in

which they offer their services to the public, are not employees.
No distinction is made between classes or grades of employees. Thus,

superintendents, managers, and others belonging to similar levels are employees.
An officer of a corporation is an employee of the corporation. An individual,
performing services for a corporation, both as an officer or director, is an employee
subject to withholding on compensation, including director’s fees.
3. Employer. The term “employer” means any person for whom an individual
performs or performed any service, of whatever nature, under an employer-
employee relationship. It is not necessary that the services be continuing at the time
the wages are paid in order that the status of employer may exist. A person for
whom an individual has performed past services and from whom he is still receiving
compensation is an “employer”.
The term “employer” is also defined as any person paying compensation on behalf
of a non-resident alien individual, foreign partnership, or foreign corporation, who is
not engaged in trade or business within the Philippines.
4. Statutory Minimum Wage (SMW) refers to the rate fixed by the Regional
Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor
and Employment Services (BLES) of the DOLE.
5. Minimum Wage Earner (MWE) refers to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector receiving
compensation income equivalent to salary grade five (SG 5) and below.
Forms of Compensation
Compensation does not always come in the form of money or is always termed as
such. Compensation has various forms, as follows:
1.Compensation paid in kind. Compensation may be in some medium other than

money, as for example, stocks, bonds or other forms of property. In this case, the
fair market value of the thing in payment is the amount to be included as
compensation subject to withholding. Where compensation is paid in property other
than money, the employer shall make necessary arrangements to ensure that the
amount of the tax required to be withheld is available for payment to the BIR.
2. Living quarters and meals. If a person receives salary as remuneration for services
rendered, and in addition thereto, living quarters or meals are provided, the value
to such person of the quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount of compensation
subject to withholding. However, if living quarters or meals are furnished to an
employee for the convenience of the employer, the value thereof need not be
included as part of compensation income.
3. Facilities and privileges of a relatively small value. Ordinarily, facilities and
privileges (such as entertainment, medical services, or so called “courtesy” discounts
on purchases), otherwise known as “de minimis benefits”, furnished or offered by
an employer to his employees, are not considered as compensation subject to
income tax and consequently to withholding tax if such facilities or privileges are of
relatively small value are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees. The
following shall be considered “de minimis” benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial
and rank-and-file employee:
a)Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c) Rice subsidy of P1,500 or one (1) sack of 50 kilos rice per month amounting to not
more than P1,500;
d) Uniforms and clothing allowance not exceeding P4,000 per annum;
e) Actual yearly medical benefits not exceeding P10,000 per annum;
f) Laundry allowance not exceeding P300 per month;
g) Employees achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favour of
highly paid employees;
h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
i) Flowers, fruits, books or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and
j) Daily meal allowance for overtime work not exceeding 25% of the basic mainimum
wage.
The amount of “de minimis” benefits conforming to the ceiling herein prescribed
shall not be considered in determining the P30,000 ceiling of “other benefits”
excluded from gross income under Section 32(b)(7)(e) of the Code. However, if the
employer pays more than the ceiling prescribed, the excess shall be considered as
part of “other benefits” and shall be taxable to the employee receiving the benefits
only if such excess is beyond the P30,000 ceiling.
Note further that MWEs receiving “other benefits” exceeding the P30,000 limit shall
be taxable on the excess benefits, as well as on his salaries, wages and allowances,
just like an employee receiving compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified
as “de minimis” benefits or fringe benefits, shall constitute as deductible expense
upon such employer.
Example: For taxable year 2009, DBA Corporation presented the following details for
its two employees to be able to compute the tax to be collected for December 2009:
Mr. Tuazon, married with two qualified dependent children, received the following
compensation for the year:
Basic monthly salary . . . . . . . . . . . . . . . . . . . . . . . . . . . P45,000.00

Overtime pay for November. . . . . . . . . . . . . . . . . . . . . . 5,000.00
13th Month Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000.00
Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000.00
Withholding tax (Jan-Nov.) . . . . . . . . . . . . . . . . . . . . . . . .98,082.27
Received
Basic Salary (P45,000 x 12) P540,000 P540,000
Overtime* (Nov.) 5,000 5,000
13th Month Pay 45,000 P30,000 15,000
Other benefits 12,000 12,000
---------------- ---------- ----------------
Totals P602,000 P30,000 P572,000
======= ====== ========
Total Gross Compensation P572,000

Less: Basic Personal Exemption P50,000
Additional Exemption (P25,000 x 2) 50,000 100,000
------------ ------------
Net Taxable Compensation P472,000
=======
Tax Due **
On P250,000 P 50,000.00
222,000 x 30% 66,600.00
-----------------
Total P116,600.00
Less: Tax withheld from previous months (Jan.-Nov.) 98,082.27
-----------------
Tax to be collected in December 2009 P 18,517.73
==========
*With a basic salary of P45,000 a month Mr. Tuazon is obviously not a MWE so
overtime pay is not exempt as will be discussed in Exclusions from Gross Income.
**Tax due is computed using the rates prescribed in Sec. 24 (A), NIRC.
Mr. Sy, married, whose wife is also employed, with two qualified dependent
children, received for the year:
Basic Monthly salary P 16,500.00

13th Month Pay 16,500.00
Other Benefits 16,500.00
Withholding tax (Jan.-Nov.) 12,924.23
Received
Basic Salary(P16,500x12) P198,000 P198,000
13th Month Pay 16,500 P16,500
Other Benefits 16,500 13,500 3,000*
------------- ------------ --------------
Totals P231,000 P 30,000 P201,000
========= ======= =======
*Excess of 13th month pay and other benefits over the P30,000 ceiling under Sec. 32
(b)(7)(e).
Total compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P201,000

Less: Personal and and Additional Exemptions (ME2) . . . . . . . 100,000
----------------
Net Taxable Compensation Income . . . . . . . . . . . . . . . . . . . . . . P101,000
=======
Tax Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,700.00

Less: Tax withheld from previous months (Jan. – Nov.) . . . 12,924.23
-----------------
Amount to be withheld in December 2009 . . . . . . . . . . . . . .. P 1,775.77
=========
4. Tips and gratuities. Tips or gratuities paid directly to an employee by a customer

of the employer which are not accounted for by the employee to the employer are
considered as taxable income but not subject to withholding.
5. Pensions, retirement, and separation pay. Pensions, retirement and separation

pay constitute compensation subject to withholding, except those provided.
6. Fixed or variable transportation, representation and other allowances.

a)In general, fixed or variable transportation, representation and other allowances
which are received by a public officer or employee of a private entity, in addition to
the regular compensation fixed for his position or office, is compensation subject to
withholding.
Representation and transportation allowance (RATA) granted to public officers

and employees under the General Appropriations Act and the Personnel Economic
Relief Allowance (PERA) which essentially constitute reimbursement for expenses
incurred in the performance of government personnel’s official duties shall not be
subject to income tax and consequently to withholding tax.
b) Any amount paid specifically, either as advances or reimbursement for

travelling, representation and other bona fide ordinary and necessary expenses
incurred or reasonably expected to be incurred by the employee in the performance
of his duties are not compensation subject to withholding, if the following conditions
are satisfied:
o it is for ordinary and necessary traveling and representation or entertainment

expenses paid or incurred by the employee in the pursuit of the trade, business or
profession; and
o the employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category of
expenses pursuant to Section 34 of the Code. The excess of actual expenses over
advances made shall constitute taxable income if such amount is not returned to the
employer. Reasonable amounts of reimbursements/advances for traveling and
entertainment expenses which are pre-computed on a daily basis and are paid to an
employee while he is on an assignment or duty need not be subject to the
requirements of substantiation and to withholding.”
7. Vacation and sick leave allowances. Amounts of “vacation allowances or sick

leave credits” which are paid to an employee constitute compensation. Thus, the
salary of an employee on vacation or on sick leave, which are paid notwithstanding
his absence from work, constitute compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or less which were paid to the
employee during the year are not subject to income tax and to the withholding tax.
Then President Joseph Estrada in Executive Order 291 granted the exemption from
income tax of monetized leave credits of government officials and employees.
8. Deductions made by employer from compensation of employee. Any amount

which is required by law to be deducted by the employer from the compensation of
an employee including the withheld tax is considered as part of the employee’s
compensation and is deemed to be paid to the employee as compensation at the
time the deduction is made.
9. Remuneration for services as employee of a non-resident alien individual or
foreign entity. The term “compensation” includes remuneration for services
performed by an employee of a non-resident alien individual, foreign partnership or
foreign corporation, whether or not such alien individual or foreign entity is engaged
in trade or business within the Philippines. Any person paying compensation on
behalf of a non-resident alien individual, foreign partnership, or foreign corporation
which is not engaged in trade or business within the Philippines is subject to all
provision of law and regulations applicable to an employer.
10. Compensation for services performed outside the Philippines. Remuneration for
services performed outside the Philippines by a resident citizen for a domestic or a
resident foreign corporation or partnership, or for a non-resident corporation or
partnership, or for a non-resident individual not engaged in trade or business in the
Philippines shall be treated as compensation which is subject to tax.
Deductions from Gross Income
Deductions from gross income as discussed in this chapter apply to individuals and
corporations engaged in trade or business; and to individuals in the exercise of
profession. Deductions are amounts allowed by the Tax Code to be deducted from
gross income to arrive at the taxable income for purposes of computing the income
tax liability under Sections 24(A), 25(A), 26(A.c) and 28(A)(1). As a rule, if a taxpayer
does not within any year deduct his expenses, losses, interests, taxes or other
charges, he can no longer deduct them from the income of any succeeding year.
1.Itemized Deductions. The following deductions are called itemized deductions.

Note that item “k” is available to individual taxpayers only.
a. Expenses
O Ordinary and necessary trade, business or professional expenses.
O Expenses allowable to private educational institutions.
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of oil and gas wells and mines
h. Charitable and Other contributions
i. Research and other development
j. Pension trusts
k. Premium payments on health and/or hospitalization insurance.
2. Optional Standard Deduction (OSD). In place of items “a” to “j” above, resident
citizens, non-resident citizens, resident aliens and taxable estates and trusts, may
deduct a standard deduction in an amount not exceeding 40% of their gross sales or
gross receipts. Domestic and resident foreign corporations may also elect a 40% OSD
of its gross income.
If the individual is on the accrual basis of accounting for his income and deductions,
the OSD shall be based on the gross sales during the taxable year. On the other
hand, if the individual employs the cash basis of accounting for his income and
deductions, the OSD shall be based on his gross receipts during the taxable year.
Note that cost of sales in case of individual seller of goods, or cost of services in the
case of individual seller of services, are not allowed to be deducted for purposes of
determining the basis of the OSD.
ITEMIZED DEDUCTIONS
A.Business Expenses
In general, all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to the development,
management, operation and/or conduct of the trade, business or the exercise of a
profession are deductible. For an expense to be allowed, the reasonableness of the
amount being claimed is a prime consideration. Payments, which constitute bribes,
kickbacks and others of similar nature, shall not be allowed as deduction from gross
income.
An expense may either be treated as a capital expenditure or a revenue expenditure.

An expenditure that benefits only the current period is a revenue expenditure while
an expenditure that benefits current and future periods is a capital expenditure.
Generally, additions, improvements, alterations, rehabilitations, replacements and
repairs to a property should be capitalized when they appreciably extend the life,
increase the capacity or improve the efficiency and safety of the property. When a
capital expenditure is capitalized, the company’s assets increase. On the other hand,
if such an expense is considered a revenue expenditure, then it is deducted outright
as expense in the year it was incurred from the gross income. Business expenses
allowed as deductions include the following:
1.Compensation payments. Compensation payments must be for personal

services actually rendered by employees under an employer-employee relationship.
2. Fringe Benefits. The grossed-up monetary value of fringe benefit furnished or
granted by the employer to the employee is deductible provided that the final tax
has been paid.
3. Travel expenses. Travel expenses here and abroad while away from home in
pursuit of a trade, business, or profession.
Deductibility of Travel Expenses and Freight Charges – The amount of expense
to be claimed by International Air Carriers shall be the actual cost incurred for the
purchase of the plane ticket/airway bill which is the net amount of the ticket
fare/airway bill after deducting the corresponding fare/freight adjustments. If plane
tickets are purchased from travel agents, travel expenses as claimed by the
passengers shall be validated on the basis of the sales invoice/official receipt issued
by the travel agent representing the actual cost of the ticket and the reasonable
margin added by the travel agent as payment for services.
4. Rentals. Rentals include other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a lessee, user or possessor.
Where a leasehold is acquired for a business purpose for a specified sum, he may
take as a deduction an aliquot part of such sum each year based on the number of
years the lease has to run.
Taxes paid by a lessee to or for a lessor for business property are treated as
additional rent and constitute a deductible item to the lessee and taxable income to
the lessor. The amount of tax paid by the lessee is deductible by the lessor as tax
expense.
Leasehold improvements by a lessee (i.e. erecting a building or making permanent

improvement on land) shall be treated as capital investment and not deductible as a
business expense.
In order to return to such taxpayer his investment of capital, an annual deduction
for depreciation may be made from gross income for an amount equal to the cost
of such improvement divided by the number of years remaining of the term of
lease. If the remainder of the term of lease is greater than the probable life of the
buildings erected or of the improvements made, this deduction shall take the form
of an allowance for depreciation.
5. Entertainment, Amusement and Recreation Expenses (EAR). Expenses during
the taxable year that are directly connected or related to the operation or conduct
of the trade, business, or profession, or that are directly related to or in furtherance
of the conduct of his/its trade, business, or exercise of a profession not to exceed
such ceilings prescribed by rules and regulations. Revenue regulations 10-2002
authorized the imposition of a ceiling on EAR expenses.
Entertainment, amusement and recreation expenses – includes representation
expenses and/or depreciation or rental expense relating to entertainment facilities,
as described below.
Representation expenses – shall refer to expenses incurred by a taxpayer in

connection with the conduct of his trade, business or exercise of profession, in
entertaining, providing amusement and recreation to, or meeting with, a guest or
guests at a dining place, place of amusement, country club, theatre, concert, play,
sporting event, and similar events or places.
Entertainment facilities – shall refer to 1)a yacht, vacation home or condominium;

and 2)any similar item of real or personal property used by the taxpayer primarily
for the entertainment, amusement, or recreation of guests or employees. To be
considered an entertainment facility, such yacht, vacation home or condominium, or
item of real or personal property must be owned or form part of the taxpayer’s
trade, business or profession, or rented by such taxpayer, for which the taxpayer
claims a depreciation or rental expense.
Guests – shall mean persons or entities with which the taxpayer has direct business
relations, such as but not limited to, clients/customers or prospective
clients/customers. The term shall not include employees, officers, partners,
directors, stockholders, or trustees of the taxpayer.
6. Repairs. Repairs are expenditures to restore assets to good operating

condition upon breakdown by replacing broken parts. Extraordinary repairs are
material replacement of parts, involving large sum of money, that extend the useful
life of the asset. Repairs of this type are usually capitalized by debiting the
corresponding allowance for depreciation. Ordinary repairs are minor replacement
of parts, involving small sum of money, and are frequently encountered. Ordinary
repairs are normally charged as expense when incurred.
--------------------end of lecture 5/12/23------------------------

--------------------start of lecture 5/16/23------------------------
B. Interest
Interest shall refer to the payment for the use or forbearance or detention of
money, regardless of the name it is called or denominated. It includes the amount
paid for the borrower’s use of money during the term of the loan, as well as for his
detention of money after the due date for its repayment.
Said regulations define taxpayer as a person, whether natural or juridical, engaged in

trade, business or in the exercise of profession, except one earning compensation
income arising from personal services rendered under an employer-employee
relationship.
Requisites for Deductibility
1.There must be an indebtedness;

2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s trade, business or
exercise of profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related taxpayers;
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure.
Rules on the Deductibility of Interest Expense
In general, the amount of interest expense paid or incurred within a taxable year on
indebtedness in connection with the taxpayer’s trade, business, or exercise of
profession shall be allowed as deduction from the taxpayer’s gross income.
However, in case the taxpayer earns interest income had been subjected to final
withholding tax, the interest expense paid or incurred shall be reduced by an
amount equal to the following percentages of the interest income earned depending
on the year when said interest income was earned.
Interest on Unpaid Taxes
Interest incurred or paid by the taxpayer on all unpaid business-related taxes shall
be fully deductible from gross income and shall not be subject to the limitation on
deduction. Interest on delinquent taxes is considered as interest on indebtedness
and not as taxes.
Non-deductible Interest Expense
No interest expense shall be allowed as deduction from gross income in any of the
following cases:
1.If within the taxable year, an individual taxpayer reporting income on the cash
basis incurs an indebtedness on which an interest is paid in advance through
discount or otherwise. Such interest shall be allowed as a deduction in the year the
indebtedness is paid. But if the indebtedness is payable in periodic amortization, the
amount of interest which corresponds to the amount of the principal amortized or
paid during the year shall be allowed as deduction in such taxable year;
2. If both the taxpayer and the person to whom the payment has been made or is to
be made are persons specified under Section 36(B) of the Tax Code of 1997; and
3. If the indebtedness on which the interest expense is paid is incurred to finance

petroleum operations in the Philippines. The non-deductible interest expense herein
referred to pertains to interest or other consideration paid or incurred by a Service
Contractor engaged in the discovery and production of indigenous petroleum in the
Philippines in respect of the financing of its petroleum operations, pursuant to
Section 23 of PD 8, as amended, otherwise known as “The Oil Exploration and
Development Act of 1972.”
Interest Expense on Capital Expenditure
At the option of the taxpayer, interest expense on a capital expenditure incurred to

acquire property used in trade, business or exercise of a profession may be allowed
as a deduction in full in the year when incurred, the provisions of Section 36(A)(2)
and (3) of the Tax Code of 1997 to the contrary notwithstanding, or may be treated
as a capital expenditure for which the taxpayer may claim only as a deduction the
periodic amortization of such expenditure.
Reversal of Accrued Interest Expense When No Tax Benefit was Derived
If a company did not derive a tax benefit from accrued interest because it operated
at a loss even without the accrual, a reversal of the accrual in subsequent years
arising from the condonation of the interest payable shall not result in any income
being recognized and taxed in the year such reversal was made. The “tax benefit
doctrine” provides for the inclusion in gross income of amounts deducted in earlier
taxable years and recovered in later years only to the extent that such deductions
resulted in tax benefits in those earlier years.
C. Taxes
Taxes deductible from gross income are taxes proper only. Interests and penalties
incident to tax delinquency are not deductible from gross income. As a general rule,
all taxes, national or local, paid or incurred within the taxable year in connection
with the taxpayer’s trade, business or profession are deductible from gross income.
Exceptions
The following are taxes not deductible from gross income:
1.Philippine income tax.

2. Income taxes imposed by authority of any foreign country. But in case a taxpayer
does not signify in his return his desire to avail of the foreign tax credit, this may be
deductible from gross income.
3. Estate and donor’s taxes.
4. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Taxes when refunded or credited shall be included as part of the gross income of the
year of receipt to the extent of the income tax benefit of said deduction.
In the case of a non-resident alien individual and a resident foreign corporation

both engaged in trade or business in the Philippines, deduction is allowed only if
and to the extent that they are connected with income from sources within the
Philippines. If the non-resident alien and foreign corporations are not engaged in
trade or business in the Philippines, the rates of income tax are to be based on their
gross income.
D. Losses
Losses of property arising from fire, storms, shipwreck, other casualties, robbery,
theft or embezzlement; and other losses, if incurred in connection with trade,
business or profession actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity, shall be allowed as
deductions.
The taxpayer shall submit a declaration of loss sustained from casualty, robbery,
theft of embezzlement during the taxable year in not less than 30-days nor more
than 90-days from the date of discovery of such loss. No loss shall be allowed as a
deduction if at the time of filing of the return, such loss has been claimed as a
deduction for estate tax purposes in the estate tax return.
E. Bad Debts
Bad debts shall refer to those debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising
from money lent or from uncollectible amounts of income from goods sold or
services rendered. Before a taxpayer may charge off and deduct a debt, he must
ascertain and be able to demonstrate with reasonable degree of certainty the
uncollectibility of the debt. The determination of worthlessness in a given case must
depend upon the particular facts and the circumstances of the case.
Thus, accounts receivable, the amount whereof is insignificant and the collection of
which through court action may be more costly to the taxpayer, may be written off
as bad debts without conclusive evidence that the taxpayer’s receivable from a
debtor has definitely become worthless. The taxpayer may strike a middle course
between pessimism and optimism and determine debts to be worthless in the
exercise of sound business judgment based upon as complete information as is
reasonably ascertainable. The taxpayer need not have perfect discernment.
Requisites for Deduction
1.There must be an existing indebtedness due the taxpayer which must be valid and
legally demandable;
2. The same must be connected with the taxpayer’s trade, business or practice of
profession;
3. The same must not be sustained in a transaction entered into between related
parties enumerated under Section 36(B) of the Tax Code of 1997;
4. The same must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year; and
5. The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
to demonstrate with reasonable degree of certainty the uncollectibility of the debt.
The Commissioner of Internal Revenue will consider all pertinent evidence, including
the value of the collateral, if any, securing the debt and the financial condition of the
debtor in determining whether a debt is worthless, or the assigning of the case for
collection to an independent collection lawyer who is not under the employ of the
taxpayer and who shall report on the legal obstacle and the virtual impossibility of
collecting the same from the debtor and who shall issue a statement under oath
showing the propriety of the deductions thereon for alleged bad debts.
Thus, where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all probability not
result in the satisfaction of execution on a judgment, a showing of those facts will
be sufficient evidence of the worthlessness of the debt for the purpose of
deduction.
In the case of banks, the Commissioner of Internal Revenue shall determine whether
or not bad debts are worthless and uncollectible in the manner provided in the
immediately preceding paragraph. Without prejudice to the Commissioner’s
determination of the worthlessness and uncollectibility of debts, the taxpayer shall
submit a Bangko Sentral ng Pilipinas/Monetary Board written approval of the writing
off of the indebtedness from the bank’s books of accounts at the end of the taxable
year.
Also, in no case may a receivable from an insurance or surety company be written

off from the taxpayer’s books and claimed as bad debts deductions unless such
company has been declared closed due to insolvency or for any such similar reason
by the insurance commissioner.
F. Depreciation
Property, plant and equipment are normally usable for a number of years. A point
will be reached when such property may not be useful anymore in the business due
to exhaustion, wear and tear. The difference between the cost of the property and
its value when worn out or retired (salvage value) is the amount which shall be
subject to depreciation considering the estimated useful life of the property.
Depreciation is that portion of the cost of the property allocated or charged as
expense for a specific period.
In general, there shall be allowed as deduction for depreciation, a reasonable

allowance for the exhaustion, wear and tear, including reasonable allowance for
obsolescence, of property used in the trade or business.
1.In case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of
the property and shall be allowed to the life tenant.
2. In case of property held in trust, the allowable deduction shall be apportioned

between the income beneficiaries and trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of such provisions,
on the basis of the trust income allowable to each.
Methods of Depreciation
1.Straight-line method
2. Declining balance method
3. Sum-of-the-years-digit method.
Agreement as to Useful Life and Rate
When the taxpayer and the Commissioner have entered into an agreement in
writing specifically dealing with the useful life and rate of depreciation of any
property, the rate so agreed upon shall be binding on both the taxpayer and the
National Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of
establishing the existence of such facts and circumstances shall rest with the party
initiating the modification. Any change in the agreed rate and useful life of the
depreciable property as specified in the agreement shall not be effective for taxable
years prior to the taxable year in which notice in writing by certified mail or
registered mail is served by the party initiating such change to the other party to
the agreement.
However, where the taxpayer has adopted such useful life and depreciation rate for
any depreciable asset and claimed depreciation expenses as deduction from his
gross income, without any written objection on the part of the Commissioner or his
duly authorized representatives, the aforesaid useful life and depreciation rate so
adopted by the taxpayer for the aforesaid depreciable asset shall be considered
binding.
Illustration: Assume that a taxpayer acquired a computer equipment for P180,000.
Shipping charges were P2,500; installation and programming amounted to P7,500.
The equipment is expected to last for four years. It has a salvage value of P30,000. If
the taxpayer uses the straight-line method of depreciating its equipment, how much
is the annual depreciation deductible?
Under the straight-line method, the annual depreciation is cost less salvage value all
over the estimated useful life of the asset, or
Cost of machinery
(P180,000 + P2,500 + P7,500) P190,000
Less: Salvage value 30,000
----------------
Depreciable cost P160,000
----------------
==========
If after two-years, it has been estimated that the computer equipment has four
more years of useful life, the annual depreciation shall be recomputed as cost less
accumulated depreciation divide by useful life, or
Cost of machinery P190,000

Less: Accumulated depreciation
(P40,000 x 2 years) 80,000
-----------------
Book value P110,000
-----------------
==========
G. Depletion
Wasting assets or natural resources usually include coal, oil, ore, precious metals like
gold, silver and timber. Wasting assets are physically consumable and irreplaceable.
Only nature may be able to replace the same. The allocation of the cost or other
basis of a wasting asset over the period the natural resource is extracted or
produced is called depletion. Depletion allowance enables the taxpayer to recover
that capital interest-free from income tax, at its cost or some other basis.
Definition of Terms
Intangible costs in petroleum operations refers to any cost incurred in petroleum

operations which in itself has no salvage value and which is incidental to and
necessary for the drilling of wells and preparation of wells for the production of
petroleum. Said costs shall pertain to the acquisition or improvement of property of
a character subject to the allowance for depreciation except that the allowances
for depreciation on such property shall be deductible.
Any intangible exploration, drilling and development expenses allowed as a

deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion.
Net income from mining operations means gross income from operations less
allowable deductions. Allowable deductions which are necessary or related to
mining operations shall include mining, milling and marketing expenses, and
depreciation of properties.
Exploration expenditures means expenditures paid or incurred for the purpose of

ascertaining the existence, location, extent, or quality of any deposit of ore or other
mineral, and paid or incurred before the beginning of the development stage of the
mine or deposit.
Development expenditures means expenditures paid or incurred during the

development stage of the mine or other natural deposits. The development stage of
a mine or other natural deposit shall begin at the time when deposit of ore or other
minerals are shown to exist in sufficient commercial quantity and quality and shall
end upon commencement of actual commercial extraction.
Cost Depletion Method
In general, in case of oil and gas wells or mines, a reasonable allowance for depletion
or amortization computed in accordance with the cost-depletion method shall be
granted under rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation by the Commissioner:
1.When the allowance for depletion shall equal the capital invested, no further
allowance shall be granted.
2. After production in commercial quantities has commenced, certain intangible
exploration and development drilling costs shall be deductible
a. in the year incurred if such expenditures are incurred for non-producing wells
and/or mines; or
b. in full in the year paid or incurred; or
c. at the election of the taxpayer, may be capitalized and amortized if such
expenditures incurred are for producing wells and/or mines in the same contract
area.
Election to Deduct Exploration and Development Expenditures
In computing taxable income from mining operations, the taxpayer, may at his
option, deduct exploration and development expenditures accumulated as cost or
adjusted basis for cost depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year on these
conditions:
1.The total amount deductible for exploration and development expenditures shall
not exceed 25% of the net income from mining operations computed without the
benefit of any tax incentives under existing laws.
2. The actual exploration and development expenditures minus 25% of the net
income from mining shall be carried forward to the succeeding years until fully
deducted.
The election by the taxpayer to deduct the exploration and development

expenditures is irrevocable and shall be binding in succeeding taxable years.
Depletion by a Non-resident alien individual or Foreign Corporation
In the case of a non-resident alien individual engaged in trade or business in the

Philippines or a resident foreign corporation, allowance for depletion of oil and gas
wells or mines shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.
H. Charitable and Other Contributions

Contributions Deductible in Full

subdivision, including fully-owned government corporation, exclusively to finance, to
provide for, or to be used in undertaking priority activities in education, health,
youth and sports development, human settlements, science and culture and in
economic development.
The activities must be according to a National Priority Plan determined by the

National Economic and Development Authority (NEDA) in consultation with
appropriate government agencies, including its regional development councils and
private philanthropic persons and institutions. Donations not in accordance with the
annual priority plan shall be subject to limitations.
2. Donations to certain foreign institutions or international organizations in

compliance with agreements, treaties or commitments entered into by the
Philippine Government and the foreign institutions or international organizations or
in pursuance of special laws.
3. Donations to accredit non-governmental organizations (means a non-profit

domestic corporation) organized and operated exclusively for scientific, research,
educational, character-building and youth and sports development, health, social
welfare, cultural or charitable purposes, or a combination thereof. The following
conditions shall be satisfied:
a) No part of the net income of the NGO inures to the benefit of any private
individual.
b) The contribution must be utilized not later than the 15th day of the third month
after the close of the NGOs taxable year.
c) The level of administrative expenses of which shall, on an annual basis, not
exceed 30% of the total expenses for the taxable year.
d) The assets of which, in the event of dissolution, would be distributed to another
accredited NGO organized for similar purpose or purposes, or to the State for public
purpose, or purposes, or would be distributed by a competent court of justice to
another accredited NGO to be used in such manner as in the judgment of said court
shall best accomplish the general purpose for which the dissolved organization was
organized.
4. Under special laws, donations to the Integrated Bar of the Philippines,

Development Academy of the Philippines, Agricultural Development of Southeast
Asian Fisheries Development Center, National Social Action Council, National
Museum/Library Archives, Museum of Philippine Costumes, Intramuros
Administration and Lungsod ng Kabataan.
Contributions Subject to Limitations

subdivision exclusively for public purposes.
2. Donations to accredit domestic corporations or associations organized and
operated exclusively for religious, charitable, scientific, youth and sports
development, cultural or educational purposes, or for the rehabilitation of veterans,
or to social welfare institutions, or to NGOs.
Donations, contributions or gifts actually paid or made within the taxable year shall
be allowed limited deductibility in an amount not in excess of 10% for an individual
donor, and 5% for a corporate donor, of the donor’s income derived from trade,
business or profession as computed before the deduction for charitable
contributions.
The amount of any charitable contribution of property other than money shall be
based on the acquisition cost of said property.
I.Research and Development
Research and development costs are cost of materials, equipment, facilities,

personnel, purchased intangibles, contract services and a reasonable allocation of
indirect costs that are specifically related to research and development activities
and that have no alternative future uses. Research activities are those undertaken to
discover new knowledge that will be useful in developing new product service or
process. Development activities involve the application or research findings to
develop a product, service or process.
In general, a taxpayer may treat research or development expenditures which are

paid or incurred by him during the taxable year in connection with his trade,
business or profession as ordinary and necessary expenses which are not chargeable
to capital account. The expenditures so treated shall be allowed as deduction during
the taxable year when paid or incurred.
J. Pension Trusts
An employer establishing or maintaining a pension trust to provide for the payment

of reasonable pensions to his employees shall be allowed as a deduction (in addition
to the contributions to such trust during the taxable year to cover the pension
liability accruing during the year which is allowed as a deduction) a reasonable
amount transferred or paid into such trust during the taxable year in excess of such
contributions, but only if such amount:
1.has not been allowed as a deduction; and

2. is apportioned in equal parts over a period of ten (10) consecutive years beginning
with the year in which the transfer of payment is made.
Any amount paid or payable which is otherwise deductible from, or taken into
account in computing gross income or for which depreciation or amortization may
be allowed, shall be allowed as deduction only if it is shown that the tax required to
be deducted and withheld therefrom has been paid to the Bureau of Internal
Revenue in accordance with the provisions of the Code.
ITEMS NOT DEDUCTIBLE
1.Personal, living or family expenses.

2. Any amount paid out for new buildings or for permanent improvements, or
betterment made to increase the value of any property or estate, except that
intangible drilling and development cost incurred in petroleum operations are
deductible. This is a capital expenditure.
3. Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made. This is a capital expenditure.
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. Losses from sales or exchanges of property between related taxpayers.
---------------proposed end of lecture 5/16/23--------------------------

CHAPTER 6 – INCOME TAXATION OF PARTNERSHIPS AND PARTNERS
In a contract of partnership, the partners agree to contribute money, property or

industry to a common fund with the intention of dividing the profits among
themselves.
Classification of General Partnerships in Taxation

1. General Professional Partnership. One formed by persons for the sole purpose
of exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
2. General co-partnership (compania colectiva). A general partnership which is not
a general professional partnership.
GENERAL PROFESSIONAL PARTNERSHIPS

A general professional partnership (GPP) shall not be subject to the income but
is required to file annual income tax return/annual information return for the
purpose of furnishing information as to the items of gross income, deductions, and
the names, TINs, addresses and share of each of the partners. Partners in a general
professional partnership shall be liable for income tax in their separate and
individual capacities.
Where the result of partnership operation is a loss, the loss will be divided as agreed
upon by the partners. If there is no agreement as to division of losses but there is as
to profits, the losses shall be distributed according to the profit sharing ratio. Such
share in the losses may be taken up by the individual partners in their respective
income tax returns.
Section 26 of the NIRC provides that – “For purposes of computing the distributive
share of the partners, the net income of the GPP shall be computed in the same
manner as a corporation.” As such, A GPP may claim either the allowed itemized
deductions or the OSD allowed to corporations in claiming the deductions in an
amount not exceeding 40% of its gross income.
The net income determined by either claiming the itemized deduction or OSD from
the GPP’s gross income is the distributable net income from which the share of each
partner is to be determined. Each partner shall report as gross income his
distributive share, actually or constructively received, in the net income of the
partnership.
GPPs, unlike corporations and general co-partnerships, do not pay national income
taxes. Rather, the GPP serves as a “conduit” or “pass-through” entity where its
income is ultimately taxed to the partners comprising it.
In computing taxable income, all expenses which are ordinary and necessary,
incurred or paid for the practice of profession, are allowed as deductions. Since the
taxable income is in the hands of the partner, as a rule apart from the expenses
claimed by the GPP in determining its net income, the individual partner can still
claim deductions incurred or paid by him that contributed to the earning of the
income taxable to him.
Itemized Deductions or OSD for GPPs

Section 2 of Revenue Regulations 2-2010 amended Section 6 of RR 16-2008 with
regard to the determination of the OSD for GPPs and partners of GPPs. The
following rules shall govern the claim of the partners of deductions from their share
in the net income of the partnership.
1. If the GPP availed of the itemized deduction in computing its net income, the
partners may still claim itemized deductions from said share, provided, that, in
claiming itemized deductions, the partner is precluded from claiming the same
expenses already claimed by the GPP.
In fine, if the GPP claimed itemized deductions the partners comprising it can only
claim itemized deductions which are in the nature of ordinary and necessary
expenses for the practice of profession which were not claimed by the GPP in
computing its net income or distributable net income during the year. Examples of
these are representation expenses incurred by the partner where the covering
invoice or receipt is issued in his name; travelling expenses while away from home,
which were not liquidated by the partnership; depreciation of a car used in the
practice of profession where said car is registered in the name of the partner; and
similar expenses.
Hence, if the GPP availed of itemized deductions, the partners are not allowed to
claim the OSD from their share in the net income because the OSD is a proxy for all
the items of deductions allowed in arriving at taxable income. This means that the
OSD is in lieu of the items of deductions claimed by the GPP and the items of
deduction claimed by the partners.
2. If the GPP avails of OSD in computing its net income, the partners comprising it
can no longer claim further deduction from their share in the said net incomefor the
following reasons:
a) The partners’ distributive share in the GPP is treated

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WORLD CITI COLLEGES

Guimba, Nueva Ecija

Basic Principles of a Sound Tax System

1.Fiscal adequacy. Sources of revenue are sufficient to meet govt expenditures;

Limitation on the Power of Taxation

1.Purpose. Taxes may be levied only for public purpose.

Some Doctrines in Taxation

1)Prospectivity of Tax Laws

The usual methods of avoiding the occurrence of double taxation are;

4)Escape from Taxation

Tax evasion connotes the integration of three (3) factors;

The following situs of taxation apply;

Essential Characteristics of a Tax

1.It is an enforced contribution;

Types of Tax Rate Structures

Tax systems are often described as either regressive, proportional, or progressive.

1.As to subject matter or object

a) Personal, poll or capitation - Tax of a fixed amount imposed on individuals, whether

2. As to who bears the burden

a) Specific - Tax imposed based on a physical unit of measurement, as by head or number,

5. As to authority imposing the tax or scope

a) Proportional - Tax based on a fixed percentage of the amount of property, income, or

Tax Distinguished from Other Fees

3. From special assessment. Special assessment is an enforced proportional contribution from

Sources of Tax Authority

Sources of Tax Laws

INCOME AND INCOME TAXES

Income Defined and Distinguished from Capital

Income Tax Defined

CHAPTER 1 – INCOME TAXATION ON INDIVIDUALS

CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS

1. Citizen. The following shall be considered citizens of the Philippines

It is important to know the source of income of an individual taxpayer-whether from within

Individual Source of Income

CATEGORIES OF INCOME AND TAX RATES

If a taxpayer is receiving compensation income from two or more employers, he/she

Gross Compensation Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P600,000.00

Gross Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . P700,000.00

An individual receiving a combination of compensation and business income shall first

Computation of Final Tax:

1. From compensation income

Kinds of Personal Exemptions

1. Basic personal exemption

Additional Exemption - An individual, whether single or married, shall be allowed an additional

Rules on Change of Status

Head of family means an unmarried or legally separated man or woman with:

Individual Taxpayers Allowed Personal Exemptions

Premium Payments on Health and/or Hospitalization Insurance

The following conditions must be met:

TAXABLE INCOME AND TAX DUE

TRAIN LAW (R.A. 10963)

THE TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) ACT.

1. Reduced income tax rate of employees of Regional Headquarters (RHQs), Regional

5. Earmarking of incremental tobacco taxes.

WITHHOLDING OF TAX AT SOURCE

Persons Required to Deduct and Withhold Creditable Tax on Income Payments

Exemptions from Withholding

1. National government and its instrumentalities, including provincial, city or municipal

WITHHOLDING TAX ON COMPENSATION