tax i codal digest

7/25/2019 Tax I Codal Digest

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1NIRCMADE EZAPRIL GUIANG (2D-BATCH 2018)

GROSS INCOME- All income derived from whatever source, except when otherwise provided by the Code. Includes the ff. (not anexclusive list) CTP-P-PPADIRR:

(1) Compensation for services in whatever form paid(e.g., fees, salaries, wages, commissions, and similar items);(2) Gross income derived from the conduct of Trade or business or the exercise of a profession;(3) Gains derived from dealings in Property;(4) Interests;(5) Rents;

(6) Royalties;(7) Dividends;(8) Annuities;(9) Prizes and winnings;(10) Pensions; and(11) Partner's distributive sharefrom the net income of the general professional partnership.

EXCLUSIONS FROM GROSS INCOMEnot included as gross income and are therefore exempt from taxation1. Proceeds from life Insurancepolicies paid to the heirs or beneficiaries upon the death of the insured, whether in a single

sum or otherwise.a.

Exception: if such amounts are held by the insurer under an agreement to pay interest thereon, the interestpaymentsshall be included in gross income.

2. Amount received by insured as return of Premium paid by him under life insurance, endowment, or annuity contracts,either during the term or at the maturity of the term.

3. Value of the property acquired by Gifts, bequests, and devisesa.

Exception: Incomefrom such property, as well as gift, bequest, devise or descent of income from any property, in

cases of transfers of divided interest, shall be included in gross income.4. Amounts received as compensation for Personal Injuries or Sickness through Accident or Health Insurance or under

Workmen's Compensation Acts, plusthe amounts of any damages received, whether by s uit or agreement, on accountof such injuries or sickness.

5. Incomeof any kindexempt under a Treaty obligation binding upon the Philippine government6. Retirement benefits, pensions, gratuities, etc.-

a.

Retirement benefits received under Retirement Pay Law and those received by officials/employees of private firms,individual or corporate, in accordance with a reasonable private benefit plan1maintained by the employer

i.

Retiring official/employee has been in the service of the same employer for at least 10 years and is notless than fifty 50 years of age at the time of his retirement.

ii.

Benefits granted shall be availed of by an official/employee only once.b.

Any amount received by an official/employee or by his heirs from the employer as a consequence of separationofsuch official or employee from the service of the employer because of death, sickness, or other physical disability orfor any cause beyond the control of the said official or employee .

c.

Social security benefits, retirement gratuities, pensions and other similar benefits received by resident ornonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreigngovernment agencies and other institutions, private or public.

d.

Payments of benefits due or to become due to any person residing in the Philippines under the laws of the USadministered by the US Veterans Administration.

e.

Benefits received from or enjoyed under the SSSf.

Benefits received from the GSIS, including retirement gratuity received by government officials and employees. 7.

Miscellaneous Items.-a.

Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or frominterest on deposits in banks in the Philippines by(i) foreign governments, (ii) financing institutions owned, controlled,or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established byforeign governments.

b.

Income derived from any public utilityor from the exercise of any essential governmental functionaccruing to theGovernment of the Philippines or to any political subdivision thereof.

c.

Prizes and awardsmade primarily in recognition of (CARCLES) Religious, Charitable, Scientific, Educational, Artistic,

Literary, or Civic achievement but only if:1. The recipient was selected without any action on his partto enter the contest/proceeding; &2.

The recipient is not required to render substantial futureservices as a condition to receiving the prize or award.d.

All prizes and awards granted to athletesin local and international sports competitions and tournaments whether heldin the Philippines or abroad and sanctioned by their national sports associations.

e.

13thMonth Pay and Other Benefits collectively referred to asgross benefits received by officials and employees of

1a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, whereincontributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees theearnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income ofthe fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.


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public and private entities. NOTE: The total exclusion under this subparagraph shall not exceed P82,000. Includes (i)Benefits received by officials and employees of the national and local government pursuant to Christmas BonusLaw; (ii) Benefits received by employees pursuant to the 13th Month Pay Law; (iii) Benefits received byofficials/employees not covered by the 13 th Month Pay Law; and (iv) Other benefits such as productivity incentives andChristmas bonus.

f. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals.g.

Gains from the Sale or Exchange of Bonds, Debentures or other Certificate of Indebtedness with a maturity of more than

5 years.h.

Gains realized by the investor from redemption of shares of stock in Mutual Fund company.

SEC. 73. Distribution of Dividends or Assets by Corporations.-

1. Dividends are any distribution made by a corporation to its shareholders out of its earnings or profits and payable to itsshareholders, whether in money or in other property.

2. Where a corporation distributes all of its assets in complete liquidation or dis solution, the gain realized or loss sustained bythe stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. (See Wise andCo v Meer case.)

3. As tock di videndrepresenting the transfer of s urplus to capital accountshall not be subject to tax.i.

However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make thedistribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable div idend,the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent thatit represents a distribution of profits .

4. Any distribution made to the shareholders or members of a corporation shall be deemed to have been madefrom the mos trecently accumulated profits or surplus , and shall constitute a part of the annual income of the dis tributee for the year in

which received.5. The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A), after deducting the

corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in thesame taxable yearand shall be taxed to them in their individual capaci ty, whether actually distributed or not.

Tax Liability of Members of a General Professional Partnership (Sec. 26)1.

A general professional partnership as suchshall not be subject to the income tax. Persons engaging in business as partnersin a general professional partnership shall be liable for income tax only in their s eparate and individual capacities .

2.

Each partner shall report as gross income his dis tributive s hare, actually or constructively received, in the net income ofthe partnership.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME (SEC. 34)Special case: Taxpayers earning compensation income arising from personal services rendered under an employer-employeerelationship- no deductions shall be allowed under this Section other than premium payments on health and/or hospitalizationinsurance of an individual taxpayer.

Main Categories of Deductions1.

Ordinary and necessary trade, business, or professional expenses2.

Interest3.

Taxes4.

Losses5.

Bad Debts6.

Depreciation7.

Depletion of oil and gas wells and mines8.

Charitable and other contributions9.

Research and development10.

Pension trusts11.

Payments on health and/or hospitalization insurance of an individual taxpayer 12.

OSD

EXPENSES

EXCLUSIONS REMARKSAll the ordinary and necessary expenses paid or incur redduring the taxable year in carrying on or which are directlyattributable to, the development, management, operation and/orconduct of TBP. Includes reasonable allowancefor the ff.:

a. Compensation for personal services actually rendered,including grossed up monetary value of fringe benefitfurnished by the employer to the employee

b.

Travel expenses, here and abroad, while away fromhome in the pursuit of TBP

c.

Rentals and other payments which are required as a

Bribes, Kickbacks and Other Similar Payments made, directlyor indirectly, to an official/employee of the national government,LGU, GOCC, or foreign government, or to a private corporation ora similar entity are NOT deductible.

Substantiation RequirementsTP should substantiate with sufficient evidence (i) the amount ofthe expense being deducted, and (ii) the direct relation of theexpense being deducted to the development, management,operation and/or conduct of the TBP


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condition for the continued use or possession, forpurposes of TBP to which the taxpayer has not taken oris not taking title

d.

Entertainment, amusement and recreation expensesduring the taxable year, that are directly connected to thedevelopment, management and operation of the TBP,unless such expense is contrary to law, morals public

policy or public order

Expenses Allowable to Private Educational Institutions- Sameplusit has the option either to:

a) to deduct expenditures otherwise considered as capitaloutlays of depreciable assets incurred during the taxableyear for the expansion of school facilities or(b) to deduct allowance for depreciation thereof

INTERESTS

Amount of interest paid or incurred within a taxable year onindebtedness in connection with the TPs TBP.

Note:The TPs allowable deduction for interest expense shall bereduced by 33% of the interest income.

TP has the option to treat interest expense incurred to acquireproperty used in TBP as a) a deduction or b) a capitalexpenditure.NON-DEDUCTIBLE ITEMS:

(a)

If within the taxable year, an individual TP reportingincome on the cash basis incurs an indebtedness onwhich an interest is paid in advance through discount orotherwise

- Deductible in the year when the indebtedness ispaid- If the indebtedness is payable in periodic

amortizations, the amount of interest whichcorresponds to the amount of the principal amortizedor paid during the year shall be allowed as deduction in

such taxable year;(b)

If both TP and the person to whom the payment hasbeen made or is to be made are persons specified underSection 36 (B) (fiduciaries, family members, etc.); or

(c)

If the indebtedness is incurred to finance petroleumexploration.

TAXES

Taxes paid or incurred within the taxable year in connection withthe TPs TBP

If NRA-ETRB or RFCdeductions for taxes shall be allowed onlyif and to the extent that they are connected with income fromsources within the Philippines.

NOTE: Taxes allowed under this Subsection, when refunded orcredited, shall be included as part of gross income in the year ofreceipt to the extent of the income tax benefit of said deduction.

NON DEDUCTIBLE ITEMS(a)

Income tax;(b)

Income taxes imposed by authority of any foreigncountry, aka foreign taxes

- Deductible if TP does not signify in his return his desireto have to any extent the benefits of FTC;

(c)

Estate and donor's taxes; and(d)

Taxes assessed against local benefits of a kind tendingto increase the value of the property assessed, akaspecial assessments

[Forei gn tax credi t]

FTC under this Section NOT ALLOWED to aliens and foreign corporations.

If the taxpayer signifies in his return his desire to have the benefits of credit against tax for taxes of foreign countries, the taximposed by this Title shall be credited with:

a.

the amount of income taxes paid or incurred during the taxable year to any foreign country, in the case of a Filipino citizenand a domestic corporationand

b.

his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred duringthe taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported fortaxation, in the case of a partner or a beneficiary of an estate or trust.

FTCLIMITATIONSa.

The amount of the credit in respect to the tax paid or incurred to any countryshall not exceed the same proportion of the tax

against which such credit is taken, which the taxpayer's taxable income from sources within such countryunder this Titlebears to his entire taxable income for the same taxable year; and

b.

The total amount of the creditshall not exceed the same proportion of the tax against which such credit is taken, which thetaxpayer's taxable income from sources without the Philippines taxableunder this Title bears to his entire taxable incomefor the same taxable year.

Adjustments on Payment of Incurred Taxes.

- If accrued taxes, when paid, differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded inwhole or in part, the taxpayer shall notify the Commissioner who shall re-determine the amount of the tax for the year oryears affected, and the amount of tax due upon such re-determination, if any, shall be paid by the taxpayer upon notice anddemand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer.

Prove the ff. to Kim:


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o Total amount of income derived from sources without the Philippines;o Amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph;o All other information necessary for the verification and computation of such credits.

Year in Which Credit Taken.- At the option of the taxpayer and irrespective of the method of accounting employed, FTC may be taken in the year which

the taxes of the foreign country were incurred.- Effect: The credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be

allowed as a deduction in the same or any succeeding year.LOSSES

Losses actually sustained during the taxable year and notcompensated for by insurance or other forms of indemnity shall beallowed as deductions:(a) If incurred in trade, profession or business;(b) Of property connected with the trade, business or profession, ifthe loss arises from fires, storms, shipwreck, or other casualties,or from robbery, theft or embezzlement.

In the case of a nonresident alien individual or foreign corporation ,the losses deductible shall be those actually sustained during theyear incurred in TBP conducted within the Philippines, when suchlosses are not compensated for by insurance or other indemnity.

Loss from sales/exchanges of capital assets shall be allowed onlyto the extent provided in Sec. 39. Moreover, securities which arecapital assets become worthlessduring the taxable year, the lossresulting therefrom shall be considered as a loss from thesale/exchange, on the last day of such taxable year, of capitalassets.

Losses from wagering transactions shall be allowed only to theextent of the gains from such transactions.

Losses from 'wash s ales ' of stock or securities (?)

Abandonment losses are deductible, including:1.

Exploration & development expenses in petroleumoperations, whether abandonment is partial/whole. Filenotice of abandonment.

2.

Unamortized and un-depreciated costs ofequipment/facility directly used in a producing well in theyear such well, equipment or facility is abandoned by thecontractor. If production is resumed, or theequipment/facility is restored into service, the said costsshall be included as part of gross income in the year ofresumption or restoration and shall be amortized ordepreciated, as the case may be.

DECLARATION OF LOSS- Submit not be less than thirty (30) days nor more than

ninety (90) days from the date of discovery of the causegiving rise to the loss.

If at the time of the filing of the return, such loss has been claimedas a deduction for estate tax purposes in the estate tax return cannot claim loss as a deduction.

Net Operating Loss Carry-OverThe net operating loss, i.e. the excess of allowable deductionover gross income of the business in a taxable year, of thebusiness for any taxable year immediately preceding the currenttaxable year, which had not been previously offset as deduction

from gross income shall be carried over as a deduction from grossincome for the next 3 consecutive taxable years immediatelyfollowing the year of such loss.

Any net loss incurred in a taxable year during which thetaxpayer was exempt from income tax shall not beallowed as a deduction.

No NOLCO if there if there has been a substantiachange in the ownership of the business in that not lessthan 75% of outstanding issued shares/paid-up capital isheld by or on behalf of the same persons.

For mines other than oil and gas wells, a NOL withoutthe benefit of incentives provided for in the OmnibusInvestments Code, incurred in any of the first 10 yearsooperation may be carried over as a deduction fromtaxable income for the 5 years immediately following theyear of such loss.

BAD DEBTS

Debts due to TP actually ascertained to be worthless and chargedoff within the taxable year except:

a.

those not connected with TBP andb.

those sustained in a transaction entered into between

parties mentioned under Sec. 36 (B).

The recovery of bad debts previously allowed as deduction in thepreceding years shall be included as part of the gross income inthe year of recovery to the extent of the income tax benefit of saiddeduction.

DEPRECIATION

Reasonable allowance for the exhaustion, wear and tear(including reasonable allowance for obsolescence) of propertyused in the trade or business.

In the case of property held by one person for life with remainderto another person, the deduction shall be computed as if the lifetenant were the absolute owner of the property and shall beallowed to the life tenant.

Reasonable allowanceinclude, but not limited to, an allowancecomputed in accordance with rules and regulations prescribed bythe Secretary of Finance under the straight-line method, declining-balance method, sum-of-the-years-digit method, and others.

The TP and KIMs written agreementspecifically dealingwith the useful life and depreciation rate (ULDR) of anyproperty shall be binding, as long as rules andregulations prescribed by Sec. of Finance are followed.


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In the case of property held in trust, the allowable deduction shallbe apportioned between the income beneficiaries and the trusteesin accordance with the Deed of Trust, or in the absence of such,on the basis of the trust income allowable to each.

DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONSIf property is directly used in the petroleum operations:

a.

Depreciation allowance in respect to such properties initiallyplaced in service in a taxable year shall be allowed under thestraight-line or declining-balance method of depreciation atthe option of the service contractor.

b.

Useful life of properties shall be 10 years of such shorter lifeas may be permitted by BIR.

If property is not directly used in the petroleum operations:a.

Properties shall be depreciated under the straight-linemethod on the basis of an estimated useful l ife of 5 years.

DEPRECIATION DEDUCTIBLE BY NRA-ETRBOR RFCA reasonable allowance for the deterioration of property arisingout of its use or employment or its non-use in the TBP shall bepermitted only when such property is located in the Philippines.

DEPRECIATION OF PROPERTIES USED IN MINING OPERATIONS OTHERTHAN PETROLEUM OPERATIONSIf the expected life is 10 years or less at the normal rate ofdepreciation; orIf the expected life is more than 10 years Depreciated over anynumber of years between 5 years and the expected life. NotifyKIM at the beginning of the depreciation period.

Where TP has adopted such ULDR for any depreciableand claimed the depreciation expenses as deductionfrom his gross income, without any written objection onthe part of BIR, that ULDR adopted by TP for theaforesaid depreciable asset shall be considered binding.

DEPLETION OF OIL AND GAS WELLS AND MINES

A reasonable allowance for depletion or amortization computed inaccordance with the cost-depletion method shall be granted.--------------------------------------------------------------------------After production in commercial quantities has commenced, certainintangible exploration and development drilling costs :

a.

shall be deductible in the year incurred if suchexpenditures are incurred for non-producing wells and/ormines, or

b.

shall be deductible in full in the year paid or incurred orat the election of the taxpayer, may be capitalized andamortized if such expenditures incurred are for producingwells and/or mines in the same contract area.

--------------------------------------------------------------------------ELECTION TO DEDUCT EXPLORATION AND DEVELOPMENT (E&D)EXPENDITURES, which is irrevocable and shall be binding insucceeding taxable years.- TPmay, at his option, deduct accumulated E&D expenditures

as cost or adjusted basis for cost depletion as of date ofprospecting, as well as E&D expenditures paid or incurredduring the taxable year,provided that:a.

the amount deductible for E&D expenditures shall notexceed 25% of the net income from mining operationscomputed w/o the benefit of any tax incentives underexisting laws; and

b.

the actual E&D expenditures minus 25% of the netincome from mining shall be carried forward to thesucceeding years until fully deducted.

When the allowance for depletion shall equal the capital invested,no further allowance shall be granted.

--------------------------------------------------------------------------Intangible costs in petroleum operations any cost incurred inpetroleum operations which in itself has no salvage value andwhich is incidental to and necessary for the drilling of wells andpreparation of wells for the production of petroleum. Said costsshall not pertain to the acquisition or improvement of property of acharacter subject to the allowance for depreciation except that theallowances for depreciation on such property shall be deductibleunder this Section.

Any intangible exploration, drilling and development expensesallowed as a deduction in computing taxable income during theyear shall not be taken into consideration in computing theadjusted cost basis for the purpose of computing allowable costdepletion.--------------------------------------------------------------------------Exploration expenditures expenditures paid or incurred for thepurpose of ascertaining the existence, location, extent or quality of

any deposit of ore or other mineral, and paid or incurred beforethe beginning of the development stage of the mine or deposit.Development expenditures expenditures paid or incurredduring the development stage of the mine or other naturaldeposits, which shall begin at the time when deposits of ore orother minerals are shown to exist in sufficient commercial quantityand quality and shall end upon commencement of actualcommercial extraction.Net income from mining operations gross income fromoperations less allowable deductions which are necessary orrelated to mining operations.


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DEPLETION OF OIL AND GAS WELLS AND MINES DEDUCTIBLE BY NRA-ETRBOR RFCAllowance for depletion of oil and gas wells or mines shall beauthorized only in respect to oil and gas wells or mines locatedwithin the Philippines.

A llowable deductions include mining, milling, and marketingexpenses, and depreciation of properties directly used in themining operations; shall not apply to expenditures for theacquisition or improvement of property of a character which issubject to the allowance for depreciation.

Note: In no case shall this paragraph (?) apply with respect to

amounts paid or incurred for the exploration and development ofoil and gas.CHARITABLE AND OTHER CONTRIBUTIONS

Contributions or gifts actually paid or made within the taxable yeara.

to, or for the use of, the Government of the Philippines or anyof its agencies or any political subdivision thereof exclusivelyfor public purposes, or

b.

to accredited domestic corporation or associations organizedand operated exclusively for religious, charitable, scientific,youth and sports development, cultural, or educationalpurposes or for the rehabilitation of veterans, or to socialwelfare institutions, or

c.

to NGO, in accordance with rules and regulationspromulgated by the Secretary of Finance, no part of thenet income of which inures to the benefit of any private

stockholder or individual in an amount not greater than 10%in the case of an individual, and 5% in the case of acorporation, of the taxpayer's taxable income derived fromTBP as computed without the benefit of deductions under thisSection.

To be deductible, contributions shall be verifiedunder the rulesand regulations prescribed by the Secretary of Finance.

Valuation of charitable contribution of property other than money- based on the acquisition cost of said property.

Utilizationmeans:1.

Any amount in cash or in kind (including administrativeexpenses) paid or utilized to accomplish one or morepurposes for which the accredited NGO was created ororganized.

2.

Any amount paid to acquire an asset used (or held for

use) directly in carrying out one or more purposes forwhich the accredited nongovernment organization wascreated or organized.

An amount set aside for a specific project which comes within oneor more purposes of the accredited NGO may be treated as autilization, but only if at the time such amount is set aside, theaccredited NGO has established to the satisfaction of the BIRthat:

a.

the amount will be paid for the specific project within aperiod to be prescribed in rules and regulations to bepromulgated by the Secretary of Finance, but not toexceed 5 years, and

b. the project is one which can be better accomplished bysetting aside such amount than by immediate payment offunds.

DONATIONS TO BE DEDUCTIBLE IN FULL(CODE:GOVERNMENT;FOREIGN INSTITUTIONS/INTERNATIONAL ORGANIZATIONS;ACCREDITED DOMESTIC NON-PROFIT NGOS):1.

Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-ownedgovernment corporations:

o Exclusivelyto finance, to provide for, or to be used in undertaking priority activitiesin education, health, youth and sportsdevelopment, human settlements, science and culture, and in economic development accd. to National Priority Plan(NPP)of NEDA.

o Any donation not in accordance with the NPP shall be subject to the limitations prescribed;2. Donations to foreign institutions or international organizations:

o Those which are fully deductible in compliance with treaties or commitments entered into by the Government of thePhilippines and the FI/IO or

o Those which are fully deductible in pursuance of special laws;3.

Donations toAccredited Nongovernment Organizations:o Organized and operated exclusively for scientific, research, educational, character-building and youth and sports

development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income ofwhich inures to the benefit of any private individual;o Which, not later than the 15thday of the 3rd month after the close of the accredited NGOs taxable year in which

contributions are received, makes utilization directly for the active conductof the activities constituting the purpose forwhich it is organized and operated, unlessan extension is granted by the Secretary of Finance;

o The level of administrative expense of which shall, on an annual basis, conform with the rules prescribed by the Secretaryof Finance, but in no case to exceed 30% of the total expenses; and

o The assets of which, in the event of dissolution, would be distributed to another NGO organized for similar purpose, ortothe state for public purpose, orwould be distributed by a court to another organization to be used in such manner as inthe judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized.


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RESEARCH AND DEVELOPMENT

R&D expenditures which are paid or incurred by him during thetaxable year in connection with his TBP as ordinary andnecessary expenses which are not chargeable to capital account allowed as deduction during the taxable year when paid orincurred.

--------------------------------------------------------------------------AMORTIZATION OF CERTAIN R&DEXPENDITURESAt the election of TP, the ff. R&D expenditures may be treated asdeferred expenses and as such, shall be allowed as deductionratably distributed over a period of not less than 60 months asmay be elected by TP (beginning with the month in which the TPfirst realizes benefits from such expenditures):

a.

Paid or incurred by the taxpayer in connection with hisTBP;

b.

Not treated as R&D expenses;c.

Chargeable to capital account but not chargeable to

property of a character which is subject to depreciationor depletion.

LIMITATIONS ON DEDUCTION:a.

Any expenditure for the acquisition or improvement ofland, or for the improvement of property to be used inconnection with R&D of a character which is subject todepreciation and depletion; and

b.

Any expenditure paid or incurred for the purpose of

ascertaining the existence, location, extent, or quality ofany deposit of ore or other mineral, including oil or gas.

--------------------------------------------------------------------------Electionmay be made for any taxable year, but only if made not later thanthe time prescribed by law for filing the return for such taxableyear.The method so elected, and the period selected by the taxpayer,shall be adhered to in computing taxable income for the taxableyear for which the election is made and for all subsequent taxableyears unless with the approval of the Commissioner, a change toa different method is authorized.The election shall not apply to any expenditure paid or incurredduring any taxable year for which the taxpayer makes theelection.

PENSION TRUSTS

An employerestablishing or maintaining a pension trust to providefor the payment of reasonable pensionsto his employees shall beallowed as a deduction a reasonable amounttransferred or paidinto such trust during the taxable year in excess of suchcontributions, but only if such amount:

has not theretofore been allowed as a deduction, &

is apportioned in equal parts over a period of 10 consecutiveyears beginning with the year in which the transfer orpayment is made.

Allowed deduction is in addition to the contributions to such trustduring the taxable year to cover the pension liability accruingduring the year, allowed as a deduction under ordinary andnecessary TBP expenses.

ADDITIONAL R EQUIREMENTS FOR DEDUCTIBILITY OF CERTAIN PAYMENTS Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for whichdepreciation or amortization may be allowed, shall be allowed as a deduction only ifit is shown that the tax required to be deductedand withheld therefromhas been paidto the BIR.OPTIONAL STANDARD DEDUCTION (OSD)

In lieuof the deductions allowed above:a.

An individual subject to tax under Section 24, other than a nonresident alien, may elect an SD in an amount not exceeding40% of his gross sales or gross receipts, as the case maybe.

b.

A corporation subject to tax under Sections 27(A) and 28 (A)(1) may elect an SD in an amount not exceeding 40% of its grossincome.

Unless the TP signifies in his return his intention to elect the OSD , he shall be considered as having availed himself of thedeductions allowed in the preceding Subsections.

Such election in the return shall be irrevocable for the taxable year for which the return is made. An individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return

such financial statements otherwise required under NIRCPREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE OF AN INDIVIDUAL TAXPAYER

The amount of premiums not exceeding P2,400/ family or

P200/month paid during the taxable year for health and/orhospitalization insurance taken by the TP for himself, including hisfamily, shall be allowed as a deduction from his gross income.

To qualify, said family must have a gross income of not

more than P250,000 for the taxable year.

In the case of married TPs, only the spouse claiming theadditional exemption for dependents shall be entitled to thisdeduction.

NOTE:The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have beenheld for this purpose, may prescribe by rules and regulations, limitations or ceilingsfor any of the itemized deductionsunder Subsections (A) to (J) of this Section, observing the ff. factors:

1.

Adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and2.

Effects of inflation on expenditure levels.No ceilings shall further be imposed on items of expense already subject to ceilings under present law.


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SEC. 36. ITEMS NOT DEDUCTIBLE.-In computing net income, no deduction shall in any case be allowed in respect to -

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 anyproperty or estate;

a. This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations whichare 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 beenmade; or4.

Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interestedin any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly abeneficiary under such policy.

SEC. 45. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred'

dependent upon the method of accounting upon the basis of which the net income is computed:o Unless in order to clearly reflect the income, the deductions should be taken as of a different period.o In the case of the death of a TP, there shall be allowed as deductions for the taxable period in which falls the date of

his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such periodor a prior period.

Taxable Income- Gross income less the deductions and/or personal and additional exemptions, if any, authorizedfor such types of income by NIRC or by special law.

Definitions Taxable on income derived fromsourcesthe Philippines

Resident citizen Filipino citizen residing in the Philippines WI/WODomestic corporation WI/WONonres ident citizen (1) A Filipino citizen who physically present abroad

with a definite intention to reside therein.(2) A Filipino citizen who leaves the Philippines toreside abroad, either as an immigrant or foremployment on a permanent basis.(3) A Filipino citizen who works and derives incomefrom abroad and whose employment thereat requireshim to be physically present abroad most of the time(at least 183 days) during the taxable year.

(4) A citizen who has been previously considered asnonresident citizen and who arrives in the Philippinesat any time during the taxable year to residepermanently in the Philippines shall likewise be treatedas a nonresident citizen for the taxable year in whichhe arrives in the Philippines with respect to his incomederived from sources abroad until the date of hisarrival in the Philippines. (aka arriving and departingNRCs)

WI

Note:An individual citizen of the Philippineswho is working and deriving income fromabroad as an overseas contract worker istaxable only on income derived from sourceswithin the Philippines.A seaman who is a citizen of the Philippinesand who receives compensation for services

rendered abroad as a member of thecomplement of a vessel engaged exclusivelyin international trade shall be treated as anOCW.Most of the time rule need not be compliedwith to avail of the foreign source exemption;however, contract must be registered withPOEA (BIR Ruling 33-00).

Resident alien An individual whose residence is within the Philippinesand who is not a citizen thereof.

WI

Nonres ident alien An individual whose residence is not within thePhilippines and who is not a citizen thereof.

WI

Resident foreigncorporation

A foreign corporation engaged in trade or businesswithin the Philippines.

WI

Nonresident foreigncorporation

A foreign corporation not engaged in trade or businesswithin the Philippines.

WI


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INCOME TAX ON INDIVIDUALS

RATES OF INCOME TAX ON INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT ALIEN OF THE PHILIPPINES.-An income tax is hereby imposedon the taxable income, other than income subject to tax under Subsections (B), (C) and (D) ofthis Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of thePhilippines residing therein. Rates are as follows:

Not over P10,000Over P10,000 but not over P30,000

Over P30,000 but not over P70,000Over P70,000 but not over P140,000Over P140,000 but not over P250,00Over P250,000 but not over P500,000Over P500,000

5%P500+10% of the excess over P10,000

P2,500+15% of the excess over P30,000P8,500+20% of the excess over P70,000P22,500+25% of the excess over P140,000P50,000+30% of the excess over P250,000P125,000+32% of the excess over P500,000.

For married individuals , H and W shall compute separately their individual income tax based on their respective totaltaxable income.

o If any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of thespouses, the same shall be divided equally between the spouses for the purpose of determining their respectivetaxable income.

o Married individuals who do not derive income purely from compensation shall file a return for the taxable year toinclude the income of both spouses, but where it is impracticable for the spouses to file one return, each spousemay file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes ofverification for the taxable year.

Rate of Tax on Certain PASSIVE INCOME

(B) Rate of Tax on Certain Passive Income:-(1) Interests, Royalties, Prizes, and Other Winnings.- 20% final tax on:

o amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutesand from trust funds and similar arrangements;

interest income received by an individual TP (except a nonresident individual) from a depository bankunder the expanded foreign currency deposit system - 7.5% final income tax

interest income from long-term deposit or investment in the form of savings, common or individual trustfunds, deposit substitutes, investment management accounts and other investments evidenced bycertificates in such form prescribed by the BSPexempt

Should the holder of the certificate pre-terminate the deposit or investment before the 5 thyear, a final taxshall be imposed on the entire income and shall be deducted and withheld by the depository bank from theproceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

4 years to less than 5 years - 5%;3 years to less than 4 years - 12%; and

Less than 3 years - 20%o

royalties, excepton books, as well as other literary works and musical compositions - 10% final tax;o prizes, exceptprizes amounting to P10,000 or less - tax under Subsection (A) of Section 24;o and other winnings, exceptPCSO and Lotto winnings.

(2) Cash and/or Property Dividends.- Final taxo cash and/or property dividends actually or constructively received by an individual from a

o domestic corporation oro joint stock company, insurance or mutual fund companieso ROHQ of multinational companies, or

o on the share of an individual in the distributable net income after tax of a partnership (except a GPP) of which he isa partner, or

o on the share of an individual in the net income after tax of an association, a joint account, or a JV or consortiumtaxable as a corporation of which he is a member or co-venturer:

o 6% beginning January 1, 1998; 8% beginning January 1, 1999; 10% beginning January 1, 2000.

Note: The tax on dividends shall apply only on income earned on or afterJanuary 1, 1998.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B)notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable yearfrom the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed ofthrough the stock exchange.

Not over P 100,000On any amount in excess of P 100,000

5%10%

(D) Capital Gains from Sale of Real Property.-GENERAL RULE:


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- Section 39(B) notwithstanding, 6% final tax based on the gross selling price or current FMV, whichever is higher, is herebyimposed upon:

o capital gains presumed to have been realizedo from the sale, exchange, or other disposition ofo real property located in the Philippines,o classified as capital assets,o including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts.

-

Tax liability on gains from sales or other dispositions of real property to the government or any of its political subdivisions oragencies or to GOCCsdetermined either under Section 24 (A) or under this Subsection, at the option of TP.

EXEMPTION FROM CGTFROM SALE OF REAL PROPERTY,REQUISITES1.

Capital gains presumed to have been realized from the sale or disposition of their principal residence2.

by natural persons,3.

the proceeds of which is fullyutilized in acquiring or constructing a new principal residence4.

within 18 calendar months from the date of sale or disposition5.

Notify BIR within 30 days from the date of the sale thru a prescribed return of his intention to avail of the tax exemption6.

Exemption can only be availed of once every 10 yearso Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal

residence built or acquired.o If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been

realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price orfair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilizedamount bears to the gross selling price in order to determine the taxable portion and the final tax shall be imposed

thereon.

TAX ON NONRESIDENT ALIEN INDIVIDUAL

1.

NRA-ETRBsubject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxableincome received from all sources within the Philippines.

a.

NRA individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 daysduring any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'.

2.

NRA-NOT ETRBupon the entire income received from all sources within the Philippines as interest, cash and/or propertydividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed ordeterminable annual or periodic(FDAP) or casual gains, profits, and income, and capital gains, a tax equal to 25% of suchincome.

a.

Capital gains realized by a NRA-not ETRB from the sale of shares of stock in any domestic corporation and realproperty shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

3.

Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters Established inthe Philippines of Multinational Companies (RHQ or ROHZ of MNC) upon the gross income received as salaries,wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from suchregional or area headquarters and regional operating headquarters, a tax equal to 15% of such gross income.

a.

Same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employedby these multinational companies.

b.

MNCa foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in theAsia-Pacific Region and other foreign markets.

4.

Alien Individual Employed by Offshore Banking Unitsestablished in the Philippinesupon the gross income receivedas salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, fromsuch off-shore banking units, a tax equal to 15% of such gross income.

a.

Same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliensemployed by these offshore banking units.

5.

Alien Individual Employed by Petroleum Service Contractor and Subcontractor Alien individual who is a permanentresident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a

foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of 15% of thesalaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, receivedfrom such contractor or subcontractor.

a.

Same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed bypetroleum service contractor and subcontractor.

NOTE: Any income earned from all other sources within the Philippines by the alien employees referred to under No. 3 to 5 shall besubject to the pertinent income tax imposed under this Code.General Rule:Interests, Royalties, Prizes, and Other Winnings.20% INCOME tax on:

o amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes


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and from trust funds and similar arrangements; interest income from long-term deposit or investment in the form of savings, common or individual trust

funds, deposit substitutes, investment management accounts and other investments evidenced bycertificates in such form prescribed by the BSPexempt

Should the holder of the certificate pre-terminate the deposit or investment before the 5 thyear, a final taxshall be imposed on the entire income and shall be deducted and withheld by the depository bank from theproceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

4 years to less than 5 years - 5%;3 years to less than 4 years - 12%; andLess than 3 years - 20%

o Interestso Royalties (all forms)

However, royalties on books and other literary works and on musical compositions subject to 10% final taxon the total amount thereof.

Cinematographic films and similar works shall be subject to the tax provided under Section 28 (rates forRFC).

o prizes, exceptprizes amounting to P10,000 or less - tax under Subsection (B)(1)of Section 24;o and other winnings, exceptPCSO and Lotto winnings.

Cash and/or Property Dividends.20% INCOME tax ono cash and/or property dividends actually or constructively received by an individual from a

o domestic corporation oro joint stock company, insurance or mutual fund companies

o

ROHQ of multinational companies, oro on the share of an NRAindividual in the distributable net income after tax of a partnership (except a GPP) of which

he is a partner, oro on the share of an NRA individual in the net income after tax of an association, a joint account, or a JV or

consortium taxable as a corporation of which he is a member or co-venturer:Capital Gains.- Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded throughthe local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

SEC.35.ALLOWANCE OF PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER.o For purposes of determining the tax provided in Section 24 (A)) Basic personal exemption amounting to P50,00 per

individual taxpayer.o Married individuals where only one spouse is deriving gross income only such spouse shall be allowed the

personal exemption.o Additional exemption of P25,000 for each dependent not exceeding 4; shall be claimed by only one of the spouses

in the case of married individuals; shall be claimed only by the spouse who has custody of the child or children incase of legally separated spouses.

Dependentmeans a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living withthe taxpayer if such dependent is not more than 21 years of age, unmarried, and not gainfully employed orif such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

o The total amount of additional exemptions that may be claimed by both shall not exceed the maximum additionalexemptions herein allowed.

o Change of status1.

If TP marries or should have additional dependent(s) during the taxable year, TP may claim the correspondingadditional exemption in fullfor such year.

2.

If TP dies during the taxable year, his estate may still claim the personal and additional exemptions for himselfand his dependent(s) as if he died at the close of such year.

3.

If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years old orbecomes gainfully employed during the taxable year, TP may still claim the same exemptions as if the spouseor any of the dependents died, or as if such dependents married, became 21 years old or became gainfully

employed at the close of such year.o

NRA-ETB shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the incometax law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country,not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines.

Said nonresident alien should file a true and accurate return of the total income received by him from allsources in the Philippines.

TAXONCORPORATIONS

SEC.27.RATES OF INCOME TAX ON DOMESTIC CORPORATIONS.-o Income tax of 30% upon the taxable income derived during each taxable year from all sources within and without the Philippines

by every corporation as defined in Section 22(B) and taxable as a corporation, organized in, or existing under the laws of the


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Philippines.

22B: The term 'corporation ' shall include partnerships, no matter how created or organized, joint-stock companies, jointaccounts (cuentas en participacion), association, or insurance companies, but does not include general professionalpartnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging inpetroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a servicecontract with the Government. 'General professional partnerships ' are partnerships formed by persons for the solepurpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or

business.

'Domestic', when applied to a corporation, means created or organized in the Philippines or under its laws.

'Foreign', when applied to a corporation, means a corporation which is not domestic

'Resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines.o In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to

the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shallbe deemed to have been earned and spent equally for each month of the period. (same w/ RFC)

o The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the newrate within the fiscal year by the taxable income of the corporation for the period, divided by 12. (same w/ RFC)

o GROSS INCOME TAX OPTION (same w/ RFC):The President, upon the recommendation of the Secretary of Finance, mayeffective January 1, 2000, allow corporations the option to be taxed at 15% of gross income, after the following conditionshave been satisfied:

Tax effort ratio of twenty 20% of Gross National Product (GNP); Ratio of 40% of income tax collection to total tax revenues; VAT tax effort of 4% of GNP;

0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.- The option shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources

does not exceed 55%.- The election of the option by the corporation shall be irrevocable for 3 consecutive taxable years during which the

corporation is qualified under the scheme.o For purposes of this Section, the term 'g ros s income' derived from business shall be equivalent to gross sales less sales returns,

discounts and allowances and cost of goods sold.o 'Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their

present location and use.o For a trading or merchandising concern, 'cost of goods s old' shall include the invoice cost of the goods sold, plus import duties,

freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.o For a manufacturing concern, 'cos t of goods manufactured and sold' shall include all costs of production of finished goods,

such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurredto bring the raw materials to the factory or warehouse.

o In the case of taxpayers engaged in the sale of service, 'g ros s income' means gross receipts less sales returns, allowances anddiscounts.

Proprietary Educational Institutions and Hospitals. -o Proprietary educational institutions and hospitals which are nonprofit shall pay a tax 10% on their taxable income exceptthose

covered by Subsection (D) hereof (i.e. tax on certain passive incomes)o If the gross income from 'unrelated trade, business or other activity' exceeds 50% of the total gross income derived by such

educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof (30% income tax) shall beimposed on the entire taxable income.

o 'Unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which isnot substantially related to the exercise or performance by such educational institution or hospital of its primarypurpose or function.

o 'Proprietary educational institution ' is any private school maintained and administered by private individuals orgroups with an issued permit to operate from the DepEd, CHED, TESDA, as the case may be, in accordance withexisting laws and regulations.

GOCCs, Agencies or InstrumentalitiesAll agencies/instrumentalities/GOCCs exceptthe GSIS, SSS, PhilHealth, LWDs, PCSO,and PAGCOR shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associationsengaged in similar business, industry, or activity.

Rates of Tax on Certain Passive Incomes.-Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and SimilarArrangements, and Royalties.

- Amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trustfunds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines

20% final tax


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- Interest income derived by a domestic corporation from a depository bank under the expanded foreign currency depositsystemfinal income tax at 7.5% of such interest income.

Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange.

- Net capital gains realized during the taxable year from the sale, exchange, or other disposition of shares of stock in adomestic corporation

o except shares sold or disposed of through the stock exchange

Not over P 100,000

Amount in excess of P 100,000

5% final tax

10% final taxTax on Income Derived under the Expanded Foreign Currency Deposit System.

- SM: Income derived by a depository bank under the expanded foreign currency deposit system from foreign currencytransactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches offoreign banks that may be authorized by the BSP to transact business with foreign currency deposit systemExempt fromall taxes

o Except net income from such transactions as may be specified by the Secretary of Finance, upon recommendationby the Monetary Board to be subject to the regular income tax payable by banks:

- Interest income from foreign currency loans granted by such depository banks under said expanded system to residentsother than offshore banking units in the Philippines or other depository banks under the expanded system10% final tax

- Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under theexpanded systemExempt from income tax.

Intercorporate Dividends

- Dividends received by a domestic corporation from another domestic corporationexemptCapital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. Final tax of 6%

-

Gain presumed to have been realized on the sale, exchange, or disposition of lands and/or buildingso which are not actually used in the business of a corporationo and are treated as capital assets,o based on the gross selling price or FMV, whichever is higher, of such lands and/or buildings.

Minimum Corporate Income Tax on Domestic Corporations.

- 2% MCIT on the gross income of a taxable domestic corporation as of the end of the taxable year,o beginning on the fourth taxable year immediately following the year in which such corporation commenced its

business operations,o when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable

year..Carry Froward of Excess Minimum Tax.

- Any excess of the MCIT over the normal income tax as computed under Subsection (A) of this Section shall be carriedforward and credited against the normal income tax for the 3 immediately succeeding taxable years.

Relief from the MCIT Under Certain Conditions.- The Secretary of Finance is authorized to suspend the imposition of the MCIT on any corporation which suffers losses:

o on account of prolonged labor dispute, oro because of force majeure, oro because of legitimate business reverses.

o 'Cost of services ' shall mean all direct costs and expenses necessarily incurred to provide the services required by thecustomers and clients including:

(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and

cost of supplies.o In the case of banks, 'cost of services ' shall include interest expense.SEC. 28. RATES OF INCOME TAX ON FOREIGN CORPORATIONS.

TAX ON RESIDENT FOREIGN CORPORATIONS.

- Except as otherwise provided in this Code, for a corporation organized, authorized, or existing under the laws of any foreign

country, engaged in trade or business within the PhilippinesIncome tax equivalent to 35% of the taxable income derived inthe preceding taxable year from all sources within the Philippines.

- NB: Gross income tax option and MCIT also available for RFCs, under the same conditions applied to domestic corporations.

International Carrier.- An international carrier doing business in the Philippines shall pay 2.5% tax on its 'Gross Philippine Billings', but it may avail

of a preferential rate or exemption from the such tax herein imposed on their gross revenue derived from the carriage ofpersons and their excess baggage

o on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory oro on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to


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Philippine carriers, shall likewise be exempt from the tax imposed under this provision.

(a) 'Gros s Philippine Billings ' in International Air Carriers- Amount of gross revenue derived from carriage of persons, excess baggage, cargo, and mail- originating from the Philippines in a continuous and uninterrupted flight,- regardless of the place of sale or issue and the place of payment of the ticket or passage document.- Tickets revalidated, exchanged, and/or indorsed to another international airline form part of the Gross Philippine

Billings if the passenger boards a plane in a port or point in the Philippines.- For a flight which originates from the Philippines, but transshipment of passenger takes place at any part outside

the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flownfrom the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

(b) 'Gros s Philippine Billings ' International Shipping- Amount of gross revenue whether for passenger, cargo, or mail- originating from the Philippines up to final destination,-

regardless of the place of sale or payments of the passage or freight documents.

Offshore Banking Units.

- Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, otheroffshore banking units, and local commercial banks, including branches of foreign banks that may be authorized by BSP totransact business with offshore banking unitsexempt from all taxes.o Exception: net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the

Monetary Board which shall be subject to the regular income tax payable by banks

-

Any interest income derived from foreign currency loans granted to residents other than offshore banking units or localcommercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business withoffshore banking units10% final tax.

- Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units exemptfrom income tax.

Tax on Branch Profits Remittances (BPRT).

- Any profit remitted by a branch to i ts head office15% BPRT-

Tax shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof(except those activities which are registered with the Philippine Economic Zone Authority).

-

The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 (Withholding of tax at source).-

Interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities,emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by aforeign corporation during each taxable year from all sources within the Philippinesshall not be treated as branch profits unlessthe same are effectively connected with the conduct of its trade or business in the Philippines.

Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.-(a) RHQnot subject to income tax.(b) ROHQ10% tax on their taxable income.

'Reg ional or area headquarters '-

a branch established in the Philippines by multinational companies and-

which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications, andcoordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

'Regional operating headquarters '-

a branch established in the Philippines by multinational companies- which are engaged in any of the following services:

o general administration and planning;

o

business planning and coordination;o sourcing and procurement of raw materials and components;o corporate finance advisory services;o marketing control and sales promotion;o training and personnel management; logistic services;o research and development services and product development;o technical support and maintenance;o data processing and communications; ando business development.

TAX ON CERTAIN INCOMES RECEIVED BY A RESIDENT FOREIGN CORPORATION.


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Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and SimilarArrangements and Royalties.

- Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds andsimilar arrangements and royalties derived from sources within the Philippines final income tax at the rate of 20% of suchinterest.

- However, interest income derived by an RFC from a depository bank under the expanded foreign currency deposit system finalincome tax at the rate of 7.5% of such interest income.

Income Derived under the Expanded Foreign Currency Deposit System. (NB: compare with Offshore Banking Units)- Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions

with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that maybe authorized by the BSP to transact business with foreign currency deposit system units, and other depository banks under theexpanded foreign currency deposit systemexempt from all taxes.

o Exception: net income from such transactions as may be specified by the Secretary of Finance, uponrecommendation by the Monetary Board to be subject to the regular income tax payable by banks.

- Interest income from foreign currency loans granted by such depository banks under said expanded system to residents otherthan offshore banking units in the Philippines or other depository banks under the expanded system10% final tax.

- Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expandedsystemexempt from income tax.

Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange.

- Net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a

domestic corporation ishares sold or disposed of through the stock exchangeNot over P 100,000On any amount in excess of P 100,000

5% final tax10% final tax

Intercorporate Dividends.

- Dividends received by an RFC from a domestic corporation liable to tax shall not be subject to tax under this Title.TAX ON NONRESIDENT FOREIGN CORPORATION.-

- Aforeign corporation not engaged in trade or business in the Philippines- Tax equal to 30% of the gross income received during each taxable year from all sources within the Philippines, such as

interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or otherfixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject totax under subparagraph 5 (c).

Nonresident Cinematographic Film Owner, Lessor or Distributor.

-

Subject to tax of 25% of its gross income from all sources within the Philippines.

Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals.- Subject to a tax of 4.5% of gross rentals, lease, or charter fees from leases or charters to Filipino citizens or corporations

Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.

- Subject to 7.5% tax on the gross rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries andother equipment.

Tax on Certain Incomes Received by a Nonresident Foreign Corporation.--

Interest on Foreign Loans.- A final withholding tax at 20% on the amount of interest on foreign loans contracted on or afterAugust 1, 1986;

- Intercorporate Dividends.- A final withholding tax at 15% on the amount of cash and/or property dividends received from adomestic corporation,

o which shall be collected and paid as provided in Section 57 (A) of this Code,o

subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow acredit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in thePhilippines equivalent to 15%, which represents the difference between the regular income tax of 30% and the 15%tax on dividends;

- Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - Net capital gains realized during thetaxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, exceptsharessold, or disposed of through the stock exchange:

Not over P 100,000On any amount in excess of P 100,000

5% final tax10% final tax

SEC.29.IMPOSITION OF IMPROPERLY ACCUMULATED EARNINGS TAX.
http://www.bir.gov.ph/index.php/tax-code.html#_ftn27http://www.bir.gov.ph/index.php/tax-code.html#_ftn27http://www.bir.gov.ph/index.php/tax-code.html#_ftn27


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- IAET is in addition to other taxes imposed by this Title- IAET equal to 10% of the improperly accumulated taxable income of each corporation for each taxable year- Applies to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or

the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided ordistributed.

- Exceptions.-o Publicly-held corporations;

o

Banks and other nonbank financial intermediaries; ando Insurance companies.

Evidence of Purpose to Avoid Income Tax.- Prima Facie Evidence.- The fact that any corporation is a mere holding company or investment company shall be prima facie

evidence of a purpose to avoid the tax upon its shareholders or members.- Evidence Determinative of Purpose.- The fact that the earnings or profits of a corporation are permitted to accumulate beyond

the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or membersunless the corporation, by the clear preponderance of evidence, shall prove to the contrary.

Improperly Accumulated Taxable Income

- Taxable income adjusted by:1.

Income exempt from tax;2.

Income excluded from gross income;3.

Income subject to final tax; and

4.

The amount of net operating loss carry-over deducted;- And reduced by the sum of:

1.

Dividends actually or constructively paid; and2.

Income tax paid for the taxable year.

- For corporations using the calendar year basis, the accumulated earnings tax shall not apply on improperly accumulated incomeas of December 31, 1997.

- In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax,shall be reckoned, as of the end of the month comprising the 12-month period of fiscal year 1997-1998.

Reasonable Needs of the Business

- includes the reasonably anticipated needs of the business.

SEC. 30. EXEMPTIONS FROM TAX ON CORPORATIONS

-

These are organizations which shall not be taxed in respect to income received by them as such.-

Income of whatever kind and character of these organizations from any of their properties, real or personal, or from any oftheir activities conducted for profit regardless of the disposition made of such income, shall be subject to tax.

1.

Labor, agricultural or horticultural organization not organized principally for profit;2.

Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organizedand operated for mutual purposes and without profit;

3.

A beneficiary society/association, operating for the exclusive benefit of the member; or mutual aid association or a nonstockcorporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to themembers of such society/association, or nonstock corporation or their dependents;

4.

Cemetery company owned and operated exclusively for the benefit of its members;5.

Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or culturalpurposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of anymember, organizer, officer or any specific person;

6.

Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which

inures to the benefit of any private stock-holder, or individual;7.

Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;8.

A nonstock and nonprofit educational institution;o Government educational institution;

9.

Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperativetelephone company, or like organization of a purely local character, the income of which consists solely of assessments,dues, and fees collected from members for the sole purpose of meeting its expenses; and

10.

Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing theproducts of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis ofthe quantity of produce finished by them.


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SEC.33.SPECIAL TREATMENT OF FRINGE BENEFIT.-Imposition of Tax.

- Final tax of 32% effective January 1, 2000 and thereafter imposed on the grossed-up monetary valueof fringe benefit furnishedor granted to the employee (except rank and file employees) by the employer, whether an individual or a corporation unless

o the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, oro when the fringe benefit is for the convenience or advantage of the employer.

- Payable by the employer; paid in the same manner as provided for under Section 57 (A) (withholding at source)

-

Grossed-up monetary value of the fringe benefit = actual monetary value of the fringe benefit divided by 68%- Fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 [all non-resident aliens

except from those NRA engaged in trade or business)taxed at the applicable rates imposed thereat.o Grossed-up monetary value of the fringe benefit = actual monetary value of the fringe benefit divided by the

difference between 100% and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section25.

Fringe Benefit Defined.

- any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (exceptrank and file employees as defined herein) such as, but not limited to, the following:

1.

Housing;2.

Expense account;3.

Vehicle of any kind;4.

Household personnel, such as maid, driver and others;5.

Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;

6.

Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or othersimilar organizations;

7.

Expenses for foreign travel;8. Holiday and vacation expenses;9.

Educational assistance to the employee or his dependents; and10.

Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

Fringe Benefits Not Taxable under this Section:1.

Fringe benefits which are authorized and exempted from tax under special laws;2.

Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;3.

Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and4.

De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, uponrecommendation of the Commissioner

SEC.39.CAPITAL GAINS AND LOSSES.-DEFINITIONS:Capital Assets

- property held by the taxpayer (whether or not connected with his trade or business), but does not includeo stock in trade of the taxpayer oro other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of

the taxable year oro property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, oro property used in the trade or business, of a character which is subject to the allowance for depreciation provided in

Subsection (F) of Section 34; oro real property used in trade or business of the taxpayer.

Net Capital Gain- the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

Net Capital Loss

-

the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

Percentage Taken into Account-

In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon thesale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and netincome.1.

100% if the capital asset has been held for not more than 12 months; and2.

50% if the capital asset has been held for more than 12 months;

Limitation on Capital Losses.-

Losses from sales or exchange capital assets shall be allowed only to the extent of the gains from such sales or exchanges.- If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt

of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation


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(including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any lossresulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining theapplicability of such limitation to other losses.

Net Capital Loss Carry-Over.- If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in

excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange

of a capital asset held for not more than 12 months.

Retirement of Bonds, Etc.

- Amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences ofindebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interestcoupons or in registered form, shall be considered as amounts received in exchange therefor.

Gains or Losses from Short Sales, Etc- Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital

assets; and-

Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered ascapital gains or losses.

SEC.40. DETERMINATION OF AMOUNT AND RECOGNITION OF GAIN OR LOSS.-Computation of Gain or Loss.

1.

Gain from the sale or other disposition of property = the excess of the amount realized therefrom over the basis or adjusted

basis for determining gain,2.

Loss from the sale or disposition of the property = excess of the basis or adjusted basis for determining loss over the amoun trealized.

3.

Amount realized from the sale or other disposition of property = sum of money received plus the fair market value of theproperty (other than money) received.

4.

Basis for determining gain or loss from sale or disposition of property.-a.

The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired bypurchase; or

b.

The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; orc.

If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the lastpreceding owner by whom it was not acquired by gift,

i.

except that if such basis is greater than the fair market value of the property at the time of the gift then, forthe purpose of determining loss, the basis shall be such fair market value; or

d.

If the property was acquired for less than an adequate consideration in money or money's worth, the basis of suchproperty is the amount paid by the transferee for the property; or

e.

The basis as defined in paragraph (C)(5)2of this Section, if the property was acquired in a transaction where gain orloss is not recognized under paragraph (C)(2) of this Section [referring to non-recognized gains or losses in mergersor consolidations].

Exchange of Property.-General Rule: Upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall berecognized.Exception.

1.

No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation-(a)

A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation,which is a party to the merger or consolidation; or

(b)

A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for thestock of another corporation also a party to the merger or consolidation; or

(c)

A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such

corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.2.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit ofparticipation in such a corporation of which as a result of such exchange said person, alone or together with others, notexceeding 4 persons, gains control of said corporation.

a.

Stocks issued for services shall not be considered as issued in return for property.

Exchange Not Solely in Kind.-1.

If, in connection with an exchange described in the above exceptions,

2See C(5) basisin the next page.


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o an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to bereceived without the recognition of gain or loss, but also money and/or property,

o the gain, if any, but not the loss,o shall be recognized but in an amount not in excess of the sum of the money and fair market value o f such other property

received.o As to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend,

- there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his

proportionate share of the undistributed earnings and profits of the corporation;- the remainder, if any, of the gain recognized shall be treated as a capital gain.

2.

If, in connection with the exchange described in the above exceptions,o the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also

mon

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