INCOME AND WITHHOLDING

TAXES
Atty. Vic C. Mamalateo
June 25-28, 2015
SAN SEBASTIAN RECOLETOS, Manila
 TITLE II: INCOME TAX
• Chap I – Definitions
• Chap II – General principles
• Chap III – Tax on individuals
• Chap IV – Tax on corporations
• Chap V – Computation of taxable income
• Chap VI – Computation of gross income
• Chap VII – Allowable deductions
• Chap VIII – Accounting periods and methods of accounting
• Chap IX – Returns and payment of tax
• Chap X – Estates and trusts
• Chap XI – Other income tax requirements
• Chap XII – Quarterly corporate income tax
• Chap XIII – Withholding tax on wages
BASICTAX PRINCIPLES
• General principles arising from lifeblood theory:
– Taxation is the rule; exemption, the exception.
– Exemptions are construed strictly against the taxpayer. In
case of doubt, you tax income or disallow deductions and
tax credits.
• Taxes are imposed by law (e.g., NIRC), while financial
accounting are based on generally accepted accounting
standards. In case of conflict between tax rules and
accounting rules, the former shall prevail.
OVERVIEW
• 1. Cash/Property Received
– Is it a (a) return of capital (or capital), or (b)
income, gain or profit?
• 2(A). Capital or Return of Capital
– Is it acquired (1) gratuitously or (2) for a valuable
consideration?
• Gratuitous Transfer: Transferor may be subject to
estate tax (Chapter I, Title III) or donor’s tax (Chapter II,
Title III)
• For Valuable Consideration: Transferor may be subject
to income tax (Title II)
OVERVIEW
• 2(B). If income, gain or profit
– 1. Exempt from income tax:
• Constitution, tax treaty, NIRC, or special law
• Exclusion from gross income [Sec. 32(B), NIRC]
• Sec. 30, NIRC: Exempt corporations and associations
• Sec. 22, NIRC: GPP or JV (construction or energy-
related projects)
– 2. If taxable, what income tax system applies?
• Schedular tax system (subject to FWT)
• Global tax system (subject to CWT or no WT)
• Mixed schedular and global tax systems
OVERVIEW
• 3. Who is the taxpayer?
– Individual (or estate or trust)
• Citizen or alien
– Corporation (or partnership or joint venture)
• Domestic or foreign
• 4. Where is the source of income?
– Within the Philippines
– Without the Philippines
• 5. Methods of reporting income
– Cash, accrual, installment, POC, and crop year
 OVERVIEW
• 6. Nature of income?
– Compensation income
– Business or professional income
– Capital gain
– Passive investment income
– Other income
• 7. Type of asset and gain?
– Capital asset
– Ordinary asset
 INCOME TAX
• IMPORTANT PROVISIONS:
– Secs. 23 (Gen principles), 24-28 (individual & corp), 32
(gross income & exclusions), 39-40 (capital gain/loss
and determination of gain), 42 (source rules), and 60-
63 (tax on estates and trusts), NIRC
– Secs. 22(b) [corp & other definitions], 30 (exempt
corp or asso), 31 (taxable income), 34-36 (deductions
& non-deductible items), 44-45 (accounting periods),
and 48-49 (methods of accounting), and 50 (allocation
of income of related parties), NIRC
 INCOME TAX
• INCOME TAX
– Tax on all yearly profits arising from property, professions, trades or
offices, or as a tax on a person’s income, emoluments, profits and the like
(Fisher v. Trinidad).

– Income tax is a tax on (a) actual or presumed income, gain or profit

(gross or net) of a taxpayer, (b) received, accrued or realized during the
taxable year, and (c ) there is no law that exempts (i) such income, gain
or profit, or (ii) the person who derives such income, from income tax.
• WITHHOLDING TAX
– It is not an internal revenue tax but a mode of collecting income tax in
advance on income of the recipient of income thru the payor of income.
[NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.]
– The duty to file and pay income tax is different from the duty to withhold
and remit income tax. Exemption from income tax does not exempt said
taxpayer from withholding income tax!
– There are 2 types of withholding taxes, namely: (1) final withholding tax;
and (2) creditable withholding tax, including expanded withholding tax.
 FEATURES OF INCOME TAX
• It is a direct tax.
• It is a progressive tax, since the tax base increases as
the tax rate increases. It is founded on the ability to
pay of taxpayer.
• Phil adopted the most comprehensive system in
imposing income tax (based on citizenship,
residence, or source of income).
• Phil follows the semi-global or semi-schedular
income tax system (i.e., global, schedular, or mixed
global and schedular tax system).
• It is of American origin. Decisions of U.S. tax
authorities have peculiar and persuasive effects for
the Phil.
 CRITERIA IN IMPOSING INCOME TAX

• Citizenship principle
– For Filipino citizens and domestic corporations,
who are entitled to Philippine government
protection wherever they are situated.
• Residence principle
– For alien individuals and foreign corporations
• Source principle
– For alien individuals and foreign corporations
 INCOME TAX SYSTEMS
• GLOBAL TAX SYSTEM
– Compensation income not subject to FWT
– Business and/or professional income
– Capital gains not subject to FWT
– Passive investment income not subject to FWT
– Other income not subject to FWT
• SCHEDULAR TAX SYSTEM
– Compensation income subject to FWT
– Capital gains subject to FWT
– Passive investment income subject to FWT
– Other income subject to FWT
• The Philippines adopted the semi-global or semi-schedular tax system.
Either the global or schedular system, or both systems, may apply on
income of a taxpayer.
• You apply the schedular tax system only when the income, gain or profit is
subject to FWT.
 PURELY GLOBAL TAX SYSTEM
• 1. The taxable income (regardless of nature) is not subject to FWT;
it may be subject to CWT or no WT applies. In other words, if
income, gain or profit is subject to income tax and no FWT tax
applies thereon, use GLOBAL TAX SYSTEM in computing income tax.
• 2. All taxable incomes above are declared in tax return for the year.
COST OF SALES (representing return of capital) or cost of services is
DEDUCTED FROM GROSS SALES to arrive at GROSS INCOME.
• 3. All allowable deductions (except on compensation income) and
personal/additional exemptions, if qualified, are deducted
therefrom to arrive at NET INCOME.
• 4. Tax rates depend on WHO is the taxpayer -- graduated rates (5%-
32%) for individuals, and fixed rate (30%) for corporations.
• 5. CWT taxes are credited against the income tax due for the period.
 PURELY SCHEDULAR TAX SYSTEM
• 1. Income is subject to income tax under Title II, NIRC;
• 2. Income is listed in Sec 57(A), NIRC among those subject to FWT,
to be withheld by the Phil resident-payor of income and remitted to
BIR within the prescribed period.
• 3. FWT return is filed by payor of income-buyer of goods or service.
However, capital gains tax return for sale of real property subject to
6% CGT is to be filed by the seller/transferor, not by the buyer.
• 4. Payee-recipient of income may be resident or non-resident
person. He does not report or declare such income subjected to
FWT in his tax return, although current regulations require that
such income be reflected in the supplemental information in the tax
returns to be filed.
– RA 1405 (Bank Secrecy Law) prohibits the disclosure or inquiry into the
bank deposits by the government.
 SEMI-GLOBAL OR SEMI-SCHEDULAR
• 1. Incomes are subject to income tax, but one or more
types of income is subject under the global tax system
(e.g., compensation income), while other types of
incomes are subject under the schedular tax system
(e.g., interest income on bank deposits).
• 2. It does not apply to mixed incomes of taxpayer,
where both of the incomes are subject to the purely
global tax system (e.g., compensation income and
professional/business income), or purely schedular tax
system (e.g., interest income on bank deposits and
dividend income from domestic corporation).
 FORMULA
• GLOBAL SYSTEM (CWT/No • SCHEDULAR SYSTEM (FWT)
WT) • Type #1. Gross selling price
• Gross sales/revenue or fair market value,
• Less: Cost of sales/service whichever is higher times
• Gross income applicable tax rate = Tax due
(real property)
• Less: Deductions • Type #2. Gross selling price
• PAE (for individual) less cost or adjusted basis =
• Net taxable income Capital gain times
• Multiplied by applicable applicable tax rate = Tax due
rate (graduated or flat) (shares of dom corp)
• Income tax due • Type #3. Gross income
times applicable rate = Tax
• Less: Creditable WT due (passive inv income;
• Balance income paid to resident or
non-resident person)
 FINAL WITHHOLDING TAX
• Income payment is listed in Sec 57(A), NIRC, as subject to FWT.
• FWT withheld by the payor of income (e.g., 20% FWT on interest income
on bank deposits) represents FULL payment of income tax due on such
income of the recipient.
• Income payee (or recipient of income) does not report income subjected
to FWT in his income tax return, although income is reflected in his
audited financial statements for the year. However, he is not allowed to
claim any tax credit on income subjected to FWT.
• Withholding agent (payor of income) files the withholding tax return,
which includes the FWT deducted from the income of payee, and pays the
tax to the BIR. There is no Certificate of Tax Withheld issued to income
payee.
• No Certificate of Tax Withheld (BIR Form 2307) is attached to the income
tax return of recipient of income because he does not claim any tax credit
in his tax return.
FWT: SEC 57(A), NIRC
• Income tax is imposed or prescribed by:
– Sec. 24(B)(1) – Interests, royalties, prizes & other winnings
– Sec. 24(B)(2) – Cash and/or property dividends
– Sec. 24(C) – CGs from sale of shares not traded in PSE
– Sec. 24(D)(1) – CGs from sale of real property
– Sec. 25(A)(2) – Cash and/or property dividends from DC; interests,
royalties, prizes and other winnings
– Sec. 25(A)(3) – CGs from sale of shares not traded in PSE and real
property
– Sec. 25(B) – NRA not engaged in trade or business in the Phil
– Sec. 25(C) – Alien employed by RHQ and ROHQ
– Sec. 25(D) – Alien employed by OBU
– Sec. 25(E) – Alien employed by petroleum service contractor and sub-
contractor
• FWT is required to be withheld and remitted by payor of income.
 CREDITABLE WITHHOLDING TAX
• Income payment is (a) compensation income subject to WT on
Wages under Chapter XIII (WT on wages), or (b1) one listed, in the
case of ordinary withholding agent, or (b2) even though unlisted, in
the case of Top 20,000 Corporation or Top 5,000 Individual, that is
subject to expanded withholding tax (EWT) under Sec 57(B) [EWT],
NIRC; hence, if income or person is exempt from income tax, NO
WT is required.
• Taxable income is reported in the tax return of taxpayer, together
with other incomes subject to income tax under the global tax
system.
• Income tax is generally computed on the net taxable income of
taxpayer.
• EWT is creditable against the income tax due, provided that it is
evidenced by BIR Form 2307 (Cert of Creditable WT), or other
relevant legal documents (e.g., JV/check).
 NO WITHHOLDING TAX APPLICABLE
• Income is subject to income tax, but no
withholding tax (whether CWT or FWT)
applies thereon.
• Income is reported by the taxpayer in his/its
tax return, together with other incomes
subject to income tax under the global tax
system.
 TYPES OF INCOME TAX
• 1. Graduated income tax on individuals (Secs 24-25);
• 2. Regular corporate income tax on corporations (RCIT) [Sec 27(A)-28(A)];
• 3. Minimum corporate income tax on corporations (MCIT) [Sec 27(E)-Sec(E2)];
• 4. Special income tax on certain corporations (e.g., private educational
• institutions [Sec 27(B)]; foreign currency deposit units [Sec 27(D3)];
international carriers [Sec 28(A3)]; OBU (Sec 28(D4)]; ROHQ (Sec 28(D6); FCDU
(Sec 27(D3) &28(D7b)];
• 5. Capital gains tax on sale or exchange of unlisted shares of stock of a
• domestic corporation classified as a capital asset;
• 6. Capital gains tax on sale or exchange of real property located in the
• Philippines classified as a capital asset;
• 7. Final withholding tax on certain passive investment incomes (e.g., interest,
• dividend, and royalty);
• 8. Final withholding tax on income payments made to non-residents
• (individual or corporation);
• 9. Fringe benefit tax (FBT) [Sec 33];
• 10. Branch profit remittance tax (BPRT) [Sec 28(D5)]; and
• 11. Tax on improperly accumulated earnings (IAET) [Sec 29, NIRC].
 KINDS OF TAXPAYERS
• INDIVIDUAL, including estate and trust
– CITIZEN
• Resident (RC) – Taxable on worldwide income
• Non-resident – immigrant, permanent worker, OFW (seamen)
– ALIEN
• Resident
• Non-resident
– Engaged in trade or business (more than 180 days in the Phil)
– Not engaged in trade or business (180 days or less stay in Phil)
• CORPORATION, including partnership
– DOMESTIC (DC) – Taxable on worldwide income
– FOREIGN
• Resident (e.g., Phil branch of foreign corporation)
• Non-resident
– TEST FOR TAX PURPOSES:
Law of incorporation, NOT ownership
• RULE: All taxpayers are taxed only on income from sources within the
Phil, except RC and DC.
 INCOME TAX ON INDIVIDUAL
• COMPENSATION INCOME • BUSINESS/PROFESSIONAL INCOME
• Gross compensation income • Gross sales/professional fees
• Less: Personal (P50T) and • Less: Cost of sales/service
additional exemptions (P25T) • Gross income
• Tax base • Less: Deductions
• Multiplied by graduated rates of • Personal and additional
income tax (5%-32%) exemptions
• Ordinary income tax • Net taxable income
• Less: Creditable withholding tax • Multiplied by grad tax rates
(CWT) • Income tax due
• Balance due for payment upon • Less: CWT
filing of return
• Balance due (if amount of income
tax due is over P2,000, he may pay
in 2 equal installments on April 15
and July 15) [Sec 56(A2), NIRC]
RA 9504, June 17, 2008
• 1. COMPENSATION INCOME EARNER
– Statutory Minimum Wage (SMW) – rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by BLES of
DOLE (Sec. 22(GG), NIRC)
– Minimum Wage Earner (MWE) – worker in the private sector
paid the statutory minimum wage, or to an employee in the
government sector with compensation income of not more than
the statutory minimum wage in the non-agricultural sector
where he/she is assigned (Sec. 22 (HH), NIRC)
– Minimum wage earners shall be exempt from the payment of
income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential pay and hazard
pay received by such MWE shall likewise be exempt from
income tax (Sec. 24(A)(2), NIRC)
– The following individuals shall not be required to
file an income tax return:
• d. A MWE as defined in Sec 22(HH) of this Code (Sec. 51,
NIRC)

– Except in the case of a MWE, every employer

making payment of wages shall deduct and
withhold upon such wages a tax determined in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the CIR (Sec. 79(A), NIRC).
RR 10-2008, July 8, 2008
• An employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P30,000 (increased to P82,000
beginning 2015 under RA _____), taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard
pay and night shift differential pay, shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt
from income tax and, consequently, from withholding tax.
• MWEs receiving other income, such as income from the conduct of
trade, business or practice of profession, except income subject to final
tax, in addition to compensation income, are not exempted from
income tax on their entire income earned during the year.
• This rule notwithstanding, the SMW, holiday pay, overtime pay, night
shift differential pay, and hazard pay shall still be exempt from
withholding tax.
RR 10-2008, July 8, 2008
• Any reduction or diminution of wages for
purposes of exemption from income tax shall
constitute misrepresentation and therefore,
shall result to the automatic disallowance of
expense; i.e., compensation and benefits
account, on the part of the employer.
• The offenders may be criminally prosecuted
under existing laws.
RMC 91-2010, Dec 2, 2010 0

– If in Dec 2010, the MWE was promoted, her salary

for the month of December will be subject to
income tax if it exceeds her personal and
additional exemptions (Q10).
– If an MWE with a salary of P382/day assigned in
NCR was re-assigned in Laguna with the same
salary in May 2010, his salary in Laguna will be
subject to withholding tax because his daily wage
is above the prevailing minimum wage in Laguna
region (Q14-15).
 RESIDENT CITIZENS EMPLOYED BY
ADB & INTL ORGANIZATIONS
• A. ADB IN THE PHIL
– Sec 45(b), Art XII of the Agreement between ADB and
RP: Only officers and staff of ADB who are not Phil
nationals shall be exempt from Phil income tax
(because exemption is “subject to the power of the
Govt to tax its nationals.”
• B. FOREIGN EMBASSIES IN THE PHIL
– Resident citizens are taxed on worldwide income.
• C. OTHER INTL ORGANIZATIONS IN THE PHIL
– Resident citizens are taxed on worldwide income.
TAXES ON LABOR DISPUTE AWARDS
• RMC 39-2012, Aug 3, 2012
• Backwages, allowances and benefits awarded in a labor
dispute constitute remuneration for services that would
have been performed by the employee in the year when
actually received, or during the period of his dismissal from
the service which was subsequently ruled to be illegal.
• The employee should report as income and pay the
corresponding income taxes by allocating or spreading his
backwages, allowances and benefits thru the years from his
separation up to the final decision of the court awarding
the backwages.
• The backwages, allowances and benefits are subject to
withholding tax on wages.
TAXES ON LABOR DISPUTE AWARDS
• However, when the judgment awarded in a labor dispute is
enforced thru garnishment of debts or having in possession
or control of such credits (e.g., banks or other financial
institutions) would normally release and pay the entire
garnished amount to the employee. As a result, employers
who are mandated to withhold taxes on wages cannot
withhold the appropriate tax due thereon.
• In order to ensure the collection of the appropriate
withholding tax on wages, garnishees of a judgment award
in a labor dispute are constituted as withholding agents
with the duty to withhold tax on wages equivalent to five
percent (5%) of the portion of the judgment award,
representing the taxable backwages, allowances and
benefits.
DE MINIMIS BENEFITS
• RR 10-2008, July 8, 2008
– Facilities and privileges of relatively small value.–
Ordinarily, facilities and privileges (such as
entertainment, medical services, or so-called
“courtesy” discounts on purchases), otherwise known
as “de minimis benefits,” furnished or offered by an
employer to his employees, are not considered as
compensation subject to income tax and
consequently, to withholding tax, if such facilities or
privileges are of relatively small value and are offered
or furnished by the employer merely as means of
promoting the health, goodwill, contentment, or
efficiency of his employees.
DE MINIMIS BENEFITS
• RR 5-2011, Mar 16, 2011
• Monetized unused vacation leave credits of private
employees not exceeding 10 days
• Monetized value of vacation and sick leave credits paid
to government employees
• Medical cash allowance to dependents of employees,
not exceeding P750 per employee per semester or
P125 per month
• Rice subsidy of P1,500 or one sack of 50 kg rice per
month amounting to not more than P1,500
• Uniform and clothing allowance not exceeding P4,000
per annum
DE MINIMIS BENEFITS
• Actual medicine assistance (e.g., medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity
assistance, and routine consultations, not exceeding P10,000 per annum
• Laundry allowance not exceeding P300 per month
• Employees achievement awards (e.g., for length of service or safety
achievement, which must be in the form of tangible personal property
other than cash or gift certificate, with an annual monetary value not
exceeding P10,000 received by employee under an established written
plan which does not discriminate in favor of highly paid employees
• Gifts given during Xmas and major anniversary celebrations not exceeding
P5,000 per employee per annum
• Daily meal allowance for overtime work and night/graveyard shift not
exceeding 25% of basic minimum wage on a per region basis

• All other benefits not included above shall not be considered as “de
minimis” benefits; hence, subject to income tax and withholding tax.
 FILIPINO CITIZENS
• A. RESIDENT CITIZENS
– 2. Self-employed (i.e., engaged in trade or
business in the Philippines or exercises his
profession)
• Allow deductions from gross income
• Use purely global tax system; i.e., compute income tax
based on net taxable income (gross sales less cost of
sales less deductions) times graduated rates = IT due
• Taxable income from sources within and without the
Philippines are subject to income tax.
 NON-RESIDENT CITIZEN
• A. IMMIGRANT
– Qualifies as non-resident citizen from the date of
departure from the Philippines.
• B. PERMANENT EMPLOYEE
– Qualifies as non-resident citizen from the date of
departure from the Philippines.
• C. OVERSEAS CONTRACT WORKER
– Qualifies as non-resident citizen, if his aggregate
period of stay outside the Philippines during the year
exceed 183 days.
 RMO 34-2014
• St Paul College-Makati challenged the constitutionality of RMO before the
Makati RTC and requested for the issuance of injunction. It anchored its
petition on the provisions of the Constitution.
• According to the court, the RMO violates the Constitution. The said
exemption is in recognition of the fact that in the educational system, the
public and private institutions have complementary roles. The court
observed that prior to the issuance of the RMO, non-stock, non-profit
educational institutions did not need to secure a TER in order to enjoy tax
exemption. With the RMO, however, such institutions who fail to secure
the TER will be deemed non-compliant subject to tax and penalties. Thus,
the RMO effectively divests them of their tax-exempt status under the
Constitution. The court declared that the RMO is unconstitutional as it
imposes a prerequisite to the enjoyment by non-stock, non-profit
educational institutions of the privilege granted by the Constitution, which
the Congress cannot diminish by mere legislation. The Commissioner is all
the more powerless to do the same, considering that she only possesses
quasi-legislative functions.
 EXEMPT GOCCs
• EXEMPT GOCC (Sec 27©, NIRC):
– SSS
– GSIS
– PHILHEALTH
– PCSO
– Local Water Districts (RA 10026); RMC 28-2010,
March 22, 2010
• PAGCOR was deleted from Sec 27© in R.A.
9337 (Nov 1, 2005)
 PARTNERSHIPS
• EXEMPT
• General professional partnership (GPP)
• Joint venture undertaking construction activity or energy-related
activities with operating contract with the government
• TAXABLE
• Partnerships, no matter how created or organized

• RULES:
– If taxable, partnership is taxed like a corporation.
– If taxable partnership derives net income during the year, the entire
net income is deemed received by the partners in the year it was
earned by the partnership.
– If GPP adopts itemized deductions during the year, partners must use
itemized deductions during the same year.
 RESIDENT FOREIGN CORPS
• TAXABLE: RCIT & BPRT
– Ordinary branch of a foreign corporation in the Phil: 30% x net income from
sources within the Phil
• PEZA- & SBMA-registered branch of foreign corporation is exempt from
15% BPRT
– Regional operating headquarters (ROHQ): 10% x net income from sources
within the Phil
– Offshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING
Bank Manila v. CIR]: 10% x gross interest income on forex loan to residents
– Foreign international carriers by air or water: 2.5% x GPB
– Foreign contractor or sub-contractor engaged in petroleum operations in the
Phil: 8% x gross income from sources within the Phil

• EXEMPT: Not engaged in trade or business in the Phil

– Representative office
– Regional headquarters (RHQ)
REV REGS NO. 10-2012, June 1, 2012
• JOINT VENTURE, NOT TAXABLE AS CORPORATION
– JV or consortium is formed for the purpose of undertaking
construction projects;
– It involves joining or pooling of resources by licensed local
contractors; i.e., licensed as a general contractor by the Phil
Contractors Accreditation Board (PCAB) of the DTI;
– Local contractors are engaged in construction business; and
– JV itself is likewise licensed as such by PCAB.
• If any requirement above is absent, JV or consortium is a
taxable corporation.
• Tax-exempt JV shall not include those who are mere
suppliers of goods, services or capital to a construction
project.
 JOINT VENTURE
• Lease of properties under common management
• Three sisters borrowed money from their father and bought twenty-four (24) pieces of real
property that they leased to various tenants for over fifteen years and derived rentals
therefrom. They appointed their brother to manage their properties and to collect and
receive rents.
• The court ruled that a taxable partnership was formed. There were series of transactions
where petitioners purchased twenty-four lots, showing that the purpose was not limited to
the conservation of the common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions engaged in for the purpose of gain
was present. The properties were leased out to tenants for several years. Moreover, the
term “corporation” includes organizations that are not necessarily “partnerships” in the
technical sense of the term as well as partnerships, no matter how created or organized. This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of
the standard forms, or in conformity with the usual requirements of the law on partnerships,
in order that one could be deemed constituted for purposes of the tax on corporations
(Evangelista vs. Collector, 102 Phil. 140).
• When a father and son purchased a lot and building, entrusted the administration of the
building to an administrator and divided equally the net income, there is a taxable
partnership (Reyes vs. Commissioner, 24 SCRA 198).
 JOINT VENTURE
• Insurance pool or clearing house
• An insurance pool or clearing house, composed of 41 non-life insurance
corporations, whose role was limited to its principal function of allocating
and distributing the risks arising from the original insurance among the
signatories to the treaty or the members of the pool on their ability to
absorb the risks ceded as well as the performance of incidental functions,
such as records, maintenance, collection and custody of funds, and which
did not insure or assure any risk in its own name, was treated as a
partnership or association subject to tax as a corporation.
• Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when “two or more persons bind themselves to contribute,
money, property, or industry to a common fund, with the intention of
dividing the profits among themselves. Its requisites are mutual
contribution to a common stock, and a joint interest in the profits (AFISCO
Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).
 JOINT VENTURE
• Agreement to manage and operate mine denominated as ‘Power of Attorney’
• Philex Mining Corporation entered into an agreement denominated as Power of
Attorney with Baguio Gold Mining Corporation to manage and operate the latter’s
mining claim. In managing the project, Philex made advances of cash and
property. The mine suffered continuing losses resuling in Philex’s withdrawal as
manager and cessation of mine operations.
• A “Compromise with Dation in Payment” was executed by the parties, where
Baguio Gold admitted its liabilities to Philex and agreed to pay the same.
• Philex wrote off in the books the remaining outstanding indebtedness of Baguio
Gold by charging a portion of the amount to allowances and reserves that were set
up in 1981 and a portion to the 1982 operations. The amount allocated to 1982
was deducted from the 1982 gross income as “loss on settlement of receivables.”
• The BIR disallowed the deduction for bad debt and assessed Philex deficiency
taxes because the advances are Philex’s investment in a partnership with Baguio
Gold for the exploitation and development of the mine.
 JOINT VENTURE
• The totality of the circumstances and the stipulations in the parties’
agreement indubitably lead to the conclusion that a partnership was
formed between the parties.
• First, it does not appear that Baguio Gold was unconditionally obligated to
return the advances made by Philex under the agreement.
• Second, the Tax Court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions to another corporation with
neither security nor collateral or a specific deed evidencing the terms and
conditions of such loans. The parties also did not provide for a specific
maturity date for the advances to become due and demandable, and the
manner of payment was unclear.
• Third, the strongest indication that Philex was a partner is the fact that it
would receive 50% of the net profits as “compensation” under the
agreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187, Apr. 16, 2008).
 SOURCES OF INCOME
• Interest – Interest from sources within Phil and interest on bonds and obligations
of residents, corporate or otherwise
• Dividend – From domestic corporation and from foreign corporation, unless less
than 50% of gross income of foreign corporation for 3 years prior to declaration of
dividends was derived from sources within the Phil, in which case, apply only ratio
of Phil-source income to gross income from all sources
• Services – Place where services are performed, except in case of international air
carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.
Revenues from outbound trips (originating from the Phil) are considered as
income from sources within the Philippines, while revenues from inbound trips are
treated as income from sources outside the Philippines.
• Rentals and royalties – Location or use of property or property right in Phil
• Sale of real property – Located in the Philippines
• Sale of personal property – Located in the Philippines
• Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as
income from sources within the Philippines.
• Other intangible property – Mobilia sequuntur personam (e.g., gain from sale of
shares of stocks of a foreign corporation)
 MINIMUM CORP INCOME TAX
• SALE OF GOODS • SALE OF SERVICES
• Gross Sales • Gross Revenue
• Less: Cost of Sales: • Less: Cost of Service
• Beg. Inventory • consisting of all direct
+ Purchases • costs and expenses
Total available for sale
- Ending inventory
Cost of Sales
• Gross income • Gross income
• Times 2% • Times 2%
• MCIT • MCIT
 INCOME
• INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit from
investment. It covers gain derived from capital, from labor, or from both
combined, including gain from sale or conversion of capital assets.
• Return of capital is exempt from income tax. Capital, labor, or property is
the tree; income is the fruit. Capital is the fund, income is the flow of
fund.
– Subsidy of foreign corporation to Phil representative office is not income.
– Reimbursement of advances made is not income, but receipts/invoices must
be issued by provider of goods or services in the name of the principal.
• To be taxable, there must be income, gain or profit; gain is received,
accrued or realized during the year; and such income or the person who
derives such income is not exempt from income tax under the
Constitution, treaty or law.
– Mere increase in the value of property does not constitute taxable income. It
is not yet realized during the year.
– Transfer of appreciated property to the employee for services rendered is
taxable income.
– MCIT on domestic corporations is constitutional, as it is a tax on gross income.
 TEST IN DETERMINING INCOME
• Realization test
– There must be separation from capital of something of
exchangeable value (e.g., sale of asset)
• Claim of right doctrine
– CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M,
instead of $1,000)
• Economic benefit test
– Stock option given to the employee
• Income from whatever source
– All income not expressly exempted from income,
irrespective of voluntary or involuntary action of taxpayer
in producing income
 NATURE OF INCOME
• COMPENSATION INCOME
– Existence of employer-employee relationship
– No deduction from gross compensation income allowed
• BUSINESS AND/OR PROFESSIONAL INCOME
– NO employer-employee relationship
• CAPITAL GAIN
– Real property in the Phil and shares of stock of domestic corporation
– Other sources of capital gain
• PASSIVE INVESTMENT INCOME
– Interest, dividend, and royalty income
• OTHER INCOME
– Prizes and winnings
– All other income, gain or profit not covered by the above classes
 COMPENSATION INCOME
• Compensation income falling within the meaning of “statutory
minimum wage”(SMW) under R.A. 9504, effective July 6, 2008, as
implemented by Revenue Regulations No. 10-2008 dated July 8,
2008, shall be exempt from income tax and withholding tax.
• Holiday pay, overtime pay, night shift differential pay, and hazard
pay earned by Minimum Wage Earner (MWE) shall likewise be
covered by the above exemption, provided that an employee who
receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, hazard pay
and night shift differential pay shall not enjoy the privilege of being
a MWE and, therefore, his/her entire earnings are not exempt from
income tax and withholding tax.
•
 RMC 58-2014, July 22, 2014
• RMC 58-2014 publishes the full text of Supreme Court
Resolution dated June 25, 2014 on the withholding of tax
from the special allowance for the judiciary as well as the
withholding of corresponding taxes on the following:
– Monthly SAJ of incumbent justices, judges and judiciary
officials with the equivalent rank of a CA justice or RTC
judge;
– Monthly special allowance in an amount equivalent to the
SAJ being received by judiciary officials not included in
item #1; and
– Additional allowances from the surplus of the SAJ Fund
that may be authorized to be given to judiciary officials
and employees who are not direct beneficiaries under RA
9227.
 COMMISSION INCOME
• Commissions paid for marketing services rendered abroad for a Philippine
company is considered foreign-source income. The source of the income
is the property, activity or service that produced the income. Place where
services are rendered determine taxation.
• The fact that recipient of commission income is President and majority
stockholder of the Philippine company does not alter the source of
income. There are only two ways by which the President and other
members of the Board can be granted compensation apart from
reasonable per diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders agree to give it to
them. If none of these conditions are present, commission income cannot
be automatically attributed to petitioner’s position in the company
(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)
• Documents faxed to Philippine company bearing instructions as to sizes,
designs and fabrics to be used in finished products and sample sales
orders relayed to clients abroad are not enough to show services were
performed abroad. Said documents must show that instructions or orders
ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel,
GR No. 153793, Aug 29, 2006).
 ONSHORE AND OFFSHORE INCOME
• Construction and installation works were subcontracted and
done in the Philippines by a Phil corporation; hence, income is
from sources within the Philippines.
• However, some pieces of equipment and supplies for NDC
project and ammonia storage tanks and refrigeration units
were completely designed and engineered in Japan. All
services for the design, fabrication, engineering and
manufacture of materials and equipment under Japanese Yen
portion were made and completed in Japan; hence, exempt
from Phil income tax.
• Service income from turn-key contract on a project in the Phil
is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).
 NATURE OF ASSET
• ORDINARY ASSET • Inventory if on hand at end of
taxable year
• Stock in trade held primarily for
sale or for lease in the course of
trade or business
• Asset used in trade or business,
subject to depreciation
• Real property used in trade or
business

• All other assets, whether or not

• CAPITAL ASSET (Sec 38A) used in trade or business, other
than the above assets
 ORDINARY v. CAPITAL ASSETS
• Who is seller of asset?
– Person is habitually engaged in real estate business
• Presumption or proof when habitually engaged in real
estate business
• 6-transaction rule
– Person is not habitually engaged in real estate business
• Nature of asset sold?
– If it forms part of stock primarily for sale or it is being used
in trade or business, ordinary asset
– Otherwise, capital asset
 ORDINARY v. CAPITAL ASSETS
• Type of capital asset sold?
– If CA is used as principal residence of seller who is a citizen or alien
who resident or non-resident but engaged in trade in the Phil, sale is
exempt from 6% CGT, provided other conditions are present.
– Otherwise, sale is taxable.

• Tax base, tax rate, and gain or loss from sale

– CA located in the Phil – 6% CGT; CA located abroad – Global tax
system. Basis is FMV or GSP, whichever is higher. Seller pays the 6%
CGT, but buyer does not withhold the FWT.
– In OA, tax base is net income and rate of tax depends on whether
seller is individual or corporation; it is subject to EWT provisions.
 ORDINARY v. CAPITAL ASSETS
• Cost or adjusted basis upon subsequent sale
– This is not material, if asset sold is capital asset, because
tax base is GSP/FMV, whichever is higher.
– This is important, if asset sold is ordinary asset, because
tax base is net income.
• Donor’s tax on sale for insufficient consideration
– If CA, no donor’s tax due.
– If OA, there is donor’s tax due per Sec 100, NIRC.
• Filing of tax return
– If CA, within 30 days from date of sale
– If OA, within 45/60 days from close of quarter
 COST OR ADJUSTED BASIS
• COMPUTATION OF GAIN OR LOSS
– Amount realized less basis or adjusted basis = gain or loss
– Amount realized is the sum of money received plus the fair
market value of property (other than money) received
• BASIS OF PROPERTY
– Cost, if acquired by purchase
– FMV at date of acquisition, if property was acquired by
inheritance
– Basis shall be the same as if it would be in the hands of the
donor or last preceding owner by whom it was not acquired by
gift, if property was acquired by donation
– Basis is the amount paid by the transferee for the property, if
acquired for less than adequate consideration (Sec. 40, NIRC).
 EXCHANGE OF PROPERTY
• GENERAL RULE
– The entire gain or loss shall be recognized.
• EXCEPTIONS:
– No gain or loss shall be recognized at the time of
the transaction on tax-free exchanges of property
under Sec 40©(2), NIRC:
– a. Merger or consolidation
– b. Exchange of property for shares of stocks, as a
result of which, he together with four others gains
control of the corporation
 GROSS PHIL BILLINGS
• INTERNATIONAL AIR CARRIER
• On outbound trip: Flight from Phil to foreign destination, income
is treated as from Philippine sources; hence, subject to 2.5% on
GPB.
– Continuous and uninterrupted flight
– If transhipment of passenger in another country on another foreign
airline takes place: GPB tax applies only on aliquot portion of
revenue on Philippine leg (Phil to foreign country)
• On inbound trip: Flight from foreign country to the Phil, income is
treated as from foreign sources; hence, exempt from Phil income
tax
• INTERNATIONAL SHIPPING LINE
• From Phil to final foreign destination: entire income is taxable,
even if transhipment of cargoes took place in another country
• From foreign country to Phil: exempt
RMC 40-2013, May 2, 2013
• RA 10378 (grants income tax exemptions to international
carriers based on reciprocity) passed into law on March 7,
2013, published in Manila Bulletin and Phil Star on March
13, 2013, and took effect on March 29, 2013.
• International carrier doing business in the Phil shall pay
2.5% on its GPB, provided that international carriers may
avail of preferential rate or exemption from tax imposed on
gross revenue derived from the carriage of persons and
their excess baggage on the basis of applicable tax treaty or
international agreement to which the Phil is a signatory or
on the basis of reciprocity such that the intl carrier, whose
home country grants income tax exemption to Phil carriers,
shall likewise be exempt from income tax.
 CAPITAL GAINS
• 3 TYPES OF CAPITAL GAINS
– Capital gain from sale of real property located in the Phil
– Capital gain from sale of shares of stocks of a domestic
corporation
– Other types of capital gains
• Sale of real property located in the Phil
– Seller is not engaged in real estate business
• The law presumes that the seller realizes a profit from sale of
capital asset; hence, despite the loss from sale, seller has to pay
the 6% CGT.
 SALE OF REAL PROPERTY
• The tax base is gross selling price or fair market value, whichever is
higher
• Apply the 6% capital gains tax, if the seller is a resident citizen, an
alien individual (resident or non-resident), or a domestic
corporation.
• If the seller is a foreign corporation (resident or non-resident), the
asset in the Phil is a capital asset, but the gain from sale is subject
to the global tax system of taxation.
• If the real property is located abroad, the gain from sale is exempt
from Phil income tax, unless the seller is a resident citizen or a
domestic corporation.
• If the seller is a resident citizen and capital asset is the principal
residence of the seller, the sale may be exempt from the 6% CGT,
provided that the conditions provided for in the law are complied
with by the seller.
 SALE OF REAL PROPERTY
• Seller is a person engaged in real estate business
– Real property is an ordinary asset; hence, any gain (selling
price less cost or adjusted basis) from sale is taxed under
the global tax system.
– The transaction is subject to the expanded withholding tax,
such tax to be withheld by the buyer of the property and
remitted to BIR. The withholding tax is creditable against
the income tax of the seller.
– The 6% capital gains tax on the transaction is not
applicable thereon.
 SALE OF SHARES OF DOMESTIC
CORPORATION
• Seller is a dealer in securities
– Dealer in securities is a person regularly engaged in the buy and sale
of securities for his own account. He sells property and looks at profits
from sale of shares or securities. A stockbroker is a middleman
between the seller and buyer of stocks or securities. He is a seller of
services and his income is commission.
– Shares are ordinary assets of seller; selling price less cost or adjusted
basis equals gain; gain from sale is subject to global tax system of
income taxation.
– Transaction involving listed shares traded in local stock exchange is
covered by Sec 127(A), NIRC (stock transaction tax), but exempt from
income tax.
 SHARES OF DOMESTIC CORPORATION
• Seller is an investor who is not a dealer in securities
– If shares are listed and traded in a local stock exchange,
apply ½ of 1% stock transaction tax on gross selling price or
gross value in money. Sale is exempt from income tax.
– If shares are listed but not traded in a local stock exchange
(or over-the-counter), or the shares are unlisted, the net
capital gain (selling price less cost or adjusted basis), if any,
is subject to the capital gains tax computed as follows:
• 5% on first P100,000 net capital gain; and
• 10% on any amount in excess of P100,000
SHARES OF DOMESTIC CORPORATION
– CGT return is filed within 30 days from date of sale. Every
sale must be covered by a separate CGT return and the tax
paid upon filing of the return.
– All transactions during the year are consolidated and the
annual return shall be filed not later than April 15 of the
following year, but only one P100,000 is subject to 5% and
the balance of net capital gain for the year is subject to
10%.
– Net capital gain = Total capital gains from sales of shares of
domestic corporation during the year less total capital
losses during the same year.
RR 6-2013, Apr 11, 2013
• SEC 7 of RR 6-2008 is amended as follows:
– Sec. 7 covers sale or exchange of shares (of domestic
corporation) not traded thru a local stock exchange
– FMV – Fair market value of shares of stock sold shall be the
value at the time of sale. In determining value of the shares,
the Adjusted Net Asset Method shall be used, whereby all
assets and liabilities are adjusted to fair market values. The net
of adjusted asset minus the liability values is the indicated value
of the equity. For purposes of this section, the appraised value
of real property at the time of sale shall be the higher of (1)
FMV as determined by CIR; or (2) FMV as shown in the schedule
of values fixed by Provincial/City Assessor; or (3) FMV as
determined by independent Appraiser.
– RR shall take effect immediately.
 OTHER CAPITAL ASSETS
• INDIVIDUAL
– If capital asset is long-term (holding period is over
12 months), only 50% of gain is subject to income
tax, using the global tax system.
– If gain is short-term, 100% of gain is subject to
income tax under the global tax system.
• CORPORATION
– Regardless of holding period, the entire gain or
loss is taxable or deductible.
 INTEREST INCOME
• TYPES OF INTEREST INCOME
– Subject to FWT: Interest income on bank deposits, deposit
substitutes, trust and other similar arrangements
• 20% FWT – peso deposit with bank
• 7.5% FWT – foreign currency deposit with OBU/FCDU
– NOT subject to FWT but subject to global tax system: All other interest
income or financing income not covered above
– Exempt income:
• Long-term deposit or investment (5 years or more) by individuals in the
form of trust funds, deposit substitutes, IMA and other investments
prescribed by BSP
– Taxable income:
• Preferential tax rate – Pre-termination of long-term deposit by individual :
20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5
yrs); and interest on foreign loan (20%)
• Regular tax rate – All other cases; subject to 20% CWT.
 TAX ON OBU/FCDU
• Final tax on interest income from loans to resident
borrower is a direct liability of FCDU
• Failure of local borrower to withhold and remit the
final withholding tax does not exempt OBU/FCDU on
onshore interest income (ING Bank v CIR, 2005).
• The withholding agent-borrower may also be
assessed deficiency withholding tax as penalty for
failure to withhold (RCBC v. CIR, CTA Case 2004).
 DIVIDEND INCOME
• REQUISITES FOR DIVIDEND DECLARATION
– Presence of positive retained earnings
– No prohibition to declare dividend in loan agreement
– Declaration of dividend by Board of Directors

• TYPES OF DIVIDENDS
– Taxable
• Cash dividend
• Property dividend
– Exempt
• Stock dividend (except when there is change in proportionate interest among
stockholders, or there is subsequent cancellation or redemption of shares
declared as stock dividend, which is essentially equivalent to cash dividend)

• NOTE: Liquidating dividend represents distribution of corporate assets to

stockholders. Gain from surrender of shares are treated as ordinary income.
 DIVIDEND INCOME
• Intra-corporate dividend: Exempt from tax
– Corporation paying dividend: Domestic corporation
– Recipient of dividend: Another domestic corporation or resident
foreign corporation
• Dividend paid to non-resident foreign corporation
– Corporation paying dividend: Domestic corporation
– Recipient of dividend
• Foreign head office makes direct investment in Phil company: 15% FWT
on gross dividend income
• Phil branch of foreign corporation makes investment in Phil company:
Exempt from income tax
– Tax-sparing provision
• If country of residence of the foreign corporation does not impose income
tax on dividend paid by a domestic corporation, impose 15% FWT only
 DIVIDEND INCOME
• While there is transfer of the shares of stock/securities to the Borrower pursuant
to the Securities Borrowing and Lending (SBL) Agreement, the Lender retains
certain rights accruing to the shares of stock/securities lent, such as the right to
receive cash, stock dividends or interest which the Borrower is obliged to
manufacture or reimburse to the Lender during the borrowing period. These cash,
stock dividends or interest which the Borrower is required to manufacture or
reimburse to the Lender are otherwise referred to as "Manufactured Dividends or
Benefits". The Lender may likewise retain voting rights over the loaned shares of
stock/securities while in the possession of the Borrower, if mutually agreed upon
by the parties.
• Receipt of the “Manufactured Dividends or Benefits” shall not be a taxable income
of the Lender since it just represents dividends/other benefits that the lender
would have received had the share not been loaned pursuant to SBL agreement.
However, the payment of such amount by the Borrower shall not be a tax
deductible expense. On the other hand, the receipt of cash dividend from the
issuing company by the Borrower or Buyer shall be subject to the provisions of
existing laws (e.g., final withholding tax of 10% on gross dividend paid to a citizen).
 OTHER INCOME
• Income from any source whatever
• The words “income from any source whatever” discloses a legislative
policy to include all income not expressly exempted from the class of
taxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner vs.
BOAC). The words “income from any source whatever” is broad enough to
cover gains contemplated here. These words disclose a legislative policy
to include all income not expressly exempted within the class of taxable
income under our laws, irrespective of the voluntary or involuntary action
of the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31,
1955).
• Any economic benefit to the employee whatever may have been the
mode by which it is effected is taxable. Thus, in stock options, the
difference between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional
compensation income to the employee (Commissioner vs. Smith, 324 U.S. 177).
 EXCLUSIONS
• Life insurance proceeds
• Amount received by insured as return of premium
• Gifts, bequests and devises
• Compensation for injuries or sickness
• Income exempt under treaty
• Retirement benefits, pensions, gratuities
– R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
• Interest income of employee trust fund or accredited retirement plan is exempt
from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)
– Amount received as a consequence of separation because of death, sickness
or other physical disability or for any cause beyond the control of employee
• Miscellaneous items
– Income of foreign government
– Income of government or its political subdivisions from any public utility or
exercise of governmental function
 EXCLUSIONS
• Miscellaneous items
– Prizes and awards
• In recognition of religious, charitable, artistic, literary
achievement, etc. (He did not enter contest and is not required to
render substantial future services)
• Granted to athletes in local and international sports competitions,
sanctioned by their national sports associations
– 13th month pay and other benefits (up to P30,000)
– Gains from sale of long-term (5 years and 1 day) bonds,
debentures and other certificates of indebtedness
– Gains from redemption of shares in mutual fund
 INCOME OF RETIREMENT FUND
• COA alleged that DBP is actual owner of the trust fund and its income because:
– DBP made the contribution to the Fund
– Trustees of the Fund are merely administrators
– DBP employees only have an inchoate right to the Fund
• DBP responded that the Trustees received and collected income and profit from
the Fund and they maintained separate books for that purpose. The principal and
income will not revert to DBP, even if trust is subsequently modified or terminated.

• SC ruled that the beneficiaries of the Fund are the DBP officials and employees
who will retire. It is not always necessary that the beneficiaries should be named
or even be in existence at the time the trust is created in his favor, provided they
are sufficiently certain or identifiable.
• The Salary Loan Program did not terminate the trust to the Fund’s trustee. That
the DBP Board of Directors confirms the approval of the SLP by the Fund’s trustees
does not make the fund property of DBP (DBP v. COA, 2004).
 RMC 39-2014, May 12, 2014
• RMC 39-2014 clarifies the tax treatment of payouts by
employee pension plans
– Sec 60(A), NIRC subjects income of any kind of property
held in trust to income tax.
– Sec 60(B), NIRC exempts from income tax an employee’s
trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all
of the employees. However, any amount actually
distributed to employee to the extent it exceeds the
amount contributed by such employee shall be subject to
income tax.
– Payments of retirement benefits under Sec 32(B)(6)(a),
NIRC are exempt from income tax.
 RMC 39-2014, May 12, 2014
• Non-contributory pension plan
– If employees who do not contribute to the provident fund
receive dividends from en employee pension fund, the
same is subject to income tax.
– If employee resigns from an employer, and he receives
benefits from the provident fund maintained by it that
does not qualify as tax-exempt, the entire amount
received by him is subject to income tax.
• Contributory pension plan
– Dividend distributed to employees is subject to income tax
in the year so distributed.
– Benefits received by a resigning employee is exempt only
to the extent of his contribution to the pension fund.
 DE MINIMIS BENEFITS
• EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND
FILE, OR MANAGERIAL OR SUPERVISORY)
• a. Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year and the monetized value of leave
credits paid to government officials and employees;
• b. Medical cash allowance to dependents of employees not exceeding
P750.00 per employee per semester or P125 per month;
• c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month
amounting to not more than P1,500.00;
• d. Uniforms and clothing allowance not exceeding P4,000.00 per
annum;
• e. Actual yearly medical benefits not exceeding P10,000.00 per
annum;
• f. Laundry allowance not exceeding P300.00 per month;
•
 DE MINIMIS BENEFITS
• g. Employees achievement awards (e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding
P10,000.00 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
• h. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000.00 per employee per annum;
• i. Flowers, fruits, books, or similar items given to employees under special
circumstances (e.g., on account of illness, marriage, birth of a baby, etc.); and
• j. Daily meal allowance for overtime work not exceeding twenty-five
percent (25%) of the basic minimum wage.
• The amount of “de minimis” benefits conforming to the ceiling herein
prescribed shall not be considered in determining the P30,000.00 ceiling of
“other benefits” provided under Sec. 32(b)(7)(e) of the Tax Code. However, if
the employer pays more than the ceiling prescribed by these regulations, the
excess shall be taxable to the employee receiving the benefits only if such
excess is beyond the P30,000.00 ceiling. Any amount given by the employer as
benefits to its employees, whether classified as de minimis benefits or fringe
benefits, shall constitute as deductible expense upon such employer.
 INCOME FROM PROPERTY OF EXEMPT
ASSOCIATION
• The phrase “any of their activities conducted for profit” does not qualify the
word “properties.”-- The phrase “any of their activities conducted for profit” does not
qualify the word “properties.” This makes income from the property of the organization
taxable, regardless of how that income is used – whether for profit or for lofty non-profit
purposes. Thus, the income derived from rentals of real property owned by the Young Men’s
Christian Association of the Philippines, Inc. (YMCA), established as a welfare, education and
charitable non-profit corporation, is subject to income tax. The rental income cannot be
exempted on the solitary but unconvincing ground that said income is not collected for profit
but is merely incidental to its operation. The law does not make a distinction. Where the law
does not distinguish, neither should we distinguish. Because taxes are the lifeblood of the
nation, the Court has always applied the doctrine of strict interpretation in construing tax
exemptions. YMCA is exempt from the payment of property taxes only but not income taxes
because it is not an educational institution devoting its income solely for educational
purposes. The term “educational institution” has acquired a well-known technical meaning.
Under the Education Act of 1982, such term refers to schools. The school system is
synonymous with formal education which “refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system and for
which certification is required in order for the learner to progress through the grades or
move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No.
124043, Oct. 14, 1998).
 INCOME FROM ACTIVITY FOR PROFIT OF NON-
STOCK HOSPITAL
• To be exempt from income tax, Sec 30(e), NIRC requires that a charitable
institution be “organized and operated exclusively” for charitable
purposes. Due to huge amount received from paying patients, hospital is
not operated exclusively for charitable purposes.
• The last paragraph of Sec 30, NIRC provides that if a tax-exempt charitable
institution conducts any activity for profit, regardless of the disposition
made of such income, such activity is not tax exempt (even as its not-for-
profit activities remain exempt from income tax). Such taxable net income
is taxed at 10% pursuant to Sec. 27(B), NIRC.
• However, in view of the BIR ruling in 1990 stating that St Luke’s Hospital is
exempt from income tax, no surcharge and interest shall be imposed on
the deficiency tax (CIR v. St Lukes Med Center, Sept 2012).
 RMC 51-2014, June 11, 2014
• RMC 51-2014 clarifies the inurement prohibition
under Sec 30, NIRC
– Sec 30 enumerates the non-stock, non-profit corporations
or associations exempt from income tax on income
received by them as such.
– “Non-stock” means no part of its income is distributable as
dividends to its members, trustees, or officers and that any
profit obtained as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance
of the purpose(s) for which the corporation was organized.
– “Non-profit” means that no income or asset accrues to or
benefits any member or specific person, with all the net
income or asset devoted to the institution’s purposes and
all its activities conducted not for profit.
 RMC 51-2014, June 11, 2014
– To qualify as a tax-exempt entity, its earnings or assets
shall not inure to the benefit of any of its trustees,
organizers, officers, members or specific person. The
following are considered “inurements” of such nature:
• Payment of compensation, salaries or honorarium to its trustees
or organizers;
• Payment of exorbitant or unreasonable compensation to its
employees;
• Provision of welfare aid and financial assistance to its members.
An organization is not exempt if its principal activity is to receive
and manage funds associated with savings or investment
programs, including pension or retirement programs. This does not
cover a society, order, association or non-stock corporation under
Sec 30©, NIRC providing for payment of life, sickness, accident and
other benefits exclusively for its members or their dependents.
 RMC 51-2014, June 11, 2014
• Donation to any person or entity (except donations made to
other entities formed for the purpose(s) similar to its own);
• Purchase of goods or services for amounts in excess of FMV
of such goods or services from an entity in which one or
more of its trustees, officers or fiduciaries has an interest;
and
• When upon dissolution and satisfaction of all liabilities, its
remaining assets are distributed to its trustees, organizers,
officers or members. Its assets must be dedicated to its
exempt purpose(s). Its constitutive document must
expressly provide that in the event of dissolution, its assets
shall be distributed to one or more entities formed for the
purposes similar to its own or to the Phil government for
public purpose.
 CIR v. Insular Life Assurance Co. Ltd,
G.R. 197192, June 4, 2014
• The 1997 Tax Code does not require registration with
the CDA. No tax provision requires a mutual life
insurance company to register with that agency in
order to enjoy exemption from both the percentage tax
and DST.
• Although RMC 48-91 requires the submission of the
Cert of Registration with the CDA before issuance of
the tax exemption certificate, that provision cannot
prevail over the clear absence of an equivalent
requirement under the Tax Code.
• The provisions of the Cooperative Code of the Phil do
not apply to mutual life insurance companies.
 CIR v. Insular Life Assurance Co. Ltd,
G.R. 197192, June 4, 2014
• Gratia argumenti that registration is mandatory, it cannot
deprive respondent of its tax exemption privilege merely
because it failed to register.
• The Insurance Code does not require registration of mutual
life insurance companies with the CDA.
• While administrative agencies like the BIR may issue
regulations to implement statutes, they are without
authority to limit the scope of the statutes to less than
what it provides, or to extend or expand the statute beyond
its terms, or in any other way modify explicit provisions of
the law. Indeed, a judicial body or an administrative agency
for that matter cannot amend an Act of Congress. In case
of discrepancy between the basic law and an interpretative
or administrative ruling the basic law prevails.
 DEDUCTIONS
• KINDS OF DEDUCTIONS
– Itemized Deductions
– Optional Standard Deductions
– Special Deductions
• ITEMIZED DEDUCTIONS
– Business expenses, incl. research and development
– Interests
– Taxes
– Losses
– Bad debts
– Depreciation
– Depletion
– Charitable contributions
– Contributions to pension trust
– Health or hospitalization premium
 DEDUCTIONS
• BUSINESS EXPENSES
• 1. The expense must be ordinary and necessary;
• 2. Paid or incurred during the taxable year;
• 3. In carrying on or which are directly attributable to the develop-
• ment, management, operation and/or conduct of the trade,
• business or exercise of profession;
• 4. Supported by adequate invoices or receipts;
• 5. Not contrary to law, public policy or morals. Operating expenses
• of an illegal or questionable business are deductible, but
• expenses of an inherently illegal nature, such as bribery and
• protection payments, are not.
• 6. The tax required to be withheld on the amount paid or payable is
• shown to have been paid to the BIR.
•
 DEDUCTIONS
• 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” where 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.

• P9.4 M paid in 1985 for advertising a product was staggering incurred to

“create or maintain some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which the taxpayer is a
member.”
• “Goodwill” generally denotes the benefit arising from connection and
reputation, and efforts to establish reputation are akin to acquisition of
capital assets. Therefore, expenses related thereto are not business
expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr.
24, 2003).
 DEDUCTIONS
• TEST OF REASONABLENESS OF BONUS
• There is no fixed test for determining the reasonableness of a given
bonus as compensation. This depends upon many factors, one of them
being the amount and quality of the services performed with relation to
the business.
• Other tests suggested are payment must be made in good faith, the
character of the taxpayer’s business, the volume and amount of its net
earnings, its locality, the type and extent of the services rendered, the
salary policy of the corporation, the size of the particular business, the
employee’s qualifications and contributions to the business venture, and
general economic conditions.
• However, in determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as a whole.
Ordinarily, no single factor is decisive (C.M. Hoskins & Co., Inc. vs. Commissioner, L-24059,
Nov. 28, 1969; Pacific Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).
• Bonuses that are “out-and-out gifts,” are gratitude and are not deductible.
 DEDUCTIONS
• Legal and accountant’s fees for prior years were not billed in
corresponding years (1984-1985). It was paid by taxpayer in succeeding
year (1986) when it was billed by the lawyer and accountant. Taxpayers
uses accrual method of accounting.
• Accrual of income and expense is permitted when the “all events test” has
been met. This test requires (1) fixing a right to income or liability to pay,
and (2) the availability of reasonably accurate determination of such
income or liability. It does not, however, demand that the amount of
income or liability be known absolutely; it only requires that a taxpayer
has at its disposal the information necessary to compute the amount with
reasonable accuracy, which implies something less than an exact or
completely accurate amount.
• Moreover, deduction takes the nature of tax exemption; it must be
construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporation,
G.R. No. 172231, Feb. 12, 2007).
 DEDUCTIONS
• Entertainment, amusement and recreation expenses are subject to
limitation
– ½% of net sales for sellers of goods
– 1% of net sales for sellers of services
• Club dues for membership in social or athletic clubs to promote business
of corporation paid by the corporation are deductible from gross income.
However, they will be treated as fringe benefits subject to FBT on the part
of the employer. FBT paid by employer is deductible as business expense
of the corporation.
• Rental expenses include leasehold acquired for business purposes and
cost of improvements introduced by lessee to be allocated over the term
of the lease. Realty taxes paid by lessee for business property is part of
rental expenses.
 DEDUCTIONS
• Director’s Fees
– If not officer or employee of corporation, report it as other income
subject to 10% EWT.
– If director is also an officer of the corporation, apply CWT on
compensation income upon the director’s fees, together with salaries.
• Commission Income
– If there is no employer-employee relationship between broker and
payor of income, treat it as business income subject to 10/15% EWT.
– If there is employer-employee relationship, commission income is
treated as part of CWT on compensation income.
 RR 12-2013, July 12, 2013
• Sec. 2.58.5, RR 2-98, as amended by RR 12-2013:
– Any income payment which is otherwise deductible
under the Tax Code shall be allowed as a deduction
from the payor’s gross income only if it is shown that
the income tax required to be withheld has been paid
to the Bureau in acc with Secs. 57 and 58 of the Code.
– No deduction will also be allowed notwithstanding
payments of withholding tax at the time of the audit
investigation or reinvestigation/reconsideration in
cases where no withholding of tax was made in acc
with Secs 57 and 58 of the Code.
RMC 63-2013, Sept 26, 2013

• RR 12-2013 (No WT, no deduction from gross

income) shall apply to audit investigation for
the taxable year 2013.
 DEDUCTIONS
• INTEREST EXPENSE
• 1. There must be a valid and existing indebtedness;
• 2. The indebtedness (unconditional obligation to pay) must be that of the taxpayer;
• 3. The interest must be legally due and stipulated in writing;
• 4. The interest expense must be paid or incurred during the taxable year;
• 5. The indebtedness must be connected with the taxpayer's trade, business or
• exercise of profession;
• 6. The interest payment arrangement must not be between related taxpayers as
• mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code;
• 7. The interest is not expressly disallowed by law to be deducted from the taxpayer’s
• gross income (e.g., interest on indebtedness to finance petroleum operations);
• and
• 8. The amount of interest deducted from gross income does not exceed the limit set
• forth in the law. In other words, the taxpayer’s otherwise allowable deduction for
• interest expense shall be reduced by forty-two percent (42%) of the interest
• income subjected to final tax beginning November 1, 2005 under R.A. 9337, and
• that effective January 1, 2009, the percentage shall be thirty-three percent (33%)
• [Sec. 34(B)(1), NIRC].
 DEDUCTIONS
• Deficiency or delinquency interest
– Deficiency or delinquency interest on unpaid taxes is not
deductible as tax, but taxpayer is allowed to deduct the
same as interest.
• Interest expense on capital expenditures
– At the option of the taxpayer, interest expense on capital
expenditure incurred to acquire property used in trade,
business or exercise of profession may be deducted in full
in the year incurred, or may be treated as capital
expenditure subject to amortization. However, taxpayer
cannot claim interest expense both as deduction and part
of cost of asset.
 DEDUCTIONS
• TAXES

• 1. Payments must be for taxes;

• 2. Taxes are imposed by law upon the taxpayer;
• 3. Taxes must be paid or accrued during the
• taxable year in connection with the
• taxpayer’s trade, business or profession; and
• 4. Taxes are not specifically excluded by law from
• being deducted from the taxpayer’s gross income.
 DEDUCTIONS
• The word “taxes” means taxes proper and no deduction
should be allowed for amounts representing interest,
surcharge or penalties. Interest on taxes is not deductible as
taxes, but as an item of interest.
• Fines and penalties for violations of law are not deductible as
taxes.
• Only the person upon whom taxes are imposed may claim
them as deduction, except: (1) Taxes upon an individual upon
his interest as shareholder of corporation which are paid by
corporation without reimbursement; and (2) Corporate bonds
or other obligations containing a tax-free covenant clause, the
corporation paying the tax or any part of it for someone else
(Sec. 80, RR 2).
 DEDUCTIONS
• DEDUCTIBLE TAXES
– All taxes, national and local, paid or accrued during the year in
connection with trade, business or exercise of profession is deductible.
Examples: professional tax, documentary stamp tax, other percentage
tax, excise tax, real property tax, etc.
• NON-DEDUCTIBLE TAXES
– 1. Philippine income tax
– 2. Foreign income tax
– 3. Estate and donor’s taxes
– 4. Special assessments on real property
– 5. Electric energy consumption tax under B.P. 36.
– 6. VAT
• Foreign income tax paid may be credited against the Phil income tax due,
subject to limitation (e.g., Federal income tax of M Pacquiao).
 DEDUCTIONS
• LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)

• 1. The loss must be that of the taxpayer;

• 2. The loss is actually sustained and charged off within the taxable
• year;
• 3. The loss is evidenced by a closed and completed transaction (fixed by
identifiable events or when insurance recovery was definitely established);
• 4. The loss is not claimed as a deduction for estate tax purposes;
• 5. The loss is not compensated for by insurance or otherwise;
• 6. In the case of an individual, the loss must be connected with his
• trade, business or profession, or incurred in any transaction
• entered into for profit though not connected with his trade,
• business or profession; and
• 7. In the case of casualty loss, it has been reported to the BIR
• within forty-five days from date of occurrence of the loss.
 DEDUCTIONS
• Bad Debt Theory
– Loss from theft or embezzlement occurring in the year and discovered
in another year is deductible in the year in which sustained. However,
where the taxpayer had no means of determining the actual date of
embezzlement, a loss was sustained in the year of discovery.
– The rule is now modified by the “bad debt theory,” which holds that
since embezzlement creates a debtor-creditor relationship, a loss is
deductible as bad debt in the year the right of recovery becomes
worthless.
• NOLCO
– Net operating loss of one year may be carried over and deducted from
gross income for the next succeeding 3 years, provided that no
substantial change in the ownership of the business or enterprise (not
less than 75%) takes place.
 DEDUCTIONS
• BAD DEBTS

• 1. There must be an existing indebtedness due to the taxpayer

• which must be valid and legally demandable;
• 2. The same must be connected with the taxpayer's trade, business
• or practice of profession;
• 3. The same must not be sustained in a transaction entered into
• between related parties enumerated under Sec. 36(B) of the Tax
• Code of 1997;
• 4. The same must be actually charged off the books of accounts of
• the taxpayer as of the end of the taxable year; and
• 5. The same must be actually ascertained to be worthless and
• uncollectible as of the end of the taxable year.
 DEDUCTIONS
• In the case of banks, the BSP thru the Monetary Board shall
ascertain the worthlessness and uncollectibility of the bad
debts and approve in writing the writing off of bad debts from
the books, without prejudice to the CIR’s determi-nation of
the worthless and uncollectibility of debts.
• In no case shall a receivable from an insurance or surety
company be written off from taxpayer’s books and claimed as
bad debt deduction, unless such company has been declared
closed due to insolvency or for any similar reason by the
Insurance Commission.
 DEDUCTIONS
• TAX BENEFIT RULE
– The taxpayer is obliged to declare as taxable income any
subsequent recovery of bad debts in the year they were
collected to the extent of the tax benefit enjoyed by the
taxpayer when the bad debts were written off and claimed
as deduction from gross income.
– It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited
by the BIR. He has to report income to the extent of the
tax benefit derived in the year of deduction.
 DEDUCTIONS
• DEPRECIATION

• 1. The allowance for depreciation must be reasonable;

• 2. It must be for property arising out of its use in the trade or
business, or out of its not being used temporarily during the year;
• 3. It must be charged off during the taxable year from the taxpayer’s
books of accounts;
• 4. Depreciation shall be computed on the basis of historical cost or
adjusted basis. While financial accounting allows computation based
on appraised value, recovery of investment for tax purposes shall be
limited to historical cost.

Depreciation for the year = Cost less salvage value divided by the
estimated useful life (number of years) of the asset
Book value of the asset = Cost or adjusted basis less accumulated
depreciation.
 DEDUCTIONS
• CHARITABLE CONTRIBUTIONS

• 1. The charitable contribution must actually be paid or made to the

Philippine government or any political subdivision thereof exclusively for
public purposes, or any of the accredited domestic corporation or
association specified in the Tax Code;
• 2. It must be made within the taxable year;
• 3. It must not exceed 10% (individual) or 5% (corporation) of the
taxpayer’s taxable income before charitable contributions (whether
deductible in full or subject to limitation);
• 4. It must be evidenced by adequate receipts or records; and
• 5. The amount of charitable contribution of property other than money
shall be based on the acquisition cost of said property (Sec. 34(H), NIRC).
The limitation is imposed to prevent abuse of donating paintings and
other valuable properties and claiming excessive deductions therefrom.
 DEDUCTIONS
• D. Optional Standard Deduction

• Privilege is available only to citizens or resident aliens as well

corporations subject to the regular corporate income tax;
thus, non-resident aliens and non-resident foreign
corporations are not entitled to claim the optional standard
deduction.
• Standard deduction is optional; i.e., unless taxpayer signifies
in his/its return his/its intention to elect this deduction, he/it
is considered as having availed of the itemized deductions;
• Such election when made by the qualified taxpayer is
irrevocable for the year in which made; however, he can
change to itemized deductions in succeeding year(s);
 DEDUCTIONS
• Amount of standard deduction is limited to 40% of taxpayer’s gross
sales or receipts (in the case of an individual) or gross income (in the
case of a corporation). If the individual is on the accrual basis of
accounting for his income and deductions, OSD shall be based on the
gross sales during the year. If he employs the cash basis of accounting,
OSD shall be based on his gross receipts during the year. It should be
noted that cost of sales or cost of services shall not be allowed to be
deducted from gross sales or receipts.
• A general professional partnership (GPP) may claim either the itemized
deductions or in lieu thereof, the OSD allowed to corporations in
claiming the deductions in an amount not exceeding 40% of its gross
income. The net income determined by either the itemized deduction
or OSD from the GPP’s gross income is the distributable net income
from which the share of each share is to be ascertained.
• Proof of actual expenses is not required; hence, he is not also required
to keep books of accounts and records with respect to his deductions
during the year.
•
 DEDUCTIONS
• NON-DEDUCTIBLE ITEMS

• 1. Personal, living or family expenses;

• 2. Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate. This Subsection
shall not apply to intangible drilling and development costs incurred in petroleum
operations, which are deductible under Subsection (G)(1) of Section 34 of this
Code.
• 3. Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
• 4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy
• 5. Losses from sales or exchanges of property between related parties
 PERSONAL EXEMPTIONS
• RA 8424: Jan 1, 1998 • RA 9504: July 6, 2009
• Single and estate or trust – • Individual, whether single,
P20,000 HOF, or married – P50,000
• Head of family – P25,000 • For each child, not to
• Married – P32,000 exceed 4 – P25,000
• For each child, not to • Law exempts income of
exceed 4 – P8,000 minimum wage earners and
increases OSD from 10% to
40% of gross sales or
receipts, for individuals, and
of gross income, for
corporations.
 PERSONAL EXEMPTIONS
• Status-at-the-end-of-the-year rule

• “Status-at-the-end-of-the-year rule” which means that whatever is the

status of the taxpayer at the end of the calendar year shall be used for
purposes of determining his personal and additional exemptions generally
applies.
• A change of status of the taxpayer during the taxable year generally
benefits, but does not prejudice, him. Thus, if a child is born at any time
during the calendar year, even on the last day of the year, the taxpayer is
entitled to claim his child as a dependent entitling him to deduct
additional exemption of P8,000/P25,000 for that year. On the other hand,
if one of his qualified dependent children dies during the year, the law
considers that the child died on the last day of the year; hence, he is
entitled to claim the full amount of additional exemption of
P8,000/P25,000 for the deceased child for the year.
• If he marries at the end of the year, he shall be entitled to personal
exemption of P50,000. It does not matter under present law whether the
individual is single, head of family or married at the end of the year.
 BRANCH PROFIT REMITTANCE TAX
• Branch profit of the Phil. branch used as additional capital
investment of the foreign head office in the Philippine branch,
pursuant to the requirements of the Bangko Sentral ng
Pilipinas, is considered as profit constructively remitted
abroad.
• Branch profit remittance tax (BPRT) applies not only when the
profit is actually remitted but also when such profit is
constructively remitted to the head office abroad (ING Bank, Manila
Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)
• BPRT does not apply on profits remitted by an enterprise
registered with PEZA or SBMA and other freeport zones.
• Tax base of BPRT is the amount of profit earmarked for
remittance to its head office abroad.
 ACCOUNTING METHODS
• Cash method
• Accrual method
– All events test; amounts received in advance are not treated as
revenue of the period in which received but as revenue of future
periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar
24, 1997).
• Installment sales
– Sale on the installment plan
• Initial payments do not exceed 25% of GSP
– Deferred payment sale, not on the installment plan
• Initial payments exceed 25% of GSP
• Percentage of completion (for long-term construction
project)
• Crop year method
 FILING OF TAX RETURN
• SUBSTITUTED FILING OF ITR: No individual income tax return
for the year will be filed by the employee concerned, and the
employer is the one that files the return for him
– Applies only to individuals
– With only one (1) employer
– Who correctly withholds the income tax on compensation income paid
to the employee and remits the same to the BIR
• Substituted filing of return does not apply when the
conditions above are not met, such as when the individual has
(a) two or more employers, (b) mixed incomes, © correct WT
was not deducted from compensation income, etc.
• BIR Form 2316 is filed by employer with BIR not later than Feb
28 of the following year; original copy thereof is given to
employee concerned on Jan 30 of following year.
 FILING OF TAX RETURN
• Individual deriving mixed income, or purely business/
professional income, or other income must file his quarterly
income tax returns (BIR Form 1700 Q) and annual income tax
return (BIR Form 1700 ) as follows:

• Period Due Date for Filing Return

•
• Q1 Return April 15 of same year
• Q2 Return August 15 of same year
• Q3 Return November 15 of same year
• Annual Return April 15 of the following year
•
 FILING OF TAX RETURN
• A domestic corporation and resident foreign corporation shall file
quarterly corporate income tax return (BIR Form 1702 Q) and annual
corporate income tax return (BIR Form 1702 as follows:

• Q1 Return May 31 of same year

• Q2 Return August 31 of same year
• Q3 Return November 30 of same year
• Annual Return April 15 of the following year (if on calendar
year), or 15th day of the fourth month following
the close of the fiscal year (if on fiscal year).

• Computation of the quarterly and annual tax returns of individuals (except those
receiving purely compensation income) and corporations shall be made on the
cumulative basis; i.e., gross income and deductions are consolidated and the
income tax liability is computed on the consolidated net income, and the income
taxes paid for the preceding quarter(s) are credited against the consolidated
income tax due.
•
 WITHHOLDING TAX
• An income payment is subject to the expanded withholding
tax, if the following conditions concur:
• a. An expense is paid or payable by the taxpayer, which is
income to the recipient thereof subject to income tax;
• b. The income is one of the income payments listed in the
regulations that is subject to withholding tax, unless the
corporation is designated as Top 20,000 Corporation or Top
5,000 Individual; and
• c. The income recipient and the payor-withholding agent are
residents of the Philippines.
 WITHHOLDING TAX
• EXEMPT FROM EWT
• 1. National government and its instrumentalities, including provincial, city or
municipal governments and barangays, except government-owned or
controlled corporations;
• 2. Persons enjoying exemption from payment of income taxes pursuant to the
provisions of any law, general or special, such as but not limited to the
following:
• a. Sales of real property by a corporation which is registered with and certified
by HLURB or HUDCC as engaged in socialized housing project where the selling
price of the house and lot or only the lot does not exceed P180,000 in Metro
Manila and other highly urbanized areas and P150,000 in other areas;
• b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption
from income tax under E.O. 226, R.A. 7916, and R.A. 7227;
• c. Corporations which are exempt from income tax under Section 30 of the Tax
Code, such as GSIS, SSS, PHIC, and PCSO;
• d. General professional partnerships; and
• e. Joint ventures or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other
energy operations
• f. International carriers (by air or water) subject to 2.5% Gross Phil Billings
 WITHHOLDING TAX
• 1. Professional fees for services rendered by individuals, incl. real estate service
practitioners; and
• professional entertainers and athletes, and directors:
– If gross income for current year exceeds P720,000 - 15%
– If gross income for current year does not P720,000 - 10%
• 2. If recipient of professional fees, talent fees, etc. is
• a juridical person:
– If gross income for current year exceeds P720,000 - 15%
– If gross income for current year does not P720,000 - 10%
• 3. Rental income
– Real properties - 5%
– Personal properties of P10,000 per payment; P10,000
– shall not apply when accumulated rental to same
– lessor exceeds or is reasonably expected to exceed
– P10,000 within a year - 5%
– Poles, satellites and transmission facilities - 5%
– Billboards - 5%
•
 WITHHOLDING TAX
• 4. Gross payments to resident individuals and corporate cine-
• matographic film owners, lessors, or distributors - 5%
• 5. Gross payments to contractors - 2%
• 6. Income distribution to beneficiaries - 15%
• 7. Income payments to certain brokers and agents - 10%
• 8. Income payments to partners of general professional
• partnerships:
• If gross income for current year exceeds P720,000 - 15%
• If otherwise - 10%
• 9. Professional fees paid to medical practitioners
– If gross income for current year exceeds P720,000 - 15%
– If otherwise - 10%
• 10. Gross additional payments to government personnel from
• importers, shipping and airline companies, or their
• agents - 15%
• 11. One-half of gross amounts paid by any credit card
• company in the Philippines - 1%
 WITHHOLDING TAX
• 12. Income payments made by any Top 20,000 Corp or Top
• 5,000 Individual:
• Supplier of goods - 1%
• Supplier of services - 2%
• 13. Income payments made by government to its local/resident
• supplier of goods and services other than those covered
• by other rates of withholding taxes
• Supplier of goods - 1%
• Supplier of services - 2%
• 14. Commissions of independent and exclusive distributors,
• and marketing agents of companies - 10%
• 15. Tolling fees paid to refineries - 5%
• 16. Payments made by pre-need companies to funeral parlor - 1%
• 17. Payments made to embalmers - 1%
• 18. Income payments made to suppliers of agricultural products - 1%
• 19. Income payments on purchases of minerals, mineral pro-
• ducts and quarry resources - 10%
• 20. MERALCO refund to customers
• With active contracts - 25%
• With terminated contracts - 32%
•
 REFUND
• Requisites of claim for refund are:
– Claim was filed within 2 years under Sec. 230, NIRC;
– Income upon which taxes were withheld were included in the return of
the recipient; and
– Fact of withholding is established by a copy of statement (BIR Form
1743.1) duly issued by payor (withholding agent) to payee, showing
amount paid and amount of tax withheld (RR 6-85).
• CTA found above requisites were satisfied. Findings of facts of CTA are entitled
to great weight and will not be disturbed on appeal, unless it is shown that the
lower court committed gross error in the appreciation of facts.
• Failure of respondent to indicate its option in its annual ITR to avail itself of
either tax refund or tax credit is not fatal to its claim for refund.
– Sec. 76, NIRC offers two options: refund or tax credit. The options are
alternative and the choice of one precludes the other. However, in Philam
Asset Mgt v. CIR, this Court ruled that failure to indicate a choice will not
bar a valid request for refund, should this option be chosen by the
taxpayer later on. The requirement is only for the purpose of easing tax
administration, particularly the self-assessment and collection aspects.
 REFUND
• Tax refunds or credits are not founded principally on
legislative grace but on the legal principle which underlies all
quasi-contracts, abhorring a person’s unjust enrichment at the
expense of another. The dynamic of erroneous payment of tax
fits to a tee the prototypic quasi-contract, which covers not
only mistake in fact but also mistake in law.
• The government is not exempt from the application of solutio
indebiti. Indeed, the taxpayer expects fair dealing from the
government, and the latter has the duty to refund without
any unreasonable delay what it has erroneously collected (CIR v.
Fortune Tobacco Corp, GR 167274, July 21, 2008).
REV REGS NO. 1-2014, Dec 17, 2013
• The submission of the prescribed alphalist where the income
payments and taxes withheld are lumped into one single amount
shall not be allowed. The submission thereof, including any alphalist
that does not conform with the prescribed format, thereby
resulting to the unsuccessful uploading into the BIR system, shall be
deemed as not received and shall not qualify as a deductible
expense for income tax purposes.
• The manual submission of alpha lists containing less than 10
employees/payees by withholding agents under BIR Form 1604CF
and 1604E shall be immediately discontinued beginning Jan 31,
2014 and March 1, 2014, respectively, and every year thereafter.

• This regulation shall take effect 15 days after publication in leading

newspaper of general circulation.
REV REGS NO. 4-2014, March 20, 2014
• RR 4-2014, Mar 20, 2014 -- Prescribes the policies and guidelines in the
monitoring of service fees of professionals
– Self-employed professionals shall register and pay the ARF with the RDO/LTDO
having jurisdiction. In addition, they shall submit an affidavit indicating the
rates, manner of billings and the factors they consider in determining their
service fees upon registration and every year thereafter on or before Jan 31.
– Self-employed professionals are obligated to register their books of accounts
and official appointment books of their practice of profession before using the
same. The OAB shall contain only the names of client and date/time of
meeting. They shall likewise register their invoices and receipts (VAT or NV)
before using them.
– In cases when no professional fees are charged by professionals, a BIR receipt,
duly acknowledged by the client, shall be issued showing a discount of 100%
as substantiation of the “pro-bono” service.
• RMC 32-2014, May 5, 2014 – Extends the period to submit the required
affidavit and official appointment books under RR 4-2014 from April 6,
2014 to May 6, 2014, to give ample time for all parties.
 RMC 8-2014, Feb 6, 2014
• RMC 8-2014 requires the presentation of Tax Exemption
Certificate or Ruling by exempt individuals and entities
– Secs 57-59 and 78-83, NIRC require certain items of income to
be subject to withholding taxes. However, certain persons are
exempt from income tax and consequently, withholding taxes.
– Withholding agents shall require all taxpayers claiming such
exemption to provide a copy of a valid, current and subsisting
tax exemption certificate (TEC) or ruling before payment of the
related income. Such TEC or ruling must explicitly recognize the
grant of tax exemption as well as the corresponding exemption
from imposition of withholding tax.
– Failure of taxpayer to present such TEC or ruling shall subject
him to the payment of appropriate WT due on the transaction,
and failure of withholding agent to withhold shall cause the
imposition of penalties.
• END OF PRESENTATION

• Atty. Vic C. Mamalateo

• Mobile: 0918-9037436
• Email: [email protected]
• [email protected]