f)

I.

Taxes may be levied to promote

science and invention (see RA. No.
5448) or to finance educational
activities (see RA. No. 5447) or to
improve the efficiency of local
police forces in the maintenance of
peace and order through grant of
subsidy (see RA.No. 6141.).
g) Taxation may be made as an
implement of the police power to
promote the general welfare.

General Principles of Taxation

A. Definition and Concept of Taxation
Taxation- is a mode by which
governments make exactions for
revenue in order to support their
existence and carry out their legitimate
objectives.
Taxes- are
enforced
proportional
contributions
from
persons
and
property levied by the law-making body
of the State by virtue of its sovereignty
for the support of the government and
all public needs.
B. Nature of the Power of Taxation
inherent in sovereignty
essentially a legislative function
subject to constitutional and
inherent limitations
C. Characteristics of Taxation
1.
2.

3.

4.
5.
6.

enforced contribution
generally payable in the form of
money, although the law may
provide payment in kind
levied by the State which has
jurisdiction or control over the
subject to be taxed.
levied by the law-making body of
the State
levied for public purpose
most taxes that they are commonly
required to be paid at regular
periods or intervals

D. Power of Taxation Compared With

Other Powers
E. Purpose of Taxation
1.
2.

Revenue-raising
Non-revenue/special or regulatory
a) Taxation can strengthen anemic
enterprises or provide incentive to
greater production.
b) Taxes on imports may be increased
to protect local industries.
c) Taxes on imported goods may also
be used as a bargaining tool.
d) Taxes may be used to control
spending power and inflation.
e) Taxes may be levied to reduce
inequalities in wealth and incomes.

F.

Principles of Sound Tax System

(1) Fiscal Adequacy - the sources

(proceeds) of tax revenue should
coincide with, and approximate the
needs of, government expenditures.
(2) Administrative Feasibility - Tax laws
should be capable of convenient, just
and effective administration.
(3) Theoretical Justice or Equality - The tax
burden should be in proportion to the
taxpayers ability to pay.
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent that specific
constitutional limitations are violated. (De Leon)
G. Theory and Basis of Taxation
Lifeblood Theory
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda]
Necessity Theory
The power of taxation proceeds upon theory
that the existence of government is a necessity;
that is cannot continue without means to pay its
expenses; and that for those means it has the
right to compel all citizens and property within
its limits to contribute.
Benefits-Protection
Theory
(Symbiotic
Relationship)
This principle serves as the basis of taxation and
is founded on the reciprocal duties of protection
and support between the State and its
inhabitants. Also called symbiotic relation
between the State and its citizens.
Jurisdiction over subject and objects
The limited powers of sovereignty are confined
to objects within the respective spheres of
governmental control. These objects are the

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

proper subjects or objects of taxation and none
else.
H. Doctrines in Taxation
Prospectivity of tax laws
General rule: Tax laws are prospective in
operation.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or clearly the
legislative intent.

(4) by the same State, Government, or taxing

authority;
(5) within the same territory, jurisdiction or
taxing district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.
Broad sense
Means taxing twice for the same tax period the
same thing or activity, when it should be taxed
once, for the same purpose and with the same
kind of character of tax.

Non-retroactivity of Rulings (Sec. 246)

Constitutionality of double taxation

There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional requirement
is not thereby violated, such as the requirement
that taxes must be uniform. [Villanueva v. City of
Iloilo (1968)]

General
rule:
IF
REVOCATION,
MODIFICATION OR REVERSAL WILL BE
PREJUDICIAL TO THE TAXPAYER Any
revocation, modification, or reversal of any of
the rules and regulations promulgated by the
Secretary of Finance and rulings and circulars
promulgated by the CIR shall NOT be given
retroactive effect.

Modes of eliminating double taxation

(1) Allowing reciprocal exemption either by
law or by treaty;
(2) Allowance of tax credit for foreign taxes
paid
(3) Allowance of deduction for foreign
taxes paid
(4) Reduction of Philippine tax rate.

Exceptions:
(1) Where
the
taxpayer
deliberately
misstates or omits material facts from
his return or any document required of
him by BIR;
(2) Where the facts subsequently gathered
by the BIR are materially different from
the facts on which the ruling is based;
OR
(3) Where the taxpayer acted in bad faith.

Escape from taxation

Exception to the exception: a tax law should not be

given retroactive application when it would be
so harsh and oppressive for in such case, the
constitutional limitation of due process would
be violated.

Imprescriptibility
Unless otherwise provided by the tax itself,
taxes are imprescriptible.
Double taxation
Strict sense
In order to constitute double taxation in the
strict sense or direct duplicate taxation:
(1) the same property must be taxed twice
when it should be taxed once;
(2) both taxes must be imposed on the same
property or subject matter;
(3) for the same purpose;

1. Shifting of tax burden

SHIFTING - is the transfer of the burden of a
tax by the original payer or the one on whom
the tax was assessed or imposed to someone
else. What is transferred is not the payment of
the tax but the burden of the tax.
2. Tax avoidance
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order to
avoid or reduce tax liability. It is politely called
tax minimization and is not punishable by
law.
3. Transformation
TRANSFORMATION method of escape in
taxation whereby the manufacturer or producer
upon whom the tax has been imposed, fearing
the loss of his market if he should add the tax to
the price, pays the tax and endeavors to recoup

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

himself by improving his process of production
thereby turning out his units of products at a
lower cost.
4. Tax evasion
TAX EVASION - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of a tax. It is also known as tax
dodging. It is punishable by law.
Elements of Tax Evasion
(1) The end to be achieved
(2) An accompanying state of mind
(3) A course of action (or failure of action)
which is unlawful
Exemption from taxation
Strictly construed against the taxpayer.
Nature of tax exemption
(1) Mere personal privilege.
(2) General
rule:
revocable
by
the
government.
Exception: It is founded on a contract
which is protected from impairment.
(3) Implies a waiver on the part of the
government of its right to collect taxes
due to it, and, in this sense, is prejudicial
thereto.
(4) Not necessarily discriminatory, provided it
has reasonable foundation or rational
basis.
(5) General rule: Strict construction against
taxpayer claiming exemption.
Exceptions:
(a) tax exemptions in favor of a political
subdivision or instrumentality of
the
government
(Maceda
v.
Macaraig),
or
of
charitable,
religious,
and
educational
institutions (De Leon).
(b) When the law itself expressly
provides for a liberal construction.
(c) Exemptions to traditional grantees,
such as those in favor of religious
and charitable institutions.
(d) Exemptions from certain taxes
granted under special circumstances
to special classes of persons. (Vitug
and Acosta)
Grounds for tax exemption
(1) It may be based on contract.

(2) It may be based on some ground of

public policy.
(3) It may be created in a treaty on grounds
of reciprocity or to lessen the rigors of
international or multiple taxation.
But: equity is NOT a ground for tax exemption.
Revocation of tax exemption
Generally revocable by the government.
Contractual tax exemptions, however, may not
be unilaterally so revoked by the taxing
authority without thereby violating the nonimpairment clause of the Constitution
Compensation and Set-off
General rule: Taxes cannot be the subject of setoff or compensation.
Reasons:
(1) This would adversely affect the
government revenue system.
(2) Government and the taxpayer are not
creditors and debtors of each other.
Exception: If the claims against the government
have been recognized and an amount has already
been appropriated for that purpose, set-off or
compensation may be had. Where both claims
have already become due and demandable as
well as fully liquidated, compensation takes
place by operation of law under Art. 1200 in
relation to Articles 1279 and 1290 of the NCC,
and both debts are extinguished to the
concurrent amount. [Domingo v. Garlitos]
Doctrine of Equitable Recoupment- a claim for
refund barred by prescription may be allowed to
offset unsettled tax liabilities. The doctrine
FINDS NO application in this jurisdiction.
(Collector v. UST).
Compromise
A contract whereby the parties, by making
reciprocal concessions avoid litigation or put an
end to one already commenced.
Tax amnesty
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it.
Scope and Limitation of Taxation
Inherent Limitations
1. Public Purpose

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

2. Inherently Legislative
Taxation may exceptionally be delegated,
subject to such well-settled limitations as
(1) not contravene any constitutional
provision or the inherent limitations of
taxation;
(2) effected either by the Constitution or by
validly enacted legislative measures or
statute; and
(3) The delegated levy power, except when
the delegation is by an express
provision of the Constitution itself,
should only be in favor of the local
legislative body of the local or
municipal
government
concerned.
[Vitug and Acosta]
Exceptions
(1) Delegation to local governments
(2) Delegation to the President to enter
into Executive agreements, and to ratify
treaties which grant tax exemption
subject to Senate concurrence. The
Congress may, by law, authorize the
President to fix within specified limits,
and subject to such limitations and
restrictions as it may impose, tariff rates,
import and export quotas, tonnage and
wharfage dues, and other duties or
imposts within the framework of the
national development program of the
Government.
(3) Delegation to administrative agencies Limited
to
the
administrative
implementation.
Note: Delegation to administrative
agencies is really not an exception to the
rule as no delegation of the strictly
legislative power to tax is involved.
3. Territorial
Situs of taxation refers to the place of taxation, or
the state or political unit which has jurisdiction
to impose tax over its inhabitants.
General Rule: The taxing of a country is limited
to persons and property within and subject to its
jurisdiction.
Reasons:
(1) Act of sovereignty could only be
exercised within a countrys territorial
limits.

(2) Taxes are paid for the protection and

services provided by the taxing
authority which could not be provided
outside the territorial boundaries of the
taxing State.
Exceptions:
(1) Where tax laws operate outside
territorial jurisdiction.
(2) Where tax laws do not operate within
the territorial jurisdiction of the State.
(3) When exempted by treaty obligations.
(4) When exempted by international
comity.
KIND
OF
TAX
Property Tax
Real property
Tangible
Personal
property
Intangible
personal
property

SITUS

Where it is located (lex rei

sitae)
Where
the
property
is
physically located although
the owner resides in another
jurisdiction.
Gen Rule: Domicile of the
owner. Mobilia sequuntur
personam (movables follow
the person)
Exceptions:
(1) When
property
has
acquired a business situs
in another jurisdiction;
or
(2) When the law provides
for the situs of the
subject of tax (i.e., Sec
104 NIRC)

Excise Tax
Income

Donors Tax

Estate

VAT
Others
Poll,
Capitation or
Community
Tax

Source
of
the
income,
nationality or residence of the
taxpayer (Sec 23 NIRC)
Location of the property;
nationality or residence of the
taxpayer
Location of the property;
nationality or residence of the
taxpayer
Where the transaction is made
Residence of the taxpayer,
regardless of the source of
income or location of the
property of the taxpayer

4. International Comity

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

Comity is the respect accorded by nations to
each other because they are sovereign equals.
Thus, the property or income of a foreign state
or government may not be the subject of
taxation by another state.
Reasons:
(1) Doctrine of Sovereign Equality
(2) Doctrine of Diplomatic Immunity from
Suit, so it is useless to impose a tax
which could not be collected.
(3) When a foreign sovereign enters the
territorial jurisdiction of another, it does
not subject itself to the jurisdiction of the
other.
5. Exemption of Government
Agencies, and Instrumentalities

Entities,

If the taxing authority is the National Government:

General Rule: The government is exempt from
tax.
Exception: When it chooses to tax itself.
If the taxing authority is the local government unit:
RA 7160 expressly prohibits LGUs from levying
tax on the National Government, its agencies
and instrumentalities and other LGUs.
Constitutional Limitations
1. Provisions Directly Affecting Taxation
a) Prohibition against imprisonment for
non-payment of poll tax
b) Uniformity and equality of taxation
c) Grant by Congress of authority to the
President to impose tariff rates
d) Prohibition against taxation of religious,
charitable entities, and educational
entities
Test
of
Exemption
Nature of Use

Scope
of
Exemption

Use of the property, and not

the ownership
Actual, direct and exclusive
use for religious, charitable or
educational purposes.
Real property taxes on facilities
which are
(1) actual,
(2) incidental to, or
(3) reasonably necessary for
the accomplishment of said
purposes. [Abra Valley College

v. Aquino]

e) Prohibition against taxation of nonstock, non-profit institutions

Art. VI, sec. 28, par. 3
Charitable institutions,
churches
and
parsonages or convents
appurtenant
thereto,
mosques,
non-profit
cemeteries, and all
lands, buildings, and
improvements, actually,
directly, and exclusively
used
for
religious,
charitable,
or
educational purposes.
Property taxes

f)

Art. XIV, sec. 4, par. 3

Non-stock, non-profit
educational
institutions.

Income,
property,
and donors taxes and
custom duties.

Majority vote of Congress for grant of

tax exemption
Note:
(1) The LGU shall have the
authority to grant local tax
exemption privileges. (Sec. 192,
LGC)
(2) The President of the Philippines
may, when public interest so
requires, condone or reduce
real property taxes and interest.
(Sec. 277, LGC)

g) Prohibition on use of tax levied for

special purpose
h) Presidents
veto
power
on
appropriation, revenue, tariff bills
i) Non-impairment of jurisdiction of the
Supreme Court
j) Grant of power to the local government
units to create its own sources of
revenue
k) Flexible tariff clause
l) Exemption from real property taxes
m) No appropriation or use of public
money for religious purposes
2. Provisions Indirectly Affecting Taxation
Due process
Due Process in Taxation requirements:
(1) Tax must be for public purpose

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

(2) It must be imposed within taxing
authoritys territorial jurisdiction
(3) Assessment or collection must not be
arbitrary or oppressive
Equal protection
All persons subject to legislation shall be treated
alike under similar circumstances and
conditions both in the privileges conferred and
liabilities imposed.
Religious freedom
The free exercise clause is the basis of tax
exemptions.
Non-impairment of obligations of contracts
The Contract Clause has never been thought as a
limitation on the exercise of the State's power of
taxation save only where a tax exemption has
been granted for a valid consideration. [Tolentino
v. Secretary of Finance]
I.

Stages of Taxation

(1)
(2)
(3)
(4)

Levy
Assessment and Collection
Payment
Refund

J.

Definition, Nature, and Characteristics

of Taxes

Toll
TAXES
Paid for the support of
the government
Demand
of
sovereignty
Generally, no limit on
the amount collected
as long as it is not
excessive,
unreasonable
or
confiscatory
Imposed only by the
government

License fee
TAXES
Imposed under the
taxing power of the
state for purposes of
revenue.
Forced contributions
for the purpose of
maintaining
government functions.
Generally, unlimited
as to amount

K. Requisites of a valid tax

(1) It should be for a public purpose
(2) The rule of taxation should be uniform
(3) That either the person or property taxed
be within the jurisdiction of the taxing
authority
(4) That the assessment and collection be in
consonance with the due process clause
(5) The tax must not infringe on the
inherent and constitutional limitations
of the power of taxation
L. Tax as distinguished from other forms
of exactions
Tariff
TAXES
All embracing term to
include various kinds
of
enforced
contributions
upon
persons
for
the
attainment of public
purposes

TARIFF
A kind of tax imposed
on articles which are
traded internationally

Imposed on persons,
property
and
to
exercise a privilege.
Failure to pay does not
necessarily make the
act or business illegal.

TOLL
Paid for the use of
anothers property.
Demand
of
proprietorship
Amount paid depends
upon the cost of
construction
or
maintenance of the
public improvement
used.
Imposed
by
the
government or by
private individuals or
entities.

LICENSE
AND
REGULATORY FEE
Levied
under
the
police power of the
state.
Exacted primarily to
regulate
certain
businesses
or
occupations.
Should
not
unreasonably exceed
the expenses of issuing
the license and of
supervision.
Imposed only on the
right to exercise a
privilege
Failure to pay makes
the act or business
illegal.

Penalty
for
nonpayment: surcharges
or
imprisonment
(except poll tax).

Note: Taxes may also be imposed for regulatory

purposes. It is called regulatory tax.
Special assessment
TAXES
Imposed regardless of
public improvements

SPECIAL
ASSESSMENT
Imposed because of an
increase in value of
land
benefited
by

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

public improvement.

Contribution
of
a
taxpayer
for
the
support
of
the
government.
It
has
general
application both as to
time and place.
Debt
TAXES
Based on laws

Generally cannot be
assigned
Generally
paid
in
money
Cannot be a subject of
set off
Non-payment
is
punished
by
imprisonment except in
poll tax
Governed
by
the
special
prescriptive
periods provided for
in the NIRC.
Does not draw interest
except only when
delinquent
Imposed
only
by
public authority

Levied only on land.

Contribution
of
a
person
for
the
construction
of
a
public improvement
Exceptional both as to
time and locality.

Can be a subject of set

off
No imprisonment in
case of non-payment
(Art. III, Sec. 20 1987
Constitution)
Governed
by
the
ordinary periods of
prescription.
Draws interest when it
is so stipulated or
where there is default.
Can be imposed by
private individual

(1) Personal, Poll or Capitation Tax

(2) Property Tax
(3) Privilege/Excise Tax
As to burden or incidence

(1) Specific Tax

(2) Ad Valorem Tax
(3) Mixed
As to purposes

(1) National
(2) Municipal or Local
As to graduation
(1) Proportional
(2) Progressive
(3) Digressive Tax Rate progressive rate
stops at a certain point. Progression
halts at a particular stage.
(4) Regressive the rate of which decreases
as the tax base or bracket increases.
There is no such tax in the Philippines.

May be paid in kind.

As to object

As to tax rates

As to scope or authority to impose

DEBT
Generally based on
contract, express or
implied.
Assignable

M. Kinds of Taxes

(1) Direct Taxes

(2) Indirect Taxes

(1) General Tax

(2) Special Tax

II. National Internal Revenue Code of 1997 as

amended (NIRC)
A.

Income Taxation
1.

Income Tax Systems

Global Tax System

All items of gross income, deductions, and
personal and additional exemptions, if any, are
reported in one income tax return, and one set of
tax rates are applied on the tax base.
Schedular Tax System
Different types of incomes are subject to
different sets of graduated or flat income tax
rates.
Semi-schedular or semi-global tax system
The compensation income, business or
professional income, capital gain and passive
income not subject to final tax, and other income
are added together to arrive at the gross income,
and after deducting the sum of allowable
deductions, the taxable income is subjected to
one set of graduated tax rates or normal
corporate income tax.
NOTE: The Philippines, under EO 37 (1986) and
RA 8424 (1998), follows a semi-schedular and
semi-global tax system.
2.

Features of the Philippine Income

Tax Law

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

11. tax
on
improperly
earnings of corporations

a)
b)
c)
d)

Direct tax
Progressive
Comprehensive
Semi-schedular or semi-global
tax system
e) Of American Origin
3.

Criteria in Imposing Philippine

Income Tax

a. Citizenship or Nationality Principle

A citizen of the Philippines is subject to
Philippine income tax
(a) on his worldwide income, if he resides in the
Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.

5.

Taxable Period
a) Calendar Period
b) Fiscal Period
c) Short Period

6.

Kinds of Taxpayers

Primary
Classification

Sub-Classification(s)
Citizens of
the
Philippines

b. Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but exempt from tax on his
income from sources outside the Philippines.

Aliens

c. Source of Income Principle

An alien is subject to Philippine income tax
because he derives income from sources within
the Philippines, despite the fact that he has not
set foot in the Philippines.
4.

Individuals

Types of Philippine Income Tax

1.
2.

graduated income tax on individuals

normal corporate income tax on
corporations
3. minimum corporate income tax on
corporations
4. special
income
tax
on
certain
corporations
5. capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
6. capital gains tax on sale or exchange of
real property classified as capital asset
7. final withholding tax on certain passive
investment income paid to residents
8. final withholding tax on income
payments made to non-residents
9. fringe benefits tax on fringe benefits of
supervisory or managerial employees
10. branch profit remittance tax

Special
Classes of
Individuals

Estates
Trusts

accumulated

Residents
of
the
Philippines
Not Residents of the
Philippines
Residents
of
the
Philippines
Engaged in
Trade
or
Business in
the
Not
Philippines
Residents
Not
of
the
Engaged in
Philippines
Trade
or
Business in
the
Philippines
Individual Employed by
Regional
or
Area
Headquarters
and
Regional
Operating
Headquarters
of
Multinational
Companies
Individual Employed by
Offshore Banking Units
Individual Employed by
a
foreign
service
contractor or by a
foreign
service
subcontractor engaged
in petroleum operations
in the Philippines
Minimum wage earner

and

Partnerships

General Business Partnership

General Professional Partnership

Coownerships
Corporations

Domestic Corporations
Resident
Foreign
Corporations
Corporations
Non-resident

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

Special Classes of
Corporations

Corporations
Proprietary
educational
institutions and
non-profit
hospitals
Domestic
Depositary Bank
(Foreign
Currency
Deposit Units)
Resident
international
carriers
Offshore
Banking Units
Resident
Depositary Bank
(Foreign
Currency
Deposit Units)
Regional or Area
Headquarters
and
Regional
Operating
Headquarters of
Multinational
Companies
Non-resident
cinematographic
film
owners,
lessors
or
distributors
Non-resident
owners
or
lessors of vessels
chartered
by
Philippine
nationals
Non-resident
lessors
of
aircraft,
machinery and
other equipment

Definition of Each Kind of Taxpayer

Taxpayer- any person subject to tax.
Person- means an individual, a trust, estate or
corporation.
I. Individual
a. Citizen
i. Resident
ii.
Non- (1) establishes to the satisfaction of

resident

the Commissioner the fact of his

physical presence abroad with a
definite intention to reside therein.
(2) leaves the Philippines during
the taxable year to reside abroad,
either as an immigrant or for
employment on a permanent basis.
(3) 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.

iii.
Overseas
Contract
Worker

(4) has been previously considered

as nonresident citizen and who
arrives in the Philippines at any
time during the taxable year to reside
permanently in the Philippines
shall likewise be treated as a
nonresident citizen for the taxable
year in which he arrives in the
Philippines with respect to his
income derived from sources
abroad until the date of his arrival
in the Philippines.
OCW refer to Filipino citizens
employed in foreign countries,
commonly referred to as OFWs,
who are physically present in a
foreign country as a consequence
of their employment thereat. Their
salaries and wages are paid by an
employer abroad and is not borne
by any entity or person in the
Philippines. To be considered as
an OCW or OFW, they
must be duly registered as such
with the Philippine Overseas
Employment
Administration
(POEA) with a valid Overseas
Employment Certificate (OEC).
Seafarers or seamen are Filipino
citizens who receive compensation
for services rendered abroad as a
member of the complement of a
vessel engaged exclusively in
international
trade.
To
be
considered as an OCW or OFW
they must be duly registered as
such with the Philippine Overseas
Employment
Administration
(POEA) with a valid Overseas
Employment Certificate (OEC)

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

with a valid SeafarersIdentification
Record Book (SIRB) or Seaman's
Book issued by the Maritime
Industry Authority (MARINA).
(Revenue Regulations No. 2-2011)
b. Aliens
i. Resident

ii.
Nonresident

for an aggregate
period of more
than one hundred
eighty (180) days
during
any
calendar
year.,
regardless
of
whether
he
actually engages
in
trade
or
business herein.

Individual whose residence is

within the Philippines and who is
not a citizen thereof.
Individual whose residence is not
within the Philippines and who is
not a citizen thereof.
(RR 2-1940)
- An alien actually present in the
Philippines who is not a mere
transient of sojourner is a
resident of the Philippines for
purposes of income tax,
Whether he is a transient or
not is determined by his
intentions with regard to the
length and nature of his stay.
- A mere floating intention
indefinite as to time to return to
another country is not sufficient
to constitute him a transient.
- One who comes to the
Philippines for a definite
purpose which in its nature
may
be
promptly
accomplished is a transient,
but if his purpose is of such a
nature that an extended stay
may be necessary for its
accomplishment, and to that
end the alien makes his home
temporarily in the Philippines,
he becomes a resident, though
it may be his intention at all
times to return to his domicile
abroad when the purpose for
which he came has been
consummated or abandoned.
Loss of residence by alien- An
intention to change his residence
does not change status; retains
status as resident until actual
abandonment of residence.
Engaged in A
nonresident
trade
or alien
individual
business
who shall come to
the
Philippines
and stay therein

Not engaged
in trade or
business
II. Corporate
a.
Created or organized under
Domestic
Philippine Laws
b. Foreign A corporation which is not
domestic
Resident
Engaged in trade
Foreign
or business within
the Philippines
Non- resident Not engaged in
Foreign
trade or business
within
the
Philippines

7.

Income Taxation

a. Definition
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the persons
income, emoluments, profits and the like
(Fisher v. Trinidad).
b. Nature
Income tax is generally classified 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.
c. General principles
Taxpayer
Resident Citizen
Non-resident Citizen and
OCW
Resident and Non-resident
Alien
Domestic Corporation
Foreign Corporation
8.

Income

Within

Without

10

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

a. Definition
All wealth which flows to the taxpayer other
than a mere return of capital
b. Nature
Income includes earnings, lawfully or unlawfully
acquired, without consensual recognition, express or
implied, of an obligation to repay and without
restriction as their disposition.

determines the inclusion of the amount in

gross income
b) Installment payment vis--vis Deferred
payment vis--vis Percentage completion (in
long term contracts)

Personal Property
Dealer in personal
property
who
regularly sells in
installment
plan:
Installment method

Dealer

c. When income is taxable

Existence of income
1. There is INCOME, gain or profit
2. RECEIVED or REALIZED during the
taxable year
3. NOT EXEMPT from income tax

*held as ordinary
asset; regardless of
amount of percentage
of initial payments

2) Realization of income
a) Tests of Realization
1. Realization Test
2. Claim of right doctrine Principle of
Constructive Receipt of Income
3. Economic benefit test
4. Severance test

Casual
Sale

Installment
Provided:
1.
2.

b) Actual vis--vis Constructive receipt

1. Actual receipt
2. Constructive receipt 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 it is so credited
or set apart, although not actually reduced
to possession.
3) Recognition of income
NOTE: Discussed below.
4) Methods of accounting
a) Cash method vis--vis Accrual method
Income received follows the cash basis of
accounting, where income is recognized when
realized and expenses are recognized when
paid.
Income realized pertains to the accrual basis of
accounting, when recognition of income in the
books is when it is realized and expenses are
recognized when incurred. It is the right to
receive and not the actual receipt that

method;

Selling price
exceeds
php1,000
Initial
payments do
not
exceed
25%
of
selling price

If either of 2 or both
conditions not met
Deferred
payment
method

Real Property
Installment
method;
Provided,
initial
payments do
not
exceed
25% of selling
price
If
exceeds
25%-Deferred
payment
method
Installment
method;
Provided,
initial
payments do
not
exceed
25% of selling
price
If
exceeds
25%-Deferred
payment
method

Percentage of completion
This method is applicable in the case of
a building, installation or construction
contract covering a period in excess of
one year whereby gross income derived
from such contract may be reported
upon the basis of percentage of
completion
d. Tests in determining whether income is
earned for tax purposes
9.

Gross Income

a. Definition

11

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

GROSS INCOME means all income derived
from whatever source

b. Concept of income from whatever source

derived
income derived from whatever source means
inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources (i.e. gambling, extortion, smuggling,
etc.).

it is for ordinary and necessary

travelling
and
representation
or
entertainment expenses paid or incurred
by the employee in the pursuit of the
employers
trade,
business
or
profession; and
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 pursuant to sec. 34
of the Tax Code)

c. Gross Income vis--vis Net Income vis--vis

Taxable Income

The excess of actual expenses over advances

made shall constitute taxable income if such
amount is not returned to the employer.

GROSS INCOME means all income derived

from whatever source

2) Fringe Benefits

Net income Means gross income less

deductions and/or personal and additional
exemptions (Sec. 31, NIRC)
d. Classification of Income as to Source
1.
2.
3.

Gross income and taxable income from

sources within the Philippines
Gross income and taxable income from
sources without the Philippines
Income partly within or partly without the
Philippines

a) Special treatment of fringe benefits

Persons liable
The Employer (as a withholding agent), whether
individual, professional partnership or a
corporation, regardless of whether the
corporation is taxable or not, or the government
and its instrumentalities
Basic Rule: Convenience of the Employer Rule

1) Compensation Income

Fringe benefit tax is imposed on fringe benefits

received by supervisory and managerial
employees. The fringe benefits of rank and file
employees are treated as part of his
compensation income subject to income tax and
withholding tax on compensation.

Income arising from an ER-EE relationship.

b) Definition

GENERAL
RULE:
Fixed
or
variable
transportation,
representation
or
other
allowances that are received by a public officer
or employee of a private entity, in addition to
the regular compensation fixed for his position
or office is COMPENSATION subject to
withholding tax. (Rev. Regs. 2-98)

Fringe benefit means any good, service, or other

benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to
an individual employee (except rank and file
employees).

EXCEPTION: any amount paid specifically,

either as advances or reimbursements for
travelling, representation and other bona fide
ordinary and necessary expenses incurred or
reasonably expected to be incurred by the
employee in the performance of his duties are
NOT COMPENSATION provided the following
conditions are satisfied:

Fringe Benefits NOT subject to Tax

1. Fringe benefits not considered as gross
income
a. if it is required or necessary to the
business of employer
b. if it is for the convenience or advantage
of employer
2. Fringe Benefit that is not taxable under Sec.
32 (B) Exclusions from Gross Income

e. Sources of income subject to tax

c) Taxable and non-taxable fringe benefits

12

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

3.

Fringe benefits not taxable under Sec. 33

Fringe Benefit Tax:
a. Fringe Benefits which are authorized
and exempted under special laws, such
as the 13th month Pay and Other
Benefits with the ceiling of P30,000.
b. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;
c. Benefits given to the Rank and File
Employees, whether granted under a
collective bargaining agreement or not;
and
d. The De minimis benefits benefits which
are relatively small in value offered by
the employer as a means of promoting
goodwill, contentment, efficiency of
Employees
Note: The term Rank and File
Employees shall mean all employees
who are holding neither managerial nor
supervisory position as defined in the
Labor Code
In the case of rank and file employees,
fringe benefits other than those
excluded from gross income under the
Tax Code and other special laws, are
taxable under the individual normal tax
rate.

De minimis benefits (exempt from income tax):

RR 13-98
a) Monetized unused vacation leave
credits of private employees not
exceeding 10 days during the year
and the monetized value of leave
credits to government officials and
employees (RR 10-00)
b) Medical
cash
allowance
to
dependents of employees not
exceeding php750 per employee
per semester of Php125 per month
c) Rice subsidy of Php1500 or one sack
of 50-kg rice per month amounting
to not more than Php1500 (RR5-08)
d) Uniforms and clothing allowance
not exceeding Php4,000 per annum
(RR5-08)
e) Actual yearly medical benefits not
exceeding Php10,000 per annum
f) Laundry allowance not exceeding
Php300 per month

g) Employee achievements awards

,e.g., for length of service or safety
achievement, which must be in the
form of tangible personal property
other than cash or GC with an annual
monetary value not exceeding
Php10,000 received by the employee
under an established written plan
which does not discriminate in
favor of highly paid employees;
h) Gifts given during Christmas (not
bonus) and major anniversary
celebrations not exceeding Php5,000
per employee per annum;
i) Flowers, fruits, books, or similar
items given to employees under
special circumstances, e.g., on
account of illness, marriage, birth of
a baby etc
j) Daily meal allowance for OT work
not exceeding 25% of basic MW
HOUSING
HOUSING PRIVILEGE

1.

2.

3.

4.

LEASE
of
residential
property for the
residential use of
employees
Assignment
of
residential
property owned by
employer for use of
employees
Purchase
of
residential
property
in
installment
basis
for the use of the
employee
Purchase
of
residential
property
and
ownership
is
transferred in the
name
of
the
employee

FRINGE
BENEFIT
TAX
BASE
(MONETARY
VALUE)
MV= 50% of lease
payments

MV= [5% (FMV or

ZV, whichever is
higher) x 50%]

MV= 5% x acquisition
cost x 50%

MV= FMV or ZV,

whichever is higher

Non-taxable housing fringe benefit:

1. AFP, Philippine Army, Philippine Navy,
Philippine Air Force
2. Situated inside of adjacent to the premises of
a business or factory maximum of 50

13

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

3.

meters from perimeter of the business

premises
Temporary housing for an employee who
stays in housing unit for three months or
less

Net
Income

Net
Income

Gains (other
than
those
subject
to
final CGT)

a) Types of Properties
MOTOR VEHICLE
MOTOR VEHICLE
1.
2.

3.

4.

5.

6.

Purchased in the
name of the employee
Cash
given
to
employee to purchase
in his own name
Purchase
on
installment, in the
name of employee

Employee shoulders
part of acquisition
cost,
name
of
employee
Employer maintains
fleet for use of the
business
and
of
employees
Employer leases and
maintains a fleet for
the
use
of
the
business
and
of
employees

FRINGE BENEFIT
TAX BASE
MV=
acquisition
cost
MV= cash given

MV=
acquisition
cost/ 5 years
Where acquisition
cost is exclusive of
interest
MV=
amount
shouldered
by
employer
MV= (AC/5) x 50%

MV= 50% of rental

payment

3) Professional Income
Refers to fees received by a professional
from the practice of his profession,
provided that there is NO employeremployee relationship between him and
his clients.
4) Income from Business
Any income derived from doing
business
Doing business: The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works
or the exercise of some of the functions
normally incident to, and in progressive
prosecution of, the purpose and object
of its organization.
5) Income from Dealings in Property
Taxable

Ordinary

Net

Capital

Capital v. Ordinary Asset

ORDINARY ASSETS
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 hand at
the close of the taxable
year.
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 ASSETS
Property held by the
taxpayer, whether or
not connected with
his trade or business
which is not an
ordinary asset.
Generally,
they
include:
1. shares of stock of a
domestic
corporation
not
listed in the stock
exchange
2. real property of
individuals
or
land/building of
corporations
3. other types of
assets, including
shares of stock of
foreign
corporation

b) Types of Gains from dealings in property

(1) Ordinary income vis--vis Capital gain
Note: Capital losses can only be deducted from
capital gains; excess capital losses are to be
carried over by INDIVIDUALS in the
succeeding taxable year against capital gains.
Note: Ordinary losses may be deducted from
capital gains.
(2) Actual gain vis--vis Presumed gain
PRESUMED GAIN: In the sale of real property
classified as capital asset, the tax base is the
gross selling price or fair market value,
whichever is higher. The law presumes that the
seller makes a gain from such sale.
ACTUAL GAIN: The tax base in the sale of real
property classified as an ordinary asset is the

14

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

actual gain. The ordinary gain shall be added to
the operating income and the net taxable income
shall be subject to the graduated rates (if
individual) or to 30% corporate tax or to 2%
MCIT.
(3) Long term capital gain vis--vis Short term
capital gain
HOLDING PERIOD RULE: Only 50% of capital
gain or loss taken into account in computing
Capital Gains Tax if asset (other than shares not
traded thru SE) is held as a long-term capital
asset.
Taxpayers Other than a Corporation (i.e.,
individual taxpayers and taxpayers treated as
individuals, such as estates and trusts):
100% of capital gain or loss if the capital
asset was held for not more than 12
months (short-term capital asset)
50% of capital gain or loss if the capital
asset has been held for more than 12
months (long-term capital asset)
General Rule: For purposes of computing
capital loss and capital gain, the actual holding
period is taken into account.
Exception: If securities become worthless during
the taxable year and are capital assets, the loss
resulting therefrom shall be considered as a loss
from the sale or exchange, on the last day of
such taxable year, of capital assets.
HOLDING PERIOD RULE does not apply to
Corporate Taxpayers 100% of the capital gain
or loss, regardless of the holding period.
HOLDING PERIOD RULE does not apply to
sale of shares not traded thru stock exchange
(Sec. 24 (C) and sale of real property (Sec. 24 (D)(1))
The provision of Section 39 (b) notwithstanding..
(4) Net capital gain, Net capital loss
Note:

If subject to specific final income tax:

specific capital loss can only be
deducted from specific capital gain.
If not subject to specific final income tax:
capital loss and ordinary loss can be
deducted from capital gain; BUT capital
loss cannot be deducted from ordinary
income but may be carried over is
taxpayer is an individual.

(5) Computation of the amount of gain or loss

Amount realized from sale or other
disposition of property
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other
disposition of property = sum of money
received + fair market value of the property
(other than money) received
(a) Cost or basis of the property sold
In computing the gain or loss from the sale or
other disposition of property, the BASIS shall
be as follows:
1. Property acquired by purchase its cost,
i.e., the purchase price plus expenses of
acquisition.
2. Property which should be included in the
inventory its latest inventory value
[RR-2 sec 136]
3. Property acquired by devise, bequest or
inheritance its fair market price or
value as of the date of acquisition
4. Property acquired by gift or donation the
same as if it would be in the hands of
the donor or at last preceding owner by
whom it was not acquired by gift,
EXCEPT that if such basis is greater
than the FMV of the property at the time
of the gift then, for the purpose of
determining loss, the basis shall be such
FMV
5. Property (other than capital asset) acquired
for less than an adequate consideration in
moneys worth a) the amount paid by
the transferee for the property; or b) the
transferors adjusted basis at the time of
the transfer whichever is greater
(b) Cost or basis of the property exchanged in
corporate readjustment
Sales or exchanges resulting in non-recognition
of gains or losses:
1. Exchange solely in kind in legitimate mergers
and consolidation; includes:
a. Between the corporations which are
parties to the merger or consolidation
(property for stocks);
b. Between a stockholder of a corporation
party to a merger or consolidation and
the other party corporation (stock for
stock);

15

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

c.

Between a security holder of a

corporation party to a merger or
consolidation and the other party
corporation (securities for securities)

SUBSTITUTED BASIS OF STOCK OR

SECURITIES RECEIVED:
Original basis of the property, stock or
securities exchanged
LESS: (a) money received, if any; and
(b) FMV of the other property received.
ADD:
(a) the amount treated as
dividend of the shareholder; and
(b) the amount of any gain that was
recognized and the exchange.

2.

The property received as boot shall

have as basis its FMV
If as part of the consideration to the
transferor, the transferee of property
assumes a liability of the transferor or
acquires from the latter property subject
to a liability, such assumption or
acquisition (in the amount of liability),
shall be treated as money received by
the transferor on the exchange
The Commissioner may allocate the
basis among the several classes of stocks
or securities received.

Transfer to a controlled corporation

exchange of property for stocks resulting in
acquisition of corporate control by a person,
alone or together with others not exceeding
four.
SUBSTITUTED BASIS OF PROPERTY
TRANSFERRED:
The basis of the property transferred in the
hands of the transferee shall be the same as
it would be in the hands of the transferor
increased by the amount of the gain
recognized to the transferor on the transfer.

(c) Recognition of gain or loss in exchange of

property
General rule
Upon the sale or exchange of property, the
ENTIRE amount of the gain or loss shall be
recognized.
Exceptions
No gain or loss shall be recognized:

(a) If in pursuance of a plan of merger or

consolidation:
a. A corporation, which is a party
to a merger or consolidation,
exchanges property solely for
stock in a corporation, which is
a party to the merger or
consolidation;
b. A shareholder exchanges stock
in a corporation, which is a
party
to
a
merger
or
consolidation, solely for the
stock of another corporation
also a party to the merger or
consolidation; or
c. A security holder of a
corporation, which is a party to
the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or
securities
in
another
corporation, a party to the
merger or consolidation.
(b) If property is transferred to a
corporation by a person in exchange for
stock or unit of participation in such a
corporation, of which as a result of such
exchange, said person, alone or together
with others not exceeding 4 persons,
gains control of the corporation.
- Stocks issued for services shall not
be considered as issued in property.
(6) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to
both corporations and individuals)
General Rule: Losses from sales or exchanges of
capital assets shall be allowed only to the extent
of the gains from such sales or exchanges.
EXCEPTION for Banks and Trust Companies: If a
bank or trust company incorporated under the
laws of the Philippines, a substantial part of
whose business is the receipt of deposits or the
sale of bond, debenture, note, certificate or other
evidence of indebtedness, any loss resulting
from such sale shall not be subject to the
foregoing limitation and shall not be included in
determining the applicability of such limitation
to other losses.
(b) Net loss carry-over rule (applicable only to
individuals)

16

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

If an individual sustains in any taxable year a
net capital loss, the loss (in an amount not in
excess of the net income for the year) shall be
treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held
for not more than 12 months.

(7) Dealings in real property situated in the

Philippines
Persons Liable and Transactions Affected
a) Individual taxpayers, estates and trusts
Sale
or
exchange
or
other
disposition
of
real
property
considered as capital assets.
Includes "pacto de retro sale" and
other conditional sale.
b)

Domestic Corporation
Sale or exchange or disposition of
lands and/or building which are
not actually used in business and
are treated as capital asset.

Rate and Basis of Tax

A final withholding tax of 6% is based
on the gross selling price or fair market
value or zonal value whichever is
higher.
Note: Gain or loss is immaterial, there being
a conclusive presumption of gain.
(8) Dealings in shares of stock of Philippine
corporations
1.

2.

Persons Liable to the Tax

a) Individual taxpayer, whether citizen or
alien;
b) Corporate taxpayer, whether domestic
or foreign; and
c) Other taxpayers not falling under (a)
and (b) above, such as estate, trust, trust
funds and pension funds, among others.
Persons not liable
a) Dealers in securities
b) Investor in shares of stock in a mutual
fund company
c) All other persons who are specifically
exempt from national internal revenue
taxes
under
existing
investment
incentives and other special laws.

(a) Shares listed and traded in the stock

exchange

of 1% of the gross selling price of the

stock
Note: In the nature of percentage tax
and not income tax; exempt from
income tax per Section 128 (d):
- Any gain derived from the
sale, barter, exchange or other
disposition of share of stock
under this section shall be
exempt from taxes imposed in
Sections
24(C),
27(D)(2),
28(A)(8)(c), and 28(B)(5)(c) of
this Code and from the regular
individual or corporate income
tax.
Note:
Percentage
tax
paid
is
DEDUCTIBLE for income tax purposes.

(b) Shares not listed and traded in the stock

exchange
Net capital gains derived during the
taxable year from sale, exchange, or
transfer shall be taxed as follows (on a
per transaction basis):

Not over P 100,000

- 5%

Over P 100,000 - 10%

(9) Sale of principal residence
Disposition of principal residence is exempt
from Capital Gains Tax provided:
a. Sale or disposition of the old principal
residence;
b. By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not
include an estate or a trust);
c. The proceeds of which is fully utilized
in (a) acquiring or (b) constructing a
new principal residence within eighteen
(18) calendar months from date of sale
or disposition;
d. Notify the Commissioner within thirty
(30) days from the date of sale or
disposition through a prescribed return
of his intention to avail the tax
exemption;
e. Can only be availed of only once every
ten (10) years;
f. The historical cost or adjusted basis of
his old principal residence sold,
exchanged or disposed shall be carried
over to the cost basis of his new
principal residence
g. If there is no full utilization, the portion
of the gains presumed to have been

17

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

h.

realized shall be subject to capital gains

tax.
Portion of presumed gains subject to
CGT: (Unutlized/GSP) x (higher or GSP
or FMV)

(10) Passive Investment Income

a) Interest Income
b) Dividend Income
Cash dividend and property dividend are
subject to income tax.
Stock dividend is generally exempt from
income tax, EXCEPT:
a. It shall be taxable only if subsequently
cancelled and redeemed by the corporation
and shares become treasury shares; or
b. It shall also be taxable if it leads to a
substantial alteration in the proportion of tax
ownership in a corporation.
Liquidating dividend
It is taxable or deductible loss, depending on
whether gain is realized or loss sustained by the
stockholder upon the distribution of the
corporation of all its assts. The income is subject
to ordinary income tax rates and NOT to the
FWT on dividends.

Vessel
Aircraft,
machineries
and
other Equipment
Other assets
Lease of real property
LESSOR
Citizen
Resident Alien
Non-resident
alien
engaged in trade or
business
in
the
Philippines
Non-resident alien not
engaged in trade or
business
in
the
Philippines

Domestic Corporation
Resident
Foreign
Corporation

Non-resident Foreign
Corporation

c) Royalty Income
Royalty is a valuable property that can be
developed and sold on a regular basis for a
consideration; in which case, any gain derived
therefrom is considered as an active business income
subject to the normal corporate tax
d) Rental Income
Actual rent itself: included in gross income
(taxable); income recognition for tax purposes
follows income recognition for accounting
purposes
Payments by lessee of obligations of lessor to
third persons: considered as additional rent
income of the lessor, and therefore included in
gross income (taxable).
Lease of personal property
Rental income on the lease of personal property
located in the Philippines and paid to a nonresident taxpayer shall be taxed as follows:
NonResident

NonResident

Corporation
4.5%
7.5%

Alien
25%
25%

30%

25%

TAX RATE
Net taxable income
shall be subject to the
graduated income tax
rates
Rental income from
real property located
in the Philippines shall
be subject to 25% final
withholding tax unless
a
lower
rate
is
imposed pursuant to
an effective tax treaty
Net taxable income
shall be subject to 30%
corporate income tax
or its gross income will
be subject to 2% MCIT
Gross rental income
from real property
located
in
the
Philippines shall be
subject
to
30%
corporate income tax,
such
tax
to
be
withheld and remitted
by the lessee in the
Philippines

Tax treatment of:

(a) Leasehold improvements by lessee
Income from leasehold improvements:
1. Outright method- income recognized
when the improvement is completed at its
market value
2. Spread-out method- the estimated book
value of the leasehold improvement at the
end of the lease is spread over the term of the
lease and is reported as income for each year
of the lease an aliquot part thereof.
estimated BV at the end of the lease
contract/ lease term
(b) VAT added to rental/paid by the lessee

18

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

If the lessee is VAT-registered, treat VAT paid as
input VAT;
If the lessee is not VAT-registered OR not liable
to VAT, treat VAT paid as additional rent
expense deductible from gross income.
(c) Advance rental/long term lease
Note: Income recognition for income tax
purposes should follow income recognition for
accounting purposes. If accrual method is
employed by lessor, income is reported as
taxable income when earned; if cash basis, when
received.
7) Annuities, Proceeds from life insurance or
other types of insurance
8) Prizes and awards
Contest prizes and awards received are
generally taxable. Such payment constitutes
gain derived from labor.
The EXCEPTIONS are as follows:

Prizes and awards received in

recognition of religious, charitable,
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS
from gross income if:
a. The recipient was selected without
any action on his part to enter a
contest or proceedings; and
b. The recipient is not required to
render substantial future services
as a condition to receiving the prize
or award.
Prizes and awards granted to athletes in
local and intl sports competitions and
tournaments held in the Philippines and
abroad and sanctioned by their national
associations shall be EXEMPT from
income tax.

9) Pensions, retirement benefit, or separation

pay
10) Income from any source whatever
Forgiveness of indebtedness
The cancellation
or
forgiveness of
indebtedness may have any of three possible
consequences:
a. It may amount to payment of income.

b. It may amount to a gift.

c. It may amount to a capital transaction.
Recovery of accounts previously written off
Tax Benefit Rule Bad debts claimed as a
deduction in the preceding year(s) but
subsequently recovered shall be included as part
of the taxpayers gross income in the year of
such recovery to the extent of the income tax benefit
of said deduction. There is an income tax benefit
when the deduction of the bad debt in the prior
year resulted in lesser income and hence tax savings
for the company. (Sec. 4, RR 5-99)
c) Receipt of tax refunds or credit
The following tax refunds are not to be included
in the computation of gross income: (CAPIF
FEDVAT)
1. Philippine income tax, except the fringe
benefit tax
2. Income tax imposed by authority of any
foreign country, if the taxpayer claimed
a credit for such tax in the year it was
paid or incurred.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special assessments)
5. Value Added Tax
6. Fines and penalties due to late payment
of tax
7. Final taxes
8. Capital Gains Tax
Note: The enumeration of tax refunds that are
not taxable (income) is derived from an
enumeration of tax payments that are not
deductible from gross income.
d) Income from any source whatever
These words disclose a legislative policy to
include all income not expressly exempted
within the class of taxable income under our
laws, irrespective of the voluntary or
involuntary action of the taxpayer in producing
the gains.
f. Source rules in determining income from
within and without
Sale of personal property

19

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

General Rule: Gains, profits and income from
the sale of personal property, subject to the
following rules:
Place
of
PURCHASE
Philippines

Place
SALE
Abroad

of

sold w/o: Partly w/in and

partly w/o
3. Manufactured w/o and sold
w/in: Partly w/in and partly
w/o

Treatment**

Income from
Without
Abroad
Philippines Income from
Within
** in other words, treated as income from the
country in which sold

B. Intangible
General rule: Place of Sale
Exception: Shares of stock of
domestic corporations: Place
of incorporation
Place of incorporation

Exceptions:
1. Gain from the sale of shares of stock in a
domestic corporation
treated as derived entirely from sources
within the Philippines regardless of where
the said shares are sold.

h. Exclusions from Gross Income

2.

Exclusions distinguished from deductions

Gains from the sale of (manufactured)

personal property:
a. produced (in whole or in part) by the
taxpayer within and sold without the
Philippines, or
b. produced (in whole or in part) by the
taxpayer without and sold within the
Philippines
treated as derived partly from
sources within and partly from
sources without the Philippines.

Place
of
PRODUCTION
Philippines

Place
of
SALE
Abroad

Abroad

Philippines

Treatment
Partly within,
partly
without
Partly within,
partly
without

g. Situs of Income Taxation

INCOME
Interest
Dividends
Services
Rentals
Royalties
Sale of Real
Property
Sale
of
Personal

SITUS
Residence of the debtor
Residence of the corporation
Place of performance
Location of the property
Place of exercise
Location of realty
A. Tangible
1. Purchase and sale: Location
of Sale
2. Manufactured w/in and

Shares
of
Stock
of
Domestic
Corporation

Exclusions from gross income refer to a flow of

wealth to the taxpayer which are not treated as
part of gross income, for purpose of computing
the taxpayers taxable income.
Deductions, on the other hand, are the amounts
which the law allows to be deducted from gross
income in order to arrive at net income.
Exclusions pertain to the computation of gross
income, while deductions pertain to the
computation of the net income. (Mamalateo)
1) Exclusion under the Constitution
a.

b.

Income derived by the government or its

political subdivisions from the exercise of
any essential governmental function
Income derived from any public utility or
from the exercise of any essential
governmental function accruing to the
Government of the Philippines or to any
political subdivision thereof.

2) Exclusions under the Tax Code

a) Proceeds of life insurance policies
b) Return of premium paid
c) Amounts received under life insurance,
endowment or annuity contracts
d) Value of property acquired by gift, bequest,
devise or descent
e) Amount received through accident or health
insurance

20

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

f) Income exempt under tax treaty
g) Retirement benefits, pensions, gratuities, etc.

5.
6.

a. RETIREMENT benefits under RA

7641 or under a reasonable private
benefit plan
b. TERMINAL pay
c. BENEFITS from foreign governments
d. VETERANS benefits
e. Benefits under the Social Security Act
f. GSIS and SSS benefits

3) Under a Tax Treaty

4) Under Special Laws
a. Income subject to final tax;
b. PCSO and lotto winnings;
c. Income already subjected to final tax, such
as gains from shares and real property
subject to capital gains tax.
d. GAIN from buying and selling stocks
classified as capital asset listed and traded in
the PSE;
e. FRINGE benefits already subject to FBT;
f. DE MINIMIS benefits.
g. Tax Exempt EMPLOYEES TRUST under
Sec. 60B of the NIRC
h. Tax
Exempt
EDUCATIONAL
INSTITUTIONS
i. QUALIFIED SENIOR CITIZEN- The income
of a qualified senior citizen is exempt from the
payment of income tax provided his annual
taxable income does not exceed the poverty level
of P60,000 per year, except interest income. [BIR
Ruling 066-2000; R.A. 7432; BIR Ruling 1598]
j. Tax
Exempt
INVENTORS
AND
INVENTIONS
k. Tax Exempt COOPERATIVE INCOME
l. BARANGAY
MICRO
BUSINESS
ENTERPRISES (BMBE)
i. Deductions from Gross Income
Conditions for Deductibility of Business
Expenses:
1. must be ordinary and necessary
2. paid or incurred during the taxable year
3. directly attributable to the development,
management, operation and/or conduct
of the trade, business or exercise of
profession
4. Supported by adequate invoices or
receipts

Not Contrary to law, public policy or

morals.
The tax required to be withheld on the
amount paid or payable is shown to
have been paid to the BIR.

j. Return of capital (cost of sales or services)

a)
Sale of inventory of goods by
manufacturers and dealers of properties
In sales of goods representing inventory, the
amount received by the seller consists of return
of capital and gain from sale of goods or
properties. That portion of the receipt
representing return of capital is not subject to
income tax.
b) Sale of stock in trade by a real estate dealer
and dealer in securities
Real estate dealers and dealers in securities are
ordinarily not allowed to compute the amount
representing return of capital through cost of
sales. Rather they are required to deduct the
total cost specifically identifiable to the real
property or shares of stock sold or exchanged.
c) Sale of services
Their entire gross receipts are treated as part of
gross income.
TYPE OF TAXPAYER
Individuals with gross
income
from
business/practice
profession

Individuals
earning
purely compensation
income (except nonresident aliens not
engaged in trade or
business)
Corporations (except
non-resident foreign
corporations), general
professional
partnerships, estates
and trusts engaged in
business, proprietary
educational
institutions
and

ALLOWABLE
DEDUCTIONS
Itemized deductions
OR
Optional
Standard
Deduction;
Premium payments on
health/hospitalization
insurance [Sec. 34(M)];
Personal/additional
exemptions
Premium payments on
health/hospitalization
insurance [Sec. 34(M)];
Personal/additional
exemptions
Itemized deductions

21

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

hospitals (non-profit),
and GOCC
Estates and Trusts

exemption [Sec. 62]

Computed in the same
manner and on the
same basis as in the
case of an individual,
except that, there shall
be
allowed
as
deduction
in
the
computation of the
taxable income of the
estate or trust:
a) The amount of
income for the
taxable
year
distributed
currently by the
fiduciary to the
beneficiaries; and
b) Amount of income
collected
by
guardian of an
infant which is to
be
held
and
distributed as the
court may direct.
BUT the amount
so
allowed
as
deduction shall be
included
in
computing
the
taxable income of
the
beneficiary
whether
distributed
to
them or not.
c) Amount of the
income
not
previously
distributed
or
credited
(hence
initially
formed
part of income of
the estate or trust)
but subsequently
distributed
or
credited;
the
amount allowed as
deduction shall be
included
in
computing
the
taxable income of
the legatee, heir or
beneficiary.

TAXPAYER

Additional

b) Interest

P50,000

Resident
citizen
Nonresident
Citizen
Resident
Alien
Nonresident
alien
(engage
d
in
trade
and
business
)
Nonresident
alien
(Not
engaged
in trade
and
business
)

PERSONAL
EXEMPTIO
N
Yes

ADDITIONA
L
EXEMPTION
Yes

OS
D

Yes

Yes

Yes

Yes

Yes

Yes

Subject
to
the rule of
reciprocity

No

No

No

No

No

Yes

3) Itemized deductions
a. Expenses
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Charitable and other contributions
h. Contributions to pension trusts
a) Expenses
Includes:
a. Salaries,
wages,
compensation,
including the grossed-up monetary
value of fringe benefits subject to FBT
b. Travel expenses
c. Rentals
d. Entertainment,
recreation
and
amusement expenses
e. Other expenses such as repairs or those
incurred by farmers and other persons
in agribusiness

22

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

Requisites for deductibility
1. There is an INDEBTEDNESS.
2. The indebtedness is that of the TAXPAYER.
3. The indebtedness is connected with the
taxpayers TRADE, profession, or business.
4. The interest must be legally DUE.
5. The interest must be stipulated in
WRITING.
6. The taxpayer is LIABLE to pay interest on
the indebtedness.
7. The indebtedness must have been paid or
accrued DURING the TAXABLE YEAR.
8. The interest payment arrangement must not
be between RELATED taxpayers
9. The interest must not be incurred to finance
PETROLEUM operations.
10. In case of interest incurred to acquire
property used in trade, business or exercise
of profession, the same was not treated as a
CAPITAL expenditure,
LIMITATION: The taxpayer's allowable
deduction for interest EXPENSE shall be
reduced by an amount equal to 42% of the
interest INCOME subjected to final tax;
provided, that effective January 1, 2009, the
percentage shall be 33%.
c) Taxes
General Rule: All taxes, national or local, paid
or incurred during the taxable year in
connection with the taxpayer's profession, trade
or business, are deductible from gross income
Exceptions:
1. Philippine income tax, except Fringe Benefit
Taxes;
2. Income tax imposed by authority of any
foreign country;
Exception to exception:
When the taxpayer does NOT signify
his desire to avail of the tax credit for
taxes of foreign countries, the amount
may be allowed as a deduction subject
to the limitations set forth by law.
3. Estate and donors taxes
4. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special Assessments)
5. Value Added Tax
6. Fines and penalties
7. Final taxes
8. Capital Gains Tax
9. Import duties

10.
11.
12.
13.
14.
15.
16.
17.

Business taxes
Occupation taxes
Privilege and license taxes
Excise taxes
Documentary stamp taxes
Automobile registration fees
Real property taxes
Electric energy consumption tax under BP
36

Treatments of interests
CIR v. Vda. de Prieto (1960): Although interest
payment for delinquent taxes is not deductible
as tax under the Tax Code, the taxpayer is not
precluded thereby from claiming said interest
payment as deduction.
Treatment of special assessment
Special assessments and other taxes assessed
against local benefits of a kind tending to
increase the value of the property assessed are
non-deductible from gross income.
(5) Tax credit vis--vis deduction
TAX CREDIT - Foreign income taxes paid or
incurred which reduces the Philippine income
tax to be paid.
The following may claim tax credits:
1. Resident citizens
2. Domestic corporations
3. Members
of
general
professional
partnerships
4. Beneficiaries of estates or trusts
The following may NOT claim tax credits:
1. Non-resident citizens
2. Resident aliens
3. Non-resident aliens
4. Foreign corporations
Limitations:
1) Per Country Limit; AND
1.

Taxable
Income
per
Foreign
Country
Worldwide
Taxable
Income

2) Worldwide Limit

Phil.
Income
Tax

Per
Country
Limit

23

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

2.

Taxable
Income for
all Foreign
Countries
Worldwide
Taxable
Income

f.

Phil.
Income
Tax

Worldwide
Limit

Note: The second limitation applies where the

taxpayer derives income from more than one
foreign country.
d) Losses
REQUISITES FOR DEDUCTIBILITY:
1. Loss must be that of the taxpayer (i.e. losses
of the parent corp. cannot be deducted by its
subsidiary);
2. Actually sustained during the taxable year;
3. Connected with the trade, business or
profession;
4. Evidenced by a close and completed
transaction;
5. Not compensated for by insurance or other
form of indemnity;
6. Not claimed as a deduction for estate tax
purposes;
7. In case of casualty, notice of loss must be
filed with the Bureau of Internal Revenue
within 45 days from the date of discovery of the
casualty or robbery, theft or embezzlement.
No loss is recognized in the following:
1. Merger, consolidation, or control
securities (where no gains are
recognized either);
2. Exchanges not solely in kind;
3. Related taxpayers;
a. Between members of a family
b. Between
an
individual
and
corporation more than fifty percent
(50%) in value of the outstanding
stock of which is owned, directly or
indirectly, by or for such individual;
or
c. Between two corporations more
than fifty percent (50%) in value of
the outstanding stock of which is
owned, directly or indirectly, by or
for the same individual;
d. Between the grantor and a fiduciary
of any trust;
e. Between the fiduciary of a trust and
the fiduciary of another trust if the
same person is a grantor with
respect to each trust;

4.
5.

Between
a
fiduciary
beneficiary of a trust.
Wash sales;
Illegal transactions

and

Other types of losses

(a) Capital losses
(b) Securities becoming worthless
(c) Losses on wash sales of stocks or securities
WASH SALE - a sale or other disposition of
stock or securities where substantially
identical securities are acquired or
purchased within a 61-day period,
beginning 30 days before the sale and
ending 30 days after the sale
GENERAL RULE: Not deductible from
gross income
EXCEPT: If by a dealer in securities in the
course of ordinary business, it is deductible.
(d) Wagering losses
Deductible only to the extent of
wagering gains. A wager is made when
the outcome depends upon CHANCE.
(e) NOLCO (Net Operating Loss Carry Over)
Net operating loss is the excess of allowable
deductions over gross income for any taxable
year immediately preceding the current taxable
year.
NOLCO: Net operating losses which have not
been previously offset as deduction from gross
income shall be carried over as a deduction
from gross income for the next three (3)
consecutive taxable years immediately following the
year of such loss.
Exception: Mines other than oil and gas wells,
where a net operating loss incurred in any of the
first ten (10) years of operation may be carried over
as a deduction from taxable income for the next
five (5) years immediately following the year of
such loss.
REQUISITES for NOLCO:
1. The taxpayer was not exempt from income
tax the year the loss was incurred;
2. There has been no substantial change in the
ownership of the business or enterprise
wherein:

24

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

AT LEAST 75% of nominal value of
outstanding issued shares is held by or on
behalf of the same persons;
or
AT LEAST 75% of the paid up capital of the
corporation is held by or on behalf of the
same persons.
Taxpayers Entitled to NOLCO
A. Individuals engaged in trade or business or
in the exercise of his profession (including
estates and trusts);
Note: An individual who avails of optional
standard deduction cannot simultaneously
claim deduction of NOLCO. However, the
three-year period shall continue to run
during such period notwithstanding the
election made by the taxpayer.
B. Domestic and resident foreign corporations
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential tax
rates under the Code (e.g., private educational
institutions, hospitals, and regional operating
headquarters) or under special laws (e.g, PEZAregistered companies).
Note: Corporations cannot avail of NOLCO
as long as it is subject to Minimum
Corporate Income Tax in any taxable year.
However, the three-year period shall
continue to run notwithstanding the fact
that the corporation paid its income tax
under MCIT during such period.
e) Bad debts
Requisites for deductibility
1. Existing indebtedness due to the taxpayer
which is valid and legally demandable;
2. Debt is connected with the taxpayer's trade,
business or practice of profession;
3. Debt was not sustained in a transaction
entered into between related parties;
4. Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year
(taxpayer
had
REASONABLY
ASCERTAINED in GOOD FAITH using
sound business judgment); and
5. Actually charged off in the books of
accounts of the taxpayer as of the end of the
taxable year
Tax Benefit rule on Bad Debts

Bad debts claimed as deduction in the preceding

year(s) but subsequently recovered shall be
included as part of the taxpayers gross income
in the year of such recovery the extent of the
income tax benefit of said deuction. Also called
the equitable doctrine of tax benefit.
f) Depreciation
There shall be allowed as a depreciation
deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in
the trade or business.
Requisites for deductibility
1. Must be for property used in the TRADE or
business, or those not being used
temporarily during the year
2. A limited USEFUL life.
3. Allowance must be REASONABLE.
4. CHARGED OFF during the taxable year
from the taxpayers books of accounts.
5. Does NOT EXCEED the cost of the property
g) Charitable and other contributions
Requisites for deductibility
1. Actually paid or made to the ENTITIES
specified by law;
2. Made within the TAXABLE year.
3. It must be EVIDENCED by adequate
receipts or records.
4. For Contributions Other than Money: The
amount shall be BASED on the acquisition
cost of the property (i.e., not the fair market
value at the time of the contribution).
5. For Contributions subject to the statutory
limitation: It must not EXCEED 10%
(individual) or 5% (corporation) of the
taxpayers taxable income before charitable
contributions.
1) Contributions Deductible in Full: (FoNG)
a.

b.

Donations to the Government Donations to the Government of the

Philippines or to any of its agencies or
political subdivisions, including fullyowned
government
corporations,
exclusively to finance, to provide for, or
to be used in undertaking PRIORITY
ACTIVITIES.
Donations
to
Certain
Foreign
Institutions
or
International
Organizations

25

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

c.

Donations
to
Accredited
Nongovernment Organizations - non-profit
domestic corporation organized and
operated exclusively for: (CRWSH Cys
ChE Com)
- 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;

2) Contributions subject to the Statutory Limit

(DNGS)
a.

Contributions made to the Government

or any of its agencies or political
subdivisions exclusively for public
purposes (contributions for non-priority
activities)
b. Contributions made to accredited
domestic corporation or associations
organized exclusively for religious,
charitable, scientific, youth and sports
development, cultural or educational
purposes or for the rehabilitation of
veterans
c. Contributions
to
social
welfare
institutions
d. Contributions
to
non-government
organizations. No part of the net income
of which inures to the benefit of any
private stockholder or individual
Statutory Limit:
Amount deductible must not be in excess of:
10% in the case of an individual,
and
5% in the case of a corporation,
of the taxpayer's taxable income
derived from trade, business or
profession before the deduction for
contributions and donations.
The amount deductible is the actual
contribution or the statutory limit
computed, whichever is lower.

h) Contributions to pension trusts

Pertains to PAST SERVICE COST, or the

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

Requisites for deductibility

1. It has not been claimed as a deduction, and
2. Is apportioned in equal parts over a period
of ten (10) consecutive years beginning with
the year in which the transfer or payment is
made.
Premium Paid on Health or Hospitalization
Insurance
[Sec.34 (M)]

Amount of premium paid on health and/or

hospitalization by an individual taxpayer
(head of family or married), for himself and
members of his family during the taxable year.

Requisites for Deductibility:

1. Insurance must have actually been taken
2. The amount of premium deductible does
not exceed P2,400 per family or P200 per
month during the taxable ear.
3. That said family has a gross income of not
more than P250,000 for the taxable year.
4. In case of married individual, only the
spouse claiming additional exemption shall
be entitled to this deduction.
The following may avail of the deduction:
1. Individual
taxpayers
earning
purely
compensation income during the year.
2. Individual taxpayer earning business
income or in practice of his profession.
4) Optional standard deduction
a) Individuals, except non-resident aliens
May be taken by an INDIVIDUAL in lieu of
itemized deductions EXCEPT those earning
purely compensation income.
Amount: 40% of GROSS INCOME. (under
RA 9504, effective July 6, 2008)
Requisites:
1. Taxpayer is a citizen or resident alien;
2. Taxpayers income is not entirely from
compensation;
3. Taxpayer signifies in his return his
intention to elect this deduction; otherwise

26

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

he is considered as having availed of the
itemized deductions.
4. Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.

b) regardless of age, is incapable of

self-support because of mental or
physical defect. (Sec 35 B, NIRC)
NOTE:
Only
children
may
be
considered dependent for purposes of
additional exemptions.

b) Corporations, except non-resident foreign

corporations
The option to elect Optional Standard Deduction
granted is now granted to corporations (domestic
and resident foreign corporations) by virtue of RA
9504.

5)
Personal and additional exemption
(Republic Act 9504 Minimum Wage Earner
Law)
a) Basic personal exemptions

According to RA 9504 (effective July

6, 2008) basic personal exemption is
Fifty thousand pesos (P50,000) for
each individual taxpayer, regardless
whether single, married or head of
the family.

* BUT note Sec 35(A) - In the case of married

individuals where only one of the spouses
is deriving gross income, only such spouse
shall be allowed the personal exemption.

b) Additional exemptions for taxpayer with

dependents
Amount allowed as a deduction
P25,000 per dependent child, but
not to exceed four children (RA
9504)

Who may claim additional exemptions?

Married Individuals: Additional
exemptions are claimed by only one
spouse.

Who is a dependent for purposes of

additional exemptions?
1. A
taxpayers
child,
whether
legitimate, illegitimate or legally
adopted child
2. chiefly dependent for support upon
on the taxpayer
3. living with the taxpayer
4. a) not more than 21 years old,
unmarried and not gainfully
employed OR

Who may claim personal exemptions?

Citizens (whether resident or nonresident) and resident aliens are
allowed to avail of basic personal
and additional exemptions.
Non-resident aliens engaged in
trade or business are entitled to
basic personal exemptions only by
way of reciprocity, but not to
additional exemptions. [Sec. 35,
NIRC]
o Limit of BPE Allowed to
NRAETB: An amount equal to
the exemptions allowed by the
non-resident aliens country to
Filipino citizens not residing
therein but deriving income
therefrom, but not to exceed the
amount fixed by NIRC.[In other
words, whichever is LOWER]
Who may claim personal exemptions?
Citizens (whether resident or nonresident) and resident aliens are
allowed to avail of basic personal
and additional exemptions.
Non-resident aliens engaged in
trade or business are entitled to
basic personal exemptions only by
way of reciprocity, but not to
additional exemptions. [Sec. 35,
NIRC]
o Limit of BPE Allowed to
NRAETB: An amount equal to
the exemptions allowed by the
non-resident aliens country to
Filipino citizens not residing
therein but deriving income
therefrom, but not to exceed the
amount fixed by NIRC.[In other
words, whichever is LOWER]

j. Exempt Corporations
(CREB-CLEF-SMB)

The following organizations shall not be

taxed in respect to income received by
them as such (e.g. membership fees):

27

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

1.

LABOR, agricultural or horticultural

organization not organized principally
for profit
2.
MUTUAL savings bank not having a
capital stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit
3.
A BENEFICIARY society, order or
association, operating for the exclusive
benefit of the members such as a fraternal
organization operating under the lodge
system, or mutual aid association or a
non-stock corporation organized by
employees providing for the payment of
life, sickness, accident, or other benefits
exclusively to the members of such society,
order, or association, or 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 inures to
the benefit of any member, organizer,
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 stock-holder, or
individual
7.
CIVIC league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare
8.
A
non-stock
and
nonprofit
EDUCATIONAL institution
9.
Government
EDUCATIONAL
institution
10. FARMERS' or other mutual typhoon or
fire insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
purely local character, the income of
which consists solely of assessments,
dues, and fees collected from members
for the sole purpose of meeting its
expenses and
11. Farmers', fruit growers', or like
association organized and operated as a
SALES agent for the purpose of

marketing the products of its members

and turning back to them the proceeds
of sales, less the necessary selling
expenses on the basis of the quantity of
produce finished by them;

Note: Notwithstanding the exemptions,

income of whatever kind and character of the
enumerated 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.
National Power Corporation (NPC) in
general is subject to income tax. [RA 9337]

Note: RA 9178 Barangay Micro Business

Enterprises (BMBEs) implemented by DO 1704, April 20, 2004
BMBEs shall be exempt from income tax for
income arising from the operations of the
enterprise.
BMBE is any business entity or enterprise
engaged in the production, processing or
manufacturing of products or commodities,
including agro-processing trading and
services, whose total assets including those
arising from loans but exclusive of land on
which the particular business entitys office,
plant and equipment are situated, shall not
be more than P3M.
10.
Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens
General rule: Resident citizens Taxable on
income from all sources within and without
the Philippines
Q: With regard to tax status, can a Filipino be
a resident and a non-resident citizen
during the same taxable year?
A: General rule: A citizen has only one tax
status during the taxable year either as a
resident or a non-resident.
Exception: If at the beginning of the year, he
citizen derives compensation and/or
business or professional income, and
sometime later dring the same year, he
departs from the Philippines as an
immigrant or a qualified non-resident
citizen or vice versa.
ALIEN

28

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

RESIDENT ALIEN residence is within the
Philippines and who is not a citizen thereof (Sec.
22 (F), NIRC). An alien actually present in the
Philippines who is not a mere transient or
sojourner is a resident of the Philippines for
income tax purposes. A mere floating intention,
indefinite as to time, to return to another
country is not sufficient to constitute him a
transient.
taxable for income derived within the
Philippines based on taxable (i.e., net)
income
Loss of residence by an alien An alien
who has acquired residence in the
Philippines retains his status as a resident
until he abandons the same and actually departs
from the Philippines.
NON-RESIDENT ALIEN residence is NOT in
the Philippines and who is not a citizen thereof
(Sec. 22 (G), NIRC).
Engaged in trade or business in the
Philippines (NRAETB) - is taxable for
income derived within the Philippines
based on taxable (i.e., net) income
Not Engaged in trade or business in the
Philippines (NRANETB) - is taxable for
income derived within the Philippines
based on gross income.
NOTES:
What makes an alien a resident or non-resident
alien is his intention with regard to the length
and nature of his stay. Thus:
a. One who comes to the Philippines for a
definite purpose which in its very nature
may be promptly accomplished is not a
resident citizen.
b. One who comes to the Philippines for a
definite purpose which in its very nature
would require an extended stay, and to that
end, makes his home temporarily in the
Philippines, becomes a resident, though it
may be his intention at all times to return to
his domicile abroad when the purpose for
which he came has been consummated or
abandoned.

Length of stay is indicative of intention.

An alien who shall have stayed in the
Philippines for more than one year by the
end of the taxable year is a resident alien.
NOTE FURTHER: An alien who shall come
to the Philippines and stay for an aggregate
period of more than one hundred eighty

days during a calendar year shall be

considered a non-resident alien in business
in the Philippines. [Sec. 25(A)(1)]
Length of Stay in the Philippines as Indicative
of Intent
Length
of
Stay Status
(aggregate within the
calendar year)
More than 1 year
Resident Alien
More than 180 days up NRAETB
to 1 year
180 days or less
NRANETB
If an alien stays in the Philippines for 180 days
or less during the calendar year, he shall be
deemed a non-resident alien engaged in
business in the Philippines.
Taxation of Business Income/Income from
Practice of Profession

All income obtained from doing

business and/or engaging in the
practice of a profession shall be
included in the computation of taxable
income.
This shall be subject to the graduated
rates of income.
Not over P10,000
5%
Over P10,000 but not P500+10% of the
over P30,000
excess over P10,000
Over P30,000 but not P2,500+15% of the
over P70,000
excess over P30,000
Over P70,000 but not P8,500+20% of the
over P140,000
excess over P70,000
Over P140,000 but not P22,500+25% of the
over P250,000
excess over P140,000
Over P250,000 but not P50,000+30% of the
over P500,000
excess over P250,000
Over P500,000

P125,000+32% of the
excess over P500,000

Taxation of Passive Income

1) Passive income subject to final tax
Final tax means tax withheld from source, and
the amount received by the income earner is net
of the tax already. The tax withheld by the
income payor is remitted by him to the BIR. The
income having been tax-paid already, it need
not be included in the income tax return at the
end of the year. These passive income items are
as follows:

29

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

a) Interest income
on any currency bank deposit, yield or
any other monetary benefit from deposit
substitutes, trust funds and similar
arrangements - 20% final tax
under the expanded foreign currency
deposit system (EFCDS) - 7.5% final tax
for residents, exempt if non-residents
on long-term deposit or investment
certificates (LTDIC) in banks (e.g.,
savings, common or individual trust
funds, deposit substitutes, investment
management accounts and other
investments, which have maturity of 5
years or more) exempt

Should
LTDIC
holder
preterminate LTDIC before the 5th year,
a final tax shall be imposed on the
entire income based on the remaining
maturity:
4 years to less than 5 years
3 years to less than 4 years
less than 3 years
Summary Rules on Interest Income
Interest Income from:
Tax Rate
Any currency deposit, 20%
yield or any other
monetary benefit from
deposit substitutes ans
from trust funds and
similar arrangements
derived from the Phils
Long term investment 4 less
or investment in the than
5
form
of
savings, yrs: 5%
common or individual
trust funds, substitute 3 less
investment
than
4
management accounts yrs: 12%
and other investments
evidenced
by less than
certificates in such 3
yrs:
form prescribed by BSP 20%
EFCDS deposits

7.5%

Foreign currency loans

granted by FCDUs to
residents other than
OBUs banks or other
depositary under the

10%

5%
12%
20%

Payee
RC, NRC,
RA
NRAETB

DC, RFC
RC, NRC,
RA,
NRAETB

EFCDS
Foreign currency loans
granted by OBUs to
residents other than
OBUs
or
local
commercial
banks,
including braches of
foreign
banks
authorized by BSP to
transact business with
OBUS
Foreign currency loans
contracted on or after
August 1, 1986
Transactions
with
depositary
banks
under FCDs

10%

RC, RA
DC, RFC

20%

NRFC

EXEMPT

NRC,
NRA,
NRFC

b) Royalties
From books,
literary works,
and musical

Other
royalties

10%

25%
30%
20%

25%
30%

RC, RA, NRC,

NRAETB,
DC,
RFC
NRANETB
NRFC
RC, RA, NRC,
NRAETB,
DC,
RFC
NRANETB
NRFC

c) Dividends from domestic corporation

RATE:
10% for residents (RC, RA) and
non-resident citizens (NRC);
20% for NRAETB (non-resident
aliens engaged in trade or business)
Summary Rules on Dividends (Cash, Property,
Scrip)
TAXPAYE
R

Dividend
paid by a
DOMESTI
C CORP

RC
NRC
RA
NRAETB

10% FT
10% FT
10% FT
20% FT

RC, NRC,
RA
DC, RFC
RC, RA
DC, RFC

Dividend paid
by a FOREIGN
CORP
Note: Sec 42(A)
in correlation w/
Sec 23 NIRC.
Sourc Source
e
without
within
5-32%
BT

EXEMP
T

30

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

NRANETB
DC
RFC
NRFC

25% FT
EXEMPT
EXEMPT
15% FT - w/
tax sparing

30%
5-32%
BT
30%
FT

RA,
NRAETB
EXEMP
T
EXEMP
T

30% FT w/o
tax
sparing
FT final tax
BT base tax (form part of gross income
subject to graduated rates)
d) Prizes and other winnings
a. Winnings, except Philippine Charity
sweepstakes / lotto winnings 20%
b. Prizes exceeding P10,000 20%

Prize, differentiated from

winnings:
A prize is the result of an effort made
(e.g., prize in a beauty contest), while
winnings are the result of a transaction
where the outcome depends upon
chance (e.g., betting).
Summary Rules for Prizes and Winnings (from
sources within the Phils)
Taxpayer Prizes not Winnings Prizes
exceeding from
exceeding
P10,000
PCSO & P10,000
Lotto
Other
winnings,
regardless
of
amount
RC,
5-32% BT
EXEMPT
20% FT
NRC,

FT final tax
BT base tax (form part of gross income
subject to graduated rates)
2) Passive income not subject to final tax
Interest income from long-term deposit
or investment in the form of savings,
common or individual trust funds,
deposit
substitutes,
investment
management accounts and other
investments evidenced by certificates in
such form prescribed by the BSP shall be
EXEMPT from tax
o BUT should the holder of the
certificate pre-terminate the
deposit or investment before the
5th year, a final tax shall be
imposed on the entire income
and shall be deducted and
withheld by the depository
bank from the proceeds of the
long-term deposit or investment
certificate
based
on
the
remaining maturity thereof:
Four (4) years to less
than five (5) years - 5%;
Three (3) years to less
than four (4) years 12%; and
Less than three (3) years
- 20%.
e. Taxation of capital gains

RESIDENT
CITIZEN

ALIEN

CITIZEN

NRAETB

All sources

Within the
Philippine
s

Within the
Philippine
s

Within the
Philippine
s

CATEGORY OF INCOME

Business

NON-RESIDENT

1.

Compensation
Profession

2.

Prizes of P10,000 or less

Based on Taxable (i.e, Net) Income

Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%)

3.

Interest from any currency bank

deposit , etc., Royalties (other
than from books, literary works
and
musical
compositions),

Gross Income Within the Philippines (GIW) 20%

Final Withholding Tax

NRANET
B
Within the
Philippine
s
GIW
25%

Not
Applicabl
e

31

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

RESIDENT

NON-RESIDENT

CITIZEN

ALIEN

CITIZEN

NRAETB

All sources

Within the
Philippine
s

Within the
Philippine
s

Within the
Philippine
s

CATEGORY OF INCOME

NRANET
B
Within the
Philippine
s

Winnings / Prizes (except prizes

P10,000 and below)
4.

Royalties from books, literary

works, musical compositions

5.

Interest from long-term deposit or

investment certificates, which
have a maturity of 5 years or
more

6.

Cash / Property Dividends from

a domestic corporation, etc., OR
share in the distributable net
income after tax of a partnership
(except a general professional
partnership), etc.

7.

8.

9.

Interest
(Expanded
Foreign
Currency Deposit System)
Winnings
on
Sweepstakes / Lotto

GIW 10% Final Withholding Tax

EXEMPT; However:
In case of pre-termination, with remaining
maturity of:
4 years to less than 5 years 5% on entire income
3 years to less than 4 years 12% on entire income
less than 3 years 20% on entire income

GIW 10% Final Withholding Tax

GIW 7.5%
Withholding Tax

Final

EXEMPT

Philippine

Capital Gains on Sale of Shares of

Domestic Corp. (not traded in a
domestic stock exchange)

10. Capital Gains on Sale of Real

Property in the Philippines
11. Sale of Shares of Domestic Corp.
(traded in a domestic stock
exchange)
12. Sale of Real Property located
Abroad
13. Sale of Shares of Foreign Corp
14. Passive Income from Abroad

EXEMPT
Net Capital Gains within:
Not Over P100,000 5% Final Tax
Amount in Excess of P100,000 plus 10% Final Tax on the excess
Gross Selling Price or FMV, whichever is higher
6% Final Withholding Tax
of 1% of the Selling Price (Stock Transaction Tax)
Note: Stock Transaction Tax is not an income tax, but a business
(percentage) tax
Schedular Income Tax Rates (Sec. 24, NIRC)
(i.e, 5% to 32%)

COMPUTATIONS
1. Pure Compensation Income
x
Less:

GIW
20%

Gross Compensation Income

Personal
&
Additional
Exemptions
and
hospitalization/health

xx

xx

Less:

insurance premium
Taxable Income
Rate
Income Tax
Creditable Withholding Tax on
Compensation Income
Tax Payable

xx
xx
xx
xx

32

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

2. Mixed-Income (i.e., compensation income and
business income/income from the practice of
profession)

Less:

ADD:

Less:

x
Less:

Gross Compensation Income

Personal
&
Additional
Exemptions
and
hospitalization/health
insurance premium
Taxable Compensation Income
Gross Business Income &/or
Income
from
Practice
of
Profession
Allowable Deduction (itemized
or optional deduction)
Taxable Income
Rate
Income Tax
Creditable Withholding Tax on
Compensation
Income/Other
Allowable Tax Credit
Tax Payable

Xx

Xx
Xx
Xx

Xx
Xx
Xx

Xx
Xx

13. Individual Taxpayers Exempt from Income

Tax
a. Senior citizens
The income of a qualified senior citizen is
exempt from the payment of income tax provided
his annual taxable income does not exceed the
poverty level of P60,000 per year, except interest
income. [BIR Ruling 066-2000; R.A. 7432; BIR
Ruling 15-98]
b. Exemptions granted under international
agreements
14. Taxation of Domestic Corporations
a. Tax payable
b. Allowable deductions
c. Taxation of Passive Income
d. Taxation of Capital Gains
f. Tax on government-owned or controlled
corporations, agencies or instrumentalities
a. Tax payable
1) Regular tax
a. Normal Corporate Income Tax Rate: 30% of
net taxable income

3. Pure Business/Professional Income

Less

Less:

x
Less:

Gross Business Income &/

or Income from Practice of
Profession
(a)
Allowable
Deduction
(itemized
or
optional
deduction)
(b)
Personal
&
Additional Exemptions
and hospitalization/health
insurance premium
Total Taxable Income
Rate
Income Tax
Creditable Withholding Tax on
Compensation
Income/Other
Allowable Tax Credit
Tax Payable

Xx

xx

xx

Xx
Xx

Xx
Xx

11. Taxation of Non-resident Aliens Engaged

in Trade or Business
See tables above.

Gross Income
Allowable Deductions
Taxable Income

2) Minimum corporate income tax (MCIT)

a) Imposition of MCIT
Gross Sales
Less Sales Returns
Sales Returns & Allowances
Cost of Goods Sold
MCIT GI
MCIT is in the nature of a tax credit, not
an allowable deduction. Its purpose is
to prevent corporations from escaping
being taxed by including frivolous
expenses in their statement of income.
The MCIT is compared with the regular
income tax, which is due from a
corporation. If the regular income is
higher than the MCIT, then the
corporation does not pay the MCIT.
Who are covered by MCIT? The MCIT
covers domestic and resident foreign
corporations which are subject to the
regular income tax. The term regular
income tax refers to the regular income
tax rates under the Tax Code. Thus,
corporations which are subject to a special

33

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

corporate tax system do not fall within the
coverage of the MCIT.
Note: For corporations whose operations or
activities are partly covered by the regular
income tax and partly covered under special
income tax system, the MCIT shall apply on
operations by the regular income tax system.

When is the MCIT computed?

beginning of the fourth taxable year
immediately following the year in
which such corporation commenced its
business operations, and after incurring
a net loss or zero taxable income, or a
normal income tax that is lesser than
minimum income tax.
What amount of income tax is paid by the
corporation to the BIR?
Whichever is HIGHER between the
normal tax and the minimum corporate
income tax.

b) 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 TAX for the three
(3) immediately succeeding taxable
years. [Sec. 27(E)(2)] In the year to
which carried forward, the normal tax
should be higher than the MCIT.
c) Corporations exempt from the MCIT
1. Banks and other non-bank financial
intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and
Development Act of 1992 under R.A.
7227; and
c. under special economic zones declared
by law which enjoy payment of special
tax rate on their registered operations or
activities in lieu of other taxes, national
or local.
Words in regular letters are found in Sec.

29(B)(2) of the NIRC. Words in italics are

additions made by the revenue regulation to
consolidate Sec. 29 with other pertinent
laws.
e)
Applicability of the MCIT where a
corporation is governed both under the regular
tax system and a special income tax system
For corporations whose operations or activities
are partly covered by the regular income tax and
partly covered under special income tax system,
the MCIT shall apply on operations by the
regular income tax system.
15. Taxation of Resident Foreign Corporations
A Philippine branch of a foreign corporation
duly licensed by the SEC is considered a resident
foreign corporation. Thus, only the income of the
Philippine branch from sources within the
Philippines is subject to Philippine income tax.
But, when the head office of a foreign
corporation independently and directly invested
in a domestic corporation without the funds
passing throught its Philippine branch, the
taxpayer, with respect to the tax on dividend income,
would be the non-resident foreign corporation itself
and the dividend income shall be subject to the
tax similarly imposed on non-resident foreign
corporations.
With respect to their income from sources
within the Philippines

NORMAL CORPORATE INCOME TAX

RATE 30% of net taxable income from
sources within the Philippines [RA 9337]
MINIMUM CORPORATE INCOME TAX
(MCIT) 2% of MCIT Gross Income from
sources within the Philippines. The MCIT is
imposed on RFCs under the same
conditions as domestic corporations. [Sec.
28(A)(2)]

Offshore banking units

Coverage of the Rule: ONLY income derived

by offshore banking units from foreign
currency transactions with:
nonresidents,
other offshore banking units
local commercial banks including
branches of foreign banks that may be
authorized by the Bangko Sentral ng

34

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

Pilipinas (BSP) to transact business with
offshore banking units

TAX RATE: Exempt from all taxes, except net

income from such transactions as may be
specified by the Secretary of Finance, upon
recommendation by the Monetary Board to
be subject to the regular income tax payable
by banks
EXCEPTION: Interest income derived
from foreign currency loans granted to
residents other than offshore banking
units or local commercial banks,
including local branches of foreign
banks that may be authorized by the
BSP to transact business with offshore
banking units, shall be subject only to a
final tax at the rate of 10%.

Branch profits remittances

Taxable transaction any profit remitted by a
branch to its head office
Tax Rate and Base 15% based on the total
profits applied or earmarked for remittance
without any deduction for the tax
component
Non-taxable activities activities which are
registered with the Philippine Economic
Zone Authority
Income NOT TREATED AS BRANCH
PROFITS unless effectively connected with
the conduct of trade or business in the
Philippines:
i. Interests, dividends, rents, royalties,
including remuneration for technical
services
ii. salaries, wages premiums, annuities,
emoluments
iii. other fixed or determinable annual,
periodic or casual gains, profits, income
iv. capital gains received during each
taxable year from all sources within the
Philippines
NOTES:
imposed whether the head office of the
foreign corporation is located in a tax treaty
country, in a tax haven or other non-treaty
country.
imposed only on the profits remitted by a
Philippine branch to the head office of a
foreign corporation.

OPTIONAL STANDARD DEDUCTION

40% of its gross income (RA 9504,
effective July 6, 2008)

Regional or area headquarters and Regional

operating headquarters of multinational
companies

Regional or area headquarters: not subject to

income tax

Regional operating headquarters

10% of their taxable income
a branch established in the Philippines
by multinational companies which are
engaged in any of the following
services:
(SMART - BAD PPL)
1. general
Administration
and
planning
2. business Planning and coordination
3. sourcing and Procurement of raw
materials and components
4. corporate finance Advisory services
5. Marketing
control
and
sales
promotion
6. Training
and
personnel
management
7. Logistic services
8. Research and development services
and product development
9. technical Support and maintenance
10. Data
processing
and
communications, and
11. Business development.

16.
Taxation
Corporations

of

Non-resident

Foreign

35% of the gross income received from all

sources within the Philippines, such as interests,
dividends, rents, royalties, salaries, premiums
(except
reinsurance
premiums),
annuities,
emoluments or other fixed or determinable
annual, periodic or casual gains, profits and
income, and capital gains EXCEPT capital gains
resulting from the sale of shares of stock of a
domestic corporation not listed and traded
through a local stock exchange, held as a capital
asset.
Summary of Tax Bases and Rates of Special
Corporations
Type of Corporation
Domestic Corporations

Tax Base

Tax
Rate

35

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

Proprietary
Educational
Taxable
Institutions
and Income from
Hospitals
(Non- all sources
profit)
Depository
Banks
(Foreign
Currency Exempt (except
Deposit Units)
that
net

With respect income from

to
income such
derived
under transactions is
the
expanded subject to the
foreign currency regular
deposit system income
tax
from
certain payable
by
foreign currency banks)
transactions

With respect
to
interest
income
from
foreign currency
loans to residents Amount
of
other
than interest
offshore units in income
the Philippines
or
other
depository banks
under
the
expanded system
Resident Foreign Corporations
International
Gross
Carriers
Philippine
Billings
Offshore
Banking
Units
Exempt (except

With respect that

net
to
income income from
derived
by such
offshore banking transactions is
units
from subject to the
certain
foreign regular
currency
income
tax
transactions
payable
by
banks)

With respect
to
interest
income derived
from
foreign
currency
loans Amount
of
granted
to interest
residents other income
than
offshore
banking units or
local commercial
banks

10%

10%

2.5%

10%

Resident Depository
Bank
(Foreign Exempt (except
Currency
Deposit that
net
Units)
income from

With respect such

to
income transactions is
derived
under subject to the
the
expanded regular
foreign currency income
tax
deposit system payable
by
from
certain banks)
foreign currency
transactions

With respect
to
interest
income
from
foreign currency
Amount
of
loans to residents
interest
other
than
income
offshore units in
the Philippines
or
other
depository banks
under
the
expanded system
Regional or Area Exempt
Headquarters
Regional Operating Taxable
Headquarters
of Income from
Multinational
within
the
Companies
Philippines
Non-resident Foreign Corporations
Non-resident
Gross Income
cinematographic film from
the
owners, lessors or Philippines
distributors
Nonresident Owner Gross Rentals,
or Lessor of Vessels Lease
and
Chartered
by Charter Fees
Philippine Nationals
from
the
Philippines
Nonresident Owner Gross Rentals,
or Lessor of Aircraft, Charges and
Machineries
and Fees from the
Other Equipment
Philippines

36
-

10%

10%

25%

4.5%

7.5%

17. Improperly Accumulated Earnings of

Corporations
[Sec. 29, as implemented by RR 2-2001
which prescribes rules governing the
imposition of IAET]
There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of
the improperly accumulated taxable
income of domestic and closely-held

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

corporations formed or availed of for the
purpose of avoiding the income tax with
respect to its shareholders or the
shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of
dividing them among or distributing them
to the shareholders.
Exception The use of undistributed
earnings and profits for the reasonable
needs of the business would not generally
make the accumulated or undistributed
earnings subject to the tax.
18. Exemption from tax on corporations
[Sec. 30]
19. Taxation of Partnerships
A. Classification of Partnerships for Tax
Purposes
1.
General Professional Partnerships (GPP)
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
2.
Other Partnerships (or General Copartnerships) partnerships wherein all or
part of their income is derived from the
conduct of trade or business. An ordinary
business partnership is considered as a
corporation and is thus subject to tax as
such.
B. Other Partnerships
partnerships)

(or

General

Co-

Rules:
1.
The partnership is subject to the same
rules on corporations, but is not subject to
the improperly accumulated earnings tax
[IAET]. The partnership must file quarterly
and year-end income tax returns.
2.
The taxable income of the partnership,
less the normal corporate income tax (30%)
thereon, is the distributable net income of
the partnership.
3.
The share of a partner in the
partnerships distributable net income of a
year shall be deemed to have been actually
or constructively received by the partners in
the same taxable year and shall be taxed to
them in their individual capacity, whether

actually distributed or not. [Sec. 73(D)] Such

share will be subjected to a final tax of 10%
to be withheld by the partnership. [Sec.
24(B)(2)]
D. Joint Venture and Consortium
A joint venture is not taxed as a corporation, and
is taxed just like a general professional
partnership (meaning, taxed on the individual
companys share in the profits).
But, if the joint venture is engaged in any other
line of business than construction or energyrelated activity with operating contract with the
government, the same will be treated as a
taxable corporation.
Two elements necessary to exempt a joint
venture or consortium from tax
a. The joint venture must be an
unincorporated entity formed by two or
more persons
b. The joint venture was formed for the
purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government.
20.
Taxation
Partnerships

of

General

Professional

Rules:

A GPP as such shall not be subject to

the income tax. It is NOT a taxable entity for
income tax purposes.

The partners shall only be liable for

income tax only in their separate and
individual capacities.

For purposes of computing the

distributive share of the partners, the net
income of the GPP shall be computed in the
same manner as a corporation.

Each partner shall report as gross

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

The share of a partner shall be subject to

a creditable withholding income tax of
15%. (RR 2- 1998)

If the partnership sustains a net

operating loss, the partners shall be entitled
to deduct their respective shares in the net
operating loss from their individual gross
income.

37

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

21. Taxation on Estates and Trusts
a) Application
b) Exception
c) Determination of tax
1) Consolidation of income of two or more
trusts
Requisites:
(a) 2/more trusts exist
(b) creator of the trust in each instance is the
same person
(c) beneficiary in each instance is the same
2) Taxable income
3) Revocable trusts
REVOCABLE TRUSTS: Where at any
time the power to revest in the grantor
title to any part of the corpus of the trust
is vested
a. in the grantor either alone or in
conjunction with any person not having
a substantial adverse interest in the
disposition of such part of the corpus or
the income therefrom, or
b. in any person not having a substantial
adverse interest in the disposition of
such part of the corpus or the income
therefrom,
the income of such part of the trust
shall be included in computing the
taxable income of the grantor. [Sec. 63,
NIRC]
4) Income for benefit of grantor
Where any part of the income of a trust
a. is, or in the discretion of the grantor or
of any person not having a substantial
adverse interest in the disposition of
such part of the income may be held or
accumulated for future distribution to
the grantor, or
b. may, or in the discretion of the grantor
or of any person not having a
substantial adverse interest in the
disposition of such part of the income,
be distributed to the grantor, or
c. is, or in the discretion of the grantor or
of any person not having a substantial
adverse interest in the disposition of
such part of the income may be applied
to the payment of premiums upon
policies of insurance on the life of the
grantor,

such part of the income of the trust shall be

included in computing the taxable income of the
grantor. (Sec. 64, NIRC)
5) Meaning of in the discretion of the grantor
NOTE: 'In the discretion of the grantor'
means in the discretion of the grantor, either
alone or in conjunction with any person not
having a substantial adverse interest in the
disposition of the part of the income in
question.
22. Withholding tax
Withholding tax is a method of collecting
income tax in advance from the taxable income
of the recipient of income.
Withholding on wages/compensation
1) Requirement for withholding
Every employer making payment of wages
shall deduct and withhold upon such wages
a tax determined in accordance with the
rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation
of the Commissioner.
EXCEPTION: No withholding of a tax shall
be required where the total compensation
income of an individual does not exceed the
statutory minimum wage, or five thousand pesos
(P5,000.00) per month, whichever is higher.
Liability for tax
(A) Employer. - The employer shall be liable for
the withholding and remittance of the correct
amount of tax required to be deducted and
withheld. If the employer fails to withhold and
remit the correct amount of tax as required to be
withheld, such tax shall be collected from the
employer together with the penalties or
additions to the tax otherwise applicable in
respect to such failure to withhold and remit.
(B) Employee. - Where an employee fails or
refuses to file the withholding exemption
certificate or willfully supplies false or
inaccurate information thereunder, the tax
otherwise required to be withheld by the
employer shall be collected from him including
penalties or additions to the tax from the due
date of remittance until the date of payment. On
the other hand, excess taxes withheld made by
the employer due to:
(1) failure or refusal to file the
withholding exemption certificate; or

38

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

(2) false and inaccurate information
shall not be refunded to the employee
but shall be forfeited in favor of the
Government.
Exemptions from Withholding tax on
compensation:
Remuneration as an incident of employment
Retirement benefits received under RA 7641
Any amount received by an official or
employee or by his 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 such
as retrenchment, redundancy or cessation of
business
Social
security
benefits,
retirement
gratuities, pensions and other similar
benefits
Payment of benefits due or to become due to
any person residing in the Philippines under
the law of the US administered US Veterans
Administration
Payment of benefits made under the SSS Act
of 1954, as amended
Benefits received from the GSIS Act of 1937,
as amended, and the retirement gratuity
received by the government employee
Remuneration paid for agricultural labor
Remuneration for domestic services
Remuneration for casual labor not in the
course of an employer's trade or business
Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international organization
Payment for damages
Proceeds of Life Insurance
Amount received by the insured as a return
of premium
Compensation for injuries or sickness
Income exempt under Treaty
Thirteenth (13th) month pay and other
benefits (not to exceed P 30,000)
GSIS, SSS, Medicare and other contributions
Persons not subject to Withholding Tax on
Compensation:
Any employee whose total compensation
income does not exceed the statutory
minimum wage of Five Thousand (P
5,000.00) Pesos a month or Sixty Thousand
(P 60,000.00) Pesos a year is not subject to
Withholding Tax on Compensation.
NOTE: Employees, whose total annual
compensation do not exceed P 60,000,

shall be given two options with which

to pay his income tax due as follows:
o His compensation income shall
be subjected to withholding tax,
but he shall not be required to
file
the
income
return
prescribed in Section 51 of the
Code (filing of an individual
return) except when covered by
any
of
the
situations
enumerated in Sec. 2.83.4 of
Revenue Regulations No. 2-98;
or
o His compensation income shall
not be subject to withholding
tax but he shall file his annual
income tax return and pay the
tax due thereon, annually.

When the employee has opted to have his

compensation
income
subjected
to
Withholding tax so as to be relieved of the
obligation of filing an annual Income Tax
return and paying his tax due on a lump
sum basis, he shall execute a waiver in a
prescribed BIR Form of his exemption(s)
from withholding, which shall constitute the
authority for the employers to apply the
withholding tax table provided under
Revenue Regulations No. 2-98.

Withholding of VAT
On gross payments for the purchase of
goods
On gross payments for the purchase of
services
Payments made to government public
works contractors
Payments for lease or use of property or
property rights to non-resident owners
Final withholding tax at source
Under the final withholding tax system,
the amount of income tax withheld by
the withholding agent is constituted as a
full and final payment of the income tax
due from payee on the said income. The
liability for payment of the tax rests
primarily on the payor as a withholding
agent. Thus, in case of the withholding
agents failure to withhold the tax or in
case
of
under-withholding,
the
deficiency tax shall be collected from
him. The payee is not required to file an
income tax return for the particular

39

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

income, nor is he liable for the payment
of the tax. (Sec. 2.57, RR No. 2-98)
Creditable withholding tax
Taxes withheld on certain income
payments are intended to equal or at
least approximate the tax due of the
payee on the income.
1) Expanded withholding tax
a kind of withholding tax which is
prescribed on certain income payments
and is creditable against the income tax
due of the payee for the taxable
quarter/year in which the particular
income was earned.

o
o

o
o

o
Income payments subject to Expanded
Withholding Tax:
a. Professional fees / talent fees for
services rendered by the following:
Those individually engaged in the
practice of profession or callings
Professional entertainers such as but
not limited to actors and actresses,
singers and emcees
Professional
athletes
including
basketball players, pelotaris and
jockeys
Directors involved in movies, stage,
radio,
television
and
musical
directors
Insurance agents and insurance
adjusters
Management
and
technical
consultants
Bookkeeping agents and agencies
Other recipient of talent fees
Fees of directors who are not
employees of the company paying
such fees whose duties are confined
to attendance art and participation in
the meetings of the Board of
Directors
b. Professional fees, talent fees, etc for
services of taxable judicial persons
c. Rental of real property (in excess of P
10,000) used in business
d. Rental of personal properties in excess
of P 10,000 annually
e. Rental
of
poles,
satellites
and
transmission facilities
f. Rental of billboards
g. Cinematographic film rentals and other
payments
h. Income payments to certain contractors

o
o

o
o
o

o
o

General engineering contractors

General building contractors
Specialty contractors
Other contractors like:
Transportation contractors
Filling, demolition and salvage
work contractors and operators
of mine drilling apparatus
Operators of dockyards
Persons
engaged
in
the
installation of water system, and
gas or electric light, hear or
power
Operators
of
stevedoring,
warehousing or forwarding
establishments
Printers,
bookbinders,
lithographers and publishers,
except
those
principally
engaged in the publication or
printing of any newspaper,
magazine, review or bulletin
which appears at regular
intervals, with fixed prices for
subscription and sale
Advertising agencies, exclusive
of payments to media
Independent
producers
of
television, radio and stage
performances or shows
Independent
producers
of
"jingles"
Labor recruiting agencies
Persons
engaged
in
the
installation of elevators, central
air conditioning units, computer
machines and other equipment
and machineries and the
maintenance services thereon
Messengerial,
janitorial,
security, private detective and
other business agencies
Persons engaged in landscaping
services
Persons
engaged
in
the
collection and disposal of
garbage
TV and radio station operators
on sale of TV and radio airtime,
and
TV and radio blocktimers on
sale of TV and radio commercial
spots
Persons engaged in the sale of
computer services, computer

40

BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

i.
j.

k.

l.
m.

n.

o.

p.

q.
r.

s.

t.
u.
v.
w.
x.

programmers,
software
developer/designer, etc.
Income distribution to the beneficiaries
of estates and trusts
Gross commission or service fees of
customs, insurance, stock, real estate,
immigration and commercial brokers
and fees of agents of professional
entertainers
Commission, rebates, discounts and
other
similar
considerations
paid/granted to independent and
exclusive
distributors,
medical/technical
and
sales
representatives and marketing agents
and sub-agents of multi level marketing
companies
Income payments to partners of general
professional partnerships
Payments made to medical practitioners
through a duly registered professional
partnership
Payments
for
medical/dental/veterinary services thru
hospitals/clinics/health
maintenance
organizations,
including
direct
payments to service providers
Gross selling price or total amount of
consideration or its equivalent paid to
the seller/owner for the sale, exchange
or transfer of real property
Additional
income
payments
to
government personnel from importers,
shipping and airline companies or their
agents
Certain income payments made by
credit card companies
Income payments made by the top
10,000 private corporations to their
purchase of goods and services from
their local/resident suppliers other than
those covered by other rates of
withholding
Income payments by government offices
on their purchase of goods and services,
from local/resident suppliers
Tolling fees paid to refineries
Payments made by pre-need companies
to funeral parlors
Payments made to embalmers by
funeral parlors
Income payments made to suppliers of
agricultural products
Income payments on purchases of
mineral, mineral products and quarry
resources

41