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2ND Exam Coverage

I.

GENERAL PRINCIPLES:

All items of income are subject to income tax, unless clearly


exempted under specific provisions of the Internal Revenue
Code. (Section 31 NIRC) Items of income include interests and
gains from dealings in property. (Section 32 NIRC) Interests
are, generally, subject to the ordinary income tax rates. They
enjoy a special income tax rate treatment only if there are
specific provisions of the Internal Revenue Code granting such
special income tax rate treatment. (See Section 24 and
Section 27 NIRC) The ordinary income tax rates for individual
taxpayers are specified in Section 24 of the National Internal
Revenue Code. The ordinary income tax rate for corporations
is currently thirty two percent (32%). (See Section 27(A) NIRC)

from dealings in property are, strictly speaking, capital gains


from the disposition of capital assets.
6. SOVEREIGN POWER TO TAX:
Exemption from taxation is a derogation of the sovereign
power of the State to tax. Therefore, it must be strictly
construed against the taxpayer. The taxing authority must
deny the exemption, unless the law under which the
exemption is claimed clearly grants it. Any doubt must be
resolved in favor of the State. This rule is so important that
even the Constitution itself provides that "No law granting any
tax exemption shall be passed without the concurrence of a
majority of all the members of the Congress." (Section 28(4),
Article VI of the Constitution)

2. FOR INDIVIDUALS:

7. THE BIR RULING:

Interests from bank deposits, or from deposit substitutes, or


from trust funds are subject to a final income tax of twenty
percent (20%). (Section 24(B) NIRC) Interests from depository
banks under the expanded foreign currency deposit system
are subject to a final income tax of seven and one-half
percent (7-1/2%). (Section 24(B) NIRC) Interests from longterm deposit or investment (in the form of savings, common
or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by
certificates) in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP), with maturities of five years or more, are
exempted from income tax, unless pre-terminated before the
fifth year. (Section 24(B) NIRC) The exemption from income
tax of interests from long-term deposit or investment applies
only to individual taxpayers. It does not apply to corporations.
(See Chapter III NIRC)

In its ruling dated 31 May 2001, the Bureau of Internal


Revenue ruled that the zero bonds issued by the government
are not subject to the withholding tax on deposit substitutes.
The Bureau of Internal Revenue is correct. The interest on the
zero bonds is not subject to the final income tax of twenty
percent (20%). It is subject to the normal corporate tax of
32%. Therefore, there is no possibility of withholding a twenty
percent (20%) final tax on the interest of the zero bonds. The
interest on the zero bonds is not derived from bank deposits,
or from deposit substitutes, or from trust funds, or from the
expanded foreign currency deposit system. It is derived from
the zero bonds themselves, which are not deposits
substitutes. They are not marketed to twenty (20) or more
lenders and, therefore, do not constitute public for income tax
purposes. The interest on these zero bonds, therefore, is not
subject to a special income tax rate treatment. It does not
qualify for the final income tax of twenty percent (20%). It
must, therefore, be subjected to the normal corporate rate of
thirty two percent (32%) on corporations.

3. FOR DOMESTIC CORPORATIONS:


Interests received by a domestic corporation from bank
deposits, or from deposit substitutes, or from trust funds are
subject to a final income tax of twenty-percent (20%).
(Section 27(D) NIRC) Interests received by a domestic
corporation from a depository bank, under the expanded
foreign currency deposit system, is subject to a final income
tax of seven and one-half percent (7-1/2%). Interests received
by depository banks from currency loans granted, under the
expanded foreign currency deposit system, to residents are
subject to a final income tax of ten percent (10%). All other
interests that are not from bank deposits, or from deposit
substitutes, or from trust funds, or from the expanded foreign
currency deposit system are subject to the normal corporate
rate of thirty two percent (32%).
4. CAPITAL GAINS:
Section 32(B)(7)(g) does not apply to interest income. It
applies only to gains derived from dealings in property. To be
more precise, Section 32(B)(7)(g) deals with gains derived
from the sale or exchange or retirement of specific type of
property, namely, bonds, debentures, or other certificates of
indebtedness. It exempts the gains from the sale or exchange
or retirement of qualified bonds, debentures, or other
certificates of indebtedness, but not the interests on the same
bonds, debentures, or other certificates of indebtedness. In
my view, the bonds, debentures, or other certificates of
indebtedness that could qualify for exemption under Section
32(B)(7)(g) of the National Internal Revenue Code are only
those long-term investments evidenced by certificates
prescribed by the Bangko Sentral ng Pilipinas under Section
24(B)(1) and Section 25(A)(2) of the National Internal Revenue
Code. No other bonds, debentures, or certificates of
indebtedness would qualify under Section 32(B)(7)(g).
5. DISTINCTION BETWEEN INTERESTS AND GAINS:
Interests are ordinary income. They are fixed, periodic, and
determinable income. Gains derived from dealings in property
are not fixed, periodic, and determinable income. Gains arise
from appreciation in the value of property. Appreciation in the
value of property results from market forces. Gains derived

8. TAX REVENUE LOSSES:


In terms of tax revenue, the government stands to lose
heavily in the zero bond transaction. From media reports, it
seems
the
government
issued
in
the
aggregate
P35,000,000,000.00 ten-year zero bonds and received in turn
P10,170,000,000.00 in cash. If the cash received by the
government of P10,170,000,000.00 is subtracted from the
P35,000,000,000.00, which is the aggregate total of zero
bonds issued, there remains a balance of P24,830,000,000.00,
which will represent accumulated interest over the ten-year
period of the zero bonds. Therefore, the tax revenue loss of
the
government
will
be
P35,000,000,000.00
less
P10,170,000,000.00 equals PP24,830,000,000.00 times 32%
corporate tax equals P7,945,600,000.00.
9. POWER OF SUPERVISION AND CONTROL:
The Department of Finance has supervision and control over
the Bureau of Internal Revenue (Section 1, NIRC). In addition,
the Secretary of Finance has the power of review over the
rulings of the Commissioner of Internal Revenue (Section 4,
NIRC). Evidently, all these powers were not put into operation
in this zero bond transaction. It is very likely that the huge tax
revenue loss of the government and the enormous problem
that is now full-blown could have been avoided if the
Department of Finance exercised its powers over the Bureau
of Internal Revenue.
National Internal Revenue Code of 1997 as amended (NIRC)
INCOME TAXATION
Income Tax is defined as a tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on the
persons income, emoluments, profits and the like [Fisher v.
Trinidad, 43 Phil. 981].
It may be succinctly defined as a tax on income, whether
gross or net, realized in one taxable year.

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Income tax is generally classified as an excise tax. It is not


levied upon persons, property, funds or profits but upon the
right of a person to receive income or profits.
In the Philippines, income tax is imposed on the net income of
citizens, resident aliens, domestic corporations, and
nonresident aliens and foreign corporations engaged in trade
or business within the Philippines [Sec. 24 (A), Sec. 25 (A),
Sec. 27 (A), Sec. 28 (A), NIRC]. It is also imposed on the gross
income of nonresident aliens and foreign corporations-not
doing business in the Philippines [Sec. 25 (B), (C), (D), Sec. 28
(B), NIRC]. It is further imposed as a final tax on certain
passive income (interests, royalties, prizes, and other
winnings), cash and property dividends, capital gains from the
sale of domestic shares of stock and real property classified as
capital assets located in the Philippines [Sec. 24 (B), Sec. 25
(A) (2), (3), Sec. 27 (D), Sec. 28 (A), NIRC].
Income Tax Law aims to mitigate the evils arising from the
inequalities of wealth by a progressive scheme of taxation
which places the burden of on those best able to pay
[Madrigal v. Rafferty & Concepcion, G.R. No. L-12287, August
7, 1918].
INCOME TAX SYSTEMS
GLOBAL TAX SYSTEM Under a global tax system, it did not
matter whether the income received by the taxpayer is
classified as compensation income, business or professional
income, passive investment income, capital gain, or other
income. All items of gross income, deductions, and personal
and additional exemptions, if any, are reported in one income
tax return, and one set of tax rates are applied on the tax
base.
SCHEDULAR TAX SYSTEM Different types of incomes are
subject to different sets of graduated or flat income tax rates.
The applicable tax rate(s) will depend on the classification of
the taxable income and the basis could be gross income or
net income. Separate income tax returns (or other types of
return applicable) are filed by the recipient of income for the
particular types of income received.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
All
compensation income, business or professional income,
capital gain and passive income not subject to final tax, and
other income are added together to arrive at the gross
income, and after deducting the sum of allowable deductions,
the taxable income is subjected to one set of graduated tax
rates or normal corporate income tax. With respect to such
income the computation is global. For those other income not
mentioned above, they remain subject to different sets of tax
rates and covered by different returns.
Note: The Philippines, under EO 37 (1986) and RA 8424
(1998), follows a semi-schedular and semi-global tax system.

EXCISE TAX - It is imposed on the right or privilege of a person


to receive or earn income. It is not a personal tax or a
property tax.

CRITERIA IN IMPOSING PHILIPPINE INCOME TAX


Citizenship or Nationality PrincipleA citizen of the
Philippines is subject to Philippine income tax
a)
b)

on his worldwide income, if he resides in the


Philippines; or
only on his income from sources within the
Philippines, if he qualifies as a nonresident citizen.

Residence PrincipleA resident alien is liable to pay


Philippine income tax on his income from sources within the
Philippines but is exempt from tax on his income from sources
outside the Philippines.
Source of Income PrincipleAn alien is subject to
Philippine income tax because he derives income from
sources within the Philippines. Thus, a non-resident alien or
non-resident foreign corporation is liable to pay Philippine
income tax on income from sources within the Philippines,
such as dividend interest, rent, or royalty, despite the fact
that he has not set foot in the Philippines.
The income tax law adopts the most comprehensive tax situs
of nationality and residence of the taxpayer and of the
generally accepted and internationally recognized income tax
base. [Tan v. De Rosario, G.R. No. 109289 October 3, 1994]
Resident citizens and domestic corporations are subjected to
income tax liability on their income from all sources within
and without the Philippines. The law adopts the source rule
with respect to income received by taxpayers, other than
resident citizens and domestic corporations.
TYPES OF PHILIPPINE INCOME TAX
1.
2.
3.
4.
5.

Graduated income tax on individuals


Normal corporate income tax on corporations
Minimum corporate income tax on corporations
Special income tax on certain corporations
Capital gains tax on sale or exchange of shares of
stock of a domestic corp. classified as capital assets
6. Capital gains tax on sale or exchange of real property
classified as capital asset
7. (7)Final withholding tax on certain passive
investment income paid to residents
8. Final withholding tax on income payments made to
non-residents
9. Fringe benefits tax on fringe benefits of supervisory
or managerial employees
10. Branch profit remittance tax
11. Tax on improperly accumulated earnings of
corporations

FEATURES OF THE PHILIPPINE INCOME TAX LAW DIRECT


TAX

TAXABLE PERIOD

The tax burden is borne by the income recipient upon whom


the tax is imposed.

The accounting periods used in determining the taxable


income of taxpayers are:

PROGRESSIVE -The tax rate increases as the tax base


increases. It is founded on the ability to pay principle and is
consistent with Sec. 28, Art. VI, 1987 Constitution.

(1) Calendar Year - Accounting period of 12 months ending on


the last day of December

COMPREHENSIVE- The Philippines has adopted the most


comprehensive system of imposing income tax by adopting
the citizenship principle, the residence principle, and the
source principle. Any of the three principles is enough to
justify the imposition of income tax on the income of a
resident citizen and a domestic corporation that are taxed on
a worldwide income.
SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM- The
Philippines follows the semi-schedular or semi-global system
of income taxation, although certain passive investment
incomes and capital gains from sale of capital assets (namely:
(a) shares of stock of domestic corporations, and (b) real
property) are subject to final taxes at preferential tax rates.
NATIONAL TAX - It is imposed and collected by the National
Government throughout the country.

(2) Fiscal Year - Accounting period of 12 months ending on the


last day of any month other than December [Sec. 22(Q),
NIRC]. (3) Short Period- Accounting period which starts after
the first month of the tax year or ends before the last month
of the tax year (less than 12 months).

INSTANCES
ARISES
1.
2.
3.
4.

WHEREBY

When
When
When
When

SHORT

ACCOUNTING

PERIOD

a corporation is newly organized.


a corporation is dissolved.
a corporation changes accounting period.
the taxpayer dies.

"Taxable year" means the calendar year, or the fiscal year


ending during such calendar year, upon the basis of which the
net income is computed under Title II (Tax on Income).

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Taxable year includes, in the case of return made for a


fractional part of a year under the provisions of Title II, the
period for which such return is made [Sec. 22 (P), NIRC].
WHEN CALENDAR YEAR SHALL BE USED IN COMPUTING
TAXABLE INCOME:
1.
2.
3.
4.

If the taxpayer's annual accounting period is other


than a fiscal year; or
if the taxpayer has no annual accounting period; or
If the taxpayer does not keep books of accounts; or
If the taxpayer is an individual [Sec. 43, NIRC].

Not engaged in trade or business within the Philippines - If the


aggregate period of his stay in the Philippines does not
exceed 180 days.

Special class of individual employees


Minimum Wage Earner
a)
b)

KINDS OF TAXPAYERS

A worker in the private sector paid the statutory


minimum wage;
An employee in the public sector with compensation
income of not more than the statutory minimum
wage in the non-agricultural sector where he/she is
assigned.

DEFINITION OF EACH KIND OF TAXPAYER


Taxpayer- any person subject to tax imposed by Title II of the
Tax Code [Sec. 22(N), NIRC].
Person- means an individual, a trust, estate or corporation
[Sec. 22(A), NIRC].
For income tax purposes, taxpayers are classified generally as
follows:
1.
2.
3.
4.

(1) Individuals
(2) Corporations;
(3) Partnerships; and
(4) Estates and Trusts.

INDIVIDUAL TAXPAYER
Citizens
1.
2.

Resident Citizens (RC)


Non-resident Citizens (NRC)
a. (a) Citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite
intention to reside therein.
b. (b) Citizen who leaves the Philippines during
the taxable year to reside abroad, either as an
immigrant or for employment on a permanent
basis.
c. (c) Citizen of the Philippines who works and
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
d. (d) Citizen previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year
to reside permanently in the Philippines
Treated as NRC with respect to his income
derived from sources abroad until the date of
his arrival in the Philippines

Corporations
Includes all types of corporations, partnerships (no matter
how created or organized), joint stock companies, joint
accounts, associations, or insurance companies, whether or
not registered with the SEC.
Excludes general professional partnerships (GPP), joint
venture or consortium formed for the purpose of undertaking
construction projects, joint venture or consortium engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a
service contract with the government.
(1) Domestic corporations A corporation created and
organized under its laws (the law of incorporation
test).
(2) Foreign corporations A corporation which is not
domestic.
a. (a) Resident foreign corporations Foreign
corporation engaged in trade or business
within the Philippines.
Doing business The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of commercial gain or for the
purpose and object of the business
organization. [RA 7042, Foreign Investments
Act]
In order that a foreign corporation
may be regarded as doing business within a
State, there must be continuity of conduct
and intention to establish a continuous
business, such as the appointment of a local
agent, and not one of a temporary character
[CIR v. BOAC]
b.

Aliens
(1) Resident Alien
An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident for income tax purposes.
No/Indefinite Intention = RESIDENT: If he lives in the
Philippines and has no definite intention as to his stay, he is a
resident. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute him a
transient.
Definite Intention = TRANSIENT: One who comes to the
Philippines for a definite purpose, which in its nature may be
promptly accomplished, is a transient.

(b) Non-resident foreign corporations


Foreign corporation not engaged in trade or
business within the Philippines

(3) Joint venture and consortium Essential factors of a joint


venture or consortium:
a)
b)
c)
d)

Each party must make a contribution, not necessarily


of capital but by way of services, skill, knowledge,
material or money;
Profits must be shared among the parties;
There must be a joint proprietary interest and right of
mutual control over the subject matter of the
enterprise;
There is a single business transaction.

Exception: Definite Intention but such cannot be promptly


accomplished; If his purpose is of such nature that an
extended stay may be necessary for its accomplishment, and
thus the alien makes his home temporarily in the Philippines,
then he becomes a resident.

Partnership

(2) Non-resident Alien

General Professional Partnerships (GPP)

Engaged in trade or business within the Philippines - If the


aggregate period of his stay in the Philippines is more than
180 days during any calendar year.

A general professional partnership is a partnership formed by


persons for the sole purpose of exercising their common

The Tax Code mandates that every other type of business


partnership is subject to income tax in the same manner and
at the same rate as an ordinary corporation.

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profession, no part of the income of which is derived from


engaging in any trade or business.
Not considered as a taxable entity for income tax purposes.
The partners themselves are liable, not the partnership, are
liable for the payment of income tax in their individual
capacities.

WHEN INCOME IS TAXABLE


Existence of taxable income
a)
b)
c)

Estates and Trusts


Taxable estates and trusts are taxed in the same manner and
on the same basis as an individual.
Co-ownership
For income tax purposes, the co-owners in a co- ownership
report their share of the income from the property owned in
common by them in their individual tax returns for the year
and the co- ownership is not considered as a separate taxable
entity or a corporation.
INCOME TAXATION
DEFINITION
Income Tax is defined as a tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on the
persons income, emoluments, profits and the like [Fisher v.
Trinidad].

WHEN IS THERE INCOME? When there is a FLOW of wealth


other than mere return of capital during the taxable period.
REALIZATION OF INCOME
Tests of
receipt

NATURE

1.

Income tax is generally classified as an excise tax. It is not


levied upon persons, property, funds or profits but upon the
right of a person to receive income or profits.

2.

GENERAL PRINCIPLES
o

o
o

A resident citizen of the Philippines is taxable on all


income derived from sources within and without the
Philippines;
A nonresident citizen is taxable only on income
derived from sources within the Philippines;
An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas
contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a
seaman shall be treated as an overseas contract
worker if he is
citizen of the Philippines; and
receives
compensation
for
services
rendered abroad as a member of the
complement of a vessel engaged exclusively
in international trade
An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
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. [Sec. 23]

INCOME DEFINITION
(a) income means all wealth which flows to the taxpayer other
than a mere return of capital. It includes gain derived from the
sale or other disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and capital; and
includes the gain derived from the sale or exchange of capital
assets.
(b) It is an amount of money coming to a person within a
specified time, whether as payment for services, interest or
profit from investment. Unless otherwise specified. It means
cash or its equivalent. Income can also be thought of as a flow
of the fruits of one's labor. [Conwi v. CTA, G.R. No. 48532
August 31, 1992]
(c) Income may be received in the form of cash, property,
service, or a combination of the three. NATURE Income
includes earnings, lawfully or unlawfully acquired, without
consensual recognition, express or implied, of an obligation to
repay and without restriction as their disposition. [James v.
US, 366 US 213]

There is INCOME, gain or profit


RECEIVED or REALIZED during the taxable year
NOT EXEMPT from income tax
a. "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit;
capital is a tree, income the fruit." A tax on
income is not a tax on property. "Income,"
as here used, can be defined as "profits or
gains." [Madrigal vs. Rafferty (1918)]
b.
A mere increase in the value of property is
not income, but merely unrealized increase
in capital. [1 Mertens, Sec. 5.06]The
increase in the value of property is also
known as appraisal surplus or revaluation
increment.

Realization

Actual

vis--vis

Constructive

Actual receipt Income is actually reduced to


possession. The realization of gain may take the form of
actual receipt of cash.
Constructive receipt An income is considered
constructively received when it is credited to the
account of, or segregated in favour of a person. The
person may withdraw the said account credited in his
favor anytime without any substantial limitations or
conditions upon which payment or enjoyment is to be
made or exercised. Examples of constructive receipt of
income are:
a. (1) Interest credited on savings bank deposit
b. (2) Matured interest coupons not yet collected
by the taxpayer
c. (3) Dividends applied by the corporation
against the indebtedness of a stockholder
d. (4) Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively
received; or
e. (5) Intended payment deposited in court
(consignation).

The doctrine of constructive receipt is designed to prevent the


taxpayer using the cash basis from deferring or postponing
the actual receipt of taxable income. Without the rule, the
taxpayer can conveniently select the year in which he will
report the income. [Dimaampao]
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 or expense?
The accrual of income and expense is permitted when the allevents test has been met. This test requires:
1.
2.

fixing of a right to income or liability to pay; and


the availability of the reasonable accurate
determination of such income or liability [CIR v.
Isabela Cultural Corporation].

The As If Theory of Constructive Income is designed to


prevent a cash basis taxpayer to delay reporting of income. It
also resumes the existence of income on transactions
supposedly not subject to tax. [Valencia and Roxas]
RECOGNITION OF INCOME
Methods of
expenses

accounting

in

reporting

income

and

Cash method vis--vis Accrual methodCash method


generally reports income upon cash collection and reports
expenses upon payment. If earned from rendering of services,
income is to be reported in the year when collected, whether
earned or unearned. [Sec. 108, NIRC].

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Accrual method generally reports income when earned and


reports expense when incurred. If earned from sale of goods,
income is to be reported in the year of sale, irrespective of
collection. [Sec. 106, NIRC].

Contract Price is the amount which the purchaser contracts


to pay the seller in cash. It includes the excess of the
mortgages assumed over the cost or other basis of the
property sold

Income realized pertains to the accrual basis of accounting,


when recognition of income in the books is when it is realized
and expenses are recognized when incurred. It is the right to
receive and not the actual receipt that determines the
inclusion of the amount in gross income

Change from accrual to installment basis

Examples:
1.
2.
3.

interest or rent income earned but not yet received


rent expense accrued but not yet paid
wages due to workers but remaining unpaid

Generally, trade and manufacturing businesses use accrual


method while servicing businesses use cash method. If the
service business opted to report on accrual basis, such
method can only be applied when it comes to reporting of
expense. To prevent tax evasion, individual taxpayers whose
business consists of the sale of inventories cannot use cash
method. [Valencia and Roxas]
Installment method vis--vis Deferred method vis--vis
Percentage of completion method (in long- term
contracts)
Installment Method is a special method of accounting whereby
income on installment sales of property during the year is
allowed to be reported in installments in proportion to the
installment payments actually received in that year, which the
gross profit realized or to be realized when payment is
completed, bears to the total contract price [Sec. 49, NIRC].
Income may be reported on the installment basis in the
following cases:
Sales of personal property by a dealer A dealer who
regularly sells or otherwise disposes of personal property on
the installment plan
Sales of real property (inventory) and casual sales of
personalty
1.

2.

casual sale or other casual disposition of personal


property (not of a kind which would be includible in
the inventory of the taxpayer if on hand at the close
of the taxable year) where the selling price > P1,000
and the initial payments do not exceed 25% of the
selling price, or
sale or other disposition of real property (inventory),
if the initial payments do not exceed 25% of the
selling price. Note: This sale is subject to creditable
withholding tax and normal tax which is 30% for
corporate taxpayer or 5% to 32% for individual
taxpayer.

A taxpayer entitled to the benefits of a dealer in personal


property may elect for any taxable year to report his taxable
income on the installment basis. In computing his income for
the year of change or any subsequent year, amounts actually
received during any such year on account of sales or other
dispositions of property made in any prior year shall not be
excluded. [see Sec. 49(D), NIRC].
Deferred Payment
a) If the initial payments exceed 25% of the selling price,
the gain realized may be reported on a deferred payment
method.
b)The taxable gain or income returnable during the year of
sale is the difference between the selling or contract price
and the cost of the property, even though the entire
purchase price has not been actually received in the year
of sale.
c) The obligations of the purchaser received by the vendor
are to be considered as equivalent of cash.
PERSONAL Property
Dealer
Dealer in personal property
who
regularly
sells
in
installment
plan:
Installment method
*held as ordinary asset
regardless of amount of
percentage
of
initial
payments
Casual sale
Installment
method;
Provided:
(1) Selling price exceeds
php1,000
(2)
Initial
payments do not exceed
25% of selling price

Note: Initial payments are the total payments received in cash


or property (other than evidences of indebtedness such as
promissory notes, mortgages given) by the seller upon or
before the execution of the instrument of sale during the
taxable year of the disposition of the real property. Considered
as initial payments are the downpayment and all other
payments received by the seller during the year of sale,
including excess mortgage assumed by the buyer over the
basis or cost of the property sold. It contemplates at least
one other payment in addition to the initial payment. If the
entire purchase price is to be paid in a lump sum in a later
year, there being no payment during the first year, the
income may not be returned on the installment basis.
Selling Price - is the total amount or price of the sale
including the cash or property received and all notes of the
buyer or mortgages assumed by him.

Installment
method;
Provided, initial payments
do not exceed 25% of
selling price
If exceeds 25%-- Deferred
payment method
*held as inventory

If
either of 2 or both
conditions
not
met
Deferred payment method
*personal
property
considered inventory
Sale by individual

not

Installment
method;
Provided, initial payments
do not exceed 25% of
selling price

Sales of real property considered as capital asset by


individuals
An Individual who sells or disposes of real property,
considered as capital asset, if initial payments do not exceed
25% of the selling price, may pay the capital gains tax in
installments [Sec. 49(C), NIRC]. Note: This sale is subject to a
capital gains tax of 6% based on the selling price or zonal
value, whichever is higher.

Real property

*held as capital asset


PERCENTAGE
CONTRACTS)

OF

COMPLETION

(IN

LONG-TERM

Income from long-term construction contracts refers to the


earnings derived from construction of a building, installation
or other construction contract usually covering a period in
excess of one year. When income is derived from long- term
construction contracts, it is generally reported on the basis of
percentage of completion made every year that will be
evidence by the certificates of engineers or architects. The
reportable income is calculated by deducting from the
contract price the actual cost of construction.
In recognizing realized revenue for long-term construction
contracts, accountants usually follow two methods:
i.

ii.

Completed contract method requires recognition of


revenue only when the contract is finally completed;
and
Percentage of completion method requires
recognition of income based on the progress of work.

Long-term contracts are no longer allowed to be


reported based on the completed contract method basis

@GlowingGloria 5

beginning January 1, 1998 pursuant to RA 8424; hence,


all long- term contracts must be reported using the
percentage of completion method.

Tests in determining whether income is earned for tax


purposes
(1) Realization test no taxable income until there is a
separation from capital of something of exchangeable value,
thereby supplying the realization or transmutation which
would result in the receipt of income (Eisner v Macomber).
Thus, stock dividends are not income subject to income tax on
the part of the stockholder when he merely holds more shares
representing the same equity interest in the corporation that
declared stock dividends (Fisher v Trinidad).
2. Claim of right doctrine (or Doctrine of Ownership,
command, or control) a taxable gain is conditioned upon the
presence of a claim of right to the alleged gain and the
absence of a definite unconditional obligation to return or
repay that which would otherwise constitute a gain. To collect
a tax would give the government an unjustified preference as
to the part of the money that rightfully and completely
belongs to the victim. The embezzlers title is void.
(3) Economic benefit test, Doctrine of Proprietary
Interest any economic benefit to the employee that
increases his net worth, whatever may have been the mode
by which it is effected, is taxable. Thus, in stock options, the
difference between the fair market value of the shares at the
time the option is exercised and the option price constitutes
additional compensation income to the employee at the time
of exercise (not upon the grant or vesting of the right).
(4) Severance Test - Under the doctrine of severance test of
income, in order that income may exist, is necessary that
there be a separation from capital of something of
exchangeable value. The income required a realization of
gain.
(5) All Events Test Under the accrual method of
accounting, expenses are deductible in the taxable year in
which:
1.
2.

all events have occurred which determine the


liability; and
the amount of liability can be determined with
reasonable accuracy.

All events test requires:


i.
ii.

Fixing a right to income or liability to pay; and


The availability of reasonably accurate determination
of such income or liability.

All of the above tests are followed in the Philippines for


purposes of determining whether income is received by the
taxpayer or not during the year [Mamalateo].
GROSS INCOME
DEFINITION
Gross Income means the pertinent items of income referred to
in Section 32(A) of the Tax Code. It includes all income derived
from whatever source (unless exempt from tax by law),
including, but not limited to, the following items:
1.

Gross income derived from the conduct of Trade or


business or the exercise of a profession
2. Rents
3. Interests
4. Prizes and winnings
5. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items
6. Annuities
7. Royalties
8. Dividends
9. Gains derived from dealings in property
10. Pensions
11. Partners distributive share from the net income of
the general professional partnership (GPP) [Sec 32A,
NIRC]

The list here is NOT exclusive

The term gross income whenever used without


qualification, is comprehensive, as defined above, and is
different from the limited meaning of gross income for
purposes of minimum corporate income tax or the gross
income tax of corporations. Gross income includes gross
profit from ordinary business and other income not
subject to passive income tax or final withholding tax.
Gross income means income, gain, or profit subject to
income tax.
It includes the compensation for personal services,
business income, profits, and income derived from any
source whatever (whether legal or illegal)
It excludes unless it is exempt from income tax under the
Constitution, tax treaty, or statute or it is subject to final
withholding income tax in accordance with the semiglobal or semi-schedular tax system adopted by the
Philippines.
It is the difference between gross sales/revenue and the
cost of goods sold/services. The definition of gross
income is broad and comprehensive to include proceeds
from sales of transport documents. [Mamalateo]

CONCEPT
DERIVED

OF

INCOME

FROM

WHATEVER

SOURCE

Income derived from whatever source means inclusion of


all income not expressly exempted within the class of taxable
income under the laws irrespective of the voluntary or
involuntary action of the taxpayer in producing the gains, and
whether derived from legal or illegal sources (i.e. gambling,
extortion, smuggling, etc.)
GROSS INCOME VIS--VIS
TAXABLE INCOME

NET

INCOME

VIS- -VIS

(a) Gross income - means income, gain or profit subject to tax.


(b) Net income means gross income less
deductions and/or exemptions [Sec. 31, NIRC]

statutory

(c) Taxable income means the pertinent items of gross


income specified in the Tax Code, less the deductions and/or
personal and additional exemptions, if any, authorized for
such types of income by the Tax Code or other special laws
[Sec. 31, NIRC]. It is synonymous to the term net income
[Valencia and Roxas]
CLASSIFICATION OF INCOME AS TO SOURCE
Source is ascribed to the place wherein the income is earned.
It is governed by the situs of taxation. This classification of
income is necessary to determine whether such income is
subject to tax or not. Income may be:
(1) Derived entirely from sources within the Philippines [Se.
42A, NIRC]. Examples: compensation for labor or service
derived from Philippine sources; interest on bonds, notes,
deposits and the like earned in the Philippines; dividends
declared by domestic corporations; rentals and royalties from
property located within the Philippines; and gains, profits and
income from sale of real property as well as from personal
property in the Philippines. As a rule, incomes earned within
the Philippines are taxable.
(2) Derived entirely from sources without the Philippines [Sec.
42C, NIRC]. Examples: compensation for labor or service
rendered by overseas contract workers; interest on bonds,
notes, deposits and the like earned abroad; dividends
declared by nonresident foreign corporation; rental and
royalties from property located outside the Philippines; and
gains, profits and income from sale of real property as well as
from personal property located outside the Philippines. As a
rule, incomes earned with the Philippines are taxable.
(3) Derived from sources partly within or partly without the
Philippines. Examples: gains, profits and income from
transportation or other services rendered partly within and
partly outside, and dividend received by a resident citizen
from a resident foreign corporation. (Sec. 43(E), NIRC). In
general, when an income is earned partly from within and
partly from without, only income within is taxable in the
Philippines, except if the taxpayer is a resident citizen or a
domestic corporation. A Filipino citizen or a domestic

@GlowingGloria 6

corporation whose income is derived from within and without


the Philippines is generally subject to tax.

SOURCES OF INCOME SUBJECT TO TAX


Compensation Income
Income arising from an employer-employee (ER-EE)
relationship. It means all remuneration for services performed
by an EE for his ER, including the cash value of all
remuneration paid in any medium other than cash [Sec.
78(A)], unless specifically excluded by the Tax Code.
It includes, but is not limited to, salaries and wages, honoraria
and
emoluments,
allowances
(e.g.,
transportation,
representation, entertainment), commissions, fees (including
directors fees, if the director is, at the same time, an
employee of the payor-corporation), tips, taxable bonuses,
fringe benefits except those subject to Fringe Benefit Tax
(FBT) under Section 33 of the Tax Code, and taxable pensions
and retirement pay (e.g. retirement benefits earned without
meeting the conditions for exemption thereof, such as
retirement of less than 50 years of age.)
General Rule: every form of compensation income is taxable
regardless of how it is earned, by whom it is paid, the label by
which it is designated, the basis upon which it is determined,
or the form in which it is received. The basis upon which
remuneration is paid is immaterial. It may be paid on the
basis of piece of work, percentage of profits, hourly, weekly,
monthly, or annually.
Exception: The term wages does NOT include remuneration
paid:
1.
2.
3.
4.

For agricultural labor paid entirely in products of the


farm where the labor is performed, or
For domestic service in a private home, or
For casual labor not in the course of the employer's
trade or business, or
For services by a citizen or resident of the Philippines
for a foreign government or an intl organization. [Sec.
78(A)]

Note: The term agricultural labor does not include services


performed in connection with forestry, lumbering or
landscaping.
The term remuneration for domestic services refers to
remuneration paid for services of a household nature
performed by an employee in or about the private home of
the person whom he is employed. The services of household
personnel furnished to an employee (except rank and file
employees) by an employer shall be subject to the fringe
benefits tax pursuant to Sec. 33 of the Tax Code. A private
home is the fixed place of abode of an individual or family. If
the home is utilized primarily for the purpose of supplying
board or lodging to the public as a business enterprise, it
ceases to be a private home and remuneration paid for
services performed therein is not exempted. Services of the
household nature in or about a private home include services
rendered by cooks, maids, butlers, valets, laundresses,
gardeners, chauffeurs of automobiles for family use. The
remuneration paid for the services which are performed in or
about rooming or lodging houses, boarding houses, clubs,
hotels, hospitals or commercial officer or establishments is
considered as compensation. Remuneration paid for services
performed as a private secretary, even if they are performed
in the employers home is considered as compensation.
The term casual labor includes labor which is occasional,
incidental or regular. Not in the course of the employers
trade or business includes labor that does not promote or
advance the trade or business of the employer.
The term remuneration paid for services performed as an
employee of a foreign government or an international
organization includes not only remuneration paid for services
performed by ambassadors, ministers and other diplomatic
officers and employees but also remuneration paid for
services performed as consular or other officer or employee of
a foreign government or as a non-diplomatic representative of
such government.

Compensation income including overtime pay, holiday pay,


night shift differential pay, and hazard pay, earned by
MINIMUM WAGE EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to withholding tax on
wages [RA 9504]Provided, however, that an employee shall
not enjoy the privilege of being a MWE and, therefore, his/her
entire earning are not exempt from income tax and,
consequently, from withholding tax if he receives/earns
additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory
amount of P30,000, taxable allowance, and other taxable
income other than the statutory minimum wage (SMW),
holiday pay, overtime pay, hazard pay and night shift
differential pay.
MWEs receiving other income, such as income from the
conduct of trade, business, or practice of profession, except
income subject to final tax, in addition to compensation
income are not exempted from income tax on their income
earned during the taxable year.
This rule, notwithstanding, the SMW, Holiday Pay, overtime
pay, night differential pay and hazard pay shall still exempt
from withholding tax.
Forms of compensation and how they are assessed
(a) Cash If compensation is paid in cash, the full amount
received is the measure of the income subject to tax.
(b) Medium other than money If services are paid for in a
medium other than money (e.g. shares of stock, bonds, and
other forms of property), the fair market value (FMV) of the
thing taken in payment is the amount to be included as
compensation subject to tax. If the services are rendered at a
stipulated price, in the absence of evidence to the contrary,
such price will be presumed to be the FMV of the
remuneration received.
(c) Living quarters or meals - General Rule: The value to the
employee of the living quarters and meals given by the
employer shall be added to his compensation subject to
withholding.
Exception: If living quarters/meals are
furnished to an employee for the convenience of the
employer the value needed NOT be included as part
of compensation income.
(d) Facilities and privileges of a relatively small value Facilities and privileges (such an entertainment, medical
services, or so called courtesy discounts on purchases),
otherwise known as de minimis benefits furnished or
offered by an employer to his employees generally, are NOT
considered as compensation subject to income tax and
therefore withholding tax if such facilities are offered or
furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.
Convenience of the Employer Rule Allowances in kind
furnished to the employee for and as necessary incident to
the performance of his duties are not taxable [Valencia and
Roxas].
If meals, living quarters, and other facilities and privileges are
furnished to an employee for the convenience of the
employer, and incidental to the requirement of the
employees work or position, the value of that privilege need
not be included as compensation [Henderson v. Collector]
The amount of de minimis benefits confirming to the ceiling
prescribed shall not be considered in determining the P30,000
ceiling of other benefits excluded from gross income under
Section 32 (b)(7)(e) of the Tax Code, Provided, that the excess
of the de minimis benefits over their respective ceilings
prescribed by these regulations shall be considered as part of
other benefits and the employee receiving it will be subject
to tax only on the excess over the P30,000 ceiling, Provided,
further, that MWEs receiving, other benefits exceeding the
P30,000 limit shall be taxable on the excess benefits, as well
as on his salaries, wages, and allowances, just like an
employee receiving compensation income beyond the SMW.
Any amount given by the employer as benefits to its
employees, whether classified as de minimis benefits or
fringe benefits, shall constitute as deductible expense upon
such employer. Where compensation is paid in property other

@GlowingGloria 7

than money, the employer


shall make necessary
arrangements to ensure that the amount of the tax required
to be withheld is available for payment to the BIR.
Classification of Gross Compensation Income
Basic salary or wage
(1) Salary earnings received periodically for a regular work
other than manual labor. Example: monthly salary of an
employee
(2) Wages earnings received usually according to specified
intervals of work, as by the hour, day, or week. Example: a
carpenters wage.
Backwages are subject to income tax and withholding tax on
wages [BIR Ruling No. DA- 073-2008]
Honoraria payments given in recognition for services
performed for which the established practice discourages
charging a fixed fee. Example: honorarium of a guest lecturer
Fixed or variable allowances i.e. Transportation,
Representation, and other allowances such as Cost of Living
Allowances (COLA)
General Rule: Fixed or variable transportation, representation
or other allowances that are received by a public officer or
employee of a private entity, in addition to the regular
compensation fixed for his position or office is COMPENSATION
subject to withholding tax. [Rev. Regs. 2-98]
Exception: Any amount paid specifically, either as advances or
reimbursements for travelling, representation and other bona
fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance
of his duties are not compensation subject to withholding tax,
provided the following conditions are satisfied:
a)

b)

(a) It is for ordinary and necessary traveling and


representation or entertainment expenses paid or
incurred by the employee in the pursuit of the
employers trade, business or profession; and
(b) The employee is required to account or liquidate
for the foregoing expenses.
The excess of actual
expenses over advances made shall constitute
taxable income if such amount is not returned to the
employer.
The
employee
is
required
to
account/liquidate for the expenses in accordance
with the specific requirements of substantiation for
each category of expenses pursuant to Section 34 of
the Tax Code.

Note: Reasonable amounts of reimbursements/advances for


traveling and entertainment expenses which are precomputed on a daily basis and are paid to an employee while
he is on an assignment or duty are NOT subject to withholding
tax on wages and substantiation requirements.
Commission usually a percentage of total sales or on
certain quota of sales volume attained as part of incentive
such as sales commission.

In general, retirement pay is taxable except in the following


instances:
(1) SSS or GSIS retirement pays.
(2) Retirement pay (R.A. 7641) due to old age provided the
following requirements are met:
a)
b)

c)
d)
e)

Separation pay taxable if voluntarily availed of. It shall not


be taxable if involuntary i.e. death, sickness, disability,
reorganization/merger of company and company at the brink
of bankruptcy or for any cause beyond the control of the said
official or employee.
For any cause beyond the control.
1.
2.
3.
4.

5.

6.

Hazard or Emergency Pay additional payment received


due to the workers exposure to danger or harm while
working. It is normally added to the basic salary together with
the overtime pay and night differential to arrive at gross
salary.
Retirement Pay a lump sum payment received by an
employee who has served a company for a considerable
period of time and has decided to withdraw from work into
privacy. [RR 6-82, Sec. 2b]

Connotes involuntariness on the part of the official or


employee
The separation from the service of the official or
employee must not be asked for or initiated by him.
The separation was not of his own making.
4. Such fact shall be duly established by the
employer by competent evidence which should be
attached to the monthly return for the period in
which the amount paid due to the involuntary
separation was made.
(6) Amounts received by reason of involuntary
separation remain EXEMPT from income tax even if
the official or the employee, at the time of
separation, had rendered less than ten (10) years of
service and/or is below fifty (50) years of age.
(7)Any payment made by an employer to an
employer to an employee on account of dismissal,
constitutes compensation regardless of whether the
employer is legally bound by contract, statute, or
otherwise, to make such payment.

Pension a stated allowance paid regularly to a person on


his retirement or to his dependents on his death, in
consideration of past services, meritorious work, age, loss, or
injury. Pension is taxable unless the law states otherwise, OR
unless the BIR approves the pension plan of a private
company.
Vacation and sick leave- rules in determining whether
money received for vacation and sick leave is taxable or not:
1.

2.

Fees received by an employee for the services rendered to


the employer including a directors fee of the company, fees
paid to the public officials such as clerks of court or sheriffs for
services rendered in the performance of their official duty
over and above their regular salaries.
Tips and Gratuities those paid directly to the employee
(usually by a customer of the employer) which are not
accounted for by the employee to the employer. (taxable
income but not subject to withholding tax) [RR NO. 2-98, Sec.
2.78.1]

The retirement program is approved by the BIR


Commissioner;
It must be a reasonable benefit plan. (Its
implementation must be fair and equitable for the
benefit of all employees)
The retiree should have been employed for 10 years
in the said company;
The retiree should have been 50 years old or above
at the time of retirement; and
It should have been availed of for the first time.

3.

If paid or availed of as salary of an employee who is


on vacation or on sick leave notwithstanding his
absence from work, it constitutes TAXABLE
compensation income. [RR 6-82, 2d]
Monetized value of unutilized VACATION leave credits
of ten (10) days or less which were paid to private
employees during the year, and the monetized value
of vacation and sick leave credits paid to government
officials and employees are NOT subject to income
tax and to the withholding tax. These are de
minimis benefits. [RR no. 5-2011, Sec 2.78.1(A)(7)]
Note: monetization of sick leave credits of private
employees even if not exceeding 10 days is not
exempt from income tax and withholding tax on
wages.
Terminal leave or money value of accumulated
vacation and sick leave benefits received by heir
upon death of employee is not taxable.

Thirteenth month pay and other benefits - Not taxable if


the total amount received is P30,000 or less. Any amount
exceeding P30,000 is taxable. [Sec. 32 (7)e, NIRC]
Fringe Benefits and De Minimis
o

Fringe Benefits any good, service, or other


benefit furnished or granted by an employer, in cash

@GlowingGloria 8

or in kind, in addition to basic salaries of an


individual employee [Sec. 33, NIRC]
De Minimis privileges of relatively small value as
given by the employer to his employees. Fringe
Benefits and De Minimis are not considered
compensation subject to income tax and withholding
tax.

1.
2.
3.
4.

Housing
Expense Account
Vehicle of any kind
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 and similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life insurance
premiums or similar amounts on excess of what the
law allows.[Sec. 33(B)]

Overtime Pay premium payment received for working


beyond regular hours of work which is included in the
computation of gross salary of employee. It constitutes
compensation.
Profit Sharing the proportionate share in the profits of the
business received by the employee in addition to his wages.
Awards for special services awards for past services or
suggestions to employers resulting in the prevention of theft
or robbery, etc. are also compensations.

Tax Rate and Tax Base

Beneficial Payments such as where employer pays the


income tax owed by an employee are additional
compensation income.

1.
2.
3.

Other forms of compensation other forms received due


to services rendered are compensation paid in kind, e.g.,
insurance premium paid by the employer for insurance
coverage where the heirs of the employee are the
beneficiaries is the employees income.
Note: Any amount which is required by law to be deducted by
the employer from the compensation of an employee
including the withheld tax is considered as part of the
employees compensation and is deemed to be paid to the
employee as compensation at the time the deduction is made.
(This also applies to deductions not required by law.)
WITHHOLDING TAX ON COMPENSATION INCOME
The income recipient (i.e., EE) is the person liable to pay the
tax on income, yet to improve the collection of compensation
income of EEs, the State requires the ER to withhold the tax
upon payment of the compensation income.
FRINGE BENEFITS
Special treatment of fringe benefits
Persons liable: The Employer (as a withholding agent),
whether individual, professional partnership or a corporation,
regardless of whether the corporation is taxable or not, or the
government and its instrumentalities, is liable to remit the
fringe benefit tax to the BIR once fringe benefit is given to a
managerial or supervisory employee.
The fringe benefit tax (FBT) is a final tax on the employees
income to be withheld by the employer. The withholding and
remittance of FBT shall be made on a calendar quarterly
basis.
Managerial employee: one who is vested with the powers or
prerogatives to lay down and execute management policies
and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees.
Supervisory employees: those who, in the interest of the
employer, effectively recommend such managerial actions if
the exercise of such authority is not merely routinary or
clerical in nature but requires the use of independent
judgment.
All employees not falling within any of the above definitions
are considered rank-and-file employees.
Fringe benefit tax is imposed on fringe benefits received by
supervisory and managerial employees. The fringe benefits of
rank and file employees are treated as part of compensation
income subject to income tax and withholding tax on
compensation.

How GMV is determined


GMV is determined by dividing the actual monetary value of
the fringe benefit by 68% [100% - tax rate of 32%]. For
example, the actual monetary value of the fringe benefit is
P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The
fringe benefit tax, therefore, is P470.59 [P1470.59 x 32%].
Special Cases:
(1) For fringe benefits received by non-resident alien not
engaged in trade of business in the Philippines (NRANETB),
the tax rate is 25% of the GMV. The GMV is determined by
dividing the actual monetary value of the fringe benefit by
75% [100% - 25%].
(2) For fringe benefits received by alien individuals and Filipino
citizens employed by regional or area headquarters, regional
operating headquarters, offshore banking units (OBUs), or
foreign service contractor or by a foreign subcontractor
engaged in petroleum operations in the Philippines, or by any
of their Filipino individual employees who are employed and
occupying the same positions as those occupied by the alien
employees, the tax rate is 15% of the GMV. The GMV is
determined by dividing the actual monetary value of the
fringe benefit by 85% [100% - 15%].
(3) What is the tax implication if the employer gives fringe
benefits to rank-and-file employees? Fringe benefits given to
a rank- and-file employee are treated as part of his
compensation income subject to normal tax rate and
withholding tax on compensation income, except de minimis
benefits and benefits provided for the convenience of the
employer.
Payor of Fringe Benefit Tax (FBT): The employer withholds and
pays the FBT but the law allows him to deduct such tax from
his gross income.
Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
1.

Definition
Fringe benefit means any good, service, or other benefit
furnished or granted by an employer, in cash or in kind, in
addition to basic salaries, to an individual employee (except
rank and file employees) such as, but not limited to the
following:

Tax base is based on the grossed-up monetary value


(GMV) of fringe benefits.
Rate is generally 32%
GMV represents:
a.
the whole amount of income realized by the
employee which includes the net amount of
money or net monetary value of property
that has been received; and
b.
the amount of fringe benefit tax due from
the employee which has been withheld and
paid by the employer for and in behalf of his
employee.

2.
3.

Fringe benefits not considered as gross income


i. (a) if it is required or necessary to the business of
employer
ii. (b) if it is for the convenience or advantage of
employer
Fringe Benefit that is not taxable under Sec. 32 (B)
Exclusions from Gross Income
Fringe benefits not subject to Fringe Benefit Tax:

@GlowingGloria 9

i.
ii.

iii.
iv.
v.

(a) Fringe Benefits which are authorized and


exempted from income tax under the Code or under
special laws;
(b) Contributions of the employer for the benefit of
the employee for retirement, insurance and
hospitalization benefit plans;
(c) Benefits given to the rank-and-file employees,
whether granted under a collective bargaining
agreement or not; and
(d) Fringe benefits granted for the convenience of
the employer;
(e) De minimis benefits

The exemption of any FB from the FBT shall not be interpreted


to mean exemption from any other income tax imposed under
the Tax Code except if the same is likewise expressly exempt
from any other income tax imposed under the Tax Code or
under any other existing law. Thus, if the FB is exempted from
the FBT, the same may, however, still form of the employees
gross compensation income which is subject to income tax;
hence, likewise subject to withholding tax on compensation
income payment.
De minimis benefits (exempt from income tax as well
as withholding tax on compensation income of both
managerial and rank and file EEs)
a) Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the
year;
b)Monetized value of vacation and sick leave credits
paid to government officials and employees;
c) Medical cash allowance to dependents of employees,
not exceeding P750 per employee per semester or
P125 per month;
d)Rice subsidy of P1,500 or one (1) sack of 50 kg. rice
per month amounting to not more than P1,500;
e) Uniform and Clothing allowance not exceeding P5,000
per annum (RR 8-2012)
f) Actual medical assistance, e.g. medical allowance to
cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance,
and routine consultations, not exceeding P10,000.00
per annum;
g)Laundry allowance not exceeding P300 per month;
h)Employees achievement awards, e.g., for length of
service or safety achievement, which must be in the
form of a tangible personal property other than cash
or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under
an established written plan which does not
discriminate in favor of highly paid employees;
i) Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum; and
j) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty- five
percent (25%) of the basic minimum wage on a per
region basis; [Revenue Regulation No. 5-2011]
All other benefits given by employers which are not included
in the above enumeration shall NOT be considered as "de
minimis" benefits and hence, shall be subject to withholding
tax on compensation (rank and file employees) and FBT
(managerial/supervisory employees).
Housing Privilege
(1) LEASE of residential
property for the residential
use of employee
(2)
Assignment
of
residential property owned
by employer for use of
employee
(3) Purchase of residential
property in installment basis
for the use of the employee
(4) Purchase of residential
property and ownership is
transferred in the name of
the employee

Fringe Benefit Tax Base


(Monetary Value)
MV=
50%
of
lease
payments
where MV = monetary value
of the FB
MV= [5% (FMV or ZV,
whichever is higher) x 50%]

MV= 5% x acquisition cost


exclusive of interest x 50%
MV= FMV or ZV, whichever
is highe

ZV = Zonal Value = value of the land or improvement, as


declared in the Real Property Declaration Form FMV = Fair
Market Value = FMV as determined by the Commissioner of
Internal Revenue
Non-taxable housing fringe benefit:
(1) Housing privilege of the Armed Forces of the Philippines
(AFP) officials i.e, those of the Philippine Army, Philippine
Navy, or Philippine Air Force
(2) A housing unit, which is situated inside of adjacent to the
premises of a business or factory maximum of 50 meters
from perimeter of the business premises
(3) Temporary housing for an employee who stays in housing
unit for three months or less
MOTOR Vehicle
Motor Vehicle
(1) Purchased in the name
of the employee
(2) Cash given to employee
to purchase in his own nam
(3) Purchase on installment,
in the name of employee
(4) Employee shoulders part
of the purchase price,
ownership in the name of
employee
(5) Employer owns and
maintains a fleet of motor
vehicles for use of the
business and of employees
(6) Employer leases and
maintains a fleet for the use
of the business and of
employees

Fringe Benefit Tax Base


MV= acquisition cost
MV= cash received by
employee
MV=
acquisition
cost
exclusive of interest
MV= amount shouldered by
employer

MV= (AC/5) x 50%

MV= 50% of rental payment

Professional Income Refers to fees received by a


professional from the practice of his profession, provided that
there is NO employer-employee relationship between him and
his clients.
Income from Business
(a) Any income derived from doing business
(b) Doing business: The term implies a continuity of
commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise
of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its
organization.

Income from Dealings in Property


Dealings in property such as sales or exchanges may result in
gain or loss. The kind of property involved (i.e., whether the
property is a capital asset or an ordinary asset) determines
the tax implication and income tax treatment, as follows:
Taxable Net Income = Ordinary Net Income +
Capital Gains (other than those subject to final CGT)
Ordinary Asset
Gain
from
sale
and
exchange
or
other
disposition
Oridnary Gain ( Part of
Gross income )
Loss
from
sale,
exchange,
or
other
disposition
Ordinary Loss ( Part of
allowable deductions from
gross income)
Excess of Gain over
losses
Part of Gross income
Excess of losses over

Net

Capital Asset

Capital Gain

Capital loss

Net Capital Gain

@GlowingGloria 10

gains
Part Allowable Deduction
from gross income

6.
Net Capital Loss
7.

Types of Properties

When a capital gain or capital loss is sustained by a


corporation, the following rules shall be observed:

Capital vs Ordinary Assets


Ordinary Assets
(1)Stock in trade of the
taxpayer or other property
of a kind which would
properly be included in the
inventory of the taxpayer if
on hand at the close of the
taxable year.
(2) Property held by the
taxpayer primarily for sale
to customers in the ordinary
course of his trade or
business.
(3) Property used in the
trade or business of a
character which is subject
to
the
allowance
for
depreciation, or
(4) Real property used in
the trade or business of the
taxpayer, including property
held for rent.

Capital assets
Property
held
by
the
taxpayer, whether or not
connected with his trade or
business which is not an
ordinary asset. Generally,
they include:
(1) stocks and securities
held by taxpayers other
than dealers in securities

(2) real property not used in


trade or business, such as
residential house and lot,
idle or vacant land or
building
(3)investment property,
such as interest in a
partnership,
stock
investment
(4)Personal or non- business
properties, such as family
car,
home
appliances,
jewelry.

TYPES OF GAINS FROM DEALINGS IN PROPERTY


(1) Ordinary income vis--vis Capital gain. If the asset
involved is classified as ordinary, the entire amount of the
gain from the transaction shall be included in the computation
of gross income [Sec 32(A)], and the entire amount of the loss
shall be deductible from gross income. [Sec 34(D)]. (See
Allowable Deductions from Gross Income - Losses)
If the asset involved is a capital asset, the rules on capital
gains and losses apply in the determination of the amount to
be included in gross income. (See Capital Gains and Losses).
These rules do not apply to: (a) real property with a capital
gains tax (final tax), or (2) shares of stock of a domestic
corporation with a capital gains tax (final tax). Also, sale of
shares of stock of a domestic corporation, held as capital
assets, through the stock exchange by either individual or
corporate taxpayers, is subject to of 1% percentage tax
based on gross selling price.
The following percentages of the gain or loss recognized upon
the sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss, and
net income:
i.

ii.

If the taxpayer is an individual 100% if the capital


asset has been held for not more than 12 months; and
50% of the capital asset has been held for more than
12 months
If the taxpayer is a corporation 100%, regardless of
the holding period of the capital asset [Sec. 39(B),
NIRC]

The tax rules for the gains or losses from sales or exchanges
of capital assets over ordinary assets are as follows:
1.
2.
3.
4.

5.

The amount of loss does not exceed the income


before exemptions at the year when the loss was
sustained; and
The holding period should not exceed 12 months.
[Valencia]

Net capital gain is added to ordinary gain but net


capital loss is not deductible from ordinary gain.
Net ordinary loss is deductible from ordinary gain.
Capital losses are deductible only to the extent of
the capital gain.
There is a net capital loss carry-over on the net
capital assets loss in a taxable year which may be
deducted as a short-term capital loss from the net
capital gain of the subsequent taxable year;
provided that the following conditions shall be
observed:
The taxpayer is other than a corporation;

1.
2.
3.
4.

There is no holding period; hence, there is no net


capital loss carry-over.
Capital gains and losses are recognized to the
extent of their full amount.
Capital losses are deductible only to the extent of
capital gains.
Net capital losses are not deductible from ordinary
gain or income but ordinary losses are deductible
from net capital gains.

Note: For sale, barter, exchange or other forms of disposition


of shares of stock subject to the 5%/10% capital gains tax on
the net capital gain during the taxable year, the capital losses
realized from this type of transaction during the taxable year
are deductible only to the extent of capital gains from the
same type of transaction during the same period. If the
transferor of the shares is an individual, the rule on holding
period and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of the Tax Code
as amended. [RR 6-2008, c.4]
(1) Actual gain vis--vis Presumed gain
Presumed Gain: In the sale of real property located in the
Philippines, classified as capital asset, the tax base is the
gross selling price or fair market value, whichever is higher.
The law presumes that the seller makes a gain from such sale.
Thus, whether or not the seller makes a profit from the sale of
real property, he has to pay 6% capital gains tax. In fact, her
has to pay the tax, even if he incurs an actual loss from the
sale thereof. (Note, however, that where an individual sells his
real property classified as a capital asset to the government,
he has the option whether to be taxed at the graduated
income tax rates or at 6% capital gains tax.)
Actual Gain: The tax base in the sale of real property
classified as an ordinary asset is the actual gain. If the seller
incurs a loss from the sale, such loss may be deducted from
his gross income during the taxable year. The ordinary gain
shall be added to the operating income and the net taxable
income shall be subject to the graduated rates from 5% to
32% (if an individual) or to 30% corporate tax or to 2% MCIT
(if a corporation).
Computation of the amount of gain and loss- LIBOG PA
MORE
Amount realized from sale or other disposition LESS basis or
adjusted Basis = NET GAIN (LOSS)
Note: Amount realized from sale or other disposition of
property = sum of money received + fair market value of the
property (other than money) received
Note: When a taxpayer sells a real or personal property, he
should deduct its cost from its selling price to measure the
gain or loss from the sales transaction [Sec. 40, NIRC].
(2) Long term capital gain vis--vis Short term capital
gain

Long-term capital gain: Capital asset is held for


more than twelve month before it is sold. Only 50%
of the gain is recognized.
Short-term capital Gain: Capital asset is held for less
than 12 months. 100% of the gain is subject to tax.

(3) Net Capital Gain vis--vis Net Capital Loss

Net Capital Gain is the excess of the gains over the


losses on sales or exchange of capital assets during
the taxable year.
Net Capital Loss means the excess of the losses
over the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39A, NIRC]

(4) Computation of the amount of Gain or Loss

@GlowingGloria 11

For income tax purposes the following rules should be


observed regarding the cost and expenses of the capital
assets:
1.
2.

the costs and expenses of the acquisition are to be


capitalized, and
the expenses of disposition are to be treated as
reduction from the selling price. [Valencia]

The gain shall be recognized in an amount not in


excess of the sum of such money and the fair market
value of such other property so received, which is
not distributed [Sec. 40 (C) (3) (b), NIRC].

Cost or basis of the property sold


In computing the gain or loss from the sale or other
disposition of property, the BASIS shall be as follows:

If an individual, stockholder, security holder or


corporation receives on the exchange not only stock
or securities but also money and/ or property (boot),
the gain but not the loss shall be recognized, in an
amount not exceeding the sum of the money and fair
market value of the property received.

a) Property acquired by purchase its acquisition cost, i.e., the


purchase price plus expenses of acquisition.
b)Property which should be included in the inventory its
latest inventory value [RR-2 sec 136]
c) Property acquired by devise, bequest or inheritance its fair
market price or value as of the date of acquisition
(inheritance)
d)Property acquired by gift or donation the basis is the same
as it would be in the hands of the donor or at the last
preceding owner by whom it was not acquired by gift, or the
fair market value at the time the gift was made, whichever
is lower
e) Property acquired for less than an adequate consideration
in moneys worth the amount paid by the transferee for
the property
Cost or basis of the property exchanged in corporate
reorganizations: Sales or exchanges resulting in nonrecognition of gains or losses:
Exchange Solely in Kind
1.

2.

If in pursuance of a plan of merger or consolidation,


exchanges:
a. (a) Between the corporations which are parties
to the merger or consolidation (property solely
for stocks);
b. (b) Between a stockholder of a corporation party
to a merger or consolidation and the other
corporation, which is a party to the merger or
consolidation (stock in a corporation solely for
the stock of another corporation);
c. (c) Between a security holder of a corporation
party to a merger or consolidation and the other
corporation, which is a party to the merger or
consolidation (securities solely for securities)
Transfer to a controlled corporation a person transfers
his property to a corporation in exchange for stocks in
such a corporation, resulting in acquisition of corporate
control by said person, alone or together with others not
exceeding four (4).

If the money or other property received has the


effect of a distribution of a taxable dividend, there
shall be taxed as dividend to the stockholder 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.

SUBSTITUTED BASIS OF STOCK OR SECURITIES


RECEIVED BY TRANSFEROR UPON THE EXCHANGE:
Original basis (cost) of the property, stock or securities
exchanged/transferred
LESS: (a) money received, if any; and (b) FMV of the other
property received. Balance
ADD: (a) the amount treated as dividend of the shareholder;
and (b) the amount of any gain that was recognized on the
exchange. Basis (Cost) of the stock received
Notes:
o
o

Exchange Not Solely in Kind


Gain, but not the loss, shall be recognized if, in connection
with an exchange described in the above exceptions:

An individual, a shareholder, a security holder or a


corporation receives not only stock or securities
permitted to be received without the recognition of gain
or loss, but also money and/or property.
The gain, if any, but not the loss, shall be recognized but
in an amount not in excess of the sum of the money and
the fair market value of such other property received.
As to the shareholder, if the money and/or other property
received has the effect of a distribution of a taxable
dividend, there shall be taxed as dividend to the
shareholder 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 [Sec. 40 (C) (3) (a), NIRC].

(b) The transferor corporation receives not only stock


permitted to be received without the recognition of gain
or loss but also money and/or other property, then
o
(i) if the corporation receiving such money
and/or other property distributes it in pursuance

of the plan of merger or consolidation, no gain to


the corporation shall be recognized from the
exchange, but
(ii) if the corporation receiving such other
property and/or money does not distribute it in
pursuance
of
the
plan
of
merger
or
consolidation, the gain, if any, but not the loss to
the corporation shall be recognized.

The property received as boot shall have as basis its


FMV
If as part of the consideration to the transferor, the
transferee of property assumes a liability of the transferor
or acquires from the latter property subject to a liability,
such assumption or acquisition (in the amount of liability),
shall be treated as money received by the transferor on
the exchange
If the transferor receives several kinds of stocks or
securities, the Commissioner is authorized to allocate the
basis among the several classes of stocks or securities
received.

SUBSTITUTED BASIS OF PROPERTY TRANSFERRED


The basis of the property transferred in the hands of the
transferee shall be the same as it would be in the hands of the
transferor increased by the amount of the gain recognized to
the transferor on the transfer [Sec. 40 (C)(5), NIRC].
Recognition of gain or loss in exchange of property:
General rule- Upon the sale or exchange of property, the
ENTIRE amount of the gain or loss shall be recognized.
Exceptions- No gain or loss shall be recognized:
1.

If in pursuance of a plan of merger or consolidation:


i. (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;
ii. (b) A shareholder exchanges stock in a
corporation, which is a party to a merger or
consolidation, solely for the stock of another
corporation also a party to the merger or
consolidation; or

@GlowingGloria 12

iii.

2.

(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 another corporation, a party to the
merger or consolidation.
If property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a
corporation, of which as a result of such exchange, said
person, alone or together with others not exceeding 4
persons, gains control of the corporation.

- Stocks issued for services shall not be considered as issued


in property.

Persons Liable and Transactions Affected


A. Individual taxpayers, estates and trusts (1) Sale or
exchange or other disposition of real property considered
as capital assets. (2) Includes "pacto de retro sale" and
other conditional sale.
B. Domestic Corporation Sale or exchange or disposition of
lands and/or building which are not actually used in
business and are treated as capital asset.
Rate and Basis of Tax - A final withholding tax of 6% is
based on the gross selling price or fair market value or zonal
value whichever is higher.
Note: Gain or loss is immaterial, there being a conclusive
presumption of gain.

Meaning of merger, consolidation, control, securities


a)

b)

c)

d)
e)

Merger and consolidation for tax purposes - shall


mean (1) The ordinary merger or consolidation; or (2)
The acquisition by one corporation of all or
substantially all the properties of another corporation
solely for stock [Sec. 40(C )(6)
(b), NIRC]. (b) Requirements to establish merger or
consolidation
a.
Must be undertaken for a bona fide
business purpose and not solely for the
purpose of escaping the burden of taxation
b.
In determining whether a bona fide
business purpose exists, each and every
step of the transaction shall be considered
and the whole transaction or series of
transaction shall be treated as a single unit
c.
The property transferred must constitute a
substantial portion of the property of the
transferor [Sec. 40(C)(6)(b), NIRC]. Note: In
determining
whether
the
property
transferred constitutes a substantial portion
of the property of the transferor, the term
property shall be taken to include the cash
assets of the transferor [Sec. 40(C)(b),
NIRC].
Substantially All: the acquisition by one
corporation of at least 80% of the assets, including
cash, of another corporation, which has the element
of permanence and not merely momentary holding.
Securities: bonds and debentures but not "notes" of
whatever class or duration [Sec. 40(C)(6)(a), NIRC]
Control: ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the
total voting power of all classes of stocks entitled to
vote [Sec. 40(C)(6)(c), NIRC].

(5) Income tax treatment of capital loss


(a) Capital loss limitation rule (applicable to both
corporations and individuals)
General Rule: Losses from sales or exchanges of capital assets
shall be allowed only to the extent of the gains from such
sales or exchanges [Sec. 39(C), NIRC].
EXCEPTION for Banks and Trust Companies: 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, 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, any loss resulting from
such sale shall not be subject to the foregoing limitation and
shall not be included in determining the applicability of such
limitation to other losses [Sec. 39(C), NIRC].
(b) Net loss
individuals)

carry-over

rule

(applicable

only

(7) Dealings
corporations

in

shares

of

stock

of

Philippine

Persons Liable to the Tax


A. Individual taxpayer, whether citizen or alien;
B. Corporate taxpayer, whether domestic or foreign; and
C. Other taxpayers not falling under (a) and (b) above, such
as estate, trust, trust funds and pension funds, among
others.
Persons not liable
1.
2.
3.

Dealers in securities
Investor in shares of stock in a mutual fund company
All other persons who are specifically exempt from
national internal revenue taxes under existing investment
incentives and other special laws.

Shares listed and traded through the stock exchange


other than sale by a dealer in securities.
(1) of 1% of the gross selling price of the stock or gross
value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed 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.
(2) Note: In the nature of percentage tax and not income tax;
exempt from income tax per Section 127 (d): Any gain
derived from the sale, barter, exchange or other disposition of
share of stock under this section shall be exempt from taxes
imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)
(c) of this Code and from the regular individual or corporate
income tax.
(3) Note: Percentage tax under Sec. 127 is NOT DEDUCTIBLE
for income tax purposes.

Shares not
exchange ---

listed

and

traded

through

the

stock

Net capital gains derived during the taxable year from sale,
exchange, or transfer shall be taxed as follows (on a per
transaction basis):
Amount of capital Gain
Not over 100,000
On any amout in excess of
100,000

Tax Rate
5%
10%

(8) Sale of principal residence

to

Principal residence: the family home of the individual


taxpayer (RR 14-2000)

If an individual sustains in any taxable year a net capital loss,


such loss (in an amount not in excess of the net income for
the year) shall be treated in the succeeding taxable year as a
loss from the sale or exchange of a capital asset held for not
more than 12 months [Sec. 39(D), NIRC].

Disposition of principal residence (capital asset) is exempt


from Capital Gains Tax, provided:
i.
ii.

Sale or disposition of the old principal residence;


By natural persons - citizens or aliens provided that they
are residents taxable under Sec. 24 of the Code (does
not include an estate or a trust);

(6) Dealings in real property situated in the Philippines

@GlowingGloria 13

iii.
iv.

v.
vi.

vii.
viii.

The proceeds of which is fully utilized in (a) acquiring or


(b) constructing a new principal residence within
eighteen (18) months from date of sale or disposition;
Notify the Commissioner within thirty (30) days from the
date of sale or disposition through a prescribed return of
his intention to avail the tax exemption;
Can only be availed of onlyonce every ten (10) years;
The historical cost or adjusted basis of his old principal
residence shall be carried over to the cost basis of his
new principal residence
If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject to
capital gains tax.
Portion
of
presumed
gains
subject
to
CGT:
(Unutilized/GSP) x (higher of GSP or FMV)

Passive Investment Income


Under Sec 24(B), a final tax is imposed upon gross passive
income of citizen and resident aliens. An income is considered
passive if the taxpayer merely waits for it to be realized.
(a) Interest Income - An earning derived from depositing or
lending of money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such as Treasury
Bills.
Unless exempted by law, interest income received by the
taxpayer, whether or not usurious, is subject to income tax.
(b) Dividend Income A form of earnings derived from the
distribution made by a corporation out of its earnings or
profits and payable to its stockholders, whether in money or in
property.
In general, dividends are included in the gross income of the
stockholder, unless they are exempt from tax or subject to
final ax at preferential rate under the Tax Code.
1.

2.

3.

4.

Cash dividend Dividends are included in the gross


income of the stockholder, unless they are exempt from
tax or subject to tax at preferential rate under the NIRC.
Cash dividend is the most common form of dividend,
valued at the amount of money received by the
stockholder. Cash dividend and property dividend are
subject to income tax.
Stock dividend Stock dividend is generally exempt from
income tax, EXCEPT:
i. (a) If a corporation cancels or redeems stock
issued as a dividend at such time and in such
manner as to make the distribution and
cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall
be considered as taxable income to the extent
that it represents a distribution of earnings or
profits (Sec. 73(B), NIRC); or
ii. (b) Where there is an option that some
stockholders could take cash or property
dividends instead of stock dividends; some
stockholders exercised the option to take cash
of property dividends; and the exercise of
option resulted in a change of the
stockholders proportionate share in the
outstanding share of the corporation.
Property dividend - Dividends are included in the gross
income of the stockholder, unless they are exempt from
tax or subject to tax at preferential rate under the NIRC.
Cash dividend and property dividend are subject to
income tax.
Liquidating dividend Represents distribution of all the
property or assets of a corporation in complete liquidation
or dissolution. It is strictly not dividend income, but rather
is treated in effect, as a sale of shares of stock resulting
in capital gain or loss. The difference between the cost or
other basis of the stock and the amount received in
liquidation of the stock is a capital gain or a capital loss.
Where property is distributed in liquidation, the amount
received is the FMV of such property. The income is
subject to ordinary income tax rates and NOT to the FWT
on dividends.

SUMMARY OF TAXES ON DIVIDENDS

1.
2.
3.
4.

Received from a domestic corporation by


a. Another domestic corporation
b. Resident foregoing corporation
Received from a cooperative
Pure stock dividend
Pure liquidating dividend (return of capital)

Subject to final tax


If received from a domestic corporation by a
1.
2.
3.
4.

Citizen or resident alien = 10% final tax


Nonresident alien doing business in the Philippines =
20% final tax
Nonresident alien not doing business in the
Philippines = 25% final tax
Non-resident foreign corporation = 20% final tax if
with reciprocity or 35 % if without reciprocity

Subject to Normal Tax


Dividends are subject to year end normal tax of individual or
corporation if such dividends are
1.
2.
3.

Not included as tax-exempt dividends


Not subject to final tax
Distributive shares of partner in
partnership

professional

(a) Royalty Income - Royalty is a valuable property that can


be developed and sold on a regular basis for a consideration;
in which case, any gain derived therefrom is considered as an
active business income subject to the normal corporate tax.
Where a person pays royalty to another for the use of its
intellectual property, such royalty is generally a passive
income of the owner thereof subject to withholding tax.
(b) Rental Income - Refers to earnings derived from leasing
real estate as well as personal property. Aside from the
regular amount of payment for using the property, it also
includes all other obligations assumed to be paid by the
lessee to the third party in behalf of the lessor (e.g., interest,
taxes, loans, insurance premiums, etc.) [RR 19-86]
Rent income may be in the following forms:
a) Cash, at the stipulated price
b)Obligations of the lessor to third persons paid or assumed
by the lessee in consideration of the contract of lease, e.g.,
real estate tax on the property leased assumed by the
lessee
c) Advance payment
1. (1) If the advance payment is actually a loan
to the lessor, or an option money for the
property, or a security deposit for the faithful
performance of certain obligations of the
lessee, such advance payment is not income
to the lessor.
2.
(2) However, a security deposit that is
applied to rental is taxable income to the
lessor.
3. (3) If the advance payment is, in fact, a prepaid rental, received by the lessor under a
claim of right and without restriction as to its
use, then such payment is income to the
lessor.
4. (4) Pre-paid rent must be reported in full in
the year of receipt, regardless of the
accounting method used by the lessor.

(1) Lease of personal property Rental income on the


lease of personal property located in the Philippines and paid
to a non-resident taxpayer shall be taxed as follows

Vessel
Aircraft,
machineries and
other equipment
Other assets

NON
resident
corporation
4.5%
7.5%

Non
Alien
25%
25%

30%

25%

resident

(2) Lease of real property

Tax exempt if :

@GlowingGloria 14

Lessor
Citizen Resident Alien Nonresident alien engaged in
trade or business in the
Philippines
Non-resident
alien
not
engaged
in
trade
or
business in the Philippines

Domestic
Resident
Corporation

Non-resident
Corporation

Corporation
Foreign

Foreign

Tax Rate
Net taxable income shall be
subject to the graduated
income tax rates

determinate persons in consideration of a capital consisting of


money or other property, whose ownership is transferred to
him at once with the burden of the income. [Art. 2021, New
Civil Code]

Rental income from real


property located in the
Philippines shall be subject
to 25% final withholding tax
unless a lower rate is
imposed pursuant to an
effective tax treaty
Net taxable income shall be
subject to 30% corporate
income tax or its gross
income will be subject to
2% MCIT
Gross rental income from
real property located in the
Philippines shall be subject
to 30% corporate income
tax, such tax to be withheld
and remitted by the lessee
in the Philippines

The annuity payments represent a part that is taxable and not


taxable. If part of annuity payment represents interest, then it
is a taxable income. If the annuity is a return of premium, it is
not taxable.

Prizes and awards


A prize is a reward for a contest or a competition. It
represents remuneration for an effort reflecting ones
superiority.
Contest prizes and awards received are generally taxable.
Such payment constitutes gain derived from labor.
The EXCEPTIONS are as follows:
(1) Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS from gross income if:
a) The recipient was selected without any action on his
part to enter a contest or proceedings; and
b)The recipient is not required to render substantial
future services as a condition to receiving the prize
or award.

(3) Tax treatment of:


(a) Leasehold improvements by lesseeleasehold improvements:
I.

II.

Rent Income from

Outright method- lessor shall report as income FMV of


the buildings or improvements subject to the lease in
the year of completion.
Spread-out method- lessor shall spread over the
remaining term of the lease the estimated depreciated
(book) value of such buildings or improvements at the
termination of the lease, and reports as income for each
remaining term of the lease an aliquot part thereof.
estimated BV at the end of the lease contract/
remaining lease term = Income per year
If for any reason than a bona fide purchase from the
lessee by the lessor, the lease is terminated, so that the
lessor comes into possession or control of the property
prior to the time originally fixed, lessor receives
additional income for the year which the lease is so
terminated to the extent of the value of such buildings
or improvements when he became entitled to such
possession exceeds the amount already reported as
income on account of the erection of such building or
improvement. No appreciation in value due to causes
other than the premature termination of lease shall be
included [Sec. 49, Rev. Reg. No. 2].
If the building or other leasehold improvement is
destroyed before the expiration of the lease, the lessor
is entitled to deduct as a loss for the year when such
destruction takes place, the amount previously reported
as income because of the erection of the improvement,
less any salvage value, to the extent that such loss was
not compensated by insurance [Sec. 49, Rev. Reg. No. 2]

(b) VAT added to rental/paid by the lessee


o
o

If the lessee is VAT-registered, treat VAT paid as input


VAT;
If the lessee is not VAT-registered OR not liable to
VAT, treat VAT paid as additional rent expense
deductible from gross income.

(c) Advance Rental/ Long Term Lease


Pre-paid rent must be reported in full in the year of receipt,
regardless of the accounting method used by the lessor.

Annuities, Proceeds from life insurance or other types


of insurance
Annuities are installment payments received for life insurance
sold by insurance companies.
The aleatory contract of life annuity binds the debtor to pay
an annual pension or income during the life of one or more

(2) Prizes and awards granted to athletes in local and


international sports competitions and tournaments held in the
Philippines and abroad and sanctioned by their national
associations shall be EXEMPT from income tax.
Pensions, retirement benefit, or separation pay
1.
2.

paid for past employment services rendered.


a stated allowance paid regularly to a person on his
retirement or to his dependents on his death, in
consideration of past services, meritorious work, age,
loss or injury. It is generally taxable unless the law
states otherwise. [VALENCIA, Income Taxation 5th ed.
(200/9)]

Income from any source whatever


Inclusion of all income not expressly exempted within the
class of taxable income under the laws irrespective of the
voluntary or involuntary action of the taxpayer in producing
the gains, and whether derived from legal or illegal sources.
Forgiveness of indebtedness The cancellation or forgiveness
of indebtedness may have any of three possible
consequences:
a) It may amount to payment of income. If, for example,
an individual performs services to or for a creditor,
who, in consideration thereof, cancels the debt,
income in that amount is realized by the debtor as
compensation for personal services.
b)It may amount to a gift. If a creditor wishes merely to
benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is
a gift to the debtor and need not be included in the
latters report of income.
c) It may amount to a capital transaction. If a corporation
to which a stockholder is indebted forgives the debt,
the transaction has the effect of a payment of
dividend.
Tax Benefit Rule
This is a general principle in taxation which states that is a
taxpayer deducted an item on his income tax return and
enjoyed a tax benefit (reduced his income tax) thereby, and in
a subsequent year recovers all or part of that item, he will
recognize gross income in the year the deducted item is
recovered. The rule has both an inclusionary and an
exclusionary component, i.e., the recovery is included in the
taxpayers gross income to the extent that the taxpayer
obtained a tax benefit from the prior years deduction, and
the recovery is excluded to the extent that the prior years
deduction did not provide a tax benefit.

@GlowingGloria 15

Recovery of accounts previously written-of B d debts


claimed as a deduction in the preceding year(s) but
subsequently recovered shall be included as part of the
taxpayers gross income in the year of such recovery to the
extent of the income tax benefit of said deduction. There is an
income tax benefit when the deduction of the bad debt in the
prior year resulted in lesser income and hence tax savings for
the company. [Sec. 4, RR 5-99]

3.
4.

GlowingGloria- Illustration in BOC UP 2014 page 56


Receipt of tax refunds or credit General rule: a refund of a
tax related to the business or the practice of profession, is
taxable income (e.g., refund of fringe benefit tax) in the year
of receipt to the extent of the income tax benefit of said
deduction (i.e., the tax benefit rule applies).

5.

6.

Exceptions: However, the following tax refunds are not to be


included in the computation of gross income:
1.
2.

3.
4.

5.
6.
7.

Philippine income tax, except the fringe benefit tax


Income tax imposed by authority of any foreign
country, if the taxpayer claimed a credit for such tax
in the year it was paid or incurred.
Estate and donors taxes
Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed
(Special assessments)
Value Added Tax
Fines and penalties due to late payment of tax
Final taxes (8) Capital Gains Tax

Note: The enumeration of tax refunds that are not taxable


(income) is derived from an enumeration of tax payments that
are not deductible from gross income.
If a tax is not an allowable deduction from gross income when
paid (no reduction of taxable income, hence no tax benefit),
the refund is not taxable.
SOURCE RULES IN DETERMINING INCOME FROM WITHIN
AND WITHOUT
The following items of gross income shall be treated as gross
income from sources WITHIN the Philippines:
Interests- Derived from sources within the Philippines, and
interests on bonds, notes or other interest- bearing obligation
of residents.
Ultimately, the situs of interest income is the residence of the
debtor.
Dividends - Dividends received:
1.
2.

from a domestic corporation; and


from a foreign corporation, UNLESS less than 50% of its
gross income for the previous 3- year period was
derived from sources within the Philippines [in which
case it will be treated as income partly from within and
partly from without].

The income which is considered as derived from within the


Philippines is obtained by using the following formula:
Philippine gross income/ within wourlwide gross income x
dividend = Income

7.
8.

The supply of scientific, technical, industrial or


commercial knowledge or information;
The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of enabling
the application or enjoyment of, any such property or
right as is mentioned in
i. (a), any such equipment as is
mentioned in
ii. (b) or any such knowledge or
information as is mentioned in (c);
The supply of services by a nonresident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person;
Technical advice, assistance or services rendered in
connection
with
technical
management
or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and
The use of or the right to use:
Motion picture films;
i.
(i) Films or video tapes for use in
connection with television; and
ii. (ii) Tapes for use in connection with
radio broadcasting.

As a rule, the situs of rental income is the place where the


property is located. The situs of royalty income is where the
rights are exercised.
Sale Of Real Property
As a rule, the situs of the income from sale of real property is
where the realty is located.
Sale Of Personal Property
General Rule: Gains, profits and income from the sale of
personal property, subject to the following rules:
Place of purchase
Pilipinas
kong
minumutya
Abroad

Place of sale
Abroad

Treatment
Income
from
without
Pilipinas
kong Income
from
minumutya
abroad
Note: in other words, the situs of the income from the sale of
personal property is the place of sale
Exceptions:
(1) Gain from the sale of shares of stock in a domestic
corporation Treated as derived entirely from sources within
the Philippines regardless of where the said shares are sold.
(2) Gains from the sale of (manufactured) personal property:
(a) produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or
(b) produced (in whole or in part) by the taxpayer without
and sold within the Philippines Treated as derived partly from
sources within and partly from sources without the Philippines.

Place
Production
Pilipinas

of

Place of Sale

Treatment

Abroad

Partly
within,
partly without
Partly
within,
partly without

Note: of the corporation giving the dividend As a rule, the


situs of dividend income is the residence of the corporation
declaring the dividend.

Abroad

ServicesCompensation for labor or personal services


performed in the Philippines: As a rule, the situs of
compensation is the place of performance of the services.

Shares of Stock of Domestic Corporation

Rentals and Royalties From property located in the


Philippines or from any interest in such property, including
rentals or royalties for
1.

2.

The use of or the right or privilege to use in the


Philippines any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade
brand or other like property or right;
The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;

Pilipinas

Treated as derived entirely from sources within the Philippines


regardless of where the said shares are sold.
SITUS OF INCOME TAX
Income
Interest
Dividends
Services
Rentals
Royalties
Sale of property

situs
Residence of the debtor
Residence of corporation
Place of performance
Location of the property
Place of exercise
Location of realty

@GlowingGloria 16

Sale of personal

Shares
of
stocks
domestic corporation

of

(a) Tangible

revenue tax

(1) Purchase and sale:


Location of Sale
(2) Manufactured w/in and
sold w/o: Partly w/in and
partly w/o
(3) Manufactured w/o and
sold w/in: Partly w/in and
partly w/o

Express exclusion

(b) Intangible
General rule: Place of Sale
Exception: Shares of stock
of domestic corporations:
Place of incorporation
Place of incorporation

EXCLUSIONS FROM GROSS INCOME


Exclusions from gross income refer to income received or
earned but is not taxable as income because it is exempted
by law or by treaty. Such tax-free income is not to be included
in the income tax return unless information regarding it is
specifically called for. Receipts which are not in fact income
are, of course, excluded from gross income.
The exclusion of income should not be confused with the
reduction of gross income by the application of allowable
deductions. While exclusions are simply not taken into
account in determining gross income, deductions are
subtracted from gross income to arrive at net income. [De
Leon]
Items of Exclusions representing return of capital
(a) Amount of capital is generally recovered through
deduction of the cost or adjusted basis of the property sold
from the gross selling price or consideration, or through the
deduction from gross income of depreciation relating to the
property used in trade or business before it is sold.
(b) It may also related to indemnities, such as proceeds of life
insurance paid to the insureds beneficiaries and return of
premiums paid by the insurance company to the insured
under a life insurance, endowment or annuity contract.
(c) Damages, in certain instances, may also be exempt
because they represent return of capital.
Items of Exclusion because it is subject to another
internal revenue tax
The value of property acquired by gift, bequest, devise or
descent is exempt from income tax on the part of the
recipient because the receipt of such property is already
subject to transfer taxes (estate tax or donors tax)
Items of Exclusions because they are expressly exempt
from income tax
1.
2.
3.

Under the Constitution


Under a tax treaty
Under special laws

Rationale for the exclusions


The term exclusions refers to items that are not included in
the determination of gross income because:
a) They represent return of capital or are not income,
gain or profit;
b)They are subject to another kind of internal revenue
tax;
c) They are income, gain or profit expressly exempt
from income tax under the Constitution, tax treaty,
Tax Code, or a general or special law. [Mamalateo]
Taxpayers who may avail of the exclusions
Exclusion
Return of the capital
Already subject to internal

Taxpayer
All taxpayer since there is
no income
All taxpayer unless provided

Exclusions
credit

distinguished

that income is to
included
As expressly provided
from

deductions

and

be

tax

Exclusions from gross income refer to flow of wealth to


the taxpayer which are not treated as part of gross
income for purposes of computing the taxpayers taxable
income, due to the following reasons: (1) it is exempted
by the Constitution or a statute; or (2) it does not come
within the definition of income. Deductions, on the other
hand, are the amounts which the law allows to be
subtracted from gross income in order to arrive at net
income.
Exclusions pertain to the computation of gross income,
while deductions pertain to the computation of net
income. Exclusions are something received or earned
by the taxpayer which do not form part of gross income
while deductions are something spent or paid in earning
gross income.

Tax Credit refers to amounts subtracted from the computed


tax in order to arrive at taxes payable.
(1) Exclusions Under the Constitution
(a) Income derived by the government or its political
subdivisions from the exercise of any essential governmental
function
(b) Also, all assets and revenues of a non- stock, non-profit
private educational institution used directly, actually and
exclusively for private educational purposes shall be exempt
from taxation.
(2) Exclusions Under the Tax Code (Sec. 32, NIRC)
(a) Proceeds of life insurance policies.
General rule: The proceeds of life insurance policies paid to
his estate or to any beneficiary (but not a transferee for a
valuable consideration), directly or in trust, upon the death of
the insured, are excluded from the gross income of the
beneficiary. However, if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest
payments received by the insured shall be included in gross
income. The interest income shall be taxed at the graduated
income tax rates.
(b) Return of premium paid.
General rule: The amount received by the insured as a return
of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of
the term mentioned in the contract or upon surrender of the
contract is a return of capital and not income.
This refers to the cash surrender value of the contract.
Exception: If the amounts received by the insured (when
added to the amounts already received before the taxable
year under such contract) exceed the aggregate premiums or
considerations paid (whether or not paid during the taxable
year), then the excess shall be included in gross income.
(c) Amounts received under life insurance, endowment or
annuity contracts.
Amounts received (other than amounts paid by reason of
the death of the insured and interest payments on such
amounts) under a life insurance, endowment or annuity
contracts are excluded from gross income, but if such
amounts (when added to amounts already received before the
taxable year under such contract) exceed the aggregate
premiums of considerations paid (whether or not paid during
the taxable year), then the excess shall be included in gross
income. However, in the case of a transfer for valuable
consideration, by assignment or otherwise, of a life insurance,
endowment , or annuity contract, or any interest therein, only
the actual value of such consideration and the amount of the
premiums and other sums subsequently paid by the
transferee are exempt from taxation.

@GlowingGloria 17

(d) Value of property acquired by gift, bequest, devise or


descent.
Gifts, bequests and devises (which are subject to estate or
gift taxes) are excluded from gross income, BUT not the
income from such property. If the amount received is on
account of services rendered, whether constituting a
demandable debt or not, or the use or opportunity to use of
capital, the receipt is income [Pirovano v. Commissioner G.R.
No. L-19865, July 31, 1965].
(e) Amount received through accident or health insurance
(Compensation for damages).
As a rule, amounts received through accident or health
insurance or under workmens compensation acts, as
compensation for personal injuries or sickness, plus the
amount of any damages received, whether by suit or
agreement, on account of such injuries or sickness are
excluded from gross income.

benefit of all employees


(e.g. from president to
laborer)
Plan must be approved by
BIR
A 'reasonable private benefit plan' means a pension, gratuity,
stock bonus or profit-sharing plan maintained by an employer
for the benefit of some or all of his employees wherein
contributions are made by such employer, or employees, or
both for the purpose of distributing to such employees the
earnings and principal of the fund thus accumulated by the
trust in accordance with such plan (trust fund)
Further, it should be provided in the plan that at no time prior
to the satisfaction of all liabilities with respect to employees
under any trust, shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose other than for
the exclusive benefit of his employees.

Examples of nontaxable and taxable damages recoveries are:

Terminal pay/Separation pay

Nontaxable compensation
for damages on account of
(1)
Personal
(physical)
injuries or sickness
(2)
Any other damages
recovered on account of
personal injuries or sickness
(3) Exemplary and moral
damages for out-of-court
settlement,
including
attorneys fee
(4) Alienation of affection,
or breach of promise to
marry
(5)
Any amount received
as a return of capital or
reimbursement of expenses

Any amount received by an employee or by his heirs from the


employer as a consequence of separation of such official or
employee from the service of the employer because of death,
sickness, other physical disability or for any cause beyond the
control of the employee. The phrase for any cause beyond
the control of the said official or employee means that the
separation of the employee must be involuntary and not
initiated by him.

Taxable compensation for


damages on account of
(1) Actual damages for loss
of anticipated profit
(2) .Moral and exemplary
damages awarded as a
result of break of contract
(3) Interest for non- taxable
damages above

The separation must not be of his own making.


(4)
Any
damages
as
compensation for unrealized
income

Notes:

(f) Income exempt under tax treaty.

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


obligation binding upon the Government of the Philippines.
(g) Retirement benefits, pensions, gratuities, etc.. These are
1.
2.
3.
4.
5.
6.

Retirement benefits under RA 7641, RA 4917, and


Section 60(B) of the NIRC
Terminal pay
Retirement Benefits
from foreign
government
agencies
Veterans benefits
Benefits under the Social Security Act
GSIS benefits
Retirement benefits received under RA 7641(The
Retirement Pay Law) and those received by officials
and employees of private firms under a reasonable
private benefit plan (RPBP) maintained by the
employer under RA 4917 (now Section 32(B)(6)(a) of
NIRC) are excluded from gross income subject to
income tax.

RA 7641
Retiring employee must be
in the service of same
employer
CONTINUOUSLY
for at least five (5) years
Retiring employee must be
at least sixty (60) years
oldbut not more than 65
years of age at the time of
retirement
Availed of only once, and
only when there is no RPBP

RPBP
Retiring official or employee
must have been in the
service
of
the
same
employer forat least ten
(10) years.
Retiring official or employee
must be at least fifty (50)
years old at the time of
retirement
Retiring employee shall not
have previously availed of
the
privilege
under
a
retirement benefit plan of
the
same
or
another
employer
Plan must be reasonable.
Its implementation must be
fair and equitable for the

Sickness must be life-threatening or one which


renders the employee incapable of working
Retrenchment of the employee due to unfavorable
business conditions or financial reverses is considered
as involuntary. However, resignation or availment of
an optional early retirement plan is voluntary and bars
a claim under this provision.
BIR Ruling 143-98: The terminal leave pay (amount
paid for the commutation of leave credits) of retiring
government employees is considered not part of the
gross salary, and is exempt from taxes. The
government recognizes that for most public servants,
retirement pay is always less than generous if not
meager and scrimpy. Terminal leave payments are
given not only at the same time but also for the same
policy considerations governing retirement benefits.
[Commissioner v. Castaneda, 203 SCRA 72].
Retirement BENEFITS from foreign government
agencies The social security benefits, retirement
gratuities, pensions and other similar benefits
received by resident or non-resident citizens or aliens
who come to reside permanently in the Philippines
from foreign government agencies and other
institutions, private or public;
Payments of VETERANS benefits under U.S. Veterans
Administration Payments of benefits due or to
become due to any person residing in the Philippines
under the laws of the United States administered by
the United States Veterans Administration
Social Security Act benefits Payments of benefits
received under the Social Security Act of 1954 (RA
8282), as amended, e.g., Maternity Benefits
GSIS benefits Benefits received from GSIS under the
GSIS Act of 1937, as amended, and the retirement
gratuity received by government officials and
employees are not taxable. [Sec. 32B6., NIRC; Sec. B1,
RR 2-98]
Winnings, prizes and award, including those in
sports competitions.All prizes and awards granted
to athletes:

(1) in local and international sports


competitions and tournaments whether held
in the Philippines or abroad, AND

(2) sanctioned by their national sports


associations shall not be included in gross
income and shall be tax exempt. [Sec. 32
B7d, NIRC]
Prizes and awards made primarily in recognition of
charitable, literary, educational, artistic, religious,

@GlowingGloria 18

scientific, or civic achievement are not taxable,


provided:

(1) Recipient was selected without any


action on his part to enter the contest or
proceeding; and

(2) Recipient is not required to render


substantial future services as a condition to
receiving the prize or award

(4) Under R.A. 9178 [Barangay Micro Business Enterprises Act


of 2002], BMBEs shall be exempt from income tax for income
arising from the operation of the enterprise.

(3) Under special laws


Personal Equity and Retirement Account
(1) Under R.A. 6657 (Comprehensive Agrarian Reform
Package Law), gain arising from the transfer of agricultural
property covered by the law shall be exempt from capital
gains tax.
(2) Under R.A. 6938 [Cooperative Code of the Philippines], as
amended by R.A. 9520, cooperatives transacting business
with both members and non-members shall not be subject to
tax on their transactions with members. In relation to this, the
transactions of members with the cooperative shall not be
subject to any taxes and fees, including but not limited to final
taxes on members' deposits.
(3) Under R.A. 7916 (PEZA Law), as amended, PEZA-registered
enterprises are given income tax holidays of six or four years
from the date of commercial operations, depending on
whether their activities are considered pioneer or non-pioneer.

@GlowingGloria 19

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