Tax Gross Income To VAT Compressed

Presented by GROUP 6
GROSS
INCOME
CAMPOS, DE OCAMPO, ESCANLAR
CONCEPT OF
GROSS INCOME
Gross income means the total income of a taxpayer

subject to tax. It includes the gains, profits
and income derived from whatever source, whether
legal or illegal.
It does not include income

excluded by law, or which are exempt from income
tax (Sec. 32 (B), NIRC).
2
WHEN INCLUDED IN THE GROSS INCOME, SUCH INCOME IS SUBJECT TO THE NORMAL/NET
INCOME TAX WHEN THE TAXPAYER IS A CITIZEN, RESIDENTS, OR NRAETB; TO REGULAR
CORPORATE INCOME TAX WHEN THE TAXPAYER IS THE DOMESTIC OR RESIDENT FOREIGN
CORPORATION; OR TO GROSS INCOME TAX WHEN THE TAXPAYER IS NRANETB OR NON-
RESIDENT FOREIGN. CORPORATION.
Other than the applicable tax rates, it is apparent that the

normal/net income tax and RCIT allow deduction from gross
income to determine the taxable income subject to tax. Compared
with the gross income tax, no deduction is allowed, and the entire
gross income is subject to twenty-five percent (25%) or thirty
percent (30%) tax, as the case may be. 2
A. INCLUSIONS
Gross income means all income derived from whatever source, including (but not limited to) the
following items:
1. Compensation for services;

2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
4. Gains derived from dealings in property;
5. Interest income;
6. Royalties;
7. Dividends;
8. Prizes and Winnings;
9. Pensions
10. Partner’s distributive share from the net income of the general professional
partnership 3
INCLUSIONS
B. GROSS INCOME DERIVED FROM
THE CONDUCT OF TRADE OR
A. COMPENSATION FOR
BUSINESS OR THE EXERCISE OF A
SERVICES;
PROFESSION;
means all remuneration This income is an active income, an

for services performed by an employee income received from the regular
for his employer under an employer- conduct or performance of an
employee relationship, unless specifically act, as compared to a passive
excluded by the Tax Code. income.
The important element to determine This is included in the gross

whether compensation for services is income subject to normal/net
classified as compensation income is the income tax or regular corporate
presence of the employer-employee income tax.
relationship.
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D. INTERESTS
INCLUSIONS Interest income may either be
interest from loans/interest-
C. GAINS DERIVED FROM
bearing obligations or interest
DEALINGS IN PROPERTY;
from bank deposits. Interest
income from loans such as
from lending activities is
Gains derived from dealings of ordinary
included in the gross income.
asset, whether real or personal, are
included in the gross income.
With respect to interest from
Gains derived from dealings ofcapital bank deposits, the source of
asset are also included in the gross the interest whether derived
income except gain from sale of shares of from sources within or
a domestic corporation under Section without the Philippines and the
24(C), and gains on sale of real property classification ofincome
under Section 24(D)(l) of the Tax Code.
earner are determinative as
to what type of income tax is
applicable. 5
RULES ON INTEREST
FROM BANK DEPOSITS
FIT = FINAL INCOME TAX

GIT = GROSS INCOME TAX
C. RENTS
Rental income from leasing activities is included in GI.
The exception is rental income received by a NRANETB

and non-resident foreign corporation which is subject to
gross incometax under Section 25(B) and Section 28(B)(l) of
the Tax Code.
5
Outright Method.
C. RENTS
The lessor may report as
When buildings are erected or income the fair market value of
improvements are made by a lessee such buildings or improvements
in pursuance of an agreement with subject to the lease at the time
the lessor, and such buildings or when such or improvements are
improvements are not subject to completed.
removal by the lessee,
Spread-Out Method.
the lessor may at his option
report the income therefrom The lessor may spread over the
upon either of the following life of the lease the estimated
bases: depreciated value of such
buildings or improvements at the
termination ofthe lease and
report as income for each year of
the lease an aliquot part thereof.
5
F. ROYALTIES THE RULES ON ROYALTIES
MAY BE SUMMARIZED AS
FOLLOWS:
Royalties received from sources
outside the Philippines of resident
citizen and domestic corporation
are included in the gross income
subject to normal/net income tax
or regular corporate income tax.
Royalties received from sources

outside the Philippines from all
other taxpayers are not taxable in
the Philippines.
5
G. DIVIDENDS
Dividends included in the gross THE RULES ON DIVIDENDS MAY

income are dividends received from BE SUMMARIZED AS FOLLOWS:
sources outside the Philippines by a
resident citizen and domestic
corporation.
Dividends received from sources

outside the Philippines by all other
taxpayers are not taxable in the
Philippines.
Dividends from sources within the

Philippines are either subject to
normal income tax, final income tax,
gross income tax, or exempt from
income tax.
5
H. ANNUITIES I. PRIZES AND WINNINGS
Prizes included in the gross income are the following:

a. prizes received by resident citizen, non-resident
An annuity is a financial product
citizen, resident alien, and NRAETB from sources
that pays out a fixed and within the Philippines in the amount-of Pl0,000.00 or
regular stream of payments to an less;
individual.
b. prizes received by resident citizen regardless of
amount from sources outside the Philippines;
The annuity is payable yearly or at
other regulaf intervals for a c. prizes received by a domestic corporation
certain or uncertain period. regardless of amount and source; and
Annuity is included in gross income
and hence taxable when it d. prizes received by a resident foreign corporation
from sources within the Philippines regardless of the
exceeds the premium paid.
amount.
5
Winnings ofresident citizen regardless ofamount derived from sources
outside the Philippines are included in the gross income.
Winnings of resident citizen, non-resident citizen and resident alien

derived from sources within the Philippines are subject to final income
tax except PCSO and Lotto winnings in the amount of Pl0,000.00 or
less.
Winnings of NRAETB from sources within the Philippines regardless of

amount is subject to final income tax of twenty percent (20%).
PCSO and Lotto winnings are exempt.

K. PARTNER’S DISTRIBUTIVE SHARE FROM
J. PENSIONS
THE NET INCOME OF THE GENERAL
PROFESSIONAL PARTNERSHIP
Pension refers to allowance
paid regularly to a person on his The general professional partnership
retirement or to dependents is an exempt entity but persons
on his death, in consideration of engaging in business as partners in a
past services, meritorious general professional partnership is
work, age, loss or injury. liable for income tax only in their
separate and individual capacities.
5
GROUP 6
THANK YOU
CAMPOS, ESCANLAR, DE OCAMPO
Basic Taxation Law | JD 2C
EXCLUSIONS FROM
GROSS INCOME
Chapter V- Gross Income
Caoyonan | Lota | Sultan

A. EXCLUSIONS
Essentially, items that are not included in the computation of the gross
income.
FORM: Money or its equivalent form received or earned by the taxpayer
WHY EXACTLY?
B. EXCLUSIONS DISTINGUISHED FROM EXEMPTION
Exemption - Immunity
Exclusion - Removal
BUT given their concepts have the same effects, exclusion is also
an immunity or privilege just like exemptions.
MEAN?
1. Proceeds of Life Insurance
Proceeds paid to the heirs or beneficiaries UPON DEATH is EXCLUDED in this

gross income. Applicable even received in a single sum or otherwise.
In such a case wherein the proceeds are held by the insurer and it pays interest,
the interest payments shall be included in gross income and therefore taxable.
[Section 32(B)(1), NIRC]
NOTE: Main standard is PROCEEDS. As an effect, also exempt from estate tax.
But what happens if the proceeds are received by the insured during his lifetime?
[Section 32(B)(1), NIRC] applies.
1.1 Rules on Life Insurance Premium
When an employer took life insurance on the life of its employees, the insurance
premium may result to a taxable income depending on who the employees are.
2 cases:
1. Managerial or supervisory position

2. Rank-and-file employee
1.2 Question
May the employer claim deductible expense the life insurance premium it
paid for its employees?
It depends on who the designated beneficiary of the life insurance is.
2 cases:
1. Executor, administrator, estate itself

2. Employer itself
2. Amount Received by Insured as Return of
Premium
Such amount as a return of premium is excluded from gross income.

Note that the recipient here is the insured himself.
Ratio: Return of premium is a return of capital.
EX:
X took a life insurance in 2015 with a premium payment of 200,000 and a

maturity value of 900,000 after 10 years if he outlives the policy.
What happens?
3. Gifts, Bequests, and Devises
Donation or gift and inheritance are income because they are a flow of wealth.
Nevertheless, these incomes are not taxable because they are excluded from
gross income.
However, income from such is included in gross income.
The gratuitous transfers, donations, and succession are subject to donor’s tax
and estate tax, respectively.
C. COMPENSATION FOR INJURIES OR
SICKNESS
The amount received by an insured/his estate/beneficiaries through accident or health

insurance or under the Workmen’s Compensation Act as compensation for personal
injuries and sickness are excluded from the gross income of the insured, his estate and
other beneficiaries.
Also, any damages recovered by suit or agreement on account of such injuries or

sickness are similarly excluded from the gross income. [Section 32(B)(4), NIRC; Section
63, Revenue Regulations No. 2-1940)
Additionally, Section 2.78(B)(6) exempts from withholding tax the actual, moral,
exemplary, and niminal damages received by an employee pursuant to a final judgment
or compromise agreement arising out of or related to an employer-employee relationship.
D. INCOME EXEMPT UNDER TREATY
Income of any kind, to the extent required by any treaty obligation

binding upon the Government of the Philippines is excluded in the gross
income of the entity involved. (Section 32(B) (5), NIRC)
E. RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.
1. RETIREMENT BENEFITS
2. SEPARATION PAY
3. TERMINAL LEAVE BENEFITS
1. Retirement Benefits
Retirement Benefits - Section 32(B)(6) of the Tax Code contemplates two

retirement benefits, namely, (1) retirement benefits under Republic Act No.
7641, and (2) retirement benefits under Republic Act No. 4917.
•Republic Act No. 7641 to retirement benefits received by an employee from a

private firm without a retirement plan. To be excluded from gross income and
therefore exempt from income tax, the following requirements should be present:
1.The employee is at least sixty (60) years or but not more than sixty-five (65)
years old; and
2.The employee must have served the company for at least five (5) years.
•Republic Act No. 4917 refers to a retirement benefits received from private firms with a
reasonable private retirement plan.
"Reasonable private benefit plan" means a pension, gratuity, stock bonus, or profit-sharing
plan maintained by an employer for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the officials or employees, or both, for the
purpose of distributing to such officials and employees the earnings and principal of the fund thus
accumulated.
In order to avail of the exemption, the following requirements must be met:
•a. The plan must be reasonable;

•b. The retiring official or employee must have been in the service of the same employer for at
least ten (10) years;
•c. The retiring official or employee is not less than fifty (50) years of age at the time of retirement;
•d. The retiring official or employee shall not have previously availed of the privilege under a
retirement benefit plan of the same or another employer.
Section 32(B)(6) of the Tax Code also excludes in the gross income, and therefore exempt
from tax the following benefits:
1.Social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens who come to reside permanently in
the Philippines from foreign government agencies and other institutions, private or public
(Section 32(B)(6)(c), NIRC);
2.Payments of benefits due or to become due to any person residing in the Philippines under
the laws of the United States administered by the United States Veterans Administration
(Section 32(B)(6)(d), NIRC);
3.Benefits received from or enjoyed under the Social Security System in accordance with the
provisions of Republic Act No. 8282 (Section 32(B)(6)(e), NIRC); and
4.Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity
received by government officials and employees (Section 32(B)(6)(e), NIRC).
2. Separation Pay
Separation Pay - is a statutorily mandated payment to employees separated from

employment due to authorized causes such as installation of labor-saving
devices, redundancy, retrenchment, closure of business operations, and medical
condition.
Pursuant to Section 32(B)(6)(b) of the Tax Code, any amount received by an

official or employee or by his heirs from the employer as a consequence of
separation of such official or employee from the of the employer because of
death, sickness, or other physical disability or for any cause beyond the control of
the said official or employee shall be excluded from the gross income and shall
be exempt from income tax regardless of age or length of service.
•The exemption from income tax only applies to payment received by the official
or employee on account of involuntary separation from employment.
•The exemption does not apply to other income received prior to separation, or
income not relating to the separation such as earned 13th month pay and other
benefits on account of employment. This amount of 13th month pay and other
benefits is however subject to the P90,000.00 tax-exempt threshold.
•In addition, the tax exemption on termination or separation benefits does not
apply to back wages or illegal deductions by the employer.
3. Terminal Leave Benefits
Terminal Leave Benefits - is the commutation or the monetization of accumulated

unused leave credits of an employee. It may be received by a retiring, retired or
separated employee.
Executive Order No. 291 provides that terminal leave benefits of government
employees given in annual or yearly basis are likewise exempt from income tax.
For private employees, terminal leave benefits paid upon retirement are exempt
from income tax provided: (1) sick leave is not exempt and (2) vacation leaves of
not more than 10 days is exempt.
D. MISCELLANEOUS ITEMS
1. INCOME DERIVED BY FOREIGN GOVERNMENT
2. INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL SUBDIVISIONS
3. PRIZES AND AWARDS
4. PRIZES AND AWARDS IN SPORTS COMPETITION
5. 13TH MONTH PAY AND OTHER BENEFITS
6. GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
7. GAINS FROM THE SALE OF BONDS, DDEBENTURES, OR OTHER CERTIFICATES
OF INDEBTEDNESS
8. GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND
9. INCOME DERIVED FROM THE SALE OF GOLD
1 . INCOME DERIVED BY FOREIGN GOVERNMENT
Excluded in the gross income and therefore exempt from income tax are income
derived from investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the Philippines by:
•Foreign governments,
•Financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and
•International or regional financial institutions established by foreign
governments.
2. INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL
SUBDIVISIONS
Income derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to any
political subdivision thereof is also excluded form gross income. (Section 32(B)(7)
(b), NIRC)
The income referred to above are those from public utility and from the exercise
of essential governmental function. Income from other sources such as from
profit generating activities which are proprietary or commercial in nature are
subject to income tax. See also discussion on income taxation of government-
owned and controlled corporation.
3. PRIZES AND AWARDS
Conditions for the exclusion of prizes and awards in gross income:
a. The prizes and awards are made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement;
b. The recipient was selected without any action on his part to enter the contest or proceeding;
and
c. The recipient is not required to render substantial future services as a condition to receiving
the prize or award. (Section 32(B)(7)(c), NIRC)
NOTE: If any of the above conditions is not present, the prizes and awards are included in
the gross income and are subject to income tax.
4. Prizes and Awards in Sports Competition
“”Sports tournaments and competition”- tournaments and competitions

sanctioned by the national sports associations.
"National sports associations"- duly accredited by the Philippine Olympic

Committee.
REPUBLIC ACT NO. 7549 “AN ACT EXEMPTING ALL PRIZES AND AWARDS
GAINED FROM LOCAL AND INTERNATIONAL SPORTS TOURNAMENTS
AND COMPETITIONS FROM THE PAYMENT OF INCOME AND OTHER
FORMS OF TAXES AND FOR OTHER PURPOSES.”
Conditions for the exclusion of prizes and awards received by
athletes in gross income:
a. The prizes and awards are granted to athletes in local and international
sports competitions and tournaments, whether held in the Philippines or
abroad and
b. The competition and tournaments are sanctioned by their national sports

associations. (Section 32(B)(7)(d), NIRC)
5. 13th Month Pay and Other Benefits
Covers the gross benefits received by officials and employees of public

and private entities.
The total exclusion shall not exceed P82,000.00. Upon the effectivity of
TRAIN Law, the limit is increased to P90,000.00.
Included in exemption are the "other benefits" received by an employee
such as productivity incentives and Christmas bonus.
This means when the gross benefits exceed the P90,000.00 threshold, the
excess is subject to income tax.
6. GSIS, SSS, Medicare and Other Contributions
GSIS, SSS, Medicare and Pag-Ibig contributions, and

union dues of individuals are excluded in the gross
income. (Section 32(B) (7)(f), NIRC)
7. Gains from the Sale of Bonds, Debentures or
Other Certificate of Indebtedness
Gains realized from the sale or exchange or retirement of bonds, debentures

or other certificate of indebtedness with a maturity of more than five (5)
years are also excluded in the gross income. (Section 32(B)(7)(g), NIRC)
If the maturity is less than five (5) years, the gain is subject to final income
tax.
8. Gains from Redemption of Shares in Mutual
Fund
Gains realized by the investor upon redemption of shares of stock in a mutual

fund company are excluded in the gross income. (Section 32(B)(7)(h), NIRC)
The term "mutual fund company" shall mean an open-end and close-end
investment company as defined under the Investment Company Act. (Section
22(BB), NIRC)
9. Income Derived from the Sale of Gold
Republic Act No. 11256, which was enacted into law on March 29, 2019,
amended Section 32(B)(7)(e) of the Tax Code to include the income derived from
the following transactions as an exclusion to gross income, thereby not subject
to income tax:
The sale of gold to the Bangko Sentral ng Pilipinas by registered small-

scale miners and accredited traders; and
The sale of gold by registered small-scale miners to accredited traders for

eventual le to the Bangko Sentral ng Pilipinas.
"Registered Small-Scale Miners" (SSMs) refer to Filipino citizens who have
organized themselves as an individual miner or cooperative duly licensed by
the Mines and Geosciences Bureau (MGB) to engage in the extraction of
minerals or ore-bearing materials from the ground under the terms of a small-
scale mining contract, as defined under Department of Environment and
Natural Resources Department Administrative Order No. 2015-03, or any
subsequent administrative issuance/s of the relevant government agency
governing the registration of SSMs.
"Accredited Traders" refer to persons and/or entities engaged in the business

of buying and selling gold that have complied with the BSP's gold trader
accreditation procedures. (Section 2, Revenue Regulations No. 4-2020)
CAPITAL GAINS AND LOSSES
Reported by:
Karen Crisostomo-Delmo
Gem Anton P. Estimos
Stephannie Tan-Gumban
CAPITAL GAINS AND LOSSES
Dealings on properties, whether by sale, exchange, barter, or other mode of

disposition, may result to a gain or loss. The income treatment of this gain or loss
is determined by the classification of property involved whether capital asset or
ordinary asset.
CAPITAL ASSET DISTINGUISHED FROM ORDINARY
ASSET
1. Ordinary assets – properties held by the taxpayer used in connection with his trade or
business which includes the following: (S-O-U-R)
• Stock in trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the taxable year;
• Property held by the taxpayer primarily for sale to customers in the Ordinary course of trade
or business;
• Property Used in the trade or business of a character which is subject to the allowance for
depreciation provided in the NIRC; or
• Real property used in trade or business of the taxpayer.
Examples of Ordinary Assets

• Condominium building owned by a realty company, the units of which are for rent or for sale
• Machinery and equipment of a manufacturing concern subject to depreciation
• Motor vehicles of a person engaged in transportation business
CAPITAL ASSET DISTINGUISHED FROM ORDINARY
ASSET
2. Capital assets – include property held by the taxpayer (whether or not connected
with his trade or business) other than S-O-U-R above.
Examples of Capital Assets

• Jewelry not used for trade or business
• Residential houses and lands owned and used as such
• Automobiles not used in trade or business
• Stock and securities held by taxpayers other than dealers of securities
Construction and Interpretation of Capital Assets

The general rule has been laid down that the codal definition of a capital asset must be
narrowly construed while the exclusions from such definitions must be interpreted
broadly. (Tuazon v. Lingad, G.R. No. L-24248, 31 July 1974)
CAPITAL GAINS AND LOSS DISTINGUISHED FROM
ORDINARY GAIN AND LOSS
CAPITAL GAIN
• It includes the gain derived from the sale or exchange of an asset not connected with the trade or
business.
CAPITAL LOSS
• The loss that may be sustained from the sale or exchange of an asset not connected with the trade or
business.
• Capital loss may not exceed capital gains when used as a deduction to income.
ORDINARY GAIN
• It includes the gain derived from the sale or exchange of ordinary asset.
ORDINARY LOSS
• The loss that may be sustained from the sale or exchange of ordinary asset.
TAX TREATMENT
ORDINARY GAIN AND LOSS

• Ordinary gain is included in the gross income for the purposes of computing the
taxable income.
• Ordinary loss may be claimed as a deduction for purposes of computing taxable
income.
CAPITAL GAIN AND LOSS

• Tax treatment of capital gain or loss arising from dealing in capital assets shall
depend on the type of capital asset involved. Capital gain may either be subject
to final income tax or normal/net income tax or RCIT, as the case maybe.
TYPES OF CAPITAL ASSETS AND THEIR TAX
TREATMENT
From Sale of Stocks of Corporations
• Stocks Traded in the Stock Exchange – subject to six-tenths of one percent (6/10 of
1%) of the gross selling price or gross value in money of the shares of stock sold,
bartered, exchanged or otherwise disposed which shall be paid by the seller or
transferor (Sec. 127(A), NIRC)
• Stocks Not Traded in the Stock Exchange – subject to capital gains tax
NOTE: Under R.A. No. 11534 or CREATE Act, foreign corporations are now subject to
15% capital gains tax on from the sale, barter, exchange or other disposition of shares of
corporation not traded in the stock exchange. (Sec. 7, R.A. No. 11534, amending Sec.
28, NIRC)
What is controlling is whether or not the shares of stock are traded in the local stock
exchange and not where the actual sale happened. (Del Rosario v. CIR, CTA Case No.
4796, 01 Dec. 1994)
TREATMENT
From Sale of Real Properties/Land and/or Buildings in the Philippines
Capital gains tax shall be imposed based on the higher amount between:
• The gross selling price; or
• Whichever is higher between the current fair market value as determined by:
a. Zonal Value – prescribed zonal value of real properties as determined by the CIR; or
b. Assessed Value – the fair market value as shown in the schedule of values of the Provincial and
City assessors (NIRC, Sec. 24(D) (1))
NOTE: Actual gain or loss is immaterial since there is a conclusive presumption of gain.
As regards transactions affected by the 6% capital gain tax, the NIRC speaks of real
property with respect to individual taxpayers, estate and trust but also speaks of land
and/or building with respect to domestic corporations.
CGT on sale or disposition of real properties shall apply only to domestic corporations,
since foreign corporations (RFC and NRFC) cannot own properties in the Philippines.
TREATMENT
From Sale of Real Properties/Land and/or Buildings outside the Philippines

Gains realized from the sale, exchange or other disposition of real property not
located in the Philippines by resident citizens or domestic corporations shall be
subject to ordinary income taxation (Sec. 4(F), RR No. 7- 2003) but subject to
foreign tax credits.
Such income may be exempt in the case of non-resident citizens, alien individuals
and foreign corporations (Sec. 4(F), RR No. 7-2003) .
TREATMENT
From Sale of Real Property held as Capital Asset to the Government

The taxpayer has the option to either:
1. Include as part of gross income subject allowable deductions and personal
exemptions, then subject to the schedular tax; or
NOTE: This is not available to a corporate taxpayer.
2. Subject to final tax of 6% on capital gains (Sec. 24(D), NIRC)

TREATMENT
From Sale of Other Capital Assets
Included in gross income subject to the graduated rates for individuals and the
normal corporate income tax for corporations, and not subject to capital gains
tax.
PERCENTAGE TAKEN INTO ACCOUNT OR HOLDING
PERIOD
Holding Period
Holding period is the length of time that the asset has been held by the taxpayer.
It covers the period from date of acquisition to the date of sale of a particular
asset.
Rules on Holding Period:
• Rules applies to whom: Individual Taxpayers only.
• To what kind of assets: Capital Assets except Sale of Real Property and Sale of
Shares of Tax Not Listed or Traded through local stock exchange (since subject
to Capital Gains Tax)
PERCENTAGE TAKEN INTO ACCOUNT OR HOLDING
PERIOD
Holding period rule (long-term capital gain vis-à-vis short-term capital gain) –
Where the taxpayer held the capital asset sold for more than 12 months, the gain
derived therefrom is taxable only to the extent of 50% (Long Term holding
Period). Consequently, if the taxpayer held the capital asset sold for a year or less,
the whole gain shall be taxable. The same also applies to capital loss (Short Term
Holding Period). It is a form of tax avoidance since the taxpayer can exploit it in
order to reduce his tax due. (Sec. 39(B), NIRC)
LIMITATIONS ON CAPITAL LOSSES (LOSS
LIMITATION RULE)
Loss limitation rule – Losses from sale or exchanges of capital assets shall be
allowed only up to the extent of the gains from such sales or exchanges. (Sec.
39(C), NIRC).
Thus, under this capital loss limitation rule, capital loss is deductible only up to
the extent of capital gain. The taxpayer can only deduct capital loss from capital
gain. If there is no capital gain, then no deduction is allowed because you cannot
deduct capital loss from ordinary gain. On the other hand, ordinary loss can be
deducted both from ordinary gain and capital gain.
LIMITATIONS ON CAPITAL LOSSES (LOSS
LIMITATION RULE)
Where the Capital Loss Limitation Rule will NOT Apply:

• If a bank or trust company is incorporated under the laws of the Philippines;
• A business whose substantial part is the receipt of deposits;
• Sells any bond, debenture, note or certificate or other evidence of indebtedness
issued by any corporation, with interest coupons or in registered form; and
• Any losses resulting from such sale shall not be subject to the above limitations
and shall not be included in determining the applicability of such limitation to
other losses. (Sec. 39(C), NIRC).
NET CAPITAL LOSS CARRY OVER (NCLCO)
Loss carry-over rule/Net Capital Loss Carry Over (NCLCO) – If any taxpayer, other
than a corporation, sustains in any taxable year a net capital loss, such loss (in an
amount not in excess of the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or exchange of a capital asset held
for not more than 12 months. (Sec. 39(D), NIRC)
NET CAPITAL LOSS CARRY OVER (NCLCO)
Rules on NCLCO
• NCLCO is allowed only to individuals, including estates and trusts;
• The net loss carry-over shall not exceed the net income for the year sustained
and is deductible only for the succeeding year;
• The capital assets must not be real property or stocks listed and traded in the
stock exchange; and
• Capital asset must be held for not more than 12 months.
CONVERSION OF CAPITAL ASSETS TO ORDINARY
ASSETS AND VICE VERSA
• Conversion of capital asset to ordinary asset is allowed when (1) property is

substantially improved, (2) very actively sold, or (3) both. (Calasanz vs. CIR, G.R.
No. L-26284, 10-08-1986)
• There is no conversion of idle property from ordinary to capital asset if the
entity is a taxpayer engaged in real estate business.
GAINS AND LOSSES FROM SHORT SALES
• Short Sale is any sale of shares of stocks/not yet in the possession of the
seller.(Sec. 3(j) Revenue Regulations No. 10-2006).
• A short sale is not deemed consummated until the delivery of property to cover
the short sale.
• Gains or losses from short sales of property shall be considered gains or losses
from sales or exchanges of capital assets. (Sec. 3(F)(1), NIRC)
OPTIONS
• It is a right or privilege giving a person under specified conditions a certain

period within which to accept the offer of the offeror.
• It is a property which in the hands of a taxpayer who does not deal in options
may be considered a capital asset.
• Where a corporation leased from another certain properties with option to buy
them, which option was later assigned to a third corporation, the gain derived
from the sales or assignment of option by the first corporation is a capital gain.
• Gains or losses attributable to the failure to exercise privileges or options to buy
or sell property shall be considered as capital gains or losses. (Sec. 39(F)(2),
NIRC)
DETERMINATION OF AMOUNT AND RECOGNITION
OF GAIN OR LOSS
Amount Realized – Basis (Adjusted Basis) of Property = Gain/Loss

Rules on Determining Adjusted Basis or Cost of
the Property Sold (Sec. 40(B), NIRC)
• By purchase - Cost plus expenses of acquisition;
• Included in the inventory - Its latest inventory value;
• By devise, bequest or inheritance - FMV or value of such property at the time of
the acquisition – death of the decedent;
• By Gift - The same basis as if it would be in the hands of the donor or the last
preceding owner by whom it was acquired by gift, except that if such basis is
greater than the fair market value of the property at the time of the gift, then
for the purpose of determining the loss, the basis shall be such fair market
value;
• Acquired (other than capital assets) for less than adequate consideration in
money or money’s worth - Amount paid by the transferee;
Rules on Determining Adjusted Basis or Cost of
the Property Sold (Sec. 40(B), NIRC)
• Stock or security property received if the exchange is one where gain or loss
may not be recognized - The same as the basis of the stock, or security or
property given in exchange;
• Stock of security received if the exchange is one where the gain or loss may
not be recognized - Basis of the property, stock, or security given in exchange:
Less: Cash and FMV of property given in exchange
Add: Dividend and/or gain recognized
= Basis of stock or security received
• Property transferred in the hands of the transferee if exchange is one where
the gain, if any, but not the loss is to be recognized - The same basis as it would
be in the hands of transferor increased by the amount of the gain recognized to
the transferor on the transfer.
Exchange of Property
General Rule:
In a sale or exchange of property the entire amount of gain or loss is recognized.
(Sec. 40(c)(1), NIRC)
Exception:
Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the
NIRC which, as amended by CREATE law, are not subject to Income Tax, Capital
Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may be.
In general, there are two kinds of tax-free exchange:
• Transfer to a controlled corporation; and
• Merger or consolidation
Transfer to a controlled corporation – No gain or loss shall be recognized if

property is transferred to a corporation by a person in exchange for stock or unit
of participation in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four persons, gains control
of said corporation;
Merger or consolidation – No gain or loss shall be recognized if in pursuance of a

plan of merger or consolidation:
• A corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the merger or
consolidation;
• A shareholder exchanges stock in a corporation, which is a party to the merger
or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or
• A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for stock or
securities in another corporation, a party to the merger or consolidation.
Requisites for Non-recognition of Gain or Loss

• Transferee is a corporation;
• Transferee exchanges its shares of stock for property/ies of the transferor;
• The transfer is made by a person, acting alone or together with others, not
exceeding four persons; and
• As a result of the exchange the transferor, alone or together with others, not
exceeding four (4), gains control of the transferee. (CIR v. Filinvest Development
Corporation, G.R. Nos. 163653 & 167689, 19 Jul. 2011)
Exchange Not Solely in Kind
If an individual, shareholder, security holder, or a corporation receives not only

stocks or securities permitted to be received without the recognition of gain or
loss, but also money and/or property, the gain, if any, but not the loss, shall be
recognized but in amount not in excess of the sum of the money and FMV of such
other property received.
As to the shareholder, if the money and/or other property received has the effect
of a distribution of a taxable dividend, there shall be taxed as dividend to the
shareholder of an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the corporation;
the remainder, if any, of the gain recognized shall be treated as a capital gain.
Exchange Not Solely in Kind
If the transferor corporation receives not only stock permitted to be received

without the recognition of gain or loss but also money and/or property, then (1) if
the corporation receiving such money and/or property distributes it in pursuance
of the plan of merger or consolidation, no gain to the corporation shall be
recognized from exchange, but (2) if the corporation receiving such money and/or
property does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the corporation shall be
recognized but in amount not in excess of the sum of such money and the fair
market value of such other property so received, which is not distributed.
Assumption of Liability
If the taxpayer receives stocks or securities which would be permitted to be

received without the recognition of the gain if it were the sole consideration, and
as part of the consideration, another party to the exchange assumes the liability
of the taxpayer, or acquires the property from taxpayer, subject to a liability, then
such assumption or acquisition shall not be treated as money and/or other
property, and shall not prevent the exchange from being with the exceptions.
Assumption of Liability
If the amount of the liabilities assumed plus the amount of liabilities to which the
property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered as a
gain from the sale or exchange of a capital asset or of property which is not a
capital asset, as the case may be.
FRINGE BENEFITS AND
OTHER BENEFITS
GROUP 9
By:
Hannah Lyka Patricia C. Deslate
Ma. Renee Sophia S. Mangao
Taxation
CONTENTS
Fringe Benefits Liability to Pay the Fringe Benefit Tax
Items of Fringe Benefits Fringe Benefits Not Subject to Fringe

Fringe Benefit Tax Benefit Tax
Basis of Fringe Benefit Tax De Minimis Benefits
Valuation of Fringe Benefits in General Tax Treatment of De Minimis Benefits
Valuation of Specific Types of Fringe Given to Employees Which Are Beyond
Benefits the Prescribed Amount of Benefits
Tax Treatment for the Premium on
Health Card paid by the Employer

Fringe Benefits
Taxation
FRINGE BENEFITS
Any good, service, or other benefit furnished or granted in cash or in

kind by an employer to an individual employee.
What employees are covered by Fringe benefits?
Any employee may be granted as there is no express prohibition

under the law. There are however, different tax treatment depending
upon the recipient of the fringe benefit.
Taxation
Items of Fringe Benefits
Taxation
ITEMS OF FRINGE BENEFITS
Under Revenue Regulation No. 3-1998 and under Section 33 (B), NIRC:
The taxable value of Specific Fringe Benefits is the grossed-up monetary valued based on
the following:
1. Housing Privilege
2. Expense Account
3. Motor Vehicle of any kind
4. Household Expenses
5. Interest on loan at less than market rate
6. Membership fees, dues, and other expenses borne by the employer for his employee, in the social
and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday Vacation Expenses
9. Educational Assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows Taxation
Fringe Benefits Tax
Taxation
FRINGE BENEFIT TAX
PRIOR TO TRAIN LAW TRAIN LAW
32% 35%
NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR

BUSINESS: 25% (Sec. 33 (A), NIRC
Note: Fringe Tax is applicable only to fringe benefits received by the managerial or supervisor
employee. Fringe benefit tax is a final tax.
Fringe benefit received by rank-and-file employee are not subject to fringe benefits tax but to
normal/net income tax. (fringe benefit is part of compensation included in the gross income)
Taxation
Basis of Fringe Benefits Tax
Taxation
BASIS OF FRINGE BENEFIT TAX
Fringe benefit Tax of 35% is based on the grossed-up monetary value of fringe benefit received
by the managerial or supervisory employee who is either a resident citizen, non-resident
citizen, resident alien, and non-resident alien engage in trade or business in the
Philippines.
How to determine the grossed-up monetary value of the fringe benefit?
Divide the actual monetary value of the fringe benefit by 65% (January 1, 2018 onwards)
Note: For non-resident alien not engaged in trade or business in the Philippines occupying
a managerial or supervisory position: FBT is 25%.
The grossed-up monetary value of the fringe benefit:
Divide the actual monetary value of the fringe benefit by 75%

Taxation
BASIS OF FRINGE BENEFIT TAX
RC/NRC/RA/NRAETB NRANETB
Monetary Value P100,000.00 P100,000.00
Divided by: 65% 75%
Grossees-up Monetary
P153, 846.15 P133,333.33
Value
Multiplied by: FBT Rate 35% 25%
Fringe Benefit tax P53, 846.15 P33,333.33
Taxation
Valuation of Fringe Benefits in General
Taxation
VALUATION OF FRINGE BENEFITS IN GENERAL
The following are the rules on the valuation of fringe benefits:
Condition Value
a. FB is granted in money or directly paid by the

Amount granted or Paid for
employer
b. FB is granted or furnished by the employer in Equal to the fair market value of the property
property other than money or ownership is determined in accordance with Sec. 6 (E) of the
transferred to the employee Tax Code
c. FB is granted or furnished by the employer in

property other than money but ownership is not Equal to the depreciation value of the property
transferred to the employee
Taxation
VALUATION OF SPECIFIC TYPES
OF FRINGE BENEFITS
Taxation
VALUATION OF SPECIFIC TYPES OF FRINGE BENEITS
Under Revenue Regulation No. 3-1998 and under Section 33 (B), NIRC:
The taxable value of Specific Fringe Benefits is the grossed-up monetary valued based on
the following:
1. Housing Privilege
2. Expense Account
3. Motor Vehicle of any kind
4. Household Expenses
5. Interest on loan at less than market rate
6. Membership fees, dues, and other expenses borne by the employer for his employee, in the social
and athletic clubs or other similar organizations
7. Expenses for foreign travel
8. Holiday Vacation Expenses
9. Educational Assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of
what the law allows Taxation
1. HOUSING PRIVILEGE
a. the employer leases a residential property for his employee- the value of the benefit
shall be the amount of the rental paid thereon by the employer (as evidence by lease
contract).
Fringe Benefit: 50% of the value of the benefit.
b. The employer owns a residential property and the same is assigned for the use of his
employee as his usual place of residence- the annual value of the benefit shall be 5% of
the market value of the land and improvement (as declared in the Real Property Tax), or
zonal value (as determined by the Commissioner pursuant to Sec. 6(E) of the Tax Code,
whichever is higher.

Taxation
Hence: MV = [5% (FMV OR ZONAL VALUE) x 50%]
c. The employer purchases a residential property on installment basis and allows

his employee to use the same as his usual place of residence- the annual value of
the benefit shall be 5% of the acquisition cost, exclusive of interest.
d. The employer purchases a residential property and transfers ownership to his

employee -the value of the benefit shall be the employer’s acquisition cost or zonal
value as determined by the Commissioner (Sec. 6(E) of the Tax Code), whichever is
higher.
Fringe Benefit: entire value of the benefit.
Taxation
e. The employer purchases a residential property and transfers ownership to his

employee for the latter’s residential use, at a price less than the employer’s acquisition
cost- the value of the benefit shall be the difference between the fair market value
(declared by the RPT Declaration Form) or zonal value as determined by the
Commissioner (Sec. 6(E) of the Tax Code), whichever is higher, and the cost to the
employee.
Fringe Benefit: entire value of the benefit.
f. Housing privileges of military officials of the AFP (Philippine Army, Philippine Navy,
and Philippine Airforce- shall not be treated as taxable fringe benefit. It is a State
obligation that it shall provide its soldiers with necessary quarter within or accessible
from the military camp so that they can be readily on call.
Fringe Benefit: not taxable. Taxation

g. A housing unit which is situated inside or adjacent to the premises of a business or

factory(located within the maximum of 50meters from the perimeter of the business area-
shall not be considered taxable fringe benefit.
Fringe benefit: not taxable
h. Temporary housing for an employee who stays in a housing unit for 3 months or less-
not considered taxable fringe benefit.
Fringe benefit: not taxable
Taxation
2. EXPENSE ACCOUNT
a. General Rule: expenses incurred by the employee but which are paid by his employer
shall be treated as taxable fringe benefit.
XPNs:
1. when the expendiutes are duly receipted for and in the name of the employer; and
2. the expenditures do not partake the nature of a personal expense attributable to the
employee.
Taxation
2. EXPENSE ACCOUNT
b. General Rule: expenses paid for by the employee but reimbursed by hils employer shall
be treated as taxale benefits,
XPNs:
1. when the expenditures are duly receipted and in the name of the employer; and
2. the expenditures do not partake the nature of a personal expense attributable to the
said employee.
Taxation
2. EXPENSE ACCOUNT
c. Personal expenses of the employee (personal purchases of groceries for his/her personal
or family’s consumption) paid for or reimbursed by the employer to the employee shall be
treated as taxable fringe benefit of the employee. (regardless if receipted or not)
d. Representation and transportation allowances which are fixed in amount and are
regularly received by the employees as part of their monthly income shall not be treated as
taxable fringe benefit, but shall be considered as taxable compensation income sibject to
tax imposed under Section 24 of the Tax Code.
Taxation
3. MOTOR VEHICLE OF ANY KIND
a. Employer purchased the motor vehicle in the name of the employee- the value of the
benefit is the acquisition cost thereof.
fringe benefit: entire value of the benefit (regardless if employee used it partly personal
or for the benefit of his employer)
b. If the employer provides the employee with the cash for the purchase of the motor-
ownership is placed in the name of the employee. The value of the benefits shall be the
aount of cash received by the employee.
Fringe benefit: entire value of the benefit (regardless if employee used it partly for
personal or for the benefit of employer, unless subjected to witholding tax as
compensation income under Rev. Regulation No. 2-98)
Taxation
c. The employer purchases the car on installment basis and the ownership of which is
placed un the name of the employee- the value of the benefit shall be the acquisition cost
exclusive interest, dvided by 5 years.
Fringe benefit: the entire value of the benefit (regardless of whether the motor vehicle is
used partly for personal or for the benefit of his employer.)
d. The employer shoulders a portion of the amount of the purchase price of a motor
vehicle to the ownership of which is placed in the name of the employee- the value of the
benefit shall be the amount shouldered by the employer.
Fringe benefit: the entire value of the benefit (regardless of whether the motor vehicle is
used partly for personal or for the benefit of his employer.)
Taxation
e. The employer owns and maintains a fleet of motor vehicles for the use of te business
and the employees- the value of the benefit shall be the acquisition cost of all the motor
vehicles not normally used for sales, freight, delivery services, and other non personal use
divide by 5 years.
Fringe benefit: 50% of the value of the benefit (MV= [(A)/5] x 50%)
f. The employer leases and maintains a fleet of motor vehicles for the use of the business
and the employees- the value of the benefit shall be the amount of rental payments for the
motor vehicles not normally sued for the sales, freight, delivery, service, and other non-
personal use.
Fringe benefit: 50% of the value of the benefit.
Taxation
g. The use of aircraft (including the helicopters) owned and maintained by the
employer shall be treated as business use. (Not subject to tax)
h. The use of yacht (owned, maintained or leased by the employer) is taxable fringe
benefit. The value of the benefit shall be measured based on the depreciation of
the yacht at an estimated useful life of 20 years.
Taxation
4. HOUSEHOLD EXPENSES
Expenses of the employee which are borne by the employer for personnel, such as salaries
of household help, personal driver of the employee, or other similar personal expenses
(like payment for homeowners -association dues garbage dues, etc.) shall be treated as
taxable fringe benefits.
Taxation
5. INTEREST ON LOAN AT LESS THAN MARKET RATE
a. If the employer lends money to h1s employee free of or at a rate lower than twelve
percent (12%), such interest foregone by the employer or the difference of the interest
assumed by the employee and the rate of twelve percent (12%) shall be treated as a taxable
fringe benefit.
b. The benchmark interest rate of twelve percent (12%) shall remain in effect until revised
by a subsequent regulation.
c. This regulation shall apply to installment payments or loans with interest rate lower
than twelve percent (12%) starting January 1, 1998.
6. MEMBERSHIP FEES, DUES, AND OTHER EXPENSES BORNE BY THE

EMPLOYER FOR HIS EMPLOYEE, IN SOCIAL AND ATHLETIC CLUBS OR
OTHER SIMILAR ORGANIZATIONS
These expenditures shall be treated -as taxable fringe benefits of the employee in full.
7. EXPENSES FOR FOREIGN TRAVEL
a. Reasonable business expenses which are paid for by the employer for the foreign
travel of his employee for the purpose of attending business meetings or conventions
shall not be treated as taxable fringe benefits.
In this instance, inland travel expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar establishments) amounting to an
average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual occurrences of the meetings or
conventions.
The cost of economy and business class airplane ticket shall not be subject to a fringe
benefit tax. However, 30% of the cost of first-class airplane ticket shall be subject to a
fringe benefit tax.
7. EXPENSES FOR FOREIGN TRAVEL
b. In the absence of documentary evidence showing that the employee's travel abroad was
in connection with business meetings or conventions, the entire cost of the ticket
including cost of hotel accommodations and other expenses incident thereto shouldered
by the employer, shall be treated as taxable fringe benefits.
The business meetings shall be evidenced by official communications from business

associates abroad indicating the purpose of the meetings. Business conventions shall be
evidenced by official invitations/communications from the host organization or entity
abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as
taxable fringe benefits of the employee.
c. which are paid by the employer for the travel of the family members of the employee
shall be treated as taxable fringe benefits of the employee.
Taxation
8. HOLIDAY AND VACATION
Holiday and vacation expenses of the employee borne by his employer shall be treated as
taxable fringe benefits.
9. EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR HIS

DEPENDENTS
a. The cost of the educational assistance to the employee which are borne by the employer
shall, in general, be treated as taxable fringe benefit.
However, a scholarship grant to the employee by the employer shall not be treated as
taxable fringe benefit if the education or study involved is directly connected with the
employer's trade, business, or profession, and there is a written contract between them
that the employee is under obligation to remain in the employ of the employer for period
of time that they have mutually agreed upon. In this case, the expenditure shall be treated
as incurred for the convenience and furtherance of the employer's trade or business.
9. EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR HIS
DEPENDENTS
b. The cost of assistance extended by an employer to the dependents of an employee shall be
treated as taxable fringe benefits of the employee unless the assistance was provided
through a competitive scheme under the scholarship program of the company.
10. LIFE OR HEALTH INSURANCE AND OTHER NON-LIFE

INSURANCE PREMIUMS OR SIMILAR AMOUNTS IN EXCESS
OF WHAT THE LAW ALLOWS
The cost of life or health insurance and other non-life insurance premiums borne by the
employer for his employee shall be treated as taxable fringe benefit, except the following:
a. contributions of the employer for the benefit of the employee, pursuant to the provisions
of existing law, such as under the SSS, (Republic Act. No. 8282, as amended) or under the GSIS
(Republic Act No. 8291), or similar contributions arising from the provisions of any other
existing law; and
b. the cost of premiums borne by the employer for the group insurance of his employees.
LIABILITY TO PAY THE FRINGE BENEFIT TAX
The person liable to pay the fringe
benefit tax is the employee because
he is the income earner or the recipient
of the benefit.
Section 33(A) of the Tax Code states that the

tax is payable by the employer.
However The Tax Code makes a reference to
Section 57(A) which is Withholding of Final
Tax on Certain Incomes. By referring to such Considering that fringe benefit tax is a final
provision, the employer merely serves as the tax, the fringe benefit received by the
withholding agent of the fringe benefit tax managerial and supervisorial employee
with the due to withhold and remit the tax to need not be included in the gross income.
the BIR.
FRINGE BENEFITS NOT SUBJECT TO FRINGE
BENEFIT TAX
The following fringe benefits given to managerial or supervisory
employees are not subject to fringe benefit tax:
a. Fringe benefit required by the nature of, or necessary to the trade, business or
profession of the employer; or
b. Fringe benefit for the convenience or advantage of the employer. (Section 33(A),
NIRC, as amended)
In addition, the following fringe benefits are also not subject to fringe
benefit tax:
a. Fringe benefits which are authorized and exempted from ' tax under special laws;
b. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
FRINGE BENEFITS NOT SUBJECT TO FRINGE
BENEFIT TAX
In addition, the following fringe benefits are also not subject to fringe
benefit tax:
c. Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
d. De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner
As stated, fringe benefits received by rank-and-file employee part of

compensation income included in the gross income and subject to
normal/net income tax.
DE MINIMIS BENEFITS
are facilities and privileges of relatively

small value and provided by an employer to
employees merely as a means to promote
their health, good will, contentment, or
efficiency.
The recipient maybe whether managerial,

supervisorial, or rank-and-file employee, are
not subject to income tax or fringe benefit
tax.
All other benefits given by employers which are not included under Revenue
Regulations No. 11-2018 shall not be considered as de minimis, and hence, shall be
subject to income tax as well as withholding tax.
DE MINIMIS BENEFITS
Monetized unused Medical cash Uniforms and

Rice subsidy
vacation leave allowance clothing allowance
Monetized unused Medical cash allowance Rice subsidy of P2,000 Uniforms and clothing
vacation leave credits of to dependents of or one 50kg sack of allowance not
private employees not employees, not rice per month worth exceeding P6,000 per
exceeding ten (10) days exceeding P1,500 per not more than P2,000;
annum;
during the year; employee per semester
or P250 per month; Laundry allowance not
Monetized value of
Actual medical exceeding P300 per
vacation and sick leave
assistance, not month;
credits paid to government
exceeding P10,000 per
officials and employees; annum
DE MINIMIS BENEFITS
Employees' Benefits received by

Gifts Meal allowance
achievement awards virtue of a CBA
Must be in the form of tangible Gifts given during Daily meal allowance Benefits received by an
personal property other than Christmas and major for overtime work and employee by virtue of a
cash or gift certificates, with anniversary night/ graveyard shift Collective Bargaining Agreement
an annual monetary value not celebrations not not exceeding twenty- (CBA) and productivity incentive
exceeding P10,000 received by exceeding P5,000 per five percent (25%) of schemes, provided the total
the employee under an employee per annum; the basic minimum annual monetary value received
wage; and from both CBA and productivity
established written plan which
incentive schemes combined do
does not discriminate in favor
not exceed P10,000 per
of highly paid employees;
employee per taxable year
TAX TREATMENT OF DE MINIMIS BENEFITS GIVEN TO
EMPLOYEES WHICH ARE BEYOND THE PRESCRIBED AMOUNT
OF BENEFITS
The benefits given in excess of the If the recipient is a rank-and-file employee,

maximum amount allowed as de minimis the amount in excess of P90,000 is
benefits shall be included as part of the included in the gross compensation income
"other benefits" which is subject to the subject to normal/net income tax.
P90,000 ceiling under Section 32(B)(7) (e)
(iv) of the Tax Code, as amended.
Any amount in excess of the P90,000 shall If the recipient is a managerial/ supervisory
be subject to normal income tax or fringe employee, the amount in excess of P90,000
benefit tax depending on whether the is subject to fringe benefit tax. (Revenue
recipient is a rank-and-file employee or a Regulations No. 5-2011; Revenue
managerial/supervisory employee. Memorandum Circular No. 20-2011)
OF BENEFITS
Illustration: In 2019, Ms. A, a rank-and-file employee, received

an annual clothing allowance amounting to P10,000. Her 13th
month pay is P80,000. No other benefits were received for the
entire year.
Since the prescribed maximum amount for annual clothing allowance is only
P6,000, as increased by Revenue Regulations No. 11-2018, the excess of P4,000
shall be added to the 13th month pay, thereby the entire benefits received
amounted to P84,000.
In this case, the "other benefit" of P84,000. is still exempt from, income tax because
it does not exceed the threshold amount of P90,000.
Assuming the "other benefit'' is P100,000, only P10,000 or the excess over P90,000 is
subject to normal/net income tax.
OF BENEFITS
Illustration: In 2019, Ms. A, a rank-and-file employee, received

an annual clothing allowance amounting to P10,000. Her 13th
month pay is P80,000. No other benefits were received for the
entire year.
Using the same illustration except that Ms. A is a managerial/ supervisory
employee, the P84,000 other benefits is exempt from income tax because it does
not exceed the threshold amount of P90,000. Assuming the "other benefit'' is
P100,000, only P10,000 or the excess over P90,000 is subject to fringe benefit tax.
TAX TREATMENT FOR THE PREMIUM ON HEALTH CARD PAID BY
THE EMPLOYER FOR THE "RANK-AND-FILE" AND "MANAGERIAL
OR SUPERVISORY” EMPLOYEES
Premium on health card paid by the employer for all employees, whether rank
and file or managerial/supervisory, under a group insurance shall be included
as part of other benefits of these employees which are subject to the P90,000
threshold.
However, individual premiums (nor part of group insurance) paid for selected
employees holding managerial or supervisory functions are considered "fringe
benefits" subject to fringe benefits tax. (Revenue Memorandum Circular No. 50-
2018)
Thank you!
FOR LISTENING
Taxation
ALLOWABLE
DEDUCTIONS
TAXATION LAW
Lampa Donna | Rhea Go | Ciara Tubid

RECALL
The tax base of normal/net income tax (individual) and regular corporate income tax
(corporation) is the "taxable income," thus the formula:
The provisions of allowable deductions under Section 34 of the Tax Code is applicable only to
normal/net income tax and regular corporate income tax because these-are the only income taxes
that allow deductions in the determination of income tax liability.
Impact of TRAIN Law on
Compensation Income Earners
PRIOR TRAIN LAW CHANGES UNDER Impact of TRAIN Law on

Compensation Income
0
TRAIN LAW Earners
1
Pure compensation income earners could claim deductions: Repealed deductions for:
• Premiums for health and/or hospitalization insurance • Health and/or hospitalization insurance premiums
(Section 34(M)) • Personal exemptions
• Personal and additional personal exemptions
• Additional personal exemptions
(Section 35)
• Deductions are now integrated into the P250,000.00 exempt
Definition of “taxable income”
threshold
"pertinent items of gross income specified in this Code, less • New definition of "taxable income" under Section 31 does not
the deductions and/or personal and additional exemptions, include these deductions.
if any, authorized for such types of income by this Code or
"Taxable income" is now defined as "the pertinent items of gross
other special laws."
income specified in this Code, less deductions, if any, authorized
for such types of income by this Code or other special laws.”
Simply: Gross income minus deductions/exemptions Simply: Gross income minus deductions authorized by
authorized by Tax Code or special laws. Tax Code or special laws.
Deductions and Its Nature
Deductions for income tax purposes
Deductions are items allowed partake of the nature of tax exemptions;
hence, if tax exemptions are strictly Deductions from gross income
by the Tax Code or special law
construed, then deductions must also be are matters of legislative grace;
to be subtracted from the what is not expressly granted by
strictly construed.
gross income in order to (Commissioner of Internal Revenue v. Congress is withheld.
arrive at the taxable income, General Foods (Phils.)
Moreover, when acts are
which is the tax base of the It is a governing principle in taxation that condemned, by law and their
normal/net income tax or tax exemptions must be construed in commission is madepunishable
strictissimi juris against the taxpayer and
regular corporate income tax. by fines or forfeitures, to allow
liberally in favor of the taxing authority;
and he who claims an exemption must them to be deducted from the
Deduction from gross income –
be able to justify his claim by the wrongdoer's gross income,
pertain to business expenses
clearest grant of organic or statute law. reduces, and so in part defeats,
incurred by a taxpayer engaged in
An exemption from the common burden the prescribed punishment.
business or engaged in the practice cannot be permitted to exist upon vague (Lino Gutierrez v. Collector of
of profession implications. Internal Revenue)
(Asiatic Petroleum Co. v. Llanas, 49
Phill.cited in Davao Light & Power Co . v.
Commissioner of Cust)oms
TAX CREDIT V. TAX DEDUCTIONS
EXCLUSION V. TAX DEDUCTIONS
THE DISTINCTION IS BETTER EXPRESSED IN THE FOLLOWING FORMULA:
Kinds of Deductions
Deductions may be classified into:
(1) Itemized Deductions

(2) Optional Standard Deductions
There are however 'special provisions regarding

deductions of insurance companies, whether domestic
or foreign, under Section 37 of the Tax Code.
ITEMIZED DEDUCTIONS
A.Expenses( Section 3(A) , NIRC)
Ordinary and Necessary Trade, Business or Professional Expenses
Ordinary and necessary expenses in the conduct of trade or business or exercise of a profession is allowed as deduction
from gross income.
An expense is “ordinary" when it connotes a payment,which is normal in relation to the business of the taxpayer and the
surrounding circumstances.
An expense is "necessary" when the expenditure is appropriate or helpful in the development of taxpayer's business or that
the same is proper for the purpose of realizing a profit or minimizing a loss.
In Atlas vs. CIR, it was defined that an expense is “necessary” if reasonable and
essential to the development, management, operation, or conduct of the trade,
business or exercise of profession of the taxpayer. It is "ordinary" when it is
normal in relation to the business of the taxpayer and the surrounding
circumstances. An expense is also said to be ordinary if it is normally incurred by
other taxpayers under the same line of business.
Ordinary and necessary expenses the
following:
a. A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of fringe
benefit furnished or granted by the employer to the employee: Provided, that the final
tax imposed under Section 33 hereof has been paid;
b. A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;
Deductibility of Travel expenses in taxation

• Travel expenses for deduction must relate to trade, business, or profession.
• Section 33(B)(7) of the Tax Code categorizes foreign travel expenses as fringe benefits subject to final income tax.
• Section 33(B)(7) applies to managerial employees' foreign travel, considered fringe benefits not related to trade,
business, or profession.
• Contrastingly, Section 34(A)(1)(a)(ii) covers travel expenses incurred by any employee, managerial or not, in pursuit of
trade or business.
• Travel expenses not related to trade, business, or profession can still be deductible if final income tax is paid and
provided to a managerial employee
c.A reasonable allowance for rentals and/or other payments which are required
as a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a lessee, user, or
possessor; and
d.A reasonable allowance for entertainment, amusement, and recreation

expenses during the taxable year, that are directly connected to the development,
management, and operation of the trade, business or profession of the taxpayer,
or that are directly related to or in furtherance of the conduct of his or its trade,
business, or exercise of a profession not to exceed such ceilings as the Secretary
of Finance may, by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as' well as the special
circumstances, nature and character of the industry, trade, business, or
profession of the taxpayer;
Any expense incurred for entertainment, amusement, or recreation that is

contrary to law, morals, public policy, or public order shall in no case be allowed
as a deduction.
Under Section 5 of Revenue Regulations No. 10- 2002,
a limit is set as deduction from gross income for
entertainment, amusement, and recreation expenses
(EAR) as follows:
1. For taxpayers engaged in the sale of good and properties, the

EAR expense allowed is the actual amount of EAR paid or
incurred within the taxable year but in no case shall exceed
one-half percent (1/2% or 0.50%) of the net sales.
2. For taxpayers engaged in sale of services, including exercise of profession

and use or lease of properties, the EAR expense allowed is the actual amount
of EAR paid or incurred within the taxable year but in no case shall exceed one
percent (1 %) of the net revenue.
IF THE TAXPAYER IS DERIVING INCOME FROM BOTH SALE OF GOODS/PROPERTIES AND SERVICES, THE
ALLOWABLE EAR EXPENSE SHALL IN ALL CASES BE DETERMINED BASED ON AN APPORTIONMENT FORMULA
TAKING INTO CONSIDERATION THE PERCENTAGE OF THE NET SALES/NET REVENUE TO THE TOTAL NET SALES/NET
REVIEW BUT WHICH IN NO CASE SHALL EXCEED THE MAXIMUM PERCENTAGE CEILING STATED PREVIOUSLY.
The apportionment formula is:

Requisites for Deductibility
The following requisites must be present before an expense may be

allowed as a deduction:
a. It must be ordinary and necessary expense;

b. It must be paid or incurred during the taxable year;
c.It must be paid or incurred in carrying on or which are directly attributable to
the development, management, operation, and/or conduct of the trade,
business, or exercise of a profession;
d. The amount must be reasonable;
e. It must be substantiated with sufficient evidence;
f. It is not contrary to law, public policy, or morals; and
g.The tax required to be withheld on the amount paid or payable must have been paid to
the BIR by the taxpayer, who is constituted as a withholding agent of the government.
Substantiation Requirements
The ordinary and necessary expenses must be substantiated with

sufficient evidence such as official receipts or other adequate records
showing or indicating:
a. The amount of the expense being deducted; and

b. The direct connection or relation of the expense being deducted to the
development, management, operation, and/or conduct of the trade, business, or
profession of the
taxpayer.
Ordinary and necessary expenses not substantiated are not allowed as deduction in
the gross income.
Bribes, Kickbacks, and Other
Similar Payments
Payments contrary to law, morals, and public policy are not allowed as a
deduction from gross income
Any bribe, kickback, or payment of similar nature paid directly or

indirectly, to an official or employee of the national government, or to
an official or employee of any local government unit, or to an official or
employee of a government-owned or controlled corporation, or to an
official or employee or representative of a foreign government, or to a
private corporation, general professional partnership, or a similar
entity, is not allowed as a deduction from gross income.
Expenses Allowable to Private
Educational Institutions
For capital expenditures, a private educational institution described
under Section 27(B) of the Tax Code, may at its option elect either:
a. To deduct expenditures otherwise considered as capital outlays of depreciable

assets incurred during the taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation under Section 34(F) of the Tax Code.
This deduction for private educational institution is in addition to the expenses allowable under Section 34
of the Tax Code. It must be emphasized that under Section 36(A)(2) of the Tax Code, any amount paid out
for new buildings or for permanent improvements, or betterments made to increase the value of any
property or estate is not a deductible item. This rule however does not apply to a private educational
institution as provided in the above rules.
INTEREST
B. Interest (Section 34(B), N.IRC)
Interest refers to payment for the use or forbearance of detention of money regardless of the name it is called
or dominated. It includes the amount paid for the detention of the money after the due date for its repayment:
(Section 2, Revenue Regulations No. 13-2000) In fine, interest is the fee paid for the' use of someone else
money.
Requisites for Deductibility (RR13-2000):
The following requisites must be present before an expense may be allowed as a deductible in gross income.
a. There must be indebtedness;

b. There should be an interest expense paid or incurred upon such indebtedness;
c. The indebtedness must be that of the taxpayer;
d.The indebtedness must be connected with the taxpayer's trade, business, or exercise of profession;
e. The interest expense must have been paid or incurred during the taxable year;
f. The interest must have been stipulated in writing;
g. The interest must be legally due;
h. The interest payment arrangement must not be between related taxpayers provided in Section
34(B)(2)(b), in relation to Section 36(B) of the Tax Code;
i. The interest must not be incurred to finance petroleum operations; and
j. In case of interest incurred to acquire property used in trade, business or exercise of profession,
the same was not treated as a capital expenditure.
Tax Arbitrage Rule
Pursuant to Section 34(B) of the Tax Code, the amount of interest
expense paid or incurred by a taxpayer within a taxable year on
indebtedness in connection with the trade, business, or exercise of
profession is allowed as a deduction from his gross income.
• Deduction may be reduced if the taxpayer has earned interest income

subjected to final withholding tax.
• Effective January 1, 2009, allowable deduction for interest expense is
reduced by 33% of interest income subject to final income tax.
• This reduction mechanism is known as the Tax Arbitrage Rule.
Rationale of Tax Arbitrage Rule
The rationale behind the tax arbitrage rule is to limit the practice of profiting from the different tax
treatment of interest income and interest expense.
ILLUSTRATION: ASSUMING THAT IN 2015, COMPANY A BORROWED MONEY FROM A BANK AMOUNTING TO
P1,000,000.00 WITH TEN PERCENT (10%) ANNUAL INTEREST. IMMEDIATELY UPON RECEIPT OF THE PROCEEDS
OF THE LOAN, COMPANY A DEPOSITED. THE MONEY IN ANOTHER BANK THAT EARNS A TEN PERCENT (10%)
ANNUAL INTEREST. THUS, COMPANY A EARNS P100,000.00 INTEREST INCOME AND INCURS P100,000.00
INTEREST EXPENSE.
Without the tax arbitrage rule, the interest income of P100,000.00 is subject to twenty percent
(20%) final income tax or Company A pays P20,000.00 tax P100,000.00 × 20%). On the other hand,
Company A is allowed to claim interest expense of P100,000.00 as a deduction from gross income
which gives a thirty percent (30%) tax benefit or tax savings of P30,000.00 (P100,000.00 × 30%).
Taken as a whole, the lower final income tax of twenty percent (20%) on interest income and
higher tax deductibility of thirty percent (30%) on interest expense result to a net benefit of
P10,000.00 (P30,000.00 less P20;000.00), or thirty-three percent (33%) (P10,000.00/P30,000.00).
SIMPLIFIED:
Illustration:
• Company A borrows P1,000,000.00 at 10% annual interest in 2015.

• It immediately deposits the amount in another bank earning 10% annual interest.
• Interest income earned: P100,000.00
• Interest expense incurred: P100,000.00
Without the tax arbitrage rule:

• Interest income is taxed at 20%, resulting in a tax of P20,000.00.
• Interest expense is deductible at 30%, yielding a tax benefit of P30,000.00.
• Net benefit: P10,000.00 (P30,000.00 - P20,000.00) or 33% (P10,000.00/P30,000.00).
Summary:
Company A's interest income is subject to a 20% final income tax, resulting in a tax of P20,000.00.
Meanwhile, the interest expense is deductible at a higher rate of 30%, providing a tax benefit of P30,000.00.
This yields a net benefit of P10,000.00 or 33% of the interest expense.

APPLICATION OF TAX ARBITRAGE-RULE
APPLYING THE TAX ARBITRAGE RULE IN THE ILLUSTRATION ABOVE, THE DEDUCTIBLE INTEREST
EXPENSE IS COMPUTED AS FOLLOWS:
From the above computation, it is not P100,000.00, the actual interest expese, but
only P67,000 which may be allowed as deductible interest expense.
Exceptions
Interest in the following instances is not allowed as a deduction
from gross income:
a. Interest paid in advance
If within the taxable year, an individual taxpayer reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance through discount or otherwise, such interest paid in advance is not
deductible' interest. However, such interest paid in advance is allowed as a deduction in the year the
indebtedness is paid.
If the loan, in which an interest is paid in advance, is payable in periodic amortizations, the amount of
interest which corresponds to the amount of the principal or amortized or paid during the year shall be
allowed as deduction isuch taxable year.
b. If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under Section 36(B)
Section 36(B) of the Tax Code does not allow interest payments as a deduction if the payments are between
members of a family. For this purpose, the family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors; and lineal descendants:
c. If the indebtedness is incurred. to finance petroleum exploration

Optional Treatment of Interest
Expense
At the option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure
Illustration: Assuming Company A acquired an equipment in the amount of P500,000.00 in

June 2010, Company A will pay the equipment in June 2011 with ten percent (10%) interest;
thus, Company A will pay P550,000.00, inclusive of interest. The P50,000.00 interest, at the
option of Company A, may be claimed as itemized deduction under Section 34(B) in full, or
included in the capital expenditure subject to depreciation under Section 34(F) of the Tax
Code.
SIMPLIFIED:
• Company A acquired equipment worth P500,000.00 in June 2010.
• The payment, including ten percent (10%) interest, will be made in June 2011, totaling P550,000.00.
The P50,000.00 interest can be:

• Claimed as an itemized deduction under Section 34(B) in full, or
• Included in the capital expenditure subject to depreciation under Section 34(F) of the Tax Code.
Optional Treatment of Interest
Expense
At the option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure
Illustration: Assuming Company A acquired an equipment in the amount of P500,000.00 in

June 2010, Company A will pay the equipment in June 2011 with ten percent (10%) interest;
thus, Company A will pay P550,000.00, inclusive of interest. The P50,000.00 interest, at the
option of Company A, may be claimed as itemized deduction under Section 34(B) in full, or
included in the capital expenditure subject to depreciation under Section 34(F) of the Tax
Code.
SIMPLIFIED:
• Company A acquired equipment worth P500,000.00 in June 2010.
• The payment, including ten percent (10%) interest, will be made in June 2011, totaling P550,000.00.
The P50,000.00 interest can be:

• Claimed as an itemized deduction under Section 34(B) in full, or
• Included in the capital expenditure subject to depreciation under Section 34(F) of the Tax Code.
TAXES
C. Taxes (Section 34(C), NIRC)
Section 34(C) of the Tax Code contemplates taxes either as a deduction or a credit. As previously illustrated, tax
as a deduction is subtracted from the gross income in the computation of the taxable income, while tax as a
credit is being subtracted from the income tax liability.to arrive at the income tax still due.
This is better: expressed using the formula below:
Gross Income xx
Less: Deductions (includes Tax) xx
Taxable Income xx
Multiply by: Tax Rate xx
Income Tax Liability xx
Less: Tax Credits xx
Income Tax Still Due xx
Taxes as Deductions
Taxes paid or incurred within the taxable year in connection

with the taxpayer's profession, trade or business, are allowed as
deduction, except
a. The income tax;

b. Income taxes imposed by the authority of any foreign
country; but this deduction shall be allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent the benefits of Section 34(C)(3) of
the Tax Code;
c. Estate and donor's taxes; and
d. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Taxes may be deducted in the gross income the following

requisites are present:
a. Taxes must be paid or incurred within the taxable

b. Taxes must be paid or incurred in connection with the
taxpayer's trade, business, or profession;
c. It must be imposed directly on the taxpayer; and
d. It must not be specifically excluded by law from being
deducted from the taxpayer's gross income.
Tax Benefit Rule

Illustration: Assuming Company A claimed as tax deductionPl00,000.00 in 2012, 'thus,
Company A obtained a tax benefit of P30,000.00 (Pl00,000.00 x 30%); meaning its
income tax liability is reduced by P30,000.00 because of the tax deduction. When the
P100,000.00 tax is subsequently refunded, only P30,000.00 shall beincluded on the gross
income in the year of receipt of the refund because this is the only extent to which Company
A benefited from thePl00,000.00 tax deduction previously claimed.
Tax as Credit
Tax credit refers to an amount of taxes paid by a taxpayer in a

foreign country that is allowed to be deducted in the said
taxpayer's tax liability in the Philippines. Tax credit reduces the
tax liability in the Philippines
Not all taxpayers may claim tax credit in Philippine income tax on foreign taxes paid.
The right to credit foreign taxes paid is available only to the following:
a. Resident Citizen;
b. Domestic Corporation;
c. Member of a General Professional Partnerships; and
d. Beneficiaries of Estate or Trust.
On the contrary, the right to credit foreign taxes paid is not available to the following:
a. Non-Resident Citizen;
b. Resident Alien;
c. Non-Resident Alien;
d. Resident Foreign and
e. Non-Resident Foreign Corporation
Application of Tax Credit
If the taxpayer signifies in the return the desire to

avail and apply tax credits, the income tax
imposed shall be credited with:
a. Citizen and Domestic Corporation

In case of a citizen of the Philippines and of a domestic
corporation, the tax credit is the amount of income taxes paid or
incurred during the taxable year to any foreign country.
b. Members of a General Professional Partnership and

Beneficiaries of Estate or Trust
Limitations on Credit
The amount of the tax credit shall be subject to each .of the
following limitations:
a. The amount of the credit in respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax against which such credit is taken
which the taxpayer's taxable income from sources such country under Tile II
bears to his entire taxable
income for the same taxable year; and
b. The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken which the taxpayer's taxable income from
sources without the Philippines taxable under this Title bears to his entire taxable
income for same taxable year.
THESE LIMITATIONS ARE BETTER EXPRESSED USING THE FORMULA BELOW:
Proof of Credits
The tax credits shall be allowed only if the taxpayer

establishes to the satisfaction of the Commissioner the
following:
a. The total amount of income derived from sources without the Philippines;
b. The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be
determined under rules and regulations prescribed by the Secretary of Finance;
and
c. All other information necessary for the verification and computation of such
credits.
LOSSES
C. Losses
In general, losses actually sustained during the taxable year and not compensated for by insurance or other
forms of indemnity shallbeallowedasdeductions.Theselossesare:
a. Business losses - losses incurred in trade, profession, or business; or
b. Casualty losses - losses of property connected with the trade, business, or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement.
No loss is allowed as a deduction for income tax purposes if at the time of the filing of the
income tax return, such loss has been claimed as a deduction for estate tax purposes in
the estate tax return. There is a similar provision in Section 86(A)(l)(e) of the Tax Code
which states that loss claimed be claimed as a deduction for estate tax purposes ifat the
time ofthe filing of the return such losses have not been claimed as a deduction for the
income tax purposes in an income tax return. Simply, claiming losses as deduction both for
income tax and estate tax purposes is not allowed.
The following conditions must be present before losses may be

claimed as a deduction:
1.The loss must be that of the taxpayer;

2.There must be an actual loss suffered in a closed and completed transaction;
3.The loss must be connected with the taxpayer's trade, business or profession;
4.The loss must not be compensated for by insurance or otherwise;
5.The loss must be actually sustained and charge-off during the taxable year;
6.In the case of casualty loss, declaration of loss must be filed within 45 ·days
from the occurrence of the casualty loss (Revenue Regulations No. 12-77, as
amended); and
7.The loss must not be claimed as deduction for estate tax purposes in the estate
tax return.
Proof ofLoss
In the case of a non-resident alien individual or foreign corporation,

the losses deductible shall be those actually sustained during the year
incurred in business, trade, or exercise of a profession conducted
within the Philippines, when such losses are not compensated for by
insurance or other forms of indemnity.
The Secretary of Finance, upon recommendation of the

Commissioner, ·is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and manner by
which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embezzlement during the taxable
year: Provided, That the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than
ninety (90) days from the date ofdiscovery ofthe casualty or robbery,
theft or embezzlement giving rise to the loss.
Net Operating Loss Carry-Over
Net Operating Loss Carry-Over (NOLCO) arises when there is "net operating
loss," which is the excess of allowable deduction over gross income of the
business in a taxable year.
When the taxpayer incurred net operating loss, it still derives benefit from it
because the Tax Code allows the carry-over of the operating loss as a
deduction from gross income for the next three (3) consecutive taxable years
immediately following such loss. This means for the next three (3) years, an
additional deduction called as NOLCO may be claimed in the computation of
taxable income.
NOLCO shall be carried over as deduction from gross income for the next three
(3) consecutive years following the year Df such loss provided that:
1.The taxpayer was not exempt from income tax in the year of such net
operating loss; and
2.There has been no substantial change in the ownership of the business or
enterprise.
There is no substantial change in ownership of the business or enterprise when:

1.Not less than seventy-five percent (75%) in nominal value of outstanding
issued shares, if the business is in the name of a corporation, ii;; held by or
on behalf of the same persons; or
2.Not less than seventy-five percent (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.
The three-year reglementary period on the carry-over of NOLCO shall continue

to run notwithstanding the fact that the corporation paid its income tax under
the "Minimum Corporate Income Tax" computation. (Section 2:6, Revenue
Regulations No. 14- 2 0 0'1 )
Taxpayers Who Can Avail of
NOLCO
In general, all taxpayers subject to normal/net income tax or regular corporate
income tax or at preferential tax rate can avail or claim NOLCO as a deduction.
NOLCO, however, may not be availed by taxpayers:
(1) exempt from income tax,
(2) subject to gross income tax,
(3) subject to final income t ax, or (4) enjoying income tax holiday.
Specifically, the following are taxpayers entitled to deduct

NOLCO"from gross income:
a. Any individual (including estates and trusts) engaged in trade or business
or in the exercise of his profession;
b. Domestic and resident foreign corporations subject to the. normal income

tax (e.g., manufacturers and traders); and
c. Corporations subject to preferential tax rates under the Code (e.g., private
educational institutions, hospitals, and regional operating headquarters) on
their taxable income.
On the contrary, the following entities not entitled to claim deduction of NOLCO:
a. OBU of a foreign banking corporation, and FCDU of a domestic or foreign banking corporation, duly
authorized as such by the BSP;
b. An enterprise registered with the Board of Investments (BOI) with respect to its BOI-registered activity
enjoying the Income Tax Holiday incentive. Its accumulated net operating losses incurred or sustained
during the period of such Income Tax Holiday shall not qualify for purposes of the NOLCO;
C. An enterprise registered with the PEZA, pursuant to Republic Act No. 7916, as amended, with
respect to its PEZA-registered business activity. Its accumulated net operating losses incurred or
sustained during the period of its PEZA registration shall not qualify for purposes of the NOLCO.
D. An enterprise registered under Republic Act No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its business activity. Its
accumulated net operating losses incurred or sustained during the period of its said registered operation
shall not qualify for purposes of the NOLCO;
e. Foreign corporations engaged in international shipping or air carriage business in the Philippines; and
f.In general, any person, natural or juridical, enjoying exemption from income tax, pursuant to the
provisions of the Code or any special law, with respect to its operation during the period for which the
aforesaid exemption is applicable. Its accumulated net operating losses incurred or sustained during the
said period shall not qualify for purposes of the NOLCO. (Section 4, Revenue Regulations No. 14-2001)
Exemption to the 3-Year
Carry-Over Rule
As a general rule, NOLCO may only be carried over for the next
three (3) consecutive taxable years immediately following such
loss.
As an exception, net operating loss sustained ·by mines

other than oil and gas wells without the benefit of
incentives provided for under Executive Order No. 226
(Omnibus Investments Code of.1987) incurred in any of the
first ten(10) years of operation may be carried over as a
deduction from taxable income for the next five (5) years
immediately following the year of such loss.
Capital
Losses
Capital losses are allowed as deduction subject to certain
conditions
Distinction between Net Capital Loss Carry-Over and

Net Operating Loss Carry Over
Losses from Wash Sales of
Stock or Securities
Wash Sale is a sale or disposition of stock securities where

substantially identical securities are purchased within a sixty-one
(61) day period beginning thirty (30) days before the sale and
ending thirty (30) days after the sale.
A wash sale occurs when a customer enters a purchase order

and a sales order at the same time through the same dealer. The
ownership of the stock does not change. This would normally be
done to create the appearance of activity in a security
Wagering Losses
Wagering loss or gambling loss shall be allowed

only to the extent of the gains from such
transactions. This provision is applicable only to
an individual taxpayer unless corporations can
legally enter into gambling transactions
Abandonment Losses
In the event a contract area where petroleum operations are undertaken

is partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a
deduction: Provided, that accumulated expenditures incurred in that
area prior to January 1, 1979 shall be allowed as a deduction only from
any income derived from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner. .
In case a producing well is subsequently abandoned, the unamortized

costs thereof, as well as the undepreciated costs of equipment directly
used therein, shall be allowed as a deduction in the year such well,
equipment or facility is abandoned by the contractor: Provided,.that if
such abandoned well is re-entered and production is resumed, or if
such equipment or facility is restored into service, the said costs shall
be included as part of gross income in the year of resumption or
restoration and shall be amortized or depreciated, as the case may be.
Bad Debts
Bad debts are debts due to the taxpayer arising

from or connected with the trade, business of
profession actually ascertained to be worthless
and charged off within the taxable year.
Requisites for Deductibility of
Bad Debts
a.There must be an existing indebtedness due to the taxpayer
which must be valid and legally demandable;
b.The same must be connected with the taxpayer's trade, business

or .Practice of profession;
c.The same must not be sustained in a transaction entered into

between related parties enumerated under Section 36(B) of the Tax
Code of 1997;
d.The same must be actually charged off the books of accounts

ofthe taxpayer as of the end of the taxable year; and
e.The same must be actually ascertained to be worthless and

uncollectible as of the end of the taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able
to demonstrate with reasonable degree of certainty the uncollectibility of the debt.
The Commissioner of Internal Revenue will consider all pertinent evidence, such as:
a. The value of the collateral, if any, securing the debt and the financial condition of
the debtor in determining whether a debt is worthless, or
b. The assigning of the case for collection to an independent collection lawyer who
is not under the employ of the taxpayer and who shall:
• Report on the legal obstacle and the virtual impossibility of collecting the same
from the debtor, and
• Issue a statement under oath showing the propriety of the deductions thereon
made for alleged bad debts.
Thus, where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all probability not
result in the satisfaction of execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the purpose of deduction.
Receivables from Banks,
Insurance, and Surety Company
In the case of banks, the Commissioner of Internal Revenue

shall determine whether or not bad debts are worthless and
uncollectible in the same manner as that stated above.
Without prejudice to the Commissioner's determination of
the worthlessness and uncollectibility of debts, the
taxpayer shall submit a Bangko Sentral ng
Pilipinas/Monetary Board written approval of the writing
off of the indebtedness from the banks' books of accounts
at the end of the taxable year.
Ascertaining the
Worthlessness of a Debt
To qualify as a bad debt deduction, there are established rules in
determining the "worthlessness of a debt." For debts to be considered as
"worthless," and thereby qualify as ''bad debts" making them deductible,
the taxpayer should show that:
(1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and

uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer
must also show that it is indeed uncollectible even in the future.
Ascertaining the
Steps to be undertaken by the taxpayer to prove that he

exerted diligent efforts to collect the debts:
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.

Ascertaining the
A mere testimony of the financial accountant explaining the

worthlessness of the debts is not sufficient to establish the
worthlessness of the debt. Absence any documentary evidence
(e.g., collection letters sent, report from investigating fieldmen,
letter of referral to their legal department, police report/affidavit
that the owners were bankrupt due to fire that engulfed their
stores or that the owner has been murdered. etc.), there is no
strong basis to allow the bad debt as a deduction. (Philippine
Refining Company v. Court ofAppeals, G.R. No. 118794, May
8, 1996, citing Collector v. Goodrich International Rubber Co.,
21SCRA1336, December 22, 1967)
Tax Benefit Rule
The recovery of bad debts previously allowed as deduction in the

preceding years shall be included as part of the gross income in
the year of recovery to the extent of the income tax benefit of
said deduction. If the taxpayer did not receive any· income tax
benefit from the bad debt written off, the bad debt recovery is
not to be included in the gross income of the year of recovery.
Illustration: Assuming that in 2010, Company A charged off a bad debt

amounting to Pl00,000.00 against his gross income of P500,000.00,
leaving a taxable income ofP400,000.00 or an income tax liability of
P120,000.00 (P400,000.00 x 30%). On the following year, Company A
recovered the bad debts of Pl00,000.00. Considering that in 2010,
Company A had a tax benefit of P30,000.00 (Pl00,000.00 x 30%)
from the bad debts, only to this extent (P30,000.000) shall be included
in the gross income in the year of recovery.
Tax Benefit Rule
Illustration: Assuming that in 2010, Company A charged off a bad debt

amounting to Pl00,000.00 against his gross income of P500,000.00, leaving a
taxable income ofP400,000.00 or an income tax liability of P120,000.00
(P400,000.00 x 30%). On the following year, Company A recovered the bad
debts of Pl00,000.00. Considering that in 2010, Company A had a tax benefit of
P30,000.00 (Pl00,000.00 x 30%) from the bad debts, only to this extent
(P30,000.000) shall be included in the gross income in the year of recovery.
Securities Becoming
Worthless
If securities are ascertained to be worthless and charged off

within the taxable year and are capital assets, the loss
resulting therefrom shall in the case of a taxpayer other than
a bank or trust company incorporated under the laws of the
Philippines a substantial part of whose business is the
receipt of deposits, for the purpose of Title II of Tax Code,
be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets. (Section
34(E)(2), NIRC).
DEPRECIATION ON
ALLOWABLE
DEDUCTIONS
LET'S START!
Group Members
All are handsome! Except one who is Extremely
Bombastic
STEVEN JOSHUA CYRIL

JUDE THADEUS
ALEXIS CARDINAL
PAREDES
BENEDICTO
DEPRECIATION, AS DEFINED IN SECTION 34(F) OF THE
NIRC, IS THE GRADUAL DECREASE IN THE VALUE OF
TANGIBLE PROPERTY DUE TO WEAR AND TEAR AND
NORMAL OBSOLESCENCE. THIS ALSO INCLUDES THE
AMORTIZATION OF INTANGIBLE ASSETS WITH LIMITED
BUSINESS USE DURATION. IT BEGINS UPON PROPERTY
ACQUISITION, AND OWNERS MUST ENSURE ITS VALUE
IS SUSTAINED THROUGH PROVISIONS FROM EARNINGS
FOR REPLACEMENT. THIS IS BOTH A RIGHT AND DUTY
OF COMPANIES TO STAKEHOLDERS AND THE PUBLIC,
ENABLING GRADUAL CAPITAL INVESTMENT RECOVERY
IN DEPRECIABLE ASSETS WITHOUT INCOME TAX
IMPLICATIONS.
Requisites for Deductibility The following are the
requisites for deductibility of depreciation: a. The
allowance for depreciation must be
reasonable; b. It must be for property arising out
of its use or employment in the business or
trade, or out of its not being used temporarily
during the year; c. It must be charged-off during
the taxable year; d. A statement on the
allowance must be attached to the return;
and e. The property must have a limited useful
life.
Reasonableness of· Depreciation vis-a-vis
Methods of Depreciation The term
"reasonable allowance" for depreciation,
as per regulations set forth by the
Secretary of Finance upon
recommendation of the Commissioner,
encompasses various methods tailored
to the taxpayer's circumstances and the
property in question. These methods
include:
1. Straight-Line Method: Spreads the total cost of the
asset evenly over its useful life, resulting in consistent
annual depreciation irrespective of asset usage or
output. 2. Declining-Balance Method: Applies a rate to
the declining book value of the asset, with higher
depreciation in the initial years and decreasing
amounts in subsequent years, assuming higher
revenue generation early in the asset's life. 3. Sum-of-
the-Years-Digits Method: Utilizes a changing fraction
applied to the property's cost basis, adjusted for
estimated residual salvage value. 4. Any other method
prescribed by the Secretary of Finance upon the
Commissioner's recommendation.
Depreciation allowances for properties used in
petroleum and mining operations are governed by
specific rules: For petroleum operations: - Service
contractors can choose between straight-line or
declining-balance methods for depreciation. - The typical
useful life is ten years, but the Commissioner may allow a
shorter duration. - Properties not directly involved in
petroleum production have a five-year estimated useful
life and are depreciated using the straight-line method.
For mining operations (excluding petroleum): - Normal
depreciation rates apply if the expected life is ten years
or less. - If the expected life exceeds ten years,
depreciation can be spread over any period between
five and the expected life.
NON-RESIDENT ALIENS AND RESIDENT
FOREIGN CORPORATIONS CAN ONLY
CLAIM PROPERTY DEPRECIATION
DEDUCTIONS FOR ASSETS SITUATED IN
THE PHILIPPINES. DEPLETION
ALLOWANCES FOR OIL AND GAS WELLS
AND MINES ARE BASED ON A COST-
DEPLETION METHOD. EXPLORATION AND
DEVELOPMENT COSTS ARE DEDUCTIBLE
WHEN INCURRED FOR NON-PRODUCING
SITES OR AMORTIZED FOR PRODUCING
ONES. THESE COSTS DO NOT IMPACT
DEPRECIATION DEDUCTIONS AND DO NOT
ALTER THE ADJUSTED COST BASIS FOR
CALCULATING ALLOWABLE COST
DEPLETION.
TAXPAYERS IN MINING OPERATIONS CAN
DEDUCT EXPLORATION AND
DEVELOPMENT EXPENSES WHEN
CALCULATING TAXABLE INCOME. THESE
COSTS CAN EITHER BE ACCRUED FOR
COST DEPLETION OR INCURRED DURING
THE TAXABLE YEAR, UP TO 25% OF NET
INCOME FROM MINING OPERATIONS
WITHOUT TAX INCENTIVES. ANY SURPLUS
CAN BE CARRIED FORWARD. THIS
ELECTION IS PERMANENT AND APPLIES
TO FUTURE YEARS. "NET INCOME FROM
MINING OPERATIONS" REFERS TO GROSS
INCOME MINUS ALLOWABLE DEDUCTIONS
RELATED TO MINING ACTIVITIES.
EXPLORATION EXPENSES ARE INCURRED
PRE-DEVELOPMENT TO EVALUATE MINERAL
DEPOSITS, WHILE DEVELOPMENT COSTS
OCCUR DURING COMMERCIAL EXTRACTION.
NON-RESIDENT ALIEN INDIVIDUALS OR
FOREIGN CORPORATIONS IN PHILIPPINE
BUSINESS CAN ONLY CLAIM DEPLETION
ALLOWANCES FOR LOCAL OIL AND GAS
WELLS OR MINES. CHARITABLE
CONTRIBUTIONS ARE DEDUCTIBLE, SUBJECT
TO CONDITIONS. DONATIONS TO THE
GOVERNMENT OR ACCREDITED NON-
GOVERNMENT ORGANIZATIONS FOR PRIORITY
ACTIVITIES OR SPECIFIC PURPOSES MAY BE
FULLY DEDUCTIBLE IF THEY MEET
SPECIFIC CRITERIA.
CONTRIBUTIONS OR GIFTS MADE WITHIN THE
TAXABLE YEAR TO THE PHILIPPINE
GOVERNMENT, ITS AGENCIES, ACCREDITED
DOMESTIC CORPORATIONS OR ASSOCIATIONS
FOR SPECIFIC PURPOSES, OR NON-
GOVERNMENT ORGANIZATIONS CAN BE
DEDUCTIBLE. FOR INDIVIDUALS, THE
DEDUCTION IS CAPPED AT 10% OF TAXABLE
INCOME, WHILE FOR CORPORATIONS, IT'S 5%
OF TAXABLE INCOME FROM TRADE, BUSINESS,
OR PROFESSION. UNLIKE OTHER
DEDUCTIONS, CHARITABLE CONTRIBUTIONS
SUBJECT TO LIMITATION ARE SUBTRACTED
FROM NET INCOME BEFORE ARRIVING AT
TAXABLE INCOME. THIS IS EXPRESSED AS:
NOTE THAT THE LIMITATIONS
OF TEN PERCENT (10%) FOR
INDIVIDUAL AND FIVE
PERCENT (5%) FOR
CORPORATION ARE BASED ON
THE NET INCOME BEFORE
CHARITABLE AND OTHER
CONTRIBUTIONS AND NOT ON
THE AMOUNT OF THE
CHARITABLE CONTRIBUTION.
ILLUSTRATION: MR. A HAS A GROSS INCOME OF
PL,000,000.00 AND OTHER DEDUCTIONS OF
P400,000.00, EXCLUDING CHARITABLE
CONTRIBUTIONS. HE DONATED A CASH AMOUNTING TO
P500,000.00 TO THE GOVERNMENT EXCLUSIVELY
FOR PUBLIC PURPOSE BUT NOT IN PURSUANT TO A
NATIONAL DEVELOPMENT PRIORITY PROGRAM. THE
TAXABLE INCOME OF MR. A IS COMPUTED AS
FOLLOWS:
THE CHARITABLE AND OTHER CONTRIBUTIONS THAT
MR. A MAY CLAIM IS P60,000.00 (P600,000.00 X
10%) ONLY DESPITE HAVING DONATED CASH IN THE
AMOUNT OF P500,000.00. THE EXCESS OF
CHARITABLE CONTRIBUTION OF P440,000.00
(P500,000.00 - P60,000.00) IS NOT DEDUCTIBLE. IF
THE TAXPAYER IS A CORPORATE TAXPAYER, THE
INCOME IS COMPUTED AS FOLLOWS:
THE CHARITABLE AND OTHER
CONTRIBUTIONS THAT A
CORPORATE TAXPAYER MAY CLAIM
IS P30,000.00 (P600,000.00 X
5%) ONLY DESPITE HAVING
DONATED CASH IN THE AMOUNT OF
P500,BOO.OO THE EXCESS
OF CHARITABLE CONTRIBUTION OF
P470;000.00 (P500,000.00 -
P30,000.00) IS NOT DEDUCTIBLE.
VALUATION THE AMOUNT OF ANY
CHARITABLE CONTRIBUTION OF
PROPERTY OTHER THAN MONEY
SHALL BE BASED ON THE
ACQUISITION COST OF SAID
PROPERTY. PROOF OF
DEDUCTIONS CONTRIBUTIONS OR
GIFTS SHALL BE ALLOWABLE AS
DEDUCTIONS ONLY IF VERIFIED
UNDER THE RULES AND
REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON
RECOMMENDATION OF THE
COMMISSIONER.
UNDER REVENUE MEMORANDUM
CIRCULAR NO. 86-2014, DONORS
CLAIMING DEDUCTIONS FOR
CONTRIBUTIONS TO ACCREDITED NON-
STOCK, NON-PROFIT
CORPORATIONS/NGOS MUST PROVIDE
EVIDENCE TO THE BIR. THIS INCLUDES
CERTIFICATES OF DONATION
SHOWING: - ACTUAL RECEIPT BY THE
ACCREDITED ORGANIZATION AND THE
DATE OF RECEIPT. - THE AMOUNT OF
THE DONATION, WHETHER IN CASH OR
PROPERTY, WITH THE ACQUISITION
COST SPECIFIED FOR PROPERTY
CONTRIBUTIONS.
TAXPAYERS HAVE OPTIONS FOR HANDLING
RESEARCH AND DEVELOPMENT (R&D)
EXPENSES: THEY CAN DEDUCT THEM AS
ORDINARY AND NECESSARY BUSINESS
EXPENSES IN THE YEAR INCURRED OR DEFER
THEM THROUGH AN ELECTION, SUBJECT TO
REGULATORY GUIDELINES. DEFERRED R&D
EXPENSES MUST BE DEDUCTED EVENLY OVER
A PERIOD OF AT LEAST 60 MONTHS ONCE
THEY START BENEFITING THE TAXPAYER. THE
ELECTION MUST BE MADE WITHIN THE
SPECIFIED TIME FOR TAX RETURN FILING AND
ADHERED TO UNLESS APPROVED FOR A
CHANGE BY THE COMMISSIONER. HOWEVER,
DEDUCTIONS FOR R&D COSTS ARE LIMITED
AND DO NOT INCLUDE EXPENSES FOR LAND
ACQUISITION OR IMPROVEMENT, OR FOR
ASSESSING MINERAL DEPOSITS.
PAYMENTS TO EMPLOYEE PENSION TRUSTS
ARE DEDUCTIBLE UNDER CERTAIN
CONDITIONS: A. THE EMPLOYER MUST
ESTABLISH A REASONABLE AND
FINANCIALLY SOUND PENSION OR
RETIREMENT PLAN FOR EMPLOYEES. B.
THE PLAN MUST BE FUNDED BY THE
EMPLOYER. C. THE EMPLOYER MUST
RELINQUISH CONTROL OVER THE
CONTRIBUTED AMOUNT. D. THE PAYMENT
CANNOT ALREADY BE DEDUCTED. E. THE
AMOUNT MUST BE SPREAD EQUALLY OVER
TEN CONSECUTIVE YEARS STARTING FROM
THE YEAR OF TRANSFER OR PAYMENT.
TAXPAYERS IN TRADE, BUSINESS, OR
PROFESSION MUST PROVIDE MORE THAN
JUST RECEIPTS AND INVOICES FOR
DEDUCTIONS. SECTION 34(K) MANDATES
EVIDENCE THAT REQUIRED TAXES WERE
WITHHELD AND PAID TO THE BIR UNDER
SECTIONS 58 AND 81. THIS INCLUDES
CREDITABLE WITHHOLDING TAXES, VITAL
FOR EFFECTIVE TAX COLLECTION AND
GOVERNMENT REVENUE. WITHHOLDING
AGENTS, USUALLY INCOME PAYORS, ARE
TASKED WITH WITHHOLDING AND REMITTING
TAXES TO THE BIR.
ILLUSTRATION: IF COMPANY A PAYS MR. A P100,000
FOR PROFESSIONAL SERVICES, IT MUST WITHHOLD 5%
(P5,000) AS CREDITABLE INCOME TAX. COMPANY A
REMITS THIS AMOUNT TO THE BIR AND ISSUES MR. A A
CERTIFICATE OF CREDITABLE TAX WITHHELD AT
SOURCE. FAILURE TO WITHHOLD AND REMIT TAXES CAN
IMPACT THE DEDUCTIBILITY OF PAYMENTS MADE.
THIS WITHHELD TAX SERVES AS A CREDIT AGAINST
THE INCOME TAX LIABILITY OF THE RECIPIENT, WHO
COMPUTES THE REMAINING TAX DUE
ACCORDINGLY. MR. A WOULD NEED TO PRESENT THE
CERTIFICATE OF CREDITABLE TAX WITHHELD AT
SOURCE PROVIDED BY COMPANY A AS PROOF THAT THE
TAX HAS INDEED BEEN WITHHELD AND REMITTED TO
THE BIR. THIS CERTIFICATE SERVES AS EVIDENCE
THAT THE REQUIRED TAX HAS BEEN PAID, ALLOWING
MR. A TO CLAIM THE TAX CREDIT AGAINST HIS INCOME
TAX LIABILITY WHEN COMPUTING HIS TAXES.
REVENUE REGULATIONS NO. 6-2018 REQUIRES
INCOME PAYMENTS DEDUCTIBLE UNDER THE
TAX CODE TO HAVE WITHHOLDING TAX PAID TO
THE BIR. DEDUCTIONS ARE ALLOWED IF
WITHHOLDING IS DONE CORRECTLY, WITH
EXCEPTIONS FOR CERTAIN CASES.
ADDITIONALLY, DEDUCTIONS REPRESENTING
RETURN OF CAPITAL ARE ALLOWED UPON
PAYMENT OF BASIC WITHHOLDING TAX.
TAXPAYERS CAN CHOOSE THE OPTIONAL
STANDARD DEDUCTION (OSD) AT 40% OF
GROSS INCOME OR RECEIPTS INSTEAD OF
ITEMIZED DEDUCTIONS BUT MUST FULFILL
WITHHOLDING OBLIGATIONS.
TAXPAYERS ENTITLED TO AVAIL OSD THE
FOLLOWING TAXPAYERS MAY AVAIL OF THE
OSD: A. INDIVIDUALS: RESIDENT CITIZEN 11.
NON-RESIDENT CITIZEN M. RESIDENT
ALIEN IV. TAXABLE ESTATES AND TRUSTS B.
CORPORATIONS: DOMESTIC
CORPORATION RESIDENT FOREIGN
CORPORATION NON-RESIDENT ALIEN,
WHETHER OR NOT ENGAGED IN TRADE
OR BUSINESS, AND NON-RESIDENT FOREIGN
CORPORATION CANNOT AVAIL OF THE OSD.
REVENUE REGULATIONS NO. 2-2014 MANDATES ITEMIZED
DEDUCTIONS FOR CERTAIN TAXPAYERS: 1.
CORPORATIONS, PARTNERSHIPS, AND NON-INDIVIDUALS
MUST USE ITEMIZED DEDUCTIONS IF: - EXEMPT UNDER
THE TAX CODE OR SPECIAL LAWS WITH NO OTHER
TAXABLE INCOME. - SUBJECT TO
SPECIAL/PREFERENTIAL TAX RATES. - SUBJECT TO
INCOME TAX RATES UNDER SPECIFIC SECTIONS OF THE
TAX CODE AND ALSO SUBJECT TO
SPECIAL/PREFERENTIAL TAX RATES. - JURIDICAL
ENTITIES WITH TAXABLE BASE AS GROSS
REVENUE/RECEIPTS (E.G., NON-RESIDENT FOREIGN
INTERNATIONAL CARRIERS) CANNOT USE ITEMIZED
DEDUCTIONS OR OPTIONAL STANDARD DEDUCTION
(OSD). 2. INDIVIDUAL TAXPAYERS WHO CANNOT USE OSD
MUST USE ITEMIZED DEDUCTIONS IF: - EXEMPT UNDER
THE TAX CODE OR SPECIAL LAWS WITH NO OTHER
TAXABLE INCOME (E.G., BARANGAY MICRO BUSINESS
ENTERPRISE). - SUBJECT TO SPECIAL/PREFERENTIAL
TAX RATES. - SUBJECT TO INCOME TAX RATES UNDER
SPECIFIC SECTION OF THE TAX CODE AND ALSO SUBJECT
TO SPECIAL/PREFERENTIAL TAX RATES.
RATE AND BASE OF OSD FOR INDIVIDUAL TAXPAYERS,
OSD IS FORTY PERCENT (40%) OF GROSS SALES OR
GROSS RECEIPTS. FOR CORPORATE TAXPAYERS, OSD IS
FORTY PERCENT , (40%) OF GROSS INCOME. FOR
ILLUSTRATION:
OSD FOR INDIVIDUALS: - INDIVIDUAL TAXPAYERS CAN
CLAIM AN OSD OF UP TO 40% OF GROSS SALES OR
RECEIPTS. - IF USING THE ACCRUAL BASIS, OSD IS
BASED ON GROSS SALES; IF CASH BASIS, OSD IS BASED
ON GROSS RECEIPTS. - "COST OF SALES" OR "COST OF
SERVICES" CANNOT BE DEDUCTED FROM OSD. - OTHER
ACCOUNTING METHODS FOLLOW RESPECTIVE GROSS
SALES OR RECEIPTS CALCULATIONS. OSD FOR
CORPORATIONS: - CORPORATIONS SUBJECT TO SPECIFIC
TAX SECTIONS CAN CLAIM OSD UP TO 40% OF GROSS
INCOME. - "GROSS INCOME" FOR CORPORATIONS IS
GROSS SALES MINUS RETURNS, DISCOUNTS, AND COST OF
GOODS SOLD. - FOR SERVICES, "GROSS INCOME" IS
GROSS RECEIPTS MINUS RETURNS, ALLOWANCES,
DISCOUNTS, AND COST OF SERVICES. - PASSIVE
INCOMES WITH FINAL TAX ARE EXCLUDED FROM GROSS
INCOME FOR OSD CALCULATION. - DIFFERENT
ACCOUNTING METHODS USE RESPECTIVE GROSS INCOME
CALCULATIONS.
OSD FOR INDIVIDUALS: - INDIVIDUAL TAXPAYERS CAN
CLAIM AN OSD OF UP TO 40% OF GROSS SALES OR
RECEIPTS. - IF USING THE ACCRUAL BASIS, OSD IS
BASED ON GROSS SALES; IF CASH BASIS, OSD IS BASED
ON GROSS RECEIPTS. - "COST OF SALES" OR "COST OF
SERVICES" CANNOT BE DEDUCTED FROM OSD. - OTHER
ACCOUNTING METHODS FOLLOW RESPECTIVE GROSS
SALES OR RECEIPTS CALCULATIONS. OSD FOR
CORPORATIONS: - CORPORATIONS SUBJECT TO SPECIFIC
TAX SECTIONS CAN CLAIM OSD UP TO 40% OF GROSS
INCOME. - "GROSS INCOME" FOR CORPORATIONS IS
GROSS SALES MINUS RETURNS, DISCOUNTS, AND COST OF
GOODS SOLD. - FOR SERVICES, "GROSS INCOME" IS
GROSS RECEIPTS MINUS RETURNS, ALLOWANCES,
DISCOUNTS, AND COST OF SERVICES. - PASSIVE
INCOMES WITH FINAL TAX ARE EXCLUDED FROM GROSS
INCOME FOR OSD CALCULATION. - DIFFERENT
ACCOUNTING METHODS USE RESPECTIVE GROSS INCOME
CALCULATIONS.
TAXPAYERS ELECTING OSD MUST DECLARE IT IN THEIR
RETURN, WHICH IS THEN FIXED FOR THE YEAR.
INDIVIDUALS AVOID SUBMITTING FINANCIAL STATEMENTS,
BUT CORPORATIONS STILL DO. QUARTERLY RETURNS
ALLOW A CHOICE, BUT THE FINAL ONE MANDATES A
SINGLE METHOD. GPPS AND PARTNERS MAY ONLY CHOOSE
OSD ONCE, EITHER BY THE GPP OR PARTNERS, WITH
PARTNERS REPORTING THEIR SHARE AS TAXABLE
INCOME. GPPS CAN OPT FOR EITHER ITEMIZED
DEDUCTIONS OR OSD, WHILE PARTNERS CANNOT CLAIM
FURTHER DEDUCTIONS FROM THEIR GPP INCOME SHARE.
SECTION 36 OF THE TAX CODE OUTLINES
NONDEDUCTIBLE ITEMS FROM GROSS INCOME,
INCLUDING PERSONAL EXPENSES, PROPERTY
IMPROVEMENTS, AND LIFE INSURANCE PREMIUMS.
EXCEPTIONS APPLY TO CERTAIN EDUCATIONAL
INSTITUTIONS AND DESIGNATED BENEFICIARIES.
LOSSES FROM PROPERTY SALES OR EXCHANGES
BETWEEN FAMILY MEMBERS, INDIVIDUALS AND
CLOSELY-HELD CORPORATIONS, OR BETWEEN
TRUSTS AND BENEFICIARIES ARE ALSO
DISALLOWED FOR DEDUCTION.
PAYMENTS FOR HEALTH AND HOSPITALIZATION
INSURANCE PREMIUMS USED TO BE DEDUCTIBLE
FOR INDIVIDUAL TAXPAYERS UNDER SECTIONS 35
AND 34(M) OF THE TAX CODE. HOWEVER, WITH THE
IMPLEMENTATION OF THE TRAIN LAW, THESE
DEDUCTIONS WERE REMOVED AND INTEGRATED INTO
THE P250,000 THRESHOLD. THE TAX CODE
PREVIOUSLY ALLOWED A BASIC PERSONAL
EXEMPTION OF P50,000, AS WELL AS AN
ADDITIONAL EXEMPTION OF P25,000 FOR EACH
QUALIFIED DEPENDENT, UP TO FOUR DEPENDENTS.
DEPENDENTS WERE DEFINED AS CHILDREN BELOW
21 YEARS OLD OR INCAPABLE OF SELF-SUPPORT
DUE TO MENTAL OR PHYSICAL DISABILITIES.
SENIOR CITIZENS QUALIFIED AS DEPENDENTS IF
THEY MET THE CRITERIA FOR PERSONS WITH
DISABILITIES UNDER REPUBLIC ACT NO. 10754.
HOWEVER, THESE PROVISIONS ARE NO LONGER
APPLICABLE DUE TO THE REPEAL OF SECTION 35
BY THE TRAIN LAW.
NON-RESIDENT ALIEN INDIVIDUALS ENGAGED IN
PHILIPPINE TRADE OR BUSINESS CAN CLAIM A
PERSONAL EXEMPTION, WHILE THOSE NOT ENGAGED
CANNOT CLAIM DEDUCTIONS. HEALTH INSURANCE
PREMIUMS UP TO P2,400 ANNUALLY ARE
DEDUCTIBLE FOR FAMILIES WITH GROSS INCOMES
BELOW P250,000. FREE LEGAL SERVICE
PROVIDERS CAN DEDUCT EITHER THE VALUE OF
THEIR SERVICES OR 10% OF THEIR GROSS INCOME.
DONATIONS TO ATHLETES' PRIZES IN SPORTS
COMPETITIONS ARE FULLY DEDUCTIBLE.
THANKS FOR
PLAYING
END
WITHHOLDING TAX
Dava, Espinosa, Ligacion
What is the withholding The taxes withheld are in the nature of
tax system? advance tax payments by a taxpayer in order

to extinguish its possible tax obligation. They
are installments on the annual tax which may
be due at the end of the taxable year.
Withholding tax system is a system of
collection of taxes employed primarily for
the efficient collection of taxes by the
government. It is a tool to ensure that the
government will have a regular and steady Citibank vs CA (1997)
source of revenue inflows.
1. makes tax administration more efficient by
improving the collection of tax revenues
PURPOSES OF 2. encourages tax compliance and minimizes
WITHHOLDING
tax evasion and avoidance practices
3. relieves the taxpayer from financial difficulties in
TAX SYSTEM
raising the entire amount of tax when it falls due
4. provides the government a continuous cash

flow to finance its services
REQUISITES
payment of income is subject to income tax
income is fixed at the time of payment
one of the income payments subject to withholding tax
payee is a Philippine resident liable to pay income tax
payor-withholding agent is also a Philippine resident

Withholding of Tax at Source
Withholding of Tax at Source The withholding agent is the payor, a separate
entity acting no more than an agent of the
The withholding agent retains a portion of government for the collection of the tax in order
the amount received by the income earner. to ensure its payments - the payer is the taxpayer
or the person subject to tax imposed by law; and
In turn, the said amount is credited to the the payee is the taxing authority.
total income tax payable in transactions
covered by the expanded withholding tax.
Withholding of tax at source is a
procedure of collecting income tax which
is sanctioned by our tax laws. CIR vs La Flor Dela Isabela (2019)
Distinct Liabilities in the
Withholding Tax System
The income earner/taxpayer is liable to the income
tax due on the income, subject to withholding tax,
he earned. The withholding agent is liable on the
withholding tax he deducted and should be
remitted to the BIR out of the income earned by
the income earner/taxpayer. (CIR vs La Flor Dela
Isabela (2019))
Final Withholding Tax Creditable Withholding Tax
The amount of income tax withheld by the withholding Taxes withheld on certain income payments are intended
agent is constituted as a full and final payment of the to equal or at least approximate the tax due of the
income tax due from the payee on the said income. payee on said income.
Payee of income is required to report the income and/or

The liability for payment of the tax rests primarily on pay the difference between the tax withheld and the tax
the payor as a withholding agent. due on the income. The payee also has the right to ask
for a refund if the tax withheld is more than the tax due.
The payee is not required to file an income tax return The income recipient is still required to file an income tax
for the particular income. return.
Kinds of Withholding Tax at Source

KINDS OF CREDITABLE WITHHOLDING TAX
Withholding Tax on Compensation
Expanded Withholding Tax
Withholding Tax on Government Money Payments - VAT
Withholding Tax on Government Money Payments -

Percentage Taxes
tax withheld from income payments to individuals arising
from an employer-employee relationship
Expanded Withholding Tax

Percentage Taxes
creditable against income tax due to payee for the taxable

quarter/year in which income was earned

Percentage Taxes

tax withheld by national government agencies including GOCCs

and LGUs before making any payments to VAT registered payees

Percentage Taxes

tax withheld by national government agencies including GOCCs

and LGUs before making any payments to VAT registered payees
same as above but to non-VAT registered payees

Income Payments Subject to Final
Withholding Tax
The income payments subject to final
withholding tax are basically the (1)
passive incomes subject to final income
tax, (2) income of non-resident foreign
corporation subject to gross income tax,
(3) the fringe benefits, and (4) informer's
reward.
Income Payments Subject to
Creditable Withholding Tax
The Secretary of Finance may, upon the recommendation
of the Commissioner, require the withholding of a tax on
the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than
thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer
for the taxable year.
Gross Income....................................................xx
(Less: Allowable Deductions)........................xx
TAXABLE INCOME..............................................xx
(Multiply by: Applicable Tax Rate)..............xx
INCOME TAX......................................................xx
(Less: Creditable Withholding Tax).............xx
INCOME TAX STILL DUE....................................xx
Persons Required to Deduct and
Withhold Tax
any juridical person
an individual, with respect to
payments made in connection with
his trade of business
all government offices including
GOCCs and LGUs
NOTE: Time of Withholding
The obligation of the payor to deduct and
withhold the tax arises at the time an
income is paid or payable, whichever
comes first. The term ''payable" refers to
the date the obligation become due,
demandable or legally enforceable.
Exemptions from Withholding
Income payments made to the following:
national government and its
instrumentalities, including provincial,
city or municipal governments
persons enjoying exemption from
payment of income taxes pursuant to
the provisions of any law, general or
special
corporations registered with the
Board of Investments and enjoying
exemption from the income tax
Claim for Refund
Recall: Citibank vs CA - The amount of creditable
tax withheld shall be allowed as a tax credit
against the income tax liability of the payee in
the quarter of the taxable year in which income
was earned or received.
Claims for tax credit or refund of any creditable

income tax which was deducted and withheld on
income payments shall be given due course only
when it is shown that the income payment has
been declared as part of the gross income.
May a withholding agent file
a claim for refund?
Yes. He has the personality and legal standing to
file a claim for refund of withholding tax
erroneously collected.
IN FACT: The right of a

withholding agent to claim a
refund of erroneously
CIR vs Smart
withheld taxes comes with Communications
the responsibility to return
the same to the principal (2010)
taxpayer.
Withholding of Tax on Compensation
Withholding of Tax on For tax purposes, the two are synonymous. They
consist of remuneration (other than fees paid to
Compensation a public official) for services performed by an
employee for his employer, including the cash
It is a method of collecting the income tax
value of all remuneration paid in any medium
at source upon receipt of the income. It
other than cash.
applies to all employed individuals whether
citizens or aliens deriving income from
compensation for services rendered in the
Philippines. The employer is constituted as
the withholding agent. Wages and Compensation
REQUISITES
for withholding tax on wages/compensation
there must exist an employer-employee relationship
there must be payment, actual or constructive, on

the services rendered by the employee to the
employer
there must be a payroll period (period for which

payment of wages is ordinarily made to the employee
by his employer)
Exemptions from Withholding Tax
on Compensation
remuneration received as an incident of
employment
remuneration paid for agricultural labor
remuneration for domestic services
damages
life insurance
13th month pay and other benefits
GSIS, SSS, Medicare and other
contributions
Income Tax Collected at Source
on Compensation Income
Every employer must withhold from compensation paid an
amount computed, except for non-resident aliens not
engaged in trade or business. No withholding of tax shall be
required on the statutory minimum wage including holiday
pay, overtime pay, night-shift differential and hazard pay
of minimum wage earners in the private/public sectors.
An employee who receives additional compensation shall be

taxable only on such additional compensation received.
THANK YOU
RETURNS AND
PAYMENT OF TAXES
Amador | Dumapig | Rondario
TAX RETURNS
• Income tax return is a sworn statement or
declaration, including attachments thereto,
designed to be part of said return, in which the
taxpayer discloses the nature and extent of his
tax liability by formally making a report of his
income and allowable deductions for the
taxable year in the prescribed income tax
form. (National Internal Revenue Code
Annotated Vol. 1, De Leon and De Leon, Jr.,
2015 Edition, p. 605)
INDIVIDUAL
RETURNS
Requirements to File Return
The following individuals are required to file an income tax
return:
Every Filipino citizen residing in the Philippines;
Every Filipino citizen residing outside the Philippines, on his

income from sources within the Philippines.
Every alien residing in the Philippines, on income derived from

sources within the Philippines; and
Every non-resident alien engaged in trade or business or in the

exercise of profession in the Philippines. (Section 51(A)(1), NIRC)
Requirements to File Return
As amended by TRAIN Law, the following individuals shall not be required to file an income tax
return:
1. An individual earning purely compensation income whose taxable income does not exceed
P250,000.00;
2. An individual whose income tax has been correctly withheld by his employer, provided that such
individual has only one employer for the taxable year
3. An individual whose sole income has been subjected to final withholding tax; and
4. A minimum wage earner
In all cases, all individuals deriving compensation income, regardless of the amount, from two
(2) or more concurrent or successive employers at any time during the taxable year are not
qualified for substituted filing. Thus, they are still required to file a return. (Section 51(A)(2),
NIRC, as amended by Republic Act No.10963; Section 9, Revenue Regulations No. 8-2018)
Forms and Contents of Income Tax Return
TRAIN Law limits the income tax return into a maximum of four (4) pages in paper form
or electronic form, and shall only contain the following information:
Personal profile and information;
Total gross sales, receipts or income from compensation for services rendered, conduct of
trade or business or the exercise of a profession, except income subject to final tax;
Allowable deductions;
Taxable income; and
Income tax due and payable. (Section 13, Republic Act No. 10963)
Forms and Contents of Income Tax Return
The income tax return shall be filed in duplicate by the following persons:
• (1) Resident citizen - on his income from all sources;

• (2) Non-resident citizen
on his income derived from
• (3) Resident alien sources within the Philippines.
• (4) Non-resident alien engaged (Section 51(A)(4), NIRC)
in trade or business in the PH
The fact that an individual's name is signed to a filed return shall be prima facie
evidence for all purposes that the return was actually signed by him. (Section 51(G),
NIRC)
Substituted Filing of Income Tax Returns by
Employees Receiving Purely Compensation Income
Substituted Filing is when the employer's annual information return ( may
be considered as the "substitute" Income Tax Return (ITR) of employee
inasmuch as the information provided in his income tax return would
exactly be the same information contained in the employer's annual
information return.
Under "substituted filing", an individual taxpayer although required under
the law to file his income tax return, will no longer have to personally file
his own income tax return but instead the employer's annual information
return filed will be considered as the "substitute" income tax return of the
employee inasmuch as the information in the employer's return is exactly
the same information contained in the employee's return. (Revenue
Memorandum Circular No. 1-2003)
Substituted Filing of Income Tax Returns by
Employees Receiving Purely Compensation Income
Section 51-A to the Tax Code provides no income tax return (ITR) is required to be
filed from an employee if the individual taxpayer:
1. Receives purely compensation income, regardless of amount;
2. Has only one employer in the Philippines for the calendar year; and
3. The income tax of on the compensation income has been withheld correctly by the
employer
The Certificate of Withholding filed by the respective employers, duly stamped

"Received" by the BIR, shall be tantamount to the substituted filing of income tax
returns by said employees.
Individuals not qualified for Substituted Filing
The following individuals, however, are not qualified for substituted filing:
1. Individuals deriving compensation income from two or more employees, concurrently or successively at
anytime during the taxable year;
2. Employees deriving compensation income, regardless of amount, whether from a single or several
employers during the calendar year, the income tax of which has not been withheld correctly resulting to
a collectible or refundable return;
3. Employees whose monthly gross compensation income does not exceed FP5,000.00 or the statutory
minimum wage, whichever is higher, and opted for non-withholding of tax on said income;
4. Individuals deriving other non-business, non-profession-related income in addition to compensation not
otherwise subject to final tax;
5. Individuals deriving purely compensation income from a single employer, although the income of which
has been correctly subjected to withholding tax, but whose spouse is not entitled to substituted fling; and
6. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation
income or compensation income and other business or profession related income. (Section 4, Revenue
Memorandum Circular No. 1-2003)
Place of Filing
• The tax return shall be filed at the:
1. Legal residence - an authorized agent bank, Revenue District
Officer, Collection Agent or duly authorized Treasurer of the
city or municipality
2. Principal place of business in the Philippines,
3. The Office of the Commissioner, if there be no legal
residence or place of business in the Philippines, (Section
51(B), NIRC)
Time for Filing
• The income tax return (ITR) shall be filed on or before the April 15 of
each year.
• For individuals subject to tax on capital gains:
1. For sale or exchange of shares of stock not traded thru a local
stock exchange under Section 24(C) of the Tax Code, the return shall
be filed within thirty (30) days after each transaction.
2. For sale or disposition of real property under Section 24(D) of the Tax
Code, the return shall be filed within thirty (30) days following each sale
or other disposition. (Section 51(C)(2), NIRC)
Husband and Wife
• Married individuals, whether citizens, residents, or nonresident
aliens, who do not derive income purely from compensation, shall
file a return for the taxable year, including the income of both
spouses.
If it is impracticable to file one return, each spouse may file a
separately but their returns shall consolidated by the Bureau for
verification purposes. (Section 51(D), NIRC)
• In relation to Section 24(A) of the Tax Code, the husband and wife
shall compute separately their individual income tax based on
their respective total taxable income. (purely compensation
earners)
Return of Parent to Include Income of Children
The income of unmarried minors derived from property received

from a living parent shall be included in the return of the parent,
except:
a) when the donor's tax has been paid on such property, or

b) when the transfer of such property is exempt from donor's tax.
(Section 51(E), NIRC)
Persons Under Disability
If the taxpayer is unable to make his own return, the return may
be made by his duly authorized agent or representative or by
the guardian or other person charged with the care of his person
or property, the principal and his representative or guardian
assuming the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent returns.
(Section 51(F), NIRC)
Declaration of Income Tax for Individuals
• The individual covered to declare his estimated income for the current
taxable year are resident citizen, non-resident citizen, resident alien, and
non-resident alien engaged in trade or business in the Philippines who are
self-employed or self-employment income earner.
• Non-resident citizens, with respect to income from without the Philippines,

and non-resident aliens not engaged in trade or business in the
Philippines, are not required to render a declaration of estimated income
tax.
• For this purpose, "self-employment income“ consists of the earnings
derived by the individual from the practice of profession or conduct of
trade or business carried on by him as a sole proprietor or by a
partnership of which he is a member.
• The declaration is required regardless of whether the self-employment

income constitutes the sole source of his income or in combination with
salaries, wages, and other fixed or determinable income.
The declaration of estimated income for the current taxable year should be
on or before May 15 of the same taxable year. Prior to TRAIN Law, the
deadline is on or before April 15 of the same taxable year.
The amount of estimated income shall be paid in four (4) installments.
• 1st installment - at the time of the declaration
• 2nd installment- on August 15 of the current year
• 3rd installment - November 15 of the current year
• 4th installment - on or before May 15 of the following calendar year when the final
adjusted income tax return is due to be filed.
As provided in Sec. 10 of Revenue Regulations No. 8-2018, individuals engaged in
business/practice of profession, regardless of amount of sales/receipts, are required to
file quarterly income tax return on or before May 15, August 15, and November 15 for the
first, second and third quarters of the current year, respectively pursuant to Section 74(A)
of the Tax Code, as amended; and to file an annual income tax return, not later than the
fifteenth (15th) day of the fourth month following the close of the calendar year or April 15
as provided under Section 51(C)(1) of the Tax Code, as amended.
NOTE:
• TRAIN Law: The fourth (4th) installment shall be paid when final adjusted income tax
return is fled which is on or before May 15.
• Sec. 10 of Revenue Regulations No.18-2018: filing of the final adjusted income tax
return and the payment of the fourth (4th ) installment shall be on or before April 15.
On this seemingly conflicting provisions, the final adjusted income tax return
which is the annual return and the payment of the fourth (4) installment of tax, the
April 15 deadline must be followed because this deadline is what is stated in
Section 51(C)(1) of the Tax Code which is not amended by TRAIN Law.
For this purpose, "estimated tax" means the amount which the individual declared
as income tax in his final adjusted and annual income tax return for the preceding
taxable year minus the sum of the credits allowed under Title II of the Tax Code
against the said tax.
If, during the current taxable year, the taxpayer reasonable expects to pay a bigger
income tax, he shall file an amended declaration during any interval of installment
payment dates. (Section 74(C), NIRC)
CORPORATE
RETURNS
CORPORATE RETURNS
A corporate taxpayer, in general, is required to file four (4)
income tax returns every year based on its taxable year, namely
three (3) quarterly returns and one (1) final or adjustment return.
Corporations Required to File Income
Tax Return
A domestic corporation and resident foreign corporation are required to
file in duplicate quarterly income tax return and final or adjustment
return. Non-resident foreign corporation is not required to file income
tax returns because its entire income from sources within the
Philippines is subject to gross income tax and this tax is withheld at
source pursuant to Section 57(A) of the Tax Code.
The return shall be filed by the president, vice-president or other
principal officer, and shall be sworn to by such officer and by the
treasurer or assistant treasurer. (Section 52(A), NIRC)
Forms and Contents of Corporate Income Tax Return
As amended by the TRAIN Law, the corporate income tax return shall consist a
maximum of four (4) pages in paper form or electronic form and shall only contain the
following information
Corporate profile and information;
Gross sales, receipts or income from services rendered, or conduct of trade

or business, except income subject to final tax
Allowable deductions;
Taxable income; and
Income tax due and payable. (Section 13, Republic Act No. 10963)
Taxable Year of Corporation
"Taxable year" means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed.
(Section 22(P), NIRC).
Taxable Year of Corporation
Unlike an individual taxpayer who is only allowed to use calendar year
as its taxable year, a corporation may employ either calendar year
or fiscal year as a basis for filing its annual income tax return. A
corporation cannot change the accounting period employed without
prior approval from the Commissioner in accordance with the
provisions of Section 47 of the Tax Code. (Section 52(B), NIRC)
Quarterly Corporate Income Tax
Domestic corporation and resident foreign corporation are required to file a quarterly
income tax return containing the gross income and deductions. The quarterly income tax
return, filed in duplicate, shall be filed on a cumulative basis for the preceding quarter and
quarters upon which the income tax is levied, collected and paid.
• 1st quarter corporate income tax return - gross income and deductions for first three (3)
months or for the 1st quarter.
• 2nd quarter corporate income tax return - gross income and deductions of the 1st & 2nd
quarters,
• 3rd quarter corporate income tax return - the 1st, 2nd & 3rd quarter gross income and
deductions.
In view of the cumulative basis of computation and declaration of gross income and deduction
every quarter, the tax computed every quarter shall be decreased by the amount of tax
previously paid or assessed during the preceding quarters. (Section 75, NIRC)
Final Adjustment Return
Section 76 of the Tax Code requires every corporation (domestic and
resident foreign) liable to tax under Section 27 of the Tax Code to file a final
adjustment return covering the total taxable income for the preceding
calendar or fiscal year.
In preparing the final adjustment return, the corporation shall consider the
previous quarterly tax payments made. In this case, it is possible that the
sum of quarterly tax payments during the said taxable year is (1) equal to
the total tax due or (2) not equal to the total tax due on the entire taxable
income. If the sum of quarterly tax payments is equal to the total tax due on
the entire taxable income, then the corporation has no further tax obligation.
If the sum of the quarterly tax payments made during the said taxable year is
not equal to the total tax due on the entire taxable income of that year, the
corporation shall either:
a) Pay the balance of tax still due;
b) Carry-over the excess credit; or
c) Be credited or refunded with the excess amount paid, as the case may
be.
Item (a) is the duty of the corporation if the sum of the quarterly tax
payments made during the said taxable year is less than the total tax due
on the entire taxable income of that year. If the total tax due is not fully paid,
the corporation must pay the balance of tax still due.
In the event the sum of the quarterly tax payments made during the said taxable
year is more than the total tax due on the entire taxable income of that year, the
corporation has the option to (1) carry-over the excess credit, or (2) credit or
refunded with the excess amount paid.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carryover and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate
shall be allowed therefore.
Irrevocability Rule
When a corporation overpays its income tax liability as adjusted at the
close of the taxable year, it has two (2) options:
(1) to be refunded or issued a tax credit certificate, or
(2) to carry over such overpayment to the succeeding taxable quarters
to be applied as tax credit against income tax due.
Once the carry-over option is taken, it becomes irrevocable such that
the taxpayer cannot later on change its mind in order to claim a cash
refund or the issuance of a tax credit certificate of the very same
amount of overpayment or excess income tax credit.
Does the irrevocability rule apply exclusively to the carryover option?
Irrevocability Rule
A corporation has the option to carry-over or apply for refund the excess tax
payments. When the option to carry-over is chosen, the taxpayer cannot
later on change the choice to apply for refund. The excess shall be carried
over for succeeding quarter or quarters until fully utilized. The option
cannot be changed or is irrevocable.
However, if a corporation chooses the option to apply for refund, it can still
change its choice to carry-over. But once the choice is changed to
carry-over, it cannot anymore go back to the refund option.
Finally, the excess tax payments carried over shall be carried over to the
succeeding quarter or quarters until fully utilized. As an exception, a
dissolved corporation without the excess tax payments being fully utilized is
allowed to file a claim for refund.
Return on Capital Gains Realized from Sale of Shares
of Stock Not Traded in the Local Stock Exchange
For corporation deriving capital gains from the sale or exchange
of shares of stock not traded thru a local stock exchange, they
are required to file a return within thirty (30) days after each
transaction.
In addition, a final consolidated return of all transactions during
the taxable year must be filed on or before the fifteenth (15th)
day of the fourth (4th ) month following the close of the
taxable year. (Section 52(D), NIRC)
Place and Time of Filing and Payment
of Corporate Income Tax Return
The quarterly income tax declaration and the final adjustment
return shall be filed with the authorized agent banks or Revenue
District Officer or Collection Agent or duly authorized Treasurer
of the city or municipality having jurisdiction over the location of
the principal office of the corporation filing the return or
place where its main books of accounts and other data
from which the return is prepared are kept. (Section 77(A),
NIRC)
Place and Time of Filing and Payment
of Corporate Income Tax Return
The corporate quarterly declaration shall be filed within sixty 60)
days following the close of each of the first three (3) quarters of the
taxable year.
Based on the taxable year used by a corporation, the final
adjustment return shall be filed on or before April 15, or on or before
the 15th day of the fourth (4th ) month following the close of the fiscal
year, as the case may be. (Section 77(B), NIRC)
The income tax due on the corporate quarterly returns and the final
adjustment income tax returns shall be paid at the time the
declaration or return is filed, following the Pay-As-You-File
System.(Section 77(C), NIRC).
Extension of Time to File Returns
The Commissioner may, in meritorious cases, grant a reasonable
extension of time for filing returns of income (or final and
adjustment returns in case of corporations), subject to the
provisions of Section 56 of the Tax Code. (Section 53, NIRC)
Requests for such extension of time must be submitted before
the last day of the period for filing returns. Absence or
sickness shall not be considered as reasonable cause, whereas,
inability to close the books or to gather information required due
to various circumstances will be subject to careful investigations
before the request for extension is favorably considered. (Section
188, Revenue Regulations No. 2-1940)
Return of Corporation Contemplating
Dissolution or Reorganization
It is not sufficient for a dissolving or reorganizing corporation to
comply with the requirements of the SEC before it can be issued
a Certificate of Dissolution or Reorganization. It must also comply
with the notification and reportorial requirements with the BIR and
secure Certificate of Tax Clearance for submission to the
SEC.Without such Certificate of Tax Clearance, the SEC will not
issue the Certificate of Dissolution or Reorganization.
Return of Corporation Contemplating
Dissolution or Reorganization
In securing the tax clearance, the corporation shall render a
correct return, verified under oath, to the BIR within thirty (30)
days after the adoption by the corporation of a resolution or plan
for its dissolution. This requirement also applies to the liquidation
of the whole or any part of its capital stock including a corporation
which has been notified of possible involuntary dissolution or
reorganization by the SEC. The return to be filed with the BIR
shall set forth the terms of the resolution or plan and such other
information as the Secretary of Finance may prescribe. (Section
52(C), NIRC)
Returns of Receivers, Trustees in
Bankruptcy or Assignees
In cases wherein receivers, trustees in bankruptcy or assignees
are operating the property or business of a corporation, subject to
the tax imposed by this Title, such receivers, trustees or
assignees shall make returns of net income as and for such
corporation, in the same manner and form as such organization is
hereinbefore required to make returns, and any tax due on the
income as returned by receivers, trustees or assignees shall be
assessed and collected in the same manner as if assessed
directly against the organizations of whose businesses or
properties they have custody or control. (Section 54, NIRC)
RETURNS OF GENERAL
PROFESSIONAL PARTNERSHIPS
Despite being exempt from income tax, a general professional partnership is
still required to file a return of its income, except income exempt under
Section 32(B) of the Tax Code. The return, which must be filed in duplicate
shall set the following information:
• Gross income;
• Deductions allowed; and
• Names, Taxpayer Identification Numbers (TINs), addresses and shares of
each of the partners. (Section 55, NIRC)
PAYMENT OF TAXES
In the Philippines, the principle adopted is Pay-As-You-File System,
which means the total amount of tax imposed shall be paid by the
person subject thereto at the time the return is filed. (Section 56(A)(1),
NIRC) Thus, to determine the deadline for payment of taxes, one must
look at the deadline for filing of the return.
In the case of tramp vessels, the shipping agents and/or the
husbanding agents, and in their absence, the captains thereof are
required to file the return herein provided and pay the tax due thereon
before their departure. Upon failure of the said agents or captains to
file the return and pay the tax, the Bureau of Customs is hereby
authorized to hold the vessel and prevent its departure until proof of
payment of the tax is presented or a sufficient bond is filed to answer
for the tax due. (Sectión 56(A)(1), NIRC)
Installment of Payment
When the tax due is in excess of P2,000.00, the individual taxpayer
may elect to pay the tax in two (2) equal installments in which case,
1st installment - at the time the return is filed
2nd installment - on or before October 15 following the close of the
calendar year.
If any installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable,
together with the delinquency penalties. (Section 11, Revenue
Regulations No. 18-2018) Prior to TRAIN Law, the second installment
is due on or before July 15 following the close of the calendar year.
Installment of Payment
Payment by installment is not applicable to a corporation
considering that corporations file and pay taxes on quarterly
basis.
However, the quarterly payment of taxes by the corporation can
be viewed as an installment payment because previous
payments are credited or deducted from the final income tax
liability.
Payment of Capital Gains Tax
The total amount of capital gains tax shall be paid on the date the return prescribed to
be filed by the person liable thereto.
If the seller submits proof of his intention to avail himself of the benefit of exemption of
capital gains under existing special laws, no such payments shall be required. In case of
failure to qualify for exemption under such special laws and implementing rules and
regulations, the tax due on the gains realized from the original transaction shall
immediately become due and payable, subject to the penalties prescribed under the Tax
Code.
If the seller, having paid the tax, submits such proof of intent within six (6) months from the
registration of the document transferring the real property, he shall be entitled to a refund
of such tax upon verification of his compliance with the requirements for such exemption.
Payment of Capital Gains Tax
In case the taxpayer elects and is qualified to report the gain by
installments under Section 49 of the Tax Code, the tax due from
each installment payment shall be paid within thirty (30) days
from the receipt of such payments.
No registration of any document transferring real property shall
be effected by the Register of Deeds unless the Commissioner or
his duly authorized representative has certified that such transfer
has been reported, and the tax herein imposed, if any, has been
paid. (Section 56(A)(3), NIRC)
ESTATE TAX
by: BERNAS, CALVEZ, VIENTE
ESTATE TAX
Estate Tax is a tax on the exercise of the right to transfer property at
death and is measured by the value of the property. It accrues as of the
date of death of the decedent, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary. (Pablo
Lorenzo v. Juan Posadas, Jr. G.R. No. L-43082, June 18, 1927)
By nature, estate tax is not a property tax but the value of the property
serves as the basis of the tax. Estate tax is an excise tax or a privilege
tax. Estate tax is in nature of administration expenses payable out of any
available funds of the estate; and if there be none, by converting any
property into money for such purpose. (BIR Ruling No. 093-85 dated
June 13, 1985)
THEORIES OF
ESTATE TAXATION
a. Benefit-Received Theory
the government performed services in the distribution of the properties
of the decedent to the heirs. In view of these services and benefits
derived both by the estate and the heirs, the state collects the tax
b. Redistribution of Wealth Theory

the imposition of estate tax reduces the property received by the
successor bringing about a more equitable distribution of wealth in
society. the portion of the property taken by the state in the form of tax
is then used to fund social programs and projects of the state
THEORIES OF
ESTATE TAXATION
c. Ability-to-Pay Theory
the bigger the estate means the higher taxes to be paid. if the decedent
dies without any property or if the properties are sufficient to cover
some of the deductions allowed, then there is no liability to pay the tax
d. State Partnership Theory

the state is viewed as a passive and silent partner in the accumulation
of wealth and property of the decedent. The state even grants
protection to the large estate of the decedent. The state collects its just
share in such effort in the right time.
TAXPAYER OF ESTATE TAX AND LIABILITY FOR PAYMENT
The “estate” is the statutory taxpayer of the estate tax. The “estate” is
treated as a person for purposes of paying the taxes. (Section 22(a),
NIRC. In fact, there is a separate taxpayer identification number (TIN)
that the BIR issues to the estate for the purpose of filing the estate tax
return and the payment of the estate tax.
The estate tax is imposed is, however, paid by the executor or

administrator before the delivery of the distributive share in the
inheritance to any heir or beneficiary. Where there are two or more
executors or administrators, all of them are severally liable for the
payment of the tax.
TAXPAYER OF ESTATE TAX AND LIABILITY FOR PAYMENT
The estate tax clearance issued by the Commissioner of Internal Revenue (CIR
or Commissioner) or the Revenue District Officer (RDO) having jurisdiction over
the estate, serves as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary.
The executor or administrator of an estate has the primary obligation to pay
the estate tax, but the heir or beneficiary has subsidiary liability for the
payment of that portion of the estate which his distributive share bears to the
value of the total net estate. The extent of his liability, however, shall in no case
exceed the value of his share in the inheritance.
(Section 9(G), Revenue Regulations No. 2-2003)
DETERMINATION OF TAX LIABILITY
ESTATE TAX RATE
Under the NIRC, the estate tax is computed using the following
schedular and progressive tax rates:
Based on the table of rates above, a net taxable estate of P200,000.00 or less is exempt
from estate tax.
The estate tax rate is modified upon the enactment of TRAIN Law.
Effective January 1, 2018, estate tax is computed at six percent (6%) of the net taxable
estate. This means a flat rate of six percent: (6%) applies regardless of the amount of net
taxable estate. This also means that the first P200,000.00 net taxable estate is no longer
exempt.
CLASSIFICATION OF DECEDENT
The classification of a decedent is important because it determines the properties included in the gross
estate, the deductions that may be claimed, and the place of filing of the return. Decedent may be
classified based on citizenship and last residence at the time of death. A decedent may either be:
a. Resident Citizen Decedent;
b. Non-Resident Citizen Decedent;
c. Resident Alien Decedent; and
d. Non-Resident Alien Decedent (with

or without reciprocity).
GROSS ESTATE
Gross estate pertains to the value of all properties, real or personal, of the
decedent subject to estate tax. The gross estate is determined by taking into
consideration the citizenship, residence, and status of the decedent, as well as
the location of the properties of the decedent.
The gross estate of a decedent who is a resident citizen, non- resident citizen,
and resident alien comprises of all properties, real or personal, tangible or
intangible, wherever situated, and interest therein at the time of his death,
including transfer in contemplation of death, revocable transfers, property
passing under the general power of appointment, and transfers for insufficient
consideration.
GROSS ESTATE
On the other hand, the gross estate of a decedent who is a non-resident

alien comprises only of properties situated in the Philippines.
With respect to intangible personal property located in the Philippines, its

inclusion in the gross estate is subject to the rule of reciprocity provided for
under Section 104 of the Tax Code.
(Section 4, Revenue Regulations No. 2-2003)
GROSS ESTATE
INCLUSIONS TO GROSS ESTATE
As a rule, all properties owned by the decedent and existing at the time of his death are
included in the gross estate. These inclusions in the gross estate may be summarized as
follows:
RECIPROCITY RULE
A non-resident alien decedent is taxable only on properties, real and

personal, situated in the Philippines. Personal properties may either be
tangible or intangible. The inclusion of intangible personal properties in
the gross estate of the non-resident alien decedent depends on whether
the reciprocity rule applies or not.
The reciprocity rule applies only to a non-resident alien decedent and only
on his intangible personal properties located in the Philippines.
RECIPROCITY RULE
The reciprocity rule provides that no estate tax will be collected in respect of
intangible personal property in the following instances:
a. If the decedent at the time of his death was a citizen and resident of a foreign
country which at the time of his death did not impose estate tax, in respect of
intangible personal property of citizens of the Philippines not residing in that
foreign country, or
B. If the laws of the foreign country of which the decedent was a citizen and
resident at the time of his death allows a similar exemption from transfer or
death taxes of every character or description in respect of intangible personal
property owned by citizens of the Philippines not residing in that foreign
country.
Section 104 of the Tax Code provides the intangible personal properties deemed
located in the Philippines, to wit:
a. Franchise exercised in the Philippines;
b. Shares, obligations, or bonds issued by any corporation or sociedad anonima

organized or constituted in the Philippines in accordance with its laws;
c. Shares, obligations or bonds by any foreign corporation eighty-five percent

(85%) of the business of which is located in the Philippines;
d. Shares, obligations or bonds issued by any foreign corporation if such shares,

obligations, or bonds have acquired a business situs in the Philippines; and
e. Shares or rights in any partnership, business, or industry established in the

Philippines.
EXCLUSIONS TO GROSS ESTATE
The gross estate of the decedent does not include (1) exempt
transmissions/acquisitions and (2) excluded properties even if they are
existing and with the decedent at the time of death.
A. Exempt Properties
The following acquisitions and transmissions are exempt from estate tax, and
thus, shall not be taxed:
a. The merger of usufruct ni the owner of the naked title;
b. The transmission or delivery of the inheritance or legacy by the fiduciary

heir or legatee ot the fideicommissary;
c. The transmission from the first heir, legatee, or donein favor of another
beneficiary, in accordance with the desire of the predecessor; and
d. All bequests, devises, legacies, or transfers ot social welfare, cultural and

charitable institutions.
As conditions for exemption of transfers to social welfare, cultural, and

charitable institutions, no part of the net income of
of the said bequests, devises, legacies or transfers are used by such
institutions for administration purposes.
B. Excluded Properties
The gross estate does not include the capital of the surviving spouse of
adecedent. (Section 85(H), NIRC) In addition, the net share of the
surviving spouse in the conjugal partnership property as diminished by
the obligations properly chargeable to such property si also not included
in the estate of the decedent. (Section 86(C), NIRC)
DETERMINATION OF VALUE OF THE GROSS ESTATE
As estate tax accrues at the time of death, the

properties comprising the gross estate are
valued based on their fair market value as of
the time of death.
(Section 5, Revenue Regulations No. 2- 2003)
a. Usufruct - to determine the value of the right to usufruct, use or

habitation, as well as that of annuity, there shall be taken into account the
probable life of the beneficiary in accordance with the latest basic
standard mortality table, to be approved by the Secretary of Finance,
upon recommendation of the Insurance Commissioner. (Section 88(A),
NIRC)
b. Real Property - the fair market value is whichever between:
i. The fair market value as determined by the Commissioner of Internal

Revenue, usually called as the Zonal Value, and;
ii. The fair market value as shown in the schedule of values

fixed by the provincial and city assessors. (Section 88(B), NIRC)
For purposes of prescribing real property values, the Commissioner of Internal Revenue is authorized to divide
the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the
private and public sectors, determine the fair market value of real properties located in each zone or area.
(Section 6(E), NIRC)
c. Shares of Stocks - the valuation of the shares of stock will be:
i. If the share is listed in the stock exchange, the fair market value is the price quote on the
date of death. If there is no available price quote on the date of death, the fair market value
is the arithmetic mean between the highest and lowest quotation at a date nearest the date
of death.
ii. If the share is unlisted in the stock exchange:

1. Unlisted common shares are valued based on their book value; and
2. Unlisted preferred shares are valued at par value.
In determining the book value of common shares, appraisal surplus is not considered as well as the value assigned to
preferred shares, if there are any. (Section 5, Revenue Regulations No. 2-2003; Revenue Regulations No. 12-2018)
DEDUCTIONS
In computing the net taxable estate, there are deductions allowed by law depending on who
the decedent is. These deductions under the Tax Code are classified into:
A. Ordinary Deductions
1. Expenses, Losses, Indebtedness, Taxes, etc. (ELITE);
i. Funeral Expense;
ii. Judicial Expense;
iii. Claims Against the Estate;
iv. Claims Against Insolvent Person;
v. Unpaid Mortgage;
vi. Unpaid Taxes; and
viii. Losses
DEDUCTIONS
2.Property Previously Taxed or Vanishing Deduction; and
3. Transfer for Public Use.
B. Special Deductions
1. Family Home;
2. Medical Expenses;
3. Benefits Received under Republic Act No. 4917; and
4. Standard Deduction.
DEDUCTIONS
C. Share of the Surviving Spouse
The classification of the decedent is important because the estates of a resident

citizen, non-resident citizen, and resident alien decedent may claim both ordinary
and special deductions. With respect to a non-resident alien decedent, his estate
may only claim ordinary deductions but not special deduction. In addition, the
non- resident alien decedent can only claim pro-rated expenses, losses,
indebtedness, and taxes.
If the decedent is married, the share of the surviving spouse in the net conjugal
properties is deducted from the gross estate of the decedent.
REQUISITES FOR DEDUCTIBILITY OF CLAIMS AGAINST
THE ESTATE
In order to avail claims against the estate as a deduction to determine the net
taxable estate, the following essential requisites must be present:
a. The liability represents a personal obligation of the deceased existing at the

time of his death except (1) unpaid obligations incurred incident to his death such
as unpaid funeral expenses (i.e., expenses incurred up to the time of interment)
and (2) unpaid medical expenses, which are classified under a different category
of deductions;
b. The liability was contracted in good faith and for adequate and full
consideration in money or money's worth;
THE ESTATE
c. The liability was contracted in good faith and for adequate and full
consideration in money or money's worth;
d. The claim must be a debt or claim, which is valid in law and enforceable in
court;
e. The indebtedness must not have been condoned by the creditor or the action to
collect from the decedent must not have been prescribed.
THE ESTATE
It is also required of claims against the estate as allowable deduction that at

the time the indebtedness was incurred, the debt instrument was duly notarized
and, if the loan was contracted within three (3) years before the death of the
decedent, the administrator or executor is required to submit a statement
showing the disposition of the proceeds of the loan. (Section 86(A)(1)(c), NIRC)
PROPERTY PREVIOUSLY TAXED OR VANISHING
DEDUCTION
A vanishing deduction operates to ease the harshness of successive taxation of
the same property within a relatively short period to time occasioned by the
untimely death of the transferee after the death of the prior decedent or after
the donation. (Reviewer in Taxation, Victorino Mamalateo, 2014 Edition, p. 374)
A vanishing deduction is a deduction allowed from the gross estate of citizens,
resident aliens and non-resident estates for properties which were previously
subject to donor's or estate taxes. The deduction allowed diminishes for a
period of five (5) years. (Estate of Reyes v. Commissioner of Internal Revenue,
C.T.A, Case No. 6747, January 16, 2006)
PROPERTY PREVIOUSLY TAXED OR VANISHING
DEDUCTION
Simply, there are two (2) occasions where vanishing deduction may arise.
First, a decedent transferred his property to his heir/ transferee. The
transfer is subject to estate tax. Subsequently and within a period of five (5)
years, the heir/transferee who still owns the property received from the
first decedent also died. The second transfer is also subject to estate tax.
The estate in the second transfer may claim vanishing deduction as
allowable deduction. In this scenario, there is succession followed by
another succession.
REQUISITES TO CLAIM VANISHING DEDUCTION
The following are the requisites before vanishing deduction may be claimed:
a. The present decedent died within five (5) years from the date of death of
the prior decedent or the present decedent died within five (5) years from
the date of donation;
b.The property must be located in the Philippines and can be specifically
identified as the one received from the prior decedent or from the donor, or
which can be identified as having been acquired in exchange for property
so received;
c. The value of the property must be included in the gross estate of the
present decedent;
d. The donor's tax or estate tax on the prior transfer must be finally
determined and paid by or on behalf of such donor, or the estate of such
prior decedent; and
e. The estate of the prior decedent did not claim or was not allowed to claim
vanishing deduction in the case of multiple succession.
The decreasing percentages of deduction (hence the word "vanishing") are:
i. One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior
to the death of the decedent, or if the property was transferred to him by gift within the
same period prior to his death;
ii. Eighty percent (80%, if the period is more than one (1) year but not more than two (2) years;
iii. Sixty percent (60%), if the period is more than two (2) years but not more than three (3)
years;
iv. Forty percent (40%), fi the period is more than three (3) years but not more than four (4)
years; and
v. Twenty percent (20%, if the period is more than four (4) years but not more than five (5)
years.
TRANSFER FOR PUBLIC USE
The amount of all the bequests, legacies, devises or transfers to or for the
use of the Government of the Republic of the Philippines, or any political
subdivision thereof, for exclusively public purposes is allowed as deduction
as transfer for public use.
FAMILY HOME
Family home refers to the dwelling house, including the land on which it is situated, where the
husband and wife, or the head of the family, and members of their family reside. The
Barangay Captain of the locality where the family home is located must issue a certification
that it is actually the family home of the decedent.
The family home is deemed constituted on the house and lot from the time it is actually
occupied as a family residence and is considered as such for as long as any of its
beneficiaries actually resides therein. (Arts. 152 and 153, Family Code)
FAMILY HOME
For estate tax purposes, actual occupancy of the house or house and lot as the family residence
shall not be considered interrupted or abandoned in such cases as the temporary absence from
the constituted family home due to travel or studies or work abroad, etc. In other words, the
family home is generally characterized by permanency, that is, the place to which, whenever
absent for business or pleasure, one still intends to return.
The family home must be part of the properties of the absolute community or of the conjugal
partnership, or of the exclusive properties of either spouse depending upon the classification of
the property (family home) and the property relations prevailing on the properties of the husband
and wife. It may also be constituted by an unmarried head of a family on his or her own property.
(Art. 156, Ibid.)
For purposes of availing of a family home deduction, to the extent allowable, a person may
constitute only one family home. (Art. 161, Ibid.)
FAMILY HOME
To claim family home as a deduction, the following conditions must be met:
a. The family home must be the actual residential home of the decedent and his family at the time
of his death, as certified by the Barangay Captain of the locality where the family home is
situated;
b. The total value of the family home must be included as part of the gross estate of the
decedent; and
c. Allowable deduction must be in an amount equivalent to the current fair market value of the
family home as declared or included in the gross estate, or the extent of the decedent's interest
(whether conjugal/community or exclusive property), whichever is lower, but not exceeding
P10,000,000. (Section 6(D), Revenue Regulations No. 2-2003; Revenue Regulations No. 12-2018)
STANDARD DEDUCTION
A standard deduction is a deduction without need of substantiation in the amount

of One Milion Pesos (P1,000,000.00). The full amount of P1,000,000.00 is allowed
as deduction for the benefit of the decedent. (Section 6(E), Revenue Regulations
No. 2-2003) The only requirement is that the decedent is either a resident citizen,
non-resident citizen, or resident alien.
DEDUCTIONS TO ESTATE OF NON-RESIDENT ALIEN DECEDENT
Under the Tax Code, the estate of a non-resident alien decedent is allowed the
following deductions:
1. Expenses, Losses, Indebtedness, and Taxes - The proportion of the total
expenses, losses, indebtedness, and taxes which the value of such part bears to
the value of his entire gross estate wherever situated is allowed as
deduction. The allowable deduction shall be computed using the following formula:
DEDUCTIONS TO ESTATE OF NON-RESIDENT ALIEN DECEDENT
2. Property Previously Taxed; and
3. Transfer for Public Use.
The estate of a non-resident alien decedent is not allowed to claim special deductions such as family
home, medical expenses, standard deduction, and benefits received under Republic Act No. 4917.
Upon the effectivity of the TRAIN Law, funeral and judicial expenses. are removed from the list of
ordinary deductions. This means the proportion of the: total expenses now excludes these expenses.
However, the estate of a non-resident alien decedent can still claim the proportion of losses,
indebtedness, and taxes.
Significantly, TRAIN Law now allows the estate of a non- resident alien decedent to claim standard
deduction in the amount of P500,000.00.
NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL
PARTNERSHIP OR COMMUNITY PROPERTY
After deducting the allowable deductions appertaining to the

conjugal or community properties included in the gross estate, the
share of the surviving spouse must be removed to ensure that only
the decedent's interest in the estate is taxed.
ESTATE TAX RETURNS
The estate tax return (BIR Form No. 1801) must be filed in the following
instances:
a. In all cases of transfers subject to estate tax;
b. In cases, though exempt from tax, where the gross value of the estate
exceeds P200,000.00; or
c. In cases regardless of the gross value of the estate, where the said estate
consists of registered or registrable property such as real property, motor
vehicle, shares of stock or other similar property for which a clearance from
the BIR is required as a condition precedent for the transfer of ownership.
(Section 90(A), NIRC)
ESTATE TAX RETURNS
Under the TRAIN Law, deleted ni Section 90(A) of the NIRC is the phrase "or
where, though exempt from tax, the gross value of the estate exceeds Two
hundred thousand pesos (P200,000)" emphasizing the need to file an estate
tax return of the subject estate regardless of the value of the estate.
CONTENTS OF ESTATE TAX RETURNS
The estate tax return, which is filed under oath and in duplicate, shall contain the following
information:
a. The value of the gross estate of the decedent at the time of his death, or in case of a non-
resident, not a citizen of the Philippines, of that part of his gross estate situated in the
Philippines;
b. The deductions allowed from gross estate in determining the estate; and
c. Such part of such information as may at the time be ascertainable and such supplemental
data as may be necessary to establish the correct taxes. (Section 90(A), NIRC)
TIME FOR FILING OF ESTATE TAX RETURN AND ITS EXTENSION
Under the TRAIN Law, the deadline for filing of estate tax
return is extended from six (6) months to one (1) year from the
date of death of the decedent.
TIME OF PAYMENT OF ESTATE TAX
Under the TRAIN Law, considering the deadline for

filing of the return is extended, payment of estate tax
is also extended from six (6) months to one (1) year
from the date of death.
EXTENSION OF PAYMENT OF ESTATE TAX
The payment of estate tax may be extended when the Commissioner finds that the
payment on the due date of the estate tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs.
The extension for payment of estate tax depends on whether the estate is settled
judicially or extra-judicially. In case of judicial settlement, the payment of estate tax
may be extended for a period not exceeding five (5) years, while in case of extra-
judicial settlement, the payment may be extended to a period not exceeding two (2)
years.
EXTENSION OF PAYMENT OF ESTATE TAX
Any amount paid after the statutory due date of the tax, but within the extension period, is
subject to interest but not to surcharge.
If an extension is granted, the Commissioner may require the executor, or administrator, or

beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner deems necessary, conditioned
upon the payment of the said tax in accordance with the terms of the extension.
There is no extension for payment of taxes which may be granted by the Commissioner
where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer. (Section 91(B), NIRC)
EFFECT OF EXTENSION OF PAYMENT
In the event that the payment of estate tax is extended, the estate tax
must be paid on or before the date of the expiration of the period of
the extension.
In addition, the running of the Statute of Limitations for assessment as

provided in Section 203 of the NIRC or the period of the government
to assess is suspended for the period of any such extension. (Section
91(B), NIRC)
PAYMENT OF THE ESTATE TAX BY INSTALLMENT
In case the available cash of the estate is not sufficient to pay its total
estate tax liability, the estate may be allowed to pay the tax by
installment and a clearance shall be released only with respect to the
property the corresponding/computed tax on which has been paid.
There shall, therefore, be as many clearances (Certificates Authorizing
Registration) as there are as many properties released because they
have been paid for by the installment payments of the estate tax.
PAYMENT OF THE ESTATE TAX BY INSTALLMENT
The computation of the estate tax, however, shall always be on the cumulative
amount of the net taxable estate. Any amount paid after the statutory due date of the
tax shall be imposed the corresponding applicable penalty thereto.
However, if the payment of the tax after the due date is approved by the
Commissioner or his duly authorized representative, the imposable penalty thereon
shall only be the interest. Nothing in this paragraph, however, prevents the
Commissioner from executing enforcement action against the estate after the due
date of the estate tax provided that all the applicable laws and required procedures
are followed/observed. (Section 9(F), Revenue Regulations No. 2-2002)
PLACE OF FILING OF ESTATE TAX RETURN AND PLACE OF PAYMENT
In case of a resident decedent, whether citizen or alien, the

administrator or executor shall register the estate of the decedent and
secure a new TIN from the Revenue District Office where the
decedent was domiciled at the time of his death and shall file the estate
tax return and pay the corresponding estate tax with the Accredited
Agent Bank (AAB), Revenue District Officer, Collection Officer or duly
authorized Treasurer of the city or municipality where the decedent
was domiciled at the time of his death, whichever is applicable.
PLACE OF FILING OF ESTATE TAX RETURN AND PLACE OF PAYMENT
In case of a non-resident decedent, whether non-resident citizen or non-resident
alien, with executor or administrator in the Philippines, the estate tax return shall be
filed with and the TIN for the estate shall be secured from the Revenue District Office
where such executor or administrator is registered. In case the executor or
administrator is not registered, the estate tax return shall be filed with and the TIN of
the estate shall be secured from the Revenue District Office having jurisdiction over
the executor or administrator's legal residence. Nonetheless, in case the non- resident
decedent does not have an executor or administrator in the Philippines, the estate tax
return shall be filed with and the TIN for the estate shall be secured from the Office of
the Commissioner through RDO No. 39 - South Quezon City.
ESTATE TAX RATE
TRAIN Law simplifies the estate tax schedule, from a six- bracket schedule with rates
ranging from five to twenty percent (5% - 20%), to a single rate of six percent (6%)
based on the value of the net estate.
A flat rate of six percent (6%) now applies regardless of the amount of the net estate
of every decedent, whether resident or non- resident of the Philippines. This means
that the first P200,000.00 net taxable estate under the Tax Code is no longer exempt
and now subject to six percent (6%) estate tax.
WITHDRAWAL OF BANK DEPOSITS
If a bank has knowledge of the death of a person, who maintained a bank deposit account
alone, or jointly with another, the bank cannot alow any withdrawal from the said deposit
account, unless the Commissioner has certified that the estate tax is paid. A certification
issued by the Commissioner is required before the bank can allow withdrawal of bank
deposits.
As an exception, the administrator of the estate or any one (1) of the heirs of the decedent
may, upon authorization by the Commissioner, withdraw an amount not exceeding
P20,000.00 without the said certification. For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at the time of withdrawal
by any one (1) of the joint depositors and such statement shall be under oath by the said
depositors. (Eugenia D. Polido v. Mariano P. Gasat, G.R. No. 170632, July 10, 2007; Section 97,
NIRC)
WITHDRAWAL OF BANK DEPOSITS
TRAINLaw removes the P20,000.00 limit on bank withdrawal without certification

from the BIR. Even without certification, TRAIN Law now allows for the withdrawal
of any amount, but subject to a final withholding tax of six percent (6%). However,
the withdrawal shall only be made within one (1) year from the date of death of the
decedent. (Section 10, Revenue Regulations No. 12- 2018)
REPUBLIC ACT 11213 APPROVED ON FEBRUARY 14, 2019
This was enacted on February 14, 2019, to grant taxpayers a one-time opportunity to
settle tax obligations through an estate tax amnesty program that extends tax reliefs
to estates with outstanding estate tax liabilities. To encourage the processing of
unsettled estates, Republic Act (RA) No. 11213, or the Tax Amnesty Act of 2018, gave
estates of decedents who died on or before Dec. 31, 2017, with or without
assessments, whose estate taxes remained unpaid or have accrued as of Dec. 31,
2017, the opportunity to settle their tax obligations without having to pay the penalties
that had accumulated due to the failure to pay the estate tax on time. Aside from
dispensing with the penalties and interest, the amnesty also imposed the 6% estate
tax under the TRAIN Law at every stage of transfer of the property.
REPUBLIC ACT 11569 SIGNED ON AUGUST 5, 2023
The period to avail of the benefits of the Estate Tax Amnesty Program under RA 11213
was only until June 14, 2021, which is two years from June 15, 2019, the effectivity of
the Revenue Regulations No. 6-2019, the Implementing Rules and Regulations (IRR)
of RA No. 11213.
Before the expiration, however, the amnesty program was further extended until
June 14, 2023 under RA No. 11569. This year, pursuant to RA No. 11956 which lapsed
into law on Aug. 5, 2023, the period to avail of the program was further extended for
another two years, i.e., until June 14, 2025.
REPUBLIC ACT 11965 SIGNED ON JUNE 30, 2021
Aside from the extension, RA No. 11956 expanded the coverage of the amnesty
program to include estates of decedents who died on or before May 31, 2022, with or
without assessment, but whose estate taxes have remained unpaid or have accrued
as of May 31, 2022. It also listed in detail the documents that must be submitted to the
Bureau of Internal Revenue (BIR) to avail of the estate tax amnesty and allowed
payment by installment within two years from the statutory date of its payment
without civil penalty and interest.
Donor’s Tax
Algarja, NG Keith
Docejo, Renz
Inquit, Renz Isaiah
GENERAL
OVERVIEW
- General
- Gross Gifts
- Transfer for Insufficient Consideration
- Cancellation of Indebtedness
-Value of the Gifts
- Deductions from Gross Gifts (Resident or Citizen
Donors, Deduction from the Gross Gifts nu Husband
and Wife)
- Deduction for a Non-resident. Not Citizen Donor
- Other Deductions
- Exemptions under Special Laws
- Tax Rates Payable by Donor
- Donor's Tax Return
- Donor's Tax Credit
WHAT IS
DONOR’S TAX?
According to the Bureau of Internal Revenue, a

Donor’s Tax is a tax on a donation or gift, and is
imposed on the gratuitous transfer of property
between two or more persons who are living at the
time of the transfer. It shall apply whether the
transfer is in trust or otherwise, whether the gift is
direct or indirect and whether the property is real or
personal, tangible or intangible.
Donor's tax will be levied, assessed, collected and paid upon the transfer by any person, resident or
nonresident, of property by gift
The property can be real or personal, tangible or intangible

The transfer can be in trust or otherwise
The gift can be direct or indirect
The donor's tax shall not apply unless and until there is a completed gift. The transfer of property by
gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed
by the delivery, either actually or constructively, of the donated property to the donee. Thus, the law
in force at the time of the perfection/completion of the donation shall govern the Imposition of the
donor's tax. (R.R. 12-2018)
In the settlement of the estate of Mr. Barbera who died intestate, his wife
renounced her inheritance and her share of the conjugal property in favor
of their children. The BIR determined that there was a taxable gift and
thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (2013 Bar Exam)

Suggested answer:
The BIR is correct. Renunciation by the surviving spouse of his/her share in the
conjugal partnership or absolute community after the dissolution of the marriage in
favor of the heirs of the deceased spouse or any other persons is subject to donor's
tax whereas general renunciation by an heir, including the surviving spouse, of his/her
share in the hereditary estate left by the decedent is not subject to donor's tax, unless
specifically and categorically done in favor of identified heirs to the exclusion or
disadvantage of the other co-heirs in the hereditary estate. In this case, the
renunciation was specifically made in favor of the children; hence, donor's tax can be
assessed on Mrs. Barbera.
In 2011, Solar Computer Corporation (Solar) purchased a proprietary membership
share covered by Membership Certificate No. 8 from the Mabuhay Golf Club, Inc. for
P500,000.00. On December 27, 2012, it transferred the same to David, its American
consultant, to enable him to aval! of the facilities of the Club. David executed a Deed
of Declaration of Trust and Assignment of Shares wherein he acknowledged the
absolute ownership of Solar over the share; that the assignment was without any
consideration; and that the share was placed in his name because the Club required it
to be done. In 2013, the value of the share increased to P800,000.00.
Is the said assignment a "gift" and, therefore, subject to gift tax? Explain. (2016 Bar
Exam)
Suggested answer:
The transfer is subject to donor's tax. The Tax Code states that donor's tax will
be levied and assessed on the transfer of property by gift, whether the
transfer is by trust or otherwise. Transfers for less than adequate and full
consideration are considered gifts subject to donor's tax. In this case, there
was no consideration for the transfer, making it a gift, and the transfer, even if
by trust, will be subject to donor's tax.
WHAT IS A
DONATION?
Donation is a gratuitous transfer of property or right motivated by the liberty of

the giver (donor) in favor of the receiver (donee) who accepts it. Generally, a
donation or a gift is a voluntary transfer of property or right from one person to
another for free or without any payment for the value of the property or right
being transferred.
WHO ARE LIABLE TO PAY
DONOR’S TAX
Resident Citizens (RC);
Non-Resident Citizens (NRC);
Resident Alien (RA);
Non-Resident Alien (NRA);
Domestic Corporation (DC); and.
Foreign Corporation (FC).
Note: A corporation, whether domestic or foreign, is included since it is capable of entering into a contract
of donation, through a Board Resolution.
There are two kinds of donors (similar to estate tax):
1. The resident or citizen of the Philippines, and
2.The nonresident, not citizen of the Philippines
If the donor is a resident or a citizen of the Philippines, gross gifts would consist of:
Real estate, regardless of location

Tangible personal property, regardless of location
Intangible personal property, regardless of location
If the donor is a nonresident and not a citizen of the Philippines, gross gifts would consist of:
Real estate located in the Philippines
Tangible personal property located in the Philippines
Intangible personal property located in the Philippines, subject to the "reciprocity clause" (Similar
to the rules for estate tax, see discussion there for what constitutes intangible property)
a. If the donor at the time of the donation was a citizen and resident of a foreign country which at
the time of the donation did not impose a transfer tax of any character in respect of intangible
personal property of Filipino citizens not residing in that country, or
b. If the laws of the foreign country of which the donor was a citizen and resident at the time of
donation allow a similar exemption from transfer taxes of every character in respect of intangible
personal property owned by citizens of the Philippines not residing in that country
A donation made by a corporation to the heirs of a deceased officer out of
gratitude for his past services is subject to donor's tax. It is not subject to
deduction for the value of said services that do not constitute a
recoverable debt. (Pirovano v. CIR, G.R. No. L-19865, July 31, 1965, where
the heirs wanted to consider it remuneratory so it won't be taxed as a gift.)
Badges of a donation inter vivos:
Made out of love and affection;
Reservation of usufruct in favor of the donor (/.e.z the naked
ownership has been transferred to the donee);
Donor reserved certain properties for himself (so he still had
something to live by);
The donee accepted the donation (no need for acceptance if donation
mortis causa). (Spouses Gestopa v. CA, G.R. No. 111904, Octobers,
2000)
TAX RATES OF
DONOR’S TAX
Rate - The donor’s tax for each calendar year shall be six percent (6%) computed on the basis of the total
gifts in excess of Two Hundred Fifty Thousand Pesos (P250,000) exempt gift made during the calendar
year.
Notes:
1. When the gifts are made during the same calendar year but on different dates, the donor's tax shall be
computed based on the total net gifts during the year.
2. The relationship between the donor and the donee(s) shall not be considered. Republic Act No. 10963
(TRAIN Law) does not distinguish donations made to relatives, or donations made to strangers.
WHAT IS A
GROSS GIFT
Defined under Section 104 of the Tax Code, Gross Gifts or simply "Gifts "
include real and personal property, whether tangible or intangible, or mixed,
wherever situated: Provided, however, that where the donor was non-resident
alien at the time of donation, his real and personal property so transferred but
which are situated outside the Philippines shall not be included as part of "
gross gift".
TRANSFER OF PROPERTY FOR
INSUFFICIENT CONSIDERATION
General Rule: If the property transferred is for less than adequate and full
consideration in money or money’s worth, the amount by which the FMV
exceeds the consideration shall be deemed a gift and be included in computing
the amount of gifts made during the year (Sec. 100, NIRC).
Reason: The NIRC considers the transfer as a donation since what motivated
the transferor in transferring the property is his generosity.
Exceptions:
1. Transfers made bona fide in the ordinary course of business and free from any donative
intent, even if the consideration is inadequate on account of bad bargain shall not be subject
to donor’s tax.
2. Where property transferred is real property located in the Philippines considered as capital
asset, the donor’s tax is not applicable but the Final Capital gains Tax of six percent (6%) of
the fair market value or gross selling price, whichever is higher. (SABABAN, supra at 154).
Where the consideration is fictitious, the entire value of the property transferred shall be
subject to donor’s tax (1 DE LEON, supra at 814).
A transfer of real/personal property will be considered a donation/ gift and subject to the
donor's tax when:
The transfer was for less than adequate and full consideration,
Such transfer was effective during his lifetime (inter vivos), and
Other than real property in Section 24(D), NIRC, i.e., the property was not subject to final
capital gains tax (capital asset).
For example:
Bettina Cooper sold her car to Ronnie Lodge for Pl00k. It had an FMV of P280k. The P180k will be
considered a donation and thus subject to tax.
But TRAIN now gives an exception:
When the transfer is made in the ordinary course of business, it will be considered as made for an adequate
and full consideration. The requisites for this type of transfer are:
Bona fide transaction;

Arm's length; and
Free from any donative intent.
What are the implications if the real property sold was a capital asset as against an ordinary asset?
For example:
The real property had a cost of Pl00k, an FMV of P200k, but sold for only P170k. If it were classified as a
capital asset, it will be taxed 6% of the FMV (remember, the base is either the consideration or the FMV,
whichever is higher).
If it were classified as an ordinary asset, it will be taxed twice. First, it will be taxed for income tax purposes
(tax base of P70k). Second, it will be taxed for donor's tax (tax base of P30k). In this case, donor's tax will be
attracted unwittingly.
CONDONATION OR REMISSION OF
INDEBTEDNESS
Condonation or remission of debt is a mode of extinguishing an obligation. It simply means
that by a generous act of a person who, for instance, lends money to another with an
obligation to repay, the borrower is released from such obligation, hence, subject to donor ’ s
tax.
Nonetheless, there is no condonation of indebtedness or donation in these following cases:
1. Condonation is due to the rendition of service.
2. Condonation was made by a corporation in favor of its shareholders

PAYMENT OF LOAN BY THE
GUARANTOR
A “ guarantee ”, as a rule is gratuitous unless stated otherwise. However, if the obligation is
“jointly ” entered into by the guarantor and the borrower with a creditor-bank, the security
given by the guarantor to fulfill the obligation of the borrower is not gratuitous because the
guarantor must be indemnified by the principal debtor in case the guarantor pays for the
debt. In such case, payment by the guarantor is not subject to donor ’ s tax.
REPUDIATION OF
INHERITANCE
REPUDIATION - refuse to accept to
INHERITANCE - something that is or may be inherited
Section 11 of RR 2-2003 provides that repudiation or " general renunciation " by an heir,
including the surviving spouse, of his or her share in the hereditary estate left by the
decedent, is NOT subject to donor ' s tax, UNLESS:
1. The renunciation was categorically done in favor of identified heir(s); and
2. To the exclusion or disadvantage of the other co-heir(s).

VALUE OF
GIFTS
Sec. 102. Valuation of Gifts Made in Property. — If the gift is made in property, the
fair market value thereof at the time of the gift shall be considered the amount of
the gift. In case of real property, the provisions of Section 88(B) shall apply to the
valuation thereof.
The fair market value of the property donated/given at the time of the donation
shall be the value of the gross gifts.
VALUE OF
GIFTS
Mr. L owned several parcels of land and he donated a parcel each to his two children.
Mr. L acquired both parcels of land in 1975 for P200,000.00. At the time of donation,
the fair market value of the two parcels of land, as determined by the CIR, was
P2,300,000.00; white the fair market value of the same properties as shown in the
schedule of values prepared by the City Assessors was P2,500,000.00.
What is the proper valuation of Mr. L's gifts to his children for purposes of computing
donor's tax? (2015 Bar Exam)
VALUE OF
GIFTS
Suggested answer:
The proper valuation is P2,500,000.00 or the FMV based on the schedule of the City
Assessors. According to the Section 88 (B), Tax Code, for donor's tax purposes (and
also estate tax purposes), the FMV of real property is the higher value of either the
FMV as determined by the CIR or the FMV as determined by the schedule prepared
by the Provincial or City Assessor.
DEDUCTIONS FROM GROSS GIFTS RESIDENT
OR CITIZEN DONORS
(A) In the Case of Gifts Made by a Resident. —
(1) Gifts made to or for the use of the National Government or
Sec. 101. Exemption of Certain Gifts. any entity created by any of its agencies which is not conducted for
— The following gifts or profit, or to any political subdivision of the said Government; and
donations shall be exempt from the
tax provided for in this Chapter:
(2) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthropic organization or
research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes.
For the purpose of the exemption,
a 'non-profit educational and/or charitable corporation, institution,
Sec. 101. Exemption accredited nongovernment organization, trust or philanthropic
of Certain Gifts. — The organization and/or research institution or organization' is a school,
following gifts or
donations shall be college or university and/or charitable corporation, accredited
exempt from the tax nongovernment organization, trust or philanthropic organization and/
provided for in this or research institution or organization, incorporated as a nonstock
Chapter:
entity, paying no dividends, governed by trustees who receive no
compensation, and devoting all its income, whether students' fees
or gifts, donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation
INTRO
DUCTION
SITUATION:
CMI SCHOOL, INC., A NONSTOCK, NON-PROFIT
CORPORATION, DONATED ITS THREE PARCELS
OFIDLE LAND SITUATED IN THE MUNICIPALITY OF
CUYAPO, NUEVA
Ecija to SLC University, another nonstock, non-profit
corporation, in recognition of the latter's contribution to
and participation in the spiritual and educational
development of the former.
Suggested answer:
A) CMI SCHOOL, INC. IS NOT LIABLE FOR DONOR'S TAX.
a) Is CMI School, Inc. liable for the UNDER THE TAX CODE, DONATIONS TO NON-PROFIT
payment ofdonor's tax? Explain EDUCATIONAL INSTITUTIONS ARE EXEMPT FROM
your answer. DONOR'S TAX. THE DONATION IS TO SLC UNIVERSITY, A
NONSTOCK, NON-PROFIT EDUCATIONAL INSTITUTION.
HENCE, IT IS EXEMPT FROM DONOR'S TAX.
Suggested answer:
b) If SLC University later sells the three b) Assuming the Income from the sale Is actually, directly, and
parcels of idle land to Puregold exclusively used for educational purposes, the sale is exempt from
Supermarket, Inc., a stock corporation, will capita! gains tax. Under the Constitution, all revenues of non-stock,
SLC University be liable for capital gains
tax? non-profit educational institutions which are actually, directly, and
exclusively used for educational purposes are exempt from all taxes.
c) If SLC University donates the three parcels of idle
land in favor of the Municipality of Cuyapo, Nueva Ecija,
will SLC University be liable for donor's tax? Explain your
answer. (2017 Bar Exam)
c) The donation to the Municipality of Cuyapo is exempt from

donor's tax. Under the Tax Code, donations to the any political
SUBDIVISION OF THE GOVERNMENT
IS EXEMPT FROM DONOR'S TAX.
Years ago, Krisanto bought a parcel of land In
Muntinlupa for only PhP65,000. He donated the land
to his son, Kornelio, in 1980 when the property had a
fair market value of PhP75,000, and paid the
corresponding donor's tax.
Kornelio, in turn, sold the property In 2000 to

Katrina for PhP 6.5 million and paid the capital gains
tax, documentary stamp tax, local transfer tax, and
other fees and charges. Katrina, in turn, donated the
land to Klaret School last August 30, 2017 to be used
as the site for additional classrooms. No donor's tax
was paid, because Katrina claimed that the donation
was exempt from taxation. At the time of the
donation to Klaret School, the land had a fair market
value of PhP 65 million.
Is Katrina Hable for donor's tax? (2018 Bar Exam)

Suggested answer: No, Katrina is not liable for donor's tax.
Underthe Tax Code, donations to non-profit educational
institutions areexempt from donor's tax. Hence, assuming Klaret
School is a non profit educational institution, then the donation is
exempt from donor's tax.
Upon the death of their beloved parents in 2009, Karla, Karla,
and Karlie inherited a huge tract of farm land in Kanlaon City. The
siblings had no plans to use the property. Thus, they decided to
donate the land, but were not sure to whom the donation should
be made. They consult you, a well-known tax law expert, on the
tax implications of the possible donations they plan to make, by
giving you a list of the possible donees:
1. The Kanlaon City High School Alumni Association (KCHS AA), since the siblings are all alumni of the same
school and are active members of the organization. KCHS AA is an organization intended
to promote and strengthen ties between the school and its alumni;
2. The Kanlaon City Water District which intends to use the land for its offices; or
3. Their second cousin on the maternal side, Klkay, who serves as the caretaker of the property.
Advise the siblings which donation would expose them to the least
tax liability. (2018 Bar Exam)
Suggested answer: I would advise the siblings to
donate the land to the Kanlaon City Water District
because the donation will be exempt from donor's
tax. Under the Tax Code, donations to any
government entity created by any ofits agencies
which is not conducted forprofit Is exempt from
donor's tax. A water district, such as the donee here,
Is a government entity not organized for profit.
Hence, the donation will be exempt.
Due to rising liquidity problems and pressure from its concerned suppliers, P
Corp, instituted a flash auction sale of its shares of stock. P Corp, was then able
to sell Its treasury shares to Z, Inc., an unrelated corporation, for Pl,000,000.00,
which was only a little below the valuation of P Corp, 's shares based on its
latest audited financial statements. In connection therewith, P Corp, sought a
Bureau of Internal Revenue ruling to confirm that, notwithstanding the price
difference between the selling price of the shares and their book value, the said
transaction falls under one of the recognized exemptions to donor's tax under
the Tax Code.
QUESTION:
a) Cite the instances under the Tax b) Does the above transaction fall
Code where gifts made are under any of the exemptions?
exempt from donor's tax. Explain. (2019 Bar Exam)
Suggested answer:
Suggested answer: It does not fall under any of the enumerated
a) Gifts made to the national government exemptions, but it is still exempt from donor's tax
or any of its political subdivisions are because TRAIN states that that a sale, exchange, or
exempt. Gifts to educational, charitable, other transfer of property made in the ordinary course
social welfare corporations or institutions, of business (a transaction which is bona fide, at arm's
and accredited NGOs are also exempt length, and free from any donative intent), will be
from donor's tax. considered as made for an adequate and full
consideration in money or money's worth and
therefore not subject to donor's tax.
DEDUCTIONS FROM THE GROSS
GIFTS BY HUSBAND AND WIFE
For deductions from gross gifts made by husband and wife, out
of community/conjugal property, each donor has his or her own
deductions. Their donations will be distributed equally among
them (1/2)
However, if what was donated is a conjugal or community property

and only the husband signed the deed of donation, there is only
one donor for donor's tax purposes, without prejudice to the right
of the wife to question the validity of the donation without her
consent pursuant to the pertinent provisions of the Civil Code of
the Philippines and the Family Code of the Philippines.
PRESENTED BY LARANA INC.
DEDUCTIONS FOR A NONRESIDENT. NOT

CITIZEN DONOR
(B) In the Case of Gifts Made by a Nonresident Not

a Citizen of the Philippines.
(1) Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political subdivision of
the said Government.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social

welfare corporation, institution, foundation, trust or philanthropic organization or
research institution or organization: Provided, however, That not more than thirty
percent (30%) of said gifts shall be used by such donee for administration purposes.
OTHER DEDUCTIONS
o Encumbrance on the property

donated, if assumed by the
Donee Those specifically provided by
the donor as a diminution of
the property donated. (R.R. 12-2018)
The BIR has allowed the following
as deductions from gross gifts to Example:
arrive at net gifts: Fabby Wabby donated land which was
subject to a mortgage to Elfie. The FMV
of the land was P1M, but the mortgage
was P400k. Elfie agreed to assume the
mortgage, hence the deduction of
P400k is allowed. The net gift is P600k.
WHAT ARE THE EXEMPTIONS UNDER
SPECIAL LAWS?
The list below consists of entities considered Donor’s
Tax exempt under special laws including, but not
limited to the following:
· Rural Farm School (Sec. 14, R.A. No. 10618)

· People’s Television Network, Incorporated (Sec. 15, R.A. No. 10390)
· People’s Survival Fund (Sec. 13, R.A. No. 10174)
· Aurora Pacific Economic Zone and Freeport Authority (Sec. 7, R.A. No. 10083)
· Girl Scouts of the Philippines (Sec. 11, R.A. No. 10073)
· Philippine Red Cross (Sec. 5, R.A. No. 10072)
· Tubbataha Reefs Natural Park (Sec. 17, R.A. No. 10067)
· National Commission for Culture and the Arts (Sec. 35, R.A. No. 10066)
· Philippine Normal University (Sec. 7, R.A. No. 9647)
· University of the Philippines (Sec. 25, R.A. No. 9500)
· National Water Quality Management Fund (Sec. 9, R.A. No. 9275)
·
The list below consists of entities considered Donor’s
Tax exempt under special laws including, but not
limited to the following:
· Philippine Investors Commission (Sec. 9, R.A. No. 3850)

· Ramon Magsaysay Award Foundation (Sec. 2, R.A. 3676)
· Philippine-American Cultural Foundation (Sec. 4, P.D. 3062)
· International Rice Research Institute (Art. 5(2), PD 1620)
· Task Force on Human Settlements (Sec. 3(b)(8), E.O. 419)
· National Social Action Council (Sec. 4, P.D. 294)
· Aquaculture Department of the Southeast Asian Fisheries Development
Center (Sec. 2, P.D. 292)
· Development Academy of the Philippines (Sec. 12, PD 205)
· Integrated Bar of the Philippines (Sec. 3, PD 181)
·
TAX RATES PAYABLE BY DONOR
The donor’s tax for each calendar year shall be six percent (6%) computed on the
basis of the total gifts in excess of two hundred fifty thousand pesos (P250,000)
exempt gifts made during the year, regardless of whether the donation is made to a
relative or to a stranger.
WHAT IS DONOR'S TAX RETURN?

The donor’s tax for each calendar year shall be six percent (6%) computed on the basis of the total
gifts in excess of two hundred fifty thousand pesos (P250,000) exempt gifts made during the year,
regardless of whether the donation is made to a relative or to a stranger.
This return shall be filed in triplicate by any person, natural or juridical, resident or non-resident, who
transfers or causes to transfer property by gift, whether in trust or otherwise, whether the gift is
direct or indirect and whether the property is real or personal, tangible or intangible.
1. WHAT IS THE NATURE OF DONOR’S TAX?
IT IS NOT A PROPERTY TAX, BUT AN EXCISE TAX IMPOSED ON

THE TRANSFER OF PROPERTY BY WAY OF GIFT INTER VIVOS.
2. WHAT ARE THE PURPOSES OF DONOR’S TAX?
THEY ARE:
DONER’S TAX SUPPLEMENTS THE ESTATE TAX BY PREVENTING THE AVOIDANCE OF THE LATTER
THROUGH THE DEVICE OF DONATING THE PROPERTY DURING THE LIFETIME OF THE DECEASED
(DONOR); AND IT ALSO PREVENTS THE AVOIDANCE OF INCOME TAXES. WITHOUT THE DONOR’S TAX,
THE DONOR MAY ESCAPE THE PROGRESSIVE RATES OF INCOME TAXATION THROUGH THE SIMPLE
EXPEDIENT OF SPLITTING HIS INCOME AMONG NUMEROUS DONEES.
1. WHAT TRANSFERS ARE SUBJECT TO
DONOR’S TAX?
THE DONOR’S TAX IS IMPOSED ON DONATIONS INTER VIVOS OR THOSE

MADE BETWEEN LIVING PERSONS TO TAKE EFFECT DURING THE
LIFETIME OF THE DONOR.[2]
THE TAX SHALL APPLY WHETHER THE TRANSFER IS IN TRUST OR

OTHERWISE, WHETHER THE GIFT IS DIRECT OR INDIRECT. AND
WHETHER THE PROPERTY IS REAL OR PERSONAL, TANGIBLE OR
INTANGIBLE (NIRC; SEC. 98).
2. WHO ARE LIABLE TO PAY THE DONOR’S TAX?
RESIDENT CITIZENS (RC); NON-RESIDENT CITIZENS (NRC); RESIDENT ALIEN (RA); NON-RESIDENT
ALIEN (NRA); DOMESTIC CORPORATION (DC); AND.FOREIGN CORPORATION (FC).
IN A DONATION MADE BY THE HUSBAND AND
WIFE, WHO PAYS THE DONOR’S TAX?
Husband and wife are considered as separate and distinct

taxpayers for purposes of the donor’s tax. However, if what was
donated is a conjugal or community property and only the
husband signed the deed of donation, there is only one donor
for donor’s tax purposes, without prejudice to the right of the
wife to question the validity of the donation without her
consent pursuant to the pertinent provisions of the Civil Code
and the Family Code
WHAT IS THE RATE OF DONOR’S TAX?
THE DONOR’S TAX FOR EACH CALENDAR YEAR SHALL BE SIX PERCENT
(6%) COMPUTED ON THE BASIS OF THE TOTAL GIFTS IN EXCESS OF
TWO HUNDRED FIFTY THOUSAND PESOS (P250,000) EXEMPT GIFTS
MADE DURING THE YEAR, REGARDLESS OF WHETHER THE DONATION IS
MADE TO A RELATIVE OR TO A STRANGER.
WHAT IS THE RATE OF DONOR’S TAX FOR

STRANGERS?
SIX PERCENT (6%). THE RATE OF DONOR’S TAX AFTER THE EFFECTIVITY OF TRAIN LAW IS FIXED
AT SIX PERCENT (6%) REGARDLESS OF WHETHER THE DONATION IS MADE TO A RELATIVE OR TO A
STRANGER.
WHEN IS THE RETURN OF THE DONOR FILED
AND WHEN IS THE DONOR’S TAX PAID?
THE RETURN OF THE DONOR SHALL BE FILED WITHIN THIRTY (30) DAYS
AFTER THE DATE THE GIFT IS MADE AND THE TAX DUE THEREON SHALL
BE PAID AT THE TIME OF FILING.
WHAT IS THE RATE OF DONOR’S TAX FOR

STRANGERS?
SIX PERCENT (6%). THE RATE OF DONOR’S TAX AFTER THE EFFECTIVITY OF TRAIN LAW IS FIXED
AT SIX PERCENT (6%) REGARDLESS OF WHETHER THE DONATION IS MADE TO A RELATIVE OR TO A
STRANGER.
1. WHAT IS THE BASIS IN COMPUTING
DONOR’S TAX?
The basis shall be the total net gifts made during the calendar year.
WHAT IS MEANT BY NET GIFTS?
Net gift means the net economic benefit from the transfer that accrues to the donee.
Note: Accordingly, if a mortgaged property is transferred as a gift. but imposing upon the donee
the obligation to pay the mortgage liability; then the net gift is measured by deducting from the
FMV of the property the amount of mortgage assumed by the done.
1. WHAT IS THE CUMULATIVE METHOD FOR PURPOSES OF DETERMINING THE

TAX BASE?
TThe computation of the donor’s tax is on a cumulative basis over a period of one calendar year. A
separate return should be filed for each donation made on different dates during the year reflecting
therein any previous gifts made on the same calendar year.
THE FOLLOWING GIFTS ARE EXEMPTED FROM THE DONOR’S
TAX:
GIFTS MADE TO OR FOR THE USE OF THE NATIONAL GOVERNMENT

OR ANY ENTITY CREATED BY ANY OF ITS AGENCIES WHICH IS NOT
CONDUCTED FOR PROFIT; GIFTS IN FAVOR OF AN EDUCATIONAL
INSTITUTION, CHARITABLE, RELIGIOUS, CULTURAL, SOCIAL
WELFARE CORPORATION, INSTITUTION, ACCREDITED NON-
GOVERNMENT ORGANIZATION, TRUST, PHILANTHROPIC
ORGANIZATION, OR RESEARCH INSTITUTION OR ORGANIZATION
ATHLETE’S PRIZES AND AWARDS;

ENCUMBRANCES ON THE PROPERTY DONATED IF ASSUMED BY THE
DONEE;
DONATIONS TO ENTITIES EXEMPTED UNDER SPECIAL LAW; AND
THOSE SPECIFICALLY PROVIDED BY THE DONOR AS A DIMINUTION
OF THE PROPERTY DONATED.
NOTE: TRAIN LAW REMOVED THE EXEMPTION OF DOWRIES OR
GIFTS MADE ON ACCOUNT OF MARRIAGE.
Donor’s tax in the Philippines plays a vital role in regulating and generating revenue from
the transfer of properties and gifts. Understanding the rules and regulations surrounding
donor’s tax is crucial to ensure compliance and avoid potential legal issues. Always consult
with tax authorities or professionals for the latest information and assistance on this topic.
Value
Added
Tax
CAMPOS, DE OCAMPO, ESCANLAR
GROUP 6
In General
The VAT is a tax on consumption,

levied on the sale, barter,
exchange, or lease of goods or
properties and services in the
Philippines and the importation
of goods into the Philippines.
Elements of the transactions
subjected to 12% VAT
1. It must be done in the ordinary course of trade

or business;
2. There must be a sale, barter, exchange, lease of
goods or properties, or rendering of service in
the Philippines; and
3. It is not VAT-exempt or VAT zero-rated.
Absence of one will not make the transaction

subject to VAT.
Elements of the transactions subjected to 12% VAT
“There must be a sale, barter,
exchange, lease of goods or properties,
“Ordinary course of trade or rendering of service in the
or business” Philippines”
means the regular if a taxpayer renders service to an

conduct or pursuit of a affiliate for a fee, the service is still
commercial or an subject to VAT. (CIR v. CA and
economic activity. Commonwealth Management and
Services Corporation [COMASERCO],
It covers any person
G.R. No. 125355, March 30, 2000)
regardless of whether or
not the person engaged
Similarly, the fees collected by toll
therein is a nonstock, way operators are subject to VAT. Toll
nonprofit organization, or way operators are engaged in
a government entity. rendering service (constructing,
maintaining, and operating
expressways). (Diaz v. Secretary of
Finance, G.R. No. 193007, July 19, 2011
When there is no sale, barter or exchange of goods or properties,
then no VAT should be imposed.
Hence, when an affiliate provides funds to a
taxpayer who then uses the funds to pay a third
party, the transaction is not subject to VAT, as
there was no sale, barter, or exchange between the
affiliate and the taxpayer. The money was simply
given as a dole-out. (CIR v. Sony Philippines, Inc.,
G.R. No. 178697, November 17, 2010)
ALSO NOT SUBJECT TO VAT ARE
Membership fees, association dues, and the like

collected by:
recreational clubs from its members
condominium corporations
Normal VAT
Transactions (12%)
THREE CATEGORIES SUBJECT TO

NORMAL VAT TRANSACTIONS (12%)
1. Sale of goods and properties

2. Sale of services, and
3. Importation
1. THE SALE OF GOODS AND
NORMAL VAT PROPERTIES
TRANSACTIONS
SEC. 106. Value-added Tax on Sale of
Goods or Properties. —
(A) Rate and Base of Tax. — There shall
be levied, assessed and collected on
every sale, barter or exchange of goods
or properties, a value-added tax
equivalent to twelve percent (12%) of
the gross selling price or gross value in
money of the goods or properties sold,
bartered or exchanged, such tax to be
paid by the seller or transferor. (As
amended by TRAIN
"gross selling price"
means the total amount of money or its

equivalent which the purchaser pays or
is obligated to pay to the seller in
consideration of the sale, barter, or
exchange of the goods or properties,
excluding the value-added tax. The
excise tax, if any, on such goods or
properties shall form part of the gross
selling price
NORMAL VAT
TRANSACTIONS
Goods or properties include:
Sec. 106. (A) (1) The term "goods" or "properties" shall mean
all tangible and intangible objects which are capable of pecuniary
estimation and shall include:
(a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or

model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any

industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television

time
NORMAL VAT
TRANSACTIONS
2. THE SALE OF SERVICE Gross Receipts
Sec. 108. Value-added Tax on Sale of

Services and Use or Lease of Properties. — Sec. 108. The term 'gross
(A) Rate and Base of Tax. — There shall be receipts' means the total
levied, assessed and collected, a value- amount of money or its
added tax equivalent to twelve percent equivalent representing the
(12%) of gross receipts derived from the contract price, compensation,
sale or exchange of services, including the service fee, rental or royalty,
use or lease of properties. including the amount charged
for materials supplied with the
To be defined as "sales of services," the
services and deposits and
services:
Should be rendered in the Philippines, advanced payments actually or
Can be any and all kinds of services constructively received during
rendered to others (provided there is the taxable quarter for the
no employer-employee relationship); services performed or to be
and performed for another person,
There is a fee, renumeration or excluding value-added tax.
consideration
NORMAL VAT
TRANSACTIONS
3. ON IMPORTATION
Every importation of goods shall be subject to the VAT, whether
for use in business or not.
The imported goods shall be subject to 12% VAT.
The tax base is:

> the total value used by the Bureau of customs in determining tariff
and customs duty, plus customs duties, excise tax (if any), and
other charges prior to the removal of the goods from customs
custody; OR
> based on the landed cost, when the customs duties are
determined on the basis of the quantity or volume of the goods. By
"landed cost" is meant the invoice cost, freight, insurance, customs
duties, excise tax (if any), and other charges prior to the removal of
the goods from customs custody.
Zero-rated/Effectively
Zero-rated Transactions
Purpose:
• To exempt the transaction completely
from VAT previously collected since
input taxes passed to him may be
recovered as refunds or credits
For goods, a rate of 0% of the gross

selling price will be applied If:
1. Export sale; or
2. Sales to persons or entities whose
exemption under special laws, or
international agreements to which
the Philippines is a signatory
(effectively-zero rated sales)
Export sales
The sales and actual shipments or
exportations of goods from the Philippines to
a foreign country, irrespective of any
shipping arrangement that may be agreed
upon which may influence or determine the
transfer of ownership of the goods so
exported, and
Paid for in acceptable foreign currency or

its equivalent in goods or services, and
accounted for in accordance with the rules
and regulations of the BSP.
The following are also considered export sales:
1. Sales of raw materials or packaging materials to a non
resident buyer for delivery to a resident local export-oriented enterprise to be
used in manufacturing, processing, packing or repacking in the Philippines of
said buyer's goods and paid for in acceptable foreign currency and accounted
for in accordance with BSP rules and regulations;
2. Sale of raw materials or packaging materials to an export- oriented

enterprise whose export sales exceed 70% of total annual production
3. Those considered export sales under EO 226 and other special laws; and
4. Sale of goods, supplies, equipment and fuel to persons engaged in

international shipping or international air transport operations, as long as the
goods, supplies, equipment, and fuel are used for international shipping or air
transport operations.
Zero-rated transactions refer to the export sale of goods and supply
of services. The seller of such transactions charges no output tax,
but can claim a refund or a tax credit certificate for the VAT
previously charged by suppliers. This is for the benefit of the seller.
Effectively zero-rated transactions refer to the sale of goods or

supply of services to persons or entities whose exemption under
special laws or international agreements to which the Philippines is
a signatory effectively subjects such transactions to a zero rate.
Such rate does not yield any tax chargeable against purchaser. This
is for the benefit of the purchaser.
In both zero-rated and effectively zero-rated transactions, seller who

charges zero output tax can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers
Exempt Transactions
VAT-exempt transactions refer to

the sale of goods or properties
and/or services and the use or
lease of properties that is not
subject to VAT (output tax) and
the seller is not allowed any tax
credit of VAT (input tax) on
purchases.
The person making the exempt

sale of goods, properties or
services shall not bill any output
tax to his customers because the
said transaction is not subject to
VAT. (R.R. 16-2005)
VAT-EXEMPT TRANSACTIONS
A. Sale or importation of agricultural and marine food

products in their original state, livestock and poultry, and
breeding stock and genetic materials:
B. Sale or importation of fertilizers, seeds, seedlings, etc.’

except specialty feeds:
C. Importation of personal and household effects belonging to

residents of the Philippines returning from abroad and non
resident citizens coming to resettle in the Philippines
D. Importation of professional instruments and implements,

wearing apparel, domestic animals, and personal household
effects (except vehicles, goods for use in manufacture and
merchandise for any kind commercial quantity)
E. Services subject to percentage tax
F. Services by agricultural contract growers and milling for others

of palay into rice, corn into grits and sugar cane into raw sugar
G. Medical, dental, hospital and veterinary services, except those

rendered by professionals
H. Educational services rendered by private educational

institutions, accredited by the DEPED, CHED, TESDA, and those
rendered by government educational institutions
I. Services rendered by individuals pursuant to an employer

employee relationship;
J. Services rendered by regional or area headquarters

established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income from the
Philippines;
K. Transactions exempt under international agreements except those
granted under P.D. 529 or the Petroleum Exploration Concessionaires
L. Sales by agricultural cooperatives duly registered and in good

standing with the Cooperative Development Authority (CDA) to their
members, as well as sale of the produce to non members
M. Gross receipts from lending activities by credit or multi-purpose

cooperatives duly registered with the Cooperative Development
Authority(CDA);
N. Sales by non-agricultural, non-electric cooperatives duly registered

with the CDA
O. Export sales by persons who are not VAT-registered
P. Sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business;
Q. Sale of real properties utilized for low-cost housing
R. Sale of real properties utilized for socialized housing

S. Transport of passengers by international carriers;
T. Sale, importation or lease of passenger or cargo vessels and aircraft, including

engine, equipment and spare parts thereof for domestic or international transport
operations;
U. Importation of fuel, goods and supplies by persons engaged in international

shipping or air transport operations: Provided, That the fuel, goods, and supplies
shall be used for international shipping or air transport operations;
V. Services of bank, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries;
W. Sale or lease of goods and services to senior citizens and persons with disability,
as provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010)
and 10754 (An Act Expanding the Benefits and Privileges of Persons with Disability),
respectively;
X. Transfer of property pursuant to Section 40(C)(2) of the NIRC. as amended;
Y. Association dues, membership fees, and other assessments and charges

collected by homeowners associations and condominium corporations;
Z. Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

AA. Sale or importation of prescription drugs and medicines
for diabetes, high cholesterol, and hypertension (starting
2020) and cancer, mental illness, TB, and kidney disease
(starting 2023),
BB. Sale or lease of goods or properties or the performance of

services other than the enumerated, the gross annual sales
and/or receipts do not exceed P3,000,000.
-------------------------------------------------------
Additionally,
qualified self-employed individuals and professionals
availing of the 8% income tax on gross sales and/or receipts
are exempt from 12% VAT. (R.R. 13-2018)
INPUT VAT
OUTPUT TAX INPUT TAX

Input tax is the VAT due from or paid by a
VAT-registered person on importation of
Output tax is the value-added tax goods or local purchases of goods,
due ON the sale or lease of taxable properties, or services, including lease or
goods/properties/services by any use of properties, from a VAT-registered
person registered or required to person, in the course of his trade or
register under the VAT system. business.
Output tax is what the taxpayer-

seller passes on to the o It also includes:
purchaser. • the transitional input tax;
• the presumptive input tax;
• input taxes which can be directly
attributed to transactions subject to VAT
plus a ratable portion of any input tax which
cannot be directly attributed to either the
taxable or exempt activity.
The input tax credit on importation of
goods or local purchases of goods,
properties or services by a VAT-
registered person shall be creditable:
1. To the importer upon payment of VAT

prior to the release of goods from
customs custody;
2. To the purchaser of the domestic
goods or properties upon
consummation of the sale; or
3. To the purchaser of services or the
lessee or licensee upon payment of
the compensation, rental, royalty or
fee. (R.R. 16-2005)
Rule on Capital
Goods
If the aggregate acquisition cost on capital goods
purchased or imported in a calendar month does NOT
exceed Pl,000,000, the input tax will be allowed in the month
of purchase.
If the aggregate acquisition cost of such goods in a calendar

o o month, excluding the VAT, exceeds Pl,000,000:
If the estimated life is five years or more, the input tax

will be evenly spread over the month of acquisition and
the 59 succeeding months.
If the estimated life is less than five years, the input tax
will be spread evenly on a monthly basis by dividing the
input tax by the actual number of months comprising the
estimated useful life of the asset.
Excess Output or Input Tax
Excess Output or Input Tax. — If at the end of any taxable
quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person.
If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: Provided,
however, that any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or
credited against other internal revenue taxes, subject to the
provisions of Section 112. (R.A. 9361)
In other words, any input tax, attributable to zero-rated

sales may be:
Refunded, or
Credited against other internal revenue taxes of the VAT
taxpayer
Transitional and Presumptive Input Tax
Credits and Withholding VAT
Taxpayers who become VAT-registered persons upon exceeding the
minimum turnover of P3,000,000 in any 12-month period, or who
voluntarily register even if they do not reach the threshold shall be
entitled to a transitional input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
1. Goods purchased for resale in their present condition;
2. Materials purchased for further processing, but which have not yet
undergone processing;
3. Goods which have been manufactured by the taxpayer;
4. Goods in process for sale; or
5. Goods and supplies for use in the course of the taxpayer's trade or
business as a VAT-registered person.
The transitional input tax
shall be
2% of the value of the

beginning inventory on
hand, or
actual VAT paid on such

goods, materials and
supplies, whichever is
HIGHER
Presumptive Input Tax Credits
Presumptive input tax credits are given for those engaged:
In the processing of sardines, mackerel, and milk; and

In manufacturing refined sugar, cooking oil, and packed
noodle-based instant meals.
• The rate is 4% of the gross value in money

• They are given this 4% presumptive input tax because the
goods used in the said enumeration are VAT-exempt.
Withholding of creditable value-added tax
VAT is withheld in two instances:
1. In sales of goods and services to the

Government (5% withheld by the government)
2. In payment for lease or use of properties to
nonresident owners (12% withheld by the lessee)
Before 2021, transactions with the government

were subject to 5% final withholding VAT. The final
withholding VAT represented the net VAT payable
for the seller. The remaining 7% accounts for the
standard input VAT for sales of goods or services to
the government or any of its political subdivisions,
in lieu of the actual input VAT directly attributable
or ratably apportioned to such sales.
Should actual input VAT attributable to sales to
government exceed 7% of gross payments, the excess may
form part of the sellers' expense or cost.
If the actual input VAT attributable to sale to government

is less than 7%, the difference should be counted as
income.
EX: Kaka sells to the Philippine Government his services as

a master for P100. The VAT is P12. The P5 is withheld by the
government, so the Government only pays him P107.
*the government assumes that your input VAT

will be 7%. If it is 7%, then all is well.
But if the input VAT is higher than 7% (in Kaka's case, for
example it was PIO), then the excess of P3 will be treated
as an expense. It will form part of the expense column in -
the income statement.
But if the Input VAT is smaller than 7% (for example, Kaka

only spent P5), then there is income on Kaka's side, this
will form part of his income.
In transactions with nonresidents, 12% will be withheld

with respect to the following payments:
1. Lease or use of properties or property rights owned by

nonresidents, and
2. Other services rendered in the Philippines by

nonresidents. (R.R. 16-2005)
EX: Liza lives in the condo owned by nonresident

Catriona. Liza will withhold P12 of the total amount
(including VAT) of the lease of P112. Liza will only pay
Catriona P100.
VAT REFUNDS OR
TAX CREDITS
There are three instances where

one can avail of a VAT refund:
1. Zero-rated and effectively

zero-rated sales
2. Cessation of business or
3. Cessation of VAT-status
VAT REFUNDS OR
TAX CREDITS
For zero-rated and effectively zero-rated sales of goods,

properties or services, the application should be filed
within two years after the close of the taxable quarter
when such sales were made.
The two-year period is reckoned from the close of the

taxable quarter when the relevant sales were made
pertaining to the input VAT regardless when the input tax
was paid.
SUMMARY OF RULES REGARDING THE TWO-YEAR
PRESCRIPTIVE PERIOD FOR INPUT VAT REFUNDS
ADMINISTRATIVE CLAIM
(two-year period)
the administrative claim must be filed within the two-year

prescriptive period. The reckoning date of the prescriptive
period is the close of the taxable quarter when the relevant
sales were made.
The mandatory period for the CIR to process the refund Is now 90
days (as compared to the pre-TRAIN 120-day period).
JUDICIAL CLAIM
(90+30 day period)
The taxpayer can appeal in two ways:
File the judicial claim within thirty days after the CIR
denies the claim within the 90-day period, or
File the judicial claim within thirty days from the
expiration of the 90-day period if the CIR does not act
within the 90- day period.
JUDICIAL CLAIM
(90+30 day period)
GR: the 30-day period to appeal is both mandatory

and jurisdictional
XPN: Except for premature judicial filings between
December 10, 2003 and October 5, 2010 where BIR
Ruling No. DA- 489-03 was still in force. Late judicial
filing is absolutely prohibited
the two-year prescriptive period only applies to the

filing of the administrative claim. The filing of the judicial
claim follows the 90-30 day period.
APPLICATION FOR VAT REFUND/TAX CREDIT
The application for VAT refund/tax credit must be accompanied

by complete supporting documents (the BIR provides a checklist
for this).
The taxpayer must likewise attach a statement under oath

attesting to the completeness of the submitted documents. No
other documents shall be accepted from the taxpayer in the
course of the refund/tax credit evaluation.
Without the complete supporting documents, the application

will be denied. (RMC 54- 2014)
FOR CESSATION OF BUSINESS
a VAT-registered person whose registration has been cancelled

due to retirement from or cessation of business, or due to
changes in or cessation of status under Section 106(C), may
within two years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax
which he may use in payment of his other internal revenue
taxes.
Provided, that he shall be entitled to a refund if he has no

internal revenue tax liabilities against which the tax credit
certificate may be utilized.
VAT ON REAL PROPERTIES
The sales of the following real properties are subject to VAT:
Those held for sale to customers in the ordinary course of

trade or business;
Those held for lease in the ordinary course of trade or O
business; and
Those used in the trade or business of the seller (as it is
incidental to the taxpayer's main business) (R.R. 4-2007)
The sale, transfer, or disposal of two or more adjacent lots,

house and lots, or other residential dwellings is also subject
to VAT when:
it is within a 12-month period,

in favor of one buyer from the same seller,
for the purpose of utilizing the lots, house and lots, or other O
residential dwellings as one residential area,
where th aggregate value of the adjacent properties exceeds
• Pl,919,500 for residential lots and P3,199,200 for residential
house and lots or other dwellings. (R.R. 13-2012)
A sale on installment of real property by a real estate dealer

shall be subject to the 12% VAT on the installment payments,
including interest and penalties, actually and/or
constructively - received by the dealer.
Sale of real property on installments means sales by a real

estate dealer, the initial payments of which in the year of sale
do not exceed 25% of the gross selling price.
If the initial payments exceed 25% of the selling price, the

transaction shall be considered a cash sale with a VAT at the
time of the sale. This is a sale on a deferred payment basis.
VAT ON LEASE
All forms of property for

lease, whether real or
personal, are liable to VAT
except when the gross
annual sales do not
exceed P3,000,000, In
which case they will be
exempt.
ADMINISTRATIVE
PROVISIONS
A. VAT REGISTRATION
Every taxpayer subject to the Every taxpayer NOT subject to

VAT must: the VAT but subject to the
register with the BIR as a excise or percentage tax must:
VAT taxpayer register with the BIR
pay an annual registration pay an annual registration
fee of P500 for every fee of P500 for every
separate and distinct separate and distinct
establishment, including establishment, where the
facility types where the business is conducted.
business is conducted.
B. MANDATORY REGISTRATION - persons required
to register for VAT
Any person who, in the course of trade or business, sells, barters
or exchanges goods or properties, or engages in the sale or
exchange of services shall be liable to register for VAT if:
1. His gross sales or receipts for the past 12 months, other than
those exempt under Section 109(A) to (BB), have exceeded
P3,000,000; or
2. There are reasonable grounds to believe that his gross sales or

receipts for the next 12 months, other than those exempt under
Section 109(A) to (BB), will exceed P3,000,000.
FAILURE TO REGISTER:
He shall be liable to pay the tax as if he were a VAT-registered person, and
Without the benefit of input tax credits
C. OPTIONAL REGISTRATION
Any person who is not required to registered as a VAT taxpayer
may register for the VAT. He or she, however, cannot cancel his or
her registration for the next three years.
CANCELLATION OF VAT REGISTRATION

A VAT-registered person may cancel his registration for VAT if:
(a) he makes written application and can demonstrate to the

Commissioner's satisfaction that his gross sales or receipts for the
following 12 months, over than those that are exempt under Section
109 (A) to (V), will not exceed (Pl,500,000), or
(b) he has ceased to carry on his trade or business, and does not
expect to recommence any trade or business within the next
twelve months. The cancellation of registration will be effective
from the first day of the following month.
COMPLIANCE REQUIREMENTS
A VAT-registered person shall
issue:
1. A VAT invoice for every sale,

barter, or exchange of
goods or properties; and
2. A VAT official receipt for
every lease of goods or
properties, and for every
sale, barter or exchange of
services
WHAT MUST BE CONTAINED IN THE VAT RECEIPT
1. Statement that seller is a VAT-registered person, followed by his

TIN
2. Total consideration indicating that such amount includes the VAT,
which tax shall be shown as a separate item
3. If VAT-exempt or zero-rated, must also be indicated as either
"VAT-EXEMPT SALE" or "ZERO-RATED SALE"
4. Clear breakdown of VAT, VAT-zero rated or VAT-exempt where
applicable, or separate invoices or receipts for the same
5. Date of the transaction, quantity, unit cost, and description of the
goods or properties or nature of the service
6. In case of sales of Pl,000 or more where the sale or transfer is made
to a VAT-Registered person, the name, business style if any,
address and TIN of the purchaser, customer or client shall be
indicated
Issuing Erroneous VAT invoice or VAT official
receipt
If a person who is NOT a VAT-registered person issues an invoice or
receipt showing his TIN followed by the word "VAT," the issuer shall be:
Liable for the percentage tax due on his transaction

Liable for the VAT, without credit for any input tax, and
Subject to a 50% surcharge.
If the VAT is erroneously billed in the invoice, the total invoice amount
shall be presumed to be comprised of the gross selling price/gross
receipts plus the correct amount of the VAT.
RETURN AND PAYMENT OF VAT
Every person liable to pay VAT shall file a quarterly return of the
amount of his quarterly gross sales or receipts within 25 days
following the close of the taxable quarter using the latest version of
Quarterly VAT Return.
The VAT-registered persons shall pay the VAT on a monthly basis.
Starting 2023, the filing and payment of VAT shall be done within 25
days following the close of each taxable quarter.
POWER OF THE COMMISSIONER
The Commissioner or his authorized representative Is hereby
empowered to suspend the business operations and temporarily close
the business establishment of any person for any of the following
violations:
(a) In the case of a VAT-registered Person. —

(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section
114; or
(3) Understatement of taxable sales or receipts by thirty percent
(30%) or more of his correct taxable sales or receipts for the taxable
quarter.
(b) Failure of any Person to Register as Required under Section 236. —

The temporary closure of the establishment shall be for the duration
of not less than five (5) days and shall be lifted only upon compliance
with whatever requirements prescribed by the Commissioner in the
closure order.
THANK
YOU.
CAMPOS
ESCANLAR
DE OCAMPO

Tax Gross Income To VAT Compressed

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Presented by GROUP 6

Gross income means the total income of a taxpayer

It does not include income

Other than the applicable tax rates, it is apparent that the

1. Compensation for services;

means all remuneration This income is an active income, an

The important element to determine This is included in the gross

FIT = FINAL INCOME TAX

Rental income from leasing activities is included in GI.

The exception is rental income received by a NRANETB

Royalties received from sources

Dividends included in the gross THE RULES ON DIVIDENDS MAY

Dividends received from sources

Dividends from sources within the

Prizes included in the gross income are the following:

Winnings of resident citizen, non-resident citizen and resident alien

Winnings of NRAETB from sources within the Philippines regardless of

PCSO and Lotto winnings are exempt.

Caoyonan | Lota | Sultan

FORM: Money or its equivalent form received or earned by the taxpayer

Proceeds paid to the heirs or beneficiaries UPON DEATH is EXCLUDED in this

1. Managerial or supervisory position

It depends on who the designated beneficiary of the life insurance is.

1. Executor, administrator, estate itself

Such amount as a return of premium is excluded from gross income.

Ratio: Return of premium is a return of capital.

X took a life insurance in 2015 with a premium payment of 200,000 and a

However, income from such is included in gross income.

The amount received by an insured/his estate/beneficiaries through accident or health

Also, any damages recovered by suit or agreement on account of such injuries or

Income of any kind, to the extent required by any treaty obligation

Retirement Benefits - Section 32(B)(6) of the Tax Code contemplates two

•Republic Act No. 7641 to retirement benefits received by an employee from a

In order to avail of the exemption, the following requirements must be met:

•a. The plan must be reasonable;

Separation Pay - is a statutorily mandated payment to employees separated from

Pursuant to Section 32(B)(6)(b) of the Tax Code, any amount received by an

Terminal Leave Benefits - is the commutation or the monetization of accumulated

“”Sports tournaments and competition”- tournaments and competitions

"National sports associations"- duly accredited by the Philippine Olympic

b. The competition and tournaments are sanctioned by their national sports

Covers the gross benefits received by officials and employees of public

GSIS, SSS, Medicare and Pag-Ibig contributions, and

Gains realized from the sale or exchange or retirement of bonds, debentures

Gains realized by the investor upon redemption of shares of stock in a mutual

The sale of gold to the Bangko Sentral ng Pilipinas by registered small-

The sale of gold by registered small-scale miners to accredited traders for

"Accredited Traders" refer to persons and/or entities engaged in the business

Dealings on properties, whether by sale, exchange, barter, or other mode of

Examples of Ordinary Assets

Examples of Capital Assets

Construction and Interpretation of Capital Assets

ORDINARY GAIN AND LOSS

CAPITAL GAIN AND LOSS

From Sale of Real Properties/Land and/or Buildings outside the Philippines

From Sale of Real Property held as Capital Asset to the Government

2. Subject to final tax of 6% on capital gains (Sec. 24(D), NIRC)

From Sale of Other Capital Assets

Where the Capital Loss Limitation Rule will NOT Apply: