TAXATION LAW I l PRE-FINALS l Atty.

Amago l Updated by JCV 2017-2018

ALLOWABLE DEDUCTIONS KINDS OF ALLOWABLE DEDUCTIONS

ALLOWABLE DEDUCTIONS KINDS OF DEDUCTIONS

Allowable deductions are items allowed by law to reduce gross income 1. Itemized Deductions
in order to arrive at net income subject to tax. (Sec. 34, NIRC) 2. Optional Standard Deduction

Reason: Law allows it to be claimed or deducted. Basic Personal and Additional Exemptions Repealed
Basic personal and additional exemptions have been repealed by the
No deduction shall be allowed for taxpayers earning compensation TRAIN Law effective January 1, 2018.
income arising from personal services rendered under an employer-
employee relationship.
ITEMIZED DEDUCTIONS
Matching principle
Before income can be generated, you have to spend something for it. ITEMIZED DEDUCTIONS
You need to deduct your expenses from your income to arrive at your [ExInTaLoBaChaRePenDepDep]
net taxable income.
Deductions from Gross Income (Section 34 (A) – (K), NIRC)
1. Expenses
DEDUCTION V. EXCLUSION
2. Interest
3. Taxes
Deduction is an outflow of wealth. It represents the money spent or 4. Losses
the taxpayer‘s expenses. It pertains to the computation of net income. 5. Bad Debts
6. Charitable Contributions
Exclusion is an inflow of wealth but is not considered as part of gross 7. Research and Development
income in computing taxable income because it does not fall within the 8. Pensions
definition of income or is exempted by the fundamental law or statute. 9. Depreciation
It pertains to the computation of gross income. 10. Depletion

Premiums on Hospitalization and Insurance Repealed

DEDUCTION V. EXEMPTION
Exemptions refer to inflows of wealth not subject to tax because the
law expressly provides for its exemption.
Personal Exemptions are arbitrary amounts allowed for personal,
living or family expenses of the taxpayer. The amount has been
calculated to roughly cover the minimum subsistence of the taxpayer.
It can be claimed only by individual taxpayers.
Premiums paid on hospitalization and insurance have been repealed by
the TRAIN Law effective January 1, 2018.
Only for Business Income Earners
Only individuals/corporations earning business income can deduct
these. If purely compensation income earner, one cannot deduct
these. However, to claim all these deductions, official receipts are
required to substantiate them, which is why most would instead
choose the optional standard deduction.

BASIC PRINCIPLES OPTIONAL STANDARD DEDUCTION

BASIC PRINCIPLES GOVERNING DEDUCTIONS OPTIONAL STANDARD DEDUCTION (OSD)

1. The taxpayer seeking the deduction must point to some In lieu of itemized deductions, the taxpayer may elect an optional
specific provisions of the law authorizing the deduction. standard deduction of 40%. (Sec. 36 (L), NIRC)

2. He must be able to prove, through substantial evidence, that  Individual – 40% OSD on Gross Sales or Receipts
he is entitled to the deduction authorized or allowed by law.  Corporation – 40% OSD on Gross Income

Interpretation If a taxpayer elects to offset his losses against his profit from capital
Deductions are strictly construed against the taxpayer. asset transactions, he may no longer claim OSD since OSD is in lieu of
the itemized deductions which include losses from sales or exchanges
Withholding tax of capital assets.
Withholding tax must be strictly imposed when required under the law.
Otherwise, the salaries cannot be deducted from gross income. Also,
Basis of 40% OSD
there is a penalty equivalent to the amount the employer failed to
withhold.
Gross Sales P xxx Basis of Individual OSD
Related to trade or business Less: Cost of Sales (xxx)
The conditions in the law must be satisfied. The deduction must be Gross Profit P xxx. Basis of Corporate OSD
used or related to your trade or business.
OSD for individuals is higher compared to the corporate OSD since it is
Example:
based on gross sales/receipts wherein no deduction has been made for
Your business is leasing out real properties. You went to collect rents
cost of sales.
from your lessee. When you went out, your child wanted to buy the
very colourful balloons. Can you deduct the cost of balloons? No, it is
Individuals
not related to conduct of trade or business. There could be other
Resident citizens, non-resident citizens and resident aliens except
conditions.
purely compensation income earners can claim 40% OSD on gross
sales or receipts. Non-resident aliens cannot claim OSD.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 1 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
If an individual opted to use OSD, he can no longer deduct the cost of
sales or cost of services.
If an individual employs the accrual basis of accounting for his income
and deductions, the OSD shall be based on the gross sales during the
taxable year. If he employs cash basis, the OSD shall be based on his
gross receipts during the year.
Corporations
Domestic Corporations and resident foreign corporations can claim
40% OSD on their gross income. Non-resident foreign corporations
cannot claim OSD.
Taxable Estates & Trusts
Taxable estates and trust can claim 40% OSD. Estates and trusts are
taxed like individuals.
When option is made
To qualify for OSD, the taxpayer should apply at the first quarter of
the taxable year. It is irrevocable for the taxable year of choice.
For individuals, OSD would be better if the total expenses will not
reach 40%.
For corporate taxpayers, OSD would be beneficial if there is less cost
of sales/service because there could be a higher tax base for OSD, and
there could be less operating expense.
Still, there are other considerations in determining whether or not to
avail of OSD even if figures would go against OSD. For example, your
substantiation is not in accordance with regulations like when they are
not in the name of the company or there is no substantiation at all.
PERSONAL AND ADDITIONAL EXEMPTION
TN: This has now been repealed by RA 10963 or the TRAIN Law.
BASIC PERSONAL EXEMPTION
P50,000
This presupposes that there is an income. It is granted to all individuals
who are earning income. It is granted on the account that you are a
person in order to cover your living expenses.
ADDITIONAL EXEMPTION
P25,000 per child, maximum of 4 children
Requirements: (All must be complied with)
1. Dependent child - legitimate, illegitimate, or legally adopted child
2. Must be chiefly supported by the taxpayer (probably more than
50% support)
3. Child must be living with the taxpayer
4. Must not be more than 21 years old
5. Unmarried
6. Must not be gainfully employed
Exception: Even if more than 21 years old but incapable of self-
support, can still be considered dependent when mentally
incapacitated or with physical defect - something born with.
Physical disability - not something born with – out of accident.
Physical disability is not covered under this law
Change of status
If the taxpayer marries or should have additional dependent(s) during
the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim
the personal and additional exemptions for himself and his
dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such
dependents marries, becomes twenty-one (21) years old or becomes
gainfully employed during the taxable year, the taxpayer may still
claim the same exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became twenty-one (21) years
old or became gainfully employed at the close of such year.
This is favorable to the taxpayer:
If at end of the year, you gave birth to twins, you can claim
50k additional exemption for the whole year even if the twins
were born by 11:59:59 pm on December 31.
Even if the status changes at the beginning of the year, such as
the dependent becomes 22 by January, the dependent can still
be included in the deduction.
Husband and wife can claim maximum of 4 children for both.
Only one can claim the 4. Husband can claim 2. Wife can claim
the other 2.
NON-DEDUCTIBLE ITEMS
NON-DEDUCTIBLE ITEMS
Sec. 36, NIRC
Items Not Deductible. –
(A) General Rule. - In computing net income, no deduction shall in
any case be allowed in respect to –
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the
value of any property or estate; This Subsection shall not
apply to intangible drilling and development costs
incurred in petroleum operations which are deductible
under Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or
has been made; or
(4) Premiums paid on any life insurance policy covering the
life of any officer or employee, or of any person
financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such
policy.
(B) Losses from Sales or Exchanges of Property. - In computing net
income, no deductions shall in any case be allowed in respect of losses
from sales or exchanges of property directly or indirectly –
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or
indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was
under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor
with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 2 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Items Not Deductible from Gross Income
As a general rule in computing net income, no deduction shall in any
case be allowed with respect to:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of
any property or estate
EXC: Intangible drilling and development costs incurred in
petroleum operations
3. Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or has
been made
4. Premiums paid on any life insurance policy covering the life
of any officer or employee, or of any person financially
interested in any trade or business carried on by the
taxpayer, when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. Losses from Sales or Exchanges of Property, directly or
indirectly (Related Parties)
a. Between members of a family
b. Between a direct stockholder with more than 50%
equity interest and his corporation
EXC: liquidation distributions
c. Between corporations owned by the same
individual, direct or indirect, with more than 50%
equity interest
EXC: liquidation distributions
d. Between grantor and a fiduciary of any trust
e. Between trusts if the grantor for such trusts are
the same
f. Between the fiduciary of a trust and beneficiary of
such trust
Personal, living or family expenses
Reason: Not an expense related to your trade, business or exercise of
profession.
It is also deemed accounted for in the exemption of P250,000 under
the TRAIN Law.
Amount paid out for new buildings or improvements
EXC:
1. Proprietary educational institutions (Sec. 34(A)(2))
2. Intangible drilling and development costs incurred in
petroleum operations (Sec. 34 (G)(1), NIRC)
The full amount of the capital expenditure for the new asset cannot be
claimed in the taxable year in which it is paid but will be spread out
over the life of the asset.
The depreciation for the current year will be an expense and can be
claimed as a deduction. So, it is not really correct to say that is not an
allowable deduction. Only that the deduction is not outright.
Amount expended in restoring property
The capital expenditure for extraordinary restoration cannot be
claimed as a deduction but forms part of the value of the property
which will be subject to depreciation. The expense is not deducted
outright but spread over the life of the asset.
Ex. A mining company digs out an entire mountain and then incurs
costs to restore the property back to its original form. The costs will
form part of the value of the property which will be subject to
depletion.
Premiums paid on any life insurance policy
This is not deductible as it is a return of capital where the employer is
the beneficiary of the policy, directly or indirectly.
Ex. ABC Corporation insured the life of employee X, a key employee.
ABC pays the premium of P100,000 a year. The beneficiary is ABC
Corporation.
1. Can ABC Corp claim the premiums paid as a deduction on its
taxable income?
No, because it is a return of capital. ABC Corp can recoup
whatever it expended for the life insurance premiums for
employee X since it is the beneficiary.
2. Can Mr. X consider the life insurance as income?
No, there is no gain on the part of Mr. X as he will not be
benefitted by the life insurance. The proceeds will not go to
him or his heirs or his estate but to ABC Corporation.
3. If there is another life insurance, are the proceeds taxable?
No, life insurance proceeds, regardless of the beneficiaries,
are excluded from gross income.
4. If ABC Corporation makes the parents of Mr. X the
beneficiaries, what are the tax implications?
ABC Corporation can now deduct the expense from their
income. Mr. X can consider the life insurance as income
which will be taxable since he can gain something. The
parents of Mr. X will not be taxed upon receipt of the
proceeds since such are excluded.
Losses from sales or exchanges of property directly or
indirectly (Related Parties)
Between members of a family
The family of an individual shall include only his
1. Brothers and sisters (whether by the whole or half-blood),
2. Spouse,
3. Ancestors, and
4. Lineal descendants
No deduction shall be allowed for losses arising from transactions
between family members.
Reason: It may be simulated by the nature of the relationship.
Ex. Real property which forms part of the exclusive property of the
wife worth P1M is sold to the husband for P100K. The P900K loss
cannot be claimed as a deduction by the wife since this is a transaction
involving family members.
TN: Aunts are not included because they are collateral relatives.
Cousins can deduct the loss.
Between a direct stockholder with more than 50% equity
interest and his corporation
No deduction shall be allowed for losses from sales or exchanges of
property between an individual and corporation more than 50% in
value of the outstanding stock of which is owned, directly or indirectly,
by or for such individual.
EXC: In case of distributions in liquidation
Reason: There may be undue influence. A controlling shareholder may
dictate the price.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 3 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

A personal holding company is a corporation in which more than

TN: ‗Direct or indirect‘ here refers to the status of ownership. 50% of the value of its shares is owned by 5 or fewer individuals,
directly or indirectly, and which receives at least 60% of its adjusted
Ex. Shareholder directly owns the shares ordinary income from passive sources.
S1 is the controlling shareholder of X Corporation who owns 60% of
the shares. S2, S3, S4, and S5 own 10% each. Ex. S1 owns 80% of X Corp. which is a personal holding company,
while S2, S3, S4 and S5 own 5% each. Moreover, S1 owns 60% of Y
Shareholders of X Corporation Corp. while, S6, S7, S8 and S9 own 10% each. X Corp. entered into a
S1 60% transaction with Y Corp. which resulted in a loss of P2M.
S2 10%
S3 10% Shareholders of X Corporation
S4 10% (Personal Holding Company)
S5 10% S1 80%
S2 5%
Q: Can X Corporation and S1 deduct the loss resulting from the S3 5%
dealings between them? S4 5%
S5 5%
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a
controlling shareholder. Shareholders of Y Corporation
S1 60%
Ex. Shareholder indirectly owns the shares S6 10%
S1 owns 50% of the shares of X Corporation. S2, S3, S4, S5 and Y S7 10%
Corporation own 10% each. S1 also owns 75% of Y Corporation. S8 10%
S9 10%
Shareholders of X Corporation
S1 50% Q: Can X Corp. deduct the loss from its dealings with Y Corp.?
S2 10%
S3 10% A: No. The loss cannot be deducted since one of the corporations is a
S4 10% personal holding company and both X and Y Corporations are held by
Y Corporation 10% the same individual, S1, who owns more than 50% interest in each.

Shareholders of Y Corporation Between grantor and a fiduciary of any trust

S1 75% The parties to a trust are:
S6 10% 1. Grantor/trustor
S7 5% 2. Trustee/fiduciary
S8 5% 3. Grantee/ beneficiary
S9 5%
Reason: Trustor may influence the trustee to incur loss.
Q: Can X Corporation and S1 deduct the loss resulting from the
dealings between them? Between trusts if the grantor for both is the same
No deduction shall be allowed for losses from transactions between the
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a fiduciary of a trust and the fiduciary of another trust if the same
controlling shareholder who owns a total of 65% of the shares of X person is a grantor with respect to each trust
Corp. 50% of which is owned directly while 15% is owned indirectly.
The 15% interest is derived from the 20% ownership of Y Corp in X Trust 1 Trust 2
Corp which is multiplied by the 75% interest of S1 in Y Corp. A – trustor A – trustor
[20%*75%=15%] B – Fiduciary X - Fiduciary
C – Beneficiary Y – Beneficiary
This is called the grandfather rule.
If there is a transaction between B and X (fiduciary), they cannot claim
Between corporations owned by the same individual, direct or a loss because they have the same trustor A.
indirect, with more than 50% equity interest
No deduction shall be allowed for losses from sales or exchanges of Between the fiduciary and beneficiary of a trust
property between two corporations more than 50% in value of the Reason: Control may be exercised by one over the other
outstanding stock of which is owned, directly or indirectly, by or for the
same individual if either one of such corporations, with respect to the In the same illustration above, when trust B transacts with C, or X
taxable year of the corporation preceding the date of the sale or transacts with Y, any of them cannot claim the loss incurred.
exchange was under the law applicable to such taxable year, a
personal holding or a company or a foreign personal holding company.
GRANDFATHER RULE
EXC: In case of distributions in liquidation
GRANDFATHER RULE
TN: ‗ Direct or indirect‘ here refers to the gain or loss. The grandfather rule looks at the shareholders (S1) of the corporate
shareholder (Y Corp.) in order to determine the percentage of
It must be a personal holding company. Otherwise, it will not fall under ownership in a specific corporation (X Corp.).
the non-deductible items.

Holding company is a company engaged merely for investment

purposes. It exists for the sole purpose of controlling another company
or for owning property, rather than for the purpose of producing its
own goods or services.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 4 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

INCOME TAXATION FOR INDIVIDUALS

(4) A citizen who has been previously considered as non-resident
citizen and who arrives in the Philippines at any time during the
TAXABLE INDIVIDUALS
taxable year to reside permanently in the Philippines shall
likewise be treated as a non-resident citizen for the taxable year
TYPES OF TAXABLE INDIVIDUALS in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
1. Resident Citizen (RC) Philippines.
2. Non-resident Citizen (NRC)
3. Resident Alien (RA) (5) The taxpayer shall submit proof to the Commissioner to show his
4. Non-resident Alien (NRA) intention of leaving the Philippines to reside permanently abroad
a. Non-resident Alien Engaged in Trade or Business or to return to and reside in the Philippines as the case may be
(NRA-ETB) for purposes of this section.
b. Non-resident Alien Not Engaged in Trade or
Business (NRA-NETB) Sec. 23 (C) of the NIRC
5. Special Employees An individual citizen of the Philippines who is working and deriving
6. Estates and Trusts income from abroad as an overseas contract worker is taxable only on
income from sources within the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who receives compensation for
RESIDENT CITIZEN
services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an
Sec. 1, Art. IV of the 1987 Constitution overseas contract worker.
The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the NON-RESIDENT CITIZEN (NRC)
adoption of this Constitution; TN: NRC is taxable only for income within the Philippines.
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who A non-resident citizen is one who:
elect Philippine citizenship upon reaching the age of majority; 1. Establishes to the satisfaction of the Commissioner the fact of
and his physical presence abroad with a definite intention to
(4) Those who are naturalized in accordance with law. reside therein.

Write letter to commissioner or photocopy passport and

CITIZEN show when you leave

1. Resident Citizen (RC) 2. Leaves the Philippines during the taxable year to reside abroad,
2. Non-resident Citizen (NRC) either as an immigrant or for employment on a permanent
basis.
To be a citizen, whether RC or NRC, the above constitutional
requirements must be complied with. Immigrant – Immigrant visa does not matter when he/she
leaves, as long as he/she intended to be an immigrant.
RESIDENT CITIZEN (RC) Permanent employment – when there is no definite
TN: RC is taxable for income within and without. period. It is not merely contractual.
Ex: Nurses who leave the country in the middle of the
A Resident Citizen is a Filipino citizen who stayed permanently in the year are deemed non-resident citizen.
Philippines or stayed outside the Philippines for less than 183 days
during the taxable year. 3. Works and derives income from abroad and whose employment
requires him to be physically present abroad most of the time
He is one who is physically present in the Philippines and established a during the taxable year.
domicile in the Philippines.
Most of the time for taxable year = 183 days (365/2)
Residence for tax purpose requires physical presence in the Higher because intention is for wider taxpayers taxable in
Philippines. One must establish residence here, more or less similar the Philippines
with domicile. There must be animus revertendi. 183 days doesn‘t need to be continuous as long as it is
within the year
Temporary employment
NON-RESIDENT CITIZEN Seamen are considered temporary workers and belong
under this category
Section 22(E) of the NIRC
The term ―non-resident citizen‖ means: Illustration
You are assigned to SG for a period of 2 yrs. You left the country
(1) A citizen of the Philippines who establishes to the satisfaction of July 2, 2015. Reason is to earn income abroad. Employment
the Commissioner the fact of his physical presence abroad with a requires physical presence. Is it most of the year 2015 to be
definite intention to reside therein. considered a non-resident citizen.

(2) A citizen of the Philippines who leaves the Philippines during the Count if reaches 183 days.
taxable year to reside abroad, either as an immigrant or for July 2 to December 31 = 182 days; Resident Citizen for
employment on a permanent basis. 2015
But if you left on July 1, you will be considered NRC.
(3) A citizen of the Philippines who works and derives income from For Jan 1 to Dec 2016, NRC in this case
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 5 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

4. Has been previously classified as NRC and arrives in the SUMMARY

Philippines at any time during the taxable year to reside
permanently in the Philippines.
 He will be treated as NRC for the taxable year in
which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of
his arrival in the Philippines.
Hybrid or Dual Personality of Taxpayer
Same Illustration as above: Jan 1 to July 7, 2016 (end of the
assignment to Singapore).
In this case, he was previously classified as NRC and will reside
permanently in the Philippines.
The following are classified as NRC:
1. Filipino citizen with physical presence abroad and intention
to reside therein
2. Filipino citizen leaves Philippines during taxable year as
immigrant or permanent employee
3. Filipino citizen with temporary employment abroad (most of
the time = at least 183 days)
4. Previous NRC arrives in Philippines to reside permanently
with respect to income from abroad until date of arrival
5. Overseas Contract Worker
6. Seaman who is a Filipino citizen is considered OCW if
a. He receives compensation for services rendered
abroad as member of complement of vessel
b. Vessel is engaged exclusively in international trade

Therefore, this person is now a HYBRID NRC

Will be considered as NRC up to July 2, 2017
From Jul 7 to December 31, 2017, RC
Regardless of the date of arrival in the Philippines for as
long as the intention of arrival is to reside permanently in
the Philippines within the taxable year
And will only apply if previously classified as NRC in the
previous taxable year.
5. Working and deriving income from abroad as an overseas
contract worker.
 He is taxable only on income from sources within the
Philippines.
6. Receives compensation for services rendered abroad as a
seaman.
RESIDENT ALIEN
Sec. 22 (F) of NIRC
The term ―resident alien‖ means an individual whose residence is
within the Philippines and who is not a citizen thereof.
RESIDENT ALIEN (RA)
TN: RA is taxable only for income within the Philippines.
A resident alien is one who has a residence in the Philippines although
he is not a Filipino citizen.
He has no definite period of stay in the Philippines. He is not a mere
transient or sojourner. His definite purpose for staying requires an
extended stay and to that end, he makes his home temporarily in the
Philippines.

He shall be treated as an overseas contract worker provided You established residence here in Philippines, for as long as you
that the following are present: intended to make Philippines as your residence, or if you established
a. He is a member of the complement of a vessel presence in Philippines for 1 year. No hard and fast rule for residence
b. The vessel is engaged exclusively in international trade. requirement.

If he does not meet these qualifications, then he shall be Test is definite purpose or intention
treated as a resident citizen. The test is not the length of stay but the definite purpose or intention
to stay in the Philippines. If he has a definite purpose, then he is a
resident alien. An example is the kind of visa applied for.
Illustration:
Secondment abroad for 2 years starting on June 26, 2017
NON-RESIDENT ALIEN
1/1/2017 6/26/2017 12/31/2017 12/31/2018 6/26/2019 12/31/2019
Sec. 22 (G) of NIRC
The term ―nonresident alien‖ means an individual whose residence is
not within the Philippines and who is not a citizen thereof.
NRC NRC NRC RC
Stayed for 188 Stayed With respect to For income Sec. 25 (A)(1) of NIRC
days abroad abroad the income abroad from date of In General – A non-resident alien individual engaged in trade or
June – 4 whole year until date of arrival business in the Philippines shall be subject to an income tax in the
July – 31 arrival Reside same manner as an individual citizen and a resident alien individual, on
Aug – 31 Previously NRC permanently taxable income received from all sources within the Philippines. A non-
Sept – 30 Arrived in in Philippines
Oct – 31 Philippines during resident alien individual who shall come to the Philippines and stay
Nov – 30 taxable year therein for an aggregate period of more than one hundred eighty
Dec – 30 (180) days during any calendar year shall be deemed a ‗nonresident
188 days alien doing business in the Philippines; Section 22 (G) of this Code
notwithstanding.

Jan – 31 Sec. 25 (B) of NIRC

Submit proof to the Commissioner Feb – 28
Nonresident foreign individuals who have stayed within the Philippines
The taxpayer shall submit proof to the Commissioner to show his
Mar – 31
April – 30 or to for only 180 days or less, and have no business income derived within
intention of leaving the Philippines to reside permanently abroad
May – 31 the Philippines.
return to and reside in the Philippines.
June – 26
147 NON-RESIDENT ALIEN (NRA)
Philippine Embassy/Consulate days
A Filipino employed as Philippine Embassy/Consulate service personnel
of the Philippine Embassy/Consulate is not treated as a non-resident A non-resident alien is one who is not a Filipino citizen and who does
citizen, hence his income is taxable. not have a residence in the Philippines.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 6 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
TN: NRA, whether or not engaged in trade or business, is taxable only
for income within the Philippines.
Classification
NRA may be further classified into:
1. Non-resident Alien Engaged in Trade or Business within the
Philippines (NRA-ETB)
2. Non-resident Alien Not Engaged in Trade or Business within
the Philippines (NRA-NETB)
Test is length of stay
The test to classify NRA is the length of stay in the Philippines,
whether he stays for more than 180 days or, 180 days or less.
NRA-ETB
NRA-ETB is a non-resident alien who is engaged in trade or business
and has business income in the Philippines.
NRA-ETB is one who has stayed within the Philippines for an aggregate
period of more than 180 days (360/2) during the taxable year.
NRA-ETB is subject to 0-35% tax on net taxable income within the
Philippines.
NRA-NETB
NRA-NETB is a non-resident alien who has stayed within the
Philippines for only 180 days or less and who has no business
income in the Philippines.
NRA-NETB is subject to a final tax rate of 25% of gross income within
the Philippines.
Why distinction is important
They are subject to different tax rates. NRA-ETB is taxed at the regular
income tax rate of 0%-35% for taxable income within the Philippines
while NRA-NETB is taxed with a final tax rate of 25% of gross income
from within the Philippines.
SUMMARY
1. NRA-ETB
a. More than 180 days
b. 0-35% tax on net income
2. NRA-NETB
a. 180 days or less
b. 25% final tax on gross income
SPECIAL EMPLOYEES
Sec. 22 (DD) of NIRC
The term ―regional or area headquarters‖ shall mean a branch
established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.
Sec. 22 (EE) of NIRC
The term ―regional operating headquarters‖ shall mean a branch
established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and
planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development
services and product development; technical support and
maintenance; data processing and communication; and business
development.
SPECIAL EMPLOYEES
Special employees are alien individuals or Filipino citizens who are
subject to 15% tax based on their gross compensation income when:
1. They are employed occupying managerial and/or technical
positions with regional or area headquarters of multi-
national corporations, petroleum service contractors and
subcontractors, or offshore banking units.
2. If the special taxpayer is an alien, all of his gross
compensation income received is subject to 15% final tax.
3. If the taxpayer is a Filipino citizen, he has the option to be
taxed at 15% final tax based on his gross compensation
income received or at a regular income tax rate (0%-35%)
based on the net taxable compensation income if his gross
annual taxable compensation is at least P975,000 (whether
or not actually received).
15% preferential tax rate vetoed
Under the TRAIN Law, the preferential tax treatment shall not apply
for employees of ROHQ, RAHQ, OBU and Petroleum service
contractors and subcontractors which registered with the SEC
beginning January 1, 2018.
Item vetoed: Present and future qualified employees of existing ROHQ,
RAHQ, OBU, and Petroleum service contractors and subcontractors as
of December 31, 2017 shall enjoy preferential tax treatment.
Regional or Area Headquarters (RAHQs)
Refer to a branch established in the Philippines by multinational
companies which
1. Headquarters do not earn income from the Philippines
2. Act as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
TN: It is merely a liaison or communication office in the Asia Pacific.
It has no business operations in the Philippines.
Regional Operating Headquarters (ROHQs)
Refer to a branch established in the Philippines by multinational
companies which are engaged in any of the following services:
1. general administration and planning;
2. business planning and coordination;
3. sourcing and procurement of raw materials and
components;
4. corporate finance advisory services;
5. marketing control and sales promotion;
6. training and personnel management;
7. logistic services;
8. research and development services and product
development;
9. technical support and maintenance;
10. data processing and communication; and
11. business development.
TN: It actually operates in the Philippines.
In short, regional operating headquarters are income-generating while
regional or area headquarters are non-income generating, but they are
still headquarters for multinational companies.
Multi-national companies
These are foreign corporations having branches in the Asia Pacific and
other parts of the world. Actually, if a foreign corporation has a branch
in the Philippines, it can be claimed as a multinational company.
Foreigners or aliens
Aliens occupying technical or managerial positions can automatically
claim the 15% rate, provided that you are employed in a regional
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 7 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
operating or regional area headquarters of a multinational company, or
if you are employed in an offshore banking unit, or a company
engaged in petroleum or geothermal operations (examples: Shell,
Chevron, Procter and Gamble).
Filipinos
TN: These tests are no longer applicable beginning January 1, 2018.
1. Position and function test – employee must be occupying
managerial or technical position.
The requirement before was that you must be occupying both
managerial and technical position but now you can claim if you
are occupying either position.
The function must be actually exercised and you must have the
responsibilities of a managerial or technical position.
2. Compensation test – employees must be paid in their contract
(whether actual or not, as long as stipulated in the contract) the
amount of P975,000 per annum which is the minimum amount.
3. Exclusivity test – you are only hired by that company,
exclusively. It could happen than you have two employers which
are both multinational companies, then you can still qualify to
have the 15% rate.
The 15% rate is based on compensation from this company. It does
not apply to other incomes you earn.
If you are employed by an offshore banking unit, Citibank, which paid
you 975k per year and then you sell kutsinta to your co-employees and
you earn 500k per year, how will you be subject to tax? You still
complied with the requirements because you were employed
exclusively by Citibank. Where will you base the 15%? This will only be
applied to the compensation income, excluding your sales from the
kutsinta.
Are you allowed to claim deductions for your 15%? No, because it is
based on gross compensation income.
SUMMARY
1. Alien – 15% of gross compensation income
2. Filipino – either
a. 15% FT on gross compensation income; or
b. 0%-35% on net taxable compensation income
i. If gross annual taxable compensation is
at least P975,000
Managerial and/or technical positions with
1. Regional or area headquarters (RAHQs) of multi-national
corporations
2. Regional operating headquarters (ROHQs) of multi-national
corporations
3. Petroleum service contractors and subcontractors or
4. Offshore banking units (OBUs)
ESTATES AND TRUSTS
ESTATES AND TRUSTS
Estates and trusts are taxable as individuals.
ESTATES
ESTATE
An estate is composed of all properties, rights and obligations including
those properties, earnings or obligations that have accrued thereto
since the opening of the succession. The estate is to be transferred
from the decedent to his successors.
It is created upon the death of a person who is a resident citizen.
An estate will only be taxable when it is under administration or
settlement. Once it has been transferred it will not be taxable as an
estate anymore and will no longer be a separate taxpayer.
Illustration
The taxpayer dies on June 30, 2016. He died leaving behind a 10-door
apartment which earns P100,000 per month. This is his only income.
How will the income be taxed for the taxable year?
The income earned from January 1, 2016 to June 30, 2016 will be
attributable to the decedent and he will be taxed as a resident citizen.
So, the rental income of P600,000 will be taxed on his person.
However, the income earned after June 30, 2016 until December 31,
2016 will be taxed on his estate, for as long as his estate is still under
administration or settlement. Thus, the remaining P600,000 will be
considered as income of his estate not on his person.
Basic Personal Exemption Repealed
The exemption of P20,000 allowed from the income of the estate or
trust has been repealed by the TRAIN Law effective January 1, 2018.
TRUSTS
Article 1440 of the Civil Code
A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another
person is known as the trustee; and the person for whose benefit the
trust has been created is referred to as the beneficiary.
TRUSTS
A trust is an obligation imposed or a right to administer over a
property given to a person for the benefit of another.
Three instances:
1. Where the income is accumulated or held for future
distribution by the trustee
2. Where it is up to the fiduciary whether there will be
distribution or not
3. Where the income is collected by a guardian of an infant
which is to be held or distributed as the court may direct
Parties to a trust:
1. Trustor or Grantor
2. Trustee or Fiduciary
3. Beneficiary or Grantee
Q: For purposes of taxation who is the subject of tax?
A: None of them. It is the trust which is considered as the Income
Tax payer.
How to set up a trust
Go to a Trust Company and open a trust. The trust is for the benefit of
a certain individual.
Consolidation of income of two or more trusts
When there are two or more trusts created by the same person for the
same beneficiary, the taxable income of all trusts shall be consolidated
and the tax shall be computed based on the consolidated income.
The proportionate amount of the tax based on the consolidated
income shall be assessed and collected from each trustee.
Ex. Trustor X created trusts 1, 2, and 3 for the benefit of his child Y.
All trusts will be consolidated into one and will be treated as one
taxpayer.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 8 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
SUMMARY
GR: A trust once created can be considered a separate taxpayer.
EXC: Consolidation of trusts when the trusts are created by the same
person for the same beneficiary
TRUST INCOME SUBJECT TO INCOME TAX
Sec. 60 (A) of the NIRC
Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in
trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will
or trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is
to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period
of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
Unborn or unascertained persons
Remember the Civil Code provision on who has personality.
Supposedly a baby has no personality. But an unborn can be given
personality for all purposes not only contract when he has 7 months
intrauterine life and must live at least 24 hours.
But if the contract is for the benefit of the unborn it does not require
an intrauterine period. Any unborn/unascertained person is granted
the benefit but it can‘t be burdened with liability.
Income to be distributed
Income to be distributed directly to beneficiaries and the amount of
income collected by a guardian of an infant which is to be held or
distributed as the court may direct.
It is supposed to be included in the income subject to tax of the trust.
Example: Part of trust, the condominium unit if for benefit of the child.
It was mentioned as a condition of trust that every income earned by
the condo unit will be distributed to the child.
Rent Income per month 10,000
Yearly Income of child 120,000
Will it be part of the gross income of the trust?
Yes, but before you compute the taxable income, this distribution of
income will just be deducted. Add it to Total Gross Income but at the
end of the computation, you still end up deducting it. It‘s a hassle but
that is what is meant by the law when it said that the income which is
to be distributed must be shown that it was part of gross income but
you will deduct them as items distributed to the beneficiary.
So, you will add 120,000 to total gross income and then deduct it as a
distribution to the beneficiary. If not considered at all, this will not
change the answer but this must be shown for administrative
purposes.
Income during administration or settlement
Q: What happens if a person dies and his estate can‘t be settled right
away?
A: Under the law, only estate settled extrajudicially can be subject to
income tax. Now, in practice, both judicial and extrajudicial are
required to file ITR for as long as you are not able to settle taxes for a
particular estate, you will have to register the estate as if it‘s another
tax payer. Estates have a different TIN (Tax Identification Number).
Q: During the period of settlement, the period that you were not able
to settle estate just yet and estate has earned income. Will it be
subject to tax?
A: Yes, just like any other individual. Sec 60(A3) of the NIRC on the
imposition of tax, provides for the application of tax on ―income
received by estates of deceased persons during the period of
administration or settlement of the estate…‖
There is not much of a problem when you are talking about estate.
The fact that the estate earns income means that it is subject to tax. It
is automatic.
Income either to be distributed or accumulated
Take note, in number 2, it is required that it be distributed. Here in,
number 4, you will always include the income whether distributed or
not. The good thing is that, if it‘s distributed, it can be claimed as
deduction.
TRUST INCOME EXEMPTED FROM INCOME TAX
Sec. 60 (B) of the NIRC
Exception. –
The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
(1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees:
Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to
the extent that it exceeds the amount contributed by such employee or
distributee.
Employee’s trust
This is how companies circumvent the law on nationality requirement
of the Constitution, the 60/40. What the company does is that they
make use of employee‘s trust as stock holder to hold the 60%.
Conditions:
1. The employer has to contribute or employees may contribute
or both employer and employee.
AND
2. No part of the principal, the corpus, or income can be
distributed for the benefit of anyone other than the
employee.
Important: The conditions are both to be complied with because it
mentions AND. There is contribution required and no part of the
principal, the corpus, or income can be distributed for the benefit of
anyone other than the employee. It is only for the purpose of pension.
If you use the principal or its profit for other purposes than for pension
or profit sharing plan of employee, it becomes subjected to tax,
whatever income earned. Currently, Employee‘s trusts are managed by
bank.
If there‘s an employee trust and it is actually the one holding your
retirement benefit if it complies with the retirement benefit then there
is actually no tax to be paid.
But if the retirement plan does not comply with the requirements for
exemption (not reasonable private benefit plan duly approved by BIR)
but they set up this trust any income received by the employee from
trust will be subject to tax.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 9 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
COMPUTATION AND PAYMENT
Sec. 60 (C) of the NIRC
Computation and Payment. –
(1) In General. - The tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the
case of two or more trusts, the creator of the trust in each instance is
the same person, and the beneficiary in each instance is the same, the
taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and
such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him
bears to the consolidated income of the several trusts.
COMPUTATION
How to compute income
Income = Total amount received now less contributions made.
Example: If you have 100 years of employment in the company and
you pay 100 as contribution and you receive 100,000, how much is
subject to tax?
Total Amount received 100,000
Total Contributions − 10,000
Income Subject to tax 90,000
So end up NOT paying taxes.
The trust itself is not subject to tax granting it complies with the
conditions on SEC 60B.
Consolidation of Income of Two or More Trusts
If you are the same trustor for each of the trust and you have the
same beneficiary for each of the trust regardless of the difference in
trustee, the income will be consolidated.
Trusts set up by Y for the benefit of X. These can be consolidated
because the same trustor and the same beneficiary.
Trust A Trust B Consolidated
Income 500,000 500,000 1,000,000
Distribution to X 100,000 200,000 (300,000)
Taxable Income 700,000
How is this taxed?
The taxable income of P700,000 will be subject to 0-35% tax rate.
USUAL. This is the income (500k) and part of it is already distributed
(100k), meaning 100k is accounted for in the income 500k, so add
both income and deduct distributions from income. What is distributed
is part of the income already. Where will you get distribution, from
income-the total amount earned by the trust. So there is no need to
add distributions in the total income.
ANOTHER. The 500K income does not account for the 100k
distribution as distributed so add the 100k to 500k.
While the usual situation happens take note of how it was written in
the problem. If it says the income mentioned already excludes
distribution then add the distribution to total. Law says add the income
distributed as part of the Gross Income of the trust.
REVOCABLE TRUSTS
Sec. 63 of the NIRC
Revocable trusts.
Where at any time the power to revest in the grantor title to any part
of the corpus of the trust is vested
(1) in the grantor either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of such part of
the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the
taxable income of the grantor.
REVOCABLE TRUSTS
Important: Trust as a separate entity must be an irrevocable trust.
In other words, if we talk about trust being subjected to tax as a
separate entity, it must be an irrevocable trust. Otherwise, if it is
revocable, it does not become a separate taxpayer and the income is
included as part of the income of the trustor.
Illustration
A condominium unit is placed in trust and the trustor‘s children are
revocable beneficiaries.
This means that the beneficiaries can be changed and the trustor can
make use of the profit instead. The control of the trust is still with the
trustor. It‘s as if he never placed it in a trust and it was as if he
allowed others to manage it but everything is still under the trustor‘s
control.
Here, it is not considered a separate tax payer. The trust is just an
extension of his personality as a trustor/grantor.
The law deems it that if the trustor is able to control the income or
corpus of the trust and to the extent of even the beneficiary, then it
cannot be considered as a separate taxpayer.
This is the reason why only an irrevocable trust may be considered a
separate taxpayer. This may be subject to abuse because one can set
up a lot of trusts.
INCOME FOR THE BENEFIT OF GRANTOR
Sec. 64 of the NIRC
Income for the Benefit of Grantor
(A) Where any part of the income of a trust
(1) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the
grantor, or
(2) may, or in the discretion of the grantor or of any person not having
a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor, or
(3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor, such part of the income of the
trust shall be included in computing the taxable income of the grantor.
`
(B) As used in this Section, the term 'in the discretion of the
grantor' means in the discretion of the grantor, either alone or in
conjunction with any person not having a substantial adverse interest
in the disposition of the part of the income in question.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 10 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
INCOME FOR THE BENEFIT OF GRANTOR
This means that the trust has earned an income but the grantor makes
use of the income for the payment of his life insurance. If you made
your child a beneficiary when the income is just used for the payment
of your life insurance, there is no separate entity for the trust. It is an
extension of your personality. The income this property may generate
is still under your control and it is still for your benefit.
For purposes of determining whether it will be treated as a separate
entity or not, it must be that the trustor has no control over the
principal and income of the tax payer.
DEDUCTIONS ALLOWED TO ESTATES & TRUSTS
Sec. 61 of the NIRC
Taxable Income. - The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of
an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate
or trust for the taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the income collected
by a guardian of an infant which is to be held or distributed as the
court may direct, but the amount so allowed as a deduction shall be
included in computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction under
this Subsection shall not be allowed as a deduction under Subsection
(B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons
during the period of administration or settlement of the estate, and in
the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be
allowed as an additional deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for
its taxable year, which is properly paid or credited during such year to
any legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall
not be allowed: Provided, That the amount of any income included in
the return of said trust shall not be included in computing the income
of the beneficiaries.
DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS
1. Income to be distributed directly to beneficiaries and the
amount of income collected by a guardian of an infant which
is to be held or distributed as the court may direct
2. Income either to be distributed to the beneficiary or
accumulated on the discretion of the fiduciary
Income to be distributed
If there is any income distributed by the trust or estate to any heirs or
beneficiaries then this can be claimed as a deduction.
Example
A condominium unit is placed in trust and the trustor‘s children are
beneficiaries. You stated in the trust that the income of this property
will be distributed to the children and the total Income distributed is
120,000. This amount can be claimed as deduction.
If the only income of the trust is 120,000 and it is distributed to the
beneficiaries, the taxable income is zero.
Q: Does this mean the government is prejudiced since no tax is paid
by the trust?
A: No. Since the beneficiary will be the taxed, it is considered an
income on their part. While it is allowed as a deduction to the trust, it
is considered an income of the beneficiary. Taxes are collected not on
trust but on the beneficiary. The government still finds a way to collect
taxes.
Income either to be distributed or accumulated
If ever there will be distributions to any person other than the
beneficiary, or in the case of estate, it is possible that it is to be
distributed other than the heirs, those distributions can be considered
as a deduction. But while there is a deduction, there is tax to be paid
for it but it is on the part of person receiving such property.
It is the recipient that is subject to tax and not the trust itself.
Q: What is the purpose of creating trust when income is distributed
and the taxable person is the recipient and not the trust?
A: It is actually a tax planning tool to minimize the tax.
Trust administered in a foreign country
Q: Does this mean that the trust is not considered anymore as a tax
payer?
A: No. It will be considered as a tax payer but the income that you will
claim in the Philippines will be net of the taxes paid abroad.
Example:
Total income abroad 100,000
Taxes paid (abroad) (40,000)
Net Income 60,000
In the Philippines, the 60,000 is considered taxable income. No
deductions is allowed under (A) and (B) because it was already
claimed in the foreign country. It was already taxed abroad, so in the
Philippines, only the net income is subject to tax.
EMPHASIZED BY SIR
Trust is taxable if it is irrevocable trust.
What is considered as its income?
Income of the property under trust and even the income ought to be
distributed are also considered its income.
What is considered deduction to person who created the
trust?
The one where it is included in income but deducted. Only the
distribution is deducted.
What is added as income of the trustor?
Only happens if Y sets up a trust and Y has control over how income is
distributed. So the trust is not a separate entity but an extension of
the income of Y.
You include the distribution for purposes of determining GROSS
Income but deduct it for purposes of taxation. What is being taxed is
the amount less the distribution
When trustor has control over the entire trust. No computation
separate for the trust everything is considered as income of the
trustor. If in this case trustor gave the income to someone else, on the
part of the recipient it will be considered as taxable income. But trustor
cannot claim it as a deduction. It is as if you are subject to tax for the
entire income and then someone else earned anther income. The
same amount is taxed twice.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 11 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

VAT Threshold of P3,000,000

INCOME TAX RATES
The option to be taxed at 8% on the business income is only available
if the gross income of the taxpayer does not exceed P3,000,000.
TAX RATES OF INDIVIDUALS
Otherwise, if the total income exceeds the threshold, then the
1. RC – 0-35% of net income within & without taxpayer cannot opt for the 8% tax rate even if he is a self-employed
2. NRC – 0-35% on net income within individual or professional or mixed income earner.
3. RA – 0-35% of net income within
4. NRA-ETB – 0-35% of net income within Illustration
5. NRA-NETB – 25% of gross income within The compensation income is 1M and the business income is 2.5M. The
6. Estates & Trusts – 0-35% of net income taxpayer availed of OSD.
7. Special Employees – 15% of gross compensation income
Since the taxpayer is a mixed income earner whose income does not
INCOME TAX RATES exceed the 3M VAT threshold, he can choose to be taxed on his
compensation and business income at the graduated income tax rates
of 0-35% using the tax table or apply the 8% optional tax rate on his
business income.

Even if he opts for the 8% tax, such is only applied to the business
income. His compensation income will still be subject to the graduated
income tax rates.

Here, choosing the 8% tax rate on the business income is more

beneficial since the tax due is only P370,000 which is lesser than the
tax due of P670,000 under the graduated income tax rates.

Tax Due
Using the Graduated Income Tax Rates

Gross Income P 2,500,000

Less Allowable Deduction (2.5M*40%OSD) (1,000,000)
Taxable Business Income P 1,500,000
Compensation Income 1,000,000
Total Taxable Income P 2,500,000
Less Threshold (excess over 2,000,000) (2,000,000)
Total P 500,000
Multiplied by Tax Rate 32%
Total P 160,000
Add Threshold (490,000) 490,000
Total Tax Due and Payable P 670,000

Tax Due
Using the 8% Optional Tax Rate

Business Income P 2,500,000

Less Threshold (in excess of 250,000) (250,000)
Taxable Business Income P 2,250,000
Multiplied by Optional Tax Rate 8%
Tax Due on Business Income P 180,000

Compensation Income P 1,000,000

Less Threshold (excess over 800,000) (800,000)
Total P 200,000
Multiplied by Tax Rate 30%
Total P 60,000
Add Threshold (130,000) 130,000
Tax Due on Compensation Income P 190,000

Tax Due on Business Income P 180,000

Add Tax Due on Compensation Income 190,000
Total Tax Due and Payable P 370,000

Source: https://www.pwc.com/ph/en/tax-alerts/assets/pwcph_tax-alert-34.pdf

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 12 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
INCLUSIONS
GROSS INCOME FOR INDIVIDUALS
[CGGIRRDAPPP]
1. Compensation for services in whatever form
2. Gross income derived from the conduct of trade or business or
the exercise of a profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner‘s distributive share from the net income of the general
professional partnership
COMPENSATION INCOME
COMPENSATION INCOME
It refers to all remuneration for services rendered by an employee for
his employer, unless specifically excluded under the Tax Code.
Existence of employer-employee relationship
There is compensation income when there is an employer-employee
relationship. The four-fold test and the two-tiered test can be used to
determine the existence of the employer-employee relationship.
The four-fold test consists of: (1) the selection and engagement of the
employee; (2) the payment of wages; (3) the power of dismissal; and
(4) the power to control the employee‘s conduct.
The two-tiered test pertains to the (1) economic dependency test and
(2) control test.
How compensation is paid
Compensation income can either be paid in cash or in kind.
If paid in cash, then the amount of the money received is the
compensation income.
If paid in kind, then the compensation income is equivalent to the
monetary value of the property under the doctrine of cash equivalent.
How to tax income if it’s not in cash
At the rate of its Fair Market Value (FMV)
Q: What if instead of money, you received jewelry, car, house and lot,
or some other things from your employer, in addition to your
compensation, how much is the compensation?
A: Compensation is equivalent to the fair market value of the property.
DOCTRINE OF CASH EQUIVALENT
All items considered as income which you do not receive as cash has
to be valued in cash for purposes of taxation.
COMPENSATION IN KIND
Stock options
Promissory note
Cancellation of debt
Tax liability as compensation
STOCK OPTIONS
Stock options are taxable as compensation income taxed only if there
is a benefit to the employee such as when he can buy the share at a
more favorable price than the public.
How computed
The tax will be on the amount of the difference between the book
value or the FMV of the stock, whichever is higher, and the exercise
price (price which you are allowed to buy the stock). The tax is
imposed whether or not the stock option is exercised.
Example: When the option gives you the right to purchase the stock at
P100 when the price outside is P500. You would not have the option if
you were not an employee of the company.
Important: Even if you do not exercise this option, you will still be
subject to tax because the benefit has already been in your control. It
was only that you chose not to avail of the benefit. At the time it was
granted, there was already a benefit to you so you are already taxable.
PROMISSORY NOTE
Compensation is equivalent to the face value of the promissory note,
unless it is discounted. For a discounted promissory note, the cash
discounted value will be the amount of compensation.
CANCELLATION OF DEBT
Cancellation of debt is considered an income when you render services
and in exchange, your debt is forgiven.
Example: Supposedly, I have a P10k obligation and I am supposed to
pay you in cash. Instead, I rendered services and you are now
supposed to pay me. In this case, we might as well cancel the
obligation instead of receiving the cash and giving it back as payment.
I would not have paid the debt had I not rendered the service. This is
considered as compensation income.
Q: Do we consider employer-employee relationship?
A: Yes. Compensation income presupposes EE relationship. However, it
doesn‘t mean that if there is no EE relationship, there is no income. It
is just that it is termed differently as professional income as
independent contractor.
Q: What if there is no service required?
A: This is purely out of liberality. Thus, it is not taxable under income
tax but subject to donor‘s tax.
TAX LIABILITY AS COMPENSATION
This happens when the employer shoulders your tax on compensation
instead of you getting less than your gross monthly salary. The
employee receives income net of taxes. The amount shouldered by the
employer is subject to tax.
Example: If you have a gross monthly salary of 100k, less tax, net
amount is only 65k (assuming it is taxed at 35%). If you will receive
the same 100k every month, it means that the employer has
shouldered your 35K tax.
The portion of the tax shouldered by your employer should have been
part of your income. However, there seems to be an issue here if you
consider this as income so this should be taxed in the first place.
To make it simple, it seems that your compensation is grossed up.
Under the employment contract, it should state that the amount you
will receive is already net of tax and your employer will shoulder the
tax instead of them withholding it from you.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 13 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
So, the 100K is divided by 65%, the amount of 155K is your actual
salary coming from the employer. This is like a fringe benefit. You are
supposed to pay tax of 54k but instead the employer shoulders this tax
liability.
SUMMARY
 Cash – actual value of the cash received
 Promissory note – face value of the promissory note
 EXC: Discounted PN – cash discounted value
 Stock options – taxed only if the employee can buy the share
at a more favorable price than the public
 Cancellation of debt – value of debt forgiven
 Tax Liability as compensation – amount of tax shouldered by
employer
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
Sec. 79 of the NIRC
Income Tax Collected at Source. -
(A) Requirement of Withholding. - Every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in
accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner: Provided, however, That no withholding of a tax shall
be required where the total compensation income of an individual does
not exceed the statutory minimum wage, or five thousand pesos
(P5,000.00) per month, whichever is higher.
(B) Tax Paid by Recipient. - If the employer, in violation of the
provisions of this Chapter, fails to deduct and withhold the tax as
required under this Chapter, and thereafter the tax against which such
tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection
shall in no case relieve the employer from liability for any penalty or
addition to the tax otherwise applicable in respect of such failure to
deduct and withhold.
(C) Refunds or Credits. -
(1) Employer. - When there has been an overpayment of tax under
this Section, refund or credit shall be made to the employer only to the
extent that the amount of such overpayment was not deducted and
withheld hereunder by the employer.
(2) Employees. -The amount deducted and withheld under this
Chapter during any calendar year shall be allowed as a credit to the
recipient of such income against the tax imposed under Section 24(A)
of this Title.
Refunds and credits in cases of excessive withholding shall be granted
under rules and regulations promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer
shall be returned or credited within three (3) months from the fifteenth
(15th) day of April.
Refunds or credits made after such time shall earn interest at the rate
of six percent (6%) per annum, starting after the lapse of the three-
month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or
by his duly authorized representative without the necessity of counter-
signature by the Chairman, Commission on Audit or the latter's duly
authorized representative as an exception to the requirement
prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of
Executive Order No. 292, otherwise known as the Administrative Code
of 1987.
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
Withholding tax
There is withholding of tax which shall be collected at source the
moment the wages are paid. The taxes are retained by the employer
who will remit the taxes withheld to the BIR.
However, there shall be no withholding where the total compensation
income of an individual does not exceed the statutory minimum wage
or P5,000 per month, whichever is higher.
Quarterly remittance
Previously, the remittance of the taxes withheld was done monthly.
However, Sec. 58 of the NIRC has been amended by the TRAIN Law
such that the remittance shall now be done quarterly.
The final and creditable withholding tax returns (except for withholding
tax on compensation and withholding VAT) shall be due quarterly on
or before the last day of the month following the close of the calendar
quarter. The first quarterly return covering the months of January to
March 2018 should be due on April 30, 2018. These used to be filed
monthly.
Excessive withholding
Any excess on the taxes withheld shall be returned or credited within 3
months from May 15.
The refund shall be made by the BIR within 3 months from May 15
through warrants (tax credit).
Although the date mentioned in Sec. 79 of the NIRC which is April 15
has not been amended by the TRAIN Law, the date under Sec. 74 has
been amended from April 15 to May 15. For consistency, the relevant
date for the return of the excess of the taxes withheld under Sec. 79
shall also be May 15.
Q: When is the last payroll period?
A: December 31
Q: When is the last day of refund from the employer to the
employees?
A: January 15
FRINGE BENEFITS
FRINGE BENEFITS
Any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file
employees) such as, but not limited to, the following:
[HEVHIMEHEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows
TN: The list under Sec. 33 (B) of the NIRC is not exclusive.
These items are also found in Revenue Regulation 03-98 which talks
about fringe benefits.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 14 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Important: Fringe benefits refer to benefits given to an employee
other than a rank and file employee.
Managerial employee
He is one who is vested with powers and prerogatives to lay down and
execute management policies and or fire, transfer, suspend, layoff,
discharge, assign or fire employees. He is the employee vested with
the power to determine the employer-employee relationship because
of his powers. He has the power to execute management policies
which can include salaries and wages. All aspects of EE relationship
are within his control.
Supervisory employee
He recommends managerial action but it should not be considered as
merely routinary or clerical in nature, but which requires use of
independent judgment.
Rank and file employee
Those who are neither managerial nor supervisory employees
VALUATION OF FRINGE BENEFITS
VALUATION OF FRINGE BENEFITS
Fringe Benefit Valuation
In money or directly paid for by the
Amount granted or paid for
employer
In property other than money and
Fair market value of the
ownership is transferred to the
property
employee
Other than money but there is no Depreciated value of the
transfer of ownership property
In money
When the fringe benefit is in the form of money, the value is the
amount granted or paid for.
Ex: If I give you a grocery allowance, the value of the fringe benefit is
the amount that I gave.
If you give a receipt to the employer and he pays for it, the amount
paid for is the value of the fringe benefit. But, take note that this is not
the amount subjected to tax.
Other than money with transfer of ownership
When the benefit granted is property or something other than money
and ownership is transferred to the employee, the value of the fringe
benefit is equal to the fair market value of the property which is the
higher between the assessed value and zonal value.
Ex: Houses and other properties.
Other than money without transfer of ownership
When the benefit furnished by employer is something other than
money where ownership is not transferred to the employee, the value
of the fringe benefit is equal to the depreciation of the property.
If your employer allows you to use a car, you will be benefitted by the
ease and comfort of using a car. While you use it, the value of the car
diminishes. The value you receive is equal to the value which the
property diminishes by your use of such property.
COMPUTATION OF FRINGE BENEFIT TAX
COMPUTATION OF FRINGE BENEFIT TAX
Fringe benefit tax (FBT) is computed by multiplying the grossed-up
monetary value (GUMV) by 35%. GUMV is determined by dividing the
monetary value by 65%.
In other words, FBT is computed by first determining the GUMV and
then, multiplying the GUMV by the tax rate.
Another way to determine FBT is to deduct the net monetary value
from the GUMV. The difference will be the FBT.
Either way, the GUMV is to be computed first.
Fringe Benefit Tax
Grossed-up Monetary Value (GUMV) 100%
Less Fringe Benefit Tax (FBT) (35%)
Monetary Value (MV) 65%
FBT is now 35%
Under the TRAIN Law effective January 1, 2018, fringe benefits given
to non-rank and file employees are subject to 35% final tax rate.
Previously, 32% was the and 68% was used for determining GUMV.
NRA-NETB & Special Employees
NRA-NETB is subject to FBT of 25% while special employees are
subject to 15%. Consequently, 75% will be used for determining the
GUMV of NRA-NETB and 85% will be used in the case of special
employees.
Example:
Resident Citizen Employee given housing privilege but ownership is not
transferred
A managerial employee is given a housing benefit in the form of rent
worth P10,000. To get the net monetary value, we have to multiply it
by 50% since ownership is not transferred to such employee. Hence,
the net monetary value of rental allowance is P5,000.
Since fringe benefit tax can be computed by first determining the
GUMV, we have to divide the net monetary value of 5,000 by 65%.
This will result to GUMV of P7,692.31.
There are two ways to arrive at the FBT. One way is to deduct the
GUMV of P7,692.31 from the net monetary value of 5,000 which will
yield FBT of P2,692.31. Another way is to multiply the GUMV of
P7,692.31 by 35% which will also result to the same FBT of P2,692.31.
Non-resident Alien Not Engaged in Trade and Business
For non-resident aliens not engaged in trade or business who received
fringe benefit tax, they are subject to 25% fringe benefit tax and we
use the same computation above. We just have to replace the 65%
with 75% and 35% with 25%.
For instance, a non-resident alien not engaged in trade or business is
given a housing benefit in the form of rent worth P10,000. To get the
net monetary value, we have to multiply it by 50% since ownership is
not transferred to such employee. Hence, the net monetary value of
rental allowance is P5,000.
Since fringe benefit tax can be computed by getting first the GUMV,
we have to divide the net monetary value of P5,000 by 75% because
the fringe benefit tax imposed is 25%. Hence, the GUMV is 6,666.67.
There are two ways to determine the FBT. One way is to deduct the
GUMV of P6,666.67 from the net monetary value of P5,000 which
will result to FBT of P1,666.67. Another way is to multiply the GUMV of
P6,666.67 by 25% which will also result to the same FBT of P1,666.67.
Special Employees
For special employee who received fringe benefit tax, they are
subject to 15% fringe benefit tax. The same computation will be
used. Only the tax rates will vary. The GUMV will be divided by 85%.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 15 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

FBT CONCEPT SUMMARY
Taxable amount is the GUMV of the fringe benefit granted/furnished.
(b)
The FBT is 35% of the GUMV of the benefit
The GUMV is the benefit expense of the employer which is also the
income of the employee.
The liability of the employer is to withhold the corresponding income
tax from the fringe benefit earned by the employee.
The fringe benefit income tax is a final tax on gross taxable income.
lease contract. The monetary value of the fringe benefit shall
be fifty per cent (50%) of the value of the benefit.
If the employer owns a residential property and the same is
assigned for the use of his employee as his usual place of
residence, the annual value of the benefit shall be five per cent
(5%) of the market value of the land and improvement, as
declared in the Real Property Tax Declaration Form, or zonal
value as determined by the Commissioner pursuant to Section
6(E) of the Code (Authority of the Commissioner to Prescribe
Real Property Values), whichever is higher. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the
value of the benefit.

 The monetary value of the housing fringe benefit is

HOUSING
equivalent to the following:
Monetary value = [5% (FMV or Zonal value) x 50%]
HOUSING PRIVILEGE
(c) If the employer purchases a residential property on installment
Guidelines in the valuation of the Housing Privilege basis and allows his employee to use the same as his usual
place of residence, the annual value of the benefit shall be five
Monetary Value per cent (5%) of the acquisition cost, exclusive of interest. The
Annual Value monetary value of fringe benefit shall be fifty per cent (50%)
Case of Benefit
of Benefit of the value of the benefit.
(Monthly)
Employer leases residential 50% x Monthly
(d) If the employer purchases a residential property and transfers
property for use of the - rental paid by the
ownership thereof in the name of the employee, the value of
employee employer
the benefit shall be the employer's acquisition cost or zonal
5% of FMV of 50% x Monthly value as determined by the Commissioner pursuant to Section
Employer owns residential land and value of the 6(E) of the Code (Authority of the Commissioner to Prescribe
property which was assigned improvements or benefit* Real Property Values), whichever is higher. The monetary
to an officer for his use as zonal value, value of the fringe benefit shall be the entire value of the
residence whichever is *Monthly value = benefit.
higher Annual value/2
Employer purchases (e) If the employer purchases a residential property and transfers
residential property on 5% of acquisition ownership thereof to his employee for the latter's residential
50% x Monthly use, at a price less than the employer's acquisition cost, the
installment basis and allows cost excluding
value of the benefit value of the benefit shall be the difference between the fair
the employee to use the interest
same as his residence market value, as declared in the Real Property Tax Declaration
Form, or zonal value as determined by the Commissioner
Purchases residential Acquisition cost or pursuant to Sec. 6(E) of the Code (Authority of the
property and transfers the - FMV, whichever is Commissioner to Prescribe Real Property Values), whichever is
ownership to the employee higher higher, and the cost to the employee. The monetary value of
Purchases residential the fringe benefit shall be the entire value of the benefit.
property and transfers FMV of CIR and
ownership thereof to his FMV of Assessor, (f) Housing privilege of military officials of the Armed Forces of the
employee for the latter‘s - whichever is higher Philippines (AFP) consisting of officials of the Philippine Army,
residential use at a price less minus the cost to Philippine Navy and Philippine Air Force shall not be treated as
than the employer‘s the employee taxable fringe benefit in accordance with the existing doctrine
acquisition cost that the State shall provide its soldiers with necessary quarters
which are within or accessible from the military camp so that
they can be readily on call to meet the exigencies of their
General Rule: Housing privileges are taxable as fringe benefits.
military service.
Exceptions:
 What if you are a private in the Philippine
1. Housing privilege of AFP, Philippine Navy and Philippine Air
Army and you are granted a sleeping space in
Force
the barracks, is this fringe benefit?
2. Housing unit situated inside or within the maximum of 50
meters from the perimeter of the business or factory
No, because the tax exemption privilege is only
3. Temporary housing for an employee who stays in a housing
granted to officials of Philippine Army, Navy and Air
unit for 3 months or less
Force. It has to be a managerial or supervisory
4. Housing privilege granted to rank-and-file employees
position. (Private is the lowest rank or position in the
Army)
TN: The housing privilege given to rank-and-file employees is not a
fringe benefit but form part of compensation income.
The general rule is that housing privileges are taxable fringe
benefits, but exceptions are provided for as enumerated above
Revenue Regulation 03-98:
(sections f, g and h).
(a) If the employer leases a residential property for the use of his
(g) A housing unit which is situated inside or adjacent to the
employee and the said property is the usual place of residence
premises of a business or factory shall not be considered as a
of the employee, the value of the benefit shall be the amount
taxable fringe benefit. A housing unit is considered adjacent to
of rental paid thereon by the employer, as evidenced by the
the premises of the business if it is located within the

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 16 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
maximum of fifty (50) meters from the perimeter of the
business premises.
(h) Temporary housing for an employee who stays in a housing
unit for three (3) months or less shall not be considered a
taxable fringe benefit.
 The revenue regulation does not even mention that
the employee is travelling but it is interpreted to
mean that the employee is travelling because of the
short and temporary time that the employee is
assigned. Because this is temporary and this is also
for business considerations, it is deemed for the
convenience of the employer.
(i) A housing unit which is situated inside or adjacent to the
premises of a business or factory shall not be considered as a
taxable fringe benefit. A housing unit is considered adjacent to
the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the
business premises.
 A company personnel is still exempt from fringe
benefit tax if he is asked to stay in a location more
than 50 meters from the company perimeter due to
safety and health hazards.
 If a The BIR took the position that this is considered
within the exception for the reason that it is for the
convenience of the employer. This is set by
regulation, not by law. This is deemed for the
convenience of the employer, the benefit is exempt
from fringe benefit tax. Take note, according to sir,
that there is fringe benefit here but it is just that it is
exempt.
Q: If you are asked by the priest in USC to live in the front
building, will this privilege be subject to FBT?
A: No, because it is within the premises of the employer‘s
premises. The fifty meter radius rule does not even have to be
considered because this rule applies only when the property is
adjacent, such as when it is outside the campus.
Valuation of housing privilege
It is the amount of rental multiplied by 50%.
Reason: Whether or not it is for the convenience of the employer, you
will really need to live somewhere else.
For all intents and purposes, the benefit is for both you and the
company. As such, this should be divided. 50% accounts for the
portion that you were really benefitted, and the 50% exemption is for
the fact that the employer is also deemed benefitted by it.
If the benefit, whether for personal or business purpose, is not
determined, there is a presumption that both the employer and
company are benefitted.
If a company leases a condo unit and pays for it, the fringe benefit is
the amount of rental that is paid by the company. Because there is no
transfer of ownership, the additional consideration for purposes of
valuing is the amount of rental which is considered as the amount of
fringe benefit. But for taxation purposes, there is there is a concept of
monetary value which is the tax base of the fringe benefit tax.
Rule on housing privilege
Housing privilege is subject to fringe benefit tax, but there are
exceptions. When you are computing for the amount, it depends
whether ownership is transferred or not. Or if in the case that it is just
leased out, only the rent is deemed as fringe benefit and you multiply
it by 50%. If the house and lot is transferred to you, the fringe benefit
is the entire amount of the benefit given.
If only the right to use is given to you (ownership is still with the
company but they allow employees to use it), that is the time that the
depreciation value is used.
The general rule on valuation if ownership is transferred is to use FMV,
but if there is no transfer of ownership, use depreciation value.
EXPENSE ACCOUNT
EXPENSE ACCOUNT
(a) In general, expenses incurred by the employee but which are
paid by his employer shall be treated as taxable fringe benefits,
except when the expenditures are duly receipted for and in the
name of the employer and the expenditures do not partake the
nature of a personal expense attributable to the employee.
(b) Expenses paid for by the employee but reimbursed by his
employer shall be treated as taxable benefits except only when
the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a
personal expense attributable to the said employee.
(c) Personal expenses of the employee (like purchases of groceries
for the personal consumption of the employee and his family
members) paid for or reimbursed by the employer to the
employee shall be treated as taxable fringe benefits of the
employee whether or not the same are duly receipted for in the
name of the employer.
(d) Representation and transportation allowances which are fixed
in amounts and are regular received by the employees as part
of their monthly compensation income shall not be treated as
taxable fringe benefits but the same shall be considered as
taxable compensation income subject to the tax imposed under
Sec. 24 of the Code.
Expense account
Another fringe benefit is an expense account granted for the usage of
manager of miscellaneous items.
When you are asked to liquidate your expenses, those cannot be
considered a fringe benefit.
Note that these expenses must be related to the business of the
employer so that the business can claim these as business expenses.
An example of this is the transportation allowance given to you and
you are given a cap of P1,000 per month and you are asked to present
receipts and liquidate. This is fringe benefit but not subject to fringe
benefit tax because you are asked to liquidate it and this is not a
benefit for you.
A fringe benefit only happens when you are given an amount
without you having to liquidate it.
If you are only asked to present receipts for purposes of knowing the
amount of your expense, then that is different.
When you are given an amount which you are allowed to use and you
present receipts so you can receive the amount, such is not a fringe
benefit because you are asked to liquidate. These expenses will be
later on considered as expenses of the company.
If your groceries are paid for by the employer and it is for the
employee‘s personal use, then it is clearly a fringe benefit, subject to
tax. If there are expenses that are personal to the employee but are
paid for by the employer, or if the employer gives you money so you
can pay for these benefits, then it is a fringe benefit.
There are certain expenses which are in that form but are not
considered subject to fringe benefit tax. Representation and
transportation allowance (RATA) which are fixed in amount and
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 17 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

are regularly received by an employee are part of monthly
compensation and are subject to income tax.
Take note that fringe benefit is given on top of the monthly
compensation tax.
the value of the motor vehicle. Otherwise, if
ownership is not transferred, fringe benefit is only
the depreciation value of the car. This is because of
your use, you are benefitted by the use of the car
and this is shown through the depreciation.

There are also certain instances when you buy groceries and you (d) If the employer shoulders a portion of the amount of the
are to liquidate and present receipt. These are not part of the purchase price of a motor vehicle the ownership of which is
expenses of the company so the company cannot claim them as placed in the name of the employee, the value of the benefit
business expenses. These are fringe benefits subject to tax. shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
MOTOR VEHICLE OF ANY KIND
the employee partly for his personal purpose and partly for the
benefit of his employer.
MOTOR VEHICLE OF ANY KIND
(e) If the employer owns and maintains a fleet of motor vehicles
Guidelines in the Valuation of Motor Vehicles for the use of the business and the employees, the value of the
benefit shall be the acquisition cost of all the motor vehicles
Monetary Value of the notnormally used for sales, freight, delivery service and other
Case non-personal used divided by five (5) years. The monetary
Benefit
value of the fringe benefit shall be fifty per cent (50%) of the
Purchases the motor vehicle in the Acquisition cost
value of the benefit.
name of the employee
Provides the employee with cash for Amount of cash received by  The monetary value of the motor vehicle fringe benefit
the purchase of a motor vehicle in the employee is equivalent to the following:
the name of the employee
Shoulders a portion of the amount Amount shouldered by the MV = [(A)/5] X 50%
of the purchase price of a motor employee Where:
vehicle in the name of the employee MV = Monetary value
A = acquisition cost
Purchase the car on instalment in Acquisition cost (exclusive of
the name of the employee interest) divided by 5 years
(f) If the employer leases and maintains a fleet of motor vehicles for
Owns and maintains a fleet of motor Acquisition cost of all motor the use of the business and the employees, the value of the
vehicles for the use of the business vehicles not normally used in benefit shall be the amount of rental payments for motor vehicles
and the employees business divided by 5 years x not normally used for sales, freight, delivery, service and other
50% non-personal use. The monetary value of the fringe benefit shall
Leases and maintains a fleet of Amount of rental payment for be fifty per cent (50%) of the value of the benefit.
motor vehicles for the use of the motor vehicles not normally
business and the employees used in business x 50% (g) The use of aircraft (including helicopters) owned and maintained
by the employer shall be treated as business use and not be
Use of yacht whether owned and Depreciation of yacht at an
subject to the fringe benefits tax.
maintained or leased by the estimated useful life of 20
employer years
 It will never be fringe benefit subject to fringe benefit
tax because the regulation then looks at the fact that
(a) If the employer purchases the motor vehicle in the name of the only few companies use aircrafts. But it seems that
employee, the value of the benefit is the acquisition cost today, especially in Manila, big companies are using
thereof. The monetary value of the fringe benefit shall be the helicopters because of traffic congestion.
entire value of the benefit, regardless of whether the motor
vehicle is used by the employee partly for his personal purpose Airline companies that grant free trips are expense accounts and
and partly for the benefit of his employer. this does not fall under this category of fringe benefit. The
employees do not use the aircraft exclusively for themselves.
(b) If the employer provides the employee with cash for the They use their free flights along with other passengers.
purchase of a motor vehicle, the ownership of which is placed
in the name of the employee, the value of the benefits shall be (h) The use of yacht whether owned and maintained or leased by the
the amount of cash received by the employee. The monetary employer shall be treated as taxable fringe benefit. The value of
value of the fringe benefit shall be the entire value of the the benefit shall be measured based on the depreciation of a
benefit regardless of whether the motor vehicle is used by the yacht at an estimated useful life of 20 years.
employee partly for his personal purpose and partly for the
benefit of his employer, unless the same was subjected to a  It is fringe benefit if you are allowed to use the yacht
withholding tax as compensation income under Revenue for your personal benefit. This presupposes that you
Regulations No. 2-98. are using the yacht for a month, or for several days.

(c) If the employer purchases the car on installment basis, the
ownership of which is placed in the name of the employee, the
value of the benefit shall be the acquisition cost exclusive of
interest, divided by five (5) years. The monetary value of the
fringe benefit shall be the entire value of the benefit regardless
of whether the motor vehicle is used by the employee partly
for his personal purpose and partly for the benefit of his
employer.
 It matters also if ownership is transferred or not. If
ownership is transferred, fringe benefit is equal to
 The value of the fringe benefit is equal to the
depreciation value (presupposes that there is no
transfer of ownership here), with an estimated life of
20 years.
Examples:
If you are given transportation allowance but still required to
liquidate, it will not be considered a fringe benefit. If you need to
justify why you have to go to that place, say for example, you need to
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 18 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
specify that you are going to SEC to register your employer‘s business,
then this is not fringe benefit.
If a transportation allowance is given and you are not required to
liquidate, such is in the form of a fringe benefit subject to fringe
benefit tax.
If you are allowed to use the company car/ motor vehicle strictly for
business purposes, such is not a fringe benefit. There is no
benefit on your part.
It can be a benefit if you can use it for personal purposes and the
company does not impose restrictions on how you use it.
If you are free to use the motor vehicle after office hours then
there is still a fringe benefit here.
In the case of Medical Representatives, the companies keep a pool of
vehicles which the sales persons can make use. This is not a
fringe benefit because the purpose of the car is for sales purposes,
even if the company allows you to bring it home. Usually the company
will declare to the BIR that these are company vehicles with
corresponding company expenses. Another issue here is the fact that
the persons granted these cars are not managers. Even if sales
managers are granted motor vehicles, such privilege will still not be
considered a fringe benefit because this is used for sales and it is
pursuant to the nature and business of the employer and not
for the convenience of the employer.
If the employer leases and maintains a fleet of motor vehicles for the
use of the business and the employees, the value of the benefit shall
be the amount of rental payments for motor vehicles not normally
used for sales, freight, delivery, service and other non-personal use.
The monetary value of the fringe benefit shall be 50% of the value of
the benefit. This means that sales representatives are not included.
SUMMARY
Taxable fringe benefit
1. Can be used for personal purposes
2. No restrictions on its use
Instances include:
1. Given transportation allowance but not required to liquidate
2. Free to use the motor vehicle after office hours
Not taxable fringe benefit if
1. For the convenience of the employer
2. Used in trade or business of employer
Instances include:
1. Motor vehicle not exclusively used by an employee but used
also by other employees
2. Fleet of vehicle for marketing or sales department
3. Given transportation allowance and required to liquidate
4. Use company car/vehicle strictly for business purposes
HOUSEHOLD EXPENSES
HOUSEHOLD EXPENSES
Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help, personal
driver of the employee, or other similar personal expenses (like
payment for homeowners association dues, garbage dues, etc.) shall
be treated as taxable fringe benefits.
INTEREST ON LOAN AT LESS THAN MARKET RATE
INTEREST ON LOAN AT LESS THAN MARKET RATE
1. If the employer lends money to his employee free of interest or
at a rate lower than twelve per cent (12%), such interest
foregone by the employer or the difference of the interest
assumed by the employee and the rate of twelve per cent
(12%) shall be treated as a taxable fringe benefit.
2. The benchmark interest rate of twelve per cent (12%) shall
remain in effect until revised by a subsequent regulation.
3. This regulation shall apply to installment payments or loans with
interest rate lower than twelve per cent (12%) starting January
1, 1998.
12% interest for fringe benefit
The current market rate is 6% but the revenue regulation has not yet
been changed, so we will use 12% for fringe benefits.
MEMBERSHIP FEES
MEMBERSHIP FEES
Membership fees, dues, and other expenses borne by the employer for
his employee, in social and athletic clubs or other similar
organizations.
These expenditures shall be treated as taxable fringe benefits of the
employee in full.
Membership fee contemplates that you become a member of a sports
gym for your health. There are some companies that instead of doing
that, they just put up a gym in their own building.
Q: Your employer pays for your membership in Cebu Country Club, so
you could play golf with the clients of your employer, is this fringe
benefit?
A: It depends on the reason of the grant of the membership fee. If the
benefit is pursuant to the nature of the business of the employer, it is
not clearly a benefit to you but to the employer because you are asked
to play with the clients of the employer. It is not a taxable fringe
benefit. If you are to play anytime you want with anyone, then that
becomes a taxable fringe benefit.
Necessary for the position not subject to FBT
If it is necessary for his/her position, then considered for the benefit of
the employer or pursuant to the nature of the business of the
employer, thus, not subject to Fringe Benefit Tax.
It is not intended for social organizations, for fellowship and the like. If
you pay IBP membership fee and your being a lawyer is not pursuant
to the nature of the business, it is not considered as fringe benefit and
subject to ordinary income tax. It is most likely compensation income.
If necessary for your position, then not subject to tax since it is now
considered as expense of the business.
EXPENSES FOR FOREIGN TRAVEL
EXPENSES FOR FOREIGN TRAVEL
(a) Reasonable business expenses which are paid for by the
employer for the foreign travel of his employee for the purpose
of attending business meetings or conventions shall not be
treated as taxable fringe benefits. In this instance, inland travel
expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less
per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual
occurrences of the meetings or conventions.
(b) The cost of economy and business class airplane ticket shall not
be subject to a fringe benefit tax. However, 30 percent of the
cost of first class airplane ticket shall be subject to a fringe
benefit tax.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 19 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
(c) In the absence of documentary evidence showing that the
employee's travel abroad was in connection with business
meetings or conventions, the entire cost of the ticket, including
cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable
fringe benefits. The business meetings shall be evidenced by
official communications from business associates abroad
indicating the purpose of the meetings. Business conventions
shall be evidenced by official invitations/communications from
the host organization or entity abroad. Otherwise, the entire
cost thereof shouldered by the employer shall be treated as
taxable fringe benefits of the employee.
(d) Travelling expenses which are paid by the employer for the
travel of the family members of the employee shall be treated
as taxable fringe benefits of the employee.
(e) The expenses for travel contemplate a situation where you are
being sent by employer for a business convention. The reason is
because you are pursuing the business of the employer.
Excess of US$300 is fringe benefit
There are instances that though it is considered pursuant to the nature
of the business of the employer, it will still be subject to fringe benefit
tax. It is when your inland travel expenses while you're abroad
exceeds the amount of 300 USD, then that becomes fringe benefit, at
least the excess.
Problem
How much is considered Fringe Benefit here?
 Local transportation (airport to hotel, hotel to
convention) = 100USD
 Food & drinks = 300 USD
 Lodging = 1500 USD
 1st class ticket = 300,000 pesos x 30% = 90,000 Fringe
benefit
Under the Revenue Regulation, it says that in this instance, in land
travel expense such as expenses for food, beverages and local
transportation except lodging cost in a hotel and similar establishment
amounting to an average of 300 USD /day shall not be subject to
Fringe benefit tax.
So, add 100 and 300, and then subtract 300, only 100 USD is
considered as Fringe Benefit because you don't include lodging.
This is because you are in a foreign country so it is presumed that you
don't have a place to stay. Lodging is always considered for the benefit
of the employer but inland travel expenses, including food and drinks
and transportation, only 300 is considered for the benefit of the
employer, anything in excess will be deemed fringe benefit.
In the case of the first class ticket, only 30% of the value of the first
class ticket will be considered as fringe benefit. Business and economy
class tickets are considered for the benefit of the employer.
Entire cost of family travel is fringe benefit
If an employee travels with his family, the entire cost of the expenses
of the family excluding you the employee will be considered as fringe
benefit if paid for by your employer.
HOLIDAY & VACATION EXPENSES
HOLIDAY AND VACATION EXPENSES
Holiday and vacation expenses of the employee borne by his employer
shall be treated as taxable fringe benefits.
TN: Everything is considered as fringe benefit since it is not pursuant
to the purpose of the business of the employer.
EDUCATIONAL ASSISTANCE
EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR
HIS DEPENDENTS
(a) The cost of the educational assistance to the employee which
are borne by the employer shall, in general, be treated as
taxable fringe benefit. However, a scholarship grant to the
employee by the employer shall not be treated as taxable fringe
benefit if the education or study involved is directly connected
with the employer's trade, business or profession, and there is a
written contract between them that the employee is under
obligation to remain in the employ of the employer for period of
time that they have mutually agreed upon. In this case, the
expenditure shall be treated as incurred for the convenience
and furtherance of the employer's trade or business.
(b) The cost of educational assistance extended by an employer to
the dependents of an employee shall be treated as taxable
fringe benefits of the employee unless the assistance was
provided through a competitive scheme under the scholarship
program of the company.
TN: It is a Fringe benefit since it is for the benefit of the employee.
Educational assistance to employee
GR: Cost of the educational assistance to the employee borne by the
employer is taxable fringe benefit.
EXC: Scholarship granted to the employee by the employer, provided
the following conditions are met:
1. The education or study involved is directly connected with
the employer‘s trade, business or profession; and
2. There is a written contract between them to the effect that
the employee is under obligation to remain in the employ of
the employer for the period that they have mutually agreed
upon.
In this case, the expenditure shall be treated as incurred for
the convenience and furtherance of the employer‘s trade or
business.
Q: When is it considered non-taxable fringe benefit?
A: There has to be a lock-in contract (written contract whereby you
are required to stay in the company in consideration of the assistance.
No period required). It‘s not enough though. It must be that you are
pursuing a course which is related to the business of the employer.
Educational assistance to dependents
GR: Cost of Educational assistance extended by an employer to the
dependents of an employee is taxable fringe benefit.
EXC: The assistance was provided through a competitive scheme
under the scholarship program of the company.
Example: Scholarship grants where many will apply or only for those
who pass the exam and where there is a grade requirement.
Q: If it a benefit provides that all dependents of the employees can be
granted with scholarship, provided that they should to maintain a
grade of 1.9/subject, is it a fringe Benefit?
A: According to BIR, it is a Fringe benefit but not subject to fringe
benefit tax because it is still under a competitive scheme since the
students are required to maintain a grade.
No required level.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 20 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
HEALTH OR LIFE INSURANCE
HEALTH OR LIFE INSURANCE
Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows — The cost of life or
health insurance and other non-life insurance premiums borne by the
employer for his employee shall be treated as taxable fringe benefit,
except the following:
(a) contributions of the employer for the benefit of the employee,
pursuant to the provisions of existing law, such as under the Social
Security System (SSS), (R.A. No. 8282, as amended) or under the
Government Service Insurance System (GSIS) (R.A. No. 8291), or
similar contributions arising from the provisions of any other existing
law; and
(b) the cost of premiums borne by the employer for the group
insurance of his employees.
Beneficiary
If beneficiary is the heir, it is considered income of the employee
because he clearly benefits from it.
If employee is managerial or supervisory, fringe benefit subject to tax.
But if beneficiary is the company, then it is not considered as fringe
benefit since employee does not benefit from it.
If for group of employees, not a fringe benefit subject to tax because
it is not personal to each of the employees.
SSS contributions not subject to FBT
Not subject to Fringe benefit tax because it is statutorily mandated.
EXEMPTION FROM FRINGE BENEFIT TAX
FRINGE BENEFITS NOT SUBJECT TO TAX
(1) Fringe benefits which are authorized and exempted from income
tax under the code or any special laws.
 Retirement benefits granted to managerial employees
are considered fringe benefit, but prior to retirement,
there is still employer-employee relationship.
 Granting that you are able to comply with all the
requirements, it is not subject to Fringe benefit tax
because it is already excluded in income tax law.
(2) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans.
 This applies to a group of employees.
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not.
 They are not fringe benefits in the first place as they
are given to rank and file employees.
(4) Benefits granted to employee as required by the nature of, or
necessary to the trade, business or profession of the employer.
(5) Benefits granted for the convenience of the employer.
(6) De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.
The Secretary of Finance is authorized to promulgate, upon
recommendation of the Commissioner, such rules and regulations as
are necessary to carry out efficiently and fairly the provisions of this
Section, taking into account the peculiar nature and special need of
the trade, business or profession of the employer.
DE MINIMIS BENEFITS
De minimis benefits, in a form of facilities or privileges, are furnished
or offered by the employer to its employees that are of relatively small
value and are offered or furnished merely as a means of promoting
goodwill, contentment or efficiency of his employees. These benefits
are not subject to fringe benefit tax.
Sec. 33 of NIRC, RR 5-2011, 8-2012 and 1-2015
1. Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year.
 It only refers to unused vacation leave credits and not
sick leave credits.
2. Monetized value of vacation and sick leave credits paid to
government officials and employees.
3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month.
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.
5. Uniform and Clothing allowance not exceeding P5,000 per
annum.
6. Actual medical assistance, e.g. medical allowance to cover
medical and healthcare needs, annual medical/executive check-
up, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum.
 When the employer pays for maternity check-up of
the employee, it is considered as de minimis benefits,
provided that there is actual medical assistance.
7. Laundry allowance not exceeding P300 per month.
8. Employees achievement awards, e.g., for length of service or
safety achievement, which must be in the form of a tangible
personal property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not
discriminate in favor of highly paid employees.
 Because you are very efficient in your work the
company decided to give you a gift certificate of
Shangri-la good for 1 day, P10,000, it does not form
part of de minimis since it is provided that it must be a
tangible personal property other than cash or gift
certificate.
9. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000 per employee per annum.
 Christmas gifts and not Christmas bonus.
10. Daily meal allowance for overtime work and night/graveyard
shift not exceeding twenty-five percent (25%) of the basic
minimum wage on a per region basis.
11. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive schemes
provided that the total monetary value received from both CBA
and productivity incentive schemes combined do not exceed
P10,000.00 per employee per taxable year.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 21 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Threshold of P90,000
PASSIVE INCOME
The list of de minimis benefits is exclusive. The threshold now under
the TRAIN Law is P90,000. The amount in excess of P90,000 will be
subject to the normal income tax rate or fringe benefit tax, as the case PASSIVE INCOME
may be.
The types of passive income are:
Example: Determine the tax due given the following: 1. Royalties
Monthly compensation income - P80,000 2. Prizes
Rice subsidy – P2,000/month 3. Winnings
Uniform allowance – P10,000 4. Interest
Medical allowance to employee – P15,000 5. Long-term deposits or investments
Laundry allowance – P800/month 6. Dividends
Productivity incentive – P15,000 7. Capital Gains
Christmas bonus – P10,000
TAX RATES
Tax Due
For RC, NRC & RA
Rank & File Employee

Types of Passive Income Rate

Compensation Income
(P80,000x12 months) P 960,000 Interest from currency deposits, trust funds and deposit 20%
13th Month Pay P 80,000 substitutes
Christmas Bonus 10,000
Excess of de minimis benefits: Royalties
Rice Subsidy 6,000 a. In general 20%
Uniform Allowance 5,000 b. Books, literary & musical compositions 10%
Medical Allowance 5,000 Prizes & Winnings
Laundry Allowance 6,000 a. P10,000 or less 0-35%
Productivity Incentive 5,000 b. In excess of P10,000 20%
Total P 117,000
Less Threshold (90,000) 27,000 PCSO & Lotto Winnings
Taxable Income P 987,000 a. P10,000 or less Exempt
b. In excess of P10,000 20%
Taxable Income P 987,000 Interest Income from foreign currency deposit 15%
Less Threshold (excess over 2,000,000) (800,000)
Total P 187,000 Cash & Property Dividends
Multiplied by Tax Rate 30% a. To individuals from domestic corporations 10%
b. To domestic corporations from another DC 0%
Total P 56,100
Add Threshold (490,000) 130,000 On capital gains presumed to have been realized from sale,
Total Tax Due and Payable P 186,100 exchange or other disposition of real property (capital asset) 6%
On capital gains for shares of stock not traded in the stock
exchange 15%
De Minimis Benefits
Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
Taxable Non-taxable
substitutes, investment management accounts and other
Rice subsidy (P2,000x12mos) P 6,000 P 18,000
investments evidenced by certificates Exempt
Uniform allowance (P10,000) 5,000 5,000
Medical allowance to employee 5,000 10,000
Upon pre-termination before the 5th year, there should be
(P15,000)
imposed on the entire income from proceeds of the long-
Laundry (P800x12mos) 6,000 3,600
term deposit based on the remaining maturity thereof:
Productivity incentive (P15,000 5,000 10,000
Holding Period
Total P 27,000 P 46,600
a. 4 years to less than 5 years 5%
b. 3 years to less than 4 years 15%
For managerial employees, the excesses will be subject to FBT. The c. Less than 3 years 20%
rate of the excess would depend on the type of individual. This is the
position of the BIR as provided in a revenue regulation. TN: Winnings, other than PCSO and Lotto, are subject to 20% final tax
regardless of the amount.
SUBJECT TO OTHER TAXES (RR 5-98)
For NRA-ETB
The exemption of any fringe benefit from the fringe benefit tax shall
not be interpreted to mean exemption from any other income tax Types of Passive Income Rate
imposed under the Code except if the same is likewise expressly
exempted from any other existing law. Interest from currency deposits, trust funds and deposit 20%
substitutes
Thus, if the fringe benefit is exempted from the fringe benefit tax, the
same may still form part of the employee‘s gross compensation income Interest Income from long-term deposit or investment in the
subject to income tax. Hence, it is likewise subject to withholding tax form of savings, common or individual trust funds, deposit
on compensation income payment. substitutes, investment management accounts and other
investments evidenced by certificates Exempt

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 22 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Upon pre-termination before the 5th year, there should be TN: Whichever is higher
imposed on the entire income from proceeds of the long-
term deposit based on the remaining maturity thereof: 3. CG from Sale of Other properties
Holding Period a. Rate: 0-35% based on
a. 4 years to less than 5 years 5% b. Things to remember: Ordinary gains and capital gains
b. 3 years to less than 4 years 15% can be added. Ordinary loss and capital gains can be
c. Less than 3 years 20% joined. But capital loss cannot be deducted from
ordinary gains.
On capital gains presumed to have been realized from sale, c. Sec. 39 (B): Percentage taken into account
exchange or other disposition of real property (capital asset) 6% i. Held for not more than 12 months: 100%
ii. Held for more than 12 months: 50%
On capital gains for shares of stock not traded in the stock d. Sec. 39 (D): In case of Capital Loses, the amount of
exchange 15% Net Capital Loss Carry-Over cannot exceed ordinary
gains.
For NRA-NETB i. Can only be carried over for a period of 1 year.

Types of Passive Income Rate TAXATION AT SOURCE

On the gross amount of income derived from all sources 25%
within the Philippines TAXATION AT SOURCE

On capital gains presumed to have been realized from sale, 1. Final Withholding Tax
exchange or other disposition of real property (capital asset) 6% 2. Creditable Withholding Tax
On capital gains for shares of stock not traded in the stock a. Withholding Tax On Compensation
exchange 15% b. Expanded Withholding Tax
c. Withholding Tax on Government Money Payments
(GMP) – Percentage Taxes
Q: If you won Bingo in the US while you were on vacation for P10M, d. Withholding tax on GMP – Value Added Tax (GVAT)
how will it be taxed of you are a resident citizen?
KINDS OF WITHHOLDING TAX
A: The 10M will be form part of the income subject to 0-35% tax rates
and will not be considered passive income since it is earned outside of Withholding Tax on Compensation is the tax withheld from
the Philippines. income payments to individuals arising from an employer-employee
relationship.
SUMMARY
Passive income earned outside the Philippines – 0-35% Expanded Withholding Tax is a kind of withholding tax which is
prescribed on certain income payments and is creditable against the
Passive income earned within the Philippines – 20%, except: income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
1. Royalties on books, literary & musical compositions – 10%
2. Prizes & winnings (P10,000 or less) – 0-35% Final Withholding Tax is a kind of withholding tax which is
3. PCSO & lotto winnings (P10,000 or less) – exempt prescribed on certain income payments and is not creditable against
4. Interest income from FCDU – 15% the income tax due of the payee on other income subject to regular
5. Cash & Property dividends rates of tax for the taxable year. Income Tax withheld constitutes the
a. To RC, NRC, RA from DC – 10% full and final payment of the Income Tax due from the payee on the
b. To NRA-ETB from DC – 20% particular income subjected to final withholding tax.
c. To NRA-NETB from DC – 25%
d. To DC from DC – 0% Withholding Tax on Government Money Payments (GMP) -
e. To individuals from RFC – 0-35% Percentage Taxes - is the tax withheld by National Government
- Apply the tax situs rule: Agencies (NGAs) and instrumentalities, including government-owned
i. Income within if ratio is more than 85% and controlled corporations (GOCCs) and local government units
ii. Income without if ratio is less than 50% (LGUs), before making any payments to non-VAT registered
iii. Partly income within & income without if taxpayers/suppliers/payees
ratio is between 50% and 85%
Withholding Tax on GMP - Value Added Taxes (GVAT) - is the
tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before
Capital Gains transactions:
making any payments to VAT registered taxpayers/suppliers/payees on
1. CG from Sales of Shares of Stocks
account of their purchases of goods and services.
a. Must not be listed or traded in the local stock
exchange.
b. Rate: 15% based on Net Gain: GSP – Cost TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
c. If listed and traded in the stock exchange:
i. 60% of 1% based on Gross Selling Price.
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
2. CG from Sale of Real property
1. Income payments to a RC, NRC & RA
a. Rate: 6% based on either:
a. Interest on any peso bank deposit
i. Sec. 24 (D): Gross Selling Price
b. Royalties
ii. Sec. 6 (E)(1): FMV as determined by
c. Prizes (except prizes amounting to P10,000 or less
Commissioner of BIR
which are subject to tax)
iii. Sec. 6 (E)(2): FMV as determined by Prov. or
d. Winnings (except winnings not exceeding P10,000
City Assessors
from PCSO & Lotto which are exempt)
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 23 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

e. Interest income on foreign currency deposit

EXEMPT ENTITIES FROM CGT
f. Interest income from long term deposit (except those
with term of 5 years or more)
g. Cash and/or property dividends EXEMPT ENTITIES FROM CGT
h. Capital gains assumed to have been realized from the
sale, exchange or other disposition of real property 1. Dealer in securities, regularly engaged in the buying and
selling of securities
2. Income payments to NRA-ETB 2. Entity exempt from the payment of income tax under
a. On certain passive income existing investment incentives and other special laws
b. Cash and/or property dividends 3. Individual or non-individual exchanging real property solely
c. Share in the distributable net income of partnership for shares of stocks resulting in corporate control
d. Interest on any bank deposits 4. Government entity or GOCC selling real property
e. Royalties 5. Disposition of the real property which is gratuitous in nature
f. Prizes (except prizes amounting to P10,000 or less 6. Disposition of real property pursuant to the CARP law
which is subject to tax) 7. Proceeds of the sale of the principal residence have been
g. Winnings (except winnings not exceeding P10,000 fully utilized in acquiring or constructing new principal
from PCSO & Lotto which are exempt) residence within 18 calendar months from the date of sale or
h. Interest on long term deposits (except those with term disposition
of 5 years or more)
i. Capital gains presumed to have been realized from the
OTHER INCOME
sale, exchange or other disposition of real property

3. Income derived from all sources within the Philippines by OTHER INCOME
NRA-NETB
a. On gross amount of income derived from all sources 1. Rent income other than royalties
within the Philippines 2. Interest income other than interest income on bank deposit
b. On capital gains presumed to have been realized from 3. Dividend income
the sale, exchange or disposition of real property 4. Income from other sources and this include:
located in the Philippines a. Bad debts recovered
b. Illegal gains derived from gambling
4. Income derived by alien individual employed by special c. Tax refunds
corporations d. Compensation for private property expropriated by the
government for public use
5. Fringe benefits granted to the employee (except rank & file) e. Damages
f. Cancellation of indebtedness
6. Informer‘s reward
- 10% of the revenues, surcharges or fees recovered INTEREST INCOME FROM LONG-TERM DEPOSIT
and/or fine or penalty imposed and collected or
P1,000,000 per case, whichever is lower
LONG-TERM DEPOSITS OR INVESTMENTS
7. Cash or property dividends paid by a Real Estate Investment
Trust (REIT) pursuant to Sec. 13 of RR 13-2011 Example
Mr. X has a 10-year time deposit of P1,000,000 which earns interest at
P100,000 per year. Mr. X held it for 3 years before he sold it to Mr. Y.
CAPITAL GAINS
Mr. Y held it for 5 years before he, in turn, sold it to Mr. Z. Mr. Z held
it for 2 years until the date of maturity. How will income be taxed?

Types of Capital Gains
Sale of shares of stocks not listed
and traded in the local exchange or
listed but not traded in local stock
exchange
Sale of shares of stocks listed and
traded in the stock exchange
The interest income of Mr. X will be taxed at 12% since he held it for 3
Rate Basis
years. Mr. Y is exempt since the holding period is 5 years. Mr. Z is
subject to a tax rate of 20% since he held it for 2 years.
15% Net Capital Gains
It does not matter how long the time deposit is. What matters is how
long you held into it.
TN: The same goes for deposit substitutes, the tax would also depend
60% Gross Selling Price on the holding period
of 1%

Sale of real property located in the 6% GSP or FMV, BAD DEBTS RECOVERED
Philippines whichever is higher

Sale of other capital assets BAD DEBTS RECOVERED

Holding period:
a. More than 12 months 0-35% 50% of capital gain Once recovered, bad debts can be considered as income, as well as,
b. 12 months or less 0-35% 100% of capital gain allowed as deductions. It is subject to income tax but only to the
extent of the tax benefit.
Formula:
Tax benefit rule
Under the Tax Benefit Rule, a taxpayer is subject to income tax to the
extent of tax benefit when bad debts are recovered. There is benefit
when bad debts are recovered because the taxpayer is allowed by law
to deduct the bad debts which lower its taxable income.

How to compute the benefit on bad debts?

TN: This computation applies to tax refund as well.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 24 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

2015 2016 2017 2017 ILLEGAL GAINS FROM GAMBLING

Income 100,000 (100,000) 20,000 20,000
Bad debts (50,000) (50,000) (50,000) (50,000)
GAMBLING
Taxable 50,000 (150,000) (30,000) (30,000)
Income
Gambling is taxable. The NIRC does not distinguish between legal or
Amount
illegal gambling. As long as there is income, it is taxable.
recovered in 30k 30k 30k 40k
2018
TAX REFUNDS
100 – 50 (100) – (50k) 20 – (50) 20 – (50)
Actual
= 50k = (150k) or = (30k) or = (30k) or TAX REFUND
0 0 0
Tax refund is taxable to the extent of the tax benefit.
What if
What if you
Taxes that cannot be deducted [PESSIV]
did not
A. Philippine income tax
declare as 100 – 20 (100) – (20) 20 - (20k) 20 - 10
B. Estate and donor's tax
bad debts = 80k = (120k) =0 = 10k
C. Stock Transaction Tax
the one you
D. Special assessment
recovered?
E. Income tax paid to foreign government claimed as tax credit
Difference F. Value Added Tax
between
what if and When the above enumerations are deducted and there is a refund,
actual 30k 0 0 10k there is no tax benefit since it is not allowed as deduction in the first
place. It is not part of taxable income even though there is a refund.
Suppose in 2018 now, based on the table above, the taxpayer
recovered bad debts of 30K in 2015, 30K in 2016 and 30K in 2017. Q: Is the tax refund from a local business tax paid in excess taxable?
How will you compute the benefit on bad debts?
A: Yes. Since local business tax is not enumerated in the taxes that
The taxpayer shall compare first the 'what if' to the 'actual'. The 'what cannot be deducted then a taxpayer may deduct local business tax.
if' refers to difference of the amount between the bad debts and the
amount of bad debts being recovered. The 'actual' refers to the same Q: If you were able to recover a tax that you previously deducted, is
computation within the taxable year. that considered taxable income then?

For instance in 2015:
1. 'What if' means 100K minus (20K) = 80K
N.B. (20K) is derived from (50K) [bad debts in 2015] minus
30K [bad debts recovered in 2018].
2. 'Actual' means 100K minus (50K) = 50K
3. Then, we have to get the difference between the 'what if' and
the 'actual' which is 30K. It is derived from 80K minus 50K.
4. Therefore, 30K is the tax benefit received by the taxpayer
subject to taxable income.
For instance in 2016:
1. 'What if' means (100K) minus (20K) = (120K)Loss
N.B. (20K) is derived from (50K) [bad debts in 2016] minus
30K [bad debts recovered in 2018].
2. 'Actual' means (100K) minus (50K) = (150K)Loss
3. Since both 'what if' and 'actual' are at loss or negative, then it
will be treated as zero (0).
4. Therefore, it is not subject to taxable income.
For instance in 2017:
1. 'What if' means 20K minus (20K) = 0
N.B. (20K) is derived from (50K) [bad debts in 2017] minus
30K [bad debts recovered in 2018].
2. 'Actual' means 20K minus (50K) = (30K)Loss
3. Since 'what if' has no income and 'actual' are at loss or
negative, then the 'actual' will be treated as zero (0). As a
result, zero income already.
4. Therefore, it is not subject to taxable income.
A: Yes, to the extent of the tax benefits. We apply the Tax Benefit Rule
and use the same computation in bad debts.
Computation of tax benefit
The computation shown under bad debts is also applicable to tax
refund. Just change the bad debts to taxes because tax refunds also
follow the tax benefit rule and taxes are allowed as deductions.
Compare the income with the tax deduction (the ―actual‖ income) and
the income without the tax deduction (the ―would be‖ income. The
difference, if any is the taxable income.
Thus, if the ―actual‖ income is more than the ―would be‖ income, the
difference is taxable income.
Example: In year 1, you had an operating income of P100,000 and tax
deduction of P50,000. This resulted to a taxable income of P50,000. In
year 2, you got a tax refund of P10,000. How much is the taxable
income for year 2?
A: The taxable income is P10,000. Since you received a tax refund of
P10,000 in year 2, the tax refund will be removed from the deductions
in year 1. So only P40,000, which is the tax deduction of P50,000 less
the tax refund of P10,000, will be deducted from the income of
P100,000 in year 1. As a result, the ―would-be‖ taxable income of year
1 is P60,000. Comparing the ―would-be‖ taxable income with the
―actual‖ income of P50,000 will yield a difference of P10,000. The
difference will form part of your taxable income.

What if the bad debts collected in 2017 amounted to 40K, would that
change your answer? Yes. It is because the 'what if' will become 10K COMPENSATION IN EXPRORPRIATION CASES
while the 'actual' will be the same as zero (0). Then, we have to get
the difference between the 'what if' and the 'actual' which is 10K. COMPENSATION IN EXPRORIATION CASES
Clearly, there is already a tax benefit subject to taxable income.
The just compensation for private property expropriated by the
Note: Do not show these computations during bar exam or Atty. government for public use is subject to tax. It will be treated as a sale
Amago's exam. This is only intended to understand the computation of to the government.
tax benefit from bad debts being recovered.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 25 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

If the private real property expropriated is residential, it will be treated

Self-employed Individuals
as capital gains subject to 6% Capital Gains Tax based on the gross
selling price or zonal value as determined by BIR or assessed value as Using the Graduated Income Tax Rates
determined by local assessor, whichever is higher.
Gross Income P xxx
If the real property expropriated is used in trade or business, it will be Less Allowable Deduction (xxx)
treated as ordinary gains subject to 0-35% income tax. Net Taxable Income P xxx
Multiplied by the tax Rate (0-35%) x%
The only kind of property that cannot be expropriated is cash. Income Tax Due P xxx
Less Withholding taxes, Tax Credits (xxx)
SUMMARY Income Tax Due and Payable P xxx
o Only cash cannot be expropriated.
o Tax depends on type of property
 Personal property – 0-35%
 Residential property – 6% CGT Self-employed Individuals
 Used in trade or business – 0-35% Using the 8% Optional Tax Rate
 Capital Asset – option to use rate of 6% or 0-35%
- Most would likely use the dumping ground because you Gross Income P xxx
get to deduct the cost. Less Threshold (in excess of 250,000) (250,000)
- The 6% CGT is based on presumed gain. Taxable Business Income P xxx
Multiplied by Optional Tax Rate 8%
DAMAGES Income Tax Due P xxx

DAMAGES
TAX ON NRA-NETB
General rule: Damages are subject to tax.
Exception: Damages received from physical injuries are excluded from TAX ON NRA-NETB
tax under the law
A non-resident alien not engaged in trade or business in the Philippines
Q: Are the following taxable? is taxed at a final tax of 25% based on his gross income within, except
1. Moral damages due to sleepless night or exemplary damages – Yes for alien employed by regional or area headquarters (RAHQs)
2. Payment of back wages or nominal damages in a labor case –Yes established in the Philippines by multinational company, offshore
3. Moral damages relating to a physical injury case – No banking units (OBUs), petroleum service contractor and subcontractor
Except Lucrum cessans or loss of profits since they are taxed at 15% of salaries within.

CANCELLATION OF INDEBTEDNESS SUMMARY

GR: 25% of gross income
EXC: 15% of salaries within
CANCELLATION OF INDEBTEDNESS 1. Alien employed in RAHQ
2. OBUs
Rules 3. Petroleum service contractor and subcontractor

A. If the reason for cancellation is due to the services rendered by

PROCEDURE FOR FILING INCOME TAX RETURN
the debtor, it is subject to income tax.
INDIVIDUALS REQURED TO FILE ITR
B. If the reason for cancellation is due to the generosity or liberality
of the creditor, it is not subject to income tax but subject to
donor's tax. INDIVIDUALS REQUIRED TO FILE ITR

C. When the corporation extended a debt to one of its stock holders
and eventually condone the debt, it is subject to dividend income
tax of 10% or 20% or 25% as the case may be.
D. When the stock holder extended a debt to its corporation and
eventually condoned the debt, it is considered as part of
investment that shall not be subject to tax since it is a capital.
INCOME TAX COMPUTATION
Sec. 51 (A) (1) of the NIRC
Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.

Pure Compensation Income Earner Who are required to file Tax Returns?
All individual taxpayers are required to file income tax return, except
Compensation Income NRA NETB since the final tax is withheld at source.
(Net of Mandatory Deductions) P xxx
Multiplied by the tax Rate (0-35%) x% INDIVIDUALS NOT REQUIRED TO FILE ITR
Income Tax Due P xxx
Less Tax Withheld (xxx)
Income Tax Due and Payable P xxx Sec. 51 (A) (2) of the NIRC
The following individuals shall not be required to file an income tax
return:
Self-employed Individuals
Using the Graduated Income Tax Rates
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 26 | P a g e
Gross Income P xxx
Less Allowable Deduction (xxx)
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
(a) An individual whose taxable income does not exceed P250,000:
Provided that a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippines
shall file an income tax return regardless of the amount of the gross
income;
(b) An individual with respect to pure compensation income, as
defined in Section 32(A)(1), derived from such sources within the
Philippines, the income tax on which has been correctly withheld under
the provisions of Section 79 of this Code: Provided, That an individual
deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return;
(c) An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code
or an individual who is exempt from income tax pursuant to the
provisions of this Code and other laws, general or special.
Sec. 51 (A) (3) of the NIRC
The forgoing notwithstanding, any individual not required to file an
income tax return may nevertheless be required to file an information
return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
INDIVIDUALS NOT REQUIRED TO FILE ITR
1. An individual who is a minimum wage earner.
2. An individual whose taxable income does not exceed
P250,000, provided that a citizen of the Philippines and any
alien individual engaged in business or practice of profession
within the Philippines shall file an income tax return
regardless of the amount of the gross income
3. An individual whose income has been subjected to final
withholding tax
4. Those who are qualified under ―substituted filing‖
Does not exceed P250,000
The taxpayer whose income does not exceed P250,000 is not required
to file since is exempted.
Professional & Business Income Earner
An individual engaged in business or the practice of profession is
required to file ITR regardless of the amount of gross income. The
reason is for the government to verify if they are claiming the proper
deductions.
Pure Compensation Income Earner
General Rule: An individual earning pure compensation income is
required to file ITR, regardless of the amount of income, since he is
qualified under substituted filing. It is the employer who files.
The TRAIN Law added an additional section for substituted filing. It
wanted to clarify that the certificate of withholding filed by the
employer duly stamped received by the BIR is tantamount to the filing
of an ITR by the employee. The taxpayer can therefore present it as
proof of payment of tax.
Exception: When the employee has two or more employers during the
taxable year, he is required to file an ITR. This is because of the
possibility that he might be earning total income of more than
P250,000 from his employers.
Also, when BPE‘s existed, the income earned by the taxpayer might be
claimed by each employer and such BPE can only be claimed once.
Now, it is to ensure that the 250,000 exemption is only claimed once
by the employee as it can happen that both can separately claim. The
BIR must make sure that he is taxed according to the correct tax
bracket.
Subject to FWT
Those earning income solely subject to final withholding tax are not
required to file ITR.
Ex. Housewives receiving remittances from their spouses abroad and
placing such in the bank. They are earning interest income but are not
required to file an ITR because the taxes due are already withheld by
the bank.
This is only true if all your income are subject to final tax.
Ex. If you also earn income from a sari-sari store, then you are
required to file an ITR regardless of the income earned since it is
considered business income.
Minimum wage earner
Minimum wage earners are not required to file an ITR because they
are exempt from taxes. However, they are required to file an
information return.
SUMMARY
A. Individuals not required to file ITR:
 GR: All individuals are required to file an ITR. (RC, NRC, RA,
NRA-ETB)
 EXC: NRA-NETB
 REASON: Income of NRA-NETB is subject to final
withholding tax of 25% withheld at source.
B. Individuals not required to file ITR:
 Taxable income does not exceed P250,000
o EXC: Business or professional income, regardless
of amount of gross income
 Pure compensation income earner
o EXC: 2 or more employers any time during the
taxable year
 Sole income subjected to final withholding tax
 Minimum wage earner or tax-exempt individual
WHERE TO FILE
Sec. 51 (B) of the NIRC
Except in cases where the Commissioner otherwise permits, the return
shall be filed with an authorized agent bank, Revenue District Officer,
Collection Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal
place of business in the Philippines, or if there be no legal residence or
place of business in the Philippines, with the Office of the
Commissioner.
WHERE TO FILE
1. Authorized Agent Bank (AAB)
2. Revenue District Officer (RDO)
3. Treasurer
4. Office of the Commissioner
Authorized Agent Bank (AAB)
AAB has jurisdiction over the RDO. BIR is prohibited from accepting
cash/ check payments in order to prevent or minimize opportunities for
corruption. At least with AABs, the funds are directly deposited to the
government coffers.
Revenue District Officer (RDO)
The ITR is filed with the RDO where your principal place of business is
located. You can go to the RDO if you don‘t have payment.
Q: How do you update the RDO now that you are now working in
Cebu with another employer if you were registered by your previous
employer in the RDO of Manila where his principal place of business is?
A: You need to write the RDO of your previous employer requesting
for the transfer of your registration to the RDO in Cebu. They will then
conduct an automatic audit.
Q: What happens if you transfer your business in Cebu to Mandaue?
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 27 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
A: The RDO of Cebu will audit your business before transferring you to
the RDO of Mandaue to ensure that you have cleared your account.
Once you are transferred, the RDO of Cebu will lose jurisdiction.
Treasurer
Municipal and city treasurers can be deputized to receive income tax
returns and payments.
Office of the Commissioner
The ITR can be filed with the Office of the Commissioner in Quezon
City when there is no principal place of business in the Philippines.
WHEN TO FILE
Sec. 51 (C) of the NIRC
(1) The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income
for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a
local stock exchange as prescribed under Section 24(c) shall file a
return within thirty (30) days after each transaction and a final
consolidated return on or before April 15 of each year covering all
stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D)
shall file a return within thirty (30) days following each sale or other
disposition.
Sec. 58 (A), par. 3 of the NIRC
The return for final and creditable withholding taxes shall be filed and
the payment made not later than the last day of the month following
the close of the quarter during which the withholding was made.
WHEN TO FILE
1. Individual
a. On or before May 15 starting 2019
b. On or before April 15 until 2018
2. Corporation
a. On the 15th day of the 4th month
3. Capital Gains
a. Sale or exchange of shares of stock not traded thru a
local stock exchange
i. Within 30 days after each transaction
ii. Final consolidated return on or before April 15
b. Sale or disposition of real property
i. Within 30 days following each sale or other
disposition
4. Taxes withheld at source
a. Not later than the last day of the month following the
close of the quarter
TN: Under the TRAIN law, the ITR must be filed on or before May 15.
Although the date of April 15 in Sec. 51 has not been amended, when
you file under Sec. 74, you are supposed to make an estimate
declaration of your estimated income on or before May 15 of the
taxable year starting 2019.
OTHER PROVISIONS
Sec. 51 (D) of the NIRC
Husband and Wife. - Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to include the
income of both spouses, but where it is impracticable for the spouses
to file one return, each spouse may file a separate return of income
but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.
Sec. 51 (E) of the NIRC
Return of Parent to Include Income of Children. - The income of
unmarried minors derived from property received from a living parent
shall be included in the return of the parent, except (1) when the
donor's tax has been paid on such property, or (2) when the transfer
of such property is exempt from donor's tax.
Sec. 51 (F) of the NIRC
Persons Under Disability. - If the taxpayer is unable to make his own
return, the return may be made by his duly authorized agent or
representative or by the guardian or other person charged with the
care of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or fraudulent returns.
Sec. 51 (G) of the NIRC
Signature Presumed Correct. - The fact that an individual's name is
signed to a filed return shall be prima facie evidence for all purposes
that the return was actually signed by him.
Sec. 56 (A) (2) of the NIRC
Installment of Payment. - When a tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation, may
elect to pay the tax in two (2) equal installments, in which case, the
first instalment shall be paid at the time the return is filed and the
second installment on or before October 15 following the close of the
calendar year, if any installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid becomes due and
payable together with the delinquency penalties.
Husband and Wife
GR: Joint filing
EXC: Where it is impracticable
Minors
GR: Income included in return of parent
EXC: For property where
1. Donor‘s tax has been paid on the property or
2. Transfer of the property is exempt from donor‘s tax
Minors can file separately since there is no age requirement in the tax
code. However, the BIR will not issue a Tax Identification Number
(TIN) to a minor which is necessary for filing an income tax return. So,
their income is added to the parents.
Persons under Disability
GR: Taxpayer can file his own ITR
EXC: When he is unable to make his own return
1. Duly authorized agent or representative
2. Guardian or other person charged with the care of his
person or property
Pay-as-you-file system
Taxes are paid when you file. However, taxes can be paid in
installments.
Installment payments
When a tax due is in excess of P2,000, the taxpayer other than a
corporation can pay in 2 equal installments on May 15 and October 15.
Frequency of filing
The ITR is filed quarterly for business or professional income earners
and annually for compensation income earners.
Number of Copies
The ITR is filed in triplicate, two copies for the BIR and one copy for
the taxpayer. The tax code only requires duplicate copies but for
regulation purposes, triplicate copies have been required.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 28 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
INCOME TAXATION FOR CORPORATIONS
INTRODUCTION & DEFINITION OF TERMS
Sec. 22 (B) (C) (D) (H) (I) of the NIRC
(B) The term 'corporation' shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas
en participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a
service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business.
(C) The term 'domestic,' when applied to a corporation, means created
or organized in the Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a
corporation which is not domestic.
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign
corporation not engaged in trade or business within the Philippines.
DEFINITION OF TERMS
Corporation
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence. (Sec. 2,
Corporation Code)
For taxation purposes, a corporation shall include
 partnerships, no matter how created or organized,
o except general professional partnerships
 joint-stock companies,
 joint accounts (cuentas en participacion),
 association, or
 insurance companies,
But does not include
 general professional partnerships and
 a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to
an operating consortium agreement under a service contract
with the Government.
TN: The definition under the tax code is not limited to corporations per
se. It can include other entities that do not possess a separate juridical
personality.
General Professional Partnerships
'General professional partnerships' are partnerships formed by persons
for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.
Joint Ventures
A joint venture is created when two corporations, while registered and
operating separately, are placed under one sole management which
operates the business affairs of said companies as though they
constitute a single entity, thereby obtaining substantial economy and
profits in the operation.
It is a business activity that is organized or established only for a
temporary or short period of time. It is dissolved once its business
objective is accomplished.
Joint Account
A joint account is created when two persons form or create a common
fund and such persons engage in a business for profit. This may result
in a taxable unregistered association or partnership.
Joint Stock Companies
It is the midway between a corporation and a partnership, a ―hybrid
personality.‖ It is somewhat a corporation because this is managed by
a Board of Directors and such persons may transfer their share/s
without the consent of others, and somewhat a partnership because it
is an association, and persons or members of the same contribute
fund, money to a common fund.
Emergency Operation
This may be formed by two corporations with separate personalities. If
they form that emergency operation (it is really a special activity) to
engage in joint venture, corporation may be taxed only from the
income derived from such business. The income derived from such
emergency operations should also be included in that taxable income
subject to corporate income tax. In the same way that has a separate
and distinct personality; if it‘s a part of that emergency operation, the
income derived from such special activity should also be included in
the income of that corporation, subject to corporate income tax, even
if it is not registered with the SEC.
EXCLUSIONS FROM THE TERM CORPORATION
EXCLUSIONS FROM THE TERM CORPORATION
1 – Joint Venture
(For the purposes of undertaking construction project)
Corporation itself ordinarily owns the land but there are some
individuals who own it but they (corporation) undertake to develop the
land and subdivide it and once the land is ready for sale, whatever is
the sales proceeds once it has been developed, they will just share the
profits with the owner of the land. They enter in this Joint Venture
Agreement. At one part, what was contributed by the owner of the
land (which is the ownership) while the other party it contributes to
the cost of developing the land.
But ordinarily, when you transfer property to one fund, you will be
treated as a partnership and it is supposedly subject to tax.
The law deems it that no, in this type of conveying property to a
particular fund, you don‘t treat it as if a partnership. Because the
undertaking is a construction project, the law deems it that it should
not be taxed but does that mean that there no tax in such operations?
No. There is still tax but on the level of the entities who formed the
Joint Venture. The owner will be subject to tax separately and then the
one who developed the property will also be taxed separately on
whatever income was distributed to them.
While it says exclusions from the term corporation, it does not mean
there is no tax imposed, it‘s just taxed on a different level. Different
type of taxpayer is being taxed when everyone is excluded from the
term corporation.
Not corporate income tax applies but it is individual taxation (of course
if that entity happens to be a corporation then it would be still taxed as
a corporation) but not on his operations together with someone who is
in Joint Venture with him on that construction project. They would still
be taxed as corporation, but only separately, not jointly.
General Rule: An unincorporated joint venture is taxed like a
corporation.
The share of the joint venture partners will no longer be taxable to
them because they partake of dividends if paid to a domestic or
resident corporation.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 29 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Exception: When formed for the purpose of undertaking a construction
project or engaging in petroleum operations pursuant to the
consortium agreement with the Philippine Government is not subject to
the corporate income tax.
Only the joint venture partners will be taxed on their respective shares
in the income of the joint ventures.
Reason: To enable local contractors to compete with large foreign
contractors which are usually big, otherwise, the local contractors
cannot bid in large construction projects on their own.
BIR Revenue regulations require that they be registered or licensed by
the Philippine Contractors Accreditation Board (PCAB) to ensure that
they are engaged in the construction business.
2 – Consortium for the operations engaging in petroleum,
coal, geothermal, and other energy operations pursuant to an
operating/consortium agreement under the service contract
with the government
This refers to certain entities providing public utilities like electricity
and its distribution. When the National Power Corporations sub-
transmission assets - the one being used to distribute the line; the
asset used to hold the electricity and distribute it, there are certain
entities which on the consortium to buy these sub-transmission assets.
If you look at the Tax Code, they will not be treated as forming a
separate entity subject to tax because it is providing public utilities.
They agreed to service the public when in fact it is the government
who should do that. It will not be treated as a separate entity just like
the joint venture. They are joined together in a certain operation, they
own sub-transmission assets then they will allow the passage of
electricity under their assets. It‘s like contributing asset to a common
fund.
Reason: The government wanted support on its energy projects.
There must be service contract with the government. Otherwise, such
joint venture or consortium is not exempt from corporate income tax.
Q: Will they be subject to tax as one entity?
No, because under the law, when there is a consortium for the
purpose of operating petroleum, coal, geothermal and other energy
operation under service contracts with the government, it is excluded
from the term corporation.
Q: Are these types of operation really exempted from taxes?
A: No, because separately, these entities forming the consortium will
still be taxed once the income is distributed - not treated as dividends
but as ordinary income.
TAXABLE CORPORATIONS
CLASSES OF CORPORATE TAXPAYERS
1. Domestic Corporation – taxed for income within and without the
Philippines
2. Resident Foreign Corporation – taxed for income within only
3. Non-resident Foreign Corporation - taxed for income within only
Reasons for distinction:
A. To know when can they be taxed (income within/ within or
without Philippines)
B. Different tax base and rate will apply
 DC is taxed at 30% based on net income for those
earned within and without
 RFC within is taxed based on 30% net income
 NRFC are taxed at 30% gross income within Philippines
Domestic Corporations
Domestic corporations are those which are registered and/or organized
under Philippine laws. It is presupposed that if the corporation is
registered and/or organized here, then the operations must be here.
Foreign Corporations
In general, these refer to those which are organized and/or registered
in laws other than the Philippines.
They need to register with SEC to conduct business in the Philippines.
The following are the ways by which a foreign corporation can legally
do business in the Philippines:
1. Incorporate with a domestic corporation (set up a
subsidiary)
2. Establish a branch in the Philippines
3. Set up a representative office which does not earn income
but only exists for communication or as a liaison of the
foreign corporation.
Resident foreign corporations
Refer to those which are doing business in the Philippines.
It should pass the test of regularity. There should be continuous or
regular operations. A foreign corporation having a branch here is a
means of having regular or continuous operation but it is not
necessarily a branch because it could be a representative office.
Under Foreign Investment Act, there are 2 ways a foreign corporation
can do business here. It‘s either by having a branch or a
representative office. If it has either one of these, it is deemed to be a
RFC automatically.
Q: Does that mean that if you are not registered in the Philippines
SEC, you will not be subject to tax?
A: No, because if that‘s the case then all of the foreign corporations
will never register with the Philippine SEC because if they will register
then they are subject to tax and if they won‘t register then they won‘t
be subject to tax. Again, the laws on which the corporation is
registered matters. To be a resident foreign corporation, it must be
doing business in the Philippines, otherwise, you will only be
considered NRFC.
Non-resident foreign corporation
Refer to those not engaged in trade or business in the Philippines.
They can be taxed on their isolated transactions in the Philippines.
Example: There is a foreign corporation which happens to have shares
of stocks in a domestic corp. It does not necessarily mean that they
are doing business here in the Philippines as their income is dependent
on the operations of the Philippine company.
So there is a domestic corporation set up here and shares of stock
were bought by a foreign corporation (shares of stocks owned by a
foreign corporation but the business is registered here – this is allowed
under Foreign Investment Act). If that corporation distributes income
to its stockholder, is the distribution subject to tax?
Supposedly if NRFC, you are still supposed to subject them to tax
based on their income here in the Philippines. The Corporation will
have to withhold the amount and the rate would be 30% based on its
gross income. It means that in isolated cases, the corporation can still
be subject to tax whether it has actual presence here in the Phil or
not. If there is no actual presence, then it is automatically an NRFC if
they have an isolated transaction.
Howden v. CIR
The source of an income is the property, activity or service that
produced the income.
Appellants should not confuse activity that creates income
with business in the course of which an income is realized. An activity
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 30 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
may consist of a single act; while business implies continuity of
transactions. An income may be earned by a corporation in the
Philippines although such corporation conducts all its businesses
abroad. Precisely, Section 24 of the Tax Code does not require a
foreign corporation to be engaged in business in the Philippines in
order for its income from sources within the Philippines to be taxable.
It subjects foreign corporations not doing business in the Philippines to
tax for income from sources within the Philippines.
PARTNERSHIPS & CO-OWNERSHIPS
CO-OWNERSHIP
CO-OWNERSHIP
A co-ownership exists when more than one person acquired the right
to own a piece of property or mass of properties.
General Rule: Co-ownership is tax-exempt
Reason: It is formed an organized not for profit but for common
enjoyment or preservation of a property.
Any income incident to the co-ownership forms part of the ordinary
income of the co-owners taxed at 0-35%.
Exceptions:
1. When the income of the co-ownership is invested by the co-
owners in other income-producing activities; or
2. When there is no attempt to divide the inherited property for
more than 10 years and the said property was not under any
administration proceedings nor held in trust, an unregistered
partnership is deemed to exist
PARTNERSHIP
PARTNERSHIP
By the contract of partnership, two or more persons bind themselves
to contribute money, property, or industry into a common fund with
the intention of dividing the profits among themselves. (Art. 1767, CC)
Two Types of Partnership under the Tax Code
1. General Professional Partnership – partnership formed
by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business. (Sec. 22 (B), NIRC)
2. General Co-partnership or Taxable or Business or
Trade Partnership (compania colectiva) – partnership
wherein part or all of its income is derived from the conduct
of trade or business. The income is taxed like a corporation.
SUMMARY OF TAX LIABILITIES
General Professional Partnership
 GPP is exempt from income tax.
 GPP is required to file a tax return for its income for the
purpose of furnishing information as to the share in the
gains or profits that each partner shall include in his
individual tax return.
 For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
computed in the same manner as that of a corporation.
Trade Partnership
 It is considered as a corporation and therefore liable to
corporate tax of 30% on net taxable income.
 It is also subject to MCIT of 2% on gross income starting
from the 4th year of its business operation.
LIABILITY OF PARTNERS
General Professional Partnership
 Partners in a GPP shall be liable for income tax only in their
separate and individual capacities.
 Each partner shall report his distributive share, actually or
constructively received in the net income of the partnership
as gross income.
 The share of a partner shall be subject to 8% creditable
withholding tax.
 The partner is deemed to have elected the itemized
deductions unless he declares his distributive share
undiminished by his share of the itemized deductions.
 A 40% OSD is deductible from the distributive share of the
gross income if such gross income was not previously
reduced by the partnership‘s itemized deduction.
Trade Partnership
 Partners are considered as stockholders.
 The profits distributed to them by the partnership are
considered dividends subject to final tax of 10%.
TAXABLE AS CORPORATIONS
No specific form required
There is no specific form of partnership required because the tax code
provides that partnerships are included in the term corporation ―no
matter how created or organized.‖
Tax of partnerships
There is no separate taxation for partnerships as they are taxed like a
corporation. We also need to make a distinction on whether it is
domestic, resident foreign or non-resident foreign.
 Domestic Partnership – 30% of net income within & without
 Resident Foreign Partnership – 30% of net income within
 Non-resident Foreign Partnership – 30% of gross income within
Constructive Receipt Doctrine
The point of difference between a corporation and a partnership, under
the tax code, lies in the fact that partnerships adhere to the
constructive receipt doctrine. Even if there is no actual declaration of
dividends or distribution of income by the partnership, such income is
deemed to have been automatically received by the partners for
purposes of taxation. In corporations, dividends must be declared first.
Tax of Partners
Partners in a partnership are taxed depending on the type of
individual. RC, NRC, RA & NRA-ETB is taxed at 10% while a NRA-NETB
is taxed at 20%.
GPP Partners
Partners in a GPP are taxed at 0-35% dumping ground computation.
They cannot avail of the 8% gross income taxation since the GPP
already accounts for allowable deductions in the level of the
partnership. What has been distributed to the partners in a GPP is
already net of the allowable deductions.
Evangelista v. CIR
Facts: Petitioners are siblings who borrowed from their father a certain
sum for the purpose of buying real properties. Within February 1943 to
April 1994, they bought parcels of land from different persons, the
management of said properties was charged to their brother Simeon.
The properties were then leased or rented to various tenants.
Issue: Whether or not there is a partnership.
Held: Yes. Petitioners have agreed to, and did, contribute money and
property to a common fund. Their purpose was to engage in real
estate transactions for monetary gain and then divide the same among
themselves as indicated by the following circumstances:
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 31 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
1. The common fund was not something they found already in
existence nor a property inherited by them pro indiviso. It
was created purposely by jointly borrowing a substantial
portion in order to establish said common fund;
2. They invested the same not merely in one transaction, but in
a series of transactions.
3. Said properties were not devoted to residential purposes, or
to other personal uses, of petitioners but were leased
separately to several persons;
4. They were under the management of one person where the
affairs relative to said properties have been handled as if the
same belonged to a corporation or business and enterprise
operated for profit;
5. Existed for more than 10 years, or, to be exact, over 15
years, since the first property was acquired, and over 12
years, since Simeon Evangelista became the manager;
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already
adverted to, or on the causes for its continued existence.
Obillos v. CIR
Facts: Petitioners are siblings who sold the lots they inherited from
their father. They derived a total profit of P33,584 for each of them.
They treated the profit as capital gain and paid an income tax thereof.
Held: No, there was no partnership. Petitioners were co-owners and to
consider them partners would obliterate the distinction between co-
ownership and partnership. The petitioners were not engaged in any
joint venture since the sale was an isolated transaction. The sharing of
gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in
any property from which the returns are derived. There must be an
unmistakable intention to form partnership or joint venture.
Oña v. CIR
After an extrajudicial settlement the co-heirs used the inheritance or
the incomes derived therefrom as a common fund to produce profits
for themselves, it was held that they were taxable as an unregistered
partnership.
Gatchalian v. CIR
Facts: Jose Gatchalian and 14 others bonded together to purchase a
sweepstakes ticket for P2 and registered the same as Jose Gatchalian
and Co. This ticket eventually won 3rd prize amounting to P50,000
which they divided in accordance with their aliquot share in the cost of
the ticket.
Held: When the petitioners bonded together and contributed to the
cost of, they formed an unregistered partnership.
AFISCO Insurance v. CIR
Facts: 41 non-life insurance companies entered into Quota Share
Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation, to cover for All Risk Insurance Policies over machinery
erection, breakdown and boiler explosion. The treaties required
petitioners to form a pool, to which AFISCO and the others complied.
Held: The pool is a partnership as evidenced by a common fund, the
existence of executive board and the fact that while the pool is not in
itself, a reinsurer and does not issue any insurance policy, its work is
indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have
received their premiums.
DOMESTIC CORPORATIONS
DOMESTIC CORPORATION
Tax rate: 30%
Tax base: Net taxable income
Source: Income within and without
SPECIAL DOMESTIC CORPORATIONS
PROPRIETARY EDUCATIONAL INSTITUTION & HOSPITALS
Section 27(B) of the NIRC
Proprietary educational institutions and hospitals which are nonprofit
shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross
income from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution ' is any private school
maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or
the Technical Education and Skills Development Authority (TESDA), as
the case may be, in accordance with existing laws and regulations.
PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS
Proprietary educational institutions and non-profit hospitals are subject
to a tax rate of 10% based on taxable income.
The general rule is that it is subject to a 10% tax if it complies with
the predominance test with the unrelated activities as basis.
Otherwise, it is subject to 30% tax.
Predominance test
If the gross income from unrelated trade, business, or other activities
exceeds 50% of the total gross income from all sources, then it is
subject to the 30% of net income.
Otherwise, if the gross income from unrelated trade, business, or other
activities does not exceed 50%, then it is taxable at 10% of net
income.
Q: The University of Cebu earns rent income from unrelated activities
at the amount of 1,000,000. Aside from that, it earns educational
income from tuition fees, sales of books and library fees amounting to
1,000,000. How will this be subject to tax?
Formula:
A: The tax rate will be 10% of the net taxable income. Since the
income from unrelated trade activities did not exceed 50% of the
gross income, it passed the predominance test.
Q: If the income from unrelated activities is 2,000,000, how will it be
taxed?
A: The tax will be at 30% of the net taxable income. It did not pass
the predominance test since the income from unrelated activities of
66.67% more than 50%.
Important: Take note that this rule not only applies to proprietary
educational institutions but also to hospitals which are also non-profit.
Chong Hua, according to sir, is a non-profit hospital.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 32 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Unrelated Trade, Business or other Activity
Conduct of trade, business or other activity is not substantially related
to the exercise or performance of the primary purpose or function.
Lung Center v. Quezon City
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, so long as the money received is
devoted to charitable objects and no money inures to the private
benefit of the persons managing or operating the institution. As well as
the reason of donation in the form of subsidies granted by the
government.
The petitioner failed to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals
for their clinics and a canteen.
Hence, the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
CIR v. St. Luke’s Medical Center
St. Luke‘s fails to meet the requirements under Section 30(E) and (G)
of the NIRC to be completely tax exempt from all its income. It is a
corporation that is not ―operated exclusively‖ for charitable or social
welfare purposes insofar as its revenues from paying patients are
concerned.
However, an institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. It remains a
proprietary non-profit hospital as long as it does not distribute any of
its profits to its members and such profits are reinvested pursuant to
its corporate purposes. St. Luke‘s, as a proprietary non-profit hospital,
is entitled to the preferential tax rate of 10% on its net income from its
for-profit activities.
CIR v. De La Salle University
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and
exclusive use of their assets, revenues and income for educational
purposes. Unlike the exemption that may be availed of by proprietary
educational institutions, it is not subject to limitations imposed by law.
Hence, the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
TN: Only formal educational institutions can avail of the exemption.
GOVERNMENT-OWNED OR CONTROLLED CORPORATION
Sec. 27 (C) of the NIRC
Government-owned or -Controlled Corporations, Agencies or
Instrumentalities. — The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the
Government Service Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC), and
the local water districts shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry, or activity.
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS,
AGENCIES OR INSTRUMENTALITIES
General Rule:
All corporations, agencies, or instrumentalities owned or controlled by
the government shall pay such rate of tax upon their taxable income
as are imposed upon corporations or associations engaged in a similar
business, industry or activity.
GOCCs, agencies or instrumentalities are taxed like any other
corporation.
Exceptions:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. National Power Corporation (NAPOCOR)
5. Local Water Districts (RMC 28-2010, RA 10026)
6. Cooperatives (RA 6938) with conditions
7. Foundations created for scientific advancement (RA 2067)
Philippine Amusement and Gaming Corporation (PAGCOR) is exempt
from taxes for income related to gaming operations as provided for in
its charter. If it earns income from other sources then such would be
subject to 30% tax because this is the tax for other gaming
corporations. PAGCOR was previously part of the exemptions provided
in the tax code but it was recently changed by an act of congress and
the extent of their exemption was clarified by the SC in a recent case.
Philippine Charity Sweepstakes Office (PCSO) was removed from the
exemptions under the tax code. It is no longer exempt from corporate
income tax under the TRAIN law.
RESIDENT FOREIGN CORPORATIONS
RESIDENT FOREIGN CORPORATION
Tax rate: 30%
Tax base: Taxable income
Source: Income within
The tax for a resident foreign corporation is similar to a domestic
corporation but only for income earned within the Philippines. The rule
for passive income is also similar.
Interest Income
Interest income from bank deposits are subject to 20% final tax but
interest income earned from deposits under the foreign currency
depositary unit is subject to 15% tax rate.
Income derived by a depositary bank from an expanded foreign
currency deposit system is exempt from tax if it transacts with non-
residents, offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the BSP to
transact with OBUs.
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with local
commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and other
depository banks under the expanded foreign currency deposit system,
including interest income from foreign currency loans granted by such
depository banks under said expanded foreign currency deposit system
to residents, shall be subject to a final income tax at the rate of
10%)of such income.
Royalties
Royalties are subject to 20% final tax
Capital gains from sale of shares of stock not traded in stock
exchange
The tax for capital gains derived from the sale of shares of stock not
traded in the stock exchange is 15%.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 33 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Capital Gains from Sale of real property
It is subject to the 30% tax because it is not considered a passive
income for purposes of foreign corporations because it is not provided
in the tax code. This transaction is not impossible but not ordinary
because they can still own condominiums.
Intercorporate Dividends
A resident foreign corporation earning dividends from a domestic
corporation is also exempt. If a domestic corporation earns income
from RFC, it will be taxed at 30% subject to the dumping ground
corporation.
Dividend income earned by RFC from another RFC is still taxed at 30%
because the taxes for these transactions are not found in the tax code.
Absent such provisions, we apply the general rule of taxing it at 30%,
dumping ground computation.
SPECIAL RESIDENT FOREIGN CORPORATIONS
INTERNATIONAL CARRIERS
Sec. 28 (A) (3) of the NIRC)
International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its
'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port
outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
(b) International Shipping. — 'Gross Philippine Billings' means gross
revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.
INTERNATIONAL CARRIERS
International air carrier and international shipping are taxed at 2.5% of
Philippine Gross Billings.
Q: The value of the ticket paid by a passenger travelling from the
Philippines to the US via Hongkong (connecting flight) is 100,000.
Coming to the Philippines, he paid another 100,000 passing through
Korea. Will the international carrier which flies these flights be subject
to tax in the Philippines?
A: The trip from Philippines to Hongkong in an uninterrupted and
continuous flight will be subject to tax here in the country. The
100,000 will be apportioned for the value from the Philippines to
Hongkong. For the trip from HK to US, the Philippines has no
jurisdiction because this is a resident foreign corporation.
On the second part, there will be no income that is taxable in the
Philippines because the point of origin is the US and then the second
flight originated from Korea. The law provides that the point of origin
must be the Philippines.
OFFSHORE BANKING UNITS
Sec. 28 (A) (4) of the NIRC
Offshore Banking Units. — The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized
by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
transactions with local commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP)
to transact business with offshore banking units, including any interest
income derived from foreign currency loans granted to residents, shall
be subject to a final income tax at the rate of ten percent (10%) of
such income.
Any income of nonresidents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from
income tax.
OFFSHORE BANKING UNITS
You make a distinction on who these offshore banking units are
transacting with. If it is transacting with non-residents then they are
exempt unless otherwise provided by the BSP. Interest income on
foreign loans is subject to final tax of 10% if you are transacting with
residents in relation to their interest income from foreign loans.
BRANCHES OF FOREIGN CORPORATIONS
Sec. 28 (A) (5) of the NIRC
Tax on Branch Profits Remittances. — Any profit remitted by a branch
to its head office shall be subject to a tax of fifteen percent (15%)
which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof
(except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code:
Provided, That interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the
Philippines.
BRANCHES OF FOREIGN CORPORATIONS
Branches enter into transactions which allow them to earn income
subject to tax. Most likely they will return that income they earned
here to their home office. They will remit it to their home office. If that
happens, it will be subject to tax.
A representative office will not earn income because they are here for
purposes of liaising with costumers. Otherwise, they are now subject
to tax.
Branch profit remittance tax
This is called the branch profit remittance tax. Foreign corporations
may engage in business here in the country in two ways: branch office
or representative office.
Example:
A company registered in the British Virgin Islands (USA) has a branch
here in the Philippines. The Philippine branch earns an income of 1M
but it decided to remit P500,000 to its home office. How much is the
branch profit tax applicable?
Only the 500,000 will be taxed. The law provides that any profit
applied or earmarked for remittance. Earmarked means that there is
an intention for the amount will be remitted. Even without actual
remittance, they will still be subject to tax at a rate of 15%.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 34 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Subsidiary
A subsidiary is a corporation set-up here in the Philippines. It is a
domestic corporation where the shares are owned by a foreign
corporation and it is a separate entity. A branch is an extension of the
home office abroad and it is not a separate entity.
When a corporation is a stockholder of a corporation, the subsidiary
will distribute income to its principal through dividends and not
remittance. It is taxed at 30% or at 15% depending on the
applicability of the tax sparing rule. It is as if it is a domestic
corporation distributes income through dividends to a non-resident
foreign corporation.
Tax sparing rule
The domestic corporation giving out dividends to the NRFC, the latter
may be subject to tax because it is the one earning income. It is taxed
either at 15% or 30%. A rate of 15% will be applied if there is
reciprocity in the sense that the foreign country where the NRFC is
domiciled allowed the same credit or more favorable to Filipino
corporations. This concept is similar to personal exemptions granted to
NRA NETB under the reciprocity rule for individuals.
If the country of NRFC allows credit to Filipino corporations then 15%
rate is allowed. This is computed by deducting the amount spared
which is 15% from regular tax rate of 30% and the resulting amount is
15%.
If you have a subsidiary distributing income to principal, the rate is
15% or 30%. When would you advice your client that it is better set-
up a branch here in the Philippines rather than a subsidiary?
First, ask about the country of the NRFC and check if there is
reciprocity. If it is the US and there is reciprocity, then you can advise
that they can set-up either a subsidiary or a branch. In actual practice,
you will realize that it is better to set-up a subsidiary than a branch
because the requirements for the latter are difficult to comply with.
Otherwise, if there is no reciprocity, then it would be better to set-up a
branch where the tax is at 15%.
RAHQs & ROHQs
Sec. 28 A (6) of the NIRC
(a) Regional or area headquarters as defined in Section 22(DD)
shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
REGIONAL OR AREA HEADQUARTERS (RAHQs) AND
REGIONAL OPERATING HEADQUARTERS (ROHQs) OF
MULTINATIONAL COMPANIES
Make a distinction between Regional Area Headquarters (RAHQ) and
Regional Operating Headquarters (ROHQ).
RAHQs are exempt from tax while ROHQs are subject to 10% tax on
net income.
ROHQ meaning they are earning income from their operations and
they conduct activities that are income generating and so they will be
subject to tax on such income.
RAHQ are not subject to tax because they are not supposed to engage
in such activities otherwise they will violate the license granted to
them in the Philippines.
Q: What will happen then when the RAHQ will earn income?
A: They will be subject to tax at 30% as if they were operating as a
regular corporation. They cannot be automatically considered ROHQ
because when they made their registration, they were registered as a
RAHQ.
Area headquarters are not earning income here in the Philippine
because it is only for liaising and cooperation purposes. If it starts to
earn income then it is subject to a 30% and not 10% because it is
registered as area headquarters. It will not be converted to an
operating headquarter.
Procter & Gamble is a regional operating headquarters of a
multinational company so it is subject to a rate of 10%.
NONRESIDENT FOREIGN CORPORATIONS
NON-RESIDENT FOREIGN CORPORATION
Rate: 30%
Tax base: Gross income
Source: Income within
The tax for a resident foreign corporation is similar to a domestic
corporation but only for income earned within the Philippines. The rule
for passive income is also similar.
Interest Income
Interest income from bank deposits is subject to 30% NCIT.
Interest income under the expanded foreign currency deposit system
is tax-exempt.
Royalties
Royalties are subject to 30% NCIT.
Capital gains from sale of shares of stock not traded in stock
exchange
The tax for capital gains derived from the sale of shares of stock not
traded in the stock exchange is 15%.
Capital Gains from Sale of real property
It is treated as other income subject to the 30% NCIT.
Intercorporate Dividends
Dividends received from DC is subject to 15% FT if the foreign
corporation allows a tax credit of at least 15% of the taxes deemed
paid in the Philippines by the NRFC.
SPECIAL NONRESIDENT FOREIGN CORPORATIONS
NONRESIDENT CINEMATOGRAPHIC FILM OWNERS, ETC
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR
DISTRIBUTOR
A cinematographic film owner, lessor, or distributor shall pay a tax of
25% of its gross income from all sources within the Philippines.
Example: You want to watch Batman vs Superman. The owner of the
film will have to lease it to someone here in the Philippines, but they
need not be considered as resident foreign corporations. DC is the
owner of that film and it is shown in the Philippines, so they allowed
cinemas in the Philippines to show it. They can be considered as non-
resident cinematographic film owner, lessor or distributor and so they
can subject to the 25% tax based on their gross income.
TN: The income is not the sale of the tickets, because the ticket sales
belong to the cinemas. The film owner will only get a portion of the
income earned by the cinemas.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 35 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

NONRESIDENT OWNER OR LESSOR OF VESSELS
NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED
BY PHILIPPINE NATIONALS OR CORPORATIONS
A nonresident owner or lessor of vessels shall be subject to a tax of 4
1/2% of gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime Industry
Authority. However, Maritime Industry Authority does not allow non-
resident foreign corporations to own vessels in the Philippines.
NONRESIDENT OWNER OR LESSOR OF AIRCRAFTS, ETC
GROSS INCOME
Gross income refers to all income derived from whatever source.
[CGGIRRDAPPP]
All income enumerated in Sec. 32 (A), except compensation and
pensions, can be earned by a corporation.
Gross income depends on the type of business. This is important since
this could be the tax base of the corporation or another entity.
Gross Income
For Merchandising Concern

NONRESIDENT OWNER OR LESSOR OF AIRCRAFT, Gross Sales P xxx

MACHINERY AND EQUIPMENT Less Cost of Sales (xxx)
Gross Income P xxx.
Entities which allows aircrafts and vessels to be leased here in the
Philippines will be subject to 7 ½% on gross rentals or fees from
sources within the Philippiens. Gross Income
For Manufacturing Concern
Items 2 and 3 are not very much applicable in the Philippines because
not much engage in such business because at most companies here in Gross Sales P xxx
the Philippines buy the property from abroad and not lease them. But Less Cost of Goods manufactured and Sold (xxx)
nonetheless, still memorize the rates. Gross Income P xxx.

GROSS INCOME

Gross Income
Sec. 27 (A) of the NIRC For Service Entity
xxx
For purposes of this Section, the term 'gross income' derived from Gross Receipts P xxx
business shall be equivalent to gross sales less sales returns, discounts Less Cost of Services (xxx)
and allowances and 'cost of goods sold.' ‗Cost of goods sold' shall Gross Income P xxx.
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
PERTINENT ITEMS OF GROSS INCOME
For a trading or merchandising concern, 'cost of goods sold' shall
include the invoice cost of the goods sold, plus import duties, freight in Not all enumerated items of gross income under Sec. 32 apply to all
transporting the goods to the place where the goods are actually sold, kinds of taxpayers. (Note: dumping ground computation here refers to
including insurance while the goods are in transit. 30% tax rate for corporations and not 0-35%)

For a manufacturing concern, 'cost of goods manufactured and Compensation income

sold' shall include all costs of production of finished goods, such as No compensation income in corporations because this is earned under
raw materials used, direct labor and manufacturing overhead, freight an employer-employee relationship
cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse. Gross income derived from the conduct of trade, business or
exercise of the profession
In the case of taxpayers engaged in the sale of service, 'gross This is sales or receipts (for services) less the cost directly used in
income' means gross receipts less sales returns, allowances and producing the product.
discounts.
Gains derived from dealings in property
Sec. 32 (A) of the NIRC Corporations can have properties; such as buildings. When they sell
Except when otherwise provided in this Title, gross income means all the building, they will earn income from dealings in property. It will not
income derived from whatever source, including (but not limited to) form part of the gross income for the purposes of taxation but will be
the following items: subject to capital gains tax.
(1) Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions, and similar items; Interests
(2) Gross income derived from the conduct of trade or business or the If the business of the corporation is financing, and they extend loans
exercise of a profession; to individuals or other entities, they can earn interest income. It will
(3) Gains derived from dealings in property; form part of the 30% dumping ground taxation. Deposits in the bank
(4) Interests; are passive income subject to a different tax rate.
(5) Rents;
(6) Royalties; Rents
(7) Dividends; When a corporation is engaged in the business of leasing out
(8) Annuities; properties then it can earn rent income. This forms part of the 30%
(9) Prizes and winnings; dumping ground computation, not passive income.
(10) Pensions; and
(11) Partner's distributive share from the net income of the general Dividends
professional partnership. Corporation can sell their shares to other corporations and if they
--- declare dividends, these will not form part of the 30%.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 36 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Annuities
When the company‘s investment gets periodic payments of income
then it can still earn annuities. Ordinarily, when businesses do
investments, they can either receive interest income or dividends and
not usually annuities. They are not limited from earning annuities
because there can still be investment opportunities which gives them
periodic payments of income.
Prizes and winnings
Corporations may win prizes which require participation on the part of
a corporation. These will be given to the corporation as an entity.
There are winnings when they are earned as a matter of chance - like
a raffle ticket bought by a representative.
Pension
Corporations can‘t earn them.
PASSIVE INCOME
PASSIVE INCOME
Interest Income from Peso Deposits
Interest income derived from peso currency bank deposit (saving
deposits of corporations) is subject to final withholding tax of 20%.
The interest income of deposit substitutes is subject to 20% final tax,
unless there are less than 20 lenders wherein it is taxed at 30%.
Interest income from foreign currency deposit is subject to 15% final
withholding tax. This is to encourage foreign reserves.
Income from Expanded Foreign Currency Depositary Unit
This income is derived by a depositary bank. Do not confuse this with
the interest income derived by a domestic corporation from a
depositary bank under a foreign currency deposit subject to a tax of
15%. Under this, it is the bank itself that is earning income.
If you are a depository bank and you earn income under EFCD system
for foreign currency transactions, your tax will depend on whom you
are transacting with.
If you are transacting with non-residents, off -shore banking units in
the Philippines, local commercial banks including branches of foreign
banks authorized by BSP, then you will be exempted from all taxes.
If you are transacting with residents, you are subject to the dumping
ground computation of 30%. You will see that under the exemption, if
it relates to a loan transaction, interest income will be subject to final
tax of 10%. Take note that this 10% rate is applicable only to loan
transaction and only for an interest income to residents.
Royalties
Royalties sourced within the Philippines are subject to final tax of 20%
regardless of where that royalty is from, whether or not from books,
literary works and musical composition. These are passive royalty
income which is subject to a final tax. There is no distinction of the
royalties in the case of corporations since corporations do not write
books or create literatures. Only individuals can.
If a corporation allows the franchise of their name, then they may earn
royalties. The rate depends on whether it is an active or passive
royalty. If it is a passive royalty, then it is subject to 20% final tax. If
it is an active royalty, it forms part of gross income which is subject to
30% normal tax.
Prizes & Winnings
Prizes and winnings form part of the dumping ground computation
since it is not listed as passive income for purposes of corporations in
the tax code.
Capital gains from the sale of shares of stock not traded in the
stock exchange
The tax rate is 15% of the net capital gains.
Q: Corp. Y is a stockholder of Corporation X. If Corporation Y has
2,000 shares with a par value of 1 peso per share, the total value of
the shares is P2,000. To earn capital gains, you sell the shares not in a
local stock exchange but in some other market exchange. If you sell it
directly to an individual, Mr. A, how will it be taxed?
A: First, you have to establish that there is net capital gains. The cost
of the shares is 2,000. We must determine the amount for which the
shares were sold. The total cost is P2,000 (2,000xP1) and gross selling
price is P20,000, your Net Capital gains is 18,000. This will be taxed at
15%. So P18,000 x 5% is P2,700 which is the capital gains tax.
Q: You have a total of 6,000 shares. The previous transaction
happened on January 1, 2015. If on June, you sold shares in the
amount of 2,000 shares but this time, the amount is for 100,000. The
cost would still be 2,000 so your gain is 98,000. How will it be taxed?
A: Under the TRAIN Law, it will be taxed at a flat rate of 15%. Before,
there was a threshold of P100,000 wherein the first P100,000 gain for
the year was subject to 5% tax and the excess was subject to 10%.
YEach of these transactions will have separate income tax returns. A
return will be made within 30 days after the transaction.
Capital gains realized from sale of real property
The tax depends on the type of real property sold. If it is an ordinary
asset, then it is subject to 30% tax. If it is a capital asset, then it is
subject to a final tax of 6%. The 6% is based on the highest amount
among the gross selling price, the assessed value given by the local
assessor, and the zonal value determined by the BIR.
Even if you sell the property at a loss, you will still be taxed because
there is a presumed gain when you sell real property. The law for
individuals also applies for corporations for treatment of capital gains.
Q: If there is an improvement on a property of a corporation which is
not used in trade or business and such improvement was sold with the
parcel of land, how will it be taxed? Let‘s say the improvement is a
wall or fence.
A: Improvement is subject to 30% while the parcel of land is subject
to 6% based on either GSP, FMV BIR, FMV local assessor whichever is
higher.
The reason for the distinction is because under Sec 27 D (5), Capital
gains realized from the sale exchange or disposition of Lands and/or
Buildings is subject to 6% capital gains tax unlike in individual
taxation, ―Real property‖ is used without distinction which may cover
improvement on the land or building such as machineries, etc. The Tax
code is specific on the ―LANDS and/or BUILDINGS‖ part, if the property
does not belong to either then it is subject to 30% rate under the
dumping ground computation.
Q: How about other capital assets that may be sold by a corporation,
how are they taxed?
A: Taxed at the rate of 30% under the dumping ground computation.
So, the fence in the above example just like any other improvements
like machineries will be subjected to the tax rate of 30%.
TN: Improvements will fall under ―other capital assets‖
Q: Do we subject these improvements to the rule on holding period?
A: No, because tax code is specific that such will not apply to a
corporation.
Q: if there is a net capital loss, can it be carried over?
A: No, the net capital loss carry-over is only applicable to taxpayers
other than a corporation.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 37 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Dividends (Intercorporate Dividends)

Dividend income can be earned by a corporation through a corporation Shareholders of Number of Cash
owning shares of another corporation. Intercorporate dividends are not Corporation X Shares Held Dividends
subject to tax. A 100 10,000
B 100 10,000
From To Rate C 100 10,000
DC DC Exempt D 100 10,000
DC RFC Exempt E 100 10,000
DC NRFC Subject to the tax sparing rule: Corporation Y 2,000 200,000
 15% if it allows
 30% Gross income if it does not allow Corporation X decides to give dividends to all stockholders in the
RFC DC 30% Net income amount of 100 per share. Mr. A, B, C, D and E will earn P10,000 while
RFC RFC 30% subject to the rule on situs of the dividends the corporation Y will be exempt from tax. The individual shareholders
RFC NRFC 30% subject to the rule on situs of dividends earning dividend income will be taxed at 10% if they are resident
citizen, non-resident citizen, or resident alien. 20% will apply if they
NRFC DC 30% subject to the rule on reciprocity
are NRA-ETB and 25% for NRA-NETB.
NRFC RFC No jurisdiction
NRFC NRFC No jurisdiction
Reason: Dividends are just being deferred. While the 200,000 is
distributed by Corp. X to Corp. Y, such will also be distributed as
Rules:
income to the stockholders of Corp. Y. The moment it is distributed to
1. Domestic –> domestic = Exempt
Corp. Y‘s stockholders or it trickles down to individuals, it is the time
2. Domestic –> resident foreign = Exempt
that it will be subject to tax. If Corp. Y will give the dividends to Corp.
3. Domestic –> non-resident foreign = 15% or 30% depending on
Z, a domestic corporation, there will still be no tax because it has not
when the tax sparring rule applies
yet been distributed to an individual.
4. Resident foreign –> domestic corp = 30%
5. Resident foreign –> resident foreign = 30% if you can establish
TN: Dividends are only taxable then when it reaches individuals.
that the income is earned within the Philippines and depending on
the rule on situs on dividends, you look at the income of the
SAMPLE PROBLEM
foreign corporation for the last 3 years and if you can establish
that the income earned within the Philippines is:
Total Sales 1,000,000
Under the Tax Code (Sec 42 A (2)(b)) Cost of Goods Sold 400,000
Determine the gross income of the corporation for the last three years Salaries and Wages 100,000
and the percentage of income earned within the PH: Utilities 50,000
Interest Income from bank deposit 10,000
A. If income earned is 50% or less, then it is deemed income Dividend income from X Corp 10,000
outside the Philippines
Q: Compute for the tax due and payable of the corporation.
B. If income earned is more than 50%, then it is deemed income
inside the Philippines
Tax Due
Under the Regulation (BIR RR 2-98) Normal Corporate Income Tax

A. 50% or less – income outside the Philippines Gross Sales P 1,000,000

B. More than 50% to 85% - income partly within and partly without Less Cost of Goods Sold 400,000
C. More than 85% - income within the Philippines Gross Income P 600,000
Less Salaries & Wages (100,000)
RESIDENT FOREIGN -> NON-RESIDENT FOREIGN: Less Utilities Expense (50,000)
Taxable Income P 450,000
Determine if it has situs within the Philippines, otherwise the Multiplied by the Tax Rate 30%
Philippines does not have jurisdiction Tax Due and Payable P 135,000

NON-RESIDENT FOREIGN -> DOMESTIC CORP: 30%

NON-RESIDENT FOREIGN -> NON-RESIDENT FOREIGN: Tax Due

Item Subject to Final Tax
Philippines has no jurisdiction because they are not supposed to have
any activities within the Philippines. Item subject to final tax:
Interest Income from Bank Deposit P 10,000
Q: Why is the rule on situs of dividends not applicable when it is from Multiplied by the Tax Rate 20%
RFC to DC? Tax Due P 2,000

A: DC is taxed on income earned from all sources, within and without.

Q: X. Corp is RFC declaring dividends to Y Corp., another RFC. Which Tax Due
financial statement will you look at? Normal Corporate Income Tax

A: We look at the financial statement of X Corp. which declared the Item exempt from tax:
dividends. Since Y Corp. is a resident foreign corporation we need to Dividend Income from X Corp. P 10,000
determine whether the income is earned within or without the Tax Due P 0
Philippines. RFC is taxed only on income within.

Example:
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 38 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
A: The corporation has taxes due and payable in the amount of
P135,000 on its net taxable income and P2,000 on its interest income
from bank deposit subject to final tax. The income from the dividends
from X Corp. is exempt since it is an intercorporate dividends which
will be taxed only when it is distributed to individual stockholders.
You cannot actually add the tax due from the items subject to the
dumping ground computation with that of the items subject to final
tax. It‘s like adding apples and oranges. But, there are domestic
corporations which are not subject to that type of computation.
20-LENDER RULE
20-LENDER RULE
To be considered a ―deposit substitute‖, the borrowing must be made
from twenty (20) or more individual or corporate lenders at any one
time. Mere flotation of a debt instrument is not considered to be a
―public‖ borrowing and is not deemed a ―deposit substitute‖ if there
are only 19 or less individual or corporate lenders at any one time.
Any person holding any interest, whether legal or beneficial, on a debt
instrument or holding thereof either by assignment or participation,
with or without recourse, shall be considered as lender, and thus, be
counted in applying the 19-lender rule.
20% CWT shall apply on interest income from all other debt
instruments which do not fall within the coverage of ―deposit
substitutes‖ paid or payable to persons residing in the Philippines. The
withholding tax is due when the interest is paid or payable or is
accrued or recorded as an expense in the books of the payor.
The phrase ‗at any one time‘ for purposes of determining the 20-lender
rule, would refer to every transaction executed in the primary or
secondary market relative to the purchase or sale of the
securities. There is a deemed public borrowing and the bonds are
considered deposit substitutes when funds are simultaneously obtained
from 20 or more lenders through any of the transactions connected in
the issuance/trading of the government bonds (e.g., issuance by the
Bureau of Treasury; sale/distribution of government dealers; and
trading in the secondary market).
BDO v. Republic
The term ‗deposit substitutes‘ shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing
from 20 or more individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower‘s own account, for the purpose of
relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer.
Under the 1997 National Internal Revenue Code, Congress specifically
defined ―public‖ to mean ―twenty (20) or more individual or corporate
lenders at any one time.‖ Hence, the number of lenders is
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% FWT.
RULE ON SITUS OF DIVIDENDS
RULE ON SITUS OF DIVIDENDS
Determine the gross income of the corporation for the last three years
and the percentage of income earned within the PH:
(According to a BIR Revenue Regulation 2-98)
 Income within if ratio is more than 85%
 Income without if ratio is less than 50%
 Partly income within & income without if ratio is between
50% and 85%
ALLOWABLE DEDUCTIONS
ALLOWABLE DEDUCTIONS
These are the amounts which you can deduct from the gross income in
order to arrive at the taxable income of the taxpayer.
ITEMIZED DEDUCTIONS
Expenses
Comes in the form of rentals of a building or salaries and wages to the
employees
Interest Expenses
Incurred when they enter into debt transactions which require them to
pay interest
Taxes
For taxes incurred (they can deduct real property taxes and local
business taxes) but should not include Philippines Income Tax, Estate
& donor‘s tax, stock transaction tax, special assessment, income tax
paid in a foreign country claimed as tax credit and VAT
Losses
Incurred in the course of trade or business
Example: a building was razed by fire and the amount not
compensated by insurance is considered the loss
Bad Debts
If there are certain receivables from entities or individuals which may
have already been insolvent, but not necessarily judicially declared as
insolvent, and after exercising due diligence, you cannot collect, then
you can treat them as bad debts.
Charitable Contributions
Deductible in full, if given to the government either local or national or
any political subdivision as long as it pertains priority projects in the
field of education, science; or if it is given to accredited foreign
organizations and non-government organizations such as the Ramon
Magsaysay Foundation, Caritas, Bantay Bata, etc.
It is subject to limitations if they don‘t fall in the list; for individuals, it
is 10% based on taxable income but before deductions for charitable
contributions and for corporations, it is 5%.
Research and development
These are expenses for the discovery of knowledge and development;
costs of exploration, cost of exploring and finding a particular property
are not considered research and development expenses for purposes
of allowable deductions.
Example: You paid someone to build a cellphone and whatever is the
cost of building that cellphone will be considered part of your research
& development.
What if part of your operations is into mining? Part of your research is
you have to find a possible mining site. The cost of finding the mining
site will not form part of your research and development but does that
mean you cannot deduct it? No, you can deduct it but it will form part
of your expenses, even the cost of the land itself will not form part of
research and development.
Pension trust
There is a separate section for pensions granted for employees.
Pension can refer to current service cost and past service cost. The
total cost which you pay in order to set up this pension trust can be
allowed as a deduction.
Depreciation
Pieces of equipment used are subject to depreciation. In relation to the
earlier example, if you can‘t deduct it under R & D then deduct it
under depreciation.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 39 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Depletion
In mining sites, equipment used in the mining wasting assets like
mineral ores may be accounted it under depletion.
OPTIONAL STANDARD DEDUCTION
The OSD for corporations is 40% based on gross income. Only DC and
RFC can avail of the 40% OSD. NRFC cannot.
Q: How about proprietary educational institutions, OBUs, ROHQs and
PEZA-registered companies?
A: It depends on whether the corporation is subject to a preferential
tax rate based on gross income. OSD is applicable only when the
corporation is subject to the normal corporate income tax. The
exception is in the case of proprietary educational institutions which
are taxed at 10% of the net income.
EXPENSES
EXPENSES
Business Expense refer to all the ordinary and necessary expenses
paid for or incurred during the taxable year in carrying on or which are
directly attributable to the development, management, operation
and/or conduct of the trade, business or the exercise of a profession.
Capital Expenses are expenditures for the extraordinary repairs
which are capitalized and subject to depreciation. These tend to
increase the value or prolong the life of the taxpayer‘s property.
Ordinary Expenses refer to the expenses which are normal, usual or
common to the business, trade or profession of the taxpayer. An
expense is ordinary when it is commonly incurred in the trade or
business of the taxpayer as distinguished from capital expenditures.
The payments need not be normal or habitual in the sense that the
taxpayer will have to make them often. The payment may be unique
or non-recurring to the particular taxpayer affected.
Ex. Gasoline is an ordinary expense for delivery van of the
manufacturing company but not it sari-sari store.
Necessary Expenses refer to those which are useful and appropriate
in the conduct of the taxpayer‘s trade or business. When the
expenditure is appropriate or helpful to the development of the
taxpayer's business or that the same is proper for the purpose of
realizing a profit or minimizing a loss.
Ex. Raw materials in the manufacturing company but not vacation
expenses of janitor to the US.
Extraordinary Expenses refer to those which are not normal, usual
or common to the business, trade or profession of the taxpayer. These
are amortized or depreciated.
REQUISITES FOR DEDUCTIBILITY
1. It must be ordinary and necessary
2. It must be paid or incurred during the taxable year
3. It must be paid or incurred in carrying on or which are directly
attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession
4. It must be supported by adequate invoices or receipts
5. It is not contrary to law, public policy or moral
6. The tax required to be withheld on the expense paid or payable is
shown to have been remitted to the BIR.
KINDS OF ORDINARY EXPENSES
[CARTERS]
1. Compensation for services rendered
2. Advertising and promotional expenses
3. Rent expense
4. Travelling expense
5. Entertainment, amusement and recreation expense
6. Repairs and maintenance expense
7. Supplies and materials
COMPENSATION FOR SERVICES RENDERED
COMPENSATION FOR SERVICES RENDERED
Special requisites for deductibility:
a. Must be reasonable, meaning, this must not be ostensible
b. It is, in fact, payments for personal services actually
rendered.
Special requisites for deductibility of bonuses to employees:
a. The bonuses are made in good faith.
b. They are given for personal services actually rendered.
c. They do not exceed a reasonable compensation for the
services rendered, when added to the stipulated salaries,
measured by the amount and quality of services performed
in relation to the taxpayer‘s business.
d. Bonuses must be given in good faith and in determining
whether the bonuses will form part of the compensation for
services rendered, you need to consider the (1) nature of
the business, (2) financial capacity of the taxpayer, and (3)
extent of the services rendered
e. General economic condition
Deductible expenses under compensation for personal
services:
1. Salaries, wages, commissions, professional fees, vacation-
leave pay, retirement pay and other compensation
2. Bonuses are deductible expenses if paid-in good faith as
additional compensation for services rendered
3. Pensions and compensation for injuries, if not compensated
for by insurance or otherwise
4. GUMV of fringe benefit provided for, as long as the final tax
imposed has been paid.
ADVERTISING & PROMOTIONAL EXPENSES
ADVERTISING & PROMOTIONAL EXPENSES
Advertising and promotional expenses can be claimed as expense
deduction if it will build good will to the company. If the good will
exceeds 1 year, then the advertising and promotional expenses shall
be divided in the number of years as deductible expenses.
To be deductible outright:
a. Must be reasonable and
b. Must be incurred to stimulate current sales and not to
establish goodwill or future sales
Example: When the prediction of advertising and promotional
expenses will build good will to the company for 10 years and it spent
1M, the allowable deduction is 100K for every year. However,
advertising and promotional expenses for Valentine's Day will not
exceed good will to the next Valentine's Day. Hence, it will only be
treated as period cause which is allowed to be deducted as expense
within the taxable period.
RENT EXPENSE
RENT EXPENSE
Requisites for deductibility:
a. Rental payment is required as a condition for continued use
or possession.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 40 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
b. The purpose is for trade, business or profession; meaning
the property is used in trade or business
c. The taxpayer must not be the owner of the property or he
has no equitable title over the property.
d. This is subject to withholding tax of 5%.
Operating Lease is a contract that allows for the use of an asset, but
does not convey ownership of the asset. The lessee has not taken or is
not taking title over the property. You pay rent but do not claim
ownership over the property no matter how long you have been
paying the rent.
Finance Lease is pretty much a sale on installment. There is a
transfer of ownership. Legal title is lodged in the finance lessor. Lessee
is entitled to the possession and use of the property in exchange for
periodic payment to allow lessor to recover the purchase price.
TRAVELLING EXPENSE
TRAVELLING EXPENSE
Requisites:
a. Must be reasonable and necessary
b. Must be incurred or paid ―while away from home‖
Home refers to the station assignment or post/principal
place of business, not your residence.
c. Must be paid or incurred in the conduct of trade or business
ENTERTAINMENT, AMUSEMENT, & RECREATION
ENTERTAINMENT, AMUSEMENT AND RECREATION (EAR)
EXPENSES
Requisites:
a. It must be paid or incurred during the taxable year
b. It must be paid or incurred in carrying on or which are
directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise
of profession
c. It must be supported by adequate invoices or receipts
d. It is not contrary to law, public policy or moral
e. It must not have been paid, directly or indirectly, to an
official or employee of the national government or similar
entity if it constitutes a bribe, kickback or other similar
payment.
f. The appropriate amount of withholding tax, if applicable,
should have been withheld therefrom and paid to the BIR.
g. Provided that, the deductible expense of sale of goods shall
not exceed 0.50% of net sales (i.e. Gross sales less sales
returns/allowances and sales discount) while sale of services
shall not exceed 1% of net revenue (i.e. Gross revenue less
discount). If both sale of goods and sale of services, it is
proportional based on net sales or net revenue.
Q: How about bringing the client to a bikini bar, is that allowed?
A: Yes, it is allowed because you are trying to establish goodwill with
the client in furtherance of your business. The intention is to market
your company or product, not necessarily what is being offered in the
bikini bar. It may be considered as EAR expense.
Such guests must not include the employees of the company or family
members but there must be someone from the company
accompanying the clients. The benefit of the employee is only
incidental and not primary.
Q: In case such EAR expenses were given to employees, how will it be
treated?
A: They are treated as fringe benefits.
Limitation (Ceiling)
 Engaged in sale of goods/properties –0.5% of net sales
 Engaged in sale of service – 1% of net revenue
 Mixed – use the apportionment formula but in no case shall
exceed the respective ceilings
Example: X Corp. is engaged in the sale of goods and services with net
sales of P100,000 and net revenue of P100,000. The actual EAR
expense for the taxable quarter is P10,000. How much will be allowed
as a deduction?
A: Only a total of P1,500 will be allowed as deduction. The amount
cannot exceed the ceiling for the sale of goods of P500 and sale of
services of P1,000.
REPAIRS & MAINTENANCE EXPENSE
REPAIRS & MAINTENANCE EXPENSES
Repairs expense is allowed as deductible expense either:
a. In ordinary repairs – the cost of repair increases the life of
an asset for a period not more than one year. It will be
treated as period cause subject to deduction within the
taxable year.
b. In extraordinary repairs – the cost of repair increases the life
of an asset for a period more than one year. It will be
treated as part of the cost of the asset and subject to
depreciation.
SUPPLIES & MATERIALS
SUPPLIES & MATERIALS
Supplies and material must be actually consumed during the taxable
year in order to be deductible.
COHAN RULE
COHAN RULE
Some expenses need not be supported by official receipts or sales
invoice as long as it can be substantiated with other adequate records
which prove that such were purchased by the company and the goods
received were actually converted to the product sold. However, this
does not apply in all instances. It is only to the extent of 50% of the
expenses.
Background
George M. Cohan was a very well known Broadway star in the early
1900s. His most famous performance is ―Give My Regards to
Broadway.‖ Interestingly, his legacy is also closely connected to tax
law. Cohan was audited by the IRS and was told that he was not
allowed to deduct many of his business and entertainment related
expenses because he did not keep all of the necessary receipts. Mr.
Cohan appealed this ruling and the courts actually sided with him,
forcing the IRS has to accept estimates of his expenses.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 41 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
The Cohan Rule is now a law that allows taxpayers to deduct some of
their business-related expenses even if the receipts have been lost or
misplaced so long as they are reasonable and credible.
INTEREST EXPENSE
INTEREST
Interest must be expressly stipulated in writing. It must be legally due.
Interest expense can only be deducted in full if the taxpayer incurs
interest expense but does not earn interest income. Otherwise, the tax
arbitrage rule will apply wherein the allowable deduction will be
reduced by 33% of the interest income earned.
This is to prevent taxpayers from creating a tax shield by loaning
money from a bank and subsequently loaning it back to earn interest
income. The interest expense reduces taxable income while the
interest income is only subject to 20% final tax.
Requisites for deductibility:
1. It must relate to indebtedness.
2. The indebtedness must be related to the taxpayer's trade or
business
3. The indebtedness must be that of the taxpayer
4. The interest should be legally due on the indebtedness
5. The interest must have been stipulated in writing
6. The interest is paid or accrued during the taxable year
7. The indebtedness must not be made under the arrangement with
related taxpayer.
8. The indebtedness must not be incurred to finance petroleum
operation or exploration
Non-deductible interest expense
1. Interest expense on preferred stock
2. When there is no agreement in writing to pay interest
3. Interest expense on loan entered into between related taxpayers
4. Interest paid or calculated for cost-keeping purposes
5. Interest paid in advance through discount
6. Interest on obligation to finance petroleum exploration
7. Interest on unclaimed salaries of employees
8. 33% of the interest income subject to final tax
Theoretical interest
Theoretical interest is an interest computed for the purposes of
determining the opportunity cost of investing in a business. This is not
paid or incurred. Theoretical interest income and theoretical interest
expense is no longer applicable in our jurisdiction since the interest
must be stipulated in writing to be demandable.
Kuenzle & Streiff, Inc. v. CIR
The rule is that interest payment on unpaid salaries and bonus
participation cannot be allowed as a deduction if at all times the
company or corporation who is supposed to make payments on these
unclaimed salaries and bonuses has sufficient money to pay it. But the
employees were not able to claim it through their own fault.
The rule is that whenever there is money supposedly not due to you
and it is not yet claimed, it will earn interest assuming the employer
deposits it in the bank. The moment the employee claims the
salary/bonus, it will now include the interest.
The question now is that, whether or not the employer can claim the
interest as a deduction for purposes of income tax, the SC said no if
the company always had money to pay for the salaries. It‘s just that
the employees did not go and claim it. In reality, the employer usually
does not impose interest on salaries. But if ever the reason for the
non-payment of salaries is because of bankruptcy or the company is
having a bad year in terms of operation, then in that case the interest
expense may be allowed as a deduction.
TAX ARBITRAGE RULE
TAX ARBITRAGE RULE
The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 33% of the interest income earned by
him which has been subjected to final tax. It means that, instead of
deducting 100% of the interest expense, you can only deduct 100%
interest expense less the 33% interest income subjected to final
withholding tax.
You are able to get the benefit of 30% because of the deduction but
the interest income is subject only to 20% final tax. There is a
difference of 10%. This is how to get the 33%.
Q: Does Tax Arbitrage Rule apply to all interest expense? Does it mean
that taxpayer can deduct 100%?
A: No. Tax Arbitrage Rule does not apply when:
1. Interest expense is for unpaid taxes
2. Interest income is not subject to final withholding tax
Actually, if the taxpayer has no interest expense in relation to bank
transaction, the Tax Arbitrage Rule does not apply. The purpose of Tax
Arbitrage Rule is to avoid circumvention of the law for tax benefit
between the difference of interest deduction and interest income.
Requisites for Tax Arbitrage Rule to apply
1. There must be an interest payment to be made to the bank
2. The interest income must be earned from the bank and
3. There must be interest income subject to final withholding tax.
Arbitrage is an activity or scheme where a certain investor takes
advantage on the difference of the rates and prices from one market
to another market.
TAXES
TAXES
Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business are deductible from the gross
income.
Except:
1. Philippine Income Tax
2. Estate and Donor‘s Tax
3. Special Assessment
4. Stock Transaction Tax
5. Value Added Tax
6. Foreign Income Tax if claimed as tax credit
TN: When we relate deductions from taxes, it should not include
surcharge and other penalties but it can include interest.
Requisites for deductibility:
a. Must be paid or incurred during the taxable year
b. Must be taxes paid or incurred in connection with the trade,
business or profession of the taxpayer
TAX CREDIT
TAX CREDIT
The source of tax credit is foreign income tax paid, war profit tax,
excess profit tax paid to the foreign country. It is a deduction from
Philippine income tax.
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 42 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Who may claim? Example: A fire occurred in your house. The losses you incurred
1. Citizens cannot be deducted from income of your business because your
2. Domestic Corporations business is separate from your personal properties for purposes of
3. Members of GPPs taxation. But if it is your store which was burned, then you can deduct
4. Beneficiaries of estates and trusts the damage sustained by your store. If there is an insurance, it
5. NRA-ETB and RFC but only for income within the Philippines reduces the amount of losses you can deduct for tax purposes.

Limitation Requisites for deductibility

Foreign income tax paid is not always the amount that may be
claimed. It must not be more than the ratio of foreign income to the a. Must be incurred in the trade, business, or profession of the
total income multiplied by the Philippine income tax. taxpayer
b. Must be actually sustained and charged off within the
taxable year and not mere anticipated losses
c. Must be evidenced by a closed and completed transaction
d. Must not be compensated by insurance or other forms of
indemnity
e. If partly compensated, only the amount not compensated by
Per Country Limitation insurance is deductible
The amount of the credit in respect to the tax paid or incurred to any f. In the case of casualty loss, taxpayer must filed a sworn
country shall not exceed the same proportion of the tax against which declaration of loss within 45 days after the date of discovery
such credit is taken, which the taxpayer's taxable income from sources of the casualty or robbery, theft or embezzlement
within such country bears to his entire taxable income for the same
taxable year.
NET OPERATING LOSS CARRY-OVER

NET OPERATING LOSS CARRY OVER (NOLCO)

You have to compute for the limit for each country. The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
Global Limitation been previously offset as deduction from gross income shall be carried
The total amount of the credit shall not exceed the same proportion of over as a deduction from gross income for the next three (3)
the tax against which such credit is taken, which the taxpayer's taxable consecutive years immediately following the year of such loss.
income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year. Whenever your business incurs operating loss, then that can be
claimed as a deduction for the succeeding year. When expenses is
greater than your revenue, then there is a loss. The government
allows you to spread out this loss for a period of three (3) years by
allowing you to deduct the NOLCO.
Example:
Country Income Tax Paid Tax Credit Any net loss incurred in a taxable year during which the taxpayer was
USA 1,000,000 400,000 150,000 exempt from income tax shall not be allowed as a deduction.
Japan 1,000,000 100,000 100,000
Philippines 2,000,000 600,000 Total: 250,000 Q: Does the three year period need to be continuous?

Per Country Limit: A: Yes, the three year period cannot be extended. It is always the
three years after you incurred the loss.

Period to avail
NOLCO can be claimed for the next 3 consecutive years immediately
following the year of loss.

Global Limit: When NOLCO is not deductible

The tax credit allowed is 250,000. You choose whichever is lower
between the total of the ―per country limit‖ and the ―global limit.‖ The
total per country limit is 250,000 while the global limit is 300,000.
LOSSES
LOSSES
Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be
allowed as deductions:
1. Incurred during tax holiday
2. Tax is based on gross income or receipts
3. OSD is claimed
4. MCIT is imposed
5. Substantial change in ownership (75%)
Year of tax exemption
NOLCO cannot be deducted in the year the taxpayer is exempted from
tax. Losses incurred during the year of tax exemption cannot be
deducted as NOLCO.
No substantial change of ownership
 Not less than 75% in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is
held by or on behalf of the same persons or

a. Incurred in trade, profession or business of individual taxpayer.
b. Of property connected with the trade, business or profession,
if the loss arises from fires, storms, shipwreck or other
casualties or from robbery, theft or embezzlement.
 Not less than 75% of the paid up capital of the corporation,
if the business is in the name of a corporation, is held by or
on behalf of the same persons
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 43 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Instances of substantial change of ownership
 Individual – transfer of ownership of the sole proprietorship
to another; all or nothing
 Partnership – when there is change of partners, the
partnership is dissolved
 Corporation – more than 75% of the shares of stock are
transferred from one stockholder to another
NOLCO cannot be availed of whenever there is a substantial change in
ownership, for the reason that laws can no longer disadvantage the
current owner, the one that was actually disadvantaged was the
previous owner. That may be why the previous owner transferred the
shares due to the losses he may have incurred previously.
Illustration:
2015 2016 2017 2018 2019
Loss (100,000) (10,000)
Income 50,000 20,000 30,000
Q – In 2016, is there a net operating loss that can be deducted?
A – Yes, 50,000. And the remaining balance of NOLCO is
50,000.
Q – In 2017, is there net operating loss that can be deducted?
A – Yes, 20,000. The remaining balance of the NOLCO is 30,000
Q – In 2018, is there net operating loss that can be deducted?
A – None, because it is already a loss and in fact it added to the
balance of your NOLCO. However, you must not co mingle the two
losses because there is only a limit of three years.
Q – In 2019, is there a NOLCO that you can deduct?
A – Yes, 10,000. The amount came from the loss from 2018 which you
can deduct from the income in 2019.
Q – What happens with the remaining NOLCO from 2015?
A – It will be forfeited (the right to use the 30,000 losses)
Q – In 2015, an individual taxpayer is still under Income Tax Holiday.
Can you claim NOLCO?
A – The law provides that when the individual is exempted on the year
he incurred the loss, no NOLCO may be allowed as a deduction for the
succeeding year.
Another illustration:
1. If you incurred a loss of 400,000 in Year 1, can you deduct this
loss in Year 2 when you are exempted from taxes?
No. The loss cannot be deducted since you are exempted.
2. How about in Year 3 when you availed of OSD?
No. OSD is in lieu of itemized deductions so the losses are
already accounted for.
3. If you have a net income of 200,000 in Year 4 and there is still
no deduction, can NOLCO be applied?
Yes, to the extent of 200,000.
4. Can you still avail of NOLCO during Year 5?
No. NOLCO is allowed as a deduction only for the next 3
consecutive taxable years immediately following the year of such
loss. The remaining amount is forfeited.
LOSSES FROM SECURITIES
LOSSES ARISING FROM SECURITIES
When the securities which can be in the form of shares of stocks or
loan receivables be considered as worthless, the losses can be
deducted. It will be worthless when the company losses operations in
which the shares belong.
Ex. The shares of stocks of Jollibee become worthless when a law is
passed by the Congress banning the fast food industry.
You will know that it is already worthless when these shares cannot be
sold anymore because there exists no available market for it even it is
not through a declaration made by law.
Ex. Shares of stocks of diskette companies
Value of Loss that you can deduct: The cost of acquiring the security.
LOSSES FROM SHARE TRANSACTIONS
LOSSES FROM SHARE TRANSACTIONS
Losses from share transactions can be claimed as deduction upon
realization of the loss.
Shrinkage in value of shares of stocks cannot be used to claim for the
deduction as loss because you haven't realized it yet. Only if you sold
it then if there is any loss, you can claim it as a deduction.
Ex. You bought the share at 100 and sold it at 50, here you incurred a
loss of 50.
How will you report it?
Since it is shares of stock being part of the equity of the company, it is
considered as a capital loss which shall be deducted in your capital
gains. And if ever there is no capital gains, then it is considered as a
capital loss which cannot be deducted from your ordinary gains but it
can be carried over for the next year. It means that it can be claimed
as NOLCO which you can only recover for a period of one year.
LOSSES FROM WASH SALES
LOSSES FROM WASH SALES
A wash sale is the buying or selling of the same type of stock or
security at a loss within 30 days before the date of sale or 30 days
after date of sale. It cannot be claimed as allowable deduction.
A wash sale is a price manipulation activity prohibited under the
Security Regulation Code (R.A 8799). It is a practice where a
person or entity who is not a dealer of securities disposes of such
securities. It occurs when the taxpayer disposes shares of stock or
securities and within 30 days before or after such disposition
acquires substantially identical stocks or securities. That‘s why it is
termed as a 61-day sale.
TN: The 30 days before and 30 days after period.
Important: This does not include dealers of securities. Only
spectators who can manipulate sale of shares transactions by means of
washed sales.
Example:
2/20 Bought PLDT Shares 10/Sh x 10,000 100,000
3/20 Sold PLDT Shares 20/Sh x 5,000 100,000
4/19 Sold PLDT Shares 5/Sh x 5,000 25,000
5/19 Bought PLDT Shares 10/Sh x 10,000 100,000
You sold the shares on April 19, but you purchased again another set
of shares on May 19. The 25,000 loss incurred on April 19 from wash
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 44 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
sales cannot be used to reduce your income at the time you sold it on
March 20. The wash sale would be based on April 19 and May 19 when
you sold the shares and purchased it back thereafter.
Considering that the period is covered by the 61-day period, the
25,000 loss cannot be used to reduce the income. As such, you will
still be taxed based on the 50,000 income.
That is wash sale and any loss from any wash sale transaction cannot
be used as a deduction. People do this to make it appear that there is
a transaction or activity pertaining to their shares. Actively traded
shares are more attractive to investors but in reality these are just
manipulated. Just take note of that prohibition because first and
foremost, wash sales are illegal.
WAGERING LOSSES
WAGERING LOSSES
Losses from wagering transactions shall be allowed only to the extent
of the gains from such transactions.
There could be no wagering loss which is related to your business
unless you are engaged in an illegal business.
Illegal wagering loss cannot be deducted from wagering gain.
Q: You are engaged in the business of financing money for casinos.
You give money to whoever may be betting and the guy was able to
incur a loss of 1M. Can he claim the 1M peso loss as a deduction?
A: Yes, but only if he has incurred wagering gains. How would this
happen? You must be regularly engaged in gambling.
CASUALTY LOSSES
CASUALTY LOSSES
The loss is caused by fortuitous event or force majeure.
Requisites for deductibility
a. Report to taxing authorities within 45 days from occurrence
of the loss
b. Related to trade and business
c. Evidenced by a closed and completed transaction (perfected
sale)
d. Actually sustained during the taxable year
e. Must not be compensated by insurance or other forms of
indemnity
ABANDONMENT LOSSES
ABANDONMENT LOSSES
In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures shall be allowed as a
deduction.
BAD DEBTS
BAD DEBTS
Bad debts actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or
business and those sustained in a transaction entered into between
parties. The recovery of bad debts previously allowed as deduction in
the preceding years shall be included as part of the gross income in
the year of recovery to the extent of the income tax benefit of said
deduction.
Tax Benefit Rule
If you were benefited by the deductions made when you claim it as
bad debts, then you will be able to recognize it as income. If there is
no benefit as you were already at a loss, you cannot claim recovery of
bad debts later on.
Requisites for the deductibility of bad debts
a. Arise from a valid and subsisting obligation
b. Ascertained to be worthless
c. Charged off and uncollectible within the taxable year
d. Uncollectible in the near future
e. Arise from trade or business of profession of taxpayer
When are bad debts ascertained to be worthless?
A court order is necessary and the regular procedure is as follows:
1. Creditor sends a statement of Account to the debtor which
states the maturity date and amount due.
2. If no payment is made, then the creditor sends a collection
letter to the debtor.
3. Still no payment is made, then the creditor‘s lawyer will send
a formal demand letter to the debtor.
4. Still failed to pay, then an action is filed in court for
collection.
5. No payment despite the order of court, then the account will
be considered as bad debt.
When the debtor files for the declaration of insolvency in court, and
after the rehabilitation, the liabilities still exceed the assets, then the
debtor is considered insolvent and the account will be considered bad
debt.
It is a requirement that moment you ascertain the worthlessness of a
debt on the same period you must claim it as bad debts. Otherwise,
you will lose the right to consider it as an allowable deduction. So, in
the year that you ascertained that the debt is uncollectible, make sure
that it is also claimed as bad debts.
Q: You have a bet with your friend on who will win the Binibining
Pilipinas, and your bet won. Your bet amounted to 100,000, and who
ever loses would pay such amount. Now, you are demanding payment
but X cannot pay you anymore. Can you claim that as bad debts?
A: No, because such debt is not born out of a valid and subsisting
obligation and because such debt is not connected with my trade,
business, or exercise of profession.
Q: What if your debtor dies, does that make your debt worthless?
A: No, because you can charge the debt against the estate of the
deceased.
Near future
There is no hard and fast rule as long as it cannot be collected by next
year, then it can be considered bad debts.
DEPRECIATION
DEPRECIATION
Depreciation is the gradual diminution of the useful value of the
property used in trade, business or profession of the taxpayer, arising
from wear and tear or natural obsolescence. The term is also applied
to amortization of the value of intangible assets, the use of which in
trade or business is definitely limited in duration.
There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear of property used in the
trade or business.
When you buy a property, that‘s really a cost in the first place,
however, the law cannot allow you to deduct it outright. That‘s why
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 45 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

you have to account for how long that property will be considered
useful, because you will spread that cost during the period that it is
useful. After all, you will be able to use it during the time it is
considered useful, so here when you actually account for depreciation
you are just spreading the cost. It is a cost-spreading mechanism. It is TN: No Computation for Depreciation in the exams. This is just for you
just apportioning the cost of your property throughout its life. to imagine the method or how it is done.

For example: If you bought machinery that is good for 10 years for
DECLINING BALANCE METHOD
1,000,000 pesos, you won‘t be able to deduct that on the year you
purchased it, after all that machinery can be used for the next 10
years. What we‘re doing here is to account for depreciation and try to DECLINING BALANCE METHOD
spread-out the cost throughout the useful life of the property.
Under the declining balance method, a fixed or uniform rate is
Requisites for deductibility multiplied by the declining carrying amount of the asset in order to
arrive at the annual depreciation.
a. Property must be used in trade, business or profession of the
taxpayer Formula:
b. There must be depreciable properties
c. Allowance for depreciation must be reasonable
d. Depreciation must be charged off during the taxable year
e. Statement of the allowance must be attached to the return
f. Method for computing the allowance for depreciation must
be in accordance with the method prescribed by the
Secretary of Finance upon the recommendation of the BIR
Commissioner
TN: It is actually the taxpayer who recommends to the CIR. Example:
Cost – P1,000,000
FACTORS OF DEPRECIATION Useful Life – 10 years

Depreciable amount
Depreciable amount or cost is the cost of an asset or other amount
substituted for cost, less its residual value. Year 1:

Salvage value Year 2:

Salvage or residual value is the estimated net amount currently
obtainable if the asset is at the end of the useful life. It is the value of
the asset at the end of its useful life.
Year 3:
Useful life
Useful life is either the period over which an asset is expected to be
available for use by the entity, or the number of production or similar
units expected to be obtained from the asset by the entity
TN: Notice that the amount of depreciation also declines.

METHODS OF DEPRECIATION DOUBLE DECLINING BALANCE METHOD

Under the double declining balance method, the rate is doubled.

METHODS OF DEPRECIATION
In the example above, the rate will be 20%.
1. Straight line method
2. Declining balance method
Year 1:
3. Sum of the years digit method
4. Any other method that may be prescribed by the Secretary of
Year 2:
Finance upon the recommendation of the Commissioner.

STRAIGHT LINE METHOD

Year 3:
STRAIGHT LINE
Under the straight line method, the annual depreciation expense is
calculated by allocating the depreciable amount equally over the
number of years of estimated useful life. In other words, straight line
depreciation is a constant charge over the useful life of the asset. It SUM OF THE YEARS’ DIGIT METHOD
accounts for passage of time rather than usage.
SUM OF THE YEARS’ DIGIT METHOD
Formula:
The sum of the years‘ digits method provides for depreciation that is
computed by multiplying the depreciable amount by a series of
fractions whose numerator is the digit in the useful life of the asset
and whose denominator is the sum of the digits in the useful life of the
Example: asset. The fractions are developed by getting the sum of the digits in
Cost – P1,000,000 the useful life of the asset. This actually uses the sequence formula.
Useful Life – 10 years
Salvage Value – P100,000
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 46 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Formula: Wasting Assets

Wasting assets are material objects of economic value and utility to
man produced by nature. They are natural resources which usually
include coal, oil, ore, precious metals like gold and silver, and timber.
They are so called because these are physically consumed and once
consumed, the assets can no longer be replaced. If ever, they can be
replaced only by the process of nature. Natural resources cannot be
produced by man.
Example:
Cost – P1,000,000 Cost Depletion Method
Useful Life – 5 years The method allowed under the tax code is the cost depletion method.
This is similar to the unit of production method.

The depletable amount of the wasting asset is divided by the units

Year 1: estimated to be extracted to obtain a depletion rate per unit. The
depletion rate per unit is then multiplied by the units extracted during
the year to arrive at the depletion for the period. The depletable
amount is equivalent to the cost of the asset less salvage value, if any.
Year 2:
Formula:

Year 3:

Year 4:
Example: A parcel of land has a total mineral ore deposit of
10,000,000. The asset used to extract the mineral ore deposit is
valued at 10,000,000. A total mineral ore of 789,000 was extracted
Year 5: during the year.

You begin with the highest until to the lowest until you reached the 5 th
year or the ratio of 1/15.
UNITS OF PRODUCTION METHOD
UNITS OF PRODUCTION METHOD
Under this method, depreciation per unit is computed by dividing the
depreciable amount by the estimated useful life in terms of units of
output. The depreciation rate per unit is then multiplied by the yearly
output to get the annual depreciation. The output or production
method results in a charge based on the expected use or output.
Formula:
CHARITABLE & OTHER CONTRIBUTIONS
CHARITABLE AND OTHER CONTRIBUTIONS
This is the only deduction that does not have to be related to the tax
payer‘s trade, business, or exercise of profession. In the first place,
when you donate to charity it makes no qualification on what sort of
trade, business, or exercise of profession the donor has. If it did, it
would be difficult to donate to charitable institutions. However, the
type of organization you are giving your donation and the purpose of
such donation would matter since it will affect the amount to be
recognized as a deduction.

Kinds of Charitable Contributions

1. Ordinary – those subject to limitations as to the amount
deductible from gross income (5%/10%)
2. Special – deductible in full from gross income

Example: In a soft drinks company, after producing 10 Million Bottles,
the machine used will already be deemed fully depreciated. The value
of machine is 10 Million Pesos. 2M bottles were produced.
DEPLETION
Requisites for Deductibility
a. Contribution or gift must actually be paid
b. Must be given to organizations specified in the tax code
c. Net income of the institution must not inure to the benefit of
any private stockholder or individual
d. Must be made within the taxable year
e. Must be evidenced by adequate records or receipts
f. Must not exceed 10% in the case of individuals and 5% in
the case of a corporation, of the taxpayer‘s taxable income
(except where the donation is deductible in full) to be
determined without the benefit of the contribution.

DEPLETION DEDUCTIBLE IN FULL

Depletion is the exhaustion of natural resources like mines and oil and
gas as well as result of production or severance from such mines or DEDUCTIBLE IN FULL
wells. These are non-replaceable assets. This is applicable to wasting
asset entities 1. Recipient is:

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 47 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Government of the Philippines or to any of its agencies or political 4. Character building/youth and sports development
subdivisions, including fully-owned government corporations, 5. Charitable
exclusively to finance, to provide for, or to be used in undertaking 6. Social welfare
priority activities 7. Religious
8. Rehabilitation of Veterans
For priority activities in: 9. Social welfare institution
1. Science
2. Education If the conditions under those deductible in full is not complied with
3. Culture Subject to limitation:
4. Health a. Individual – 10% of taxable income from trade,
5. Economic Development business or profession before contribution or before the
6. Human Settlement deduction of the charitable contribution
7. Youth and Sports Development
b. Corporation – 5% of taxable income from trade
2. Recipient is: business or profession before contribution or before the
An accredited non-government organization, organized/operated for deduction of the charitable contribution
(purposes)
1. Scientific How it is done?
2. Education In arriving with the taxable income, all deductions (EX-IN-TA-LO-BA-
3. Cultural RE-PEN-DEP-DEP) are allowed except the Charitable Contributions.
4. Character building/youth and sports development
5. Charitable From the taxable income, you make the deductions multiplied by10%
6. Social welfare or 5%. Choose whichever is lower between the computation or the
7. Health contribution.
8. Research
RESEARCH AND DEVELOPMENT
And satisfying the following conditions:
1. Organized and operated exclusively for the aforementioned
purposes or a combination thereof, no part of the net income of RESEARCH AND DEVELOPMENT
which inures to the benefit of any private individual;
Research or development expenditures which are paid or incurred by
2. The donation must be utilized not later than the 15 th day of the him during the taxable year in connection with his trade, business or
3rd month following the close of its taxable year.(taxable year of profession shall be allowed as deduction during the taxable year when
the NGO concern not the taxpayer) paid or incurred.

3. The administrative expense must not exceed 30% of total Research and development costs refer to any costs related to
expenses. innovating products or services.

4. Upon dissolution, assets would be distributed to another non- Limitation

profit domestic corporation organized for similar purpose or
purposes, or to the state for public purpose ,or would be
distributed by a court to another organization to be used in such
manner as in the judgment of said court shall best accomplish
the general purpose for which the dissolved organization was
organized.
3. Recipient is
Foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties,
or commitments entered into by the Government of the Philippines and
the foreign institutions or international organizations or in pursuance of
special laws.
The deduction shall not apply
1. Any expenditure or the acquisition or improvement of land, or
for the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining
the existence, location, extent, or quality of any deposit of ore or
other mineral, including oil or gas.
Important: These cannot be claimed as deductions anymore under
research and development because it is already considered as expense
of the company and claiming it again will amount to double
deductions.

Types of R&D
DEDUCTIBLE SUBJECT TO LIMITATION
1. Not chargeable to capital account –deducted outright
Ex. Project feasibility study
DEDUCTIBLE SUBJECT TO LIMITATION
2. Chargeable to a capital account – spread out or
1. Recipient is: amortized over a period of 60 months
Government of the Philippines; Any of its agencies or political
subdivisions Not considered R&D
1. Cost of land/improvement
For a non-priority activity  Improvement is part of an asset subject to depreciation
In any of the areas mentioned under those deductible in full and  Land is not subject to depreciation but is a capital
exclusively for a public purpose expenditure which is never allowed as deduction
2. Cost of property subject to depreciation
2. Recipient is  Part of depreciation expense
An accredited non-government organization, organize/operated for 3. Cost of ascertaining the existence, location, extent or quality
(purposes) of any deposit of ore or other minerals
1. Scientific  Part of cost depletion
2. Education
3. Cultural
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 48 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

Basically, they are not allowed as deductions under R&D costs because
they are already part of the other itemized deductions.
PENSION TRUSTS
The PSC must be spread out over a period of 10 years. Using the
Corregidor method, divide the PSC by 10 years. From the year 2015
down to the year 2025, the deduction you can claim additional
deduction of 100,000 (1M/10years).

PENSION TRUSTS
A pension trust is a trust fund established by the employer for the
retirement of the employees.
This would refer to any reasonable amount transferred or paid in to
such trust during the taxable year in excess of such contributions, but
only if such amount
1. Has not theretofore been allowed as a deduction, and
2. Is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment is
made.
Company usually sets up pension trust for their employees and it
usually accounts for the current services or particular years of service
that the employee has rendered. But then it is also possible that the
employer has set up the pension trust years after the years you have
started the company or past services were already rendered.
Current Service Cost is the cost of the services rendered from the
time the pension trust is set up until its retirement.
Past Service Cost is the cost of the services relating to those prior to
the setting up of the pension trust.
The amortization of the PSC will be added to the CSC. Hence, you can
claim a total deduction of 300,000 per year from 2015-2025.
In 2026, the amount that can be claimed as deduction will now only
be P200,000 because the PSC has already been fully amortized.
PREMIUMS ON HEALTH & HOSPITALIZATION
PREMIUMS ON HEALTH AND HOSPITALIZATION
The amount of premiums not to exceed P2, 400 per family or P200 a
month paid during the taxable year.
Conditions:
1. That said nuclear family has a gross income of not more than
P250,000 for the taxable year
2. The taxpayer must be the person who availed of health or
hospitalization benefit
Repealed
This has already been repealed under the TRAIN Law. No one avails of
it anyway since the requirements are too stringent for such a small
amount of benefit.

It would seem that it violates the matching principle if I‘m allowed to

CORPORATE INCOME TAX RATES
deduct it this year when I set-up the trust, because after all the
service were done prior to the setting up of the trust, but then again if
we look at the taxpayer, he actually incurs it and previously, he wasn‘t CORPORATE INCOME TAX RATES
allowed to deduct it as well.
General Rule:
Requisites for deductibility  DC – 30% of net income within & without, with deductions
a. Employer must have established a pension or retirement  RFC - 30% of net income within, with deductions
plan to provide for the payments of reasonable pensions to  NRFC – 30% of gross income within, without deductions
his employees
b. Pension plan is reasonable and actuarially sound Exceptions:
c. Contribution must be made by the employer to the pension  15% optional tax on gross income
fund  2% minimum corporate income tax
d. Must be funded by the employer
e. Amount contributed must no longer be subject to the control TAX REGIMES
and disposition of the employer
f. Payment has not yet been allowed as deduction 1. Normal Corporate Income Tax (NCIT) – 30% of net income or
g. Deduction is apportioned in equal parts over a period of 10 gross income
consecutive years beginning with the year in which the 2. Optional Corporate Income Tax – 15% of gross income
transfer or payment is made 3. Minimum Corporate Income Tax (MCIT) – 2% of gross income

CORREGIDOR METHOD NORMAL CORPORATE INCOME TAX

CORREGIDOR METHOD NORMAL CORPORATE INCOME TAX

This is the method where the past service cost is amortized over a The normal corporate income tax is 30%.
period of 10 years.
The tax base for domestic is net income within and without. For
Example: resident foreign corporations, it is based on net income within. For
Current Service Cost (CSC) – 200,000/year non-resident foreign corporations, it is based on gross income within.
Past Service Cost (PSC) – 1,000,000
OPTIONAL CORPORATE INCOME TAX
Pension Trust
OPTIONAL CORPORATE INCOME TAX
2015-2025 2026
Past Service Cost P 100,000 P - Domestic corporations and resident foreign corporations have the
(1M/10years) option to be taxed at 15% of gross income, provided certain conditions
Current Service Cost 200,000 200,000 are satisfied.
Total P 300,000 P 200,000

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 49 | P a g e

TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018
Rules
 Option is available only for DC and RFC.
 Option to be taxed on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed 55%.
 Option shall be irrevocable for 3 consecutive taxable years
during which the corporation is qualified under the scheme.
Conditions to be satisfied
1. Tax effort ratio of 20% of GNP
2. Ratio of 40% of income tax collection to total tax revenues
3. VAT tax effort ratio of 4% of GNP
4. 0.9% ratio of the Consolidated Public Sector Financial Position
to GNP
Not available to NRFC
This option is not available to Non-Resident Foreign Corporations
because they are already subject to 30% tax based on Gross Income.
The government will definitely not allow NRFC from availing of this
option because all NRFC will just avail of this smaller rate instead of
the 30% Income Tax on their Gross Income.
Irrevocable for 3 years
If the corporation incurs very high expenses on the succeeding years,
it may end up at a disadvantage for choosing this option because the
expenses are not accounted for when it is taxed based on its Gross
Income.
MINIMUM CORPORATE INCOME TAX
MINIMUM CORPORATE INCOME TAX (MCIT)
A minimum corporate income tax rate of 2% of the gross income at
the end of the taxable year is imposed on a corporation beginning the
4th taxable year immediately following the year in which such
corporation commenced its business operations.
The MCIT is paid when the minimum income tax is greater than the
NCIT of 30% of the net taxable income.
Purpose
The purpose of the MCIT is to curtail the fraudulent mechanisms of
corporations done in order to avoid paying the right amount of taxes
due to the government. This is to discourage corporations from
overstating their expenses since the MCIT is imposed on the gross
income where the expenses have not yet been deducted.
When availed of
MCIT is availed of at the beginning of the 4th taxable year immediately
following the year in which such corporation commenced its business
operations. In other words, MCIT is imposed on the 5th year of
operations.
A company is considered to have started its business operations on the
date of its registration with the BIR or the actual commencement of
the business, whichever is earlier.
Relief from MCIT
The Secretary of Finance is authorized to suspend the imposition of
MCIT on a corporation which suffers losses
1. On account of prolonged labor dispute (more than 6 months)
2. Because of force majeure,
3. Because of legitimate business reverses.
CARRY FORWARD EXCESS MCIT
Excess MCIT can be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.
The excess MCIT can only be credited if the NCIT is higher than the
MCIT. In that case, the tax paid will be net of the excess MCIT.
If MCIT is higher than the NCIT for the year, then the excess MCIT
cannot be credited but will continue to be carried over until the 3-year
period expires.
The credit of the excess MCIT is based on the First-In First-Out
method such that the excess MCIT incurred first will also be the first to
be credited against the NCIT for the taxable year.
EXCEPTIONS TO MCIT
1. Proprietary Educational Institutions
a. 10% taxable income – exempt
b. 30% taxable income – not exempt
2. Non-profit hospitals
a. 10% taxable income – exempt
b. 30% taxable income – not exempt
3. PEZA-registered entities
a. 5% income from registered activities - exempt
b. 30% income from unregistered activities – not exempt
4. OBUs
5. International Carriers
TN: Corporations subject to special tax rates are exempt from MCIT.
Proprietary educational institutions & non-profit hospitals
For domestic corporations, these include proprietary educational
institutions and non-profit hospitals subject to the tax rate of 10% on
their net taxable income when the income derived from unrelated
trade, business, or activity does not exceed 50% of the gross income.
This is because MCIT can only be imposed if the corporation is subject
to the NCIT of 30% of net taxable income.
However, if the income of proprietary educational institutions and non-
profit hospitals from unrelated trade, business, or activity exceeds
50% of the gross income, MCIT can now be applied since they will be
subject to 30% tax on their net taxable income.
PEZA-registered entities
Another exception is the case of a PEZA-registered entity since it is
subject to a preferential tax rate of 5% of gross income in lieu of all
taxes. However, it can be subject to NCIT if it is engaged in
unregistered activities.
The MCIT can be applied on the 5th year of operations when the net
income is less than 2% of the gross income from unregistered
activities.
OBUs and international carriers
MCIT is also not applicable to offshore banking units generally taxed at
10% and international carriers subject to tax of 2.5% on gross
Philippine billings.
Example:
2017 is the fourth year of its business operations.
In 2017, MCIT is not yet applicable in 2017 since it is the 4 th year of
operations. MCIT applies only on the 5 th year of operations in 2018.
Since there is a net loss, there is no tax to be paid for the year.
In 2018, MCIT can now be applied since it is the 4th taxable year after
the start of its business operations. Since MCIT is higher than NCIT,
the tax due for the year will be P160,000. There is excess MCIT of
P100,000 which is the difference between the MCIT paid of P160,000
and NCIT of P60,000. It will be carried forward for the 3 immediately
succeeding years until 2021.
In 2019, the tax due and payable is P160,000. Excess MCIT from 2018
of P100,000 cannot be applied this year since MCIT is higher than
NCIT. It will continue to be carried forward until its expiration in 2021.
In addition, there is an excess of P130,000 which is the difference
between the MCIT of P160,000 and NCIT of P30,000 for the year will
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 50 | P a g e
TAXATION LAW I l PRE-FINALS l Atty. Amago l Updated by JCV 2017-2018

be carried forward for the 3 immediately succeeding taxable years until Capital Gains from 6% of GSP
2022. Sale of Real or ZV,
30% 30%
Property Not Used whichever
In 2020, there is no tax to be paid due to the application of the excess in Trade or Business is higher
MCIT from previous years. The excess MCIT from 2018 of P100,000 15% on
and excess MCIT from 2019 of P50,000 can be applied to the NCIT of total profits
P150,000 since NCIT is higher than MCIT for the year. The excess Branch Profit applied for
MCIT can be deducted to the extent of the tax due under the NCIT. Not
Remitted by a or Not Applicable
The remaining excess MCIT from 2019 of P80,000 will continue to be Applicable
Branch Office earmarked
carried forward until its expiry in 2022. for
remittance
In 2021, the tax due is P220,000. The excess MCIT from 2019 of Subject to Tax
P80,000 can be applied to the NCIT since the NCIT of P300,000 is Sparing Rule
higher than the MCIT of P120,000 for the year. 15% if foreign
corporation
In 2022, the tax due is equivalent to the NCIT of P900,000 which is Dividends Received
Exempt Exempt allows a tax
higher than the MCIT of P120,000. There is no more excess MCIT from DC
credit of at least
carried forward from the previous years. 15% of the taxes
deemed paid in
MCIT the Philippines

2017 2018 2019

Gross Sales 10,00,000 10,00,000 10,00,000
Cost of Sales (5,000,000) (2,000,000) (2,000,000)
Gross Income 5,000,000 8,000,000 8,000,000
Allowable Deductions (5,000,000) (7,800,000) (7,900,000)
Net Income - 200,000 100,000
NCIT (30% of NI) - 60,000 30,000
MCIT (2% of GI) - 160,000 160,000
Excess MCIT -
From 2018 - 100,000 100,000
From 2019 - 130,000
Tax Due - 160,000 160,000

2020 2021 2022

Gross Sales 10,00,000 10,00,000 10,00,000
Cost of Sales (3,000,000) (4,000,000) (2,000,000)
Gross Income 7,000,000 6,000,000 6,000,000
Allowable Deductions (6,500,000) (5,000,000) (3,000,000)
Net Income 500,000 1,000,000 3,000,000
NCIT (30% of NI) 150,000 300,000 900,000
MCIT (2% of GI) 140,000 120,000 120,000
Excess MCIT
From 2018 (100,000) - -
From 2019 ( 50,000) ( 80,000) -
Tax Due - 220,000 900,000

TN: You cannot lump together the excess MCIT since the excess MCIT
expires differently.

PASSIVE INCOME

PASSIVE INCOME TAX RATES

TN: Income must be derived from the Philippines.

Passive Income DC RFC NRFC

Interest Income on
Bank Deposit (Peso 20% 20% 30%
Account
Interest Income on
Bank Deposit Under
the Expanded 15% 15% Tax Exempt
Foreign Currency
Deposit System
Royalties 20% 20% 30%
Capital Gains from
Sale of Shares of 15% 15% 15%
Stock

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 51 | P a g e