CHAPTER 3 INTRODUCTION TO INCOME TAXATION
Requisites: (AEETI)
Income:
- best measure of taxpayers ability to pay tax
- gross income (a taxable item is referred to as an item of
gross income or inclusion in gross income)
- Any inflow of wealth to the taxpayer from whatever source,
legal or illegal, that increases net worth
- Income from employment, trade, business, or exercise of
profession, income from properties, and other sources such
as dealings in properties
Elements of Gross Income: (RNR)
1. Return on capital that increases net worth (Return OF capital
merely maintains net worth, not taxable)
2. Not exempted by law, contract, or treaty
3. Realized benefit
RETURN ON CAPITAL: INCREASE IN NET WORTH
Capital items deemed with infinite value: anything received as
compensation for their loss is deemed a return OF capital
1. Life: proceeds of life insurance of an officer or any person
directly interested with his trade are exempt (advanced
recovery of future loss)
- The following are taxable return ON capital from insurance
policies:
o Any excess amount received over premiums paid
by the insured upon surrender or maturity of policy
(INSURED OUTLIVES THE POLICY)
o Gain realized by the insured from the assignment
or sale of his insurance policy
o Interest income from the unpaid balance of the
proceeds of the policy
o Any excess of the proceeds received over the
acquisition costs and premium payments by an
assignee of a life insurance policy
2. Health: any compensation received for loss of health such as
compensation for personal injuries or tortuous acts is a return
OF capital
3. Human Reputation: any indemnity for impairment is exempt
from tax
o Oral defamation or slander
o Alienation of affection
o Breach of promise to marry
Recovery of lost capital vs. recovery of lost profits
- Recovery of lost profits is a return on capital
- Taxable:
o Proceeds of crop or livestock insurance
o Guarantee payments
o Indemnity received from patent infringement suit
REALIZED BENEFIT: EARNED
- Any form of advantage derived by the taxpayer
- One receives through income, donation, or inheritance
- The following are not benefits, not taxable:
o Receipt of a loan: properties increase but
obligations also increase (offset)
o Discovery of lost properties: finder has an
obligation to return to owner
o Receipt of money or property to be held in trust for,
or to be remitted to another
- If a taxpayer is entitled to keep for his account portion of a
receipt, only the portion is a benefit
1. Transaction involves another entity
2. Must be an exchange transaction
3. Increases net worth
- Types of Transfers
1. Bilateral transfers or exchanges: onerous transactions
a. Sale
b. Barter
2. Unilateral transfers: gratuitous transactions
a. Succession
b. Donation
- Benefits derived from onerous transactions are earned or
realized (taxable)
- Benefits derived from gratuitous transactions are subject to
transfer tax, not income tax
3. Complex transactions: party gratuitous, partly onerous
(transfers for less than full and adequate consideration)
- Only the benefit from onerous portion is subject to income
tax (eg. Excess of selling price over cost)
- Income between affiliated companies such as between a
holding parent company and its subsidiaries and between
sister companies are taxable because each of them is a
separate entity
- Sales of home office to its branch office are NOT taxable
because they pertain to one and the same taxable entity
- Proprietorship business is not a juridical entity
Benefits in the absence of transfers
- Increase in wealth in the form of appreciation or increase in
the value of his properties or decrease in value of obligation
in absence of sale or barter is not taxable
- Referred to as unrealized gains or holding gains
Rendering of services
- Entire consideration received from rendering of service such
as compensation income or service fees is an item of gross
income
Basis of Exemption of Unrealized Income
- Income realized in non-cash considerations is taxable at the
fair value of the property received
- Exempting income realized in non-cash considerations would
open a wide avenue for tax evasion
Mode of receipt/realization benefits
1. Actual receipt: actual physical taking of income in the form of
cash or property
2. Constructive receipt: no actual physical taking of income but
the taxpayer is effectively benefited
o Offset of debt of taxpayer in consideration for the
sale of goods or services
o Deposit of the income to taxpayers checking
account
o Matured detachable interest coupons on coupon
bonds not yet encashed
o Increase in the capital of a partner from the profit
of partnership
Inflow of wealth without increase in net worth
- Inflow of wealth to a person that does not increase his net
worth is not income due to the total absence of benefit
- Eg. Receipt of property in trust, borrowing of money under
the obligation to return
- Proceeds of embezzlement or swindling where money is
taken without an original intention to return are considered
as income
EXEMPTED BY LAW, CONTRACT, OR TREATY
- Income of qualified employee trust fund
- Revenues of non-profit non-stock educational institutions
- PCSO or lotto winnings
- SSS, GSIS, Pag-Ibig, or PhilHealth benefits
- Salaries and wages of minimum wage earners and qualified
senior citizen
- Regular income of barangay micro-business enterprise
(BMBEs)
- Income of foreign governments and foreign government-
owned controlled corporations
- Income of international missions and organizations with
income tax immunity
TYPES OF INCOME TAXPAYERS
A. Individuals
1. Citizen
o Resident citizen: Filipino citizen residing in the
Philippines
o Non-resident citizen:
- Citizen who establishes to the satisfaction
of the Commissioner the fact of his
physical presence abroad with a definite
intention to reside therein
- Leaves the Philippines during the taxable
year to reside abroad, either as an
immigrant or for an employment on a
permanent basis
- Works and derives income from abroad
and whose employment thereat requires
him to be physically present most of the
time during the taxable year
- Previously considered as NRC and who
arrives in the Philippines at anytime
during the taxable year to reside
permanently in the Philippines with
respect to his income derived from
sources abroad until the date of his arrival
in the Philippines
**Filipinos working in Philippine embassies or Philippine consulate
offices are not considered NRC
2. Aliens
o Resident alien: residing in the Philippines but not a
citizen
- Lives in the country without definite
intention as to his stay
- One who comes for a definite purpose
which in its nature would require an
extended stay and to that end makes his
home temporarily in the Philippines with
the intention of going back to his country
o Non-resident alien: not residing and not a citizen
- Non-resident alien engaged in business
(NRA-ETB): stayed for an aggregate
period of more than 180 days during the
year
- Non-resident alien not engaged in
business (NRA-NETB): who come to the
country for a definite purpose which may
be promptly accomplished; aliens who
stay for an aggregate period of not more
than 180 days
**General classification rule for individuals:
1. Intention: shall submit to the CIR of BIR document proofs such
as visas, work contracts and other documents indicating
intention of stay
2. Length of stay: in default of documentary proof:
o Citizens staying abroad for a period of at least 183
days are considered non-resident
o Aliens who stayed in the country for more than 1
year as of the end of taxable year are considered
resident
o Aliens staying in the country for not more than 1
year but more than 180 days are deemed non-
resident aliens engaged in business (NRA-ETB)
o Aliens who stayed in the country for not more than
180 days are considered non-resident aliens not
engaged in trade or business (NRA-NETB)
B. Corporations:
- Shall include partnerships, joint stock companies, joint
accounts, association, insurance companies except 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
- Includes profit-oriented and non-profit institutions such as
charitable institutions, cooperatives, government agencies
and instrumentalities, associations, leagues, civic or religious
and other orgs
1. Domestic Corporation: organized in accordance to
Philippine laws
2. Foreign Corporation: organized under a foreign law
a. Resident Foreign corporation (RFC): operates
and conducts business in the Philippines
through a permanent establishment (eg.
Branch)
b. Non-resident foreign corporation (NRFC):
does not operate or conduct business in the
Philippines
**corporation incorporated in the Philippines is a domestic corporation
under incorporation test if the same is controlled by foreigners
**foreign corporation that transacts with residents through a resident
branch is taxable as a RFC through its branch
**foreign corporation transacting directly to residents outside its
branch is taxable as a NRFC on the direct transactions
3. Special Corporations: domestic or foreign corporations
which are subject to special tax rules or preferential tax
rates
Other Corporate Taxpayers
1. Partnership: business organization owned by two or more
persons who contribute their industry or resources to a
 common fund for the purpose of dividing the profits from the 3. Rent Income Location of Property
venture 4. Service Income Where service is rendered
- Types:
a. General Professional Partnership (GPP): Other Income Situs Rules:
formed for the exercise of a common A. Gain on sale of Properties
profession; not treated as a corporation and is 1. Personal Property
not taxable; PARTNERS are taxable in their o Domestic securities: presumed earned within the
individual capacity with respect to their share Philippines
in the income of the partnership o Other personal properties: earned in the place
b. Business Partnership: one formed for profit; where the property is sold
taxable as a corporation 2. Real Property: earned where the property is located
B. Dividend Income from:
2. Joint Venture: business undertaking for a particular purpose 1. Domestic Corporation: presumed earned within
(may be partnership or corporation) 2. Foreign Corporation
- Types: o RFC: depends on pre-dominance test
a. Exempt joint venture: formed for the purpose - If the ratio of Philippine gross income
of undertaking construction projects or over the world gross income of the RFC in
engaging in petroleum, coal, geothermal and the three-year period preceding the year
other energy operations pursuant to an of dividend declaration is at least 50%,
operating consortium agreement under a portion of dividend corresponding to the
service contract with the government; not Philippine gross income ratio is earned
taxable, but VENTURERS are taxable to their within; less than 50%, entire dividends
share in the net income of the venture received is earned abroad
b. Taxable joint venture: all other joint venture o NRFC: earned abroad
are taxable as corporations C. Merchandising Income: earned where the property is sold
D. Manufacturing Income: earned where the goods are
3. Co-ownership: joint ownership of a property formed for manufactured
the purpose of preserving the same and/or dividing its
income; co-ownership limited to property preservation
is not taxable or income collected is exempt, but the CO-
OWNERS are taxable with respect to their share of
income of the property

**Co-ownership that reinvests the income of the co-owned property to

other income-producing properties or ventures will be considered an
unregistered partnership taxable as a corporation

GENERAL RULES IN INCOME TAXATION

Within Without
Resident Citizen Yes Yes
Non-resident
Yes No
Citizen
Resident Alien Yes No
Non-resident Alien Yes No
Domestic
Yes Yes
Corporation
Resident Foreign
Yes No
Corporation
Non-resident
Foreign Yes No
Corporation

SITUS OF INCOME: place of taxation of income; jurisdiction that has the

authority to impose tax upon the income

INCOME SITUS RULES

Type of Income Place of taxation
1. Interest income Debtors residence
2. Royalties Where intangible is employed
CHAPTER 4 INCOME TAX SCHEMES, ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND REPORTING Regular Income Taxation
- is the general rule in income taxation and covers all other
Income Taxation Schemes (FCR) income such as: active income, gains from dealings in
a. Final Income Taxation properties (dealings in ordinary assets, dealings in other
b. Capital Gains Taxation capital asset not subject to CGT), other income, active or
c. Regular Income Taxation passive, not subject to FT
- items of gross income from these sources are measured using
- An item of gross income can be taxable to any one of the an accounting method, accumulated over an accounting
income tax schemes period, and reported through an income tax return
- Mutually exclusive coverage: tax schemes are mutually
exclusive; an item of gross income that is subject to tax in one Accounting Period: length of time over which income is measured and
scheme will be not be taxed by the other schemes; items that reported
are exempted in one scheme are not taxable by other - Types:
schemes o Regular accounting period: 12 months in length
- Calendar
Classification of Items of Gross Income - Starts from January 1 and ends
a. Gross income subject to FT December 31
b. Gross income subject to CGT - Available to both corporate
c. Gross income subject to RT taxpayers and individual
taxpayers
Final Income Taxation - Under the NIRC, should be used
- Taxes are withheld or deducted at source when:
- Taxpayer receives income net of tax o Annual accounting
- The payor of the income remits the tax to the government period is other than
- Applicable only to certain passive income; not all passive fiscal year
income is subject to final tax o Has no annual
- Passive income vs. active income accounting period
o Passive income: earned with very minimal or even o Does not keep books
without active involvement of the taxpayer in the o individual
earning process - Fiscal
- Example: interest income from banks, - Any 12-month period that ends
dividends from domestic corporations, on any day other than
royalties December 31
o Active or regular income: arises from transactions - Available only to corporate
requiring a considerable degree of effort or taxpayers and is not allowed to
undertaking from the taxpayer individual taxpayers
- Example: compensation income, business **Deadline of filing the income tax return: fifteenth
income, professional income day of the month following the close of the taxable
year of taxpayer
Capital Gains Taxation Regular tax is payable upon filing of ITR
- Imposed on the capital gain on the sale, exchange and other
disposition of certain capital assets; not all capital gains are o Short accounting period: less than 12 months
subject to CGT; most of them are subject to regular income - Newly commenced business: covers the
tax date of the start of business until the
- Capital assets vs. ordinary assets designated year-end of business
o Capital assets: all other assets other than ordinary - Dissolution of business: covers the start
assets of the current year to the date of
o Ordinary assets: assets directly used in the dissolution of business
business, trade or profession of the taxpayer such - Dissolving corporations shall
as inventory, supplies and items of property, plant, file their return within 30 days
and equipment from the cessation of activities
- Capital gains vs. ordinary gains or 30 days from the approval of
o Capital gains: arise from the sale, exchange and merger by the SEC in case of
other disposition of capital assets merger
o Ordinary gains: arise from the sale, exchange and - Individuals shall be due on or
other disposition of ordinary assets before April 15; no requirement
- NIRC identifies CGT as a final tax but they are not actually final for early filing under NIRC
tax similar to those imposed under FIT - Change of accounting period by
- Taxpayer still files a CGT return to report the gain to the corporate taxpayers: start of the previous
government and pay the corresponding tax accounting period up to the designated
- Applies only to two types of capital assets: DOMESTIC STOCKS year-end of the new accounting period;
and REAL PROPERTY BIR approval is required in changing an
accounting period; not automatic
 - Death of taxpayer: start of calendar year
until death of taxpayer - Cash basis expense:
- Termination of the accounting period of
the taxpayer by the Commissioner of Cash expenses xxx
Internal Revenue: start of the current Amortization of prepayments
year until the date of the termination of And depreciation of
accounting period (ITR shall be due and Capital expenditures xxx
payable immediately) Deductions xxx

Accounting Methods: accounting techniques used to measure income Sellers of goods:

- Types:
o General methods Sales xxx
- Accrual basis Less: COGS
- Cash basis Beginning Inventory
o Installment and deferred payment method Add: Purchases
o Percentage of Completion method Total Goods available for sale
o Outright and spread-out method Less: Ending Inventory
o Crop year basis COGS xxx
Gross Income xxx
General methods for income from sale of goods or service
- Accrual basis: income is recognized when earned regardless **The expensing of purchase of cost of goods does not properly and
of when received; expense is recognized when incurred fairly reflect the income of taxpayer particularly when there are
regardless of when paid significant fluctuations in inventory levels between accounting periods
o Income is said to have accrued when the right to **Use of accrual method is suggested but subject to practical and cost
receive is established or when an enforceable right considerations
to secure payment is created against the
counterparty Hybrid Basis: combination of accrual basis, cash basis and or other
- Cash basis: income is recognized when received, expense methods of accounting methods; used when taxpayer has several
recognized when paid businesses which employ different accounting methods

Tax and accounting concepts of accrual and cash basis Sale of goods with extended payment terms: may be reported using
- Advanced income is taxable upon receipt the accrual basis, installment method, or deferred payment method
o Income received in advance is taxable upon receipt
in pursuant to the lifeblood doctrine and ability to Installment method: gross income is recognized and reported in
pay theory proportion to the collection from the installment sales
- Prepaid expense is non-deductible - Available to the following taxpayers:
o Not deductible against gross income in the year o Dealers of personal property on sale of properties
paid; deducted against income in the future period they regularly sell
they expire or are used in business o Dealers of real properties, only if their initial
- Special tax accounting requirement must be followed payment does not exceed 25% of the selling price
o Cases where the tax law itself provides for a specific o Casual sale of non-dealers in property, real or
accounting treatment of an income or expense personal, when their selling price exceeds P1,000
and their initial payment does not exceed 25% of
PROFORMA: the selling price
- Accrual basis income: o Ration of IP: (initial payment / selling price)
- Initial payment: total payments by the buyer, in cash or
Cash xxx property, in the taxable year the sale was made; includes
Accrued (uncollected) income xxx installment payments in the year of sale and DP
Advanced Income xxx - Selling price: entire amount for which the buyer is obligated
Gross income xxx to the seller
o Proforma:
- Accrual basis expense: Cash received and/or receivable xxx
FMV of prop. received/able xxx
Cash expenses xxx Mortgage or any indebtedness
Accrued (unpaid) expense xxx assumed by buyer xxx
Amortization of prepayments Selling Price xxx
and depreciation of
capital expenditures xxx - Contract price: amount receivable in cash or other property
Deductions xxx from the buyer; usually the selling price in the absence of
agreement whereby the debtor assumes indebtedness on
- Cash basis income: property
o Proforma:
Cash income xxx Selling Price xxx
Advanced income xxx Less: Mortgage assumed by buyer xxx
Gross income xxx Contract Price xxx
 - Income can be reported using the following:
Cash down payment xxx o Outright method: lessor may report as income the
Collectible balance xxx FMV of such building or improvement subject to the
Contract Price xxx lease at the time when such building or
improvement are completed
**Gross profit will be reported in gross income throughout the o Spread-out method: lessor may spread over the life
installment period by the formula: (collection/contract price) x Gross of the lease the estimated depreciated value of
profit such buildings or improvements at the termination
of the lease and report as income for each year of
Indebtedness assumed exceeds tax basis of property sold the lease an aliquot part thereof
- Excess is an indirect receipt realized by the seller - Depreciated value:
- Indirect down payment which must be added as part of the
contract price and the initial payment

- All collection from the contract including the excess mortgage
is a collection of income
- Proforma: Farming Income
Selling Price xxx - Commonly recognized using the cash basis or accrual basis
Less: Mortgage assumed by buyer xxx - Long term crops or those that take more than one year to
Cash collectible xxx harvest may be accounted for under the crop year basis
Add: Excess indebtedness constructive xxx - Crop year basis: farming income is recognized as the
Contract Price xxx difference between the proceeds of harvest and expenses of
the particular crop harvested; expenses of each crop are
Down payment xxx accumulated and deducted upon the harvest of the crop
Installment in the year of sale xxx - Crop year basis is an accounting method and not an
Excess mortgage over tax basis xxx accounting period
Initial Payment xxx
NOT YET FINISHED
**Gross profit on the sale is the same as the contract price

Deferred Payment method

- Variant of the accrual basis and is used in reporting income
when a non-interest bearing note is received as consideration
in a sale
- Gross income is computed based on the present value
(discounted value) of a note receivable from the contract
- Discount interest on the note is amortized as interest income
over the installment term
- Proforma:
Cash down payment xxx
Present Value of note xxx
Selling Price xxx
Less: Tax basis of property xxx
Gross income xxx

Percentage of Completion Method for Construction contracts

- Output method based on engineering survey prescribed by
NIRC
- Proforma:
FIRST SECOND
YEAR YEAR
Contract Price xxx xxx
Multiply by: % of completion xxx xxx
Construction Revenue (CR) xxx xxx
Less: CR prior year - xxx
CR this year xxx xxx
Less: Expense during the year xxx xxx
Construction gross income xxx xxx

Income from leasehold improvement

- Tangible improvements made by the lessee to the property of
lessor
- Will benefit the lessor when their useful life extends beyond
the lease term
CHAPTER 10 COMPENSATION INCOME 2. Special aliens
o Alien employees subject to 15% final income tax on
EMPLOYER-EMPLOYEE RELATIONSHIP gross income received (salaries, wages, annuities,
compensation, remuneration, except those subject
Employer: to FBT)
- any person for whom an individual performs any service of o Aliens holding MANAGERIAL or TECHNICAL
whatever nature as employee of such person position in a:
- person who has control over the payment of the employee - Regional or area headquarters (RHQ) or
remuneration Regional operating headquarters (ROHQ)
- if NRA-NETB, deemed the person paying remuneration in of multinational companies
their behalf -
- RHQ/ROHQ: branch of a
Employee: multinational company or
- any individual who is a recipient of wages and includes officer, foreign firm engaged in
employee or elected official of the government or any international trade, with
political subdivisions, agency or instrumentality affiliates, subsidiaries, or
- also includes officer of a corporation branch offices in the foreign
markets
Elements of employer and employee relationship under case law: - Offshore banking units (OBUs)
1. Selection and engagement of employees: screening process - Division of a foreign bank which
for employees to hire is authorized to transact
2. Payment of wages: employer usually fixes and controls the banking transactions in foreign
payment of wages currencies in the Philippines
3. Power of dismissal: employer has power to retrench or - Petroleum service contractors/
terminate employees when incurring heavy losses or other subcontractors
reasonable basis - Awardee of a petroleum service
4. Power of control: employer has power to control the contract under the oil
employee on the means and methods by which the work is exploration and development
accomplished act of 1972 either alone or in
**an arrangement which do not manifest all the elements is not an consortium with others
employer-employee relationship but an independent contract for the
provision of services **optional final income tax for Filipino employees: those who
**not considered employees: consultants, directors without are occupying the same positions as those held by special
management function, talents and artists on tv shows or radio aliens may opt to be taxed at 15% final income tax on gross
broadcasts (their fees are business or professional income, not income or the regular income tax
compensation income) **Special alien include qualifying Filipino employees who
opted to be taxed at 15% of gross income
Types of employees as to function: o Requirements:
1. Managerial: given powers of prerogatives to lay down and - Position and function test: must be
execute managerial policies and/or to hire, transfer, suspend, occupying and actually exercising a
layoff, recall, discharge, assign or discipline employees managerial or technical position
2. Supervisory: effectively recommend such managerial actions - Compensation threshold test: must have
if the exercise of such authority is not merely routinary or a gross annual taxable income of at least
clerical in nature but requires the use of independent P975,000
judgment - Exclusivity test: not a consultant or
3. Rank and file: hold neither managerial nor supervisory contractual personnel and is solely
functions employed by the RHQ or ROHQ
**Special alien is not a general classification but a special
Types of employees as to taxability: category that exists only in tax law for purposes of taxing
1. Minimum wage earners compensation income
o Recipients of minimum wage and are exempt from
income taxation 3. Regular employees: subject to regular progressive income tax
o Worker in the PRIVATE SECTOR who is paid the
minimum wage or in the PUBLIC SECTOR with Tax Model on compensation income:
compensation income of not more than the Gross compensation income xxx
statutory minimum wage (rate fixed by the Regional Less: non-taxable compensation xxx
Tripartite Wage and Productivity Board of the DOLE Gross taxable compensation income xxx
or P5,000/month or P60,000/year, whichever is
higher) in the non-agricultural sector where he or Gross compensation income: includes ALL remunerations received
she is assigned under an employer-employee relationship
o To be considered MWE, employee must not have
other income aside from their minimum wage and
exempt benefits; otherwise, considered as regular
employee
Non-taxable or exempt compensation:
A. Benefits excluded and/or exempted under the NIRC and
special laws
1. Remunerations received as incidents of employment
a. Exempt retirement benefits under RA 7641
including exempt retirement gratuities to
government officials and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans
Administration
d. Social security, retirement gratuities,
pensions, and similar benefits from foreign
government agencies and other institutions,
private or public
e. Benefits from SSS
f. Benefits from GSIS
2. Employee mandatory contributions to GSIS, SSS,
PhilHealth, HDMF, and union dues
3. Certain benefits of MWE
a. Basic minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential pay
e. Hazard pay
**MWE must not have other items of taxable
income except these to be exempt
4. De minimis benefits: facilities or privileges such as
entertainment, medical services, or courtesy discounts
on purchases that are of relatively small value and are
furnished by the employer merely as a means of
promoting health, goodwill, contentment, or efficiency
of employees
a. Monetized unused vacation leave credits of
PRIVATE employees 10 days during the year
**monetized sick leaves of private employees
are taxable
b. Monetized unused vacation and sick leave
credits paid to GOVERNMENT officials and
employees no limit
c. Medical cash allowance to dependents of
employees P750 per employee per
semester or P125 per month
d. Rice subsidy P1,500 or 1 sack of 50-kg rice
per month amounting to not more than
P1,500
e. Uniform and clothing allowance P5,000 per
annum
f. Actual medical assistance P10,000 per
annum
g. Laundry allowance P300 per month
h. Employee achievement award must be in
the form of tangible property other than cash
or gift certificate (P10,000)
i. Christmas gift and major anniversary
celebration gifts P5,000 per employee per
annum (includes loyalty or service awards in
kind)
j. Daily meal allowance for overtime work and
night or graveyard shift (25% of basic
minimum wage on a per region basis)
k. Benefits received by an employee by virtue of
a collective bargaining agreement (CBA) and
productivity incentive schemes P10,000 per
employee per taxable year
**taxable de minimis: excess de minimis over their
limits; other benefits that are not included in the
list of de minimis
**treatment of taxable de minimis:
- Rank and file: other compensation
income under 13th month pay and other
benefits
- Managerial and supervisory: fringe
benefit subject to FBT
**terminal leave pay or commutation of unused
leave credits due to involuntary separation is
treated as de minimis subject to the 10-day leave
credit and is no longer exempt as part of exempt
termination benefits
5. 13th month pay and other benefits not exceeding
P82,000
B. Benefits exempt under treaty or international agreements
o Employee benefits of non-Filipino nationals and/or
non-permanent residents of the Philippines from
foreign governments, embassies or diplomatic
missions, and international organizations in the
Philippines are exempt from income tax
o Filipino employees of foreign governments,
international missions and organizations are
taxable except only to employees of the following
organizations:
- United Nations
- Specialized Agencies of the UN
- Australian Agency for International
Development (AUSAID)
- Food and Agriculture Organization
- World Health Organization
- United Nations Development
Programme
- International Organization for Migration
- International Seabed Authority
**exemption of Filipino employees is NOT
AUTOMATIC: shall file an application for
confirmation of tax exemption with the BIRs
International Tax Affairs Division (ITAD)
**without confirmation certificate, employee is
taxable
**employees of Philippine embassies or Philippine
consulate offices are NOT CONSIDERED NRC and
are subject to Philippine income tax
Phil. Embassy
Foreign embassy,
or consulate
missions, or org
office
Philippines
Taxable (exempt
- Filipino citizen only with N/A
exemption grant)
-Alien Exempt N/A
Abroad
-Filipino citizen Exempt Taxable
-Alien Exempt Exempt
 C. Benefits required by the nature of, or necessary to, the
trade, business or conduct of profession of the employer
- necessity of the employer rule
- Such are expenses of employer
- Examples:
1. Necessary travelling, transportation, representation, or
entertainment expenses that are subject to an
accounting or liquidation
2. Allowances which essentially constitute reimbursement
to government personnel
a. Representation and Transportation Allowance
(RATA) of public officers and employees
b. Personnel Economic Relief Allowance (PERA)
3. Reasonable amounts of reimbursements or advance to
employees for travelling and representation which are
pre-computed on a daily basis and which are paid to
any employee while on duty
Non-compensation items:
1. Fees: retainer fees of consultants, talents, and directors who
have no management function in the business are
professional income, not compensation income
2. Commissions: to non-employees such as independent sales
agents are business income
3. Tips and gratuities: paid directly to employee by customer
which are not accounted for are not considered
compensation income, but other income of employee
Valuation of compensation in kind: taxable at fair value of
consideration received
**termination pay is included in gross compensation income, but is
also deducted as non-taxable compensation income if the reason of
termination is beyond the control of the employee

D. Benefits for the convenience or advantage of the employer 2. Supplemental compensation:

- convenience of the employer rule o Performance-based pays with or without regard to
- Such are expenses of employer payroll period
- Examples: o Following are SC under tax rules:
1. Work-related mobile phone allowance and - Overtime pay
transportation allowance - Hazard pay
2. Outstation allowance who will be out from office site at - Night shift differential pay
least 8 hours - Holiday pay
3. Grant of housing privilege to employees working at - Commissions (incentives intended to
distant or remote facilities stimulate sales)
4. Car incentives to medical doctors on-call who are - Fees, including directors fee (if
required to report on duty anytime employee)
5. Scholarship grants to employees under contract to - Emoluments (any pay) and honoraria
remain in service for a specified period (paid for attending to special
6. Housing privilege of military officials tasks/assignments)
**if expense is unreasonably excessive making it depart - Taxable retirement and separation pay
from the nature of a reasonable business expense, such - Value of living quarters or meals (except
portion of expense is considered a taxable fringe benefit when for the convenience of employer)
(hybrid expenses, partly business expense, partly - Gains on exercise of stock options
employee benefit) - Employees are given privilege
to buy shares at an agreed
Gross taxable compensation income exercise price after meeting
- Classification: stipulated vesting conditions
1. Regular compensation: - Value of option is the discount
o Fixed remunerations received every payroll period at exercise date (market price
- Basic salary exercise price)
- Fixed allowances (COLA, fixed housing - Treatment:
allowance, representation, o Employer is domestic
transportation, and other allowances corporation: through
paid) PSE, subject to of
- Applies even if a portion of the 1% of gross selling
allowances are actually used in price
employers business o Employer is domestic
- Exception rule: corporation: directly
o It is an ordinary and to buyer, net gain on
necessary expense of the sale is subject to
employee in pursuit 5%-10% CGT
of his business o Employer is foreign
o Expense is subject to corporation: net gain
accounting or on the sale is capital
liquidation gain subject to
o Any excess advances regular income tax
returned to employer - Profit sharing and taxable bonuses:
**those retained by employee are considered reward for churning the business to post
compensation a profit (marketing and sales,
productivity, and administrative factors)
 **if bonus is linked solely to productivity under the RR2-98 provides that 13th month pay and other benefits are exempt
productivity incentive plan, considered as de withholding on compensation provided they do not exceed P82,000.
minimis benefits (improvements in productivity
usually in terms of cost savings through waste Excess above P82,000 is subject to withholding tax on compensation
reduction, efficient labor utilization, or increase in subject to regular income tax.
volume of production)
**productivity incentive is payable even if business Tax Treatment of Gross Taxable Compensation Income
poses a loss; profit sharing is payable when Regular Employee Progressive Tax
business post a profit Special Employee 15% final tax
Minimum wage earner Exempt
3. 13th month pay and other benefit
o Residual category which generally includes **The fringe benefits of special aliens are subject to 15% final tax while
incentive pays and all other taxable benefits those of regular managerial or supervisory employees are subject to
o Includes: 32% final tax. The final tax is computed from the grossed up monetary
- 13th month pay value of the fringe benefits.
- GOVERNMENT: consists of
Christmas bonus equivalent to Taxability of Minimum Wage Earners (MWE)
one month salary plus a P5,000 - An MWE loses the special privilege of tax exemption for the
cash gift year when he or she derives other income such as:
- PRIVATE: equivalent one o Taxable income from employment
month salary - May include taxable allowances,
commissions, honoraria, fringe benefits,
Government other benefits in excess of P82,000 and
Private employee
employee other taxable income other than the
Christmas bonus 13th month pay and 13th month pay and SMW, holiday pay, overtime pay, hazard
OB OB pay, and night shift differential pay
Christmas gift 13th month pay and - Pertains to fixed allowances, and non-
De minimis
OB exempt supplemental compensation to
MWEs
**Bonus: performance-based; gift: gratuity and discretionary upon - Receipt of 13th month pay and other
employer benefits will not automatically disqualify
an MWE unless the same exceeds
- Other benefits: P82,000
- Christmas bonus of PRIVATE o Taxable income outside employment
employees - Includes income from conduct of trade,
- Cash gifts other than Christmas business, or practice of profession except
or anniversary gifts of PRIVATE those subject to final tax and other
employees income subject to regular income tax
- Additional compensation **first case: employee shall be subject to withholding tax on
allowance of GOVERNMENT compensation similar to other regular employees
personnel **second case: employee is exempt from withholding tax but he or she
- 14th month pay, 15th month must file an annual income tax return
pay, etc.
- Other fringe benefits of RANK Rules of change in status as a MWE during a year
AND FILE employees 1. When an employee becomes a MWE during the year, he shall
be subject to income tax only on compensation earned before
**amount of 13th month and OB not exceeding P82,000 becoming a MWE
is an exclusion from gross income; excess is considered o This rule may also apply in cases of:
supplemental compensation - Transfer to an employer paying salary at
minimum wage
OTHER FRINGE BENEFITS - Transfer of employment to a region with
- Employee personal expenses shouldered by employer higher minimum wage
o Rental of residence, grocery, association dues, 2. When an employee ceases to be a minimum wage earner
vacation expense, tuition fees; even when during the year due to increase in salary, only the income for
receipted in the name of employer the rest of the year is taxable
- Taxable de minimis benefits: excess de minimis; not included o This rule applies in cases of:
in the list - Transfer to an employer paying salary
- Treatment: above the minimum wage
o RANK AND FILE: part of other benefits under 13th - Transfer of employment to a region with
month pay and other benefits lower statutory minimum wage
o MANAGERIAL OR SUPERVISORY: treated as fringe 3. When an employee ceases to be a minimum wage earner
benefit subject to FBT during the year by disqualification (eg. Earning taxable
income)
Tax Treatment of 13th month pay and other benefits
**In all the cases, if the personal exemption of the employee exceeds
their reportable compensation income, there is no need to file an ITR
Treatment of Cost-of-living allowance of MWEs
- COLA which forms part of the new wage rates prescribed to
be the statutory minimum wage should be treated as part of
the minimum wage and shall not be treated as a separate or
other benefit
The withholding tax on compensation
- Method of collecting the income tax at source upon receipt of
income
- Applies to all employed individuals whether citizens or aliens
- Employer is constituted as the withholding agent
Procedural computation of withholding tax on compensation
1. Tax status of employee is determined
2. Regular compensation is traced starting from the status row
across the column to determine the max amount of income it
exceeds
3. Maximum amount is deducted against the regular
compensation
4. Supplemental or additional compensation are added to the
excess
5. Withholding tax due is the sum of the taxes determined in 3
and 4
**13th month pay and other benefits are excluded from withholding
until they exceed P82,000; excess of P82,000 is treated as supplemental
or additional compensation
14. Compensation income of employees in the public sector if the
same does not exceed those of MWE in the non-agricultural
sector
Deadline of filing and remittance of the withholding tax on
compensation
- Employers shall file the BIR form 1601-C on or before the 10th
day of the following month the withholding was made except
for taxes withheld for December which shall be filed/paid on
or before January 15 of the succeeding year
- Employers are also required to file BIR form 1604-CF on or
before January 31 of the following calendar year in which the
compensation income payments and passive income
payments were made
Penalties for non-compliance
- Employers are subject to same penalties for non-compliance
of withholding tax requirements
Treatment of withholding tax on compensation
- To employee, withholding tax on compensation is a tax credit
which is deductible against his consolidated or annual income
tax due
- If employee has other items of income subject to regular
income tax, he must file a consolidated ITR to include such for
the entire taxable year
- If employee has no other sources of income subject to regular
tax aside from his compensation, he may apply for
substituted filing of tax return
** Substituted filing of tax return: employer files the ITR of the
employee; if correctly withheld by employer, employee no longer needs
to file an annual ITR

Proforma:
Regular compensation income xxx
Less: Compensation level xxx
Excess xxx
Add: supplementary compensation xxx
Total xxx

Tax on first xxx

Marginal tax on excess xxx
Withholding tax xxx

Benefits not subject to withholding tax on compensation

1. Remunerations received as incidents of employment
2. Remuneration paid for agricultural labor and paid entirely in
products of the farm where the labor is performed
3. Remuneration for domestic services
4. Remuneration for casual labor not in the course of an
employers trade or business treated as other income
5. Compensation for services by a citizen or resident of the
Philippines for a foreign government or an international
organization (taxable compensation income to be reported by
the employee
6. Damages paid by the employer to employees
7. Proceeds of life insurance
8. Amounts received by an insured employee as a return of
premium
9. Compensation for injuries or sickness
10. Income exempt under treaty
11. 13th month pay and other benefits not exceeding a total of
P82,000
12. GSIS, SSS, PhilHealth, and other contributions
13. Compensation income including overtime pay, holiday pay,
night shift differential pay, and hazard pay of MWE
CHAPTER 11 FRINGE BENEFIT TAX
Fringe benefit:
- pertain to all other benefits or incentives of employees other
than the basic pay (fixed regular salary of wages of employees
every payroll period)
- pertain to goods, services or other benefits furnished by the
employer to the employees
Tax classification of fringe benefits
- in the strict sense, items of fringe benefits are scattered
among three classes of gross taxable compensation income
while some are exempt from income tax
o examples:
- Regular compensation: fringe benefit that
are fixed every payroll period (eg. Fixed
transportation allowance)
- Supplemental compensation: fringe
benefits that are variable and
performance-based (eg. Commission,
profit sharing, overtime pay)
- 13th month pay and OB: fringe benefits in
the form of incentives
- Fringe benefits furnished for the
employers convenience or necessity are
EXEMPT FROM INCOME TAX
Other fringe benefits:
- Rank and file: included as other benefits under 13th month
pay and other benefits
- Managerial and supervisory: excluded in compensation
income and are subjected to final fringe benefit tax
Scope of fringe benefit tax:
- Covers only the taxable fringe benefits of managerial and
supervisory employees
- Taxable fringe benefits EXCLUDE those items considered as
compensation income
General categories of fringe benefits subject to final tax
1. Management perquisite benefits
o management perks
o Non-performance based and are given as incentives
to management employees
o Not considered as compensation income, but as
fringe benefit subject to FBT
2. Employee personal expenses shouldered by the employer
o Expense takes the nature of an employee personal
expense or expenditure and is paid or assumed by
the employer in default of a proximate business
necessity, it is deemed a fringe benefit in its entirety
even if the expense is receipted in the name of
employer
**Hybrid expenses: employer incurs expenses which is purported partly
for business and partly for employees incentive, only 50% of the
expense representing the employee incentive is subject to FBT
- Examples:
o Housing benefits in the form of rental
accommodation
- Employer leases a residential unit for the
use of the employee and the business;
half business expense, half fringe benefit
o Allowing an employee free use of business property
- Employer allows employee to use
business properties, the rental value or
depreciation value of business property
over the period of usage is deemed half
business expense, half fringe benefit
Exempt fringe benefits
1. Benefits which are authorized and exempted from tax under
special laws (eg. Employers contribution to SSS, PhilHealth,
HDMF or group insurance)
2. Benefits required by the nature of, or necessary to trade,
business or profession of employer
3. Benefit given for the convenience or advantage of employer
4. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans
5. Benefit given to rank and file employees whether or not
granted under a collective bargaining agreement
**taxable fringe benefits of rank and file employees
are exempt from fringe benefit tax, but are subject to regular
income tax as part of compensation income
6. De minimis benefits within their legal limits
Necessity or convenience of employer rule
- If an expense is necessitated by nature of the trade, business,
or profession of the employer, or is furnished principally for
the employers convenience or advantage, it is an ordinary
business expense
- The personal advantage of employee is merely incidental to
the expense
- Examples:
o Scholarship program for an employee to study and
acquire competence for future use of business
o Car incentives to medical doctors so they will be
available for duty anytime
o Free transportation services to employees working
at distant facilities
o Mobile phone allowance to corporate secretaries
who are required to handle off duty client inquiries
o Sleeping quarters to field engineers and staffs
working on remote facilities
o Helicopters assigned to fishing employees for
locating schools of fish offshore or to mining
engineers for mineral exploration purposes
o Personal aircraft to a chief executive officer
managing business affiliates and subsidiaries
spread across different countries
o Car incentive to a travelling company salesman
o Sleeping quarters near the camp furnished to
military personnel so they will be available for duty
at any time of insurgency
o Housing units for an employee and his family near
the employers place of business to ensure the
employees availability anytime when employer
needs him
FRINGE BENEFIT TAX
- Final tax imposed on fringe benefit furnished, granted or paid
by employer to employee, except rank and file employees,
whether such employer is an individual, professional
partnership or a corporation, regardless of whether the
corporation is taxable or not, or the government and its
instrumentalities
 - Examples of fringe benefits: transferred to
o Housing benefits employee, MV is
o Expense account entire fair value of
o Vehicles of any kind property even if
o Household personnel, such as maid, driver or others property is partially
o Interest, for the difference between the market used in business of
rate (12%) and the actual interest granted employer
o Membership fees, dues, and other expenses borne Given in the form of 50% rental value of Depreciation value
by the employer for the employee in social and free use of property (if no useful lives:
athletic clubs or other similar organizations employers rental value, -REAL PROPERTY:
o Expense for foreign travel property depreciation value 20 years; computed
o Holiday and vacation expenses is used) as 1/20 or 5% of
o Educational assistance to employee or his value of property
dependents -PERSONAL
o Life or health and other non-life insurance PROPERTY: 5 years;
premiums or similar accounts in excess of what the computed as 1/5 or
law allows 20% of value of
property
Characteristics of fringe benefit tax
1. Final tax: withheld by employer at source; employee need not **valuation and reporting of monetary value is done quarterly
to report the fringe benefits in his ITR **in use of employer properties, reporting of monetary value ceases
2. Tax upon managerial or supervisory employees: not a tax to from the month the free use is discontinued
the employer
3. Paid by employer: withheld at source and remitted by Special guidelines on monetary value determination
employer to government
4. Grossed-up tax: monetary value or amount of fringe benefit **Taxable housing benefit
realized or taken home by the employee is effectively net of Monetary value Remarks
final tax which is to be withheld at source; monetary value is 50% of benefit Employer leases a residential property
first grossed-up by the complement percentage of applicable for the use of his employee and the said
fringe benefit tax rate before the fringe benefit tax rate is property is the usual residence of
applied employee
5. Due quarterly 50% of annual value Employer owns a residential property
o Manual filing: on or before 10th day of month of benefit and assigns the same for the use of his
following the quarter in which withholding was employee as his usual place of residence;
made the annual value of benefit is 5% of
o EFPS filing: on or before 15th day of month following whichever is higher of zonal or assessed
the quarter which withholding was made value of land and improvement
50% of annual value Employer purchases a residential
Procedures in computing fringe benefit tax of benefit property on installment basis and allows
1. Determine monetary value (taxable amount of benefits taken his employee to use the same as his
home or realized by managerial or supervisory employee) usual place of residence; annual value is
2. Determine gross-up rate and fringe benefit tax rate applicable 5% or 1/20 of acquisition cost, exclusive
for taxpayer of interest
3. Determine grossed-up monetary value by dividing the **purchase price is cost net of interest
monetary value by gross-up rate 100% value of Purchase by employer of residential
4. Determine fringe benefit tax by multiplying the fringe benefit benefit property and transfer of ownership in
tax to the grossed-up monetary value the name of employee, the value of
benefit is whichever is higher of
Rules on valuation of fringe benefits acquisition cost or zonal value
100% value of Purchase by employer of property and
Benefit Monetary value Remarks benefit transfer of title to employee for less than
Given in cash Amount paid for in Exception: adequate consideration, the value is
cash employer pays for [(fair market value or zonal value,
the rent of whichever is higher) less consideration
residence of paid by employee]
employee (MV =
50%) Exempt housing privileges:
Given in kind Fair value or book book value = cost 1. Military officials of AFP, PAF, Philippine Army, Philippine Navy
value, whichever is provision for on their quarters which are within or accessible from military
higher depreciation) for camp so they can be readily available on call to meet the
depreciable exigencies of their military service
properties 2. Housing unit situated or adjacent to the premises of a
**when ownership business or factory (within a maximum of 50 meters) from the
of property is
 perimeter of the business premises (may be farther based on Aircrafts including helicopters are deemed
health or safety requirements) solely for business use; hence, not subject
3. Temporary housing for an employee in a housing unit for 3 to FBT
months or less (not exceeding on quarter) Owned or Yachts whether owned and maintained or
maintained: leased by employer are presumed not for
**Expense Account depreciation value business use; hence, taxable as FBT
Benefit Monetary Value Remarks over 20 years
Expenses incurred Amount paid by When expense is **Yacht is considered an immovable
by employee paid employer receipted for and in Leased: entire
by employer the name of rental payment **If yacht is used solely for entertainment
employer and the of guests or prospective clients, it is not
expenditure does subject to FBT; depreciation of the yacht
not partake of the qualifies as entertainment, amusement
nature of a personal and recreation expense
expense
attributable to the
employee, it is not a **Household Expenses
taxable fringe Monetary Value Remark
benefit because it is Amount paid Employee expenses borne by
a business expense employer for household
**fixed and regular personnel, salaries of
RATA are treated as household help, personal driver
part of regular of employee, and other
compensation personal expenses such as
income and are homeowners association dues,
subject to garbage dues, electricity and
creditable water are taxable fringe
withholding taxes, benefits
not FBT
**Interest on loan at less than market rate
**Motor Vehicles of any kind - Interest forgone by employer representing the difference
Monetary Value Remarks between 12% and the actual interest charged is a taxable
100% of cost of Purchase by employer of motor vehicle in fringe benefit
motor vehicle the name of employee regardless of
whether the same is used partially in the **Membership fees, dues, and other expenses borne by the employer
business of employer for his employees in social and athletic clubs or other similar
**monetary value shall be reported in the organizations
quarter of purchase
100% of cash Cash benefit to employee for purchase of a Monetary Value Remark
benefit, except vehicle, even if the vehicle is partly used in Amount paid Taxable fringe benefit
when amount is the business of employer
subjected to **Expenses for foreign travel
withholding tax on - Reasonable business expenses for foreign travel for attending
compensation business meetings and conventions are exempt
1/5 or 20% of Purchase of car on installment basis by - In-land travel expenses: food, beverage, and local
acquisition cost employer with ownership placed in the transportation are EXEMPT
name of employee even if the car is used - Lodging costs amounting to an average of $300 or less per
partly for employers business, the benefit day are EXEMPT
is the acquisition cost divided by 5 years - Economy and business class airplane tickets are EXEMPT
Portion shouldered Employer shoulders a portion and is placed - First class ticket, 30% of ticket cost is presumed a FRINGE
by employee in the name of employee even if partially BENEFIT
used in business - Substantiation requirement:
50% of the value of Fleet of motor vehicles owned for the use o Apply only if expenses were supported by
benefit of business and the employees, the value of documentations proving actual occurrences of
benefit is the cost of all motor vehicles not meeting or convention; otherwise, subject to FBT
used for sales, freight, delivery service, and o Business meetings: supported by official
other non-personal uses divided by 5 years communication from business associates abroad
50% of the value of Fleet of motor vehicles leased for the use indicating the purpose of meeting
the benefit of business and the employee, the value of o Business conventions: supported by an official
benefits is the rental payments for motor invitation or communication from the host
vehicles not normally used for sales, organization or entity abroad
freight, etc. - EXPENSES FOR FAMILY MEMBERS OF EMPLOYEE
SHOULDERED BY EMPLOYER ARE TAXABLE FRINGE BENEFITS
IN FULL
 3. Exempt benefits paid for in cash or in kind
**Holiday and vacation expenses
- Taxable fringe benefits if shouldered by the employer Fringe benefit expense (monetary value) xxx
- Monetary value: amount paid or shouldered by employer Cash/property given xxx

**Educational assistance to the employee or his dependents 4. Exempt benefits which do not involve payment of cash or
- Generally taxable except when it is incurred for the transfer of property
convenience or furtherance of employers business
- Examples: No entry required
o Education or study is directly connected with
employers trade, business or profession Tax treatment of total fringe benefit expense
o There is a written contract that the employee is - It is a deductible expense of employer against his gross
under obligation to remain at the employ of income in the computation of his taxable income
employer for a period of time they mutually agreed - A deductible fringe benefit expense exists only when the
upon benefit is paid in cash or in kind
- EDUCATIONAL ASSISTANCE GRANTED TO DEPENDENTS OF
EMPLOYEE IS GENERALLY TAXABLE EXCEPT WHEN THE
ASSISTANCE WAS PROVIDED THROUGH A COMPETITIVE
SCHEME UNDER A SCHOLARSHIP PROGRAM OF THE
COMPANY

**Life or health insurance and other non-life insurance premiums or

similar amounts in excess of what the law allows
- Taxable fringe benefits EXCEPT the following insurance or
premium contributions allowed by law:
1. Contributions of employer for the benefit of employee
pursuant to the provisions of existing law such as
contributions to SSS, GSIS, PhilHealth, and HDMF
2. Cost of premium for group insurance of employees

FRINGE BENEFIT TAX RATES

Resident or Non-resident
Year Special aliens
citizen aliens
1998 34%
1999 33%
15% 25%
2000 and
32%
thereafter

GROSSED-UP MONETARY VALUE

- Monetary value of benefits divided by appropriate grossed-
up rate for employee
- Grossed-up monetary value is Inclusive of FBT

Resident or Non-resident
Year Special aliens
citizen aliens
1998 66%
1999 67%
85% 75%
2000 and
68%
thereafter

ACCOUNTING ENTRIES
1. Taxable benefits paid for in cash or in kind

Fringe benefit expense (monetary value) xxx

Fringe benefit tax expense xxx
Cash/tax basis of property given xxx
Fringe benefit tax payable xxx

2. Taxable benefits which do not involve payment of cash or

transfer of property

Fringe benefit expense (monetary value) xxx

Fringe benefit tax payable xxx
CHAPTER 5 FINAL INCOME TAXATION o Long term deposits or investment certificates:
certificate of time deposit or investment in the form
Features of final income taxation of savings, common or individual trust funds,
1. Final tax deposit substitutes, investment management
2. Tax withholding at source accounts and other investments with a maturity of
3. Territorial imposition not less than 5 years
4. Imposed on certain passive income and persons not engaged - Form shall be prescribed by the BSP and
in business in the Philippines (NRA-NETB and NRFC) issued by banks only (not by non-bank
financial intermediaries or finance
Final withholding system companies) to individuals in
- Imposes upon the person making income payments the denominations of P10,000 and other
responsibility to withhold the tax denominations as prescribed by BSP
- Tax which will be deducted at source is final **exemption of long term deposits for individuals is because they are
- Taxpayer receives the income net of tax usually for infrastructures, property development, etc., which is for the
- No need to file an ITR for the taxpayer development of the country
- Inherently territorial (applies only to certain passive income
earned from sources within the Philippines) o Tax on pre-termination of long-term deposits of
- Government cannot compel non-resident subjects of foreign individuals
countries to withhold tax as this would amount to - Deposit or investment placement of
infringement of foreign sovereignty individual taxpayer is pre-terminated
- ALL ITEMS OF INCOME EARNED FROM SOURCES ABROAD, before 5 years, any previously untaxed or
PASSIVE OR ACTIVE, ARE SUBJECT TO TAX UNDER THE exempted interest income will be subject
GENERAL SCOPE OF THE REGULAR INCOME TAX to the following:
Holding period Final tax
Rationale of final income taxation Less than 3 years 20%
- Built upon taxpayer and government convenience 3 years to less than 4 years 12%
- Relieves taxpayer from filing the ITR 4 years to less than 5 years 5%
- For the government, collection will be effective since there 5 years or more 0%
will be lesser risk of non-compliance or tax evasion
- Under NIRC, final income tax is imposed on certain passive o Savings or time deposits with cooperatives are not
income and upon non-resident persons not engaged in trade subject to final tax
or business in the Philippines - Final tax is limited to banks and shall not
- Passive income: income earned with very minimal be applied with time and savings account
involvement from the taxpayer and are generally irregular in deposit maintained by members with
timing and amount; not usually specifically monitored by cooperatives and by primary
taxpayers cooperatives with their federations
- Non-resident persons not engaged in business in the o Other applications of final tax on interest
Philippines: NRA-NETB and NRFC have high risk of non- - Deposit substitute
compliance; do not have principal offices or fixed places of - Government securities
business in the country - Money market placements
**PHILIPPINE RESIDENTS SHALL WITHHOLD THE FOLLOWING FINAL TAX - Trust funds
FROM THEIR GROSS INCOME, ACTIVE OR PASSIVE, FROM ALL SOURCES - Other investments evidence by
WITHIN THE PHILIPPINES certificates prescribed the BSP
o Deposit substitute: alternative form of obtaining
Non-resident person not General final tax rate funds from at least 20 persons at any one time
engaged in trade or business other than deposits through the issuance,
NRA-NETB 25% endorsement, or acceptance of debt instruments
NRFC 30% for the borrowers own account, for the purpose of
relending or purchasing of receivables and other
PASSIVE INCOME SUBJECT TO FINAL TAX: obligations, or financing their own needs or the
1. INTEREST OR YIELD FROM BANK DEPOSITS OR DEPOSIT needs of their agent or dealer
SUBSTITUTES o Government debt instruments including treasury
o From LOCAL CURRENCY BANK DEPOSITS OR bonds, treasury bills, and treasury notes shall be
DEPOSIT SUBSTITUTES considered as deposit substitute irrespective of
number of lender at origination if such debt
Individuals instruments and securities are to be traded or
Source Corporations
exchanged in the secondary market
Short-term deposits 20% 20%
Long-term deposits/
Exempt (does not
investment 20%
include NRA-NETB)
certificates

o Short term deposits: made for a period of less than

5 years
 o Foreign currency deposit with foreign currency excess is a taxable capital gain subject to
depositary banks (or foreign currency deposit regular income tax; any loss is deductible
system by residents) only to the extent of capital gain
Taxpayer Individuals Corporations o Taxability of stock dividends:
Resident 7.5% 7.5% - NORMALLY EXEMPT FROM INCOME TAX
Non-resident Exempt Exempt - EXCEPTIONALLY, STOCK DIVIDENDS ARE
SUBJECT TO TAX AT THE FAIR VALUE OF
**Resident taxpayers include resident citizens, resident aliens, THE STOCK RECEIVED UNDER THE
domestic corporations and resident foreign corporations FOLLOWING CONDITIONS:
**Non-resident taxpayers include non-resident citizens, non-resident - Subsequent cancellation and
aliens and NRFC redemption
**NRA-NETB and NRFCs are exempt o corporation cancels
**no long term or short term classification of foreign currency deposit or redeems stock
issued as a dividend
o Joint accounts on forex deposits at such time and in
- If the bank account is jointly in the name such manner as to
of a non-resident and a resident taxpayer, make the distribution
50% of the interest shall be exempt while and cancellation or
the other 50% shall be subject to the 7.5% redemption, in whole
final tax or in part, equivalent
to the distribution of
**Interest income subject to REGULAR TAX a taxable dividend,
1. Lending activities, whether or not in the normal course of the amount so
business distributed shall be
2. Investments in bonds taxable to the extent
3. Promissory notes it represents a
4. Foreign sources, whether bank or non-bank distribution of
5. Penalty for legal delay or default earnings or profit
o EQUIVALENT TO
2. DIVIDENDS DECLARATION OF
o Any distribution made by a corporation to its CASH DIVIDENDS
shareholders out of its earnings or profits and - If it leads to substantial
payable to its shareholders, whether in money or in alteration in ownership in the
other property corporation
o Types: o Stock dividends are
- Cash dividends: paid in cash given in lieu of cash
- Property dividends: paid in non-cash dividends or when
properties including stocks or securities the corporation
of another corporation declared an optional
- Scrip dividends: those paid in notes or stock or cash
evidence of indebtedness of the dividend
corporation - Stock dividend vs. stock split
- Stock dividends: pain in the stocks of the - Stock dividend: capitalization of
corporation earnings; may be taxable in
- Liquidating dividends: distribution of certain conditions
corporate net asset - Stock split: results in reduction
o AS A RULE, DIVIDENDS ARE INCOME SUBJECT TO in par value of stock and an
TAX, except: increase in the number of
- Stock dividends representing transfer of shares of shareholders; never
surplus to capital account shall not be subject to income tax
subject to tax; they are in the form of o Dividend tax rules
increase in corporate value (capital gain) Source Individuals Corporation
which should be properly taxable when Domestic 10% final tax Exempt
realized through disposal or sale of the corporation NRA-ETB -> 12% NRFC -> 30%
stock investment NRA-NETB -> 25% 15% when tax
- DISTRIBUTION OF STOCKS OF sparing rule applies
ANOTHER CORPORATION AS Foreign corporation Regular tax Regular tax
DIVIDENDS IS A TAXABLE
PROPERTY DIVIDEND AND NOT o Historical dividend tax rates
A STOCK DIVIDEND Earnings before January 1, 1998 Exempt
- Liquidating dividends: receipt of Earnings from 1998 6%
liquidating dividends is not viewed as Earnings from 1999 8%
income but as exchange of properties; Earnings from 2000 and thereafter 10%
dividend exceed cost of investment, the
 o Exempt dividends: share in residual income after such
- Intercorporate dividends: received by provisions is subject to final tax
domestic corporation and resident - Improperly Accumulated Earnings Tax (IAET)
foreign corporation from a domestic o Domestic corporations cannot avoid the dividends
corporation (minimize double taxation) tax by simply not declaring dividends
- Extends to dividends received o Corporations which accumulate earnings beyond
by business partnerships from the reasonable needs of business will be imposed
domestic corporations the 10% IAET, a penalty tax
- Exemption does not extend to
dividends received by general 3. ROYALTIES
professional partnership, Source of passive Individuals Corporations
exempt joint ventures, and royalties
exempt co-ownership since Books, literary 10% final tax 20% final tax
they are not considered works, and musical
corporations compositions
- Exemption does not apply to (pertain to printed
the share of a corporation from literatures)
the net income of a business Royalties on books 20% final tax 20% final tax
partnership due to absence of sold on e-copies or
express legal exemption; CDs
exemption is restricted to Royalties on NRA-ETB, NRA-NETB NRFC -> 25%
dividend declaration only cinematographic 25%
- Dividends from cooperatives: dividends films and similar
by an exempt cooperative to its members works
either representing interest on capital or Other sources 20% final tax 20% final tax
as patronage refunds shall not be subject
to tax - Passive royalties: royalties of claim owners or land owners of
** ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL mining properties, royalties of investors from companies that
TAX manufacture and sell their invention, and royalty from
- Also applies to dividends or share in the net income of entities licensing agreements that transfers the use of trademark or
considered as corporations under NIRC and special laws, such technology are subject to 20% final tax
as: - Royalties accrues from an undertaking where taxpayer has
o Real Estate Investment Trusts active involvement, active income subject to regular income
- REIT, publicly listed corporation tax
established principally for the purpose of
owning income-generating real estate 4. PRIZES
assets - Taxation of prizes may vary: either exempt from income tax,
- The following recipients of REIT dividends or subject to either final tax or regular income tax
are exempt from final tax: - Exempt prizes:
- NRA individuals or NRFC o Prizes received by a recipient without any effort on
entitled to claim preferential his part to join a contest (eg. Prizes from such
tax rate pursuant to applicable awards as Nobel Prize, Most Outstanding citizen,
tax treaty most benevolent citizen of the year, and similar
- Domestic corporations or RFC awards)
- Overseas Filipino investors o Prizes from sports competitions that are sanctioned
exempt from REIT dividend tax by their respective national sport organizations
until August 12, 2018 **Requisite of exemption:
o Business Partnerships, Taxable Associations, - Recipient was selected without any
Taxable joint ventures, joint accounts or consortia, action on his part to enter the contest
Taxable co-ownerships - Recipient is not required to render
- Net income of these entities is deemed substantial future services as a condition
constructively received by the partners, to receiving the price or reward
members or venturers, respectively, in - Taxable prizes:
the same year the net income is reported o Subject to either final tax or regular tax depending
- Final tax of 10% applies at the point of on the amount of the prize
determination of the income, not at the o There is no final tax imposition on corporate prizes
point of actual distribution under NIRC (must be subject to regular income tax)
- Share in business partnership net income: Amount of taxable Individuals Corporations
includes the share in the residual profit prize
and provisions for salary, interest, and Prizes exceeding 20% final tax Regular tax
bonus to a partner; if provisions for P10,000
salaries, interest and bonuses are Prizes not exceeding Regular tax Regular tax
expensed, subject to regular tax to the
P10,000
receiving partner, not to final tax; only the
**final taxation does not apply to foreign passive income; will be 7. TAX-FREE CORPORATE COVENANT BONDS
subject to regular income tax o Interest income of NRA, citizens or residents of the
Philippines on bonds, mortgages, deeds of trust, or
5. WIININGS other similar obligations of domestic or resident
o Individual taxpayers, winnings received from foreign corporations with tax-free or tax-reduction
sources within are generally subject to 20% final tax provision where the obligor shoulders in whole or
with the exception of the following exempt in part any tax on the interest shall be subject to a
winnings: final withholding tax of 30%
- Philippine Charity Sweepstakes Office
(PCSO) winnings Bond investor Individual Corporation
- Lotto winnings 30% final tax Regular income tax
o Similar to prizes, there is no final tax imposed on
corporate winnings under the NIRC **applies to all individuals regardless of classification
o Winnings that are not subjected to final tax by the
payor should be reported as part of the regular EXCEPTIONS TO THE GENERAL FINAL TAX ON NRA-NETB AND NRFC
income NRA-NETB NRFC
o Winnings from foreign sources are subject to General final tax 25% 30%
regular income tax rate
Types Individuals Corporations Exceptions:
PCSO or lotto Exempt Exempt Capital gain on sale 5%-10% CGT 5%-10% CGT
winnings of domestic stocks
Other winnings, in 20% final tax Regular tax directly to buyer
general Rentals on 25% of rentals 25% of rentals
**winnings on PCSO or lotto also extends to NRA-NETBs and NRFCs cinematographic
films and similar
6. TAX INFORMERS REWARD works
o Cash reward may be given to any person Rentals of vessels 25% of rentals 4.5% of rentals
instrumental in the discovery of violations of the Rentals of aircrafts, 25% of rentals 7.5% of rentals
NIRC or discovery and seizure of smuggled goods machineries, and
o Subject to 10% final tax other equipment
o Requisites: Special aliens 15% of gross income N/A
- Definite sworn information (special employees) from employer
which is not yet in the Lotto and PCSO Exempt Exempt
possession of the BIR winnings
- Information furnished lead to
Interest income Exempt Exempt
the discovery of fraud upon
under the foreign
internal revenue laws or currency deposit
provisions thereof
system
- Enforcement results in
Interest on foreign N/A 20%
recovery of revenues,
loans
surcharges, and fees and/or
Dividend income 25% 15% if tax sparing
conviction of the guilty party or
rule is applicable
imposition of any fine or
Tax on corporate 30% 30%
penalty
bonds
- Informer must not be a:
o BIR official or
employee **Capital gains tax: as a rule, NRA-ETB and NRFACs do not file ITRs;
exceptionally, NRA-NETBs and NRFCs are required to file ITR to report
o Other public official
or employee their gain from dealings in domestic stocks directly to buyers;
ownership of stocks shall not be transferred to the assignee without the
o Relative within the 6th
degree of required return and tax clearance from BIR that tax on transfer has been
paid
consanguinity of
those officials or
employee in the first **Special aliens are NRA-NETBs employed by regional or area
headquarters and regional operating headquarters of multinational
and second
o Amount of cash reward: whichever is the lower of companies, OBUs, or petroleum service contractors or subcontractors;
subject to 15% final tax on gross income from their employers
the following per case:
- 10% of revenues, surcharges, or fees
**Tax sparing rule: country of domicile of the NRFC credits against the
recovered and or fine or penalty imposed
and collected or tax due of such NRFC taxes presumed to have been paid by such NRFC
from the Philippines equivalent to 15% of dividends (requirement:
- P1,000,000
country to which NRFC is domiciled imposes no tax on dividends from
foreign sources)
Other applications of final income tax
1. Compensation income of Filipinos qualified as special aliens
2. Fringe benefits of managerial or supervisory employees
3. Income payments of residents other than depositary banks
under the expanded foreign currency deposit system (EFCDS)
to OBUs and EFCDUs
4. Income payments to oil exploration service contractors or
sub-contractors
Filipino employees qualified as special aliens
- Filipino employees occupying the same position as those held
by special aliens subject to 15% final tax may opt to be tax at
the same 15% final tax
c. The authorized city or municipality treasurer within
the revenue district where the withholding agents
place of business is located
Deadline for efps filings
- Group a 15 days following end of month
- Group b 14 days following end of month
- Group c 13 days following end of month
- Group d 12 days following end of month
- Group e 11 days following end of month
Penalties for late filing or remittance of final income tax withheld
- Same penalties for late payment

Fringe benefit tax Entities exempt from Final income tax:

- Includes all remunerations under an employer-employee - Foreign governments and foreign government-owned and
relationship that do not form part of compensation income controlled corporations
- International missions or organizations with tax immunity
Interest and other income payments to depositary banks under the - General professional partnership
expanded foreign currency deposit system - Qualified employee trust fund
- Residents, other than depositary banks under the expanded
foreign currency deposit system, shall withhold 10% final tax **first two are exempt on grounds of international comity
on income payments such as interest income on loans from **GPP and qualified employee trust funds are expressly exempt from
OBUs and FCDUs any income tax
**exempt not only to final tax but also to CGT
Income payments to sub-contractors of petroleum service contractors
- Every subcontractor, whether domestic or foreign, entering
into a contract with a service contractor engaged in
petroleum operations in the Philippines shall be liable to a
final income tax equivalent to 8% of its gross income derived
from such contract, such tax to be in lieu of any and all taxes
whether national or local
- Income received from all other sources within and without
the Philippines in the case of domestic subcontractors and
within for foreign subcontractors shall be subject to regular
income tax
- Gross income: all income earned or received as a result of the
contract entered into by the subcontractor with a serve
contractor engaged in petroleum operations in the
Philippines
- 8% final tax applies only to subcontractors, whether
individuals, corporations, resident or non-resident
- Petroleum service contractors are subject to regular income
tax
- Persons or entities contracted by a petroleum service
contractor to locally supply goods and materials that are
required by and in, or that are inherently necessary to, its
exploration and development of petroleum mineral resources
are entitled to the preferential rate of 8% final tax on their
gross income derived from such contracts

Final tax withholding tax return

- Filed in triplicate by every withholding agent or payor who is
either individual or corporation

Deadline and place for manual filing

- Filed and paid before the 10th day of the month following the
month in which the withholding was made with:
a. Authorized agent bank of the revenue district office
having jurisdiction over the withholding agents
place of business
b. In places where there are no authorized agent
banks, to the revenue collection officer
CHAPTER 6 CAPITAL GAINS TAXATION
Classification of taxpayers properties:
1. Ordinary assets: assets used in business
a. Stock in trade of a taxpayer or other real 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
b. Real property held by taxpayer primarily for sale to
customers in the ordinary course of his trade or
business
c. Real property used in trade or business (buildings
and/ or improvements) of a character which is
subject to the allowance for depreciation
d. Real property used in trade or business of taxpayer
2. Capital assets: any asset other than ordinary assets
**Asset classification is relative: depends upon the nature of the
taxpayers business
**Real and other properties acquired (ROPA) by BANKS are classified as
ORDINARY ASSETS even if banks are not actually engaged in the realty
business
**ROPA in the form of DOMESTIC STOCKS held by banks are CAPITAL
ASSETS
**stocks classified as capital assets all stocks and securities held by
taxpayers other than dealers in securities
Asset classification rules:
1. Property purchased for future use in business: ORDINARY
ASSET even though the purpose is later thwarted by
circumstances beyond taxpayers control
2. Discontinuance of the active use of the property does not
change its character previously established as a business
property
3. Real properties used, being used, or have been previously
used, in trade of the taxpayer: ORDINARY ASSETS
4. Depreciable asset: ORDINARY ASSET even if fully depreciated,
or there is a failure to take depreciation during the period of
ownership
5. Real properties used by an exempt corporation in its exempt
operations: CAPITAL ASSET
6. For taxpayers not engaged in the real estate business,
ordinary assets are automatically converted to capital asset
upon showing proof that the same have not been used in
business for more than 2 years prior to the consummation of
the taxable transaction involving such property
7. Classification of property transferred by sale, barter or
exchange, inheritance, donation, or declaration of property
dividends shall depend whether or not the acquirer uses it in
business
8. Real properties subject of involuntary transfer such as
expropriation and foreclosure sale, the involuntariness of
such sale shall have no effect on the classification of such real
property
**all personal assets of taxpayers not engaged in business are capital
assets while the business assets of taxpayers engaged in business may
either be ordinary or capital
Types of gains on dealings in properties
1. Ordinary gain: arises from sale, exchange, and other
disposition including pacto de retro sales and other
conditional sales of ordinary assets
2. Capital gain: arises from the sale, exchange, and other
disposition including pacto de retro sales and other
conditional sales of capital assets
Taxation of gains on dealings in properties:
Ordinary gains Regular income tax
Capital gains GR: regular income tax
Exception rule: CGT
Capital gains subject to CGT
Only 2 types of capital gains are subject to CGT:
1. Capital gains on the sale of domestic stocks sold DIRECTLY TO
BUYER
2. Capital gains on the sale of real properties NOT USED IN
BUSINESS
Scope of CGT
Gain on sale, exchange, and 5%-10% CGT
other disposition of domestic
stocks directly to buyer
Sale, exchange, and other 6% CGT
disposition of real property in
the Philippines
Gains from other capital assets RIT
Sale, exchange, and other disposition of domestic stocks directly to
buyer
Domestic stocks: evidence of ownership or rights to ownership in a
domestic corporation regardless of its features, such as:
1. Preferred stocks (participative, cumulative, etc.)
2. Common stocks
3. Stock rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation, or
amusement club (golf, polo, or similar clubs)
The CGT covers not only sales of domestic stocks for cash but also
exchange of domestic stocks in kind and other dispositions such as:
1. Foreclosure of property in settlement of debt
2. Pacto de retro sales: sales with buyback agreement
3. Conditional sales: sales which will be perfected upon
completion of certain specified conditions
4. Voluntary buyback of shares by the issuing corporation:
redemption of shares which may be re-issued and not
intended for cancellation
The term disposition does not include:
1. Issuance of stocks by a corporation: financing transaction
rather than a sale transaction; excess of fair value received
over the par value of shares issued is an additional capital to
the corporation; treasury share premium should not be
subjected to CGT
2. Exchange of stocks for services: no gain or loss can be
imputed as it involves payment of expense in kind
3. Redemption of shares in a mutual fund: gains from
redemption of shares in a mutual fund are exempted by NIRC
from income taxation
4. Worthlessness of stocks: considered a capital loss subject to
the rules of regular income tax
5. Redemption of stocks for cancellation by the issuing
corporation: gain or loss subject to regular income tax; gain
 by investor on redemption of redeemable preferred shares
are subject to regular income tax
**voluntary buyback of shares by issuing corporation held in
treasury which may later on be re-issued subject to CGT
6. Gratuitous transfer of stocks: donation inter vivos or donation
mortis causa subject to transfer tax
Modes of disposing domestic stocks: shares of stocks may be sold,
exchanged or disposed:
1. Through the Philippine Stock Exchange (PSE) sale of
domestic stocks classified as capital assets through the PSE is
subject to a stock transaction tax of of 1% of the SELLING
PRICE
o Non-dealer in stocks: applies to selling price
regardless if there is a gain or loss on sale; net
capital gains after deduction of transaction tax will
no longer be subject to CGT or RIT
o Dealer in stocks: not subject to stock transaction tax
but gain/loss is an ordinary gain/loss reportable as
item/deduction of gross income subject to RIT
2. Directly to buyer subject to a two-tiered CGT
Net gain up to P100,000 5%
Excess net gain above P100,000 10%
Proforma:
Selling Price xxx
Less:
Basis of stocks disposed xxx
Selling expenses xxx
DST on sale xxx xxx
Net capital gain (loss) xxx
- Selling price:
o Cash sale: total consideration received per deed of
sale
o Total consideration paid partly in money and partly
in property: sum of money and fair value of
consideration received
o Exchanges: fair value of property received
- Tax basis of stocks:
o Acquired by purchase: cost of property which will
be determined by the following methods in
descending order of priority:
- Specific identification: shares can be
specifically identified
- Moving average method: books of
accounts are maintained by the seller
where transaction of every particular
stock is recorder
- First-in, first-out method: stocks cannot
be specifically identified
o Acquired by devise, bequest, or inheritance: fair
value at the time of death of decedent
o Acquired by gift: lower of fair market value at the
time of gift and the basis in the hands of the donor
or the last preceding owner by whom it was not
acquired by gift
o Acquired for inadequate consideration: amount
paid by the transferee for the property
o Acquired under tax-free exchanges: substituted
basis of the stocks
- Stocks sold below their fair value: excess of fair value over the
selling price subject to donors tax; selling price less cost and
expenses subject to CGT
Scope of two-tiered CGT:
- Applies for ALL classes of taxpayers, individuals or
corporations, regardless of the place of sale, the identity of
the buyer and the length of time the domestic stocks were
held by taxpayer
- Even NRA-NETBs and NRFCs are required to file CGT return
- Regarded as the most universal rule in income taxation
- Transfer by nonresident alien of a foreign corporation to
anyone of any share of stocks issued by a domestic
corporation shall not be effected in its book unless the
transferor has filed with the Commissioner a bond
conditioned upon the future payment by him of any income
tax that may be due on the gains derived from such transfer,
or the Commissioner has certified that the taxes due on gain
realized have been paid
- Duty of transferor and the corporation the shares of which
are sold and transferred to advise the transferee of this
requirement
CGT compliance:
- Transactional CGT: reported after each sale, exchange, and
other dispositions through CGT return; shall be filed 30 days
after each S, E, OD of stocks; if qualified for installment
method, due within 30 days after each installment
- Annual CGT: tax on capital gains on S, E, OD of domestic stocks
directly to a buyer is based on the annual net capital gains
(transactional capital gains less transactional capital losses);
excess of annual capital gains tax due over the sum of
transactional capital gains taxes paid during the year is CGT
payable; excess of sum of transactional CGT over the annual
CGT due is CGT refundable
o Capital loss cannot be absorbed by ordinary gain
o Ordinary loss can be absorbed by capital gain
o Proforma:
Annual net capital gain (CG CL) xxx
Less: First P100,000 net gain (xxx) -> x 5% xxx
Excess net capital gain xxx -> x 10% xxx
Annual capital gains tax due xxx
Less: total transactional CGT paid (xxx)
CGT payable (refundable) xxx
o Deadline: filed on or before the 15th day of fourth
month following the close of taxable year;
individuals: April 15 (calendar year only allowed for
individuals)
Installment payment of the 5%-10% CGT
Domestic stocks sold in installments, CGT may be paid in installments if:
a. Selling price exceeds P1,000
b. Initial payment does not exceed 25% of selling price
Ration of initial payment (initial payment/ selling price)
CGT every installment (collection/contract price) x CGT
- With mortgage on stocks but not in excess of cost
o Selling price less mortgage assumed = contract
price
- With excess mortgage over cost
o Selling price xx
Less: mortgage assumed (xx)
Cash collectible xx
Constructive receipt (mortgage cost) xx
Contract price xx
 o Constructive receipt xx
Installments xx
Total initial payment xx
SPECIAL TAX RULES IN CGT OR LOSS MEASUREMENT
1. Wash sales of stocks
2. Tax-free exchanges
a. Exchange of stocks pursuant to merger or
consolidation
b. Transfer of stocks resulting in corporate control
Wash sales rule
- Occurs when within 30 days before and 30 days after the sale
(also referred to as the 61-day period), taxpayer acquired or
entered into a contract or option to acquire substantially
identical securities
- Capital losses on wash sales by NON-DEALERS IN SECURITIES
are not deductible against capital gains
- Securities for purposes of the 61-day rule include stocks and
bonds
- Has significance on the recognition of reportable capital
losses on domestic stocks sold directly to buyer
- Substantially identical means that stocks or bonds of the
same class with the same features
- Common stock NOT substantially identical to preferred stock
- Participating and non-participating stocks are NOT
substantially identical
- There is full replacement or full cover-up when the quantity
of the shares acquired in the 61-day period is at least equal to
the quantity of the shares sold
- Loss is deferred and is added to the tax basis of the
replacement shares
- If replacement shares are less than shares sold, only the
portion covered with replacement shares shall be disallowed;
the portion without replacement cover is a deductible
realized loss; the capital loss will be split into deferred loss
and deductible loss; only the deferred loss is added to the
replacement shares
- Involves the sale of shares at a loss, but same shares were
effectively reacquired before or after the sale by a covering
acquisition
- Rationale: intended to prevent taxpayers from feigning
temporary losses to manipulate their reportable taxable net
gain
- Prohibition against the claim of wash sales is not an absolute
rule but is a form of deferral of loss
- Not applicable to dealers in securities as it is normal business
for them to buy and sell stocks and realize gains or incur losses
within short periods of time
Tax free exchanges
- Merger or consolidation:
o Stockholders of a domestic corporation may
exchange their stocks for the stocks of another
corporation pursuant to a plan of merger or
consolidation
o Gains or losses on share-for-share swaps pursuant
to a plan of merger or consolidation will not be
recognized for taxation purposes
o Share-swap pursuant to merger or consolidation,
shareholders of the acquired corporation will be
integrated in the acquiring corporation; shares of
the acquired corporation will be called in
replacement with the shares of the acquiring
corporation
o Transaction merely involves a replacement of
shares of stocks of the shareholders of the
absorbed corporation with them being simply
integrated as shareholders of the acquiring
corporation
- Initial acquisition of control:
o No gain or loss shall be recognized if property is
transferred to a corporation by a person in
exchange for the stocks or units of participation in
such a corporation of which as a result of such
exchange, said person, alone or together with
others not exceeding four, gains control of said
corporation
o Control: ownership of stocks in a corporation
possessing at least 51% of the total voting power of
all classes of stocks entitled to vote
o Relevant only to the CGT or recognition of capital
gains when stocks are exchanged in the acquisition
of corporate control
o Initial acquisition of corporate control by not more
than 5 person is an investing transaction rather
than income generating transaction
- Exchange not solely for stocks:
o If stocks are exchanged not solely for stocks but
with other consideration such as cash and other
properties, the gains BUT NOT LOSSES are
recognized up to the extent of cash and other
properties received
o Regulatory formula on tax substituted basis arising
from tax-free exchanges:
Tax basis of old shares exchanged xxx
Add: gain recognized on transfer xxx
Less: cash or other properties received xxx
Tax basis of new shares received xxx
- Minimum public float requirement of publicly listed
corporations:
o Listed corporations are mandatorily required to
maintain a minimum public ownership under PSE
regulations
o Minimum public ownership is the higher of:
- 10% of issued and outstanding shares
- Minimum public ownership required by
the SEC or the PSE
o Non-compliance to the minimum public ownership
shall result in the de-listing of the stocks of the
corporation in the PSE
o Sale of listed stocks which fall below their minimum
public ownership requirement will be subject to the
5%-10% CGT and not the of 1% stock transaction
tax
o Ex-dividend: stocks are sold between the date of
record and date of payment (seller receives
dividends)
o Dividend-on: between date of declaration and date
of record (buyer receives dividends)
Tax issue: sale of stocks dividend-on to a corporate buyer
- Dividends may escape taxation when stocks are sold
dividend-on by individual taxpayers to a corporate buyer
between the date of declaration and the date of record
- At date of record, corporate buyer will be listed as
shareholder in the corporate books and will not be subjected
to the 10% dividend tax
How should the dividend on the stocks sold be taxed? Exception to the 6% CGT
- Income not expressly exempted or not subjected to final tax - Alternative taxation rule:
or CGT must be included in gross income subject to RIT o Individual seller of real property capital assets has
option to be taxed at either:
Persons not liable to the 5%-10% CGT - 6% CGT
- Dealers in securities - RIT
- Investors in shares of stocks in a mutual fund company in o Permissible only when seller is an individual
connection with gains realized upon redemption of stocks in taxpayer and the buyer is the government, its
the mutual company instrumentalities or agencies including GOCCs
- All other persons, whether natural or juridical, who are o Basis: to ease the burden of government
specifically exempt from national revenue taxes under expropriation where taxpayers may incur losses on
existing investment incentives and other special laws forced expropriation sale and are still required to
- Examples: foreign governments and foreign GOCCs; qualified pay tax
employee trust funds - Exemption rules:
o Exemption under NIRC
Sale, exchange, and other disposition of real property classified as - Sale, exchange, and other disposition of a
capital asset located in the Philippines principal residence for the re-acquisition
- Subject to 6% of the selling price or fair value, whichever is of a new principal residence by individual
higher taxpayers is exempt from 6% CGT
- Under the NIRC, the fair value of real property is whichever is - Principal residence: house and
higher of the: lot which is the primary
o Zonal value, which is the value prescribed by the CIR domicile of the taxpayer; if
for real properties for purposes of enforcement of there are multiple residences,
internal revenue laws principal residence is deemed
o Assessed value, which is the value prescribed by the that one shown on latest tax
City or Municipal Assessors Office for purposes of declaration
real property tax - Requisite of exemption:
o Zonal value exists only for land; assessed value is o Seller must be a
prescribed separately for land and improvements citizen or resident
- For lands, the CGT is 6% of whichever is the highest of the alien
selling price (bid price in case of foreclosure sales), zonal o Sale involves the
value, or assessed value principal residence of
- Independent appraisal valuation is not used in CGT the seller-taxpayer
o Proceeds of sale is
BIR Tax clearance utilized in acquiring a
- No registration of any document transferring real property new principal
shall be effected by register of deeds unless the commissioner residence
or his duly authorized representative has certified such o BIR is duly notified by
transfer has been reported and paid the taxpayer of his
- Certificate Authorizing Registration (CAR) intention to avail of
the tax exemption
Nature of the 6% CGT within 30 days of the
a. Presumption of capital gains: 6% CGT applies even if the sale sale through a
transaction resulted to a loss; gain is always presumed to prescribed return and
exist; the basis of taxation is the selling price or fair value, Sworn Declaration
whichever is higher, not the actual gain of Intent
b. Non-consideration to the involuntariness of the sale: CGT o Reacquisition of new
applies even if the sale is involuntary or is forced by residence must be
circumstances such as in the case of expropriation sale, within 18 months
foreclosure sale, dispositions by judicial order, and other from date of sale
forms of forced disposition; applies to conditional sale and o Capital gain is held in
pacto de retro sale escrow in favor of
government
Scope and applicability of 6% CGT o Exemption can only
Location of property Individual Corporation be availed of once in
Within All Domestic every 10 years
corporation only o Historical cost or
Outside Not applicable Not applicable adjusted basis of
principal residence
- Foreign corporations when they realize gains from sale of sold shall be carried
property, they are subject to RIT over to the new
- Sale of real property located abroad is not covered by the CGT principal residence
(subject to RIT if taxpayer is taxable on global income -> built or acquired
resident citizen and domestic corporation) **sale of principal residence must precede the acquisition of new
principal residence to be exempt
**full utilization of proceeds is exempt: escrow will be released once
taxpayer acquires new residence within 18 months; if not, escrow will
be taken by the government
**proceeds is fully utilized, tax basis of new residence shall be the basis
of old residence plus additional cost incurred by taxpayer in acquiring
the new residence (additional cost is the excess of purchase price of
new over selling price of old)
DST on sale of real properties: subject based on gross selling price or
fair market value whichever is higher; P15 for every P1,000 and
fractional parts of the tax basis; if government is a party to the sale,
basis shall be consideration paid
Penalties for late/non-filing or non-payment of CGT: Same penalties
with income tax

Basis of old residence xxx Entities exempt from CGT: same with those exempt in final tax
Add: additional out-of-pocket costs
(purchase price new less selling price old) xxx
Basis of new residence xxx

**Partial utilization of proceeds is partially exempt; portion

representing unused proceeds shall be subject to tax
[(unused / total proceeds) x CGT]
**Any interest which might have accrued on the escrow fund shall be
released to taxpayer; government is entitled to amount unpaid tax only

**Tax basis of new residence with less than full utilization:

Tax basis of old residence x utilized proceeds / total proceeds

o Exemption under special laws

- Sale of land pursuant to the
Comprehensive Agrarian Reform
Program; interest income on selling price
that may have been agreed upon the land
owner and tenant-buyer
- Sale of socialized housing units by the
National Housing Authority
**sale of the NHA of
commercial lots which is not
part of the socialized housing
project for the poor and
homeless is subject to CGT or
RIT and DST
**to be exempt, must comply
with price ceilings set by NIRC
and special laws

Payment of 6% CGT in installment: initial payment does not exceed 25%

of selling price; initial payment refers to collections in the taxable year
the sale is made

Initial payment exceeds 25% of selling price: sale would be taxed as if it

were a cash sale; CGT shall be paid lump sum upon filing of the CGT
return; applies without regard to whether or not any mortgage on
property exceeds cost of property disposed

Deadline for payment of CGT: due within 30 days from date of sale or
exchange; for foreclosure sales, due within 30 days from expiration of
applicable statutory redemption period; if installment, 30 days upon
receipt of every installment

Statutory redemption period on foreclosure sale: foreclosed properties

are subject to a right redemption by individual mortgagor within one
year counted not from the date of sale but from the time of registration
of sale in the office of registry of deeds; for juridical person, redemption
must be made before the registration of certificate of foreclosure sale
with applicable register of deeds or within 3 months from foreclosure,
whichever is earlier

Documentary stamp tax on sale of capital assets

DST on sale, exchange and other disposition of domestic stocks directly
to buyer: P0.75 for every P200 of the par value of stocks sold
CHAPTER 12 DEALINGS IN PROPERTIES - No holding period
- Regardless of length of holding period,
- Dealings in properties involves the sale, exchanges, and other 100% of capital gain or capital loss is
dispositions of properties such as ordinary assets or capital recognized
assets
- Dealings in ordinary assets are subject to regular income tax Proforma:
- Dealings in capital assets, other than domestic stocks and real - Individual
properties are also subject to regular income tax Net Sales/ Revenues/ Receipts/ Fees xxx
- Dealings in ordinary assets may result in an ordinary gain or Add: Other taxable income from operation xxx
an ordinary loss Total sales/revenue/receipts/fees xxx
- Dealings in capital assets may result in capital gain or capital Less: Cost of sales or services xxx
loss Gross income from operations xxx
- Determination of gain or loss: Add: Non-operating taxable income
Ordinary gain xxx
Selling Price xxx Net capital gain xxx xxx
Less: Tax basis or adjusted basis of Total gross income xxx
asset disposed xxx Less: Allowable deductions
Gain or loss xxx Business expenses xxx
Ordinary loss xxx xxx
- Selling price: includes amount realized from the sale and Net income xxx
other disposition of property which shall include the sum of
money received and fair value of non-cash properties - Corporation
received Sales/ Revenues/ Receipts/ Fees xxx
- Tax basis: cost, carrying amount, or depreciated cost of an Less: Cost of sales or services xxx
asset; cost is the value forgone to acquire it; generally, the Gross income from operations xxx
purchase price or the fair value of consideration paid in Add: Other taxable income not subject to FT xxx
acquiring the property disposed of Total Gross Income xxx
- Tax treatment of ordinary gains and losses: Less: Allowable deductions
o Ordinary gains are separate items of gross income Business expenses xxx
subject to RIT Ordinary loss xxx xxx
o Ordinary losses are items of deductions from gross Taxable net income xxx
income in the determination of net of net income
from business or profession
o Ordinary gain is taxable in full **ordinary gains or losses are recognized at their full amounts
o Ordinary loss is deductible in full **holding period rule is applicable only to measurement of gains or
o Bonds, debentures, notes, or other certificates of losses from capital assets other than stocks and real properties
indebtedness issued by any corporation or by **net capital loss is not deductible as an item of deduction for both
government are considered ordinary assets by NIRC individuals and corporations
if owned by banks or trust companies
o ROPA acquired by banks although not involved in - Rationale of holding period rule:
realty business, are considered ordinary assets o Ability to pay theory wherein the gains are taxable
- Tax treatment of capital gains and losses: only when realized or severed from capital through
o Capital losses are deductible only up to the extent disposal by sale or exchange
of capital gains from dealings in capital assets other o One-time lump sum taxation of capital gains results
than domestic stocks and real properties (capital to higher income tax compared to total taxes
loss offset to capital gain) assuming annual build-up of capital gains taxed
o Net capital gain is an item of gross income subject annually
to RIT o For corporations, one time taxation of the gain and
o Net capital loss is not an item of deduction against annual taxation of capital gain yield the same
gross income subject to RIT (net capital losses are amount; hence, no holding period
viewed as unnecessary expenses) - Effect of situs on dealings in properties:
- Determination of net capital gain or net capital loss o Taxpayer is taxable on world income such as
o Depends upon whether the taxpayer is an individual resident citizen and domestic corporations, rules
or corporation apply to all properties regardless of location
o Individual taxpayer: o Taxpayer is taxable only on Philippine income, rules
- Holding period rule: apply only to properties located in the Philippines
- Capital asset is held by an
individual for a period of not Net Capital Loss Carry Over
more than one year (short-term - Individuals are allowed to carry-over net capital loss as a
HP): 100% of capital gain or deduction against net capital gain of the following year
loss is recognized subject to the following limits:
- Held more than one year (long- o Limit 1: amount of net income in the year the net
term HP): 50% of capital gain or capital loss was sustained
loss is recognized o Limit 2: available net capital gain in the following
o Corporate taxpayer: year
 - Amount of net capital loss carry over shall be whichever is the C. For assets received by way of gratuitous title:
lowest of actual net capital loss, Limit 1, and Limit 2 a. Donation: whichever is lower of:
- NCLCO is strictly for one year only and is applicable only to i. Tax basis on hand of donor or the last
individual taxpayers preceding owner by whom it was not
- Corporate taxpayers are not allowed under NIRC to carry over acquired by donation or
net capital loss ii. Fair market value at date of gift
- Determine net income before dealings in capital assets **if basis is greater than market value of property
at the time of donation, basis shall be such market
Net income before dealings in properties xxx value
Ordinary gains xxx b. Inheritance: fair value of property on date of death
Ordinary losses (xxx) of decedent
Net income before dealings in capital assets xxx D. For shares received by way of tax-free exchanges
a. For pure share-for-share swap, tax basis of shares
exchanged or given is tax basis of shares received
Net capital gain (loss) xxx b. For share-swap with non-cash consideration, tax
Carry-over: lowest of net income before basis shall be substituted basis computed as:
dealings in capital assets, net capital
gain or loss, net capital gain next year xxx Transferor:
Net capital gain xxx Tax basis of shares exchanged xxx
Add: Gain recognized xxx
Amounts treated as dividends
Net income before dealings in capital assets xxx of shareholder xxx
Add: Net capital gain xxx Less: Cash and fair value of other
Net income xxx Properties received xxx
Tax basis of new shares received
**Net income before dealings in capital assets must be determined first By transferor xxx
**no capital loss carry-over when taxpayer incurs a net operating loss
in the period the net capital loss was sustained and when the following **Properties received as boot shall have the same basis as their FMV
year results to a net capital loss (boot refers to money received and other property received in excess
of the stocks or securities received by transferor on tax free exchange
- Rationale of first limit: Net income at incurrence of capital loss
o Anchored on the tax benefit rule Transferee:
o If law allowed full deductibility of capital loss, Original basis in the hands of
taxpayer would be benefited only up to the amount transferor xxx
of net income which the capital loss will erase and Add: gain recognized to transferor xxx
save from taxation Tax basis of shares received by
o Excess of capital loss above the amount will not Transferee xxx
have a tax benefit
o Carry over shall not result in allowing taxpayer more **Rules on tax basis of stocks received pursuant to plan of merger or
than what he could have claimed assuming full consolidation under CGT are also relevant to RIT for determination of
deductibility of capital loss is allowed by the law substituted basis of:
o Carry-over should not result in undue enrichment - Stocks, domestic or foreign, received by dealers in securities
to taxpayer pursuant to a plan of merger or consolidation
- Rationale of second limit: net capital gain in the following year - Foreign stocks received by non-dealers in securities pursuant
o Creates another net capital loss the following year to a plan of merger or consolidation
which will breach the one-year carry-over rule
Tax free exchanges:
Special rules in determination of tax basis 1. Merger or consolidation
A. For assets acquired by purchase, tax basis is the: o No gain or loss shall be recognized if in pursuant to
1. Acquisition cost for: merger or consolidation:
a. Capital assets - A corporation exchanges property solely
b. Non-depreciable ordinary assets such as land for stock of another corporation
c. Any asset purchased for an adequate - Shareholder exchanges his stock in a
consideration or those acquired at less than corporation solely for stock of another
fair value at date of acquisition - Security holder of corporation exchange
2. Depreciated cost for depreciable ordinary assets his securities in such corporation solely
- Acquisition costs include purchase price, tax assumed, and for stocks of another
acquisition-related costs such as commission paid in acquiring o Both parties must be parties to merger or
- Tax basis of land is the cost consolidation
- Tax basis of depreciable properties is the depreciated cost or o Merger: one corporation acquires all or
book value substantially all of the properties of another
- Tax basis for capital assets is acquisition cost o Consolidation: two or more corporations merged to
- Capital assets are not depreciated for purpose of taxation form one corporation
B. Other assets received by exchange, fair value of asset o Securities: includes bonds or debentures but does
received not include notes of whatever class or duration
 o Substantially all of properties of another
corporation: acquisition by one corporation of at
least 80% of the assets, including cash, of another
corporation which has the element of permanence
and not merely momentary holding
2. Initial acquisition of control
o No gain or loss shall be recognized if property is
transferred to a corporation by a person in
exchange for the stocks or unit of participation in
such a corporation of which as a result of such
exchange said person, alone or together with
others, not exceeding four persons, gains control of
said corporation
o Provided that stocks issued for services shall not be
considered as issued in return for property
o Assuming they do not corporate control, respective
gains or losses which shall be measured as
difference between fair value of stocks respectively
received and tax basis of properties respectively
exchanged shall be recognized as ordinary gain or
loss; basis of stocks received shall be fair value of
stocks; NOTE: if the land exchanged are capital
assets, subject to 6% CGT, still no gain will be
recognized under RIT
Taxable exchanges:
1. Share-for-share swap transactions or property-for-share
transaction that are not in pursuant to plan of merger or
consolidation; losses are recognized subject to applicable tax
rules
2. Transfer of properties to corporation alone or with four
others which did not result in acquisition of corporate control
3. Transfer of properties to a controlled corporation after the
initial acquisition of control; losses are non-deductible since
transferee is related party to transferor
Properties sold for less than adequate consideration: excess of fair
market value over selling price shall be deemed as a gift subject to
transfer tax; difference between selling price and tax basis is accounted
for as gain or loss
Capital gains and losses of GPP: net income of partnership shall be
determined similar to corporations; rules on dealings on capital assets
by corporations apply to partnership including GPP
Sale of properties with excess mortgage assumed by buyer: if the
amount of indebtedness assumed by buyer exceeds the tax basis of
property disposed of, any consideration received including the excess
of mortgage over basis of property sold constitutes gain
Wash sales: also apply to regular income tax particularly by non-dealers
of securities of:
a. Foreign shares
b. Debt securities, foreign or domestic
**gains from wash sales are taxable; losses are not deductible
**wash sales rule is not applicable to dealers in securities
Transactions considered exchanges:
1. Retirement of bonds, debentures, notes, or certificates and
other evidence of indebtedness
2. Short sale of properties
3. Failure to exercise a privilege or option to buy or sell property
that is a capital asset
4. Security becoming worthless
5. Receipt of liquidating dividends
6. Amount received in liquidation of partnership is also deemed
in exchange of partners interest on partnership
7. Redemption of shares for cancellation or retirement by
corporation
8. Voluntary buy-back of shares to be held in treasury

Exchanges not plainly for stocks

- Exemption rule to stockholders on share-for-share swap and
to security holders on security-for-share swap both pursuant
to a plan of merger or consolidation proceeds from the theory
that there is no realization
- Shareholder or security holder is still part of the same
corporate entity and the transaction merely involves a
replacement of stocks or securities by stocks (no realization
of income)
- If transferor received considerations other than stocks in the
exchange, gains but not losses shall be recognized to the
extent of cash and/or properties received

Gain classification:

Dealer in stocks Non-dealer in stocks

Domestic Ordinary gain CGT 5%-10%
corporation subject to RIT
Foreign corporation Ordinary gain Capital gain subject
subject to RIT to holding period
rule under RIT

Gain on sale of indebtedness with maturity of more than 5 years

- Exempt from income tax
- Any capital gain or ordinary gain in dealings in bonds,
debentures, or other certificate of indebtedness with
maturity of more than 5 years shall not be subject to income
tax
CHAPTER 15 A REGULAR INCOME TAXATION: SPECIAL
CORPORATIONS
Corporate income taxation:
- Subject to final tax, CGT, and RIT
- Corporation:
o Includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts,
associations, or insurance companies
o Excludes GPPs and a join 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 classification and taxation of corporations:
1. Domestic corporations: 30% regular tax on world taxable
income
2. Resident foreign corporation: 30% regular tax on Philippine
taxable income
3. Non-resident foreign corporation: 30% final tax on Philippine
gross income
Special Corporations: certain corporations subject to a special tax
treatment or preferential tax rates lower than 30% regular corporate
income tax
Sub-classification of corporate income taxpayers:
A. Domestic corporations:
a. Exempt domestic corporations
i. Exempt non-profit corporations under
the NIRC
1. Labor, agricultural, or
horticultural organizations not
organized principally for profit
2. Mutual savings banks not
having a capital stock
represented by shares, and
cooperative bank without
capital stock organized and
operated for mutual purposes
and without profit
3. Beneficiary society, order, or
association operating for the
exclusive benefit of the
members such as a fraternal
organization operating under
the lodge system, or mutual aid
association or a non-stock
corporation organized by
employees providing for the
payment of life, sickness,
accident, or other benefits
exclusively to the members of
such society, order, or
associations, or non-stock
corporation or their
dependents
4. Cemetery company owned and
operated exclusively for the
benefit of its members
5. Non-stock corporation or
association organized and
operated exclusively for
religious, charitable, scientific,
athletic, or cultural purposes,
or for the rehabilitation of
veterans, no part of its net
income or asset shall belong to
or inures to the benefit of any
member, organizer, officer or
any specific person
6. Business league chamber of
commerce, or board of trade,
not organized for profit and no
part of the net income of which
inures to the benefit of any
private stock-holder, or
individual
7. Civic league or organization not
organized for profit but
operated exclusively for the
promotion of social welfare
8. Non-stock and nonprofit
education institution
9. Government education
institution
10. Farmers or other mutual
typhoon or fire insurance
company, mutual ditch or
irrigation company, mutual or
cooperative telephone
company, or like organization
of a purely local character, the
income of which consists solely
of assessments, dues, and fees
collected from members for the
sole purpose of meeting its
expenses
11. Farmers, fruit growers, or like
association organized and
operated as a sales agent for
the purpose of marketing the
products of its members and
turning back to them the
proceeds of sales, less the
necessary selling expenses on
the basis of the quantity of
produce finished by them
ii. Government agencies and
instrumentalities:
- Departments and bureaus
inherently non-profit because
of their public service functions
- Income from unrelated
activities or from properties are
subject to income tax
iii. Certain government-owned and
controlled corporations
- Generally proprietary or
commercial in nature and are
subject to regular corporate
income tax except the following
exempt GOCCs:
o Government Service
Insurance System
(GSIS)
o Social Security
System (SSS)
 o Philippine Health and
Insurance
Corporation (PHIC)
o Local water districts
(RA No. 10026)
o Philippine Charity
Sweepstakes Office
(PCSO)
iv. Cooperatives
- Autonomous association of
persons who voluntarily joined
together to achieve their social,
economic and cultural needs
and aspirations by making
equitable contributions to the
capital required, patronizing
their products and services, and
accepting fair share of risk and
benefit
- Classification of registered
cooperatives for tax purposes:
Cooperatives which transact
business only with members:
not subject to any taxes and
fees (income tax on related
regular income, VAT and
percentage, donors, excise,
DST, annual registration fee)
Cooperatives which transaction
business with both members
and non-members:
o those with not more
than P10M
accumulated reserve
and undivided net
savings are exempt
from taxes
o those with more than
P10M accumulate
reserve and
undivided net savings
are subject to:
income tax on full
amount allocated for
interest on capital,
VAT on transactions
with non-members,
percentage tax on all
sales of goods or
services rendered to
non-members, all
other internal
revenue taxes unless
otherwise provided
by law
- Accumulated reserve (reserve
fund): totality of amounts
legally required to be deducted
annually from the annual net
surplus (income) of cooperative
for protection and stability
- Under RA 9520, net surplus
shall be distributed as:
o Reserve fund: at least
10% of net surplus
but must not be less
than 50% of net
surplus in the first 5
years of operation
o Education and
training fund: not
more than 10% of NS
o Community
development fund:
not less than 3% of NS
o Optional land and
building fund: not to
exceed 7% of NS
o Interest, which shall
not exceed normal
rate of return on
investments, and
patronage refunds
which must not be
less than 30% of NS
after deducting
statutory reserves
o Any excess to reserve
fund
- Cooperatives regardless of
classification are subject to:
o Applicable income
tax on unrelated
income
o CGT
o DST
o VAT on purchases of
goods or services
except VAT exempt
importations
o Withholding tax on
wages except for
MWE
o All other taxes for
which cooperatives
are directly liable and
not otherwise
expressly exempted
by any law
- Taxable income of cooperatives
is determined after provision
for general reserve fund
**qualification of tax exemption: relates only to income from
related activities; income from activities unrelated to the
purposes for which an exempt corporation is organized and
income from activities conducted for profit including income
from properties are taxable regardless of disposition made of
such income
**classification rule: income from related activities and
income from unrelated activities; income from unrelated
activities are subjected to regular income tax
**EXCEPTION TO CLASSIFICATION RULE: Non-profit
educational institutions: all revenues, and assets of non-stock
non-profit educational institutions used actually, directly, and
exclusively for education purposes shall be exempt from taxes
and duties; income from unrelated operations is still exempt
if used for educational purposes (if government school,
classification rule will apply; if private school, dominance test
will apply)
**exempt corporations are treated as regular domestic -
Pre-dominance test: gross
corporations with regard to their income from unrelated income from unrelated trade,
sources business or other activity
**fund raising activities, being commercial in nature, are exceeds 50% of total gross
taxable income derived by such
**requisites for exemption of non-stock, non-profit education institutions or
corporations: hospitals from all sources, the
o Must be non-stock corporation or association 30% regular corporate tax
organized and operated exclusively for religious, applies
charitable, scientific, athletic, or cultural purposes - Unrelated trade, business or
or for rehabilitation of veterans activity: any trade, business, or
o Should meet the following tests: other activity, the conduct of
- Organizational test: constitutive which is not substantially
documents exclusively limit its purposes related to the exercise or
to one or more of the ff: religious, performance by such
charitable, scientific, athletic, or cultural educational institution or
purposes or for rehabilitation of veterans hospital from its primary
- Operational test: regular activities of purpose
corporation or association must be Owner Educational Hospitals
exclusively devoted to the institution
accomplishment of the aforementioned Private 10% taxable 30% taxable
purposes; corporation fails this test if a income income
substantial part of its operations is Non-profit Exempt 10% taxable
considered activities conducted for income
profit Government Exempt Exempt
o All net income or assets of corporation must be
devoted to its purposes and no part of net income ii. Foreign currency deposit units (FCDUs)
or asset accrues to or benefits any member or and expanded FCDUs
specific person - unit or department of a local
o Must not be a branch of a foreign non-stock, non- bank or local branch of foreign
profit corporation bank authorized by BSP to
** certificate of tax exemption ruling: valid for 3 years unless engage in foreign currency
sooner revoked or cancelled (revoked on the date there are denominated transactions
material changes in character, purpose or method of - local bank: commercial bank,
operation which are inconsistent with the basis of income tax universal bank, thrift bank
exemption; revoked also on basis of non-renewal of tax organized under the laws of the
exemption ruling or non-revalidation of previously issued Philippines; bank shall secure a
rulings; failure to file an ITR results to loss of tax exempt TIN for its EFCDU or FCDU
status) separate from TIN of regular
**expenses of an exempt corporation that are not directly business unit
traceable to either related and unrelated activities are - authorized transactions of
allocated based on gross income FCDU: limited under their
**reporting requirements for exempt corporations: exempt license to short-term foreign
corporations with no taxable income shall file BIR form 1702- currency denominated
EX using itemized deductions only; if they are not delinquent transactions; authorized to
in filing their return or have no violations on withholding accept deposits and trusts
taxes, they will not pay any tax accounts, borrow on short-
term maturity, and invest in
b. Special domestic corporations short-term maturity deposits,
i. Proprietary educational institutions and readily marketable debt
non-profit hospitals securities and short-term
- Private or proprietary foreign currency loans;
education institution and non- authorized to enter into
profit hospitals are subject to currency swap with BSP, other
10% tax on world taxable FCDUs/EFCDUs or OBUs, enter
income subject to pre- into security lending activities
dominance test as lender, and engage in
- Private or proprietary repurchase agreement on
educational institution: any foreign currency denominated
private school maintained and securities
administered by private - authorized transactions of
individuals or groups with an EFCDU: same with FCDU plus
issued permit to operate from authorization to enter into
DepEd, CHED, TESDA foreign exchange trading, issue
 letters of credit for non-
resident exporters, accept or
negotiate drafts or bills of
exchange drawn under letters
of credits or make payments to
the order of non-resident
exporter upon request of their
foreign correspondent bank,
purchase export bills of
resident exporters, enter into
securities lending activities and
repurchase agreements
involving foreign currency
denominated securities
- FCDUs: limited to short-term
foreign currency transactions;
division of a domestic bank
- EFCDUs: allowed both short-
term and longer-term foreign
currency denominated
transactions; may be a division
of domestic bank or resident
foreign bank authorized to
conduct banking under
expanded foreign currency
deposit system
- OBU: division of foreign bank
which is authorized to conduct
foreign currency denominated
transactions
**tax on EFCDUs and OBUS: income of depositary banks
under expanded foreign currency deposit system from
foreign currency transactions with:
o Non residents (offshore income) exempt from
income tax
o Residents
- Banks under foreign currency deposit
system:
- OBUs
- Local commercial banks and
branches of foreign banks
authorized by BSP to transact
with FCDUs exempt from
income tax
- Other residents (onshore income)
- Interest income only 10% final
tax
- Other income, such as
commissions and gains
regular corporate income tax
**FCDUs are taxed same way as EFCDUs and OBUs
Nature of income (E)FCDUs Other Non-
or OBUs residents residents
Income from forex
transactions:
Interest income Exempt 10% FIT Exempt
from forex loans
and receivables
Interest income Exempt - Exempt
from forex
deposits
Other forex Exempt RCIT Exempt
income
Income from non- RCIT RCIT RCIT
forex transactions
** interest income of residents from depositary bank under
FCDs/EFCDs subject to 7.5% final tax
**income from regular banking unit of domestic banks is
subject to 30% regular corporate income tax
**allocation of cost and expenses of banks:
o Specific identification: expenses directly traceable
to income are allocated to that income
o Pro-rate allocation: expenses that are not directly
traceable to an income are allocated pro-rata on
ratio of all income
iii. PEZA or BOI-registered enterprises
- BOI -registered enterprises:
new registered firms under
Board of Investments enjoy
income tax holiday (income tax
exemption) for 6 years from
commercial operations for
pioneer firms and 4 years for
non-pioneer firms; income tax
holiday may be further
extended not to exceed 10
years upon meeting certain
conditions
- PEZA-registered enterprises: all
businesses operating in the
ecozone shall pay 5% of gross
income earned in lieu of all
taxes except real property tax
on land of developers (3%
national government, 2% city or
municipality where
establishment is located)
- Gross income earned: gross
sales or gross revenue derived
from business activity within
the ecozone, net of sales
discounts, sales returns and
allowances and minus cost of
sales or direct costs but before
any deduction is made for
administrative, marketing,
selling or operating expenses or
incidental losses during tax
period; gross income shall
include interest income, gains
from sales, and other income
c. Regular domestic corporations
B. Resident foreign corporations:
a. Special resident foreign corporations
i. Offshore banking units (OBU) and
expanded FCDUs
ii. Regional Area Headquarters and Regional
Operating Headquarters of Multinational
Companies
iii. International carrier
iv. BOI or PEZA-registered enterprises
b. Regular resident foreign corporations
C. Non-resident foreign corporations:
a. Special non-resident foreign corporations
i. Non-resident cinematographic film
owner, lessor or distributor
 ii. Non-resident lessor of vessels, chartered
by Philippine nationals
iii. Non-resident owner or lessor of aircraft,
machineries and other equipment
b. Regular non-resident foreign corporations