Taxation 1 1

8/8/2019 Taxation 1 1

1/44

TAXATION

General Principles

What is taxation? Taxation is the process or means by which the sovereign throughits law making body raises income to defray the necessary expenses of thegovernment. It is the act of levying tax.

From the definition itself, we can glean some of the inherent characteristic of tax.1. It is an enforced contribution. Contributions mainly come from persons andproperties under the sovereign which has jurisdiction over such. The degree of enforcement depends upon the tax system and the resources available to the taxadministration.2. It is generally payable in money.3. It is proportionate in character. Sec. 28(1) of the 1987 Philippine Constitutionprovides that The rule of taxation shall be uniform and equitable. The Congressshall evolve a progressive system of taxation.4. It is levied on persons, property, or the exercise of a right or privilege. Fromsuch characteristic, we become aware of the different kind of taxes to whom tax isbeing levied upon: personal, property and excise or privilege tax.5. It is levied by the State, which has jurisdiction over the subject or object of taxation.6. It is legislative in character.7. It is commonly required to be paid at regular periods or interval.

Tax is a proportionate enforced contribution levied by the government through itslaw making body upon persons, property and privileges for the defrayment of government expenses and public purpose.

Classification of taxes:

According to what to tax:1. Personal CTC or poll tax2. Property Real property tax3. Excise taxes Income tax

Tax can also be classified in some other Review them

Sound tax system (FAT)

Also included in your Political Law

Basically our tax system in some degree allows a voluntary or self-assessmentmethod, such as the degree of enforcement is somehow reduced causing the taxadministration to become less efficient or effective. Power and water utilities on theother hand strictly enforce measurement and does not allow self-assessment suchas a taxpayer is more inclined to pay the correct utility bill than the correct tax.

INCOME TAX:

8/8/2019 Taxation 1 1

2/44

Items of Gross Income (Sec. 32 NIRC)Less:

1. Exempt activities of exempt corporation/entities (Sec. 30)2. Exclusion from Gross Income (Sec. 32 (B))

Equals:Items of taxable gross income

Less:1. Allowable itemized deductions against business income/ capital gains or

other types of income (Sec. 34 (A) to (K))2. 40% Optional Standard Deductions in lieu of itemized deductions3. Premium payments on helath and/or hospitalization insurance (For

individual only Sec. 34 (M))Equals:

Income after deductionsLess:

Personal exemptions (For individuals only Sec. 35 as amended)Equals:

Taxable income (Sec. 31)Multiply by:

1. For individual tax rates as per table, (Normal tax rate) normal rate from5% to 32%. [Sec. (24)-(26)]

2. Corporate tax rate of 30% but not be lower than the Minimum CorporateIncome Tax (MCIT- 2% of Gross Income) { Sec. 27-29 [R.A. No. 9337]}

Tax Due

Sectionof theNIRC

Taxable Persons Taxable Transactions TaxableBase/Normal TaxRate

23 (A)24 (A)(1)a,c

a. Individualresident citizen

1. Compensation, business ormixed including prizesamounting to P10,000 or less,and transfer of ownership of asoftware copyright (RMC 44-2005)

See taxable incometable for individual.

Taxable income(Normal Tax rate)-taxable within andwithout thePhilippines

22 (E)

42

b. Non-residentcitizen who:1. Establishes tothe satisfaction of the CIR the fact of his physicalpresence abroadwith a definiteintention to residetherein; or2. Leaves the Phil.During the taxableyear to resideabroad, either as

Gross income from sourceswithin the Philippines:1. Interest derived fromobligations of resident,corporate or otherwise;2. Dividends from sourceswithin the Philippines

a. From domesticcorporations

b. From foreigncorporation, if 50% or more of the gross income were derivedfrom sources within the Phil., if less than 50%, then only the

Normal Tax Rate. Taxable for incomederived within thePhil.

Taxable income(Normal tax rate)-taxable only onincome within thePhilippines

8/8/2019 Taxation 1 1

3/44

immigrant or foremployment on apermanent basis;or3. Works andderives incomefrom abroadwhoseemploymentrequires him to bephysically presentabroad most of thetime during thetaxable year; or4. Has beenpreviouslyconsidered as non-resident citizenand who arrives inthe Phil. At anytime during thetaxable year toresidepermanently in thePhil. Shall betreated as non-resident citizen forthe taxable year inwhich he arrives inthe Phil. Withrespect to hisincome derivedfrom sourcesabroad until thedate of arrival; or5. Works andderives incomefrom abroad as anoverseas contractworker or is aseaman and amember of thecomplement of avessel engagedexclusively ininternational trade

amount which bears the sameratio to such dividends as thegross income derived fromsources within the Philippinesbears to its gross income fromall sources.3. Services- Compensation forlabor or personal servicesperformed in the Phil4. Rentals and Royalties- fromproperty located in the Phil. Orfrom any interest in suchproperty, including:

a. The use of right orprivilege to use in the Phil. anycopyright, patent, design ormodel plan, secret formula orprocess, goodwill, trademark,tradebrand, or other propertyright

b. The use of or the right touse in the Phil. any industrial,commercial or scientificequipment;

c. The supply of scientific,technical, industrial orcommercial knowledge orinformation;

d. The supply of anyassistance that is ancillary andsubsidiary to, and is furnishedas a means of enabling theapplication or enjoyment of,any such property or right;

e. The supply of servicesby a nonresident persons or hisemployee in connection withthe use of property or rightsbelonging to , or theinstallation or operation of anybrand, machinery or otherapparatus purchased fromsuch nonresident person;

f. Technical advise,assistance or servicesrendered in connection withtechnical management oradministration of any scientific,industrial or commercialundertaking, venture, project

8/8/2019 Taxation 1 1

4/44

or scheme; andg. The use of or the right to

use:i. Motion picture films

ii. Films or video tapesfor use in connection withtelevision;

iii. Tapes for use inconnection with radiobroadcasting5. Sale of real property-gains,profits and income from thesale of real property located inthe Phil. and;6. Sale of personal property-gains, profits and income fromthe sale of personal property.

23(C)22 (F)

c. Resident alien Resident but not a citizen Taxable incomederived within.

24 (A)(1)c

22 (G)22 (A)

22 (N)

d. Non-residentalien engaged intrade or businessin the Phil (stayedfro an aggregateperiod of morethan 180 daysduring anycalendar year.)

The term non-resident alienmeans an individual whoseresidence is not within thePhilippines and who is not acitizen thereof.A person is an individual, atrust, estate or corporation.

Taxpayer means a personsubject to tax imposed by theNIRC.Husband and wife (whethercitizen or alien) shall compute(compute is different from file)their individual income taxseparately based on theirindividual taxable income. If unidentifiable, divide equally.

Taxable incomederived within.

25 (A) 128 (A) 4

Non residentscitizen and alien

Any income from transactionswith offshore banking units(OBUs)

Exempt fromincome tax

24 (B)(1)

RMC 44-2005

a. Individualresident citizen

b. Nonresidentcitizenc. Resident aliend. Nonresidentalien engaged intrade or businessin the Phil.

1. Interest from any currencybank deposit and yield or any

other monetary benefit fromdeposit substitutes and fromtrust funds and similararrangements2. Royalties/Payments madedue to acquisition of copyrightright (RMC 44-2005)3. Prizes (except Phil. CharitySweepstakes and Lotto

20% FinalWithholding Tax

(FWT) RR No. 2-98Gross incomederived within

8/8/2019 Taxation 1 1

5/44

winnings)

Royalties on books as well asother literary works andmusical compositions

Individual taxpayer(except anonresidentindividual)

Interest income from adepository bank under theexpanded foreign currencydeposit system

7.5% FWTGross incomederived withinRR No. 2-98

Interest income from long termdeposit or investment in theform of savings, common orindividual trust funds, depositsubstitutes, investmentmanagement accounts andother investments evidencedby certificates prescribed bythe Bangko Sentral ng Pilipinas(BSP)

Exempt from Sec.24 (B)(1)

a. Individualresident citizenb. Nonresidentcitizenc. Resident liend. Nonresidentalien engaged intrade or businessin the Phil.

If the holder of the certificatepre-terminate the deposit orinvestment before the 5 th year,FWT shall be imposed on theentire income and shall bebased on the remainingmaturity thereof:

a. 4 years to less than 5years

b. 3 years to less than 4years

c. less than 3 years

Entire Grossincome derivedwithin

RR No. 2-98

5% FWT12% FWT20% FWT

24 (B)2

25 (A)(2)

Citizen andresident alien

Nonresident alienengaged in trade

a. Cash and/or PropertyDividends actually orconstructively received from adomestic corporation or from a

joint stock company insuranceor mutual fund company and aregional operatingheadquarters of a multi-national company

b. Share in the distributivenet income after tax of apartnership (except a generalprofessional partnership)c. Share in the net incomeafter tax of an association, a

joint account or a joint ventureor consortium taxable as acorporation

10% FWTGross incomederived within(actually orconstructivelyreceived)

8/8/2019 Taxation 1 1

6/44

or business in thePhil.

20% FWT Grossincome withinRR No. 2-98

24 (C)

25 (A)(3)25 (B)

Citizen andresident alien

Non resident alien

Sale or barter or exchange orother disposition of shares of stock in a domestic corporation(except shares sold ordisposed of through the stockexchange taxable under Sec.127)

RMC 73-2007 provides theguidelines in the treatment of block sale of shares of stockdisposed in the stock exchange

5% Final Tax onNet capital gainsrealized not overP100,00010% Final Tax onNet capital gains inexcess of P100,000

24 (D) Individualsincluding estatesand trusts

Nonresident aliens

Presumptive capital gain fromthe sale (including pacto deretro and other forms of conditional sales) exchange orother disposition of realproperty classified as capitalasset

If sold to the government of any of its political subdivisionsor agencies or to governmentowned or controlledcorporations (GOCCs)

Sale or disposition of theprincipal residence theproceeds of which is fullyutilized in acquiring orconstructing a new andprincipal residence within 18calendar months from the dateof sale or residence (See RR.Nos. 13-99 and 14-2000, RMCNo. 45-2002)Conditions of tax exemption:1. Historical cost of adjustedbasis shall be carried over tothe new principal residence;2. The CIR is notified of theintention to avail such taxexemption within 30 days fromthe date of sale or disposition;3. Any portion of the proceeds

6% FWT on Grossselling price orcurrent fair marketvalue asdetermined by theCIR (RR Nos. 2-98,17-2003)

6%FWT on Grossselling price orcurrent fair marketvalue asdetermined by theCIR or Normal Taxat the option of thetaxpayer

Exempt from FWT

8/8/2019 Taxation 1 1

7/44

not utilized shall be subjectedto final capital gains tax;4. Tax exemption can beavailed of only once every 10years.

Under Revenue Audit Memorandum Order (RAMO)No. 1-2001 dated February 15,2001, the valuation of improvements for tax purposesare determined as follows:

a. Total sellingprice/consideration per deed of sale xxx- land and improvementxxxValue of improvementxxx

The value of improvementarrived at shall not be lowerthan the fair market value(FMV) appearing in the latesttax declaration, covering saidimprovement, at the time of the aforesaidtransaction/transfer.

b. The FMV per latestdeclaration at the time of saleor disposition duly certified bythe City/Municipal Assessorshall be used. No adjustmentsshall be added on the saidvalue, provided that the taxdeclaration bears the upgradedFMV of the said propertypursuant to Sec. 219 of R.A.No. 7160, otherwise known asthe Local Government Code of 1991 and the last paragraphof the Local AssessmentRegulations No. 1-92 datedOctober 6,1992.

In case the Tax Declarationbeing presented was issuedthree (3) or more years prior to

8/8/2019 Taxation 1 1

8/44

the date of sale or dispositionof the real property, theseller/transferor shall berequired to submit acertification from the City/Municipal Assessor whether ornot the same is still the latesttax declaration covering thesaid real property, otherwise,the taxpayer shall secure itslatest tax declaration and shallsubmit a copy thereof, dulycertified by the said Assessor.

RR No. 6-2001

Nonresident alienengaged in tradeor business in thePhil.

Gross income from all sourceswithin the Phil. derived by non-resident cinematographic filmowners, lessors or distributors.

The term cinematographicfilm includes motion picturefilms, tapes, discs and othersuch similar or relatedproducts.

25% FWT on Grossincome

Sec. 33(NIRC)

RR 4-2002

Any employer,whether anindividual or acorporation

The tax imposedunder Sec. 33 of the Tax Code shallbe treated as afinal income tax onthe employee thatshall be withheldand paid by theemployer.

The grossed-upvalue of the fringebenefit shall bedetermined bydividing the actualmonetary value of the fringe benefitby the differencebetween 100%and the applicablerates of incometax under Sec. 25(B), (C), (D) and

Fringe benefit furnished orgranted to the employee(except rank and fileemployees) by the employer(unless the fringe benefit Irequired by the nature of, ornecessary to the trade,business or profession of theemployer, or when the fringebenefit is for the convenienceof the employer).

The term fringe benefitmeans any good, service orother benefit furnished orgranted in cash or in kind byan employer to an individualemployee (except rank and fileemployees) such as but notlimited to the following:

(1) Housing;(2) Expense account;(3) Vehicle of any kind;(4) Household personnel,

such as maid, driver andothers;

(5) Interest on loans at less

32% FWT onGrossed-upMonetary Value of Fringe Benefit

RR Nos. 2-98 and3-98

Fringe benefitfurnished toemployees andtaxable under Sec.25 (B), (C), (D), and(E) shall be taxedat the applicablerates imposedthereat.

8/8/2019 Taxation 1 1

9/44

(E).

The grossed upmonetary valueshall bedetermined bydividing the actualmonetary value of the fringe benefitby 68% effective

Jan. 1, 2000.

Any amount givenby the employeras benefits to itsemployees,whether classifiedas de minimisbenefits or fringebenefits, shallconstitute asdeductibleexpense uponsuch employer.

than market rate to theextent of the differencebetween the market rateand actual rate granted;

(6) Membership fees, duesand other expensesborne by the employerfor the employee insocial and athletic clubsor other similarorganizations;

(7) Expenses for foreigntravel;

(8) Housing and vacationexpenses;

(9) Educational assistanceto the employee or hisdependents;

(10) Life or healthinsurance or other non-life insurance premiumsor similar amounts inexcess of what the lawallows;

The exemption of any fringebenefit from the fringe benefittax shall not be interpreted tomean exemption from anyother income tax imposedunder the Tax Code or anyother existing law. Thus if thefringe benefits is exemptedfrom the fringe benefits tax,the same, may however, stillform part of the employeesgross compensation incomewhich is subject to income tax,hence, likewise subject to awithholding tax oncompensation incomepayment.

RR No. 8-2000

RR No.10-2008

The amount of theDE MINIMISconforming to theceiling hereinprescribed shallnot be consideredin determining thePhp30,000 ceiling

Fringe Benefits Not Taxable-(1) Fringe benefits which

are exempted from taxunder special laws;

(2) Contributions of theemployer for thebenefit of theemployees to

Not subject toincome tax

Not subject towithholding tax oncompensation

8/8/2019 Taxation 1 1

10/44

of Other Benefitsprovided underSec. 32 (B) (7) (e)of the Tax Code.Provided that, theexcess of the deminimis benefitsover theirrespective ceilingsprescribed by RRNo. 10-2008 shallbe considered aspart of otherbenefits and theemployeereceiving it will besubject to tax onlyon the excess overthe Php30,000.00ceiling. Providedfurther, thatMinimum WageEarners receivingother benefitsexceedingPhp30,000 limitshall be taxable onthe excessbenefits, as well ason his salaries,wages andallowances, justlike an employeereceivingcompensationincome beyondthe StatutoryMinimum Wage.

Under RR. No. 10-2000 , amounts of vacationallowances or sickleave creditswhich are paid toan employeeconstitute

Thus the salary of an employee on

retirement, insurance,and hospitalizationbenefits plans;

(3) Benefits given to therank and fileemployees whethergranted under acollective bargainingagreement or not; and

(4) De minimis benefits asdefined in the rulesand regulations to bepromulgated by theSec. of Finance uponrecommendation of the CIR.

(5) If the grant of fringebenefits to theemployee is requiredby the nature of, ornecessary to the trade,business or professionsof the employer;

(6) If the grant of thefringe benefit is for theconvenience of theemployer

The term rank and fileemployees shall meanemployees who are holdingneither managerial norsupervisory position as definedunder existing provisions of theLabor Code of the Philippines,as amended (Sec. 22 (AA) of the Tax Code).DE MINIMIS benefits are notconsidered as compensationsubject to income tax andconsequently to withholdingtax if such facilities orprivileges (such asentertainment, medicalservices, or so-calledcourtesy discounts onpurchases) are relatively smallvalue and are offered orfurnished by the employermerely as means of promoting

8/8/2019 Taxation 1 1

11/44

vacation or on sickleave that is paidnotwithstandinghis absence fromwork constitutestaxablecompensation.

However, themonetized value of unutilized vacationleave credits of 10days or less whichare paid to privateemployees notexceeding 10 daysduring the yearand the monetizedvalue of leavecredits paid togovernmentofficials andemployees shallbe subject toincome tax andconsequently towithholding tax(RR No. 10-2000).

the health, goodwill,contentment, or efficiency of his employees.

The following shall beconsidered as DE MINIMISbenefits not subject to incometax hence not subject towithholding tax oncompensation income of bothmanagerial and rank and fileemployees (RR No. 10-2008):1. Monetized unused vacationleave credits of privateemployees not exceeding 10days during the year and themonetized value of leavecredits paid to governmentofficials and employees;2. Medical cash allowance todependents of employees notexceeding Php750.00 persemester or Php125 permonth;3. Rice subsidy of Php1,500 orone (1) sack of 50 kg. rice permonth amounting to not morethan Php1,500.00;4. Uniforms and clothingallowance not exceedingPhp4,000.00 per annum;5. Actual yearly medicalbenefits not exceedingPhp10,000.00 per annum;6. Laundry allowance notexceeding Php300 per month;7. Employee achievementawards, e.g., for length of service or safety achievementwhich must be in the form of atangible personal propertyother than cash or giftcertificate, with an annualmonetary value not exceedingPhp10,000.00 received by anemployee under an establishedwritten plan which does notdiscriminate in favor of highlypaid employees;8. Gifts given during Christmas

8/8/2019 Taxation 1 1

12/44

and major anniversarycelebrations not exceedingPhp5,000.00 per employee perannum;9. Flowers, fruits, books orsimilar items given toemployees under specialcircumstances, e.g. on accountof illness, marriage, birth of ababy, etc. and10. Daily meal allowance forovertime work not exceeding25% of the basic minimumwage.

Allowances andbenefits granted tomembers of theAFP that areexcluded fromgross income andtherefore exemptfrom income tax(RMC No. 23-2001):a. Longevity Payb. Mandatoryallowances- Costof LivingAllowances,PersonnelEconomic Relief Allowance, andHazardousAllowancec. Collateral Pay-Specialist Pay,Combat Pay,Flying Pay, AirMechanics Pay,Sea Duty Pay,Hazardous DutyPay, InstructorsDuty Pay,Parachutists Pay,Hardship Pay;d. CollateralAllowances-Special ClothingAllowance, ColdWinters Clothing

Other items not subject toincome tax andconsequently towithholding tax (RR 8-2000):1. Representation andtransportation allowance(RATA) granted to publicofficers and employees underthe General Appropriations Actand the Personnel EconomicRelief Allowance whichessentially constitutesreimbursement for expensesincurred to the performance of government personnel's officialduties shall not be subject toincome tax and consequentlyto withholding tax.2. Pursuant to E.O. 219 whichtoo effect on Jan. 1, 2000,Additional CompensationAllowance (ACA) given togovernment personnel shallnot be subject to withholdingtax pending its formalintegration into the basic pay.Consequently and effective forthe taxable year 2000, ACAshall be classified as part of the "Other Benefits" under Sec.32 (B)(7)(e) of the Tax Codewhich are excluded from grosscompensation income providedthat the total amount of suchbenefits does not exceed


8/8/2019 Taxation 1 1

13/44

Allowance andCold WeatherClothingMaintenanceAllowance, WinterClothingAllowance, InitialEnlistment andReenlist Allowanceand LaundryAllowance

Php30,000.00 (RR No. 8-2000).3. Any amount paidspecifically, either as advancesor reimbursements fortraveling, representation andother bona fide ordinary andnecessary expenses incurredby the employee in theperformance of his duties arenot compensation subject towithholding if the followingconditions are satisfied:3.1 It is ordinary and necessarytraveling and representation orentertainment expenses paidor incurred by the employee inthe pursuit of the trade,business or profession; and3. 2 the employee is requiredto account/liquidate for theforegoing expenses inaccordance with the specificrequirements of substantiationfor each category or expensespursuant to Sec. 34 of the TaxCode.

The excess of advances madeover actual expenses shallconstitute taxable income if such amount is not returned tothe employer. Reasonableamounts of reimbursements/advances fortraveling and entertainmentexpenses which are pre-computed on a daily basis andare paid to an employee whilehe is on an assignment or dutyneed not be subject to therequirements of substantiationand to withholding.

Exemption from tax of certainbenefits granted to membersof the Philippine National Police(PNP) under RMC No. 12-97

a. Quarters allowanceb. B. Clothing allowancec. Hazard pay

8/8/2019 Taxation 1 1

14/44

d. Longevity paye. Cost of living allowance

282 NIRC Reward

The amount of reward shall be equivalent to 10% of the revenues, surcharges or fees recovered and/orfine or penalty imposed and collected or one millionpesos (P1M) per case, whichever is lower.

In the case of the smuggled and confiscated goods,the amount of reward shall be equivalent to 10% of the market value of the confiscated goods or P1Mper case whichever is lower.

The following persons shall be entitled to thereward:

1. Any person, except an internal revenueofficial or employee or other public official oremployee or his relative within the sixthdegree of consanguinity who voluntarily givesdefinite or sworn information not yet in thepossession of the BIR leading to the discoveryof fraud or violations of any of the provisionsof the Tax Code thereby resulting in therecovery of revenues, surcharges and feesand/or the imposition of any fine or penalty;

2. Informer where the offender has offered to

compromise the violation offer has beenaccepted by the CIR and collected from theoffender; and

3. Persons instrumental in the discovery andseizure of smuggled goods.

10% FWT (RR 2-98)

25 (B)25 (C)

Nonresident aliennot engaged intrade or businesswithin the Phil.

Interest, cash and/or propertydividends, rents, salaries,wages, premiums, annuities,compensation, remuneration,

25% FWT on Entireincome derivedwithin RR No. 2-98

8/8/2019 Taxation 1 1

15/44

emoluments, or other fixed ordeterminable annual or periodor cash gains, profits andincome and capital gain,except that capital gains fromthe sale of shares of stock inany domestic corporation andreal property shall be subjectto the income tax prescribedunder Sec. 24 (C) and (D) of the NIRC 1997.

RR No.12-2001

Alien individualemployed byRegional or AreaHeadquarters andRegionalOperatingHeadquarters of MultinationalCompanies

Filipinos employedand occupying thesame positions of those aliensemployed by themultinationalcompanies

Salaries, wages, annuities,compensation, remunerationand other emoluments, such ashonoraria and allowancesreceived from such regional orarea headquarters

The term multinationalcompany means a foreign firmor entity engaged ininternational trade withaffiliates or subsidiaries orbranch offices in the AsiaPacific region and other foreignmarkets.

If the employer (RegionalOperatingHeadquarters/Regional AreaHeadquarters) is governed byBook III of E.O. 226 asamended by R.A. 8756.

15%FWT on GrossincomeRR No. 2-98RR No. 12-2001

15%FWT on Grossincome or Normaltax rate on taxableincome, at hisoption

25 (D)RR No. 6-2001

Alien individualemployed byOffshore BankingUnits (OBUs)Filipinos employedand occupying thesame position asthose aliensemployed by OBUs

Salaries, wages, annuities,compensation, remunerationand other emoluments, such ashonoraria and allowancesreceived from such offshorebanking units

15% FWT on Grossincome

25 (E)RR 6-2001

Alien individualwho is apermanentresident of aforeign countrybut employed andassigned in thePhil. by a foreign

Salaries, wages, annuities,compensation, remunerationand other emoluments, such ashonoraria and allowancesreceived from such contractoror subcontractor

15%FWT on GrossincomeRR 2-98

8/8/2019 Taxation 1 1

16/44

RR No. 6-2001

RR No. 6-2001

service contractoror by a foreignservicesubcontractorengaged inpetroleumoperations in thePhil.

Filipinos employedand occupying thesame position asan alien employedby petroleumservice contractorand subcontractor

Citizen, residentalien andnonresident alienengaged in tradeor business in thePhil.

Gross income from contractsby subcontractors from servicecontractors engaged inpetroleum operations asdefined under PD 87 (alsoknown as the Oil Explorationand Development Act) in thePhil.

15%FWT on Grossincome

8%FWT in lieu of any and all taxes,national and localas imposed underPD 1354

28 (A) (4) Non residents Any income from transactionwith OBUs

Tax exempt on anyincome

26 GeneralProfessionalPartnership

Computes net income in thesame manner as a corporation


24 (A)(1)c Partners in ageneralprofessionalpartnership

Distributive share actually orconstructively received in thenet income of the partnership

5%-32% normal taxon Gross income

27 (A)

R.A. No.9337

Corporations,includingpartnerships. Nomatter howcreated ororganized, joint-stock companies,

joint accounts,associations, or

insurancecompanies,excluding generalprofessionalpartnerships and a

joint venture orconsortium formedfor the purpose of undertaking

Gross Income derived frombusiness shall be equivalentgross sales less sales returnsand allowances and cost of goods sold. Cost of goods soldshall include all businessexpenses directly incurred toproduce the merchandise tobring them to their present

location and use.For a trading or merchandisingconcern, cost of goods soldshall include the invoice cost of goods sold, plus import duties,freight in transporting thegoods to the place where thegoods are actually sold,including insurance while the

Normal Tax Rate34% - 199833% - 199932% (prior toeffectivity of R.A.No. 9337)35% (RA No. 9337)30% (effective Jan.1,2009)

on taxable incomederived within andwithout, exceptincome subject toSpecial Tax Rates)

15% on Grossincome(The President

8/8/2019 Taxation 1 1

17/44

constructionprojector engagingin petroleum, coal,and other energyoperationspursuant to anoperating, orconsortiumagreement undera service contractwith thegovernment.

goods are in transit.For a manufacturing concern,cost of goods manufacturedand sold shall include all costof production or finished goodssuch as raw materials used,direct labor and manufacturingoverhead, freight cost,insurance premiums and othercosts incurred to bring the rawmaterials to the factory orwarehouse.Gross income includespayments received inconsideration of a transfer of software copyright (RMC 44-2005)

In the case of taxpayersengaged in the sale of service,gross income means grossreceipts less sales returns andallowances and discounts.

Conditions to be satisfied forthe Optional 15% Tax on GrossIncome:

1. A tax effort ratio of 20%of gross national product(GNP);

2. A ratio of 40% of incometax collection to total taxrevenues; and

3. A VAT tax effort of 4% of GNP;

4. A 0.9% ratio of theConsolidated PublicSector Financial Position(CPSFP) to GNP.

upon therecommendation of the Secretary of Finance may,effective Jan.1,2000 allows thecorporations whoseratio of cost of sales to gross salesor receipts from allsources does notexceed 55% at theoption to be taxedbased on its grossincome

27 (B)

RA 9337

Proprietaryeducationalinstitutions whichare non-profitHospitals whichare non-profit

A ProprietaryEducationalInstitution is anyprivate school

The term unrelated trade,business or other activitymeans any trade, business orother activity, the conduct of which is not substantiallyrelated to the exercise orperformance by sucheducational institution orhospital of its primary purposeor function. If gross incomeform unrelated trade, business

10% on Taxableincome exceptthose subject tospecial income taxrates.

35% on Entire Taxable income(RA No. 9337)

8/8/2019 Taxation 1 1

18/44

30 (H)

30 (I)

27 (C)

RA No.9337

maintained andadministered byprivate individualsor groups with anissued permit tooperate from theDepartment of Education or theCommission onHigher Education(CHED) or the

TechnicalEducation andSkills DevelopmentAuthority (TESDA)as the case maybe.

Non-stock andnonprofiteducationalinstitution (SeeRMC No. 76-2003)

Governmenteducationalinstitution

Governmentowned orcontrolledcorporations,agencies, orinstrumentalities

ExceptGovernmentService InsuranceSystem (GSIS), theSocial SecuritySystem (SSS), thePhilippine HealthInsurance

or other activity exceeds 50%of the total gross incomederived by such educationalinstitutions or hospitals form allsources, then entire taxableincome is subject to 35% taxrate.

1. 34% effective January 1,1998;


3. 32% from Jan. 1 2000until the date prior tothe effectivity of RA No.9337;

4. 35% (RA No. 9337); and5. 30% effective Jan. 1,

2009.

Income received as such

Income received as such

Note: RA 8424 and RA 9337provide for the followingnormal income tax rates:





2009.

Local water districts aresubject to income taxeseffective August 13, 1996(RMC 63-2003)

Under RA No. 8424 which took



35% on Taxableincome (RA No.9337)

Subject to itsRespectiveCorporate Charteror Special Law

8/8/2019 Taxation 1 1

19/44

Corporation (PHIC)and the PhilCharitySweepstakesOffice (PCSO)

effect on Jan. 1, 1998, the Phil.Amusement and GamingCorporation (PAGCOR) isexempt from income tax.Under RA No. 9337, PAGCORis already subject to the35% income tax rate.

27 (D)(1) Domesticcorporations

Interest on currency bankdeposit and yield or any othermonetary benefit from depositsubstitutes and from trustfunds and similararrangements

Royalties/Payments due toacquisition of softwarecopyright rights (RMC 44-2005)

Interest income from adepository bank under theexpanded foreign currencydeposit system

20%FWT

20%FWT on Grossincome derivedwithinRR 2-98

7 %FWT on Grossincome derivedwithinRR 2-98

27 (D)(2) Domesticcorporation

Sale, exchange or otherdisposition of shares of stock ina domestic corporation exceptshares sold or disposedthrough the stock exchange

5% Final Tax onNet Capital GainsNot overP100,000.0010% Final Tax onNet Capital GainsOver P100,000.00

27 (D)(3)

R.A. 9337

Depository bankunder theexpanded foreigncurrency depositsystem

Interest income from foreigncurrency loans granted by suchdepository banks under theexpanded foreign currencydeposit systems to residentsother than offshore bankingunits in the Phil. or otherdepository banks under theexpanded system (RMC No. 14-2002)

Income from foreigncurrency transactions withnonresidents, offshorebanking units in the Phil.,local commercial banksincluding branches of foreign banks that may beauthorized by the BSP totransact business with

10%FWT on Grossincome derivedwithinRR 2-98R.A. 9337

Exempt (RA No.

9337)

8/8/2019 Taxation 1 1

20/44

Nonresidentswhetherindividuals orcorporations

foreign currency deposit system units and other depository banks under theexpanded foreign currency deposit systems shall beexempt from all taxes,except net income fromsuch transactions as may be specified by the Sec. of Finance upon therecommendation by theMonetary Board which shall be subject to the regular income tax payable by thebanks (Previously subject to 10%FWT prior to R.A.No. 9337)

Any income from transactionswith depository banks underthe expanded system

Normal tax ratesimposed onbanks on Net income asspecified by theSec. of Finance

Exempt on anyincome


Dividends received fromanother domestic corporation

Dividends receivedare exempt


Gain presumed to have beenrealized on the sale, exchangeor disposition of lands and/orbuildings which are notactually used in the business of a corporation and are treatedas capital assets

6%FWT on Grossselling price or FMVas determined bythe CIR, whicheveris higherRR No. 2-98RR No. 17-2003

27 (E)RR 9-1998RR4-2003RR12-2007

Domesticcorporations

The Sec. of Finance isauthorized tosuspend theimposition of theMCIT on anycorporation whichsuffers losses onaccount of

prolonged labordispute, orbecause of forcemajeure orbecause of legitimatebusiness reverses

Imposed on a corporationbeginning on the 4 th taxableyear immediately following theyear in which such corporationcommenced its businessoperations, when the minimumincome tax is greater than thetax computed under Sec. 27(A) NIRC.

Gross income is defined under

Sec. 27 (A) except taxpayersengaged in the sale of servicesof which gross income meansgross receipts less salesreturns, allowances, discounts,and cost of services. Cost of services shall mean all directcosts and expenses necessarilyincurred to provide the

2% MCIT on GrossIncome derivedwithin

Any excess of theMCIT over thenormal income taxshall be carriedforward andcredited againstthe normal income

tax for the 3immediatesucceeding taxableyears

8/8/2019 Taxation 1 1

21/44

services required by thecustomers including-a. salaries and employeebenefits of personnel,consultants and specialistsdirectly rendering the serviceandb. cost of facilities directlyutilized in providing the servicesuch as depreciation or rentalof equipment used and cost of supplies.In the case of banks, cost of services shall include interestexpense.

29 Domestic andresident foreigncorporation. thefact that anycorporation is amere holdingcompany orinvestmentcompany shall beprima facieevidence of apurpose to avoidthe tax upon itsshareholders ormembers. It shallnot apply to a. Publicly heldcorporationsb. Banks and othernon bank financialintermediaries;andc. Insurancecorporations

The improperly accumulatedearnings tax shall apply toevery corporation formed oravailed for the purpose of avoiding the income tax withrespect to its shareholders orthe shareholders of any othercorporation by permittingearnings and profits toaccumulate instead of beingdivided or distributed (RR No.2-2001). The fact that earningsor profits of a corporation arepermitted to accumulatebeyond the reasonable needsof the business shall bedeterminative of the purposeto avoid the tax upon itsshareholders or membersunless the corporation, by theclear preponderance of evidence, shall prove to thecontrary. Reasonable needs of the business includes thereasonably anticipated needsof the business. The termimproperly accumulatedtaxable income means taxableincome adjusted by:

1. Income exempt formtax;

2. Income excluded fromgross income;

3. Income subject to finaltax; and

10% on Improperlyaccumulatedtaxable income

8/8/2019 Taxation 1 1

22/44

4. The amount of netoperating loss carry overdeducted;

And reduced by the sum of:a. Dividends actually or

constructively paid; andb. Income tax paid for the

taxable year.RR No. 6-2001

Domestic andResident ForeignCorporation

Gross income derived fromcontracts by subcontractorsfrom service contractorsengaged in petroleumoperations as defined underPD 87 (also known as the OilExploration and Development

Act ) in the Philippines.

8%FWT on Grossincome derivedform suchcontracts in lieu of any and all taxes,national and localas imposed underPD 1354

28 (A)(1) Resident foreigncorporationengaged in tradeor business withinthe Phil.

Gross income as defined underSec. 27 (A)Note: R.A. 8424 and R.A. 9337provides for the followingnormal income tax rates:





2009.

35% on Taxableincome derivedwithin (RA No.9337)

Optional:15% on GrossIncome derivedwithin undercertain conditions(Sec. 27 (A) NIRC)

28 (A)(2) Resident foreigncorporationengaged in tradeor business withinthe Phil.

Gross income as defined underSec. 27 (E)

2%MCIT based onGross incomederived within

28 (A)(3)

RR 15-2002

Internationalcarrier

International Air Carrier GrossPhil. Billings refers to theamount of gross revenuederived from carriage of

persons, excess baggage,cargo, and mail originatingfrom the Phil. in a continuousand uninterrupted flight,irrespective of the place of saleor issue and the place of payment of the ticket orpassage document: providedthat tickets revalidated,

2 % on GrossPhil. Billings

8/8/2019 Taxation 1 1

23/44

exchanged and/or indorsed toanother international airlineform part of the Gross Phil.Billings if the passenger boardsa plane in a port or point in thePhil. Provided, further, that fora flight which originated formthe Phil., but transshipment of passengers takes place at anyport outside the Phil., onanother airline, only the aliquotportion of the cost of the ticketcorresponding to the leg flownfrom the Phil. to the point of transshipment shall form partof Gross Phil. Billings.International shipping GrossPhil. Billings means grossrevenue whether forpassenger, cargo or mailoriginating from the Phil. up tofinal destination, regardless of the place of sale or paymentsof the passage or freightdocuments.

28 (A)(4)

RA No.9337

Offshore bankingunits (OBUs)

Nonresidents,whether individualor corporations

Interest income derived fromforeign currency loans grantedto residents other than OBUsor local commercial banks,including local branches of foreign banks authorized bythe BSP to transact businesswith OBUsIncome from foreigncurrency transactions withnonresidents, other thanOBUs, local commercial banks, including branchesof foreign banks authorized by the BSP to transact business with OBUs shall be exempt except net income from transaction asmay be specified by theSec. of Finance which shall be subject to the regular income tax payable by thebanks

Any income from transactions

10%FWT onInterest incomeRR 2-98RA 9337

Exempt(RA No. 9337)

Exempt fromincome tax

8/8/2019 Taxation 1 1

24/44

with OBUs28 (A)(5) Branch Any profit remitted by a branch

to its head office, exceptactivities which are registeredwith the Phil. Economic ZoneAuthority (PEZA), provided thatinterests, dividends, rents,royalties, includingremuneration for technicalservices, salaries, wages,premiums, annuities,emoluments or other fixed ordeterminable annual, periodicor casual gains, profits, incomeand capital gains received by aforeign corporation from allsources within the Phil. shallnot be treated as branchprofits unless the same areeffectively connected with theconduct of its trade or businessin the Philippines.

15%FWT on totalprofits applied orearmarked forremittance withoutany deduction forthe tax componentthereof

28 (A)(6)(a)

a. Regional or areaheadquarters

b. Regionaloperatingheadquarters

The term regionaloperatingheadquarter shallmean branchestablished in thePhil. bymultinationalcompanies.

Regional or areaheadquarters shall mean abranch established in the Phil.by multinational companiesand which headquarters do notearn or derive income form thePhil. and which act assupervisory, communicationsand coordinating enter for theiraffiliates, subsidiaries, orbranches in the Asia-PacificRegion and other foreignmarkets.

Regional OperatingHeadquarters are engaged inany of the following services:general administration andplanning; business planningand coordination; sourcing andprocurement of raw materialsand components; corporatefinancial advisory services;marketing control and sales,promotion; training andpersonnel management;logistics services; research anddevelopment services and


10% on Taxableincome

8/8/2019 Taxation 1 1

25/44

product development;technical support andmaintenance; data processingcommunication and businessdevelopment.

28 (A)(7)(a)

28 (A)(7)(b)

RA No.9337

a. Resident foreigncorporation

b. Depository bankunder theexpanded foreigncurrency depositsystem

Non residents

a. Interest on currency bankdeposit and yield or any othermonetary benefit from depositsubstitutes and from trustfunds and similararrangements and royaltiesderived from all sources withinthe Phil.

b. Interest income from adepository bank under theexpanded foreign currencydeposit system

Interest income from foreigncurrency loans granted toresidents other than offshorebanking units in the Phil. orother depository banks underthe expanded system

Income from foreigncurrency transactions withnonresidents, offshorebanking units in the Phil.,local commercial banksincluding branches of foreign banks that may beauthorized by the BSP totransact business withforeign currency deposit system units and other depository banks under theexpanded foreign currency deposit systems shall beexempt from all taxes,except net income fromsuch transactions as may be specified by the Sec. of Finance upon therecommendation by theMonetary Board which shall be subject to the regular income tax payable by thebanks. Note: Under RA

20%FWT on Grossincome derivedwithinRR 2-98

7 % on Interestincome derivedwithinRR 2-98

10%FWT onInterest incomeRR 2-98

Exempt RA 9337

Normal tax rateson Net income asspecified by theSec. of Financeimposed onbanks

Exempt

8/8/2019 Taxation 1 1

26/44

8424, this item of income issubject to 10% FWT, priorto the effectivity of RA9337.

Any income from transactionswith depository banks underthe expanded system

28 (A)(7)(c)

Resident foreigncorporation

Net capital gains from sale,barter or exchange or otherdisposition of shares of stock ina domestic corporation exceptshares sold or disposed of through the stock exchange


28 (A)(7)(d)

RA 9337

Resident foreigncorporation

Nonresidentforeign corporationnot engaged intrade or businessin the Phil.

Inter-corporate dividends froma domestic corporation

Gross income such as interest,dividends, rents, royalties,salaries, premiums (exceptreinsurance premiums),annuities, emoluments or otherfixed or determinable annual,periodic or casual gains subjectto Sec. 28 (B)(5)(c). Note: RA8424 and RA 9337 provide forthe following normal incometax rates:





2009.

Exempt

35% FWT on Grossincome derivedwithin(RA No. 9337)

28 (B)(2) Nonresident

cinematographicfilm owner, lessoror distributor

Gross income 25%FWT on Gross

income derivedwithinRR 2-98

28 (B)(3) Nonresident owneror lessor of vesselschartered by Phil.nationals

Gross rentals, lease or charterfees from leases or charters toFilipino citizens orcorporations, as approved bythe Maritime Industry Authority

4 % FWT onGross incomederived withinRR 2-98

28 (B)(4) Nonresident owner Rentals, charters and other 7 %FWT on Gross

8/8/2019 Taxation 1 1

27/44

or lessor of aircraft,machineries andother equipment

fees derived within the Phil. income derivedwithinRR 2-98

28 (B)(5)RR 2-98

Nonresidentforeign corporation

Interest income derived withinthe Phil. on foreign loanscontracted on or after August1, 1986

20%FWT onInterest income

28 (B)(5)(b)

RA 9337

Foreignnonresidentcorporation

Inter-corporate dividendssubject to the followingconditions under RA 9337:1. The country in which thenonresident foreigncorporation is domiciled shallallow credit against the tax dueform the nonresident foreigncorporation taxed deemed tohave been paid in the Phil.equivalent to 20% (previously17%) which represents thedifference between the normalincome tax of 35% (previously32%) on corporations and the15% tax on dividends providedthat effective Jan. 1, 2009, thecredit against the tax shall beequivalent to 15%; or2. The foreign country does notimpose any income tax ondividends received from adomestic corporations (See RRno. 2-98).

15%FWT on Cashand/or Propertydividends receivedfrom a domesticcorporationRR 2-98

28 (B)(5)(c)

Nonresidentforeign corporation

Net capital gains from sale,barter or exchange or otherdisposition of shares of stock ina domestic corporation exceptshares sold or disposed of through the local stockexchange


Sec. 30 of the NIRC of 1997 provides that the following organizations shall not be

subject to income tax with respect to income received by them as such (RMC No.37-2007):a. Labor, agricultural or horticultural organization not organized

principally for profit;b. Mutual savings bank not having a capital stock and cooperative bank

without capital stock organized and operated for mutual purposes andwithout profit;

c. A beneficiary society, order, association, operating for the exclusivebenefit of the members

8/8/2019 Taxation 1 1

28/44

d. Cemetery company owned operated for the benefit of members;e. Non-stock corporation or association operated exclusively for religious,

charitable, scientific, athletic, or cultural purposes, or for therehabilitation of veterans, no part of its net income or asset shallbelong to or inure to the benefit of any member, organizer, officer orany specific person;

f. Business league, chamber of commerce, or board of trade, notorganized for profit and no part of the net income of which inures tothe benefit of any private stockholder or individual;

g. Civic league or organization not organized for profit but exclusively forthe promotion of social welfare;

h. A non-stock and non-profit educational institution;i. Government educational institution;

j. Farmers or other mutual typhoon or fire insurance company, mutualditch or irrigation company, mutual or cooperative telephone companyor like organization of a purely local character the income of whichconsists solely of assessments, dues, and fees collected form membersfor the sole purpose of meeting its expenses; and

k. Farmers, fruit growers or like association organized and operated assales agent for the purpose of marketing the products of its membersand turning back to them the proceeds of sales, less the necessaryselling expenses on the basis of the quantity of produce finished bythem.

The income of whatever kind and character of the above mentioned organizationsform any of their properties, real or personal, or from any of the disposition made of such income shall be subject to income tax.

Other laws relevant to taxation and its elated BIR issuances also provide for theincome tax exemption/preferential tax treatment of certain entities andtransactions, such as:

1. The tax incentives of cooperatives (RA No. 6938 Cooperative Code of thePhilippines. Cooperatives are exempt from income tax, VAT, 3% percentagetax, donors tax, excise tax, and documentary tax subject to certainconditions (RR Nos. 20-2001 and 14-2007)

2. RA No. 9178 Barangay Micro Business Enterrprises (BMBEs) Act of 2002 itsincome tax exemption is provided in RMC No. 40-2004 which published D.O.No. 17-04 of the DOF. RMC No. 52-2004 prescribes the format of the swornaffidavit for submission upon registration. But its income not arising from itsoperations shall be subject to income tax.

3. RR No. 4-2006 as amended by RR No. 1-2007 implements the tax privilegesprovisions of RA No. 9257, otherwise known as the Expanded Senior CitizensAct of 2003. A senior citizen shall refer to any resident Filipino citizen aged60 years old and above. Senior citizens are exempt from the payment of individual income tax provided that their annual taxable income does notexceed the poverty level as determined by the NEDA for the correspondingtaxable year. Senior citizens are also entitled to the 20% discount on theirpurchase of goods and services as follows:

a. In fare for domestic air and sea travel for the exclusive use orenjoyment of senior citizens;

8/8/2019 Taxation 1 1

29/44

b. From all establishments relative to the utilization of services in hotelsand similar lodging establishments, restaurants and recreation centers,and purchase of medicines in all establishments for the exclusive useor enjoyment of senior citizens, including funeral and burial servicesfor the death of senior citizens;

c. On admission fees charged by theaters, cinema houses and concerthalls, circuses, carnivals and other similar places of culture, leisure,and amusement for the exclusive use or enjoyment of senior citizens;

d. On medical and dental services, professional fees of attending doctors,and diagnostic and laboratory fees such as but not limited to x-rays,computerized tomography scans and blood tests in all private hospitalsand medical facilities in accordance with rules and regulations to beissued by the department of Health, in coordination with the PhilippineHealth Insurance Corporation; and

e. In public railways, skyways and bus fare for the exclusive use andenjoyment of senior citizens.

4. RR No. 10-2006 and RR No. 5-2007 provides for the guidelines and conditionsfor the tax treatment of securities borrowing and lending (SBL) transactions.

The lender of the shares of stock/securities listed in the PSE and Phil. andExchange Corp. shall be exempt form the capital gains tax. The borrowingand lending transactions shall not be subject to the stock transaction taxunder Sec. 27 (B)(5)(c) of the Tax Code and the Documentary Stamp Taxunder Sec. 176 of the same Code.

5. RMC No. 44-2006 publishes RA No. 9343, an Act amending RA no. 9182,otherwise known as the Special Purpose Vehicle (SPV) Act of 2002. The lawprovides that SPV transactions shall be exempt from capital gains tax,creditable withholding income taxes, VAT, gross receipts tax under Title Vand Documentary Stamp Taxes subject to certain conditions.

6. RMC No. 27-2007 publishes the full text of RA No. 9400 entitled An ActAmending Republic Act No. 7227, as Amended, Otherwise known as theBases Conversion and Development Act of 1992

7. RMC No. 29-2007 publishes the full text of Republic Act No. 9399 entitled AnAct Declaring a One-Time Amnesty on Certain and Duty Liabilities, Inclusiveof Fees, Fines, Penalties, Interests and Other Additions Thereto, Incurred byCertain Business Enterprises Operating Within the Special Economic Zonesand Freeports.

8. RMC No. 36-2007 circularizes the full text of Executive Order No. 619, anOrder creating and designating Special Economic Zones pursuant to republicAct (RA) No. 7916, as amended by RA No. 8784, in relation to RA No. 7227, asamended by RA No. 9400, inside the Clark Freeport Zone (RMC 50-2007).

RMC No. 37-2007 dated May 30, 2007 provides for the delegation of authority tosign rulings granting and/or confirming tax exemptions, tax incentives as well astax treaty relief through the ruling process.

Situs of Items of Income

a. Income from capital the place where the capital is invested or employed

8/8/2019 Taxation 1 1

30/44

b. Income from labor or personal services the place where the labor orpersonal services are rendered

c. Gain on sale of property :Sale gains, profits and income from sale of personal property produced

within and sold outside the Phil., or produced outside and sold within shall betreated as derived partly from sources within and partly from sources withoutthe Phil.

Purchase gains, profits and income derived from personal property withinand its sale without the Phil. or from sources without and its sale in the Phil. shallbe treated as derived entirely from sources within the country in which sold:provided, however, that gain from the sale of shares of stock in domesticcorporation shall be treated as derived solely from within regardless of wherethe said shares were sold.d. Gain on sale of real property the place where the property is located

EXCLUSIONS FROM GROSS INCOMESec. 32 (B) of the Tax Code

1. Life insurance proceeds of which upon death of the insured, whether lumpsum or otherwise, but if such amounts are held by the insurer under theagreement to pay interest thereon, the interest payments shall be included ingross income;

2. Amounts received by insured as return of premium under life insurance,endowment, or annuity contracts, either during the term or at the maturity of the term in the contract or upon the surrender of the contract;

3. The value of gifts, bequests and devises or descent: Provided, however, thatincome from such property, as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of dividend interest, shall beincluded in gross income;

4. Compensation for injuries or sickness plus damages received5. income exempt under treaty;6. retirement benefits, pensions, gratuities, etc. subject to certain conditions

a. retirement benefits received under Republic Act No. 7641 and thosereceived by officials and employees of private firms, whether individualor corporate, in accordance with a reasonable private benefit planmaintained by the employer: Provided that the retiring official oremployee has been in the service of the same employer for at least 10years and is not less than 50 years of age at the time of his retirement:Provided further that the benefits granted shall be availed of by anofficial or employee only once. The term reasonable private benefitplan means a pension, gratuity, stock bonus or profit-sharing planmaintained by an employer for the benefit of some or all of his officialsor employees wherein contributions are made by such employer forthe officials or employees, or both, for the purpose of distributing tosuch officials and employees the earnings and principal of the fundthus accumulated, and wherein it is provided in said plan that at notime shall any part of the corpus or income of the fund be used for, orbe diverted to, any purpose other than for the exclusive benefit of thesaid officials and employees (See RR Nos. 1-83 and 11-2001);

8/8/2019 Taxation 1 1

31/44

b. Any amount received by an official or employee or by his heirs formthe employer as a consequence because of separation or suchemployee or official from the service of the employer because of death, sickness and other physical disability or for any cause beyondthe control of the said official or employee (RMC No. 48-2004);

c. Benefits received from SSS and GSIS; andd. Social security benefits, retirement, gratuities, pensions and other

similar benefits received by resident or nonresident citizens of thePhilippines or aliens who come to reside permanently in the Phil. fromforeign government agencies and other institutions, private or publicincluding the United States Veterans Administration.

7. Miscellaneous items a. Income derived by foreign governmentb. Income derived by the government or its political subdivisions from

any public utility or from the exercise of any essential governmentfunctions;

c. Prizes and awards made primarily in recognition of religious,charitable, scientific, educational, artistic, literary, or civic achievementbut only if:1. The recipient was selected without any action on his part to enter

the contest or proceeding;2. the recipient is not required to render substantial future services as

a condition to receiving the prize or award;d. Prizes and awards in sports competition;e. 13 th month pay and other benefits not exceeding Php30,000.00 or as

determined by existing rules and regulations i. Benefits received by officials and employees of the

national and local government pursuant to RA No. 6686which was approved on December 14, 1988 authorizingthe grant of an annual Christmas bonus starting calendaryear 1998;

ii. Benefits received by employees pursuant to PresidentialDecree (PD) No. 851 as mended by Memorandum Orderno. 28 dated August 13, 1986 requiring all employers topay their employees, receiving a basic salary of not morethan Php1,000.00 a month, regardless of the nature of their employment, a 13 th month pay not later thanDecember 24 of every year. As amended byMemorandum Order No. 28 on August 13, 1986, allemployees have been required to pay all their rank andfile employees a 13 th month pay not later than December24 of every year;

iii. Benefits received by officials and employees not coveredby PD No. 851 as amended by Memorandum Order No. 28dated August 13, 1986 including the benefits under RRNos. 3-98, 8-2000 and 10-2000.

f. GSIS, SSS, Medicare and other contributions;g. Gains from the sale of bonds debentures or other Certificate of

Indebtedness with a maturity of more than 5 years;

8/8/2019 Taxation 1 1

32/44

h. Gains from redemption of shares in mutual fund company as defined inSec. 22 (BB) of the Tax Code

The guidelines in the tax-free exchange of property for shares under Sec. 40 (C)(2)of the Tax Code of 1997, as amended are provided for in RR No. 18-2001 andRevenue Memorandum Order (RMO) 32-2001.

TAX SHIELD ON ALLOWABLE DEDUCTIONS

Sec. 34 (A)(1) of the Tax Code provides that there shall be allowed as adeduction from gross income all the

1. ordinary and necessary expenses;2. paid or incurred during the taxable year;3. in carrying on or which are directly attributable to, the development,

management, operation and/or conduct of the trade, business or exercise of a profession including:

a. A reasonable allowance for salaries, wages and other forms of compensation for personal services actually rendered, including thegrossed-up monetary value of fringe benefits furnished or granted bythe employer to the employee: Provided, that the fringe benefit finaltax has been paid;

b. A reasonable allowance for travel expenses here and abroad (RR No,15-2002)

c. A reasonable allowance for rentals;d. A reasonable allowance for entertainment, amusement and recreation

expenses not to exceed such ceilings prescribed in existing rules andregulations.

Substantiation Requirements - no deductions from gross income shall be allowedunless the taxpayer shall substantiate with sufficient evidence, such as officialreceipts or other adequate records:

a. the amount of the expense being deducted;b. the direct connection or relation of the expense being deducted to the

development, management, operation and/or conduct of the trade, businessor profession of the taxpayer;

c. compliance with existing withholding tax regulations (Sec. 34 K of the TaxCode, as amended).

If the taxpayer decides to claim incremental allowable deduction after an initialdetermination of the taxable income then any such incremental deduction has acorresponding Tax Shield which is equivalent to the amount of tax otherwisepayable if no such incremental allowable deduction is claimed. The cash outlaytherefore of such incremental allowable deduction is reduced by the amount of taxshield.

ILLUSTRATION

Before TrainingExpense

After Training Variance (TaxShield)

Net Income before Php 50M Php 50M

8/8/2019 Taxation 1 1

33/44

training Training expense 1MNet income beforeincome tax

50M 49M Php 1M

30% tax due 15M 14.7M Php .3M

Sec. 34 of the NIRC of 1997, as amended, provides for the following deductionssubject to certain conditions:

Expenses

1. Ordinary and Necessary Trade, Business or Professional Expenses2. Expenses allowable to private Educational Institutions in addition:

(a) deduct expenditures otherwise considered as capital outlays ordepreciable assets for the expansion of school facilities; or

(b) deduct allowance for depreciation thereof

Bribes, Kickbacks and Other Similar Payments no deduction from gross incomeshall be allowed for any payment made, directly or indirectly, to an official oremployee of the national government, or to an official or employee of any localgovernment unit, or to an official employee of a government-owned corp. or to anofficial or employee or representative of a foreign government, or to privatecorporation, general professional partnership, or similar entity if the paymentconstitutes a bribe or kickback.

ALLOWABLE ITEMIZED DEDCUTIONS

1. business expenses2. Entertainment, Amusement and Recreational Expenses3. interest4. taxes5. losses6. bad debts7. depreciation8. depletion9. charitable and other contribution10.research and development11.contribution to pension trust12.other deductions subject to withholding tax

Private entities that employ persons with disability (PWDs) either as a regular

employee, apprentice or learner shall be entitled to an additional deduction, fromtheir gross income equivalent to 25% of the total amount paid as salaries andwages to PWDs.

Furthermore, entities that improve or modify their physical facilities in order toprovide reasonable accommodation, for disabled persons shall also be entitled to anadditional deduction from their net taxable income, equivalent to 50% of the directcosts of the improvements or modifications. However, this incentive does not applyto improvement or modification of facilities under Batas Pambansa Bilang 344.

8/8/2019 Taxation 1 1

34/44

These incentives are provided for in RR 8-93 pursuant to RA No. 7277 otherwiseknown as the Magna Carta for Disabled Persons.

RR No. 4-2006, amending RR No. 2-94 provides that establishments granting salesdiscounts to senior citizens are entitled to deduct the said discount from grossincome subject to certain conditions. Furthermore, private establishmentsemploying senior citizens shall be entitled to additional deduction from their grossincome equivalent to 15% of the total amount paid as salaries and wages to seniorcitizens subject o provision of Sec. 34 of the Tax Code and its implementing rulesand regulations and that certain conditions are met.

ENTERTAINMENT, AMUSEMENT and RECREATION (EAR) Expense

These are expenses incurred in connection with the conduct of his trade, businessor exercise in profession, in entertaining, providing amusement and recreation to,or meeting with, a guest or guests at a dining place, place of amusement, countryclub, theater, play, sporting event and similar events or places.

It does not refer to fixed representation allowances that are subject to withholdingtax on wages pursuant to appropriate revenue regulations.

Entertainment facilities may include a yacht, vacation home or condominium andany similar item of real or personal property used by the taxpayer primarily for theentertainment, amusement, or recreation of guests or employees. To be consideredan entertainment facility, it must be owned or form part of the taxpayers trade,business or profession, or rented by such taxpayer, for which the taxpayer claims adepreciation or rental expense.

EAR expenses include depreciation and rental expense relating to facilities intendedfor entertainment.

Under RR No. 10-2002, the allowed deduction from gross income: actual amount of EAR expenses paid or incurred within the taxable year or 0.50% of net sales fortaxpayer engaged in sale of goods or properties; or 1% for taxpayers engaged insale of services, including exercise of profession and use or lease of properties,whichever is lower . However, if taxpayer is deriving income from both sale of goods/properties and services, the allowable deduction shall be determined basedon an apportionment formula taking into consideration the % of net sales/netrevenue to the total net sales/net revenue but in no case shall not exceed theminimum percentage ceiling provided in the regulations.Illustration of EAR expenses : Actual Expense Php30,000.00

Net sales/Netrevenue

EAR based onapportionment

formula

Maximum %Ceiling of EAR

Allowable EARExpense (lower)

Sale of GoodsPhp 2,000,000.00

Php 20,000.00 Php 10,000.00(0.5%)

Php 10,000.00

Sale of ServicesPhp 1,000,000.00

10,000.00 10,000.00(1%)

10,000.00

Total Sales 30,000.00 20,000.00 20,000.00

8/8/2019 Taxation 1 1

35/44

Php 3,000,000.00

INTEREST

As amended by RA No. 9337 (Effective November 1, 2005), the Tax Code providesthat the taxpayers otherwise allowable deduction as interest expense shall bereduced by 42% (previously 38% prior to RA No. 9337) of the interest incomesubjected to final tax: Provided, that effective Jan. 1, 2009 the percentageshall be 33%).

the 33% limitation is approximately equal to 10% divided by 30% Corporate TaxRate, the 10% being the difference between the 30% Corporate Tax rate and the20% Final Withholding Tax rate on interest income form bank deposits.

Interest incurred or paid by the taxpayer on all unpaid business related taxes shallbe fully deductible form gross income and shall not be subject to the limitation ondeduction. Thus, such interest expense incurred or paid shall not be diminished bythe percentage of interest income earned which had been subjected to FWT.

No deduction shall be allowed in respect of interest under the succeedingsubparagraphs:

1. If within the taxable year an individual taxpayer reporting income on the cashbasis incurs indebtedness on which a interest is paid in advance throughdiscount or otherwise: Provided , that such interest shall be allowed as adeduction in the year the indebtedness is paid: Provided , further , that if theindebtedness is payable in periodic amortizations, the amount of interestwhich corresponds to the amount of the principal amortized or paid duringthe year shall be allowed as deduction in such taxable year;

2. if both the taxpayer and the person to whom the payment has been made oris to be made are persons specified under Sec. 36 (B) of the tax Code, asamended; or

3. If the indebtedness is incurred to finance petroleum exploration.

Illustration:Borrower A secures a Php100,000.00 loan from a bank with an annual interest of 10%. He maintains Php100,000.00 time deposit in the same bank and earns anannual interest of 5%.

Compute:a. Allowable deduction for interest under RA No. 9337b. Tax shield if taxpayer is a corporation or individualc. Net taxes after tax shield due to the government as a result of the borrowing

Interest expense = Php 10,000.00 ( 100,000.00 x 10%)Interest income = Php 5,000.00 (100,000.00 x 5%)30% corp. tax on creditors income (bank) = Php 3,000.00 (10,000 x 30%)20% FWT on interest income (borrowers deposit/income) = Php 1,000.00 (5,000.00x 20%)33% interest income limitation = Php 1,650.00 (5000.00 x 33%)

8/8/2019 Taxation 1 1

36/44

Interest expense by taxpayer (depositor) = Php (10,000.00)Less: interest income limitation (33%) = 1650.00a). Allowable Interest Deduction 8,350.00b). Tax shield: 2,505.00 (8,350.00 x 30%)

Income taxes after tax shield:Due from the Creditor (bank) Php 3,000.0020% FWT from borrower (depositor) 1,000.00

4,000.00Less tax shield: 2,505.00c). Net taxes due to the govt. after tax shield 1,495.00

TAXES

Taxes are part of allowable deductions except:1. Income tax2. Income tax imposed by authority of any foreign country;3. Estate and Donors tax4. Taxes assessed against local benefits of a kind tending to increase the value

of the property assessed;5. Tax on sale, barter, exchange of shares of stock listed and traded through the

local stock exchange or through initial public offering (Sec. 127 (D) of the TaxCode.)

As a rule, withholding taxes are not deductible taxes. However, the only withholdingtax that is deductible from gross income is the fringe benefit tax under certainconditions.

Tax deduction is allowed to non-resident alien individual engaged in trade orbusiness in the Phil. and resident foreign corp. only if and to the extent that suchtaxes are connected from sources within the Phil.

Taxes if subsequently refunded or credited, shall form part of gross income in theyear of receipt.An alien individual and a foreign corp. shall not be allowed the credits against thetax for the taxes of foreign countries allowed in Sec. 34 (C)(3) of the tax Code.

Tax credit is creditable from the tax due itself, while tax deduction is deducted fromthe gross income to arrive at the taxable income.

LOSSESLosses actually sustained during the taxable year and not compensated for byinsurance or other forms of indemnity, subject to the following conditions:

a. If incurred in trade, profession or business;b. Of property connected with the trade, business or profession, if the loss

arises from fires, storms, shipwreck, or other casualties, or from robbery,theft or embezzlement ;

c. Taxpayer submits a declaration of loss sustained form casualty or fromrobbery, theft or embezzlement during the taxable year within the time limitprescribed in the regulations which shall not be less than 30 days nor more

8/8/2019 Taxation 1 1

37/44

than 90 days from the date of discovery of the casualty or robbery, theft orembezzlement giving rise to the loss; and

d. The loss must not be claimed as deductions for the estate tax purposes.

Losses include:1. Ordinary Losses

a. losses incurred in the conduct of trade, profession or businessb. losses incurred in any transaction entered into for profit, though not

connected with trade or businessc. losses incurred on properties connected with trade or business, if the loss

arises from casualties or from robbery, theft or embezzlement

2. Net Operating Loss Carry-Over (NOLCO) subject to certain conditions the termnet operating loss shall mean the excess of allowable deduction over gross incomeof the business in a taxable year. The net operating loss of the business orenterprise for any taxable year immediately preceding the current taxable year,which had not been previously offset as deduction from gross income shall becarried over as a deduction form gross income for the next three (3) consecutivetaxable years immediately following the year of such loss. A NOLCO shall be allowedonly if there has been no substantial change in the ownership of the business orenterprise in that -

a. Not less than 75% in nominal value of outstanding issued shares, id thebusiness is the name of a corporation is held by or on behalf of the same persons;or

b. Not less than 75% of the paid up capital of the corp., if the business is inthe name of the corp., is held by or on behalf of the same persons (RR No. 14-2001)3. Capital losses, including net capital loss carry over but only to the extent of thecapital gains and subject to certain conditions:

a. On real properties considered as capital asset not deductible;b. On shares of stock not deductible up to the extent of capital gain (except

shares sold or disposed through the stock exchange which are taxable under Sec.127 of the Tax Code);

c. On other properties deductible up to the extent of capital gains. Incomputing net capital gain or loss and taxable income, the following percentageshall be taken into account:

100% if capital asset has been held for not more than 12 months50% if capital asset has been held for more than 12 months

This only applies to individual taxpayer. Corporation takes into account 100%whether the holding period is less or more than 12 months.

e. Losses from short sales Short sale is a transaction in which the seller sellssecurities that he does not own, and therefore he cannot supply thesecurities for delivery, in expectation of the decline of their price. The sellerin this case, is a mere speculator for his purpose being to postpone deliveryuntil such time when he hopes to purchase the securities at a price lowerthan that received on his sale and thereby make a profit. But id the price of the securities go up, he incurs a loss; and

f. Securities becoming worthless Sec. 39 (A)(1) of the Tax Code provides forthe term capital asset means property held by the taxpayer (whether or notconnected with his business) but does not include stock in trade of thetaxpayer or other property of a kind which would properly be included in the

8/8/2019 Taxation 1 1

38/44

inventory of the taxpayer or property held primarily for sale to customers inthe ordinary course of his trade or business, or property used in the trade orbusiness, of a character which is subject to the allowance for depreciationprovided in subsection (F) of Sec. 34 of the Tax Code; or real property used intrade or business of the taxpayer.

4. Losses on wash sales of stock or securities any loss claimed to have beensustained from any sale or other disposition of shares of stock where it appears thatwithin a period beginning 30 days before the date of such sale or disposition and 30days after such date, the taxpayer has acquired (by purchase or exchange uponwhich the entire amount of gain or loss was recognized by law), or has entered intoa contract or option to acquire, substantially identical stock, then no deductions forthe loss shall be allowed under Sec. 38 of the Tax Code unless the claim is made bya dealer on securities and with respect to a transaction made b\un the ordinarycourse of the business of such dealer.5. Wagering losses shall be allowed only to the extent of the gains from suchtransactions.6. Abandonment losses losses allowed in relation to abandonment of petroleumoperations while on exploration, development or production stage.

ACTUAL BAD DEBTS (RR Nos. 5-1999 and 25-2002)Debts due to taxpayer actually ascertained to be worthless and charged off withinthe taxable year except those not connected with profession, trade, or business andthose sustained in a transaction entered into between parties mentioned under Sec.36 (B) of the Tax Code.Provided that recovery of bad debts previously allowed as deduction in thepreceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

DEPRECIATION There shall be allowed as a depreciation deduction a reasonable allowance for theexhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business.In the case of a non-resident alien individual engaged in trade or business orresident foreign corporation, a reasonable allowance for deterioration of propertyarising out of its use or employment or its non-use in the business trade orprofession shall be permitted only when such property is located in the Phil.

DEPLETION OF OIL AND GAS WELLS AND MINESA reasonable allowance for depletion or amortization computed in accordance withthe cost-depletion method shall be granted under the rules and regulations to beprescribed by the Secretary of Finance, upon recommendation of the CIR; Providedthat when the allowance for depletion shall equal the capital invested, no furtherallowance shall be granted.

CHARITABLE AND OTHER CONTRIBUTIONS (RR No. 13-1998, RMC Nos. 88-2007 and14-2008)

1. Not to exceed the following rates of the taxpayers taxable income derivedfrom trade, business or profession as computed without the benefit of suchdeduction.

a. 10% in the case of an individual

8/8/2019 Taxation 1 1

39/44

b. 5% in the case of a corporation2. Contributions deductible in full:

a. Donations to the government national, local, including fully ownedcorporations, exclusively to finance, to provide for use in undertakingpriority activities in education, health, youth and sports development,human settlements, science and culture and in economic developmentaccording to a National Priority Plan determined by the NationalEconomic and Development Authority: Provided that any donation notin accordance with the said annual priority plan shall be subject to thelimitations prescribed in Sec. 34 (H)(1) of the Tax Code.

b. Donations to certain foreign institutions or international organization deductible in full in compliance with agreements, treaties, orcommitments entered into by the Govt. of the Phil. and the foreigninstitutions o by international organizations or in pursuance of speciallaws; and

c. Donations to accredited non-government organizations non-government organization means a nonprofit domestic corporation:1. Organized and operated exclusively for scientific research,

educational, character-building and youth and sports development,health, social welfare, cultural or charitable purposes, or acombination thereof, no part of the net income of which inures tothe benefit of any private individual;

2. Which, not later than the 15 th day of the 3 rd month after the close of the accredited non-government organizations taxable year in whichcontributions are received, makes utilization directly for the activeconduct of the activities constituting the purpose or function forwhich it is organized and operated, or within a period prescribed inthe existing rules and regulations;

3. the level of administrative expense of which shall, on an annualbasis, conform with the existing rules and regulations but in no caseto exceed 30% of the total expenses; and

4. the assets of which, in the event of dissolution, would be distributedto another nonprofit domestic corp. organized for similar purpose/s,or to the state for public purpose, or would be distributed by a courtto another organization to be used in such manner and judgment of said court shall best accomplish the general purpose for which thedissolved organization was organized.

RR No. 10-2003 provides for the tax incentives of RA 8525 otherwise known as theAdopt-a-School Act of 1998.

RESEARCH AND DEVELOPMENTAt the option of the taxpayer, the taxpayer may treat research or developmentexpenditures that are paid or incurred by him during the taxable year in connectionwith his trade, business or profession as ordinary and necessary expenses if theseare not charged to a capital account or deferred expense account subject todepreciation or amortization.

PENSION TRUSTS

8/8/2019 Taxation 1 1

40/44

An employer establishing or maintaining a pension trust to provide for the paymentof reasonable pensions to his employees shall be allowed as a deduction (in additionto the contributions to such trust during the taxable year to cover the pensionliability accruing during the year) a reasonable amount transferred or paid into suchtrust during the taxable year in excess of such contributions, but only if suchamount:

1. has not therefore been allowed as a deduction, and2. is apportioned in equal parts over a period of 10 consecutive years beginning

with the year in which the transfer or payment is made.

PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE OF ANINDIVIDUAL TAXPAYER (Sec. 34 (M) of the Tax Code, provides tha the amount of premiums, not to exceed Php2,400.00 per family or Php200.00 a month paid duringthe taxable year for health and/or hospitalization insurance taken by the taxpayerfor himself, including his family, shall be allowed as a deduction form his grossincome: Provided, that said family has a gross income of not more thanPhp250,000.00 for the taxable year: Provided, finally, that in the case of marriedtaxpayers, only the spouse claiming the additional exemption for dependents shallbe entitled to his deduction.

40% OF THE GROSS SALES/RECEIPTS OR GROSS INCOME (OPTIONAL STANDARDDEDUCTIONS)In lieu of the deductions allowed under Sec. 34 (A) to (J) of the Tax Code, asamended by RA No. 9504, an individual subject to tax under Sec. 24 of the TaxCode, other than a non-resident alien, may elect a standard deduction in an amountnot exceeding 40% of his gross sales or receipts, as the case may be. In the case of a corporation subject to tax under Sec. 27 (A) and 28 (A)(1), it may elect a standarddeduction in an amount not exceeding 40% of its gross income as defined in Sec. 32of the same Code. Unless the taxpayer signifies in his return his intention to electhimself of the itemized allowable deductions. An individual who required to submitwith his tax return such F/S otherwise required: Provided, further that except whenthe CIR otherwise permits, the said individual shall keep such records pertaining tohis gross income during the taxable year, as may be required by the rules andregulations promulgated by the Secretary of Finance upon the recommendation of the Commissioner (RR 16-2008).Prior to the effectivity of RA No. 9504 of 2008, only an individual subject to taxunder Sec. 24 of the Tax Code, as amended, other than a non-resident alien, mayelect the optional Standard Deduction in an amount not exceeding 10% of his grossincome.

ALLOWABLE OF PERSONAL EXEMPTIONS

Sec. 35 of the NIRC of 1997, as amended by RA No. 9504, provides for Allowance of Personal Exemption for Individual Taxpayers as follows:A. In general for purposes of determining the tax provided in Sec. 24 (A) of the TaxCode, there shall be allowed a basic personal exemption amounting to Php50,000.00 for each individual taxpayer.

In the case of married individuals where only one of the spouses is derivinggross income, only such spouse shall be allowed the personal exemption.

8/8/2019 Taxation 1 1

41/44

RR No. 4-2006, amending RR 2-94, provides that a benefactor of a seniorcitizen shall be considered as head of the family with a basic personal exemptionequivalent to Php50,000.00 (previously Php25,000.00 prior to the effectivity of RANo. 9504) and shall be allowed to avail himself/herself of that status subject tocertain conditions under RA No. 9257 Expanded Senior Citizens Act of 2003. Thebenefactor of a senior citizen shall not, however, be entitled to claim additionalexemption of Php25,000.00 (Php 8,000.00 prior to the effectivity of RA No. 9504)per dependednt (not exceeding 4) allowable to a married individual or head of family with qualified dependent child/children. A benefactor shall refer to anyperson, whether related to the senior citizen or not, who takes care of him/her as adependent.

Prior to the effectivity of RA no. 9504, the basic personal exemption were asfollows:For single individual or married individual

judicially decreed as legally separatedwith no qualified dependents Php 20,000.00For head of the family 25,000.00For each married individual 32,000.00

B. Additional exemption for dependents there shall be allowed an additionalexemption of Php 25,000.00 for each dependent not exceeding 4. Prior to theeffectivity of RA No. 9504, the allowable additional exemption was Php8,000.00 foreach dependent.In the case of legally of separated spouses, additional exemptions may be claimedonly by the spouse who has custody of the child or children: Provided, that the totalamount of additional exemptions that may be claimed by both shall not exceed themaximum additional exemptions herein allowed.A dependent means a legitimate, illegitimate or legally adopted child chieflydependent upon and living with the taxpayer if such dependent is not more than 21years of age, unmarried and not gainfully employed or if such dependent,regardless of age, is incapable of self-support because of mental or physical defect.RR No. 10-2008 provides that an individual receiving a combination of compensatinand business/professional income shall first deduct the allowable personal andadditional exemptions from compensation income, only the excess therefrom canbe deducted from business or professional income. In the case of husband and wife,the husband shall be the proper claimant of the additional exemption unless hewaives it in favor of his wife.

ITEMS NOT DEDUCTIBLE

Sec. 36 (B) of the Tax Code, provides that in computing net income, no deductionshall in any case be allowed in respect of losses from sales or exchanges pf property directly or indirectly

1. Between members of a family. The family of an individual shall include onlyhis brothers and sisters (whether by the whole or half blood), spouse,ancestors, and lineal descendants; or

2. except in the case of distributions in liquidation, between an i

Taxation 1 1

Documents

Transcript of Taxation 1 1