INCOME TAX

Income Tax is a tax on a person's income, emoluments, profits arising
from property, practice of profession, conduct of trade or business or on the
pertinent items of gross income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income, by the Tax Code, as
amended, or other special laws.
A person means an individual, a trust, estate or corporation. (Sec. 22[A] of
the Tax Code)
GENERAL PRINCIPLES OF TAXATION
SEC. 23. General Principles of Income Taxation in the Philippines. -
Except when otherwise provided in this Code:
a. A domestic corporation;
b. A foreign corporation, unless 50% of the gross income of such
foreign corporation for the 3-year period ending with the close of
its taxable year preceding the declaration of such dividends was
derived from sources within the Philippines; but only in an amount
which bears the same ratio to such dividends as the gross income
of the corporation for such period derived from sources within the
Philippines bears to its gross income from all sources.
Example: Z Corporation received P10,000 dividends from X
Corporation, a Japanese firm, which earned P200,000 from
Philippine sources and P300,000 from Japan. The amount of
dividends received by Z Corporation as from Philippine sources is
only P4,000 (P10,000 * P200,000/P500,000).

(A) A citizen of the Philippines residing therein is taxable on all income 3. Services where performed. Thus, if performed within the
derived from sources within and without the Philippines; Philippines, it is considered earned herein.
(B) A nonresident citizen is taxable only on income derived from sources
within the Philippines; 4. Rentals and Royalties where the property is located or the place
(C) An individual citizen of the Philippines who is working and deriving of use of the intangible. As such, if the property or any interest in such
income from abroad as an overseas contract worker is taxable only on is located in the Philippines, rentals and royalties therefrom are
income derived from sources within the Philippines: Provided, That a considered earned within the Philippines.
seaman who is a citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the complement of a vessel 5. Sale of real property where the real property is located. As such,
engaged exclusively in international trade shall be treated as an overseas gains, profits and income from the sale of real property located in the
contract worker; Philippines are considered earned herein.
(D) An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines; 6. Sale of Personal Property
(E) A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and Purchase: where the property is sold. If the personal property was
(F) A foreign corporation, whether engaged or not in trade or business in purchased outside the Philippines, but sold herein, the gains, profits
the Philippines, is taxable only on income derived from sources within the and income derived therefrom are considered earned within the
Philippines. Philippines. On the other hand, even if it was purchased in the
Philippines and sold outside, gains therefrom shall be treated earned
from outside the Philippines.
Taxability of Individuals:
Produced: if the personal property is produced in the Philippines and
Earned within the Earned outside the sold outside, it shall be treated as derived from sources partly within
Philippines Philippines and partly without the Philippines. (see no. 7)
Resident Citizens Taxable Taxable
Non-Resident Citizens Taxable Non-Taxable Except: sale of shares of stock of a domestic corporation, which shall
Resident Alien Taxable Non-Taxable be considered entirely within the Philippines even if sold outside.
Non-Resident Aliens Taxable Non-Taxable
(whether engaged in trade 7. Income partly within and partly without the Philippines: aside
or business or not) from sale of personal property produced in the Philippines, income
from transportation and other services rendered partly within and
partly without, is covered by this number.
For simplicity, resident citizens are taxable on their worldwide income, while
all the rest (Non-resident Citizen and Aliens [whether resident or non-
In these cases, the net income may first be computed by deducting the
resident) are taxable only on their income from sources within the
Philippines. expenses, losses, or other deductions apportioned or allocated thereto
and a ratable part of any expenses, losses or other deductions which
Taxability of Corporations: cannot definitely be allocated to some items or class of gross income;
and the portion of such net income attributable to sources within the
Philippines may be determined by processes and formulas of general
Earned within the Earned outside the
apportionment prescribed by the Secretary of Finance.
Philippines Philippines
Domestic Corporations Taxable Taxable
Requisites of Income:
Resident Foreign Taxable Non-Taxable
1. There must be gain or profit.
Corporations
Non-Resident Foreign Taxable Non-Taxable Income tax only applies only when there is income, gain or profit.
Corporations Income, in its broad sense, means all wealth that flows into the
taxpayer other than as a mere return of capital. Unless otherwise
specified, it means cash or its equivalent.
RULES ON SITUS (whether earned within or outside the Philippines): 2. The gain must be realized or received
1. Interest the situs of interest income is the residence of the debtor. 3. The gain must not be excluded by law or treaty from taxation.
Thus, if the debtor is a resident of the Philippines, it is considered (Commissioner of Internal Revenue vs. The Court of Appeals, et.al.,
earned within the Philippines. G.R. No. 108576, January 20, 1999 301 SCRA 152)
2. Dividends received from:

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INCOME TAX
 TAX ON INDIVIDUALS
A. CLASSIFICATION OF INDIVIDUALS
1. Resident Citizens A citizen of the Philippines residing therein.
Under Sec. 1, Art. IV of the 1987 Constitution, the following are citizens
of the Philippines.
(1) Those who are citizens of the Philippines at the time of the adoption of
this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino Mothers, who elect
Philippine citizenship upon reaching the age of majority; and
(4) Those who are naturalized in accordance with law.
2. Non-resident citizen
a. A citizen of the Philippines whose physical presence abroad is with a
definite intention to reside therein to the satisfaction of the
Commissioner of Internal Revenue.
b. A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
A good example would be Overseas Contract Workers (OCW) or
Overseas Filipino Workers (OFW) who were issued an overseas
employment permit. For purposes of income tax, a seaman is
considered an OCW.
c. A 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.
Most of the time meaning at least 183 days. (Sec. 2 of RR No. 1-79)
d. A citizen who has been previously considered as non-resident citizen
and who arrives in the Philippines at any time during the taxable year
to reside permanently in the Philippines shall likewise be treated as a
non-resident citizen for the taxable year with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines. (Sec. 22[E] of the Tax Code)
So, if the taxpayer, who is previously considered a non-resident citizen
arrived in the Philippines on July 1, 2016 with the intention of residing
permanently in the Philippines, shall be considered a non-resident
citizen for his income from January 1 to June 30, 2016 (prior to his
date of arrival) and a resident citizen for the rest of the year.
3. Resident Alien
a. An alien who lives in the Philippines with no definite intention as to
his stay (floating intention);
b. One who comes to the Philippines for a definite purpose which in its
nature would require an extended stay and to that end makes his
home temporarily in the Philippines;
c. An alien who has acquired residence in the Philippines and retains his
status as such until he abandons the same and actually departs from the
Philippines.
4. Non-resident alien (NRA)
a. An alien who comes to the Philippines for a definite purpose which in
its nature may be promptly accomplished.
b. One who may either be a:
i. NRA engaged in trade or business (NRAETB) in the Philippines or
ii. NRA not engaged in trade or business (NRANETB) in the
Philippines.
A NRA who shall come to the Philippines and stay for an aggregate of
more than 180 days shall be deemed a NRAETB.
B. SOURCES OF INCOME FOR INDIVIDUAL TAXPAYERS
Cesar Nickolai F. Soriano Jr.
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INCOME TAX
1. Compensation Income all remuneration received for services
performed by an employee for his employer under an employee-
employer relationship. (Section 2.78.1 (A) of RR No. 2-98)
It includes salaries, wages, emoluments and honoraria, allowances,
commissions (e.g., transportation, representation, entertainment and
the like); fees including director's fees, if the director is, at the same
time, an employee of the employer/corporation; taxable bonuses and
fringe benefits except those which are subject to the fringe benefits tax
under Sec. 33 of the NIRC; taxable pensions and retirement pay; and
other income of a similar nature.
2. Business or Professional Income income earned by an individual
from his sole proprietorship business, from the practice of profession,
or share in the income of a general professional partnership subject to
Income Tax and Expanded Withholding Tax, whenever applicable.
3. Passive Income - income generated without any active conduct.
These are income generated by assets which can be in the form of real
properties that return rental income, shares of stock in a corporation
that earn dividends or interest income received from savings. (Chamber
of Real Estate and Builders Associations, Inc. vs. the Hon. Executive
Secretary Alberto Romulo, et. Al)
Specific rates of final withholding tax are provided for certain passive
incomes, such as interest from deposits, dividends, royalties, etc.
However, if they are not covered by such rate, it will form part of the
taxpayers gross income subject to income tax.
4. Capital Gains are those arising from the sale of capital assets which
may be subject to Capital Gains Tax, for sale of real property and
shares of stock not traded in a local stock exchange; or as part of gross
income subject to income tax for all other types of capital assets.
C. ALLOWABLE DEDUCTIONS FOR INDIVIDUAL TAXPAYERS
Compensation Income for individuals earning purely compensation
income, the only allowable deductions are Basic Personal Exemption,
Additional Exemption(s), and Premium Payments for Health and/or
Hospitalization Insurance.
Business Income for those earning business income or income from the
practice of profession, the individual is allowed to claim itemized deductions
or the optional standard deduction.
1. Basic Personal Exemption
This amount represents roughly the equivalent of a taxpayers minimum
subsistence and is deductible from the gross income to arrive at taxable
income.
In accordance with the provisions of Revenue Regulations (RR) No. 10-2008
implementing Republic Act No. 9504, each taxpayer shall be allowed a Basic
Personal Exemption of Fifty Thousand Pesos (P50,000).
This amount is available to all individuals, regardless of status, whether
single, married or head of the family.
Non-resident alien engaged in trade or business: is allowed a basic personal
exemption, provided:
a. His country has an income tax law and it allows a similar privilege to
Filipinos residing therein (reciprocity rule);
b. The amount allowable as basic personal exemption shall not exceed
P50,000 (that given in the Philippines);
c. An accurate statement of his income from all sources within the
Philippines is filed.
Non-resident alien NOT engaged in trade or business: is not given any Basic
Personal Exemptions since he is taxable on gross income.
2. Additional Exemption P25,000 for each qualified dependent child,
not to exceed four (4).
Dependent: A dependent means a legitimate, illegitimate or legally adopted
child (including a FOSTER child):
a. Chiefly dependent upon AND living with* the taxpayer;
b. Not more than twenty-one (21) years of age;
c. Unmarried; and
d. Not gainfully employed;
e. Or regardless of age, is incapable of self-support because of mental or
physical defect.
*the term living with does not necessarily require that the child and the
taxpayer are under the same residence at all times and under all
circumstances. The terms till applies even if the parent is absent on
business; the child is away for school or on a visit; a parent, through force
of circumstances, is obliged to maintain his dependent children with relatives
or in a boarding house while living elsewhere.
If, however, without the necessity, the dependent continuously makes his
home elsewhere, his benefactor is not entitled to additional exemption
irrespective of the question of support. Thus, a resident alien with children
abroad is not thereby entitled to credit for additional exemption.
(Ampongan, Income Taxations, 8th edition, p. 170-171)
Married Individuals: For purposes of claiming additional exemptions for
married individuals, only the Husband can claim them except when:
(1) The Husband is unemployed;
(2) The Husband is a non-resident citizen deriving income from foreign
sources; or
(3) The Husband waives his right to additional exemptions in favor of his
wife through a waiver executed for that purpose.
Legally Separated Spouses: In case of legally separated souses, additional
exemptions are claimed by the spouse who has custody of the child or
children.
Relatives other than a child: A brother, sister, mother, father, uncle, aunt,
grandparent is not considered a qualified dependent for purposes of
additional exemptions, regardless if they are actually dependent on the
taxpayer since the law limits the additional exemptions to a child. Except
only in case of a PWD.
Persons with Disabilities: while RA No. 9054 limited qualified dependents to
children, Sec. 14 of the Implementing Rules and Regulations of RA No.
10754 provides that [f]or purposes of granting the incentives, persons with
disability shall be treated as dependents under Sec. 35(b) of the Tax Code,
as amended, and as such, individual taxpayers providing care for them shall
be accorded the privileges granted by the Code insofar as having
dependents under the same section is concerned.
Thus, those caring for and living with a person with disability, up to the
fourth degree of affinity or consanguinity, shall be granted the above tax
incentive. However, the maximum number of dependents is still limited to
four.
Foster Children: under RA No. 10165, the term dependent under Sec.
35(B) of the Tax Code now includes a foster child. As such, the foster
parent shall be allowed to claim a foster child as his qualified dependent for
an additional exemption.
Non-resident aliens: same rules for the basic personal exemptions apply in
case of a non-resident alien.
3. Premium Payment on Health and/or Hospitalization Insurance
(PHHI) (Sec. 34[M], Tax Code)
Premiums paid during the taxable year for insurance taken by the taxpayer
for himself, including his family, shall be allowed as a deduction for income
tax purposes.
Cesar Nickolai F. Soriano Jr.
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INCOME TAX
For purposes of claiming this deduction, the following rules must be
observed:
a. Amount Deductible P2,400 per family (P200 a month) or actual
payment whichever is lower.
b. Total Family Income must not exceed P250,000 in order to claim
deduction.
c. In case of married taxpayers, the one claiming additional exemptions
shall be the one allowed to claim deduction for PHHI.
4. Itemized Deductions (Sec. 34 of the Tax Code)
Expenses incurred in conducting the business or in the practice of profession
are also allowed as deductions for income tax purposes provided that they
meet all the requirements for deductibility.
These items are not available against compensation income and shall only
be allowed against business income or from the practice of profession.
Accordingly, the amount thereof cannot exceed the said income and is not
available to individuals earning purely compensation income.
See discussions of Itemized Deductions under Corporate Income Tax.
5. Optional Standard Deduction (OSD)
In lieu of the itemized (per item) expenses mentioned in no. 4 above, the
Individual may opt to claim Optional Standard Deduction. Accordingly, no
other deductions for expenses, such as Cost of Sales, Cost of Services,
Rent, Selling or any Administrative Expenses, or other business expenses or
those incurred in the practice of profession, shall be allowed. Moreover, it is
not available against compensation income nor can it be claimed by an
individual earning purely compensation income.
Purpose: The purpose of OSD is to make the BIR Audit a little less complex
since the BIR need not go through all the documents evidencing and
necessary to support itemized deductions; the BIR audit would then be
limited to the propriety of the gross sales or receipts and items of tax
credits, if any.
Basis of computation: The OSD is 40% of Gross Sales or Receipts. If the
individual has mixed income (from business and compensation) the basis for
the 40% will not include compensation income. Note that the basis for the
OSD is gross sales or receipts which is the amount BEFORE any deduction
for cost of sales or cost of services.
Non-resident aliens: The OSD cannot be claimed by Non-Resident Aliens.
Period to elect: as to the use of OSD or Itemized Expenses shall be made on
the first quarter of the taxable year, upon filing of the first quarter return
and shall be irrevocable for the said year. (RR No. 2-10)
6. Special Allowable Itemized Deductions
In addition to the regular itemized deductions, these are the deductions
allowed by regular and special laws such as Rooming-in and Breast-feeding
Practices under RA 7600, Adopt a School Program under RA 8525, Senior
Citizen Discount under RA 9257, etc.
D. CHANGE OF STATUS DURING THE TAXABLE YEAR:
1. If a qualified dependent child turns 21 during the year, say August 12,
the taxpayer may still claim P25,000 additional exemption on said child
for the taxable year, as if he turned 21 at the close of the year.
2. The same rule will apply if the child became gainfully employed or got
married.
3. If a qualified dependent child is born during the year, say November
30, 2016, the taxpayer may claim in full additional exemption of
P25,000 for the taxable year 2016, as if the child was born at the
beginning of the year.
4. If a qualified dependent child dies during the taxable year, the taxpayer
may still claim the additional exemption of P25,000, as if the child died
at the close of the taxable year.
 Filipinos employed and occupying the same position as those of aliens
In general, changes would be treated in a way that is favorable to the employed by these multinational companies. (Sec. 25[C])
taxpayer and no pro-rata application is necessary.
b. Offshore Banking Units (OBUs) 15% of gross income therefrom.
E. BASIC FORMAT OF COMPUTATIONS Provided, that the same treatment shall apply to Filipinos employed
and occupying the same position as those aliens employed by these
1. Pure Compensation Income OBUs. (Sec. 25[D])
Gross Taxable Compensation Income P XXX
Less: Non-Taxable Compensation Income* (XXX) c. Petroleum Service Contractor and Subcontractor 15% of the
Taxable Compensation Income XXX salaries, wages, annuities, compensation, remuneration and
Less: Basic Personal Exemption XXX other emoluments, such as honoraria and allowances received
Additional Exemption XXX from such contractor or subcontractor with the same preferential
PHHI XXX (XXX) treatment for Filipino employees therein. (Sec. 25[E])
Taxable Income XXX
d. Any other income from all sources within the Philippines by the above
Tax Due XXX alien employees shall be subject to the pertinent income tax, as the
Less: Withholding Tax XXX case may be, imposed under the Tax Code.
Creditable Tax XXX (XXX)
Tax Payable (Refundable) XXXX Multinational Companies means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-
*non-taxable compensation income includes those benefits provided for by Pacific Region and other foreign markets.
the employer which are considered de minimis or otherwise exempted from
income tax such as mandatory government and other contributions. Requirements: for a Filipino employed by an ROHQ/AHQ/RHQs to qualify
for the 15% preferential tax rate, the following requisites must be present:
2. Pure Business or Professional Income a. The employee must be performing a managerial or technical position;
Gross Business/Professional Income** P XXX b. The gross compensation, exclusive of fringe benefits subject to FBT,
Less: Allowable Deductions (OSD or Itemized) (XXX) must be at least P975,000.
Net Income Before Personal Exemptions XXX c. The employee must be exclusively working for the RHQ or ROHQ as a
Less: Basic Personal Exemption XXX regular employee and not just a consultant or contractual personnel.
Additional Exemption XXX (RR No. 11-10)
PHHI XXX (XXX)
Taxable Income XXX Non-resident aliens NOT engaged in trade or business:

Tax Due XXX Except for sale of capital assets (shares of stock and real property) covered
Less: Withholding Tax XXX by Sec. 24 (C) and (D) of the Tax Code, the entire income received from
Creditable Tax XXX (XXX) all sources within the Philippines by every non-resident alien NOT engaged
Tax Payable (Refundable) XXXX in trade or business within the Philippines such as interest, cash and/or
property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed or determinable
**The amount reported as business/professional income shall be gross of annual or periodic or casual gains, profits and income, and capital gains
any applicable withholding taxes. Note that creditable withholding taxes are the applicable tax rate is 25% (Sec. 25[B])
deducted from the Tax Due not to arrive at Taxable Income.
G. PASSIVE INCOME
F. INCOME TAX RATES
There are items of passive income which are specifically enumerated in the
Graduated Income Tax Rate for Individuals (sometimes referred to as Tax Code as subject to final withholding tax and thus are not included in the
basic income tax or schedular income tax or regular income tax of Gross Income of the Taxpayer for purposes of computing his taxable income
individuals) subject to the graduated/scheduler/basic income tax.

Under Section 24(A)(2) of the National Internal Revenue Code, the tax shall The final withholding tax is the amount of tax which constitutes the full and
be computed in accordance with and at the rates established in the final payment of the income tax due from the payee of the said income.
following schedule:
Remittance of the Tax:
But Not Of Excess
Over Over Tax Plus Over The liability for the payment of the tax rests primarily on the payor as a
- 10,000 5% withholding agent. Thus, in case of his failure to withhold the tax or in case
10,000 30,000 500 10% 10,000 of underwithholding, the deficiency tax shall be collected from the
30,000 70,000 2,500 15% 30,000 payor/withholding agent. The payee is not required to include the income
70,000 140,000 8,500 20% 70,000 subject to final withholding tax to his gross income subject to income tax.
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000 The final tax is withheld at source; thus, the income earner need not file a
500,000 - 125,000 32% 500,000 return for the income subjected to Final Tax.

The above rates are applicable to the taxable income of individuals (citizens, Example: A earned P100 interest from his deposits with X Bank, X Bank
resident aliens and NRAETB). withheld P20 final tax due on the interest. In this transaction, the P100
interest is the passive income of A, X Bank will remit the P20 final tax on
Alien individuals employed by: interest to the BIR, A will receive the interest net of the tax, P80. The P100
a. Regional or Area Headquarters and Regional Operating Headquarters of interest will no longer be included in As taxable income subject to income
Multinational Companies 15% of gross income received from such tax.
establishment. Provided, that the same tax treatment shall apply to
Rates and Income Items Subject to Final Withholding Tax
Cesar Nickolai F. Soriano Jr.
4 Arellano University School of Law 2011-0303
INCOME TAX
The following types of income are subject to the following rates of income Capital Assets are those not falling within the definition of an ordinary
tax for Citizens and Resident Aliens: asset.

20% Interest from any currency bank deposit; Yield or other Ordinary Assets, on the other hand, means:
monetary benefit from deposit substitutes and from trust funds 1. Stock in trade of the taxpayer or other property of a kind which would
and similar arrangements. properly be included in the inventory of the taxpayer if on hand at the
20% Royalties, except on books and other literary works and close of the taxable year;
musical compositions. 2. Property held by the taxpayer primarily for sale to customers in the
20% Prizes and Winnings exceeding P10,000 except those from ordinary course of his trade or business;
the PCSO and Lotto 3. Property used in the trade or business, of a character which is subject
10% Royalties from books and other literary works and musical to the allowance for depreciation;
compositions 4. Real property used in trade or business of the taxpayer.
7.5% Interests from depository banks under the Foreign Currency
Deposit System Thus, "capital assets" refers to taxpayers property that is NOT any of the
10% Cash and/or property dividends* following:
Interest Income from LONG TERM deposit or investment are 1. Stock in trade;
generally exempt from tax, but if they are PRETERMINATED 2. Property that should be included in the taxpayers inventory at the close
before the 5th year the final tax would be: of the taxable year;
3. Property held for sale in the ordinary course of the taxpayers business;
5% 4 years to less than 5 years 4. Depreciable property used in the trade or business; and
12% 3 years to less than 4 years 5. Real property used in the trade or business. (SMI-ED Philippines
20% Less than 3 years Technology, Inc. vs. CIR)

Passive Income earned from outside the Philippines: if a resident
citizen earns any of the above income items from abroad, the same is not
subject to final withholding tax but to the regular/graduated income tax and
will thus form part of his taxable income subject to the same. Note that the
above rates apply only for income earned from Philippine sources.
*dividends must come from a domestic corporation to be subject to the
10% FWT.
The following rates shall apply on the income of Non-Resident Alien
ENGAGED in Trade or Business in the Philippines (NRAETB):
20% Interest from any currency bank deposit; Yield or other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements.
Royalties, except on books and other literary works and
musical compositions.
Prizes and Winnings exceeding P10,000 except those from
the PCSO and Lotto
Cash and/or property dividends
10% Royalties from books and other literary works and musical
compositions
Interest Income from LONG TERM deposit or investment are
generally exempt from tax, but if they are PRETERMINATED
before the 5th year the final tax would be:
5% 4 years to less than 5 years
12% 3 years to less than 4 years
20% Less than 3 years
Except for royalties and dividends which are taxed at 20%, all other passive
income of a NRAETB is subjected to the same rate of final tax as those of
citizens and resident aliens.
Income derived from the foreign currency deposit system: for non-
residents (whether individual or corporation, resident or non-resident),
income derived from foreign currency deposit units of banks are EXEMPT
from tax. (Sec. 27[D][3], last par. of the Tax Code)
Non-Resident Aliens NOT engaged in trade or business are subject to
the 25% Final Tax on his entire income. The above rates do not apply.
H. GAINS FROM DISPOSITION OF ASSETS
Cesar Nickolai F. Soriano Jr.
5 Arellano University School of Law 2011-0303
INCOME TAX
Determination of gain or loss: the gain shall be the excess of the
amount realized from the disposition of property over the basis or adjusted
basis for determining the gain; on the other hand, the loss is the excess of
the basis or adjusted basis for determining loss over the amount realized.
Amount realized: is the sum of the money plus the fair market value of the
property received.
Amount of cost or basis or adjusted basis of computing gain or loss:
1. Purchase the cost thereof;
2. Inheritance fair market value as of the date of acquisition;
3. Gift the basis is the same as if it would be in the hands of the donor
or the last preceding owner who did not acquire the property by gift;
however, if the same exceeds the fair market value at the time of the
gift, then for purposes of determining loss, the fair market value.
4. Property acquired for less than an adequate consideration in money or
moneys worth the amount paid by the transferee;
The above amounts are adjusted by amounts of improvements that
materially add to the value of the property or appreciably prolong its life less
accumulated depreciation. (RR No. 6-08)
No gain or loss: generally, upon the sale or exchange of property, the entire
amount of the gain or loss as the case may be, shall be recognized. Except
in the following instances where no gain or loss shall be recognized in
pursuance of a plan of merger or consolidation:
a. A corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the
merger or consolidation; or
b. A shareholder exchanges stock in a corporation, which is a party to the
merger or consolidation, solely for the stock of another corporation,
also a party to the merger or consolidation; or
c. A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely for
stock or securities in another corporation, a party to the merger or
consolidation. (Sec. 40[C][2] of the Tax Code)
Tax Free Exchange: no gain or loss shall also be recognized 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 persons, alone or together with others, not exceeding four (4) persons,
gains control of the corporation: Provided, that stocks issued for services
shall not be considered as issued in return for property. (Sec. 40[C], last
par. of the Tax Code)
Treatment of Ordinary Gains: or those arising from the sale of ordinary
assets will form part of the taxable income subject to the
graduated/basic/regular income tax. Likewise, losses arising from such sale
may be claimed as deductible expense, without any limitation as to amount,
unlike in capital losses. (see limitation on capital losses)
Treatment of Capital Gains: depending on the nature of the property,
the gains derived from sale or disposition of capital assets may be subject
to:
1. Capital gains tax; or
2. Ordinary income tax.
Capital Gains Tax is a final tax assessed on the presumed gain derived by
citizens and resident aliens, as well as estates and trusts, from the sale or
exchange of real property. (Tax Law and Jurisprudence, Justice Jose C. Vitug and
Judge Ernesto D. Acosta, 2nd ed., Manila, Philippines, p. 74)
This tax is applicable only to (1) sale of shares of stock of a domestic
corporation NOT listed or traded through a local stock exchange held as
capital assets; and (2) sale of real property located in the Philippines held as
a capital asset.
Transactions Subject to Capital Gains Tax:
1. Sale of Shares of Stock of a Domestic Corporation NOT listed
and traded through a local stock exchange
Held as capital assets: means all stocks and securities held by taxpayers
other than dealers in securities. (Sec. 2[a] of RR No. 6-2008)
Not applicable: the Capital Gains Tax does not apply if the sale of shares of
stock was made by
a. A dealer in securities;
b. Investor in shares of stock in a mutual fund company; and
c. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)
Capital Gains Tax Rate: at the following rates:
Rate Net Capital Gain
5% Not over P100,000
10% On any amount in excess of P100,000
Tax base: is the net capital gain, which is the excess of the selling price/fair
market value (less cost to sell) over the cost of the shares.
Determination of cost/fair market value: the value of the shares of stock at
the time of sale shall be the fair market value. In determining the value of
the shares, the Adjusted Net Asset Method shall be used whereby all assets
and liabilities are adjusted to fair market values. The net of adjusted asset
minus the liability values is the indicated value of the equity. The appraised
value of real property at the time of sale shall be the higher of
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of valued fixed by the
Provincial and City Assessors, or
(3) The fair market value as determined by Independent Appraiser. (Sec. 7
of RR No. 6-08, as amended by RR No. 6-2013)
Shares listed or traded through the stock exchange: if the shares are
disposed through the stock exchange, the same is not subject to CGT but to
the Stock Transaction Tax of of 1% of the selling price. This tax
constitutes the final tax on such sale since the Tax Code provides that the
same shall be exempt from income tax. Thus, any gain resulting from such
disposition will no longer be included in the taxpayers gross income subject
to regular/graduated income tax.
However, if the shares, although listed in the stock exchange, are sold over-
the-counter, or directly to the buyer, and not through such stock exchange,
then it will still be subject to the CGT.
Not subject to the Capital Gains Tax:
a. The sale is made through the local stock exchange;
b. The shares of stock are of a foreign corporation;
Cesar Nickolai F. Soriano Jr.
6 Arellano University School of Law 2011-0303
INCOME TAX
c. The shares are NOT held as capital assets, e.g., the seller is a dealer in
securities.
d. The sale resulted in a capital loss.
2. Sale of Real Property located in the Philippines
A 6% Capital Gains Tax of 6% is imposed on the presumed gain from sale
of real property, based on the gross selling price, the BIR zonal valuation or
the assessed value of the property, whichever is highest.
Note: for individuals, real property consists of ALL real properties classified
as capital assets; whereas for domestic corporations, the only real property
subject to capital gains tax are LANDS and BUILDINGS. Sale of machineries,
even though classified as a capital asset, shall be subject to the regular
corporate income tax.
Sale of real property to government or any of its political subdivisions or
agencies or GOCCs may be treated as subject to capital gains tax or ordinary
income tax, at the option of the taxpayer. (Sec. 22[D] of the Tax Code)
Sale of Principal Residence: sale of principal residence of natural
persons, the proceeds of which is fully utilized in acquiring or constructing a
new principal residence within 18 calendar months from the date of sale or
disposition is not subject to the 6% CGT. Subject to the following
requirements:
a. The historical cost or adjusted basis of real property sold or disposed is
carried over to the new principal residence;
b. The exemption can only be availed once every 10 years;
c. The BIR is notified by the taxpayer within 30 days from the date of sale
or disposition of his intention to avail of the tax exemption.
If there is no full utilization of the proceeds, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject
to the 6% CGT, as follows:
Unutilized Portion
Taxable Amount = X CGT base*
Gross Selling Price
*CGT base is the higher between the FMV and the Selling Price.
The CGT then would be 6% of the Taxable Amount computed above.
Not subject to Capital Gains Tax:
1. The real property sold was not held as a capital asset, e.g., used in
business;
2. The real property is located abroad;
3. The real property sold was the principal residence of the taxpayer,
where there is full utilization of the proceeds and all the above
requisites are met.
Capital Gains not subject to CGT; subject to regular/graduated
income tax:
All gains resulting from sales not subject to capital gains tax, are subject to
ordinary/regular income tax.
Transactions resulting in capital gains and losses even if no sale of capital
assets:
1. Retirement of bonds: amounts received by the holder upon the
retirement of bonds, debentures, notes or certificates or other
evidences of indebtedness issued by a corporation with interest
coupons or in registered form, shall be considered as amounts received
in exchange therefor.
2. Short sales of property gains or losses from short sales of
property shall be considered as gains or losses from exchanges of
capital assets.
Short sales: is a transaction in which the speculator sells securities
which he does not own (he merely borrows the stock certificate
through or from his stock broker) in anticipation of a decline in its
 price, and within a reasonably short period of time buys or covers the
stock to complete the transaction.
3. Option gains and losses an option is a contract granting a person
the exclusive privilege to buy or not to buy certain objects at any time
within the agreed period at a fixed price. It is a contract different from
the contract which the parties may enter into; it is one supported by a
consideration (called option money) which is distinct from the purchase
price.
The law considers the option or the privilege as the capital asset itself.
Thus, if X wanted to buy the cellphone of A, and gave P100 as option
money to decide within 3 days, but forfeits the same, the P100 is
considered capital loss of X and A likewise recognizes a capital gain of
P100.
4. Securities becoming worthless loss from shares of stock, held as
capital asset, which have become worthless during the taxable year
shall be treated as capital loss at the end of the year. However, this
loss is not deductible against the capital gains realized from the sale,
barter or exchange or other forms of disposition of shares of stock
during the taxable year, but must be claimed against other capital
gains to the extent of capital gains. (RR No. 6-2008) Note that in order
to be subject to 5% and 10% CGT, there must be actual disposition of
the shares of stock.
5. Liquidating Dividends - Upon surrender by the investor of the
shares in exchange for cash and property distributed by the issuing
corporation upon its dissolution and liquidation of all assets and
liabilities, the investor shall recognize either capital gain or capital loss
upon such surrender of shares computed by comparing the cash and
fair market value of property received against the cost of the
investment in shares. The difference between the sum of the cash and
the fair market value of property received and the cost of the
investment in shares shall represent the capital gain or capital loss
from the investment, whichever is applicable. (Sec. 8, RR No. 6-08)
In case the distribution is in instalments: the first payments are applied
against the cost. The gain is returnable only when he has completely
recovered. The loss can be taken only upon the distribution of the final
liquidating dividend.
6. Retirement or Redemption for Cancellation of Preferred Shares
- when preferred shares are redeemed at a time when the issuing
corporation is still in its "going-concern" and is not contemplating in
dissolving or liquidating its assets and liabilities, capital gain or capital
loss upon redemption shall be recognized on the basis of the difference
between the amount/value received at the time of redemption and the
cost of the preferred shares.
This, however, does not apply if a corporation acquires its own shares
and books it as treasury shares. (Sec. 9, RR No. 6-08)
Rules applicable to capital gains not subject to capital gains tax:
1. Percentage taken into account:
The following percentages of the gain or loss recognized upon the sale or
exchange of capital assets shall be taken into account in computing net
capital gain, loss or net income:
Percentage Applicability
100% If the capital asset has been held for
NOT more than 12 months;
50% If the capital asset has been held for
MORE than 12 months.
(Sec. 39[B] of the Tax Code)
This rule is not applicable to corporations.
2. Limitation on Capital Losses:
Cesar Nickolai F. Soriano Jr.
7 Arellano University School of Law 2011-0303
INCOME TAX
The capital losses realized 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 capital asset 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. (Sec. 7[c.4] of RR No.
6-08)
Exception: banks and trust companies whose business is the receipt of
deposits, sells any bond, debenture, note or certificate or other evidence of
indebtedness. Any loss resulting from such sale shall not be subject to the
foregoing limitation and not included in determining the applicability of such
limitation to other losses. (Sec. 39[C] of the Tax Code)
3. Net Capital Loss Carry-Over
If the individual sustains in any taxable year a net capital loss, such loss, in
an amount not to exceed the net income of such year, shall be treated in
the succeeding taxable year as a loss from the sale or exchange of asset
held for not more than 12 months. (Sec. 39[D] of the Tax Code)
This rule is likewise not applicable to a corporation.
4. Corporations
Based on the above, only the rule on limitation on capital losses apply to
corporations; and if the corporation sustains a net capital loss, the same
cannot be carried over in the succeeding taxable year.
Sale of Real Property NOT located in the Philippines: regardless of
classification, the gain derived therefrom by a resident citizen shall be
subject to ordinary income tax.
In case of domestic corporations, it will be subject to the RCIT or MCIT
whichever is applicable.
In case of non-residents or aliens and foreign corporations (whether
resident or not), the gain from the sale is exempt not being derived from
sources within the Philippines. (RR No. 7-2003)
Forced Sale of Real Property: the fact that the sale is involuntary, e.g.,
from a court order of foreclosure sale, does not affect the classification of
the property in the hands of the seller, either as capital asset or ordinary
asset, and are thus subject to the rules applied therefor.
FRINGE BENEFITS
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 (Sec. 33[B]).
Fringe benefits given to non-rank-and-file employees are generally subject
to fringe benefits tax; while fringe benefits received by rank-and-file
employees are subject to withholding tax on compensation.
Fringe Benefits Tax is 32% effective Jan. 31, 2000 under Sec. 33(A) of
the Tax Code. Fringe benefits tax is paid by the employer and is considered
a final tax. Accordingly, the fringe benefits received by the employee is no
longer included in his taxable income subject to income tax.
A. DIFFERENT KINDS OF EMPLOYEES
Rank and File Employees are those who are not holding managerial or
supervisory positions
Managerial Employees are those who are vested with 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 are 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 *5% is used in the computation to equate depreciation, on the presumption
independent judgment. of the regulations that the economic useful life of a house is 20 years.

B. Fringe Benefits SUBJECT to Fringe Benefit Tax Examples:

1. Housing; a. If an employer rents a house for an employee for P10,000 a month, the
2. Expense account; P10,000 is the value of the benefit. For purposes of computing the FBT,
3. Vehicle of any kind; P10,000*50% or P5,000 would be the monetary value which would be
4. Household personnel such as maid, driver and others; grossed up.
5. Interest on loan at less than market rate to the extent of the difference b. If an employer owns the house with a FMV of P1,000,000 and allows
between the market rate and the actual rate granted (12% benchmark the employee to use the same as residence, the value of the benefit
rate); would be P50,000 (5% of P1,000,000) and the monetary value for FBT
6. Membership fees, dues and other expenses borne by the employer for would be P25,000.
the employee in social and athletic clubs and similar organizations; c. If an employer purchased a house for P1,200,000 on an instalment
7. Expenses for foreign travel; basis where the P200,000 is for the interest throughout the instalment
8. Holiday and vacation expenses; period, and allows the employee to use the same, the value of the
9. Educational assistance to the employee or hid dependents; benefit would be P1,000,000*5% (without the interests) or P50,000.
10. Life or health insurance and other non-life insurance premiums or For FBT, the monetary value would be P25,000.
similar amounts in excess of what the law allows. d. In a, b and c there is NO TRANSFER of ownership, thats why the
monetary value for FBT purposes would only be 50% of the value of
C. Fringe Benefits NOT SUBJECT to Fringe Benefit Tax the benefit.
1. Fringe benefits which are authorized and exempted from income tax e. If an employer purchased a house for P1,000,000 with a FMV of
under the Tax Code or under any special law; P800,000, the value of the benefit would be P1,000,000 (Higher
2. Contributions of the employer for the benefit of the employee to acquisition cost) and the monetary value for FBT would be the same.
retirement, insurance and hospitalization benefit plans; f. If in (e) above, the employee is required to pay half of the purchase
3. Benefits given to rank and file, whether granted under a collective price, the value of the benefit would only be P300,000 which is the
bargaining agreement or not; difference between the FMV and the amount paid by the employee, the
4. De minimis benefits; monetary value would be the same.
5. Benefits granted to employee which are required by the nature of, or
necessary to the trade, business or profession of the employer; or Exempt housing privileges:
6. Benefits granted for the convenience or advantage of the employer. a. If the house is within the maximum of 50 meters from the perimeter of
the business premises;
D. MONETARY VALUE AND EXEMPTIONS FROM FBT b. Housing privilege of military officials of Armed Forces of the Philippines;
c. Temporary housing for an employee who stays in a housing unit for 3
In case of housing privilege and motor vehicle: months or less.
a. If there is NO transfer of ownership, the monetary value of the
benefit is 50% of the value of the benefit. 2. FORGONE INTEREST:
b. If there is transfer of ownership, the monetary value shall be the
same as the value of the benefit. The monetary value, for loans with no or less interest than that of the
market rate (12%), would be the difference between the market interest
In case of other fringe benefits, the monetary value shall be the same as and the interest paid, if any.
the value of the benefit.
If the employee extends a loan to an employee with a 7% interest rate in
1. Monetary value of HOUSING PRIVILEGE: the amount of P100,000, the annual monetary value would be 5% (12%-
7%) of P100,000 or P5,000 for FBT purposes.
Value of the Monetary value of
benefit the benefit Starting 2013, however, the Bangko Sentral ng Pilipinas has already lowered
Employer leases Rental paid 50% of the value of the market rate of interest to 6%. However, no Revenue Regulation has
residential property for the benefits been issued by the BIR to implement such change in the market rate.
the use of the
employee 3. Monetary value for VEHICLES of any kind:
Employer OWNS the 5%* of the FMV of 50% of the value of
residential property the land and the benefits Value of the Monetary
which is assigned to the improvements benefit value of the
employee for his use benefit
Employer PURCHASES 5% of the 50% of the value of Employer OWNS and Acquisition cost of 50% of the
residential property on acquisition cost the benefits maintains a fleet of motor all motor vehicles value of the
the instalment basis exclusive of interest vehicles for the use of the not normally used benefit
and allows employee to business and employees for business divided
use the same as his by 5 years
residence Employer LEASES motor Amount of rental 50% of the
Employer PURCHASES a Employers Entire value of the vehicles for the use of the payments for motor value of the
residential property and acquisition cost or benefit business and the vehicles not benefit
TRANSFERS ownership FMV, whichever is employees normally used for
to the employee higher business purposes
Employer PURCHASES a The difference of Entire value of the Employer PURCHASES the Acquisition cost Entire value of
residential property and the FMV and the benefit motor vehicle in the name the benefit
TRANSFERS ownership payment of the of the employee
to the employee at a employee Employer PROVIDES CASH Cash received by Entire value of
PRICE LOWER than the to the employee for the employee the benefit
acquisition cost purchase of a vehicle in
the name of the employee
Cesar Nickolai F. Soriano Jr.
8 Arellano University School of Law 2011-0303
INCOME TAX
 Employer SHOULDER A Amount shouldered Entire value of amount actually given and the amount received by the employee is
PORTION of the purchase by employer the benefit already NET of the FBT.
price of the motor vehicle 5. The Fringe Benefit and the related FBT are both allowable deductions
in the name of the for the EMPLOYERs taxable income computation.
employee
Employer purchases the Acquisition cost Entire value of Limitation on deductibility: The benefit cannot be claimed as FRINGE
car on instalment in the exclusive of interest the benefit BENEFIT EXPENSE for computation of the taxable income if the
name of the employee divided by 5 years house/vehicle or depreciable asset is already subjected to DEPRECIATION
and such is claimed as a deduction already.
Note:
a. Treatment of the above for FBT purposes is similar to that of the ITEMS EXEMPT FROM WITHHODING TAX ON
housing privilege except that the presumptive economic useful life of COMPENSATION/FRINGE BENEFITS TAX
the vehicles is 5 years (20 years for housing privileges).
b. Note that the same rule applies, the monetary value is 50% of the 1. Remunerations received as an incident of employment (Sec.
benefit if there is no transfer of ownership 2.78.1 (B)(1) of RR No. 2-98)
c. Note that the vehicles owned by the company used for business
purposes although provided to a managerial or supervisory employee is a. Retirement benefits received under Republic Act (RA) No. 7641 and
not subject to FBT. those received by officials and employees of private firms, whether
d. Use of an aircraft and helicopters owned and maintained by the individual or corporate, under a reasonable private benefit plan; subject
employer is treated as business expense and is not subject to FBT. to the following requisites:

4. EXPENSE ACCOUNTS which are personal to the employee (such as i. Plan is reasonable;
groceries for personal consumption) are subject to FBT based on the ii. Plan is approved by the BIR;
amount reimbursed to the employee. If, however, they are not iii. Retiring employee must have been in the service of the same
personal (such as food expensed for a meeting with a client) and duly employer for at least 10 years
receipted in the name of the EMPLOYER, they will be treated as valid iv. Retiring employee is 50 years old or older at the time of
reimbursable expenses and is not subject to FBT. retirement; and
v. Retiring employee has not previously availed of the privilege
Fixed amounts: if the amounts are given regularly on a monthly under the retirement benefit plan of the same or another
basis, this will not be considered as fringe benefits subject to FBT. They employer
will form part of the regular compensation of the employee subject to
withholding tax on compensation. Retirement benefits under R.A. 7641 (amendment to the Labor Code
granting retirement pay under Art. 287 thereof) where:
5. EDUCATIONAL ASSISTANCE provided to an employee is generally i. No private retirement plan or retirement plan under the
subject to FBT, except if the study is directly related with the trade or CBA/employment contract.
business or profession or if there is a bond where the employee is ii. Must have served the company for at least 5 years
required to stay in the employ of the employer for some period after iii. Retiree at least 60 years old but not more than 65 years of age at
finishing. the time of retirement.

6. EDUCATIONAL ASSISTANCE PROVIDED TO A DEPENDENT of an CBA is a retirement plan

employee is generally subject to FBT, except if awarded through a In International Broadcasting, Inc. vs. Amarilla (GR No. 162775 dated
competitive scheme under a scholarship program. Oct. 27, 2006), the Supreme Court considered the CBA as a retirement
plan, and as such, the retiree must comply with the requirements
7. INSURANCE PREMIUMS paid by the employer for the employee is under RA No. 4917. In this case, since the CBA was not registered with
generally subject to FBT, except those exempt under the law (SSS, the BIR, the retirement benefits were deemed taxable.
GSIS, etc.) and those which are for the group insurance of the
employee. Applicability of RA No. 7641
RA No. 7641 applies only in situations where: (1) there is no CBA or
8. EXPENSES FOR FOREIGN TRAVEL are generally subject to FBT, other applicable employment contract providing for retirement benefits
except if in connection with attending business meetings or of an employee; or (2) there is a CBA or other applicable contract
conventions at an average of $300 a day (excluding lodging costs). For providing for retirement benefits for an employee, but it is below the
all others, the cost of economy and business class airplane tickets shall requirements set by law. (Oxales vs. Abbot Laboratories, Inc., GR No.
NOT be subject to FBT and 70% of the cost of first class tickets shall 152991 dated July 21, 2008)
likewise be exempt.
CBA or other employee contract providing retirement benefits
E. TAX BASE AND TAX RATE to employees to be non-taxable:
1. The Fringe Benefit Tax (FBT) is computed as follows: If the CBA or other employee contract providing retirement
Monetary Value XXX benefits to employees provides for a less or equal benefit
Divided by 68% provided under RA No. 7641, provided the requirements under RA
Grossed Up Monetary Value XXX No. 7641 are met. (BIR Ruling No. DA-151-04 dated March 31,
Tax Rate 32% 2004)
Fringe Benefit Tax XXX If it provides more benefits than those under RA No. 7641, must
2. For Non-Resident Aliens NOT Engaged in Trade or Business, the gross comply with the requirements of Sec. 32(B)(6)(a) of the Tax Code
up rate is 75% and the FBT rate is 25%. or RA No. 4917. (Oxales, BIR Ruling No. DA-151-04 dated March
3. For Special Aliens and their Filipino counterparts and employees in 31, 2004 and BIR Ruling No. 068-14 dated February 25, 2014)
Special Economic Zones it is 85%/15% respectively.
4. The FBT is imposed on the benefit received by the managerial or b. Any amount received by an employee or by his heirs from the employer
supervisory employee but the liability of paying FBT is on the employer. due to death, sickness, or other physical disability or for the cause
This is the reason why the amount received by the employee is grossed beyond the control of the said employee such as retrenchment,
up for the imposition of FBT, so that the tax base would be the total redundancy, or cessation of business.

Cesar Nickolai F. Soriano Jr.

9 Arellano University School of Law 2011-0303
INCOME TAX
 i. The cause of separation by the employee from the service was
beyond his control.
ii. Amounts received by involuntary separation remain exempt from
income tax even if the employee, at the time of separation, had
rendered less than 10 years of service and/or is below 50 years
old;
7. Compensation for injuries or sickness (Sec. 2.78.1 (B)(9) of RR
No. 2-98): Amounts received through Accident or Health Insurance or
under Workmen's Compensation Act, as compensation for personal
injuries or sickness. It likewise includes the amount of any damages
received whether by suit or agreement on account of injuries or
sickness.

However, any payment made by an employer to an employee on 8. Income exempt under treaty (Sec. 2.78.1 (B)(10) of RR No. 2-98):
account of dismissal constitutes compensation regardless of legal income required by any treaty obligation binding on the Government of
contract, statute, or otherwise to make such payment - thus not the Philippines.
exempted.
9. Thirteenth (13th) month pay or other benefits (Sec. 2.78.1
c. Social security benefits, retirement gratuities, pensions and other (B)(11) of RR No. 2-98; RR No. 3-2015): 13th month pay and other
similar benefits received by resident and non-resident citizens of the benefits such as Christmas bonus, loyalty awards, gifts in cash or kind,
Philippines or aliens who reside permanently in the Philippines from and other benefits of similar nature; Provided that the total amount
foreign entities whether private or public shall not exceed 82,000 (as amended by RR No. 3-2015, previously
d. Payments of benefits due or to become due to any person residing in 30,000).
the Philippines under the law of the US administered by the US
Veterans Administration 10. GSIS, SSS, Medicare and Other Contributions (Sec. 2.78.1
e. Payments of benefits made under the Social Security System Act of (B)(12) of RR No. 2-98): GSIS, SSS, Medicare, Pag-ibig contributions
1954, as amended and union dues of individual employees. For purposes of computing
f. Benefits received from the GSIS Act of 1937, as amended, and the taxable income subject to Income Tax and Withholding Tax on
retirement gratuity received by government officials and employees Compensation, the said contributions are deducted to arrive at taxable
income. However, for employees, the amount considered not taxable
2. Remuneration for casual labor not in the course of an employer's shall only pertain to the maximum required by law. Any amount in
trade or business (Sec. 2.78.1 (B)(4) of RR No. 2-98) excess of the mandatory amounts, voluntarily given as contribution by
the employee, shall be taxable.
Remuneration paid for labor which is occasional, incidental, or irregular
AND does not promote or advance the employer's trade or business; 11. Facilities and privileges of relatively small value or de minimis
benefits (Sec. 2.78 (A)(3)(c) of RR No. 2-98, as amended by RR No.
The above is exempt from withholding tax on compensation because 10-2008, as further amended by RR No.5-2011) are facilities or
there may be no employer-employee relationship between the privileges furnished or offered by an employer to his employees that
employer and the casual laborer. However, the remuneration received are of relatively small value and are offered or furnished by the
by the laborer is part of his taxable income for income tax purposes. employer merely as a means of promoting the health,
goodwill, contentment or efficiency of his employees, including:
Note: The following remunerations constitutes compensation income,
thus taxable: De Minimis Benefits Maximum Value Per Year per
Remuneration paid for labor which is occasional, incidental, or Employee
irregular but is in the course of the employer's trade or business; 1. Monetized unused vacation Equivalent to 10 days VL
and leave (VL) credits
Remuneration paid for casual labor performed for another 2. Medical cash allowance to 1,500
corporation dependents, per employee (750 per employee per semester
or
3. Compensation for services by a citizen or resident of the Philippines 125 per month)
performed for a foreign government or international 3. Rice subsidy 18,000
organization. (Sec. 2.78.1 (B)(5) of RR No. 2-98) (1,500 or 1 sack of 50kg rice per
month)
i. Includes remuneration paid for services performed by 4. Uniform and clothing 5,000
ambassadors, ministers, and other diplomatic officers and allowance
employees; 5. Actual medical 10,000
assistance/allowance
ii. Includes remuneration paid for services performed as consular or 6. Laundry allowance 3,600 (300 per month)
other employee of a foreign government or a non-diplomatic 7. Employees achievement 10,000
representative of such government awards (Must be in the form of tangible
personal property other than cash
4. Damages (Sec. 2.78.1 (B)(6) of RR No. 2-98): Actual, moral, or gift certificate, received by
exemplary, and nominal damages received by an employee or his heirs employees under an established
pursuant to a final judgment or compromise agreement written plan which does not
discriminate in favor of highly
5. Life Insurance (Sec. 2.78.1 (B)(7) of RR No. 2-98): proceeds of life paid employees)
insurance policies paid to heirs or beneficiaries upon death of the
8. Gifts given during Christmas 5,000
insured, whether single sum or otherwise; Provided that interest
and major anniversaries
payments agreed under the policy for the amounts which are held by
9. Daily meal allowance for 25% of basic minimum pay on a
the insured shall be included in gross income.
overtime or night/graveyard per region basis
work
6. Amount received by the insured as a return of premium. (Sec. 2.78.1
10. Benefits received by an 10,000
(B)(8) of RR No. 2-98): the amount received by the insured, as a
employee by virtue of a
return of premiums paid by him under life insurance, endowment, or
collective bargaining
annuity contracts either during the term or at the maturity of the term
agreement (CBA) and
mentioned in the contract or upon surrender.
Cesar Nickolai F. Soriano Jr.
10 Arellano University School of Law 2011-0303
INCOME TAX
 De Minimis Benefits Maximum Value Per Year per
Employee
productivity incentive
schemes (RR No. 1-2015)
Treatment: De Minimis benefits are considered non-taxable and are not
included in the computation of taxable income and withholding tax on
compensation, as well as fringe benefits tax.
Amounts in excess of the above-mentioned ceiling will form part of OTHER
BENEFITS, which is non-taxable only up to P82,000 together with other
benefits received by the employee including 13th month pay and other
bonuses, etc. (BIR Ruling No. 030-2013)
12. COMPENSATION INCOME OF MINIMUM WAGE EARNERS
(MWES) who work in the private sector and being paid the Statutory
Minimum Wage (SMW) (Sec. 2.78.1 (B)(13) of RR No. 2-98, as
amended).
Coverage: No withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay of MWEs.
However, under RR No. 10-2008, an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of 82,000, taxable allowances
and other taxable income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy the privilege of
being a MWE and, therefore, his/her entire earnings are not exempt from
income tax and, consequently, shall be subject to withholding tax.
Note, however, that the Supreme Court has nullified this provision of RR No.
10-2008 noting that RA No. 9504 simply defined an MWE and provided for
the exemption. Simply put, MWE is the status acquired upon passing the
litmus test whether one receives wages not exceeding the prescribed
minimum wage, or that fixed by the RTWPB. RA No. 9504 is explicit as to
the coverage of the exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards, including holiday,
overtime, night differential and hazard pays, and the RR cannot change this.
Therefore, an MWE would still be exempted from income tax (and
consequently, withholding tax on compensation) and shall be taxable only
for the amounts received in excess of the SMW and for other bonuses in
excess of P82,000. The treatment of the excess (as taxable income) cannot
operate to disenfranchise the MWE from enjoying the exemption explicitly
granted by RA No. 9504. (Soriano vs. Secretary of Finance and the
Commissioner of Internal Revenue, GR No. 184450, January 24, 2017)
13. Other benefits given to employees not included in the list, but
are otherwise treated as non-taxable:
a. Living quarters or meals (Sec. 2.78.1 (A)(2) of RR No. 2-98),
subject to the following conditions:
(1) The lodging and meals are furnished within the business premises
of the employer;
Business premises of the employer means the place where the
employee performs a significant portion of his duties or where the
employer conducts a significant portion of his business. In case of
doubt, the criteria to be used shall be (a) time, more than 50% of
the employee's work time or (b) value of business, more than
50% of the production of the said employee. (Section (2)(2.4) of
RAMO No. 1-87)
(2) The employee is required to accept the lodging as a condition of
his employment; and
(3) The meals are furnished for the convenience of the employer.
(RAMO No. 1-87; BIR Ruling [DA-197-97])
b. Tips and gratuities (Sec. 2.78.1 (A)(4) of RR No. 2-98): Tips or
gratuities paid directly to an employee, by a customer of the employer,
which are not accounted for by the employee to the employer are
considered as taxable income but not subject to withholding.
Cesar Nickolai F. Soriano Jr.
11 Arellano University School of Law 2011-0303
INCOME TAX
c. Other benefits and allowances:
(1) Transportation, Representation and Other Allowances (Sec. 2.78.1
(A)(6) of RR No. 2-98, as amended)
(2) Advances/Reimbursements
In general, fixed or variable transportation, representation and other
allowances which are received by an employee in addition to his/her
regular is compensation subject to withholding. (Section
2.78.1(A)(6)(a) of RR No. 2-98, as amended)
To be considered as tax-exempt, all of the following conditions shall be
met based on the rulings/opinions issued by the BIR, as follows:
1. It is incurred in the pursuit of trade or business of the employer;
2. the employee is required to, and does make an accounting/
liquidation for each expense; and
3. Liquidated in the Name of the employer.
Advances in excess of actual expense, if not returned to the employer
constitutes taxable compensation/benefit.
Per Diem Allowances: reasonable amounts of reimbursements/
advances for traveling and entertainment expenses which are pre-
computed on a daily basis and are paid to an employee while he is on
an assignment or duty need not be liquidated and not subject to
withholding.
FILING OF RETURNS FOR INDIVIDUALS
A. INCOME TAX RETURN
1. Annual Income Tax Return:
a. BIR Form No. 1700 for individuals earning purely compensation
income.
b. BIR Form No. 1701 for self-employed individuals.
The deadline for either is April 15 of the succeeding year. Note that the
deadline for the filing of an Income Tax Return is the 15 th day of the 4th
month following the close of the taxable year. For individuals, the
taxable year is always a CALENDAR year which ends on December 31.
Thus, the deadline for an individuals ITR is always April 15.
SUBSTITUTED FILING OF INCOME TAX RETURN: under this rule,
individual income taxpayers need not file their own ITR, provided the
following requisites are met:
a. The individual is receiving purely compensation income;
b. The amount of income tax has been correctly withheld by the
employer;
c. There is only one employer during the taxable year.
WHO ARE REQUIRED TO FILE AN INCOME TAX RETURN:
a. Individuals deriving compensation from two or more employers
concurrently or successively at any time during the taxable year.
b. Employees deriving compensation income, regardless of the
amount, whether from a single or several employers during the
calendar year, the income tax of which has not been withheld
correctly.
c. Individuals deriving income other than compensation, such as
business income or income from the practice of profession.
d. Individuals whose spouse is required to file an ITR.
e. Non-resident alien engaged in trade or business in the Philippines.
2. Quarterly Income Tax Return (BIR Form No. 1701Q) applicable only to
individuals who earn business income or income from the practice of
profession.
B. FINAL WITHHOLDING TAX RETURNS 10th day following the
close of the month the withholding as made; except for the December
return, the deadline of which is January 15 of the succeeding year.
C. CAPITAL GAINS TAX
1. Shares of stock 30 days after each transaction; the consolidated
return shall be filed on or before April 15 of the following year.
 2. Real Property 30 days following each sale or other disposition.
D. FRINGE BENEFITS TAX RETURN 10th day following the close of
the quarter when the benefit was granted.
E. WITHHOLDING TAX RETURNS (Withholding tax on compensation,
Final Withholding Taxes, Expanded Withholding Taxes) 10th day
following the close of the month when the withholding was made.
Under Sec. 2.57.4 of RR No. 2-98, as amended, the obligation to
withhold arises at the time the income payment is accrued or recorded
as an expense or asset, whichever is applicable, in the payors books,
or when the payment becomes payable, whichever comes first.
F. MANNER OF FILING: the returns can be filed (1) manually; (2)
through electronic filing and payment system (EFPS); or (3) through
the use of eBIR Forms.
In case of filing through the eFPS, the deadlines are extended by 1 to 5
days depending on the industry classification of the taxpayer.
TAX ON ESTATES AND TRUSTS
A. TAXABILITY OF TRUSTS
A trust is the arrangement created by will or an arrangement under which
title to property is passed to another for consideration or investment with
the income therefrom and ultimately the corpus to be distributed in
accordance with the directions of the creator as expressed in the governing
instrument.
Parties to a trust include the trustor, the one who establishes the trust; the
trustee, the one in whom confidence is reposed as regards the property for
the benefit of another person; and the beneficiary, for whose benefit the
trust has been established.
Kinds of trust:
1. Revocable one where at any time the power to revest (return) in the
grantor title to any art of the corpus of the trust is vested; the trust is
not considered a separate taxable entity and the income from the
corpus forms part of the taxable income of the grantor.
2. Irrevocable where no such right exists or cannot be exercised after an
agreed period; this is taxed similar to an estate under judicial settlement
and similarly entitled to a P20,000 basic personal exemption.
Rules on Taxability:
1. If the income is distributed regularly, such will form part of the taxable
income of the beneficiary.
2. If the trust is revocable, the income of the trust forms part of the
taxable income of the trustor.
3. Only when the trust is irrevocable and the income is kept in the trust,
would there be a need to compute for the income tax liability of the
Trust.
4. If the Trust is treated as a separate taxable unit, the rules on individuals
are the same, except the following:
a. The Basic Personal Exemptions is only P20,000.
b. No Additional Exemptions is applicable.
c. Distribution of INCOME to the beneficiary shall be deductible
for purposes of computing the taxable income of the Trust subject
to 15% withholding tax, and the amount distributed (gross of the
withholding tax) will form part of the beneficiarys taxable income.
ILLUSTRATION: G transferred property to F, in trust, and under the terms of
the transfer, F should accumulate the income for the benefit of B until the
latter reaches the age of majority. During 2016, the property earned
P490,000 and incurred expenses of P350,000. P50,000 of the income was
distributed to B. How much is income tax?
Gross Income P490,000
Less: Deductions for:
Expenses 350,000
Cesar Nickolai F. Soriano Jr.
12 Arellano University School of Law 2011-0303
INCOME TAX
Distribution of income to beneficiary 50,000
Exemption 20,000 420,000
Taxable Income 70,000
Income Tax 8,500
1. In the above illustration, G is known as the Grantor, F is known as the
Fiduciary, B is known as the Beneficiary.
2. Income distribution to the beneficiary and income set aside or applied
for his benefit shall be deductible for the computation of the taxable
income of the trust. (similar to an Estate)
3. The income distributed is subject to a 15% withholding tax.
Accordingly, B will receive P42,500 cash, net of the related withholding
tax of P7,500 (P50,000 * 15%). The amount to be included in Bs
taxable income is still P50,000 with a tax credit of P7,500. (similar to
an Estate)
4. The Fiduciary is the one liable to file the income tax return for trusts
held.
Two or more Trusts: In the event that a Fiduciary holds two or more trusts
from the same grantor with the same beneficiary, the income tax shall be
consolidated for such trusts. Accordingly, the gross income and deductions
are consolidated as if they are from one property with only one exemption
of P20,000.
B. TAXABILITY OF ESTATES
An estate pertains to all the property, rights and obligations of a deceased
person, including those that accrue since the opening of succession.
Taxability: An estate is taxable DURING judicial settlement, that is, during
the time the estate is the subject of judicial testamentary or intestate
proceedings.
Estates are taxed similar to an individual, so the rules on taxable income,
those subject to final tax, capital gains tax, the deductions and the rates are
similar, EXCEPT:
1. The Basic Personal Exemption for an estate is only P20,000.
2. No Additional Personal Exemption is applicable.
3. An estate is required to obtain its own Tax Identification Number
(TIN).
4. Distribution of the INCOME to the heirs shall be deductible for
purposes of computing taxable income. Such distribution shall be
subject to a 15% withholding tax and will be reported by the heir as
part of his personal taxable income.
Period to start: The estate is taxed only on its income from the death of the
decedent. Any income for the year which was earned prior to death is
reported separately in the individuals income tax return for the year.
Not under JUDICIAL settlement: An estate NOT under judicial settlement
shall be treated as a co-ownership for tax purposes or if the heirs actively
participated in its management or invested additional capital thereto, it may
be considered a partnership, taxable as such.
Liability to pay the income tax: the administrator or executor will be liable to
pay the income tax liability of the estate.
WITHHOLDING TAX SYSTEM
Concept: the concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld comes from the
income earned by the taxpayer. Since the amount of the tax withheld
constitutes income earned by the taxpayer, then that amount manifestly
forms part the taxpayers gross receipt. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government in
payment of his tax liability. The amount withheld indubitably comes from
income of the taxpayer, and thus forms part of his gross receipts (China
Banking Corporation v. CA, 403 SCRA 634, 2003).
A manner of collection: A withholding tax on income is not a new kind of tax
but simply a manner or system by which income taxes may be collected
when the income is paid or received. It is in the nature of advance tax
payment by a taxpayer on the annual tax which may be due at the end of
the taxable year.
Reason for the system: the withholding tax system was devised for three
primary reasons:
1. To provide the taxpayer a convenient manner to meet his probable
income tax liability;
2. To ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns;
and
3. To improve the governments cash flow.
Kinds:
1. Withholding tax at source (Secs. 34K, 57-59);
a. Withholding tax on quarterly corporate income (Secs 75-76);
b. Withholding tax on quarterly individual income (Secs 74);
2. Withholding tax on employers compensation or wages (Secs. 78-83);
3. Withholding of value-added tax (Sec 114c); and
4. Withholding of percentage tax (Secs 116-128).
Withholding of Final Tax of Certain Income Payments: The amount
of income tax withheld by the withholding agent is constituted as a full and
final payment of the income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as a
withholding agent. (see Final Tax rates on Tax on Individuals and Tax on
Corporations)
Withholding of Creditable Tax at Source: Taxes withheld on certain
income payments are intended to equal or at least approximate the tax due
from the payee on said income. The income recipient is still required to file
an income tax return, as prescribed in Sec. 51 and 52, to report the income
and/or pay the difference between the tax withheld and the tax due on the
income. This is otherwise known as Expanded Withholding Tax (EWT) or the
Creditable Withholding Tax (CWT)
Final Withholding Tax (FWT) and Creditable Withholding Tax
(CWT) distinguished
1. In FWT, the amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income. In CWT, the taxes withheld on certain
income payments are creditable against the income tax due on said
income.
2. In FWT, the liability for payment of the tax rests primarily on the payor
as a withholding agent. In CWT, the payee of the income is required to
report the income and/or pay the difference between the tax withheld
and the tax due on the income. The payee also has the right to ask for
a refund if the tax withheld is more than the tax due.
3. In FWT, the payee is not required to file an income tax return for the
particular income. In CWT, the income received by the payee is to be
included in his gross income subject to normal income tax, and the tax
withheld is a credit/deduction from the income tax due thereon.
Persons Constituted as Withholding Agent (Sec. 3 of Revenue
Regulation No. 14-2002)
1. Any juridical person whether or not engaged in trade or business;
2. Any individual, with respect to payments made in connection with this
trade or business. However, insofar as taxable sale, exchange or
transfer of real property is concerned, individual buyers who are not
engaged in trade or business are also constituted as withholding
agents; and
3. All government offices including GOCC, as well as provincial, city and
municipal governments and barangays.
Return and Payment in Case of Government Employees
If the employer is the Government of the Philippines or any political
subdivision, agency or instrumentality thereof, the return of the amount
deducted and withheld upon any wage shall be made by the officer or
employee having control of the payment of such wage, or by any officer or
employee duly designated for the purpose (Section 81, NIRC).
Cesar Nickolai F. Soriano Jr.
13 Arellano University School of Law 2011-0303
INCOME TAX
Statements and Returns
Requirements Every employer required to deduct and withhold a tax shall
furnish to each such employee in respect of his employment during the
calendar year, on or before January thirty-first (31st) of the succeeding year,
or if his employment is terminated before the close of such calendar year,
on the same day of which the last payment of wages is made, a written
statement confirming the wages paid by the employer to such employee
during the calendar year, and the amount of tax deducted and withheld
under this Chapter in respect of such wages.
Annual Information Returns Every employer required to deduct and
withhold the taxes in respect of the wages of his employees shall, on or
before January thirty-first (31st) of the succeeding year, submit to the
Commissioner an annual information return containing a list of employees,
the total amount of compensation income of each employee, the total
amount of taxes withheld therefrom during the year, accompanied by copies
of the statement referred to in the preceding paragraph, and such other
information as may be deemed necessary.
Extension of time. The Commissioner, under such rules and regulations as
may be promulgated by the Secretary of Finance, may grant to any
employer a reasonable extension of time to furnish and submit the
statements and returns required under the Section (Section 83, NIRC).
Withholding Tax on Compensation: A method of collecting that income
tax at source upon receipt of income. It applies to all employed individual
whether citizens or aliens, deriving income from compensation for services
rendered in the Philippines, and the employer is constituted as the
withholding agents (Revenue Regulation 2-79, amending Section 9-10, 19-
23 of Regulation V-8 and Revenue Regulation 2-98).
The income recipient is the person liable to pay the income tax, yet to
improve the collection of compensation income of employees, the State
requires the employer to withhold the tax upon payment of the
compensation income.
Refunds or credits
a. Employer when there has been an overpayment of tax under this
Section, refund or credit shall be made to the employer only to the
extent that the amount of such overpayment was not deducted and
withheld hereunder by the employer.
b. Employees the amount deducted and withheld under the Code during
any calendar year shall be allowed as a credit to the recipient of such
income against the income tax due. Refunds and credits in cases of
excessive withholding shall be granted under rules and regulations
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be
returned or credited within three (3) months from the fifteenth (15th) day of
April. Refunds or credits made after such time shall earn interest at the rate
of six percent (6%) per annum, starting after the lapse of the three-month
period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his
duly authorized representative without the necessity of counter-signature by
the Chairman, Commission on Audit or the latters duly authorized
representative as an exception to the requirement prescribed by Section 49,
Chapter 8, Subtitle B, Title 1 of Book V of the Administrative Code of 1987.
Year-end adjustment
Every withholding agent required to deduct and withhold taxes shall submit
to the CIR an annual information return containing the list of employees and
income payments, amount of taxes due and amount of taxes withheld from
each employee.