DEDUCTIONS EXCLUSIONS

INCOME TAXATION
entitled to deductions allowed to avail of
under Section 34. exclusions under
Section 32 (B).
OVERVIEW

1. Trade, Business or Professional

Gross Income (Sec. 32) xxx Expenses

Less: Allowable Deduction (Sec. 34) (xxx)

Requisites:
a. The expense must be ordinary and
Taxable income xxx necessary;
b. It must have been paid or incurred during the
taxable year;
Multiply: Tax rate (Secs. 24, 25, 27, % c. It must have been paid or incurred in carrying
and 28) on the trade or business of the taxpayer; and
d. It must be supported by receipts, records or
Tax Due xxx other pertinent papers. (CIR v. General
Foods [Phils.], Inc., G.R. No. 143672, April
24, 2003)
Less: Tax Credits/Payments (xxx)

Paid v. Incurred
Tax Payable/(Overpayment) (Sec. xxx An expense is considered paid, when the money is
76) already paid, nabayaran na. On the other hand, an
expense is incurred when it was already utilized,
although not yet paid, nangyari na, pero di pa
ALLOWABLE DEDUCTIONS bayad.

Example: Your postpaid plans for your mobile

Itemized Deductions from Gross Income
devices. For the month of March, you have already
used your plan coverage, but you have not yet paid
Section 34. Deductions from Gross Income. - your bills. Your expenses have already occurred,
Except for taxpayers earning compensation but you have not yet paid. That is an example of
income arising from personal services rendered incurred.
under an employer-employee relationship
where no deductions shall be allowed under The requirement of the Tax Code, in order for a
this Section, in computing taxable income subject trade or business or professional expenses, it is not
to income tax, there shall be allowed the following necessary that it must be paid, the fact that it was
deductions from gross income: xxx incurred will suffice.

NOTE: It actually depends on what basis of

Section 34 of the NIRC, as amended, made a listing
accounting is used by the company. If it is:
of the deductions allowed under the Tax Code.
a. Cash Basis of Accounting - an expense
However, the opening paragraph states, in effect,
will only be recognized if it is already paid.
that those who earn purely compensation income
b. Accrual Basis of accounting - an
are not allowed to avail of any of the deductions
expense will only be recognized if it is
under Section 34.
already incurred, regardless if paid or not.
Hence, if you are working and you are earning
The expense must have been paid or incurred in
purely compensation income, the deductions we
carrying on the trade or business of the
will be discussing moving forward are not allowed
taxpayer. This means that the expense must be
to be deducted from your compensation income.
related to the normal operations of the taxpayer.
Deductions v. Exclusions
Example: if you are engaged in a sale of gadgets,
you claimed a travel expense to Africa. How is that
DEDUCTIONS EXCLUSIONS related to your trade or business?
- If I am looking at the perspective of the BIR,
Provided under Section Provided under Section I will disallow the expense, unless the
34 32 (B) taxpayer can show the relation. But in this
case, how can you establish the correlation
Purely compensation Purely compensation between selling gadgets and traveling to
income earners are not income earners are Africa?
 Expense is considered It is ORDINARY when
Supported by receipts, records or other
NECESSARY where it connotes payments
pertinent papers
the expenditure is which are normal in
ANECDOTE: I have a client, we are now writing a
appropriate and helpful relation to the business
request for ruling from the BIR to confirm that the
in the development of of the taxpayer and the
substantiation requirement under Section 34
the taxpayers surrounding
(A)(1)(b) is not really official receipts or BIR Invoice.
business. circumstances
The requisite provides that it must be supported by
receipts, records or other pertinent papers. Our
It dwells more on the It dwells more on the
position to support our client is that, we do not need
nature of the expense. amount of the expense.
BIR official receipts or invoice for purposes of
claiming deductions.

NOTE: It is a different case, however, for Value- Example: We are engaged in a legal profession.
Added Tax. Our law office from time to time sends us to
seminars. We can easily establish the correlation
between these seminars and this business in
Requisites:
engaging legal practice.
● An expense will be considered
"necessary" where the expenditure is
The taxpayer has a sale of only One Million and the
appropriate and helpful in the
travel expenses is 50 Million. So evidently, it is
development of the taxpayers business.
grossly disproportionate to the sales. Definitely, it is
It is "ordinary" when it connotes a
extraordinary.
payment which is normal in relation to the
business of the taxpayer and the
Bribes, Kickbacks and Other Similar Payments
surrounding circumstances. (Atlas
- These are not allowable deductions. This is
Consolidated Mining & Development
obvious because it is immoral and contrary
Corp. v. Commissioner of Internal
to public policy.
Revenue, G.R. No. L-26911, L-26924,
January 27, 1981)
So the important here in Trade, Business and
● Bribes, Kickbacks and Other Similar
Professional Expense is the ordinary and
Payments. - not allowable deduction.
necessary, and substantiated by records

2. Expenses Allowable to Private

For Value-Added Tax, the substantiation required is
Educational Institutions.
a VAT registered official receipt, VAT registered
invoice.
Expenses Allowable to Private Educational
But for income tax purposes, the Tax Code provides
Institutions. - a private educational institution,
“other pertinent records/other supporting
may at its option elect either: (a) to deduct
documents”
expenditures otherwise considered as capital
outlays of depreciable assets incurred during the
VAT INCOME TAX taxable year for the expansion of school facilities
or (b) to deduct allowance for depreciation.
Must be substantiated Under the Tax Code, it
by VAT registered may be based on
Q: What do we mean by CAPITAL OUTLAYS or
official receipt or VAT “other
CAPITAL EXPENDITURE or CAPEX?
registered invoice. pertinentrecords/other
supportingdocuments.” A: These are disbursements of material amounts.
The expected benefit of which should last for more
than 1 year.
Because our client is engaged in agricultural
business. So they are selling agricultural products. Example 1: Bumili ka ng turnilyo. ‘Yung turnilyo
In these products, they purchased it from farmers. magtatagal naman ‘yan ng 10 taon. Is that CAPEX?
So how can you expect farmers to issue BIR official
receipt or invoice. The BIR decided to disallow The answer is NO because hindi naman siya
these expenses amounting to millions because material.
there are no invoices from BIR. This is very unfair
because the Tax Code only provides pertinent Example 2: But if UST constructed a building,
records or documents. would it be considered CAPEX?

Ordinary expense v. Necessary expense YES. Because the amount material, the benefit is
expected to last for more than a year. That’s capital
expenditure.
NECESSARY ORDINARY
Q: What is the normal treatment of CAPEX?
A: The normal treatment of CAPEX is the option tending to increase the value of the property
number 2 on the slide [(b) to deduct allowance for assessed)?
depreciation]. A: This is a special assessment tax. This is a
charge against those property owners who were
Q: What do we mean by DEPRECIATION? benefited by the project of the government.
A: In Capital Expenditure, it is spread over its used
to life. Example: If gumawa ka ng road, yung
madadaanan ng road mag iincrease ng value. So
Example: If the building is worth 1 Million, the the local government collects special tax and that
expected life of the building is 10 years. So P 1M special tax cannot be claimed as a deduction.
divided by 10, hence, P 100,000 per year. Every
year, the company will be deducting 100,000. It will a. Income tax
not be an outright deduction of 1M. The whole cost
of CAPEX is spread over it is used to life. That’s The income tax cannot be claimed as a deduction
what we meant for depreciation. because before you can get the income tax you
need to have your deductions.
The normal treatment for CAPEX is that only the
depreciation will be deducted and not the total b. income taxes imposed by authority of any
capital made. foreign country which was availed as tax
credits
But for some exceptional cases, for private
educational institutions. 2 options are You recall that a resident citizen is subject to
provided : income tax for incomes earned from within and from
1. You may ought to deduct that whole P 1M without. Yang mga resident citizen na yan may mga
at the time incurred it or you pay it. binabayaran din na income tax abroad, so those
2. You spread over in the form of income taxes paid in other jurisdiction, they have
depreciation. the option to:
1. Claim it as a deduction
2. Claim it as tax credit
(3) Interest.
(4) Taxes, except:
You recall our formula: Gross income - allowable
income tax; income taxes imposed by authority of
deduction. That payment of income tax abroad can
any foreign country which was availed as tax
be claimed as a deduction or claim as tax credit
credits; estate and donor's taxes; and Taxes
from tax due.
assessed against local benefits of a kind tending
to increase the value of the property assessed.
Ang sinasabi sa Sec. 24, if the taxpayer has opted
to use the tax payment in the form of tax credit, then
This other deductions are governed by the rule on hindi mo na siya pwede ilagay sa deduction
Ordinary and Necessary Expenses. otherwise it would be dual availment.

c. estate and donor’s taxes

3. Interest
Estate and donor’s taxes are personal in nature. So
The interest being contemplated here, is the it will not meet the requirements of ordinary and
business business or the taxpayer obtained a loan. necessary.
That loan is used in a business of the taxpayer and
the loan requires payment of interest. The interest
5. Losses not compensated by insurance or
expense can be paid as a deduction. other form of indemnity

4. Taxes
This must be covered by the rule of ordinary and
necessary.
Taxes can be allowed as deduction except for the
following: Q: You are engaged in the sale of furniture and
a. income tax; the finished products were stored in a
b. income taxes imposed by authority warehouse. Unfortunately, the warehouse was
of any foreign country which was razed by fire and as a result you lost all your
availed as tax credits; inventories, your finished product. Can you
c. estate and donor's taxes; and claim the value of those inventories and
d. Taxes assessed against local finished products as a deduction?
benefits of a kind tending to A: The answer is yes because these are your
increase the value of the property losses and definitely the loss is related to your
assessed. business.

Q: Are you familiar with number 4 (Taxes Q: Pano kung yung bahay nyo? Kunwari
assessed against local benefits of a kind business mo furniture, you form a corporation,
your furniture stored in the warehouse pero ang Depreciation, as mentioned, is the expense or
nasunog yung bahay mo. Can you claim the allowable deduction of the taxpayer based on the
losses dun sa bahay nyo? use over the life of the depreciable asset. Note that
A: No, they're not related at all. It is qualified by that depreciation is applicable to tangible properties that
phrase, “it should not be compensated by insurance are capital expenditures such as machinery or
or other forms of indemnity. equipment.

Q: So assuming in my example that the taxpayer

8. Depletion
opted to insure his finished products so ang
value ng inventory that was raxd by fitre 100M
but the insurance company paid the face value It has the same concept as that of depreciation.
of the poocy amounting to 70M. How much is However, it applies to intangible assets such as
your deduction? patents.
A: It will be the amount not compensated.
Example: A patent has a useful life of 20 years. The
Q: How about that concept of Net Operating cost of development, research and other costs of a
Loss Carry Over? patent are depreciated or depleted over 20 years,
A: Go back to your formula: gross income less the useful life of a patent.
allowable deductions = taxable income. It will be
taxable income if your gross income is more than Also, depletion is used in mining activities.
the allowable deduction. Remember that in mining there are substantial
development costs before you can start to mine.
Q: What if it;s the other way around? Your This cost of development is being spread over the
allowable deduction is more than your taxable useful life of the mining, which is over a certain
income and that happened during the years depending on the operation of the mining.
lockdown.
A: If it’s the other way around that is called NOLCO
9. Charitable and other contributions
or net operating loss carry over. The treatment of
NOLCO, the excess of the allowable deduction over
the gross income can be carried forward in the next
3 taxable years. Assuming this year the taxpayer 9. Charitable and other contributions
has a NOLCO of 1M, next year nagkaroon siya ng
taxable income amounting to 10M, so that 1M can a. Contributions or gifts to or for the use of the
be fully deducted against the 10M. Government of the Philippines or any of its
political subdivision thereof exclusively
Q: What if the next year, the taxable income is for public purposes, or associations
only 500K? organized and operated exclusively for
A: Edi deduct mo yung NOLCO mo na out of the religious, charitable, scientific, youth and
1M, 500 deduct it against the 500 next year, may sports, development, or to social welfare
nakikita ka pa which you can claim to the next other institutions, or to NGOs where no part of
years. The carry over of NOLCO is up to 3 the net income inures to the benefit of any
succeeding years. So if the NOLCO rests this year private stockholder or individual. –
it can be carried forward up to the next 3 succeeding allowable deduction cannot exceed 10% in
years. the case of individual, and 5% in the case of
corporation, of the taxpayer’s taxable
NB: Requisites for availment of NOLCO: There income before deduction for charitable
must be no substantial change in ownership of the institutions.
enterprise - it means at least 75% of the owners of
the business should remain. Yung 25 pwede b. Donations to the Government of the
magpalit palit. Philippines or to any of its agencies or political
subdivisions, including fully-owned
government corporations, exclusively to
6. Bad debts finance, to provide for, or to be used in
undertaking priority activities, in education,
health, youth and sports development, human
When we say bad debts, these debts are no longer
settlements, science and culture, and in
collected or uncollectible.
economic development according to a
National Priority Plan determined by the
Q: What is the treatment of bad debts?
National Economic and Development
A: Bad debts are considered allowable deductions,
Authority (NEDA). – contribution
but the said debt must be the debt of the taxpayer.
deductible in full.
It cannot be the debt of someone else. It must be
the debt of the taxpayer.

Charitable and other contributions – we have to

7. Depreciation
qualify because there are certain donations for
charitable contributions that cannot be deducted or
non-deductible, and there are certain donations that So, the general rule is that the 5%/10% limit will
are deductible in the gross income to a certain apply. The only exception is donation to priority
extent. activities.

(a) Contributions or gifts to or for the use of the

GR: 5% or 10% limit will apply.
Government of the Philippines or any of its
XPN: Donation to priority activities.
political subdivision thereof exclusively for
public purposes, or associations organized
and operated exclusively for religious, Q: How about donations to private institutions?
charitable, scientific, youth and sports, Will there be an instance that the donation shall
development, or to social welfare be fully deductible?
institutions, or to NGOs where no part of the
net income inures to the benefit of any
c. Donations to qualified and accredited donee
private stockholder or individual. –
institution – deductible in full, provided:
allowable deduction cannot exceed 10% in
i. Donations must be made in favor of a
the case of individual, and 5% in the case of
qualified and accredited donee
corporation, of the taxpayer’s taxable
institution, which is for charitable,
income before deduction for charitable
educational, religious or cultural
institutions.
purpose, accredited by Philippine
If we are going to simplify this: Donations to the Counsel of NGOs Commission
(PCNC);
government, donations to political
ii. The donor must be engaged in
subdivisions, or donations to religious,
business or practice of profession;
charitable, or scientific organizations – these
iii. The donor shall give notice of
donations are subject to a particular limit. It
donation (of at least P50,000) to the
shall be allowable deductions to the extent of
BIR within 30 days after the receipt by
10% of the taxable income in case of individual,
the qualified donee institution of the
and 5% in case of corporation’s taxable income.
certificate of donation; and
iv. The certificate of donation must contain
Limit on the allowable deduction on donations to undertaking that not more than 30%
government, donation to political subdivision, or of the donation shall be used for
donations to religious, charitable, or scientific administrative purposes.
organization

Individual Corporation A: The answer is yes. There are certain

requirements. The donation shall be made in favor
10% on the his/her 5% on the its taxable to the qualified and accredited donee institutions.
taxable income income
Q: What are the requirements before a donee
institution can be considered qualified and
There are certain deductions to the government that accredited?
may be deducted in full. What are these?
1. Donations must be made in favor of a
(b) Donations to the Government of the qualified and accredited donee institution,
Philippines or to any of its agencies or which is for charitable, educational,
political subdivisions, including fully-owned religious or cultural purpose, accredited by
government corporations, exclusively to Philippine Counsel of NGOs Commission
finance, to provide for, or to be used in (PCNC);
undertaking priority activities, in
education, health, youth and sports Basically, the donee must be PCNC accredited.
development, human settlements, science
and culture, and in economic development Q: What is this PCNC?
according to a National Priority Plan A: PCNC is actually a private organization that
determined by the National Economic and accredits and makes the assessment of different
Development Authority (NEDA). – foundations and different charitable institutions.
contribution deductible in full. PCNC makes sure that these foundations or
charitable institutions have good governance. Their
Q: So if your donation to the government shall objective is to ensure that the donation made to
be used for these priority activities, and where these institutions will use the funds donated to
can you find these priority activities? further its mandate or purpose. That the donated
funds are not kept in the pockets of the officers or
A: It can be located in the National Priority Plan of trustees of these charitable institutions.
the NEDA. That is the only time that it can be
deducted in full. 2. The donor must be engaged in business or
practice of profession;
 3. The donor shall give notice of donation (of
at least P50,000) to the BIR within 30 days
11. Pension Trust
after the receipt by the qualified donee
institution of the certificate of donation; and
For pension trust, you know already the concept of
This requirement is more on reportorial pension.
requirement.
Additional Requirements for Deductibility of
4. The certificate of donation must contain
Certain Payments - A deduction shall be allowed
undertaking that not more than 30% of the
only if it is shown that the tax required to be
donation shall be used for administrative
deducted and withheld therefrom has been
purposes.
paid to the Bureau of Internal Revenue.
Atty. LJ: The first and fourth requirements are the
most important requirements, at least for me. They Atty LJ: This has never been asked in the bar. But
are the substance to be considered as qualified and for practice, this is very important.
accredited donee.
Revenue Regulations 02-98 (RR 02-98) is the
A donation to a private institution may be mother implementing rules and regulations of our
deductible in full provided the private institution NIRC, at least for income tax purposes.
is a PCNC accredited institution, and not more
than 30% of the donation shall be used for Under RR 02-98, certain expenses are required to
administrative purposes. be subject to withholding.

Q: What do we mean by withholding?

GR: Government/private institution – 5%/10%
A: For example, A is the lessor and B is the lessee.
limitation
Lessee is required to pay 100k monthly rent to
lessor. Under RR 02-98, rental payments are
XPN:
subject to 5% withholding tax, so instead of the
1. Made to the government, and shall be used
lessee paying 100k, he will only pay 95k. The 5k will
by the government to undertake priority
be withheld by the lessor and remitted to the BIR,
activities according to the national priority plan
on behalf of the lessee.
of NEDA – 100% deductible
2. Donation to the private institution –
If a particular expense is required by law to be
deductible in full (100% deductible) if the
subject to withholding and if the income payor does
private institution is PCNC accredited, and not
not withhold the income tax, then that
more than 30% of the donation shall be used
corresponding expense cannot be claimed as a
for administrative purposes
deduction.

Try to imagine Dean Nilo T. Divina. Dean makes a

OPTIONAL STANDARD DEDUCTION (OSD)
lot of donations like scholarships, or internet
allowance. Of course, the limitation applies to us
because you do not meet the second requirement –
you are not engaged in business or practice of Optional Standard Deduction (OSD)
profession. Definitely, you are not PCNC
accredited. So, the 5% limitation applies. Despite In lieu of itemized deductions, a taxpayer may
those large amounts of donations, not all of them avail of OSD equivalent to:
are considered deductible to Dean Divina’s gross a) 40% of gross sales or gross receipts for
income. individuals or
b) 40% of gross income for corporations

10. Research and Development Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction,
he shall be considered as having availed himself
(10) Research and Development of the itemized deductions. Such election when
(11) Pension Trust made in the return shall be irrevocable for the
taxable year for which the return is made.
Research and Development is self explanatory.
Again, it should be governed by the ruling on Q: What is the distinction between OSD and
ordinary and necessary. itemized deductions?
A: The deductions that we have been discussing,
Example: If you are say engaged in manufacturing such as the business expenses, donation are
of furnitures and at the same time you are trying to itemized deductions. It is itemized because
discover and manufacture a certain drug. Definitely nakalista sila. In lieu of itemized deductions, the
that research and development will not be allowed taxpayer may avail of OSD.
as a deduction because they are not related.
Q: How about OSD? Q: For your future reference, when should you
advice availing of Itemized Deductions and that
Optional Standard Deduction (OSD) of OSD?
· In lieu of itemized deductions, a A: If you avail of OSD, that’s an automatic 40%
taxpayer may avail of OSD equivalent deduction without need for substantiation.
to: Remember that one of the general requirement, is
a) 40% of gross sales or gross that the expense should be supported by receipts,
receipts for individuals; or invoice or other pertinent records? So, if you avail
b) 40% of gross income for the OSD, automatic may 40% deduction ka, kahit
corporations wala kang gross receipts.
Ø Unless the taxpayer signifies in his
return his intention to elect the Atty LJ’s Advice: ‘Pag nagtayo kayo ng law offices
optional standard deduction, he at di kayo masipag sa mga receipts niyo, pakalat-
shall be considered as having kalat or nakapangalan kung kani-kanino, mag-avail
availed himself of the itemized na lang kayo ng OSD. But if you are very diligent,
deductions. Such election when your Invoice and Other Requirements and Other
made in the return shall be supporting documents complied with the
irrevocable for the taxable year for regulations of the Tax Code for deductibility, then
which the return is made. definitely, avail of Itemized Deducitons – IF YOU
CAN FORESEE, that the Itemized Deductions is
A: Magkaiba yung tax base. For individuals, gross more than that of OSD.
sales or gross receipts.
ITEMS THAT ARE NOT DEDUCTIBLE
Q: What’s the difference between gross sales
and receipts, as against gross income?
A:
Items not Deductible
Gross Sales or Receipts, you deduct your Cost of
Sales. (1) Personal, living or family expenses
(2) Any amount paid out for new buildings or for
So: Gross Sales – Cost of Sales = Gross Income permanent improvements, or betterments
made to increase the value of any property or
So, if you’re an individual trying to avail of itemized estate;
deduction, the basis is not the gross income. But for (3) Any amount expended in restoring property or
corporation, the basis is the gross income, which is in making good the exhaustion thereof for
40%. which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy
Unless the taxpayer signifies in his return his covering the life of any officer or employee, or
intention to elect the Optional Standard Deduction, of any person financially interested in any
he shall be considered as having availed of himself trade or business carried on by the taxpayer,
the Itemized Deduction. Such election will take in individual or corporate, when the taxpayer is
the nature of irrevocable toward the present taxable directly or indirectly a beneficiary under such
year. policy. (Section 36 of the Tax Code)
NB: The default is itemized deduction.
(1) Personal, living or family expenses
Meron kasi yan sa Tax Return. There’s a box that
you have to check – OSD or Itemized Deduction.
This option has to be made during your quarter Again, the expenses must be related to the
filing. Remember that a corporation is required to business.
file quarterly – Q1, Q2, Q3 and then, Annual Income
Tax filing. So, sa Q1 filing, dun niya gagawin yung Situation: Bill for wifi, electricity used in his
election, whether OSD or Itemized Deduction. house for his work, in a work from home setup
during the pandemic – can this be used and be
If you have availed OSD, that choice cannot be charged in his office?
revoked at least for the present taxable year. A: No, kasi most likely, his bill, naka-name sa
Next year, during Q1, pwede ka na ulet mag- parents niya in his personal capacity, and that is not
Itemized. allowed to be deducted.

So, the default option is Itemized if there was no (2) Any amount paid out for new buildings
OSD selected. or for permanent improvements, or
betterments made to increase the value of
In lieu of Itemized Deduction, you can offer OSD. any property or estate;

This refers to capex expenditures.

 that, “all other assets are considered as capital.” So
CAPEX only did depreciation for preferably the parang residual definition yung capital.
allowed deduction, except for private educational
institutions. Q: How would you distinguish a Capital Asset
from an Ordinary Asset?
(3) Any amount expended in restoring
property or in making good the exhaustion Capital Assets Ordinary Assets
thereof for which an allowance is or has been
made; Those not considered Includes inventory or
as Ordinary Assets are those held for sale to
Capital Assets. customers, as well as
It’s the same. It’s actually referring to CAPEX those produced in
expenditures Ex. Land where the trade for taxpayers.
Ayala Corp’s principal
(4) Premiums paid on any life insurance office is located. Ex. Land of Ayala
policy covering the life of any officer or Corp. used for their real
employee, or of any person financially estate business.
interested in any trade or business carried on
by the taxpayer, individual or corporate, when Q: Why is there a need to distinguish Capital
the taxpayer is directly or indirectly a Asset and Ordinary Asset?
beneficiary under such policy. A:
1.) It is very important in case of sale of Real
Properties.
SEC.39: CAPITAL GAINS AND LOSSES
If it is an Ordinary Asset:
(/) subj to Regular Corporate Income Tax
Distinguish Capital Asset from Ordinary Asset (/) subj to VAT (12%)
(Sec.39, Tax Code)
If it is a Capital Asset:
(/) subj to Capital Gains Tax (6%)
SEC. 39. Capital Gains and Losses. - (/) subj to Document Stamp Tax

(A) Definitions. - As used in this Title – NB: DST is present to either OA or CA, so
it is NOT a deciding factor.
(1) Capital Assets. – The term ‘capital assets’ This is another kind of Tax Avoidance.
means property held by the taxpayer (whether or
not connected with his trade or business), but 2.) There are certain rules that only applies to
does not include stock in trade of the taxpayer or Capital Assets.
other property of a kind which would properly be
included in the inventory of the taxpayer if on a) Limitation on Capital Losses - Losses
hand at the close of the taxable year or property from sale or exchange of capital assets
held by the taxpayer primarily for sale to shall be allowed to the extent of gains from
customers in the ordinary course of his trade or such sale/ exchange.
business, or property used in the trade or
business, of a character which is subject to the Example:
allowance for depreciation provided in i) 1st transaction, assuming there is a Capital Asset
Subsection (F) of Section 34; or real property of 100k, but only sold 80k. Can you consider the
used in trade or business of the taxpayer. loss of 20k as a deduction?
NO, because of the Limitation on Capital loss

Capital Gains and Losses ii) In this 2nd transaction, the Capital Asset is 90k,
and selling price is 100k. Thus profit of 10k. Can you
Capital Asset v. Ordinary Asset offset the 20k loss in the 1st transaction, against the
2nd transaction?
Ordinary assets include inventory or those YES, only to the extent of 10k.
held primarily for sale to customers, as well
as those assets used in trade or business of
the taxpayer. Any other assets which are not Q: Can you offset the first capital asset
considered ordinary assets are classified as transaction with the gain of the second capital
capital assets. asset transaction?
A: the answer is only to the extent of 10,000. That
Sec.39 actually made less things of those assets is what is meant by the limitation on capital loss.
that can be considered as ordinary. There are 5.
And then, the following paragraph goes on in saying
Q. What if it is an ordinary asset transaction? A. Period of In the next Carry over of
Kung may ordinary asset transaction yan and there Carry-over succeeding operating loss
is a resulting loss, it can be claimed in full as a taxable year in 3
deduction. That is why it is important to distinguish succeeding
between capital and ordinary. taxable years,
or 5 years in
b) Net Capital Loss Carry-Over: If any the case of
taxpayer, other than a corporation, sustains mining
in any taxable year a net capital loss, such companies
loss (in an amount not in excess of the net
income for such year) shall be treated in the
succeeding year as a loss from the sale or
exchange of a capital asset held for not
more than twelve (12) months.
NACOLCO it can be carried over only up to the next
If any tax payer, other than a corporation.. year. So if ngayon nagkaroon ng losses of sale of
remember that this particular rule does not apply to capital asset, you can claim it as against next year.
a corporation. So if any tax payer other than a
corporation sustains for any taxable period a net TAX FREE EXCHANGE TRANSACTION
capital loss, such loss in an amount not in excess of
the net income for such year shall be treated in the
succeeding year as a loss from the sale or There are 2 general classifications of tax free
exchange. exchange transactions:
1. Reorganization – no gain or loss shall be
Remember our concept of NOLCO (Net Operating recognized on a corporation or on its stock
Loss Carry-Over), our NOLCO is an allowable or securities if such corporation is a party to
deduction more than the gross income. a reorganization and exchanges property in
pursuance to a plan of reorganization solely
Net Capital Loss Carry-Over (NCLCO) is the for stock or securities in another
difference between the cost of the capital asset and corporation that is a party to the
the selling price for that asset. So NCLCO, excess reorganization.
of losses from sale of capital assets over selling
price. NOLCO on the other hand, is allowable 2. Property for share swap – no gain or loss
deduction of your gross income. shall also be recognized if property is
transferred to a corporation by a person,
alone or together with others, not
NCLCO NOLCO exceeding (4) persons, in exchange for
stock or unit of participation in such a
corporation of which as a result of such
Source Excess of Excess of exchange the transferor or transferors,
losses from allowable collectively, gains or maintains control of
sales or deduction said corporation.
exchanges of over gross
capital assets income Atty. LJ: Don’t worry we will not dwell on this much.
over the gains If you check sec. 40, the type of reorganizations
from such have already been identified. Mergers and
sales or reorganizations between group of companies. We
exchanges will focus rather on property for share swap.

Q: Why is it called tax free exchange?

A. No. 1, it is an exchange because there seems to
Who can Individual Individual and be a barter. I give I receive. So assuming that A and
avail corporate B where A transfers something to B and B transfers
taxpayers another thing to A, that is an exchange transaction
and it’s like a barter.

So in your law on sales, barter is effectively a sale

transaction. If A transferred to B then that’s A selling
to B. If B transferred to A that’s be effectively B
selling to A. So there are two sales involved. And in
a sale transaction it may result to a gain or loss of
sale, but under sec. 40, if that exchange met the
requirements.. the exchange even if there is
resulting gain on the transaction, that gain will not
be subject to income tax. Kaya siya tax free
exchange.
 Property for Share Swap requisites:
NB: These transactions are also exempt from
a. The transferee is a corporation;
VAT.
- Yung pupuntahan corporation
b. The transferee exchanges its shares of
Example: If the transferor transfers land to the
stocks for property/ies of the transferor;
transferee, as a GR that would be subject to 12%
- So the transferor is transferring certain
VAT. But Sec. 110 of the Tax Code specifically
assets to the transferee corporation and
excluded that as a VAT-exempt transaction. Hence,
in exchange the transferee corporation
transactions falling under Sec. 40(c)(2) shall be
issues its shares of stocks.
exempt.
c. The transfer is made by a person acting
alone or together with others not exceeding
four (4) persons.; Tax-Free Exchange Transaction
- Take note that the ‘not exceeding four’
qualifies the ‘others’. So the maximum In all of the foregoing instances of exchange of
number of transferor is five. property, prior Bureau of Internal Revenue
d. As a result of the exchange, the confirmation or tax ruling shall not be
transferor, alone or together with others, not required for purposes of availing the tax
exceeding four (4), gains control over the exemption.
transferee.

The term “control” is define as “ownership of INCOME TAXATION OF INDIVIDUALS

stocks in a corporation possessing at least fifty-
one percent (51%) of the total voting power of all
Recall: Types of taxpayers (ITEC)
classes of stocks entitled to vote.
1. Individuals
2. Trusts
Illustration: Let’s try to simplify, you have the 3. Estate
transferor transferring assets to the transferee 4. Corporations
which is a corporation. The transferor need not be
a corporation, it may be an individual it may be a Atty. LJ: Remember that the Philippine tax system
corporation but the number should not exceed five. is semi-schedular, semi-global. This means that we
Transferor transferring assets to the transferee classify income, then per classification we apply a
which should be a corporation, and as a result of different tax rate.
the transfer, the transferee will issue its shares of
stocks to the transferor. And because of the Classifications of individual taxpayers:
transaction of the transferor gains control over the 1. Resident citizen (RC) - Filipino residing in
transferee. the PH
2. Non-resident citizen (NRC)- Filipino
The term control means at least 51% of the total residing abroad
voting power. It should be voting power. So if the 3. Resident alien (RA) - foreigners residing in
issuances are for non-voting shares, it should not the PH
be considered in your computation of the 51%. 4. Non-resident alien engaged in trade or
business (NRA-ETB)- foreigners doing
business in PH
No gain shall be recognized if property is
5. Non-resident alien not engaged in trade or
transferred to a corporation by a person in
business (NRA-NETB) - foreigners who
exchange for stock or unit of participation in
have passive income in the PH and not
such a corporation of which as a result of such
actively engaged in business.
exchange said person, alone or together with
others, not exceeding four (4) persons, gains
control of said corporation: Provided, that Income taxation of RC, NRC, RA, NRA-ETB
stocks issued for services shall not be
considered in return for property.
NIRC, Sec. 40 (C) Generally, we have the same treatment for RC,
NRC, RA, NRA-ETB. Their income is classified as
follows.
Q: What is the rationale? What is the particular
reason that this transaction is not taxable? Income taxation of RC, NRC, RA, NRA-ETB
A: The reason why this transaction is because this Classification of Income
is kalokohan. Why? Who are the transferors–they 1. Passive Income
are either individual, partnerships, or corporations 2. Capital Gains from Sale of Shares of Stock
transferring to the transferee; after the transaction not Traded
who is the owner of the transferee? In effect, the in the Stock Exchange
transferors, after the transaction, effectively, it is 3. Capital Gains from Sale of Real Property
also the owners who own the transferee. At least 4. Other Income
51%. So it’s like putting your money from one
pocket to another.
Why did I classify the income tax of individuals Take note that the remittance is on behalf of the
this way? lessor.
Atty LJ: Because we are a semi-schedular, semi-
global. So a different tax treatment applies for Q: So what will happen to the lessor?
passive income, different on CGT on sale of A: Lessor at the end of the year he will compute his
shares/property. All income not subject to the tax income tax liabilities based on the rentals
rate on passive income or CGT, will be subject to
the regular income tax rates for individuals. So assuming that on the rent, the total income tax
may be is 150k . When the lessor computes his final
income tax liability, he determined that his income
1. Passive Income
tax is 50k. Idededuct niya ngayon yung 5k. Kasi
when you say creditable withholding this is just an
When we say passive income as opposed to active advance payment on the income tax liability of a
income, in active income, you do the labor–there is particular transaction.
an active participation like in employee. In contrast,
passive income, you let the money do the work for When you say credible withholding tax, this is just
you. Like bank deposits which earn interest income; an advanced payment on the income tax liability of
investments etc. a particular transaction, in our case lease. Such that
by the end of the year, the income earned by the
lessor shall still form part of the gross income and
A. Passive Income (IRPOD) then the income tax will be computed and then
applied in the formula on “less tax credit” portion. It
· Interest, Royalties, Prizes, other Winnings-
will be a different case for IRPODS which are
20% FWT in general subject to FWT.
· Cash/Property Dividends from domestic
corporations (including share of an individual in So the 20% final withholding tax from the rest like
the distributable net income after tax of a interest royalties, prizes, and other winnings these
partnership, except a general professional already constitutes as the final and full payment of
partnership) – 10% FWT (Note: 20% FWT if the income tax liability due on the interest,
received by NRA-ETB) royalties, prizes, and other winning. Wala ka ng
babayaran pa.
Final Withholding Tax is a kind of withholding tax
which is prescribed on certain income payments Interest royalties, prizes, and other winnings as
and is not creditable against the income tax due a general rule is 20%.
of the payee on other income subject to regular
rates of tax for the taxable year. Income Tax So if you earned interest income of 1000, the bank
withheld constitutes the full and final will withheld 20%, your account will be credited with
payment of the Income Tax due from the
800 pesos. Wala ka ng income tax due because it
payee on the particular income subjected to was already subjected to final withholding tax.
final withholding tax.
FWT is the amount withheld/remitted to BIR
My acronym is IRPODS constitutes the final and full payment of the
1. Interest income tax due on that particular transaction. As
2. Royalties opposed to creditable withholding tax, which is
3. Prizes just a sort of advanced payment and a partial
4. Other winnings payment of a tax due of a particular transaction.
5. Dividends
Cash/Property Dividends is 10% FWT. However,
Note: hindi yan standard na 20%. if the recipient of the stockholder is NRA-ETB,
then 20% FWT. I want to emphasize cash or
Q: What is Final Withholding Tax? property dividend.
A: It is a kind of withholding tax which is prescribed
on certain income payments and is not creditable Tax Code only mentioned cash or property
against the income tax due of the payee on other dividends to be subject to the 10% or 20% FWT.
income subject to regular rates of tax for the taxable
year. Income Tax withheld constitutes the full Q: What if it is a stock dividends? What is the
and final payment of the Income Tax due from concept of stock dividends? Corporation A and
the payee on the particular income subjected to Stockholders B and C. A shall issue shares of
final withholding tax. stocks as dividends to B and C. Would that be
subject to 10% FWT?
Go back to our example awhile ago, Lease A: No, stock dividends is not subject to FWT it will
transaction: Lessee withheld 5k from the 100k that be subject to income tax only in such time na
is supposed to be paid to the Lessor and that 5k binenta.
was remitted by the lessee on behalf of the lessor.
Suggestion: no need to memorize on rates, at
least know the nature of income tax liability on FWT.
So if you cannot recall the rates sabihin niyo nalang 2. The shares must not be sold by the
“it is subject to final income tax”. But at least yung Philippine Stock Exchange.
dividends man lang alamin niyo which is 10% - It should not be a listed share as listed
except if NRA-ETB then 20% shares are traded through the
Philippine Stock Exchange.
Q: What if that dividend came from a foreign
corporation? What is the tax treatment? Q: What if the shares are listed in the Philippine
A: It will not fall under passive income. It is not Stock Exchange?
capital gains from sale of shares. It is not capital A: It will not be the 15% capital gains tax that shall
gains sale of real property. Rather, it falls under the apply. It will be the stock transaction tax of 6/10 of
fourth category – all other income, which shall be 1% based on gross selling price.
subject to regular income tax.
If it is not listed in the Stock Exchange, it will be
stock transaction tax which is a form of a
2. Capital Gains from Sale of Shares of Sock
percentage tax.
not Traded in the Stock Exchange
Q: What is a percentage tax?
A: The national internal revenue taxes under the
B. Capital Gains from Sale of Shares of Stock
Tax Code are income, estate, donor’s, percentage,
not Traded in the Stock Exchange
excise, documentary stamp, and value-added
- Subject to 15% CGT based on the net
taxes. Percentage tax is a form of national tax under
capital gains provided:
our Tax Code. It is different from income tax. If the
i. Shares sold should be issued by a
share of stock being sold is listed in the Stock
domestic corporation
Exchange, it is subject to stock transaction tax of
ii. Shares are not listed in the Philippine
6/10 of 1% based on gross selling price. That is a
Stock Exchange
form of percentage tax.
- If shares sold are listed in the Philippine
But despite being subject to percentage tax, that
Stock Exchange – the transaction is
would be in lieu of the payment of income tax
exempt from income tax, but shall be
liability already. Meaning to say, if you paid a stock
liable for a percentage tax of 6/10 of 1%
transaction tax, you are no longer subject to income
based on gross selling price.
tax for this kind of transaction.

Review:
Capital gains from sale of shares of stock not traded ● Requisites:
in the stock exchange shall be subject to 15% (1) issued by domestic corporation
capital gains tax. (2) not listed shares
● If it is issued by a foreign corporation
Don’t be confused with the concept of capital asset - all other income subject to regular tax.
that we discussed a while ago. The capital asset ● If it is a listed share
transactions on sale of shares and capital asset - subject to stock transaction tax
transactions on sale of land or real property are
governed separately by different Tax Code 3. Capital Gains from Sale of Real Property
provisions. The (inaudible) Rule or Limitation on
Capital Loss will not apply here. Don’t apply these
rules on sale of shares of stocks or lands.
C. Capital Gains from Sale of Real Property
- Subject to 6% CGT provided that:
It’s 15% capital gains tax and the base is net capital
i. Real property is located in the
gains.
Philippines; and
ii. Real property must be classified as a
Q: How do you compute the net capital gains?
capital asset.
A: That’s basically selling price less cost. You
- Ordinary assets are those for sale or use
acquire shares of stocks – Php100,000.00, and you
in the ordinary course of business or
sell it for Php150,000.00. Your net capital gain is
trade; all other assets are capital assets.
Php50,000.00. That is your tax base. The rate is
- Tax base is the highest among (i) gross
15%.
selling price, (ii) market value per tax
declaration, and (iii) zonal value.
Q: What are the requisites?
- Doctrine of presumed gain – in case of a
A:
sale of real property located in the
1. Shares sold should be issued by a
Philippines and held as capital assets,
domestic corporation.
there is no need to prove that there is
- The 15% capital gains tax shall apply if
income gained before the transaction
the subject shares are shares of a
can be subject to income tax.
domestic corporation

Atty. LJ: This is subject to 6% capital gains tax.

 it at 500,000php then you sell it at below
Q: What is the tax base? 500,000php. Meron kang loss, but it will still be
A: For real property, the tax base is the gross (not subject to income tax, because the basis is the
the net). highest among selling price, zonal value and market
value per tax declaration; that’s the concept of
Q: What are the requisites for the application of Presumed Gain.
6% capital gains tax?
A: The Doctrine of Presumed Gain only applies in
1. The real property should be located in the the sale of Capital Asset- Real Property held as
Philippines. Capital Asset. The Tax Code presupposes that this
kind of transaction always resulted to a gain.
Q: What if the real property is located outside
the Philippines, e.g. house and lot of Manny
C. Capital Gains from Sale of Real Property ▰
Pacquiao in California, and if Pacquiao will sell
When not subject to 6% CGT?
the same, will it be subject to capital gains tax?
i. Sold to the govt, its political subdivisions,
A: No. It is not located in the Philippines.
intrumentalities or GOCC- The individual
taxpayer has option to either: a) pay the 6% CGT,
Q: What will be the applicable tax?
or b) subject the income from sale to the
A: It is not passive income, not capital gains on
schedular income tax rates
sale of shares of stock, not capital gains on sale of
ii. Sale of principal residence – exempt from CGT
real property, but all other income subject to
provided:
regular tax.
a. Proceeds are fully utilized to
acquire/construct new principal
2. The real property should be classified as a
residence within 18 months from the
capital asset. (refer to previous discussions on
sale of old principal residence. (Note: The
capital assets)
sale must precede the
acquisition/construction)
If the parcel of land was sold by Ayala Land, Inc.,
b. BIR is notified of the intention to avail
the land is an ordinary asset; thus, it is not subject
tax exemption within 30 days from sale
to 6% capital gains tax because it is an ordinary
c. 6% CGT is deposited in an escrow
asset.
account
d. Tax exemption must be availed once
Q: What is the tax base?
every 10 years only.
A: The tax base is the highest among the gross
selling price, the zonal value, and the market value
in the tax declaration.
Q: With the third instance, wherein the
If you look in the Tax Code, it will mention that the requirements are met- meaning to say the asset
tax base is the higher of the gross selling price and is in the Philippines, and it is a real property
the fair market value under Section 6, para. E. Fair held as capital asset in the PH, will there be an
market value is defined as the zonal value on the instance that it will not be subjected to 6% CGT
value set by the Commissioner of Internal Revenue despite meeting the conditions that I
and the market value as determined by local described?
assessors. A: Yes, under these two instances:

To simplify, highest of the gross selling price, the i. Sold to the govt, its political subdivisions,
zonal value which is the value determined by the intrumentalities or GOCC.
Commissioner, and the market value per tax
declaration which is the value determined by the so if you are selling to government, political
assessors. So again, the basis is the GROSS and subdivisions, intrumentalities or GOCC, the
not the NET as compared to Shares of Stocks and individual tax payer has the option:
because of that way of computation, we have now a) pay the 6% CGT, or
the Doctrine of Presumed Gain. b) subject the income from sale to the
schedular income tax rates
Q: What is this doctrine of Presumed Gain?
A: In case of a sale of real property located in the The schedular income tax rates is the usual regular
Philippines and held as capital assets, there is no income tax that I keep on mentioning. The option is
need to prove that there is income gained before with the seller, who is the individual tax payer but
the transaction can be subjected to income tax. this option is only applicable if the buyer is a
government, political subdivisions, instrumentalities
So even assuming, you acquire a real property or GOCCs. So even if the property is a capital asset,
amounting to 500,000php (capital asset in the even if the property is in the Philippines, this
Philippines), and then you set it at 400,000php. The individual tax payer may still ought to subject the
zonal value and the market value per tax transaction to schedular rates.
declaration are also below 500,000php. If you will
compute mathematically, may lugi ka- you acquire
ii. Sale of principal residence (this is the favorite bar Kasi di naman agad ma-iidentify ni BIR na qualified
question) sya dun sa exemption until the construction of the
new principal residence. That’s the reason why, it is
A principal residence by nature is a capital asset, required in the Tax Regulation that the 6% CGT is
and if it is located in the Philippines then this one deposited in the mean time in an escrow account,
will apply. So even if in the sale of principal asset, it and if after the construction the tax payer did not
should be subjected to 6% CGT, it will be exempt meet the requirements for exemption then that
from CGT provided the following requisites Escrow or the bank holding the Escrow account will
concur: remit the balance to the BIR. But if all the
requirements are met, the escrow account will be
a. Proceeds are fully utilized to given in favor of the tax payer.
acquire/construct new principal residence
within 18 months from the sale of old principal d. Tax exemption must be availed once every 10
residence. (Note: The sale must precede the years only
acquisition/construction)
Ang premise dyan ng Tax Code, di ka naman dapat
The sale must precede the acquisition/construction, papalit palit ng principal residence- kaya once every
why? Because the requirement of the Tax Code is 10 years lang.
that you disposed of your principal residence for the
purpose of acquiring a new- that’s the rationale. The Remember this requirements, 18-30-10.
Tax Code is giving you an exception because the [use within 18 months, notify within 30 days,
Tax Code or the Congress realizes that you needed available only once in 10 years]
a Principal Residence. So there must be a sale of
the old to acquire a new. Full utilization within 18 months from the time of sale
of the old residence .in which case the sale must
In one of the questions, I gave to my students, precede the construction or acquisition of the new,
pinagpalit ko lang. Sinabi ko lang na the new notification within 30 days to the BIR, and the
principal residence was already acquired and then availment once every 10 years. Those are the
sinabi ko that the cost of acquisition is say 5M, so requirements under the Tax Code. But if you want
this is the situation: to impress your examiner, you can add the
requirement of escrow.
Q: There was an acquisition of a new principal
residence and to acquire this, a loan has to be Again,
obtained with the bank (assuming 5M). After 1. Passive Income, IRPOD = Final
that transaction, the tax payers sold the old Withholding Tax.
residence for 5M and the 5M was used to pay off 2. Capital Gains on Sale of Shares, shares
the liability with the bank. Will that qualify for must be issued by domestic corporations
the exception? not listed in the Stock Exchange = 6% CGT
A: No, because the sale must precede the (?).
acquisition of liability. 3. Capital Gains on Sales of Real Property,
RP must be located in the PH and must be
b. BIR is notified of the intention to avail tax a capital asset = 6% CGT.
exemption within 30 days from sale
So, if a transaction will not fall under those three
This is a notification requirement. general or broad categorizations, then it will be
considered as other income.
c. 6% CGT is deposited in an escrow account
Q: What’s the treatment of other income?
Third requirement is not seen in the Tax Code, but A: The income earner may be a Purely
it is provided in the Revenue Regulations. The 6% Compensation Income Earner, meaning to say, his
CGT is deposited in an escrow account. sole source of income is the compensation,
empleyado.
Q: What do you mean by an escrow account?
A: It is like an account in trust. A person may also be a Purely Self- Employed
Individuals/Professionals. Hindi siya empleyado,
At the onset, the presumption of the BIR is that “oh pero mayroon siyang sariling business na, or he is
di ka naman nag qualify with the requirements for engaged in the practice of his profession. Practice
the sale of principal residence, and therefore your of profession, let me qualify. If you are a lawyer, me,
6% CGT will be deposited in a bank account and by for example, I am a lawyer but I am an employee of
the end of the construction- if we can see that you Atty. Nilo,, for tax purposes I am not considered as
utilize the proceeds from the sale of the home within engaged in the practice of profession. I am
18 months we will release to you or the escrow considered as an employee.
account shall revert to you the CGT that we
deposited. Let us clarify that. When I say you are engaged in
the practice of profession, you have your own law
office. Like, Atty. Nilo for example. He is engaged in over 8m, 35% bracket. So that’s how you determine
the practice of profession. your tax rate.

The third is Mixed Income Earner. So, on one side You know how to compute for taxable income right?
you have your own business or you are engaged in Gross Income less Allowable Deductions. But
the practice of profession, and on the other side you under Section 34 introductory paragraph, no
are also considered an employee. deductions shall be allowed for purely
compensation income earners.
Q from Student: So does that term employee
include senior partners?
Income Source of Tax Tax Base
Atty: It depends on the Article of Co-partnership.
Earner Income Rate
There are General Professional Partnerships where
the Senior Partners or Partners are considered as
employees, but there are also articles of co- Graduat Taxable
partnership where these partners are considered as ed Income
partners. So if they are _ partners, they are Income
considered engaged with a profession, not an Tax
employee. These are definitely the major rates
classifications of income earners. Purely Business
Self- Income or
Income Source of Tax Tax Employed Professional
Individual Income OR OR
Earner Income Rate Base
s/
Professio
Purely Compensation Graduat Taxabl nals Gross
Compensa Income ed e Sales or
tion income Income Gross
Income tax 8% receipts,
Earner rates and other
Non-
Operating
Now, if the taxpayer is a Purely Compensation Income in
Income Earner, the source of income is definitely excess of
just compensation income. Yan lang talaga. P250,000

Q: What would be the applicable tax rate?

A: The applicable rate would be the Graduated Q: Next, how about purely self-employed
Income Tax Rates under Section 24 (A). Na-amend individuals/professionals?
nga yan starting January 1, 2023.
So, the source of income is business income or
Q: What would be the tax base? professional income. If you are engaged in
A: Taxable Income. business, it’s business income. If engaged in a
profession, it's professional income.
Your Graduated Income Tax Rates is in Section 24
(A). You’ll see there that as your income increases, Q: What’s the tax rate?
the applicable tax likewise increases. Schedular We have an option already, and the option is with
siya, naka-table siya. the taxpayer. The income may be subjected to
graduated income tax rates and if the taxpayer
Please go to Section 24 (A) (2). You see that not opted to use the graduated income tax rate, the tax
over 250,000 is subject to 0%? Meaning to say if base should be taxable income. OR:
your annual compensation is 250k or below, you
are not liable for income tax on compensation. The taxpayer may avail of the 8% optional income
tax rate. In which case the tax base shall be gross
If your income is say, 300k, you are technically sales, gross receipts and other non-operating
speaking, already in the 15% bracket. We’ll no income in excess of 250,000.
longer discuss the details of how to compute but
you can generally say that you are subject to the Q: Why 250,000?
15% bracket. A: Tingnan niyo yung tax table niyo, exempt kasi
yung 250,000. So that’s an “or” ha, an option
If your income is over 400k but not over 800k then provided to the taxpayer. But, later on we will
you are subject, generally to 20% income tax discuss that there are certain requirements before
bracket. a taxpayer may avail of the 8% option.

If you are over 800k but not over 2m, you are
subject to the 25% bracket. If the annual income is
2m but not exceeding 8m, then 30% bracket, and
 income tax rate shall be applicable to business or
professional income
Q: How about a mixed income earner?
Income taxation of RC, NRC, RA, NRA-ETB
Income Source of Tax Rate Tax Base
Earner Income Basic conditions to avail of the 8% income tax
rate option:
Compensation Graduated Taxable a. Taxpayer must not be a VAT-registered
Income; income Income person;
tax rates b. The gross sales/receipts and other
income should not exceed P3M;
AND AND AND c. The income is not compensation income
Mixed
Income Benefits of Availing the 8% income tax rate
Earner Business Graduated Taxable option:
Income or income Income a. In lieu of graduated income tax rates;
Professional tax rates and
Income b. In lieu of 3% percentage tax under Sec.
OR OR 116 of the Tax Code

8% Gross Sales NOTE:

or Gross Re: the first condition, Non-VAT persons are those
Receipts; and not subjected to VAT, he is subject to percentage
other Non- tax. If you are subject to VAT then you are not
Operating subject to percentage tax, vice versa.
Income
NOTE: 3% percentage tax under Sec. 116 of the
Ans: Source of income is either compensation TC.
income and business income or professional
income. If you are a Non-VAT person under Sec. 116, you
are required to pay percentage tax, but if you
Insofar as compensation income is concerned, the register under the 8% optional income tax rate, that
tax rate that will be used is the graduated income 3% shall also be (di ko po marinig).
tax rate, and the tax base shall be the taxable
income. Income taxation of NRA-NETB

In compensation income, it shall be the graduated

income tax rate and not the universal(?) option. Income taxation of NRA-NETB

Insofar as the business income or professional Classification of Income:

income is concerned, we still have the option to 1. Capital Gains from Sale of Shares of
apply the graduated income tax rate, in which case Stock not Traded in the Stock Exchange
shall be based on the taxable income or the 8% - 15% CGT
option, in which case, the tax base shall be the 2. Capital Gains from Sale of Real
Gross Sales or Gross Receipts; and other Non- Property - 6% CGT
Operating Income. 3. Other Income - 25% FWT

In contrast to the Purely Self-Employed income

earner , the tax base is Gross Sales or Gross NOTE: There is no Passive Income. The passive
Receipts, and other Non-Operating Income in income shall be under other incomes subject to
excess of P250,000. 25% Final Withholding Tax.

In the case of Mixed Income Earner, he has A. Capital Gains from Sale of Shares of Stock
compensation income and business income. The not Traded in the Stock Exchange
compensation income shall be subjected to - Sales of Shares of Stock, issued by
schedular rates. The schedular rate already has the Domestic Corporation and not listed in the
250,000 deduction, it has 250,000 exemption. Stock Exchange = 15% CGT.
B. Capital Gains from Sale of Real Property
That is why in the business income, there is no - Sale of real property in the Philippines,
longer a 250,000 deduction, otherwise, it will be classified as capital asset = 6% CGT.
doubled. C. Other income, including passive income,
that may be earned by NRA-NETB = 25%
Thus, compensation is always subjected to FWT.
graduated income tax rates and it will never be
subject to 8% optional income tax. The 8% optional
NOTE: Do not forget the Rule on Situes under Sec.,
42.

A NRA-NETB shall be subject to income tax but

only with regards to income earned within the
Philippines. Royalties from outside sources shall
not be subject to 25% FWT.