TAX1: INCOME TAXATION NOTES

I. INHERENT POWERS OF THE STATE:  Vertical Equity- the extent of one's ability to pay
Taxation Police Power Eminent Domain is directly proportional to the level of his tax
For the support or To protect the For Public use. base. (A earns more than B; A must pay more
the Gov’t welfare of the taxes than B)
people.  Horizontal Equity- requires consideration of a
Most Important Most Superior Important particular circumstances (A and B have the same
Inferior to “Non Superior to the Superior to the income but A incurred more expenses than B; B
Impairment “Non Impairment “Non Impairment must pay more taxes)
Clause” of the Clause” of the Clause” of the LIFEBLOOD DOCTRINE- Taxes are the lifeblood of the
Constitution Constitution. Constitution. Government
Gov’t Services Legal Protection Just
of welfare Compensation THE LIMITATIONS OF TAXATION POWER:
A. Inherent Limitations (TIPEN)
II. GENERAL PRINCIPLES OF TAXATION  Territoriality of Taxation
TAXATION- Inherent power of a sovereign state to impose a  International Comity
charge or burden upon persons, properties, or rights to raise  Public Purpose
revenues for the use and support of the government to  Exemption of the Gov’t
enable it to discharge its appropriate functions. Note: Exemption of the Gov’t limited to those for public
function. If for profit, taxable.
SCOPE OF TAXATION:  Non-Delegation of Taxing Power
 Unlimited- Tax is based on Gov't need; need is Note: Exemption of the Delegation to the LGUs
unlimited
 Plenary- without significant restrictions B. Constitutional Limitations
 Comprehensive- may cover persons, businesses,  Due Process of the law
activities, and rights  Equal Protection of law
 Supreme- can be imposed on anything  Uniformity Rule of Taxation
 Progressive System of Taxation
STAGES OF TAXATION (LAP):  Non Imprisonment of Non-payment of Debt and
 Levy- to impose the tax law Poll Tax
 Assessment- to determine how much is the taxes Note: Applies only to Basic Community Tax; Non-payment of
payable Additional Community tax can be imprisoned
 Payment- to pay the tax liability  Non impairment of obligations and contracts
Revenue- Gov’t needs  Free Worship Rule
PURPOSE Note: Properties and Revenues of Church are TAX EXEMPT.
Regulatory- Regulation of Goods, Activities  Exemption of the Church, charitable entities,
Theory of Taxation-Governments cannot exist without a non-profit cemeteries from PROPERTY TAXES
system of funding to provide services to the public  Non Appropriation of funds to church, or sect of
any religion
 Exemption of Non-Profit, Non-Stock Educational
Basis of Taxation (also called as Reciprocity or Mutuality
Institutions from REVENUE and ASSETS TAXES
Theory)-People provide taxes and the gov't provides
 Concurrence of the majority of all members of
services; this mutual support is the basis of taxation.
congress to pass laws granting tax exemption
Important Note: Receipt of Benefits is conclusively Note: Tax Law- Majority of those present
presumed. This means that one cannot avoid payment of Tax Exemption- Majority of all members (2/3)
taxes under the reason that no benefit was received.  Non Diversification of Tax Collections
THEORIES OF COST ALLOCATION:  Non Delegation of Taxing Power
 Benefit Received Theory- presupposes that the benefits  Non Impairment of the jurisdiction of Supreme
and the amount of taxes have a direct relationship; the Court to review tax cases
more benefits received from the government, the more  Bills concerning Taxes should originate from
taxes to pay. Congress
Note: Senate may concur with amendments.
 Ability to Pay Theory- presupposes that taxation should
also consider the taxpayer's ability to pay taxes; those  The delegation of taxing power to LGUs
who have more should be taxed more, those who have
less should be taxed less.
OTHER FUNDAMENTAL DOCTRINES IN TAXATION III.BUREAU OF INTERNAL REVENUE
Marshall Doctrine- presupposes that “taxation involves the Tasked to assess and collect taxes; under the supervision of
power to destroy” Department of Finance

Holme’s Doctrine- presupposes that “taxation is not the 1 Commissioner Commissioner of Internal Revenue
power to destroy while the court sits”; taxes have the power 4 Deputy a. Operations Group
to create Commissioners b. Legal Enforcement Group
c. Information Systems Group
Taxes are generally prospective in nature except when d. Resource Management Group
intended by congress under justifiable condition.
POWERS OF BIR:
Tax is not a debt; hence, it is not subject to set off except 1. Assessment and collection of all national internal
when (a) Taxpayer’s Claim has become due and revenue taxes, fees, and charges
demandable, (b) Obvious overpayment of taxes, (c) local 2. Enforcement of all forfeitures, penalties, and fines
taxes connected therewith, including the execution of
judgments in all cases decided in its favor by the
“Taxes can’t be assigned by way of contracts.”
Court of Tax Appeals and the ordinary courts
“Courts are not allowed to issue injunction cases against 3. Give effect to and administer the supervisory and
the government in pursuit to collect tax.” police powers conferred to it by NIRC or other laws.
POWERS OF THE CIR
Vague Tax Laws- Construed against the government, in 1. To interpret tax laws, subject to review by Secretary
favor of the taxpayers of Finance
2. To Obtain Information, and to Summon, Examine,
Vague Exemption Laws- Construed against the taxpayers, in and Take Testimony of Persons in ascertaining the
favor of the government correctness of any return, or in making a return
when none has been made, or in determining the
“He who claims tax exemption, has the burden of proof” liability of any person for any internal revenue tax,
or in collecting any such liability, or in evaluating tax
DOUBLE TAXATION- occurs when the taxpayer is taxed compliance,
twice by the same tax jurisdiction for the same object 3. To decide tax cases, subject to appellate jurisdiction
Elements of Double Taxation: of the Court of Appeals
Primary element- Same Object 4. To make assessments and prescribe additional
Secondary element- Same Period requirements for administration and enforcement
Same Authority 5. They examine tax returns and determine tax due
Same Purpose thereon
If all elements are present: DIRECT DOUBLE TAXATION 6. To conduct inventory taking or surveillance
If some: INDIRECT DOUBLE TAXATION 7. To prescribe presumptive gross sales and receipts
for taxpayers when:
TAX EVASION- avoiding taxes using illegal manners  Taxpayers failed to issue receipts or
TAX AVOIDANCE- reducing tax thru LEGAL PERMISSIBLE  The commission of internal revenue
MEANS believes that the books or records of the
TAX EXEMPTION- privilege, immunity or freedom form taxpayer's do not correctly reflect the
being subject to tax declaration in the return
TAX SHIFTING- mode of transferring tax burden to other 8. To terminate tax period when the taxpayer is:
taxpayers  Retiring from business
TAX CAPITALIZATION- adjustment of the value of an asset  Intending to leave the Philippines
caused by changes in tax rates  Intending to remove hide or conceal his
TAX AMNESTY- absolute pardon of all obligations property
TAX CONDONATION- forgiveness of tax obligations due  Intending to perform any act tending to
justifiable circumstances obstruct and proceedings for the collection
of the tax or under the same ineffective
PRINCIPLES OF A SOUND TAX SYSTEM (FAT): 9. To prescribe real property values
 Fiscal Adequacy- Do we have enough to cover gov’t 10. To compromise tax liabilities of taxpayers when
needs? taxpayer is:
 Administrative Feasibility- Do we have the  Insolvent or
capability of enforcing it?  When there are excessive assessments
 Theoretical Justice – Is it equitable? 11. To inquire into bank deposits
 12. To accredit and registered tax agents Note: Seamen are considered as NRC.
13. To refund or credit internal revenue taxes
14. To abate or cancel tax liabilities in certain cases CRITERIA FOR RESIDENCY:
15. To prescribe additional procedures or documentary CITIZENS:
requirements 1. Intention- whether for work, migration
16. To delegate his powers to any subordinate officer (non-resident), for tourism (resident)
with rank equivalent to division chief of an office 2. If intention not clear then, # of days spent
outside PH
NON DELEGATED POWERS OF CIR
 Power to recommend the promulgation of rules and
183 DAYS
regulations to the Secretary of Finance
RESIDENT NON-RESIDENT
 The power to issue rulings of first impression or to
reverse, revoke or modify any existing rulings of the
ALIENS:
Bureau
1. Intention- whether for work, migration
 The power to compromise or abate any tax liability
(resident), for tourism (non-resident)
Except:
2. If intention not clear then, # of days spent
 Assessments are issued by the regional offices
inside PH
involving basic deficiency tax of P500,000 or less
and Minor criminal violations discovered by
180 DAYS 1 YEAR
regional and district officials
NRANETB NRAETB RA
 The power to assign or reassign internal revenue
officers to establishments where articles subject to
On Corporations…
excise tax are produced or kept.
INCOME TAX MODEL: Domestic Corp. (DC)
GROSS INCOME CORP. Resident (RFC)
- ALLOWABLE DEDUCTIONS Foreign Corp. (FC) Non-Resident (NRFC)
NET TAXABLE INCOME
____________(TAX RATE) Note: Business Partnerships, except for General
TAX DUE Professional Partnership, are taxed as a corporation.
- ____________TAX CREDIT
TAX PAYABLE GENERAL RULES ON TAXATION:
1. RC- taxed on global income (in and out of
FINAL TAX- Not creditable to the against the tax due ph)
BASIC TAX- creditable to the taxes due 2. NRC
IV. KINDS OF TAXPAYERS RA Income IN ph only (Situs)
a. Individuals NRAETB
b. Corporations 3. NRANETB- 25% of Gross Income
4. DC-global income
PERSONS/ ENTITY SUBJECT TO INCOME TAX:
FC- income IN ph only
A. INDIVIDUALS-people (citizens and aliens)
5. NRFC- 25% of Gross Income
B. CORPORATIONS- artificial entity created by law
6. Passive Income (Except for Rent Income) is
C. TRUSTS- Objects entrusted to a third party to be subject to FINAL TAX.
given to a certain person 7. Income outside PH is subject to BASIC TAX.
D. ESTATE- Total value of assets, rights, and obligation ESTATE: (if produces income; taxable)
of a dead person Judicial- settled in court/ thru last will; TAXABLE
On Citizenship… ESTATE
Extrajudicial-agreement between heirs; NOT
Resident Citizen (RC) TAXABLE
CITIZENS TRUSTS: (if generates income; taxable)
Non-resident Citizen (NRC) Revocable – NOT TAXABLE; Taxed to grantor
TRUSTS
Resident Aliens (RA) Irrevocable- TAXABLE
Engaged in Business
ALIENS (NRAETB) V. GROSS INCOME
Non-resident Aliens Not engaged in Business Inflow of wealth to the tax payer whether legal or illegal
(NRA) (NRANETB)
ELEMENTS OF GROSS INCOME: Note: Excess Benefits of De Minimis are added to the
A. Return on Capital (Total Returns-Investments) 90,000 threshold before taxed.
B. Realized Benefits
Monetized Unused Vacation Leave (private): 10 days
C. Not Exempted by Law
Sick Leave (private): TAXABLE
Compensation Income- Income resulting from employer- Monetized Unused Vacation Leave (gov’t): No Limit
employee relationship Sick Leave (gov’t): No Limit
TYPES OF EMPLOYEES: Medical Cash Allowance To Dependents: 250/month
A. Regular- Basic Tax Rice Subsidy: 2000/month
Uniform Clothing: 6,000/year
B. Special Employees-No longer available
Medical Allowance to Employees : 10,000/year
C. Minimum Wage Earners- exempted Laundry Allowance: 300/month
KINDS OF COMPENSATION INCOME: Employee Achievement Award (other than cash):10,000/year
A. Regular- Fixed Remuneration (salary and allowance) Christmas and Anniversary Celebration: 5,000/year
B. Supplementary- performance based remuneration Daily Meal Allowance for OT,GS,NS: 25% of Basic Min. Wage
C. 13th Month Pay and Other Benefits Collective Bargaining Prod. Incentive: 10,000/year
MINIMUM WAGE INCOME EARNERS -TAX EXEMPT
REGULAR COMPENSATION INCOME
Salaries- received regularly or by interval Private Sector- does not exceed statutory minimum wage
Wage- earned hourly or daily Gov’t Sector- does not exceeds the non-agricultural private
Allowances- if received regularly, fixed and if by variable, sector minimum wage
supplemental Note: If Minimum Wage Earner has other source of income,
Note: Mandatory Contributions are TAX EXEMPT will still be exempt for income tax derived from
SUPPLEMENTAL COMPENSATION INCOME- all are taxable compensation income.
 Fees SEPARATION PAY
➢ Retainer fees of consultants, talents, and A. EXEMPT-cause beyond the control of the employee
directors who have no management functions in the B. TAXABLE-voluntary cause
business RETIREMENT PAY
 Commissions General Rule: TAXABLE
➢ To non-employees such as independent sales Exempt: a. BIR approved
agent business income to the sales b. 10 years of service
➢ If employee (compensation income) c. >=50 years old
➢ If non-employee (business income) d. First time to avail
 Tips and Gratuities FRINGE BENEFITS TAXATION
➢ Other income FBT- subject to FINAL TAX (Taxes of the employee)
 Overtime Pay Fringe Benefits are a form of compensation provided in
➢ Premium payment received for working beyond cash/kind in addition to salary
regular hours of work Treatment - Depends primarily on the classification or the
 Hazard Pay employee
➢ Amount paid by the employer to employees who Rank and File (not Part of Gross Income subject
are actually assigned to danger managerial or supervisory) to BASIC TAX (excess add to
 Night Differential 90,000 threshold)
➢ Pay received by an employee for every hour of Managerial and Supervisory Not part of gross income but
work between 10PM to 6AM subject to FBT
 Holiday Pay Non-taxable fringe benefits
➢ Pay received by an employee on occasion of a • Exempt from tax under special law
regular holiday or special • Contributions of the employer for the benefit of the
 Fringe Benefits employee to retirement, insurance, and hospitalization
13TH MONTH PAY AND OTHER BENEFITS • Given to rank & File, whether granted under a collective
This includes benefits other than fixed or supplemental like bargaining agreement or not
13th Month Pay, Christmas Bonus, and others • De minimis benefits
• Fringe benefits granted to the employee that is
General Rule: 13th Month Pay and Other benefits are not
required by the nature of, or necessary to, the trade,
taxable on the first 90,000 pesos, excess are subject to
business, or profession of the employer
basic tax.
• Fringe benefit given to the employee for the
DE MINIMIS BENEFITS- minimal benefits; NOT TAXABLE but convenience or advantage of the employer
subject to the following rules:
Note: Remittance to the Gov’t of FBT shall be made on a Exempt
quarterly basis  Lodging expense =
SEC 33A EXEMPT
A final tax shall be imposed on the GROSS-UP MONETARY  Food, beverages, and local
VALUE OF FRINGE BENEFITS granted to the employee by transportation = $300/Day
the employer, whether the latter is an individual or a is EXEMPT, excess =
corporation TAXABLE
EDUCATIONAL ASSISTANCE Employee
GROSSED-UP MONETARY VALUE
• If related to business OR
Monetary value divided by gross-up monetary rate
with obligation to remain in
GROSSED-UP MONETARY RATE
the employ of the employer
Percentage of which actual benefit received after taxes
= EXEMPT, otherwise
GUMV = Monetary Value or actual value TAXABLE
Gross-up monetary rate Dependents
GUMR= 100% - FBT Rate • Provided under
TAXPAYER FRINGE BENEFIT TAX RATE competitive scheme = NON
NRANETB 25% TAXABLE, if not, TAXABLE
OTHERS 35% USE OF AIRCRAFT, Aircraft and helicopter = Not
FBT= GUMV x FBTR HELICOPTER, OR YACHT Taxable
Frequently used Formulas: Yacht: MV= Acquisition
FBT= ___MV______ x FBTR cost/20
100%-FBTR BUSINESS INCOME- income from habitual engagement in
FBE= MV=FBT commercial activity
MONETARY VALUE, consideration PROFESSIONAL INCOME- income from exercise of
CASH MV=Cash Given/Paid; if profession
RENT, 50% of cash paid (but FORMULA:
in computing FBE for rent is GROSS SALES/REVENUE
still 100% of Cash Paid) - SALES RETURNS, DISCOUNTS, and ALLOWANCES
IN KIND MV= Purchase Price/ Book - COST OF SALES/ COGS
Value/ Zonal Value, GROSS INCOME
whichever is highest TYPES OF BUSINESS INCOME:
USE MV=50% of Depreciation; A. Merchandising (Buy and Sell)
FBT=FBE B. Service (Provide Services)
Useful Life: C. Manufacturing (Make and Sell)
5 years if PERSONAL PROP. D. Farming (agriculture)
20 years if REAL PROP.  Cash Basis-does not maintain inventory
PURCHASE OF PROPERTY IN  Accrual Basis- maintains inventory
INSTALLMENT  Crop Year Basis- Cost Recovery Method
(>1 year to produce crops, defer expenses;
PERSONAL PROPERTY MV=Purchase Price/5 recognize only when income is received)
50% if for use; 100% if given E. Construction (permanent structures)
(interest not included)  Completed Contract Method- recognizes
REAL PROPERTY MV= Purchase Price/20 income and expenses when project is
50% if for use; 100% if given completed
(interest not included)  Percentage of Completion- recognizes
FORGONE INTERST ON LOAN MV= Principal x (12%- rate) x income and expenses based on the % of
GRANTED time completion
FBE=FBT
FOREIGN TRAVEL PASSIVE INCOME- income received without having to exert
With no Documentary MV=100% of the Cost force or work; subject to FINAL TAX (except for Rent Income;
Evidence Basic Tax)
With Documentary Evidence  Business class or economy INTEREST INCOME- income derived from depositing, lending
ticket = EXEMPT of money, goods, or credit.
 First class ticket = 30% INTEREST INCOME FROM BANKS- Subject to FINAL TAX
AMOUNT TO BE TAXED: ROYALTIES- Payment or portion of proceeds paid to the
(Philippine Peso) owner of the rights; Subject to FINAL TAX except for Active
INDIVID. NRANETB CORP. NRFC Royalties (make it as a business)
Short Term 20% 25% 20% 25%
Indiv NRANETB CORP NRFC
Long Term EXEMPT 25% 20% 25%
Books, 10% 25% 20% 25%
Short Term: <5 years Works,
Long Term: >5 years Musical
If Deposit is Pre-terminated: Other 20% 25% 20% 25%
< 3 years 20% Sources
3 to <4 years 12%
4 to <5 years 5% DIVIDENDS- portion of income received by stockholders
5 years above 0% INDIV NRAETB NRANETB CORP NRFC
Domestic 10% 20% 25% Exempt 25%
(Foreign Currency)
(Final Tax) or
RESIDENT NON CORP. NRFC
15%*
RESIDENT
Foreign Basic1 Basic1 25% Basic** 25%
Amount 15% EXEMPT 15% EXEMPT
(Basic Tax) or
Note: Interest Income that is not from banks is subject to 15%*
basic tax. *if with tax sparing rule derived from reciprocity between
nations
RENT INCOME- subject to regular income tax (Basic Tax)
**Exempt IF reinvested for business operations within the
It includes the following:
next taxable years, if used for WCR, and if holds at least 20%
 Obligations of the Lessor assumed by the Lessee
was held uninterrupted
 Advance Rentals 1
NRC
o Item of gross income upon receipt:
NRA Income in ph
a. Unrestricted
FC only
b. Restricted but to be applied in the
How to know if income is from ph? Predominance Test
future
If dividends are issued by:
o Not an item of gross income
NRFC- Exempt less than 50%- w/o
a. If it constitute a loan W/I GI in ph for 3 years 50%-85% partly
b. If it is a security deposit to RFC GI w/o ph for 3 years 85% above-w/i
guarantee payment W/O
 Leasehold Improvements
o Out Right Method ANNUITIES-refers to instalment amount paid to insurance
Improvement is recognized when the coverage returned by Insurance Corporation
improvement is completed (use the Fair Taxable only to the extent of return
Market Value at the date of completion)
o Spread Out Method PRIZES
Recognize income every year of the INDIV NRANETB CORP NRFC
improvement >10,000 20% 25% BASIC 25%
Annual Inc.= BV at the end of the lease term <10,000 BASIC 25% BASIC 25%
Remaining term of the lease Foreign BASIC (RC EXEMPT BASIC (DC EXEMPT
Termination of lease contract before lease term: Sources ONLY) ONLY)
Out Right Method Spread Out Other Exempt for Prizes
Method - Those acquired w/o effort of joining
Income FMV @ Annual Inc= BV @ - Sports competition that are sanctioned by the
completion end/RT National Sports Org
Pre-termination Additional Inc= 0 Additional Inc.= WINNINGS
FMV @ INDIV NRANETB CORP NRFC
termination- PCSO/LOTTO
Income already <10,000 E X E M P T
recognized >10,000 20% 25% BASIC 25%
Loss of property FMV @ the time Loss of income FOREIGN BASIC EXEMPT BASIC EXEMPT
before the end of of completion - recognized (RC (DC
lease term Depreciation ONLY) ONLY)
TAX INFORMER REVEAL-subject to 10% of the taxes  Shall refer to all real properties held by a taxpayer,
collected; subject to FINAL TAX whether or not connected with his trade or business
Rule: 10% of taxes collected or 1,000,000 pesos (whichever is and which are not included among real properties
LOWER) considered as ordinary asset under Sec 39 A1 of the
VI. DEALINGS ON PROPERTIES NIRC.
 Disposition of property  Residual definition
 Involves the sale, exchange, and other disposition of  All real property which is not considered as ordinary
properties such as ordinary assets or capital assets asset
 Income derive from sale or exchange of assets =  Preferential tax treatment
onerous RR7 2003
 Gain = excess of selling price over costs  Real estate dealer (Buy-Sell) – ORDINARY ASSET
 Loss = excess of cost over selling price  Real estate developer (Buy-Develop-Sell -- ORDINARY
DETERMINATION OF GAIN (LOSS) ASSET
SALE OF PROPERTY EXCHANGE OF PROPERTY  Real estate lessor – lease/rent (buy-rent) – ORDINARY
SELLING PRICE XXXXX FM VALUE XXXXX ASSET
LESS: COST XXXXX LESS: COST XXXXX  All real properties acquired in the course of trade or
GAIN (LOSS) XXXXX GAIN (LOSS) XXXXX business by a taxpayer habitually engaged in the sale
of real property who has:
To determine the cost of the property, we must know how o authority to sell
the property is acquired o more than 6 real property transaction in the
DETERMINATION OF COST OF PROPERTY previous year, whether taxable or not, IS AN
MODE OF ACQUISITION MEANING OF COST ORDINARY ASSET
1. PURCHASE Acquisition Cost – Cost  All real properties which are used or being used or
attributable to sale have been previously used in trade or business of
2. INHERITANCE FMV @ the date of the taxpayer NOT engaged in the real estate
inheritance business – ORDINARY ASSET
3. DONATION FMV @ the date of gift OR  Real properties held by taxpayers changing business
the value in the hands of from real estate business to non-real estate business
the donor (whichever is – ORDINARY ASSET unless subsequently disposed to
lower) the buyer
4. WITH LESS The amount paid for the  Real properties formerly forming part of the stock in
CONSIDERATION property trade of a taxpayer engaged in the real estate
business, or formerly being used in the trade or
What is the importance of classifying asset as ordinary or
business of a taxpayer engaged or not engaged in
capital?
the real estate business, which were later on
- The need to classify an asset as ordinary or capital is
abandoned and became idle – ORDINARY ASSET
underlined by the concept that capital assets have
preferential tax treatment against ordinary assets  Real properties formerly forming part of the stock in
trade of a taxpayer not engaged in the real estate
Classification of Assets business, which were later on abandoned and
ORDINARY ASSETS became idle for more than 2 years prior to
 Stock in trade of the taxpayer or other property of consummation of the sale or transaction. – CAPITAL
a kind that would property be included in the ASSET
inventory of the taxpayer if on hand at the end of  Real property transferred through succession or
taxable year. donation to the heir or done who is not engaged in
 Property used in trade or business of a character If 1 yes = ordinary, all is no = capital asset the real
which is subject to the allowance for depreciation estate business with respect to the real property
 Real property used in trade or business of the inherited or donated, and who does not
taxpayer subsequently use such property in trade or business
Questions to be an ordinary asset – CAPITAL ASSET
1. Is the asset part of inventory?  Real property received as dividend by the
2. Is the asset subject to depreciation? stockholders who are not engaged in the real estate
3. Is the asset available for sale? business and who do not subsequently use such
4. Is the asset is used in trade or business? property in trade or business – CAPITAL ASSET
If there is 1 yes, then it is an Ord. Asset
CAPITAL ASSETS
 Real Property Principal Sale is TAX EXEMPT if (a)
Types of Gain/Losses on Dealings in properties
Located in Residence proceeds are used to
1. Ordinary gain or loss
Philippines acquire a New Principal
 Arises from the sale, exchange, barter and Residence, (b) notified BIR
other disposition, including pacto de retro
within 30 days from
sales and other conditional sales of
sale,(c) reacquisition is 18
ORDINARY ASSETS
months from date of sale,
2. Capital gain or loss
(d) availed once every 10
 Arises from sale, exchange and other
years, (e) citizen or
dispositions, including pacto de retro sales
resident alien
and other conditional sales of CAPITAL
ASSETS Note: Tax Exempt is only
TAX TREATMENT up to the amount of cost of
ORDINARY GAIN (LOSS) -100% TAXABLE; Part of New Residence, presented
Gross Income subject to below**
BASIC TAX Non-Principal Subject to FINAL TAX
-100% DEDUCTIBLE (Part of Residence (Capital Gains Tax of 6%)
Allowable Deductions) The CGT is based on FMV
CAPITAL GAIN (LOSS -Subject to FINAL TAX or Selling price, whichever
 Real Properties in is higher
Philippines OR
 Domestic Shares of BASIC TAX (at the choice of
Stocks the taxpayer) IF seller is
individual and buyer is
-Subject to BASIC TAX
Other properties (Real Gov’t
property located on abroad, Other Exceptions from CGT
personal property other than  CARP
domestic shares)  Socialized housing units by NHA
NOTE: TAXATION SCHEME
IN THE IMAGE ABOVE

Sale, Exchange, and other disposition of Real Property

as Capital Asset located in the Philippines
**Sale of Principal Residence  Taxpayer who sells or disposes real property on
Proceed=New Proceeds > actual cost Proceeds < installment basis, provided the initial payments do
of new (underutilized) actual cost not exceed 25% of selling price
of new To Illustrate:
(over If Personal Property
utilized) a. Regular Sale –Installment Method
b. Casual- SP >1000 Installment Method
=0 𝑈𝑛𝑑𝑒𝑟 =0 -IP/SP ≤25%
CGT

𝑥 𝐶𝐺𝑇
𝑆𝑃 If Real Property
a. IP/SP ≤25%-Installment Method
Formula for Recognizing Income:
On the year of Sale…
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Cost of New
Residence

𝒙 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

=Cost of Old 𝑈𝑡𝑖𝑙𝑖𝑧𝑒𝑑 =Cost of 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
𝑥𝐶𝑜𝑠𝑡 𝑜𝑓 𝑜𝑙𝑑 Subsequent Collection…
𝑆𝑃 Old+ Excess

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝒙 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡 𝐶𝑜𝑙𝑙. 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒

Sale, Exchange, and other disposition of Domestic Stocks Instalment method

Domestic Shares Listed in PSE Exempt from Income  Income subject to BASIC TAX = Gross income (net
of Stocks Tax but subject to taxable income)
percentage tax to  Capital gain tax = FINAL TAX = CGT payable
the 6/10 of 1% of  VAT = output VAT
Gross Selling Price 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛
X Total Gross Income/CGT/Output VAT
(0.6%) 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
Not Listed in 15% CGT based on
PSE Net Capital Gain (SP- INITIAL PAYMENT = Down payment + Payment made in the
Cost of Shares) year of sale + Excess of mortgage over cost (if any)
SELLING PRICE = Cash received or receivable + excess of
Note: If FMV is mortgage over cost (if any)
higher than the CONTRACT PRICE = Cash received or receivable + Excess of
selling price, deemed mortgage over cost (if any)
to be donation. If no mortgage: SP = CP
Exempt Dispositions of CGT (if stocks sold are: ) Ordinary Gain = SP – COST (BASIC TAX)
- Original issuance of shares of stock
- Exchange of stocks for services VII. ALLOWABLE DEDUCTIONS
- Worthlessness of shares DEDUCTIBLE EXPENSES-expenses incurred by a taxpayer
- Gratuitous transfer of shares engaged in business that can be subtracted from a
Net Gain = _____Selling price – Cost____ company’s income being subject to taxation
Basis of the shares of stocks Requisites:
1. Ordinary and Necessary- in the ordinary course of
INSTALLMENT METHOD business
The amount of income reported under the installment 2. Sufficiently Substantiated- needs evidence
method is a portion of the collection received during the 3. Reasonableness- No Limit but must be reasonable
year 4. Withholding Tax Requirement- must withheld and
Who Can Use the Installment Method? remit taxes
 Taxpayer sells personal property on installment
TYPES OF ALLOWABLE DEDUCTIONS
(regularly)
1. ITEMIZED DEDUCTIONS- There shall be allowed as
 Taxpayer makes a casual sale of the personal
deduction from gross income all the ordinary and
property other than inventory, on installment basis;
necessary expenses paid or incurred during the
provided the selling price exceeds 1,000 and the
taxable year in carrying on or which are directly
initial payments do not exceed 25% of selling price
attributable to, the development, management,
operation and/or conduct of the trade, business or
exercise of a profession including a reasonable
 allowance for salaries, travel, rental and TESDA provided that it does not exceed 10% of
entertainment expenses. direct labor wage (RA 11534,March 26, 2021)
2. OPTIONAL STANDARD DEDUCTION (OSD) – A Expenses Allowable to Private Educational Institutions. - In
maximum of 40% of their gross sales or gross addition to the expenses allowable as deductions, a private
receipts shall be allowed as deduction in lieu of the educational institution may at its option elect either: (a) to
itemized deduction. This type of deduction shall not deduct the whole cost of expenditures or (b) to capitalize
be allowed for non-resident aliens engaged in trade the cost/capital outlays deduct allowance for depreciation
or business. An individual who opts to avail of this
deduction need not submit the Account Information INTEREST
Return (AIF)/Financial Statements. The amount of interest paid or incurred within a taxable
year on indebtedness in connection with the taxpayer's
ITEMIZED DEDUCTIONS (ExInTaLoBa DepDep ChaRD PeT) profession, trade or business shall be allowed as deduction
EXPENSES from gross income:
i. A reasonable allowance for salaries and wages Provided, however, that the taxpayer's otherwise allowable
and other forms of compensation for personal deduction for interest expense shall be reduced by twenty
services actually rendered. Including GUMV of percent (20%) of the interest income subjected to final tax
Fringe Benefits granted by the employer to the
Note: Interests paid in advance shall be claimed as
employee. deduction in the year the indebtedness is paid.
Provided, that the corresponding withholding
Note: With the effectivity of the CREATE Law that changes
taxes have been withheld and remitted to BIR, if
the corporate rate to 25% or 20%, it will also change the
not, then NOT DEDUCTIBLE
interest arbitrage as follows:
ii. A reasonable allowance for travel expenses
domestic and abroad, while away from home, in  For individuals, the interest arbitrage will be 20%. Based
the pursuit of trade, business, or practice of on the formula shown in this video, the 20% arbitrage is
profession computed as (Corporate Rate - Final Tax on Interest) /
Corporate Rate OR (25% - 20%) / 25% = 20%
Provided that it is Ordinary, Necessary, and
 For corporations subject to 25% corporate rate, the
Substantiated, if not, then NOT DEDUCTIBLE interest arbitrage is 20%. Same computation above.
iii. A reasonable allowance for rentals or other
 For corporations subject to 20% corporate rate, the
payments for continued use or possession for the
interest arbitrage is 0% since there is no difference from
purpose of trade, business, or practice of
the corporate rate of 20% and final tax on interest
profession.
income of 20%.
Provided that the use of lease of real properties,
Exceptions:
the lessee, shall withhold 5% creditable tax from
(a) If within the taxable year an individual taxpayer reporting
the gross payment to the lessor, and shall remit
income on the cash basis incurs an indebtedness on which
the same to the BIR, otherwise, NOT DEDUCTIBLE
an interest is paid in advance through discount or otherwise:
iv. A reasonable allowance for Entertainment,
Provided, That such interest shall be allowed as a deduction
Amusement and Recreation Expense during the
in the year the indebtedness is paid: Provided, further, That
taxable year that are directly connected to the
if the indebtedness is payable in periodic amortizations, the
development, management, and operation of
amount of interest which corresponds to the amount of the
trade, business and practice of profession of the
principal amortized or paid during the year shall be allowed
taxpayer provided that it does not exceed the
as deduction in such taxable year;
limit of:
 Company is Seller of Goods- 0.5% of Net (b) If both the taxpayer and the person to whom the
Sales payment has been made are related or have any relation; or
 Company is Seller of Services- 1% of Net
(c) If the indebtedness is incurred to finance petroleum
Sales
exploration
 Engaged in sales of both goods or properties
& services Optional Treatment of Interest Expense - At the option of
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 the taxpayer, interest incurred to acquire property used in
𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐸𝑎𝑟 trade business or exercise of a profession may be allowed as
𝑇𝑜𝑡𝑎𝑙 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
a deduction or treated as a capital expenditure.
v. An Additional Deduction for Business Expenses
vi. An additional deduction of the taxable income ½
Note: Interests owing to the government are deductible FOR
of the value of the labor and training expenses
THE FULL AMOUNT
for skills development of enterprise-based
trainees enrolled in Public SHS or College or
TAXES (b) The amount of income derived from each country, the
Taxes paid or incurred within the taxable year in connection tax paid or incurred to which is claimed as a credit under
with the taxpayer's profession, trade or business, shall be said paragraph, such amount to be determined under rules
allowed as deduction, except: and regulations prescribed by the Secretary of Finance; and
 The income tax; (c) All other information necessary for the verification and
 Income taxes imposed by authority of any foreign computation of such credits.
country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return LOSSES
his desire to have to any extent the benefits of Losses actually sustained during the taxable year and not
paragraph (3) of this subsection (relating to credits compensated for by insurance or other forms of indemnity
for taxes of foreign countries); shall be allowed as deductions
 Estate and donor's taxes; and Business Loss- can come from a normal operation of the
 Taxes assessed against local benefits of a kind company or an irregular event that sends corporate
tending to increase the value of the property activities into tailspin
assessed.
Provided, that when refunded or credited, shall be included Types of loss
as part of gross income in the year of receipt to the extent of 1. Ordinary loss
the income tax benefit of said deduction.  Ordinary assets are deemed normal to the taxpayers
 Deductible in FULL
Limitations on Deductions - In the case NRAETB and RFC, 2. Capital loss
the deductions for taxes shall be allowed only if and to the
 Capital assets which are assets not used in business,
extent that they are connected with income from sources trade, or profession
within the Philippines.
 Deductible only to the extent of capital gains
(Tax Credit) Credit against Tax for Taxes of Foreign
GR: Actually sustained during the taxable year; shall be
Countries- If the taxpayer signifies in his return his desire to
allowed as deductions only when these requisites are
have the benefits of this paragraph, the tax imposed shall be
present:
credited with:
1. Incurred in trade, business, or profession
a. Resident Citizen and Domestic Corporation. - In the
case of a citizen of the Philippines and of a domestic 2. Pertain to the property connected with trade, business,
corporation, the amount of income taxes paid or incurred or profession, if the loss arises from fire, storms,
during the taxable year to any foreign country; and shipwreck, or other casualties, or from robbery, theft,
b. Partnerships and Estates. - In the case of any such
and embezzlement
individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his 3. A declaration of loss must be filed within 45 days from
proportionate share of such taxes of the general the date of discovery
professional partnership or the estate or trust paid or 4. Loss must not be compensated by insurance or
incurred during the taxable year to a foreign country, if his
distributive share of the income of such partnership or trust indemnity contract
is reported for taxation purposes .  Loss on issued party is non-deductible unless
there is excess
Taxpayer can opt to claim the taxes in the foreign country as
 Loss of value of assets – non-deductible but
deduction; it is in the allowable deduction OR can opt to
impairment loss that became actually sustained
claim it as tax credit
can be deducted such as those due to legal
Formula for Limit reason
Limit 1 (per Country basis): 5. No loss shall be allowed as a deduction at the time
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑖𝑛 1 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 of filing of return, such loss can be claimed as a
𝑥 𝑇𝑎𝑥 𝐷𝑢𝑒
𝐶𝑜𝑛𝑠𝑜𝑙𝑖𝑡𝑎𝑡𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 deduction for estate tax purposes in the estate tax
Limit 2 (Global; All Countries) return
𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑁𝑒𝑡 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 Rules on restoration or replacement of destroyed
𝑥 𝑇𝑎𝑥 𝐷𝑢𝑒
𝐶𝑜𝑛𝑠𝑜𝑙𝑖𝑑𝑎𝑡𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒 properties
Or Actual Tax Paid WHICHEVER IS LOWER 1. Total destruction
 Tax base of the old property shall be claimed as
Proof of Credits - The credits shall be allowed only if the a loss while the replacement cost is subject to
taxpayer establishes to the satisfaction of the Commissioner allowance for depreciation. Applicable if
the following: restoration involves total replacement of old
(a) The total amount of income derived from sources property.
without the Philippines;
2. Partial deduction Losses incurred are NOT DEDUCTIBLE if the following are
 Restoration cost shall be expense as to the present:
extent of the tax basis of the property a. Sale is form a non-dealer of stocks
immediately before the casualty b. Loss is sustained and not resulting from
 Deductible loss is the amount of restoration shrinkage of stock prices
subject to the limit of the book value of the c. Where within 30 days Before or 30 days
asset After the sale, the seller acquires stocks
IDENTICAL to stocks or securities sold or
NET OPERATING LOSS CARRY-OVER
entered into a contract to acquire IDENTICAL
Net operating loss
stocks
 Excess of the allowable deductions over the gross
Formula for the amount of non-deductible
income from business or exercise of a profession during 𝐼𝑑𝑒𝑛𝑡𝑖𝑐𝑎𝑙 𝑆𝑡𝑜𝑐𝑘𝑠 𝐴𝑞𝑢𝑖𝑟𝑒𝑑
the taxable year. 𝑁𝑜𝑛 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑏𝑙𝑒 = 𝑥 𝐿𝑜𝑠𝑠
𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑜𝑐𝑘𝑠 𝑆𝑜𝑙𝑑
NOLCO
 Pertains to the amount of net operating loss that is
Non Deductible Losses are capitalized.
𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑖𝑜𝑛 1
allowed by the law to be carried over as deductions 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝐿𝑜𝑠𝑠 = 𝑥 𝑁𝑜𝑛 − 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑏𝑙𝑒
against available net income in the following 3 years 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒𝑠
Abandonment of losses
Special Case:  A contract area where petroleum operates are
R.A. 4494 (BAYANIHAN TO RECOVER AS ONE ACT) undertaken is partially or wholly abandoned, all
 As implemented by RR 25-2020, any NOL for accumulated exploration and development shall be
year 2020 and 2021 shall be carried over for 5 allowed as deduction. Accumulated expenditures
years incurred shall be allowed as a deduction only from any
Mines, other than oils and gas wells income derived from the same contract area.
 NOC sustained in the first 10 years of business  In case a producing well is subsequently abandoned, the
may be carried over to the next 5 years un-amortized costs thereof, as well as the un-
Requisites for the deductibility of NOLCO depreciated costs of equipment directly used therein ,
1. The taxpayer must not exempt from income tax during shall be allowed as a deduction in the year such well,
taxable year when the NOLCO was incurred equipment or facility is abandoned by the contractor:
2. No substantial change in the ownership of the business Provided, That if such abandoned well is re-entered and
of enterprise production is resumed, or if such equipment or facility is
A change at least 75% of either paid up capital or restored into service, the said costs shall be included as
nominal value of the outstanding shares of a part of gross income in the year of resumption or
corporation is deemed substantial change in business restoration and shall be amortized or depreciated, as
ownership the case may be.
Who Can Claim NOLCO? Wagering Losses - Losses from wagering transactions shall
a. Individual Taxpayers engaged in trade, business, or be allowed ONLY to the extent of the gains from such
practice of profession transactions.
b. Domestic and Resident Foreign Corporation subject
BAD DEBTS
to Basic Tax
When does debt become bad?
c. Special Corporation subject to preferential tax rates
1. Likely that a borrower will default payment
such as private educational institutions, hospital,
2. When the borrower can no longer pay his/her debt
and regional area headquarters
Difference in recognizing bad debts
Taxpayers who are exempt enjoying a tax holiday, subject to Accounting standard
tax on gross income, or those subject to final income tax,  Any expense is recognized whenever there is a
cannot deduct NOLCO possibility that a debt may become bad
NRFC cannot claim NOLCO because they are taxed on gross Tax Code
income and not on net income  Any expense is allowed for deduction if and only if it is
ascertained to be worthless and has been actually
Note: NOLCO is claimable in FIFO written off
Wash Sale  Only bad debts representing loss of income and not
Sale of a security at a loss by a non-dealer of stock and capital
repurchase of the same or substantially identical security Requisites of claim for deduction of bad debts
shortly before or after. 1. Debt must have been ascertained to be worthless
2. Must be changed off within the taxable year
3. Connected to the taxpayer’s profession, trade, or
business
4. Must be under accrual basis of accounting  Properties NOT RELATED to production
5. It must not be incurred from a related party o Only Straight Line
Securities becoming worthless o Useful life is 5 years
Domestic banks and trust companies Properties used in mining operations
 Securities becoming worthless are bad debt expense  Expected Useful Life
and are not capital loss o 10yrs or less- use normal useful life
 Bonds o More than 10yrs- can use useful life between
 Debentures 5 to useful life
 Notes  Allowable deduction for obsolescence
 Certificates NO DEDUCTIBLE DEPRECIATION FOR YACHTS, AIRPLANES,
 Other evidence of indebtedness HELICOPTER or BOATS (unless used for transportation of
Capital losses not deductible as bad debts goods)
 Bad debts from personal receivables
Additional information
 Securities becoming worthless other than domestic
 Deductibility of depreciation when taxpayer is a trust,
banks and trust companies
but the principles and requisites are the same regardless
 Loss on capital investment
of the type of taxpayer
Recovery of bad debts previously written off
 Additional requirement for depreciation particularly for
 Recognized as income in the books and is taxable in the
motor vehicle is that the cost of the motor vehicle must
year of recovery
not be more than 2.4M. If the cost of the motor vehicle,
 Tax is imposed on the amount recovered
it will be considered as a non-depreciable asset, thus,
Additional information:
the depreciation is non-deductible
 It requires a lot of documentary evidence before the
taxpayer can deduct bad debts CHARITABLE AND OTHER CONTRIBUTIONS
 It must be virtually certain that the receivable cannot be Charitable and other contributions
collected, and the taxpayer has EXERTED ALL POSSIBLE  Money, noncash item or hours
EFFORTS to impose collection, but still the debtor failed Types according to deductibility:
to comply. This may require hiring collection lawyers  Deductible
who are not under the employ of the taxpayer to  Partially deductible
impose collection. Classification of contributions
 However, under BSP rules, banks' loans outstanding may A. Fully deductible
be considered as bad debts when approved by the 1. Donations to the government or political subdivisions
Monetary board of the Banko Sentral ng Pilipinas, including fully owned government and controlled
especially for microfinancing which involves small corporation to be used exclusively in undertaking
amount of individual loans but big amount if already priority activities as determined by NEDA
consolidated a. Education d. Human Settlements
DEPRECIATION b. Health e. Science and Culture
Requisites c. Youth and Sports f. Economic Development
1. Ordinary and Reasonable 2. Donations to foreign institution or international
2. Charged off during the year organization in pursuance of or in compliance with
3. Must not exceed the cost of property agreements, treaties or special laws.
4. Schedule of allowance must be attached to the 3. Donations accredited domestic non-government
return organizations made exclusively for:
Straight Line Method a. Scientific e. Youth and Sports
𝐶𝑜𝑠𝑡 − 𝑆𝑉 b. Research f. Health and Social Welfare
𝐷𝑒𝑝. = c. Educational g. Cultural and Charitable
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
Declining Balance Method d. Character Building h. Combination thereof
For donations exceeding 1,000,000 in value, the
𝑅𝑎𝑡𝑒 = 1 − 𝒏√𝑆𝑉/𝐶𝑜𝑠𝑡
donor is required to notify the revenue district officer
Sum of the Years (SYD) Method
(RDO) with jurisdiction to his place of business within
𝐿𝑖𝑓𝑒(𝐿𝑖𝑓𝑒 + 1)
𝑆𝑢𝑚 𝑜𝑓 𝑌𝑒𝑎𝑟𝑠 = 30 days from the receipt of the COD
2
Rules for properties used in petroleum operations Requisites for full deductibility
 Properties DIRECTLY related to production A. NGO must be organized and operated exclusively
o Straight Line/ Declining Balance Method B. Non-profit organization makes utilization of the
o Useful life is Actual or 10yrs, whichever is contributions not later than 15 day of the third month
th

shorter C. Administrative expenses of NGO do not exceed 30%

of its total expenses
 D. Members of the board of trustees must not receive OPTIONAL STANDARD DEDUCTION
remunerations A standard rate of 40% that a taxpayer may opt to choose as
E. In the event of liquidations, the asset of NGO will be charge against his gross income in lieu of the itemized
distributed deductions
F. Amount of contribution other than money must be Reasons for OSD:
valued at acquisition cost  Taxpayer CANNOT SUBSTANTIATE the itemized
Contributions subject to limit deduction; in OSD there is no need for evidence
i. Donations to government of the Philippines or political  Taxpayer believes that he would save on income tax
subdivisions exclusively for public purposes not in in using OSD
accordance with priority activities
ii. Donation to non-accredited, non-government GR: Individual is 40% of Gross Sales/ Receipts
organizations or domestic corporations that were not Corporations are 40% if Gross Income
stated above. Advantages of OSD:
1. A taxpayer who opts to avail of this deduction need not
Limit of deduction for contributions submit Account Information Form/Financial Statements but
 10% for individual may be required to do so by BIR
 5% for corporations 2. Need not to substantiate OSD
3. Easier to compute
Gross income xxxx 4. Tax Benefits to those who have minimal expenses
Less: other deductible expenses xxxx Disadvantages of OSD:
Net income before contributions xxxx 1. Once the taxpayer opts to choose OSD in the first quarter,
Multiply by percentage limit % it is irrevocable throughout the year
Deduction limit xxxx 2. Taxpayers with actual expenses that is higher than that of
Compare with actual amount, whichever is lower OSD
Additional information: Formula:
Classifications of charitable and other contributions as to Individual
deductibility Gross Sales/Receipts xxxx
1. Fully deductible Less: Discounts (xxxx)
2. Deductible subject to limit of 5% or 10% of tax income Sales Returns (xxxx)
before donations Net Sales xxxx
Multiplied by 40%
RESEARCH AND DEVELOPMENT OSD xxxx
Costs for improvement of processes and formulas as well as
the development of improved or new products Sales or Receipts xxxx
Add: Other Income xxxx
It may either be: Total Gross Income xxxx
 For acquisition of improvements of properties subject Less: OSD (xxxx)
to depreciation- NOT DEDUCTIBLE AS R&D, but as Taxable Income xxxx
depreciation
 Other development costs that are chargeable to capital Corporation
account- the taxpayer may elect to (a)Deduct Outright Gross Sales/Receipts xxxx
or (b) Amortize over 60 months (5 years) from date Less: Discounts (xxxx)
benefits are received Sales Returns (xxxx)
PENSION TRUSTS Net Sales xxxx
Retirement Benefits Less: COGS (xxxx)
 Previously Discussed in the previous topic Gross Income xxxx
 ½ of monthly Salary X No. of years in service Multiplied by 40%
 ½ of monthly salary, by DOLE, is equivalent to 22.5 OSD xxxx
days
Minimum Retirement Pay= Daily Rate (22.5 days) No. of Gross Income xxxx
years Less: OSD (xxxx)
Taxable Income xxxx
Current Service Cost=100% Deductible
Past Service Cost = Amortized over 10 years
VII. TAX ON INDIVIDUALS VIII. TAX ON CORPORATIONS
Individuals are subject to: Corporations are subject to:
a. Basic Income Tax a. Basic Income Tax
b. Final Withholding Tax b. Final Withholding Tax
c. Capital Gains Tax c. Capital Gains Tax
Classification Classification
Taxpayer Subject to tax Tax basis Tax rate TAXABILITY
RC World NTI Basic PH ABROAD RCIT TAXBASE
NRC Within NTI Basic
DC YES YES 25% or 20% NTI
RA Within NTI Basic
NRA-ETB Within NTI Basic RFC YES NO 25% NTI
NRA-NETB Within GI 25% FWT NFRC YES NO 25% GI
BASIC INCOME TAX BASIC INCOME TAX
Source of Income Tax Treatment Source of Income Tax Treatment
COMPENSATION Graduated Tax (refer to Tax REGULAR CORPORATE 25% of Taxable Income
Table) INCOME TAX (RCIT) Except if:
BUSINESS/EXERCISE OF a. Gross Sales is < 3M a. Taxable Income < 5M AND
PROFESSION Taxpayer has the option b. Total Assets is < 100M
to: (excluding land)
 Use Tax Table (Tax Base Then, 20% of Taxable Income
is Taxable Income) MINIMUM CORPORATE July 1, 2020-June 30, 2023
 8% of Gross Income, in INCOME TAX (MCIT) 1% of Gross Income
excess of 250,000 in
lieu of Graduated and July 1, 2023 onwards
3% percentage tax (Tax 2% of Gross Income
Base is Gross Income) IMPROPERLY Not Applicable in CREATE
ACCUMULATED EARNINGS LAW
b. Gross Sales is >3M
TAX (IAET)
Use Tax Table
MIXED INCOME a. Compensation NOTES FOR MCIT
Use Tax Table  Applies to DC and RFC except:
b. Business - Educational institutions
o Gross Sales is < 3M - Non-profit Proprietary Hospitals
Taxpayer has the option - Banking institutions under the Expanded FCDS
to: - Corporations under special income tax regime
 Use Tax Table (Tax Base  Effective beginning the 4th Year since establishment
is Taxable Income) (Year Established+4))
 8% of Gross Income, in  Applicable even if Business suffers a loss
lieu of Graduated and  Excess MCIT (MCIT>RCIT) can be carried over for 3
3% percentage tax (Tax years, and can be credited against RCIT if
Base is Gross Income) RCIT>MCIT
c. Gross Sales is >3M  The corporate income tax liability shall be based on
Use Tax Table the NCIT or the MCIT, whichever is higher
Special Corporations
Note: a. Gross Sales/Receipts- Net of Sales Returns, Allow, Domestic Special Corporations
Disc.  Proprietary Educational Institutions
b. 8% is in lieu of Graduated Tax and 3% Business Tax  Proprietary Hospitals
Business Tax 12% VAT a. VAT registered  Foreign Special Corporations
b.>3m  International Carrier
3% Percentage a. Non VAT  Regional Operating Headquarters
Tax b. <3M  Regional Area Headquarters
 Offshore banking units
Note: GROSS INCOME FOR INDIVIDUAL IS GROSS SALES  Branch Remittance
 Owner, lessor or distributor of cinematographic film
  Non-resident lesser/owner of machinery, equipment, IX. TAX ON PARTNERSHIPS
and aircraft TYPE OF TAX TREATMENT TAX
 Non-resident lesser/owner of vessels charted by PARTNERSHIP
Philippine nationals GENERAL Business Tax BASIC TAX
Domestic Special Corporations PROFESSIONAL exempt; a pass
 Subject to a special rate of income tax based on their PARTNERSHIP through entity
TAXABLE INCOME therefore the
 10% - January 1,1998 to June 30, 2020 partners are
 1% - July 1, 2020 to June 30, 2023 taxed, not the
 10% - July 1, 2023 onwards business
However, if the gross income from UNRELATED trade, BUSINESS Taxed as FINAL TAX
business or other activity exceeds 50% of the gross PARTNERSHIP Corporations;
income derived from all sources, they shall be treated as distribution of
ORDINARY CORPORATIONS income treated as
 Operational treatment of Capital Outlays dividends
As its option it may either: GENERAL PROFESSIONAL PARTNERSHIP
 Outright expense
Gross Income xxxx
 Capitalized and Depreciate
Less: Allowable Deductions (xxxx)
Net Distributable Income xxxx
Special corporations – Foreign Corporation
Add: Other Income (Subject to Basic) xxxx
International Carrier
Total Net Distributable Income xxxx
 Subject to 2.5% based on GROSS PHILIPPINE BILLING
(Subject to 10% Withholding Tax upon distribution; treat as tax
 GROSS PHILIPPINE BILLINGS – the amount of gross
credit)
revenue derived from carriage of persons, excess
baggage, cargo, and mail originating from the Taxable Income of Partners of GPP
Philippines in a continuous and uninterrupted flight, Gross Income-Other Sources xxxx
irrespective of the place of sale or issue and place of Less: A/D (xxxx)
payment of the ticked Net Taxable Income (Other Sources) xxxx
 Income of international carrier doing business in the Gross Income-Share from GPP xxxx
Philippines other than those classified as GROSS Less: A/D (if GPP uses itemized, and was not
PHILIPPINE BILLINGS may be subject to 25% income tax Deducted on GPP, substantiated) (xxxx)
Regional Operating headquarters Net Taxable Income (Share from GPP) xxxx
 10% until 2021 NTI (Other Sources) xxxx
 25% effective January 1, 2022 and shall be subject to NTI (Share from GPP) xxxx
MCIT Total Taxable Income xxxx
Branch remittance (Use Tax Table)
 Any profit remitted by a branch to its head office shall Tax Due xxxx
be subject to A TAX OF 15% which shall be BASED ON Less: Tax Credit (xxxx)
THE TOTAL PROFITS APPLIED or earmarked for Tax Payable xxxx
remittance without any deduction for the tax
component BUSINESS PARTNERSHIPS
Owner, lessor or distributor of cinematographic film
 25% of its GROSS INCOME from ALL SOURCES within the Gross Income xxxx
Philippines Less: Allowable Deductions (xxxx)
Net Taxable Income xxxx
Non-resident lessor/owner of machinery, equipment, x Tax Rate (25% or 20%)
aircraft
Tax Due xxxx
 7.5% of GROSS RENTALS OR FEES
Net Taxable Income xxxx
Non-resident lessor/owner of vessels chartered by Less: Tax Due (xxxx)
Philippine Nationals Net Distributable Income xxxx
 4.5% of GROSS RENTALS, lease or charter fees from
Add: Other Income Subject to Final Tax, Net xxxx
leases or charters by Filipino citizens or corporations Total Net Distributable Income xxxx
(Subject to 10% Final Tax upon distribution)
X. TAX ON ESTATES AND TRUSTS
Estate
1. Judicial – taxable
2. Non-judicial – non-taxable (heirs)
Trust Taxed as Individuals
1. Revocable – non-taxable (trustor)
2. Irrevocable – taxable

Gross Income
Less: Allowable Deductions
Special Deductions:
 Amount distributed to heirs or beneficiary
 Income of the estate or trust taxable to heirs or
beneficiary
 To be deductible it must be an apportion of the
income
Can distribute:
Property = inheritance or donation (non-taxable)
Income = taxable
Corpus – property of the estate