INCOME TAX

RR 2
Non-resident Alien engaged in business in the Phil
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 thePhilippines for purposes of the
income tax. Whether he is a transient or not is determined by
hisintentions with regard to the length and nature of his stay. A
mere floating intention indefinite as totime, to return to
another country is not sufficient to constitute him a transient. If
he lives in thePhilippines and has no definite intention as to his
stay, he is a resident. One who comes to thePhilippines for a
definite purpose which in its nature may be promptly
accomplished is a transient. Butif his purpose is of such a nature
that an extended stay may be necessary for its accomplishment,
andto that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though itmay be his intention
at all times to return to his domicile abroad when the purpose for
which he camehas been consummated or abandoned.
SECTION 6.Loss of residence by alien. An alien who has
acquired residence in the Philippinesretains his status as a
resident until he abandons the same and actually departs from
the Philippines.An intention to change his residence does not
change his status as a resident alien to that of anonresident
alien. Thus an alien who has acquired a residence in the
Philippines is taxable as aresident for the remainder of his stay in
the Philippines.
CHAPTER I- DEFINITIONS
SEC. 22. Definitions. - When used in this Title:

(A) The term 'person' means an individual, a trust, estate or

corporation.
(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.
(C) The term 'domestic', when applied to a corporation, means
created or organized in the Philippines or under its laws.
(D) The term 'foreign', when applied to a corporation, means a
corporation which is not domestic
(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.

(GG) The term 'statutory minimum wage' shall refer to the rate

(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.

(HH) The term 'minimum wage earner' shall refer to a worker in

(F) The term 'resident alien' means an individual whose

fixed by the Regional Tripartite Wage and Productivity Board, as

defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE). [9]
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. [10]

residence is within the Philippines and who is not a citizen

thereof.

COMPUTATION OF TAXABLE INCOME

(G) The term 'nonresident alien' means an individual whose

residence is not within the Philippines and who is not a citizen
thereof.

income' [28] means the pertinent items of gross income specified in

(H) The term 'resident foreign corporation' applies to a foreign

SEC.

31.

Taxable

Income

Defined. -The

term

'taxable

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.

corporation engaged in trade or business within the Philippines.

SEC. 35. Allowance of Personal Exemption for Individual

(I) The term 'nonresident foreign corporation' applies to a

Taxpayer.

foreign corporation not engaged in trade or business within the

Philippines.

(B) Additional Exemption for Dependents. - There shall be

allowed an additional exemption of Twenty-five thousand pesos
(P25,000) for each dependent not exceeding four (4). [34]

(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 '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.

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.
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.

In General
Statutory Inclusions
COMPUTATION OF GROSS INCOME
SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this
Title, gross income means all income derived from whatever
source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions, and similar
items;
(2) Gross income derived from the conduct of trade or business or
the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the
general professional partnership.
Rents
SECTION 49.Improvements by lessees. When buildings
are erected or improvements made by alessee in pursuance of an
agreement with the lessor, and such buildings or improvements
are notsubject to removal by the lessee, the lessor may at his
option report the income therefrom upon either of the following
bases;(a)The lessor may report as income at the time when such
buildings or improvements arecompleted the fair market value of
such buildings or improvements subject to the lease.(b)The lessor
may spread over the life of the lease the estimated depreciated

value of suchbuildings or improvements at the termination of the

lease and report as income for each year of the lease an aliquot
part thereof.If for any other reason than a bona fide purchase
from the lessee by the lessor the lease isterminated, so that the
lessor comes into possession or control of the property prior to
the timeoriginally fixed for the termination of the lease, the lessor
receives additional income for the year inwhich the lease is so
terminated to the extent that the value of such buildings or
improvements whenhe became entitled to such possession
exceeds the amount already reported as income on accountof the
erection of such buildings or improvements. No appreciation in
value due to causes other thanthe premature termination of the
lease shall be included. Conversely, if the building or
improvementsare destroyed prior to the expiration of the lease,
the lessor is entitled to deduct as a loss for the year when such
destruction takes place the amount previously reported as income
because of the erectionof such buildings or improvements, less
any salvage value subject to the lease to the extent that suchloss
was not compensated for by insurance. If the buildings or
improvements destroyed wereacquired prior to March 1, 1913, the
deduction shall be based on the cost or the value subject to
thelease to the extent that such loss was not compensated for by
insurance.
Dividends
SEC.

73.

Distribution

of

Dividends

or

Assets

by

Corporations. (A) Definition of Dividends. - The term 'dividends' when used in

this Title means any distribution made by a corporation to its
shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss sustained by
the stockholder, whether individual or corporate, is a taxable
income or a deductible loss, as the case may be.

(B) Stock Dividend. - A stock dividend representing the transfer

of surplus to capital account shall not be subject to tax. However,
if a corporation cancels or redeems stock issued as a dividend at
such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount
so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent that it represents a
distribution of earnings or profits.

corporationfrom a domestic corporation are taxable only to the

extent of 25 per cent thereof in accordance withSection 24 of the
Code. Dividends received by a domestic corporation from a foreign
corporation,whether resident or nonresident, are taxable to the
extent that they constitute income from sourceswithin the
Philippines, as provided in Section 37 (a) (2) (b) of the Code.
Dividends paid by thedomestic corporation to a nonresident
foreign corporation are taxable in full. (For definition of
thedifferent classes of corporations, see Section 84 of the Code).

(C) Dividends Distributed are Deemed Made from Most

SECTION 251.Dividends paid in property. Dividends paid in

securities or other property (other thanits own stock), in which
the earnings of a corporation have been invested, are income to
the recipientsto the amount of the full market value of such
property when receivable by individual stockholders.When
receivable by corporations, the amount of such dividends
includible for purposes of the tax oncorporations are specified in
Section 24 of the Code. (See also Section 250 of these
regulations). Adividend paid in stock of another corporation is not
a stock dividend, even though the stock distributedwas acquired
through the transfer by the corporation declaring the dividends of
property to thecorporation the stock of which is distributed as a
dividend. Where a corporation declares a dividendpayable in a
stock of another corporation, setting aside the stock to be so
distributed and notifying thestockholders of its action, the income
arising to the recipients of such stock is its market value at
thetime the dividend becomes payable. Scrip dividends are
subject to tax in the year in which thewarrants are issued.

Recently Accumulated Profits. - Any distribution made to the

shareholders or members of a corporation shall be deemed to
have been made from 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.
Sections 250-256, RR 2
SECTION 250.Dividends. Dividends, for the purpose of the
law, comprise any distribution whether in cash or other property,
in the ordinary course of business, even though extraordinary in
amount,made by a domestic or resident foreign corporation, jointstock
company,
partnership,
joint
account(cuentas
en
participacion), association, or insurance company to the
shareholders or members out of its earnings or profits
accumulated since March 1, 1913.Although interest on certain
Government bonds and other similar obligations is not taxable
whenreceived by a corporation, upon amalgamation with the
other funds of the corporation, such incomeloses its identity and
when distributed to shareholders, is taxable to the same extent as
other dividend.A taxable distribution made by a corporation to
individual stockholders or members shall be includedis the gross
income of the distributees when the cash of other property is
unqualifiedly made subjectto their demand. Dividends, in cash or
other property received by an individual, are subject to tax inhis
hands in the same manner another income.Dividends, whether in
cash or other property, received by a domestic or resident foreign

SECTION 252.Stock dividends. A stock dividend which

represents the transfer of surplus to capitalaccount is not subject
to income tax. However a dividend in stock may constitute taxable
income tothe recipients thereof notwithstanding the fact that the
officers or directors of the corporation (asdefined in Section 84)
choose to call such distribution as a stock dividend. The
distinction between astock dividend which does not, and one
which does, constitute income taxable to the shareholder isthe
distinction between a stock dividend which works no change in

the corporate entity, the sameinterest in the same corporation

being represented after the distribution by more shares of
preciselythe same character, and a stock dividend where there
either has been a change of corporate identityor a change in the
nature of the shares issued as dividends whereby the
proportional interest of theshareholders after the distribution is
essentially different from his former interests. A stock
dividendconstitutes income if it gives the shareholder an interest
different from that which his former stockholdings represented. A
stock dividend does not constitute income if the new shares
confer nodifferent rights or interests than did the old the new
certificates plus the old representing the sameproportionate
interest in the net assets of the corporation as did the old.
SECTION 253.Sale of stock received as dividends. Stock issued
by a corporation, as a dividend,does not constitute taxable
income to a stockholder in such corporation, but gain may be
derived or loss sustained by the stockholder, whether individual
or corporate, from the sale of such stock, whichgain or loss will be
treated as arising from the sale or exchange of a capital asset.
(See Section 34 of the Code.) The amount of gain derived or loss
sustained from the sale of such stock, or from the saleof the stack
with respect to which it is issued, shall be determined in
accordance with the followingrules:(a)Where the stock issued as
dividend is all or substantially the same character or preference
asthe stock upon which the stock dividend is paid, the cost of
each share (or when acquired prior to March 1, 1913, the fair
market value as of such date) will be the quotient of the cost (or
suchfair market value) of the old shares of stock divided by the
total number of the old and newshares.(b)Where the stock issued
as a dividend is in whole or in part of a character or
preferencematerially different from the stock upon which the
stock dividend is paid, the cost (and whenacquired prior to March
1, 1913, the fair market value as of such date) of the old shares of
stockshall be divided between such old stock and the new stock,
in proportion, as nearly as may be,to the respective value of each
class of stock, old and new, at the time the new shares of stockare

issued, and the cost (or when acquired prior to March 1, 1913,
the fair market value as of such date) of each share of stock will
be the quotient of the cost (or such fair market value as of March
1, 1913) of the class to which such share belongs divided by the
number of shares in thatclass.(c)Where the stock with respect to
which a stock dividend is issued was purchased at differenttimes
and at different prices and the identity of the lots can. not be
determined, any sale of theoriginal stock, will be charged to the
earliest purchases of such stock, and any sale of dividendstock
issued with respect to such stock will be presumed to have been
made from the stockissued with respect to the earliest purchased
stock, to the amount of the dividend chargeable tosuch stock.
(d)Where the stock with respect to which a stock dividend is
declared was purchased at differenttimes and at different prices,
and the dividend stock issued with respect to such stock can not
beidentified as having been issued with respect to any particular
lot of such stock, then any sale of such dividend stock will be
presumed to have been made from the stock issued with respect
tothe earliest purchased stock, to the amount of the stock
dividend chargeable to such stock.
SECTION 254.Declaration and subsequent redemption of a stock
dividend. A true stock dividend isnot subject to tax on its
receipt in the hands of the recipient. Nevertheless, if a
corporation, after thedistribution of a stock dividend, proceeds to
cancel or redeem its stock at such time and in suchmanner as to
make the distribution and cancellation or redemption essentially
equivalent to thedistribution of a taxable dividend, the amount
received in redemption or cancellation of the stocksshall be
treated as a taxable dividend to the extent of the earnings or
profits accumulated by suchcorporation since March 1, 1913.
SECTION 255.Sources of distribution. For the purpose of
income taxation every distribution madeby a corporation is made
out of earnings or profits to the extent thereof and from the most
recentlyaccumulated earnings or profits. In determining the
source of a distribution, consideration should begiven first, to the
earnings or profits of the taxable year; second, to the earnings or

profitsaccumulated since February 28, 1913, only in the case

where, and to the extent that, the distributionmade during the
taxable year are not regarded as out of the earnings or profits of
the taxable year and all the earnings or profits accumulated since
February 28, 1913, have been distributed; and,fourth, to sources
other than earnings or profits only after the earnings or profits
have beendistributed.
SECTION 256.Distribution in liquidation. In all cases where a
corporation (as defined in Section84) distributes all of its property
or assets in complete liquidation or dissolution, the gain realized
fromthe transaction by the stockholder, whether individual or
corporate, is taxable to the extent recognizedin Section 34(b) of
the Code. For this purpose, the term "complete liquidation"
includes any one of aseries of distributions made by a corporation
in complete cancellation or redemption of all of its stockin
accordance with a bona fide plan of liquidation under which the
transfer of all the assets under liquidation is to be complete
within a reasonable time from the date of the first distribution,
usually notto exceed one year from the time of such first
distribution. If the amount received by the stockholder
inliquidation is less than the cost or other basis of the stock, the
loss in the transaction is deductible tothe extent allowed in
Section 34(c) of the Code.(Section 84 of the Code)

income, to a gift, or to a capital transaction, dependent upon

thecircumstances. If, for example, an individual performs services
for a creditor, who, in considerationthereof cancels the debt,
income to that amount is realized by the debtor as compensation
for hisservices. If, however, a creditor merely desires to benefit a
debtor and without any considerationtherefor cancels the debt,
the amount of the debt is a gift from the creditor to the debtor
and need notbe included in the latter's gross income. If a
corporation to which a stockholder is indebted forgivesthe debt,
the transaction has the effect of the payment of a dividend.

Inventories
SEC. 41. Inventories. - whenever in the judgment of the
Commissioner, the use of inventories is necessary in order to
determine clearly the income of any taxpayer, inventories shall be
taken by such taxpayer upon such basis as the Secretary of
Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may
be to the best accounting practice in the trade or business and as
most clearly reflecting the income.
If a taxpayer, after having complied with the terms and a
conditions prescribed by the Commissioner, uses a particular
method of valuing its inventory for any taxable year, then such
method shall be used in all subsequent taxable years unless:
(i) With the approval of the Commissioner, a change to a different
method is authorized; or

Section 50, RR 2
SECTION 50.Forgiveness of indebtedness. The cancellation
and forgiveness of indebtednessmay amount to a payment of

(ii) The Commissioner finds that the nature of the stock on hand
(e.g., its scarcity, liquidity, marketability and price movements) is
such that inventory gains should be considered realized for tax
purposes and, therefore, it is necessary to modify the valuation
method for purposes of ascertaining the income, profits, or loss in
a more realistic manner: Provided, however, That the
Commissioner shall not exercise his authority to require a change

in inventory method more often than once every three (3) years:
Provided, further, That any change in an inventory valuation
method must be subject to approval by the Secretary of Finance.