1

INCOME TAXATION

tickets in the Philippines is the activity

that produces the income.

IN GENERAL

Income Tax

Income tax has been defined as a tax

on all yearly profits arising from
property,
profession,
trade
or
business, or as a tax on a persons
income, emoluments, profits and the
like.

It is generally regarded as an excise

tax. It is not levied upon persons,
property, funds or profits but upon the
right of a person to receive income or
profits.

Purposes of income taxation

1.

To provide large amounts of revenues.

2.

To
offset
regressive
consumption taxes.

3.

Together with estate tax, to mitigate

the evils arising from the inequalities
in the distribution of income and
wealth,
which
are
considered
deterrents to social progress, by
imposing a progressive scheme of
taxation.

sales

and

Income v. capital

Capital is a fund or property

existing at one distinct point of time
while income denotes a flow of wealth
during a definite period of time.

The essential difference between

capital and income is that capital is a
fund or property existing at one
distinct point of time; income is a flow
of services rendered by that capital by
the payment of money from it or any
other benefit rendered by a fund of
capital in relation to such fund through
a period of time. Capital is wealth,
income is the service of wealth.
[Madrigal v. Rafferty, 38 Phil 414]

Capital is
income is the fruit.

Income

Income, in its broad sense, means all

wealth which flows into the taxpayer
other than as a mere return on capital.
[Section 36, Revenue Regulations 2]

Income means accession to

wealth, gain or flow of wealth.

Conwi v. CTA [213 SCRA

83]: Income may be defined as an
amount of money coming to a person
or corporation within a specified time,
whether as payment for services,
interest, or profit from investment.
Commissioner v. BOAC
[149 SCRA 395]: Income means cash
received or its equivalent. It is the
amount of money coming to a person
within a specific time. It is distinct
from capital for, while the latter is a
fund, income is a flow. As used in our
laws, income is flow of wealth. The
source of an income is the property,
activity or service that produces the
income. For the source of income to be
considered as coming from the
Philippines, it is sufficient that income
is derived from activity within the
Philippines. IN BOACs case, the sale of

Fisher v. Trinidad [43 Phil

973]: Stock dividend is not an income.
It merely evidences the interest of the
stockholder in the increased capital of
the corporation. An income may be
defined as the amount of money
coming to a person or corporation
within a specified time, whether as
payment for services, interest, or
profit for investment. A mere advance
in the value of property of a person or
corporation in no sense constitutes the
income specified in the revenue law.
Such advance constitutes and can be
treated merely as an increase of
capital. An income means cash
received or its equivalent. It does not
mean choses in action or unrealized
increments in the value of the
property.

the

tree

while

SOURCES OF INCOME
What produces income?

The term 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.

Commissioner v. BOAC: The source

of an income is the property, activity
or service that produces the income.

2
For the source of income to be
considered as coming from the
Philippines, it is sufficient that
income is derived from activity
within the Philippines. IN BOACs
case, the sale of tickets in the
Philippines is the activity that
produces the income. The tickets
exchanged hands here and
payments for fares were also
made in Philippine currency. The
site of the source of the income
is the Philippines and the flow of
wealth proceeded from and
occurred in Philippine territory,
enjoying the protection accorded
by the Philippine government.
Thus, said flow of wealth should
share the burden of supporting
the government.

Gain must be realized or received

When
is
received?

Sources within the Philippines

2.

Sources without the Philippines

3.

Sources partly within and partly

without the Philippines

actual receipt

2.

constructive receipt

Requisites for income to be taxable

1.

There must be a gain or profit.

2.

The gain must be realized or

received.

3.

The gain must not be excluded

by law or treaty from taxation.

Income which is credited to the

account of or set apart for a
taxpayer and which may be
drawn upon by him at any time is
subject to tax for the year during
which so credited or set apart,
although
not
then
actually
reduced to possession.
To constitute receipt in
such a case, the income must be
credited to the taxpayer without
any substantial limitation or
restriction as to the time or
manner of payment or condition
upon which payment is to be
made. [Section 52, Revenue
Regulations 2]

Taxable income
The term taxable income
means the pertinent items of
gross income specified in the
NIRC, less the deductions and/or
personal
and
additional
exemptions, if any, authorized by
such types of income by the NIRC
or other special laws.

considered

Income constructively received

TAXABLE INCOME

income

1.

Sources of income
1.

This implies that not all economic

gains constitute taxable income.
Thus, a mere increase in the
value of property is not income
but
merely
an
unrealized
increase in capital.

Limpan
Investment
Company
deemed
to
have
constructively received rental
payments in 1957 when they
were deposited in court due to its
refusal to receive them. [Limpan
v. CIR, 17 SCRA 703]

Examples of constructive receipt

1.

Interest coupons which have

matured and are payable, but
have not been cashed.

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2.
3.

Defaulted coupons are income

for the year in which paid.
Partners distributive share in the
profits of a general professional
partnership
is
regarded
as
received by the partner, although
not yet distributed.

Severance test

Are the following items income?

Found treasure - YES

Punitive damages - YES

Damages for breach of promise

or alienation of affection - YES

Worthless debts
collected - YES

Substantial alteration of interest

test

Income is earned when there is a

substantial alteration of the
interest of a taxpayer, i.e.
increase in proportionate share of
a stockholder in a corporation.

Income to be returnable for

taxation must be fully and
completely realized. Where there
is no separation of gain or profit,
or separation of increase in value
from capital, there is no income
subject to tax.

Thus, stock dividends are not

income subject to tax on the part
of the shareholder for he had the
same proportionate interest in
the assets of the corporation as
he
had
before,
and
the
stockholder was no richer and
the corporation no poorer after
the declaration of the dividend.

subsequently

Tax refund NO (but yes if the

tax was previously allowed as a
deduction
and
subsequently
refunded or credited, as benefit
accrued to the taxpayer; see
discussion on tax as a deductible
item)

Non-cash benefits - YES

Income from illegal sources - YES

Psychological benefits of work NO

Give away prizes YES

Scholarships/fellowships YES

Stock dividends - NO

However,
if
the
preexisting proportionate interest of
the stockholder is substantially
altered, the income is considered
derived to the extent of the
benefit received.

Tests to determine realization of

income
1.

Severance test

2.
test

Substantial alteration of interest

3.

Flow of wealth test

As capital or investment is not

income subject to tax, the gain or
profit derived from the exchange
or transaction of said capital by
the taxpayer for his separate use,
benefit and disposal is income
subject to tax.

Moreover, if as a result of an
exchange of stocks, the person
received something of value
which
are
essentially
and
fundamentally
different
from
what
he
had
before
the
exchange, income is realized

4
within the
revenue law.

meaning

of

the

Flow of wealth test

The essential difference between

capital and income is that capital
is a fund whereas income is the
flow of wealth coming from such
fund; capital is the tree, income
is the fruit. Income is the flow of
wealth other than as a mere
return of capital.

Ordinary gains

Business income
1.

Income
from
trading,
merchandising, manufacturing or
mining

2.

Income
from
profession

CLASSES OF INCOME
Kinds of taxable income or gain
1.

capital gain

2.

ordinary gain

Ordinary gains are gains or

income
from
the
sale
or
exchange of property which are
not capital assets.

practice

of

Note: The term trade or business

includes the performance of the
functions of a public office.
[Section 22(S), NIRC]
Passive income

a.

business income

b.

compensation income

c.
d.

1.

Passive income from Philippine

sources subject to final tax

passive income

2.

Passive income from Philippine

sources not subject to final tax

other
income
from
whatever source derived
i.e. found treasure

3.

Passive income from

outside the Philippines

sources

Capital gains

Passive income again

Capital gains are gains or income

from the sale or exchange of
capital assets. These include:

1.

Interest income

2.

Rentals/Leases

1.

3.

Royalties

4.

Dividends

5.

Annuities and proceeds of life

insurance/other
types
of
insurance

6.

Prizes and winnings, awards, and

rewards

7.

Gifts, bequests, and devises

8.

Other types of passive income

2.

3.

Income from dealings in

shares of stock of domestic
corporation whether or not
through
the
stock
exchange;
Income from dealings in
real property located in the
Philippines; and
Income from dealings in
other capital assets other
than (a) and (b).

5
used in the taxation of individuals
while the global approach is used
in the taxation of corporations.

APPROACHES IN INCOME RECOGNITION

Approaches in income recognition

CLASSES OF INCOME TAXPAYERS

1.

schedular system

2.

global system

Basis of classification of taxpayers

1.

corporations v. individuals

2.

nationality

3.

residence

Schedular system

The schedular system is one

where the income tax treatment
varies and is made to depend on
the kind or category of taxable
income of the taxpayer.

Classes of income taxpayers

1.

Global system

The global system is one where

the
tax
treatment
views
indifferently the tax base and
generally treats in common all
categories of taxable income of
the taxpayer.

Individuals
a.

Resident citizens

b.

Non-resident citizens

c.

Resident aliens

d.

Non-resident aliens
i)

Schedular system v. global system

1.

Under the schedular treatment,

there are different tax rates,
while under the global treatment,
there is a unitary or single tax
rate.

2.

Under the schedular treatment,

there are different categories of
taxable income, while under the
global treatment, there is no
need for classification as all
taxpayers are subjected to a
single rate.

3.

The schedular treatment is

usually used in the income
taxation of individuals while the
global
treatment
is
usually
applied to corporations.

Approach used in the Philippines

Partly schedular and

partly
global. The schedular approach is

engaged in trade or
business
in
the
Philippines, or

ii)

not
engaged
in
trade or business in
the Philippines
Note: A non-resident alien individual
who shall come to the Philippines
and stay therein for an aggregate
period of more than one hundred
eighty (180) days during any
calendar year shall be deemed a
non-resident alien doing business
in the Philippines. [Section 25(A)
(1), NIRC]
2.

Corporations
a.

Domestic corporations

b.
Resident
corporations

foreign

c.
Non-resident
corporations

foreign

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3.

during the taxable year to

reside permanently in the
Philippines.

Special
a.

Proprietary
educational
institutions and hospitals
that are non-profit

b.

Insurance companies

c.

General
partnerships

d.

Estates and trusts

Corporation

A corporation, as used in income

taxation, includes partnerships,
no matter how created or
organized, joint stock companies,
joint
accounts
(cuentas
en
participacion), and associations
or insurance companies.

However, it does not include:

professional

Note: Estates and trusts are treated as

individual taxpayers.
Who is a non-resident citizen?

The term non-resident citizen

means:
1.

A citizen of the Philippines

who established to the
satisfaction
of
the
Commissioner the fact of
his
physical
presence
abroad with a definite
intention to reside therein.

2.

A citizen of the Philippines

who leaves the Philippines
during the taxable year to
reside abroad, either as an
immigrant
or
for
employment
on
a
permanent basis.

3.

4.

A citizen of the Philippines

who works and derives
income from abroad and
whose
employment
thereat requires him to be
physically present abroad
most of the time during
the taxable year.
A citizen who has been
previously considered as a
non-resident citizen and
who
arrives
in
the
Philippines at any time

1.

a
general
professional
partnership; and

2.

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.

Resident foreign corporation

The term applies to a foreign

corporation engaged in trade or
business within the Philippines.

Non-resident foreign corporation

The term applies to a foreign

corporation not engaged in trade
of business in the Philippines.

GENERAL PROFESSIONAL PARTNERSHIP V.

ORDINARY BUSINESS PARTNERSHIP
General professional partnerships

General professional partnerships

are partnerships formed by
persons for the sole purpose of
exercising
their
common

7
profession, no part of the income
of
which
is
derived
from
engaging in any trade or
business. [Section 22(B), NIRC]

Persons engaging in business as

partners in a general professional
partnership shall be liable for
income tax only in their separate
and
individual
capacities.
[Section 26, NIRC]

For purposes of computing the

distributive share of the partners,
the net income of the partnership
shall be computed in the same
manner
as
a
corporation.
[Section 26, NIRC]

Each partner shall report as gross

income his distributive share,
actually
or
constructively
received, in the net income of the
partnership. [Section 26, NIRC]

Income of a general professional

partnership
are
deemed
constructively received by the
partners. [Section 73(D), NIRC]

Ordinary business partnership

An ordinary business partnership

is considered as a corporation
and is thus subject to tax as
such.
Partners
are
considered
stockholders
and,
therefore,
profits distributed to them by the
partnership are considered as
dividends.

Oa v. Commissioner, 45 SCRA 74
(1972): Unregistered partnership
Although
the
CFI
already
approved the project of partition of the
estate of Julia Buales among her
surviving spouse, Lorenzo Ona, and her
five children, no attempt was made to
divide the properties left by the

decedent. Instead, the

properties
remained under the management of
Lorenzo Ona who used said properties
in business by leasing or selling them
and investing the income derived
therefrom and the proceeds from the
sales thereof in real property and
securities. The said incomes are
recorded in the books of account kept
by
Lorenzo
Ona
where
the
corresponding shares of the heirs in the
net income for the year are known.
Based on these facts, the
Commissioner ruled that the heirs
formed an unregistered partnership
which is thus subject to corporate
income tax. The Court of Tax Appeals
and the Supreme Court affirmed.
For tax purposes, the coownership of inherited properties is
automatically
converted
into
an
unregistered partnership the moment
the said common properties and/or the
incomes derived therefrom are used as
a common fund with intent to produce
profits for the heirs in proportion to
their
respective
shares
in
the
inheritance as determined in a project
partition either duly executed in an
extrajudicial settlement or approved by
the court in the corresponding testate
or intestate proceeding.
The reason is simple. From the
moment of such partition, the heirs are
entitled already to their respective
definite shares of the estate and the
incomes thereof, for each of them to
manage and dispose of as exclusively
his own without the intervention of the
other heirs, and, accordingly, he
becomes liable individually for all taxes
in connection therewith. If after such
partition, he allows his share to be held
in common with his co-heirs under a
single management to be used with the
intent of making profit thereby in
proportion to his share, there can be no
doubt that, even if no document or
instrument were executed, for the

8
purpose, for tax purposes, at least, an
unregistered partnership is formed.
For purposes of the tax on
corporations,
the
NIRC,
includes
partnerships

except
general
professional partnerships within the
purview of the term corporation.
Note: The
income
derived
from
inherited properties may be
considered as individual income
of the respective heirs only so
long as the inheritance or estate
is not distributed or, at least,
partitioned, but the moment their
respective known shares are
used as part of the common
assets of the heirs to be used in
making profits, it is but proper
that the income of such shares
be considered as part of the
taxable
income
of
an
unregistered partnership.
Gatchalian v. Collector, 102 Phil
140
Plaintiffs contributed money to
buy a sweepstakes ticket which
subsequently won. The Supreme Court
held that they formed an unregistered
partnership.
Plaintiffs
formed
a
partnership of a civil nature since each
of them contributed money to a
common fund for the sole purpose of
dividing equally the prize which they
win.

ground that petitioners established an

unregistered partnership engaged in
real estate transactions.
The Supreme Court ruled that no
unregistered partnership was formed.
The sharing of returns does not itself
establish a partnership whether or not
the persons therein have a joint or
common right or interest in the
property. There must be a clear intent
to form a partnership, the existence of
which has the juridical personality
different from the individual partners
and the freedom of each party to
transfer or assign the whole property.
In this case, there was no
showing of intent to form a partnership.
The
transactions
were
isolated;
therefore, the character of habituality
peculiar
to
business
transactions
engaged for the purpose of gain was
not present.
The essential elements of a
partnership are: (1) an agreement to
contribute money, property, or industry
to a common fund; and (2) an intent to
divide the profits among the contracting
parties.
Unregistered partnership v.
ownership for tax purposes

If the activities of co-owners are

limited to the preservation of the
property and the collection of the
income therefrom, in which case,
each
co-owner
is
taxed
individually on his distributive
share in the income of the coownership.

If the co-owners invest the

income in business for profit,
they
would
be
constituting
themselves into a partnership
taxable as a corporation.

Pascual v. Commissioner
Petitioners bought two parcels of
land in 1965, however, they did not sell
the same nor make any improvements
thereon. In 1966, they bought another
three parcels of land. It was only in
1968 that they sold the two parcels of
land after which they did not make any
additional or new purchase. The
remaining three parcels of land were
sold in 1970. Commissioner assessed
them corporate income taxes on the

co-

Joint venture, how created

A joint venture is created when

two
corporations,
while
registered
and
operating
separately, were placed under
one sole management which
operated the business affairs of
said companies as though they
constituted
a
single
entity
thereby obtaining substantial
economy and profits in the
operation.
As stated, a joint venture is not
taxed as a corporation, just like a
general professional partnership.

GENERAL
PRINCIPLES
OF
TAXATION IN THE PHILIPPINES

INCOME

General
principles
of
taxation in the Philippines

income

1.

2.

3.

4.

A citizen of the Philippines

residing therein is taxable on all
income derived from sources
within
and
without
the
Philippines.
A non-resident citizen is taxable
only on income derived from
sources within the Philippines.
An individual citizen of the
Philippines who is working and
deriving income from abroad as
an overseas contract worker is
taxable only on income from
sources within the Philippines.
Provided, that a seaman who is a
citizen of the Philippines and who
receives
compensation
for
services rendered abroad as a
member of the complement of a
vessel engaged exclusively in
international trade shall be
treated as an overseas contract
worker.
An alien individual, whether a
resident or not of the Philippines,
is taxable only on income derived

from
sources
Philippines.

within

the

5.

A domestic corporation is taxable

on all income derived from
sources within and without the
Philippines.

6.

A foreign corporation, whether

engaged or not in trade or
business in the Philippines, is
taxable only on income derived
from
sources
within
the
Philippines.

SOME

RULES ON
VARIOUS TAXPAYERS

TAXATION

Who are
income?

on

taxed

OF

their

1.

Resident citizens

2.

Domestic corporations

THE

global

Who are taxed only on their income

from
sources
within
the
Philippines?
1.

Non-resident citizen

2.

Overseas contract workers

3.

Alien
individual,
whether
a
resident or not of the Philippines

4.

Foreign
corporation,
whether
engaged or not in trade or
business in the Philippines

Who are taxed based only on their

net income?
1.

Resident
citizens

and

non-resident

2.

Resident alien and non-resident

alien engaged in trade or
business in the Philippines

3.

Domestic corporation

10
4.

Resident foreign corporation

Who are taxed

gross income?
1.

2.

based

on

their

Non-resident alien not engaged

in trade or business in the
Philippines

GUIDE QUESTIONS
TAXABLE INCOME

The cancellation and forgiveness

of indebtedness may, dependent
upon the circumstances, amount
to:
1.

a payment of income;

2.

a gift; or

3.

a capital transaction.

DETERMINING

Is there a gain or income?

2.

Is the gain or income taxable? Is

it excluded or exempt?

3.

What type of income is it: income

includible in the gross income,
passive income, capital gains,
income
derived
from
other
source?

4.

To what class does the taxpayer

belong: individual or corporate,
citizen or not or domestic or
foreign, resident or not, engaged
in trade or business or not?

Forgiveness of indebtedness

IN

1.

Non-resident foreign corporation

TREATMENT OF SOME SPECIAL ITEMS

Considered as income

TAX ON INDIVIDUALS

If, for example, an individual

performs services for a creditor
who, in consideration thereof
cancels the debt, income to that
amount is realized by the debtor
as compensation for his service.
If, however, a creditor merely
desires to benefit a debtor and
without any consideration thereof
cancels the debt, the amount of
the debt is a gift from the
creditor to the debtor and need
not be included in the latters
gross income.
If a corporation to which a
stockholder is indebted forgives
the debt, the transaction has the
effect of payment of a dividend.
[Section 50, Revenue Regulations
2]

Recovery of
written of

amounts

previously

PRELIMINARY POINTS ON TAXATION OF

INDIVIDUALS

How taxed?

An
individual
citizen,
both
resident and non-resident, and an
individual resident alien are
taxed similarly.

A non-resident alien engaged in

trade or business shall be subject
to the same income tax rates as
a citizen and a resident alien.

Thus, only a non-resident alien

who is not engaged in trade or
business is taxed differently from
the other individual taxpayers.

On what income taxed?

A resident citizen is taxed on all

income from sources within and
outside the Philippines. The tax
base is net income.

11

A non-resident citizen is taxed

only on income from sources
within the Philippines. The tax
base is net income.
An alien, whether resident or not,
is taxed only on income from
sources within the Philippines.
However, the tax base for a
resident alien and non-resident
alien engaged in trade or
business is net income while the
tax base for a non-resident alien
not engaged in trade or business
is gross income.

Types of income taxed

1.

Items of income included in the

gross income

2.

Passive income

3.

Capital gains from sale of shares

of stock not traded in the stock
exchange

4.

Capital gains from the sale or

exchange of real property

TAX ON INDIVIDUAL CITIZEN (RESIDENT

AND NON-RESIDENT) AND INDIVIDUAL
RESIDENT ALIEN
Items of income included in the
gross income

A schedular rate of five percent

(5%) to P125,000 + 32% of
excess over P500,000.00 by 01
January 2000 is imposed on
items of income of an individual
citizen and individual resident
alien
which
are
properly
includible in the gross income.

Rates of tax on certain passive

income
1.

Interest from any currency bank

deposit and yield or any other

monetary benefit from deposit

substitutes and from trust funds
and similar arrangements 20%
2.

Royalties, except on books, as

well as other literary works and
musical compositions 20%

3.

Royalties on books, literary works

and musical compositions 10%

4.

Prizes over P10,000.00 20%

Note: Prizes less than P10,000.00 are

included in the income tax of the
individual
subject
to
the
schedular rate of 5% up to
P125,000 + 32% of excess over
P500,000.00)
5.

Other winnings, except PCSO and

lotto, derived from sources within
the Philippines 20%

6.

Interest income derived by a

resident individual (Note: nonresident citizen not included)
from a depository bank under the
expanded
foreign
currency
deposit system 7.5%

7.

Interest income from long-term

deposit or investment evidenced
by certificates prescribed by BSP
a.

Exempt if investment is
held for more than five
years

b.

If
investment
is
preterminated,
interest
income
on
such
investment
shall
be
subject to the following
rates:
20% if
preterminated in less than 3
years

12
12% if
preterminated after 3 years to
less than 4 years

General rule: A final tax of six

percent (6%) is imposed on the
gross selling price or current fair
market value, whichever is
higher,
for
every
sale
or
exchange of real property.

Optional: If the sale is made to

the government or any of its
political subdivisions or agencies
or to government-owned orcontrolled
corporations,
the
taxpayer has the option to
choose from the final tax of six
percent (6%) of gross selling
price or fair market value,
whichever is higher, or the
schedular tax rate of 5% up to
P125,000 + 32% of excess over
P500,000.

Exception:
The
sale
or
disposition
of
the
principal
residence of natural persons is
exempt from capital gains tax if
certain conditions are met.

5%
if
preterminated after 4 years to
less than 5 years
8.

Cash and/or property dividends

Ten percent (10%) final tax by 01

January 2000 on the following:
a.

b.

c.

Cash and or property

dividend
actually
or
constructively
received
from
a
domestic
corporation or from a joint
stock company, insurance
or mutual fund companies
and
regional operating
headquarters
of
multinational companies
Share of an individual in
the
distributable
net
income after tax of a
partnership
except
a
general
professional
partnership of which he is
a partner
Share of an individual in
the net income after tax of
an
association,
joint
account, or a joint venture
or consortium taxable as a
corporation of which he is
a member or a co-venturer

Conditions for exemption of gain

from sale or exchange of
principal residence:
1.

Proceeds are fully utilized

in
acquiring
or
constructing
a
new
principal residence within
18 months from the date
of sale or disposition;

2.

Historical cost or adjusted

basis of the real property
sold or disposed shall be
carried over to the new
principal residence built or
acquired;

3.

Notice
to
the
Commissioner of Internal
Revenue shall be given
within thirty (30) days from
the date of sale or
disposition; and

Capital gains from the sale of

shares of stock not traded in the
stock exchange
1.

Not over P100,000

5%

2.

Over P100,000
10%

Capital gains from the sale of real

property

13
4.

This exemption can only

be availed of once every
ten years.

If the proceeds of the sale

were not fully utilized, the portion
of the gain presumed to have
been realized from the sale or
disposition shall be subject to
capital gains tax.
GSP or FMV, whichever is
higher x Unutilized proceeds/GSP
= Taxable Portion

Non-resident alien not engaged in

trade or business

A non-resident alien individual

not engaged in trade or business
shall pay a tax equivalent to 25%
on all items of income, except for
gain on sale of shares of stock in
any domestic corporation and
real property which shall be
subject to the same rate applied
to other individual taxpayers.

Gain on sale of shares of stock:

TAX ON NON-RESIDENT ALIEN INDIVIDUAL

Remuneration received by a nonresident alien as president of a
domestic company taxable in the
Philippines (Ms. Juliane BaierNickel, as represented by Marina
Q. Guzman v. CIR, CTA Case No.
5514 dated 4/29/99)

A consultant, president of a
domestic company or person
involved
with
product
development is subject to
Philippine income taxation. Any
remuneration received would
stem from her employment as
company president and thus,
negates her allegation that she is
just a sales agent who receives
commissions. While petitioner
tried to show that she stayed in
the country for less than 180
days, her remuneration in the
form of commissions is still
taxable in the Philippines since it
is borne by a permanent
establishment in the Philippines.

Non-resident alien
trade or business

engaged

in

A non-resident alien engaged in

trade or business shall be subject
to the same income tax rates as
a citizen and a resident alien.

Exception: Cash and/or property

dividends received by a nonresident alien individual shall be
subject to a final tax of 20%; for
citizens and resident aliens, the
rate is 10% beginning in the year
2000.

1.

Not over P100,000 5%

2.

Over 100,000 10%

Capital gains tax on sale or

disposition of property 6% of
GSP or FMV, whichever is higher.

OTHER INDIVIDUAL TAXPAYERS

1.

Alien individual employed by

regional or area headquarters
and
regional
operating
headquarters of multinational
companies

2.

Alien individual employed

offshore banking units

3.

Alien individual employed by

petroleum service contractor and
subcontractor

by

Note: The salaries, wages, annuities,

compensation, remuneration and
other emoluments, such as
honoraria
and
allowances
received by these individuals and
their
Filipino
counterparts

14
occupying the same position as
these alien individuals shall be
subject to 15% tax.

otherwise, and only Filipinos are

the ones so employed by an OBU
for the time being or where the
post vacated by the expatriate is
subsequently assumed by a
Filipino to replace the expatriate,
as a result of which all top
management posts are now
being occupied by Filipinos.

All other income derived

by these individuals shall be
subject to the same rate as that
of other individual taxpayers.
Regional or area headquarters

A regional or area headquarter is

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.

Filipino staf of the ADB subject to

15% preferential tax rate ( NO. 2999 dated 3/11/99)

Regional operating headquarters

A regional operating headquarter

shall mean a branch established
in
the
Philippines
by
multinational companies which
are engaged in certain specified
services,
i.e.
general
administration
and
planning,
business
planning
and
coordination,
sourcing
and
procurement of raw materials
and components, among others.

Taxation of OBU employees (BIR

Ruling No. 147-98 dated October
16, 1998)

The 15% preferential tax rate

shall apply only in cases where
an alien concurrently holds a
position similar to that of the
Filipino employee. Thus, this
preferential tax treatment shall
not apply where the counterpart
expatriate is recalled to the head
office or reassigned elsewhere,
whether
temporarily
or

Filipino employees occupying

managerial or technical positions
as those of aliens employed by
the Asian Development Bank
(ADB), which is not only a
regional or area headquarters in
the
Philippines
but
the
headquarters itself, are subject to
the preferential tax rate of 15%
on their gross compensation
income pursuant to Section 25
( C ) of the NIRC of 1997.

General professional partnerships

General professional partnerships

are partnerships 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.

Persons engaging in business as

partners in a general professional
partnership shall be liable for
income tax only in their separate
and individual capacities.

Each partner shall report as gross

income his distributive share,
actually
or
constructively
received, in the net income of the
partnership.

The net income of the general

professional partnership shall be

15
computed in the same manner as
a corporation for purposes of
computing the distributive shares
of the partners.

2.
A ratio of forty percent (40%) of
income tax collection to total tax
revenues
3.
A VAT tax effort of four percent
(4%) of GNP

TAX ON CORPORATIONS
RATES OF INCOME TAX ON DOMESTIC
CORPORATIONS

4.
A 0.9 percent (0.9%) ratio of the
Consolidated Public Sector Financial
Position to GNP
Some definitions for this purpose

In General

Rate of tax, in general

1997
1998
1999
2000

35%
34%
33%
onwards 32%

Gross income derived from

business shall be equivalent to
gross sales less sales returns,
discounts and allowances and
cost of goods sold.

For taxpayers engaged in sale of

services, gross income means
gross receipts less sales returns,
allowances and discounts.

Cost of goods sold shall include

all business expenses directly
incurred
to
produce
the
merchandise to bring them to
their present location and use.

Tax is imposed on taxable or net

income.

Optional 15% tax on gross income

The
President,
upon
the
recommendation of the Secretary
of Finance, may, effective 01
January 2000, allow corporations
the option to be taxed at fifteen
percent (15%) of gross income,
provided certain conditions are
satisfied.

This is available to firms whose

ratio of cost of sales to gross
sales or receipts from all sources
does not exceed 55%.

Once elected by the corporation,

option shall be irrevocable for the
three consecutive years.

Conditions to be satisfied to avail

of the 15% optional corporate tax
1.
A tax effort ratio of twenty
percent (20%) of Gross National Product
(GNP)

Trading Concern
Cost of goods sold shall include the
invoice cost of the goods sold, plus
import duties, freight in transporting
the goods to the place where the goods
are actually sold, including insurance
while the goods are in transit.
Tax
rate
educational
hospitals

for
proprietary
institutions
and

10% on taxable income, except

on certain passive incomes

The ordinary rate imposed on

corporations
shall
apply
to
proprietary
educational
institutions and hospitals when
their
gross
income
from
unrelated trade, business or

Manufact
Cost of
shall inc
finished
used, d
overhead
other co
materials

16
other activity exceeds 50% of
their total gross income derived
from all sources.

5.
Philippine Amusement and
Gaming Corporation (PAGCOR)

Unrelated trade, business or other

activity

Rates on certain passive income

subject to final tax

1.

Interest from deposits and yield

or any other monetary benefit
from deposit substitutes and
from trust funds and similar
arrangements 20%

2.

Royalties 20%

3.

Interest income derived from a

depository
bank
under
the
expanded
foreign
currency
deposit system 7 %

4.

Capital gains from sale of shares

of stock not traded in the stock
exchange

This 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.

Proprietary educational institution

A
proprietary
educational
institution is any private school
maintained and administered by
private individuals or groups with
an issued permit to operate from
the DECS, or CHED, or TESDA, as
the case may be.

GOCCs,
agencies
instrumentalities

or

All corporations, agencies, or

instrumentalities
owned
and
controlled by the government
shall pay such rate of tax upon
their taxable income as are
imposed upon corporations or
associations engaged in a similar
business, industry, or activity.

5.

Security

System

(SSS)
3.
Philippine Health Insurance
Corporation (PHIC)
4.
Philippine
Sweepstakes Office (PCSO)

Charity

b.

Over P100,000 10%

Tax on income derived by a

depository
bank
under
the
expanded
foreign
currency
deposit system from foreign
currency transactions 10%

Note: Any
income
of
nonresidents,
whether
individuals or corporations,
from
transactions
with
depository banks under
the expanded system is
exempt from income tax.

1.
Government
Service
Insurance System (GSIS)
Social

Not over P100,000 5%

Note: This is different from the

interest
income.
This
pertains to the income
derived by a depository
bank itself.

Exceptions:
GOCCs
and
instrumentalities not subject to
tax are the:

2.

a.

6.

Intercorporate
exempt

dividends

17
7.

Capital gains realized from the

sale, exchange or disposition of
lands and/or buildings 6%

Sale of corporate real property

that has ceased to be used in trade
or business subject to 6% capital
gains tax ( No. 21-99 dated
2/25/99)

A final tax of 6% is imposed on

the gains presumed to have been
realized in the sale, exchange or
disposition
of
lands
and/or
buildings which are not actively
used in the business of a
corporation
and
which
are
treated as capital assets based
on the gross selling price or fair
market value, whichever is
higher. However, since in the
instant
case
the
taxpayer
claimed a depreciation deduction
when the building and other
improvements were not used in
trade or business, the taxpayer
must file and amend its income
tax return and pay the deficiency
income tax, if any, plus surcharge
and interest, based on its
adjusted
taxable
income
resulting from the disallowance
of the depreciation deduction.

Carry forward of excess minimum

tax

Any excess of the minimum

corporate income tax over the
normal income tax shall be
carried forward and credited
against the normal income tax
payable for the next three years
immediately
succeeding
the
taxable year in which the
minimum corporate income tax
was paid.

Relief from the minimum corporate

income
tax
under
certain
conditions

The Secretary of Finance may

suspend the imposition of the
minimum corporate income tax
on any corporation which suffers
losses on account of prolonged
labor dispute, or because of force
majeure, or because of legitimate
business reverses.

Meaning of gross income and cost

of goods sold under minimum
corporate income tax compared
with meaning of gross income and
cost of goods sold under Section
27(A)

MINIMUM CORPORATE INCOME TAX

Minimum corporate income tax

A minimum corporate income tax

of two percent (2%) of the gross
income as of the end of the
taxable year is hereby imposed
on a corporation subject to
income tax, beginning on the
fourth taxable year immediately
following the year in which such
corporation
commenced
its
business operations, when the
minimum income tax is greater
than
the
regular
corporate
income tax for the taxable year.

Gross Income
Cost of goods sold
Cost of goods sold for a
trading or merchandising
concern
Cost of goods manufactured
and sold for a manufacturing
concern
Gross Income for taxpayers
engaged in sale of service

Section 27(A)
equivalent to gro
discounts and allow
shall include all bu
to produce the me
present location an
shall include the in
import duties, freig
the place where
including insurance
shall include all c
goods, such as raw
manufacturing over
other costs incurred
factory or warehous
gross receipts less s
returns, allowances
discounts.

18
Optional: 15% of Gross Income

Cost of services

The option to be taxed at fifteen

percent (15%) on gross income
shall also be available to resident
foreign corporations, subject to
the same conditions.

Available to firms whose ratio of

cost of sales to gross sales or
receipts from all sources does not
exceed 55%.

Once elected by the corporation,

option shall be irrevocable for the
three consecutive years.

Minimum corporate income tax on

resident foreign corporations
Note: Definition of gross income for
taxpayers engaged in the sale of
service
includes
cost
of
services in MCIT but not in the
case of the optional 15% tax on
gross income [Section 27(A),
NIRC].
TAX
ON
CORPORATIONS

RESIDENT

FOREIGN

Resident foreign corporation

Tax rates on specific

foreign corporations

International Carrier 2 % of
Gross Philippine Billings

2.

Offshore Banking Units 10% of

income derived 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

A resident foreign corporation is

one organized, authorized, or
existing under the laws of any
foreign country, engaged in trade
or
business
within
the
Philippines.

Rates of tax, in general

1997
1998
1999
2001

Any
income
of
nonresidents, whether individuals or
corporations, from transactions
with said offshore banking units
shall be exempt from income tax.

35%
34%
33%
onwards 32%

Tax is imposed on taxable or net

income.

resident

1.

Income tax rate, in general

All conditions of the MCIT on

domestic corporations also apply
to resident foreign corporations.

3.

Tax
on
Branch
Profits
Remittances 15% of total profits
applied
or
earmarked
for

19
remittance without deduction for
the tax component thereof
4.

Regional or area headquarters

shall not be subject to income tax

5.

Regional operating headquarters

shall be subject to a tax of 10%
of their taxable income

Gross
Philippine
Billings
international air carrier

freight

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 any deduction
for the tax component thereof
(except those activities which are
registered with the Philippine
Economic Zone Authority).

The following shall not be

treated as branch profits unless
the
same
are
effectively
connected with the conduct of its
trade
or
business
in
the
Philippines:

Tickets revalidated, exchanged

and/or endorsed to another
international airline form part of
the Gross Philippine Billings if the
passenger boards a plane in a
port or point in the Philippines.
For a flight which originates from
the
Philippines,
but
transshipment
of
passenger
takes place at any port outside
the Philippines on another airline,
only the aliquot portion of the
cost of the ticket corresponding
to the leg flown from the
Philippines to the point of
transshipment shall form part of
the Gross Philippine Billing.
for

Gross Philippine Billings 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

or

Tax on branch profits remittances

for

Gross Philippine Billings refers

to the amount of gross revenue
derived from carriage of persons,
excess baggage, cargo and 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 the ticket or passage
document.

Gross
Philippine
Billings
international shipping

of the passage
documents.

1.

interests

2.

dividends

3.

rents

4.

royalties

5.

remuneration for technical

services

6.

salaries

7.

wages

8.

premiums

9.

annuities

10.

emoluments

11.

other
fixed
or
determinable
annual,
periodic or casual gains,
profits, income and capital
gains

In Marubeni v. Commissioner,
Marubeni-Japan invested directly

20
in AG & P Manila. Since Marubeni
has a branch in the Philippines,
AG & P withheld 15% as branch
profits remittance tax from the
cash dividends. SC held that the
dividends remitted were not
subject to the 15% branch profit
remittance tax as they were not
income earned by a Philippine
branch of Marubeni-Japan.

In the 15% remittance tax, the

law specifies its own tax base to
be on the profit remitted
abroad. There is absolutely
nothing equivocal or uncertain
about the language of the
provision. The tax is imposed on
the amount sent abroad, and the
law calls for nothing further.
[Bank of America NT v. Court
of Appeals, 234 SCRA 302]

Marubeni
SCRA 500

v.

Commissioner,

Marubeni
Corporation
is
resident foreign corporation.

177
a

A
resident
foreign
corporation is one that is
incorporated under the laws of a
foreign country and is engaged in
trade
or
business
in
the
Philippines. Marubeni Corporation
is a foreign corporation duly
organized under the laws of
Japan and it is duly licensed to
engage
in
business
under
Philippine
laws.
Marubeni
Corporation maintains a branch
office to carry out its business in
the country.

The equity investments of MC in

AG&P are investments of the
mother corporation and not of its
branch office.
The investment was in the
name
of
the
Marubeni
Corporation and therefore, the

stockholder in AG&P is the

mother corporation, Marubeni
Corporation, and not its branch
office in the Philippines. Marubeni
Corporation, therefore, and not
its branch office, is liable for
taxes on dividends earned on its
investments.

Branch profit remittance does not

include dividends on investments
received from other domestic
corporations.
Only
profits
remitted
abroad by a branch office to its
head office which are effectively
connected with its trade or
business in the Philippines are
subject to the 15% profit
remittance tax.
To
be
effectively
connected, it is not necessary
that the income be derived from
the actual operation of taxpayercorporations trade or business; it
is sufficient that the income
arises from the business activity
in which the corporation is
engaged.
The dividends received by
Marubeni from AG&P are not
income arising from the business
activity in which Marubeni is
involved.
Accordingly,
said
dividends if remitted abroad, are
not considered branch profits for
purposes of the 15% profit
remittance tax.
Note: Test of whether remittance
of profit by a branch to its head
office comes under the purview
of the profit remittance tax, the
branch itself should have made
the remittance. In this case, it
was not Marubenis branch in the
Philippines, but the investee
corporation, AG&P, which directly

21
remitted
the
dividends
Marubeni of Japan.

to

Also, only the branch office

is the authorized withholding
agent for the profit remittance
tax. AG&P, being an investee of
Marubeni, erred in withholding
the profit remittance tax from the
dividends
it
remitted
to
Marubeni.

Tax on certain incomes received by

a resident foreign corporation
1.

Interest income from any

currency bank deposit and yield
or any other monetary benefit
from deposit substitutes and
from trust funds and similar
arrangements
and
royalties
derived from sources within the
Philippines shall be subject to a
final income tax at the rate of
twenty percent (20%) of such
interest.

Interest received by a foreign

corporation
from
Philippine
sources not efectively connected
with the conduct of its business
not considered branch profits.
(Hongkong-Shanghai Hotels, Ltd. v.
CIR, CTA Case No. 5243 dated
4/29/99)

Interest received by a foreign

corporation during each taxable
year from all sources within the
Philippines is not considered
branch profits except when the
same is effectively connected
with the conduct of its business.
In the instant case, the interest
income from bank placements is
not effectively connected with
the
business
of
hotel
management, thus, it is excluded
form profits subject to the 15%
branch profit remittance tax.

Regional or area headquarters of

multinational companies

Regional or area headquarters

shall not be subject to income
tax.

Regional operating headquarters of

multinational companies

Regional operating headquarters

shall pay a tax of ten percent
(10%) on their taxable income.

Interest from deposits and yield

or any other monetary benefit
from deposit substitutes, trust
funds and similar arrangements
and royalties

However, interest income

derived by a resident foreign
corporation from a depositary
bank under the expanded foreign
currency deposit system shall be
subject to a final income tax at
the rate of seven and one-half
percent (71/2%) of such interest
income.
2.

Income
derived
under
the
expanded
foreign
currency
deposit system
This refers to income
derived by a depositary 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 Bangko Sentral ng Pilipinas to
transact business with foreign
currency deposit system units
and other depositary banks
under the expanded foreign
currency
deposit
system,
including interest income from
foreign currency loans granted by
such depositary banks under said

22

3.

4.

expanded
foreign
currency
deposit system to residents.

Taxation of certain
foreign corporations

A final income tax at the

rate of ten percent (10%) is
imposed on such income.

1.

Non-resident
cinematographic
film owner, lessor or distributor
25% of gross income

Capital gains from sale of shares

of stock not traded in the stock
exchange

2.

Non-resident owner or lessor of

vessels chartered by Philippine
nationals 4% of gross rentals,
lease or charter fees

3.

Non-resident owner or lessor of

aircraft, machineries and other
equipment 7% of gross
rentals or fees

a.

Not over P100,000 5%

b.

Over P100,000 10%

Intercorporate dividends
Dividends received by a
resident foreign corporation from
a domestic corporation liable to
tax under the NIRC shall not be
subject to income tax.

TAX
ON
NON-RESIDENT
CORPORATION

Rates of tax, in general

1997
1998
1999
2000

Non-resident cinematographic film

owner, lessor or distributor

FOREIGN

Taxation of a non-resident foreign

corporation, in general

35%
34%
33%
32%

A cinematographic film owner,

lessor, or distributor shall pay a
tax of twenty five percent (25%)
of its gross income from all
sources within the Philippines.

Non-resident owner or lessor of

vessels chartered by Philippine
nationals

However, the tax is imposed on

gross income, not on taxable or
net income.
Such gross income may include
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,
except capital gains from the sale
of shares of stock not traded in
the stock exchange.

non-resident

A non-resident owner or lessor of

vessels shall be subject to a tax
of four and one-half percent (4
% ) 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, machineries and other
equipment

Rentals, charters and other fees

derived by a non-resident lessor
of aircraft, machineries and other
equipment shall be subject to a
tax of seven and one-half percent
(7%) of gross rentals or fees.

23
Tax on certain incomes received by
a non-resident foreign corporation
1.

Interest on foreign loans

A final withholding tax at
the rate of twenty percent (20%)
is hereby imposed on the amount
of interest on foreign loans
contracted on or after 01 August
1986.

2.

Intercorporate dividends
A final withholding tax at
the rate of fifteen percent (15%)
is hereby imposed on the amount
of cash and/or property dividends
received
by
a
non-resident
foreign
corporation
from
a
domestic corporation, subject to
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 thirty two percent
(32%) in the year 2000.
This is the so-called tax

sparing rule.

Provided the country in which the

non-resident foreign corporation
is domiciled shall allow a credit
against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the
Philippines, which is 32% by 2000
[Sec. 28, (B) (5) (b)]

TAX ON
EARNINGS

Not over P100,000 5%

b.

Over P100,000 10%

Tax sparing rule

Involves intercorporate dividends

received by a non-resident
foreign corporation from a
domestic corporation
Only 15% final withholding tax on
cash and/or property dividends is
imposed

ACCUMULATED

Imposition of the tax

In addition to the other income

taxes, there is hereby imposed
for each taxable year on the
improperly accumulated taxable
income of each corporation an
improperly accumulated earnings
tax equal to ten percent (10%) of
the
improperly
accumulated
taxable income. [Section 29,
NIRC]

Corporations subject to improperly

accumulated earnings tax

3.
Capital gains from sale of shares
of stock not traded in the stock
exchange
a.

IMPROPERLY

The
improperly
accumulated
earnings tax shall apply to every
corporation formed or availed for
the purpose of avoiding the
income tax with respect to
shareholders or the shareholders
of any other corporation, by
permitting earnings and profits to
accumulate instead of being
divided or distributed.

Exceptions
to
improperly
accumulated earnings tax

The
improperly
accumulated
earnings tax shall not apply to:
1.

Publicly-held corporations

2.
Banks and other non-bank
financial intermediaries

24
3.

Insurance companies

Evidence of
income tax

purpose

to

2.
Income tax paid for the
taxable year.

avoid
Coverage

Prima Facie Evidence: The fact

that any corporation is a mere
holding company or investment
company shall be prima facie
evidence of a purpose to avoid
the tax upon its shareholders or
members.
Evidence Determinative of
Purpose: The fact that the
earnings
or
profits
of
a
corporation are permitted to
accumulate
beyond
the
reasonable needs of the business
shall be determinative of the
purpose to avoid the tax upon its
shareholders or members unless
the
corporation,
by
clear
preponderance of evidence, shall
prove to the contrary.
The term reasonable needs of
the
business
includes
the
reasonably anticipated needs of
the business.

For
corporations
using
the
calendar basis, the accumulated
earnings tax shall not apply on
improperly accumulated income
as of 31 December 1997.

For corporations adopting the

fiscal year accounting period, the
improperly accumulated income
not subject to this tax shall be
reckoned as of the end of the
month comprising the 12-month
period of fiscal year 1997-1998.

EXEMPTION OF CERTAIN ORGANIZATIONS

Exemption
corporations

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
a
fraternal
organization
operating
under the lodge system, or
a mutual aid association or
a non-stock corporation

Income exempt from tax;

2.
Income
gross income;
3.
and

excluded

from

Income subject to final tax;

4.
Amount of net operating
loss carry-over deducted;
And reduced by the sum of:
1.
Dividends
actually
constructively paid; and

or

on

1.

Taxable income adjusted by:

1.

tax

The following organizations shall

not be taxed in respect to income
received by them as such:

Computation
of
improperly
accumulated taxable income

from

25
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
non-stock corporation or
their dependents;
4.

Cemetery company owned

and operated exclusively
for the benefit of its
members;

5.

Non-stock 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,
organizers, officer or any
specific person;

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 non-stock, non-profit
educational institution;

9.

Government
institution;

educational

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 meetings 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
products
finished by them. [Section
30, NIRC]

Income by exempted corporations

which are not exempted

Notwithstanding the provisions

in the preceding paragraphs, the
income of whatever kind and
character
of
the
foregoing
organizations from any of their
properties, real or personal, or
from any of their activities
conducted for profit regardless of
the disposition made of such
income, shall be subject to tax
imposed under this Code. [2nd
pargraph, Section 30, NIRC]

Thus, the following income of the

exempted organizations shall not
be exempted:
1.

Income of whatever kind

and character from any of

26
their properties,
personal
2.

real

or

Income from any of their

activities conducted for
profit

See Commissioner v. CA re.

YMCA case in General Principles
of Taxation

expressly, and unambiguously. A tax

cannot be imposed without clear and
express words for that purpose.
Accordingly, the general rule of
requiring adherence to the letter in
construing
statutes
applies
with
peculiar strictness to tax laws and the
provisions of a taxing act are not to be
extended by implication.

Commissioner v. CA, CTA & Ateneo

de Manila University, 271 SCRA 605

GROSS INCOME

In conducting researches and

studies of social organizations and
cultural values thru its IPC, is Ateneo
performing the work of an independent
contractor and thus taxable for the
contractors tax?

Gross income

NO. An academic institution

conducting researches pursuant to its
commitments
to
education
and
ultimately to public service cannot be
considered
as
an
independent
contractor when it accepts sponsorships
for
its
research
activities
from
international
organizations,
private
foundations and government agencies.

1.

Compensation for services

in whatever form paid,
including, but not limited
to, fees, salaries, wages,
commissions, and similar
items;

2.

Gross income derived from

the conduct of trade or
business or the exercise of
a profession;

3.

Gains
derived
dealings in property;

4.

Interests;

5.

Rents;

6.

Royalties;

7.

Dividends;

8.

Annuities;

9.

Prizes and winnings;

10.

Pensions; and

11.

Partners distributive share

from the net income of the

The research activity of the IPC is

done in pursuance of maintaining
Ateneo's university status and not in
the course of an independent business
of selling such research with profit in
mind.
It is error to apply the principles
of tax exemption without first applying
the well-settled doctrine of strict
interpretation in the imposition of taxes
it is obviously both illogical and
impractical to determine who are
exempted without first determining who
are covered by a provision of the NIRC.
Hornbook
doctrine
in
interpretation of tax laws:

Gross income means all income

derived from whatever source,
including (but not limited to) the
following items:

from

the

Statute will not be construed as

imposing a tax unless it does so clearly,

27
general
partnership.

professional

the
health,
goodwill,
contentment, or efficiency of his
employees.
[Section
2.78.1,
Revenue Regulations 2-98]

COMPENSATION FOR SERVICES

Compensation for services

Tips and gratuities

This means all remuneration for

services
performed
by
an
employee for his employer under
an
employer-employee
relationship.

Compensation paid in kind

Compensation may be paid in

money or in some medium other
than money.

Living quarters or meals

If a person receives a salary as a

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. [Section
2.78.1, Revenue Regulations 298]

Facilities and privileges

relatively small value

of

Facilities are not considered as

compensation
subject
to
withholding if such facilities or
privileges are of relatively small
value
and
are
offered
or
furnished
by
the
employer
merely as a means of promoting

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.

Fixed or variable transportation,

representation
and
other
allowances

In general, fixed or variable

transportation,
representation
and other allowances which are
received by a public officer or
employee or officer or employee
of a private entity, in addition to
the regular compensation fixed
for his position or office, is
compensation
subject
to
withholding.

Any amount paid specifically,

either
as
advancements
or
reimbursements, for traveling,
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:
1.

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

28
2.

The employee is required

to account or liquidate for
the foregoing expenses in
accordance
with
the
specific requirements of
substantiation for each
category of expenses. The
excess of actual expenses
over advances made shall
constitute taxable income
if such amount is not
returned to the employer.

Vacation and sick leave allowances

Amounts of vacation allowances

or leave credits which are paid to
an
employee
constitutes
compensation. Thus, the salary of
an employee on vacation or on
sick leave, which are paid
notwithstanding his absence from
work constitutes compensation.
However, the monetized value of
unutilized leave credits of ten
(10) days or less which were paid
to the employee during the year
are not subject to income tax.

Fringe benefit

Fringe benefit means any good,

service or other benefit furnished
or granted in cash or in kind by
an employer to an individual
employee, except rank and file
employees, such as, but not
limited to, the following:
1.

Housing;

2.

Expense account;

3.

Vehicle of any kind;

4.

Household personnel, such

as maid, driver and others;

5.

Interest on loan at less

than market rate to the
extent of the difference
between the market rate
and actual rate granted;

6.

Membership fees, dues

and other expenses borne
by the employer for the
employee in social and
athletic clubs or other
similar organizations;

7.

Expenses
travel;

8.

Holiday
and
expenses;

9.

Educational assistance to
the
employee
or
his
dependents; and

10.

Life or health insurance

and
other
non-life
insurance premiums or
similar amounts in excess
of what the law allows.

IMPOSITION OF FRINGE BENEFIT TAX

Imposition of fringe benefit tax

A final tax of 32% effective 01

January 2000 is imposed on the
grossed-up monetary value of
fringe
benefit
furnished
or
granted to the employee, except
rank and file, by the employer,
whether an individual or a
corporation.

The fringe benefit tax is paid by

the employer.

Grossed-up monetary value is

acquired by dividing the actual
monetary value of the fringe
benefit by 68% effective 01
January 2000.

Fringe benefits
subject to FBT

for

which

foreign
vacation

are

not

29
1.

2.

3.

Fringe
benefits
which
are
authorized and exempted from
tax under special laws.
Contributions of the employer for
the benefit of the employee to
retirement,
insurance
and
hospitalization benefit plans.
Benefits given to the rank and
file employees, whether granted
under a collective bargaining
agreement or not.
De minimis benefits.

5.

Fringe benefit is required by the

nature of, or necessary to the
trade, business or profession of
the employer.
It is for the convenience
advantage of the employer.

Under this rule, allowances

furnished to the employee for,
and as a necessary incident to,
the performance of his duties are
not taxable.
Thus, the value of meals and
living quarters given to a driver
who is available any hour of the
day when needed by his doctoremployer is not considered
income of the said driver.

De minimis benefits

Performance of the functions of a

public office

The term trade or business

includes the performance of the
functions of a public office.
[Section 22(S), NIRC]

INTEREST INCOME

1.

interest on bank deposit/deposit

substitutes/trust fund and similar
arrangement

2.

interest from lending/interest

income from bonds

3.

interest on uncollected salary

4.

interest
on
foreign
bonds/government bonds

5.

interest on treasury bills

6.

interest earned from deposits

maintained under the foreign
currency deposit system

7.

interest income
operators

or

Convenience of the employer rule

TRADE OR BUSINESS

Sources of interest income

4.

6.

GROSS INCOME FROM THE CONDUCT OF

These are facilities or privileges

furnished or offered by an
employer to his employees that
are of relatively small value and
are offered or furnished by the
employer merely as a means of
promoting the health, goodwill,
contentment, or efficiency of his
employee.

of

pawnshop

Interest income earned by nonstock,

non-profit
educational
institutions

Interest income shall be exempt

only when used directly and
exclusively
for
educational
purposes. To substantiate this
claim, the institution must submit
an annual information return and
duly audited financial statement.
A certification of actual utilization
and the Board resolution on the
proposed project to be funded
out of the money deposited in
banks must also be submitted.

30
[Department of Finance Order
149-95]

whether in money or in other

property.

RENTALS

Kinds of dividend income

Operating lease

1.

Cash dividend

2.

Stock dividend/stock rights

3.

Property dividend

4.

Liquidating dividend

An operating lease is a contract

under which the asset is not
wholly amortized during the
primary period of the lease, and
where the lessor does not rely
solely on the rentals during the
primary period for his profits, but
looks for the recovery of the
balance of his costs and for the
rests of his profits from the sale
or re-lease of the returned assets
at the end of the primary lease
period.

Finance lease

Also called full payout lease is

a contract involving payment
over an obligatory period (also
called primary or basic period) of
specified rental amounts for the
use of a lessors property,
sufficient in total to amortize the
capital outlay of the lessor and to
provide for the lessors borrowing
costs and profits.
Obligatory period is primary noncancelable period of the lease
which in no case shall be less
than 730 days.
Lessee exercises choice over the
asset.

DIVIDEND INCOME
Dividends

Dividends
means
any
distribution
made
by
a
corporation to its shareholders
out of its earnings on profits and
payable to its shareholders,

Stock dividend

A stock dividend representing the

transfer of surplus to capital
account shall not be subject to
tax.

It shall be taxable only if

subsequently
cancelled
and
redeemed by the corporation.

It is also taxable if it leads to a

substantial alteration in the
proportion of tax ownership in a
corporation.

When
redemption
of
stock
dividends by a corporation is
essentially
equivalent
to
a
distribution of taxable dividends
(CIR v. CA, et. al. , G.R. No. 108576
dated 1/20/99)

If the source of the redeemed

shares is the original capital
subscriptions upon establishment
of the corporation or from initial
capital investment in an existing
enterprise, its redemption to the
concurrent value of acquisition
would not be income but a mere
return of capital. On the other
hand, if the redeemed shares are
from stock dividend declarations,
the proceeds of the redemption is
additional wealth, for it is not
merely a return of capital, and
thus,
deemed
as
taxable
dividends.

31
EXCLUSION
Dividends paid in property
Exclusion

Dividends paid in securities or

other property, in which the
earnings of a corporation have
been invested, are income to the
recipients to the amount of the
full market value of such property
when receivable by individual
stockholders.

A dividend paid in stock of

another corporation is not a stock
dividend, even though the stock
distributed was acquired through
the transfer by the corporation
declaring
the
dividends
of
property to the corporation the
stock of which is distributed as a
dividend. [Section 251, Revenue
Regulations 2]

Exclusions from gross income

1.

Proceeds from life insurance

2.

Amount received by insured as

return of premium

3.

Gifts, bequests and devises

4.

Compensation
sickness

5.

Income exempt under treaty

6.

Retirement benefits,
gratuities, etc.

7.

Income
derived
government

8.

Income derived by the Philippine

Government
or
its
political
subdivisions

9.

Prizes and awards made primarily

in
recognition
of
religious,
charitable, scientific, educational,
artistic,
literary
or
civic
achievement

10.

Prizes and awards in sports

competitions sanctioned by the
national sports associations

11.

13th month pay

benefits
not
P30,000.00

Liquidating dividend

Where a corporation distributes

all its assets in complete
liquidation or dissolution, the
gain realized or loss sustained by
the
stockholder,
whether
individual or corporation, is a
taxable income or deductible
loss, as the case may be.

Disguised dividends

These are payments which are

equivalent
to
dividend
distribution.

In
the
case
of
excessive
payments by corporations, if
such payments correspond or
bear a close relationship to
stockholdings, and are found to
be a distribution of earnings or
profits, the excessive payments
will be treated as dividends.
[Section 71, Revenue Regulation
2]

Exclusion
refers
to
income
received or earned but is not
taxable as income because it is
exempted by law or by treaty.
Such tax-free income is not to be
included in the income tax return
unless information regarding it is
specifically called for.

for

injuries

or

pensions,

by

foreign

and other
exceeding

32
12.

GSIS, SSS, Medicare and other

contributions

13.

Gains from the sale of bonds,

debentures or other certificate of
indebtedness

14.

Gains from redemption of shares

in mutual fund

Retirement
benefits,
gratuities, etc.

6.

Benefits received from the

Government
Service
Insurance
System,
including
retirement
gratuity
received
by
government officials and
employees

Requisites
for
exclusion
retirement benefits

of

pensions,
1.

It must be received under RA

7641 or in accordance with a
reasonable private benefit plan
maintained by the employer.

2.

Retiring employee or official has

been in the service of the same
employer for at least ten (10)
years and is not less than fifty
(50) years of age at the time of
his retirement.

3.

Benefits granted under the

provision shall be availed of by
an official or employee only once.

Such exclusions include:

1.

Retirement benefits under

RA
No.
7641
or
a
reasonable private benefit
plan

2.

Amount received by an
official or employee or by
his
heirs
from
the
employer
due
to
separation
from
the
service because of death,
sickness or other physical
disability or for any cause
beyond the control of the
official or employee

3.

Social security benefits,

retirement
gratuities,
pensions and other similar
benefits
received
by
resident or non-resident
citizens or resident aliens
from foreign government
agencies
and
other
institutions,
private
or
public

4.

Payment of benefits to a
resident person under the
United States Veterans
Administration

5.

Benefits received from or

enjoyed under the Social
Security System

Reasonable private benefit plan

It means a pension, gratuity,

stock bonus or profit sharing plan
maintained by an employer for
the benefit of some or all of his
officials or employees, or both,
for the purpose of distributing to
such officials and employees the
earnings and principal of the fund
thus accumulated, and wherein it
is provided in said plan that at no
time shall any part of the corpus
or income of the fund be used
for, or be diverted to, any
purpose other than for the
exclusive benefit of the said
officials and employees.

Separation
pay
and
amounts
received
due
to
involuntary
separation

Any amount received by an

official or employee or by his

33
heirs from the employer due to
death, sickness or other physical
disability or for any cause beyond
the control of the said official or
employee is excluded from gross
income.
Cause beyond the control of the
employee

The phrase for any cause

beyond the control of the said
official or employee connotes
involuntariness on the part of the
official
or
employee.
The
separation from the service of
the official or employee must not
be asked for or initiated by him.
[Section
2.78.1,
Revenue
Regulation 2-98] The separation
was not of his own making.

Terminal leave pay

Commutation of leave credits or

terminal leave pay are given not
only at the same time but also
for
the
same
policy
considerations
governing
retirement benefits. Thus, not
being part of the gross salary or
income but a retirement benefit,
terminal pay is not subject to
income tax. [Commissioner v.
Court of Appeals, 203 SCRA 72]
Terminal leave pay is exempt
from income tax. [Zialcita case,
190 SCRA 851]

Income derived
government

by

foreign

Income derived from investments

in the Philippines in loans, stocks,
bonds
or
other
domestic
securities, or from interest on
deposits
in
banks
in
the
Philippines by:
1.

foreign governments;

2.

financing
institutions
owned,
controlled,
or
enjoying refinancing from
foreign governments; and

3.

international or regional
financial
institutions
established
by
foreign
governments.

Income
by
government

the

Philippine

1.

Income derived from any public

utility or from the exercise of any
essential governmental function

2.

Accruing to the Government or to

any political subdivision thereof.

Prizes and awards in recognition of

religious,
charitable,
scientific,
educational, artistic, literary or
civic achievement
1.

Made primarily in recognition of

religious, charitable, scientific,
educational, artistic, literary or
civic achievement.

2.

The
recipient
was
selected
without any action on his part to
enter the contest or proceeding.

3.

The recipient is not required to

render substantial future services
as a condition to receiving the
prize or award.

Prizes
and
competitions

awards

in

sports

1.

Prizes and awards must be

granted to athletes in local and
international sports competitions
and tournaments.

2.

Sports
competition
or
tournament held either in the
Philippines or abroad.

34
3.

Sports
competition
or
tournament must be sanctioned
by
their
natural
sports
associations.

1.

The
taxpayer
seeking
a
deduction must point to some
specific provisions of the statute
authorizing the deduction; and

2.

He must be able to prove that he

is entitled to the deduction
authorized or allowed.

DEDUCTIONS
IN GENERAL

Kinds of deductions

Deductions

1.

Itemized deduction which is

available
to
individual
and
corporate taxpayers

2.

Optional
standard
deduction
which is available to individual
taxpayers only, except a nonresident alien

3.

Special deductions which is

available, in addition to the
itemized deductions, to certain
corporations,
i.e.
insurance
companies
and
proprietary
educational corporations

Deductions are items or amounts

which the law allows to be
deducted
under
certain
conditions from gross income in
order to arrive at taxable income.

Deduction v. exemption

Deduction is an amount allowed

by law to be subtracted from
gross income to arrive at taxable
income. Exemption from taxation
is the grant of immunity to
particular
persons
or
corporations or to persons or
corporations of a particular class
from a tax which others generally
within the same taxing district
are obliged to pay.

Time
within
deduction

Deduction is an amount allowed

by law to be subtracted from
gross income to arrive at taxable
income. Exclusion refers to
income received or earned but is
not taxable as income because
exempted by law or by treaty.
Such tax-free income is not to be
included in the income tax return
unless information regarding it is
specifically called for. [Section
61, Revenue Regulation 2]

Basic
principles
deductions

governing

to

claim

1.

As a rule, if a taxpayer does not,

within any year, deduct certain of
his expenses, losses, interests,
taxes, or other charges, he
cannot deduct them from the
income of the next or any
succeeding year.

2.

If he keeps his books on the cash

receipts basis, the expenses are
deductible in the year they are
paid.

3.

If on the accrual basis, then in

the year they are incurred,
whether paid or not.

Deduction v. exclusion

which

Who may not avail of deductions

from gross income?

35
1.

2.

3.

Citizens and resident

whose
income
is
compensation income.

aliens
purely

They are allowed personal

and additional exemptions and
deduction for premium payments
on health and hospitalization
insurance.

A corporation may avail only of

the itemized deductions; an
individual, except a non-resident
alien, may elect the itemized
deductions
or
the
optional
standard deduction.

Non-resident aliens not engaged

in trade or business in the
Philippines

Thus, the optional standard

deduction is not available to
corporations.

An individual earning purely

compensation income is not
allowed
itemized
deductions,
except premium payments on
health
and/or
hospitalization
insurance. In addition, he is also
granted personal and additional
exemptions.

An individual, who earns income

other than purely compensation
income, is allowed personal and
additional exemptions in addition
to the itemized deductions or the
optional standard deduction.

Non-resident foreign corporations

Deductions from gross income

1.

Expenses

2.

Interest

3.

Taxes

4.

Losses

5.

Bad debts

6.

Depreciation

7.

Depletion of oil and gas wells and

mines

8.

Charitable
contributions

and

other

9.

Research and development

10.

Pension trusts

11.

Premium payments on health

and/or hospitalization insurance
of an individual taxpayer

Some rules on deduction

A corporation may avail only of

the deductions from (1) to (10);
premium payments on health
and/or hospitalization insurance
is
deductible
only
by
an
individual taxpayer.

Two kinds of deduction available to

individuals, except a non-resident
alien
1.

Itemized deductions

2.

Optional standard deduction

Note: Optional standard deduction is

not available to corporations.
ORDINARY
EXPENSES
Business
expenses

AND

NECESSARY

expense

v.

BUSINESS
capital

Business expenses refer to 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

36
trade, business or the exercise of
a profession.

Capital
expenses
are
expenditures for extraordinary
repairs which are capitalized and
subject to depreciation. These
are expenses which tend to
increase the value or prolong the
life of the taxpayers property.

6.

It must not be against law,

morals, public policy or public
order.

Substantiation
requirement
business expense

for

Taxpayer need to substantiate

with sufficient evidence, such as
official receipts or other adequate
records:

Ordinary and necessary expenses

An expense is ordinary when it is

commonly incurred in the trade
or business of the taxpayer as
distinguished
from
capital
expenditures.
The
payments,
however, need not be normal or
habitual in the sense that the
taxpayer will have to make them
often. The payment may be
unique or non-recurring to the
particular taxpayer affected.
An expense is necessary when it
is appropriate and helpful to the
taxpayers business or if it is
intended to realize a profit or to
minimize a loss.

Requisites for deductibility

business expense

the amount of the expense

being deducted; and

2.

the direct connection or

relation of the expense
being deducted to the
development,
management,
operation
and/or conduct of the
trade,
business
or
profession of the taxpayer.

What are
expenses?

The expenses must be ordinary

and necessary.

2.

It must be paid or incurred during

the taxable year.
It must be paid or incurred in
carrying on any trade or business
or profession.

4.

It must be reasonable in amount.

5.

It must be substantiated by
sufficient evidence such as
official receipts and other official
records.

included

in

business

Business expenses include:

1.

Salaries, wages and other

forms of compensation for
personal services actually
rendered, including the
grossed-up
monetary
value of fringe benefit
granted
provided
the
fringe benefit tax has been
paid.

2.

Travel expenses, here and

abroad, while away from
home.

3.

Rentals
and/or
other
payments 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.

of

1.

3.

1.

37
4.

Entertainment,
amusement and recreation
expenses.

Requisites for deductibility

compensation payments

of

1.

The payments are reasonable.

2.

They are, in fact, payments for

personal
services
actually
rendered. [Section 70, Revenue
Regulation 2]

Treatment
compensation

of

excessive

In
the
case
of
excessive
payments by corporations, if
such payments correspond or
bear a close relationship to
stockholdings, and are found to
be distribution of earnings or
profits, the excessive payments
will be treated as dividends.
[Section 71, Revenue Regulations
2]

If such payments constitute

payment for property, they
should be treated by the payor as
capital expenditure and by the
recipient as part of the purchase
price. [Section 71, Revenue
Regulations 2]

Requisites for deductibility

bonuses to employees

the taxpayers business. [Section

72, Revenue Regulations 2]

Pensions
injuries

The bonuses are made in good

faith.

2.

They are given for personal

services actually rendered.

3.

They do not exceed a reasonable

compensation for the services
rendered, when added to the
stipulated salaries, measured by
the amount and quality of
services performed in relation to

and

compensation

for

Amounts paid for pensions to

retired employees or to their
families or others dependent
upon them, or on account of
injuries
received
by
the
employee,
and
lump
sum
amounts paid or accrued as
compensation for injuries are
proper deductions as ordinary
and necessary expenses. Such
deductions are limited to the
amount not compensated for by
insurance or otherwise.

Rules on repairs

Expenses
for
repairs
are
deductible if such repairs are
incidental or ordinary, that is,
made to keep the property used
in the trade or business of the
taxpayer in an ordinarily efficient
operating condition.

Repairs
in
the
nature
of
replacement to the extent that
they arrest deterioration and
prolong the life of the property
are capital expenditures and
should be debited against the
corresponding
allowance
for
depreciation.
[Section
68,
Revenue Regulations 2]

of

1.

In Kuenzle v. CIR [28 SCRA 365]

and C.M. Hoskins v. CIR [30
SCRA 434], the Supreme Court
disallowed
deductions
for
bonuses given to the top officers
of the involved corporations for
being unreasonable.

Travel expenses

Travel
expenses
include
transportation
expenses
and

38
meals
and
lodging
of
an
employee paid for by the
employer. [Section 66, Revenue
Regulations 2]
Requisites for
travel expenses

deductibility

of

1.

The
expenses
must
reasonable and necessary.

2.

They must be incurred or paid

while away from home.

3.

They must be paid or incurred in

the conduct of trade or business.

be

Tax home

the
amount
of
tax
deductible by the latter.

Tax home is the principal place of

business, when referring to
away from home.

being

The cost borne by the lessee in

erecting buildings or making
permanent
improvements
on
ground of which he is a lessee is
held to be a capital investment
and not deductible as a business
expense.

Requisites for rental expense

1.

Required as a condition
continued use or possession

for

2.

For purposes of the

business or profession

3.

Taxpayer has not taken or is not

taking title to the property or has
no equity other than that of a
lessee, user or possessor

trade,

Rental expense

A reasonable allowance for

rentals and/or other payments
which are required as a condition
for
the
continued
use
or
possession, for purposes of the
trade, business or 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 is
deductible
from
the
gross
income.
Where a leasehold is acquired for
business purposes for a specified
sum, the purchaser may take as
a deduction in his return an
adequate part of such sum each
year, based on the number of
years the lease has to run.
Taxes paid by a tenant to or for a
landlord for business property are
additional rent and constitute a
deductible rent to the tenant and
taxable income to the landlord;

Entertainment, amusement
recreation expense

and

1.

Reasonable in amount

2.

Incurred
period

3.

Directly
connected
to
the
development, management, and
operation of the trade, business,
or profession of the taxpayer, or
that are directly related to or in
furtherance of the conduct of his
or
its
trade,
business
or
profession

4.

Not to exceed such ceiling as the

Secretary of Finance may, by
rules and regulations, prescribe

5.

Any
expense
incurred
entertainment, amusement
recreation which is contrary
law, morals, public policy,
public order shall in no case
allowed as a deduction

during

the

taxable

for
or
to
or
be

39
Option
to
institutions

private

educational
Interest

In addition to the allowable

deductions, a private educational
institution may, at its option,
elect either:
1.

2.

To deduct expenditures
otherwise considered as
capital
outlays
of
depreciable
assets
incurred during the taxable
year for the expansion of
school facilities; or

Back-to-back interest

To deduct allowance for

depreciation thereof.

Treatment of other expenses

1.

Advertising expense
Not deductible business
expense. Efforts to establish
reputation are akin to acquisition
of capital assets and, therefore,
expenses related thereto are not
business expense but capital
expenditures.

2.

Promotional expenses
Same as advertising expense

3.

In Gutierrez v. CIR [14

SCRA 34], it was held that
litigation expenses defrayed by a
taxpayer to collect apartment
rentals and to eject delinquent
tenants
are
ordinary
and
necessary expenses in pursuing
his business.
INTEREST EXPENSE

The
taxpayers
allowable
deduction for interest expense
shall be reduced by an amount
equal to 38% by 01 January 2000
of the interest income earned by
him which has been subjected to
a final tax.

Interest which cannot be deducted

1.

Interest is paid in advance

through discount or otherwise by
an individual taxpayer reporting
income on the cash basis. Such
interest shall be allowed as a
deduction in the year the
indebtedness is paid.

2.

Interest
taxpayers.

3.

If the indebtedness is incurred to

finance petroleum exploration.

Litigation expenses
Litigation expenses that
are incurred in the defense or
protection of title are capital in
nature and not deductible.

The amount of interest paid or

incurred within a taxable year on
indebtedness in connection with
the taxpayers profession, trade
or business shall be allowed as
deduction from gross income.

between

related

Requisites for deductibility

interest expense

of

1.

There must be an indebtedness

incurred by the taxpayer in
connection with the taxpayers
trade, business or profession.

2.

The interest must have been paid

or incurred within the taxable
year.

3.

The interest must have been

stipulated in writing.

40
Optional
expense

treatment

of

At the option of the taxpayer,

interest incurred to acquire
property used in trade, business
or exercise of a profession may
be allowed as a deduction or
treated as a capital expenditure.

Delinquency
interest
payment deductible

interest

on

What taxes are not deductible from

gross income?
1.

Philippine income tax

2.

Income taxes imposed by the

authority of any foreign country
but deduction is allowed only in
the case of a taxpayer who is
entitled to tax credit for taxes of
foreign countries but does not
avail of the same

3.

Estate and donors taxes

4.

Special assessments or levies

assessed against local benefits of
a kind tending to increase the
value of the property assessed

tax

For interest to be allowed as

deduction from gross income, it
must be shown that there be an
indebtedness, that there should
be interest upon it, and that what
is
claimed
as
an
interest
deduction should have been paid
or accrued within the year. The
term indebtedness has been
defined as an unconditional and
legally enforceable obligation for
the payment of money. Within
the meaning of that definition, a
tax may be considered as an
indebtedness. Hence, interest
paid for late payment of the
donors tax is deductible from
gross income. [Commissioner
v. Prieto, 109 Phil 592]

TAXES
What taxes are deductible?

As a general rule, all taxes,

national or local, paid or incurred
with
the
taxable
year
in
connection with the taxpayers
trade, business or profession are
deductible from gross income.

Taxes means taxes proper and,

therefore, no deductions are
allowed for amounts representing
interest, surcharges and fines or
penalties incident to delinquency.

Tax subsequently
credited

refunded

or

Taxes previously allowed as

deductions, when refunded or
credited, shall be included as
part of gross income in the year
of receipt to the extent of the
income tax benefit of said
deduction.

Limitations on deductions for nonresident alien engaged in trade or

business and resident foreign
corporation

In the case of a non-resident

alien individual engaged in trade
or business in the Philippines and
a resident foreign corporation,
deductions for taxes shall be
allowed only if and to the extent
that they are connected with
income from sources within the
Philippines.

Tax credit

Tax credit refers to the taxpayers

right to deduct from the income
tax due the amount of tax he has

41
paid to a foreign country subject
to limitations.

Tax deduction v. tax credit

In the former, the taxes are

deducted from the gross income
in computing the net income,
while in the latter, the taxes are
deducted from Philippine income
tax itself.
In the former, all taxes as a
general rule, are allowed as
deductions
with
some
exemptions (enumerated above),
while in the latter, only foreign
income taxes may be claimed as
credits against Philippine income
tax.

Limitations on credit

The amount of the credit taken

shall be subject to each of the
following limitations:

1.

The amount of the credit in

respect to the tax paid or
incurred to any country shall not
exceed the same proportion of
the tax against which such credit
is taken, which the taxpayers
taxable income from sources
within such country bears to his
entire taxable income for the
same taxable year; and

2.

The total amount of the credit

shall not exceed the same
proportion of the tax against
which such credit is taken, which
the taxpayers taxable income
from
sources
without
the
Philippines taxable under this
Title bears to his entire taxable
income for the same taxable
year.

Proof of credits

The credits shall be allowed only

if the taxpayer establishes to the
satisfaction of the Commissioner
the following:
1.

The
total
amount
of
income
from
sources
without the Philippines;

2.

The amount of income

derived from each country,
the tax paid or incurred to
which is claimed as a
credit; and

3.

All
other
necessary
verification
computation
credits.

information
for
the
and
of
such

LOSSES
Losses

The term implies an unintentional

parting with something of value.

It is used in the income tax law in

a
very
broad
sense
to
comprehend all losses which are
not general or natural to the
ordinary course of business.

Credit against tax for taxes of

foreign countries

Credit may be claimed by a

citizen, domestic corporation,
members of general professional
partnerships, and beneficiaries of
estates and trusts.

An alien individual and a foreign

corporation are not allowed to
claim credits against the tax for
taxes of foreign countries.

Requisites for deductibility of loss

1.

The loss must be incurred in the

trade, business or profession of
the taxpayer.

42
2.

It must be actually sustained and

charged off within the taxable
year.

3.

It must be evidenced by a closed

and completed transaction.

4.

It must not be compensated for

by insurance or other forms of
indemnity.

5.

If it is a casualty loss, the

taxpayer has filed a sworn
declaration of loss within 45 days
after the date of the discovery of
the casualty or robbery, theft, or
embezzlement.

Some recognized losses

Securities becoming worthless

1.

Securities
become
worthless
during the taxable year

2.

Securities are capital assets

3.

Losses are considered as losses

from the sale or exchange, on the
last day of such taxable year, of
capital assets

Net operating loss

1.

Ordinary losses/business losses

2.

Casualty losses

3.

Capital losses

4.

Securities becoming worthless

5.

Losses from wash sales or stock

or securities

6.

Wagering losses

7.

Abandonment losses

Loss arises from fires, storms,

shipwreck, or other casualties, or
from
robbery,
theft
or
embezzlement.
rule

for

capital

loss

carry-over

NOLCO shall be carried over as a

deduction from the gross income
for the next three (3) consecutive
taxable
years
immediately
following the year of loss.

Such loss shall be allowed as a

deduction if it had not been
previously offset as deduction
from gross income.

However, any net loss incurred in

a taxable year during which the
taxpayer
was exempt
from
income tax shall not be allowed
as a deduction.

NOLCO shall be allowed only if

there has been no substantial
change in the ownership of the
business or enterprise.

There is no substantial change

when:

Casualty loss

Loss limitation
losses

It means the excess of allowable

deduction over gross income of
the business in a taxable year.

Net
operating
(NOLCO)

Note: Capital losses and securities

becoming
worthless
are
governed by rules on loss from
the sale or exchange of capital
assets.

Losses from sales or exchanges

of capital assets shall be allowed
only to the extent of the gains
from such sales or exchanges.

43
1.

2.

Not less than 75% in

nominal
value
of
outstanding issued shares,
if the business is in the
name of a corporation, is
held by or on behalf of the
same persons; or

Not less than 75% of the

paid up capital of the
corporation, if the business
is in the name of a
corporation, is held by or
on behalf of the same
persons.

Losses from wash sales of stock or

securities

undertaken is partially or wholly

abandoned,
all
accumulated
exploration and development
expenditures pertaining thereto
shall be allowed as a deduction.

No deduction for loss shall be

allowed for wash sales unless the
claim is made by a dealer in
stock or securities and with
respect to a transaction made in
the ordinary course of the
business of such dealer.

In case a producing well is

subsequently abandoned, the
unamortized costs thereof, as
well as the undepreciated costs
of
equipment directly
used
therein, shall be allowed as a
deduction in the year such well,
equipment
or
facilitiy
is
abandoned by the contractor.

BAD DEBTS
Bad Debts

Bad debts are debts due to the

taxpayer which are actually
ascertained to be worthless and
charged off within the taxable
year.

Wash sale

Requisites for deductibility of bad

debts

1.

There must be
subsisting debt.

2.

The debt must be actually

ascertained to be worthless and
uncollectible during the taxable
year.

3.

The debt must be charged off

during the taxable year.

4.

The debt must be connected with

the trade, business or profession
of
the
taxpayer,
and
not
sustained
in
a
transaction
entered into between related
taxpayers.

A wash sale occurs where it

appears that within a period
beginning thirty (30) days before
the date of the sale or disposition
of shares of stock or securities
and ending thirty (30) days after
such date, the taxpayer has
acquired
(by
purchase
or
exchange) or has entered into a
contract or option to so acquire,
substantially identical stock or
securities.

Wagering losses

Losses from wagering shall be

allowed only to the extent of
gains from such transactions.

Abandonment losses

In the event a contract area

where petroleum operations are

valid

and

Diligent eforts to collect

In addition to the four requisites,

the taxpayer must show that the

44
debt is indeed uncollectible even
in the future.

Furthermore, there are steps

outlined to be undertaken by the
taxpayer to prove that he exerted
diligent efforts to collect the
debts,
via:
a)
sending
of
statement
of
accounts;
b)
sending of collection letters; c)
giving the account to a lawyer for
collection; and d) filing a
collection
case
in
court.
[Philippine Refining Co. v.
Court of Appeals, 256 SCRA
667]

and allowed. [Basilan v. CIR, 21

SCRA 17]
Depreciation is a question of fact

Depreciation is a question of fact

and
is
not
measured
by
theoretical yardstick, but should
be determined by a consideration
of actual facts. [Limpan v. CIR,
17 SCRA 703]

Requisites for
depreciation

deductibility

of

1.

The allowance for depreciation

must be reasonable.

2.

It must be for property used in

the trade, business or profession.

3.

It must be charged off during the

taxable year.

4.

A statement on the allowance

must be attached to the return.

Equitable doctrine of tax benefit

This doctrine holds that a

recovery of bad debt previously
deducted from gross income
constitutes taxable income if in
the year the account was written
off, the deduction resulted in a
tax benefit, that is, in the
reduction of taxable income of
the taxpayer.

Deduction for obsolescence

DEPRECIATION
Depreciation

Depreciation is the gradual

diminution in the useful value of
tangible property used in trade,
business or profession resulting
form exhaustion, wear and tear,
and obsolescence.

The term is also applied

amortization of the value
intangible assets, the use
which in trade or business
definitely limited in duration.

to
of
of
is

The income tax law does not

authorize the depreciation of an
asset beyond its acquisition cost.
Hence, a deduction over and
above the cost cannot be claimed

If the whole or any portion of

physical property is clearly shown
by the taxpayer as being affected
by economic conditions that will
result in its being abandoned at a
future date prior to the end of its
natural life, so that depreciation
deductions
alone
would
be
insufficient to return the cost at
the end of its economic terms of
usefulness,
a
reasonable
deduction for obsolescence, in
addition to depreciation, may be
allowed.

Property held for life

In the 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

45
owner of the property and shall
be allowed to the life tenant.

depreciation
rate
for
any
depreciable asset and claimed
the depreciation expenses as
deduction from his gross income
without any written objection on
the part of the Commissioner or
his
duly
authorized
representative,
the
aforesaid
useful life and depreciation rate
so adopted by the taxpayer shall
be considered binding.

In case of property held in trust

Allowable deductions shall be

apportioned between the income
beneficiaries and the 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.

Certain methods
depreciation

in

Depreciation of patent or copyright

In computing a depreciation
allowance in the case of a patent
or copyright, the capital sum to
be replaced is the cost or other
basis of the patent or copyright.

The
allowance
should
be
computed by an apportionment
of the cost or other basis of the
patent or copyright over the life
of the patent or copyright since
its grant, or since its acquisition
by the taxpayer, or since March
1, 1913, as the case may be.

computing

1.

The straight line method

2.

Declining balance method

3.

Sum-of-the-year-digit method.

4.

Any other method which may be

prescribed by the Secretary of
Finance upon recommendation of
the Commissioner.

Agreement as to useful life on

which depreciation rate is based

DEPLETION OF OIL AND GAS WELLS AND

Depletion of Oil and Gas Wells and

Mines

Where 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.
Where the taxpayer has
adopted such useful life and

MINES

Depletion is the exhaustion of

natural resources like mines and
oil and gas wells as a result of
production or severance from
such mines or wells.

Determination
depletion cost

of

amount

of

In determining the amount of

depletion cost allowable, the
following
three
factors
are
essential, namely:
1.

the basis of the property;

46

2.

the
estimated
total
recoverable units in the
property; and

3.

the
number
of
units
recovered
during
the
taxable year in question.
[Consolidated Mines v.
CTA, 58 SCRA 618]

Basis means the amount of the

taxpayers capital or investment
in the property which he is
entitled to recover tax-free
during the period he is removing
the mineral in the deposit.

Intangible
operations

cost

in

petroleum

This 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.

1.

Ordinary or those which are

subject to limitations as to the
amount deductible from gross
income.

2.

Special or those which are

deductible in full from gross
income.

Requisite
for
deductibility
charitable contributions

The contribution must actually be

paid or made to the Philippine
government or any political subdivision
thereof or to any of the domestic
corporations or associations specified
by the NIRC.
2.

No part of the net income of the

beneficiary must inure to the
benefit of any private stockholder
or individual.

3.

It must be made
taxable year.

4.

It must not exceed 10% in the

case of an individual and 5% in
the case of a corporation of the
taxpayers
taxable
income
(except where the donation is
deductible
in
full)
to
be
determined without the benefit of
the contribution.

5.

It
must
be
evidenced
adequate records or receipts.

Depletion v. depreciation

Both are predicated on the same

basic premise of avoiding a tax
on capital.

However, depletion is based

upon
the
concept
of
the
exhaustion of a natural resource
whereas depreciation is based
upon
the
concept
of
the
exhaustion of the property, not
otherwise a natural resource,
used in a trade or business or
held for the production of
income.
Thus, depletion and
depreciation are made applicable
to different types of assets.

CHARITABLE AND OTHER CONTRIBUTIONS

Kinds of Charitable Contributions

of

within

the

by

Contributions deductible in full

Donations to the Philippine
government or to any of its political
subdivisions according to a national
priority plan determined by NEDA.
2.

Donations to foreign institutions

or international organizations
which are fully deductible in
pursuance of or in compliance
with agreements, treaties or
commitments entered into by the

47
Philippines or in pursuance of
special laws.
3.

Donation to accredited nongovernmental organization.

Utilization

1.

Any amount in cash or kind

(including
administrative
expenses) paid or utilized to
accomplish one or more purposes
for which the accredited nongovernmental organization was
created or organized.

2.

Any amount paid to acquire an

asset used (or held for use)
directly in carrying out one or
more purposes for which the
accredited
non-governmental
organization was created or
organized.

Non-government organization

It means a non-profit domestic

corporation:
1.

2.

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, no
part of the net income of
which inures to the benefit
of any private individual.
Utilizes the contribution
directly for the active
conduct of the activities
constituting the purpose or
function for which it is
organized and operated
not later than the 15th day
of the their month after
the close of the accredited
NGOs taxable year in
which
the
contribution
were received.

3.

Administrative
expense
shall, in no case, exceed
thirty percent (30%) of the
total expenses.

4.

The assets, in the event of

dissolution,
would
be
distributed to another nonprofit domestic corporation
organized
for
similar
purpose, or to the State for
public purpose, or would
be distributed by a court to
another organization.

Utilization means:

Proof of deductions

Contributions or gifts
shall be allowable as deductions
only if verified under the rules
and regulations prescribed by the
Secretary of Finance.

RESEARCH AND DEVELOPMENT

Research and development

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.

Amortization of certain research

and development expenditures

Taxpayer may also elect to treat

the
following
research
and

48
development expenditures
deferred expenses:

as

3.

It must be
employer.

1. Paid or incurred by the

taxpayer in connection
with his trade, business or
profession;

4.

The amount contributed must no

longer be subject to the control
or disposition of the employer.

5.

The payment has not yet been

allowed as a deduction.

6.

The deduction is apportioned in

equal parts over a period of ten
(10) consecutive years beginning
with the year in which the
transfer or payment is made.

2.

Not treated as expenses;

and

3.

Chargeable
to
capital
account
but
not
chargeable to property of a
character which is subject
to
depreciation
or
depletion.

Research
expenses
apply to:

and
development
deductions shall not

1.

Any
expenditure
for
the
acquisition or improvement of
land, or for the improvement of
property to be used in connection
with research and development
of a character which is subject to
depreciation or depletion.

2.

Any expenditure paid or incurred

for the purpose of ascertaining
the existence, location, extent or
quality of any deposit of ore or
other mineral, including oil or
gas.

PENSION TRUSTS
Requisites for deductibility
payments to pension trusts

of

1.

The
employer
must
have
established
a
pension
or
retirement plan to provide for the
payment of reasonable pensions
to his employees.

2.

The pension plan is reasonable

and actuarially sound.

ADDITIONAL

funded

by

REQUIREMENT
DEDUCTIBILITY OF CERTAIN PAYMENTS

the

FOR

Additional
requirement
for
deductibility of certain payments

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 a 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.

Limitations or ceilings on itemized

deductions

The Secretary of Finance may

prescribe limitations or ceilings
for
any
of
the
itemized
deductions from (1) to (10). This
can be done through rules and
regulations
issued
by
the
Secretary
upon
the
recommendation
of
the
Commissioner and after a public
hearing has been held for such
purpose.

The Secretary shall, for purposes

of determining such ceilings or

49
limitations, consider the following
factors:

2.

Additional exception

1.

3.

Premium payments on health

and/or hospitalization insurance

2.

Adequacy
of
the
prescribed limits on the
actual
expenditure
requirements
of
each
particular industry; and
Effects of inflation
expenditure levels.

on

Personal exemptions

OPTIONAL STANDARD DEDUCTION

Optional Standard Deduction

An individual subject to tax,

other than a non-resident alien,
may elect a standard deduction
in an amount not exceeding ten
percent (10%) of his gross
income in lieu of itemized
deductions.
Unless the taxpayer signifies in
his return his intention to elect
the optional standard deduction,
he shall be considered as having
availed himself of the itemized
deductions.
Such election when made in the
return shall be irrevocable for the
taxable year for which the return
is made.
An individual who is entitled to
and claimed for the optional
standard deduction shall not be
required to submit with his tax
return such financial statements
otherwise required in the NIRC.

DEDUCTIONS

ALLOWED
INDIVIDUAL TAXPAYERS

ONLY

TO

Deductions
allowed
individual taxpayers

only

to

1.

Personal exemption

Personal exemptions are arbitrary

amounts allowed, in the nature of
a deduction from taxable income,
for personal, living or family
expenses
of
an
individual
taxpayer. They are considered to
be
the
equivalent
of
the
minimum of subsistence of the
taxpayer.

Who
are
exceptions?

allowed

personal

1.

Citizens

2.

Resident aliens

3.

Non-resident aliens engaged in

trade
or
business
in
the
Philippines
under
certain
conditions

4.

Estates and trusts, which are

treated for purposes of personal
exemptions, as a single individual

Amount of personal exemptions

allowed to citizens and resident
aliens

P20,000

single
person or a
married
person
judicially
decreed
as
legally
separated
from his or
her
spouse
with
no
qualified
dependents

50

P25,000
family

head

P32,000
person

married

of

To be a head of a family,
one
or
more
legitimate,
recognized natural, or legally
adopted children must live with
and depend on an unmarried or
legally separated man or woman.

A dependent, on the other

hand, may be a legitimate,
illegitimate
or
legally
adopted child.

Note: Only the spouse deriving taxable

income can claim the P32,000
personal exemption; if both have
taxable income, each can claim
P32,000 exemption.

Both, however, define or

qualify different terms.

Head of the family

It means an unmarried or legally

separated man or woman with
one or both parents, or with one
or more brothers or sisters, or
with one or more legitimate,
recognized natural or legally
adopted children living with and
dependent upon him or her for
their chief support.
Such brothers or sisters or
children should be not more than
21 years old, unmarried and not
gainfully employed, or where
such children, brothers or sisters,
regardless of age, are incapable
of self-support because of mental
or physical defect.
A head of 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.

Note: Consider discrepancy between

definition of head of family and
dependent i.e. children.

Living with

The term living with the person

giving
support
does
not
necessarily mean actual and
physical dwelling together at all
times
and
under
all
circumstances.

Family

The term family includes an

unmarried or legally separated
person with:
1.

one or both parents;

2.

one or more brothers or

sisters; or

3.

one or more legitimate,

recognized
natural,
or
legally adopted children
living with and dependent
upon him or her for their
chief support.

Additional exemption

A married person or a head of a

family may claim an additional
exemption of P8,000 for each
dependent, not exceeding four
(4).

The additional exemption shall be

claimed by only one of the

51

spouses in the case of married

individuals.

Non-resident
alien
individual
engaged in trade or business

In the case of legally separated

spouses, it may be claimed only
by the spouse who has custody
of the child or children.

Entitled
only
exemption

Amount allowed is limited to

exemptions granted to Filipino
citizens who are not residents in
the aliens domicile country
but not to exceed the amount
allowed to citizens or residents of
the Philippines in the NIRC.

Dependent

Refers only to the legitimate,

illegitimate or legally adopted
child of the taxpayer

The child is:

to

personal

1.

living with the taxpayer;

Premium payment on health and/or

hospitalization insurance of an
individual taxpayer

2.

chiefly dependent upon

the taxpayer for support;

3.

not more than 21 years of

age;

Premium payments should not

exceed P2,400 per family or P200
a month for a taxable year

Family has a gross income of not

more than P250,000 for the
taxable year

In the case of married taxpayers,

only the spouse claiming the
additional
exemption
for
dependents shall be entitled to
this deduction.

4.

not married; and

5.

not gainfully employed or,

even though over 21 years
old, incapable of self
support because of mental
or physical defect.

Change of status

Taxpayer
marries
or
additional dependents

Taxpayer dies during the taxable

year

have

If the spouse or any of the

dependents dies or if any of such
dependent marries, becomes 21
years old, or becomes gainfully
employed

Note: As a general rule, interpret in

favor of taxpayer
Personal
exemptions
resident alien individual

to

non-

ITEMS NOT DEDUCTIBLE

Items not deductible
1.

Personal,
expenses

2.

Capital expenditures
a.

living

or

family

Any amount paid out for

new
buildings
or
for
permanent improvements,
or betterments made to
increase the value of any
property or estate

52
b.

3.

Any amount expended in

restoring property or in
making
good
the
exhaustion
thereof
for
which an allowance is or
has been made

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, individually
or corporate, when the taxpayer
is
directly
or
indirectly
a
beneficiary under such policy
[Section 36, NIRC]

4.

Losses
between
taxpayers.

5.

Losses on wash sales

6.

Illegal
expense
i.e.
bribes,
kickbacks, and other similar
payments [Section 34(A)(1)(c),
NIRC]

5.

Expenses of the administration of

an estate such as court costs,
attorneys fees, and executors
commissions
are
chargeable
against the corpus of the
estate and are not allowable
deductions

6.

In
case
of
a
corporation,
expenses for organization, such
as incorporation fees, attorneys
fees and accountants charges
are
ordinarily
capital
expenditures, but where such
expenditures are limited to
purely incidental expenses, a
taxpayer may charge such items
against income in the year in
which they are incurred. [Section
120, Revenue Regulations 2]

related

Life or health insurance and other

non-life insurance premiums or
similar amounts in excess of what
the law allows

Capital expenditures
1.

Any amount paid out for new

buildings
or
for
permanent
improvements, or betterments
made to increase the value of
any property or estate

2.

Any
amount
expended
in
restoring property or in making
good the exhaustion thereof for
which an allowance is or has
been made

3.

Cost of defending or perfecting

title to property constitutes a
part of the cost of the property
and is not a deductible expense

4.

The
amount
expended
for
architects services is part of the
cost of the building

General rule: The cost of life or

health insurance and other nonlife insurance premiums borne by
the employer for his employee
shall be treated as taxable fringe
benefit.

Exceptions
1.

Contribution
of
the
employer for the benefit of
the employee pursuant to
the provisions of existing
law, i.e. SSS, GSIS, among
others.

2.

The cost of premiums

borne by the employer for
the group insurance of his
employees.
[Revenue
Regulations 3-98]

Related taxpayers
1.

Between members of a family

(which shall include only his

53
brothers and sisters,
ancestors
and
descendants)
2.

3.

spouse,
lineal

Between an individual and a

corporation more than 50% in
value of the outstanding stock of
which is owned, directly or
indirectly,
by
or
for
such
individual except in the case of
distributions in liquidation
Between two corporations more
than 50% in value of the
outstanding stock of each of
which is owned, directly or
indirectly by or for the same
individual

4.

Between the grantor and the

fiduciary of a trust

5.

Between the fiduciary of a trust

and the fiduciary of another trust
if the same person is a grantor
with respect to each trust

6.

2.

Property held by the taxpayer

primarily for sale to customers in
the ordinary course of his trade
or business.

3.

Property used in the trade or

business, of a character which is
subject to the allowance for
depreciation.

4.

Real property used in the trade or

business of the taxpayer.

Capital asset

1.
Payment
deductible.

of

interest

is

3.
Losses from sales or exchanges
of property are not deductible.

Ordinary income or gain includes

any gain from the sale or
exchange of property which is
not a capital asset.

Capital gain or income

not

Bad debts are not deductible.

Property held by the taxpayer,

whether or not connected with
his trade or business, which is
not an ordinary asset.

Ordinary gain or income

Between the fiduciary of a trust

and a beneficiary of such trust
[Section 36(B), NIRC]

Relevant points regarding related

taxpayers

2.

hand at the close of the taxable

year.

Capital gain or income is any

gain from the sale or exchange of
a capital asset.

Net capital gain

CAPITAL GAINS AND LOSSES

Net capital gain means the

excess of the gains from sales or
exchanges of capital assets over
the losses from such sales or
exchanges.

Net capital loss

Ordinary asset
1.

Stock in trade of the taxpayer or

other property of a kind which
would properly be included in the
inventory of the taxpayer if on

Net capital loss means the excess

of the losses from sales or
exchanges of capital assets over
the gains from such sales or
exchanges.

54
Three rules on the recognition of
capital gains and losses
1.

from the sale or exchange of a

capital asset held for not more
than 12 months.

Holding rule

2.

Loss limitation rule

Gains and losses from short sales,

etc.

3.

Net capital loss carry-over rule

Gains or losses from short sales

of property shall be considered
as gains or loses from sales or
exchanges of capital assets.

Gains or losses attributable to

the failure to exercise privileges
or options to buy or sell property
shall be considered as capital
gains or losses.

Note: The holding and net capital loss

carry-over rules apply only to
individual taxpayers and not to
corporate taxpayers.
Percentage taken into account or
holding rule

In the case of an individual

taxpayer, only the following
percentages of the gain or loss
recognized upon the sale or
exchange of a capital asset shall
be
taken
into
account
in
computing net capital gain, net
capital loss, and net income:
100% -

50%

if the capital asset

has been held for
not more than 12
months
if the capital asset
has been held for
more
than
12
months

General rule on the recognition of

gain or loss upon the sale or
exchange of property

The general rule is that the entire

amount of the gain or loss, as the
case may be, shall be recognized,
i.e. taxable or deductible.

Exceptions
1.

Transactions where gains

losses are not recognized
a.

Exchange
of
property
where
the
property
received
is
not
substantially different from
the property disposed of.
[Section 140, Reg. No. 2]

b.

Exchange
of
property
solely in kind in pursuance
of corporate mergers and
consolidations.

c.

Exchange by a person of
his property for stocks in a
corporation as a result of
which said person, alone
or together with others not
exceeding four persons,
gains
control
of
said
corporation.

Loss limitation rule

Losses from sales or exchanges

of capital assets shall be allowed
only to the extent of the gains
from such sales or exchanges.

Net capital loss carry-over

If any taxpayer, other than a

corporation, sustains in any
taxable year a net capital loss,
such loss (in an amount not in
excess of the net income for such
year) shall be treated in the
succeeding taxable year as a loss

and

55
2.

Transactions
where
gain
recognized but not the loss

services
is
involved,
the
applicable source rule may be
simply stated as follows: The
income is sourced in the place
where the service contracted for
is rendered.

is

a.

Transactions
between
related taxpayers

b.

Illegal transactions

Sources of taxation

c.

Exchanges of property, not

solely in kind, in pursuance
of corporate mergers and
consolidations

1.

Income from sources within the

Philippines

2.

Income from sources without the

Philippines

3.

Income from sources partly

within and partly without the
Philippines

Merger or consolidation

Merger or consolidation shall be

understood to mean the (a)
ordinary merger or consolidation
or (b) the acquisition by one
corporation of all or substantially
all the properties of another
corporation solely for stock.
Such merger or consolidation
must be undertaken for a bona
fide business purpose and not
solely for the purpose of escaping
the burden of taxation.

Gross income from sources within

the Philippines

The following items of gross

income shall be treated as gross
income from sources within the
Philippines:
1.

Interests
derived
from
sources
within
the
Philippines, and interests
on bonds, notes or other
interest-bearing
obligations of residents,
corporate or otherwise.

2.

Dividends received from a

domestic corporation and
from a foreign corporation,
unless less than 50% of
the gross income of such
foreign corporation for the
three-year period ending
with the close of its
taxable year preceding the
declaration
of
such
dividends
was
derived
from sources within the
Philippines.

3.

Compensation for labor or

personal
services

SOURCES OF TAXATION
Source of income

The term source of income is

not a place but the property,
activity or service that produces
the income. [Commissioner v.
BOAC]

Dissent of Justice Feliciano

Commissioner v BOAC

in

The source of income relates not

to the physical sourcing of a flow
of money or the physical situs of
payment but rather to the
property, activity or service
which produced the income.
Where a contract for rendition of

56
performed
Philippines.
4.

in

the

Rentals and royalties from

property located in the
Philippines.

5.

Gains, profits and income

from the sale of real
property located in the
Philippines.

6.

Gains, profits and income

from the sale of personal
property if sold within the
Philippines. [Section 42(A),
NIRC]

Interest income

The residence of the obligor who

pays the interest, rather than the
physical
location
of
the
securities, bonds or notes or the
place
of
payment,
is
the
determining factor of the source
of interest income. [National
Development Corporation v.
Commissioner, 151 SCRA 472]

Gross income from sources without

the Philippines

Just the exact opposite of the

items of gross income from
sources within the Philippines.
[Section 42(B), NIRC]

Purchase
property

Gains, profits and income from

the sale of personal property
produced by the taxpayer within
and sold without the Philippines,
or produced by the taxpayer
without and sold within the
Philippines shall be treated as
derived partly from sources
within and partly from sources
without the Philippines. [Section
42(E), NIRC]

sale

of

personal

Gains, profits and income derived

from the purchase of personal
property within and its sale
without the Philippines, or from
the
purchase
of
personal
property without and its sale
within the Philippines shall be
treated as derived entirely from
sources within the country in
which sold. [Section 42(E), NIRC]

Gain from sale of shares of stock of

a domestic corporation

Gain from the sale of shares of

stock in a domestic corporation
shall be treated as derived
entirely from sources within the
Philippines regardless of where
the said shares are sold.

The transfer by a non-resident

alien or a foreign corporation to
anyone of any share of stock
issued by a domestic corporation
shall not be effected or made in
its book unless:
1.

The transferor has filed

with the Commissioner a
bond conditioned upon the
future payment by him of
any income tax that may
be due on the gains
derived from such transfer;
or

2.

The
Commissioner has
certified that the taxes, if
any, imposed and due on
the gain realized from such
sale or transfer have been
paid. [Section 42(E), NIRC]

Income from sources partly within

and partly without the Philippines

or

ACCOUNTING PERIODS AND METHODS OF

ACCOUNTING

57
Methods of accounting

General Rule: The taxable

income shall be computed upon
the basis of the taxpayers
annual accounting period in
accordance with the method of
accounting regularly employed in
keeping the books of such
taxpayer.

If the taxpayer does not keep

books

2.

If the taxpayer is an individual

When Commissioner is authorized

to terminate taxable period
1.

When a taxpayer retires from

business subject to tax

Exception: Computations shall

be made in accordance with such
method as in the opinion of the
Commissioner clearly reflects the
income:

2.

When he intends to leave the

Philippines

3.

When he removes his property

from the Philippines

a.

4.

When he hides or conceals his

property

5.

When he performs any act

tending
to
obstruct
the
proceedings for the collection of
the tax for the past or current
quarter or year

6.

When he renders the collection of

the
tax
totally
or
partly
ineffective

b.

If no such method of
accounting has been so
employed; or
If the method employed
does not clearly reflect the
income. [Section 43, NIRC]

Taxable year

3.

Taxable year means the calendar

year, or the fiscal year ending
during such calendar year, upon
the basis of which the net income
is computed.

Methods of accounting
1.

Accounting periods
1.

Calendar year December 31

2.

Fiscal year an accounting

period of twelve (12) months
ending on the last day of any
month other than December.

When

calendar

Income, profits and gains

earned by taxpayer are not
included in gross income until
received.

January 1 to

year

used?

1.

If the taxpayer
calendar year

chooses

the

2.

If the taxpayer has no annual

accounting period

Cash Basis

Expenses are not deducted

until paid within the taxable year.
2.

Accrual Method
Income, gains and profits
are included in the gross income
when earned, whether received
or not.

58
Expenses are allowed as
deductions
when
incurred,
although not yet paid.
3.

Mixed/Hybrid

Treatment of income from longterm contracts

Combination of the cash

and accrual method.
4.

Any other method which clearly

reflects the income

Cash
v.
accrual
accounting

method

of

Gains, profits and income are to

be included in the gross income
for the taxable year in which they
are received by the taxpayer,
unless they are included when
they accrue to him in accordance
with the approved method of
accounting followed by him.

Tax
accounting
accounting

construction contracts covering a

period in excess of one year.
[Section 48, NIRC]

v.

1.

Percentage of completion basis

2.

Completed contract basis

Note: Section 48 of the NIRC provides

that
Persons
whose
gross
income is derive in whole or in
part from such (long term)
contracts
shall
report
such
income upon the basis of
percentage of completion.
The return should be
accompanied
by
a
return
certificate
of
architects
or
engineers
showing
the
percentage of completion during
the taxable year of the entire
work
performed
under
the
contract.

financial

While taxable income is based on

the method of accounting used
by the taxpayer, it will always
differ from accounting income.
This is so because of a
fundamental difference in the
ends the two concepts serve.
Accounting attempts to match
cost against revenue. Tax law is
aimed at collecting revenue. It is
quick to treat an item as income,
slow to recognize deductions as
losses. Thus, tax law will not
recognized
deductions
for
contingent future losses except in
very limited situations.
Good
accounting, on the other hand,
requires
their
recognition.
[Consolidated Mines v. CTA,
58 SCRA 618]

Long-term contracts

Sales of
property

The term long term contracts

means building, installation or

in

personal

A person who regularly sells or

otherwise disposes of personal
property on the installment plan
may return as income therefrom
in
any
taxable
year
that
proportion of the installment
payments actually received in
that year, which the gross profit
realized or to be realized when
payment is completed, bears to
the total contract price. [Section
49, NIRC]

Treatment of sales of realty and

casual sales of personalty

These include:
1.

dealers

Casual sale or other casual

disposition
of
personal
property
(other
than

59
property included in the
inventory at the close of
the taxable year) for a
price exceeding P1000;
and
2.

2.

Sale or other disposition of

real property.

Treated either on installment

basis or deferred sales basis.

Installment basis - if the initial

payments do not exceed 25% of
the selling price.

value of such buildings or

improvements; or

Deferred sales basis if

the
initial payments exceed 25% of
the selling price [Section 49,
NIRC and Section 175, Revenue
Regulations 2]

Allocation
deductions

Initial payments

These include the payments

received in cash or property
other
than
evidences
of
indebtedness of the purchaser
during the taxable period in
which
the
sale
or
other
disposition is made.

The term initial payments

contemplates at least one other
payment in addition to the initial
payment. [Section 175, Revenue
Regulations 2]

Termination of leasehold

Lessor who acquires building or

improvements made by the
lessee after the termination of
the lease has two options in
reporting said income:
1.

Lessor may report as

income at the time when
such
buildings
or
improvements
are
completed the fair market

Lessor may spread over

the life of the lease the
estimated
depreciated
value of such buildings or
improvements
at
the
termination of the lease
and report as income for
each of the lease an
adequate
part
thereof.
[Section
49,
Revenue
Regulations 2]
of

income

and

In the case of two or more

organizations,
trades
or
businesses (whether or not
incorporated and whether or not
organized in the Philippines)
owned or controlled, directly or
indirectly, by the same interests,
the Commissioner is authorized
to
distribute,
apportion
or
allocate
gross
income
or
deductions between or among
such organization, trade or
business, if he determines that
such distribution, apportionment
or allocation is necessary in order
to prevent evasion of taxes or
clearly to reflect the income of
any such organization, trade or
business. [Section 50, NIRC]

RETURNS AND PAYMENT OF TAX

INDIVIDUAL INCOME TAX RETURNS
Who are required to file individual
returns?
1.

Every Filipino citizen residing in

the Philippines

2.

Every Filipino citizen residing

outside the Philippines, on his

60
income from sources within the
Philippines
3.

4.

Every alien residing in the

Philippines, on income derived
from
sources
within
the
Philippines
Every non-resident alien engaged
in trade or business or in the
exercise of a profession in the
Philippines

Who are not required

individual returns?
1.

to

file

An individual whose gross income

does not exceed his total
personal
and
additional
exemptions.
However, a Filipino citizen
and any alien individual engaged
in business or practice of
profession within the Philippines
shall file an income tax return,
regardless of the amount of gross
income.

3.

An individual whose sole income

has been subjected to a final
withholding tax.

4.

An individual who is exempt from

income tax pursuant to the NIRC
and other laws, general or
special.

Where to file
1.

Authorized agent bank

2.

Revenue District Officer

3.

Collection agent

4.

Duly authorized Treasurer of the

city or municipality in which such
person has his legal residence or
principal place of business in the
Philippines

5.

Office of the Commissioner if

there be no legal residence or
place
of
business
in
the
Philippines

When to file
2.

An individual with respect to pure

compensation income derived
from
sources
within
the
Philippines, the income tax on
which
has
been
correctly
withheld.

On or before April 15 of each

year covering income from the
preceding taxable year

Thirty (30) days from each

transaction
and
a
final
consolidated return on or before
April 15 covering all stock
transactions of the preceding
year in case of sale or exchange
of shares of stock not traded
through a local stock exchange

Thirty (30) days following each

sale or other disposition in case
of sale or disposition of real
property

However, an individual
deriving
compensation
concurrently from two or more
employees at any time during the
taxable year shall file an income
tax return.
Further,
an
individual
whose
pure
compensation
income derived from sources
within the Philippines exceeds
P60,000 shall also file an income
tax return.

Husband and wife

Married
individuals,
whether
citizens, resident or non-resident

61
aliens, who do not derive income
purely from compensation, shall
file a return for the taxable year
to include the income of both
spouses.

However, if it is impracticable for

the spouses to file one return,
each spouse may file a separate
return of income but the returns
so filed shall be consolidated by
the
BIR
for
purposes
of
verification for the taxable year.

Return of parent to include income

of children

The income of unmarried minors

derived from property received
from a living parent shall be
included in the return of the
parent, except:

not
required
to
render
a
declaration of estimate income
tax.
Self-employment income

Self employment income consists

of the earnings derived by the
individual from the practice of
profession or conduct of trade or
business carried on by him as a
sole
proprietor
or
by
a
partnership of which he is a
member.

Return and payment of estimate

income tax by individuals

The amount of estimated income

shall be paid in four (4)
installments.

Estimated tax
1.
When the donors tax has
been paid on such property; or

Estimated tax means the amount

which the individual declared as
income tax in his final adjusted
and annual income tax return for
the preceding taxable year minus
the sum of the credits allowed
against the said tax.

If, during the current taxable

year, the taxpayer reasonably
expects to pay a bigger income
tax, he shall file an amended
declaration during any interval of
installment payment dates.

2.
When the transfer of such
property is exempt from donors
tax.
SELF-EMPLOYED INDIVIDUALS
Declaration
individuals

of

income

tax

for

Every
individual
subject
to
income tax, who is receiving selfemployment income, whether it
constitutes the sole source of his
income or in combination with
salaries, wages and other fixed or
determinable income, shall make
and file a declaration of his
estimated income for the current
taxable year on or before April 15
of the same taxable year.
Non-resident Filipino citizens with
respect to income from without
the Philippines and non-resident
aliens not engaged in trade or
business in the Philippines are

CORPORATE RETURNS
Corporation returns

Every corporation subject to

income
tax,
except
foreign
corporations not engaged in
trade
or
business
in
the
Philippines, shall render, in
duplicate, a true and accurate:
1.

Quarterly
return; and

income

tax

62
2.

Final or adjustment return.

The return shall be filed by the

president, vice president or other
principal officer, and shall be
sworn to by such officer and by
the
treasurer
or
assistant
treasurer.

Every corporation liable for tax

shall file a final adjustment return
covering the total taxable income
for the preceding calendar or
fiscal year.

If the sum of the quarterly tax

payments made during the said
taxable year is not equal to the
total tax due on the entire
taxable income of that year, the
corporation shall either:

A corporation may employ either

the calendar year or fiscal year
as basis for filing its annual
income tax return.
Every corporation deriving capital
gains from the sale or exchange
of shares of stock not traded
through a local stock exchange
shall file a return within thirty
(30) days after each transaction
and a final consolidated return of
all
transactions
during
the
taxable year on or before the
fifteenth (15th) day of the fourth
month following the close of the
taxable year.

Every corporation shall file in

duplicate a quarterly summary
declaration of its gross income
and deductions on a cumulative
basis for the preceding quarter or
quarters upon which the income
tax shall be levied, collected and
paid.
The tax computed shall be
decreased by the amount of tax
previously paid or assessed
during the preceding quarters
and shall be paid not later than
sixty (60) days from the close of
each of the first three (3)
quarters of the taxable year,
whether calendar or fiscal year.

Final adjustment return

Pay the balance of tax still

due; or

2.

Carry over
credit; or

3.

Be credited or refunded
with the excess amount
paid, as the case may be.

the

excess

Carrying-over
or
crediting
excess to succeeding quarters

of

In case the corporation is entitled

to a tax credit or refund of the
excess
estimated
quarterly
income taxes paid, the excess
amount shown on its final
adjustment return may be carried
over and credited against the
estimated quarterly income tax
liabilities for the taxable quarters
of the succeeding taxable years.

But this is not automatic. Need to

apply for crediting of such excess
or tax credit to succeeding
quarters.

Declaration of quarterly corporate

income tax

1.

PAYMENT AND ASSESSMENT OF INCOME

TAX
Payment of tax, in general

The total amount of tax shall be

paid by the person subject
thereto at the time the return is
filed.

63
Installment payment

A
taxpayer, other
than
a
corporation, may opt to pay the
tax in two equal installments
when the tax due is in excess of
two thousand pesos (P2,000).

In
such
cases,
the
first
installment shall be paid at the
time the return is filed and the
second installment on or before
July 15 following the close of the
calendar year.

However,
the
amount so shown on the
return shall be increased
by the amount previously
assessed
(or
collected
without assessment) as a
deficiency, and decreased
by the amount previously
abated, credited, returned
or otherwise repaid in
respect of such tax; or
2.

Payment of capital gains tax

It shall be paid on the date the

return prescribed therefor is filed
by the person liable thereto.

In case the taxpayer elects and is

qualified to report the gain by
installments, the tax due from
each installment payment shall
be paid within thirty (30) days
from
the
receipt
of
such
payments.

Assessment
and
deficiency tax

payment

The tax or deficiency income tax

so discovered shall be paid upon
notice and demand from the
Commissioner.

Deficiency

The term deficiency means:

1.

However,
such
amounts
previously
assessed
or
collected
without assessment shall
first be decreased by the
amounts
previously
abated, credited, returned
or otherwise repaid in
respect of such tax.

of

After the return is filed, the

Commissioner shall examine it
and assess the correct amount of
tax.

The amount by which the

tax imposed by this Title
exceeds
the
amount
shown as the tax by the
taxpayer upon his return.

If no amount is shown as
the tax by the taxpayer
upon his return, or if no
return is made by the
taxpayer, then the amount
by which the tax exceeds
the amounts previously
assessed
(or
collected
without assessment) as a
deficiency.

WITHHOLDING OF TAX AT SOURCE

Two kinds of withholding
1.
Withholding
certain incomes

of

final

tax

on

2.
Withholding of creditable tax at
source
Fund withheld held in trust by
withholding agent

The taxes deducted and withheld

by the withholding agent shall be
held as a special fund in trust for
the government until paid to the
collecting officers.

64

All taxes withheld pursuant to the

NIRC and its implementing rules
and regulations are hereby
considered trust funds and shall
be maintained in a separate
account and not commingled
with any other funds of the
withholding agent.

distributed to the beneficiaries or

accumulated.
Exception from taxation of estates
or trusts

ESTATES AND TRUSTS

Taxation of estates and trusts

Income
tax
imposed
upon
individuals shall also apply to the
income of estates or of any kind
of property held in trust.

The tax shall be computed upon

taxable income of the estate or
trust and shall be paid by the
fiduciary.

What are the income of the estates

or trusts which are included for
taxation?
1.

2.

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.
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

Employees trust which forms

part of a pension, stock bonus or
profit-sharing
plan
of
an
employer for the benefit of some
or all of his employees shall be
exempt from income tax:
1.

If contributions are made

to the trust by such
employer, or employees,
or both, for the purpose of
distributing
to
such
employees the earnings
and the principal of the
fund accumulated by the
trust in accordance with
such plan; and

2.

If
under
the
trust
instrument,
it
is
impossible, at any time
prior to the satisfaction of
all liabilities with respect to
employees under the trust,
for any part of the corpus
or income to be used for or
diverted to purposes other
than for the exclusive
benefit of the employees.

However, any amount actually

distributed to any employee or
distributee shall be taxable to
him in the year in which so
distributed to the extent that it
exceeds the amount contributed
by such employee or distributee.

Taxable income of estates or trusts

The taxable income of the estate

or trust shall be computed in the
same manner and on the same
basis as in the case of an
individual.

65

However, there shall be allowed

as a deduction in computing the
taxable income of the estate or
trust the amount of the income of
the estate or trust for the taxable
year which is to be distributed
currently by the fiduciary to the
beneficiaries, and the amount of
the income collected by a
guardian of an infant which is to
be held or distributed as the
court may direct, but the amount
so allowed as a deduction shall
be included in computing the
taxable
income
of
the
beneficiaries, whether distributed
or not.
In the case of income received by
estates of deceased persons
during
the
period
of
administration or settlement of
the estate, and in the case of
income which, in the discretion of
the fiduciary, may be either
distributed to the beneficiary or
accumulated, there shall be
allowed
as
an
additional
deduction in computing the
taxable income of the estate or
trust the amount of the income of
the estate or trust for its taxable
year, which is properly paid or
credited during such year to any
legatee, heir or beneficiary, but
the amount so allowed as a
deduction shall be included in
computing the taxable income of
the legatee, heir or beneficiary.
The deductions allowed above
shall not be allowed in case of a
trust administered in a foreign
country.

Exemption allowed to estates and

trusts

There shall be allowed an

exemption of twenty thousand

pesos (P20,000) from the income

of the estate or trust.
Fiduciary returns

Guardians, trustees, executors,

administrators,
receivers,
conservators and all persons or
corporations
acting
in
any
fiduciary capacity shall render a
return of the income of the
persons, trust or estate for whom
or which they act, and be subject
to all the provisions of this Title,
which apply to individuals in case
such person, estate or trust has a
gross income of twenty thousand
pesos (P20,000) or over during
the taxable year.

Such fiduciary or person filing the

return for him or it, shall take
oath that he has sufficient
knowledge of the affairs of such
person, trust or estate to enable
him to make such return and that
the same is, to the best of his
knowledge and belief, true and
correct, and be subject to all the
provisions of this Title which
apply to individuals.

Fiduciaries
indemnified
claims for taxes paid

against

Trustees,
executors,
administrators
and
other
fiduciaries
are
indemnified
against the claims or demands of
every
beneficiary
for
all
payments of taxes which they
shall be required to make under
the provisions of this Title, and
they shall have credit for the
amount
of
such
payments
against
the
beneficiary
or
principal in any accounting which
they make as such trustees or
other fiduciaries.