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SPECIAL EMPLOYEES

GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered as Special employee
therefore, subjected to 15%.
EXC: employed Filipino, 2 conditions must concur:
1. Occupying managerial OR technical positions.
2. No other alien can occupy such position (other than the Filipino)
The employed Filipino has the option to be taxed at either:
1. fifteen percent (15%) of their gross income or
2. at the regular income tax rate on taxable compensation income in accordance with the Tax Code.
Multinational company - a foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in
the Asia-Pacific Region and other foreign markets.
Technical position - as being limited only to positions that are highly technical in nature or where there are no Filipinos who are
competent, able and willing to perform the services for which the aliens are desired.
THREE TEST FOR ELIGIBILITY TO THE 15% PREFERENTIAL TAX RATE
Filipinos exercising the option to be taxed at fifteen percent (15%) preferential rate for occupying the same managerial OR technical
position as that of an alien employed in an ROHQ or RHQ must meet all the following requirements:
1) Position and Function Test. - The employee must occupy a managerial position or technical position AND must actually be
exercising such managerial or technical functions pertaining to said position;
2) Compensation Threshold Test - In order to be considered a managerial or technical employee for income tax purposes, the
employee must have received, or is due to receive under a contract of employment, a gross annual taxable compensation of at least
PhP 975,000.00 (whether or not this is actually received);
To determine the compensation received or is due to be received by the employee, you look at the employment contract of
such employee.
o EXAMPLE: An employed Filipino is paid P100,000 per month x 12 months = P1.2 million. Thats already above the
threshold of P975,000. This Filipino employee can now exercise the option of paying the 15% preferential tax rate.
Provided that, a change in compensation as a consequence of which, such employee subsequently receiving less than the
compensation threshold stated in this section shall, for the calendar year when the change becomes effective, result in the
employee being subject to the regular income tax rate.
For purposes of determining the compensation threshold under this regulation, gross compensation shall not include
1. retirement and/or separation pay/benefits (whether or not taxable)
2. de minimis benefits.
3) Exclusivity Test The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a regular
employee and not just a consultant or contractual personnel. Exclusivity means having just one employer at a time.
Must not be a mixed employee, i.e., you should not be earning other income e.g. from you own business.
There is no employer-employee relationship in consultancy.
Take Note:
1) Its the employee, not the employer, who exercises the option to be taxed at either 15% of gross income or at the regular
rate on their taxable income in accordance with the Tax Code.
2) This revenue regulation (No. 11-2010) only mentions Filipinos working in an ROHQ or RHQ. The presumption is, this
regulation does not apply to Filipinos employed in Offshore Banking Units or Petroleum Service Contractors.
Manner of Computation of Tax
At the start of the year or at the start of the employees employment, as the case may be, it is important to determine
whether the employee shall receive, or is due to receive under a contract of employment, a gross annual compensation equivalent
to or above the compensation threshold stated in Section 3(b) of these regulations. The determination should, as far as practicable,
include both regular taxable compensation income and supplementary compensation income.
Gross compensation includes regular compensation and supplemental compensation.
At the beginning of the year, the expected gross annual taxable compensation which the employee would receive for such
calendar year should be submitted to BIR .
1. Otherwise, you cannot claim the 15% preferential tax rate. Rather, you are subject to the normal income tax rate of
5%-32%.

EXAMPLE 1: At the start of the year, Mr. A, a Filipino holding a managerial position in an RHQ, receives a monthly salary and
cost of living allowance in the amount of PhP70,000.00 and PhP7,000.00 respectively. His employment contract also states that
he may receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. A is due to
receive, under an employment contract, a regular taxable compensation income of PhP994,000.00 composed of PhP840,000.00
(PhP70,000.00 x 12 months) basic pay, PhP70,000.00 13th month pay and PhP84,000.00 (PhP7,000.00 x 12 months) cost of
living allowance, placing him above the compensation threshold of PhP975,000.00
Can Mr. A exercise his option to be taxed at the 15% preferential rate?
Yes, he has the option to be taxed at the rate of 15% of his gross income or at the regular income tax rate. Since the employer
knows that the annual gross compensation of the employee is above the compensation threshold of PhP975,000.00 at the start
of the year, then the employer may, at the option of the employee, withhold income tax at the rate of 15% of gross income. It is
immaterial that he may receive a bonus of an indeterminate amount because his regular compensation income already places
him above the compensation threshold of PhP975,000.00.
EXAMPLE 2: At the start of the year, Mr. A, a Filipino employed by an ROHQ, receives a monthly salary and cost of living
allowance in the amount of PhP65,000.00 and PhP5,000.00 respectively. His employment contract also states that he may
receive a performance bonus at the end of the year which amount is not presently determinable. Since Mr. As regular
compensation income of PhP905,000.00 composed of PhP780,000.00 (PhP65,000.00 x 12 months) basic pay, PhP65,000.00 13th
month pay and Php60,000.00 (PhP5,000.00 x 12 months) cost of living allowance, is below the compensation threshold of
PhP975,000.00 then his employer shall, on every pay period from the start of the year withhold from Mr. A income tax at the
regular rate of withholding tax on compensation. However, if at the end of the year Mr. A receives a performance incentive
bonus of PhP100,000.00, thus making his annual gross compensation income total PhP1,005,000.00 and he opts to be taxed at
the rate of 15% of his gross income, his employer shall make the necessary adjustments to the income tax rate. More
particularly: The employer shall refund to the employee the excess of the tax withheld at the regular rate of withholding tax on
compensation over the tax required to be withheld at the rate of 15% of gross income;
EXAMPLE 3: Mr. A, a Filipino employed by a regional area headquarters in the Philippines begins his employment on June 1. His
employment contract stipulates that he shall receive an annual compensation of PhP975,000.00 inclusive of 13th month pay. At
the end of the year, he would have received only Php568,750.00, composed of PhP525,000.00 (PhP975,000.00/13 x 7 months)
basic pay and PhP43,750.00 (PhP975,000.00/13 x 7/12 months) 13th month pay. However, since his employment contract
states that he shall receive an annual compensation of PhP975,000.00, whether he actually receives this or not, then his
employer shall, at the option of Mr. A, withhold income tax at the rate of 15% of actual gross compensation received.
o You can still avail of the 15% preferential tax rate even if you started working in the middle of the year for as long as
the amount of annual compensation that you will receive in your employment contract is above the threshold of
P975,000
EXAMPLE 5: What if during the year the ROHQ sustained losses such that the salary of the Filipino employee is decreased. Can
he still avail of the 15% preferential tax rate? Mr. A, a Filipino employed by a regional area headquarters in the Philippines
begins his employment at the start of the year. His contract stipulates that he shall receive an annual compensation of
PhP988,000.00. Since this amount is above the compensation threshold criteria, his employer shall, at the option of Mr. A,
withhold income tax at the rate of 15% of gross income. However, at the end of June, for one reason or another (e.g. reduction
of compensation due to business reverses), Mr. As compensation is reduced such that his annual compensation will be
reduced to an amount that is less than the compensation threshold. In this case, while the final withholding tax rate was applied
to Mr. A during the year, an adjustment should be made at the end of the year subjecting the entire annual compensation of
Mr. A to the regular income tax rates.
Refer to Revenue Regulation No. 11-2010 for more examples.

V. FRINGE BENEFITS
Definition
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 employee as defined in these regulations) such as, but not limited to the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and


(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
Atty A: For examination purposes, we will stick to the enumeration.
Kinds of Fringe Benefits [HEVHIMEHEL]
a. Housing
CASE

ANNUAL VALUE of
BENEFIT

Employer leases residential property for use of the


employee

Employer owns residential property which was assigned to


an officer for his use as residence (no transfer of
ownership)

5% of FMV of land
improvements

Employer purchases residential property on installment


basis and allows the employee to use the same as his
residence

5% of acquisition
cost excluding
interest

Monetary Value of Benefit (Monthly)


50% X Monthly rental paid by the
employer
- The 50% is given under the regulation
as a sign that there is no transfer of
ownership from the ER to EE
- If there is transfer of ownership, then
the entire amount is taxable as fringe
benefit
50% x Monthly Value of the benefit
*Monthly Value =
Annual Value /12 mos.
50% x Monthly Value of Benefit

Purchases residential property and transfers the ownership


to the employee

Acquisition cost of FMV whichever is


higher

Purchases residential property and transfers ownership


thereof to his employee for the latters residential use at a
price less than the employers acquisition cost

FMV of CIR and FMV of Assessor,


whichever is higher minus the cost of the
employee

Atty A: Please familiarize the Monetary Value of Benefit for each case.
*Exceptions:
I.
Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force;
- Take note walaI Philippine National Police ha..
II.
A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the business
premises or factory.
- Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ERs factory is hazardous.
III.
Temporary housing for an employee who stays in a housing unit for three (3) months or less.
- Applies to transient EE, like he is in Manila for training etc.
Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is subject to 5% to
32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to fringe benefit tax of 32%,
which is a final tax.
b. Expense account
In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except
when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a
personal expense attributable to the employee.
1) Business expenses
1. Related to the business of the employer.
2. Common in law firms or auditing firms: Having a lunch meeting with clients.
3. GR: Not subject to the Fringe Benefits Tax, provided:
1. It is duly receipted.
2. The receipt is under the name of the employer.

EXC: Not duly receipted.


2) Personal expenses
Purchases of groceries for the personal consumption of the employee and his family members paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly
receipted for in the name of the employer.
c. Vehicle of any kind
Guidelines in valuation of Motor Vehicles:
CASE
TRANSACTION
1
2
3

4
5

6
7

MONETARY VALUE of Benefit

Purchase the motor vehicle in the name of the


employee
Provides the employee with cash for the purchase
of a motor vehicle in the name of the employee
Shoulders a portion of the amount of the purchase
price of a motor vehicle in the name of the
employee
Purchase the car on install in the name of the
employees
Owns and maintains a fleet of motor vehicles for
the use of the business of the employees

Acquisition Cost

Leases and maintains a fleet of motor vehicles for


the use of the business and the employees
The use of yacht whether owned and maintained
or leased by the employer

Amount of rental payment for motor vehicles not normally used in


business x 50%
Depreciation of yacht at an estimated useful life of 20 years

Amount of cash received by the employee


Amount shouldered by the employee

Acquisition cost (exclusive of interest) divided by 5 years


Acquisition cost of all motor vehicles not normally used in business
divided by 5 years x 50%ount of rental payment for motor vehicles
not normally used in business x 50%

d. Household personnel
Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal
driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall
be treated as taxable fringe benefits.
GR: Subject to Fringe Benefit Tax
EXC: Not subject to FBT when:
1. these household personnel are already included in the payroll or alphalist of the employer; or
2. provided for the convenience of the employer.
1. this seldom happens because the convenience of the employer rule usually applies to de minimis benefit.
e. Interest on loan at less than market rate
No revenue regulation coming from BIR adopting the 6% per annum as the legal interest. In the essay exams, use the 12%
interest per annum but kindly indicate that the legal interest has already been lowered to 6%.
If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest
foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall
be treated as a taxable fringe benefit.
o Example: X obtains a loan from his employer B with an interest of 8%. The difference between the legal interest of 12%
and the 8% interest paid by X, which is 4%, is subject to Fringe Benefits Tax.
The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation.
This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January
1, 1998.
Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar
organizations. These expenditures shall be treated as taxable fringe benefits of the employee in full.
f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations

g. Expenses for foreign travel


General rule: subject to fringe benefit tax
Except: 1) reasonable business expense
2) inland travel expenses, excluding lodging cost in a hotel, amounting to $300 or less
3) the cost of economy and business class airplane ticket; 70% of the cost of first class airplane ticket.
Requisites in order to be exempted from the fringe benefit tax:
1. Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of
attending business meetings or conventions shall not be treated as taxable fringe benefits.
o The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.
official invitation/communication letters from business associates abroad indicating its purpose.
2. Inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax.
Not subject to fringe benefit tax
Inland travel expenses such as:
1) Food
2) Beverages
3) Local transportation
Amounting to an average of $300 or less

3.

Subject to fringe benefit tax


1) Inland travel expenses such as:
I.
Food
II.
Beverages
III.
Local transportation
In excess of $300
2) Lodging cost in a hotel

The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the
cost of first class airplane ticket shall be subject to a fringe benefit tax. Travelling expenses which are paid by the employer for
the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.
Not subject to fringe benefit tax
1) Cost of airplane ticket which are:
i. economy class
ii. business class
2) 70% of the cost of first class airplane ticket

Subject to fringe benefit tax


1) 30% of the cost of first class airplane ticket
2) Travelling expenses which are paid by the
employer for the travel of the family members of
the employee

h. Holiday and vacation expenses


i. Educational assistance to the employee or his dependents
As to the employee:
General rule: subject to fringe benefit
Except: 1) if the education or study involved is
i.
directly connected with the employer's trade, business or profession, and
ii.
there is a written contract between them that the employee is under obligation to remain in the employ of the
employer for period of time that they have mutually agreed upon. (return of service contract; lock-in service
contract)
As to the dependents of the employee:
General rule: subject to fringe benefit
Except: when the assistance was provided through a competitive scheme under the scholarship program of the company.
there must be a qualification exam to identify who will be admitted to such scholarship program.
dependent must be able maintain a certain grade.
j. Cost of life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows
[applies only to managerial or supervisory employees]
General rule: subject to fringe benefit
Except: 1) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law:
SSS, GSIS or similar contributions arising from the provisions of any other existing law
2) the cost of premiums borne by the employer for the group insurance of his employees.

Atty A: Take note that premiums on life insurance are excluded from taxation. Do not confuse it with letter j, which contains a
qualification in excess of what the law allows.
3. COMPUTATION OF FRINGE BENEFITS TAX
A final withholding tax paid by the employer.
Take note: Fringe Benefit Tax does not apply to rank and file employees.
a.
b.

c.

Burden of FBT: Employer


Grossed Up Monetary Value for:
i.
Special employees
ii.
NRA-NETB
Rate of FBT:
i.
32% for ordinary managerial or supervisory employees.
ii.
15% for Filipino special employees.
iii.
25% for NRA-NETB.

To compute for the Grossed Up Monetary Value:


GMV = Value of the Fringe Benefit + Fringe Benefit Tax
To compute for the Fringe Benefit Tax:
1) determine the GMV:
GMV = Value of the Fringe Benefit 68% (the goal here is to determine the 100% value of the benefit)
2) multiply the GMV with the FBT rate:
FBT = GMV x 32%
Example 1: Employer R leases a residential property for the use of the employee E. (Monetary value of the benefit is 50% of the
monthly rental paid by the R.). The monthly rental is P13,600. The monetary value of the fringe benefit is 50% of P6,800 which is
P25, 000.
Compute first the grossed-up monetary value:
GMV = P6,800 68% = P10,000
Now, compute for the fringe benefit tax:
FBT = P10,000 x 32% = P3,200
Atty A: FBT is treated as a final tax, i.e., you will fill-up another BIR form. The tax withheld is constituted as the full and final
payment, which means you no longer add this figure in getting your gross annual income.
Example 2: Employer R purchases the vehicle in the name of the employee E. (Monetary value of the benefit is equivalent to the
acquisition cost). The cost the car is P680,000. The monetary value of the fringe benefit is P680,000.
GMV = P680,000 68% = P1,000,000
FBT = P1,000,000 x 32% = P320,000
How much is the value of the total benefit received by E? Its the P1,000,000 because the P320,000 is paid by employer R.
Example 3: Special employee E is receiving a fringe benefit of P850,000.
GMV = P850,000 85% = P1,000,000
FBT = P1,000,000 x 15% = P150,000
Who shoulders the FBT? The employer.
Example 4: An NRA-NETB is receiving a fringe benefit of P750,000.
GMV = P750,000 75% = P1,000,000
FBT = P1,000,000 x 25% = P250,000

4. EXEMPTION FROM FRINGE BENEFIT TAX (Revenue Regulation No. 5- 2011)


a. De Minimis Benefits These are facilities and privileges of relatively small value and are offered or furnished by the employer to
his employees merely as means of promoting their, health, contentment or efficiency.
This falls under the Taxable 13th month pay and other benefits
o If it does not fall under the regular compensation, it now falls under other benefits
o Benefits always make the life of the employee easier.
Cellphone allowance
Rice subsidy
Take note: The amount in excess of the limit stated below forms part of the P30k threshold. Any amount in excess of the
P30k threshold is now subject to ordinary tax [5%-32%].)
The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation
income of both managerial and rank and file employees as long as it will not exceed the minimum amount set under this
enumeration (the list is exclusive):
a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;
does not include sick leave credits
If you are a private rank and file employee and you avail of your monetized amount of your unused sick leave credits, are
you exempted from fringe benefit tax? Yes, because you a rank and file employee, not a managerial or supervisory
employee. However, you will be subject to ordinary income tax.
b) Monetized value of vacation and sick leave credits paid to government officials and employees;
c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month;
This pertains to dependents of employees.
There are 2 semesters per year. Therefore, it is limited to:
o P1,500 per employee per year
o P750 per employee per semester
o P125 per employee per month
d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;
Rice subsidy not exceeding:
o P1,500 per month
o P9,000 per semester
o P18,000 per year
Example: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the
P30k other benefits threshold.
e) Uniform and Clothing allowance not exceeding P5,000 per annum;
P2,500 per semester.
P416.67 per month.
f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up,
maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;
This pertains to the employee himself.
It must not exceed:
o P10,000 per year
o P5,000 per semester
o P833.33 per month.
Sample question: Medical cash allowance for employees in order to be considered de minimis benefit, and therefore
exempt from fringe benefit tax is limited P750 per semester: False.
g) Laundry allowance not exceeding P300 per month;
It must not exceed:
o P3600 per year
o P1800 per semester
o P300 per month.
h) Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of highly paid employees;
If you were given cash or gift certificate, it is merely considered as a supplemental income and not a de minimis benefit.
If you were given a gold ring worth P15,000, the excess of P5000 falls to the P30k threshold.

i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum
wage on a per region basis;
To benefit the call center agents, nurses and other employees working on a graveyard shift.
TAKE NOTE: All other benefits given by employers which are not included in the above enumeration shall not be considered as "de
minimis" benefits, and hence, shall be subject to income tax as well as withholding tax on compensation income.
Atty A: The old revenue regulation used to include Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc as de minimis benefit.
These do not form part of the P30k.
What forms part of the P30k are the excesses of the items enumerated above.
Now taxable as ordinary compensation.
Illustration: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the P30k
other benefits threshold. (Any amount in excess of the P30k threshold is now subject to ordinary tax *5%-32%].)
What you will prioritize in your P30k is the 13th month pay. For example, your monthly pay is P20,000, so your annual pay is
P240,000. Your 13th pay - which is more or less equivalent to your 1 month salary provided you work from January to December
P20,000 will now be added to the P30k along with the excess P1,500 rice subsidy. Since the sum does not exceed the P30k, it is not
subject to the ordinary income tax.
Annual Income:
Monthly Income:
Annual rice allowance:

P240,000
P20,000
P3,000

Amount exceeding:
P1,500
13th month pay:
P20,000
Total
P21,500
Not subject to ordinary tax since the amount does not
exceed the P30k threshold.

Annual Income:
Monthly Income:
Annual rice allowance:

P360,000
P30,000
P3,000

Amount exceeding:
P1,500
13th month pay:
P30,000
Total
P31,500
The excess of P1,500 will now be subject to ordinary
tax. This will be added to your annual gross income.

To avoid confusion, add first the 13th month pay to the P30k threshold, then add the excess to the de minimis benefit. Once it
exceeds the P30k threshold, it will now be subject to ordinary income tax.

b. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plan
Pertains to the group insurance, group retirement, or group hospitalization benefit plan.
Exempted from fringe benefit tax because there is no direct benefit given to the employee, rather its the group of
employees who will benefit from it.
This is different from Section 32(b) Exclusions from Gross Income, where the employer takes a life insurance on the life of
its key employee, e.g., the president.
o Take note of the two perspective: Premiums as income on the part of the employee and premiums as an expense
on the part of the employer.
o If the beneficiary of the life insurance is the company itself, it is not considered as an income on the part of the
employee. It follows that the employer cannot deduct it as an expense. However, if the beneficiary is the estate or
administrator of the employee, its considered as an income on the part of the employer, and is deductible on the
part of the employer.
o Take note: This is not applicable on Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefits plan because this pertains to group life insurance whereas Section 32(b)
which pertains to specific life insurance.
C. Employers convenience rule
For the benefit to be exempted from the FBT:
1) required by the nature of or necessary to the trade, business or profession of the employer; or
2) when the fringe benefit is for the convenience or advantage of the employer.
Example: Mr. X employs Mr. Y as his driver. Mr. Y is given P5,000 monthly wage, and board and lodging worth P3,000. Is the P3,000
taxable as fringe benefit? It depends. If the employer has his own trade or business, the P3000 is exempted from the FBT, under the

presumption that it is necessary and for the convenience of the employer. However, if the employer is not engage in any trade,
business or profession, the P3,000 is taxable.
d. FB which are authorized or exempted from tax under special laws
2. Business or Professional Income
If the individual taxpayer is also earning business income or professional income, he is allowed to make deductions for his
expenses.
3. Passive Income
There is no active participation on the part of income earner to generate the fund, like interest income on bank deposit.
Subject to final tax and is withheld by the payor.
Payor must at least be registered with the BIR.
o If the payor is from abroad, there is no more withholding. It will simply form part of the ordinary income of the
individual taxpayer.
Types of Passive Income
This is usually an isolated or one-off transaction.
1. Interest from currency deposits, trust funds and deposit substitutes (20%)
2. Royalties (Special royalty: books as well as literary & musical composition) (10%)
Royalties other than those mentioned above are generally subject to 20% final income tax.
For Non-Resident Alien - Not Engaged in Trade or Business (NRA-NETB), they are subject to a flat rate of 25% of the gross
income derived from all sources within the Philippines.
o Those who are transient or sojourners and they stay here FOR 180 DAYS OR LESS.
Payor of the royalty withholds the final tax (10% or 20%, depending on the source of the royalty).
When you pass on some technical knowledge for the manufacture of this microchip or item, it will be subject to royalty fees.
This is usually an isolated or one-off transaction.
o Example: X obtained technical knowledge from Y, a software developer. In consideration thereof, X paid royalty fees to
Y. X, as payor and as the withholding agent of the government, is obliged under the law to withhold 20% of the royalty
fee. If X fails to withhold the amount of the final tax, he cannot claim deductions for royalties and expenses.
However, if the income-earner of a royalty e.g., Belgian Waffle, is really engaged in extending royalties, franchises and other
intangible assets, then it is no longer passive. Its not inactivity. The business itself is extending franchises, it will not be
considered as passive income, therefore no final taxes, therefore the one paying the royalty is not expected to withhold
equivalent to at the end of the year, the payment simply forms part of business income of Belgian Waffle, subject to 5-32%.
When it comes to musical compositions, it would depend on whether the income earner is engaged in selling musical
compositions for a living or it is simply an isolated transaction.
o One-time transaction: it is considered a passive income and the payor is obliged to withhold the final tax equivalent to
10%.
o Engaged in the business of selling musical: income forms part of his business income and the payor is not obliged to
withhold the final tax.
Take note: that the passive income subject to final tax must be an income that is paid by one who can be considered a
withholding agent in the Philippines. Payment in the Philippines, in short. If the one paying who is expected to withhold is not
from here, is abroad, not registered with the BIR, e.g. an NRA-NETB, there can be no withholding. The government of the
Philippines cannot compel this one to withhold. Even if passive income, no withholding because there is no withholding agent.
What the domestic corporation or resident citizen will do is simply declare by itself the royalty fees as part of its ordinary
income.
3. Prizes (exceeding P10,000) (20%)
If the prize does exceed P10,000, it is not subject to final tax. However, it will form part of your gross income subject to 5%-32%
ordinary tax.
If the price exceeds of P10,000, it is now subject to final withholding tax of 20%.
o Example: X won a prize worth P20,000 in a raffle draw and there no statement that it is inclusive of tax, then
automatically 20% of the prize will be withheld by the organizer of the raffle draw as payment of your final tax, unless
the prize came from PCSO or lotto which is exempted from final withholding tax.
Take note: These are not included under this category:

1) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic
achievement but only if:
i) The recipient was selected without any action on his part to enter the contest or proceeding; and
ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.
2) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations.
4. Winnings (except from PCSO and lotto) (20%)
o Example: W won a car in a raffle draw and there is a statement that it is exclusive of tax, X will be obliged the organizer
to pay 20% of the value of the car as final withholding tax for this passive income.
5. Interest Income of Foreign Currency Deposit (7.5%)
This only applies to resident citizens and resident aliens.
o Does not apply to NRC (0%) and NRA (0%).
6. Cash and Property Dividends
To Individuals from Domestic Corporations (10%)
o Applies only to resident citizens, non-resident citizen, and alien.
o Non-resident aliens engaged in trade or business who receives these dividends are subject to 20%.
o Non-resident aliens not engaged in trade or business who receives these dividends are subject to a flat rate of 25%
To Domestic Corporations from Another Domestic Corporations (0%)
To Individuals from Foreign Corporations:
a. If the income derived from the Philippines is more than 85%, it is considered as a domestic corporation. You follow the rule
on domestic corporation. (within)
b. If the income derived from the Philippines is more than 50%, its pro rata. Only the income coming from the Philippines will
be subjected to passive income tax rate. (allocation)
c. If the income derived from the Philippines is 50% or less, it is not subject to passive income tax. However, if the earner is a
RC, he will declare such dividend as part of his ordinary income. (without)
7. On capital gains presumed to have been realized from sale, exchange or other dispositions or real property (capital asset) (6%)
8. On capital gains for shares of stocks not traded in the stock exchange
- Not over P100,000 (5%)
- Any amount in excess of P100,000 (10%)
9. 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 (Exempt)
Termination after the fifth year: it is exempt from tax.
o In our previous discussion we know that one of the items excluded form gross income are those gains derived
from or other certificate of indebtedness with a maturity of more than five (5) years.
o This does not include corporate and treasury bonds because these two do not fall under the definition of longterm deposit or investment certificate which refers to certificate of time deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes, investment management accounts and other
investments. (Sec 22 ff of the Tax Code)
Termination before the fifth year: it is subject to tax.
Upon pre-termination before the fifth year, there should be imposed on the entire income from the proceeds of the long-term
deposit based on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years (5%)
- Three (3) years to less than four (4) years (12%)
- Less than three (3) years (20%)
Take note: the pre-termination rule above applies only to resident citizens, non-resident citizens, resident alien and non-resident
alien engaged in trade or business. A non-resident alien not engaged in trade or business is subject to a flat rate of 25% tax
regardless of whether or not there was pre-termination.

10. Shares/Dividends in Taxable Partnership, Joint Consortium, etc.


These are partnerships other than the general professional partnership
Example: trading business or manufacturing but the business organization is not a corporation but a partnership.
General rule: taxed just the same as a corporation (30%)
Shares of profit in this taxable partnership would be taxed similar to dividends received from a corporation.
o Resident citizens, non-resident citizens, and resident alien: 10%
o Non-resident alien engaged in trade or business: 20%
o Non-resident alien not engaged in trade or business: 25%
Summary:

Royalties (on books as well as literary &


musical composition)
All other royalties (payee must not be
normally engaged in the business of granting
or extending royalties, franchise or other
intangible assets)
Prizes (in excess of P10,000)
Winnings earned in the Philippines (except
from PCSO and lotto)
Regular Interest Income of Non-Foreign
Currency Deposit
Interest Income of Foreign Currency Deposit
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. Upon pre-termination
before the fifth year, it subject final tax rate
of
Holding Period of
Four (4) years to less than five (5) years:
Three (3) years to less than four (4) years:
Less than three (3) years:
Cash and Property Dividends
(To Individuals from Domestic Corporations)
Shares/Dividends in Taxable Partnership,
Joint Consortium, etc.

RC
w/in or w/o
10%

NRC
w/in
10%

RA
w/in
10%

NRA-ETB
w/in
10%

NRA-NETB
w/in
25%

20%

20%

20%

20%

25%

20%
20%

20%
20%

20%
20%

20%
20%

25%
25%

20%

20%

20%

20%

25%

7.5%

--

7.5%

--

--

5%
12%
20%
10%

5%
12%
20%
10%

5%
12%
20%
10%

5%
12%
20%
20%

A non-resident
alien not
engaged in
trade or
business is
subject to a
flat rate of
25% tax
regardless of
whether or not
there was pretermination.
25%

10%

10%

10%

20%

25%

i. Taxation at Source
- Withholding: refers to the means and method of collecting the income taxes.
a)

Final Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is not creditable
against the income tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax
withheld constitutes the full and final payment of the income tax due from the payee on the particular income subjected to final
withholding tax.
The withholding agent is the payor, unless the payor is a non-resident alien not engaged in trade or business. In such
cases, it will simply be declared as an ordinary income by the income-earner.
Not deducted from the income tax due.
You will fill up a separate BIR Form.
Example: Passive income like royalties.

b) Creditable Withholding Tax


Usually deducted from the income tax due.

Deduct the total amount withheld from the income tax due. Ideally, the income tax due must be equal to the total creditable
withholding tax which results in zero income tax payable.
o If the amount withheld is lesser than the income tax due, it will result in a positive income tax payable.

Withholding Tax on Compensation is the tax withheld from income payments to individuals arising from an employer-employee
relationship.

Expanded Withholding Tax is 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 Payments to MERALCO.
o Rent payments.

Withholding Tax on Government Money Payments (GMP) Percentage Taxes is the tax withheld by National Government
Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs) and local
government units (LGUs) before making any payments to non-VAT registered taxpayers/suppliers/payees.

Withholding Tax on GMP Value Added Taxes (GVAT) is the tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled corporations (GOCCs) and local government units (LGUs), before
making any payments to VAT registered taxpayers/suppliers/payees on account of their purchases of goods and services.

ii. Transactions Subject to Final Withholding


4. Capital Gains
Final tax without a withholding agent because its actually the seller, not the buyer *payor], who files the tax return.
Instances where CGT may be collected:
a. Sale of shares of stocks NOT listed and traded in the local exchange OR listed but NOT traded in the local exchange
5% for the 1st P100,000 (can only be availed of once in a taxable year.)
10% for the excess of the P100,000
Example: X is neither a real estate broker nor a dealer of securities. X transferred the shares over the counter and the shares are not
listed.
August 26, 2014:
X owns 10,000 shares at P100 par
X sells 10,000 shares at P150 par
You have a gain of

P1,000,000
P1,500,000
P500,000

To compute for the CGT:


5% x P100,000 = P5,000
10% x P400,000 = P40,000
CGT
P45,000

September 14, 2014:


X owns 10,000 shares at P100 par
X sells 10,000 shares at P200 par
You have a gain of

P1,000,000
P2,000,000
P1,000,000

To compute for the CGT, X can no longer the consider the 5%


because it has already been availed of:
CGT 10% x P1,000,000 = P100,000

b. Sale of Real Property located in the Philippines


Subject to a CGT of 6% based on FMV or the selling price, whichever is higher.
Not Subject to Capital Gains tax:
I.
All real properties acquired by the real estate dealer shall be considered as ordinary assets
II.
All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition,
and all real properties which are held by the real estate developer primarily for sale or for lease to customers in the
ordinary course of his trade or business or which would properly be included in the inventory of the tax payer if on hand at
the close of the taxable year and all real properties used in the trade or business, whether in the form of land, building, or
other improvements, shall be considered as ordinary assets.
III.
All real properties of the real estate lessor whether land, building, and/or improvements, which are for lease/rent or being
offered for lease/rent or otherwise for use or being used in the trade or business shall likewise be considered as ordinary
assets

IV.

All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property
shall be considered as ordinary assets.

Real estate dealer shall refer to any person engaged in the business of buying and selling or exchanging real properties on his own
account as a principal and holding himself out as a full or part-time dealer in real estate.
Real estate developer shall refer to any person engaged in the business of developing real properties into subdivisions, or building
houses on subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account
and offering them for sale or lease.
Real estate lessor shall refer to any person engaged in the business of leasing or renting real properties on his own account as a
principal and holding himself out as lessor of real properties being rented out or offered for rent.
Note: Registration with HLURB and HUDCC as a real estate dealer, developer shall be sufficient for a taxpayer to be considered as
habitually engaged in the sale of real estate.
Rules on Transactions involving Real Properties:
a. A property purchased for future use in the business, even though this purpose is later thwarted by circumstances beyond
the taxpayers control, does not lose its character as an ordinary asset. Nor does a mere discontinuance of the active use of
the property change its character previously established as a business property. [Sec 3-a-4 of RR 7-2003]
Example: youre engaged in the real estate business and you purchase a property to be used in your real estate
business. Eventually your business incurred losses and you cease the operation of your business. You were not able
to sell such property. Insofar as that property is concerned, it is considered an ordinary asset.
b. In the case of a taxpayer not engaged in the real estate business, real properties, whether land, building, or other
improvements, which are used or being used or have been previously used in the trade or business of the taxpayer shall be
considered as ordinary assets.
Example: youre into the merchandising business and you purchased a lot for your business and constructed a
building to be used in your business. Insofar as the property and building is concerned, it is considered as an
ordinary asset because real property used in trade or businesses are part of your ordinary asset. If you sell this
properties, you are subject to ordinary tax.
c. In the case of a taxpayer who changed its real estate business to a non-real estate business, real properties held by these
taxpayers shall remain to be treated as ordinary assets.
d. In the case of tax payers who originally registered to be engaged in the real estate business but failed to subsequently
operate, all real properties acquired by them shall continue to be treated as ordinary asset.
e. Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly
being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on
abandoned and became idle, shall continue to be treated as ordinary assets. Provided however, that properties classified as
ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are
automatically converted into capital assets upon showing of proof that the same have not been used in business for more
than two (2) years prior to the consummation of the taxable transactions involving said properties.
f. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the
hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined
in accordance with the following rules:
Real property transferred through succession or donation to the heir or donee who is not engaged in the real
estate business with respect to the real property inherited or donated, and who does not subsequently use such
property in trade or business, shall be considered as a capital asset in the hands of the heir or donee.
Real property received as dividend by the stockholders who are not engaged in the real estate business and who
do not subsequently use such real property in trade or business shall be treated as capital assets in the hands of
the recipients even if the corporation which declared the real property dividend is engaged in real estate business.
The real property received in an exchange shall be treated as an ordinary asset in the hands of the case of a taxfree exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate
business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property in
exchange.
In the case of involuntary transfers of real properties, including expropriation or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property in the hands of the
involuntary seller, either as capital asset or ordinary asset, as the case may be.

c.

Conditionally Exempt from Payment of CGT insofar as the sale of your Principal Residence:

1.

The proceeds of the sale of the Principal Residence have been fully utilized in acquiring or constructing new principal
residence within 18 calendar months from the date of sale or disposition. [includes transferring to a condo unit.]
To prove such property is your principal residence, you may need to obtain a certification from your barangay
chairwoman.
Take note: CGT of 6% FMV or selling price, whichever is higher. Cost is not deducted from the FMV or selling price
when multiplied by the rate of 6% to get the CGT of the capital asset; cost is only deducted if it is classified as
ordinary asset.
The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence
built or acquired;
The Commissioner has been duly notified, through prescribed return, within 30 days from the date of sale or disposition of
the persons intention to avail of the tax exemption
Exemption was availed only once every ten years; and
If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized
from the sale or disposition will be subject to CGT.
The portion not utilized will not subject to CGT.
Determine total proceeds of the sale and the cost of the new principal residence.
In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the
agreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or managers check in interestbearing account with an Authorized Agent Bank AAB under an Escrows Agreement between the concerned Revenue
District Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest
yield, shall only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition
thereof has, in fact, been utilized in the acquisition or construction of the Seller/Transferors new principal residence within
18 calendar months from the date of sale or disposition. The date of sale or disposition of a property refers to the date of
notarization of the document evidencing the transfer of said property.

2.
3.
4.
5.

6.

Summary: For CGT to be applicable, the real property:


1. must be a capital asset and not an ordinary asset,
not for sale.
not used in trade or business.
2. must be located in the Philippines.
3. Exception:
sale of principal residence, provided:
proceeds of the sale of the principal residence have been fully utilized in acquiring the new
principal residence within 18 calendar months from the date of sale.
a. If not fully utilized, the excess will be subjected to CGT.
Exemption is availed only once every ten years.
The Commissioner has been duly notified, through prescribed return, within 30 days from the
date of sale or disposition of the persons intention to avail of the tax exemption.
The historical cost or adjusted basis of the real property sold or disposed will be carried over to
the new principal residence built or acquired;
Real property is located abroad.
Buyer is the government, or any of its political subdivisions, including GOCCs, provided the seller opts not
to be subjected to CGT. (If the government is the buyer, the seller is given the option to choose either be
subjected to the CGT or to the ordinary tax rate.)
To determine whether to opt for CGT or ordinary tax, you have to consider whether you have a
gain or loss in the transaction.
o If you sell it at a loss, you might as well be subjected to an ordinary tax 5%-32%.
o If you sell it at a gain, CGT might be a better option.
Example: Cost of the land is P1 million. Selling price is P2 million. You will have a gain of P1
million.
If you choose CGT, it will be based on the
If you choose to be subjected to the ordinary
selling price or the FMV, whichever is higher.
tax rate: P125,000 + 32% of the excess over
Assuming the FMV equals the selling price, P2
P500,000.
million will be subjected to 6% CGT.
Ordinary tax = P125,000 + (500,000 x 32%) =
CGT = P2 million x 6% = P120,000
P285,000

d. Sale of other Capital Assets


- May refer to personal or movable properties which are not considered as inventories or used in business.
- holding period of other capital assets is material only for individual taxpayers
o HOLDING PERIOD RULE:
*50% of capital gain is taxable if the other capital asset is held more than 12 months (long term capital gain)
*100% of capital gain is taxable if held 12 months or less (short term capital gain)
Illustration:
1/1/2014 Mr. X purchased a car for 800K but instead of registering the car on his name, Mr. X gave it to his son, Y.
7/22/2014 Y purchased a new car and traded-in the old car valued at 900K. So, is there a capital gain? If yes, how much of
the capital gain is taxable?
ANS: Yes, 100K. 900K - 800K = 100K is the capital gain. The capital gain is here short-term because the car was
traded-in less than 12 months or 6 months after its purchase. Therefore, the 100% of the 100K is part of the
income and is subject to the graduated income tax rate.
REMEMBER: Capital losses can be offset only against and to the extend of the capital. Capital loss is different from ordinary
loss. Capital gain is different from ordinary gain.
e.

Exempt entities from CGT


1.
2.
3.
4.
5.
6.
7.

Dealer in Securities, regularly engaged in the buying and selling of securities


An entity exempt from the payment of income tax under existing investment incentives and other special laws
An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
A government entity or GOCC selling real property
If the disposition of the real property is gratuitous in nature
Where the disposition is pursuant to the CARP Law
The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new
principal residence within 18 months from the date of sale or disposition; refer to requirements above

f.

Certificate Authorizing Registration CAR is a certification issued by the Commissioner or his duly authorized representative
attesting that the transfer and conveyance of land, building/improvements or shares of stock arising from sale, barter, or
exchange have been reported and the taxes due inclusive of the documentary stamp tax have been fully paid.
When dealing or transferring with capital assets, the CGT should be paid within 30 calendar days from the date of
transfer, e.g. if the Deed of Sale is dated August 1, then by August 30 you should have already paid your CGT,
otherwise you will be subjected to penalties by the BIR.
Upon payment of CGT, a Certificate Authorizing Registration will be issued by the BIR in your favor.
When you transfer a capital asset, you will also be paying the documentary stamp tax.
Summary:
- Fringe Benefit Tax: final withholding tax; withholding agent: employer
- Passive Income Tax: final withholding tax; withholding agent: GR payor EXC: payor is outside the jurisdiction of the PHI.
- Capital Gains Tax: final tax; no withholding; you will file a separate form with the BIR.
5. Other Income
a.

Rent Income other than royalties


i.
5% final tax must be withheld by the payor.
Example: X is renting a stall in a mall with a monthly rental of P100,000. X is obliged to withhold P5000 (5% of
P100,000). X will only remit P95,000 to the lessor.
b. Interest income other than interest income on bank deposits
c. Dividend income
d. Income from other sources and this include:
i.
Bad Debs recovered
Definition: unpaid debt.
What are the requirements to be able to deduct bad debts as an expense?
1. The indebtedness must be entirely worthless.

2.

The indebtedness must no longer be collectible after taking legal steps to recover it. (debtor declared
insolvent)
When is the recovery of a bad debt considered a taxable income?
If the bad debts, at the time that it was claimed as an expense/deduction, has benefited the taxpayer by
paying less due to the availment of the expense/deduction, the recovery of that will be considered as an
income to offset the expense that you have claimed prior.

Income from other sources and this include:


1. BAD DEBTS RECOVERY:
Definition: unpaid debt.
Requirements to be able to deduct bad debts as an expense:
3. The indebtedness must be entirely worthless.
4. The indebtedness must no longer be collectible after taking legal steps to recover it. (debtor declared insolvent)
When is the recovery of a bad debt considered a taxable income?
If the bad debts, at the time that it was claimed as an expense/deduction, has benefited the taxpayer by paying less due to
the availment of the expense/deduction, the recovery of that will be considered as an income to offset the expense that
you have claimed prior.
-

Bad debts recovered are considered as a TAXABLE income when there is a benefit on the recovery.
There is a BENEFIT when the bad debts was previously declared as a DEDUCTION in your income tax return. This is because
by doing so there will be a reduction to your income tax payable.

NOTE: Provided this causes a reduction to you tax payable, if you deducted it and there is no reduction in tax payable there is no
benefit and therefore is not taxable.
WATCH OUT: DOUBTFUL ACCOUNTS are not yet considered as bad debts for taxation purposes.
TAX BENEFIT RULE:
Doctrine: Bad Debts are taxable upon recovery when you have benefited from it previously.
Ex.
You have a collectible collect ka no payment file an action for small claim no reply from the other party no choice but
declare the debt as bad debts expense let say 50K. Being an expense so you declare it as a deduction.
1st situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income

2015

500K
(50K)
450K

Recovered

50K

2014: you benefited from the bad debt expense to the extent of 50K.
2015: The 50K recovered is taxable because of the tax benefit rule.
2nd situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income
Recovered

2015

50K
(50K)
-050K

2015: the 50K is taxable income. Because you benefited for not paying taxes of the 50K in 2014.

3rd situation:
2014
Net Income w/o BDE
Less: Bad Debt Expense
Taxable Income

2015

30K
(50K)
-0-

Recovered

50K

2015: Part is taxable. Only the 30K is taxable not the entire 50k. it is because you were only able to avoid paying taxes of the 30k.

4th situation:
2014
Net Loss w/o BDE
Less: Bad Debt Expense
Taxable Income

2015

(10K)
(50K)
-0-

Recovered

50K

2015: its not anymore taxable because there was no benefit from the 2014 taxable income because there was no income but only
loss.
2. LOSS FROM GAMBLING
- take note the law says that:
o LOSS gambling are NOT DEDUCTIBLE but
o GAINS AND INFLOW are considered INCOME because taxation is source blind.
3. TAX REFUNDS
- Tax benefit rule. The tax refund will not be considered an income if you have not previously benefited form it.
- So here if you were able to make a tax deduction from your previous income tax return.
2014
Net Income w/o BDE
Less: Local Tax
Taxable Income

2015

20K
(5K)
15k

Erroneous tax so refund

5K

2015: the 5k Refund is taxable because under the tax benefit rule you were able to declare the 5k as a deduction to the previous
year. Had you not declared it there would have been a bigger taxable income.
-

NOT ALL TAX REFUND are considered as income. Exception is if it pertains to:
o DONORs TAX,
o INCOME TAX, and
o ESTATE TAX and
o SPECIAL ASSESMENT. (DIES)
this is because this taxes are not made as deductions to your taxable income.
4. COMPENSATION for private property expropriated by the government for public use
5. DAMGES
6. CANCELLATION OF INDEBTEDNESS
-

ascertain if there is consideration such as service it is considered as a taxable income

But is consideration is PURE LIBERALITY or PURE LOVE it is taxable to DONORs tax.

7. TAX INFORMERs REWARD


8. LEASEHOLD IMPROVEMENTS

Involves the lessor and the lesse. Let say example you lease a parcel of land. The LESSEE introduces improvements to the
lease of land like a building and there is an agreement that the building will go to the lessor at the end of the lease then it
will be considered as income taxable on the side of the lessor.
TWO METHODS of recognizing the income in leashold:
o OUTRIGHT METHOD
Upon the commencement of the lease period, it is stated in the lease agreement that any improvements
will go to the lessor at the end of the lease period then outright method is considered as income in SAME
TAXABLE year of the lessor when the improvement is transferred.
Based on the FMV @ the end of the lease term, so at the end of the lease term you add all the annual
rental income less the FMV then automatically deduct it during that year. Outright deduction on the part
of the lessor.
o SPREAD-OUT METHOD
Here you will have to consider the depreciation of the improvements and spread it out over the period
You have to take into consideration here the useful life vs the lease term then spread out to the
remaining.
Ex. THIS WILL NOT COME OUT IN THE BAR EXAM only for discussion purpose.
o SPREAD-OUT METHOD- BUILDING:
FMV of IMPROVEMENT
1M
COST
800k
Useful Life
8 years
Lease Term
5 years
1st Step: GET THE DEPRECIATION: which is COST divided by the USEFUL LIFE (COST/UL)
o 800K/8yrs = 100k

2nd Step: VALUE of the improvement @ end of the lease: which FMV less the ACCUMULATED
DEPRECIATION (total depreciation) for the entire LEASE TERM
o 100k x 5 yrs = 500k accumulated dep. For the lease term
o so 1M(FMV) 500K(Accum. Dep) = 500k
o VALUE @ end of lease term (VALET) = 500k

3rd Step: Spread-out the VALET: VALET divided by the remaining useful life (useful life less lease
term)
o 500k divided by 3 yrs (8-5) = 166,667
o so the lessor will report an annual income of 166,667.
INCOME TAX COMPUTATION
Gross Income
Less: allowable Deductions (Itemized or Optional)
Net Income
Less: Personal & Additional Exemptions
Net Taxable Income
Multiply by Tax Rate (5 to 32%)
Income Tax Due: Tax Withheld (per BIR Form 2316/2304)
Income Tax Payable

P
P
P
P
P
P
P
P

PURE COMPENSATION EARNER NO ITEMIZED DEDUCTION. Only personal and additional income.
DO NOT MEMORIZE THE INCOME TAX TABLE unless you want to TOP the BAR then by all means do so.
the tax withheld stated is the Creditable Withholding Tax and NOT FINAL WITHOLDING TAX.

TAX ON NRA-NETB
o GR: 25% on all his Gross Income

Except:
Capital Gains because if real property 6% ; Shares of stock 5-10%

DEDUCTIONS
1. Pure Compensation Income Earner
1.

Personal Exemption

For single individual or married individual judicially declared as legally separated with no
qualified dependents
For head of the family

P50,000

For each married individual

P50,000

P50,000

The term HEAD OF THE FAMILY is NO LONGER APPLICABLE because is absorbed in the single individual
Regardless of status anyone can claim.
Note: in case of married individuals where only one of the spouse is deriving gross income, only such spouse will be allowed
to claim the personal exemption.
2.

Additional Exemption

For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4 qualified dependents.

SENIOR CITIZENS NOT considered as dependent even if chiefly dependent


o Ex. A is living with parents; you are providing 60% income to the family. Can you declare them as your dependents?
NO. not a qualified DEPENDENT CHILD.

The individuals considered as Head of the Family supporting a qualified dependent:


o Dependency Test (ASS-ERA)
1. Affiliation: Legitimate, Illegitimate or LEGALLY ADOPTED child of the taxpayer
a. Can a Nephew be a dependent? Generally NO, unless LEGALLY ADOPTED
2. AGE: Not More than 21 years old (wala na apil ang tax code pag amend sa age of minority)
a. EXCEPTION: cannot be capable of being employed due to PHYSICAL or MENTAL DEFECT.
3. STATUS of child: must not be married
4. EMPLOYMENT: must not be GAINFULLY EMPLOYED.
a. in one case, an annual gross income of not more than 50k is not yet considered as gainfully
employed.
5. SUPPORT: taxpayer must be providing CHIEF SUPPORT TO THE DEPENDENT.
a. a support of more than 50% for the sustenance of the needs of that child.
6. RESIDENCE: living and residing together with the taxpayer.
a. take note: does not mean 24/7 living. It is okay for any temporary change of residence as long as
there is INTENTION to return and live again with the tax payer.

The additional Exemption can be claimed by the following:

if silent: The husband who is deemed the head of the family unless
o he explicitly waives his right in favor of the wife
this is submitted to the employer of the husband and wife.
o he is NOT GAINFULLY EMPLOYED, if husband is self-employed go back to the GR that husband claims.
o in case of LEGAL SEPARATION the spouse who has LEGAL custody of the child or children in case of legally
separated spouses.
Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed
the maximum additional exemptions allowed by the Tax Code.

SUMMARY of Personal and Additional Exemptions for:

NRA
RC

NRC

RA
NRA-ETB

NRA NETB

PERSONAL
EXMEPTION
50,000

ADDITIONAL
EXEMPTION
25,000 up to first
4 QD

(subject to
RECIPROCITY RULE)

RECIPROCITY RULE:
o
o

When a Filipino as a NRA in another country, when they are given exemption then residents of that foreign
country will also be given a personal exemption.
Whichever is lower of the two, but the maximum is 50K.

Ex. 1st situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos
are given only personal exemption of 30K. so we give that Chinese only 30k as personal exemption.

2nd situation: Chinese go to Phil. Considered as NRA-ETB. Our personal exemption is 50K but in china Filipinos are
given only personal exemption of 200K. so we give that Chinese only 50k as personal exemption.

Change of Status
o

STATUS-AT-THE-END-OF-THE-YEAR RULE
any change in the status of the tax payer within the year it will be interpreted favorably on the tax payer as if the
change of status happened at the end of the year.
Most favorable to the taxpayer.
Ex.

Dependent Child died in the middle of the year. You can still claim him or her as a additional exemption at the end
of the year. As if he or she died at the end of the year.
Dependent Child got married or got GAINFULLY employed in the middle of the year. You can still claim him or her
as a additional exemption at the end of the year. As if he or she died at the end of the year.
Other way around, wife gives birth at the end of the year it is considered as an additional exemption considered as
have been born for the entire year.
If child turn 21 during the year, still a dependent DURING THE YEAR. Considered as a dependent during the year
and turned 21 at the end of the year and therefore cannot be claimed only in the NEXT YEAR.

3. Premiums on Health and/or Hospitalization Insurance


The maximum amount of P 2,400 premium (annual) payments on health and/or hospitalization insurance can be claimed
PROVIDED: Immediate Family (single- parent & siblings; married spouse and children) gross income yearly should not be
more than P250,000
Take note the EE took this insurance and not the ER.
For Married individuals, the spouse claiming the additional exemptions for the qualified dependents shall be entitled to this
deduction.

SUMMARY FOR PURE COMPENSATION EARNER DEDUCTIONS:


1. PERSONAL EXEMPTION
2. ADDITIONAL EXEMPTION

50K
25K per Q. Dependent up to 4.

3. PREMIUM ON HEALTH/HOSP. INSURANCE

max 2400 vis-a-vi nmt 250K

2. Earning Business or Professional Income


1. Personal Exemption
2. Additional Exemption
3. Premiums on Health and/or Hospitalization Insurance
4. Itemized Deduction or Optional Standard Deduction
Itemized Deduction or Optional Standard Deduction
Itemized Deduction

Indicate one by one the items of your expenses in your FS supported by proofs.

Optional Standard Deduction

Standard available to individuals where you can make a deduction of 40% of the Gross Income, EXCEPT: NRA
It is advisable to use OSD if you have a little expenses let say only 20% might as well go with OSD because it will
take out 40% instead of the 20%.
PURPOSE: generally to speed up the audit process because substantiation is not required.
In Business ITR, you file this quarterly. In default, BIR will use ITEMIZED so you have to indicate that you will be
using OSD in your ITR.
Lets say that in the first 2 quarters you have opt to go with OSD. But in the 3rd quarter you realized that your
expenses were more than 40%. Can you change to itemized in the middle of the taxable year? NO. Choosing either
OSD or ITEMIZED is IRREVOCABLE for that taxable year.
NRA
RC

NRC

RA
NRA-ETB

NRA NETB

ITEMIZED
DEDUCTION -need
to substantiate

OSD 40%
-no need
to substantiate

CORPORATIONS

ESTATE

Personal Exemption

20,000

Additional Exemption

Premiums on Health and/or Hospitalization Insurance

Itemized Deduction or Optional Standard Deduction

- not discussed for next


semester-

VIII. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN


1) An individual who is a minimum wage earner
2) An individual whose gross income does not exceed his total personal and additional exemptions
Ex. Single with 4 qualified dependent child (S4); PE- 50K; AE- 100K; TOTAL EXEMPTION: 150K
Common law couple the husband still deducts as a general rule.
3) An individual whose compensation income derived from one employer does not exceed P 60,000 and the income tax on
which has been correctly withheld
Income tax withheld = to income tax due
4) An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee
occupying the same position as that of the alien employee or regional headquarters and regional operating headquarters of
multinational companies, petroleum service contractors and sub-contractors and offshore-banking units, non-resident
aliens not engaged in trade or business)
You File here a different return.
5) Those who are qualified under substituted filing. However, substituted filing applies only if all of the following
requirements are present:
1. Receiving purely compensation income regardless of amount:
2. Working for only one employer in the Philippines for the calendar year
3. Tax has been withheld correctly by the employer (tax due equals tax withheld);
4. The employees spouse also complies with all three (3) conditions stated above
5. The employer files the annual information return(BIR Form No. 1604 CF)
6. The employer issues BIR Form No. 2316 to each employee.
IX. PROCEDURE FOR FILING OF ITR
For with payment ITRs
(BIR FORM NOS. 1700/1701/1701Q/1702/1702Q/1704)
File the return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB)of
the place where taxpayer is registered or required to be registered.
In places where there are no AABs, the return will be filed directly with the Revenue Collection Officer or duly
authorized treasurer of the city or municipality in which such person has his legal residence or principal place of
business in the Philippines,
o or if there is none, filing of the return will be at the Office of the Commissioner.
(BIR FORM NOS. 1700/1701/1701Q/1702/1702Q/1704)
o 1700 Individuals Earning Purely Compensation Income
o 1701/1701Q(quarter) Self-Employed Individuals, Estates and Trusts
o 1702/1702Q corporations, partnerships and other non-individual taxpayers SUBJECT ONLY to the
REGULAR income tax rate
o 1702 EX for USE ONLY by corporations, partnerships and other non-individual taxpayers EXEMPT under
the tax code
o 1702-MX for corporations, partnerships and other non-individuals with Mixed Income subject to
multiple income tax rates or with income subject to special/preferential rate
o 1704 Improperly Accumulated Earnings Tax Return (IAET)
For no payment ITRsrefundable, break-even, exempt and no operation/transaction, including returns to be paid on 2 nd
instalment and returns paid through a Tax Debit Memo
File the return with the concerned Revenue District Office where the taxpayer is registered. However, no payment returns filed
late shall be accepted by the RDO but instead shall be filed with and Authorized Agent Bank or Collection Officer/Deputized
Municipal Treasurer (in places where there are no AABs), for payment of necessary penalties.

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