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A.

Income Tax Systems


a. Global
global system, all income received by the taxpayer are grouped together, without any
distinction as to the type or nature of the income, and after deducting therefrom
expenses and other allowable deductions, are subjected to tax at a fixed rate.

b. Schedular
scheduler system, the various types or items of income (compensation, business or
professional income) are classified accordingly and are accorded different tax
treatments, in accordance with schedules characterized by graduated tax rates. Since
these types of income are treated separately, the allowable deductions shall likewise
vary for each type of income.

c. Semi-schedular or semi-global
A system where the compensation, business or professional income, capital gain and
passive income not subject to final tax, and other income are added together to arrive
at the gross income, and after deducting the sum of allowable deductions from business
or professional income, capital gain and passive income not subject to final tax, and
other income, in the case of corporations, as well as personal and additional
exemptions, in the case of individual taxpayers, the taxable income is subjected to one
set of graduated tax rates; method of taxation under the law.

The schedular system is followed. Under Sec. 24 to 26 of the NIRC, the income of an individual taxpayer that
is subject to tax may be classified into compensation income, business income, professional income, passive
income, capital income derived from the sale of shares of stock, or capital gain derived from the sale of real
property. Therefore, different income classification would subject it to different tax treatment with
different tax rates.

Global system of taxation. Under Sec. 27 and 28 of the NIRC, the rules are uniform as far as domestic
corporations are concerned subject to certain exceptions. In case of resident and non resident foreign
corporations the rules applied are also uniform.

B. Characteristics and Features of the Philippine Income Tax System


1. It has adopted a comprehensive tax situs by using the nationality, residence, and source rules.
2. The individual income tax system is mainly progressive in nature in that it provides graduated
rates of income tax.
Note: Corporations in general are taxed at a flat rate of 30% of net income.
3. It has retained a more schedular than global features with respect to individual taxpayers but
has maintained a more global treatment on corporations.
4. Direct Tax tax burden is borne by the income tax recipient upon whom the tax is imposed.
(1996 Bar Question)

C. Definition of Income
The New Standard Dictionary, edition of 1915, defines an income as "the amount of
money coming to a person or corporation within a specified time whether as payment
or corporation within a specified time whether as payment for services, interest, or
profit from investment."
The New Standard Dictionary, edition of 1915, defines an income as "the amount of
money coming to a person or corporation within a specified time whether as payment
or corporation within a specified time whether as payment for services, interest, or
profit from investment."
Webster's International Dictionary defines an income as "the receipt, salary; especially,
the annual receipts of a private person or a corporation from property."
Bouvier, in his law dictionary, says that an "income" in the federal constitution and
income tax act, is used in its common or ordinary meaning and not in its technical, or
economic sense. (146 Northwestern Reporter, 812)
Mr. Black, in his law dictionary, says "An income is the return in money from one's
business, labor, or capital invested; gains, profit or private revenue." "An income tax is a
tax on the yearly profits arising from property , professions, trades, and offices."
The Supreme Court of the United States, in the case o Gray vs. Darlington (82 U.S., 653),
said in speaking of income that mere advance in value in no sense constitutes the
"income" specified in the revenue law as "income" of the owner for the year in which
the sale of the property was made. Such advance constitutes and can be treated merely
as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun, 105 Pa.,
414.)

Fisher vs. Trinidad GR 17518


(Definition of Income Tax, Realization Test of Determining Income)
Fisher was a stockholder in Phil-Am Drug Company. The company declared a stock dividend with
Fishers share of the dividend amounting to P24,800. Collector of Internal Revenue Trinidad
demanded P889 income tax on said dividend, which Fisher protested against but voluntarily
paid.
Issue: WON stock dividends can be classified as income and taxable under Act No. 2833
providing for tax upon income?
Held: No, the receipt of stock dividends merely represents an increase in value of the assets of a
corporation. The court defines stock dividends as increase in capital of corps, firms,
partnerships, etc for a particular period. They represent the increase in the proportional share
of each stockholder in the companys capital. It is not a distribution of the corps profits to the
stockholder. It only increases the stockholders SOURCE of income (capital), but does not
increase income itself.
Issue: Definition of income tax
Held: Act No. 2833 taxed any distribution by a corporation out of its earnings or profits. From
the various definitions of income tax cited, an income tax is a tax on the yearly profits arising
from property, salary, private revenue, capital invested, and all other sources of income. What is
taxed is the profit, not the source.
Issue: When is income realized (Test of Realization)
Held: Stock dividend in this case is not taxable for income because the stockholder has received
nothing out of the company's assets for his separate use and benefit. Instead, his original
investment along with whatever gains which resulted from the use of his and other
stockholders money remains property of the company. The fact that it is not yet his means
the capital is still subject to business risks that can wipe out his entire investment. All he has
received is a stock certificate indicating the increase in his capital in the company.
Thus we can say that income has been realized when there has been a separation of the interest
of the stockholder from the general capital of the corporation. This separation of interest
happens when the company declares a cash dividend on the shares of shareholders.

a. When is income taxable


i. Realization Test
Unless income is deemed realized, then there is no taxable income. Revenue is
generally recognized when both conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place. (Manila Mandarin Hotels, Inc. v. CIR)

1. Sec 38 of RR 2-40 Feb 10, 1940

SECTION 38. Bases of computation. Approved standard methods of accounting will be ordinarily
regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly
reflecting income unless all items of gross income and all deductions are treated with reasonable
consistency. All items of gross income shall be included in the gross income for the taxable year in which
they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect
income such amounts are to be properly accounted for as of a different period. For instance, in any case
in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly
reflect income except an accrual method. A taxpayer is deemed to have received items of gross income
which have been credited to or set apart for him without restriction. On the other hand, appreciation in
value of property is not even an accrual of income to a taxpayer prior to the realization of such
appreciation through sale or conversion of the property. (For methods of accounting and determination
of accounting period, see Sections 166 to 169 of these regulations.)

Manila Mandarin Hotels vs. CIR

Facts:

Petitioner is a domestic corporation engaged in business as a hotel and restaurant operator. It is a VAT
registered enterprise who appealed the decision of the CIR denying the petitioner's protest on the 1988
deficiency assessment issued for value-added tax percentage tax in the total sum of P12,211,987.53. It is
petitioner's analysis that the deficiency percentage tax assessment arose due to the imposition of the
tax on deposits made by its clients for the use of the hotel facilities. Petitioner contends that these
deposits, if not applied against hotel bills is not subject to percentage tax because these deposits
partake of the nature of a security deposit which cannot be classified as income.

Issue:

Whether or not the petitioner is liable of percentage tax

Held:

No.

This Court disagrees with the respondent in the assessment of the deficiency percentage tax, primarily
because the deposits made by petitioner's hotel clients should not be treated as part of its gross income.
Under the realization principle, revenue is generally recognized when both of the following conditions
are met: (a) the earning process is complete or virtually complete, and (b) an exchange has taken place.
This principle requires that revenue must be earned before it is recorded. Thus, the amounts received in
advance are not treated as revenue of the period in which they are received but as revenue of the
future period or periods in which they are earned. These amounts are carried as unearned revenue, that
is, liabilities to transfer goods or render services in the future until the earning process is complete.
(Compilation of Statements of Financial Accounting Standards No. 1-22, pp. 41-42). As explained by the
witness Ms. Fernando, its collection is in the nature of a security deposit to ensure that the other party
will perform his end of the contract. It is only upon the use of the reserved facilities or the default of the
reserving guest to cancel the reservation on time that the deposit is clearly convertible to revenues.
Since the deposits are payment for future services it cannot be treated as part of its gross income until
the earning process is complete.

From the above discussion, We find that the deficiency percentage tax assessment is erroneous and
should be therefore be cancelled.

2. Claim of Right Doctrine


Claim of Right Doctrine A taxable gain is conditioned upon the
presence of a claim of right to the alleged gain and the absence of a
definite unconditional obligation to return or repay.

BIR Ruling No. C-168 519-08, Dec 12, 2008


(Claim of Right Doctrine)

Facts:

Luzon Hydro Corporation ("LHC") sought confirmation to the CIR of their opinion that the return by LHC
of liquidated damages to the contractor of its power station as a result of a compromise settlement is
deductible from gross income since the said amount was previously reported as taxable income when
received and that its return is not subject to any withholding tax.

It is represented that LHC entered into an agreement ("Turnkey Contract") with Transfield Philippines,
Inc. (the "Contractor") for the design, construction, installation, completion, testing and commissioning
of a power station (the "Project") on a turnkey basis. The target completion date of the project was set
on June 1, 2000 or such later date as may be agreed upon by the parties. Under the Turnkey Contract, if
the Contractor fails to comply with the target completion date, LHC may consider it in breach, in which
case the Contractor shall be liable to LHC for liquidated damages payable without need of demand. The
liquidated damages may be collected by drawing on the irrevocable and confirmed letters of credit
("LC") amounting to US$17.98 million that the Contractor put up as security for the performance of its
obligations pursuant to the Turnkey Contract.

It is also represented that due to the delay in the completion of the Project, LHC considered the
Contractor liable for breach of contract. Thus, LHC drew against the LC the amount of US$13.95 million
(P667,674,810) and US$4.03 million (P197,515,962) in 2000 and 2001, respectively. LHC reported the
amount of liquidated damages received as part of its taxable income in its income tax returns ("ITR") for
the years 2000 and 2001, respectively.

It is represented that before the issues could be finally settled, LHC and the Contractor decided in 2008
to enter into an out-of-court settlement (the "Settlement") to avoid a drawn out legal battle and avoid
further litigation expenses. As part of the Settlement, LHC agreed to return part of the liquidated
damages amounting to US$14 million.

Issue:

WON the return or repayment by LHC in 2008 of the liquidated damages in the amount of US$14.0
million, which was part of the sum previously reported as gross income of LHC in the years 2000 and
2001, is an allowable deduction from LHC's gross income for tax purposes in the year 2008, the year of
return or repayment.

Held:

The payment by LHC of the sum of US$14.0 million to the Contractor, which sum LHC previously
reported as part of its taxable income, is an allowable deduction from the gross income of LHC in 2008,
whether such payment is viewed as a return of previously reported income or as a settlement payment
under an out-of-court compromise.

Generally, the tax treatment of the return of previously-recognized income is dependent on the tax
treatment of the income previously reported. If the taxpayer received an income and reported the same
as part of taxable gross income, but later on was made to return the said income, the taxpayer is
allowed a deduction for the amount returned against the gross income. The deduction must be made at
the time of the return. This treatment follows the rationale behind allowing sales return as a deduction
from gross sales not only for income tax but also for value-added tax ("VAT") purposes.
This ruling followed the doctrine laid down in North American Oil Consolidated v. Burnet, 5(5) where the
US Supreme Court enunciated the so-called "claim-of-right" doctrine. This doctrine provides that if a
taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has
received income even though one may claim he is not entitled to the money. Should it later appear that
the taxpayer was not entitled to keep the money, the taxpayer would be entitled to a deduction in the
year of repayment. Moreover, even if the return of US$14.0 million is viewed as an out-of-court
settlement rather than as a return of liquidated damages, it is still allowed as a deduction. A judgment
based on a compromise agreement is a judgment on the merits. 6(6) It is similar to a payment pursuant
to a judgment and has the effect and authority of res judicata. 7(7) Under Section 76 of the Income Tax
Regulations,"judgments or other binding judicial adjudication, on account of damages for patent
infringement, personal injuries, or other cause are deductible from gross income when the claim is so
adjudicated or paid, unless taken under other methods or accounting which clearly reflect the correct
deduction, less any amount of such damages as may have been compensated for by insurance or
otherwise. . . ."

Furthermore, in BIR Ruling No. DA-400-2004 dated July 22, 2004, the BIR held that a taxpayer may claim
as deductions from its gross income payments made under a court-approved compromise agreement
for the full and final settlement of the Arbitration Case and the Court Case which the parties filed against
each other. Thus, this Office held that: "Section 76 of Revenue Regulations (Rev. Regs.) No. 2, otherwise
known as the "Income Tax Regulations", provides that "judgments or other binding judicial adjudication,
on account of damages for patent infringement, personal injuries, or other cause are deductible from
gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting
which clearly reflect the correct deduction, less any amount of such damages as may have been
compensated for by insurance or otherwise. . . ."

Moreover, pursuant to Section 171 of same Rev. Regs. No. 2 "the deductions and credits must be taken
for the taxable year in which "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."

In LHC's case, the litigation which gave rise to the payment of US$14.0 million arose from the delay in
the construction of the Project, which is central to the business operations of LHC. Hence, there should
be no question that the settlement amount arose from LHC's business activities.

Accordingly, whether viewed as a return of previously reported income or as a settlement payment


under a compromise agreement, the US$14.0 million is deductible from the taxable gross income of LHC
in 2008 for income tax purposes.

Meralco Vs CIR, CTA Case 7242 December

Facts:

The case is an appeal from respondent CIR's inaction/denial on MERALCO's claim for a tax refund or
credit of excess income tax payments for the taxable years 1994-1998 and 2000 in the total amount of
P5,796,342,792.71. The original claim for a tax refund or credit of excess income tax payments for the
taxable years 1994-1998 and 2000-2001 amounted to P7,107,534,282.00. Thereafter, respondent CIR
partly granted MERALCO's claim for the taxable year 2001 to the extent of P894,473,932.58. Hence, the
original claim in the sum of P7,107,534,282.00 less MERALCO's claim for the taxable year 2001 in the
amount of P1,071,546,018.00 is equal to the original amended claim for a tax refund or credit of excess
income tax payments for the taxable years 1994-1998 and 2000 amounted to P6,035,988,264.00.

MERALCO's claim for a tax refund or credit is due to the alleged overpayment of income taxes arising
from the Decision of the Supreme Court in the consolidated cases of Republic of the Philippines, et al.
vs. Manila Electric Company, G.R. No. 141314 and Lawyers Against Monopoly, etc. vs. Manila Electric
Company, G.R. No. 141369, which became final and executory on May 5, 2003, mandating MERALCO to
refund the amount equivalent to P0.167 per kilowatt-hour of over billed electric charges to its
customers for their electric consumption made from February 1994 up to December 2003.

On November 27, 2003, MERALCO filed a claim for tax refund or credit of excess income tax payments
with respondent CIR. ECISAD On May 4, 2005, due to inaction, MERALCO appealed to this Court and
filed a "Petition for Review (Ad Cautelam)" and principally anchored its claim for a tax refund or credit of
excess income tax payments under the principle of solutio indebiti within the prescriptive period of six
(6) years, pursuant to Art. 1145 of the New Civil Code or within two (2) years, as provided in Section 229
of the 1997 Tax Code.

CIR partially granted MERALCO's claim for a tax refund or credit for the taxable year 2001 to the extent
of P894,473,932.58 but denied the claim with respect to the taxable years 1994-1998 and 2000 due to
prescription.

Issue:

Held:

Meralco vs. CIR CTA Case 7242 April

3. All events test


The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and
the amount of such income or liability be determined with reasonable
accuracy. However, the test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not
have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount
(CIR vs Isabela Cultural Corp, GR 172231)

D. Individual Income Tax


a. Kinds of Individuals

1. Resident Citizen (RC) Citizens of the Philippines who are residing therein.

2. Non-resident Citizen (NRC)

a. A citizen of the Philippines who establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside therein;

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

c. 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;

d. A citizen who has been previously considered as NRC and who arrives in the Philippines at
any time during 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;

e. The taxpayer shall submit proof to the CIR 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 purposes of this section. (Sec. 22 [E], NIRC)

3. Resident Alien (RA) An individual whose residence is within the Philippines but who is
not a citizen thereof. (Sec. 22 [F], NIRC)

Note: He is one who is actually present in the Philippines and not a mere transient or
sojourner. Residence does not mean mere physical presence, an alien is considered a
resident or non-resident depending on his intention with regard to the length and nature of
his stay.
4. Non-resident Alien (NRA) an individual whose residence is not within the Philippines
and who is not a citizen thereof. (Sec. 22 [G], NIRC)

a. Resident citizens (RC);


b. Non-resident citizens (NRC) including OCW
c. Resident alien (RA)
d. Non-resident alien engaged in trade or business (NRA- ETB)

i. Resident Citizens
Citizens of the Philippines who are residing therein.

ii. Resident Aliens


An individual whose residence is within the Philippines but who is not a citizen
thereof. (Sec. 22 [F], NIRC)
1. Section 5 of RR No 2-40
SECTION 5. Definition. A "non-resident alien individual" means an
individual
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient
or sojourner is a resident of the Philippines for purposes of the income
tax. Whether he is a transient or not is determined by his intentions
with regard to the length and nature of his stay. A mere floating
intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient. If he lives in the Philippines and
has no definite intention as to his stay, he is a resident. One who comes
to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient. But if his purpose is of such a
nature that an extended stay may be necessary for its accomplishment,
and to that end the alien makes his home temporarily in the Philippines,
he becomes a resident, though it may be his intention at all times to
return to his domicile abroad when the purpose for which he came has
been consummated or
abandoned.

iii. Non-Resident Citizens

1. Overseas Contract Workers

a. Sec 23 NIRC
(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;

b. Sec 2&3 (A) RR no. 1-11 Feb 2011

Sec. 2. Definition of an OCW.


OCW refer to Filipino Citizens employed in foreign countries,
commonly referred to as OFWs, who are physically present in a
foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer aborad and is
not borne by any entity or person in the Philippines. To be
considered as an OCW or OFW, they must be duly registered as
such with the POEA with a valid Overseas Employment
Certificate (OEC).
Seafarers or seamen are Filipino Citizens who receive
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international
trade. To be considered as an OCW or OFW they must be duly
registered with the POEA with a valid OEC with a valid Seafarers
Identification Record Book or Seamans Book issued by the
MARINA.
Sec 3. OCW are taxable on income from sources within.
Regular income tax, 5-32% of taxable income

2. Meaning of most of the time

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. [Section 22(E)(3)]

a. BIR Ruling 033-00 dated September 5, 2000


Thus, for purposes of exemption from income tax, a citizen
must be deriving foreign-sources income for being a non-
resident citizen or for being an overseas contract worker (OCW).
All your employees whose services are rendered abroad for
being seconded or assigned overseas for at least 183 days may
fall under the first category and are therefore exempt from
payment of Philippine income tax. In this connection, the
phrase "most of the time" which is used in determining when a
citizen's physical presence abroad will qualify him as non-
resident, shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year.
The same exemption applies to an overseas contract worker but
as such worker, the time spent abroad is not material for tax
exemption purposes. All that is required is for the worker's
employment contract to pass through and be registered with
the Philippine Overseas Employment Agency (POEA).

iv. Non-resident alien engaged in trade or business

1. Sec 25(A)(1) NIRC


Section 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. Sec. 8 of RR No. 2-40


SECTION 8. Taxation of non-resident aliens; classification.
Non-resident alien individuals are divided into two classes: (1) Those engaged in trade
or business within the Philippines, and (2) those not engaged in trade or business
within the Philippines. Non-resident aliens falling within the first class are subject to
the graduated rates established in Section 21 with respect to their net income from
sources within the Philippines. Non-resident aliens falling within the second class are
subject to a flat rate of 20 per cent on their total income from sources within the
Philippines, if such total income does not exceed P23,800, otherwise, the graduated
rates established in Section 21 will apply to the total income if it exceeds P23,800.
(Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the
performance of personal services within the Philippines. Whether a non-resident alien
has an "office or place of business," however, implies a place for the regular
transaction of business and does not include a place where casual or incidental
transactions might be, or are, effected. Neither the beneficiary nor the grantor of a
trust, whether revocable or irrevocable, is deemed to be engaged in trade or business
in the Philippines or to have an office or place of business therein, merely because the
trustee is engaged in trade or business in the Philippines or has an office or place of
business therein. (Test of "office or place of business" was deleted by R.A. 2343.)

v. Non-resident alien not engaged in trade or business

1. Sec. 25(B) NIRC

Section 25. Tax on Nonresident Alien Individual.

(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.

vi. Others

1. Minimum Wage Earners

a. Sec. 22 (HH)
The term minimum wage earner shall refer to a worker in the
private sector paid the statutory minimum wage, or to an
employee in the public sector with compensation income of not
more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned

b. Sec 1. RR 10-08 July 2008


SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as
follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
(A) Compensation Income Defined. . . .
xxx xxx xxx
(3) Facilities and privileges of relatively small value. Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on purchases),
otherwise known as "de minimis benefits," furnished or offered by an employer to his
employees, are not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities or privileges are of relatively small value and are offered or
furnished by the employer merely as means of promoting the health, goodwill, contentment, or
efficiency of his employees. ADSIaT
The following shall be considered as "de minimis" benefits not subject to income tax, hence, not
subject to withholding tax on compensation income of both managerial and rank and file
employees:
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;
(b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,500.00;
(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;
(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;
(f) Laundry allowance not exceeding P300.00 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000.00 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances,
e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the
basic minimum wage.
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the P30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the 'de minimis' benefits
over their respective ceilings prescribed by these regulations shall be considered as part of
'other benefits' and the employee receiving it will be subject to tax only on the excess over the
P30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW. DcAEIS
Any amount given by the employer as benefits to its employees, whether classified as "de
minimis" benefits or fringe benefits, shall constitute as deductible expense upon such employer.
Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for
payment to the Bureau of Internal Revenue. ScaHDT
xxx xxx xxx
(B) Exemptions from Withholding Tax on Compensation. The following income payments
are exempted from the requirements of withholding tax on compensation:
xxx xxx xxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned. aHCSTD
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall
determine the wage rates in the different regions based on established criteria and shall be the
basis of exemption from income tax for this purpose. HCaEAT
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard
pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt form income tax, and consequently, from withholding
tax. ESIcaC
MWEs receiving other income, such as income from the conduct of trade, business, or practice
of profession, except income subject to final tax, in addition to compensation income are not
exempted from income tax on their entire income earned during the taxable year. This rule,
notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard
pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the employer to
MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in
distressed or isolated stations and camps, which expose them to great danger of contagion or
peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed
subject to income tax and consequently, to withholding tax.
In case of hazardous employment, the employer shall attach to the monthly Remittance Return
of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June,
September and December a copy of the list submitted to the nearest DOLE Regional/Provincial
Offices Operations Division/Unit showing the names of MWEs who received the hazard pay,
period of employment, amount of hazard pay per month; and justification for payment of
hazard pay as certified by said DOLE/allied agency that the hazard pay is justifiable. IaHAcT
The NWPC shall officially submit a Matrix of Wage Order by region (Annex "A"), and any changes
thereto, within ten (10) days after its effectivity to the Assistant Commissioner, Collection
Service, for circularization in the BIR. aSTHDc
Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance of
expense, i.e. compensation and benefits account, on the part of the employer. The offenders
may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation income of
not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination of the
SMW in the public sector shall likewise adopt the same procedures and consideration as those
of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above exemption.
Provided, however, that a public sector employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from income tax and,
consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or practice
of profession, except income subject to final tax, in addition to compensation income are not
exempted from income tax on their entire income earned during the taxable year. This rule,
notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard
pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the employer to
MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in
distressed or isolated stations and camps, which expose them to great danger of contagion or
peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed
subject to income tax and consequently to withholding tax.
In case of hazardous employment, the employer shall attach to the Monthly Remittance Return
of Withholding Tax on Compensation (BIR Form No. 1601C) for return periods March, June,
September and December a copy of Department of Budget and Management (DBM) circular/s,
or equivalent, as to who are allowed to receive hazard pay."

2. Estates and trusts taxed as individuals (Sec 60 to 66 NIRC)


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

Section 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.
Section 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.

Section 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.

Section 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.

Section 65. Fiduciary Returns. - Guardians, trustees, executors,


administrators, receivers, conservators and all persons or corporations,
acting in any fiduciary capacity, shall render, in duplicate, a return of the
income of the person, trust or estate for whom or which they act, and
be subject to all the provisions of this Title, which apply to individuals in
case such person, estate or trust has a gross income of Twenty
thousand pesos (P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall take oath that he
has sufficient knowledge of the affairs of such person, trust or estate to
enable him to make such return and that the same is, to the best of his
knowledge and belief, true and correct, and be subject to all the
provisions of this Title which apply to individuals: Provided, That a
return made by or for one or two or more joint fiduciaries filed in the
province where such fiduciaries reside; under such rules and regulations
as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the
requirements of this Section.

Section 66. Fiduciaries Indemnified Against Claims for Taxes Paid. -


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

3. Aliens employed by Regional Area Headquarters and Regional


Operating Headquarters of Multinational Companies
a. Sec. 25 (C) NIRC

Section 25. Tax on Nonresident Alien Individual.

(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.

b. Same tax treatment to Filipinos occupying Technical and


Managerial Position
i. Sec. 2.57.1 (D) RR 2-98 April 1998

SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following forms of income
shall be subject to final withholding tax at the rates herein specified;
(D) Income Derived by Alien Individuals Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies.

A final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent
from the gross income received by every alien individual occupying managerial and technical positions in
regional or area headquarters and regional operating headquarters and representative offices
established in the Philippines by multinational companies as salaries, wages, annuities, compensation,
remuneration, and other emoluments, such as honoraria and allowances, except income which is
subject to the fringe benefits tax, from such regional or area headquarters and regional operating
headquarters. The same tax treatment shall apply to Filipinos employed and occupying the same as
those of alien employed by these multinational companies. The term "multinational company" means a
foreign firm or entity engaged in international trade with its affiliates or subsidiaries or branch offices in
the Asia Pacific Region and other foreign markets.

ii. Sec. 1 to 4 of RR 11-2010 October 2010


4. Aliens employed by Offshore Banking Units
a. Sec 25(D) NIRC

(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 offshore
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 position as those of
aliens employed by these offshore banking units.

b. Same Tax Treatment to Filipinos


Provided, however, That the same tax treatment shall apply to
Filipinos employed and occupying the same position as those of
aliens employed by these offshore banking units.

b. General Principles of Income Taxation


i. Sec. 23. NIRC
Except when otherwise provided in the NIRC:
1. A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines;
2. A non-resident citizen is only taxable on income derived from sources within
the Philippines
3. An individual citizen of the Philippines who is working and deriving income
from abroad as an OFW 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 OFW
4. An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines (Sec. 23, NIRC)

c. Kinds of Income
i. Income Subject to ordinary income tax
1. Business/Profession Income
Business Income gains or profits derived from rendering services,
selling merchandise, manufacturing products, farming and long-term
contracts.
Professional Income fees derived from engaging in an endeavor
requiring special training as professional as a means of livelihood, which
includes, but not limited to, the fees of CPAs, lawyers, engineers and the
like.
- Income earned from the practice of profession provided there is no
employer-employee relationship between him and his clients.
2. Compensation Income
- income derived from rendering of services under an employer-
employee relationship
- In general, the term "compensation" means all remuneration for
services performed by an employee for his employer under an
employer-employee relationship, unless specifically excluded by the
Code. Included only when the taxpayer is subject to Net Income Tax.

ii. Income subject to final tax


1. Sec. 2.57(A) of RR 2-98
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the
amount of income tax withheld by the withholding agent is constituted
as a full and final payment of the income tax due from the payee on the
said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the
tax or in case of under withholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an
income tax return for the particular income.
The finality of the withholding tax is limited only to the payee's income
tax liability on the particular income. It does not extend to the payee's
other tax liability on said income, such as when the said income is
further subject to a percentage tax.
For example, if a bank receives income subject to final withholding tax,
the same shall be subject to a percentage tax.

2. Sec 24 and 25 NIRC


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 P30,000 P500+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.. 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 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 (5th) year, a final tax shall be imposed on the entire income
and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:

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

Three (3) years to less than (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 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 (5th) year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:

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

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%.

(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.

d. Personal Exemptions
i. Section 35 of the NIRC
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 legallyseparated


with no qualified dependents P20,000For Head of Family P25,000For 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 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.

ii. Senior Citizens


1. Sec. 2(a), 2(c), and 11 of RR 7-10 July 2010
e. Premium payments on health and/or hospitalization insurance
i. Sec. 34(M) NIRC
(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.

E. Corporate Income Tax


a. Definition Sec. 22(B) NIRC
b. Partnerships taxed as a corporation
i. Joint Ventures engaged in construction projects
1. Sec. 2 and 3 RR 10-12 dated June 2012

CIR v. Batangas L-9692 January 6, 1958

Ona vs CIR L-19342 May 1972

Obillos vs. CIR L-68118 October 1985

Pascual vs. CIR 78133 October 1988

AFISCO Insurance vs. CA, 112675 January 1999

c. Kinds of Corporations
i. Domestic
ii. Resident Foreign
iii. Non-Resident Foreign
Marubeni vs CIR, 76573 September 1989
iv. Others
1. Private Educational Institutions and Non-Profit Hospitals
a. Sec 27(B) NIRC
b. Sec. 34(A)(2) NIRC

CIR vs St Lukes 195909 and 195960, Sept 2012

2. International Carrier
a. Sec. 28(A)(3) NIRC
b. Sec 2 to 5 and 8 of rr 15-02 May 30, 2002
c. Sec. 1 of RA 10378 March 2013
i. Sec. 1 to 4 of RR 15-13 Sept 2013

CIR vs. British Overseas Airways L-65773-74 April 1987

South African Airways vs CIR 180356 Feb 16, 2010

3. Foreign Currency Deposit Units


a. Sec. 27(D)(3) NIRC
b. Sec. 28 (A)(7)(b) NIRC
c. Sec. 5 RR 14-12 Nov 2012
4. Offshore banking units
a. Sec. 28(A)(4) NIRC
b. Sec. 6 RR 14-12 Nov 2012
5. Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies
a. Sec 22 (DD) and 22 (EE) NIRC
6. Other non-resident Foreign Corporations
a. Secs 28(B)(2) to 4
d. Exempt Corporations
i. GOCCs
1. Sec 27(C) NIRC
2. RA 10026 March 2010
ii. Section 30 NIRC
1. DOF Order 137-87 Dec 1987
2. DOF Order No. 149-95 Nov. 1995

CIR v VG SINCO Educ Corp L-9276 October 1956


CIR vs. St. Lukes Medical Center 195909 and 195 960 Sept 2012
Ateneo vs. CIR CTA 7246 and 7293 March 2010
DLSU vs CIR Case 7303 January 2010
iii. Sec 1, 2, 6, and 9-12 of RMO 20-13 July 22, 2013

iv. Inurement Prohibition

1. RMC 51-14 June 2014


v. General Professional Partnerships
1. Sec. 22 (B) NIRC
2. Sec 26 NIRC
3. RMC 3-12 Jan 2012

F. Income Subject to Final Tax Applicable to both Individuals and Corporations


G. Taxes applicable to corporations

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