INCOME TAXATION

A. Gross income means all income derived from whatever source, including (but not limited) to the following items:
1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions,
and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
Special rules on gross income:
1. Compensation for personal services
a. paid in cash - actual amount paid is taxable
b. paid in kind – compensation income is the fair market value of the property received
c. tips and gratuities – taxable
2. Compensation paid in promissory note
If the note can be discounted, the fair market value of note upon receipt is the fair discounted value.
3. Transportation, representation and other allowances received by officials or employees
a. General rule: Taxable as compensation income
b. Exception: If they are -
i. Ordinary and necessary expenses of the employer;
ii. Paid or incurred in the pursuit of trade, business or profession;
iii. The employee is required to account/ liquidate.
c. The excess of advances over the actual expenses incurred – taxable income if such amount is not returned to the
employer.
d. Vacation and sick leave allowances – taxable, except monetized value of unutilized vacation leave credits not
exceeding ten (10) days of employees of private firms
4. Condonation of debt
a. Debtor rendered services to the creditor – taxable income to the debtor;
b. No services rendered – taxable to the creditor as gift given to the debtor;
c. Creditor is a corporation while the debtor is a stockholder – it has the effect of a payment of dividend;
d. Creditor is the stockholder while debtor is the corporation – amount condoned is considered as an additional
investment.
5. Recovery of bad debts previously deducted (application of the tax benefit rule)
a. Taxable – if deduction of bad debt has reduced the tax liability of taxpayer.
b. Not taxable – if there was no reduction in the tax liability of the taxpayer
6. Dividend income
a. Received by domestic corporation from another domestic corporation – not taxable
b. Received by resident foreign corporation from a domestic corporation – not taxable
c. Received by nonresident foreign corporation from a domestic corporation – 25% but maybe 15% if there is
application of tax sparing credit.
d. Dividends received by domestic corporation from nonresident foreign corporations shall be exempt from tax if:
1. The dividends actually received or remitted into the Philippines are reinvested in the business operations of
the domestic corporation within the next taxable year from the time the foreign-source dividends were
received or remitted;
2. The dividends received shall only be used to fund the working capital requirements, capital expenditures,
dividend payments, investment in domestic subsidiaries, and infrastructure project; and
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3. The domestic corporation holds directly at least twenty percent (20%) in value of the outstanding shares of the
foreign corporation and has held the shareholdings uninterrupted for a minimum of two years at the time of
the dividends declaration.
7. Rules on lease contracts and leasehold improvements
a. Rent for the use of property – taxable income to the lessor; deductible expense to the lessee.
b. Taxes and other expenses assumed by lessee on behalf of the lessor – constitutes additional rent and taxable
income to the lessor;
c. If ownership of leasehold improvements on leased premises will be transferred without cost to the lessor upon
termination – income to the lessor which may be reported using either:
1. Outright method – the fair market value of the improvements in the year of completion is reported as income.
2. Spread out method – the book value of the improvements at the termination of the lease contract is spread over
the remaining term of the lease.
d. Depreciation on the improvements – the lessee may claim depreciation of the improvements over the
remaining term of the lease or the life of the improvements, whichever is shorter.
e. Premature termination of lease – the income to be reported by the lessor shall be computed by subtracting the
amounts already reported as income by the lessor from the book value upon termination.
EXCLUSIONS from gross income (EXEMPT from income tax)
1. Proceeds of life insurance policy payable upon the death of the insured. It is taxable if (a) the insured outlives the
policy, or (2) the insured assigned the policy.
2. Return of premiums either during the term, at the maturity, or upon surrender of the contract.
3. The value of the property acquired by gift, bequest, devise or descent;
4. Compensation for personal injuries or sickness received from insurance plus damages;
5. Income of any kind which are contained in a treaty binding upon the Philippine government.
6. Retirement benefits, pensions, etc.
A. Retirement benefits– requisites
a. The employer must maintain a private pension plan which is approved by the BIR;
b. The employee has been in the service of the same employer for at least 10 years;
c. The retiring employee must not be less than 50 years old upon retirement
d. The benefit of the exemption can be availed of only once.
B. Separation pay– separation of employee from service must be due to:
a. Death, sickness, physical disability, or
b. Any cause beyond the control of the employee.
Examples: Dismissal due to installation of labor saving device, retrenchment, bankruptcy and redundancy
7. Prizes and awards – given to religious, charitable, scientific, educational, artistic, literary, or civic achievement,
provided that:
a. The recipient did not join the contest; and
b. He is not required to render substantial future services.
8. Benefits received by persons residing in the Philippines under U.S. laws administered by U.S. Veterans
Administration;
9. Benefits received from SSS, GSIS including retirement gratuity received by government officials and employees.
10. Income derived by foreign governments;
11. Income derived by the government or its political subdivisions from public utility or any essential governmental
function.
12. Prizes and awards granted to athletes in -
a. local and international sports competitions,
b. in the Philippines or abroad,
c. sanctioned by their national sports associations
d. and the sports association must be recognized by the Philippine Olympic Committee (POC)
13. 13th month pay and other benefits up to P90,000;
14. GSIS, SSS, Philhealth, Pag-Ibig contributions and union dues of individuals;
15. Gains from sale of bonds, debentures and other certificate of indebtedness with a maturity period of more than 5
years;
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16. Gains realized by investors upon redemption of shares in a mutual fund company.
17. Compensation income of Minimum Wage Earners (MWEs) who work in the private sector (and public sector not
exceeding the minimum in the non-agricultural sector) and being paid the Statutory Minimum Wage (SMW), as fixed
by the Regional Tripartite Wages & Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned. including their holiday pay, overtime pay, night shift
differential pay and hazard pay.

Non-Recognition of Gain or Loss on Exchange of Property

No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a
reorganization and exchanges property in pursuance of a plan or reorganization solely for stock or securities in another
corporation that is a party to the reorganization.
The gain or loss shall also be recognized if property is transferred to a corporation by a person, alone or together with
others, not exceeding four (4) persons, in exchange for stock or unit of participation in such corporation of which as a
result of such exchange, the transferor/s. collectively, gains or maintains control of said corporation. Provided, that
stocks issued for services shall not be considered as issued in return for property.

TAX ON INDIVIDUALS
1. Rules on situs
a. Only resident citizens are taxable on income derived from sources within and without the Philippines.
b. Resident aliens, nonresident citizens and nonresident aliens are taxable on income within only.
2. Tax on NRA NETB – final withholding tax of 25% from all sources within.
Exceptions:
a. Capital gains on sale, exchange or other disposition of real property (capital asset) located in the Philippines
Rate: 6%
Base: Whichever is the highest among:
1. Selling price
2. FMV as determined by the Commissioner (zonal value)
3. FMV as determined by Provincial or City Assessor (assessor’s value)
b. Sale of shares of stocks not listed and traded in the stock exchange.
Tax Base and Tax Rate: 15% of net capital gain
3. Income earned by special groups of aliens
Tax Rate and Base: 15% of gross income coming from salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances received by:
a. Aliens employed by Regional or Area Headquarters and Regional Operating Headquarters of multi-national
companies;
b. Aliens employed by Offshore Banking Units (OBU);
c. Aliens employed by Foreign Petroleum Service Contractor and Subcontractor.
This special tax rate shall entitle only the employees who have been availing of this preferential tax rate before
January 1, 2018.
4. RATES OF TAX ON CERTAIN PASSIVE INCOMES
a. Income payments to resident citizen, resident alien, nonresident citizen and nonresident alien (ETB) taxpayers:
1. 20% final tax on income derived from sources within
a. Interest from Philippine currency bank deposit;
b. Yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements;
c. Royalties (except on books and other literary works and musical compositions which shall be subject to
10% tax);
d. Prizes (except prizes amounting to P10,000 or less which shall be subject to the graduated tax);
e. Winnings;
f. Sweepstakes and lotto winnings (except amounts not exceeding P10,000)
g. Interest income from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates which was pre-terminated by the holder before the 5th year at the rates herein prescribed:
Holding Period Rate
4 years to less than 5 years 5%
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3 years to less than 4 years 12%

Less than 3 years 20%
Note: If the maturity is more than 5 years - tax exempt
b. Income payments to citizen or resident alien individuals.
1. 15% on interest income received from a depository bank under the Foreign Currency Deposit System.
2. 10% final tax on cash and/or property dividends actually or constructively received from any of the
following:
a. domestic corporation
b. joint stock company
c. insurance or mutual fund companies
d. on the share of an individual partner in the distributable net income after tax of a partnership (except
general professional partnership), or
e. on the share of an individual in the net income after tax of an association, a joint account or a joint
venture or consortium of which he is a member or a co-venturer:
c. 20% final tax on income payment to NRA ETB out of income from sources within.
1. Cash and/or property dividend from a domestic corporation;
2.Share of a partner in the distributable net income after tax of a partnership (except general professional
partnership);
3.Share in the net income after tax of an association, a joint account, or a joint venture of which he is a
member or a co-venturer;
4.Interest from Philippine currency bank deposit (foreign currency – exempt).
TAX ON POGO WORKERS
Philippine Offshore Gaming Operators (POGO) workers are taxable at 25% final tax of gross income but shall in no case
the monthly tax be lower than P12,500.
The term gross income shall include, whether in cash or in kind, basic salary/wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, received from such service provider of offshore
gaming operator.
THE 8% INCOME TAX OPTION
1. This is allowed if:
a. The taxpayer is individual.
b. Earning self-employment income
c. Annual gross sales/receipts do not exceed P3,000,000 and is not VAT-registered.
2.Other important points:
a. If the income is a pure compensation income, the 8% option is not allowed;
b. If the taxpayer is a mixed income earner, the compensation income shall be subject to the graduated tax rates;
c. Non-operating incomes are included in the determination of the P3 million threshold and the computation of the 8%
income tax, unless exempt;
d. Businesses which are not subject to the percentage tax under Sec 116 cannot avail of the 8% income tax;
e. Self-employment incomes that were subjected to the 8% income tax are no longer subject to business tax.
f. Those who claimed deductions (either OSD or itemized) cannot avail of the 8% income tax option.
TAX ON CORPORATIONS
1. Situs of taxable income
Income
Within Without Tax Base
a. Domestic corporation Yes Yes Taxable income
b. Resident foreign corporation Yes No Taxable income
c. Nonresident foreign corporation Yes No Gross income
Tax rate – 25% of taxable income
20% income tax rate shall be imposed on domestic corporation if it complies with the following
requirements:
a. With net taxable income not exceeding P5 million; and
b. The total assets do not exceed P100 million (excluding land on which the particular business
entity’s office, plant, and equipment are situated)
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2. Minimum Corporate Income Tax (MCIT) – 2% of gross income if higher than Normal Income Tax (NIT).
a. Effectivity: 4th taxable year immediately following the year the corporation has commenced business.
b. Carry forward of excess minimum corporate income tax – three (3) immediately succeeding taxable years.
c. Limitation on carry over - the excess of MCIT over the NIT can be carried forward only to the next three (3)
succeeding years when the normal income tax is greater than the MCIT. It cannot be claimed as credit against the
MCIT itself or against any other losses.

Application of Minimum Corporate Income Tax (MCIT)

CORPORATION RATE EFFECTIVITY
Domestic corporation and 1% July 1, 2020 to June 30, 2023
Resident foreign corporation 2% July 1, 2023
Offshore Banking Units (OBUs) 1% Upon effectivity of the CREATE
2% July 1, 2023
Regional Operating Headquarters 1% Jan 1, 2022 to June 30, 2023
2% July 1, 2023
Special Corporations:
Rate Tax Base
Proprietary educational institutions and hospitals
(from July 1, 2020 to June 30, 2023) 1%
Taxable Income
Effective July 1, 2023 10%
Exception: If income from unrelated activity is more
than 50% of entire gross income 25% Taxable income

International carrier 2.5% Gross Phil. Billings

Nonresident cinematographic film owner, lessor or 25% Gross income within
distributor
NR owner or lessor of vessels chartered by Phil. Gross rental, lease or charter fees within
4.5%
Nationals
NR owner or lessor of aircraft, machineries and other Gross rentals or fees within
7.5%
equipment
Interest on loans contracted on or after
Interest on foreign loans 20% August 1, 1986

Resident Foreign Corporations

Tax rate and tax base: 25% of taxable income effective July 1, 2020
1. Offshore Banking Units (OBUs) – taxable as resident foreign corporation; 25% of taxable income
2. Regional Operating Headquarters (ROHQ) – tax rate of 25% effective January 1, 2022
3. 25% of interest income from a depositary bank under the expanded foreign currency deposit system.
4. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock exchange

Non-Resident Foreign Corporations

1. Tax rate and tax base: 25% of entire gross income within.
2. 25% intercorporate dividend received from a domestic corporation. However, if the country in which the NRFC is
domiciled, allows a tax credit equivalent to the difference between the regular income tax rate of 25% and the 15% tax
on intercorporate dividends or does not impose tax on dividends, the rate to be imposed shall be 15%.
3. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock exchange
4. Passive income subject to final withholding tax
Income within of domestic and resident foreign corporation subject to 20% final tax:
a. Interest on bank deposit
b. Yield or any other monetary benefit from deposit substitutes
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c. Yield from trust funds and similar arrangements

d. Royalties
Tax Exempt Corporations:
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Local water districts
d. Home Development Mutual Fund (HDMF)
EXEMPTIONS FROM TAX ON CORPORATIONS
The following organizations are not taxable in respect to income received by them as such:
a. Labor, agricultural or horticultural organization not organized principally for profit;
b. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without profit;
c. A beneficiary society, order or association operating for the exclusive benefit of the members such as fraternal
organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
d. Cemetery company owned and operated exclusively for the benefit of its members;
e. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic,
or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure
to the benefit of any member, organizer, officer, or any specific person;
f. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of
which inures to the benefit of any private stockholder or individual;
g. Civic league or organization not organized for profit but operated exclusively for the promotion of general welfare;
h. A nonstock and nonprofit educational institution;
i. Government educational institution;
j. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely
for the sole purpose of meeting its expenses; and
k. Farmers’ fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed under the code.
TAX ON PARTNERSHIPS
1. General professional partnership – tax exempt, but required to file income tax return.
2. Business partnership - taxable as a corporation, subject to corporate tax.
3. Share of partners in the net income of business partnership – subject to a final tax of 10%
4. Share of partners in the net income of professional partnership - taxable to the partners as ordinary income, whether
distributed to them or not (principle of constructive receipt).
5. Income payments to partners in a professional partnership in the form of drawings, advances, sharings,
allowances, stipends, etc. – subject to creditable withholding tax of 15% if the income payments to the partner for the
current year exceeds P720,000, and 10% if otherwise.
6. Co-ownership refers to the ownership of undivided thing or right which belongs to two (2) or more persons.
 Exempt from income tax if the activities of the co-owners are limited to the preservation of the property
and collection of income therefrom
 Taxable as a corporation if the co-owners make contribution of efforts, or new capital, or if the co-
ownership income is reinvested.
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7. Partnership formation
a. There must be an unmistakable intention among the partners to form a partnership.
b. Mere sharing of gross returns does not in itself establish a partnership.

ESTATES AND TRUSTS

1. Estate. - All property, rights and obligations of a person which are not extinguished by his death and also those which
have accrued thereto since the opening of the succession.
Rules:
a. Taxable only if it is under judicial settlement;
b. Taxed in the same manner as individual.
2. Trust. - The arrangement created by will or an agreement under which title to property is passed to another for
conservation or investment with the income therefrom and ultimately the corpus (principal) to be distributed in
accordance with the directions of the creator as expressed in the governing instrument.
Rules:
a. Taxable if the trust is irrevocable;
b. Taxed in the same way as estates under judicial settlement, including exemptions and rule of accrual.

SOURCES OF INCOME
Income Test of Source of Income
1. Income from services - Place of performance
2. Rent - Location of property
3. Royalties - Place of use of intangible
4. Gain on sale of real property - Location of property
5. Gain on sale of personal property purchased
in one country and sold in another - Place of sale
6. Gain on sale of domestic shares of stock - Income within
7. Interest - Residence of debtor
8. Dividend
a. From domestic company - Income within
b. From foreign company - Partly income within and partly without if 50% or more of the
gross income of the company for the preceding 3 years prior
to declaration of dividend was derived from sources within.
Income without if less than 50% of the gross income of the
-
company for the preceding 3 years prior to declaration of
dividend was derived from sources within.
Formula to compute income within:
Phil. Gross Income (3 yrs)
Income Within = --------------------------------- x Dividend
Total Gross Income (3 yrs)
CAPITAL ASSETS
CAPITAL ASSETS means property held by the taxpayer (whether or not connected with his business) but does not
include the following because they are classified as ordinary assets:
1. Stock in trade;
2. Property which would be included in the inventory if on hand at the close of taxable year;
3. Property primarily for sale in the ordinary course of his trade business;
4. Personal property used in business and subject to allowance for depreciation;
5. Real property used in trade or business.
A. RULES ON SALE OR EXCHANGE OF PERSONAL PROPERTY (CAPITAL ASSET)
1. Capital losses – deductible only from capital gain.
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2. Corporations – no holding period, no carry over

3. Holding period (not applicable on corporations)
a. Short-term (not more than 12 months) - 100%
b. Long-term (more than 12 months) - 50%
4. Carry over
a. The amount allowed is limited to the net income during the year in which the loss was sustained.
b. Carry-over is good only for one year.

B. SALE OF REAL PROPERTY (CAPITAL ASSET)

1. By individual – 6% final tax
Tax Base: Whichever is the highest among:
- Selling price
- FMV as determined by CIR (zonal value)
- FMV as determined by the City or Provincial Assessor (assessor’s market value)
Exemption: Capital gains realized from sale of principal residence if -
a. The proceeds are utilized in acquiring new residence within 18 calendar months from the date of
sale;
b. Commissioner is notified within 30 days from the sale or disposition;
c. The exemption can be availed of only once in every 10 years.
d. The 6% capital gains tax due on the presumed capital gains shall be deposited in interest bearing
account with an authorized bank under an escrow agreement.
2. By corporation - 6% final tax on sale of lands and/or buildings not used in the business.
C. SALE OF SHARES OF STOCKS
1. Not traded shares
Tax Base & tax rate: 15% of Net Capital Gain
2. Traded shares – the sale is exempt from income tax, but subject to Other Percentage Taxes (Stock Transaction Tax).
D. TRANSACTIONS RESULTING TO CAPITAL GAINS OR LOSSES EVEN IF THERE IS NO SALE OF CAPITAL
ASSETS:
1. Retirement of bonds, etc.
2. Short sales of property
3. Option gains or losses
4. Worthless securities
5. Liquidating dividend
6. Liquidation of partnership.
E. WASH SALES occur when substantially identical securities are acquired within a 61-day period beginning 30 days
before the sale and ending 30 days after sale.
Wash sales are not deductible from gross income. However, the wash sales provisions do not apply to:
a. Dealers in stocks or securities if the sale or disposition is made in the ordinary course of trade or business.
b. Short sale transactions. – A sale of stock which the seller does not own (he merely borrows the stock certificate
through or from the broker) and subsequently buys or covers the stock to complete the transaction.
DEDUCTIONS FROM GROSS INCOME
I. Itemized Deductions
A. EXPENSES in general
1. Requisites for deductibility:
a. Must be ordinary and necessary;
b. Paid or incurred during the taxable year;
c. Connected with trade, business or profession;
d. Supported by sufficient evidence; and
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e. Not against the law or public policy.
2. Travelling expenses
- include transportation expenses, meals, lodging and laundry expenses
- incurred while away from taxpayer’s tax home
3. Entertainment, amusement and recreation expenses
Requisites for deductibility:
a. Paid or incurred during the taxable year;
b.Directly connected to the development, management and operation or directly related to or in furtherance of the
conduct of his or its trade business or profession;
c. Must not have been paid directly or indirectly to an official of the government (including foreign) or private entity
if it constitutes a bribe, kickback or other similar payment.
d.Not contrary to law, morals, public policy or public order.
e. Duly substantiated by proof.
f. Must not exceed ½ % of net sales or 1% of net revenue for taxpayers engaged in sales of goods or properties, or
sale of services, respectively. However, if the taxpayer is deriving income from both, the allowable deduction
shall be based on an apportionment formula taking into consideration the percentage of the net sales/net
revenue to the total net sales/net revenue, but in no case shall exceed the maximum percentage ceiling.
4. Bribes, kickbacks and other similar payments - not deductible if paid, directly or indirectly, to official or employee
of the government or private entity.
5. Private educational institutions – costs incurred for the expansion of school facilities may at its option:
a. Capitalize and claim the annual depreciation as deduction; or
b. Deduct as expenditures during the taxable year.
6. Non-deductible expenses:
a. Personal living and family expenses;
b. Amount paid out for new buildings or for permanent improvements or betterments made to increase the value
of any property or estate;
c. Amount expended in restoring property or in making good exhaustion thereof for which an allowance is or has
been made; or
d. Premiums paid on any life insurance policy covering the life of an officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such policy.
7. Additional deduction from taxable income
An additional deduction from taxable income of 1/2 of the value of labor training expenses incurred for skills
development of enterprise-based trainees enrolled In Public Senior High Schools, Public Higher Education
Institutions, or Public Technical And Vocational Institutions and duly covered by an apprenticeship agreement
under the Labor Code of the Philippines shall be granted to enterprises, provided that:
a. For the additional deduction for enterprise-based training of students from public educational institutions, the
enterprise shall secure proper certification from the DepEd, TESDA, or CHED; and
b. Such deduction shall not exceed 10% of direct labor wage.
B. INTEREST
1. Requisites for deductibility:
a. There must be an indebtedness.
b. The indebtedness must be that of the taxpayer;
c. The indebtedness is connected with taxpayer's trade, business or profession;
d. Legal liability to pay interest.
e. Interest must be paid or incurred during the taxable year.
2. Reduction of interest expense by interest income
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a The taxpayers’ interest expense shall be reduced by an amount equivalent to 20% of interest income subjected to
final tax. However, if the final withholding tax rate on interest income of 20% will be adjusted in the future, the
interest expense reduction rate shall be adjusted accordingly.
Corporations subject to tax rate of 20%, the deduction is 0% since there is no difference in the income tax rate on
the taxable income with the tax rate applied on the interest income subjected to final tax.
b. Interest incurred or paid by the taxpayer on all unpaid business related taxes shall be fully deductible from gross
income and shall not be subject to the limitation on deduction.
3. Optional treatment of interest - at the option of the taxpayer, interest incurred to acquire property used in trade,
business or exercise of profession may be allowed as a deduction or as a capital expenditure.
4. Non-deductible interest
a. Interest on loan between related taxpayers.
b. Interest on loan paid in advance through discount by individual taxpayer reporting income on cash basis.
c. If indebtedness is incurred to finance petroleum operations.

C. TAXES
- pertains to taxes proper which does not include, surcharges, penalties, or fines incident to delinquency.
1. Requisites for deductibility:
a. Paid or incurred within the taxable year;
b. Connected with taxpayer's profession, trade or business;
c. Imposed directly on the taxpayer.
2. Non-deductible taxes
a. Philippine income tax
b. Foreign income tax, if claimed as tax credit
c. Estate and donor's tax
d. Special assessments
3. Tax credit - the taxpayer's right to deduct from income tax due the amount of tax he has paid to a foreign country,
subject to limitations.
The following taxpayers are allowed to claim tax credit:
a. Resident citizens
b. Domestic corporations
c. Members of general professional partnerships
d. Beneficiaries of estate or trust.
4. Tax benefit rule – taxes claimed as deduction, when refunded or credited, shall be included as part of gross income
in the year of receipt to the extent of the income tax benefit of said deduction.

D. LOSSES
1. Requisites for deductibility:
a. Actually sustained during the taxable year;
b. Not compensated by insurance or other forms of indemnity
c. Incurred in connection with trade, profession or business;
d. Sustained in a closed and completed transaction.
e. Arose from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
f. Not claimed as a deduction for estate tax purposes.
g. Reported to the BIR within 45 days from the occurrence of such loss.
2. Special Rules on Losses:
a. Wagering loss – deductible only to the extent of the gains from such transactions.
b. Loss on sale between related taxpayers is not deductible.
c. Voluntary removals of buildings
1. Taxpayer purchased the land without intending to use the building– the value of old building razed plus
other costs are added to the cost of the land.
2. An old building is demolished to construct new one – the value of the building demolished plus demolition
costs are deductible as losses.
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d. Loss on shrinkage in value of stocks due to fluctuation in market - not deductible; the loss allowed is that
actually suffered when the stocks are disposed of.
e. Abandonment losses- when a producing well is abandoned, the unamortized costs thereof and the undepreciated
costs of equipment directly used therein are deductible in the year of abandonment, but if the service is restored
later, said costs shall be included as part of gross income and shall be amortized or depreciated.
f. Net Operating Loss - the excess of allowable deduction over gross income of the business in a taxable year can be
carried over as deduction from gross income of the next three (3) succeeding years. However, operating losses
incurred in 2020 & 2021 shall be allowed as carry-over and deducted from gross income in the next five (5)
consecutive taxable years.
Rules:
1. Net loss in a taxable year during which the taxpayer was exempt from income tax are not deductible.
2. Deduction is allowed only if there is no substantial change in the ownership of business.
3. Not less than 75% in nominal value of outstanding issued shares if the business is held by or on behalf of the
same persons;
4. Not less than 75% of the paid up capital of the corporation, if the business is in the name of a corporation, is held
by or on behalf of the same persons.
5. Carry-over is not allowed if the corporation will pay income tax based on MCIT.
6. Carry-over is not allowed if the taxpayer availed of the optional standard deduction in computing taxable
income.
E. BAD DEBTS
1. Requisites for deductibility:
a. Valid and subsisting debt;
b. Debt is ascertained to be worthless and uncollectible;
c. Charged-off during the taxable year;
d. Connected with profession, trade or business;
e. Not sustained in a transaction entered into between members of the same family or related taxpayers.
Tax benefit rule (equitable doctrine of tax benefit) - recovery of bad debts previously allowed as deduction in
the preceding years shall be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
F. DEPRECIATION
Requisites for deductibility:
1. There must be an exhaustion, wear and tear (including reasonable allowance for obsolescence);
2. Property is used in business;
3. Reasonable allowance for depreciation.
Methods of depreciation allowed
1. Straight-line method
2. Declining balance method
3. Sum-of-years-digit method
4. Other methods prescribed by Secretary of Finance, upon the recommendation of the Commissioner of Internal
Revenue.
G. DEPLETION
- the removal, extraction or exhaustion of a natural resource like mines and gas wells as a result of production or
severance from such mines or wells.
R u l e s:
1. The method of depletion allowed is Cost Depletion Method.
2. When the allowance shall equal the capital invested, no additional allowance shall be granted.
3. In the case of a foreign corporation, depletion of oil and gas wells and mines shall be only oil and gas wells and
mines located in the Philippines.
H. PENSION TRUSTS
Requisites for deductibility:
1. Employer must have established a pension or retirement plan;
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2. Pension plan must be reasonable;

3. Funded by the employer;
4. Amount contributed by the employer must no longer be subject to his control.
I. RESEARCH AND DEVELOPMENT
Requisites for deductibility:
a. Paid or incurred during the taxable year;
b. Connected with trade, business or profession
Alternatives:
1. Treat as ordinary and necessary expenses - deductions from gross income in the year paid or incurred;
2. Treat as deferred expenses – deduction ratably distributed over a period of not less than 60 months.
J. CHARITABLE AND OTHER CONTRIBUTIONS
Requisites for deductibility
1. Contribution or gift must be actually paid or made within the taxable year;
2. Given to entity or institution specified by law;
3. Net income of the institution must be not inure to the benefit of any private individual or stockholder;
4. Taxpayer making contribution must be engaged in trade, profession or business.
Contributions deductible in full
1. Donations to the -
a. Government of the Philippines, or
b. Any of its agencies, or
c. Political subdivisions, or
d. Fully owned government corporations
- to be used exclusively in undertaking priority activities (determined by NEDA) in
a. Education
b. Health
c. Youth and sports development
d. Human settlements
e. Science and culture
f. Economic development
2. Donations to certain foreign institutions or international organizations;
3. Donations to Nongovernment Organizations accredited by Philippine Council for NGO Certification (PCNC).– A
nonprofit domestic corporation organized and operated exclusively for –
a. Scientific
b. Research
c. Educational
d. Character building and youth and sports development
e. Health
f. Social welfare
g. Cultural
h. Charitable
i. Or a combination thereof
Conditions for deductibility:
a. The donation must be utilized not later than 15th day of the 3rd month after the close of taxable year;
b. Administration expenses must not exceed 30% of total expenses;
c. Upon dissolution, the assets must be distributed to another nonprofit domestic corporation, to the state or by a
court to another similar organization.
d. If the above conditions are not complied, contributions shall be subject to limit.
Contributions subject to limit – Contributions or gifts actually paid to or for the use of the:
1. Government of the Philippines;
2. Agencies or political subdivisions of the government;
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3. Accredited domestic corporations or associations organized and operated exclusively for –
a. religious
b. charitable
c. scientific
d. youth and sports development
e. cultural
f. educational
g. rehabilitation of veterans
h. Social welfare institutions
i. Nongovernment organizations.
j. Limitations on deduction of contribution:
Individual taxpayer – 10%
Corporation – 5%
The rate shall be multiplied by the taxable income derived from trade, business or profession before deducting
the contributions.
II. OPTIONAL STANDARD DEDUCTION (in lieu of itemized deductions)
1. ON INDIVIDUAL –
Rate and Base: Not exceeding 40% of gross sales or receipts from business or profession
2. ON CORPORATION
Rate and Base: Not exceeding 40% of its Gross Income
Requisites:
a. The taxpayer signified in the return its intention to elect optional standard deduction;
b. Such election shall be irrevocable for the taxable year for which the return is made;
c. That individual who is entitled to and claimed for the optional standard deduction shall not be required to submit
with his tax return such financial statements otherwise required under the Code;
d. Except when the Commission otherwise permits, said individual shall keep such records pertaining to his gross
sales or gross receipts or the said corporation shall keep such records pertaining to his gross income.
FRINGE BENEFITS TAX
Fringe benefit means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in
addition to basic salaries, to an individual employee (except rank and file employee).
Fringe benefits not subject to fringe benefits tax:
1. Those authorized and exempted from income tax under the Code, or special law;
2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
3. Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;
4. De minimis benefits;
5. The fringe benefits given to the employee is required by the nature of, or necessary to the trade, business or profession
of employer; or
6. If the fringe benefit is for the convenience of the employer.
Applicable rates:
Monetary value 65%
Fringe benefit tax 35%

DE MINIMIS BENEFITS
De minimis benefits in general are limited to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of his employees, such as the following:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year;
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2. Monetized value of leave credits paid to government officials and employees;

3. Medical cash allowance to dependents of employees not exceeding P1,500 per semester or P250 per month;
4. Rice subsidy of P2,000 or one sack of 50 kg. rice per month amounting to not more than P2,000;
5. Uniforms and clothing allowance not exceeding P6,000 per annum;
6. Actual yearly medical benefits not exceeding P10,000 per annum;
7. Laundry allowance of P300 per month;
8. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a
tangible property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by
an employee under an established written plan which does not discriminate in favor of highly paid employees;
9. Gifts given during christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;
10. Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness,
marriage, birth of a baby, etc.; and
11. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and productivity
incentives schemes provided that the total annual monetary value received from both CBA and productivity incentives
schemes combined, do not exceed P10,000 per employee per taxable year.
All other benefits given by employers which are not included in the above enumeration shall not be considered as “de
minimis benefits”, and hence, shall be subject to income tax as well as withholding tax on compensation.
Employer gives benefit beyond the ceiling. – The amount of de minimis benefits conforming to the ceilings herein
prescribed shall not be considered in determining the P90,000 of other benefits. However, if the employer pays more
than the ceiling, the excess shall be taxable to the employee if such excess is beyond P90,000.

ACCOUNTING PERIODS AND METHODS

1. Fiscal year vs. calendar year
a. Fiscal year. - Accounting period of 12 months ending on the last day of any month other than December.
b. Calendar year. - Accounting period of 12 months which starts on the 1 st day of January and ends on the last day of
December.
2. Taxable income shall be computed on the basis of calendar year if:
a. Annual accounting period is other than fiscal year, or
b. Taxpayer has no annual accounting period; or
c. He does not keep books, or
d. Taxpayer is an individual.
3. Accounting Methods – A rule that is used to determine the year in which income are reported and expenses are
deducted for tax purposes.
a. Cash basis (cash receipts and disbursements method) – taxpayer is required to report income for the tax year in
which payments are actually or constructively received while expenses are deducted in the year it is paid.
b. Accrual method - income is reported in the year earned while expenses are deducted in the year incurred.
c. Constructive receipt of income - taxpayers are required to report taxable income though no cash is actually received,
it includes the following:
1. Interest credited to a bank savings deposit;
2. Matured bond interest coupons which have not been redeemed;
3. Salary available to an employee who does not accept payment;
4. Share of partners in the profits of general professional partnership
d. Percentage of completion method. - Taxpayer reports a percentage of gross income from a long-term contract based
on the portion of work that has been completed.
e. Completed contract method - income from contract is reported in the taxable year in which contract is completed.
Note: In long term contracts, percentage of completion is used instead of completed contract method.
f. Installment method is a special method of accounting under which the taxpayer reports as income only a part of the
gross profit to be realized from the sale on the installment plan equivalent to that proportion of the amount of
 P a g e | 15
installments received every year which the gross profit realized or to be realized when payment is completed bears
to the contract price.
g. Deferred payment sales – sales in which the payments received in cash or property other than evidence of
indebtedness of the purchaser during the taxable year in which the sale is made exceed 25% of the selling price (the
obligations of the purchaser received by the vendor are to be considered as equivalent of cash)
Persons Entitled to Use Installment Method
1. Dealers in personal property – those who regularly sell or otherwise dispose of personal property
on the installment plan.
2. Casual sellers of personal property – those who make casual sale or other casual disposition of
personal property on the installment plan where the:
a. Selling price is over P1,000;
b. Initial payments do not exceed 25% of selling price; and
c. Property is not of a kind which would be included in the taxpayer’s inventory if on hand at the close of the
taxable year.
3. Sellers of real property – those who make a sale or disposition of real property (whether capital or
ordinary asset) on the installment plan where the initial payments do not exceed 25% of S.P.
Formulas:
SELLING PRICE:
Cash received by the seller Pxx
Add: FMV of property received (if any) Pxx
Installment obligation of buyer xx
Mortgage assumed by buyer xx xx
Selling price xx
INITIAL PAYMENT:
Down payment Pxx
Add: Installment received (year of sale) xx
Excess of mortgage over cost (if any) xx
Initial payment xx
CONTRACT PRICE:
Selling price Pxx
Add: Excess of mortgage over cost xx
Total xx
Less: Mortgage assumed by buyer (if any) xx
Contract price xx

RETURNS AND PAYMENT

1. INDIVIDUALS REQUIRED TO FILE:
a. Every filipino citizen, residing in the Philippines;
b. Non-resident citizen on income within;
c. Resident alien on income within;
d. Nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.
2. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN
a. An individual earning purely compensation income whose taxable income does not exceed P250,000.
b. Regardless of amount of income –
1. If the sole income has been subjected to final tax.
2. Exempt pursuant to provisions of tax code and other laws.
c. Purely compensation income earner regardless of the amount, from one employer in the Philippines for the calendar
year if the income tax has been withheld correctly (this is known as substituted filing), except:
1. When deriving compensation income from two or more employers concurrently or successively at anytime
during the taxable year;
2. When the income tax has not been withheld correctly;
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3. Those deriving other non-business, non-profession-related income in addition to compensation income not
otherwise subject to a final tax;
4. Individuals receiving purely compensation income from a single employer, although the income tax of which has
been correctly withheld, but whose spouse falls under any of the three (3) enumerated classifications above;
5. Nonresident aliens engaged in trade or business in the Philippines deriving purely compensation income or
compensation income and other non-business, non-profession-related income.
3. A minimum wage earner
4. Others:
a. Husband and wife
1. If they are still required to file returns, only one return for the taxable year shall be filed which return shall be
signed by the husband and wife unless physically impossible to do so, in which case signature of one of the
spouses would suffice.
2. In case of unidentifiable income – it shall be divided equally between the spouses.
b. Parent – children
Income of unmarried minors derived from property received from living parent shall be included in the tax
return of parent, except when:
1. Donor's tax has been paid, or
2. The transfer of such property is exempt from donor’s tax.
c. Disabled persons
The return may be made by a duly authorized agent or representative, by guardian or other person charged with the
care of his person or property, the principal and his representative or guardian assuming the responsibility of
making the return and incurring penalties provided for erroneous, false or fraudulent return.
4. Time for filing – to be filed in duplicate setting forth specifically the gross amount of income from all sources.
a. Purely compensation income – on or before 15th day of April.
b. Self-employment income (including mixed income) – declare an estimated income on or before April 15 of the
same taxable year.
c. Corporations shall file a true and accurate quarterly income tax return on a cumulative basis and a final return.
5. Place of filing
Except in cases where the Commissioner otherwise permits, the return shall be filed with any authorized agent
bank, Revenue District Officer, thru Revenue Collection, or authorized Tax Software provider.
Classification of Taxpayers
For purposes of responsive tax administration, taxpayers shall be classified as follows:

Group Gross Sales

Micro Less than P 3 Million
Small P3 Million to less than P20 Million
Medium P20 Million to less than P1 Billion
Large P1 Billion and above

Tax Tables for Income Tax

Effective January 1, 2018 until December 31, 2022:
Over Not Over Tax Plus Of Excess Over
- P 250,000 Exempt
P 250,000 400,000 - 20% P 250,000
400,000 800,000 P 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2.000.000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000

Effective January 1, 2023:

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Over Not over Tax Plus Of excess over
P 250,000 0%
P 250,000 400,000 15% - P 250,000
400,000 800,000 P 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000