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INCOME TAX REVIEWER

I. Definition Of Income Tax

Income tax is referred to as -


A tax on all yearly profits arising fr. property, professions, trades or offices, or
A tax on a persons income, emoluments, profits & the like.
It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year.

A. Nature of Income Tax


Income tax is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits
but upon the RIGHT of a person to receive income or profits.

B. Purpose of Income tax: Fiscal/Non-fiscal


1. to provide large amounts of revenue;
1. to offset regressive sales & consumption taxes;
2. To mitigate the evils arising fr. the inequalities in the distribution of income & wealth w/c are
considered deterrents to social progress, by a progressive scheme of taxation.
Income tax is regarded as the best measure of a persons ability to pay.

C. Brief Historical Background of Phil. Income Tax

1. United States Revenue Act of 1913


Extended to the Phils. w/c was then a territorial possession of the US
administered & enforced by internal revenue officers of the Phil. Government

2. Revenue Act of 1916, War Revenue Act of 1917


amended Revenue Act of 1913

3. Act No. 2833


enacted by the Phil. legislature under authority conferred by 1917 Act

4. CA No. 466 ( National Internal Revenue Code of 1939)


revised, amended & codified into a single tax code all the internal revenue laws embodied in the
1939 NIRC & amendatory laws & decrees
was amended several times

5. PD 1158 ( NIRC of 1977)


consolidated & codified into a single tax code all the internal revenue laws embodied in the NIRC
& amendatory laws & decrees

6. PD 1994 (NIRC of 1986)


income tax law of the Phils. today
enacted to simplify & restructure certain provisions of the NIRC

VAT Law (E.O. 39, 1987) : first attempt to restructure tax system, tax administration (FAILED)

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INCOME TAX REVIEWER
SNITS (1992) : another attempt at restructuring

D. Sources of Income Tax Law: NIRC as amended

II. Meaning Of Income/ Sources/ Kinds

A. Definition of income/ differentiate fr. capital

Sec. 36, Rev. Reg. 2

Income in the broad sense - all wealth w/c flows into the taxpayer other than as a mere return of capital;
includes the forms of income specifically described as gains & profits, including gains derived fr.
the sale or other disposition of capital assets.
Gross Income - income ( in the broad sense) less income w/c is by statutory provision or otherwise
exempt fr. the tax imposed by law.
Net Income - gross income less statutory deductions
Income means -
accession to wealth
gain
flow of wealth

Conwi vs. CTA 213 SCRA 83


Facts: Pets., Filipino citizens & employees of P&G, were assigned to work abroad in 1970 & 1971, during
w/c they were paid US $ as compensation. When they filed their ITR in 1970 & 1971, they computed the
tax due by applying the $-P conversion based on the floating rate ordained under BIR Ruling No. 70-027.
In 1973 however, they filed amended ITRs for 70 & 71 using the par value of the peso as prescribed in RA
# 265. They thus claim tax refunds or tax credits, w/c was denied by CTA. It is to be noted that Pets. did
not remit any portion of their income into the Phils. during their stints abroad.
Issue: WON income of Pets. were still taxable in the absence of remittances or acceptance of their salaries
into the country
Held: Yes the foreign earnings are taxable. Income may be defined as an amount of money coming to a
person or corporation w/in a specified time, whether as payment for services, interest or profit fr.
investment. The $ earnings of Pets. are the fruit of their labors in the foreign subsidiaries of P&G. It was a
definite amount of money w/c came to them w/in a specified period of time of 2 years as payment for
their services. Sec. 21 of the NIRC states that a tax shall be imposed upon taxable net income received
during each taxable year fr. all sources by every individual, whether a citizen of the Phils. residing therein
or abroad.

CIR vs. BOAC 149 SCRA 395


Facts: British Overseas Airways Corp. is a 100% British-owned corp. organized & existing under
the laws of the UK. It had no landing rights in the Phil. & had no CPCN . Although it did not carry
passengers &/or cargo to or fr. the Phil., it maintained a general sales agent , Warner Barnes & Co. Ltd. &
later Qantas Airways w/c was responsible for selling BOAC tickets covering passengers & cargoes. CIR
assessed deficiency taxes w/c was protested by BOAC.

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INCOME TAX REVIEWER
Issue: WON the revenue derived by BOAC fr. sales of tickets in the Phil. for air transportation, while
having no landing rights here, constitute income fr. Phil. sources & accordingly taxable
Held: Income means cash received or its equivalent. It is the amount of money coming to a person
w/in a specific time. It is distinct fr. capital, for while the latter is a fund, income is a flow. As used in our
laws, income is a flow of wealth. The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as coming fr. the Phil., it is sufficient
that income is derived fr. activity w/in the Phils. In BOACs case, the sale of tickets in the Phils. is the
activity that produces the income. The tickets exchanged hands here & payments were made in Phil
currency. Thus, the flow of wealth should share the burden of supporting the government.

Madrigal vs. Rafferty 38 Phil 414


Facts: In Madrigals ITR, he declared his total net income to be P 296T. Subsequently, he submitted a
claim that said amount was the income of the conjugal partnership existing between himself & his wife, &
that in computing & assessing the additional income tax provided by act of Congress, the income declared
should be divided into two equal parts.
Issue: WON additional income tax should be assessed by dividing income into two equal parts, bec. of the
conjugal partnership existing between the Madrigal spouses
Held: NO. A wife may make a separate return of her own income only when she has a separate estate
managed by herself as her own separate property & receives an income of more than P 3T. The essential
difference between capital & income is that capital is a fund of property existing at an instant time;
income is a flow of services rendered by that capital by the payment of money fr. it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time. Capital is wealth, income
is service of wealth.

Fisher vs. Trinidad 43 Phil 973


Facts: The Philippine American Drug Co. was a duly organized corp. existing under Phil. laws. Fisher was
a stockholder of said corporation w/ a share of stock dividends worth P 24,800 in 1919. He was made to
pay under protest w/ the CIR.
Issue: WON the stock dividends are income & thus taxable
Held: NO. Stock dividends are not income. An income is the return in money fr. ones business, labor
or capital invested. Only when a cash dividend is given or such that dividend normally payable in money,
& when so paid, then only does the stockholder realize a profit or gain; w/c becomes his separate
property, & thus derive an income fr. the capital that he invested. Until that is done, the increased assets
belong to the corporation & not to the individual stockholders. The stockholder who receives a stock
dividend has received nothing but a representation of his increased interest in the capital of the
corporation.

B. Sources of Income
1. Capital/labor/exchange of capital

Query: What produces income?


Answer:

Commissioner vs. BOAC, supra


Held: The source of income is the property, activity or service that produced the income. For the source
of income to be considered as coming fr. the Phil., it is sufficient that the income is derived fr. activity w/in
the Phil. In the case of BOAC, the sale of tickets in the Phil. is the activity that produces the income. The

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INCOME TAX REVIEWER
tickets exchanged hands here & payments for fares were also made in Phil. currency. The site of the
source of income is the Phil. & the flow of wealth proceeded fr., & occurred w/in Phil. territory, enjoying
the protection accorded by the Phil. government. Thus, said flow of wealth should share the burden of
supporting the government.

2. Income derived fr. whatever source

SEC. 32. Gross Income. -


(A) General Definition. - Except when otherwise provided in this Title, gross income means all income
derived from whatever source, x x x

The words used in the law disclose a legislative policy to include all income not expressly exempted
w/in the class of taxable income under our laws, irrespective of the voluntary or involuntary action of
the taxpayer in producing the gains, & whether derived fr. legal or illegal sources.
Income tax is source blind.

Queries: Why is income tax source blind? Are the ff. items income?
1. found treasure
2. punitive damages/damages for breach of promise or alienation of affection
3. worthless bad debts subsequently collected
4. tax refund
5. non-cash benefits
6. income fr. illegal sources
7. psychological benefits of work
8. give-away prizes/scholarships/fellowships

C. Kinds/ Classification of Income or Gain (not in Maams SPIT outline but I think she just
omitted it bec. she proceeded to letter D. Ella)

1. Passive Income
refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the
earning process.
Ex. dividends, royalties, prizes & winnings

Sec. 22(z), RA 8424 The term 'ordinary income' includes any gain from the sale or exchange of
property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale
or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary
income' shall be treated as gain from the sale or exchange of property which is not a capital asset as
defined in Section 39(A)(1).
The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital
asset. Any loss from the sale or exchange of property which is treated or considered, under other
provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property
which is not a capital asset.

2. Capital Gain/Ordinary Gain


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INCOME TAX REVIEWER
GAIN - transaction resulting in increases of wealth capable of pecuniary estimation
CAPITAL GAIN is the gain derived fr. the sale or exchange of capital assets.
ORDINARY GAIN is gain derived fr. the sale or exchange of an asset w/c is not capital. (see S20(z) supra)

SEC. 39. Capital Gains and Losses. -


(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business, of a character which
is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges
of capital assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the
following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be
taken into account in computing net capital gain, net capital loss, and net income:
(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months;
and
(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof), with interest coupons or in registered
form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a
net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in
the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than
twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the
retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any
corporation (including those issued by a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or
exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property
shall be considered as capital gains or losses.

Sec. 6 (e), NIRC Authority of the Commissioner to prescribe real property values.
The Commissioner is hereby authorized to divide the Philippines into different zones or areas & shall,
upon consultation w/ competent appraisers both fr. private & public sectors, determine the fair market

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INCOME TAX REVIEWER
value of real properties located in each zone or area. For purposes of computing any internal revenue
tax, the value of the property shall be w/cever is higher of:
1. The fair market value as determined by the Commissioner, or
2. The fair market value as shown in the schedule of values of the Provl. or City Assessors.

Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of property. No deduction is allowed in respect of
losses fr. sales of exchanges of property, directly or indirectly,-
1. Between members of a family (whole or half siblings, spouse, ancestors & lineal descendants);
2. Between an individual & a corporation more than 50% in value of the outstanding stock of w/c is
owned, directly or indirectly by or for such individual except in the case of distributions in liquidation;
3. Between two corporations more than 50% in value of the outstanding stock of each of w/c is owned,
directly or indirectly, by or for the same individual, if either one of the corps. w/ respect to the taxable
year of the corp. preceding the date of the sale or exchange was, under the law applicable to such
taxable year, a personal holding company or a foreign personal holding company, except in the cases of
distributions in liquidation;
4. Between a grantor & a fiduciary of any trust;
5. Between the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w/
respect to each trust; or
6. Between a fiduciary of a trust & a beneficiary of such trust.

Sec. 131, Rev. Reg. 2 Losses fr. wash sales of stock or securities
a) A taxpayer cannot deduct any loss claimed to have been sustained fr. the sale of stock or securities, if,
w/in a period beginning thirty days before the date of such sale or disposition & ending thirty days after
such date he has acquired, or has entered into a contract to acquire, substantially identical stock or
securities. However, this prohibition does not apply in the case of a dealer in stock or securities if the
sale or other disposition of stock or securities is made in the ordinary course of business of such dealer
XXX

Sec. 132, Rev. Reg. 2 Definition of capital assets.


The law provides that the term capital assets shall be held to mean property held by the taxpayer (WON
connected w/ his trade or business) . . . Same as Sec. 33, NIRC.
The term capital asset includes all classes of property not specifically excluded by S30 (a).
The exclusion fr. the term capital assets by property used in the trade or business of the taxpayer of a
character w/c is subject to the allowance for depreciation in S30 (f) NIRC -
is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange
(&)
it has no application to gains or losses arising fr. the sale of real property used in the trade or business
to the extent that such gain or loss is allocable to the land, as distinguished fr. depreciable improvements
upon the land.
To such gain or loss allocable to the land, the limitations of 34(b) & (c) apply ( such limitation may be
inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to
customers in the ordinary course of his trade or business, not bec. the land is subject to the allowance
for depreciation provided in 30 (f) NIRC), will not be subject to the percentage provisions of 34(b) &
losses fr. such transactions will not be subject to the limitations on losses provided in 30 (c).

Tuazon vs. Lingad 58 SCRA 170

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INCOME TAX REVIEWER
Facts: In 1948, pet. inherited 2 parcels of land, w/c he subdivided into 29 lots & leased 28. In 1950, he
sold the lots on an installment basis to their occupants. Lot 29 was subsequently subdivided & paved, &
were also sold on a 10 yr. annual amortization basis. He reported his income fr. the sale of the lots as
long-term capital gain. In 1957, he treated his income fr. the sale of the small lots as capital gains &
included only 1/2 as taxable income. He deducted the real estate dealers tax he paid in 1957 due to the
rentals fr. his 28 lots & other properties. BIR charged him w/ deficiency income, considering the sale as
ordinary gains & not capital.
Issue: WON properties inherited by petitioner should be regarded as capital assets
Held: NO. When pet. inherited the properties, he got not only the duty to respect any contract thereon
but also the correlative right to receive & enjoy the fruits of the business & the property w/c the decedent
had established. Also, pet. owned other properties w/c he rented out, fr. w/c he periodically derived a
substantial income, & for w/c he had to pay the real estate dealers tax, w/c he used to deduct fr. his gross
income. Under the circumstances, pets sale of the lots forming part of his rental business cannot be
characterized as other than sales of non-capital, or ordinary assets. (remember exceptions in S33).

Calasanz vs. Com. 144 SCRA 644


Facts: Petitioner inherited fr. her father an agricultural land in Rizal. In order to liquidate her
inheritance, she had the land surveyed, introduced improvements thereon & sold the lots at a profit. In
their joint ITR, they disclosed a profit of P 31,060 fr. the sale of the subdivided lots, & reported 50%
thereof as taxable capital gains. Revenue examiner adjudged pets. as engaged in business as real estate
dealers, required them to pay real estate dealers tax & assessed a deficiency income tax on profits derived
fr. the sale based on the rates for ordinary income.
Issue: WON pets. are real estate dealers liable for real estate dealers tax
WON gains realized fr. the sale of the lots are taxable as ordinary income
Held: YES in both . The activities of pet. are no different fr. those invariably employed by one engaged in
the business of selling real estate. There was extensive development such that pets. did not sell the land
in the condition in w/c they acquired it. A considerable amount was expended to cover the cost of the
improvements. It has been held that a property ceases to be a capital asset if the amount expended to
improve it is double its original cost, as in the CAB, for the extensive improvements indicates that the
seller held the property primarily for sale to its customers in the ordinary course of business. And since
they are engaged in the business of real estate, it follows that the property sold falls w/in the exception in
the definition of capital assets in S33, NIRC.

Gonzales vs. CTA 14 SCRA 79


Facts: Expropriation proceedings were conducted on property owned by petitioners, w/c they inherited
fr. their mother. Upon the amounts received fr. the government, the pets. were ascertained to have made a
capital gain of P 213,328.82 & each of them to have received the amount of P 89T as share in the interest.
Petitioners were each credited the amount of P 86T as payment of their income tax. Subsequently, pets.
asked for a refund of the amount of P 24T saying that the P 89T they received as share in the interest
would have been computed as capital gain & not ordinary gain.
Issue: WON P 89T received as interest on the value of the land expropriated is taxable as ordinary income
Held: YES. The acquisition by the govt. of private prop. through the exercise of eminent domain is
embraced w/in the meaning of the term sale or disposition of property & the definition of gross
income in S 29. The transfer of property through condemnation proceedings is a sale or exchange & the
profit fr. the txn constitutes capital gain. However, for income tax purposes, interest does not form part of
the price paid by the govt. & thus not part of capital gain. Interest is the compensation for the delay in
the return of such capital.
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INCOME TAX REVIEWER

D. Taxable Income
1. Requisites for taxability

1. There must be gain.


There must be in fact income. A txn whereby nothing of exchangeable value comes to or is received by
the taxpayer does not give rise to taxable income.
2. The gain must be realized or received.
The increase in value, i.e., the gain, can be taxed only when a disposition of the property has occurred,
w/c is of such nature as to constitute a realization of such gain fr. the original capital invested in the
property.
The realization of income may take the form of actual receipt of cash or property or constructive
receipt of the income.
3. The gain must not be excluded by law fr. taxation.
Incomes that are exempt fr. the tax by law are not considered in determining gross income.
Deductions, in contrast, are subtracted fr. gross income to arrive at taxable net income.

2. Recognition/ Realization of income for tax purposes

Queries: When is income realized?

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the Commissioner
clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as
defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or
if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income
shall be included in the gross income for the taxable year in which received by the taxpayer, unless,
under methods of accounting permitted under Section 43, any such amounts are to be properly
accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such period or a prior
period.

Sec. 51, Rev. Reg. No. 2 When income is to be reported.


Gains, profits, & income are to be included in the gross income for the taxable year in w/c they are
received by the taxpayer, UNLESS they are included when they accrue to him in accordance w/ the
approved method of accounting followed by him.
If a person sues in one year on a pecuniary claim or for property, & money or property is received on a
judgment therefor in a later year, income is realized in THAT YEAR, assuming that the money or
property would have been income in the earliest year if then received. This is true of a recovery for
patent infringement.

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INCOME TAX REVIEWER
Bad debts or accounts charged off subsequent to March 1, 1913, bec. of the fact that they were
determined to be worthless, w/c are subsequently recovered, whether or not by suit, constitute income
for THAT YEAR IN WHICH RECOVERED, regardless of the date when amounts were charged off.

Sec. 52, Rev. Reg. No. 2 Income constructively received.


Income w/c is
credited to the account of, or
set apart for
a taxpayer & w/c is drawn upon him at any time is subject to tax for the YEAR DURING WHICH SO
CREDITED OR SET APART, although not actually reduced to possession.
To constitute receipt in such a case, the income must be credited to the taxpayer w/o any substantial
limitation or restriction as to the -
time or manner of payment or
condition upon w/c payment is to be made.
A BOOK ENTRY, if made, should indicate an absolute transfer fr. one account to another. If the income is
credited but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer.
When a corporation contingently credits Ees w/ bonus stock, BUT the stock is not available to such Ees
until some future date, the mere crediting on the books of the corporation does NOT constitute receipt.

Sec. 53, Rev. Reg. No. 2 Examples of constructive receipt


(1) Interest Coupons. When interest coupons -
have matured &
are payable,
but have not been cashed,
such interest payment, though not collected when due & payable, -
is nevertheless available for the taxpayer &
should therefore be included in his gross income for the YEAR DURING WHICH SUCH COUPONS
MATURED.
This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted
coupons are income for the year in w/c paid.
(2) Share of profits. The distributive share of the profits of a partner in a gen. partnership duly registered
is regarded as received by him, although not distributed.
(3) Interest on bank deposits. Interest credited on savings bank deposits, even though the bank nominally
has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing
depositors checks, is INCOME TO THE DEPOSITOR WHEN CREDITED.
(4) Credit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc.,
when such credit passes w/o restriction to the shareholder, has a taxable status as INCOME FOR THE
YEAR OF THE CREDIT. Where the amount of such accumulations has not become available to the
shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount
paid in by the shareholder is INCOME FOR THE YEAR OF THE MATURITY OF THE SHARE.

Limpan vs. Com. 17 SCRA 703


Facts: Limpan Investment Co., a corp. engaged in leasing real properties, filed its ITRs for 1956 & 1957.
After an investigation, the BIR found that pet. had underdeclared its rental incomes & had claimed
excessive depreciation of its buildings. Thus deficiency income taxes & surcharges were demanded

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INCOME TAX REVIEWER
against them. Pet. argues that the rents in question were not received in 1957, but were turned over by
the president to the company only in 1959 & that the rates of depreciation applied by the BIR were unfair
& inaccurate.
Issue: WON the assessment of deficiency taxes were accurate
Held: The assessment was valid. Pet.s denial & explanation of the non-receipt of the remaining
unreported income for 1957 was not substantiated by the president nor by his 1957 personal income tax
return in order to establish that the rental income w/c he allegedly collected & received in 1957 were
reported therein. The w/drawal in 1958 of the deposits in court pertaining to the 1957 rental income is
no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to
due to the refusal of pet, to accept the same, & was not the fault of its tenants. Pet. is thus deemed to have
constructively received such rentals in 1957.

Republic vs. de la Rama 18 SCRA 861


Facts: In 1951, the estate of the late Esteban de la Rama filed its ITR for the year 1950. Later, BIR claims
that the estate had received in 1950 cash dividends fr. the De La Rama Steamship Co. Inc. w/c was not
declared in the ITR. BIR claims that the cash dividends were applied in the deceaseds account w/ the
former & this constituted constructive receipt by the estate or heirs.
Issue: WON there was constructive payment & thus constructive receipt by the estate
Held: There was no constructive receipt of the dividends. Income tax is assessed on income that has
been received. In this case, income was not received due to failure to deliver, either actually or
constructively. The debts to w/c they were applied were not proven to have existed. The first debt was
not proven to exist & the second debt was due fr. Hijos de I. de la Rama, an entity separate & distinct fr. the
principal owner thereof. Constructive delivery occurs only when it is shown that the debts to w/c the
dividends were applied actually existed, were legally demandable & chargeable to the deceased.
a. When is income realized?
Realization of income for tax purposes

b. Tests to determine realization of income (Lukban, pp. 44-46)

Severance test
Substantial alteration of interest test
Flow of wealth test

c. Kinds/Classification of taxable income or gain

1. Capital gain (sale of capital asset)


2. Ordinary gain
3. Business income: Service concern/ Manufacturing/Merchandising
4. Income fr. trade or practice of profession
5. Passive income
6. Other forms of gain: ex. found treasure

3. Income Tax Base/ Meaning/ Kinds


a. Approaches in income recognition:

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INCOME TAX REVIEWER

Schedular vs. global approach

Tan vs. del Rosario


Facts: These are two consolidated special civil actions for prohibition challenging: 1) the
constitutionality of RA 7496, also known as the Simplified Net Income Taxation Scheme (SNITS),
amending certain provisions of the NIRC; 2) the validity of Sec.6, Rev. Reg. No. 2-93 promulgated by the
BIR pursuant to the said law. Petitioners are taxpayers claiming to be adversely affected by the
implementation of the law. In the 1 st case, the petitioners assert that the RA violates: 1) Art. VI, Sec. 26(1)
w/c states, Every bill passed by the Congress shall embrace only one subject w/c shall be expressed in
the title thereof.; 2) Art. VI, Sec. 28(1) w/c states, The rule of taxation shall be uniform & equitable. The
Congress shall evolve a progressive system of taxation.; & 3) Art. III, Sec.1, w/c states, No person shall be
deprived of property w/o due process of law, nor shall any person be denied the equal protection of the
laws. In the 2 nd case, the petitioners contend that the BIR exceeded its rule-making authority in
implementing the Rev. Reg.
Held: RA is constitutional; Rev. Reg. is valid. Its title is sufficiently descriptive of the subject of the law.
What may be apparent fr. the amendatory law is the legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation of individual taxpayers & to maintain the
present global treatment on taxable corporations. This classification is neither arbitrary nor
inappropriate. Further, the due process clause may be correctly invoked only when there is a clear
contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is evident in the CAB.

b. Bases of income tax

i. Gross income/ receipts/ meaning in taxation/ in financial accounting


ii. Net income/ net taxable income/ in taxation/ in accounting
iii. Presumed gain/ income

Sec. 24 (D) Capital Gains from Sale of Real Property.


(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of
this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from the sale or disposition of their principal residence
by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt
from the capital gains tax imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by
the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return

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INCOME TAX REVIEWER
of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten (10) years: Provided, finally, that 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 shall be subject to capital gains tax. For this purpose, the gross
selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

c. Income tax rates


SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and
without the Philippines be every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines who is residing outside of the Philippines
including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.
The tax shall be computed in accordance with and at the rates established in the following schedule:
Not over P10,000 5%
Over P10,000 but not over P30,000P500+10% of the excess over P10,000
Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000
Over P70,000 but not over P140,000 P8,500+20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500+25% of the excess over P140,000
Over P250,000 but not over P500,000 P50,000+30% of the excess over P250,000
Over P500,000 . P125,000+34% of the excess over P500,000 in 1998.
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and
effective January 1, 2000, the said rate shall be thirty-two percent (32%).
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall
compute separately their individual income tax based on their respective total taxable income:
Provided, That if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses for
the purpose of determining their respective taxable income.
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
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INCOME TAX REVIEWER
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash
and/or property dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of which he is a partner, or
on the share of an individual in the net income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;


Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1,
1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or
distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000.. 5%
On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -


(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of
this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer.
(3) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from the sale or disposition of their principal residence
by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt
from the capital gains tax imposed under this Subsection: Provided, That the historical cost or

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INCOME TAX REVIEWER
adjusted basis of the real property sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by
the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return
of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten (10) years: Provided, finally, that 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 shall be subject to capital gains tax. For this purpose, the gross
selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -


(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an individual citizen and a resident alien individual, on
taxable income received from all sources within the Philippines. A nonresident alien individual who
shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance
or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. -
Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an
insurance or mutual fund company or from a regional operating headquarter of multinational company,
or the share of a nonresident alien individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof:
Provided, however, that royalties on books as well as other literary works, and royalties on musical
compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax provided under Section
28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit or investment before the fifth (5 th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

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INCOME TAX REVIEWER
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations not traded through the local stock exchange, and real properties shall be subject to the tax
prescribed under Subsections (C) and (D) of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall
be levied, collected and paid for each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not engaged in trade or business within the
Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income.
Capital gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross
income received by every alien individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational companies as salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from
such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or
entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for
each taxable year upon the gross income received by every alien individual employed by offshore
banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax
equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same positions as those of aliens employed by
these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual
who is a permanent resident of a foreign country but who is employed and assigned in the Philippines
by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in
the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, received from
such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a
Filipino employed and occupying the same position as an alien employed by petroleum service
contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be,
imposed under this Code.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging
in business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.

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INCOME TAX REVIEWER
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.

CHAPTER IV - TAX ON CORPORATIONS

SEC. 27. Rates of Income tax on Domestic Corporations. -


(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under
this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent
equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall
include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances and discounts.

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those
covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or

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INCOME TAX REVIEWER
other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct of which is not substantially
related to the exercise or performance by such educational institution or hospital of its primary purpose
or function. A 'Proprietary educational institution' is any private school maintained and administered
by private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and
regulations.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of


existing special or general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -


(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital gains realized during the taxable year from the
sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:
Not over P100,000. 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by
a depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks, including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system
units and other depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not actually used in the business of a corporation

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INCOME TAX REVIEWER
and are treated as capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. -


(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

SEC. 28. Rates of Income Tax on Foreign Corporations.


(A) Tax on Resident Foreign Corporations.
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when sales, purchases and other transactions occur. Their

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INCOME TAX REVIEWER
income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each
month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen
percent (15%) on gross income under the same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income
tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of
this Subsection.
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo
or mail originating from the Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived
by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
offshore banking units, including any interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said offshore
banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject
to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except those activities which are registered with
the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties,
including remuneration for technical services, salaries, wages premiums, annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively connected with the conduct of its trade or
business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.
(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of
their taxable income.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

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INCOME TAX REVIEWER
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system
units, including interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the
rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares
sold or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be subject to tax under this Title.

(B) Tax on Nonresident Foreign Corporation. -


(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income
received during each taxable year from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner,
lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources
within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or
lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and
other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject
to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation.

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INCOME TAX REVIEWER
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby
imposed on the amount of cash and/or property dividends received from a domestic corporation,
which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that
the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the
tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%)
for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular
income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three
percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent
(15%) tax on dividends as provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange:
Not over P100,000.. 5%
On any amount in excess of P100,000 10%

SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -


(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable
year on the improperly accumulated taxable income of each corporation described in Subsection B
hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to
every corporation formed or availed for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not
apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.

(C) Evidence of Purpose to Avoid Income Tax. -


(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment
company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear
preponderance of evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly
accumulated taxable income' means taxable income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and

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INCOME TAX REVIEWER
(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:


(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the accumulated earnings under
tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of
corporations adopting the fiscal year accounting period, the improperly accumulated income not
subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month
period of fiscal year 1997-1998.

Classification of tax payers: INDIVIDUAL/ CORPORATION/ ESTATE and TRUST

SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income
specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income by this Code or other special laws.

INDIVIDUAL: citizens: resident (NET/WORLDWIDE)


non resident (NET/ WITHIN)
OCW (NET/WITHIN)
alien: resident (NET/WITHIN)
non-resident engaged in trade or business (NET/WITHIN)
non-resident not engaged in trade/ business (GROSS/ WITHIN)

CORPORATIONS: domestic (NET/WORLDWIDE)


foreign resident doing business (NET /WITHIN)
non-resident (not doing business) GROSS/ WITHIN

ESTATES and TRUSTS treated as ind. TP


tax rate on ordinary income/ tax rate for capital gain
regular tax rate/ special tax rates
final tax creditable tax
withholding tax
flat rate/ graduation of tax rates
min marginal rate / max marginal rate
automatic increase of tax rates by 1999 and 2000

4. Accounting periods & methods of accounting for taxable income & deductible expenses

a. Calendar year/ fiscal year


Accounting period: The accounting period is the taxable year. It is a fixed period of time, consisting of 12
months, upon the basis of w/c the taxable income is computed & the income tax imposed.

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INCOME TAX REVIEWER

Sec. 22. Definitions.


(P) The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case
of a return made for a fractional part of a year under the provisions of this Title or under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the
period for which such return is made.
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the last day of
any month other than December.
(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the method of
accounting upon the basis of which the net income is computed under this Title.

CHAPTER VIII - ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the Commissioner
clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as
defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or
if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income
shall be included in the gross income for the taxable year in which received by the taxpayer, unless,
under methods of accounting permitted under Section 43, any such amounts are to be properly
accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly includible in respect of such period or a prior
period.

SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title
shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the
method of accounting the basis of which the net income is computed, unless in order to clearly reflect
the income, the deductions should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not otherwise properly allowable in respect of such
period or a prior period.

SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting
period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Commissioner, be computed on the basis of such
new accounting period, subject to the provisions of Section 47.

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.

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INCOME TAX REVIEWER
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an
individual, with the approval of the Commissioner, changes the basis of computing net income from
fiscal year to calendar year, a separate final or adjustment return shall be made for the period between
the close of the last fiscal year for which return was made and the following December 31. If the
change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the
period between the close of the last calendar year for which return was made and the date designated
as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final
or adjustment return shall be made for the period between the close of the former fiscal year and the
date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made
under Subsection (A) on account of a change in the accounting period, and in all other cases where a
separate final or adjustment return is required or permitted by rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part
of a year, then the income shall be computed on the basis of the period for which separate final or
adjustment return is made.

When is income to be reported?


Income constructively received

Sec. 51, Rev. Reg. No. 2 When income is to be reported.


Gains, profits, & income are to be included in the gross income for the taxable year in w/c they are
received by the taxpayer, UNLESS they are included when they accrue to him in accordance w/ the
approved method of accounting followed by him.
If a person sues in one year on a pecuniary claim or for property, & money or property is received on a
judgment therefor in a later year, income is realized in THAT YEAR, assuming that the money or
property would have been income in the earliest year if then received. This is true of a recovery for
patent infringement.
Bad debts or accounts charged off subsequent to March 1, 1913, bec. of the fact that they were
determined to be worthless, w/c are subsequently recovered, whether or not by suit, constitute income
for THAT YEAR IN WHICH RECOVERED, regardless of the date when amounts were charged off.

Sec. 52, Rev. Reg. No. 2 Income constructively received.


Income w/c is
credited to the account of, or
set apart for
a taxpayer & w/c is drawn upon him at any time is subject to tax for the YEAR DURING WHICH SO
CREDITED OR SET APART, although not actually reduced to possession.
To constitute receipt in such a case, the income must be credited to the taxpayer w/o any substantial
limitation or restriction as to the -
time or manner of payment or
condition upon w/c payment is to be made.
A BOOK ENTRY, if made, should indicate an absolute transfer fr. one account to another. If the income is
credited but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer.
When a corporation contingently credits Ees w/ bonus stock, BUT the stock is not available to such Ees
until some future date, the mere crediting on the books of the corporation does NOT constitute receipt.

Sec. 53, Rev. Reg. No. 2 Examples of constructive receipt


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INCOME TAX REVIEWER
(1) Interest Coupons. When interest coupons -
have matured &
are payable,
but have not been cashed,
such interest payment, though not collected when due & payable, -
is nevertheless available for the taxpayer &
should therefore be included in his gross income for the YEAR DURING WHICH SUCH COUPONS
MATURED.
This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted
coupons are income for the year in w/c paid.
(2) Share of profits. The distributive share of the profits of a partner in a gen. partnership duly registered
is regarded as received by him, although not distributed.
(3) Interest on bank deposits. Interest credited on savings bank deposits, even though the bank nominally
has a rule, seldom or never enforced, that it may require so many days notice in advance of cashing
depositors checks, is INCOME TO THE DEPOSITOR WHEN CREDITED.
(4) Credit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc.,
when such credit passes w/o restriction to the shareholder, has a taxable status as INCOME FOR THE
YEAR OF THE CREDIT. Where the amount of such accumulations has not become available to the
shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount
paid in by the shareholder is INCOME FOR THE YEAR OF THE MATURITY OF THE SHARE.

Revenue Regulation #2 Provisions


Sec. 166. General Rule. The method of accounting regularly employed by the taxpayer in keeping his
books, if such method clearly reflects his income is to be followed w/ respect to the time as of w/c items
of gross income & deductions are to be accounted for. If the taxpayer does not regularly employ a
method of accounting w/c clearly reflects his income, the computation shall be made in such manner as
in the opinion of the Commissioner of Internal Revenue clearly reflects it.

Sec. 167. Methods of accounting. It is recognized that no uniform method of accounting can be
prescribed for all taxpayers, & the law contemplates that each taxpayer shall adopt such forms &
systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by
law to make a return of his true income. He must, therefore, maintain such accounting records as will
enable him to do so. Any approved standard method of accounting w/c reflects taxpayers income may
be adopted. Among the essentials are the following:
In all cases in w/c the production, purchase, or sale of merchandise of any kind is an income-producing
factor, inventories of the merchandise on hand (including finished goods, work in process, raw
materials, & supplies) should be taken at the beginning & end of the year & used in computing the net
income of the year in accordance w/ sections 144 to 151 of these regulations.
Expenditures made during the year should be properly classified as between capital & income; that is to
say, expenditures for items of plant, equipment, etc., w/c have a useful life extending substantially
beyond the year should be charged to a capital account & not to an expense account; &
In any case in w/c the cost of capital assets is being recovered through deductions for wear & tear,
depletion, or obsolescence, any expenditure (other than ordinary repairs) made to restore the property
or prolong its useful life should be added to the property account or charged against the appropriate
reserve & not to current expenses.

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INCOME TAX REVIEWER
Sec. 168. Changes in accounting methods. The true income, computed under the law, shall in all cases
be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the
taxpayer shall attach to his return a separate statement setting forth for the taxable year & for the
preceding year the classes of items differently treated under the two systems, specifying in particular all
amounts duplicated or entirely omitted as the result of such change
A taxpayer who changes the method of accounting employed in keeping his book shall, before computing
his income upon such new method for purposes of taxation, secure the consent of the Commissioner of
Internal Revenue. For the purposes of this section, a change in the method of accounting employed in
keeping books means any change in the accounting treatment of items of income or deductions, such as
a change fr. cash receipts & disbursements method to the accrual method, or vice versa; a change
involving the basis of valuation employed in the computation of inventories; a change fr. the cash or
accrual method to the long-term contract method, or vice versa; a change in the long-term contract
method fr. the percentage of completion basis to the complete contract basis, or vice versa; or a change
involving the adoption of, or a change in the use of, any other specialized basis of computing net income
such as the crop basis. Application for permission to change the method of accounting employed & the
basis upon w/c the return is made shall be filed w/in 90 days after the beginning of the taxable year to
be covered by the return. The application shall be accompanied by a statement specifying all amounts
w/c would be duplicated or entirely omitted as a result of the proposed change. Permission to change
the method of accounting will not be granted unless the taxpayer & the Commissioner of Internal
Revenue agree to the terms & conditions under w/c the change will be effected.

Sec. 169. Accounting period. Income tax returns, whether for individuals or for corporations,
associations, or partnerships, are required to be made & their income computed for each calendar year
ending on December 31st of every year. However, corporations, associations, or partnerships may w/
the approval of the Commissioner of Internal Revenue first secured, file their returns & compute their
income on the basis of a fiscal year w/c means an accounting period of twelve months ending on the last
day of any month other than December. But in no instance shall individual taxpayers be authorized to
establish a fiscal year as basis for filing their returns & computing their income.

Sec. 170. When included in gross income. Except as otherwise provided in section 39 in the case of
the death of a taxpayer, gains, profits, & income are to be included in the gross income for the taxable
year in w/c they are received by the taxpayer, unless they are included as of a different period in
accordance w/ the approved method of accounting followed by him. If a taxpayer has died, there shall
also be included in computing net income for the taxable period in w/c he died amounts accrued up to
the date of his death if not otherwise properly includible [allowable] in respect of such period or a prior
period, regardless of the fact that the decedent may have kept his books & made his returns on the basis
of cash receipts & disbursements.

Sec. 171. Paid or incurred & paid or accrued. The terms paid or incurred & paid or accrued
will be construed according to the method of accounting upon the basis of w/c the net income is
computed by the taxpayer. The deductions & credits must be taken for the taxable year in w/c paid or
accrued or paid or incurred, unless in order clearly to reflect the income such deductions or credits
should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a
period other than the period in w/c it was paid or accrued or paid or incurred, he shall attach to his
return a statement setting forth his request for consideration of the case by the Commissioner of
Internal Revenue together w/ a complete statement of the facts upon w/c he relies. However, in his
income tax return he shall take the deduction or credit only for the taxable period in w/c it was actually
paid or incurred, or paid or accrued, as the case may be. Upon the audit of the return, the
Commissioner of Internal revenue will decide whether the case is w/in the exception provided by the

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INCOME TAX REVIEWER
law, & the taxpayer will be advised as to the period for w/c the deduction or credit is properly
allowable.
The provisions of paragraph (a) of this section in general are not applicable w/ respect to the taxable
period during w/c the taxpayer dies. In such case, there shall also be allowed as deductions & credits
for such taxable period amounts accrued & credits for such taxable period amounts accrued up to the
date of his death if not otherwise allowable w/ respect to such period or a prior period, regardless of
the fact that the decedent was required to keep his books & make his returns on the basis of cash
receipts & disbursements.

Sec. 172. Change of accounting period. If a corporation, including a duly registered general co-
partnership, desires to change its accounting period fr. fiscal year to calendar year or fr. calendar year to
fiscal year, or fr. one fiscal year to another, it shall at any time not less than thirty days prior to the date
fixed in section 46(b) of the Code for the filing of its return on the basis of its original accounting period
submit a written application to the Commissioner of Internal Revenue designating the proposed date
for the closing of its new taxable year, together w/ a statement of the date on w/c the books of account
were opened & closed each year for the past three year, the date on w/c the taxable year began & ended
as shown on the returns filed for the past three years, & the reasons why the change in accounting
period is desired.

b. How is income recognized under the ff. situations:

i. Long-term contracts

SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for
tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts'
means building, installation or construction contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall report such income
upon the basis of percentage of completion. The return should be accompanied by a return certificate of
architects or engineers showing the percentage of completion during the taxable year of the entire work
performed under contract. There should be deducted from such gross income all expenditures made
during the taxable year on account of the contract, account being taken of the material and supplies on
hand at the beginning and end of the taxable period for use in connection with the work under the
contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income
arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or
require an amended return.

ii. Installment sales

SEC. 49. Installment Basis.


(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise
disposes of personal property on the installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually received in that year, which the gross profit
realized or to be realized when payment is completed, bears to the total contract price.

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INCOME TAX REVIEWER
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual
disposition of personal property (other than property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One
thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial
payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be
returned on the basis and in the manner above prescribed in this Section. As used in this Section, the
term 'initial payments' means the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes
of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom
under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A)
elects for any taxable year to report his taxable income on the installment basis, then in computing his
income for the year of change or any subsequent year, amounts actually received during any such year
on account of sales or other dispositions of property made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or among such organization, trade or
business, if he determined that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

iii. Termination of
leasehold

RR # 2. Sec. 49. Improvements by lessees---When buildings are erected or improvements made by a


lessee in pursuance of an agreement w/ the lessor & such buildings or improvements are not subject to
removal by the lessee, the lessor may at his option report the income therefr. upon either of the
following bases:
(a) The lessor may report as income at the time when such buildings or improvements are completed the
fair market value of such buildings or improvements subject to the lease. (completion basis)
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or
improvements at the termination of the lease & report as income for each of the lease an adequate part
thereof. (Pro-rated basis)
If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that
the lessor comes into possession or control of the prop. prior to the time originally fixed for the
termination of the lease, the lessor receives additional income for the year in w/c the lease is so
terminated to the extent that the value of such buildings or improvements when he became entitled to
such possession exceeds the amount already reported as income on account of the erection of such
buildings or improvements. No appreciation in value due to causes other than the premature
termination of the lease shall be included. Conversely, if the bldg. or improvements are destroyed prior
to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction
takes place the amount previously reported as income bec. of the erection of such buildings or
improvements, less any salvage value subject to the lease to the extent that such loss was not
compensated for by insurance. If the bldgs. or improvements destroyed were acquired prior to March 1,

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INCOME TAX REVIEWER
1013, the deduction shall be based on the cost or the value subject to the lease to the extent that such
loss was not compensated for by insurance.

c. Recording income & expense/ Keeping of books

i. Computing gross/ net income


ii. Allocating income & expense
iii. Matching principle/ cash method/ accrual/ mixed
iv. Acctg. method w/c clearly reflects income

Sec. 22 (R), NIRC. The terms 'paid or incurred' and 'paid or accrued' shall be construed according to
the method of accounting upon the basis of which the net income is computed under this Title.

v. Differences bet. tax acctg./ financial acctg.

III. ITEMS OF GROSS INCOME AND EXCLUSIONS

Sec. 31. Taxable income Defined. The term taxable income means the pertinent items of gross
income specified in this Code, less the deductions, and/ or personal and additional exemptions if any,
authorized by such types of income by this Code or other special laws.

Sec. 32. Gross Income.


(a) General definition. Gross income means all income fr. whatever source derived, including (but not
limited to) the following items:
1. Compensation for services in whatever form paid, including fees, salaries, wages, commissions, &
similar items;
2. Gross income derived fr. the conduct of trade or business or the exercise of profession;
3. Gains derived fr. dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes & winnings;
10. Pensions; &
11. Partners distributive share of the gross income of general professional partnership.
(b) Exclusions fr. gross income. The following items shall not be included in gross income & shall be
exempt fr. taxation under this Title:
1. Life insurance. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments shall be included in gross income.

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INCOME TAX REVIEWER
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return
of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term
or at the maturity of the term mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or descent:
Provided, however, That income from such property, as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at
the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be
availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or employees, wherein contributions are made by
such employer for the officials or employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in
said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer because of death sickness or
other physical disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens
of the Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws
of the United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions
of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received
by government officials and employees.

(7) Miscellaneous Items.


(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in
loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.

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INCOME TAX REVIEWER
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public
utility or from the exercise of any essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - 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.

(d) 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.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and
private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed
Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the
ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering among others,
the effect on the same of the inflation rate at the end of the taxable year.

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from
the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a
maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption
of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.

A. Income fr. whatever source derived

1. Income tax is source blind.


2. Treatment of special items:
a. Recovery of accounts previously written off
b. Forgiveness of indebtedness
(Sec. 50 RR 2)
c. Tax refunds
d. Found treasure

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INCOME TAX REVIEWER
3. Items of gross income

A. Compensation for services, including fees, commission & similar items

1. Taxable compensation income


Pursuant to an Er-Ee relationship

Sec.32 (A), NIRC. See above.

Sec. 2.78 1 (A) RR 2-98

De Leon:
Compensation for personal services is usually made in money but it may also be paid for in kind, or
both in money & kind
If payment is made in cash, the full amount received is subject to tax.
If services are paid for w/ something other than money, the FMV of the thing taken in payment is the
amount to be included as income.
If the services were rendered at a stipulated price, in the absence of evidence to the contrary, such
price shall be presumed to be the FMV of the compensation received.
Examples of compensation in kind:
1. Compensation paid in company stocks is to be treated as if the company had sold the stock for its
FMV & paid the EE in cash.
2. Where living quarters are furnished in addition to a cash salary, the rental value should be reported
as income.
3. When meals are given an EE, the value thereof constitutes income subject to tax.
4. Promissory notes &/or other evidences of indebtedness constitute income according to the amount
of their FMV.

a. Factors to consider in income recognition:


i. Convenience of the employer rule

Sec. 2.78 1(A-2, 6a) , RR 2-98

ii. Factor of restricted preference


iii. Forced savings / forced consumption

b. Treatment of the following compensation income:


i. Fringe benefits to managerial & supervisory Ees EXCLUDED FR. COMPENSATION
INCOME/ taxed separately.

SEC. 33. Special Treatment of Fringe Benefit.-


(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three
percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and

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INCOME TAX REVIEWER
thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted
to the employee (except rank and file employees as defined herein) by the employer, whether an
individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the convenience or
advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid
in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value
of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by
sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999;
and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe
benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be
taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe
benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference
between one hundred percent (100%) and the applicable rates of income tax under Subsections (B),
(C), (D), and (E) of Section 25.

(B) Fringe Benefit defined.- For purposes of this Section, the term 'fringe benefit' means any good,
service or other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) 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.

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the
provisions of this Section, taking into account the peculiar nature and special need of the trade, business
or profession of the employer.

Revenue Regulation 3-98

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INCOME TAX REVIEWER
ii. Fringe benefits not taxable: See Sec. 33 C above.
iii. Treatment of the ff. items for rank & file Ees:

1. Non-cash benefits: free use of facilities


2. Meals & lodging/ living quarters
3. Imputed rent/ use of household durable
4. transportation / representation & living allowance
5. other fringe benefits

Meaning of rank & file:

Sec. 22 (AA), NIRC. The term 'rank and file employees' shall mean all employees who are holding
neither managerial nor supervisory position as defined under existing provisions of the Labor Code of
the Philippines, as amended.

Sec. 2.78-1 RR 2-98

Exempt fr. Tax

Collector vs. Henderson


Facts: Arthur Henderson is the president of the American International Underwriters for the Philippines
w/c represents a group of American insurance companies engaged in the business of general insurance
(except life insurance). He receives a basic annual salary of P30,000 & allowance for house rental &
utilities (light, water, telephone, etc.). Although he & his wife are childless & are only two in the family,
they lived in a large apartment provided for by his employer. As company president, he & his wife had to
entertain & put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for
rental & utilities expenses.
Held: The exigencies of Hendersons high executive position, not to mention social standing, demanded &
compelled them to live in a more spacious & pretentious quarters like the ones they had occupied.
Although entertaining & putting up houseguests & guests of the ER were not Hendersons predominant
occupation as president, he & his wife had to do so. That is why his ER (corporation) had to grant him
allowances for rental & utilities in addition to his annual basic salary in order to take care of those extra
expenses for rental & utilities in excess of their personal needs. Hence, the fact that the taxpayers had to
live or did not have to live in the apartments chosen by the ER is of no moment, for no part of the
allowances in question redounded to their personal benefit or was retained by them. Their bills for rental
& utilities were paid directly by the ER to the creditors. Henderson is entitle to a ratable value of the
allowances, & only a reasonable amount they would have spent for house rentals & utilities should be the
amount subject to tax, & the excess considered as expenses of the corporation.

Pirovano vs. Commissioner


Facts: Pirovano was president & general manager of the De la Rama Steamship Company until the time of
his death. The company had insured his life w/ various insurance companies for a total sum of
P1,000,000, w/ itself as the beneficiary. After Pirovanos death, the company renounced its rights over the

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INCOME TAX REVIEWER
proceeds of the insurance policies in favor of Pirovanos children. The CIR collected a donees gift tax fr.
the children. The latter contest the imposition on the ground that the act of the company was not
motivated solely by its sense of gratitude but was made for compensation for Pirovanos services to the
company.
Held: A donation made out of gratitude for past services is subject to the donees gift tax. Art. 726, NCC
provides that when a person gives to another a thing on account of the latters merit or of the services
rendered by him provided they do not constitute a demandable debt, the conveyances remain a gift or
donation. In the CAB, it was emphasized in the Directors resolution that the company decided to give
the heirs the proceeds out of gratitude.

c. Income earner & the applicable tax rates

i. Regular compensation income modified gross

Only ind. taxpayers earn comp. income


Applicable rates:
Citizens, Res Alien & Non-Res. Alien engaged in trade or business:

SEC. 24. Income Tax Rates.


(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and
without the Philippines be every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines who is residing outside of the Philippines
including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.
The tax shall be computed in accordance with and at the rates established in the following schedule:

Not over P10,000 5%


Over P10,000 but not over P30,000P500+10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500+15% of the excess over P30,000
Over P70,000 but not over P140,000..8,500+20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500+25% of the excess over P140,000
Over P250,000 but not over P500,000 P50,000+30% of the excess over P250,000
Over P500,000 P125,000+34% of the excess over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and
effective January 1, 2000, the said rate shall be thirty-two percent (32%).

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INCOME TAX REVIEWER
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall
compute separately their individual income tax based on their respective total taxable income:
Provided, That if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses for
the purpose of determining their respective taxable income.
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash
and/or property dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of which he is a partner, or
on the share of an individual in the net income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;


Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1,
1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or
distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

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INCOME TAX REVIEWER
Not over P100,000.. 5%
On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -


(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of
this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from the sale or disposition of their principal residence by
natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt
from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within
thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail
of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally, that 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
shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the
time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph
(1) of this Subsection shall be imposed thereon.

5% - 34% (1998) 33% (1999) 32% (2000)/ modified gross


Non-resident Alien NETB 25% gross compensation income (no deductions/ exemption allowed)

Note: special cases: alien employed by regional HQ of multination, offshore banking units/ petroleum
service contractor 15% final tax

i. Final tax on fringe benefit (NON-RANK and FILE) at the ff. rates:

34% 1998, 33% 1999, 32% 2000 based on the grossed up monetary value of fringe benefit. The
FINAL TAX w/held & pd. by Ees at ff. rates:

1. Res. Cit & Res. Aliens 34% 1998; 33% 1999; 32% 2000.
2. Aliens employed by regional HQ of a multinational corp. 15%
3. Non-res. alien NOT engaged in trade or business: 25%

TAX BASE: grossed up monetary value of fringe benefits

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INCOME TAX REVIEWER
Note: The grossed up monetary value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by the tax rate.

Please read: Rev. Reg. 3-98

2. Exclusions fr. gross income

a. Compensation for injuries or sickness

Sec. 32 (b,4), NIRC. Compensation for injuries or sickness. Amounts received, through Accident or
Health Insurance or under Workmens Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received whether by suit or agreement on account of such
injuries or sickness.

b. Income exempt under treaty

Sec. 32 (b,5), NIRC. Income exempt under treaty. Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.

Garrison vs. CA
Held: The exemption granted to the petitioners by the Military Bases Agreement fr. payment of income
tax is not absolute. By the explicit terms of the MBA, it exists only as regards income derived fr. their
employment in the Philippines in connection w/ the construction, maintenance, operation or defense of
the bases; it does not exist in respect of other income, i.e. obtained or proceeding fr. Philippine sources or
sources other than U.S. sources. Obviously, w/ respect to the latter form of income, the petitioners & all
other American nationals who are residents of the Philippines are legally bound to pay the tax thereon.

BIR Rulings:

031-91 (Feb. 25, 1991)


Facts: The Refugee Services Philippines, Inc. (RSP), through Josefina Mendoza, requested for tax
exemption fr. the BIR on the ground that it is a non-stock, non-profit organization implementing projects
for the United Nations High Commissioner for Refugees (UNHCR).
Held: Tax exemption denied. Art. 18 of the Convention on the Privileges & Immunities of the United
Nations is specific as to who are the employees or officials entitled to tax exemption. Only officials of the
United Nations & of the specialized agencies of the UN whose names are included in the list of officials
w/c shall fr. time to time be communicated & made known to the governments of the member-nations are
exempt fr. the payment of income tax. In this case, there is no showing that the RSP & its employees had
been included in such list. The amounts that RSP receives fr. the UN represent the consideration for the

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INCOME TAX REVIEWER
services it renders under a contract w/ it. Such being the case, RSPs relationship w/ UNHCR is by virtue
of a contract, & not as conferred under the provisions of the UN Charters.
042-91 (March 13, 1991)
Facts: The Consuelo Zobel Alger Foundation (CZAF), a U.S. corporation not engaged in business in the
Philippines, requested for confirmation of its opinion to the effect that the gross amount of interest
derived by it fr. its Philippine currency bank deposits in the Philippines is subject to a 15% w/holding tax.
Held: Pursuant to Sec. 25(b)(1), NIRC, foreign corporations not engaged in trade or business in the
Philippines shall pay a tax equal to 35% of gross income received during each taxable year fr. all sources
w/in the Philippines such as interest, dividends, rents, royalties, etc. However, Art. 12(2) of the RP-US Tax
Treaty provides that interest derived by a resident of one of the contracting States fr. sources w/in the
other contracting State shall not be taxed by the other contracting State at a rate in excess of 15% of the
gross amount of such interest. Such being the case, the CZAFs interest income derived fr. its Philippine
currency bank deposits is subject to a 15% tax rate pursuant to Art. 12(2) of the RP-US Tax Treaty.

Read at least one tax treaty.

c. 13th month pay & other benefits

Sec. 32 (B, 7, e). 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees
of public and private entities: Provided, however, That the total exclusion under this subparagraph shall
not exceed Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the
ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering among others,
the effect on the same of the inflation rate at the end of the taxable year.

i. Items to be included/ Limitation


ii. Requirements for exclusion

B. Pensions/ Retirement benefits/ Separation pay

1. Taxable items : Pensions


2. Exclusions

Sec. 32 (B,6, 1-f). Retirement Benefits, Pensions, Gratuities, etc.-

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INCOME TAX REVIEWER

(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring official or employee has been in
the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at
the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be
availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable
private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or employees, wherein contributions are made by
such employer for the officials or employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in
said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the service of the employer because of death sickness or
other physical disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens
of the Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws
of the United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions
of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received
by government officials and employees.

Sec. 2.78.1 (B, 1-12) RR 2-98

a. Retirement benefits under RA 7641 and


Retirement benefits received by officials & Ees of pvt. firms fr. a reasonable plan.

b. Separation pay/ cause beyond Ees control (question of fact/ must be determined on the
basis of prevailing facts & circumstances)

must not be asked for or INITIATED by the Ee


was not of his own making
c. Similar benefits received fr. foreign govt.
d. Benefits recvd fr. US Veterans Admin
e. Benefits fr. SSS/GSIS

Commissioner vs. CA
Facts: GCL Retirement Plan is an EE trust maintained by the ER. Purpose of the plan is to provide for
retirement pensions, disability & death benefits to the EE. GCL made investments but 15% of that was
w/held as final w/holding tax. Is GCL entitled to refund.

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INCOME TAX REVIEWER
Held: RA 4917 specifically provides that retirement benefits received by officials & Ees of private firms
are exempt from all taxes. In so far as Ees trusts are concerned, RA 4917 should be read together w/ Sec
53(b) w/c provides that the tax imposed by this Title shall not apply to ees trusts w/c forms part of a
pension, stock bonus, or income-sharing plan of an ER. for the benefit of the some or all of his EEs. EEs
trust & benefit plans provide eco. assistance to EEs upon occurrence of some contingency. The tax
advantage was conceived in order to encourage the formation & establishment of such private plans for
the benefit of EEs.

Employees Trusts
The tax imposed on estates & trusts does not apply to income of an EEs trust provided the ff. conditions
are satisfied:
1. The EEs trust forms part of a
pension
stock bonus or
profit-sharing plan
of the ER (Corp. or business partnership) for the benefit of some or all of its EEs
2. Contributions made to the trust by such ER, EE or both for the purpose of distributing to such EEs
the earnings & principal of the fund accumulated by the trust in accordance w/ such plan;
3. Such contributions were made for the purpose of distributing the earnings & principal of the fund
accumulated by the trust; &
4. The trust instrument makes it impossible, at any time prior to the satisfaction of all liabilities w/
respect to EEs under the trust, for part of the corpus or income to be (w/in the taxable year or thereafter)
used for or
diverted to
purposes other than for the exclusive benefit of the EEs
Zialcita case
Facts: On Aug. 23, 1990, a resolution of the ct. en banc was issued regarding the amounts claimed by Atty.
Zialcita on the occasion of his retirement. The terminal leave pay of Atty. Zialcita received by virtue of his
compulsory retirement can never be considered a part of his salary subject to the payment of income tax
but falls under the phrase other similar benefits received by retiring Ees & workers... & thus exempt fr.
the payment of IT.
The dispositive portion of the Res. provides that Atty. Z is to be refunded the amt. w/c was
deducted fr. his terminal leave pay & the ct. declared that henceforth, no w/holding tax shall be deducted
by any office of this Court fr. the terminal leave pay benefits of all retirees similarly situated...
CIR filed a motion for clarification &/or reconsideration.
Held: Terminal leave pay is exempt fr. IT. W/in the purview of the NIRC provisions, compulsory
retirement may be considered as a cause beyond the control of said official or Ee. Consequently, the amt.
he received by way of commutation of his accumulated leave credits fall w/in Sec. 28 (b, 7b) NIRC. Or it
may likewise be viewed as a retirement gratuity received by govt officials & Ees w/c is another
exclusion fr. gross income under Sec. 28(b,7f).

1. BIR Ruling # 014-91 & 029-91, 085-91, & 020-91


Under Sec. 28(b) (7) (B) of the NIRC, any amt. received by an official or employee by his heirs fr. his
employer as a consequence of separation of such official or EE fr. the ERs service due to death, sickness,
or other physical disability or for any cause beyond the control of the said official or Ee is exempt fr.
taxes regardless of age or length of service. The phrase for any cause beyond the control of the said

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INCOME TAX REVIEWER
official or Ee connotes involuntariness on the part of the official or EE. The separation fr. the service of
the official or EE must not be asked for or initiated by him.
2. BIR Ruling # 021-91
Amounts paid specifically either as advance or reimbursements for transportation, representation &
other bona fide ordinary & necessary expenses incurred or reasonably expected to be incurred by the
employee in the performance of his duties are not compensation subject to w/holding tax if the ff.,
conditions are satisfied:
a. It is ordinary & necessary traveling & representation or entertainment expenses paid or incurred by
the Ee in the pursuit of the trade or business of the ER
b. The EE is required to & does, make an accounting/liquidation for such expense in accordance w/ the
specific req.s of substantiation for each category of expense.
If the reimbursements or advances exceed the actual expenses, the excess if not returned to the ER
constitutes taxable compensation.

C. PASSIVE INCOME
1. Interest income (Sec. 32 A, 4)
a. Taxable interest income
i. Sources of interest income

1. interest on bank deposit/deposit substitute/ fr. trust fund & similar arrangement
2. interest on lending/interest income fr. bonds
3. interest on uncollected salary
4. Int. on foreign bonds/ govt. bonds
5. in on T-bills
6. int. earned fr. deposit maintained under FCD system

Rev. Reg. 10-98: interest income of pawnshop operators

ii. Meaning of the ff. items:

Sec. 22 (V) NIRC. The term 'bank' means every banking institution, as defined in Section 2 of RA No.
337, as amended, otherwise known as the General banking Act. A bank may either be a commercial
bank, a thrift bank, a development bank, a rural bank or specialized government bank.
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one
time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrowers own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer. These instruments may
include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas
(BSP) and any authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for interbank call loans
with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not be considered as deposit substitute
debt instruments.

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INCOME TAX REVIEWER

ex. promissory notes; repurchase agreements


exception: Debt instruments issued for interbank call loans w/ maturity of not more than 5 days.

iii. Treatment of bonds issued at a premium/ at a discount


adjustment to int. income/ recognition of income upon retirement of bond.

iv. Interest on insurance proceeds

b. Exclusions

Sec. 32 (b,7) NIRC. Miscellaneous Items.


(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in
loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and
(iii) international or regional financial institutions established by foreign governments.

Com. vs. Mitsubishi Metal


Facts: Atlas Consolidated borrowed fr. Mitsubishi Metal the amount of $20 M. Atlas, in turn, undertook to
sell Mitsubishi all the copper concentrates produced fr. said machine for a period of 15 years. Mitsubishi
then borrowed fr. the Export-Import Bank of Japan. Atlas paid interest to Mitsubishi totaling P13,966.79
for the years 74 to 75. CIR imposed a 15% tax thereon. Mitsubishi is now applying for a tax credit on the
ground that it was merely a financing institution owned, controlled & financed by the Japanese Govt.
Held: The loan agreement is strictly between Mitsubishi as creditor & Atlas as seller of copper
concentrates. The terms & the reciprocal nature of their obligations make it implausible that Mitsubishi
was a mere agent of Eximbank. The loan & sales contract bet. Mitsu & Atlas does not contain any direct or
inferential reference to Eximbank whatsoever. Therefore, the interest income fr. the loans extended to
Atlas by Mitsu is NOT excludable fr. gross income taxation, is not exempt fr. w/holding tax.

cc. Applicable tax rate

i. Interest on bank deposit/ deposit substitute

From trust fund & similar arrangement (PESO-deposit) Within


20% (FINAL TAX) w/held by payer-bank Citizen/ resident alien
25% (FINAL) Nonresident alien NETB
20% (FINAL) corp.

ii. interest income fr. long term deposit or investment in the form of savings, common ind.
trust fund, deposit substitutes, investment management accounts & other investment

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INCOME TAX REVIEWER
evidenced by certificates in such form prescribed by the BSP shall be exempt fr. tax
imposed under this Subsection.

* Denomination P10,000 issued by banks ONLY

Sec. 22 (FF), NIRC. The term 'long-term deposit or investment certificates' shall refer 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 with a maturity period of not less
than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and
issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the
BSP.

Sec. 24 (B,1). Rate of Tax on Certain Passive Income.


(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%.

Sec. 25 (A,2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company,
or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational
Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests,
Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation,
or from a joint stock company, or from an insurance or mutual fund company or from a regional
operating headquarter of multinational company, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership (except a general professional partnership) of which
he is a partner, or the share of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-
venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other
winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax

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INCOME TAX REVIEWER
of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well
as other literary works, and royalties on musical compositions shall be subject to a final tax of ten
percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar
works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

Note:

Exemption applies only to ind. TPs except nonresident alien NETB. They are taxed at 35%. For
corporate taxpayers, no exemption.
Pre-termination will subject the interest to tax/ tax rate based on the remaining maturity.

iii. Interest earned by non-stock non-profit educational institutions

Finance Dept. Order 137-87


Educ. inst. means a non-stock, non-profit corporation association duly registered under Phil. law, &
operated exclusively for educational purposes, maintained & administered by private individual or
group offering formal education issued permit to operate by the DECS.
Revenues derived fr. & assets used in the operation of cafeterias/canteens, dormitories, bookstores are
exempt fr. taxation provided they are owned & operated by the educational institution as ancillary
activities & the same are located w/in the school premises.

Dept. of Finance Order 149-95 Re: Exemption of Non-stock Non-Profit Educational Entities
Amending Finance department Order 137-87
Non-stock, non-profit educational institutions are exempt fr. taxes on all their revenues & assets used
actually, directly & exclusively for educational purposes. However, they shall be subject to internal
revenue tax on such educational institution of its educational purposes or function.
Interest income shall be exempt fr. taxation only when used directly, exclusively for educational purposes.
To substantiate this claim, the institution must submit an annual information return & duly audited
financial statement. A certification of actual utilization & the Board resolution on the proposed project
to be funded out of the money deposited in banks.

iv. Other interest income


interest fr. lending (business) regular tax rate
interest income fr. bonds final tax rate
interest on uncollected salary regular rate

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INCOME TAX REVIEWER
interest on foreign bonds regular if taxable
interest on government bonds 20% final
interest on T-bills 20% final
int. earned fr. deposit maintained under FCD (foreign currency) system 7 %
int. on foreign loan contracted by a nonresident foreign corp. on or after Aug. 1, 1986 20% Final tax.
(Sec. 28 B, 5-a) NIRC.

2. Rentals/Leases

a. Lease of tangible personal property

Operating lease/finance lease


Leasehold Improvements

Rev. Regulation No. 19-86


Sec. 2.01/1 Operating lease, defined.--- An operating lease is a contract under w/c the asset is not
wholly amortized during the primary period of the lease, & where the lessor DOES NOT rely solely on
the rentals during the primary period for his profits, but looks for the recovery of the balance of his
costs & for the rest of his profits fr. the sale or re-lease of the returned assets at the end of the primary
lease period.
Sec. 2.01/2 Finance lease, defined--- Finance lease or full payout lease is a contract involving
payment over an obligatory period (also called primary or basic period) of specified rental amounts for
the use of a lessors property, sufficient in total to amortize the capital outlay of the lessor & to provide
for the lessors borrowing costs & profits. The obligatory period refers to the primary or basic non-
cancelable period of the lease w/c in no case shall be less than 730 days. The lessee, not the lessor,
exercises the choice of the asset & is normally responsible for maintenance, insurance, & such other
expenses pertinent to the use, preservation & operation of the asset. Finance leases may be extended,
after the expiration of the primary period, by non-cancelable secondary or subsequent periods w/ the
rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%)
of the lessors acquisition cost of the leased asset.

Sec. 4.02/2 Compelling persuasive factors. A contract or agreement purported to be a lease shall be
treated as conditional sales contract if one or more of the following compelling persuasive factors are
present:
(A) The lessee is given the option to purchase the asset at any time during the obligatory period of the
lease, notw/standing that the option price is equivalent to or higher than the current fair market value
of the asset;
(B) The lessee acquires automatic ownership of the asset upon payment of the stated amount of
rentals w/c under the contract he is required to make;
(C) Portions of the periodic rental payments are credited to the purchase price of the asset;
(D) The receipts of payment indicate that the payments made were partial or full payments of the asset.
Sec. 4.03/3 Absence of compelling persuasive factors. In the absence of the above compelling
persuasive factors or contrary implication, an intent warranting treatment of a transaction for tax
purposes as a purchase & sale rather than as a lease or rental agreement, may in general be said to exist
if, for example, one or more of the following conditions are present:

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INCOME TAX REVIEWER
(a) Portions of the periodic payments are made specifically applicable to an equity to be acquired by the
lessee.
(b) The prop. may be acquired under a purchase option, at a price w/c is nominal in relation to the value
of the prop. at the time when the option may be exercised, as determined at the time of entering into the
original agreement, or w/c is a relatively small amount when compared w/ the total payments w/c are
required to be made.

b. Lease of real property


c. Tax treatment of
i. Advance rental/ long-term lease
ii. Taxes & other obligations assumed by the lessee
iii. Leasehold improvements by the lessee

When is rental income recognized?

Rev. Regulation No. 2


Sec. 74. Rentals---Where a leasehold is acquired for business purposes for a specified sum, the purchaser
may take as a deduction in his return an adequate part of such sum each year, based on the number of
years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are
ADDITIONAL RENT & constitute a deductible item to the tenant & TAXABLE INCOME to the landlord;
the amount of the tax being deductible by the latter. The cost borne by the lessee in erecting buildings or
making permanent improvements on ground of w/c he is a lessee is held to be a capital investment &
not deductible as a business expense. In order to return to such taxpayer his investment of capital, an
annual deduction may be made fr. gross income of an amount equal to the cost of such improvements
divided by the number of years remaining of the term of the lease, & such deduction shall be in lieu of a
deduction for depreciation. If the remainder of the term of lease is greater than the probable life value of
the buildings erected, or of the improvements made, this deduction shall take the form of an allowance
for depreciation.
Sec. 49. Improvements by lessees---When buildings are erected or improvements made by a lessee in
pursuance of an agreement w/ the lessor & such buildings or improvements are not subject to removal
by the lessee, the lessor may at his option report the income therefr. upon either of the following bases:
(a) The lessor may report as income at the time when such buildings or improvements are completed the
fair market value of such buildings or improvements subject to the lease. (completion basis)
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or
improvements at the termination of the lease & report as income for each of the lease an adequate part
thereof. (Pro-rated basis)
If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that
the lessor comes into possession or control of the prop. prior to the time originally fixed for the
termination of the lease, the lessor receives additional income for the year in w/c the lease is so
terminated to the extent that the value of such buildings or improvements when he became entitled to
such possession exceeds the amount already reported as income on account of the erection of such
buildings or improvements. No appreciation in value due to causes other than the premature
termination of the lease shall be included. Conversely, if the bldg. or improvements are destroyed prior
to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction
takes place the amount previously reported as income bec. of the erection of such buildings or
improvements, less any salvage value subject to the lease to the extent that such loss was not
compensated for by insurance. If the bldgs. or improvements destroyed were acquired prior to March 1,
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INCOME TAX REVIEWER
1013, the deduction shall be based on the cost or the value subject to the lease to the extent that such
loss was not compensated for by insurance.

iv. VAT added to the rental/ paid by the lessee

Limpan vs. Commissioner


Facts: The BIR discovered that Limpan Investment Co. underdeclared its rental incomes for taxable years
1956 & 1957. Limpan, however, argued that it was not supposed to declare said rental income for 56 bec.
the previous owners of the leased bldg. still have to collect part of the total rentals. It also claimed that
only a part of the amount of P81,690.00 for 57 was turned over to the company by their President,
Isabelo Lim. Also, one of its tenants deposited in court his rentals amounting to P10,800.00.
Held: Limpan, having admitted through its own witness that it had NOT declared more than 1/2 of the
amt. found by the internal revenue examiners as unreported rental income for 56 & more than 1/3 of the
amount ascertained by the examiners as unreported rental income for 57 contrary to its original claim to
the revenue authorities.

d. Applicable rate
i. Normal/ regular rate
ii. Except the ff. nonresident foreign corps.

Sec. 28, (B), NIRC. Tax on Nonresident Foreign Corporation. -


(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income
received during each taxable year from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner,
lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources
within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or
lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and
other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject
to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby
imposed on the amount of cash and/or property dividends received from a domestic corporation,
which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that

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INCOME TAX REVIEWER
the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the
tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%)
for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular
income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three
percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent
(15%) tax on dividends as provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange:
Not over P100,000.. 5%
On any amount in excess of P100,000 10%.

Nonresident cinematographic film owner LESSOR or distributor 25% of gross income


Nonres owner or lessor of vessels chartered by Phil. nationals 4 % of gross rentals
Nonres owner/ lessor of aircraft, machinery & other equipmt. 7 % gross rentals or fees.

3. Royalties
a. What are royalties?
b. How are royalties earned?
c. Applicable rates:
Individual taxpayers

Sec. 24 (B,1) NIRC. (B) Rate of Tax on Certain Passive Income.


(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%.

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INCOME TAX REVIEWER
Sec. 25 (A,2), NIRC. Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or
Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a
General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from
a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company
or from a regional operating headquarter of multinational company, or the share of a nonresident alien
individual in the distributable net income after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a nonresident alien individual in the net income
after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a
member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24)
and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on
books as well as other literary works, and royalties on musical compositions shall be subject to a final
tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and
similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore,
That interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the
certificate pre-terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed
on the entire income and shall be deducted and withheld by the depository bank from the proceeds of
the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; &
Less than three (3) years - 20%.

i. all royalties 20% FINAL tax


ii. except: royalties on books, as well as other literary works & musical composition 10%
FINAL tax
iii. 25% - nonres alien NETB
iv. For domestic & resident foreign corp.

Sec. 27 (D,1). Rates of Tax on Certain Passive Incomes. -


(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income.

Sec. 28 (7,a) Tax on Certain Incomes Received by a Resident Foreign Corporation.

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INCOME TAX REVIEWER
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.

20% FINAL tax

v. for nonres foreign corp.


34% - 1998
33% - 1999
32% - 2000

4. Dividends
a. What is dividend income?
i. How is dividend income earned
ii. Kinds of dividend income
a. Cash dividend
b. Stock dividend/ stock rights
c. Property dividends
d. Liquidating dividends
b. Disguised dividend/ payments equivalent to dividend distribution
excessive compensation/ rental in lieu of dividends

Sec. 73 (C), NIRC. Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to
have been made form the most recently accumulated profits or surplus, and shall constitute a part of
the annual income of the distributee for the year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income
declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code,
after deducting the corporate income tax imposed therein, shall be deemed to have been actually or
constructively received by the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not.

Rev. Reg. 2, Secs. 250-253


The distinction between a stock dividend w/c does not, & one w/c does , constitute income taxable to the
shareholder is the distinction between a stock dividend w/c works no change in the corporate entity,
the same interest in the same corp. being represented after the distribution by more shares of precisely
the same character, & a stock dividend where there either has been a change of corporate identity or a
change in the nature of the shares issued as dividends whereby the proportional interest of the
shareholders after the distribution is essentially different fr. his former interest. A stock dividend

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INCOME TAX REVIEWER
constitutes income if it gives the shareholder an interest different fr. that w/c his former stock holdings
represented. A stock dividend does not constitute income if the new shares confer no different rights or
interest than did the old - the new certificates + the old representing the same proportionate interest in
the net assets of the corp. as did the old.
A true stock dividend is not subject to tax on its receipt in the hands of the recipient. Nevertheless, if a
corporation after the distribution of a stock dividend, proceeds to cancel or redeem its stock at such
time & in such manner as to make the distribution & cancellation or redemption essentially equivalent
to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock
shall be treated as a taxable dividend.

Republic vs. Dela Rama


Facts: The estate of the late Esteban de la Rama was the subject of Special Proceedings of the CFI of Iloilo.
The exec-administrator, Hervas, filed on March 12, 1951 income tax returns of the estate corresponding to
tax yr. 1950 declaring a net income of P22, 796.59. P3,919.00 was assessed & paid as income tax. The BIR
later claimed that it had found out that there had been received by the estate in 1950 fr. the Dela Rama
Steamship Co. cash dividends amounting to P86,800 & was not declared in the ITR. The BIR then made an
assessment as deficiency IT vs. the estate P56,032.50 (37355.00 as deficiency & 18,677.50 as 50%
surcharge).
The Collector of IR wrote a letter 2/29/56 to Mrs. Lourdes de la Rama -Osmena informing her of
the assessment & asking payment thereof. On 3/13/56, the latters counsel contended that the
assessment should be sent to Leonor de la Rama who was appointed as administratrix of the estate. CIR
sent the assessment to Leonor asking for payment. The assessment not being paid, the Dep. Comm. of IR
again sent a letter to Lourdes & again it said that they should assess Leonor. The DCIR demanded Leonor
to pay the tax but still was not paid. hence, the Rep. filed w/ CFI a complaint vs. the heirs of Esteban
seeking to collect fr. each heir the proportionate share in the IT liability of the estate.
Held: Where the dividends were not received by the estate or the heirs; neither of them is liable for the
payment of income tax therefor. There would be constructive receipt of the dividends if the debts to w/c
they were applied really exist. In CAB, no constructive receipt as the first debt was contested, & the second
debt was due fr. Hijos de la Rama an entity separate & distinct fr. Esteban.

Commissioner vs. Manning


Facts: MANTRASCO has authorized capital stock dividend into 25,000 common shares, 24,700 owned by
Reese; & the rest at 100 shares owned by Manning, McDonald, & Simmons. Pursuant to a Trust
Agreement, after Reese died, the 24,700 shares were reacquired by Mantrasco. Consequently, the same
shares were distributed equally to M, M & S while payment to the estate of Reese fr. the companies profit
was gradually made fr. 1953-63.
Held: Where corporate earnings are used to purchase outstanding stock treated as treasury stock as a
technical but prohibited device to avoid effects of income taxation, distribution of said corporate earnings
in the form of stock dividends will subject stockholders receiving them to income tax. When the company
parted w/ a portion of their earnings to buy the corporate holdings of Reese, they were in ultimate
effect & result making a distribution of such earnings to M, M & S.

Note: Distribution of partners share in the net income of a taxable partnership is equivalent to
distribution of dividends in a corp.

c. Exclusions
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INCOME TAX REVIEWER
i. Income exempt under a tax treaty
ii. Passive income of foreign government

Sec. 32 (B, 7, a), NIRC. Income Derived by Foreign Government. - Income derived from investments in
the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or
enjoying refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.

5. Annuities & proceeds fr. life insurance

a. Taxable income/computation
Art. 2021 NCC. The aleatory contract of life annuity binds the debtor to pay an annual pension or income
during the life of one or more determinate persons in consideration of a capital consisting of money or
other property, whose ownership is transferred to him at once w/ the burden of the income.
Sec. 32 (a,8) NIRC. Gross income. (a) General definition. - Gross income means all income fr. whatever
source derived, including ( but not limited to ) the following items:
(8) Annuities

b. Exclusions
i. Proceeds of Life insurance
What is insurance? Is casualty insurance a life insurance contract?
Are proceeds of non-life or property insurance taxable? Pre-need contracts?

Sec. 32 (b,1) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income &
shall be exempt fr. taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments shall be included in gross income.
Sec. 62 Rev. Reg. 2. Proceeds of life insurance are excluded fr. gross income bec. they partake more of
indemnity or compensation rather than gain to the recipient. In case of a transfer for a valuable
consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract or any
interest therein only the actual value of such consideration & the amount of the premiums & other sums
subsequently paid by the transferee shall be tax-exempt.

ii. Return of premium paid


What is cash surrender value?
Computing income in annuity contracts

Sec. 32 (b,2) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income &
shall be exempt fr. taxation under this Title:
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return
of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term
or at the maturity of the term mentioned in the contract or upon surrender of the contract.

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INCOME TAX REVIEWER

iii. Compensation for injuries or sickness

Sec. 32. B. (4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness,
plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

Sec. 63 RR 2.

6. Prizes & winnings/ Awards/ Rewards

a. Taxable items
i. gambling winnings/contests/raffle prizes
ii. small town lottery winnings
iii. rewards under Sec. 282 NIRC/ informers reward 10% FINAL w/holding tax

Sec. 32 (a, 9) NIRC. Gross income. (a) General definition. - Gross income means all income fr. whatever
source derived, including ( but not limited to ) the following items:
(9) Prizes & winnings

b. Exclusions/ Exemptions
i. Phil. Charity Sweepstakes and lotto winnings
Sec. 24. (B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

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INCOME TAX REVIEWER
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

ii. Prizes and awards in sports competition

Sec. 32 (b, 7d) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income &
shall be exempt fr. taxation under this Title:
(7) Miscellaneous items:
(d) 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.

iii. Prizes & awards/ religious/ charitable/ scientific/ artistic/ literary

Requisites for exclusion

Sec. 32 (b, 7c) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income &
shall be exempt fr. taxation under this Title:
(7) Miscellaneous items:
(c) Prizes and Awards. - 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.

7. Gifts/Bequests/Devises
Tax treatment of remunerative donation
Extended/ but income from such property taxable

Sec. 32 (B, 3) NIRC.


3. Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or descent:
Provided, however, That income from such property, as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided interest, shall be included in gross income.
8. Other types of passive income

a. Found treasure regular rate


b. Refund of tax or recovery of bad debt previously deducted regular tax rate
c. Damages

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INCOME TAX REVIEWER

C. Gains derived from dealings in property

SEC. 39. Capital Gains and Losses. -


(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business, of a character which
is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges of
capital assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss, and net income:
(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months;
and
(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof), with interest coupons or in registered
form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a
net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in
the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than
twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the
retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any
corporation (including those issued by a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
1. Gains or losses from short sales of property shall be considered as gains or losses from sales or
exchanges of capital assets; and
2. Gains or losses attributable to the failure to exercise privileges or options to buy or sell

1. Types of gain/kinds of property


a. Kinds/Classification of taxable income or gain
What is capital gain? What is ordinary gain/ income?

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INCOME TAX REVIEWER
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which is not a
capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property
which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated
as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1).
The term 'ordi\ary loss' includes any loss from the sale or exchange of property which is not a capital
asset. Any loss from the sale or exchange of property which is treated or considered, under other
provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property
which is not a capital asset.

b. What is NET capital gain? NET capital loss?

(I cant find Sec. 16 (e) in the CTRA and Sec. 22 (Z) is repetition its coming back to me
repetition the only thing I can see Obiter Master)

Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of property. No deduction is allowed in respect of
losses fr. sales of exchanges of property, directly or indirectly,-
7. Between members of a family (whole or half siblings, spouse, ancestors & lineal descendants);
8. Between an individual & a corporation more than 50% in value of the outstanding stock of w/c is
owned, directly or indirectly by or for such individual except in the case of distributions in liquidation;
9. Between two corporations more than 50% in value of the outstanding stock of each of w/c is owned,
directly or indirectly, by or for the same individual, if either one of the corps. w/ respect to the taxable
year of the corp. preceding the date of the sale or exchange was, under the law applicable to such
taxable year, a personal holding company or a foreign personal holding company, except in the cases of
distributions in liquidation;
10. Between a grantor & a fiduciary of any trust;
11. Between the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w/
respect to each trust; or
12. Between a fiduciary of a trust & a beneficiary of such trust.

Sec. 132, Rev. Reg. 2 Definition of capital assets.


The law provides that the term capital assets shall be held to mean property held by the taxpayer (WON
connected w/ his trade or business) . . . Same as Sec. 33, NIRC.
The term capital asset includes all classes of property not specifically excluded by S30 (a).
The exclusion fr. the term capital assets by property used in the trade or business of the taxpayer of a
character w/c is subject to the allowance for depreciation in S30 (f) NIRC -
is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange
(&)
it has no application to gains or losses arising fr. the sale of real property used in the trade or business
to the extent that such gain or loss is allocable to the land, as distinguished fr. depreciable improvements
upon the land.
To such gain or loss allocable to the land, the limitations of 34(b) & (c) apply ( such limitation may be
inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to
customers in the ordinary course of his trade or business, not bec. the land is subject to the allowance
for depreciation provided in 30 (f) NIRC), will not be subject to the percentage provisions of 34(b) &
losses fr. such transactions will not be subject to the limitations on losses provided in 30 (c).

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INCOME TAX REVIEWER
c. Short term asset/ long term asset
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business, of a character which
is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges
of capital assets over the gains from such sales or exchanges.

Tuazon vs. Lingad 58 SCRA 170


Facts: In 1948, pet. inherited 2 parcels of land, w/c he subdivided into 29 lots & leased 28. In 1950, he
sold the lots on an installment basis to their occupants. Lot 29 was subsequently subdivided & paved, &
were also sold on a 10 yr. annual amortization basis. He reported his income fr. the sale of the lots as
long-term capital gain. In 1957, he treated his income fr. the sale of the small lots as capital gains &
included only 1/2 as taxable income. He deducted the real estate dealers tax he paid in 1957 due to the
rentals fr. his 28 lots & other properties. BIR charged him w/ deficiency income, considering the sale as
ordinary gains & not capital.
Issue: WON properties inherited by petitioner should be regarded as capital assets
Held: NO. When pet. inherited the properties, he got not only the duty to respect any contract thereon
but also the correlative right to receive & enjoy the fruits of the business & the property w/c the decedent
had established. Also, pet. owned other properties w/c he rented out, fr. w/c he periodically derived a
substantial income, & for w/c he had to pay the real estate dealers tax, w/c he used to deduct fr. his gross
income. Under the circumstances, pets sale of the lots forming part of his rental business cannot be
characterized as other than sales of non-capital, or ordinary assets. (remember exceptions in S33).

Calasanz vs. Com. 144 SCRA 644


Facts: Petitioner inherited fr. her father an agricultural land in Rizal. In order to liquidate her
inheritance, she had the land surveyed, introduced improvements thereon & sold the lots at a profit. In
their joint ITR, they disclosed a profit of P 31,060 fr. the sale of the subdivided lots, & reported 50%
thereof as taxable capital gains. Revenue examiner adjudged pets. as engaged in business as real estate
dealers, required them to pay real estate dealers tax & assessed a deficiency income tax on profits derived
fr. the sale based on the rates for ordinary income.
Issue: WON pets. are real estate dealers liable for real estate dealers tax
WON gains realized fr. the sale of the lots are taxable as ordinary income
Held: YES in both . The activities of pet. are no different fr. those invariably employed by one engaged in
the business of selling real estate. There was extensive development such that pets. did not sell the land
in the condition in w/c they acquired it. A considerable amount was expended to cover the cost of the
improvements. It has been held that a property ceases to be a capital asset if the amount expended to
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INCOME TAX REVIEWER
improve it is double its original cost, as in the CAB, for the extensive improvements indicates that the
seller held the property primarily for sale to its customers in the ordinary course of business. And since
they are engaged in the business of real estate, it follows that the property sold falls w/in the exception in
the definition of capital assets in S33, NIRC.

Rodriguez vs. Collector


Facts: The Govt. paid P1,238,204.00 to E. Rodriguez Inc. as payment for its land w/c was expropriated by
the govt. Of the said amount, P625,315.90 were in the form of tax-exempt govt. bonds. Nung bayaran na
ng tax, E. Rodriguez Inc. did not include the sum of P625 thou, believing it to be exempt fr. taxation. Ergo,
the CIR assessed E. Rodriguez w/ a deficiency income tax.
Held: There can be no question that E. Rodriguez is taxable on its income derived fr. the sale of its prop. to
the Govt. The fact that a portion of the purchase price of the prop. was paid by the Govt. in the form of
tax exempt bonds does not operate to exempt said income fr. tax. The income fr. the sale of the land in
question & the bonds are 2 different & distinct taxable items so that the exemption does not operate to
exempt the other, unless the law expressly so provides. The tax here is on the income derived fr. the sale of
E. Rodriguezs prop. to the Govt. not the income derived fr. the sale or exchange of the bonds.

2. Computation of gain/loss

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -


(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the
loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The
amount realized from the sale or other disposition of property shall be the sum of money received plus
the fair market value of the property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property
shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was
acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is
greater than the fair market value of the property at the time of the gift then, for the purpose of
determining loss, the basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money or money's worth, the
basis of such property is the amount paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction
where gain or loss is not recognized under paragraph (C)(2) of this Section.
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of
the gain or loss, as the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation; or

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(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or securities in such corporation, a party to the merger or
consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange
for stock or unit of participation in such a corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four (4) persons, gains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for property.
(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a
security holder or a corporation receives not only stock or securities permitted to be received without
the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be
recognized but in an amount not in excess of the sum of the money and fair market value of such other
property received: Provided, That as to the shareholder, if the money and/or other property received
has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder
an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings
and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital
gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor corporation
receives not only stock permitted to be received without the recognition of gain or loss but also money
and/or other property, then (i) if the corporation receiving such money and/or other property
distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be
recognized from the exchange, but (ii) if the corporation receiving such other property and/or money
does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the
loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and
the fair market value of such other property so received, which is not distributed.

(4) Assumption of Liability. -


(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock
or securities which would be permitted to be received without the recognition of the gain if it were the
sole consideration, and as part of the consideration, another party to the exchange assumes a liability of
the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or
acquisition shall not be treated as money and/or other property, and shall not prevent the exchange
from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is
subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange,
then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property
which is not a capital asset, as the case may be.
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above
exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1)
the money received, and (2) the fair market value of the other property received, and increased by (a)
the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized
on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value:
Provided, further, That if as part of the consideration to the transferor, the transferee of property
assumes a liability of the transferor or acquires form the latter property subject to a liability, such
assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be
treated as money received by the transferor on the exchange: Provided, finally, That if the transferor

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INCOME TAX REVIEWER
receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis
among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in
the hands of the transferor increased by the amount of the gain recognized to the transferor on the
transfer.

(6) Definitions. -
(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration.
(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the
ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further,
That in determining whether a bona fide business purpose exists, each and every step of the transaction
shall be considered and the whole transaction or series of transaction shall be treated as a single unit:
Provided, finally , That in determining whether the property transferred constitutes a substantial
portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of
the transferor.
(c) The3term 'control', when used in this Section, shall mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to
vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue
rules and regulations for the purpose 'substantially all' and for the proper implementation of this
Section.

a. Cost of basis of the property sold

SEC. 39. Capital Gains and Losses. -


(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business, of a character which
is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges
of capital assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the
following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be
taken into account in computing net capital gain, net capital loss, and net income:
(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months;
and
(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

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INCOME TAX REVIEWER
b. Cost or basis of prop. exchanged in corporate readjustment

Section 39 (C, 5) NIRC---Basis.--


(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above
exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1)
the money received, and (2) the fair market value of the other property received, and increased by (a)
the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized
on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value:
Provided, further, That if as part of the consideration to the transferor, the transferee of property
assumes a liability of the transferor or acquires form the latter property subject to a liability, such
assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be
treated as money received by the transferor on the exchange: Provided, finally, That if the transferor
receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis
among the several classes of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in
the hands of the transferor increased by the amount of the gain recognized to the transferor on the
transfer.

c. Recognition of gain/loss in exchange of prop.

i. General rule

Sec. 39 (C). Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of
deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision thereof), with interest
coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the applicability of such limitation to other losses.

Sec. 136 RR 2.

ii. Exception: Where no gain or loss shall be recognized


Sec. 40(C, 2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation-
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or securities in such corporation, a party to the merger or
consolidation.

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INCOME TAX REVIEWER
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange
for stock or unit of participation in such a corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four (4) persons, gains control of said corporation:
Provided, That stocks issued for services shall not be considered as issued in return for property.

Meaning of merger/ consolidation/ control/ securities

Sec. 40 (C, 6) Definitions. -


(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration.
(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the
ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further,
That in determining whether a bona fide business purpose exists, each and every step of the transaction
shall be considered and the whole transaction or series of transaction shall be treated as a single unit:
Provided, finally , That in determining whether the property transferred constitutes a substantial
portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of
the transferor.
(c) The3term 'control', when used in this Section, shall mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to
vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue
rules and regulations for the purpose 'substantially all' and for the proper implementation of this
Section.

Commissioner vs. Rufino


Facts: There are two corporations in this case---both are named Eastern Theatrical Co. We will call them
E1 for the old corporation & E2 for the new corpo. In a special meeting of stockholders of E1, a
resolution was passed authorizing E1 to MERGE w/ E2 by transferring its business, assets, goodwill, &
liabilities to the latter. In exchange, E2 would issue & distribute to the shareholders of E1 one share for
each share held by them in the said corpo. The merger was necessary to continue the exhibition of
moving pictures at the Lyric & Capitol Theaters even after the corporate existence of E1, in view of its
pending booking contracts & CBA w/ its Ees. The CIR declared that the merger was not undertaken for a
bona fide business purpose but merely TO AVOID LIABILITY for the capital gains tax on the exchange of
the old for the new shares of stock. CIR then imposed deficiency assessments on capital gains taxes on the
stocks received by the shareholders of E1.
Held: No taxable gain was derived by the shareholders fr. the transaction. There was a valid merger
although the actual transfer of the properties subject of the Deed of Assignment was not made on the date
of the merger. The merger in question involved a pooling of resources aimed at the continuation &
expansion of business & so came under the letter & intendment of the NIRC, as amended, EXEMPTING fr.
the capital gains tax exchanges of property effected under lawful corporate combinations. The fact is that
the merger merely deferred the claim for taxes w/c may be asserted by the govt later, when gains are
REALIZED & benefits are distributed among the stockholders as a result of the merger.
Collector vs. Binalbagan Estate
Facts: Binalbagan & Isabela Sugar Co. proposed to MERGE their assets to form a NEW CORP., BISCOM, w/
a capital stock of 400 Thous Non Par value shares. The assets of both merging companies were assessed

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INCOME TAX REVIEWER
& the market value of Binalbagans tangible assets was fixed as P2,541,134.69, & the sugar quota at
P5/picul or P1,482,629.28. On the basis of such, the merger was realized w/ Binalbagan being allocated
216,000 shares in exchange for its tangible assets & sugar quota. In 1948, Binalbagans equity was
reduced to 176,945 when it gave away 29,055 shares to 3 small sugar centrals. In 1951, these shares were
sold for P6.1 M payable in installments--- (P1.5 in 51; P350 Thous + interest in 52; A total of P15 thou
for 53). The income tax was paid. For 1951, Binalbagan deducted the book value of its tangible assets at
P824,559.91 fr. the initial payment of P1.5 M. 50% of the remainder was reported as income or gain fr. the
sale of capital assets. In 54, CIR assessed deficiency income tax for 51, 52, & 53.
Held: Where 2 corporations merged their assets to form a new corporation, each receiving non par value
shares corresponding to their assets contributed, it is held that the basis in computing the taxable gain fr.
the sale of its shares of stock in the new corporation is the fair market value of its assets given in exchange
for said shares at the time of said exchange.

Revenue Memo Order 26-92


On Dec. 26, 91 & Jan. 3, 92, Revenue Reg. No. 1-92 & Rev. Mem. Circ. No. 1-92 were respectively
issued by this Office clarifying that the increased basic personal & additional exemptions under the
amendatory provisions of RA 7167 shall apply to earnings/income of individual taxpayers starting
taxable year 92 (& NOT 91) w/c shall be declared for income tax purposes in their tax returns to be filed
on or before April 15, 93. Likewise, Rev. Reg. No. 1-92 shall take effect on compensation income earned or
received fr. Jan. 1, 92.
However, in a decision in the consolidated cases of Reynaldo V. Umali vs. Hon. Jesus P. Estanislao,
Sec. of Finance & Hon. Jesus U. Ong, CIR & Rene B. Gorospe, et al, vs. CIR, promulgated May 29, 92, the
Supreme Court held that---
WHEREFORE, Secs. 1, 3 & 5 of Rev. Reg. No. 1-92 w/c provide that the regulations shall take effect
on compensation income earned or received fr. 1 Jan. 92 are hereby SET ASIDE. They should take effect
on compensation income earned or received fr. 1 Jan. 91.
Since this decision is promulgated after 15 April 92, the individual taxpayers entitled to the
increased exemptions on compensation income earned during a calendar year 91 who may have filed
their income tax returns on or before 15 April 92 (later extended to 24 April 1992) w/o the benefit of
such increased exemptions, are entitled to the corresponding tax refunds &/or credits, & respondents are
ordered to effect such refunds &/or credits. No costs.
The BIR is filing a motion for recon of the aforementioned decision.
Accordingly, pending resolution of our Motion for Recon, the basic personal & additional
exemptions allowable to individual taxpayers for income tax purposes under Sec. 29 (L) of the NIRC
before its amendment by RA No. 7167 shall still apply for purposes of w/holding of income tax on wages
as well as in the computation of the second installment payable on or before July 15, 92 of individual
income tax for taxable year 91.

iii. Exception: Where gain is recognized but not the loss


aa. Exchange not solely in kind
Sec. 39 (C, 3) NIRC Exchange Not Solely in Kind.
(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a
security holder or a corporation receives not only stock or securities permitted to be received without
the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be
recognized but in an amount not in excess of the sum of the money and fair market value of such other
property received: Provided, That as to the shareholder, if the money and/or other property received
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INCOME TAX REVIEWER
has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder
an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings
and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital
gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor corporation
receives not only stock permitted to be received without the recognition of gain or loss but also money
and/or other property, then (i) if the corporation receiving such money and/or other property
distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be
recognized from the exchange, but (ii) if the corporation receiving such other property and/or money
does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the
loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and
the fair market value of such other property so received, which is not distributed.

bb. Other transactions where gain is recognized but not the loss

Wash sales/ compared w/ short selling

SEC. 38. Losses from Wash Sales of Stock or Securities. -


(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of
stock or securities where it appears that within a period beginning thirty (30) days before the date of
such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has
entered into a contact or option so to acquire, substantially identical stock or securities, then no
deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less
than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock
or securities, the loss form the sale or other disposition of which is not deductible, shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which)
resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.

Transactions bet. related taxpayers


Who are related taxpayers?

Sec. 36 NIRC. (B) Losses from Sales or Exchanges of Property. - In computing net income, no
deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly
or indirectly
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or

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INCOME TAX REVIEWER
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

Illegal transactions

iv. Gains & losses attributable (to) taxpayers failure to exercise privileges or options to
buy/sell prop.

d. Exclusions:
Gains derived fr. buying & selling shares of stock listed & traded through the local exchange
excluded/ exempt from income tax but subject to percentage tax

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed & Traded through the Local Stock
Exchange or through initial Public Offering-
(A) Tax of Sale, Barter or Exchange of Shares of Stock Listed & Traded Through the Local Stock Exchange
There shall be levied, assessed & collected on every
sale, barter, exchange
or other disposition of
shares of stock
listed & traded through the local stock exchange
other than the sale by a dealer in securities,
a tax at the rate of
1/2 of 1% of the gross selling price or
gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed
w/c shall be paid by the seller or transferor.

(B) Tax on Shares of Stock Sold or Exchanged through Initial Public Offering -
There shall be levied, assessed & collected on every
sale, barter, exchange or other disposition
through initial public offering of shares of stock
in closely held corporations, as defined herein,
a tax at the rates provided hereunder
based on the gross selling price or
gross value in money of
the shares of stock

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INCOME TAX REVIEWER
sold bartered, exchanged or otherwise disposed in accordance w/ the proportion of shares of stock
sold, bartered, exchanged or otherwise disposed
to the total outstanding shares of stock after the listing in the local stock exchange:
Up to 25% : 4%
Over 25% but not over 33 1/3% : 2%
Over 33 1/3% : 1%

The tax herein imposed shall be


paid by the issuing corporation in primary offering
or by the seller in secondary offering.

For purpose of this Section,


the term closely held corporation means
any corporation at least 50% in value of the outstanding capital stock or
at least 50% of the total combined voting power of
all classes of stock entitled to vote
is owned directly or indirectly by or for not more than 20 individuals.

For purposes of determining whether the corporation is a closely held corporation insofar as such
determination is based on stock ownership, the following rules shall be applied:

(1) Stock Now Owned by Individuals


Stock owned
directly or indirectly
by or for a corporation, partnership, estate or trust
shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.

(2) Family & Partnership Ownership


An individual shall be considered as owning the stock owned,
directly or indirectly,
by or for his family,
or by or for his partner.

For purposes of this par.,


the family of an individual
includes only his brothers & sisters (whether by whole or half-blood),
spouse, ancestors & lineal descendants.

(3) Options - If any person has an option to acquire stock, such stock shall be considered as owned by
such person. For purposes of this paragraph, an option to acquire such an option & each one of a series
of options shall be considered as an option to acquire such stock.
(4) Constructive Ownership as Actual Ownership -
Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall,

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INCOME TAX REVIEWER
for purposes of applying paragraph (1) or (2),
be treated as actually owned by such person;
but stock constructively owned by the individual
by reason of the application of paragraph (2) hereof
shall not be treated as owned by him
for purposes of again applying such paragraph
in order to make another
the constructive owner of such stock.

(C) Return on Capital Gains Realized fr. Sale of Shares of Stocks -

(1) Return on Capital Gains Realized fr. Sale of Shares of Stock Listed & Traded in the Local Stock Exchange
It shall be the duty
of every stock broker who effected the sale
subject to the tax imposed herein
to collect the tax & remit the same
to the Bureau of Internal Revenue
w/in five (5) banking days fr. the date of collection thereof &
to submit on Mondays of each week
to the secretary of the stock exchange,
of w/c he is a member,
a true & complete return
w/c shall contain a declaration of all his transactions
effected through him during the preceding week &
taxes collected by him & turned over
to the Bureau of Internal Revenue.

(2) Return of Public Offering of Shares of Stock


In case of primary offering,
the corporate issuer shall
file the return & pay the corresponding tax
w/in thirty (30) days fr. the date of listing of the shares of stock in the local stock exchange.
In the case of secondary offering,
the provision of Subsection (C)(1) of this Section
shall apply as to the time & manner of the payment of the tax.

(D) Common Provisions


Any gain derived
fr. the sale, barter, exchange or other disposition
of shares of stock
under this Section
shall be exempt fr. the tax imposed
in Sections 24(C), 27(D)(2), 28(A)(8)(c), & 28(B)(5)(c) of this Code &
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INCOME TAX REVIEWER
fr. the regular individual or corporate income tax.

Tax paid under this Section shall not be deductible for income tax purposes .

e. Applicable tax rate

SEC. 24. Income Tax Rates.


(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and
without the Philippines be every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines who is residing outside of the Philippines
including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.
The tax shall be computed in accordance with and at the rates established in the following schedule:

Not over P10,000 5%


Over P10,000 but not over P30,000P500+10% of the excess over P10,000
Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000
Over P70,000 but not over P140,000.P8,500+20% of the excess over P70,000
Over P140,000 but not over P250,000P22,500+25% of the excess over P140,000
Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000
Over P500,000 P125,000+34% of the excess over P500,000 in 1998.
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and
effective January 1, 2000, the said rate shall be thirty-two percent (32%).
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall
compute separately their individual income tax based on their respective total taxable income:
Provided, That if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses for
the purpose of determining their respective taxable income.
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties,
except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided,
however, That interest income received by an individual taxpayer (except a nonresident individual) from
a depository bank under the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That

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INCOME TAX REVIEWER
interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the
tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5 th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash
and/or property dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of which he is a partner, or
on the share of an individual in the net income after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;


Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1,
1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or
distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net
capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000.. 5%
On any amount in excess of P100,000 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as determined in accordance with Section 6(E) of
this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,
capital gains presumed to have been realized from the sale or disposition of their principal residence by
natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt
from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new principal residence built or

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INCOME TAX REVIEWER
acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within
thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail
of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally, that 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
shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the
time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph
(1) of this Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -


(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an individual citizen and a resident alien individual, on
taxable income received from all sources within the Philippines. A nonresident alien individual who
shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance
or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. -
Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an
insurance or mutual fund company or from a regional operating headquarter of multinational company,
or the share of a nonresident alien individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof:
Provided, however, that royalties on books as well as other literary works, and royalties on musical
compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax provided under Section
28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit or investment before the fifth (5 th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.

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INCOME TAX REVIEWER
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations not traded through the local stock exchange, and real properties shall be subject to the tax
prescribed under Subsections (C) and (D) of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall
be levied, collected and paid for each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not engaged in trade or business within the
Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income.
Capital gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross
income received by every alien individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational companies as salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from
such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or
entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for
each taxable year upon the gross income received by every alien individual employed by offshore
banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax
equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same positions as those of aliens employed by
these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual
who is a permanent resident of a foreign country but who is employed and assigned in the Philippines
by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in
the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, received from
such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a
Filipino employed and occupying the same position as an alien employed by petroleum service
contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be,
imposed under this Code.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging
in business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.

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INCOME TAX REVIEWER
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.

CHAPTER IV - TAX ON CORPORATIONS

SEC. 27. Rates of Income tax on Domestic Corporations. -


(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under
this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent
equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall
include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances and discounts.

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those
covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or

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INCOME TAX REVIEWER
other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct of which is not substantially
related to the exercise or performance by such educational institution or hospital of its primary purpose
or function. A 'Proprietary educational institution' is any private school maintained and administered
by private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and
regulations.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of


existing special or general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -


(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital gains realized during the taxable year from the
sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:

Not over P100,000. 5%


Amount in excess of P100,000.. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks, including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system
units and other depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.

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INCOME TAX REVIEWER
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not actually used in the business of a corporation
and are treated as capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. -


(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

SEC. 28. Rates of Income Tax on Foreign Corporations. -


(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998,

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the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each
month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen
percent (15%) on gross income under the same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income
tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of
this Subsection.
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo
or mail originating from the Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived
by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
offshore banking units, including any interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with said offshore
banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject
to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except those activities which are registered with
the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties,
including remuneration for technical services, salaries, wages premiums, annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively connected with the conduct of its trade or
business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.

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INCOME TAX REVIEWER
(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of
their taxable income.
7. Tax on Certain Incomes Received by a Resident Foreign Corporation.
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system
units, including interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the
rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares
sold or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be subject to tax under this Title.
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income
received during each taxable year from all sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner,
lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources
within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or
lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and
other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject
to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

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INCOME TAX REVIEWER
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby
imposed on the amount of cash and/or property dividends received from a domestic corporation,
which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that
the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the
tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%)
for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular
income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three
percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent
(15%) tax on dividends as provided in this subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares
sold, or disposed of through the stock exchange:
Not over P100,000.. 5%
On any amount in excess of P100,000 10%

i. Special rates:
Stock transactions sale of domestic shares classified as capital assets but not traded and listed in the
Phil. Stock Exch. 5% - 10%
Sale of real prop classified as capital asset 6% FINAL TAX based on gross selling price or zonal value
whichever is higher
Sale of land and building by a corp. 6% FINAL TAX based on gross selling price or zonal value
whichever is higher

ii. Regular tax on NET CAPITAL GAIN

D. Gross income derived from the Conduct of Trade or Business or the Exercise of a Profession;

1. Computation of taxable income fr. business/ conduct of trade or profession.

Sec. 43, Rev. Reg. 2. Gross income fr. business. In the case of a
a) manufacturing,
b) merchandising, or
c) mining business,
gross income means the total sales, less the cost of goods sold, plus any income fr. investments & fr.
incidental or outside operations or sources. In determining the gross income, subtractions should not
be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in
computing the cost of goods sold.

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Sec. 45, Rev. Reg. 2. Gross income of farmers. - A farmer reporting on the basis of receipts &
disbursements (in w/c no inventory to determine profits is used) shall include in his gross income for
the taxable year
1. the amount of cash or the value of merchandise or other property received fr. the sale of livestock &
produce w/c were raised during the taxable year or prior years,
2. the profits fr. the sale of any livestock or other items w/c were purchased, &
3. gross income fr. all other sources. xxx xxx xxx

Sec. 27 (E) Minimum Corporate Income Tax on Domestic Corporations. -


(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure,
or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

a. Merchandising
Gross Sales less returns and discounts less Cost of Sales less Expenses = NET INCOME

b. Manufacturing

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Gross sales less returns and discounts less cost of goods manufactured and sold less expenses = NET
INCOME
c. Service concern/ Conduct of trade
Gross receipts less cost of service less expenses = NET INCOME
d. Practice of Profession
Gross professional fees less expenses = NET INCOME

e. Farming/Agribusiness

f. Performance of the functions of a public office


(Sec.22 (s) , NIRC supra.)

g. other types of business

2. Exclusions
a. Income exempt under a treaty

Sec. 32 (B 5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.

b. Income derived by the govt. or its political subd. fr. the exercise of any essential govt.
function.

Sec. 32 (B 7) NIRC
(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in
loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public
utility or from the exercise of any essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.

P.D. 1931
SECTION 1. The provisions of special or general law to the contrary notw/standing, all exemptions fr. the
payment of duties, taxes, fees, imposts & other charges heretofore granted in favor of government-
owned or controlled corporations including their subsidiaries, are hereby w/drawn.
SEC. 2. The President of the Philippines &/or the Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to
restore, partially or totally, the exemptions w/drawn by Sec. 1 above or otherwise revise the scope &
coverage of any applicable tax & duty, taking into account, among others, any or all of the following:
1) The effect on the relative price levels;

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INCOME TAX REVIEWER
2) The relative contribution of the corporation to the
revenue generation effort;
3) The nature of the activity in w/c the corporation is
engaged in; or
4) In general, the greater national interest to be served.
SEC. 3. The Ministry of Finance shall promulgate the necessary rules & regulations to effectively
implement the provisions of this Decree.

PD 1955
SECTION 1. The provisions of special or general law to the contrary notw/standing, all exemptions fr. or
any preferential treatment in the payment of duties, taxes, fees, imposts & other charges heretofore
granted to private business enterprise &/or persons engaged in any economic activity are hereby
w/drawn, except those enjoyed by the following:

(a) Those registered by the Board of Investments under PD No. 1789, as amended by BP Blg. 391, & those
registered by the Export Processing Zone Authority under PD No. 66, as amended by PD Nos. 1449,
1776, 1776-A, & 1786;
(b) The copper mining industry in accordance w/ the provisions of LOI 1416;
(c) Those covered by international agreements to w/c the Philippines is a signatory;
(d) Those covered by the non-impairment clause of the Constitution; &
(e) Those that will be approved by the President of the Philippines upon the recommendation of the
Minister of Finance.

E.O. 93
SECTION 1. The provisions of any general or special law to the contrary notw/standing, all tax & duty
incentives granted to the government & private entities are hereby w/drawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to w/c the Govt. of the Rep. of the Phil. is a
signatory;
c) those enjoyed by enterprises registered w/:
(i) the Board of Investments pursuant to PD No. 1789, as amended;
(ii) the Export Processing Zone Authority pursuant to PD No. 66, as amended;
(iii) the Phil Veterans Investment Development Corporation Industrial Authority pursuant to
PD 358 as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of LOI No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff & Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

SEC. 2. The Fiscal Incentives Review Board, created under PD No. 776, as amended, is hereby authorized
to:

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a) restore tax &/or duty exemptions w/drawn hereunder in whole or in part;
b) revise the scope & coverage of tax &/or duty exemption;
c) impose conditions for the restoration of tax &/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax &/or duty exemption;
e) formulate & submit to the President for approval, a complete system for the grant of subsidies to
deserving beneficiaries, in lieu of or in combination w/ the restoration of tax & duty exemptions or
preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries & the
terms & conditions for the grant thereof taking into consideration the international commitments of the
Philippines & the necessary precautions such that the grant of subsidies does not become the basis for
countervailing action.

Sec. 4 (3), Art XIV, Constitution--All revenues & assets of non-stock, non-profit educational institutions
used actually, directly & exclusive for educational purposes shall be exempt fr. taxes & duties. Upon the
dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of
in the manner provided by law.
Sec. 4 (4), Art. XIV, Constitution-- Subject to conditions prescribed by law, all grants, endowments,
donations or contributions used actually, directly, & exclusively for educational purposes shall be
exempt fr. tax.
Sec. 28 (3), Art. VI, Constitution--Charitable institutions, churches & parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, & all lands, buildings, & improvements, actually,
directly & exclusively used for religious, charitable or educational purposes shall be exempt fr. taxation.

Finance Dept. Order 137-87


Educ. inst. means a non-stock, non-profit corporation association duly registered under Phil. law, &
operated exclusively for educational purposes, maintained & administered by private individual or
group offering formal education issued permit to operate by the DECS.
Revenues derived fr. & assets used in the operation of cafeterias/canteens, dormitories, bookstores are
exempt fr. taxation provided they are owned & operated by the educational institution as ancillary
activities & the same are located w/in the school premises.

Dept. of Finance Order 149-95 Re: Exemption of Non-stock Non-Profit Educational Entities
Amending Finance department Order 137-87
Non-stock, non-profit educational institutions are exempt fr. taxes on all their revenues & assets used
actually, directly & exclusively for educational purposes. However, they shall be subject to internal
revenue tax on such educational institution of its educational purposes or function.
Interest income shall be exempt fr. taxation only when used directly, exclusively for educational purposes.
To substantiate this claim, the institution must submit an annual information return & duly audited
financial statement. A certification of actual utilization & the Board resolution on the proposed project
to be funded out of the money deposited in banks.

10. Partners distributive share of the gross income of gen. professional partnership

What is a gen. prof. partnership?


exercising their common profession, no part of the income is derived from engaging in any trade or
business.

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Sec. 22. (B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but
does not include general professional partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.

IV. Situs of the sources of income


A. Meaning of situs in income taxation/determining factors in fixing the situs of income under Phil.
tax law

1. Classification of income as to source

SEC. 42. Income from Sources Within the Philippines.-


(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be
treated as gross income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or
other interest-bearing obligation of residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:

(a) from a domestic corporation; and


(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign
corporation for the three-year period ending with the close of its taxable year preceding the declaration
of such dividends or for such part of such period as the corporation has been in existence) was derived
from sources within the Philippines as determined under the provisions of this Section; but only in an
amount which bears the same ration to such dividends as the gross income of the corporation for such
period derived from sources within the Philippines bears to its gross income from all sources.
(3) Services. - Compensation for labor or personal services performed in the Philippines;
(4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any
interest in such property, including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of
enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a),
any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in connection with the use of property
or rights belonging to, or the installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:

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(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. - gains, profits and income from the sale of real property located in the
Philippines; and
(6) Sale of Personal Property. - gains; profits and income from the sale of personal property, as
determined in Subsection (E) of this Section.

(B) Taxable Income From Sources Within the Philippines. -


(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall
be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of
expenses, interests, losses and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot definitely be allocated to some items or class
of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by
all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable
income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of
gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for
use in connection with the conduct or operation of trade or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall
be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2)
of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in such
property including rentals or royalties for the use of or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands,
franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.

(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified
in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of gross income. The remainder, if any,
shall be treated in full as taxable income from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income,
expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section,
shall be allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where
items of gross income are separately allocated to sources within the Philippines, there shall be deducted
(for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions
properly apportioned or allocated thereto and a ratable part of other expenses, losses or other
deductions which cannot definitely be allocated to some items or classes of gross income. The

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INCOME TAX REVIEWER
remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the
case of gross income derived from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other deductions apportioned or
allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be
allocated to some items or classes of gross income; and the portion of such taxable income attributable
to sources within the Philippines may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of
personal property produced (in whole or in part) by the taxpayer within and sold without the
Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines,
shall be treated as derived partly from sources within and partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale without the
Philippines, or from the purchase of personal property without and its sale within the Philippines shall
be treated as derived entirely form sources within the country in which sold: Provided, however, That
gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form
sources within the Philippines regardless of where the said shares are sold. The transfer by a
nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic
corporation shall not be effected or made in its book unless: (1) the transferor has filed with the
Commissioner a bond conditioned upon the future payment by him of any income tax that may be due
on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be
the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the
transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and
the word 'produced' includes 'created', 'fabricated,' 'manufactured', 'extracted,' 'processed', 'cured' or
'aged.'

a. Gross/ taxable Income fr. sources w/in the Phils.

Sec. 42. (B) Taxable Income From Sources Within the Philippines. -
(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall
be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of
expenses, interests, losses and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot definitely be allocated to some items or class
of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by
all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable
income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross
income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in
connection with the conduct or operation of trade or business in the Philippines.

Commissioner vs. JAL, supra


Com. vs. BOAC , supra
NDC vs. Com.
Facts: NDC made 14 promissory notes for the balance of the purchase price of 12 vessels it had
contracted a Tokyo firm to build. Said balance & interests were timely remitted in Tokyo. NDC w/held no
tax. The CIR assessed it liable for interest tax. The CTA affirmed. NDC now contends no tax was due as all
the related acts. in the transxn. were done in Tokyo.

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Held: Income fr. sources w/in the Phils. include interest & other interest-bearing obligations of residents,
corporate or otherwise. The law speaks of source w/c, in CAB, is the NDC, a resident domestic
corporation. Nothing in the law speaks of the act or activity of non-resident corps. in the Phils. or the
place where the contract is signed. The residence of the obligor who pays the interest & not the physical
location of the securities, bonds or notes, or the place of payment, is the determining factor of the source
of interest income. Thus, if the obligor is a Phil. resident, the interest payment he made can have sources
other than w/in the Phils. The interest is paid not by the bond, note or other interest-bearing obligations
but by the obligor.

Howden vs. Collector


Facts: Commonwealth, a domestic corporation, entered into reinsurance contracts w/ British reinsurance
companies not engaged in trade or business in the Phils., whereby former agreed to cede to the latter a
portion of the premiums on indemnity insurances it had underwritten in the Phils. Howden, another
British corporation, not engaged in trade or business in the Phils. represented said British companies.
Contracts were prepared & signed by the British in London, & sent to Manila for Commonwealths signing.
Thus, Commonwealth remitted P798,297 w/ accrued interest at P4,985 as Howdens gross income.
Howden filed refund claim for P65,115. Howden agreed to pay P977 as income tax on the P4,985 accrued
interest. He invoked a CIR ruling exempting fr. w/holding tax reinsurance premiums received fr. a
domestic insurance company by foreign insurance companies not authorized to do business here. Its
action to recover was denied by the CTA.
Held: The income source is the property, service or activity that produced it. Reinsurance premiums
remitted to Howden had for their source the undertaking (an activity ) to indemnify Commonwealth. This
took place in the Phils. The risks originally underwritten by Commonwealth on w/c the reinsurance
premiums & indemnity were based were all situated in the Phils. The latter contracts were perfected in
the Phils. under Art. 11 thereof, the parties intended Phil. law to govern by providing for arbitration in
Manila. Also, the contract provided for the use of Phil. currency as a medium of exchange & tax payment.
Appellant should not confuse activity that creates income w/ business in the course of w/c an
income is realized, for activity may consist of a single act while business implies continuity of
transactions. An income may be earned by a corp. in the Phils. although such corp. conducts all its
business abroad. The Tax Code does not require a foreign corp. to be engaged in business in the Phils. for
its income fr. sources w/in the Phils. to be taxable.

b. Gross/ Taxable Income fr. sources w/o the Phils.

Sec. 42. (C) Gross Income From Sources Without the Philippines. - The following items of gross
income shall be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2)
of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in such
property including rentals or royalties for the use of or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands,
franchises and other like properties; and
(4) Gains, profits and income from the sale of real property located without the Philippines.

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INCOME TAX REVIEWER
Sec. 24. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income
specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of gross income. The remainder,
if any, shall be treated in full as taxable income from sources without the Philippines.

2. General principles of income taxation in the Philippines and situs of sources of income

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in
this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines.

CIR vs. BOAC AND THE CTA


FELICIANO, J. dissenting:
Whether the foreign corporate taxpayer is doing business in the Philippines & therefore a resident
foreign corporation, or not doing business in the Philippines & therefore a non resident foreign
corporation, IT IS LIABLE TO INCOME TAX ONLY TO THE EXTENT THAT IT DERIVED INCOME FROM
SOURCES WITHIN THE PHILIPPINES.
SOURCE OF INCOME RELATE TO THE PROPERTY, ACTIVITY OR SERVICE WHICH PRODUCED THE
INCOME, not to the flow of money or site of payment
Where income taxation of services in involved, the income is sources in the PLACE WHERE THE
SERVICE IS RENDERED.
. Income fr. transportation or other services done outside the Philippine must be treated as derived
entirely fr. sources outside the Philippines
. Income of a foreign airline for carriage of passengers & cargo between points located outside the
Philippines is not an income fr. sources w/in the Philippines although the tickets are sold here, such
tickets being merely evidence of the contract of carriage.
Under P.D. 1355, international carriers issuing passage documentation in the Philippines for uplifts
between points outside the Philippine are not charged any Philippine income tax on their Philippine
billings. In place thereof, a 2.5% excise tax on billings in respect of passengers & cargoes originating fr.
the Philippine regardless of embarkation or debarkation is imposed.

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INCOME TAX REVIEWER
V. Allowable deductions in determining taxable income
A. General Principles Governing Tax Deductions

SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship where no deductions shall
be allowed under this Section other than under subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall
be allowed the following deductions from gross income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on or which are directly attributable to,
the development, management, operation and/or conduct of the trade, business or exercise of a
profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by
the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been
paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of
trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the
continued use or possession, for purposes of the trade, business or profession, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user
or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable
year, that are directly connected to the development, management and operation of the trade, business
or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its
trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by
rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the
needs as well as the special circumstances, nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a
deduction.

(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection
(A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or
other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or
relation of the expense being deducted to the development, management, operation and/or conduct of
the trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed
under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of
the national government, or to an official or employee of any local government unit, or to an official or
employee of a government-owned or -controlled corporation, or to an official or employee or
representative of a foreign government, or to a private corporation, general professional partnership, or
a similar entity, if the payment constitutes a bribe or kickback.

(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as
deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this

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Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays
of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to
deduct allowance for depreciation thereof under Subsection (F) hereof.

(B) Interest.-
(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense
shall be reduced by an amount equal to the following percentages of the interest income subjected to
final tax:

Forty-one percent (41%) beginning January 1, 1998;


Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;

(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:

(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That
such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if
the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable
year;
(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Section 36 (B); or
(c)If the indebtedness is incurred to finance petroleum exploration.

(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a profession may be allowed as a deduction or treated as a
capital expenditure.

(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or
business in the Philippines and a resident foreign corporation, the deductions for taxes provided in

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INCOME TAX REVIEWER
paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected
with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire
to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:

(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred during the taxable year to any foreign
country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general
professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of
the general professional partnership or the estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such partnership or trust is reported for
taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes
of foreign countries allowed under this paragraph.

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of
the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to his entire taxable income for the same taxable
year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under
this Title bears to his entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall
notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected,
and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice
and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to
the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent
to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and
to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by
the taxpayer of any amount of tax found due upon any such redetermination. The bond herein
prescribed shall contain such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at
the option of the taxpayer and irrespective of the method of accounting employed in keeping his books,
be taken in the year which the taxes of the foreign country were incurred, subject, however, to the
conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in
the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be
taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same
or any succeeding year.
(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the
taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a
credit under said paragraph, such amount to be determined under rules and regulations prescribed by
the Secretary of Finance; and

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(c) All other information necessary for the verification and computation of such credits.
(D) Losses. -
(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance
or other forms of indemnity shall be allowed as deductions:

(a) If incurred in trade, profession or business;


(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the
rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return,
such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses
deductible shall be those actually sustained during the year incurred in business, trade or exercise of a
profession conducted within the Philippines, when such losses are not compensated for by insurance or
other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in
the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next three (3)
consecutive taxable years immediately following the year of such loss: Provided, however, That any net
loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over
shall be allowed only if there has been no substantial change in the ownership of the business or
enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the
business is in the name of a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is
in the name of a corporation, is held by or on behalf of the same persons.
"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as
a deduction from taxable income for the next five (5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted
in like manner form the taxable income of the next remaining four (4) years.

(4) Capital Losses. -


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(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided
in Section 39.
(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during
the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as
provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains
from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January
1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In
all cases, notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the
undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year
such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well
is reentered and production is resumed, or if such equipment or facility is restored into service, the said
costs shall be included as part of gross income in the year of resumption or restoration and shall be
amortized or depreciated, as the case may be.

(E) Bad Debts. -


(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the preceding years shall be included as part
of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be
worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom
shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the
Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title,
be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

(F) Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the
trade or business. In the case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of the property and shall
be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the
trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding
paragraph shall include, but not limited to, an allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under
any of the following methods:

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(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had
the annual allowance been computed under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the
Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and
regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the
taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the
useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the
taxpayer and the national Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of establishing the existence of
such facts and circumstances shall rest with the party initiating the modification. Any change in the
agreed rate and useful life of the depreciable property as specified in the agreement shall not be
effective for taxable years prior to the taxable year in which notice in writing by certified mail or
registered mail is served by the party initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any
depreciable and claimed the depreciation expenses as deduction from his gross income, without any
written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid
useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be
considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in
respect of all properties directly related to production of petroleum initially placed in service in a
taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the
option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may at any subsequent
date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten (10) years of such
shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under the straight-line
method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect
of all properties used in mining operations other than petroleum operations, shall be computed as
follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more
than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided,
That the contractor notifies the Commissioner at the beginning of the depreciation period which
depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident
Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or
resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its
use or employment or its non-use in the business trade or profession shall be permitted only when such
property is located in the Philippines.
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method shall be granted under rules and
regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner.

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Provided, That when the allowance for depletion shall equal the capital invested no further allowance
shall be granted: Provided, further, That after production in commercial quantities has commenced,
certain intangible exploration and development drilling costs: (a) shall be deductible in the year
incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be
deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing wells and/or mines in the same contract
area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in
itself has no salvage value and which is incidental to and necessary for the drilling of wells and
preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the
acquisition or improvement of property of a character subject to the allowance for depreciation except
that the allowances for depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction in computing
taxable income during the year shall not be taken into consideration in computing the adjusted cost
basis for the purpose of computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income
from mining operations, the taxpayer may at his option, deduct exploration and development
expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well
as exploration and development expenditures paid or incurred during the taxable year: Provided, That
the amount deductible for exploration and development expenditures shall not exceed twenty-five
percent (25%) of the net income from mining operations computed without the benefit of any tax
incentives under existing laws. The actual exploration and development expenditures minus twenty-five
percent (25%) of the net income from mining shall be carried forward to the succeeding years until
fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and
shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross income from
operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable
deductions' shall include mining, milling and marketing expenses, and depreciation of properties
directly used in the mining operations. This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character which is subject to the allowance for
depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and
development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining
the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred
before the beginning of the development stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the development stage
of the mine or other natural deposits. The development stage of a mine or other natural deposit shall
begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or
Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the
Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines
under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.

(H) Charitable and Other Contributions. -

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(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of
the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively
for public purposes, or to accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon
recommendation of the Commissioner, no part of the net income of which inures to the benefit of any
private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an
individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived
from trade, business or profession as computed without the benefit of this and the following
subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph,
donations to the following institutions or entities shall be deductible in full;
(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its
agencies or political subdivisions, including fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking priority activities in education, health, youth and
sports development, human settlements, science and culture, and in economic development according
to a National Priority Plan determined by the National Economic and Development Authority (NEDA),
In consultation with appropriate government agencies, including its regional development councils and
private philantrophic persons and institutions: Provided, That any donation which is made to the
Government or to any of its agencies or political subdivisions not in accordance with the said annual
priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign
institutions or international organizations which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization'
means a non profit domestic corporation:
(1) Organized and operated exclusively for scientific, research, educational, character-building and youth
and sports development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net income of which inures to the benefit of any private individual;
(2) Which, not later than the 15 th day of the third month after the close of the accredited nongovernment
organizations taxable year in which contributions are received, makes utilization directly for the active
conduct of the activities constituting the purpose or function for which it is organized and operated,
unless an extended period is granted by the Secretary of Finance in accordance with the rules and
regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
but in no case to exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic
corporation organized for similar purpose or purposes, or to the state for public purpose, or would be
distributed by a court to another organization to be used in such manner as in the judgment of said
court shall best accomplish the general purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term
'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited nongovernment organization was created or
organized.

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INCOME TAX REVIEWER
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more
purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a period to be prescribed in
rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money shall be based
on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under
the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

(I) Research and Development.-


(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred
by him during the taxable year in connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The expenditures so treated shall be
allowed as deduction during the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the election of the
taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, the following research and development expenditures may
be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed
over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the
month in which the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year beginning after the
effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for
such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in
computing taxable income for the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change to a different method is
authorized with respect to a part or all of such expenditures. The election shall not apply to any
expenditure paid or incurred during any taxable year for which the taxpayer makes the election.

(3) Limitations on deduction. - This Subsection shall not apply to:


(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be
used in connection with research and development of a character which is subject to depreciation and
depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or
quality of any deposit of ore or other mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment
of reasonable pensions to his employees shall be allowed as a deduction (in addition to the

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contributions to such trust during the taxable year to cover the pension liability accruing during the
year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred
or paid into such trust during the taxable year in excess of such contributions, but only if such amount
(1)has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period
of ten (10) consecutive years beginning with the year in which the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable
which is otherwise deductible from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if
it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of
Internal Revenue in accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections,
an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard
deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer
signifies in his return his intention to elect the optional standard deduction, he shall be considered as
having availed himself of the deductions allowed in the preceding Subsections. Such election when
made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That
an individual who is entitled to and claimed for the optional standard deduction shall not be required to
submit with his tax return such financial statements otherwise required under this Code: Provided,
further, That except when the Commissioner otherwise permits, the said individual shall keep such
records pertaining to his gross income during the taxable year, as may be required by the rules and
regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer . -
the amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two
hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance
taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross
income: Provided, That said family has a gross income of not more than Two hundred fifty thousand
pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the
spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may
prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under
Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or
limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed
limits on the actual expenditure requirements of each particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense
already subject to ceilings under present law.

1. Meaning Of Deductions/ Differentiated From Other Terms

DEFINITION. Deductions are items or amounts w/c the law allows to be deducted fr. gross income in
order to arrive at taxable income.

2. Basic Principles In Governing Deductions/ Requisites

The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the
deduction.
deductions are allowed only when there is a clear provision in the statute for the deduction claimed.
He must be able to prove that he is entitled to the deduction authorized or allowed.

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As a rule, if the taxpayer does not w/in any year deduct certain of his expenses, losses, interest, taxes or
other charges, he cannot deduct them form the income o the next or any succeeding year.

BUSINESS EXPENSE VS. CAPITAL EXPENSE


Business expenses deductible fr. gross income are the ordinary & necessary expenses paid or incurred
during the taxable year in carrying on the taxpayers trade, profession or business.
Capital expenses are expenses that result in obtaining benefits of a permanent nature such as lands,
buildings, & machinery.

DIFFERENTIATED FROM EXEMPTION / EXCLUSION : basically the taxpayer does not have to pay at all
for items excluded/exempt fr. tax FROM TAX CREDIT: it is the taxpayers rt. to deduct fr. income tax due
the amt. of tax he has paid to a foreign country subject to limitations.

Zamora Vs. Collector


Facts: Zamora, owner of Bay View Hotel & Farmacia Zamora filed his ITR for 51 & 52. The Collector
found that he failed to file his return of the capital gains derived fr. the sale of certain real properties &
claimed dedns w/c were not allowed. Z appealed to the SC arguing the CTA erred when it (1) disallowed
P10,478.50 as promotion expenses incurred by wife for promoting hotel & pharmacy (1/2 of alleged
P20,957 bus. expense);(2) disallowed 3.5% per annum rate of depreciation ;(3) disregarded the price in
deed of sale, as costs of Mla. prop. for det. alleged cap. gains, & (4) applied the Ballantyne Scale of Values
in det. the cost of said prop.
Held: PROMOTION EXPENSES constitute one of the deductions in conducting a business & shld. satisfy
the requirements of the Tax Code Sec.30 w/c provides the in computing net inc. there shall be allowed as
dedns all the ord. & nec. expenses paid or incurred during the taxable year in carrying on any trade or
business/c must be substantiated by records. Mrs. Z went abroad on a combined business & medical trip.
Not all of her expenses came under the ord. & nec. expenses. (Only half of it are deductible). The SC
upheld the CTA when it based its decision on the US 1955 PH Federal Taxes Par.14 160-K w/c is based on
scientific studies & observations for a long period regarding the useful life of a hotel bldg. The sale of the
properties in JPN notes partly realized a capital gain when converted to PHP Peso.

3. Kinds Of Deductions
i. Itemized individual/ corps.
ii. Optional Standard ind. taxpayer only
iii. Special deductions

4. Limitations Imposed By Law


Example:

Sec. 34 (H) Charitable and Other Contributions.


(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of
the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively
for public purposes, or to accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon
recommendation of the Commissioner, no part of the net income of which inures to the benefit of any

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private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an
individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived
from trade, business or profession as computed without the benefit of this and the following
subparagraphs.

5. Substantiation Requirements

Sec. 34 (1,b) Substantiation Requirements. - No deduction from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official
receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct
connection or relation of the expense being deducted to the development, management, operation
and/or conduct of the trade, business or profession of the taxpayer.

6. Allocation of expenses and deductions


SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or among such organization, trade or
business, if he determined that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

B. Allowable deduction from business income/ trade or practice of profession

1. Ordinary/ Necessary Business Expenses


SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship where no deductions shall
be allowed under this Section other than under subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall
be allowed the following deductions from gross income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on or which are directly attributable to,
the development, management, operation and/or conduct of the trade, business or exercise of a
profession, including:

A. Salaries, wages, and other forms of compensation for personal services


services actually rendered
factors to consider to determine reasonableness of amount.

Sec. 34 (A, 1, a, i). A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of fringe benefit

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furnished or granted by the employer to the employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;

Rev. Reg. 6-82 as amended by Rev. Reg. 12-87


This covers the collection at the source of the Y tax on compensation Y of employed individual taxpayers.
The only impt. sections in this RR cover the defn. of Compensation (AS INCOME FOR THE EE AND AS
DEDUCTIBLE EXPENSE FOR THE ER) & its other forms (traveling, representation, etc.)

Secs. 70-73 Rev. Reg. 2


Section 70. Compensation for personal services.
Among the ordinary & necessary expenses paid for incurred in carrying on any trade or business maybe
included a reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the area of compensation payments is whether they
Are reasonable &
Are, in fact, purely for service.
This test & its practical application may be further stated & illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price services, is not
deductible.
An ostensible salary paid by a corporation may be distribution of dividend on stock. This is likely to
occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in
such a case the salaries are in excess of those ordinarily paid for similar services, & the excessive
payments corresponds or bear a close holding to the relationship to the stockholdings of the officers
or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that
excessive payments are a distribution of earnings upon the stock.
An ostensible salary may be in part payment for property. This may occur, for example, where a
partnership sells our a corporation, the farmer partners agreeing to continue in the service of the
corporation. In such a case it may be found that the salaries of the farmer partners are not merely for
services, but in part constitute payment of the transfer of the business.
The form of method of fixing compensation is not decisive as to deductibility. While any form of
contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it
does not follow that payments on a contingent basis are to be treated fundamentally on any basis
different fr. that applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer & the individual made before
the services are rendered, not influenced by any consideration on the part of the employer other than
that a securing on fair & advantageous terms the services of the individual, it should be allowed as a
deduction even though in the actual working out of the contract it may prove to be greater than the
amount w/c would ordinarily be paid.
In any event the allowance for compensation paid may not exceed what is reasonable under the
circumstances. It is in general just to assume the reasonable & true compensation is only such amount
as would ordinarily be paid for like services by are those existing at the date when the contract for
services was made, not those existing at the date when the contract is questioned.

Section 71. Treatment of excessive compensation


The income tax liability of the recipient in respect of an amount of ostensible paid to him as
compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances
of each case. Thus, in the case of payments by corporations, if such payments
Corresponds or bear a close relationship to stockholdings, &

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Are found to be distribution of earnings or profits, the excessive payments will be treated as dividend
If such payments constitute payment for property, they should be treated by the payer as capital
expenditure & by the recipient as part of the purchase price.

Section 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions fr. gross
income when such payments are made
in good faith &
as additional compensation for the services actually rendered by the employees, provided such payments,
when added to the stipulated salaries do not exceed a reasonable compensation for the service
rendered.
It is immaterial whether such bonuses are paid
in cash or
in kind or
partly cash & partly in kind.

Donations made to employees & others , w/c


do no have in them the element of compensation or
are in excess of reasonable compensation for services, are not deductible fr. gross income.

Section 73. Pensions, compensations for injuries. Amounts paid


for pensions to retired employees or to their families or others dependent upon them or
on account of injuries received by employees & lump-sum amounts paid or accrued as compensations
for injuries,
are proper deductions as ordinary & necessary expenses
Such deductions are limited to the amount not compensated for by insurance or otherwise. When the
amount of the salary of an officer or employee is paid for a limited period after his death to his widow
or heirs in recognition of the services rendered by the individual, such payments may be deducted.
Salaries paid by ER to employees
who are absent in the military, naval, or other service of the government
but who intent to return at the conclusion of such service, are allowable deductions. (relative to
pension trust.)

Additional deduction under the Productivity Incentive Act.

Sec.7 . Benefits & tax incentives -


(a) Subject to the provs. of Sec.6 hereof (defined what a productivity incentive program [PIP]is), a bus.
enterprise w/c adopts a PIP , duly & mutually agreed upon by the parties to the labor-mgt
committee, shall be granted a special deduction fr. gross Y equivalent to 50% of the total productivity
bonuses given to Ees under the program over & above the total allowable ord. & nec. bus. dedn for said
bonuses under the NIRC...
(b) Grants for manpower training & special studies given to rank-&-file Ees pursuant to a program
prepared by the labor-mgt. committee for the devt. of skills identified as nec. by the appropriate govt.
agency shall also entitle the bus. enterprise to a special dedn fr. gross Y equiv. to 50 % of the total grants
over & above the allowable ...

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INCOME TAX REVIEWER
C.M. HOSKINS VS. COMMISSIONER
Facts: H was the chairman of the Bd. of Dirs. of the corp. w/c bears his name. He owns 99.6% of the
capital stock. He was also a salesman-broker for his co. receiving 50% share on the sales commission
earned by the co. besides his monthly salary for a total annual compensation of P45,000 plus annual
salary bonus of P40,000 & free use of the co. car & receipt of other allowances & benefits. He also
received the addl Y of P99,977.91 as his 50% share of the supervisors fee received by the co. as managing
agent of a real estate project.
Held: As a general rule bonuses to Ees are deductible as such as addl compensation for the services
actually rendered by the Ees when such payments when added to the stipulated salaries do not exceed a
reasonable compensation for the services rendered. In CAB, the petitioner fails the tests of
reasonableness.

KUENZLE VS. COMMISSIONER


Facts: Comm. assessed K deficiency Y tax on the grd. that the bonuses paid to the Ees were not
reasonable.
Held: Not reasonable. In arriving at the conclusion, the CT. gave due consideration to all the material
factors (SEE ENUMERATION ABOVE)that to decide accordingly. Policy of giving bonuses in not
unreasonable but net loss resulting fr. it is.

AGUINALDO IND. VS. COMMISSIONER


Facts: Pet. was engaged in 2 businesses: fishnet mfg. & furniture mfg. It bought a pc. of land in Munti. for
the fishnet industry & then sold it to move to another location in Mka. They cited bonuses given to officers
of Pet. as their share of the profit realized fr. the sale was a deductible expense.
Held: Not deductible> Sale was effected through a broker who was paid a commission. There is no evid.
of any service incurred by pets officers w/c cld. be the basis of the grant to them of a bonus out of the
gain realized fr. the sale. Doctrine: The taxpayer must show that its claimed deductions must clearly
come w/in the language of the law, since allowances, like exemptions, are matters of legislative.

COMMISSIONER VS. ALGUE, supra.

b. TRAVEL EXPENSES
here and abroad
while away from home
in the pursuit of trade, business or profession

Sec. 34. (A, 1, a). (ii) A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;

Sec. 66. Rev. No. 2 Traveling expenses.


Traveling expenses as ordinarily understood, include
transportation expenses &
meals &
lodging.

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If the trip is undertaken for other than business purposes, -
the transportation expenses are personal expense, &
the meals & lodgings are living expenses,
& therefore, not deductible.
If the trip solely on business, the reasonable & necessary traveling expenses, including transportation
expenses, meals & lodging, becomes business instead of personal expenses.
If then, an individual whose business requires him to travel, -
receives a salary as full compensation for his services w/o reimbursement for traveling expenses, or
is employed on a commission basis w/ no expenses allowance,
his traveling expenses, including the entire amount expended for meals & lodging are deductible fr. gross
income.

If an individual
receives a salary &
is also repaid his actual traveling expenses,
he shall include in gross income, the amount so repaid & may deduct such expenses.

If an individual
receives a salary &
also an allowance for meals & lodging,
xxx the amount of the allowance should be included in gross income & the cost of such meals &
lodging may be deducted therefr.. Xxx

c. Repairs

to maintain efficient working condition


does not prolong life or add value
repair and maintenance expense v. capital expense

Sec. 34., see above na lang please.

Sec. 68. Rev. Reg. No. 2. Repairs.


The cost of incidental repairs w/c neither
materially add to the value of the property nor
appreciably prolong its life
but keep it in an ordinary/efficient operating condition
may be deducted as an expense, provided the plans or property account is not increased by the amount of
such expenditure.
Repairs in the nature of replacement, to the extent that they
arrest deterioration, &
appreciably prolong the life of the property
should be charged against the depreciation reserves if such an account is kept.

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INCOME TAX REVIEWER
Commissioner Vs. Soriano
Held: Expenditures for replacements, alterations & improvs./additions w/c either prolong the life of the
property or increase its value are capital in nature & are not deductible.

GUTIERREZ VS. COLLECTOR


Facts: G was primarily engaged in the business of leasing property for w/c he paid real estate brokers
privilege tax. He claimed dedns for electrical supplies, paint, labor, cement, tiles, gravel, masonry & labor
used to repair the taxpayers rental apartments did not increase the value nor prolong its life, but merely
kept the apartments in an ordinary operating condition, hence necessary expenditures for the
maintenance of his business.
Held: Expenses for watching over laborers in construction work are not deductible. The activity is more
akin to construction work than running a business. Construction costs are capital expenditure.

d. RENTALS/LEASE and/or other payments which are required as a condition for the continued
use or possession

for purposes of the trade, business or profession,


of property to which the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a lessee, user or possessor

Sec. 34. A, 1, a. (iii) A reasonable allowance for rentals and/or other payments which are required as a
condition for the continued use or possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking title or in which he has no equity other
than that of a lessee, user or possessor;

Advanced rental/ deposit:

Sec. 74, RR No. 2. Rentals.


Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as
deduction in his return & adequate part of such sum each year based on the number of years the lease
has to run.
Taxes paid by a tenant to or for a landlord for business property
are additional rent &
constitute a deductible item to the tenant & taxable income to the landlord;
the amount of the tax being deductible by the latter.
The cost borne by the lessee in
erecting buildings or
making permanent improvements
on ground of w/c he is lessee is held to be capital investment & not deductible as a business expense.
In order to return such taxpayer to his investment of capital, an annual deduction may be made fr. gross
income of an amount equal to the cost of such improvements divided by the number of years remaining
of the terms of the lease, & such deduction shall be in lieu of deduction for depreciation. If the
remainder of the term of the lease is greater that the probable life of the buildings erected or of the
improvements made, his deduction shall take the form of an allowance for depreciation.
Rev. Reg. 19-86 wala akong kopya eh.

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Operating lease/ finance lease/ conditional sale

e. Entertainment/ Presentation Expense

Sec. 34. A. 1. a. (iv) A reasonable allowance for entertainment, amusement and recreation expenses
during the taxable year, that are directly connected to the development, management and operation of
the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the
conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special circumstances, nature and character
of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals public policy or public order
shall in no case be allowed as a deduction.

When deductible: REQUISITES:

1. Incurred during the taxable year;


2. Directly connected to the development, management and operation of the trade, business or
profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade,
business or exercise of a profession;
3. Not to exceed such ceilings as the Sec of Fin may, by rules & regs prescribe, upon recommendation of
the Commissioner, taking into acct the needs as well as the special circumstances, nature & character
of the industry, trade, business or profession of the taxpayer.
4. Any expense incurred for entertainment, amusement or recreation that is contrary to law, morals,
public policy or public order shall in no case be allowed as a deduction.

ROXAS vs. CTA


Facts: Roxas Y Cia. a partnership formed to manage the prop. left by Do Pedro Roxas deducted fr. its gross
Y P40 for tickets to a banquet in honor of Don Sergio Osmena & P28 for beer given as gifts to various
persons, claimed as representation expenses.
Held: Representation expenses are deductible fr. gross Y as expenditures incurred in carrying on a
business or trade under the Tax Code , provided the taxpayer proves that they are reasonable in amt., nec.,
incurred in connection w/ the bus. Not proven in this case.

f. Expenses Of Farmers/ Those Engaged In Agribusiness

A farmer who operates a farm for profit is entitled to deduct amounts actually expended in
carrying on the business. Deductible: Cost of (1) tools of short life or small cost & (2)of feeding & raising
livestock in so far as it represents actual outlay but not including the value of the farm produce grown
upon the farm & (3) of gasoline or fuel, repairs & upkeep of the transportation eqpt. NOT deductible: (1)
costs of farm machinery, eqpt & farm bldgs. & (2) amts. expended in the devt. of farm orchards & ranches,
prior to the time when the productive state is reached. Such are regarded as investments of capital or
capital expenditures & may be depreciated.

GANCAYCO VS. COLLECTOR


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INCOME TAX REVIEWER
Facts: Deficiency Y taxes levied. Gancayco claims farming expenses are deductible (for the devt. &
cultivation of his prop).
Held: No evid. presented as to the nature of the farming expenses, other than Gs statement. Collector
claims that the expense was for clearing & devt., nec. to place it in a productive state. It is not an ordinary
expense but a capital expenditure.

g. Other business expenses.

Treatment of the ff.:


1. Advertising expense
2. Promotional expense
3. Litigation expense
4. Capitalization/ reorganization expense

h. Special Deductions For Educational Institutions : Sec. 29 (2) NIRC

Sec. 34. A. (2). Expenses Allowable to Private Educational Institutions. - In addition to the expenses
allowable as deductions under this Chapter, a private educational institution, referred to under Section
27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.

2. INTEREST EXPENSE

Sec. 34. (B) Interest.-


(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense
shall be reduced by an amount equal to the following percentages of the interest income subjected to
final tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;
(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:

(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That
such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if
the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable
year;

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(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Section 36 (B); or

(c)If the indebtedness is incurred to finance petroleum exploration.

(5) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a profession may be allowed as a deduction or treated
as a capital expenditure.

a. REQUISITES FOR DEDUCTION.

i. paid or incurred during the taxable year;


ii. On indebtedness in connection w/ the taxpayers profession, trade or business however
iii. Subject to limitation:
Interest paid on back-to-back loan shall be reduced by an amount = to the ff. percentages of the in. income
subj. to final tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999; and
Thirty-eight percent (38%) beginning January 1, 2000;

b. NON-DEDUCTIBLE INTEREST
c. INTEREST PAID IN ADVANCE/ INTEREST PERIODICALLY AMORTIZED.
Sec. 34. (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That
such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if
the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable
year;
(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Section 36 (B); or
(c)If the indebtedness is incurred to finance petroleum exploration.

d. Optional treatment of interest expense.

Sec. 34. B. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred
to acquire property used in trade business or exercise of a profession may be allowed as a deduction or
treated as a capital expenditure.

3. TAXES

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Sec. 34 C. Taxes.
(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business
in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1)
of this Subsection (C) shall be allowed only if and to the extent that they are connected with income
from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to
have the benefits of this paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred during the taxable year to any foreign
country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general
professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of
the general professional partnership or the estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such partnership or trust is reported for
taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes
of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of
the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to his entire taxable income for the same taxable
year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under
this Title bears to his entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall
notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected,
and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice
and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to
the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent
to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and
to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by
the taxpayer of any amount of tax found due upon any such redetermination. The bond herein
prescribed shall contain such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the
option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be

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INCOME TAX REVIEWER
taken in the year which the taxes of the foreign country were incurred, subject, however, to the
conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in
the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be
taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same
or any succeeding year.
(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the
taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a
credit under said paragraph, such amount to be determined under rules and regulations prescribed by
the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such credits.

COMMISSIONER VS. PALANCA


Facts: Palanca donated shares of stock to his son. He was assessed a gift tax, surcharge & interest for
failure to file a return. He claimed a dedn for interest paid on the donees gift tax. The BIR then
considered the transfer as made in contemplation of death & was assessed inheritance & estate taxes.
Held: Although taxes already due have not the same concept as debts strictly speaking, they are
obligations w/c may be considered as such. In CIR vs. Prieto, it was held that the distinction bet. taxes &
debts is recognized in this jurisdiction, the variance in their legal conception does not extend to the
interest paid on them. Requisites are (1) to (4) given above. Indebtedness, as used in the Tax Code, is the
unconditional & legally enforceable oblign. for the payment of money. As Such, a tax may be deemed as an
indebtedness.

COMMISSIONER VS. PRIETO


Facts: Prieto gave gifts of real prop. to her 4 kids. CIR assessed gift taxes, interests & compromises
thereon. P now claims the interest as dedn.
Held: For interest to be allowed as dedn fr. gross Y, it must be shown that there be indebtedness, interest
upon such & that what is claimed as int. dedn should have been paid or incurred w/in the yr. RR No. 2,
implementing 30(a) providing that no dedn shld. be allowed for amts. representing interest, surcharge &
penalties incident to DQ is inapplicable to cases where the taxpayer seeks to come under 30(b) w/c
provides for dedn of interest on indebtedness.

KUENZLE VS. COLLECTOR


Facts: Kuenzle is a domestic corp. engaged in the importation of textiles, hardware, etc. It deducted fr. its
gross Y certain items such as interest on earned but unpaid salaries & bonuses of its Ees.
Held: Under the law, in order that interest may be deductible , it must be paid on indebtedness. It is
imperative that there is an existing indebtedness w/c may be subject to the payment of interest. The
unclaimed salaries & bonuses do not constitute indebtedness w/in the meaning of the law.

a. IN GENERAL.

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Taxes paid or incurred within the taxable year in connection w/ the taxpayers profession, trade or
business, shall be allowed as deduction.

b. NOT DEDUCTIBLE:
i. Phil. income tax
ii. Income taxes imposed by authority of any foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have
to any extent the benefits of tax credit.
iii. Estate and donors taxes, and
iv. Taxes assessed vs. local benefits of a kind tending to increase the value of the property
assessed.

c. Treatment of tax deducted and subsequently credited or refunded shall be included as part
of gross income in the year of receipt.
d. Limitations on Deductions
Nonresident alien/ resident foreign corp.
connected w/ income fr. sources w/in the Phils.

e. Tax CREDIT.

Sec. 34. C. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return
his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred during the taxable year to any foreign
country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general
professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of
the general professional partnership or the estate or trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of such partnership or trust is reported for
taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes
of foreign countries allowed under this paragraph.

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of
the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to his entire taxable income for the same taxable
year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under
this Title bears to his entire taxable income for the same taxable year.

(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall

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INCOME TAX REVIEWER
notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected,
and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice
and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to
the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent
to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and
to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by
the taxpayer of any amount of tax found due upon any such redetermination. The bond herein
prescribed shall contain such further conditions as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at
the option of the taxpayer and irrespective of the method of accounting employed in keeping his books,
be taken in the year which the taxes of the foreign country were incurred, subject, however, to the
conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in
the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be
taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same
or any succeeding year.
(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the
taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a
credit under said paragraph, such amount to be determined under rules and regulations prescribed by
the Secretary of Finance; and
(d) All other information necessary for the verification and computation of such credits.

i. Tax credit v. tax deduction


ii. Taxpayers entitled to tax credit
iii. Taxes allowed as credit.
iv. Limitations on credit.
Tax Credit- refers to the tax payers right to deduct fr. the income tax due the amount of the tax he has
paid in a foreign country subject to limitation. It is allowed to lessen the rigor of Intl double or multiple
taxation

Distinct fr. Tax Deduction

TAX CREDIT TAX DEDUCTION


Tax deducted fr. tax deducted fr.
income tax itself computing the
taxable income
all taxes, as a only three kinds
general rule are of foreign taxes
allowed as may be claimed as
deduction w/ the credits against
exception of the 7 Phil. income tax
kinds of taxes i.e. foreign
expressly income, war-
excluded profits & excess-
profits tax.

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INCOME TAX REVIEWER
Sec. 34. C. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject
to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the
same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to his entire taxable income for the same taxable
year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under
this Title bears to his entire taxable income for the same taxable year.

v. Other requirements.
When there are adjustments on payment of incurred taxes.

vi. When crediting allowed.


vii. Substantiation requirements/ Proof of credit.

Secs. 80-83 Rev. Reg. 2


Sec. 80. RR No. 2. Taxes in General.- As a general rule, taxes are deductible w/ the exception of those w/
respect to w/c the law does not permit deduction. However, in the case of a nonresident alien individual
& a foreign corporation, deduction is allowed only if & to the extent that the taxes for w/c deduction is
claimed are connected w/ the income fr. sources w/in RP.
Import duties paid to the proper customs officers, & business occupation, license privilege, excise & stamp
taxes & any other taxes of every name & nature paid directly to the Government of the RP or to any
political sub. thereof, are deductible. The word taxes means taxes. Proper & no deduction should be
allowed for amounts representing interest, surcharge or penalties incident to delinquency.. Postage is not a
tax. Automobile registration fees are considered taxes. taxes are deductible as such only by the person
upon whom they are imposed. Thus the merchants sales tax imposed by law upon sales is not
deductible by the individual purchaser even though the tax may be billed to him as a separate item.
In computing the net income of an individual, no deduction is allowed for the tax is imposed upon his
interest as a shareholder of a bank or other corporation. w/c are paid by the corporation w/o
reimbursements fr. the taxpayer. The amount s paid should not be included in the income of the
shareholder.
In the case of corporate bonds or other obligations containing a tax-free covenant clause, the corporation
paying the tax or any part of it, for someone else, pursuant to its agreement is not entitled to deduct
such payment fr. gross income on any ground.

Sec. 81. RR. No. 2. Income tax imposed by the government.- The law does not permit the deduction of
the income tax paid or accrued in favor of the government & in no case may the taxpayer avail of such
deduction.

Sec. 82. RR No. 2 Income, war-profits & excess profits taxes imposed by the authority of a foreign
country. Income, war-profits & excess-profits taxes imposed by the authority of a foreign country are
allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent
the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries.

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INCOME TAX REVIEWER
Sec. 83. RR No. 2 Estate inheritance & gift taxes; taxes assessed against local benefits.-Estate,
inheritance & gift taxes are not deductible.
So-called taxes, property assessments paid for local benefits such as street, sidewalk & other
improvements imposed bec. of & measured by some benefit inuring directly to the property against
w/c the assessment is to be levied, do not constitute an allowable deduction fr. gross income tax. A tax is
considered assessed against local benefits when the property subject to the tax is limited to the
property benefited.

COMMISSIONER VS. LEDNICKY


Facts: The Lednicky spouses are American citizens living in the Phils. & have derived all their Y fr. Phil.
sources for the taxable year in question. In their amended ITR for 56 they claimed a deduction of
P205,939 as paid in 1956 to the US Govt. as federal Y tax for said year. Requested for refund of P112,437.
Held: No deduction nor tax credit allowed. Alien residents who derive their income fr. sources w/in the
Phils. solely may not deduct fr. gross Y the Y tax paid to his home country for the taxable year. Such rt. is
given only as an alternative to his rt. to claim a tax credit for such foreign Y taxes, such that unless he has a
right to claim such a credit if he chooses, he is precluded fr. such deduction. To allow a resident alien to
deduct fr. his taxes whatever he pays to his govt amounts to conferring upon him the power to reduce the
tax due to the Phil govt simply by increasing the tax rates on the alien resident.

5. LOSSES.

Sec. 34. (D) Losses.


(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance
or other forms of indemnity shall be allowed as deductions:

(a) If incurred in trade, profession or business;


(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the
rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return,
such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses
deductible shall be those actually sustained during the year incurred in business, trade or exercise of a
profession conducted within the Philippines, when such losses are not compensated for by insurance or
other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in
the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

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INCOME TAX REVIEWER
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next three (3)
consecutive taxable years immediately following the year of such loss: Provided, however, That any net
loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over
shall be allowed only if there has been no substantial change in the ownership of the business or
enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the
business is in the name of a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is
in the name of a corporation, is held by or on behalf of the same persons.
"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as
a deduction from taxable income for the next five (5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted
in like manner form the taxable income of the next remaining four (4) years.
(4) Capital Losses. -
(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided
in Section 39.
(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during
the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as
provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains
from such transactions.
(7) Abandonment Losses. -

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January
1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In
all cases, notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the
undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year
such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well
is reentered and production is resumed, or if such equipment or facility is restored into service, the said
costs shall be included as part of gross income in the year of resumption or restoration and shall be
amortized or depreciated, as the case may be.

a. Definition

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INCOME TAX REVIEWER
Sec. 34. D. (1) In General.- Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or embezzlement.

b. Types/ Classification of Losses

1. Ordinary Losses:/ Business Loss


2. Casualty Loss
3. Capital Loss

Special kinds of losses:


1. Losses fr. wash sales of stock or securities;
2. Losses due to involuntary removal of buildings, machinery, etc. incident to renewal or replacement;
3. Losses of the useful value of capital assets due to some change in business conditions; &
4. Abandonment losses in petroleum operations.

Secs. 94 100 / 104 of rev. Reg. No. 2 are incorporated in the following topics:

c. Requisites for deductibility


1. Must be that of the taxpayer
2. Must be actually sustained & charged off w/in the taxable year
3. Must be evidenced by a closed & completed transaction
4. Must not be compensated for by insurance or other form of indemnity
5. A sworn declaration must be filed w/in 45 days after the date of the occurrence of casualty or
robbery, theft or embezzlement
6. The taxpayer must prove the elements of the loss claimed, such as the actual nature & occurrence
of the event & amount of the loss; &
7. The loss must be connected w/ the trade or business of the taxpayer.

A casualty loss is not deductible even though the above requisites are present, if it has been claimed as a
deduction for estate tax purposes in the estate tax return. (Sec. 93 RR2)

Closed & completed transaction (Sec. 96 RR 2)


The law requires that the loss should be sustained during the taxable year. A loss is actually sustained
when it is evidenced by a closed & completed transaction. There should be an identifiable event w/c
justifies the loss, such as when there is a complete destruction of property or when insurance
proceedings are finally settled & the loss not recoverable therein is finally ascertained.

i. CASUALTY LOSS

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INCOME TAX REVIEWER
ii. NIRC provision:

Sec. 34. D. 1. b. x x x
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the
rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return,
such loss has been claimed as a deduction for estate tax purposes in the estate tax return.

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses
deductible shall be those actually sustained during the year incurred in business, trade or exercise of a
profession conducted within the Philippines, when such losses are not compensated for by insurance or
other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in
the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

iii. Net operating loss carry-over.

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next three (3)
consecutive taxable years immediately following the year of such loss: Provided, however, That any net
loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over
shall be allowed only if there has been no substantial change in the ownership of the business or
enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business
is in the name of a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is
in the name of a corporation, is held by or on behalf of the same persons.
"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of
incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as
a deduction from taxable income for the next five (5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted
in like manner form the taxable income of the next remaining four (4) years.

iv. CAPITAL LOSS.

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INCOME TAX REVIEWER

Sec. 34. D. (4) Capital Losses. -


(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided
in Section 39.
(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during
the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

Losses fr. sales or exchange of capital assets


Securities becoming worthless.

FERNANDEZ HERMANOS v. COMM.


In this case, the SC held that there was adequate basis for allowance of the writing off as worthless
securities the stock of a lumber company, it appearing that it had closed operations although it still had its
sawmill & equipment of some value, for even assuming that the company would later somehow realize
some proceeds fr. its sawmill & equipment & such proceeds would later be distributed to its stockholders,
the amount so received by the taxpayer would then be properly reportable as income of the taxpayer in
the year it is received. In the meantime, it may properly be claimed as loss in his tax return pursuant to
Sec. 29 d,4,b or Sec. 29, e (Bad debts).

v. Other kinds of losses:

Sec. 34. D.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as
provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains
from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January
1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In
all cases, notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the
undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year
such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well
is reentered and production is resumed, or if such equipment or facility is restored into service, the said
costs shall be included as part of gross income in the year of resumption or restoration and shall be
amortized or depreciated, as the case may be.

Losses fr. wash sales of stock or securities


wagering losses
abandonment losses (petroleum operations.)

Plaridel Surety V. Collector of IR

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INCOME TAX REVIEWER
Facts: The Collector of Internal Revenue disallowed a LOSS deduction by the petitioner, said deduction
was for the payment of a performance bond w/c Plaridel previously issued on behalf of certain
debtor/principals who defaulted on their obligation.
Held: The Court upheld the CIR in disallowing the deduction bec. the loss sustained by Plaridel Surety
was compensated for (by insurance or) otherwise &, therefore, it has not in fact & in law suffered any loss.
The alleged deductible loss was covered by a judicially enforceable right based on a contract an
indemnity agreement signed by the debtor/principals in favor of the Surety Co., w/c had not yet
exhausted all its available remedies under the indemnity agreement.

CU UNJIENG v. Board of Tax Appeals


Facts: Petitioner claimed war losses (actually incurred in the years 1945 to 1947) in its 1950 return,
after it was advised by the War Damage Commission that no other payments would be available other
than those already effected. CIR disallowed the deduction & assessed deficiency taxes.
Held: Petitioner could not deduct the said losses beyond the years when they were actually sustained.
[The word] Otherwise should be construed to refer to compensation due under a title analogous or
similar to insurance. The loss sustained by the taxpayer must be covered by judicially enforceable right
arising fr. any of the sources of obligations, namely: law, contract, quasi-contract, tort or crime, in order
that it may be considered compensated for otherwise than by insurance. The approval of the Phil.
rehabilitation Act in 1946 did not authorize the petitioner to postpone for another year, its claim for
deduction arising fr. the war losses in question.
COMM. v. PRISCILLA ESTATE INC.
Facts: Priscilla Estate had a barong-barong in one of its lots, w/c was being rented at P3,730 per month.
The City Engineer of Manila declared the property a fire hazard & forced the company to demolish it. The
value of the property was consequently declared by the Co., as a loss. The Commish of IR disallowed the
deduction & claims that the amount should form part of the cost of the new bldg., constructed in the place
of the old structure.
Held: The CIRs contention is erroneous bec. the removal of the barong-barong was forced upon the
corporation, the fact that the latter was earning fr. the said structure & that it had no funds to construct a
new one belied any intention to demolish the old one. Since the demolished bldg., was not compensated
for by insurance or otherwise, its loss should be charged as a deduction fr. gross income.

6. BAD DEBT

Sec. 34. (E) Bad Debts. -


(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the preceding years shall be included as part
of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be
worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom
shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the
Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title,
be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

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INCOME TAX REVIEWER
Sec. 36. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions
shall in any case be allowed in respect of losses from sales or exchanges of property directly or
indirectly
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

a. What are bad debts?


b. Who are related taxpayers?
c. Requisites for deduction.
1. Debts due taxpayer
2. Actually ascertained to be worthless
3. Charged off w/in the taxable year
4. Connected w/ profession, trade or business
5. Not those sustained in a transaction entered into bet. related parties.

d. Treatment recovered bad debts previously allowed as deduction.

included as part of the gross income in the year of recovery to the extent of the income tax benefit of
said deduction.

e. Securities becoming worthless.


1. ascertained to be worthless and
2. charged off w/in the taxable year
3. are capital assets
4. the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust co.
incorporated under the laws of the Phils. a substantial part of whose business is the receipt of
deposits, for the purpose of this Title, be considered as a loss fr. the sale or exchange, on the last day
of such taxable year, of capital assets.

FERNANDEZ HERMANOS v. COMM

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INCOME TAX REVIEWER
Facts: FH Inc., gave advances to a subsidiary mining company w/c the latter could not repay due to its
difficulties. FH Inc., wrote off said advances w/c were disallowed by the CIR & sustained by the Court.
Held: Under the memorandum agreement, the mining company was to pay FH Inc., 15% of its net income,
the advances were not loans but investments of FH Inc., w/c gave the advances w/o actually expecting
repayment as debts. The loss cannot be written off bec. there is no valid & subsisting debt.

Ascertainment of worthlessness.
Before a debt can be ascertained to be worthless, the creditor must take reasonable steps to collect the
debt w/in the period of prescription. The duty of ascertainment requires proof of two facts:
That the taxpayer did in fact ascertain the debt to be worthless in the year for w/c deduction was
sought; &
That in doing so acted in good faith.

COLLECTOR v. GOODRICH
Facts: Goodrich claimed deductions on several bad debts. Most of the debtors were merely sent demand
letters. Some debtors mad partial payments, others later paid the debt in full. The CIR disallowed these as
deductions.
Held: The claimed deductions should be rejected. The requirement of ascertainment needs proof of two
facts (see above discussion). Good faith on the part of the taxpayer is not enough. He must show also that
he had reasonably investigated the relevant facts & had drawn a reasonable inference fr. the information
thus obtained by him. Respondent herein has not adequately made such showing. The payments made,
some in full, after the accounts had been characterized as bad debts, merely stresses the undue haste w/
w/c the same had been written off.
PRC v. CA
Facts: Phil. Refining Company protested the disallowance by the CIR of bad debts & interest expenses w/c
the former listed as deductions in its return.
Held: These particular bad debts were not allowable deductions bec. they do not meet the requirements
stated in the Goodrich case. There was lack of proof or evidence of good faith & reasonable ascertainment
of collection. Among the accounts disallowed as deductions were the ff.:
1. Remoblas store & CM Variety store not a single document was offered to show that the stores were
indeed burned, even just a police report. PRC did not even send demand letters.
2. Aboitiz Shipping Corp. no proof was given of PRC policy that gives rebates to clients in case of loss
arising fr. fortuitous events, w/c it now passes off as uncollectible debts;
3. AFPCES the mere fact that AFPCES is a govt. agency does not preclude P fr. filing suit since the
agency was discharging proprietary functions.
The taxpayer must be able to demonstrate that the debt is not only uncollectible as of the taxable
year but also at any time in the future. So when the recovery is merely doubtful, the deduction is not
allowed.
Usually the ff. steps are required:
1. Sending of statements of accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer for collection; &
4. Filing a collection case in court.

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INCOME TAX REVIEWER
Deduction of bad debt subsequently collected A debt w/c was previously found to be worthless &
written off in a prior year & subsequently collected does not render the deduction unallowable or illegal.
The amount of the debt must be reported as income in the taxable year in w/c it is received.

7. DEPRECIATION

Sec.34 (f) NIRC Depreciation. -


(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the
trade or business. In the case of property held by one person for life with remainder to another person,
the deduction shall be computed as if the life tenant were the absolute owner of the property and shall
be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the
trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding
paragraph shall include, but not limited to, an allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under
any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had
the annual allowance been computed under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the
Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and
regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the
taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the
useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the
taxpayer and the national Government in the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The responsibility of establishing the existence of
such facts and circumstances shall rest with the party initiating the modification. Any change in the
agreed rate and useful life of the depreciable property as specified in the agreement shall not be
effective for taxable years prior to the taxable year in which notice in writing by certified mail or
registered mail is served by the party initiating such change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any
depreciable and claimed the depreciation expenses as deduction from his gross income, without any
written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid
useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be
considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of
all properties directly related to production of petroleum initially placed in service in a taxable year
shall be allowed under the straight-line or declining-balance method of depreciation at the option of the
service contractor.
However, if the service contractor initially elects the declining-balance method, it may at any subsequent
date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be ten (10) years of such
shorter life as may be permitted by the Commissioner.

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Properties not used directly in the production of petroleum shall be depreciated under the straight-line
method on the basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all
properties used in mining operations other than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more
than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided,
That the contractor notifies the Commissioner at the beginning of the depreciation period which
depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign
Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident
foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or
employment or its non-use in the business trade or profession shall be permitted only when such
property is located in the Philippines.

a. What is depreciation? what is obsolescence?

For the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property

Definition:
(Basilan Estates Inc., v. Comm & Secs. 110 115 RR 2)
Depreciation - the gradual diminution in the useful value of tangible property used in the trade or
business resulting fr. exhaustion, wear & tear, & normal obsolescence
The term is also applied to amortization of the value of intangible assets the use of w/c in the trade
or business is definitely limited in duration.
The necessity for depreciation allowance arises fr. the fact that certain property used in the business
gradually approaches a point where its usefulness is exhausted. By using the property, a gradual sale is
made of it; & the depreciation charged is the measure of the cost w/c has been sold. When then the
property is disposed of after years of use, it is no longer the whole thing originally used.

b. Requisites for deductibility:


1. The allowance for depreciation must be reasonable.
2. It must be for property arising out of its use or employment in the business or trade, or out of its
not being used temporarily during the year.
3. It must be charged off during the taxable year.
4. A statement on the allowance must be attached to the return.

Reasonable allowance as used in the Tax Code, includes (but is not limited to) an allowance computed in
accordance w/ the regulations prescribed by the Finance Secretary under any of the ff. methods:
1. Straight-line method;
2. Declining balance method;
3. Sum-of-the-years digits method; &
4. Any other method prescribed by the Sec. of Finance upon recommendation of the Commissioner.

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c. Who may deduct depreciation expense?

In the case of property held by one person for life with remainder to another person
in the case of property held in trust

d. COMPUTATION / methods allowed.

LIMPAN INC., v. COMM.


Facts: Limpan is the owner of several apartment units. CIR assessed deficiency taxes & reduced
depreciation expense at the rate stated in the petitioners return bec. these were excessive. Petitioners
witness tried to establish that some of its buildings were old & out of style, hence they were entitled to
higher rates of depreciation.
Held: Findings of the CIR & the CTA should be upheld, the deductions claimed by Limpan were excessive.
Depreciation is a question of fact & is not measured by theoretical yardstick but should be determined by
a consideration of actual facts.

BASILAN ENTERPRISES INC., v. COMM.


Facts: BEI claimed deductions for the depreciation of its assets up to 1949 on the basis of their
acquisition cost. As of Jan. 1950, it changed the depreciable value of said assets by increasing it to conform
w/ the increase in cost for their replacement. Accdgly, for its 1950 1953 returns, it deducted fr. gross
income, the value of depreciations computed on the reappraised value.
Held: The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.
Hence a deduction over & above such cost cannot be claimed or allowed. The reason is that deductions fr.
gross income are privileges, not matters of right. They are not created by implication but upon clear
expression in the law. Moreover, the recovery, free of income tax , of an amount, more than the invested
capital in an asset, will transgress the underlying purpose of depreciation allowance. For then, what the
taxpayer would recover would be, not only the acquisition cost, but also some profit. Recovery in due time
through depreciation of investment made is the philosophy behind depreciation, the idea of profit on the
investment made has never been the underlying reason for the allowance of a deduction for depreciation.

Illustration:
A machine w/ a cost of P50,500 w/c has an estimated useful life of 10 years & salvage value of
P500 after its useful life should have an annual depreciation of P5,000 computed as follows:
COST P50,500
Less Salvage Value (500)
Amount subject to depreciation P50,000
=======
Annual depreciation will be:
P50,000
10 years = P5,000

** No depreciation will be allowed in the case of property w/c has been amortized to its scrap value & is
no longer in use. (Sec. 108, RR 2)

Property not subject to depreciation

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1. Inventories or stock in trade;
2. Land, apart fr. the improvements or physical development added to it;
3. Bodies of minerals w/c through the process of removal suffer depletion already subj. to depletion
allowance);
4. Automobiles solely for personal purposes;
5. Intangibles, the use of w/c in business or trade is not of limited duration; &
6. Incidental repairs w/c neither materially add up to the value or prolong the life, but keep it in an
ordinary efficient operating condition. Property kept in repair may nevertheless, be subject of a
depreciation allowance.

e. Agreement as to useful life/ economic life conditions/ restrictions


f. Special types of depreciable properties

i. Properties used in petroleum operations


ii. Properties used in mining operation
iii. Depreciation of properties used by nonresident aliens engaged in trade or business or
resident foreign corps.

8. DEPLETION

Depletion is the exhaustion of natural resources like mines & oil & gas wells as a result of production or
severance fr. such mines or wells.

Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method shall be granted under rules and
regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner.
Provided, That when the allowance for depletion shall equal the capital invested no further allowance
shall be granted: Provided, further, That after production in commercial quantities has commenced,
certain intangible exploration and development drilling costs: (a) shall be deductible in the year
incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be
deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing wells and/or mines in the same contract
area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in
itself has no salvage value and which is incidental to and necessary for the drilling of wells and
preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the
acquisition or improvement of property of a character subject to the allowance for depreciation except
that the allowances for depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction in computing
taxable income during the year shall not be taken into consideration in computing the adjusted cost
basis for the purpose of computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from
mining operations, the taxpayer may at his option, deduct exploration and development expenditures
accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration
and development expenditures paid or incurred during the taxable year: Provided, That the amount
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deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of
the net income from mining operations computed without the benefit of any tax incentives under
existing laws. The actual exploration and development expenditures minus twenty-five percent (25%)
of the net income from mining shall be carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and
shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross income from
operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable
deductions' shall include mining, milling and marketing expenses, and depreciation of properties
directly used in the mining operations. This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character which is subject to the allowance for
depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and
development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining
the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred
before the beginning of the development stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the development stage
of the mine or other natural deposits. The development stage of a mine or other natural deposit shall
begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign
Corporation. - In the case of a nonresident alien individual engaged in trade or business in the
Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines
under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines
located within the Philippines.

a. Depletion of oil and gas wells and mines


b. Method allowed: COST DEPLETION
I. When depletion shall equal the capital invested/ no more deduction
II. Treatment of intangible costs in petroleum products
c. Option to deduct exploration and development expenditures

What are exploration expenditures? development expenditures?

d. Amount deductible by a nonresident alien individual or foreign corporation

Persons entitled to claim depletion allowance (Sec. 3, Rev. Reg. 5-76)


Allowed only to mining entities w/c own an economic interest in mineral deposits
Economic interest the taxpayer has acquired by investment any interest in mineral & secures it, by any
form of legal relationship, such as but not limited to, operating agreement & service contract agreement,
income derived fr. the extraction of mineral, to w/c it must look for the return of its capital
A corporation w/c has no capital investment in the mineral deposit does not possess an economic interest
merely bec. through a contractual relation it possesses a mere pecuniary advantage derived fr.
production.

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A resident foreign corporation is entitled only to deduct depreciation allowance for oil & gas wells located
w/in the Philippines.

Consolidated Mines V. CTA


Facts: Consolidated is a domestic mining corp. w/c claimed deductions for depletion, the rates of w/c
petr & the CIR disagreed on.
Held: The Tax Code provides in case of mines for a deduction on depletion - a reasonable allowance not
to exceed the market value of the product thereof w/c has been mined & sold during the year for w/c the
return was made.
The formula for computing the rate of depletion is:
Cost of mine property
Estimated ore deposit = Rate of depletion per unit of product mined & sold
Cost of mine property :
1. Mine cost
2. Expenses of development before production
As an income tax concept, depletion is wholly a creation of the statute, solely a matter of legislative
grace, hence the petr has the burden of justifying the allowance of any deduction claimed. The company
must provide the evidence for its assertion that CIR erred.

9. RESEARCH AND DEVELOPMENT EXPENSE

Sec. 34. (I) Research and Development.-


(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred
by him during the taxable year in connection with his trade, business or profession as ordinary and
necessary expenses which are not chargeable to capital account. The expenditures so treated shall be
allowed as deduction during the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and
in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following research and development expenditures may be
treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed
over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the
month in which the taxpayer first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year beginning after the
effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for
such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in
computing taxable income for the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change to a different method is
authorized with respect to a part or all of such expenditures. The election shall not apply to any
expenditure paid or incurred during any taxable year for which the taxpayer makes the election.

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(3) Limitations on deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be
used in connection with research and development of a character which is subject to depreciation and
depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or
quality of any deposit of ore or other mineral, including oil or gas.

a. What items are treated as R& D expenses?


b. How deduction is computed
c. Treated as deferred expenses (optional) of some R and D expense
conditions and limitations
d. Limitations on deduction/ R & D provisions shall not apply to:
i. Any expenditure for the acquisition or improvement of land, or for the improvement of property to
be used in connection with research and development of a character which is subject to
depreciation and depletion; and
ii. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or
quality of any deposit of ore or other mineral, including oil or gas.

10. CHARITABLE AND OTHER CONTRIBUTIONS

REV. REG. 13-98.

Sec. 34. (H) Charitable and Other Contributions.


(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of
the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively
for public purposes, or to accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon
recommendation of the Commissioner, no part of the net income of which inures to the benefit of any
private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an
individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived
from trade, business or profession as computed without the benefit of this and the following
subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph,
donations to the following institutions or entities shall be deductible in full;
(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its
agencies or political subdivisions, including fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking priority activities in education, health, youth and
sports development, human settlements, science and culture, and in economic development according
to a National Priority Plan determined by the National Economic and Development Authority (NEDA),
In consultation with appropriate government agencies, including its regional development councils and
private philantrophic persons and institutions: Provided, That any donation which is made to the
Government or to any of its agencies or political subdivisions not in accordance with the said annual
priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

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(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign
institutions or international organizations which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into by the Government of the Philippines and the
foreign institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization'
means a non profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and youth
and sports development, health, social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net income of which inures to the benefit of any private individual;
(2) Which, not later than the 15 th day of the third month after the close of the accredited nongovernment
organizations taxable year in which contributions are received, makes utilization directly for the active
conduct of the activities constituting the purpose or function for which it is organized and operated,
unless an extended period is granted by the Secretary of Finance in accordance with the rules and
regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
but in no case to exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic
corporation organized for similar purpose or purposes, or to the state for public purpose, or would be
distributed by a court to another organization to be used in such manner as in the judgment of said
court shall best accomplish the general purpose for which the dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term
'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited nongovernment organization was created or
organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more
purposes for which the accredited nongovernment organization was created or organized.

An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a period to be prescribed in
rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished
by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money shall be based
on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

a. What donations or gifts are deductible?


b. Deduction with limitation
c. Contributions deductible in full.
d. Treatment of the ff. donations:

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i. Donations to the govt.
ii. Donations to certain foreign institutions or intl organizations
iii. Donations to accredited non-govt. organizations
e. valuation of donation
f. Proof of donation for tax deduction purposes

Roxas V. CTA
Facts: Supra
Held: Contributions to the Christmas Fund of the Pasay City Police & Firemen & the Baguio City Police are
not deductible for the reason that Christmas Funds were not spent for public purposes but as gifts to the
families of the members of said entities. Under the Tax Code, a contribution to a govt. entity is deductible
when used exclusively for public purposes.
Contributions to the Phil. Heralds fund for Manilas neediest families were disallowed on the
ground that PH is not a corporation or assn. Contemplated in the Tax Code. It should be noted however,
that the contributions were not made to the PH but to a group of civic-spirited citizens organized by the
PH solely for charitable purposes.

11. CONTRIBUTION TO A PENSION TRUST

Sec. 34. (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the
payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the
contributions to such trust during the taxable year to cover the pension liability accruing during the year,
allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid
into such trust during the taxable year in excess of such contributions, but only if such amount (1)has not
theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10)
consecutive years beginning with the year in which the transfer or payment is made.

Deduction of lump-sum contribution


REQUISITES FOR DEDUCTIBILITY

C. ITEMS THAT CANNOT BE DEDUCTED

SEC. 36. Items not Deductible.-


(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to
(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.

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(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any
case be allowed in respect of losses from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

1. Personal living and other family expenses


Examples: tuition fees, groceries and other household expense

Sec. 119 Rev. Reg. 2 Personal, living, & family expenses are not deductible.
(1) Insurance paid on a dwelling owned & occupied by a taxpayer is a personal expense & not
deductible.
(2) Premiums paid for life for life insurance are not deductible.
In the case of a professional man who
Rents a property for residential purposes
But incidentally receives his clients, patients, or callers in connection w/ his professional work (his
place of business being elsewhere),
no part of the rent is deductible as a business expense.
If, however, he uses part of the house for his office, such portion of the rent as is properly attributed to
such office is deductible.
Where the father is legally entitled to the services of his minor children, any allowances w/c he gives
them whether said to be in consideration of services or otherwise, are not allowable salary deductions
in his returns of income.
Alimony & an allowance paid under a separation agreement are not deductible fr. gross income.

COLLECTOR VS. JAMIR


Facts: Jamir claimed as dedn the salary of his driver. The CIR assessed the tax due. CTA allowed 3/4s of
the salary to be deducted.
Held: It appears that the driver was used for personal & business purposes. The SC is not inclined to
disturb the finding of the court the Jamir used the car more for business than for personal purposes.

2. Capital Expenditure
i. Acquisition of asset
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INCOME TAX REVIEWER
ii. Repairs that prolong life and add value
iii. Addition/ improvement on an existing asset
iv. Compare/ differentiate with ordinary expense

Sec. 120 Rev. Reg. 2. Capital expenditure


No deduction fr. gross income may be made
For any amounts made for the new buildings or for permanent improvements or betterments made to
increase the value of the taxpayers property, or
For any amount expended in restoring property or in making good the exhaustion thereof for w/c an
allowance of depreciation expended for securing a copyright & plates, w/c remain the property of the
person making the payments, are investment of capital.
The cost of defending of perfecting title of property, constitutes a part of the cost on the property & is not
a deductible expense.
The amount expended for architects services is part of the cost of the building.
Commissions paid in purchasing securities are an offset against the selling price.
Expenses of the administration of an Estate, such as
court costs
attorneys fee &
executors commissions
are chargeable against the corpus of the estate & are not allowable deductions.
Amounts
to be assessed & placed under an agreement between bondholders or shareholders of a corporation.
to be used in a reorganizing of the corporation,
are investments of capital an not deductible for any purpose in return of income.
In the case of a corporation, expenses for organizations, such as -
incorporation fees
attorneys fees
accountants charges,
are ordinary capital expenditures,
but where such expenditures are limited to purely incidental expenses, a taxpayer may be charge such
item against income in the year in w/c they are incurred.
A holding company w/c guarantees dividend at a specified rate on the stock of the subsidiary corporation
for the purpose of
securing new capital for the subsidiary &
increasing the value of its stockholdings in the subsidiary
may not deduct amounts paid in carrying out this guarantee in computing its net income, but such
payments may be added to the cost of its stock in the subsidiary.

Commissioner Vs. Soriano


Facts: The taxpayer had a piece of land in Mla. To carry out a project, it hired an architect as a contractor
for pile-driving lumber into the grd. The taxpayer sold the prop. & later claimed as deductible the amt.
paid to the architect & service fee for pile-driving.
Held: Expenses constitute capital expenditure w/c the owner/taxpayer was entitled to consider as part
of the total cost of its property in det. the amt. of profit it realized fr. the sale. Expenditures for

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replacements, alterations & improvements/additions w/c either prolong the life of the prop. or increase
its value are capital in nature & therefore are part of the cost. Not deductible.

3. Insurance premium payment

When deductible
When NOT deductible
Insurance premium as fringe benefit

4. Losses between related taxpayers

Sec. 36. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall
in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.

5. Losses on wash sales

SEC. 38. Losses from Wash Sales of Stock or Securities. -


(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of
stock or securities where it appears that within a period beginning thirty (30) days before the date of
such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has
entered into a contact or option so to acquire, substantially identical stock or securities, then no
deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less
than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock
or securities, the loss form the sale or other disposition of which is not deductible, shall be determined

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INCOME TAX REVIEWER
under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which)
resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.

Sec. 101 Rev. Reg. 2. Capital losses on wash sales of stock or securities
Losses on sale or exchange of capital assets are allowed to the extent provided in Sec 34 of the Code. If
any securities w/c are capital assets become worthless during the taxable year, the loss resulting,
therefr. shall be considered as a low fr. the sale or exchange on the last day of such taxable year, of capital
losses assets. Losses on wash sales of stock or securities are treated in Sec. 33 of Code 1.

6. Illegal expense

Calanoc Vs. Collector


Facts: By authority of a solicitors permit, Calanoc financed & promoted a boxing match to solicit
contributions for orphans & destitute children. Included in the expenditures was an amt. for police
protection.
Held: The expenditure is disallowed as it is illegal. It is a consideration given for the performance of the
police of functions required of them to be rendered under the law.

Sec. 34. 1. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall
be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or
employee of the national government, or to an official or employee of any local government unit, or to
an official or employee of a government-owned or -controlled corporation, or to an official or employee
or representative of a foreign government, or to a private corporation, general professional partnership,
or a similar entity, if the payment constitutes a bribe or kickback.

OTHERS:
i. Protection money
ii. Ransom paid to kidnappers for the release of a corporate officer
iii. Revolutionary tax paid to NPA

D. DEDUCTIONS ALLOWED FOR SPECIAL CORPORATIONS

SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether
Domestic or Foreign. -
(A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether
domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be
made within the year to reserve funds and the sums other than dividends paid within the year on policy

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INCOME TAX REVIEWER
and annuity contracts may be deducted from their gross income: Provided, however, That the released
reserve be treated as income for the year of release.
(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and
mutual workmen's compensation and mutual casualty insurance companies requiring their members to
make premium deposits to provide for losses and expenses, said companies shall not return as income
any portion of the premium deposits returned to their policyholders, but shall return as taxable income
all income received by them from all other sources plus such portion of the premium deposits as are
retained by the companies for purposes other than the payment of losses and expenses and reinsurance
reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their
return of gross income, gross premiums collected and received by them less amounts paid to
policyholders on account of premiums previously paid by them and interest paid upon those amounts
between the ascertainment and payment thereof.
(D)Assessment Insurance Companies.- Assessment insurance companies, whether domestic or foreign,
may deduct from their gross income the actual deposit of sums with the officers of the Government of
the Philippines pursuant to law, as additions to guarantee or reserve funds.

1. Insurance companies
2. Mutual insurance companies
3. Mutual marine insurance companies
4. Assessment insurance cos.

E. DEDUCTIONS ALLOWED TO INDIVIDUAL TAXPAYERS.

1. Optional standard deduction.


Sec. 34. (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding
Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the
taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the preceding Subsections. Such
election when made in the return shall be irrevocable for the taxable year for which the return is made:
Provided, That an individual who is entitled to and claimed for the optional standard deduction shall
not be required to submit with his tax return such financial statements otherwise required under this
Code: Provided, further, That except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross income during the taxable year, as may be required by
the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.

in lieu of itemized deductions


not exceeding 10% of his gross income
What is gross income?

Sec. 27. E. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax
provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

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INCOME TAX REVIEWER
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

How to avail of the optional deduction


Who is entitled?

2. Premium payments on health and/or hospitalization insurance of an individual taxpayer.

Sec. 34. (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual
Taxpayer. - the amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per
family or Two hundred pesos (P200) a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a
deduction from his gross income: Provided, That said family has a gross income of not more than Two
hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of
married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled
to this deduction.

a. Limitation/ ceiling/ conditions for deductions


b. Who is entitled?

F. PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER.

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -


(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be
allowed a basic personal exemption as follows:
For single individual or married individual judicially decreed as legally separated with no qualified
dependents P20,000
For Head of Family P25,000
For each married Individual P32,000
In the case of married individuals where only one of the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption.
For purposes of this paragraph, the term 'head of family' means an unmarried or legally separated man or
woman with one or both parents, or with one or more brothers or sisters, or with one or more
legitimate, recognized natural or legally adopted children living with and dependent upon him for their
chief support, where such brothers or sisters or children are not more than twenty-one (21) years of

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INCOME TAX REVIEWER
age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age
are incapable of self-support because of mental or physical defect.
(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Eight
thousand pesos (P8,000) for each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who
has custody of the child or children: Provided, That the total amount of additional exemptions that may
be claimed by both shall not exceed the maximum additional exemptions herein allowed.
For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally adopted child
chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one
(21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is
incapable of self-support because of mental or physical defect.

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above
during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case
may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one
(21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the
same exemptions as if the spouse or any of the dependents died, or as if such dependents married,
became twenty-one (21) years old or became gainfully employed at the close of such year.

(D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual
engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a
personal exemption in the amount equal to the exemptions allowed in the income tax law in the country
of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to
exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines:
Provided, That said nonresident alien should file a true and accurate return of the total income received
by him from all sources in the Philippines, as required by this Title.

1. Basic personal exemption

Sec. 2.79 (I) 1. a. Rev. Reg. 2-98.

a. Single individual or
married individual judicially decreed as
legally separated w/ no qualified dependents P20,000

b. Head of family P 25,000


Dependent Sec. 2.79 (B) (1) (d) Rev Reg. 2-98
Benefactors of senior citizens
Single unmarried parent?

c. Each (legally) married individual 32,000

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INCOME TAX REVIEWER

2. Additional exemption for dependents

Sec. 2.79 (I) (1) (b) Rev Reg. 2-98

a. How many dependents are allowed?


b. Who are the qualified dependents? Are senior citizens qualified dependents? Are spurious
children covered?

Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living
with the taxpayer if such dependent is not more than 21 years of age, unmarried & not gainfully employed
or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

c. Amount allowed P8,000 each max of 4 dependents


d. Who may claim the additional exemption? Maya single parent claim the deduction?

3. Change of status of the taxpayer and the dependent

marriage
death
reaching the age of 21
gainfully employed
having children

4. personal exemption allowable to nonresident alien individual


reciprocity
requirements

VI. CLASSIFICATION OF INCOME TAXPAYERS.


A. GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHILS.

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in
this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines;

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INCOME TAX REVIEWER
(E) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines.

B. CORPORATIONS
1. Definition of corp./ corporate taxpayer

Sec. 22. (B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.

PARTNERSHIP : includes gen. partnerships & limited partnerships, whether registered or not, BUT not
gen. professional partnerships

JOINT STOCK COMPANIES: constituted when one a group of individuals, acting jointly, establish &
operate a business enterprise under an artificial name, w/ an invested capital divided into transferable
shares, an elected board of directors, & other corporate characteristics, BUT w/out formal governmental
authority.

JOINT ACCOUNTS (CUENTAS EN PARTICIPACION): constituted when one interests himself in the
business of another by contributing capital thereto, & sharing in the profits or losses in the proportion
agreed upon; not subject to any formality & may be privately contracted orally or in writing.

ASSOCIATIONS: include all orgs. w/c have substantially the same features of a corporation (substantial
resemblance in purpose, gen. form & mode of operations.

JOINT VENTURE: commercial undertaking by two or more persons, differing from a partnership in that
it relates to the disposition of a single lot of goods or the completion of a single project; its duration is
limited to the period in w/c the goods are soled or the project is carried on.

Who are large taxpayers?

Revenue Reg. 1-98

Exceptions general professional partnership

Sec. 22 (B), supra.


SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging
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INCOME TAX REVIEWER
in business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.

SEC. 73. Distribution of dividends or Assets by Corporations.


(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income
declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code,
after deducting the corporate income tax imposed therein, shall be deemed to have been actually or
constructively received by the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not.

BIR ruling 254-91, 26-11-1991


Empire Stateland & Resources, INC (Empire), a domestic corp. entered into a business tie-up w/ Uniphil
Marketing (Uniphil) another domestic corp., whereby both firms agreed to pool their resources together
for the purpose of developing & constructing condominium units & selling them to the public. Uniphil
was to contribute the lot, materials & labor, while Empire was to supply labor & materials. The
development & construction of the units & the eventual sale thereof was to be undertaken & managed by
Uniphil Empire Venture (Venture), an entity put up by the contracting parties solely for that venture.
Empire will receive 30% of the profits of the Venture while Uniphil will receive 70%. Empire argues that
the respective shares of Uniphil & Empire in the net profits is not subject to income tax, the same having
been taxes in the hands of Venture o.w. the same income would be subjected to 35% tax each in the hands
of Venture, Uniphil & Empire or a total tax of 70%
ISSUE: What is the tax status of Venture? Is it considered a joint venture (JV) & therefore taxable as a
domestic corp.?
What is the tax treatment of the distributive shares of Uniphil & Empire in the respective amount
of 70% & 30%?
RULING: To constitute a JV, certain factors are essential:
each party must make a contribution, not necessarily of capital, but by way of services, skill,
knowledge, material or money
profits must be shared amount the parties;
there must be a JOINT PROPRIETARY INTEREST, & the right of mutual control over the subject matter
of the enterprise;
usually there is a single business TXN rather than a general or continuous TXN
Likewise, a JV was created when 2 corps. while registered & operating separately where placed
under one sole management w/c operated the business affairs of said co.'s as though they constituted as
single entity thereby obtaining substantial economy & profits in the operation. (Collector vs. BTC)
Thus the Venture w/c has been constituted as a single entity whereby Empire & Uniphil agreed to
pool their resources for the dev't of a parcel of land, is a JV w/c is subject to the 35% under Sec. 24 of the
Tax Code. However, the shares of Uniphil & Empire from the profits of the JV are NOT SUBJECT to income
tax since said profits are in the nature of dividends w/c are not subject to tax under Sec. 24(e).

2. Ordinary partnership as a corporate taxpayer

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INCOME TAX REVIEWER
a. Test whether an entity is a taxable partnership
a partnership no matter how organized

Sec. 22 (B), supra.


Sec. 73 (D), supra.

Ona vs. Commissioner


Facts: When Bonales died, she left her husband & 5 children. The heirs partitioned the estate in such a
way that they had a 1/2 undivided interest in 10 lots, 6 houses & an undetermined amount of damages fr.
the Water Damage Commission. Although the project of partition was approved by the court. the
property remained undivided & the husband managed the properties. He either sold the property or
leased them, & then invested the proceeds in real estate & securities. From these investments, the Onas
received income. They did not, however, actually receive their shares in the yearly income as it was left in
the hands of their father who invested them in real properties & securities.
Held: The heirs formed an unregistered partnership. From the moment they allowed not only the
incomes from their respective shares in the inheritance but even the inherited properties themselves to
be used by the husband as a common fund in undertaking several TXN's or in business, w/ the intention
of deriving profit to be shared by them proportionally, such act was tantamount to actually contributing
such income to a common fund &, in effect, they thereby formed an unregistered partnership w/in the
purview of the NIRC.

Gatchalian vs. Collector


Facts: This is case where the pets. contributed to buy a sweepstakes ticket.
Held: The pets. organized a partnership of a civil nature bec. each of them put up money to buy a ticket
for the sole purpose of dividing equally the prize w/c they may win, as they did in fact in the amount of
Php 50,000. The partnership was not only formed, but also, upon winning the prize, one of the pets., in
his capacity as a co-partner, collected the prize. These circumstances repel the idea that the one formed &
organized among them was a community of property.
Having organized a partnership, the said entity is one bound to pay the income tax. The tax should
not be pro-rated among them & paid individually resulting in their exemption from corporate taxes.

Evangelista vs. Collector


Facts: The pets. (siblings I suppose) borrowed money from their father w/c they used together w/ their
own money to buy real properties. Their father was appointed by them to manage their properties w/
full power to lease; collect rents, etc. Then the CIR demanded payment of income tax on corps., real estate
dealers fixed tax & corporation residence tax for a period of 9 years.
Held: Yes, a partnership was formed. According to the Civil Code (A1767), the essential elements of a
partnership are:
an agreement to contribute money, property or industry to a common fund; &
intent to divide the profits among the contracting parties.
The first element is present in this case. The petitioners agreed to contribute to a common fund.
Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts &
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate
for monetary gain & divide it among themselves, because:

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INCOME TAX REVIEWER
Said common fund was not something they found already in existence. It was not property inherited
by them pro-indiviso. They created it purposely. They borrowed a substantial portion thereof in
order to establish the common fund.
They invested the same, not merely in one TXN but in a series of TXN.
The properties bought by them were not devoted to residential purposes, or to other personal uses.
Instead, they were leased.
For over a decade, these conditions existed.

Pascual vs. Com.


Facts: Pascual & Dragon bought a total of five lots in 2 sales. They then sold these lots. From these sales
they earned profits. They paid capital gains tax but the Com. demanded they pay corp. income tax for
being an unregistered partnership?
Held: In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, & that they intended to divide the profits among
themselves. Respondent commissioner &/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of land & became co-owners
thereof.
In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation 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.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one
seller. It was only 1968 when they sold the two (2) parcels of land after w/c they did not make any
additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions
were isolated. The character of habituality peculiar to business transactions for the purpose of gain was
not present.

b. Unregistered partnership distinguished from Co-ownership for tax purposes.

Obillos. vs. Com.


Facts: Jose Obillos bought two parcels of land w/c he transferred to the names of his children. After a
year, the children sold them for a profit, for w/c they paid capital gains tax. The CIR demanded payment of
corp. income tax & considered the share of each child as his distributive dividend. This was based on the
theory that the children formed an unregistered partnership.
Held: They formed a co-ownership & not a partnership. The Civil Code provides that the sharing of
gross returns does not of itself establish a partnership, WON the persons sharing them have a joint or
common right or interest in any of the property from w/c the returns are derived. There must be an
unmistakable intention to form a partnership or JV.
All co-ownerships are not deemed unreg. partnership. Co-owners who own properties w/c
produce income should not automatically be considered partners of an unregistered partnership or a
corp. w/in the purview of the income tax law.
In the CAB, they had no such intention. They were co-owners pure & simple. To consider them as
partners would obliterate the distinction between co-ownership & partnership. The pets. were not
engaged in a JV by reason of that isolated TXN. Their original plan was to divide the lots for residential
purposes. If later they found it not feasible to build their residences on the lots bec. of the high cost of
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INCOME TAX REVIEWER
construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of
the profit was merely incidental to the dissolution of the co-ownership w/c was in the nature of things a
temporary state.

Reyes vs. Com


Facts: Father & son tandem bought a lot & a building. The building were occupied by tenants.
Father & son divided the income coming from the tenants. They even hired an administrator to collect
rents. The Com. assessed them corp. income tax, surcharge & compromise for a period of 5 years.
Held: Partnership (Evangelista vs. Coll) applies. However, the difference w/ that case & the CAB is that
in the latter a single TXN occurred. But the SC ruled that such minor differentiation does not relieve them
from the Evangelista ruling.
Moreover, the case satisfies one of the reqt of partnerships -- an agreement to contribute money,
property or industry to a common fund.

c. Tax liability of partnership & partners

Revenue Reg. 1 - 89.


Except as herein otherwise provided, there shall be w/held a creditable income tax at the rates herein
specified for each class of payee from the ff. items of income payments to persons residing in the Phils.
Any amount paid or payable periodically or at the end of the taxable year by a gen. professional
partnership to the partners, such as-
drawings
advances
sharings
allowances
stipends, etc.
15%,
EXCEPT the amount paid to a partner who is a non-resident alien whether or not engaged in trade or
business in the Phils. w/c shall be subject to a final w/holding tax of 30&.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging
in business as partners in a general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.

Sec. 73 (D), supra.

d. Joint venture unincorporated/ inc.

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BIR Ruling 254-91 supra (Case of Empire Uniphil & the Uniphil Empire JV)

Queries: How is a JV created?


What is the tax treatment of a JV for the purposes of income taxation?

3. Classification of Corporate Taxpayers/ Income Tax Base

a. Domestic (NET WORLDWIDE)

Sec. 22. (C) The term 'domestic,' when applied to a corporation, means created or organized in the
Philippines or under its laws.

SEC. 27. Rates of Income tax on Domestic Corporations.


A. In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is
hereby imposed upon the taxable income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under
this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent
equally for each month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been satisfied:
1. A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
2. A ratio of forty percent (40%) of income tax collection to total tax revenues;
3. A VAT tax effort of four percent (4%) of GNP; and
4. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall
include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.
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INCOME TAX REVIEWER
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances and discounts.
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those
covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or
other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct of which is not substantially
related to the exercise or performance by such educational institution or hospital of its primary purpose
or function. A 'Proprietary educational institution' is any private school maintained and administered
by private individuals or groups with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and
regulations.
(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of
existing special or general laws to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -


(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is
hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided, however, That
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital gains realized during the taxable year from the
sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:
Not over P100,000. 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks, including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system
units and other depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.

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INCOME TAX REVIEWER
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are not actually used in the business of a corporation
and are treated as capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic Corporations. -


(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

b. Foreign

Sec. (D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic.

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INCOME TAX REVIEWER

SEC. 25. Tax on Nonresident Alien Individual.


(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be
subject to an income tax in the same manner as an individual citizen and a resident alien individual, on
taxable income received from all sources within the Philippines. A nonresident alien individual who
shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance
or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the
Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account,
Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. -
Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an
insurance or mutual fund company or from a regional operating headquarter of multinational company,
or the share of a nonresident alien individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto
winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof:
Provided, however, that royalties on books as well as other literary works, and royalties on musical
compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax provided under Section
28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral
ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit or investment before the fifth (5 th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic
corporations not traded through the local stock exchange, and real properties shall be subject to the tax
prescribed under Subsections (C) and (D) of Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall
be levied, collected and paid for each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not engaged in trade or business within the
Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income.
Capital gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

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INCOME TAX REVIEWER
(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross
income received by every alien individual employed by regional or area headquarters and regional
operating headquarters established in the Philippines by multinational companies as salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from
such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens employed by these multinational
companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or
entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for
each taxable year upon the gross income received by every alien individual employed by offshore
banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax
equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same positions as those of aliens employed by
these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual
who is a permanent resident of a foreign country but who is employed and assigned in the Philippines
by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in
the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, received from
such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a
Filipino employed and occupying the same position as an alien employed by petroleum service
contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be,
imposed under this Code.

i. Resident (NET FR. SOURCES W/IN ONLY)


Sec. 22 (h). The term resident foreign corporation, applies to a foreign corporation engaged in trade or
business w/in the Philippines.

Com. vs. BOAC


Facts: Supra
Held: In order that a foreign corp. may be regarded as doing business w/in a state, there must be
continuity of conduct & intention to establish a continuous business, such as the appointment of a local
agent & not one of a temporary character. BOAC, although it does not operate any airplane in the Phils., is
a resident foreign corp. It maintains a general sales agent in the country w/c is engaged in selling &
issuing tickets, receiving fare, etc.- activities in the exercise of the functions normally incident to, & are in
progressive pursuit of, the purpose & object of its organization as an international carrier.

ii. Non-resident (GROSS FR. SOURCES W/IN ONLY)

Sec. 22 (I). The term non-resident foreign corp. applies to a foreign corporation NOT engaged in
trade or business w/in the Philippines.

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Marubeni vs. Com.


Facts: Marubeni is a Japanese corp. duly licensed in the Phils. to do business. M had equity investments
w/ Atlantic, Gulf & Pacific. A,G & P declared & paid cash dividends to M by directly remitting the cash
dividend to Ms Tokyo office net of the 10% final intercorporate dividend tax & 15% branch profit
remittance tax. M argues that following the principal-agent relationship theory, it is a resident foreign
corp., subject only to the 10% final tax on dividends. It argues that must be considered a resident foreign
corp. because it is engaged in business in the Phils. through its Phil. branch. It reasons that the Phil.
branch & the Tokyo head office are one & the same corp. entity, whoever made the investment in A,G, & P.
Held: The gen. rule that a foreign corp. is the same juridical entity as its branch office in the Phils. cannot
apply here. This rule is based on the premise that the business of the foreign corp. is conducted through
its branch office, following the principal-agent theory. It is understood that the branch becomes its agent
here. So that when the foreign corp. transacts business independently of its branch, the prin.-agent
relationship is set aside. The TXN becomes one of the foreign corp., not of the branch. Consequently, the
taxpayer is the foreign corp., not the branch or resident foreign corp. Corollarily, is the business TXN is
conducted through the branch office the latter becomes the taxpayer & not the foreign corp.
In the CAB, the investment was made for the purposes peculiarly germane to the conduct of the
corporate affairs of M, but certainly not of the branch in the Phils. It is thus clear that M, having made the
independent investment attributable only to the head office, cannot now claim the increments as ordinary
consequence of its trade or business in the Phils.

Com. v. Procter & Gamble 204 S 277


Facts: P&G Phils declared dividends payable to its parent company & sole stockholder, P&G USA; fr. w/c
the 35% w/holding tax at source was deducted. P&G Phils claimed a refund based on 24(b) (1) allowing
a reduced rate at 15% if the country of the domicile of the foreign stockholder corporation shall allow
such corp. a tax credit for taxes deemed paid in the Phils.
Held: Sec. 24(b)(1) does not require that the US must give a deem paid tax credit for the dividend tax
waived by the Phil. to make the preferred rate applicable. the law only requires that the US shall allow tax
credit in an amount equivalent to 20 % percentage points. the court interpreted the US Tax Code & ruled
that the US allow such tax credit.
A requirement relating to administrative implementation is not property imposed as a condition
for the applicability, as a matter of law, of a particular rate. Nor an interpretation of a tax statute that
produces a revenue flow for the govt is not, for that reason alone, nec. the correct reading of the statute.

Com. v. Procter & Gamble 160 S 560


Facts: P&G- Phil. declared dividends in favor of P&G USA, w/c was subjected to the 35% tax in 1975. In
1977, P%G Phil. sought a refund of 20% invoking the tax sparing credit provision under Sec. 24(b) of
NIRC.
Held: P&G Phils is not entitled to the refund. It is merely a w/holding agent of the govt. the real party
to file the claim should have been P&G USA. P&G Phil. also failed to meet certain reqts in order that the
dividends received by its non-resident for. com. may be subj. to preferential tax rate of 15%.
1. It did not show actual amount credited to P&G USA by US govt against the income tax due on the
dividends received by it fr. the Phils.
2. Failed to present ITR of mother co. when dividends were received.
3. Failed to submit a duly authenticated doc. showing that the US govt credited the P&G USA the 20%
tax deemed paid in the Phils.

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INCOME TAX REVIEWER

Wander Philippines
Facts: Wander Phils is a domestic corp. organized under Phil. laws. It is wholly owned subsidiary of the
Glaro SA ltd, a Swiss Corp. not engaged in trade or business in the Phils. It claimed a preferential tax rate
on dividends remitted to Glaro. Under Swiss law, no tax is imposed on dividends received by the Swiss
Corp. fr. corp. domiciled in foreign countries.
Held: While it is true that the claims for refund are construed strictly against the claimant, nevertheless,
the fact that Switzerland did not impose any tax on the dividends received by Glaro should be considered
as a full satisfaction of the given condition.

Domestic

sources w/in sources w/o

Net Income
tax base

Foreign

Sources w/o sources w/in

resident non-resident

net income gross income

c. Branch & Subsidiary of a Foreign Corporation for income tax purposes

Marubeni v. Commissioner
Facts: Marubeni is a foreign corp. organized under the laws of Japan. It invested in a construction
business in the Phils. in AG&P. AG&P remitted the profits to Marubeni w/holding the 15% profit
remittance tax. The CIR ruled that the profit remitted to Marubeni shld. not be subject to the 15% profit
remittance tax bec. only profits remitted abroad to its head office w/c are effectively connected w/ its
trade or business in the Phils. are subj. to the tax. Marubeni is now claiming a refund of the 15% tax paid.
Held: Marubeni is not liable to pay the 15% profit remittance tax bec. the profits remitted to it were not
income effectively connected w/ its business in Japan. ( Note: MC was liable to pay other kind of tax, as it
derived income fr. source w/in the Phils. but not a profit remittance tax).

C. INDIVIDUAL TAXPAYERS

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INCOME TAX REVIEWER
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in
this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines;

1. Citizens
a. Resident (NET from SOURCES WITHIN AND WITHOUT)
b. Non-resident citizen (NET from sources WITHIN ONLY)

Sec. 22. (E) The term 'nonresident citizen' means:


(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise
be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines
to reside permanently abroad or to return to and reside in the Philippines as the case may be for
purpose of this Section.

Sec. 23 (B). A nonresident citizen is taxable only on income derived from sources within the Philippines;

Revenue Reg. 1-79. Regulations Governing the taxation of non-resident citizens


Sec. 2. Who are considered as non resident citizens. The term non-resident citizen-
means one who establishes to the satisfaction of the CIR the fact of his physical presence abroad w/
the definite intention to reside therein &
shall include any Filipino who leaves the country during the taxable year as :

1. one who leaves the Phils.


Immigrant to reside abroad as an
immigrant for w/c a
foreign visa as such has

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INCOME TAX REVIEWER
been secured.
2. one who leaves the Phils.
Permanent to reside abroad for
EE employment on a more or
less permanent basis.
2. Contract one who leaves the Phils.
worker on account of a contract
of employment w/c is
renewed from time to
time w/in or during the
taxable year under such
circumstances as to
require him to be
physically present abroad
most of the time during
the taxable year
(physically present
abroad most of the time
during the taxable year =
outside of the Phils. for
not less than 180 days
during such taxable year

Sec. 3. Proof of Intention


Sec. 4. Manner of filing returns. xxx
(1) What to include as gross income. The gross income of a non-resident citizen derived from sources
outside of the Phils. includes all income enumerated under Sec. 29 of NIRC, WON such income is
exempted from the income tax in the foreign country where it was derived.
2.) Rate of tax.

Y $6000 1%
$6000 Y $60 plus 2% if excess
$20,000 over $6000
Y$20,000 $340 plus 3% of
excess over $20,000

(3) Computation of gross income


Gross income less:
Personal exemptions ($2000 if single or married but legally separated)
total amt. of national income tax actually paid to the national govt of the foreign country of his
residence.
= GROSS ADJUSTED INCOME

Conwi vs. IAC

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INCOME TAX REVIEWER
Facts: Petitioners are employees of Procter & Gamble-Phils. & were assigned to other subsidiaries of P &
G in other countries. The question is : what exchange rate should be used. Cir: prevailing free market
exchange rate. Pets: par value of the peso as per CB circular:
Held: For the proper enforcement of the NIRC, the Sec. of Finance is empowered to promulgate all
needful rules & regulations to effectively enforce its provisions. Pursuant to this authority, RMC 7-71 &
41-71 were issued to provide a uniform rate of exchange for $ & Php for internal tax revenue purposes.
Pets. argue that since there were no remittances & acceptances of their salaries & wages in $ into
Phils. they are exempt from the coverage of such circulars. Pets. forge that they are citizens of the Phils.
& their income, w/in or w/o & in this case wholly w/o, are subject to income tax.

c. Filipino overseas workers (NET from SOURCES WITHIN ONLY)


Sec. 23. (C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;

2. Aliens (not Filipino citizens)


a. Resident alien (NET from SOURCES WITHIN ONLY)

Sec. 22. (F) The term 'resident alien' means an individual whose residence is within the Philippines and
who is not a citizen thereof.

b. Non-resident alien

Sec. 22. (G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.

i. Engaged in trade or business (NET from SOURCES WITHIN ONLY)

180 day test

Sec. 25. (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. -
There shall be levied, collected and paid for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual not engaged in trade or business
within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic
or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such
income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

ii. not engaged in trade or business (GROSS from SOURCES WITHIN ONLY)

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INCOME TAX REVIEWER
Sec. 25. (B) supra.

iii. Special Aliens


employed by:
1. regional HQs or area HQs of multinational corps.
2. off-shore banking units
3. petroleum service contractors.

D. Fiduciary Taxpayers: Estates & Trusts


1. Definition of taxable estate & trust/ exception

Sec. 22. (J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator
or any person acting in any fiduciary capacity for any person.

SEC. 60. Imposition of Tax. -


(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of
estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of the will
or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected
by a guardian of an infant which is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of administration or settlement of
the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated by the
trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any
employee or distributee shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be
paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator
of the trust in each instance is the same person, and the beneficiary in each instance is the same, the
taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on
such consolidated income, and such proportion of said tax shall be assessed and collected from each

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INCOME TAX REVIEWER
trustee which the taxable income of the trust administered by him bears to the consolidated income of
the several trusts.

SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same
manner and on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for the taxable year which is to be distributed currently by
the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, but the amount so allowed as a deduction
shall be included in computing the taxable income of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction
under Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration or
settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in
computing the taxable income of the estate or trust the amount of the income of the estate or trust for
its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary
but the amount so allowed as a deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A)
and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the
return of said trust shall not be included in computing the income of the beneficiaries.

2. Taxable income of fiduciary taxpayers

SEC. 61. Taxable Income. - supra.

3. Trust exempt from income tax


SEC. 60. Imposition of Tax. -
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated by the
trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any
employee or distributee shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.

Commissioner v. CA
Facts: Castaneda retired fr. the govt service in 1982. He received benefits including terminal benefits pay
fr. w/c the CIR w/held income tax. Castaneda filed a claim for refund contending that the cash equivalent
of his terminal leave is exempt fr. tax.
Held: The terminal leave pay received by a govt official or employee is not subj. to w/holding income tax.
In the exercise of sound policy. the govt encourages unused leaves to be accumulated. The govt

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INCOME TAX REVIEWER
recognizes that for most public servants, retirement pay is always less than generous. It is not a part of
the gross salary or income of the govt official but a retirement benefit not subj. to income tax.

4. Deductions allowed

SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title,
there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate
or trust.

5. Revocable trust
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the
corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having
a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus
or the income therefrom, the income of such part of the trust shall be included in computing the taxable
income of the grantor.

6. Income for benefit of grantor

SEC. 64. Income for Benefit of Grantor.-


(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of
any person not having a substantial adverse interest in the disposition of such part of the income, be
distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be applied to the payment
of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust
shall be included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the
grantor, either alone or in conjunction with any person not having a substantial adverse interest in the
disposition of the part of the income in question.

E. REGISTRATION and TAX IDENTIFICATION NO. of taxpayers

Sec. 236 (A) Requirements. Every person subject to any internal revenue tax shall register once w/ the
appropriate Rev. Dist. Officer:
1. Within 10 days fr. date of employment, or
2. On or before the commencement of the business, or
3. Before payment of any tax due, or
4. Upon filing of a return, statement or declaration as required in this Code.
The registration shall contain the taxpayers name, style, place of residence, business, and such other
information as may be required by the commissioner in the form prescribed therefor.
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INCOME TAX REVIEWER
A person maintaining the head office, branch or facility shall register w/ the RDO having jurisdiction over
the head office, branch or facility. For purposes of this Section, the term facility may include but not be
limited to sales outlets, places of production, warehouses or storage places.

Sec. 236 (J). Supplying of TIN. Any person required under the authority of this Code to make, render or
file a return, statement or other document shall be supplied with or assigned a TIN which shall indicate
in such return, statement or doc filed w/ the BIR for his proper identification for tax purposes, and w/c
shall indicate in certain docs, such as, but not ltd. to, the ff.:
1. sugar quedans, refined sugar release order or similar instruments;
2. domestic bills of lading;
3. docs to be registered w/ the Register of Deeds or Assessors office;
4. registration cert. of transportation equipment by land, sea or air;
5. docs to be registered w/ the SEC;
6. bldg. construction permits;
7. application for loan w/ banks, financial institutions, or other financial intermediaries;
8. application for mayors permit;
9. application for business license w/ the DTI; &
10. such other docs w/c may hereafter be required under rules and regs to be promulgated by the Sec. of
Finance, upon recommendation of the Commissioner.
In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the
decedent in accordance w/ subsection A hereof & a new TIN shall be supplied in accordance w/ the
provision of this Sec.
In the case of a nonresident decedent, the exec or admin of the estate shall register the estate w/ the RDO
where he is registered; Provided, however, That in case such exec or admin is not registered, registration
of the estate shall be made w/ & the TIN supplied by the RDO having jurisdiction over his legal
residence.
Only one TIN shall be assigned to a taxpayer. Any person who shall secure more than one TIN shall be
criminally liable x x x.

Rev. Memo. Circular 63-91. Issuance of the new TIN to taxpayers and its use on documents and
receipts.

Use of new TIN. Only persons required to make, render, or file a return, statement or document w/ the
BIR shall be supplied w/ or assigned a TIN to be indicated on such documents. In addition to the
persons enumerated in RMO 23-91, Filipinos who are immigrants to other countries may apply for the
issuance of a TIN.

The new TIN shall replace the existing


TAN
VAT reg. numbers
non-VAT reg. numbers &
w/holding tax agent identification numbers.
Therefore, only the TIN shall be reflected on all documents, papers, &/or records that previously required
the indication/reflection of any of the aforementioned numbers.

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INCOME TAX REVIEWER
VII. EXEMPTION AND APPLICABLE TAX RATES.

A. Corporations
1. TAX-EXEMPT CORPS.

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as
a fraternal organization operating under the lodge system, or mutual aid association or a nonstock
corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or nonstock corporation or
their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the
net income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the income of
which consists solely of assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed under this Code.

REVIEW: EXEMPTIONS UNDER THE CONSTITUTION

Sec. 28 (3) Art. VI . Charitable institutions, churches, & parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries & all lands, buildings & improvements actually, directly & exclusively
used for religious, charitable or educational purposes shall be exempt form taxation.

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INCOME TAX REVIEWER
Sec. 4 (3,4) Art. XIV. All revenues & assets of non-stock non-profit educ. institutions used A,D,E for educ.
purposes shall be exempt fr. taxes & duties. X X X
Proprietary educ. institutions including those cooperatively owned may be entitled to such exemptions
subject to the limitations provided by law
Subject to conditions prescribed by law, all grants, endowments, donations or contributions used A,D, E,
for educ, purposes shall be exempt fr. tax.

BIR RULINGS

(173 88) Non-stock non-profit educ. institutions, they are exempted fr. internal revenue taxes &
customs duties, in appropriate cases imposed by natl. govt. on all revenues & assets used A,D,E, for
educational purposes.
Exempt fr. tax tuition, matriculation & other similar fees; income fr. bank deposit interests & money
market placement incident to school operations; canteen owned & operated by the school as ancillary
activity & located w/in the school premises; value-added tax on sale of books, school supplies, uniform,
& other school related items & sale of misc. school items like car stickers.
Not exempt fr. tax income fr. trade, business or other activity not related to the exercise of its educational
purpose or function (i.e. school canteen operated by a concessionaire)

(171 88 ) A technical/vocational school accepting jobs fr. the public in order to fully utilize its
machines, income derived is not exempt fr. tax.

(105 91) The National Tobacco Admin., an attached agency of the Dept of Agriculture is not exempted
fr. paying income tax on gains to be derived fr. the sale of its properties w/c are no longer needed for its
operations. (It is not among those specifically exempted by the Tax Code, Sec. 26) As such it is liable to
the 5% creditable w/holding tax based on gross selling price or total amount of consideration or its
equivalent paid to the NTA as seller, gross selling price being, sale price on the document, the fair
market value, or zonal value w/cever is higher.

(042 91) The amount of tax to be paid by a non-resident foreign corporation (non-stock foundation,
duly organized under the laws of the State of Hawaii) , not engaged in business in the Philippines as to
its income derived fr. Phil. currency bank deposit = shall be 35% of gross income received during the
taxable year fr. all sources w/in the Philippines such as interest, dividends, rents, royalties etc. except
capital gains.
However, under the RP-US Tax Treaty, Art. 12; Interest derived by a resident of the Contracting States fr.
sources w/in the other Contracting State shall not be taxed by the other CS at a rate in excess of 15 % of
the gross amount of such interest. Thus, said income fr. its Phil, currency bank deposit is to be taxed at
15% of gross income.

(011 91) Municipal corporation is not exempt form tax on interest income fr. time & savings deposits.
PD 1931, (6/11/84), has w/drawn all the tax & duty privileges, including preferential tax treatment of
all units of government; the Natl. govt., all its agencies & political subdivisions as well as GOCCs. Also EO
93 (3/10/87) w/drew all tax & duty incentives granted to govt., & private entities subject to certain
exceptions. With tax exemption laws strictly construed, the burden is on the claimant to prove he is
w/in the terms of the statute. In the absence of a clear grant of exemption, the Mun. is subject to 20%
final w/holding tax on its interest income on bank deposits.

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INCOME TAX REVIEWER
Hospital de San Juan de Dios v. Pasay City
Facts: Petr paid under protest electrical & inspection fees allegedly due the City by virtue of an Ordinance
that was passed. The hospital claimed that as a charitable institution, it was exempt fr. the payment of the
inspection fees provided in the ordinances. But the Mayor refused to issue a building permit if the said
fees were not paid.
Held: The lower court erred in not considering the hospital as a charitable institution & thus exempt fr.
the payment of the fees under Sec. 5 of the said ordinance. The articles of incorporation of the hospital
show that it has no capital stock & that no part of the net income inures to the benefit of any individual. A
ruling by the Workmens Compensation Commissioner said it is a charitable institution exempt fr. the
scope of the Act. Also, the hospital cashier attested that it maintains 2 free wards at 60 beds each & 6 free
beds at the pediatric ward. Thus there is sufficient evidence that the hospital doles out charity & should
therefore be exempt.
Note: The fact that the hospital is charging fees for paying beds does not make it lose its character as a
charitable institution if the same were used to partly finance the expenses of the free wards maintained by
the hospital. The mere charging of medical & hospital fees fr. those who could afford to pay does not
make an institution one established for profit or gain.

1. Minimum Corporate Income Tax On Domestic & Resident Foreign Corps. (MCIT)

Sec. 27. (E) Minimum Corporate Income Tax on Domestic Corporations. -


(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and

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INCOME TAX REVIEWER
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

SEC. 28. Rates of Income Tax on Foreign Corporations. -


(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each
month of the period.
The reduced corporate income tax rates shall be applied on the amount computed by multiplying the
number of months covered by the new rates within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen
percent (15%) on gross income under the same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income
tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of
this Subsection.
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived
from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment
of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo
or mail originating from the Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived
by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with
offshore banking units, including any interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

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INCOME TAX REVIEWER
Any income of nonresidents, whether individuals or corporations, from transactions with said offshore
banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject
to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except those activities which are registered with
the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties,
including remuneration for technical services, salaries, wages premiums, annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received
by a foreign corporation during each taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively connected with the conduct of its trade or
business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.
(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of
their taxable income.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds
and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency deposit system from foreign currency
transactions with local commercial banks including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system
units, including interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the
rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares
sold or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be subject to tax under this Title.

REVENUE REGULATION 9-98.

a. When imposed

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INCOME TAX REVIEWER
Sec. 2.27 (E) (1) RR 9-98

Conditions:
beginning on the 4th taxable year immediately ff. the year in w/c such corp. commenced its business
operations,
when the min income tax is greater than the tax regular tax
Specific rules:

Sec. 2.77 (E) (5) RR 9-98.

b. tax rate 2% of gross income as of the end of the taxable year

Sec. 27 (E). (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax
provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services'
shall include interest expense.

normal tax rate defined in Sec. 2.27 (E) (1) RR 9-98

c. Carry forward of excess min tax for the 3 immediately succeeding taxable years.

Sec. 27 E. (2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income
tax over the normal income tax as computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3) immediately succeeding taxable
years.

See illustration in RR 9-98

d. Relief fr. the MCIT

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INCOME TAX REVIEWER
Sec. 27 (E) (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income
tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

When corp. suffers losses on account of prolonged labor dispute,


Or because of force majeure,
Or because of legit business reverses.

e. Exceptions:

Sec. 2.27 (E) (8) RR 9-98


Sec. 2.28 (A) (2) RR 9-98

3. IMPOSITION OF IMPROPERLY ACCUMULATED EARNINGS TAX.


a. Gen. rule

SEC. 29. Imposition of Improperly Accumulated Earnings Tax.


(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable
year on the improperly accumulated taxable income of each corporation described in Subsection B
hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.

b. Tax rate: 10% of the improperly accumulated taxable income


c. When applicable

Sec. 29. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to
every corporation formed or availed for the purpose of avoiding the income tax with respect to its
shareholders or the shareholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not
apply to:

(a) Publicly-held corporations;


(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.

(d) Exceptions.

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INCOME TAX REVIEWER
Publicly-held corps.,
Banks and other nonbank financial intermediaries; and
Insurance companies.

e. Evidence of purpose to avoid income tax


f. Evidence to determine reasonable needs of business
g. Improperly accumulated taxable income means taxable income adjusted by:

Income exempt fr. tax,


Income excluded fr. gross income;
Income subject to final tax; &
The amount of net operating loss carry-over deducted;

And reduced by the sum of:

Dividends actually or constructively paid; and


Income tax paid for the taxable year.

F. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX

1. Senior citizens
RA 7432.
Sec. 5 The govt shall provide the ff. assistance to those caring for & living w/ the senior citizen:
a) the senior citizen shall be treated as dependents provided in the NIRC & as such, individual tax[payers
caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as
having dependents are concerned.
b) Ind. or non-governmental institutions establishing homes, residential communities or retirement
villages solely for the senior citizens shall be accorded the ff.:
1. realty tax holiday for the first 5 years starting fr. the first year of operation;
2. Priority in the bldg. &/ or maintenance of prov. or mun. roads leading to the aforesaid home, res. com.
& retirement village.

Rev. Reg. 2-94 7. A qualified senior citizen living w/ & taken care of by a benefactor whether related to
him or not, shall be treated as a personal exemption of P12,000 as head of the family.
For the purpose of claiming personal exemption as head of the family w/ dependent senior citizen, the
identification card number issued by the OSCA (Office for Senior Citizens Affairs) shall be indicated in
the Income Tax Return to be filed by the benefactor who will be granted the exclusive right to claim him
as dependent for tax purposes.
Caring for a dependent senior citizen shall not, however, entitle the benefactor to claim additional
exemption allowable to a married woman or head of a family w/ qualified dependent children under
Section 29 (l) 2.
In Short: Senior citizen as a qualified dependent to enable single benefactor to claim exemption as
head-of-the-family.

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INCOME TAX REVIEWER

2. Exemptions granted under International Agreements and tax treaty

Reagan v. Com,: supra

Com. v. Robertson
Facts: The Robertsons are Phil. born US citizens working in the US bases in Subic. They are claiming
exemptions under the RP US Mil. Bases Agreement of 1947 fr. income tax. The BIR ruled that the
Robertsons are not entitled to the exemption as they are born in the Phils.
Held: The Robertsons are exempt fr. taxation by virtue of the treaty. In order to avail oneself of the tax
exemption under the RP US mil. Bases Agreement: he must be a national of the US employed in
connection w/ the const., maintenance, operation or defense of the bases residing in the Phils. by reason
of such employment & the income derived is fr. the US Govt. The obli. to fulfill in GF a treaty engagement
requires that the stipulations be observed in their spirit as well as accdg. to their letter & that what has
been promised be performed w/o evasion or subterfuge.

VIII. FILING OF TAX RETURN/ PAYMENT OF TAX/ COMPLIANCE REQUIREMENTS.

A. INDIVIDUAL.

Sec. 2.83 (4) RR 2-98

SEC. 51. Individual Return. -


(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file
an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the
Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines.

(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and additional exemptions for
dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippine shall file an income tax return,
regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived
from sources within the Philippines, the income tax on which has been correctly withheld under the
provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year shall file an income tax return:
Provided, further, That an individual whose compensation income derived from sources within the
Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;

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INCOME TAX REVIEWER
(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section
57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.

(3) The forgoing notwithstanding, any individual not required to file an income tax return may
nevertheless be required to file an information return pursuant to rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from
sources within the Philippines.

(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed
with an authorized agent bank, Revenue District Officer, Collection Agent 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, or if there be no legal residence or place of business in the Philippines, with the Office of
the Commissioner.

(C) When to File. -


(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April
of each year covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded through a local stock exchange as prescribed
under Section 24(c) shall file a return within thirty (30) days after each transaction and a final
consolidated return on or before April 15 of each year covering all stock transactions of the preceding
taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30)
days following each sale or other disposition.

(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not
derive income purely from compensation, shall file a return for the taxable year to include the income of
both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of
verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from
properly received from a living parent shall be included in the return of the parent, except (1) when the
donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from
donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made
by his duly authorized agent or representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or guardian assuming the responsibility
of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

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INCOME TAX REVIEWER
(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be
prima facie evidence for all purposes that the return was actually signed by him.

1. Individual taxpayers

SEC. 51. Individual Return. -


(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file
an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the
Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines.

(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and additional exemptions for
dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippine shall file an income tax return,
regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived
from sources within the Philippines, the income tax on which has been correctly withheld under the
provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently
from two or more employers at any time during the taxable year shall file an income tax return:
Provided, further, That an individual whose compensation income derived from sources within the
Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section
57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.

a. Required to file
b. Exempt fr. filing return

2. Filing of return by husband & wife/ consolidated but computing separately

Sec. 51. (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens,
who do not derive income purely from compensation, shall file a return for the taxable year to include
the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse
may file a separate return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.

Sec. 2.83 (40 (C) RR 2-98

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3. When and where to file regular/ special return/ annual adjusted return/ quarterly returns
Sec. 51. (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall
be filed with an authorized agent bank, Revenue District Officer, Collection Agent 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, or if there be no legal residence or place of business in the Philippines, with
the Office of the Commissioner.

(C) When to File. -


(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April
of each year covering income for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded through a local stock exchange as prescribed
under Section 24(c) shall file a return within thirty (30) days after each transaction and a final
consolidated return on or before April 15 of each year covering all stock transactions of the preceding
taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30)
days following each sale or other disposition.

SEC. 74. Declaration of Income Tax for Individuals. -


(A) In General. - Except as otherwise provided in this Section, every individual subject to income tax
under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it
constitutes the sole source of his income or in combination with salaries, wages and other fixed or
determinable income, shall make and file a declaration of his estimated income for the current taxable
year on or before April 15 of the same taxable year. In general, self-employment income consists of the
earnings derived by the individual from the practice of profession or conduct of trade or business
carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino
citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in
trade or business in the Philippines, are not required to render a declaration of estimated income tax.
The declaration shall contain such pertinent information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make
amendments of a declaration filed during the taxable year under the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income
as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall
be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the
second and third shall be paid on August 15 and November 15 of the current year, respectively. The
fourth installment shall be paid on or before April 15 of the following calendar year when the final
adjusted income tax return is due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term 'estimated tax' means the
amount which the individual declared as income tax in his final adjusted and annual income tax return
for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax.
If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall
file an amended declaration during any interval of installment payment dates.

Revenue Regulation 7-93 Re: Filing of quarterly return & payment of income tax quarterly by self-
employed taxpayers

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INCOME TAX REVIEWER
Sec. 1 Self-employment income refers to income from the practice of profession or conduct of trade or
business carried on as a sole proprietor or by general partnership of which he is a member, taxable
under SNITS.

Sec. 2 A return of summary declaration of gross income and deductions for each of the first 3 quarters of
the calendar year, and a final or adjustment return shall be filed by the individual.

Sec. 3 This is lieu of the filing of a declaration of estimated income for the current taxable year and the
payment of estimated tax under Sec. 67 NIRC.

The tax returns shall be filed on or before:

First quarterly return : May 15 of the current year


Second quarterly return : August 15 of the current year
Third quarterly return : Nov. 15 of the current year
Final return : April 15 of the following year

Sec. 5 To determine the taxable income to be reported in the quarterly returns, the gross income and
deductions shall be computed on a cumulative basis. The gross income to be reported are those subject
to tax under Sec. 21 (f) NIRC. The deduction shall be computed on a cumulative basis. The gross income
to be reported are those subject to tax under Sec. 21 (F) NIRC. The deductions that shall be allowed for
the first 3 quarters shall not include the amount for the personal and additional exemptions of the
individual. It is only in the last quarter when these amounts for exemptions can be claimed as
deduction.

Income tax due every quarter shall be computed in accordance with Sec. 21 (f) based on the cumulative
taxable income for the quarters. The amount if income tax to be paid shall be the balance of the income
tax after deducting therefrom the total quarterly tax previously paid and any taxes withheld.

Any excess of the total quarterly payment and taxes withheld over the income tax computed in the final
return shall at the option of the taxpayer, either be (1) issued a tax refund or tax credit certificate, or (2)
treated as a credit for the succeeding year.

Revenue Regulation 14-93 payment of taxes by checks & banks debit memo

Sec. 2 Payment of the internal revenue taxes amounting to P10,000 or more shall be made in check or
bank debit memos. However, payment for capital gains tax and creditable withholding tax by individuals
on sales or transfers of real property classified as capital assets as well as doc stamp tax shall be made
only by or through Managers or Cashiers check or BDM regardless of amount. Provided, that, in the
case of check payment, the taxpayer shall issue a separate check for each kind and nature of tax to be
paid. If the payment is through a BDM, the kind and nature of the tax to be paid should also be
separately identified by the bank and reflected in its reports.

Only checks specially issued and drawn for credit to BIR and collectible within the local clearing facilities
of the CB, the Phil. Clearing House Corp., other established clearing channels may be accepted as
payment for national internal revenue taxes. However, the following checks are not acceptable:

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INCOME TAX REVIEWER

a) Accommodation checks - issued/drawn by a party other than the taxpayer except the following:

1. Managers or cashiers checks.


2. Checks drawn against joint or multiple accounts for the payment purposes by anyone of them or
either himself or in behalf of other members thereof.
3. Checks issued by either of the spouses to pay the tax liability of anyone of them.
4. Checks issued by a parent for the tax liability of his/her child or vice-versa.
5. Checks drawn by a corp./partnership for the tax liability of its officers/partners only; and
6. Other special; arrangements duly approved by the BIR.

b) Out of town checks - drawn on banks outside the local area coverage of the CB? PCHC clearing house
c) Stale checks - dated more than 6 months prior to presentation
d) postdated checks
e) unsigned checks; and
f) checks with unauthorized erasure/alternations

Sec. 3 Checks, including managers or cashiers checks, shall be made payable to the BIR and
parenthetical reference to the payor and the kind of tax to be paid.

4. Income of minor children and disabled

Sec. 51. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived
from properly received from a living parent shall be included in the return of the parent, except (1)
when the donor's tax has been paid on such property, or (2) when the transfer of such property is
exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made
by his duly authorized agent or representative or by the guardian or other person charged with the care
of his person or property, the principal and his representative or guardian assuming the responsibility
of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

5. General professional partnership

SEC. 55. Returns of General Professional Partnerships. - Every general professional partnership shall
file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting
forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of the partners.

6. Fiduciary taxpayers: Estate and trust


7. Payment of tax
SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -
(A) Payment of Tax. -

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(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto
at the time the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding
agents, and in their absence, the captains thereof are required to file the return herein provided and pay
the tax due thereon before their departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure
until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer
other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first
installment shall be paid at the time the return is filed and the second installment, on or before July 15
following the close of the calendar year. If any installment is not paid on or before the date fixed for its
payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency
penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c),
24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is
filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail
himself of the benefit of exemption of capital gains under existing special laws, no such payments shall
be required : Provided, further, That in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains realized from the original transaction
shall immediately become due and payable, subject to the penalties prescribed under applicable
provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of
intent within six (6) months from the registration of the document transferring the real property, he
shall be entitled to a refund of such tax upon verification of his compliance with the requirements for
such exemption.
"In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this
Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such
payments.
No registration of any document transferring real property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized representative has certified that such transfer has been
reported, and the tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine
it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid
upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts
previously assessed (or collected without assessment) as a deficiency, and decreased by the amount
previously abated, credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the
taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated, credited returned or otherwise
repaid in respect of such tax.

Installment payment
special returns

B. Corporation.

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INCOME TAX REVIEWER
1. Filing quarterly returns/ final adjusted return

SEC. 52. Corporation Returns. -


(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not
engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return in accordance with the provisions of Chapter XII of
this Title. The return shall be filed by the president, vice-president or other principal officer, and shall
be sworn to by such officer and by the treasurer or assistant treasurer.
(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis
for filing its annual income tax return: Provided, That the corporation shall not change the accounting
period employed without prior approval from the Commissioner in accordance with the provisions of
Section 47 of this Code.
(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within
thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for
the liquidation of the whole or any part of its capital stock, including a corporation which has been
notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its
reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms
of such resolution or plan and such other information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure
a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to
the Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange.
- Every corporation deriving capital gains from the sale or exchange of shares of stock not traded
through a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c)
and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final
consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of
the fourth (4th) month following the close of the taxable year.

SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a
reasonable extension of time for filing returns of income (or final and adjustment returns in case of
corporations), subject to the provisions of Section 56 of this Code.
SEC. 54. Returns of Receivers, Trustees in Bankruptcy or Assignees. - In cases wherein receivers,
trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to
the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as
and for such corporation, in the same manner and form as such organization is hereinbefore required to
make returns, and any tax due on the income as returned by receivers, trustees or assignees shall be
assessed and collected in the same manner as if assessed directly against the organizations of whose
businesses or properties they have custody or control.

SEC. 75. - Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a
quarterly summary declaration of its gross income and deductions on a cumulative basis for the
preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be
levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid
or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close
of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

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INCOME TAX REVIEWER
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the
entire taxable income of that year, the corporation shall either:
(A)Pay the balance of tax still due; or
(B)Carry-over the excess credit; or
(C)Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment return may be carried over and credited against
the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years.
Once the option to carry-over and apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor.

SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -
(A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration
required in Section 75 and the final adjustment return required I Section 76 shall be filed with the
authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of
the city or municipality having jurisdiction over the location of the principal office of the corporation
filing the return or place where its main books of accounts and other data from which the return is
prepared are kept.
(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty
(60) days following the close of each of the first three (3) quarters of the taxable year. The final
adjustment return shall be filed on or before the fifteenth (15 th) day of April, or on or before the
fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.
(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the
final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at
the time the declaration or return is filed in a manner prescribed by the Commissioner.

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an
individual, with the approval of the Commissioner, changes the basis of computing net income from
fiscal year to calendar year, a separate final or adjustment return shall be made for the period between
the close of the last fiscal year for which return was made and the following December 31. If the change
is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period
between the close of the last calendar year for which return was made and the date designated as the
close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period between the close of the former fiscal year and the date
designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made
under Subsection (A) on account of a change in the accounting period, and in all other cases where a
separate final or adjustment return is required or permitted by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a
year, then the income shall be computed on the basis of the period for which separate final or
adjustment return is made.

2. When and where to file


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INCOME TAX REVIEWER

SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -
(A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration
required in Section 75 and the final adjustment return required I Section 76 shall be filed with the
authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of
the city or municipality having jurisdiction over the location of the principal office of the corporation
filing the return or place where its main books of accounts and other data from which the return is
prepared are kept.
(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty
(60) days following the close of each of the first three (3) quarters of the taxable year. The final
adjustment return shall be filed on or before the fifteenth (15 th) day of April, or on or before the
fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.
(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the
final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at
the time the declaration or return is filed in a manner prescribed by the Commissioner.

Com. v. TMX Sales


Facts: TMX filed its quarterly return in the first quarter of 1981 & paid the income tax due thereon.
However, in its Annual Income Tax filed for year ended Dec. 31, 1981, it declared a net loss. TMX is now
claiming a refund on the tax it paid during the first quarter of 1981. The CIR denied the same on the
ground that the claim is now already barred considering that two years have already elapsed between the
time of payment, May, 15, 1981 & the filing of the claim, March 14, 1984.
Held: the two year prescriptive period commenced fr. the date of filing the final annual return on Apr. 15,
1982, not fr. the filing on May 15, 1981. The audit is to be conducted yearly, it is the final adjusted
return where the figures of the gross receipts & deductions have been audited & adjusted that is truly
reflective of the results of the operations of a business enterprise. Thus, it is only when the adjustment
return covering the whole year is filed that the taxpayer would know whether a tax is still due or refund
can be claimed based on the adjusted & audited figures.
The filing of quarterly ITRs req. by Sec. 68 & payment of quarterly income tax should be considered mere
installments of the annual tax due. these payments w/c are computed based on the cumulative figures of
gross receipts & deductions in order to arrive at net taxable income shld. be treated as advances on
portions of annual income tax due, to be adjusted at the end of the fiscal year.

ACCRA Investment v. CA
Facts: Petitioner ACCRA is a domestic Corporation engaged in bus. of real estate invest. & management
consultancy. On Apr. 15, 1982, pet. filed w/ BIR annual corp. income tax return for cal. year ending Dec.
31, 1981 ( The end of fiscal year of the corp. ). The corp. declared a net loss of 2,957,142.00 & declared
all taxes w/held at source by w/holding agents in the total amount of 82, 751.01. The w/holding agents
remitted the w/held taxes to the BIR fr. Feb. to Dec. 1981. The corp. is now claiming a refund as it had no
tax liability against w/c to credit the amounts w/held ( the corp. declared a loss), as overpaid income
taxes. The CTA dismissed the pet. on the ground that the claim for refund had already prescribed .
Held: Claims for tax refunds, accdg. to Sec. 8 of Rev. Reg. 13-78 shall be given in due course only when it is
shown on the return that the income payment received was declared as part of the gross income & the
fact of w/holding is established by a copy of the statement. Furthermore, the return contemplated under
the REV. Reg. is not the quarterly ret. filed by corp. but the final adjusted return filed after the close of the
fiscal year. Obviously, the corp. cannot claim a tax refund UNLESS it files its return first so that it can be

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INCOME TAX REVIEWER
det. WON it is really entitled to the refund. Thus, the tow year period should commence, at the latest, fr.
the time of filing the final adj., return, w/c in CAB, on Apr. 15, 1981.

San Carlos Milling Co. v. Com.


Facts: SCM is a domestic corp. & paid its taxes for 1982. It an overpayment reflected as creditable income
tax in its annual final adj. return. In 1984, SCM informed the CIR of its intent to apply the total creditable
amount against the 1984 tax dues consistent w/ Sec. 86 coupled w/ a comforting alternative request for a
refund or tax credit. The CIR disallowed the automatic credit scheme & held that prior authority fr. the
CIR is nec. before a taxpayer could avail of the provisions of Sec. 86 of the Tax Code.
Held: The choice of a corporate taxpayer for an automatic tax credit does not ipso facto confer on it the
right to immediately avail of the same. prior approval by the CIR of the tax credit is nec. An opportunity
must be given to the internal rev. branch of the govt to investigate & confirm the veracity of the claims of
the taxpayer.

C. Withholding of INCOME tax

Rev. Reg. 2-98.

SEC. 57. Withholding of Tax at Source. -


(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5),
28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of
the Commissioner, require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the taxable year.
(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar
obligations of domestic or resident foreign corporations, contain a contract or provisions by which the
obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the
obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor
may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or
any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations,
whether the interest or other payments are payable annually or at shorter or longer periods, and
whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or
other payment thereon paid, within or without the Philippines, if the interest or other payment is
payable to a nonresident alien or to a citizen or resident of the Philippines.

SEC. 58. Returns and Payment of Taxes Withheld at Source. -


(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57
by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner
otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has

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INCOME TAX REVIEWER
his legal residence or principal place of business, or where the withholding agent is a corporation,
where the principal office is located.
The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the
government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-five (25) days
from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed
and the payment made not later than the last day of the month following the close of the quarter during
which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more
frequent intervals when necessary to protect the interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to
deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts
during the calendar quarter or year, a written statement showing the income or other payments made
by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth
(20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of
the following year in the case of individual payee for creditable withholding taxes. For final withholding
taxes, the statement should be given to the payee on or before January 31 of the succeeding year.
(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under
Section 57 shall submit to the Commissioner an annual information return containing the list of payees
and income payments, amount of taxes withheld from each payee and such other pertinent information
as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed
on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than
March 1 of the year following the year for which the annual report is being submitted. This return, if
made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section
68 of this Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension
of time to furnish and submit the return required in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source
under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so
withheld over the tax due on his return shall be refunded to him subject to the provisions of Section
204; if the income tax collected at source is less than the tax due on his return, the difference shall be
paid in accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are
hereby considered trust funds and shall be maintained in a separate account and not commingled with
any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any,
has been paid: Provided, however, That the information as may be required by rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be
annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of
Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred recognition of income in
accordance with Section 40, the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated
by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of
Title of the real property involved: Provided, finally, That any violation of this provision by the Register

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INCOME TAX REVIEWER
of Deeds shall be subject to the penalties imposed under Section 269 of this Code.

SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title
upon gains, profits, and income not falling under the foregoing and not returned and paid by virtue of
the foregoing or as otherwise provided by law shall be assessed by personal return under rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
The intent and purpose of the Title is that all gains, profits and income of a taxable class, as defined in
this Title, shall be charged and assessed with the corresponding tax prescribed by this Title, and said tax
shall be paid by the owners of such gains, profits and income, or the proper person having the receipt,
custody, control or disposal of the same. For purposes of this Title, ownership of such gains, profits and
income or liability to pay the tax shall be determined as of the year for which a return is required to be
rendered.

1. Items of gross income/ payments placed under the w/holding system


SEC. 57. Withholding of Tax at Source. - (A) Withholding of Final Tax on Certain Incomes. - Subject to
rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or
prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D),
25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)
(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
Code on specified items of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 58 of this Code.

Sec. 2.57.1 RR 2098

2. Items exempt from w/holding tax


SEC. 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5),
28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of
the Commissioner, require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the taxable year.
(B) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar
obligations of domestic or resident foreign corporations, contain a contract or provisions by which the
obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the
obligee for any portion of the tax or to pay the interest without deduction for any tax which the
obligor may be required or permitted to pay thereon or to retain therefrom under any law of the
Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other
obligations, whether the interest or other payments are payable annually or at shorter or longer
periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and

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INCOME TAX REVIEWER
the interest or other payment thereon paid, within or without the Philippines, if the interest or other
payment is payable to a nonresident alien or to a citizen or resident of the Philippines.

SEC. 78. Definitions. - As used in this Chapter:


(A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for
services performed by an employee for his employer, including the cash value of all remuneration paid in
any medium other than cash, except that such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an international
organization.
If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or
more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the
remuneration paid by such employer to such employee for such period shall be deemed to be wages;
but if the remuneration paid by an employer to an employee for services performed during more than
one -half (1/2) of any such payroll period does not constitute wages, then none of the remuneration
paid by such employer to such employee for such period shall be deemed to be wages.

SEC. 79. Income Tax Collected at Source.-


(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold
upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no
withholding of a tax shall be required where the total compensation income of an individual does not
exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is
higher.

3. Finality of the tax on compensation income


Sec. 79. (H) Year-end Adjustment. - On or before the end of the calendar year but prior to the payment
of the compensation for the last payroll period, the employer shall determine the tax due from each
employee on taxable compensation income for the entire taxable year in accordance with Section 24(A).
The difference between the tax due from the employee for the entire year and the sum of taxes withheld
from January to November shall either be withheld from his salary in December of the current calendar
year or refunded to the employee not later than January 25 of the succeeding year.

4. Final tax v. creditable w/holding tax

Sec. 2.57 RR 2-98

5. Persons required to deduct and w/hold

Sec. 2.57.3 RR 2-98.

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Prayer before Examination

My Jesus, who listened so attentively to the doctors in the temple, humbly asked them questions, &
aroused their admiration by prudent answers, grant me the light to seek out & remember important
matters of this subject I am studying for Your greater honor & glory.

O God, I ask Your help, as I approach the coming examination with some anxiety, that I may be able to
pass the test successfully, if it is Your will, O Lord.

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INCOME TAX REVIEWER

Enlighten my mind, O Heavenly Dispenser of Grace, God the Holy Spirit, that I may understand rightly
the questions to be answered by me, that I may see clearly the solution of problems put before me; & that
I may avoid the pitfalls of superficial, hasty & wrong answers; that I may keep my cool in the face of trying
circumstances, & thus avoid confusion w/c may disturb my thinking power & obfuscate my memory.

Then, O Lord, guide also my teachers that they may form their questions clearly & intelligently that I
may be able to answer them in such a way as it is expected of me. And after the test, O Lord, Eternal
Wisdom, illuminate the mind of the correctors & open their eyes that they may be able to read my
handwriting & understand my answers & evaluate them fairly & justly.

O loving Mother, who are called by your children Seat of Wisdom, assist me in my examination that I
may pass them. If it is the will of your Divine Son, the Incarnate Wisdom, and all you my dear patron
saints, be with me during these crucial moments of my examination which mean so much to me in
reaching my goal.

Lord, we pray to You, let our doings be prompted by Your inspiration & furthered by Your help, so that
every prayer & work of ours may begin from You & through You be accomplished. Amen.

Based on the outline of Prof. J. Ricalde and as UPDATED BY ELLA C.H. DEL ROSARIO, THE Obiter
Master
With input from: Ricky Sandoval, Dennis Quintero, Dinah dela Pena, Jig Fado, Lourie Garcia,
Marisa Mauricio, Mamay Quitain, Chip Perdon, Sharon Rivera, Abbie Santiago, Fritzie Tangkia,
& Marc Aseoche .

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