SunChi Notes based on Discussion of Atty VV

TAXATION I 2. Essentially a legislative function

TAXATION, definition: In its broadest sense, taxation is
defined as the power of the sovereign to impose every kind of
charge or burden upon persons, property, or property rights
for the use and support of government in order to enable it to
discharge its appropriate functions. (Des Moines Union
Railway Co. V. Chicago, Great Western Railway C0,.
177N.W. 90,91, 188 Iowa 1091.9 A.L.R. 1557)
TAXES, definitions: a forced and involuntary burden
assessed in accordance with some reasonable rule of
apportionment by authority of a sovereign government upon
persons or property within its jurisdiction, to provide public
revenue for the support of government, the administration of
the law, or payment of public expenses (Cooley, The Law on
Taxation). It is an enforced contribution levied by the State
by virtue of its sovereignty on persons and property within
its jurisdiction for the support of the government and all
public needs.
PURPOSE OF TAXATION: To generate funds for the State
to finance the needs of the citizenry and to advance the
common wealth. The government chiefly relies on taxation to
obtain the means to carry on its operation.
INCOME TAXATION
a. The power to enact laws and ordinances,
and to impose and collect taxes are given to
the Congress
b. The power to make tax laws cannot be
delegated to other branches of the
government or exercised by the executive or
judicial branch of government since it is
peculiarly and exclusively legislative in
nature
NON-DELEGATION OF THE TAXING POWERS:
Congress cannot delegate the following powers:
a. Power to select the coverage, object or property to be
taxed
b. Determining the nature and purposes for which
taxes shall be collected
c. Determining the place or situs of tax imposition
d. Fixing the amount to be imposed and tax rates
e. Granting tax exemptions or condonation
f. Setting down the rules of taxation in general
TAXATION POWERS THAT CAN BE DELEGATED:
The power to impose:
1. tariff rates,
2. import and export quotas,
3. custom duties

GENERAL PRINCIPLES
• Imposition of taxes is borne out of necessity
• These are the life-blood of the government
• The power to tax is an inherent power of the State
POWER OF TAXATION = POWER TO DESTROY
It is not regulated; it is confiscatory.
The Power of taxation is sometimes called the power to
destroy. Therefore, it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the
tax collector kill the "hen that lays the golden egg." And in
order to maintain the general public's trust and confidence in
the Government, this power must be used justly and not
treacherously. It does not conform with our sense of justice in
the instant case for the Government to persuade the taxpayer
to lend a helping hand and later on to penalize him for duly
answering the urgent call.” (BIR Ruling 006-07, March
7,2007 citing Roxas vs. Court of Appeals, 23 SCRA 276)
subject to the limitations and guidelines as the congress may
impose, consistent with the national development program of
the government. (Article VI, Section 28 of the Constitution)
LGUs can conduct revenue raising activities in the exercise
of police power.
3. Public purposes
The primary purpose of taxation is for the support of the
government
4. Territorial in operations
The taxing power cannot go beyond the Philippine taxing
jurisdiction
5. Tax exemption of government
As a rule, agencies performing governmental functions are
tax exempt unless expressly taxed. On the other hand,
agencies performing proprietary functions are subject to tax
unless expressly exempted

INHERENT POWERS OF THE STATE:

1. Police Power - most demanding and most pervasive GOVERNMENTAL PROPRIETARY
o Salus populi est suprema lex - the welfare
of the people is the supreme law Interest of health, safety, Obtains special corporate
2. Eminent Domain and for advancement of benefits or earn pecuniary
3. Power of Taxation public good and welfare, profit.
affecting the public in
ESSENTIAL ELEMENTS OF THE TAXING POWER general Private advantage and
(MIDTERM Q) benefit.
1. Inherent power of the sovereignty Departments and Agencies.
a. The State can impose and collect taxes from Transacting in business.
its inhabitants even without a specific
provision in the Constitution conferring the
power on it or authorizing it to impose taxes
b. The Constitutional provisions on taxation
merely constitute limitations on the
supremacy of the taxing power

Page 1 of 23

SOURCES OF LAW ON INCOME TAXATION:
Philippine Constitution
ART. VI, SECTION 28. (1) The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development
program of the Government
(3) Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non—profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from
taxation
(4) No law granting any tax exemption shall be passed
without the concurrence of a majority of all the Members of
the Congress.
ART. VI, SECTION 29. (1) No money shall be paid out of the
Treasury except in pursuance of an appropriation made by
law.
XXX XXX XXX .
(3) All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such
purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the Government.
Constitutional Limitations
1. Due process of Law
2. Equal protection of law
3. Rule of uniformity and equity
4. Non-impairment of contracts
5. President's power to veto separate items in revenue
or tariff bills
6. Exemption from property taxation of religious,
charitable, or educational entities, non-profit
cemeteries, churches and convents apartment
7. No public money shall be appropriated for religious
purposes
8. Majority of all the members of the congress required
granting tax exemption
9. The Congress may not deprive the Supreme Court of
its jurisdiction in all cases involving the legality of
any tax, impost or assessment or toll or any penalty
imposed in relation to tax.
10. No imprisonment for nonpayment of poll tax
11. Tax collection shall generally be treated as general
funds of the government
Statutes
a. NIRC (Tax Code)
b. Special Laws
Regulations
Revenue Regulations Issued by the BIR: issuances signed by
Page 2 of 23
SunChi Notes based on Discussion of Atty VV
the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify, prescribe or
define rules and regulations for the effective enforcement of
the provisions of the NIRC and related statutes
Administrative rulings
BIR Rulings - issued by the Bureau of Internal Revenue (BIR)
representing its position on an issue or on a transaction,
and/or its interpretation of the law as it is applied to a
particular transaction
Revenue Memorandum Circulars (not a source of law) -
issuances that publish pertinent and applicable portions, as
well as amplifications, of laws, rules, regulations and
precedents issued by the BIR and other agencies/offices
Court decisions
Decisions of the CTA and SC
FEATURES OF THE PHILIPPINE INCOME TAX LAW
1. Direct Tax - tax is borne by the income recipient or
income earner
2. Progressive Tax - based on the "ability to pay"
principle
3. Comprehensive system of imposing tax - uses
several criteria for taxation: citizenship, residence,
source, etc.
4. Semi-schedular or Semi-global
a. Schedular tax rates apply to income in
general.
b. There are types of income subjected to final
taxes
c. There are income subjected to preferential
tax rates
5. American origin - the decisions of the US courts
have force and persuasive effect in the Philippines.
The Tax Code was patterned after the US 1939 and
1954 US Internal Revenue Code
BASIS OR CRITERIA FOR THE IMPOSITION OF INCOME
TAX:
1. Citizenship or nationality
2. Residence or domicile
3. Source of income
ADMINISTRATION OF INCOME TAX LAW:
Bureau of Internal Revenue (BIR)
POWERS AND DUTIES OF THE BIR: Sec. 2, NIRC
a. assessment and collection of all national internal
revenue taxes, fees, and charges, and the
b. enforcement of all forfeitures, penalties, and fines
connected therewith;
c. execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary
courts
d. give effect to and administer the supervisory and
police powers conferred to it by the Code or other
laws
POWERS AND DUTIES OF THE COMMISSIONER OF
INTERNAL REVENUE:
1. To interpret tax laws and to decide tax cases-under
the exclusive and original jurisdiction of the CIR,
subject to review by the DOF Secretary (Section 4)
2. To obtain information, and to summon, examine,

and take testimony of persons; this shall be
construed as granting the Commissioner the
authority to inquire into bank deposits other than as
provided for in Section 6(F) of the Code (Section 5)
3. To make assessments and prescribe additional
requirements for tax administration and
enforcement (Section 6)
4. Authority of the Commissioner to delegate power
(Sec. 7)
BUT the following CANNOT be delegated:
a. power to recommend to the DOF secretary,
the promulgation of rules and regulations;
b. power to compromise and abate any tax
liability ;
c. power to assign or reassign internal revenue
officers.
5. Duty to ensure the provision and distribution of
forms, receipts, certificates, and appliances, and the
acknowledgment of payment of taxes (Sec. 8)
ROLE OF THE SECRETARY OF FINANCE (Sec. 4)
Direct control and supervision of the BIR
RULES OF CONSTRUCTION:
"Statutes levying taxes or duties are to be construed strongly
against the Government and in favor of the subject or
citizens, because burdens are not to be imposed or presumed
to be imposed beyond what statutes expressly and clearly
declare."
No person or property is subject to taxation unless they fall
within the terms or plain import of a taxing statute.
CONCEPT OF INCOME
Income is all wealth which flows into the taxpayer other than
as a mere return of capital. It includes the forms of income
specifically described as gains and profits, including gains
derived from the sale or other disposition of capital assets.
INCOME IS A FLOW OF WEALTH!!!
CAPITAL
Fund that produces wealth or income.
WHAT IS GROSS INCOME? [SECTION 32]
Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including
(but not limited to) the following items: [CGDIRRDAPPSF]
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items;
2. Gross income derived from the conduct of trade or
business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interest
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of
the general professional partnership
12. Fringe Benefit
Page 3 of 23
SunChi Notes based on Discussion of Atty VV
EXCLUSIONS FROM GROSS INCOME [Sec. 32 (B)]
The following items shall not be included in gross income and
shall be exempt from taxation: [GRLCRIM]
1. Life Insurance. — The proceeds of life insurance
policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or
otherwise, but if such amounts are held by the
insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross
income.
2. Amount Received by Insured as Return of
Premium. — The amount received by the insured,
as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term
mentioned in the contract or upon surrender of the
contract.
3. Gifts, Bequests, and Devises. — The value of
property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such
property, as well as gift, bequest, devise, or descent
of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
4. Compensation for Injuries or Sickness. —
Amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts,
as compensation for personal injuries or sickness,
plus the amounts of any damages received, whether
by suit or agreement, on account of such injuries or
sickness.
5. Income Exempt under Treaty. — Income of any
kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
—
a. Retirement benefits received under RA 7641
and those received by officials and employees
of private firms, whether individual or
corporate
In accordance with a reasonable private benefit plan
maintained by the employer. That the retiring official or
employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty (50)
years of age at the time of his retirement. That the
benefits granted shall be availed of by an official or
employee only once.
b. Any amount received by an official or
employee or by his heirs from the employer as
a consequence of separation of such official or
employee from the service of the employer
because of death, sickness or other physical
disability or for any cause beyond the control
of the said official or employee.
c. Social security benefits, retirement gratuities,
pensions and other similar benefits received
by resident or nonresident citizens of the
Philippines or aliens who come to reside
permanently in the Philippines from foreign
government agencies and other
institutions, private or public.
d. Payments of benefits due or to become due to
any person residing in the Philippines under
the laws of the United States administered by
the United States Veterans
Administration.
 SunChi Notes based on Discussion of Atty VV

e. Benefits received from or enjoyed under the g. Gains from the Sale of Bonds, Debentures
Social Security System (RA 8282) or other Certificate of Indebtedness. —
f. Benefits received from the GSIS (RA 8291), Gains realized from the sale or exchange or
including retirement gratuity received by retirement of bonds, debentures or other
government officials and employees. certificate of indebtedness with a maturity of
more than five (5) years.
7. Miscellaneous Items. — h. Gains from Redemption of Shares in
a. Income Derived by Foreign Government. Mutual Fund. — Gains realized by the
— Income derived from investments in the investor upon redemption of shares of stock in
Philippines in loans, stocks, bonds or other a mutual fund company as defined in Section
domestic securities, or from interest on 22(BB) of this Code.
deposits in banks in the Philippines by (i)
foreign governments, (ii) financing DEFINITION OF A CORPORATION FOR TAX
institutions owned, controlled, or enjoying PURPOSES
refinancing from foreign governments, and (MIDTERM Q)
(iii) international or regional financial
institutions established by foreign
governments. SECTION 22(B) NIRC CORPORATION
b. Income Derived by the Government or its CODE
Political Subdivisions. — Income derived
from any public utility or from the exercise of The term "corporation" shall include A corporation is an
any essential governmental function accruing partnerships, no matter how created artificial being
to the Government of the Philippines or to any or organized, joint-stock companies, created by
political subdivision thereof. joint accounts (cuentas en operation of law,
c. Prizes and Awards. — Prizes and awards participacion), associations, or having the right of
made primarily in recognition of religious, insurance companies, but does not succession and the
charitable, scientific, educational, artistic, include general professional powers, attributes,
literary, or civic achievement but only if: partnerships and a joint venture or and properties
i. The recipient was selected without any consortium formed for the purpose of expressly
action on his part to enter the contest or undertaking construction projects or authorized by law
proceeding; and engaging in petroleum, coal, or incidental to its
ii. The recipient is not required to render
geothermal and other energy existence.
substantial future services as a condition
operations pursuant to an operating
to receiving the prize or award.
or consortium agreement under a
d. Prizes and Awards in Sports
Competition. — All prizes and awards service contract with the
granted to athletes in local and international Government.
sports competitions and tournaments whether
held in the Philippines or abroad and WHAT ARE TAXABLE AS A CORPORATION?
sanctioned by their national sports
(MIDTERM Q)
associations.
e. 13th Month Pay and Other Benefits. -
ENTITIES TREATED AS A CORPORATION FOR INCOME
Gross benefits received by officials and
employees of public and private entities: TAX PURPOSES:
Provided, however, That the total exclusion 1. Partnerships, no matter how created or organized;
shall not exceed Ninety thousand pesos registered or unregistered
(P90,000) which shall cover: 2. Joint-stock companies
o Benefits received by officials and employees 3. Joint-accounts (cuentas en participacion)
of the national and local government 4. Associations
pursuant to Republic Act No. 6686; 5. Insurance companies
o Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by PARTNERSHIP: By the contract of partnership, two or more
Memorandum Order No. 28, dated August persons bind themselves to contribute money, property or
13, 1986; industry to a common fund with the intention of dividing the
o Benefits received by officials and employees profits among themselves. (Article 1767, Civil Code)
not covered by Presidential Decree No. 851,
as amended by Memorandum Order No. 28, JOINT VENTURE: an association of person or companies
dated August 13, 1986; and jointly undertaking some commercial enterprise; generally,
o Other benefits such as productivity all contribute assets and share risks. It requires a community
incentives and Christmas bonus." of interest in the performance of the subject matter, a right
to direct and govern the policy in connection therewith, and
f. GSIS, SSS, Medicare and Other (a) duty, which may be altered by agreement, to share both
Contributions. — GSIS, SSS, Medicare and in profit and losses. [Kilosbayan et. al., vs. Guingona (G.R.
Pag-Ibig contributions, and union dues of
No. 113375, May 5, 1994)]
individuals.

Page 4 of 23

ELEMENTS OF A JV THAT ARE TAXABLE AS A
CORPORATION (MIDTERM Q)
1. each party to the venture must make a contribution,
not necessarily of capital, but by way of services,
skill, knowledge, material or money;
2. profits must be shared among the parties;
3. there must be a joint proprietary interest and right
of mutual control over the subject matter of the
enterprise;
4. usually, there is a single business transaction rather
than a general or continuous transaction
WHAT ARE NOT TAXABLE AS A CORPORATION?
Joint Venture for Construction
The exclusion of joint venture for construction projects from
the term ”corporation" was introduced as an amendment to
the Tax Code by Pres. Decree (PD) No. 929, May 4. 1976.
The "Whereas clauses" embody the rationale for the said
exclusion:
1. They contribute substantially to the development
program of the country;
2. They are at a disadvantage in competitive bidding
with foreign contractors in view of limited capital
and financial resources;
3. In order to be able to compete with big foreign
contractors, it may be necessary for them to enter
into joint ventures to pool their limited resources in
undertaking big construction projects; to assist them
in achieving competitiveness with foreign
contractors, the joint ventures formed by them
should not be considered an additional income tax;
4. The corporate income tax is imposed on joint
ventures as well as on the entities composing such
joint ventures;
5. The 3% contractor's tax is based both on the total
contract price received by a principal contractor and
on the portion of such contract price which is
allocated by the said principal contractor to and
received by, a subcontractor;
6. The double taxation of gross receipts to a principal
contractor and subcontractor also diminishes the
competitive capability of local contractors against
foreign contractors;
REVENUE REGULATIONS NO. 10-2012
Joint Venture or Consortium Formed For The Purpose
Of Undertaking Construction Projects and Mandatory
Enrollment of Local Contractors in the Electronic
Filing and Payment System (EFPS)
Requirements to be considered as a JV for construction:
(MIDTERM Q)
1. Formed for the undertaking of a construction
project; and
2. should involve joining or pooling of resources by
licensed local contractors; that is, licensed as
general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI);
3. These local contractors are engaged in construction
business; and
Page 5 of 23
SunChi Notes based on Discussion of Atty VV
4. The Joint Venture itself must likewise be duly
licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI)
Joint ventures involving foreign contractors may also be
treated as a non-taxable corporation only if:
1. the member foreign contractor is covered by a
special license as a contractor by the Philippine
Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI); and
2. the construction project is certified by the
appropriate Tendering Agency (government office)
that the project is a foreign financed/
internationally-funded project and
3. that international bidding is allowed under the
Bilateral Agreement entered into by and between
the Philippine Government and the
foreign/international financing institution pursuant
to the implementing rules and regulations of
Republic Act No. 4566 otherwise known as
Contractor's License Law.
The tax-exempt joint venture or consortium shall not
include those who are mere suppliers of goods,
services or capital to a construction project.
The members to a Joint Venture not taxable as corporation
shall each be responsible in reporting and paying
appropriate income taxes on their respective share to
the joint ventures profit.
General Professional Partnerships (GPPs)
Definition: 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.
The GPP is not a taxable entity for income tax purposes since
it is only acting as a "pass-through" entity where its income
is ultimately taxed to the partners comprising it, who shall
be subject to income tax in their separate and individual
capacities.
TYPES OF CORPORATIONS
Domestic Corporation - a corporation organized under the
laws of the Republic of the Philippines
Foreign corporation - one which is formed, organized or
existing under laws other than those of the Philippines.
(Implementing regulations, FIA)
Kinds of Foreign Corporation
Resident Foreign Corporation (RFC)
A foreign corporation that is engaged in or doing business in
the Philippines.
The Corporation Code of the Philippines (the “Corporation
Code”) requires any foreign corporation doing business in the
Philippines to obtain a license to do business from the
Philippine Securities and Exchange Commission (“SEC”).
What is "doing business" in the Philippines under FIA?
1. soliciting orders,
2. service contracts,
3. opening offices, whether called "liaison" offices or
 SunChi Notes based on Discussion of Atty VV

branches; SOURCES OF INCOME

4. appointing representatives or distributors domiciled in
Income Principle From Sources Within
the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred Interest Where the If derived within the
eighty (180) days or more; capital is Philippines. Includes interest
5. participating in the management, supervision or control
employed on bonds, notes or other
of any domestic business, firm, entity or corporation in
interest bearing obligations of
the Philippines; and
residents
6. any other act or acts that imply a continuity of
commercial dealings or arrangements, and Dividends Where the Received from domestic corp.
contemplate to that extent the performance of acts or
capital is Received from foreign
works, or the exercise of some of the functions normally
employed corporation; if 50% or more of
incident to, and in progressive prosecution of,
the gross income of said
commercial gain or of the purpose and object of the
business organization corporation for the
immediately preceding 3 year
Acts not to be deemed "doing business" in the Philippines period was Philippine sourced
under FIA:
Services Where If performed within the
1. Mere investment as a shareholder by a foreign
service is Philippines.
entity in domestic corporations duly registered to do
performed
business, and/or the exercise of rights as such
investor;
Rentals Location of If property is located in the
2. Having a nominee director or officer to represent its
and property or Philippines.
interest in such corporation;
royalties interest in
3. Appointing a representative or distributor
domiciled in the Philippines which transacts such
business in the representative's or distributor's own property
name and account;
Sale of Location of If property is located in the
4. The publication of a general advertisement through
any print or broadcast media; Real property Philippines.
5. Maintaining a stock of goods in the Philippines Property
solely for the purpose of having the same processed
Sale of Sale of shares in a domestic
by another entity in the Philippines;
6. Consignment by a foreign entity of equipment with personal corporation
a local company to be used in the processing of property
For property Personal property purchased in
products for export;
purchased or outside the Philippines. but
7. Collecting information in the Philippines; and
and sold — sold within
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a place of sale
continuing basis, such as installing in the
For property For personal property produced
Philippines machinery it has manufactured or
produced and in whole or in part and sold
exported to the Philippines, servicing the same,
training domestic workers to operate it, and similar sold — outside; or produced in whole or
incidental services. apportioned in part and sold within; gain is
considered derived from partly
Non-Resident Foreign Corporation within and without the
A foreign corporation that is not engaged in or doing business Philippines.
in the Philippines.

Type of Corporation Tax Base Tax Rate

Domestic Corporation Worldwide 30% RCIT or

Income 2% MCIT,
whichever is
Resident Foreign Income from higher
Corporation (RFC) within the
Philippines RFC:
Branch profit
remittance tax

Non Resident Foreign Income from 30%, unless

Corporation (NRFC) within the otherwise
Philippines provided
(Sec. 28B)

Page 6 of 23
 SunChi Notes based on Discussion of Atty VV

CORPORATE INCOME TAX COMPUTATION ITEMIZED DEDUCTIONS (Section 34, NIRC)

(MIDTERM Q)
GROSS SALES (Selling) or xxx 1. Expenses
GROSS RECEIPTS (Services) 2. Interest
3. Taxes
Sales discounts / allowance (xxx) 4. Losses
5. Bad Debts
NET SALES / NET RECEIPTS xxx 6. Depreciation
7. Depletion
Cost of sales (xxx) 8. Charitable and other contributions
9. Research and Development
GROSS INCOME xxx 10. Pension Trust

Other taxable income xxx ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY OF

CERTAIN PAYMENTS [Section 34 (K)]
TOTAL GROSS INCOME xxx Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income or for
Allowable deductions (xxx) which depreciation or amortization may be allowed under
(Itemized deductions OR Optional Standard this Section, shall be allowed as a deduction only if it is
Deductions) shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal
TAXABLE INCOME xxx Revenue in accordance with this Section, Sections 58 and 81
of this Code.
Multiply by: regular tax rate: 30% 30%
ORDINARY AND NECESSARY TRADE, BUSINESS
RCIT xxx OR PROFESSIONAL EXPENSES
Requisites:
2% MCIT (based on total gross income) xxx 1. Paid or incurred during the taxable year
2. In carrying on or which are directly attributable to,
TAX DUE (higher between MCIT and xxx the development, management, operation and/or
RCIT) conduct of the trade, business or exercise of a
profession, including:
Tax Credit (xxx) a. salaries, wages, and other forms of
compensation for personal services actually
TAX DUE and PAYABLE xxx rendered, including the grossed-up
monetary value of fringe benefit furnished
by the employer to the employee, provided
GROSS SALES that the final tax imposed under Sec. 33 has
Total amount received for the sale of goods been paid;
b. travel expenses, here and abroad, while
GROSS RECEIPTS away from home in the pursuit of trade,
Amounts earned as gross revenue during the taxable year, for business or profession;
taxpayers engaged as sellers of services but employing the c. rentals and/or other payments which are
accrual basis of accounting for their income. Amounts required as a condition for the continued
actually or constructively received during the taxable year. use or possession, for purposes of the trade,
business or profession
COST OF GOODS SOLD d. entertainment, amusement and recreation
Include the purchase price or cost to produce the merchandise expenses not contrary to law, morals, public
and all expenses directly incurred in bringing them to their policy or public order
present location and use. 3. No deduction from gross income shall be allowed
unless the taxpayer shall substantiate with
COST OF SERVICES sufficient evidence, such as official receipts or other
Direct costs and expenses necessarily incurred to provide the adequate records:
services required by the customers and clients including: a. the amount of the expense being deducted,
● salaries and employee benefits of personnel, and
consultants and specialists directly rendering the b. the direct connection or relation of the
service, and expense being deducted to the development,
● cost of facilities directly utilized in providing the management, operation and/or conduct of
service such as depreciation of rental of equipment the trade, business or profession of the
used and cost of supplies taxpayer.

Bribes, Kickbacks and Other Similar Payments

No deduction from gross income shall be allowed for any

Page 7 of 23

payment made, directly or indirectly, to an official or
employee of the national government, or to an official or
employee of any local government unit, or to an official or
employee of a GOCC, or to an official or employee or
representative of a foreign government, or to a private
corporation, general professional partnership, or a similar
entity, if the payment constitutes a bribe or kickback.
SECTION 65, Tax Code. Business Expenses
Business expenses deductible from gross income include the
ordinary and necessary expenditures directly connected
with or pertaining to the taxpayer's trade or business.
The cost of goods purchased for resale, with proper
adjustment for opening and closing inventories, is deducted
from gross sales is computing gross income. Among the items
included in business expenses are management expenses,
commissions, labor, supplies, incidental repairs, operating
expenses of transportation, equipment used in the trade or
business, traveling expenses while away from home solely in
the pursuit of a trade or business, advertising and other
selling expenses, together with insurance premiums against
fire, storm, theft, accident, or other similar losses in the case
of a business, and rental for the use of business property. A
taxpayer is entitled to deduct the necessary expenses paid in
carrying on his business from his gross income from whatever
source.
What is ordinary and necessary expenses?
An expense is ORDINARY when it connotes a payment
which is normal in relation to the business of the
taxpayer under the circumstances. And the term ordinary
as used in Section 30 of the Revenue Code does not mean that
payments must be habitual or normal in that the same
taxpayer will have to make them often. The situation may be
unique in the life of an individual but it may still be ordinary
within the context of the law if it is not unique to the life of
the group, the community of which he is a part.
In this jurisdiction, an expense is considered NECESSARY
when the expenditure is appropriate and helpful in
developing and maintaining the taxpayer's business or
the same is proper for the purpose of realizing a profit
or minimizing a loss. And normally, a taxpayer will not
incur an expenditure unless required or justified by the needs
of the business. Proceeding on that logical assumption, the
courts are slow to override the taxpayer's judgment as to the
necessity for incurring the expenditure.
Requisites
1. Should be ordinary and necessary expenses
paid/incurred during the taxable year for the
development, management, operation and/or
conduct of the trade, business or profession such as:
o Salaries and other remuneration
o Travel expenses
o Rentals
o Entertainment, Amusement and
Recreation (EAR) expenses directly related
to or in furtherance of trade
2. Substantiated by Adequate Proof - documented
by official receipts or adequate records which reflect
the:
a. Amount being deducted
b. Connection or relation of expense to the
business/trade of the taxpayer
Page 8 of 23
SunChi Notes based on Discussion of Atty VV
3. Not contrary to law, morals, public policy or
order (e.g., bribes, kickbacks or similar payments)
4. The taxes required to be withheld (if
applicable) have been properly withheld and
remitted on time
Section 14 of RR No. V-1 (Bookkeeping Regulations)
Every purchase or expenditure by a taxpayer shall be
supported by an invoice or receipt issued by the vendor
or the person rendering the service. In case an invoice or
receipt is not issued, the taxpayer concerned shall require the
vendor to sign a purchase or expense voucher showing
the date, the quantity and description of the articles
purchased or the services rendered, the rate of tax to which
the articles were subjected, if subjected to the advance sales
tax in the case of importation or to the sales tax in the case of
locally manufactured or produced articles, the consideration
paid therefor, and the name and address of the vendor or
person rendering the service together with the number, date
and place of issue of his residence certificate.
RAMO N0. 1-87
Unless otherwise provided, substantiation must support
each claimed business or professional expense otherwise it
shall be disallowed, i.e.
a. receipts or adequate records
b. amount of expense
c. date and place of expense purpose of expense
d. professional or business relationship of expense
BIR Ruling DA-(TAR-001)-009-2009 dated January 13, 2009
In order to evidence their purchases of coco shells and rice
hulls from farmers and to claim said purchases as a
deductible expense, Company M is authorized to issue a
purchase voucher to the individual farmers from whom they
will purchase said items, subject to the condition that such
purchase invoice shall indicate the name and address of the
farmer, shall bear the farmer's signature and shall show the
name and address of the purchaser (i.e., Company IVI) as
well as the date when the transaction was effected and the
quantity, unit, cost and description of transaction.
Bookkeeping Regulations No. V-I, Chapter IV, as amended
by R.A. 1856, in relation to [then] Section 181 of the Tax
Code, as amended, exempts certain group of persons
from the requirement of issuing official receipts on
their sale or transfer of merchandise, namely: public
market vendors selling exclusively domestic meat,
fruit, vegetables, game poultry, fish and other
domestic food products.
The rationale thereof is that for such a group of people
conducting marginal economic activity, public interest is
served best when such group is allowed to take
advantage of modest opportunities without being
hampered with government requirements that they
cannot comprehend or comply anyway.
BUSINESS EXPENSE CAPITAL EXPENDITURE
Day to day operation Benefits future taxable period.
of the business. Short- Long-term, particularly over a
term. year.

ENTERTAINMENT, AMUSEMENT AND
RECREATIONAL EXPENSES (EAR)
(RR NO. 10-2002)
Coverage:
1. Individuals engaged in business, including taxable
estates and trusts;
2. Individuals engaged in the practice of profession;
3. Domestic corporations;
4. RFCs;
5. GPPs, including its members.
EAR
Includes representation expenses and/or depreciation of
rental expense relating to entertainment facilities.
Representation expenses
Expenses incurred by a taxpayer in connection with the
conduct of his trade, business or exercise of profession,
in entertaining, providing amusement and recreation
to, or meeting with, a guest or guests at a dining place, place
of amusement, country club, theater concert, play, sporting
event, and similar events or places.
Does NOT refer to fixed representation allowances that are
subject to withholding tax on wages.
NOTE: In the case of a country, golf, sports club, or any other
similar club where the employee or officer of the taxpayer is
the registered member and the expenses incurred in relation
thereto are paid by the taxpayer, there shall be a
presumption that such expenses are fringe benefits unless
proven that these are actually representation expenses.
For purposes of proving that said expense is a representation
expense and NOT fringe benefits, the taxpayer should
maintain receipts and adequate records that indicate the
following:
1. Amount of expense
2. Date and place of expense
3. Purpose of expense
4. Professional or business relationship of expense
5. Name of person and company entertained with
contact details
ENTERTAINMENT FACILITIES
• A yacht, vacation home or condominium and any
similar item of real or personal property used by
the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees.
• Must be owned or form part of the taxpayer's
trade, business or profession, or rented by such
taxpayer, for which the taxpayer claims a
depreciation or rental expense.
• Its use is in fact not restricted to specified officers
or employees or positions in such a manner as to
make it a fringe benefit.
GUESTS: Persons or entities with which the taxpayer has
direct business relations, such as but not limited to,
clients/customers or prospective clients/customers. The term
shall NOT include employees, officers, partners, directors,
stockholders, or trustees of the taxpayer.
Page 9 of 23
SunChi Notes based on Discussion of Atty VV
The following are NOT considered EAR expenses:
1. Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship
2. Expenses for charitable or fund raising events;
3. Expenses for bonafide business meeting of
stockholders, partners or directors;
4. Expenses for attending or sponsoring an employee to
a business league or professional organization
meeting;
5. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and
other similar events;
6. Other expenses of a similar nature.
Requisites of Deductibility of EAR
1. Paid or incurred during the taxable year
2. It must be:
a. directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer; or
b. directly related to or in furtherance of the
conduct of his or its trade, business or
exercise of a profession;
3. It must not be contrary to law, morals, good
customs, public policy or public order;
4. It must not have been paid, directly or indirectly,
to an official or employee of the GOCC, or of a
national government, or any LGU, or of a foreign
government, or to a private individual, or
corporation, or GPP, or a similar entity, if it
constitutes a bribe, kickback or other similar
payment;
5. It must be duly substantiated by adequate
proof. The official receipts, or invoices, or bills or
statements of accounts should be in the name of the
taxpayer claiming the deduction; and
6. The appropriate amount of withholding tax, if
applicable, should have been withheld therefrom
and paid to the Bureau of Internal Revenue.
CEILING ON EAR EXPENSES
sale of goods/properties 0.5% of net sales
(gross sales less sales
returns/allowances and
sales discounts)
sale of services 1% of net revenues
(including exercise of profession (gross revenues less
and use or lease of properties) discounts)
For taxpayers engaged in both sales of goods/properties and
services, use the apportionment formula.
Apportionment Formula
Net Sales/Net Revenues
_________________________________ x EAR
Total Net Sales and Net Revenues Expenses
 SunChi Notes based on Discussion of Atty VV

Illustration: 1. An indebtedness exists.

XYZ Corporation is engaged in the sale of goods and services 2. The interest has been paid or incurred.
with net sales/net revenue of PhP 400,000 and PhP 200,000 3. The indebtedness must be that of the taxpayer.
respectively. The actual EAR expense for the taxable quarter 4. The indebtedness is connected with the taxpayer's
totaled to PhP 6,000. trade, business or exercise of profession.
5. The interest was paid or incurred during the taxable
year.
Computation:
6. The interest is stipulated in writing.
APPORTIONMENT FORMULA:
7. The interest is legally due.
Sale of Goods (PhP 400,000/PhP 600,000) X PhP 6,000
8. The indebtedness is not between related taxpayers,
Sale of Services (PhP 200,000/PhP 600,000) x PhP 6,000
as defined in Section 36 (B) of the Tax Code.
9. The interest was not incurred to finance petroleum
MAXIMUM PERCENTAGE CEILING explorations.
Sale of Goods (PhP 400,000 x 0.50%) 10. If incurred on an indebtedness to acquire property,
Sale of Services (PhP 200,000 x 1%) the interest was NOT treated as a capital
expenditure.
Net EAR Maximum Claimable
Sales/Net Expense Percentage EAR Section 36(B)
Revenue based on Ceiling of Expense 1. Between members of a family. For purposes of this
(1) Apportionm EAR (Lower paragraph, the family of an individual shall include
ent Expense Between 2 only his brothers and sisters (whether by the whole
Formula* **(3) & 3) (4) or half-blood), spouse, ancestors, and lineal
(2) descendants; or
2. Except in the case of distributions in liquidation,
Sale of 400,000 4,000 2,000 2,000 between an individual and corporation more
Goods than fifty percent (50%) in value of the
outstanding stock of which is owned, directly
Sale of 200,000 2,000 2,000 2,000 or indirectly, by or for such individual; or
Services 3. Except in the case of distributions in liquidation,
between two corporations more than fifty
Total 600,000 6,000 4,000 4,000 percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or
NOTE: for the same individual if either one of such
Notwithstanding the ceiling on such expense, the claimed corporations, with respect to the taxable year of
expense shall be subject to verification and audit for the corporation preceding the date of the sale of
purposes of determining its deductibility as well as exchange was under the law applicable to such
compliance with the substantiation requirements. taxable year, a personal holding company or a
foreign personal holding company;
If after verification, a taxpayer is found to have shifted the 4. Between the grantor and a fiduciary of any
amount of the EAR expense to any other expenses in order to trust; or
avoid being subjected to the ceiling, the amount shifted shall
5. Between the fiduciary of and the fiduciary of a
be disallowed in its totality, without prejudice to such
trust and the fiduciary of another trust if the
penalties as may be imposed by the Tax Code.
same person is a grantor with respect to each trust;
REPORTING REQUIREMENT 6. Between a fiduciary of a trust and beneficiary
Taxpayer is required to use the account title "entertainment, of such trust.
amusement and recreation expense” in its FS and ITR, or to
disclose in the notes to FS the corresponding amount. LIMITATION ON THE AMOUNT OF DEDUCTIBLE
INTEREST EXPENSE
EAR expense should be reported in the taxpayer's ITR as a The amount of interest expense paid or incurred by a
separate expense item. taxpayer in connection with his trade, business or exercise of
a profession from an existing indebtedness shall be reduced
INTEREST EXPENSE by an amount equal to 33% (beginning January 1, 2009)
of the interest income earned which had been
(RR 13-00)
subjected to final withholding tax.
WHAT IS INTEREST?
Payment for the use or forbearance or detention of money,
regardless of the name by which it is called. It includes the
amount paid for the borrower's use of money during the term
of the loan, as well as for his detention of money after the due
date for its repayment.

Requisites for Deductibility of Interest Expense:

Page 10 of 23

Illustration:
Co. A has deposit with BCD bank. It obtained a loan from
XYZ Financing Corp. in connection with the operation of its
business. For the year 2009, assume the following:
Co. A’s net income before P 1,000,000
interest expense
Interest income (from BCD P 180,000
bank, gross of final tax)
Final tax on interest income P 36,000
Interest expense P 150,000
The deductible interest expense and the taxable income of
Co A is computed as follows:
Net income before P 1,000,000
interest expense
Less: Interest Expense P 150,000
Less: 33% of interest P 59,400
income from deposit (33%
x P 180,000)
Deductible Interest P 90,600
Expense
Taxable Income P 909,400
Interest incurred or paid on all unpaid business-related taxes
shall be fully deductible from gross income and shall not be
subject to the limitation on deduction.
Interest shall not be deducted in the following situations:
1. An individual taxpayer reporting income on the cash
basis incurs an indebtedness within the taxable year
on which an interest is paid in advance through
discount or otherwise.
Such interest shall be allowed as a deduction in the
year the indebtedness is paid.
2. If the indebtedness is payable in periodic
amortization, the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be allowed
as a deduction in such taxable year.
BIR Ruling DA-(C-119) 354-09 dated July 7, 2009
CPRC is a domestic corporation primarily engaged in the real
estate business. It has two major stockholders: 59.7% of its
issued and outstanding capital is owned by S Co. Employees’
Retirement Benefit Plan ("Retirement Plan") while 39.8% is
owned by S Company Limited of Korea (S Co.-Korea), a
foreign corporation listed at the Korean Stock Exchange.
CPRC obtained loans from S Co. on September 4, 1997 and
June 19, 2001. The proceeds of the loan were used by the
CPRC to acquire the land at the Calamba Park on which the
S Co. manufacturing facility currently stands. CPRC derives
rental income from the lease of the property
Page 11 of 23
SunChi Notes based on Discussion of Atty VV
ISSUE: Whether the loan transaction between CPRC and S
Co. IS NOT deemed an arrangement between related parties
and consequently, the interest paid and incurred by Company
C, is an allowable deduction from gross income
RULING:
In order for two corporations to be considered related
taxpayers, more than fifty percent (50%) of the outstanding
stock of each 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 or exchange was, under the law applicable
to such taxable year, a personal holding company or a foreign
personal holding company.
Based on the capital structure of both CPRC and S Co., it is
clear that no one individual owns more than 50% of the
outstanding capital stock of both companies. While the
Retirement Plan owns 59.7% of CPRC, such shareholding
cannot be attributed either to S Co. or to SC Korea. As an
established retirement plan duly approved by the BIR, all
benefits under the plan are payable S Co. employees and
therefore neither S Co. nor SC Korea derive any benefit from
the fund. Furthermore, they do not exercise control, either
individually or together, over the fund since it is managed by
an independent trustee, Bank B as successor-in-interest of
Bank F.
While CPRC and S Co. are affiliated corporations, they are
not considered related taxpayers. Consequently, the interest
payments by CPRC to S Co. on the loan shall be deductible
from the CPRC’s gross income.
Optional treatment by the taxpayer of interest expense
incurred to acquire property used in a trade or business may
be:
a. Allowed as ordinary deduction or
b. Treated as a capital expenditure.
LOSSES
Requirements:
1. actually sustained during the taxable year and
2. not compensated for by insurance or other forms
of indemnity
ORDINARY LOSSES
1. Incurred in trade, profession or business (e.g.
losses from destruction or disposal of inventory,
machinery or equipment which have been declared

as waste or obsolete due to spoilage, deterioration,
obsolescence, expiration or other causes, rendering
the same unfit for sale or for use in production.)
2. 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.
CAPITAL LOSSES
• losses from sales or exchanges of capital assets
(allowable only to the extent of capital gains)
• losses resulting from securities becoming
worthless and which are capital assets (considered
loss from sale or exchange) on the last day of the
taxable year
• losses from short sales of property
• losses due to failure to exercise privileges or
options to buy or sell property
OTHER KINDS OF LOSSES
• losses from wash sales of stock or securities
• wagering losses
• abandonment losses in petroleum operations
• losses due to voluntary removal of buildings,
machinery
• losses of the useful value of capital assets due to
some change in business conditions
Wash sales - illegal buying and selling of securities where no
real change of ownership takes place
CASUALTY LOSSES
The term CASUALTY is the complete or partial
destruction of property resulting from an identifiable
event of a sudden, unexpected or unusual nature. It
denotes accident, some sudden invasion by hostile agency,
and excludes progressive deterioration through steadily
operating cause.
THEFT: criminal appropriation of another’s property.
EMBEZZLEMENT: fraudulent appropriation of another’s
property by a person to whom it is entrusted or into whose
hands it has lawfully come.
RMO NO. 031-09, October 16, 2009
Policies and guidelines that shall govern the
declaration of casualty losses incurred by taxpayers,
and the reporting of such losses filed at the
concerned Revenue District Offices (RDOs)
Requisites for Deductibility:
A taxpayer may be entitled to claim as business deductions,
casualty losses incurred:
1. Properties actually used in the business
enterprise that were damaged
NOTE: The loss of assets not used in the
course of business and/or are personal in
nature shall therefore not be allowed.
2. Reported as losses in the appropriate declaration
filed with the BIR
3. Must have been properly reported as part of the
taxpayer's assets in the taxpayer's accounting
records and financial statements in the year
Page 12 of 23
SunChi Notes based on Discussion of Atty VV
immediately preceding the occurrence of the loss,
with the costs of acquisition clearly established and
recorded.
4. The amount of loss that shall be compensated by
insurance coverage should not be claimed as a
deductible loss.
If the insurance proceeds exceed the net book value
(cost minus depreciation) of the damaged assets, SUCH
EXCESS shall be subject to the regular income tax, but
not VAT, since the indemnification is not an actual sale of
goods by the insured company to the insurance company.
The deduction of assets as capital losses must be properly
recorded in the accounting reports, with the adjustment of
the applicable accounts.
The restoration of the damaged property or the acquisition of
new property to replace it must be properly recorded and
recognized as either repairs expense or capitalized asset.
Requirements for the
Filing of Claims of Casualty Loss:
Sworn Declaration of Loss, to be filed within 45 days
after the date of the event, stating:
a. Nature of the event that gave rise to such
loss(es), and the time of its occurrence;
b. Description and location of the damaged
property(ies);
c. Items needed to compute the loss(es), such
as:
i. cost or other basis of the
property(ies);
ii. depreciation allowed, if any;
iii. value of the property(ies) before and
after the event; and
iv. cost of repair
d. Amount of insurance or other compensation
received or receivable
The Sworn Declaration of loss must be supported by the
following documents:
1. The Financial Statements for the year
immediately preceding the event; and
2. Copies of the Insurance Policy(ies), if any, for
the concerned property(ies).
3. Proof of the elements of the loss(es) claimed, such as,
but not limited to, the following:
a. Photographs of the property taken before
and after the typhoon showing the extent of
the damage sustained.
b. Documentary evidence for determining
the cost or valuation of the damaged
property(ies), such as, but not limited to:
cancelled checks, vouchers, receipts, and
other evidence of costs.
c. Insurance policy, in the event that there
is an insurance coverage for the
property(ies).
d. Police report, in cases of robbery/theft
during the typhoon and/or as a consequence
of looting.
Failure to report a theft or robbery to the police can be held
against the taxpayer. However, a mere report of an alleged
 SunChi Notes based on Discussion of Atty VV

theft or robbery to the police authorities is not considered as corporation, is held by or on behalf of the same
conclusive proof of the loss arising therefrom. persons.

NOTE: All documents and other evidence submitted to prove
such loss(es) shall be subject to verification by the BIR.
They should be kept by the taxpayer as part of his tax records,
and be made available to the BIR Revenue Officer, upon audit
of his Income Tax return and the declaration of loss.
Revenue Regulations No. 12-77
The amount of casualty loss deductible is limited to the
DIFFERENCE between the value of the property
immediately preceding the casualty and its value
immediately thereafter, but SHALL NOT EXCEED an
amount equal to the cost or other adjusted basis of the
property, or depreciated cost in the case of property used in
business, reduced by any insurance or other compensation
received.
The fair market value of the property immediately before and
immediately after the casualty for purposes of determining
the amount of casualty loss deductible shall be ascertained
by an impartial but competent appraisal.
Net Operating Loss Carry Over (NOLCO)
NOLCO shall mean the EXCESS of allowable deduction
over gross income of the business in a taxable year.
The Net Operating Loss (NOL) of the business or enterprise
for any taxable year immediately preceding the current
taxable year, which had not been previously offset as a
deduction from gross income shall be carried over as a
deduction from gross income for the next 3
consecutive taxable years immediately following the
year of such loss.
NOTE: Any net loss incurred in a taxable year during which
the taxpayer was exempt from income tax shall not be
allowed as a deduction.
Section 2 of RR No.14-01
The allowance for deduction of NOLCO shall be limited only
to NOL accumulated beginning January 1, 1998.
In general, NOLCO shall be allowed as a deduction from the
gross income of the same taxpayer who sustained and
accumulated the NOL regardless of the change in its
ownership.
The 75% equity, ownership or interest rule shall only apply
to a transfer or assignment of the taxpayer's NOL as a result
of or arising from the said taxpayer's merger or consolidation
or business combination with another person.
In case the transfer or assignment of the taxpayer's NOLs
arises from the said taxpayer's merger, consolidation or
combination with another person, the transferee or assignee
shall not be entitled to claim the same as deduction from
gross income UNLESS, as a result of the said merger,
consolidation or combination, the shareholders of the
transferor/assignor, or the transferor (in case of other
business combinations) GAINS CONTROL OF AT LEAST:
▪ 75% or more in nominal value of the outstanding
issued shares or paid up capital of the
transferee/assignee (in case the transferee/assignee
is a corporation) or
▪ 75% or more interest in the business of the
transferee/assignee (in case the transferee/assignee
is other than a corporation).
MERGERS AND CONSOLIDATION:
MERGER: absorption of a corporation by another
corporation, the latter retaining its own name and identity
and acquiring the assets, liabilities, franchises and powers of
the former, and the absorbed corporation ceasing to exist as
a separate juridical person.
CONSOLIDATION: a situation when two or more
corporations are extinguished, and by the same process a new
one is created, taking over the assets and assuming the
liabilities of the said extinguished corporations; or the
unification of two or more corporations into a single new
corporation, having the combined capital, franchises and
powers of all its constituents.
COMBINATION: a situation when an owner of a business,
organized as a sole proprietorship, admits a partner in his
business for the purpose of forming a co-partnership, or any
such business combination which, in effect, is similar or
synonymous thereto.

This rule shall also apply in the case of a merger where the
taxpayer is the surviving entity.

Unless otherwise provided in the Regulations, NOLCO of the

taxpayer shall not be transferred or assigned to another
person, whether directly or indirectly, such as, but not
limited to, the transfer or assignment thereof through
a merger, consolidation or any form of business
combination of such taxpayer with another person.

NOLCO shall also be allowed if there has been no substantial

change in the ownership of the business or enterprise in that:
1. not less than 75% in nominal value of outstanding
issued shares, or
2. not less than 75% of the paid up capital of the
corporation, if the business is in the name of the

Page 13 of 23

The three-year reglementary period on the carry-over of
NOLCO shall continue to run notwithstanding the fact that
the corporation paid its income tax under the MCIT
computation.
NOLCO shall be availed of on a First-in First-out
(FIFO) basis.
The NOL incurred by a taxpayer in the year in which a
substantial change in ownership in such taxpayer occurs
shall NOT be affected by such a change in ownership.
Taxpayers ENTITLED to deduct NOLCO from gross
income (Section 4 of RR No. 14-2001)
Domestic and resident foreign corporations subject to the
normal income tax (e.g., manufacturers and traders) or
preferential tax rates (e.g., private educational institutions,
hospitals, and regional operating headquarters)
Taxpayers NOT entitled to deduct NOLCO from its
gross income (Section 4 of RR No. 14-2001)
● OBU of a foreign banking corporation
● Foreign Currency Depository Unit (FCDU) of a
domestic or foreign banking corporation
● Board of Investments (BOI) registered enterprises
enjoying the ITH incentive on their registered
activities; NOLCO sustained during period of ITH
may not be deducted.
● Enterprises registered with the PEZA and RA No.
7227 [e.g., Subic Bay Metropolitan Authority
(SBMA) registered enterprises] on their registered
activities; NOLCO sustained only during the period
of registration shall not be allowed.
● Foreign corporations engaged in international
shipping or air carriage business in the Philippines.
● Other persons, natural or juridical, enjoying
exemption from income tax; NOLCO sustained
during period of exemption shall not be allowed
Section 6 of RR No. 14-2001
In the case of BOI, PEZA and SBMA registered enterprises,
engaged in both registered and unregistered business
activities under any of the aforesaid laws (e.g., a corporation
with a BOI-registered activity enjoying Income Tax Holiday;
and other unregistered business activities not enjoying any
BOI incentive) the NOL or losses sustained or incurred by the
said enterprise from its registered activities shall not be
allowed as NOLCO deduction from its gross income derived
from the unregistered business activities
Page 14 of 23
SunChi Notes based on Discussion of Atty VV
Quarterly and Annual Availment of NOLCO:
NOLCO shall be allowed as deduction in computing the
taxpayer's income taxes per quarter and annual final
adjustment ITR. Provided that:
● If per the taxpayer's final annual adjustment ITR,
the entire operations for the year resulted to a NOL,
such NOL may be claimed as NOLCO deduction in
the immediately succeeding taxable year.
● NOLCO may be claimed as deduction only within a
period of 3 consecutive taxable years immediately
following the year the NOL was sustained or
incurred.
● In order that compliance with this three-year
statutory requisite may be effectively monitored, the
taxpayer shall, at all times, show its NOLCO
deduction, in its income tax return, as a separate
item of deduction.
● IN NO CASE may NOLCO be claimed, as a part of
the taxpayer's other itemized deductions, like under
deduction of "losses" in general.
● Corporations allowed to claim NOLCO deductions
effectively cannot enjoy the benefit of NOLCO for as
long as it is subject to MCIT in any taxable year.
● In this case, the running of the three-year period for
the expiry of NOLCO is not interrupted by the fact
that such corporation is subject to MCIT in any
taxable year during such three-year period.
Section 7 of RR No. 14-2001
• The NOLCO shall be separately shown in the
taxpayer's ITR (also shown in the Reconciliation
Section of the ITR)
• The Unused NOLCO shall be presented in the Notes
to the Financial Statements (FS) showing, in detail:
o The taxable year in which the NOL was
sustained or incurred, and
o Any amount thereof claimed as NOLCO
deduction within 3 consecutive years
immediately following the year of such loss.
• Failure to comply with this requirement will
disqualify the taxpayer from claiming the NOLCO.
BAD DEBTS
Debts resulting from the worthlessness or it being
uncollectible, in whole or in part, of the amounts due to the
taxpayer by others arising from money lent or from
uncollectible amounts of income from goods sold or services
rendered.
Requisites for deductibility [RR No. 5-99, as amended by
RR No. 25-2002]:
1. There must be an existing indebtedness due to
the taxpayer which must be valid and legally
demandable;
2. The same MUST NOT BE sustained in a
transaction entered into between related
parties.
3. The same must be connected with the taxpayer’s
trade, business or practice of profession;
4. The same must be actually charged off in the
books of accounts of the taxpayer as of the end of
the taxable year;
5. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year, EXCEPT FOR BANKS where the BSP

shall ascertain the worthlessness and
uncollectibility of the bad debts and shall approve
the writing-off of said debts.
Before a taxpayer may charge off and deduct a debt, he must
ascertain and be able to demonstrate with reasonable degree
of certainty the uncollectibility of the debt.
The CIR will consider all pertinent evidence, including:
1. The value of the collateral, if any, securing the debt
and the financial condition of the debtor in
determining whether the debt is worthless, or;
2. The assigning of the case of collection to an
independent collection lawyer who is not under the
employ of the taxpayer and who shall report on the
legal obstacle and the virtual impossibility of
collecting the same from the debtor and who shall
issue a statement under oath showing the propriety
of the deductions thereon made for alleged debts.
3. Also, in no case may a receivable from an insurance
or surety company be written-off from the
taxpayer's books and claimed as bad debts deduction
UNLESS such company has been declared closed
due to insolvency or for any such similar
reason by the Insurance Commissioner (e.g. flight
or disappearance of debtor).
Thus, where the surrounding circumstances indicate that a
debt is worthless and uncollectible and that legal action
to enforce payment would in all probability not result in the
satisfaction of execution on a judgment, a showing of these
facts will be sufficient evidence of the worthlessness of the
debt for the purpose of deduction.
While a mere hope probably will not justify postponement of
the deduction, a reasonable possibility of recovery will permit
the account to be carried along notwithstanding that the
probabilities are that the debt may not be collected at all. The
creditor may offer evidence to show some expectation that the
debt would have been paid in the intervening years, and that
subsequently, the hope was shattered or appeared to
have been unfounded.
If, for example, the creditor could show that during the years
he attempted to collect the debt, the debtor had property the
title of which was in dispute but which would enable him to
pay his debts when the title was cleared, the creditor would
be entitled to defer the deduction on the ground that there
was no genuine ascertainment of worthlessness.
In general, a debt is not worthless simply because it is of
doubtful value or difficult to collect. Worthlessness is not
determined by an inflexible formula or slide rule calculation
but upon the exercise of sound business judgment. The
determination of worthlessness in a given case must depend
upon the particular facts and the circumstances of the case.
A taxpayer may not postpone a bad debt deduction on the
basis of a mere hope of ultimate collection or because of a
continuance of attempts to collect notes which have long
become overdue, and where there is no showing that the
surrounding circumstances differ from those relating to other
notes which were charged off in a prior year.
CIRCUMSTANCES AFFECTING WORTHLESSNESS
1. The flight or disappearance of a debtor
2. Insufficiency of collateral
Page 15 of 23
SunChi Notes based on Discussion of Atty VV
3. Bankruptcy or insolvency
4. Loss of evidence of indebtedness
5. Death of debtor leaving no assets
6. Injury to debtor incapacitating him from work
7. Absence of visible properties of the debtor
8. Fruitless efforts to collect small amounts from
debtors scattered all over the country
AMENDMENTS UNDER RR 25-2002
Banks
• In the case of banks, the CIR shall determine
whether or not bad debts are worthless and
uncollectible in the manner provided in RR No. 5-99.
• Without prejudice to the Commissioner’s
determination of the worthlessness and
uncollectibility of debts, the taxpayer shall submit a
BSP/Monetary Board written approval of the writing
off of the indebtedness from the banks’ books of
accounts at the end of the taxable year.
Receivables from insurance / surety companies
IN NO CASE may a receivable from an insurance or surety
company be written off from the taxpayer’s books and claimed
as bad debts deduction UNLESS such company has been
declared closed due to insolvency or for any such similar
reason by the Insurance Commissioner.
TAX BENEFIT RULE ON RECOVERY OF BAD DEBTS
A debt which was previously found to be worthless and
written-off in a prior year and subsequently collected does not
render the deduction unallowable or illegal.
DEPRECIATION
There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property
used in trade or business. In the case of property held by one
person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the
absolute owner of the property and shall be allowed to the life
tenant.
In the case of property held in trust, the allowable deduction
shall be apportioned between the income beneficiaries and
the trustees in accordance with the pertinent provisions of
the instrument creating the trust, or in the absence of such
provisions, on the basis of the trust income allowable to each.
Depreciation includes:
• The gradual diminution in the service or useful
value of tangible property due from exhaustion,
wear and tear and normal obsolescence
• Amortization of the value of intangible assets the
use of which in the trade or business is definitely
limited in duration.
REQUISITES FOR DEPRECIATION DEDUCTION
1. Must be reasonable;
2. Must be for property used or employed in the
business, or temporarily not in use;
3. Must be charged off during the taxable year; and
4. Must be supported by a statement submitted
together with the tax return.

Methods of Computing Depreciation
1. Straight-line method - calculated by simply
dividing the cost of an asset, less its salvage value,
by the useful life of the asset.
Cost of the asset is the purchase price of the
asset.
Salvage value is the value of the asset at the
end of its useful life.
Useful life of asset represents the number of
periods in which the asset is expected to be used
by the company.
e.g.
Useful life of property: 5 years
Net cost of the property: 300,000
Depreciation per year (300,000/5)= 60,000
2. Declining-balance method
3. Sum-of-the-years digit method
4. Any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
BIR
CHANGING THE USEFUL LIFE OF PROPERTY
BIR Ruling No. 042-2010 dated August 27, 2010
Issue: Whether Company N can change the useful life of its
assets for the purpose of claiming depreciation as a deduction
for income tax purposes
RULING:
Company N can change the useful life of the assets pursuant
to Section 34(F) which states that a reasonable allowance for
the exhaustion and wear and tear of property used in trade
or business is allowed as a depreciation deduction.
The taxpayer and the BIR Commissioner may agree on
the estimated useful life and the rate of depreciation of any
property, which rate shall be binding to the taxpayer and the
BIR. However, if the useful life of the property estimated
under previous factual conditions is no longer reasonable, the
law allows the taxpayer to lengthen or shorten the
property’s useful life in light of prevailing factual conditions.
METHOD OF COMPUTING DEPRECIATION
BIR Ruling DA (TAR-010) 496-2009 dated Sept. 8, 2009
Issue: Requesting for a ruling on the proper computation of
Company R’s depreciation expense for tax purposes upon its
adoption of the International Accounting Standards (IAS) No.
16 for financial statement purposes.
Ruling: Company R may compute its depreciation expense for
each component of the PPE by dividing the net book value
prior to the application of IAS by the remaining useful life as
re estimated by Cuervo.
RMC No. 70-2010
Circularizes the revocation of BIR Ruling Nos. DA- 413-04
dated July 30, 2004 and DA-436-04 dated August 12, 2004
and clarifies the basis in computing depreciation of property,
plant and equipment.
Page 16 of 23
SunChi Notes based on Discussion of Atty VV
The SC, in its Decision in GR No. L-224992, 5 September
1967, held that depreciation of an asset must be
premised on its acquisition cost, and not on its
reappraised value.
The BIR reiterated said principle in RAMO No. 1-00 (dated
March 17, 2000), which states that, “No depreciation is
allowed on the appraisal increase of fixed assets. Any
foreseeable salvage value is to be deducted from the
cost of the asset in determining the basis of
depreciation”.
SHORTENING OF THE DEPRECIABLE LIFE
BIR Ruling DA 031-03 dated February 3, 2003
Allowed the shortening of the depreciable life of the building
from 45 years which is the estimated useful life of the
building to 25 years which is the lease term of the land
subject to certain adjusting entries for claiming depreciation
expense. Hence, the current net book value of the building
can be amortized over the remaining term of the lease. This
is allowed under the Income Tax Regulations and GAAP.
Issues:
Whether Company KL can write-off in its books the assets in
its manufacturing plant in San Pedro, Laguna to the extent
of its net book value as of December 31, 2008 and for selected
assets, to the extent of its net book value as of December 31,
2007; and
Whether Company KL can shorten the useful lives of its
vehicles to be consistent with the standard worldwide policy
of Company KW limiting the depreciable life of automobiles
to only four (4) years, instead of five (5) years.
RULING:
In BIR Ruling No. 076-94 dated February 21, 1994, machines
or equipment which are discarded, or the use of which has
been abandoned “if charged off in the books and fully
explained in the income tax return shall be deductible from
the taxpayer’s gross income to the extent of its net book value.
Therefore, Company KL can write-off in its books the assets
in its manufacturing plant in San Pedro, Laguna to the
extent of its net book value as of December 31, 2007.
As regards the shortening of the useful lives Company KL’s
vehicles to be consistent with the standard worldwide policy
of Company KW, the taxpayer and the Commissioner may
agree on the estimated useful life and rate of depreciation of
any property. The rate so agreed upon shall be binding on
both the taxpayer and the BIR. Thus, Company KL can
shorten the useful lives of its vehicles to four years (4) from
five (5) years.
DEPRECIATION OF INTANGIBLES
Section 107 of RR No. 2
Intangibles, the use of which in business is definitely limited
in duration, may be the subject of a depreciation allowance
(e.g., patents, copyrights, franchises).
Intangibles, the use of which in the business is not so limited,
WILL NOT usually be a proper subject of such an allowance.

If an intangible asset acquired through a capital expenditure
is known from experience to be of value in the business for
only a limited period, the length of which can be estimated
from experience with reasonable certainty, such intangible
asset may be the subject of a depreciation allowance, provided
the facts are fully shown in the return or prior thereto to the
satisfaction of the CIR.
BIR Ruling DA 162-2007 dated March 20, 2007
Issue: Whether Company A may deduct the full amount of
the purchase price paid for the Trademarks from its taxable
income as amortization expense over a period of ten (10)
years.
RULING:
The taxpayer is allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property
used in its trade or business.
With regard to intangible assets such as trademarks, these
may be considered as depreciable assets upon showing that
their use in trade or business is definitely limited in duration
in accordance with Section 107 of RR 2. Since the Trademarks
to be sold by Company N to Company A have a remaining
lifespan of 10 years, they are regarded as intangible assets
that are subject to depreciation.
DEPLETION
Exhaustion of natural resources as a result of production or
severance.
A reasonable allowance for depletion shall be allowed as
deduction:
• for entities engaged in oil and gas wells or mines
• under a cost depletion method
• not permitted if depletion allowance has equaled the
invested capital
CHARITABLE CONTRIBUTION
Contributions or gifts actually paid or made within the
taxable year to, or for the:
1. use of the Government of the Philippines or any of
its agencies or any political subdivision thereof
exclusively for public purposes, or
2. to accredited domestic corporations or associations
organized and operated exclusively for religious,
charitable, scientific, youth and sports development,
cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare
institutions, or to non-government organizations, in
accordance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation
of the Commissioner.
LIMITATION
Private stockholder Ten percent (10%) of taxable
or individual income derived from trade, business
or profession
Corporation Five percent (5%) of taxable
income derived from trade,
business or profession
Page 17 of 23
SunChi Notes based on Discussion of Atty VV
Requisites for Deductibility
RR No. 2-2003
• Evidence or proof submitted to the BIR by showing
the Certificate/s of Donation and indicating therein
the following:
o Actual receipt by the accredited non-stock,
non-profit corporation/ Non- Governmental
Organization (NGO) of the donation or
contribution and the date of receipt thereof;
and
o The amount of the charitable donation or
contribution, if in cash; if property,
whether real or personal, the acquisition
cost of the said property.
• For donation worth over P 50,000*, notice to the
RDO is required and Certificate of Donation must
be attached.
Donations to the following shall be allowed FULL
deductibility:
1. Donations to the Philippine Government or to
any of its agencies or political subdivisions,
including fully owned government corporations
exclusively to finance, to provide for, or to be used
in undertaking priority activities in education,
health, youth and sports development, human
settlements, science and culture, and in economic
development according to a national priority plan
to be determined by the National Economic and
Development Authority (NEDA), in consultation
with appropriate government agencies, including
its regional development councils, and private
philanthropic persons and institutions;
2. Donations to foreign institutions or
international organizations to whom the
Philippine Government has treaties or
commitments with or covered by special laws;
3. Donations to accredited NGOs subject to
conditions set forth in RR No. 13-98
4. Donations of prizes and awards to athletes
(Section 1 of RA No. 7549)
Donations actually paid or made to accredited NGOs shall be
allowed full deductibility, subject to the following conditions:
1. The accredited NGO shall make utilization directly
for the active conduct of the activities, constituting
the purpose or function for which it is organized an
operated, not later than the 15th day of the third
month after the close of the accredited NGOs taxable
year in which contributions are received, unless an
extended period is granted by the Secretary of
Finance, upon recommendation of the
Commissioner.
“UTILIZATION”
Any amount in cash or in kind, including administrative
expenses, paid or utilized by an accredited NGO to
accomplish one or more purposes for which it was created or
organized; or
Any amount paid to acquire an asset used, or held for use,
directly in carrying out one or more purposes for which the
accredited NGO was created or organized; or

Any amount set aside for a specific project which comes
within one or more purpose or purposes for which the
accredited NGO was created, but only if at the time such
amount is set aside, the accredited NGO has established to
the satisfaction of the CIR that the amount will be utilized
for a specific project within a period not to exceed five (5)
years, and the project is the one which can be better
accomplished by setting aside such amount than by
immediate payments of funds: Provided, That, the utilization
requirements prescribed under Section 5 of these Regulations
shall be complied with; or
Any amount in cash or in kind invested in any activity related
to the purpose for which it was created or organized.
Any amount in cash or in kind invested in capital sustaining
and generating activities, such as but not limited to,
endowment funds, trust funds, money market placements,
shares of stock and similar instruments: Provided, That, any
income derived from these investments shall be exclusively
used in activities directly related to one or more purposes for
which the accredited NGO was created or organized.
2. The amount of any charitable contribution of
property other than money shall be based on the
acquisition cost of said property.
3. All members of the Board of Trustees of the non-
stock, non-profit corporation, organization or NGO
do not receive compensation or remuneration for
their service to the aforementioned organization.
4. The level of administrative expenses of the
accredited NGO, shall, on an annual basis, not
exceed 30% of the total expenses for the taxable year.
5. In the event of dissolution, the assets of the
accredited NGO, would be distributed to another
accredited NGO organized for similar purpose or
purposes, or to the State for public purpose, or would
be distributed by a competent court of justice to
another accredited NGO 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.
Non-government Organization (NGO) shall refer to a non-
stock non-profit domestic corporation or organization as
defined under Section 34 (H) (2) (c) (1) of the 1997 Tax Code
organized and operated exclusively for:
1. Scientific
2. Research;
3. Educational;
4. Character-building and youth and sports
development;
5. Health;
6. Social welfare;
7. Cultural or charitable purpose; and
8. or a combination thereof, no part of the net income
of which inures to the benefit of any private
individual.
DONATIONS DEDUCTIBLE IN FULL UNDER SPECIAL
LAWS:
• The Integrated Bar of the Philippines (IBP) (PD No.
181)
Page 18 of 23
SunChi Notes based on Discussion of Atty VV
• Development Academy of the Philippines (DAP) (PD
No. 205)
• Aquaculture Department of SEA Fisheries and
Development Center (SEAFDEC) (PD No. 292)
• University of the Philippines (UP) and other State
Colleges and Universities (Various Charters)
• Cultural Center of the Philippines (CCP)
• National Commission for Culture and Arts (NCCA)
• International Rice Research Institute (IRRI
• Department of Science and Technology (DOST)
• International Red Cross and Red Crescent
Movement/Philippine National Red Cross
LIMITATIONS
Donations to accredited non-stock, non-profit corporations
shall be allowed LIMITED deductibility as follows:
For corporate donor - not in excess of 5% of the donor’s
income derived from trade, business or profession computed
before the donation.
Non-stock, non-profit domestic corporation or
organization shall refer to a corporation or
association/organization referred to under section 30 (E) and
(G) of the 1997 Tax Code or organized under Philippine laws
exclusively for one or more of the following purposes:
1. religious;
2. charitable;
3. scientific;
4. athletic;
5. cultural;
6. rehabilitation of veterans; and
7. social welfare
No part of the net income or asset of which shall belong to or
inure to the benefit of any member, organizer, officer or any
specific person.
RESEARCH AND DEVELOPMENT
All costs incident to the development of an experimental on
pilot model, a plant process, a product, a formula or invention
or similar property, and the improvement of already existing
property of the type mentioned. [US International Revenue
Service (IRS) Regulation, Section 1.174-2 (a) (1)]
A taxpayer may treat research or development expenditures
which are paid or incurred by him during the taxable year in
connection with his trade, business or profession as
ordinary and necessary expenses which are not
chargeable to capital account. The expenditures so
treated shall be allowed as a deduction during the taxable
year when paid or incurred.
Amortization of Certain Research and Development
Expenditures
At the election of the taxpayer and in accordance with the
rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, the
following research and development expenditures may be
treated as deferred expenses:
a. Paid or incurred by the taxpayer in connection with
his trade, business or profession;

b. Not treated as expenses under paragraph (1) hereof;
and
c. Chargeable to capital account but not chargeable to
property of a character which is subject to
depreciation or depletion.
In computing taxable income, such deferred expenses shall be
allowed as a deduction ratably distributed over a period of
not less than sixty (60) months as may be elected by the
taxpayer (beginning with the month in which the taxpayer
first realizes benefits from such expenditures).
The method so elected, and the period selected by the
taxpayer, shall be adhered to in computing taxable income for
the taxable year for which the election is made and for all
subsequent taxable years unless, with the approval of the
Commissioner, a change to a different method is authorized
with respect to a part or all of such expenditures. The election
shall not apply to any expenditure paid or incurred during
any taxable year prior to the taxable year for which the
taxpayer makes the election.
Research and Development – when allowed as a deduction?
• If incurred in connection with the trade, business or
profession of the taxpayer; and
• If not charged to capital account
Treatment of Research & Development as Deferred Expense
At the option of the taxpayer, the R and D expenditures may
be treated as deferred expenses:
• if paid or incurred in connection with trade, business
or profession
• if not treated as expense; and
• if chargeable to capital account not subject to
depreciation.
If treated as deferred expense, the R and D shall be amortized
over a period of not less than 60 months.
Expenses not considered as Research & Development
• Expenditures for acquisition or improvement of
land, or for the improvement of property to be used
in connection with R and D of a character which is
subject to depreciation and depletion; and
• Expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent, or
quantity of any deposit of ore or other mineral,
including oil or gas
PENSION TRUST
Requisites for deductibility of payments to pension trusts
1. There must be a pension or retirement plan
established to provide for the payment of reasonable
pensions to employees;
2. The pension plan is reasonable and actuarially
sound;
3. It must be funded by the employer;
4. The amount contributed must no longer be subject
to the employer’s control or disposition; and
5. The payment has not theretofore been allowed
before as a deduction.
In order to avail of the exemption, with respect to retirement
benefits, the following requirements must be met:
Page 19 of 23
SunChi Notes based on Discussion of Atty VV
1. The plan must be reasonable;
2. The retiring official or employee must have been in
the service of the same employer for at least 10 years
and is not less than 50 years of age at the time of
retirement; and
3. The retiring official or employee shall not have
previously availed of the privilege under a
retirement benefit plan of the same or another
employer.
Requisites of a Reasonable Retirement Benefit Plan
A. Written Program. - It must be a definite written program
setting forth all provisions essential for qualification;
B. Permanency. — It must be a permanent and continuing
program unless sooner terminated by virtue of a valid
business reason;
C. Coverage — It must cover at least 70% of all officials
and employees. If the plan provides eligibility requirements
and at least 70% of all officials and employees meet the
eligibility requirements, at least 80% of those eligible
must be covered.
Under this basis, the following employees are excluded:
1. Employees who have been employed less than the
minimum length of time stated in the plan;
2. Employees who work 20 hours a week or less; and
3. Seasonal employees who work 5 months a year or
less.
If the employee does not wish to cover the greater portion of
his employees, he may set up a plan under a classification
set-up prescribed by him and limit coverage to employees in
a certain classification, over a prescribed age, employed for a
stated number of years; etc. provided that the coverage of the
plan must not discriminate in favor of officers,
shareholders, supervisors, or highly compensated
employees.
A classification shall not be considered discriminatory merely
because:
1. it is limited to salaried or clerical employees. Neither
shall a plan be considered discriminatory
2. the contributions or benefits of or on behalf of the
employees under the plan bear a uniform
relationship to the total compensation, or the basis
or regular rate of compensation, and the employees'
length of service.
D. Contribution. — The employer, or officials and
employees, or both, shall contribute to a trust fund for the
purpose of distributing to the officials and employees or their
beneficiaries, the corpus and income of the fund accumulated
by the trust in accordance with the plan.
E. Impossibility of Diversion. — The corpus or income of
the trust fund must at no time be used for, or diverted to, any
purpose other than for the exclusive benefit of the said
officials and employees.
F. Non-discriminatory. — There must be no discrimination
in contributions or benefits in favor of officials and employees
who are officers, shareholders, supervisors, or highly
compensated.

G. Non-forfeitures. — It must provide for non-forfeitable
rights, that is upon the termination of the plan or upon the
complete discontinuance of contributions under the plan, the
rights of each official or employee to benefits accrued to the
date of such termination or discontinuance, to the extent then
funded, or the rights of each employee to the amounts
credited to his account at such time are non-forfeitable.
H. Forfeitures. — The plan must expressly provide that
forfeitures arising from severance of employment, death or
for any other reason, must not be applied to increase the
benefits any employee would otherwise receive under the
plan at any time prior to the termination of the plan at the
complete discontinuance or employer contributions
thereunder. The amounts so forfeited must be used as soon
as possible to reduce the employer's contributions under the
plan.
I. Trust. — The retirement fund shall be administered by a
trust.
Limitations on Deductions
Contribution made to a pension trust may be claimed as a
deduction in the following manner:
Amount Deductibility
contributed for
Current service 100% deductible
cost
Past service cost 1/10 of the amount contributed is
deductible in the year the
contribution is made.
The remaining balance will be
amortized equally over nine
consecutive years.
What constitutes a “reasonable private benefit plan”?
If the Plan meets the requirements of RA No. 4917 (An Act
Providing That Retirement Benefits Of Employees Of Private
Firms Shall Not be Subject to Attachment, Levy, Execution,
Or Any Tax Whatsoever, as implemented by RR No. 1-68), the
employer can deduct its contribution to the Retirement Fund,
subject to the conditions of Section 34(j) of the Tax Code and
Section 118 of RR No. 2.
RA No. 4917 and Section 32 (B) (6) (a) of the 1997 Tax Code:
Reasonable private benefit plan means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer
for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to,
any purpose other than for the exclusive benefit of the said
officials and employees.
Certificate of Tax-exemption for a “reasonable private benefit
plan”
Section 6 of RR No. 1-68, as amended by RR No. 1-83 which
implement RA No. 4917 provides that before availing of the
Page 20 of 23
SunChi Notes based on Discussion of Atty VV
privileges afforded by pension, gratuity, profit-sharing, or
stock bonus plans, a certificate must be secured by the
employer to the effect that the qualification of the plan for
tax-exemption has been determined.
Documents Required to Obtain a Certificate of Tax-
Exemption
In securing such certification, the employer must file a
written application with the CIR, attaching the following
documents:
A. In the case of a trusteed plan
• BIR Form No. 17.60 duly accomplished;
• A copy of the written program constituting the Plan;
• A copy of the Trust Agreement executed by and
between the employer as trustor and the
trustee/trustees of the employees retirement trust
fund, duly signed by the parties to the trust and
acceptance by the trustee/trustees indicated;
• Statement of Actuarial Assumption or Valuation
duly certified to by an independent consulting
actuary who must be a Fellow of the Actuarial
Society of the Philippines (in the case of fixed-
benefit type of Plan); and
• Such other documents which the Commissioner
may consider necessary in the final determination
of the Plan for tax- exemption under RA No.4917
and these regulations.
B. In the case of a non-trusteed/insured plan
• BIR Form No.1760 duly accomplished;
• A copy of the written program constituting the Plan;
• A copy of the Deposit Administration Contract
Deferred Annuity Contract executed by and
between the employer or the insured or policyholder
and the Insurance Company as the insurer; and
• Such other documents which the Commissioner
may consider necessary in the final determination
of the publication of the Plan for tax-exemption
C. In the case of Multi-employer Plans
• The same documentation requirements for the
trusteed and non-trusteed plan, as the case may be.
• These documents should be submitted for each of
the participating employers together with the
Participating Agreement.
Amendment to change corporate name and other changes in
the retirement plan will not affect the retirement plan’s
qualification as a “reasonable retirement plan”
Kinds of Private Retirement Benefit Plans
[BIR Ruling No. 116-90 dated June 8, 1990]
There are two kinds of private retirement benefit plans,
depending on the funding instruments adopted and used by
the employer:
1. Trusteed Plan
2. Non-trusteed Plan/Insured Plan
Deductibility of the premiums paid to an insured/non-
trusteed plan [BIR Ruling No. 116-90 dated June 8, 1990]
An employer’s past service contributions to its employee’s
retirement pension plan are deductible only when such

contributions are made or accrue to a trust. [Section 29 (i)
now Section 34 (j) of the Tax Code]
An insured plan established and maintained by an employer
under a Deposit Administration Contract executed by and
between the employer as the insured or policyholder and an
insurance company as the insurer is a non-trusteed plan.
The relationship between the employer and the insurance
company is that of an insured and insurer and not one of
trustor and trustee.
Insurance companies under Philippine laws are insurers and
are not authorized to perform trust functions. Such being the
case, an employer is not entitled to a deduction for past
service liability contribution made to an insured or non-
trusteed plan such as one under a Deposit Administration
Contract.
ADDITIONAL REQUIREMENT FOR
DEDUCTIBILITY
REVENUE REGULATIONS NO. 06-18
Requirements for Deductibility
Any income payment which is otherwise deductible under the
Code shall be allowed as a deduction from the payor's gross
income only if it is shown that the income tax required
to be withheld has been paid to the Bureau in
accordance with Secs. 57 and 58 of the Code.
A deduction will also be allowed in the following cases where
no withholding of tax was made:
1. The payee reported the income and pays the tax due
thereon and the withholding agent pays the tax
including the interest incident to the failure to
withhold the tax, and surcharges, if applicable, at
the time of the audit/investigation or
reinvestigation/reconsideration.
2. The recipient/payee failed to report the income on
the due date thereof, but the withholding
agent/taxpayer pays the tax, including the interest
incident to the failure to withhold the tax, and
surcharges, if applicable, at the time of
audit/investigation or
reinvestigation/reconsideration.
3. The withholding agent erroneously underwithheld
the tax but pays the difference between the correct
amount and the amount of tax withheld including
the interest, incident to such error, and surcharges,
if applicable, at the time of the audit/investigation or
reinvestigation/reconsideration.
Items of deduction representing return of capital such as
those pertaining to purchases of raw materials forming part
of finished product or purchases of goods for resale, shall be
allowed as deductions upon withholding agent's payment of
the basic withholding tax and penalties incident to non-
withholding or underwithholding.
Page 21 of 23
SunChi Notes based on Discussion of Atty VV
OPTIONAL STANDARD DEDUCTION
REVENUE REGULATIONS NO. 16-08
Persons Covered. — The following may be allowed to claim
OSD in lieu of the itemized deductions (i.e., items of ordinary
and necessary expenses allowed under Sections 34 (A) to (J)
and (M), Section 37, other special laws, if applicable):
Individuals
1. Resident Citizen
2. Non-resident citizen
3. Resident Alien
4. Taxable estates and trusts
Corporations
1. Domestic corporation
2. Resident foreign corporation
Individuals Corporations
MAXIMUM OF 40% OF MAXIMUM OF (40%) OF
GROSS SALES OR THEIR GROSS INCOME
GROSS RECEIPTS
during the taxable year
If the individual is on the accrual basis of accounting for his
income and deductions, the OSD shall be based on the gross
sales during the taxable year. On the other hand, if the
individual employs the cash basis of accounting for his
income and deductions, the OSD shall be based on his gross
receipts during the taxable year.
It should be emphasized that the "cost of sales" in case of
individual seller of goods, or the "cost of services" in the case
of individual seller of services, are not allowed to be deducted
for purposes of determining the basis of the OSD pursuant to
this Section inasmuch as the law (R.A. 9504) is specific as to
the basis thereof which states that for individuals, the basis
of the 40% OSD shall be the "gross sales" or "gross receipts"
and not the "gross income".
"Gross Income" shall mean the gross sales less sales
returns, discounts and allowances and cost of goods sold.
"Gross sales" shall include only sales contributory to income
taxable under Sec. 27 (A) of the Code. "Cost of goods sold"
shall include the purchase price or cost to produce the
merchandise and all expenses directly incurred in bringing
there to their present location and use.
For trading or merchandising concern, "cost of goods
sold" means the invoice cost of goods sold, plus import duties,
freight in transporting the goods to the place where the goods
are actually sold, including insurance while the goods are in
transit.
For manufacturing concern, "cost of goods sold" means all
costs incurred in the production of the finished goods such as
raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or
warehouse. The term may be used interchangeably with "cost
of goods manufactured and sold".
In the case of sellers of services, the term "gross income"
means the "gross receipts" less sales returns, allowances,
discounts and cost of services.

"Cost of services" means all direct costs and expenses
necessarily incurred to provide the services required by the
customers and clients including (a) salaries and employee
benefits of personnel, consultants and specialists directly
rendering the service, and (b) cost of facilities directly utilized
in providing the service such as depreciation or rental of
equipment used and cost of supplies. Provided, however, that
"cost of services" shall not include interest expense except in
the case of banks and other financial institutions. The term
"gross receipts" as used herein means amounts actually or
constructively received during the taxable year. However, for
taxpayers engaged as sellers of services but employing the
accrual basis of accounting for their income, the term "gross
receipts" shall mean amounts earned as gross revenue during
the taxable year.
MINIMUM CORPORATE INCOME TAX
WHO ARE LIABLE
Domestic and RFCs
1. Whenever such corporation has zero or negative
taxable income
2. Whenever the amount of MCIT is greater than the
normal income tax due from such corporation
Limitations:
• The MCIT shall apply only to domestic and resident
foreign corporations subject to the normal corporate
income tax
• In the case of a domestic corporation whose
operations or activities are partly covered by the
regular income tax system and partly covered under
a special income tax system, the MCIT shall apply
on operations covered by the regular corporate
income tax system.
• In computing the MCIT due from a resident foreign
corporation, only the gross income from sources
within the Philippines shall be considered for such
purpose.
When does MCIT commence?
• MCIT is imposed upon any domestic corporation
beginning the fourth taxable year in which such
corporation commenced its business operations.
• The taxable year in which business operations
commenced shall be the year when the corporation
registers with the BIR.
• For purposes of the MCIT, the taxable year in which
the business commenced shall be the year in which
the domestic corporation registered with the BIR
(not in which the corporation started commercial
operations)
Illustration:
Page 22 of 23
SunChi Notes based on Discussion of Atty VV
EXEMPTION FROM MCIT
1. Domestic corporations operating as proprietary
educational institutions subject to tax at 10% on
their taxable income;
2. Domestic corporations engaged in hospital
operations which are nonprofit subject to tax at 10%
on their taxable income;
3. Domestic corporations engaged in business as
depository banks under the expanded foreign
currency deposit system on their income from
foreign currency transactions which has been
subjected to final income tax at 10%;
4. RFCs engaged in business as “international carrier”
subject to tax at 2 1/2 % of their “Gross Philippine
Billings (GPBs)”;
5. RFCs engaged in business as Offshore Banking
Units (OBUs) on their income from foreign currency
transactions which has been subjected to a final
income tax at 10% of such income
6. RFCs engaged in business as Regional Operating
Headquarters (ROHQs) subject to tax at 10% of their
taxable income; and
7. Firms that are taxed under a special income tax
system such as the Philippine Economic Zone
Authority (PEZA) law (RA No. 7916), the Bases
Conversion Development Act (BCDA) (RA No. 7227)
and firms enjoying Income Tax Holiday (ITH) under
Executive Order (EO) No. 226.
TAX RATE: Two percent (2%) of the Gross Income
The term ‘gross income’ shall be equivalent to gross sales
less sales returns, discounts and allowances and cost of goods
sold. ‘Cost of goods sold’ shall include all business expenses
directly incurred to produce the merchandise to bring them
to their present location and use.
If apart from deriving income from core business activities
there are other items of gross income realized or earned by
the taxpayer which are subject to the normal corporate
income tax, must be included as part of gross income for
computing MCIT.
This means that the term “gross income” will also include all
items of gross income enumerated under Section 32 (A) of the
1997 Tax Code, except:
• Income exempt from income tax and
• Income subjected to final withholding tax.
Clarifying the Scope of the Term "Direct Costs and Expenses"
that Should Comprise the "Cost of Services" for Purposes of
Computing the Gross Income Subject to the 2% MCIT
(RMC No. 24-2008)
• For SELLERS OF SERVICES, “gross income”
means gross receipts less sales returns, allowances,
discounts and cost of services.
• “Cost of services” shall mean all direct costs and
expenses necessarily incurred to provide the services
required by the customers and clients including:
• Salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service and
 SunChi Notes based on Discussion of Atty VV

• Cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment
used and cost of supplies.
• "DIRECT COSTS AND EXPENSES" shall only
pertain to those costs exclusively and directly
incurred in relation to the revenue realized by the
sellers of services. These refer to costs which are
considered indispensable to the earning of the
revenue such that without such costs, no revenue
can be generated.
• “Expenses and other costs dispensed other than
"direct costs and expenses" are not items allowed for
inclusion to "cost of services“.
Quarterly MCIT Computation (RR No. 12- 2007)
• The computation and the payment of MCIT, shall
likewise apply at the time of filing the quarterly
corporate income tax return.
• In the computation of the tax due for the taxable
quarter, if the quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be paid
for such taxable quarter at the time of filing the
quarterly corporate income tax return shall be the
MCIT.
• The excess can be credited against the normal
income tax due in the next three succeeding taxable
years.
Manner of Filing and Payment
• The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
income tax which is on a quarterly and on a yearly
basis.
• The MCIT shall be indicated in BIR Form 1702Q
(November 2011 version) and 1702.
• The MCIT shall be paid in the same manner
prescribed for the payment of the normal corporate
income tax which is on a quarterly and on a yearly
basis.
• The MCIT shall be indicated in BIR Form 1702Q
(November 2011 version) and 1702.

Annual Income Tax Computation

• The final comparison between the normal income
tax payable and the MCIT shall be made at the end
of the taxable year.
• The payable or excess payment in the Annual
Income Tax Return shall be computed taking into
consideration corporate income tax payment made
at the time of filing of quarterly corporate income tax
returns whether this be MCIT or normal income tax.
• In the computation of annual income tax due, if the
normal income tax due is higher than the computed
annual MCIT, the following shall be allowed to be
credited against the annual income tax: (Example of
Tax Credits)
o Quarterly MCIT payments
o Quarterly normal income tax payments
o Excess MCIT in the prior year/s (subject to
the prescriptive period allowed for its
creditability)
o CWTs in the current year
o Excess CWTs in the prior year
• If in the computation of the annual income tax due,
the computed annual MCIT due is higher than the
annual normal income tax due, the following may be
credited against annual MCIT due:
o Quarterly MCIT payments of current
taxable quarter
o Quarterly normal income tax payments in
current year
o CWTs in the current year
o Excess CWTs in the prior year
• Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the annual
MCIT due as the same can only be applied against
normal income tax.

Treatment of Excess MCIT on an annual basis

• Any excess of MCIT over the normal income tax can
be carried forward on an annual basis.

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