INCOME AND

WITHHOLDING TAXES
Atty. Vic C. Mamalateo
July, 2011
Ateneo Law School

 INCOME TAX (TITLE II, NIRC)

BASICTAX PRINCIPLES
LIFEBLOOD THEORY
Taxation is the rule; exemption, the exception.
In case of doubt, tax income or disallow
deductions and tax credits.

Taxes are imposed by law (e.g., NIRC),

while financial accounting are based on
generally accepted accounting standards.
In case of conflict between tax rules and
accounting rules, the former shall prevail.

INCOME TAX
INCOME TAX
Tax on all yearly profits arising from property, professions, trades
or offices, or as a tax on a persons income, emoluments, profits
and the like (Fisher v. Trinidad).
Income tax is a direct tax on taxable actual or presumed income
(gross or net) of a taxpayer received, accrued or realized during
the taxable year.

WITHHOLDING TAX
It is not an internal revenue tax but a mode of collecting income
tax in advance on income of the recipient of income thru the
payor of income. [NOTE: Sec. 21, NIRC enumerates various
internal revenue taxes.]
There are 2 types of withholding taxes, namely: (1) final
withholding tax; and (2) creditable withholding tax, including
expanded withholding tax.

FEATURES OF INCOME TAX

It is a direct tax.
It is a progressive tax, since the tax base
increases as the tax rate increases. It is
founded on the ability to pay of taxpayer.
Phil adopted the most comprehensive system in
imposing income tax.
Phil follows the semi-global or semi-schedular
income tax system.
It is of American origin. Decisions of U.S. tax
authorities have peculiar and persuasive effects
for the Phil.

INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM

Compensation income not subject to FWT

Business and/or professional income
Capital gains not subject to FWT
Passive investment income not subject to FWT
Other income not subject to FWT

SCHEDULAR TAX SYSTEM

Compensation income subject to FWT

Capital gains subject to FWT
Passive investment income subject to FWT
Other income subject to FWT

The Philippines adopted the semi-global or semi-schedular tax

system. Either the global or schedular system, or both systems,
may apply on income of a taxpayer.
You apply the schedular tax system only when the income, gain or
profit is subject to FWT.

FINAL WITHHOLDING TAX

Income payment is listed in Sec 57(A), NIRC, as subject to FWT.
FWT withheld by the payor of income (e.g., 20% FWT on interest
income on bank deposits) represents FULL payment of income tax
due on such income of the recipient.
Income payee (or recipient of income) does not report income
subjected to FWT in his income tax return, although income is
reflected in his audited financial statements for the year. However,
he is not allowed to claim any tax credit on income subjected to
FWT.
Withholding agent (payor of income) files the withholding tax return,
which includes the FWT deducted from the income of payee, and
pays the tax to the BIR. There is no Certificate of Tax Withheld
issued to income payee.
No Certificate of Tax Withheld (BIR Form 2307) is attached to the
income tax return of recipient of income because he does not claim
any tax credit in his tax return.

CRITERIA IN IMPOSING INCOME TAX

Citizenship principle
For Filipino citizens and domestic
corporations, who are entitled to Philippine
government protection wherever they are
situated.

Residence principle
For alien individuals and foreign corporations

Source principle
For alien individuals and foreign corporations

TYPES OF INCOME TAX

1.
2.
3.
4.

Graduated income tax on individuals;

Normal corporate income tax on corporations (RCIT);
Minimum corporate income tax on corporations (MCIT);
Special income tax on certain corporations (e.g., private educational
institutions; foreign currency deposit units; international carriers)
5. Capital gains tax on sale or exchange of unlisted shares of stock of a
domestic corporation classified as a capital asset;
6. Capital gains tax on sale or exchange of real property located in the
Philippines classified as a capital asset;
7. Final withholding tax on certain passive investment incomes;
8. Final withholding tax on income payments made to non-residents
(individual or corporation);
9. Fringe benefit tax (FBT);
10. Branch profit remittance tax (BPRT); and
11. Tax on improperly accumulated earnings (IAET).

FORMULA

GLOBAL SYSTEM
Gross sales
Less: Cost of sales
Gross income
Less: Deductions
PAE (for ind.)
Net taxable income
Multiplied by applicable
rate (graduated or flat)
Income tax due
Less: Creditable WT
Balance

SCHEDULAR SYSTEM
Gross selling price or fair
market value, whichever
is higher times applicable
tax rate = Tax due (real
property)
Gross selling price less
cost or adjusted basis =
Capital gain times
applicable tax rate = Tax
due (shares of dom corp)
Gross income times
applicable rate = Tax due
(passive inv income;
income paid to nonresident person)

KINDS OF TAXPAYERS
INDIVIDUAL, including estate and trust
CITIZEN

Resident (RC) Taxable on worldwide income

Non-resident immigrant, permanent worker, OFW (seamen)
ALIEN

Resident
Non-resident
Engaged in trade or business (more than 180 days in the Phil)
Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION, including partnership

DOMESTIC (DC) Taxable on worldwide income
FOREIGN
Resident (e.g., Phil branch of foreign corporation)
Non-resident
TEST FOR TAX PURPOSES:

Law of incorporation
RULE: All taxpayers are taxed only on income from sources within
the Phil, except RC and DC.

PARTNERSHIPS
EXEMPT
General professional partnership (GPP)
Joint venture undertaking construction activity or energyrelated activities with operating contract with the government
TAXABLE
Partnerships, no matter how created or organized
RULES:
If taxable, partnership is taxed like a corporation.
If taxable partnership derives net income during the year, the
entire net income is deemed received by the partners in the year
it was earned by the partnership.
If GPP adopts itemized deductions during the year, partners
must use itemized deductions during the same year.

RESIDENT FOREIGN CORPS

TAXABLE: RCIT & BPRT
Ordinary branch of a foreign corporation in the Phil: 30% x net income
from sources within the Phil
PEZA- & SBMA-registered branch of foreign corporation is exempt
from 15% BPRT
Regional operating headquarters (ROHQ): 10% x net income from
sources within the Phil
Offshore banking unit (OBU) and foreign currency deposit unit (FCDU)
[ING Bank Manila v. CIR]: 10% x gross interest income on forex loan to
residents
Foreign international carriers by air or water: 2.5% x GPB
Foreign contractor or sub-contractor engaged in petroleum operations in
the Phil: 8% x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil

Representative office
Regional headquarters (RHQ)

JOINT VENTURE
Lease of properties under common management

Three sisters borrowed money from their father and bought twenty-four (24) pieces of
real property that they leased to various tenants for over fifteen years and derived
rentals therefrom. They appointed their brother to manage their properties and to
collect and receive rents.
The court ruled that a taxable partnership was formed. There were series of
transactions where petitioners purchased twenty-four lots, showing that the purpose
was not limited to the conservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present. The properties were leased out to
tenants for several years. Moreover, the term corporation includes organizations
that are not necessarily partnerships in the technical sense of the term as well as
partnerships, no matter how created or organized. This qualifying expression clearly
indicates that a joint venture need not be undertaken in any of the standard forms, or
in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations (Evangelista vs.
Collector, 102 Phil. 140).
When a father and son purchased a lot and building, entrusted the administration of
the building to an administrator and divided equally the net income, there is a taxable
partnership (Reyes vs. Commissioner, 24 SCRA 198).

JOINT VENTURE
Insurance pool or clearing house
An insurance pool or clearing house, composed of 41 non-life
insurance corporations, whose role was limited to its principal
function of allocating and distributing the risks arising from the
original insurance among the signatories to the treaty or the
members of the pool on their ability to absorb the risks ceded as well
as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, and which did not
insure or assure any risk in its own name, was treated as a
partnership or association subject to tax as a corporation.
Article 1767 of the Civil Code recognizes the creation of a contract
of partnership when two or more persons bind themselves to
contribute, money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Its requisites are
mutual contribution to a common stock, and a joint interest in the
profits (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25,
1999).

JOINT VENTURE

Agreement to manage and operate mine denominated as Power of Attorney

Philex Mining Corporation entered into an agreement denominated as

Power of Attorney with Baguio Gold Mining Corporation to manage and
operate the latters mining claim. In managing the project, Philex made
advances of cash and property. The mine suffered continuing losses
resuling in Philexs withdrawal as manager and cessation of mine
operations.
A Compromise with Dation in Payment was executed by the parties,
where Baguio Gold admitted its liabilities to Philex and agreed to pay the
same.
Philex wrote off in the books the remaining outstanding indebtedness of
Baguio Gold by charging a portion of the amount to allowances and
reserves that were set up in 1981 and a portion to the 1982 operations. The
amount allocated to 1982 was deducted from the 1982 gross income as
loss on settlement of receivables.
The BIR disallowed the deduction for bad debt and assessed Philex
deficiency taxes because the advances are Philexs investment in a
partnership with Baguio Gold for the exploitation and development of the
mine.

JOINT VENTURE
The totality of the circumstances and the stipulations in the parties
agreement indubitably lead to the conclusion that a partnership was
formed between the parties.
First, it does not appear that Baguio Gold was unconditionally
obligated to return the advances made by Philex under the
agreement.
Second, the Tax Court correctly observed that it was unlikely for a
business corporation to lend hundreds of millions to another
corporation with neither security nor collateral or a specific deed
evidencing the terms and conditions of such loans. The parties also
did not provide for a specific maturity date for the advances to
become due and demandable, and the manner of payment was
unclear.
Third, the strongest indication that Philex was a partner is the fact
that it would receive 50% of the net profits as compensation under
the agreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187,
Apr. 16, 2008).

SOURCES OF INCOME

Interest Interest from sources within Phil and interest on bonds and
obligations of residents, corporate or otherwise
Dividend From domestic corporation and from foreign corporation, unless
less than 50% of gross income of foreign corporation for 3 years prior to
declaration of dividends was derived from sources within the Phil, in which
case, apply only ratio of Phil-source income to gross income from all
sources
Services Place where services are performed, except in case of
international air carrier and shipping lines which are taxed at 2.5% on their
Gross Phil Billings. Revenues from trips originating from the Phil are
considered as income from sources within the Philippines, while revenues
from inbound trips are treated as income from sources outside the
Philippines.
Rentals and royalties Location or use of property or property right in Phil
Sale of real property Located in the Philippines
Sale of personal property Located in the Philippines
Gain from sale of shares of stocks of a domestic corporation is
ALWAYS treated as income from sources within the Philippines.
Other intangible property Mobilia sequuntur personam (e.g., gain from
sale of shares of stocks of a foreign corporation)

GROSS INCOME

SALE OF GOODS
Gross Sales
Less: Cost of Sales:

Beg. Inventory
+ Purchases
Total available for sale
- Ending inventory
Cost of Sales

Gross income
Times 2%
MCIT

SALE OF SERVICES
Gross Revenue
Less: Cost of Service

consisting of all direct

costs and expenses

Gross income
Timex 2%
MCIT

INCOME
INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit
from investment. It covers gain derived from capital, from labor, or
from both combined, including gain from sale or conversion of
capital assets.
Return of capital is exempt from income tax. Capital, labor, or
property is the tree; income is the fruit. Capital is the fund, income is
the flow of fund.
To be taxable, there must be income, gain or profit; gain is received,
accrued or realized during the year; and it is not exempt from
income tax under the Constitution, treaty or law.
Mere increase in the value of property does not constitute taxable
income. It is not yet realized during the year.
Transfer of appreciated property to the employee for services rendered
is taxable income.

TEST IN DETERMINING INCOME

Realization test
There must be separation from capital of something
of exchangeable value (e.g., sale of asset)

Claim of right doctrine

CIR v. Javier, 199 SCRA 824 (bank erroneously paid
$1 M, instead of $1,000)

Economic benefit test

Stock option given to the employee

Income from whatever source

All income not expressly exempted from income,
irrespective of voluntary or involuntary action of
taxpayer in producing income

NATURE OF INCOME
COMPENSATION INCOME
Existence of employer-employee relationship

BUSINESS AND/OR PROFESSIONAL INCOME

NO employer-employee relationship

CAPITAL GAIN
Real property in the Phil and shares of stock of domestic
corporation
Other sources of capital gain

PASSIVE INVESTMENT INCOME

Interest, dividend, and royalty income

OTHER INCOME
Prizes and winnings
All other income, gain or profit not covered by the above classes

COMPENSATION INCOME
Compensation income falling within the meaning of statutory
minimum wage(SMW) under R.A. 9504, effective July 6, 2008, as
implemented by Revenue Regulations No. 10-2008 dated July 8,
2008, shall be exempt from income tax and withholding tax.
Holiday pay, overtime pay, night shift differential pay, and hazard
pay earned by Minimum Wage Earner (MWE) shall likewise be
covered by the above exemption, provided that an employee who
receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay
and night shift differential pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from
income tax and withholding tax.

COMMISSION INCOME

Commissions paid for marketing services rendered abroad for a Philippine

company is considered foreign-source income. The source of the income is
the property, activity or service that produced the income. Place where
services are rendered determine taxation.
The fact that recipient of commission income is President and majority
stockholder of the Philippine company does not alter the source of income.
There are only two ways by which the President and other members of the
Board can be granted compensation apart from reasonable per diems: (1)
when there is a provision in the by-laws fixing their compensation; and (2)
when the stockholders agree to give it to them. If none of these conditions
are present, commission income cannot be automatically attributed to
petitioners position in the company (Juliane Baier-Nickel vs. CIR, GR No.
156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instructions as to sizes,

designs and fabrics to be used in finished products and sample sales orders
relayed to clients abroad are not enough to show services were performed
abroad. Said documents must show that instructions or orders ripened into
concluded or collected sales in Germany (CIR v. Baier-Nickel, GR No. 153793,
Aug 29, 2006).

ONSHORE AND OFFSHORE

INCOME
Construction and installation works were subcontracted
and done in the Philippines by a Phil corporation; hence,
income is from sources within the Philippines.
However, some pieces of equipment and supplies for
NDC project and ammonia storage tanks and
refrigeration units were completely designed and
engineered in Japan. All services for the design,
fabrication, engineering and manufacture of materials
and equipment under Japanese Yen portion were made
and completed in Japan; hence, exempt from Phil
income tax.
Service income from turn-key contract on a project in the
Phil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).

GROSS PHIL BILLINGS

INTERNATIONAL AIR CARRIER
On outbound trip: Flight from Phil to foreign destination,
income is treated as from Philippine sources; hence, subject
to 2.5% on GPB
Continuous and uninterrupted flight
If transhipment of passenger in another country on another
foreign airline takes place: GPB tax applies only on aliquot
portion of revenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil,

income is treated as from foreign sources; hence, exempt
from Phil income tax

INTERNATIONAL SHIPPING LINE

From Phil to final foreign destination: entire income is
taxable, even if transhipment of cargoes took place in
another country
From foreign country to Phil: exempt

CAPITAL GAINS
3 TYPES OF CAPITAL GAINS
Capital gain from sale of real property located in the
Phil
Capital gain from sale of shares of stocks of a
domestic corporation
Other types of capital gains

Sale of real property located in the Phil

Seller is not engaged in real estate business
The law presumes that the seller realizes a profit from sale of
capital asset; hence, despite the loss from sale, seller has to
pay the 6% CGT.

SALE OF REAL PROPERTY

The tax base is gross selling price or fair market value,
whichever is higher
Apply the 6% capital gains tax, if the seller is a resident
citizen, an alien individual (resident or non-resident), or a
domestic corporation.
If the seller is a foreign corporation (resident or non-resident),
the asset in the Phil is a capital asset, but the gain from sale
is subject to the global tax system of taxation.
If the real property is located abroad, the gain from sale is
exempt from Phil income tax, unless the seller is a resident
citizen or a domestic corporation.
If the seller is a resident citizen and capital asset is the
principal residence of the seller, the sale may be exempt
from the 6% CGT, provided that the conditions provided for in
the law are complied with by the seller.

SALE OF REAL PROPERTY

Seller is a person engaged in real estate business
Real property is an ordinary asset; hence, any gain
(selling price less cost or adjusted basis) from sale is
taxed under the global tax system.
The transaction is subject to the expanded
withholding tax, such tax to be withheld by the buyer
of the property and remitted to BIR. The withholding
tax is creditable against the income tax of the seller.
The 6% capital gains tax on the transaction is not
applicable thereon.

SALE OF SHARES OF
DOMESTIC CORPORATION
Seller is a dealer in securities
Dealer in securities is a person regularly engaged in the buy and
sale of securities for his own account. He sells property and
looks at profits from sale of shares or securities. A stockbroker is
a middleman between the seller and buyer of stocks or
securities. He is a seller of services and his income is
commission.
Shares are ordinary assets of seller; selling price less cost or
adjusted basis equals gain; gain from sale is subject to global tax
system of income taxation.
Transaction involving listed shares traded in local stock
exchange is not covered by Sec 127(A), NIRC (stock transaction
tax), by express provision of law.

SHARES OF DOMESTIC
CORPORATION
Seller is an investor who is not a dealer in securities
If shares are listed and traded in a local stock
exchange, apply of 1% stock transaction tax on
gross selling price or gross value in money. Sale is
exempt from income tax.
If shares are listed but not traded in a local stock
exchange (or over-the-counter), or the shares are
unlisted, the net capital gain (selling price less cost or
adjusted basis), if any, is subject to the capital gains
tax computed as follows:
5% on first P100,000 net capital gain; and
10% on any amount in excess of P100,000

SHARES OF DOMESTIC
CORPORATION
CGT return is filed within 30 days from date of sale.
Every sale must be covered by a separate CGT return
and the tax paid upon filing of the return.
All transactions during the year are consolidated and
the annual return shall be filed not later than April 15
of the following year, but only one P100,000 is subject
to 5% and the balance of net capital gain for the year
is subject to 10%.
Net capital gain = Total capital gains from sales of
shares of domestic corporation during the year less
total capital losses during the same year.

OTHER CAPITAL ASSETS

INDIVIDUAL
If capital asset is long-term (holding period is
over 12 months), only 50% of gain is subject
to income tax, using the global tax system.
If gain is short-term, 100% of gain is subject to
income tax under the global tax system.

CORPORATION
Regardless of holding period, the entire gain
or loss is taxable or deductible.

INTEREST INCOME
TYPES OF INTEREST INCOME
Subject to FWT: Interest income on bank deposits, deposit
substitutes, trust and other similar arrangements
20% FWT peso deposit with bank
7.5% FWT foreign currency deposit with OBU/FCDU

NOT subject to FWT but subject to global tax system: All other
interest income or financing income not covered above
Exempt income:
Long-term deposit or investment (5 years or more) by individuals in
the form of trust funds, deposit substitutes, IMA and other
investments prescribed by BSP

Taxable income:
Preferential tax rate Pre-termination of long-term deposit by
individual : 20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%:
4 yrs-less than 5 yrs); and interest on foreign loan (20%)
Regular tax rate All other cases

TAX ON OBU/FCDU
Final tax on interest income from loans to
resident borrower is a direct liability of FCDU
Failure of local borrower to withhold and remit
the final withholding tax does not exempt
OBU/FCDU on onshore interest income (ING Bank v
CIR, 2005).
The withholding agent-borrower may also be
assessed deficiency withholding tax as penalty
for failure to withhold (RCBC v. CIR, CTA Case 2004).

DIVIDEND INCOME
REQUISITES FOR DIVIDEND DECLARATION
Presence of positive retained earnings
No prohibition to declare dividend in loan agreement
Declaration of dividend by Board of Directors

TYPES OF DIVIDENDS
Taxable
Cash dividend
Property dividend

Exempt
Stock dividend (except when there is change in proportionate
interest among stockholders, or there is subsequent cancellation or
redemption of shares declared as stock dividend, which is
essentially equivalent to cash dividend)

NOTE: Liquidating dividend represents distribution of corporate

assets to stockholders. Gain from surrender of shares are treated
as ordinary income.

DIVIDEND INCOME
Intra-corporate dividend: Exempt from tax
Corporation paying dividend: Domestic corporation
Recipient of dividend: Another domestic corporation or resident
foreign corporation

Dividend paid to non-resident foreign corporation

Corporation paying dividend: Domestic corporation
Recipient of dividend
Foreign head office makes direct investment in Phil company: 15%
FWT on gross dividend income
Phil branch of foreign corporation makes investment in Phil
company: Exempt from income tax

Tax-sparing provision
If country of residence of the foreign corporation does not impose
income tax on dividend paid by a domestic corporation, impose 15%
FWT only

DIVIDEND INCOME

While there is transfer of the shares of stock/securities to the Borrower

pursuant to the Securities Borrowing and Lending (SBL) Agreement, the
Lender retains certain rights accruing to the shares of stock/securities lent,
such as the right to receive cash, stock dividends or interest which the
Borrower is obliged to manufacture or reimburse to the Lender during the
borrowing period. These cash, stock dividends or interest which the
Borrower is required to manufacture or reimburse to the Lender are
otherwise referred to as "Manufactured Dividends or Benefits". The Lender
may likewise retain voting rights over the loaned shares of stock/securities
while in the possession of the Borrower, if mutually agreed upon by the
parties.
Receipt of the Manufactured Dividends or Benefits shall not be a taxable
income of the Lender since it just represents dividends/other benefits that
the lender would have received had the share not been loaned pursuant to
SBL agreement. However, the payment of such amount by the Borrower
shall not be a tax deductible expense. On the other hand, the receipt of
cash dividend from the issuing company by the Borrower or Buyer shall be
subject to the provisions of existing laws (e.g., final withholding tax of 10%
on gross dividend paid to a citizen).

OTHER INCOME
Income from any source whatever

The words income from any source whatever discloses a

legislative policy to include all income not expressly exempted from
the class of taxable income under our laws (Madrigal vs. Rafferty, supra;
Commissioner vs. BOAC). The words income from any source
whatever is broad enough to cover gains contemplated here.
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 (Gutierrez vs. Collector, CTA Case 65, Aug.
31, 1955).

Any economic benefit to the employee whatever may have been

the mode by which it is effected is taxable. Thus, in stock options,
the difference between the fair market value of the shares at the
time the option is exercised and the option price constitutes
additional compensation income to the employee (Commissioner vs.
Smith, 324 U.S. 177).

EXCLUSIONS

Life insurance proceeds

Amount received by insured as return of premium
Gifts, bequests and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, gratuities
R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
Interest income of employee trust fund or accredited retirement plan is
exempt from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)

Amount received as a consequence of separation because of death,

sickness or other physical disability or for any cause beyond the control
of employee

Miscellaneous items
Income of foreign government
Income of government or its political subdivisions from any public utility
or exercise of governmental function

INCOME OF RETIREMENT FUND

COA alleged that DBP is actual owner of the trust fund and its income
because:
DBP made the contribution to the Fund
Trustees of the Fund are merely administrators
DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and profit
from the Fund and they maintained separate books for that purpose. The
principal and income will not revert to DBP, even if trust is subsequently
modified or terminated.
SC ruled that the beneficiaries of the Fund are the DBP officials and
employees who will retire. It is not always necessary that the beneficiaries
should be named or even be in existence at the time the trust is created in
his favor, provided they are sufficiently certain or identifiable.
The Salary Loan Program did not terminate the trust to the Funds trustee.
That the DBP Board of Directors confirms the approval of the SLP by the
Funds trustees does not make the fund property of DBP (DBP v. COA, 2004).

EXCLUSIONS
Miscellaneous items
Prizes and awards
In recognition of religious, charitable, artistic, literary
achievement, etc. (He did not enter contest and is not
required to render substantial future services)
Granted to athletes in local and international sports
competitions, sanctioned by their national sports associations

13th month pay and other benefits (up to P30,000)

Gains from sale of long-term (5 years and 1 day) bonds,
debentures and other certificates of indebtedness
Gains from redemption of shares in mutual fund

GAIN v. INTEREST

Gains cannot include interest, since it clearly refers to gains from the sale
of bonds, debentures and other certificates of indebtedness. Whereas the
term gains includes interest in its general sense, this rule cannot be
applied to Section 32(B)(7)(g) of the Tax Code in the specific sense.
Section 32(A) of the Tax Code defines gross income and it is clear that
there is a distinction between gains derived from dealings in property and
interests. Gains realized from the sale or exchange or retirement of
bonds, debentures and other certificate of indebtedness would fall under
the category of gains derived from dealings in property. On the other
hand, interests would include interest from bonds, debentures and other
certificate of indebtedness. Only citizens, resident aliens and non-resident
aliens engaged in trade or business are exempt from income tax on interest
from long-term deposit or investment. On the other hand, domestic and
resident foreign corporations are subject to a 20% final tax on such interest.
If Congress intended to exempt interest from bonds, debentures and other
certificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, it
would have done so in clear and specific terms (Nippon Life Insurance
Company vs. Commissioner, CTA Case No. 6142, Feb 4, 2002). After all,
exemptions are construed strictly against the taxpayer and liberally in favor
of the government.

DE MINIMIS BENEFITS
EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT
(RANK AND FILE, OR MANAGERIAL OR SUPERVISORY)

a. Monetized unused vacation leave credits of private

employees not exceeding ten (10) days during the year and the
monetized value of leave credits paid to government officials and
employees;

b. Medical cash allowance to dependents of employees not

exceeding P750.00 per employee per semester or P125 per month;

c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per

month amounting to not more than P1,500.00;

d. Uniforms and clothing allowance not exceeding P4,000.00

per annum;

e. Actual yearly medical benefits not exceeding P10,000.00 per

annum;

f. Laundry allowance not exceeding P300.00 per month;

DE MINIMIS BENEFITS

g. Employees achievement awards (e.g., for length of service or

safety achievement, which must be in the form of a tangible personal
property other than cash or gift certificate, with an annual monetary value
not exceeding P10,000.00 received by the employee under an
established written plan which does not discriminate in favor of highly
paid employees;
h. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000.00 per employee per annum;
i. Flowers, fruits, books, or similar items given to employees under
special circumstances (e.g., on account of illness, marriage, birth of a
baby, etc.); and
j. Daily meal allowance for overtime work not exceeding twenty-five
percent (25%) of the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000.00 ceiling
of other benefits provided under Sec. 32(b)(7)(e) of the Tax Code.
However, if the employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee receiving the
benefits only if such excess is beyond the P30,000.00 ceiling. Any
amount given by the employer as benefits to its employees, whether
classified as de minimis benefits or fringe benefits, shall constitute as
deductible expense upon such employer.

EXEMPT ASSOCIATIONS

The phrase any of their activities conducted for profit does not
qualify the word properties.-- The phrase any of their activities conducted

for profit does not qualify the word properties. This makes income from the
property of the organization taxable, regardless of how that income is used whether
for profit or for lofty non-profit purposes. Thus, the income derived from rentals of
real property owned by the Young Mens Christian Association of the Philippines, Inc.
(YMCA), established as a welfare, education and charitable non-profit corporation, is
subject to income tax. The rental income cannot be exempted on the solitary but
unconvincing ground that said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. Where the law does
not distinguish, neither should we distinguish. Because taxes are the lifeblood of the
nation, the Court has always applied the doctrine of strict interpretation in construing
tax exemptions. YMCA is exempt from the payment of property taxes only but not
income taxes because it is not an educational institution devoting its income solely for
educational purposes. The term educational institution has acquired a well-known
technical meaning. Under the Education Act of 1982, such term refers to schools.
The school system is synonymous with formal education which refers to the
hierarchically structured and chronologically graded learnings organized and provided
by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to higher levels (Commissioner vs.
Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).

DEDUCTIONS
KINDS OF DEDUCTIONS
Itemized Deductions
Optional Standard Deductions
Special Deductions

ITEMIZED DEDUCTIONS

Business expenses, incl. research and development

Interests
Taxes
Losses
Bad debts
Depreciation
Depletion
Charitable contributions
Contributions to pension trust
Health or hospitalization premium

DEDUCTIONS
BUSINESS EXPENSES

1. The expense must be ordinary and necessary;

2. Paid or incurred during the taxable year;
3. In carrying on or which are 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;
5. Not contrary to law, public policy or morals. Operating expenses
of an illegal or questionable business are deductible, but
expenses of an inherently illegal nature, such as bribery and
protection payments, are not.
6. The tax required to be withheld on the amount paid or payable is
shown to have been paid to the BIR.

DEDUCTIONS
An expense is ordinary when it connotes a payment, which is
normal in relation to the business of the taxpayer and the
surrounding circumstances.
An expense is necessary where the expenditure is appropriate or
helpful in the development of taxpayers business or that the same is
proper for the purpose of realizing a profit or minimizing a loss.
P9.4 M paid in 1985 for advertising a product was staggering
incurred to create or maintain some form of goodwill for the
taxpayers trade or business or for the industry or profession of
which the taxpayer is a member.
Goodwill generally denotes the benefit arising from connection and
reputation, and efforts to establish reputation are akin to acquisition
of capital assets. Therefore, expenses related thereto are not
business expenses but capital expenditures (CIR vs. General Foods Phi.,
GR No. 143672, Apr. 24, 2003).

DEDUCTIONS
TEST OF REASONABLENESS OF BONUS
There is no fixed test for determining the reasonableness of a
given bonus as compensation. This depends upon many factors,
one of them being the amount and quality of the services performed
with relation to the business.
Other tests suggested are payment must be made in good faith, the
character of the taxpayers business, the volume and amount of its
net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation, the size of the
particular business, the employees qualifications and contributions
to the business venture, and general economic conditions.
However, in determining whether the particular salary or
compensation payment is reasonable, the situation must be
considered as a whole. Ordinarily, no single factor is decisive (C.M.
Hoskins & Co., Inc. vs. Commissioner, L-24059, Nov. 28, 1969; Pacific Banking Corp. vs.
Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gifts, are gratitude and are not deductible.

DEDUCTIONS
Legal and accountants fees for prior years were not billed in
corresponding years (1984-1985). It was paid by taxpayer in
succeeding year (1986) when it was billed by the lawyer and
accountant. Taxpayers uses accrual method of accounting.
Accrual of income and expense is permitted when the all events
test has been met. This test requires (1) fixing a right to income or
liability to pay, and (2) the availability of reasonably accurate
determination of such income or liability. It does not, however,
demand that the amount of income or liability be known absolutely; it
only requires that a taxpayer has at its disposal the information
necessary to compute the amount with reasonable accuracy, which
implies something less than an exact or completely accurate
amount.
Moreover, deduction takes the nature of tax exemption; it must be
construed strictly against the taxpayer (Commissioner vs. Isabela Cultural
Corporation, G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS
Entertainment, amusement and recreation expenses are subject to
limitation
% of net sales for sellers of goods
1% of net sales for sellers of services
Club dues for membership in social or athletic clubs to promote
business of corporation paid by the corporation are deductible from
gross income. However, they will be treated as fringe benefits
subject to FBT on the part of the employer. FBT paid by employer is
deductible as business expense of the corporation.
Rental expenses include leasehold acquired for business purposes
and cost of improvements introduced by lessee to be allocated over
the term of the lease. Realty taxes paid by lessee for business
property is part of rental expenses.

DEDUCTIONS
Directors Fees
If not officer or employee of corporation, report it as other income
subject to 10% EWT.
If director is also an officer of the corporation, apply CWT on
compensation income upon the directors fees, together with
salaries.
Commission Income
If there is no employer-employee relationship between broker
and payor of income, treat it as business income subject to
10/15% EWT.
If there is employer-employee relationship, commission income
is treated as part of CWT on compensation income.

DEDUCTIONS

INTEREST EXPENSE

1.
2.
3.
4.
5.

There must be a valid and existing indebtedness;

The indebtedness (unconditional obligation to pay) must be that of the taxpayer;
The interest must be legally due and stipulated in writing;
The interest expense must be paid or incurred during the taxable year;
The indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
6. The interest payment arrangement must not be between related taxpayers as
mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code;
7. The interest is not expressly disallowed by law to be deducted from the taxpayers
gross income (e.g., interest on indebtedness to finance petroleum operations);
and
8. The amount of interest deducted from gross income does not exceed the limit set
forth in the law. In other words, the taxpayers otherwise allowable deduction for
interest expense shall be reduced by forty-two percent (42%) of the interest
income subjected to final tax beginning November 1, 2005 under R.A. 9337, and
that effective January 1, 2009, the percentage shall be thirty-three percent (33%)
[Sec. 34(B)(1), NIRC].

DEDUCTIONS
Deficiency or delinquency interest
Deficiency or delinquency interest on unpaid taxes is
not deductible as tax, but taxpayer is allowed to
deduct the same as interest.

Interest expense on capital expenditures

At the option of the taxpayer, interest expense on
capital expenditure incurred to acquire property used
in trade, business or exercise of profession may be
deducted in full in the year incurred, or may be
treated as capital expenditure subject to amortization.
However, taxpayer cannot claim interest expense
both as deduction and part of cost of asset.

DEDUCTIONS
TAXES

1. Payments must be for taxes;

2. Taxes are imposed by law upon the taxpayer;
3. Taxes must be paid or accrued during the
taxable year in connection with the
taxpayers trade, business or profession; and
4. Taxes are not specifically excluded by law from
being deducted from the taxpayers gross income.

DEDUCTIONS
The word taxes means taxes proper and no deduction
should be allowed for amounts representing interest,
surcharge or penalties. Interest on taxes is not
deductible as taxes, but as an item of interest.
Fines and penalties for violations of law are not
deductible as taxes.
Only the person upon whom taxes are imposed may
claim them as deduction, except: (1) Taxes upon an
individual upon his interest as shareholder of corporation
which are paid by corporation without reimbursement;
and (2) Corporate bonds or other obligations containing
a tax-free covenant clause, the corporation paying the
tax or any part of it for someone else (Sec. 80, RR 2).

DEDUCTIONS
DEDUCTIBLE TAXES
All taxes, national and local, paid or accrued during the year in
connection with trade, business or exercise of profession is
deductible. Examples: professional tax, documentary stamp
tax, other percentage tax, excise tax, real property tax, etc.

NON-DEDUCTIBLE TAXES
1. Philippine income tax
2. Foreign income tax
3. Estate and donors taxes
4. Special assessments on real property
5. Electric energy consumption tax under B.P. 36.
6. VAT
Foreign income tax paid may be credited against the Phil income tax
due, subject to limitation (e.g., Federal income tax of M Pacquiao).

DEDUCTIONS
LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)
1. The loss must be that of the taxpayer;
2. The loss is actually sustained and charged off within the taxable

year;
3. The loss is evidenced by a closed and completed transaction
(fixed by identifiable events or when insurance recovery was
definitely established);
4. The loss is not claimed as a deduction for estate tax purposes;
5. The loss is not compensated for by insurance or otherwise;
6. In the case of an individual, the loss must be connected with his

trade, business or profession, or incurred in any transaction

entered into for profit though not connected with his trade,

business or profession; and

7. In the case of casualty loss, it has been reported to the BIR

within forty-five days from date of occurrence of the loss.

DEDUCTIONS
Bad Debt Theory
Loss from theft or embezzlement occurring in the year and
discovered in another year is deductible in the year in which
sustained. However, where the taxpayer had no means of
determining the actual date of embezzlement, a loss was
sustained in the year of discovery.
The rule is now modified by the bad debt theory, which holds
that since embezzlement creates a debtor-creditor relationship, a
loss is deductible as bad debt in the year the right of recovery
becomes worthless.

NOLCO
Net operating loss of one year may be carried over and
deducted from gross income for the next succeeding 3 years,
provided that no substantial change in the ownership of the
business or enterprise (not less than 75%) takes place.

DEDUCTIONS
BAD DEBTS

1. There must be an existing indebtedness due to the taxpayer

which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business
or practice of profession;
3. The same must not be sustained in a transaction entered into
between related parties enumerated under Sec. 36(B) of the Tax
Code of 1997;
4. The same must be actually charged off the books of accounts of
the taxpayer as of the end of the taxable year; and
5. The same must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year.

DEDUCTIONS
In the case of banks, the BSP thru the Monetary Board
shall ascertain the worthlessness and uncollectibility of
the bad debts and approve in writing the writing off of
bad debts from the books, without prejudice to the CIRs
determi-nation of the worthless and uncollectibility of
debts.
In no case shall a receivable from an insurance or surety
company be written off from taxpayers books and
claimed as bad debt deduction, unless such company
has been declared closed due to insolvency or for any
similar reason by the Insurance Commission.

DEDUCTIONS
TAX BENEFIT RULE
The taxpayer is obliged to declare as taxable income
any subsequent recovery of bad debts in the year
they were collected to the extent of the tax benefit
enjoyed by the taxpayer when the bad debts were
written off and claimed as deduction from gross
income.
It also applies to taxes previously deducted from
gross income but which were subsequently refunded
or credited by the BIR. He has to report income to the
extent of the tax benefit derived in the year of
deduction.

DEDUCTIONS
DEPRECIATION
1. The allowance for depreciation must be reasonable;
2. It must be for property arising out of its use in the trade or
business, or out of its not being used temporarily during the year;
3. It must be charged off during the taxable year from the taxpayers
books of accounts;
4. Depreciation shall be computed on the basis of historical cost or
adjusted basis. While financial accounting allows computation
based on appraised value, recovery of investment for tax
purposes shall be limited to historical cost.
Depreciation for the year = Cost less salvage value divided by the
estimated useful life (number of years) of the asset
Book value of the asset = Cost or adjusted basis less accumulated
depreciation.

DEDUCTIONS
CHARITABLE CONTRIBUTIONS
1. The charitable contribution must actually be paid or made to the
Philippine government or any political subdivision thereof exclusively
for public purposes, or any of the accredited domestic corporation or
association specified in the Tax Code;
2. It must be made within the taxable year;
3. It must not exceed 10% (individual) or 5% (corporation) of the
taxpayers taxable income before charitable contributions (whether
deductible in full or subject to limitation);
4. It must be evidenced by adequate receipts or records; and
5. The amount of charitable contribution of property other than
money shall be based on the acquisition cost of said property (Sec.
34(H), NIRC). The limitation is imposed to prevent abuse of
donating paintings and other valuable properties and claiming
excessive deductions therefrom.

DEDUCTIONS
D. Optional Standard Deduction
Privilege is available only to citizens or resident aliens as
well corporations subject to the regular corporate income
tax; thus, non-resident aliens and non-resident foreign
corporations are not entitled to claim the optional
standard deduction.
Standard deduction is optional; i.e., unless taxpayer
signifies in his/its return his/its intention to elect this
deduction, he/it is considered as having availed of the
itemized deductions;
Such election when made by the qualified taxpayer is
irrevocable for the year in which made; however, he can
change to itemized deductions in succeeding year(s);

DEDUCTIONS

Amount of standard deduction is limited to 40% of taxpayers gross sales

or receipts (in the case of an individual) or gross income (in the case of a
corporation). If the individual is on the accrual basis of accounting for his
income and deductions, OSD shall be based on the gross sales during
the year. If he employs the cash basis of accounting, OSD shall be
based on his gross receipts during the year. It should be noted that cost
of sales or cost of services shall not be allowed to be deducted from
gross sales or receipts.
A general professional partnership (GPP) may claim either the itemized
deductions or in lieu thereof, the OSD allowed to corporations in claiming
the deductions in an amount not exceeding 40% of its gross income. The
net income determined by either the itemized deduction or OSD from the
GPPs gross income is the distributable net income from which the share
of each share is to be ascertained.
Proof of actual expenses is not required; hence, he is not also required to
keep books of accounts and records with respect to his deductions during
the year.

DEDUCTIONS
NON-DEDUCTIBLE ITEMS

1. Personal, living or family expenses;

2. Any amount paid out for new buildings or for permanent improvements,
or betterments made to increase the value of any property or estate. This
Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations, which are deductible under Subsection
(G)(1) of Section 34 of this Code.
3. Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy
5. Losses from sales or exchanges of property between related parties

PERSONAL EXEMPTIONS
RA 8424: Jan 1, 1998
Single and estate or trust
P20,000
Head of family P25,000
Married P32,000
For each child, not to
exceed 4 P8,000

RA 9504: July 6, 2009

Individual, whether single,
HOF, or married
P50,000
For each child, not to
exceed 4 P25,000
Law exempts income of
minimum wage earners
and increases OSD from
10% to 40% of gross
sales or receipts, for
individuals, and of gross
income, for corporations.

PERSONAL EXEMPTIONS
Status-at-the-end-of-the-year rule
Status-at-the-end-of-the-year rule which means that whatever is
the status of the taxpayer at the end of the calendar year shall be
used for purposes of determining his personal and additional
exemptions generally applies. A change of status of the taxpayer
during the taxable year generally benefits, but does not prejudice,
him. Thus, if he marries at the end of the year, he shall be entitled
to personal exemption of P32,000/P50,000. If a child is born at any
time during the calendar year, even on the last day of the year, the
taxpayer is entitled to claim his child as a dependent entitling him to
deduct additional exemption of P8,000/P25,000 for that year. On
the other hand, if one of his qualified dependent children dies during
the year, the law considers that the child died on the last day of the
year; hence, he is entitled to claim the full amount of additional
exemption of P8,000/P25,000 for the deceased child for the year.

TAX BASES AND RATES

COMPENSATION
INCOME

FRINGE BENEFITS

Gross compensation
income less PAE times
graduated rates
Gross compensation
income of employees of
RHQ, ROHQ,
OBU/FCDU, and
petroleum contractors
times 15%
Grossed-up monetary
value of fringe benefits
times taxable rate times
32% = FBT

TAX BASES AND RATES

BUSINESS AND/OR
PROFESSIONAL INCOME
Corporations (see formula
opposite here)
Individuals:
There is no MCIT.
Deduct applicable PAE.
Apply graduated rates of 5%
to 32%
Pay IT on two equal
installments, provided amount
is more than P2,000.

Gross sales
Less: Cost of sales or services
Gross income
Multiplied by: 2%
MCIT

Gross income
Less: Deductions
Net income
Multiplied by: 35%
RCIT
Less: CWT
Balance

TAX BASES AND RATES

CAPITAL ASSETS

A. REAL PROPERTY IN THE

PHILIPPINES

B. SHARES OF STOCKS OF
DOMESTIC CORPORATION

C. OTHER CAPITAL ASSETS

Consideration or FMV, whichever is

higher times 6% = CGT.
Sale of principal residence is exempt
from CGT, provided conditions are
satisfied

Listed and traded in local stock

exchange: GSP times of 1% =
Stock transaction tax
Listed but traded over the counter or
unlisted shares: Gross selling price
less cost or adjusted basis = Capital
gain or loss times 5%/10% = CGT
Include in global tax system, but longterm capital gain or loss shall be
taxable or deductible only at 50%
thereof.

TAX BASES AND RATES

PASSIVE INCOME
A. Interest

20% FWT (peso deposit) and

deposit substitute
7.5% FWT (foreign exchange
deposit)
Long-term deposits (5 years of
more) of individuals: exempt
Others: Global system

B. Dividend

10% FWT Citizen

20% FWT Resident alien
engaged in trade
25% FWT NRANE
0% -- DC & RFC
35%, unless tax sparing provision applies -- NRFC

TAX BASES AND RATES

C. Royalty

10% FWT books, literary

works and musical
compositions (citizen)
20% FWT general rate
(NRAE, DC & RFC)
25% FWT NRANE
35% FWT NRFC

D. Rental income

NRFC
25% x gross income: NR
cinema film owner, lessor or
distributor
4.25% x gross income: NR
owner or lessor of vessels
7.5% x gross income: NR
lessor of aircraft, machineries
and other equipment

BRANCH PROFIT REMITTANCE

TAX
Branch profit of the Phil. branch used as additional
capital investment of the foreign head office in the
Philippine branch, pursuant to the requirements of the
Bangko Sentral ng Pilipinas, is considered as profit
constructively remitted abroad.
Branch profit remittance tax (BPRT) applies not only
when the profit is actually remitted but also when such
profit is constructively remitted to the head office abroad
(ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

BPRT does not apply on profits remitted by an enterprise

registered with PEZA or SBMA and other freeport zones.
Tax base of BPRT is the amount of profit earmarked for
remittance to its head office abroad.

NATURE OF ASSET
ORDINARY ASSET

Inventory if on hand at end of

taxable year
Stock in trade held primarily for
sale or for lease in the course
of trade or business
Asset used in trade or
business, subject to
depreciation
Real property used in trade or
business

CAPITAL ASSET (Sec 38A)

All other assets, whether or not

used in trade or business,
other than the above assets

ORDINARY v. CAPITAL ASSETS

Who is seller of asset?
Person is habitually engaged in real estate business
Presumption or proof when habitually engaged in
real estate business
6-transaction rule
Person is not habitually engaged in real estate
business
Nature of asset sold?
If it forms part of stock primarily for sale or it is being
used in trade or business, ordinary asset
Otherwise, capital asset

ORDINARY v. CAPITAL ASSETS

Type of capital asset sold?
If CA is used as principal residence of seller who is a citizen or
alien who resident or non-resident but engaged in trade in the
Phil, sale is exempt from 6% CGT, provided other conditions are
present.
Otherwise, sale is taxable.
Tax base, tax rate, and gain or loss from sale
CA located in the Phil 6% CGT; CA located abroad Global
tax system. Basis is FMV or GSP, whichever is higher. Seller
pays the 6% CGT, but buyer does not withhold the FWT.
In OA, tax base is net income and rate of tax depends on
whether seller is individual or corporation; it is subject to EWT
provisions.

ORDINARY v. CAPITAL ASSETS

Cost or adjusted basis upon subsequent sale
This is not material, if asset sold is capital asset,
because tax base is GSP/FMV, whichever is higher.
This is important, if asset sold is ordinary asset,
because tax base is net income.
Donors tax on sale for insufficient consideration
If CA, no donors tax due.
If OA, there is donors tax due per Sec 100, NIRC.
Filing of tax return
If CA, within 30 days from date of sale
If OA, within 45/60 days from close of quarter

EXCHANGE OF PROPERTY
GENERAL RULE

The entire gain or loss shall be recognized.

EXCEPTIONS:

No gain or loss shall be recognized at the

time of the transaction on tax-free exchanges
of property under Sec 40(2), NIRC:
a. Merger or consolidation
b. Exchange of property for shares of stocks,
as a result of which, he together with four
others gains control of the corporation

ACCOUNTING METHODS
Cash method
Accrual method
All events test; amounts received in advance are not treated as
revenue of the period in which received but as revenue of future
periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No.
5046, Mar 24, 1997).

Installment sales
Sale on the installment plan
Initial payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan

Initial payments exceed 25% of GSP

Percentage of completion
Crop year method

FILING OF TAX RETURN

SUBSTITUTED FILING OF ITR: No individual income
tax return for the year will be filed by the employee
concerned, and the employer is the one that files the
return for him
Applies only to individuals
With only one (1) employer
Who correctly withholds the income tax on compensation income
paid to the employee and remits the same to the BIR

Substituted filing of return does not apply when the

conditions above are not met, such as when the
individual has (a) two or more employers, (b) mixed
incomes, correct WT was not deducted from
compensation income, etc.

FILING OF TAX RETURN

Individual deriving mixed income, or purely business/ professional
income, or other income must file his quarterly income tax returns
(BIR Form 1700 Q) and annual income tax return (BIR Form 1700 )
as follows:

Period

Q1 Return
Q2 Return
Q3 Return
Annual Return

Due Date for Filing Return

April 15 of same year

August 15 of same year
November 15 of same year
April 15 of the following year

FILING OF TAX RETURN

A domestic corporation and resident foreign corporation shall file quarterly

corporate income tax return (BIR Form 1702 Q) and annual corporate
income tax return (BIR Form 1702 as follows:
Q1 Return
Q2 Return
Q3 Return
Annual Return

May 31 of same year

August 31 of same year
November 30 of same year
April 15 of the following year (if on calendar
year), or 15th day of the fourth month following
the close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except

those receiving purely compensation income) and corporations shall be
made on the cumulative basis; i.e., gross income and deductions are
consolidated and the income tax liability is computed on the consolidated
net income, and the income taxes paid for the preceding quarter(s) are
credited against the consolidated income tax due.

WITHHOLDING TAX
An income payment is subject to the expanded
withholding tax, if the following conditions concur:
a. An expense is paid or payable by the taxpayer,
which is income to the recipient thereof subject to
income tax;
b. The income is fixed or determinable at the time of
payment;
c. The income is one of the income payments listed in
the regulations that is subject to withholding tax;
d. The income recipient is a resident of the Philippines
liable to income tax; and
e. The payor-withholding agent is also a resident of the
Philippines.

WITHHOLDING TAX

EXEMPT FROM EWT

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

municipal governments and barangays, except government-owned or controlled
corporations;
2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the following:
a. Sales of real property by a corporation which is registered with and certified by
HLURB or HUDCC as engaged in socialized housing project where the selling
price of the house and lot or only the lot does not exceed P180,000 in Metro
Manila and other highly urbanized areas and P150,000 in other areas;
b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption
from income tax under E.O. 226, R.A. 7916, and R.A. 7227;
c. Corporations which are exempt from income tax under Section 30 of the Tax
Code, such as GSIS, SSS, PHIC, PCSO, and PAGCOR;
d. General professional partnerships; and
e. Joint ventures or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
f. International carriers (by air or water) subject to 2.5% Gross Phil Billings

WITHHOLDING TAX

1. Professional fees for services rendered by individuals; and

professional entertainers and athletes, and directors:

If gross income for current year exceeds P720,000

If gross income for current year does not P720,000

- 10%
- 15%

3. Rental income

- 10%
- 15%

2. If recipient of professional fees, talent fees, etc. is

a juridical person:

If gross income for current year exceeds P720,000

If gross income for current year does not P720,000

Real properties
Personal properties of P10,000 per payment; P10,000
shall not apply when accumulated rental to same
lessor exceeds or is reasonably expected to exceed
P10,000 within a year
Poles, satellites and transmission facilities
Billboards

- 5%

- 5%
- 5%
- 5%

WITHHOLDING TAX

4. Gross payments to resident individuals and corporate cinematographic film owners, lessors, or distributors
5. Gross payments to contractors
6. Income distribution to beneficiaries
7. Income payments to certain brokers and agents
8. Income payments to partners of general professional
partnerships:
If gross income for current year exceedsP720,000
If otherwise
9. Professional fees paid to medical practitioners
If gross income for current year exceedsP720,000
If otherwise
10. Gross additional payments to government personnel from
importers, shipping and airline companies, or their
agents
11. One-half of gross amounts paid by any credit card
company in the Philippines

5%
2%
15%
10%

- 15%
- 10%
- 15%
- 10%

- 15%
-

1%

WITHHOLDING TAX

12. Income payments made by any Top 20,000 Corp

Supplier of goods
Supplier of services
13. Income payments made by government to its local/resident
supplier of goods and services other than those covered
by other rates of withholding taxes
Supplier of goods
Supplier of services
14. Commissions of independent and exclusive distributors,
and marketing agents of companies
15. Tolling fees paid to refineries
16. Payments made by pre-need companies to funeral parlor
17. Payments made to embalmers
18. Income payments made to suppliers of agricultural products
19. Income payments on purchases of minerals, mineral products and quarry resources
20. MERALCO refund to customers
With active contracts
With terminated contracts

- 1%
- 2%

- 1%
- 2%

10%
5%
1%
1%
1%

- 10%
- 25%
- 32%

REFUND
A taxpayer must do two things to be able to successfully make a
claim for the tax refund of withholding tax on compensation income:
(a) declare the income payments it received as part of its gross
income and (b) establish the fact of withholding.
The amounts of total taxes withheld for each redundant employees
cannot be verified against the Summary of Gross Compensation and
Taxes Withheld for 1995 due to the fact that this summary
enumerates the amounts of income taxes withheld on per
district/area basis. The SGV certification cannot be appreciated in
PLDTs favor as the courts cannot verify such claim. Besides, the
documents from which SGV traced the Alpha List to the Monthly
Remittance Returns of Income Taxes have not been presented to
the court, and this is fatal to PLDT . Also, the cash salary vouchers
for the rank and file employees do not have acknowledgment
receipts (PLDT v. CIR, GR 157264, Jan 31, 2008).

REFUND

Requisites of claim for refund are:

Claim was filed within 2 years under Sec. 230, NIRC;
Income upon which taxes were withheld were included in the return of the
recipient; and
Fact of withholding is established by a copy of statement (BIR Form 1743.1) duly
issued by payor (withholding agent) to payee, showing amount paid and amount
of tax withheld (RR 6-85).

CTA found above requisites were satisfied. Findings of facts of CTA are
entitled to great weight and will not be disturbed on appeal, unless it is
shown that the lower court committed gross error in the appreciation of
facts.
Failure of respondent to indicate its option in its annual ITR to avail itself of
either tax refund or tax credit is not fatal to its claim for refund.
Sec. 76, NIRC offers two options: refund or tax credit. The options are
alternative and the choice of one precludes the other. However, in Philam Asset
Mgt v. CIR, this Court ruled that failure to indicate a choice will not bar a valid
request for refund, should this option be chosen by the taxpayer later on. The
requirement is only for the purpose of easing tax administration, particularly the
self-assessment and collection aspects.

REFUND

Failure of respondent to present in evidence the 1998 ITR is not fatal to its
claim for refund.
CTA denied claim for 1997 tax credit of PERF because it failed to submit its 1998
ITR.
PERF attached its 1998 ITR to its motion for reconsideration. The ITR is part of
the records of the case and clearly showed that income taxes were not claimed
as tax credit in 1998.
Technicalities should not be used to defeat substantive rights, especially those
that have been held as a matter of right.
The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This
provision should be taken in the light of RA 1125; proceedings therein shall not
be governed strictly by technical rules of evidence.
No one shall unjustly enrich oneself at the expense of another. This applies not
only to individuals but to the State as well. In the field of taxation where the State
exacts strict compliance upon its citizens, the State must likewise deal with
taxpayers with fairness and honesty. The harsh power of taxation must be
tempered with evenhandedness (CIR v. PERF Realty Corp., GR 163345, July 4, 2008).

REFUND
Tax refunds or credits are not founded principally on
legislative grace but on the legal principle which
underlies all quasi-contracts, abhorring a persons unjust
enrichment at the expense of another. The dynamic of
erroneous payment of tax fits to a tee the prototypic
quasi-contract, which covers not only mistake in fact but
also mistake in law. The government is not exempt from
the application of solutio indebiti. Indeed, the taxpayer
expects fair dealing from the government, and the latter
has the duty to refund without any unreasonable delay
what it has erroneously collected (CIR v. Fortune Tobacco Corp, GR
167274, July 21, 2008).

 END OF PRESENTATION
Atty. Vic C. Mamalateo
Mobile: 0918-9037436
Email: vicmamalateo@yahoo.com

vic.mamalateo@vcmlaw.com.ph