Income tax

Taxable period
BAR: a. Calendar period. The taxable period comprising the twelve (12)
consecutive months from January 1 through to December 31. It may be utilized by
individuals, estates, trusts or corporation.
BAR: b. Fiscal period.
The taxable period comprising any twelve (12)
consecutive months, starting on any day or month and ending twelve (12) months
later. It may availed of only by corporations. Individuals, estates or trusts may not
use this tax period.
BAR: Requisites that must be present so that a joint venture undertaking
construction projects would not be subject to tax. A joint venture or consortium
formed for the purpose of undertaking construction projects not considered as
corporation under Sec. 22 of the NIRC of 1997 as amended, should be:
1)
for the undertaking of a construction project; and
2)
should involve joining or pooling of resources by licensed local
contractors; that is, licensed as general contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);
3)
these local contractors are engaged in construction business; and
4)
the Joint Venture itself must likewise be duly licensed as such by the
Philippine Accreditation Board (PCAB) of the Department of Trade and Industry
(DTI).
Joint ventures involving foreign contractors may also be treated as a nontaxable corporation only if the member foreign contractor is covered by a special
license as contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI); and the construction project is certified by
the appropriate Tendering Agency (government office) that the project is a foreign
financed/international-funded project and that international bidding is allowed under
the Bilateral Agreement entered into by and between the Philippine Government and
the foreign/international financing institution pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise known as Contractors License Law.
Absent any one of the aforesaid requirements, the joint venture or consortium
formed for the purpose of undertaking construction projects shall be considered as
taxable corporations.
In addition, the tax-exempt joint venture or consortium herein defined shall
not include those who are mere suppliers of goods, services or capital to a
construction project.
The members to a Joint Venture not taxable as corporation shall each be
responsible in reporting and paying appropriate income taxes on their respective share
to the joint ventures profit. (RR No. 10-2012, Section 3)
BAR: Partnerships. Taxable partnerships. These are partnerships which are
by law assimilated to be within the context of, and so legally contemplated as,
corporations. (Tan v. Del Rosario, Jr., et al., and companion case, 237 SCRA
324,335)
These are business partnerships or partnerships which are organized for the
purpose
of
engaging
in
trade
or
business. They are subject to income tax as if they are corporations, whether or not
registered with the Securities and Exchange Commission as a partnership.

2
Registration of a business partnership with the SEC is an indication of its taxable
character.
BAR: General professional partnerships. A general professional partnership
as such shall not be subject to income taxes. (NIRC of 1997, Sec. 26, 1st sentence)
A general professional partnership is deemed to be no more than a mechanism
or flow-through entity in the generation of income by, and the ultimate distribution of
income to, respectively, each of the individual partners. (Tan v. Del Rosario, Jr. et al.,
and Companion case, 237 SCRA 324, 335)
NOTES AND COMMENTS: While a general professional partnership as such
is not a taxable entity and therefore not subject to income taxes, the member
professionals are to be subject to income taxes on their share in the distributive net
income of such general professional partnerships.
A general professional partnership is not required to file an income tax return
because it is not a taxable entity but it is required to file an information return.
Co-ownerships
BAR: Co-ownerships not deemed unregistered partnerships therefore NOT
taxable like corporations.
1)
Article 1769(3) of the Civil Code provides that, The sharing of
gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property from which the
returns are derived.
There must be an unmistakable intention to form a partnership or joint
venture. (Obillos, Jr., v. Commissioner of Internal Revenue, 139 SCRA 436) In coownership, the purpose is merely to jointly own properties, retaining their separate
pro-indiviso titles, and not for the purpose of earning a profit.
2)
Co-heirs who own inherited properties which produce income
should not automatically be considered as partners of an unregistered partnership or
corporation subject to income tax. REASONS: Sharing of gross returns does not by
itself establish a partnership, there must be an unmistakable intention to form a
partnership or joint venture. There is no contribution or investment of additional
capital to increase or expand the inherited properties, merely continuing the
dedication of the property to the use to which it had been put by their forebears.
(Obillos, Jr., v. Commissioner of Internal Revenue, 139 SCRA 436)
3)
Persons who contribute property or funds to a common enterprise
and agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective contribution, are not
thereby rendered partners. They have no common stock capital, and no community of
interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Floyd R. Mechem, 2nd Ed., section 83, p. 74
cited in Pascual v. Commissioner of Internal Revenue,166SCRA 560)
4)
The common ownership of property does not itself create a
partnership between the owners, though they may use it for purpose of making gains.
They may, without becoming partners, are among themselves co-owners as to the
management and use of such property and the application of the proceeds therefrom.
(Spurlock v. Wilson, 142 S.W. 363, 160 No. App. 14. Ibid)
5)
A joint purchase of land, by two, does not constitute a copartnership in respect thereto, nor does an agreement to share the profits and losses on
the sale of land create a partnership; the parties are only tenants in common. (Clark v.

3
Sideway, 142 U.S. 682, 12 S. Ct. 327, 35 L. Ed., 1157 cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560 )
6)
Where plaintiff, his brother, and another agreed to become owners
of a single tract of realty holding as tenants in common, and to divide the profits of
disposing of it, the brother and the other not being entitled to share in plaintiffs
commissions, no partnership existed as between the three parties, whatever their
relation may have been as to third parties. (Magee v. Magee, 123 N.E. 673, 233 Mass.
341, Ibid.)
BAR: c.

General principles

Summary of source rule of income taxation as provided in the NRC of

1997. This is also known as the general principles of income taxation which
governs income taxation starting January 1, 1998.
1)
A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines;
2)
A nonresident citizen is taxable only on income derived from
sources within the Philippines;
3)
An individual citizen of the Philippines who is working and deriving
income abroad as an overseas contract worker is taxable only on income from
sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in international trade shall be
treated as an overseas contract worker;
4)
An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines;
5)
A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and
6)
A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.
(NIRC of 1997, Sec. 23, emphasis, arrangement and numbering supplied)
BAR: Percentage of completion basis. In the case of long-term contracts involving
building, installation or construction contracts covering a period in excess of one (1)
year, persons whose gross income is derived from such contracts shall report such
income upon the basis of percentage of completion. (NIRC of 1997, Sec. 48)
Tests in determining whether income is earned for tax purposes
BAR: Realization test. Under the realization principle, revenue is generally
recognized when both of the following conditions are met:
1)
The earning process is complete or virtually complete, and
2)
an exchange has taken place.
This principle requires that revenues must be earned before it is recorded.
(Manila Mandarin Hotels, Inc. v. The Commissioner of Internal Revenue, CTA Case
No. 5046, March 24, 1997)
BAR: v. All events test. For a taxpayer using the accrual method, the
determinative question is, when do the facts present themselves in such a manner that
the taxpayer must recognize income of expenses ?

4
The accrual of income and expenses is permitted when the all events test has
been met. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of
such income or liability.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where
a computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be
determined with reasonable accuracy. Accordingly, the term reasonable accuracy
implies something less than an exact or completely accurate amount. (Commissioner
of Internal Revenue v. Isabela Cultural Commission, G. R. No. 172231, February 12
2007)
Gross income
b.
Concept of income from whatever source derived. Gross income
means all income derived from whatever source. [NIRC of 1997, Sec. 32 (A),
paraphrasing supplied]
BAR: Included in income from whatever source.
1)
Income from an illegal business is subject to income taxation. So also,
income obtained from criminal activities such as swindling or extortion (Rutkin v.
U.S. 343 U.S. 130), embezzlement. (James v. U.S., 366 U.S. 213)
2)
Forgiveness of indebtedness in certain instances, or
3)
Under the so-called tax benefit rule (also known as recapture rules)
where there is recovery of previously written-off debts, or refund of tax payments.
BAR: b) Definition. For purposes of applying fringe benefit taxation,
fringe benefit means any good, service or other benefit furnished or granted in cash
or in kind by an employer to an individual employee (except rank and file
employees), such as but not limited to:
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 other similar organizations.
7)
Expenses for foreign travel.
8)
Holiday and vacation expenses.
9)
Educational assistance to the employee or his
dependents.
10) Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows. [NIRC of 1997, Sec. 33 (B); RR
No. 3-98, Sec. 2.33 (B)]
v.

Income from dealings in property

a)

Types of properties

BAR: 1) Ordinary assets. Ordinary assets are all the property that are
held by a taxpayer in connection with his trade or business, and may include:
a)
Stock in trade of the taxpayer, or
b)
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, or
c)
Property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or
d)
Property used in the trade or business, of a character which is
subject to the allowance for depreciation; or real property used in the trade or business
of the taxpayer. [NIRC of 1997, Sec. 39 (A) (1), paraphrasing and numbering
supplied]
BAR: 2) Capital assets. The term capital assets means property
held by the taxpayer (whether or not connected with his trade or business), BUT
DOES NOT INCLUDE:
a) Stock in trade of the taxpayer, or
b)
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, or
c)
Property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or
d)
Property used in the trade or business, of a character which is
subject to the allowance for depreciation; or real property used in the trade or business
of the taxpayer. [NIRC of 1997, [Sec. 39 (A) (1), arrangement and numbering
supplied]
NOTES AND COMMENTS: For analysis, if the property is used in traded or
business, it is an ordinary asset. If it is NOT used in trade of business it is a capital
assert.
Ordinary income vis--vis capital gain
BAR: Ordinary gain, defined. Any gain from the sale or exchange of property
which is NOT a capital asset or property. [NIRC of 1997, Sec. 22 (Z), capitalized
word supplied]
BAR: Capital gain, defined. Any gain from the sale or exchange of property which
IS a capital asset or property.
BAR: Kinds of capital gains.
1)
Capital gains subject to final tax. These are usually imposed upon
the sale, exchange or other disposition of
a)
real property
b)
and shares of stock that are not listed and trade through the stock
exchange.
2)
Capital gains included in gross income and reported in the income
tax return for income tax purposes.
BAR: Capital gain distinguished from ordinary gain.
1)
The source of capital gain is property not used in trade or business
WHILE the source of ordinary gain is property used in trade or business.
2)
Some types of capital gains are adjusted by the holding period,
WHILE the holding period does not find application to ordinary gains.

6
3)
From certain types of capital gains may be deducted ordinary losses,
WHILE only ordinary losses may be deducted from ordinary gains.
4)
The concept of net loss carryover applies to capital gains taxation,
WHILE the concept of net operating loss carryover applies to ordinary gains taxation.
5)
Generally no deductions are allowed from capital gains WHILE
deductions are usually allowed for ordinary gains.
6)
Generally capital gains are subject to final taxes, WHILE this is not
so with regard to ordinary gains;
7)
The income from capital gains are not generally to be included in
the annual income tax return, WHILE ordinary income is to be included in the annual
income tax return.
BAR: 3) Long term capital gain vis--vis short-term capital gain. A long term
capital gain is one that is derived from the disposition of a capital asset that has been
held for more than twelve (12) months WHILE a short-term capital gain is that
derived from the disposition of a capital asset that has been held for not more than
twelve (12) months. [NIRC of 1997, Sec. 39 (B)]
Net capital gain, net capital loss
BAR: Net capital gain, defined. The excess of the gains from sales or exchanges of
capital assets over the losses from sales or exchanges of such assets. [NIRC of 1997,
Sec. 39 (A) (2)]
BAR: Net capital loss, defined. The excess of the losses from sales and exchanges
of capital assets over the gains from sales or exchanges of such assets. [NIRC of
1997, Sec. 39 (A) (3)]
BAR: Basis for determining gain or loss from sale or disposition of property.
1)
If acquired by purchase: The cost in case of property acquired
on or after March 1, 1913;,
2)
If acquired by inheritance: The fair market value or value as of the
date of acquisition.
3)
If acquired by gift:
a)
the basis shall be the same as if it would be in the hands of the donor or
the last preceding owner by whom it was not acquired by gift.
b)
EXCEPT that if such basis is greater than the fair market value of the
property at the time of the gift, than for the purpose of determining loss, the basis
shall be the fair market value.
4)
If the property was acquired for less than an adequate consideration in
money or moneys worth, the basis of such property is the amount paid by the
transferee for the property.
BAR: Related parties, defined. The following are included in the concept of related
parties for the purpose of the prohibition.
1)
Members of the same family. For purposes of defining related
parties, the family of an individual includes only his brothers and sisters (whether by
the whole or half-blood), spouse, ancestors, and lineal descendants, or
2)
An individual and a corporation more than fifty per-cent (50%) in
value of the outstanding stock of which is owned, directly or indirectly, by or for such
individual, or
3)
Two corporations more than fifty percent (50%) in value of the
outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual, or
4)
The grantor and a fiduciary of any trust, or

7
5)
The fiduciary of a trust and the fiduciary of another trust of the
same person is a grantor with respect to each trust, or
6)
A fiduciary of a trust and a beneficiary of such trust. [NIRC of
1997, Sec. 36 (B)]
NOTES AND COMMENTS: Interests paid to related parties are not allowed to
be deducted from gross income.
BAR: (a) Capital loss limitation rule (applicable to both corporations and
individuals)
1)
Losses from sales or exchanges of capital assets, are
2)
allowed to be deducted only to the extent of the gains from such
sales or exchanges. [NIRC of 1997, Sec. 39 (C), 1 st sentence, arrangement and
numbering supplied]
Instance when the above limitation does not apply.
1)
If a bank or trust company incorporated under the laws of the
Philippines,
2)
a substantial part of whose business is the receipt of deposits,
3)
sells any bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in registered form,
4)
any loss resulting from such sale shall not be subject to the
above limitations and shall not be included in determining the applicability of such
limitation to other losses. [NIRC of 1997, Sec. 39 (C), 2nd sentence, arrangement and
numbering supplied]
Net loss carry-over rule (applicable only to individuals)
BAR: The concept of net loss carry-over rule.
1)
If any taxpayer, other than a corporation,
2)
sustains in any taxable year a net capital loss,
3)
such loss (in an amount not in excess of the net income for such
year)
4)
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 twelve months. [NIRC of
1997, Sec. 39 (D), arrangement and numbering supplied]
NOTES AND COMMENTS: The net capital loss carry-over is allowed only to
individuals, including estates and trusts. It could not be availed of by corporations.
Furthermore, even for individuals the net loss carry-over shall not exceed the
net income for the year sustained, and is deductible only once (for the succeeding
year) from the sale or exchange of a capital asset held for not more than twelve
months. The capital assets must not be real property or stocks listed and traded in the
stock exchanges because these are subject to final taxes.
The reader should note the limitations for the net loss carry-over, specially that
the carry-over is allowed only for the next succeeding taxable year.
Finally, the reader is reminded that all transactions made during the year of
capital assets that are not real property or shares of stocks listed and traded in the
stock exchange should be taken into account in the determination of whether there
existed a loss during the taxable year. Examples of such capital assets are shares of
stock that are not listed and traded in the stock exchange, jewelry, motor vehicles,
objects of art, and other personal property other than shares of stock that are listed and
traded in the stock exchange.

8
WARNING: The author does not agree with the statement of the BIR that, if
the transferor of the shares is an individual, the rule on holding period and capital loss
carry-over will not apply [RR No. 6-2008, Sec. 7 (c.4, 2 nd sentence)] because an
administrative issuance could not limit an express provision of a statute.
BAR: The presumed capital gains tax. A final tax of six percent (6%) based on the
gross selling price or current fair market value (BIR zonal valuation or the assessors
value), whichever is higher, is imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms
of conditional sales, by individuals, including estates and trusts. [NIRC of 1997, Sec.
24 (D), emphasis supplied)
A final tax of six percent (6%) is hereby imposed on the gain presumed to have
been realized from the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price or fair market value (BIR zonal valuation or the
assessors value), whichever is higher, of such lands and/or buildings. [NIRC of
1997, Sec. 27 (D) (5), emphasis supplied]
NOTES AND COMMENTS: The reader should take note of the differential
treatment. For individuals, estates and trusts the subject may be any real property
but for corporations the subject is limited only to lands and/or buildings.
Furthermore, the asset disposed of must be a capital asset and the capital asset
should be located in the Philippines. If located outside the Philippines treat it as if it
is an ordinary asset.
Likewise, the buyer should not be the government.
Finally, the holding period should not be applied and the tax is applied whether
there is a gain or a loss arising from the transaction. This is so because the tax is
imposed on the presumed capital gains.
BAR: The following sellers of real property located in the Philippines classified
as a capital asset subject to the presumed capital gains tax.
1)
Individual citizen, whether resident or not, and individual resident alien of
the Philippines. [NIRC of 1997, Sec. 24 (D)]
2)
non-resident alien engaged in trade or business within the Philippines.
[Ibid., Sec. 25 (A) (3),in relation to Sec. 24 (D)]
3)
non-resident alien not engaged in trade or business within the Philippines.
[Ibid., Sec. 25 (B), 2nd sentence, in relation to Sec. 24 (D)]
4)
an estate or trust. [Ibid., Sec. 24 (D)]
5)
a domestic corporation. [Ibid., Sec. 27 (D) (5)]
BAR: Tax treatment of sale by individual of real property classified as a capital
asset to the government. The tax imposed on such sale or other dispositions to the
government or any of its political subdivisions or agencies or to government owned or
controlled corporations shall be determined, at the option of the taxpayer, in either of
the following:
1)
included as part of gross income to be subject to the allowable
deductions and/or personal and additional exemptions, then subject to the schedular
tax [NIRC of 1997, Sec. 24 (D) (1), in relation to Sec. 24 (A) (1)] or
2)
the final tax of six percent (6%) imposed on the presumed capital
gain which is whichever is higher of the gross selling price, or the current fair
market value (BIR zonal valuation or the assessors value). [Ibid., Sec. 24 (D) (1) in
relation to Sec. 6 (E)]

9
NOTES AND COMMENTS: The above privilege is not available to a
corporation.
BAR: (a) Shares listed and traded in the stock exchange. There shall be levied,
assessed and collected on every sale, barter or exchange or other disposition of Shares
of Stock Listed and Traded through the Local Stock Exchange other than the sale by a
dealer of securities under the following rules:
1)
Tax Rate. - A stock transaction tax at the rate of one-half of one
percent (1/2 of 1%) based on the amount determined in subsection (b) hereunder.
2)
Tax Base - Gross selling price or gross value in money of the shares
of stock sold, bartered, exchanged or otherwise disposed of which shall be assumed
and paid by the seller or transferor through the remittance of the stock transaction tax
by the seller or transferors broker. [NIRC of 1997 , Sec. 127 (A); RR No. 6-2008,
Sec. 5]
NOTES AND COMMENTS: The above tax is not an income tax categorized as
a capital gains tax but a percentage tax in the nature of a transaction tax. Thus, an
exemption from taxation does not include exemption from the payment of this
percentage tax.
BAR: (b) Shares not listed and traded in the stock exchange. Without applying
the holding period, a final tax at the rates prescribed below is hereby imposed upon
the net capital gains realized during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation:
Not over P100,000 5%
On any amount in excess of P100,000... 10% [NIRC of 1997, Sec. 24
(C); RR No. 6-2008, Sec. 7 (a), paraphrasing supplied]
NOTES AND COMMENTS: The tax is imposed on the net capital gain which
is arrived at by deducting the cost basis from the realized proceeds of the sale. Sales
price less cost basis or acquisition price = tax base.
BAR: 9) Sale of principal residence. Conditional exemption in favor of natural
persons subject to the following requirements:
a)
the sellers are natural persons,
b)
the sale or disposition is of their principal residence
c)
the proceeds of which is fully utilized in acquiring or constructing a
new principal residence
d)
within eighteen (18) calendar months from the date of sale or
disposition,
e)
the historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence built or acquired:
f)
the BIR Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax exemption;
g)
the said tax exemption can only be availed of once every ten (10)
years. [NIRC of 1997, Sec. 24 (D) (2) , numbering and arrangement supplied]
BAR: Tax treatment of interest income. Determine the nature of the interest
income. Is it passive income, such as interest earned from bank deposits and deposit
substitutes subject to the final tax OR is it income derived from the business activities
of the income earner arising from trade or business such as interest earned from
lending money which should be reported in the income tax return as ordinary income
subject to the global or schedular system of taxation.
BAR: Members deposits with cooperative deposits of primary cooperatives with
federations are NOT currency bank deposits nor deposit substitutes.
The

10
interests are not subject to withholding because they are exempt from final taxes.
(Dumaguete Cathedral Credit Cooperative v. Commissioner of Internal Revenue,
G.R. No. 182722, January 22, 2010 reiterated in RMC No. 47-2011)
NOTES AND COMMENTS: Reasons for the above conclusion. The BIR
Ruling that cooperatives are not required to withhold the corresponding ta on the
interest from savings and time deposits of their members is an interpretation of an
administrative agency that is given great weight and consideration by the courts.
The aforesaid BIR Ruling is in keeping with the letter and spirit of the
Constitution considering cooperatives as instruments for social justice and economic
development, the state policy to promote social justice which includes the
commitment to create economic opportunities based on freedom of initiatives and self
reliance. (Dumaguete, supra)
BAR: Interest income from deposits under the Foreign Currency Deposit
(EFCD) System that are exempt from income tax. Interest earned from foreign
currency deposits of taxpayers that are not subject to tax on their incomes from
without are exempt from the final or other kinds of taxes. (RR No. 10-98) REASON:
They are fruits of income from without hence also incomes from without.
NOTES AND COMMENTS: If the foreign exchange earnings are converted
to local currency the interest income would then be taxable.
BAR: Deposit substitutes, defined. An alternative form of obtaining funds from the
public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowers own account, for
the purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer. [NIRC of 1997, Sec.
22 (Y), 1st sentence]
NOTES AND COMMENTS: The income are from deposit substitutes are
subject to final tax if he income earner is passive income but if the income is derived
from being in the business of lending or relending money then it is treated as ordinary
income subject to regular income taxation.
Examples of deposit substitutes. These instruments may include, but need not be
limited to bankers' acceptances, promissory notes, repurchase agreements, including
reverse repurchase agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse. [NIRC of 1997, Sec. 22 (Y), 2 nd
sentence]
NOTES AND COMMENTS: debt instruments issued for interbank call loans
with maturity of not more than five (5) days to cover deficiency in reserves against
deposit liabilities, including those between or among banks and quasi-banks, shall not
be considered as deposit substitute debt instruments. [NIRC of 1997, Sec. 22 (Y), 2 nd
sentence]]
BAR: Tax treatment of stock dividends. Stock dividends are unrealized gain and
cannot be subject to income tax until the gains have been realized. Stock dividends
represent capital and do not constitute income to its recipient. The mere issuance
thereof is not subject to income tax as they are nothing but an enrichment through
increase in value of capital investment.
As capital, stock dividends postpone the realization of profits because the fund
represented by the new stock has been transferred from surplus to capital and no
longer available for actual distribution.

11
Before realization, stock dividends are nothing but a representation of an
interest in the corporate properties. As capital, it is not yet subject to income tax.
(Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576,
January 20, 1999)
Property dividend
BAR: Property dividend may be subject to VAT. Distribution or transfer, of
property held for sale and ordinarily subject to VAT, to shareholders or investors as
share in the profits of a VAT- registered person [NIRC of 1997, Sec. 106 (B) (2) (a)]
shall be subject to VAT.
BAR: Tax treatment of royalty income for inviduals. A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of royalties, except on
books, as well as other literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%). [NIRC of 1997, Sec. 24 (B) (1),
paraphrasing supplied]
NOTES AND COMMENTS: For corporations, the tax rate is also 20%
without any distinction as to royalties. [NIRC of 1997, Sec. 27 ((D) (1); Sec. 28 (7)
(a)] Thus, even books and other literary works and musical compositions shall be
subject to the 20% tax.
Likewise, prizes, and other winnings (except Philippine Charity Sweepstakes
and Lotto winnings) of corporations are not subject to the final tax but included as
part of their ordinary income.
BAR: Tax treatment of lease payments. Be sure that you are able to distinguish
between a true lease and a conditional sale. If it is a true lease then the lessee
may deduct the rental payments as expenses and the lessor recognizes income from
the lease payments from which he may deduct depreciation of the leased property.
If it is a conditional sale, then the lessee may not be allowed to deduct the
payments as rental expense because the payments are treated as capital expenditures
but he may subject the property leased to depreciation. On the other hand the lessor
recognizes the payments as income but he may deduct the cost of the property sold
from his income and not depreciation.
BAR: Methods for income recognition where ownership of improvements
constructed by the lessees is transferred to the lessor after the lease period. If
improvements are in lieu of rent, the value is income to the landlord upon completion
of the improvements.
If the improvements are not in lieu of rents, the value thereof is income to the
landlord only in the year of termination of the lease. (Bkatt v. U.S., 305 U.S. 267, and
Helvering v. Brunn, 309 U.S. 461)
BAR: a) Forgiveness of indebtedness.
1)
When cancellation of debt is income. If an individual performs
services for a creditor, who in consideration thereof, cancels the debt, it is income to
the extent of the amount realized by the debtor as compensation for his services.
2)
When the cancellation of debt is a gift. If a creditor merely desires
to benefit a debtor and without any consideration therefore cancels the amount of the
debt is a gift from the creditor to the debtor and need not be included in the latters
income.
3)
When cancellation of debt is a capital transaction. If a corporation
to which a stockholder is indebted forgives the debt, the transaction has the effect of
payment of a dividend. (RR No. 2, Sec. 50)

12
4)
An insolvent debtor does not realize taxable income from the
cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 F2d 327 CCA
10th)
5)
The insolvent debtor realizes income resulting from the cancellation or
forgiveness of indebtedness when he becomes solvent. [Lakeland Grocery Co. v.
Commissioner, 36 BTA (F) 289]
BAR: b) Recovery of accounts previously written-off when taxable/when not
taxable. Under the tax benefit rule bad debts that were previously written off and
deducted from gross income but subsequently paid are recaptured and included as
part of the income in the year in which they were subsequently paid. They thus
become taxable. This is only applicable where the debts arose out of trade or business
such as trade receivables, or amounts lent.
However, if they were not personal loans that had no relation at all to trade or
business, hence could not be deducted from gross income if not paid, then the
subsequent payment does not result to income.
BAR: c) Receipt of tax refunds or credit. Taxes incurred in connection with
trade or business are generally deductible from gross income to arrive at income
subject to tax. However, under the tax benefit or recapture rule, the amount of
taxes previously deducted but are subsequently refunded or allowed as a tax credit to
the taxpayer who made the deduction, are then considered as income in the period
refunded or credited.
BAR: e) Source rules in determining income from within and without. As a
general rule, the determinative factor for the source rule (the place where the
income was earned) is the place where the income earning activity took place. This
means that if the income earning activity took place in the Philippines then it is
income derived from sources within the Philippines. On the other hand if the income
earning activity took place outside of the Philippines, then it is income derived from
sources without the Philippines.
The rationale behind the source rule is the symbiotic relationship or the benefitprotection theory. The place where the income earning activity has the jurisdiction to
impose the tax because it is the one that gives protection to the activity.
The source rule is important because some taxpayers are subject to taxation
both on their incomes from within and without while others are to be taxed only on
their incomes from within and those from without. For detailed discussion refer to
general principles of income taxation, page 7, supra.
BAR: Dividends considered as gross income from sources WITHIN the
Philippines. The amount received as dividends:
1)
from a domestic corporation
2)
from a foreign corporation
a)
MORE than fifty percent (50%) of the gross income of such foreign
corporation
b)
for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends (or for such part of such period as the
corporation has been in existence)
c)
was derived from sources within the Philippines as determined under
these provisions
d)
but only in an amount which bears the same ratio to such dividends as the
gross income of the corporation for such period derived from sources within the
Philippines

13
e)
bears to its gross income from all sources. [NIRC of 1997, Sec. 42 (A)
(2) (a), (b), numbering and arrangement supplied]
NOTES AND COMMENTS: All dividends other than the above are dividends
derived from sources without the Philippines.
Dividends received by a domestic corporation from another domestic corporation
are not subject to tax.
BAR: 3) Services. Compensation for labor or personal services performed in
the Philippines [NIRC of 1997, Sec. 42 (A) (3)] are considered as income derived
from sources within the Philippines.
This is irrespective of the origin of the money, where the service was
performed, the nationality of the income earner, the nature of the personal service
performed, etc.
If the service is performed outside of the Philippines, then the compensation is
income derived from services without the Philippines.
BAR: 7) Sale of personal property. If the contract for the sale of personal
property was consummated in the Philippines, then the proceeds are considered as
income derived from sources within the Philippines. [NIRC of 1997, Sec. 42 (E), 4 th
pars., in relation to Sec. 42 (A) (6)]
This is irrespective of the residence and nationality of the buyer and the seller,
the source of the money, where the personal property sold was originally purchased,
the place of delivery and place of payment. (Ibid.)
It follows that if the contract was signed outside of the Philippines, that the
income would from sources derived without the Philippines.
BAR: 8) Shares of stock of domestic corporation. The proceeds of sales of
shares of stock of domestic corporations are always considered as from sources within
the Philippines. [NIRC of 1997, Sec. 42 (E), 4th pars., in relation to Sec. 42 (A) (6)]
This is irrespective of the place where the sale was consummated. residence
and nationality of the buyer and the seller, the source of the money, where the
personal property sold was originally purchased, the place of delivery and place of
payment. (Ibid.)
Shares of stock of domestic corporations have obtained a business situs in the
Philippines.
BAR: Conditions for exclusion from gross income of life insurance proceeds.
1) The proceeds of life insurance policies
2) paid to the heirs or beneficiaries
3) upon the death of the insured,
4) whether in a single sum or otherwise. [NIRC of 1997, Sec. 32 (B) (1)
paraphrasing, arrangement and numbering supplied]
NOTES AND COMMENTS: The reader should note that the revocability or
irrevocability of the designation of the beneficiary is not among the conditions.
Whether the beneficiary is designated in a revocable or irrevocable capacity does not
matter. The life insurance proceeds are still excluded from gross estate.
BAR: (e) Amount received through accident or health insurance. Excluded
from gross income are
1)
Amounts received, through
a)
Accident or Health Insurance or
b)
Workmens Compensation Acts,
2) as compensation for personal injuries or sickness,
3) plus the amounts of any damages received,

14
a)
by suit or
b)
agreement,
4) on account of such injuries or sickness. [NIRC of 1997, Sec. 32 (B) (4),
arrangement and numbering supplied)]
BAR: Summary of requirements for exclusion of retirement benefits,
pensions, gratuities, etc. to be excluded from gross income The following
requirements must all be complied with in order to avail of the exclusion from gross
income:
1)
Qualified employee. The retiree must
a)
have rendered at least ten (10) years service with the employer from
which he is retiring;
b)
not less than fifty (50) years at the time of the retirement;
2)
Qualified funding source. The retirement must be in accordance
with a reasonable private retirement plan maintained by the employer OR the
retirement is in accordance with Rep. Act No. 7641, which provides for the optional
and mandatory retirement to employees in the private sector.
3)
The retiree must have never enjoyed the benefit of exclusion of any
retirement payment received in the past.
NOTES AND COMMENTS: It does not matter whether the retirement is
voluntary as long as the requirements are met, the retirement proceeds are excluded
from gross income.
If the retirement is compulsory, there is no need to comply with the above
requirements before the retirement benefits would be excluded because the same
would be excluded under the concept of amounts received as a result of separation
beyond control.
1)
General rules
BAR: Requisites before deductions are allowed.
1)
There must be a specific provision of law allowing the deductions,
since deductions do not exist by implication. (Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue, L-26911, January 27,
1981 and Commissioner of Internal Revenue v. Atlas Consolidated Mining and
Development Corporation, et al., 102 SCRA 246);
2)
The requirements of deductibility for each specific deduction must
be met;
3)
There must be proof of entitlement to the deductions (Atlas
Consolidated, supra; Paper Industries Corporation of the Philippines v. Court of
Appeals, et al., 250 SCRA 434);
4)
The deductions must not have been waived (RR
No. 2, Sec. 76);
5)
The withholding and payment of the tax required must be shown
[NIRC of 1997, Sec. 34 (K), Secs. 58 and 81].
(a) Deductions must be paid or incurred in connection with the
taxpayers trade, business or profession
BAR: Matching concept for deductibility. The matching concept for deductibility
posits that the deductions must, as a general rule, match the income, i.e. helped earn
the income.
Thus, the requisite that the ordinary and necessary expense that is being
deducted must have been paid or accrued or paid or incurred during the taxable year.

15
Consequently, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the same
for the next year. (Commissioner of Internal Revenue v. Isabela Cultural
Corporation, G. R. No. 172231, February 12, 2007)
BAR: (b) Deductions must be supported by adequate receipts or invoices
(except standard deduction). This is known as the substantiation rule or
substantiation requirement. The taxpayer shall substantiate the expense being
deducted with sufficient evidence, such as official receipts or other adequate records
by showing:
1)
The amount of the expense being deducted;
and
2)
the direct connection or relation of the expense being deducted to
the development, management, operation and/or conduct of the trade, business or
profession of the taxpayer. [NIRC of 1997, Sec. 34 (A) {1} (b), arrangement and
numbering supplied]
Unless provided, substantiation, i.e.
1)
Receipts or adequate records;
2)
amount of expense;
3)
date and place of expense;
4)
purpose of expense.
5)
Professional or business relationship of
expense
a)
must support each claimed business or professional expense;
b)
otherwise it shall be disallowed. (RAMO No. 1-87, No. 1, last
sentence, arrangement and numbering supplied)
(c) Additional requirement relating to withholding
BAR: Where no withholding made but still deductible. A deduction will
also be allowed in the following cases where no withholding tax was made:
1)
The payee reported the income and pays the income due thereon
and the withholding agent pays the tax including the interest incident to the failure to
withhold the tax, and surcharges, if applicable, at the time of the audit investigation or
reinvestigation/reconsideration.
2)
The recipient/payee failed to report the income on the due date
thereof, but the withholding agent/taxpayer pays the tax, including the interest
incident to the failure to withhold the tax, and surcharges, if applicable, at the time of
the audit/investigation or reinvestigation/reconsideration.
3)
The withholding agent erroneously underwithheld the tax, but pays
the difference between the correct amount and the amount of tax withheld, including
the interest, incident to such error, and surcharges, if applicable at the time of the
audit/investigation or reinvestigation/ reconsideration. (RR No. 2-98, Sec. 2.58.5, 2nd
par., as amended by RR. No. 14-2002, numbering supplied)
BAR: Requisites for deductibility of business expense.
1)
It must be paid or incurred within the taxable year;
2)
The expense must be ordinary and necessary;
3)
It must meet the business test rule and be paid or incurred in
carrying on a trade or business;
4)
The substantiation rule must be complied through substantially
proving by evidence or records the deductions claimed under the law. Otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense

16
is ordinary and necessary does not justify its deduction. (Atlas Consolidated Mining
and Development Corporation, v. Commissioner of Internal Revenue, 102 SCRA 246;
Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue, 175 SCRA 149)
5)
The business expense must not be an illegal expenditure,
such as bribes, kickbacks, for immoral purposes , etc.
NOTES AND COMMENTS: The above are more familiarly known as the
conditions for deductibility of business expense. The reader should note that aside
from the above, the business expense must still comply with the requisites for
deductibility in general.
(a) Nature: ordinary and necessary
BAR: Ordinary expenses. These are the expenses which are common to incur in
the trade or business of the taxpayer as distinguished from capital expenditures.
These are usually incurred during taxable year and benefits such taxable year.
The term ordinary expenses as used in income taxation is taken in its common
significance and it has the connotation of being normal, usual or customary (Deputy v.
Du Pont, 308 U.S. 488) expenses in earning the income that is subject to the tax.
BAR: Necessary expense for tax purposes, defined. Expenses which are
appropriate or helpful to development of the taxpayers business. (Atlas Consolidated
Mining and Development Corporation v. Commissioner of Internal Revenue, 102
SCRA 246; Alhambra Cigar & Cigarette Manufacturing Co., v. Collector of Internal
Revenue, 105 Phil. 1337)
An expense is necessary if the taxpayer subjectively believes it may lead to an
economic benefit. (Welch v. Helvering, 290 U.S. 111)
BAR: Requisites for bonus to employees to be deductible by the employer
as business expense.
1)
The payment of the bonus is made in good faith for additional
compensation.
2)
It must be for personal services actually rendered.
3)
The bonus when added to salaries is reasonable when measured by
the amount and quality of the services performed with relation to the business of the
particular taxpayer, (Kuenzle & Streiff, Inc. v. Collector, 106 Phil. 355; C.M. Hoskins
& Co., Inc. v. Commissioner, 30 SCRA 434) and when added to the stipulated salaries
do not exceed a reasonable compensation for services rendered.
NOTES AND COMMENTS: In C.M. Hoskins, & Co., Inc., Hoskins
owned 99.6% of the stock, he being the chairman when the resolution authorizing the
bonus was passed. The Supreme Court held, Having chosen to use the corporate
form with its advantages of a separate corporate personality as distinguished from his
individual personality, the corporation so erected, i.e. petitioner, is bound to comport
itself in accordance with its corporate obligations. Specifically, it is bound to pay the
income tax imposed by law on corporations and may not be legally permitted, by way
of corporate resolution authorizing payment of inordinately large allowances and fees
to its controlling stockholder, to dilute and diminish its corresponding corporate tax
liability.
BAR: Alternative factors to be considered in the determination of deductibility
of bonus as business expense.
1)Payment must be in good faith;
2)
the character of the taxpayers business;
a)
the volume and amount of net
earnings;

17

3)
4)
venture; and

b)
its locality;
c)
the type and extent of the services
rendered;
d)
the taxpayers salary policy;
the size of the particular business;
the employees qualifications and contributions to the business

5)
General economic conditions.
Ordinarily, it is the interplay of several factors, properly weighted for the
particular case which would determine the deductibility of the bonus. (Kuenzle &
Streiff, Inc. v. Collector, 106 Phil. 355, citing Mertens)
BAR: Three (3) kinds of advertising and their deductibility.
1)
Advertising to stimulate the current sale of merchandise or use of
services. Except as to questions of reasonableness of amount, these are deductible as
business expenses. (General Foods,(Philippines), Inc. v.. Commissioner of Internal
Revenue, CTA Case No. 4386, February 8, 1994, emphasis supplied)
2)
Advertising designed to stimulate the future sale of merchandise or use of
services. This involves expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade or business of which the
taxpayer is a member.
These expenditures are not deductible as expense but instead to be spread over a
reasonable period of time, irrespective of whether the taxpayer is on the cash or
accrual basis. REASON: A capital asset which has a determinable life has been
acquired and, therefore, the expenditure should be spread over the life of the asset.
(Ibid., citing Mertens, emphasis supplied)
3)
Advertising to promote the sales of shares of stock or to create a
favorable corporate image are not deductible.
BAR: Interest in the form of dividends paid to preferred shareholders not
deductible interest. Preferred shares are considered capital regardless of the
conditions under which such shares are issued and dividends or interests paid
thereon are not allowed as deductions from the gross income of Corporations. (RR
No. 2, Sec. 78, par.3;; Rev. Memo. Circ. No. 17-71)
NOTES AND COMMENTS: The above doctrine applies only with respect to
dividends not being considered as interest. It does not apply where the corporation
issues script dividends, in which case the dividends themselves are not considered
interest, but the interest paid by a corporation on the script dividend is deductible
interest. (RR No. 2, Sec. 78, 1st par.)
A script dividend is a dividend in the form of a promissory note.
BAR: Summary outline of optional treatment interest expense.
1)
At the option of the taxpayer,
2)
interest incurred to acquire property used in trade, business or
exercise of a profession,
3)
may be allowed as a deduction or treated as a capital expenditure.
[NIRC of 1997, Sec. 34 (B) (3), numbering and arrangement supplied]
BAR: (2) Non-deductible taxes
a.
The income tax provided for under the NIRC;
b.
Income taxes imposed by authority of any foreign country

18
1)
but this deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of credits
for taxes paid to foreign countries;
c.
Estate and donors taxes;
d.
Taxes assessed against local benefits of a kind tending to increase
the value of the property assessed. [NIRC of 1997, Sec. 34 (C) (1), arrangement and
numbering supplied]
e.
Taxes on sale, barter or exchange of shares of stock listed and
traded through the local stock exchange or through initial public offering. [Ibid., Sec.
127 (D)]
f.
Final income taxes, such as the presumed capital gains tax on
the disposition of real property, and the capital gains tax on the disposition of shares
of stock not listed and traded in the stock exchange.
(d)

Losses

(1) Requisites for deductibility

BAR: General requisites for deductibility of losses. There must be
compliance with the general requisites for deductibility as applied to losses:
1)
There must be a specific provision of law allowing the deductions,
since deductions do not exist by implication. (Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue, L-26911, January 27,
1981 and Commissioner of Internal Revenue v. Atlas Consolidated Mining and
Development Corporation, et al., 102 SCRA 246).
2)
There must be proof of entitlement to the deductions. (Atlas
Consolidated, supra; Paper Industries Corporation of the Philippines v. Court of
Appeals, et al., 250 SCRA 434)
3)
The deductions must not have been waived. (RR No. 2, Sec.
76)
4)
The withholding and payment of the tax required must be
shown. [NIRC of 1997, Secs. 34 (K), 58 and 81]
BAR: Specific requisites for deductibility of losses.
The specific
requirements of deductibility of losses must be met:
1)
They must be ordinary losses that are incurred by a taxable
entity as a result of its day to day operations conducted for profit or otherwise, or
casualty losses.
2)
They must have been losses that are actually sustained during
the taxable year.
3)
Must not have been compensated for by insurance or other
forms of indemnity.
4)
If they are casualty losses, they are of property connected
with trade, business, or profession and the lose arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft or embezzlement.
5) Must not have been claimed as a deduction for estate tax purposes in the
estate tax return. [NIRC of 1997, Sec. 34 (D) (1)]
(e)

Net Operating Loss Carry-Over (NOLCO)

19
BAR: Requisites for deductibility of NOLCO.
1)
The net operating loss of the business or enterprise,
2)
for any taxable year immediately preceding the current taxable year,
3)
which has not been previously offset as deduction from gross
income,
4)
shall be carried over as a deduction from gross income,
5)
for the next three (3) consecutive taxable years immediately
following the year of such loss:
6)
Provided, however, That any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax shall not be allowed as a deduction
xxx,
7)
Provided, further, That a net operating loss carry-over shall be
allowed only
8)
if there has been no substantial change in the ownership of the
business or enterprise. [NIRC of 1997, Sec. 34 (D) (3), numbering, arrangement and
paraphrasing supplied]
(e)

Bad debts

BAR: (1) Requisites for deductibility

a.
There must be an existing indebtedness due to the taxpayer which must be
valid and legally demandable.
b.
The same must be connected with the taxpayers trade,
business or practice of profession.
c.
The same must not be sustained in a transaction entered into
between related parties.
d.
The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year.
e.
The debt must be actually ascertained to be worthless and
uncollectible during the taxable year.
f.
The debts are uncollectible despite diligent effort exerted by the
taxpayer. [NIRC of 1997, Sec. 34 (E) (1); RR No. 5-99, Sec. 3, reiterated in RR No.
25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667]

(f)

Depreciation

BAR: (1) Requisites for deductibility

a.
The property subject to depreciation must be property with life of more
than one taxable year.
b.
The property depreciated must be used in trade, business or exercise
of a profession.
c.
The depreciation method used must be reasonable and consistent.
d.
The depreciation must have been charged during the taxable year.
(RR No. 2, Sec. 113)
e.
A depreciation schedule should be attached to the income tax return.
(Ibid., Sec. 115)

20
Depreciation of goodwill. Goodwill may or may not be subject to
depreciation. If cost is paid or incurred in the acquisition, then it may be subject to
depreciation.
On the other hand, goodwill that is internally generated may or may not be
subject to depreciation depending on certain considerations.
5)
Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner
Law)
BAR: (a) Basic personal exemption. There shall be allowed a basic personal
exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouse is deriving
gross income, only such spouse shall be allowed the personal exemption. [NIRC of
1997, Sec. 35 (A), as amended by Rep. Act No. 9504; RR No. 2-98, Sec. 2.79 (I) (1)
(a), as amended by RR No. 10-2008]
NOTES AND COMMENTS: There is a substantial change in concept
occasioned by Rep. Act No. 9504 which removed the distinctions between the
concepts of single, married and head of the family for purpose of availing of the basic
personal exemption.
(b) Additional exemptions for taxpayer with dependents. These are the
exemptions in addition to the basic personal exemptions that are granted to certain
individuals who have dependents that qualify them for this exemption.
Additional exemptions for taxpayers with dependents.
An individual,
1)
whether single or married,
2)
shall be allowed an additional exemption of Twenty-Five Thousand
Pesos (P25,000.00)
3)
for each qualified dependent child,
4)
provided that the total number of dependents for which additional
exemptions may be claimed
a)
shall not exceed four (4) dependents. [NIRC of 1997, Sec. 35 (B),
as amended by Rep. Act No. 9504; RR No. 2-98, Sec. 2.79 (I) (1) (b), 1 st par., as
amended by RR No. 10-2008, arrangement and numbering supplied]
NOTES AND COMMENTS: It is clear that under the amendment, that single
individuals may now claim for the additional exemptions. Furthermore, the concept
of head of a family does not find application anymore.
Additional dependents other than qualified dependent children:
1)
Senior citizens shall be treated as dependents provided for in the
National Internal Revenue Code, as amended, and as such, individual taxpayers caring
for them, be they relatives or not shall be accorded the privileges granted by the Code
insofar as having dependents are concerned. [Rep. Act No. 7432, as amended by Rep.
Act 9257, The Expanded Senior Citizens Act of 2003, Sec. 5 (a), last par.]
2)
Additional exemptions for dependent foster child under Republic
Act No. 10165, the Foster Care Act of 2012. The term dependent under Section 35
(B) of the NIRC of 1997 was amended to include a Foster Child.
A Foster Parent shall be allowed an additional exemption of Twenty Five
Thousand Pesos (P25,000.00) for each qualified dependent, Provided however, that
the total number of dependents for which additional exemptions may be claimed shall
not exceed four (4) as provided for by Republic Act No. 9504.

21
The Twenty Five Thousand Pesos (P25,000.00) additional exemption for a
Foster Child shall be allowed only if the period of foster care is at least a continuous
period of one (1) taxable year.
BAR: (e) Premiums paid on life insurance policy covering life or any
other officer or employee financially interested. Not deductible are premiums paid
on any life insurance policy
1) covering the life of any officer or employee, or of any person financially
interested in any trade or business carried on by the taxpayer, individual or corporate,
2)
when the taxpayer is directly or indirectly a beneficiary under
such policy. [NIRC of 1997, Sec. 36 (A)]
NOTES AND COMMENTS: The premiums may be deductible as an ordinary
and necessary expense if the insurance was taken as part of the employees
compensation package and the designated beneficiary is not the employer.
BAR: b) Non-monetary compensation. Compensation may be paid
in money, or in some medium other than money, as for example, stocks, bonds or
other forms of property. [RR No. 2-98, Sec. 2.787.1 (A) (1), 1st sentence]
Thus, they are subject to tax unless there is a specific provision of law that
exempts them.