Tax1 Updated

8/9/2019 Tax1 Updated

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Taxation One: Outline with Codals

Course OutlineTax I

Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class,

Reyes, some Mamalateo, and the various reviewers in school.

A. In General...........................................................................................................1B. General Principles...............................................................................................1C. Income Tax on Individuals..................................................................................2

D. Definitions........................................................................................................17

E. Income Tax ates.............................................................................................1!". Proprietar# Educational Institutions and $ospitals...........................................1%

G. G&CCs...............................................................................................................2'$. Passive Income.................................................................................................21

I. (inimum Corporate Income Tax )(CIT*............................................................2+,. Income Tax on esident "orei-n Corporations..................................................2

/. Income Tax on 0onresident "orei-n Corporations...........................................2!. Improperl# Accumulated Earnin-s Tax )IAET*..................................................+2

(. Taxexempt Corporations.................................................................................+

0. Taxa3le Income................................................................................................+!P. "rin-e Benefits Tax )"BT4 56ut up4*.................................................................7. Deductions........................................................................................................81

. Capital Gains and osses )9ale or Exc6an-e of Propert#*.................................7+9. Determination of Gain or oss from 9ale or Transfer of Propert#......................77

T. 9itus of Taxation...............................................................................................!2:. Accountin- Periods and (et6ods......................................................................!7

;. Estates and Trusts............................................................................................%15. eturns and Pa#ment of Taxes.........................................................................%

5. 5it66oldin- Tax...............................................................................................%%

A. In General

Taxable Income The essential difference between capital and income is that capital is a fund; and

income is a flow. Capital is wealth, while income is the service of wealth.

ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is a

tree, income the fruit.

Income means profits or gains. #$adrigal v %affert!&

Income ma! be defined as the amount of mone! coming to a person or corporationwithin a specified time, whether as pa!ment for services, interest or profit from

investment.

o ' mere advance in the value of propert! of a person or a corporation in no

sense constitutes the (income) specified in the law. *uch advance constitutesand can be treated merel! as an increase in capital. #isher v Trinidad&

Cash dividends is taxed as income because it has been realied-received, while stoc

dividends is not taxed as income because it is merel! inchoate as it is a mereanticipation of income #it becomes income once !ou sell it&.

o One is an actual receipt of profits; the other is a receipt of a representation of

the increased value of the assets of a corporation. #isher v Trinidad&

When dealing with money or property, the questions you should as are!

o "s this capital or is this income#

o $as it %een reali&ed'received or is it merely inchoate#

B. General Principles

$ice! Ingles'teneo "aw /01/'tt!. $ontero and some stuff from 'tt!. *alvador #2pdated: $arch 3, /01/ 4 $ice!&

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*5C. /6. 7eneral rinciples of Income Taxation in the hilippines. 8 5xcept when otherwise provided in this Code:#'& ' citien of the hilippines residing therein is taxable on all income derived from sources within and without thehilippines;#9& ' nonresident citien is taxable onl! on income derived from sources within the hilippines;#C& 'n individual citien of the hilippines who is woring and deriving income from abroad as an overseas contractworer is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is a

citien of the hilippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract worer;#& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sourceswithin the hilippines;#5& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and#& ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on income

derived from sources within the hilippines.

ho are taxable on income derived from all sources, whether within or outside thehilippines< Taxed worldwide=

1. %esident citiens./. omestic corporations.

The other inds of taxpa!ers are sub>ect to tax onl! on income derived from

hilippine sources.

Taxa3le Income Taxa3le IncomeCitiourner is a

resident of the hilippines for purposes of the income tax. hether he is a transient or

not is determined b! his intentions with regard to the length and nature of his sta!.

o ' mere floating intention indefinite as to time, to return to another countr! is not

sufficient to constitute him a transient.o If he lives in the hilippines and has no definite intention as to his sta!, he is a

resident. One who comes to the hilippines for a definite purpose which in itsnature ma! be promptl! accomplished is a transient.

9ut if his purpose is of such a nature that an extended sta! ma! benecessar! for its accomplishment, and to that end the alien maes his

home temporaril! in the hilippines, he becomes a resident, though it ma!be his intention at all times to return to his domicile abroad when the


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purpose for which he came has been consummated or abandoned. #*ec.3, %% /&

@on8resident citiens*ec // #5&. The term Anonresident citienA means:#1& ' citien of the hilippines who establishes to the satisfaction of the Commissioner the fact of his ph!sicalpresence abroad with a definite intention to reside therein.#/& ' citien of the hilippines who leaves the hilippines during the taxable !ear to reside abroad, either as animmigrant or for emplo!ment on a permanent basis.#6& ' citien of the hilippines who wors and derives income from abroad and whose emplo!ment thereat reBuires

him to be ph!sicall! present abroad most of the time during the taxable !ear.#& ' citien who has been previousl! considered as nonresident citien and who arrives in the hilippines at an!time during the taxable !ear to reside permanentl! in the hilippines shall liewise be treated as a nonresidentcitien for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sourcesabroad until the date of his arrival in the hilippines.#3& The taxpa!er shall submit proof to the Commissioner to show his intention of leaving the hilippines to residepermanentl! abroad or to return to and reside in the hilippines as the case ma! be for purpose of this *ection.

$eaning of non8resident citien:

1. Citien who establishes to the satisfaction of the Commissioner the fact of his

ph!sical presence abroad with a definite intention to reside therein/. Citien who leaves the hilippines during the taxable !ear to reside abroad, either

as an immigrant or for emplo!ment on a permanent basis6. Citien who wors and derives from abroad and whose emplo!ment thereat

reBuires him to be ph!sicall! present abroad most of the time during the taxable

!ear. Citien who has been previousl! considered as nonresident citien and who

arrives in the hilippines at an! time during the taxable !ear to residepermanentl! in the hilippines shall liewise be treated as a nonresident citien

for the taxable !ear in which he arrives in the hilippines with respect to hisincome derived from sources abroad until the date of his arrival in the

hilippines.

ho are non8resident citiens< #%% 18DE&

1. Immigrant 4 one who leaves the hilippines to reside abroad as an immigrant forwhich a foreign visa has been secured

/. ermanent emplo!ee 4 one who leaves the hilippines to reside abroad foremplo!ment on a more or less permanent basis

6. Contract worer 4 one who leaves the hilippines on account of a contract of emplo!ment which is renewed from time to time under such circumstance as to

reBuire him to be ph!sicall! present abroad most of the time #not less than 1F6da!s&

@on8resident citiens who are exempt from tax with respect to income derived from

sources outside the hilippines shall no longer be reBuired to file information returns

from sources outside the hilippines beginning /001. #%% 38/001&

The phrase Gmost of the timeH shall mean that the said citien shall have sta!ed abroad

for at least 1F6 da!s in a taxable !ear.

The same exemption applies to an OC but as such worer, the time spent abroad is

not material for tax exemption purposes all that is reBuired is for the worer)semplo!ement contract to pass through and be registered with the O5'. #9I% %uling668/000&.

@on8resident aliens engaged in business in the hilippines*ec //. #7& The term Anonresident alienA means an individual whose residence is not within the hilippines and

who is not a citien thereof.

ho are non8resident aliens<


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1. 'n individual whose residence is not within the hilippines/. @ot a citien of the hilippines

o etermination is b! his intention with regard to the length and nature of his sta!.

#*ec 3, %% /&

"oss of residence b! alien

o 'n alien who has acBuired residence in the hilippines retains his status until he

abandons the same and actuall! departs from the hilippines.o ' mere intention to change his residence does not change his status. 'n alien who

has acBuired a residence is taxable as a resident for the remainder of his sta! in thehilippines. #*ec. , %% /&

$inimum wage earner*ec //. #77& The term (statutor! minimum wage) earner shall refer to rate fixed b! the %egional Tripartite ageand roductivit! 9oard, as defined b! the 9ureau of "abor and 5mplo!ment *tatistics #9"5*& of the O"5.

#JJ& The term (minimum wage earner) shall refer to a worer in the private sector paid the statutor! minimumwage; or to an emplo!ee in the public sector with compensation income of not more than the statutor! minimumwage in the non8agricultural sector where he-she is assigned.

ixed b! the %egional Tripartite age and roductivit! 9oard. $inimum wage earner:

o rivate sector 4 paid the statutor! minimum wage

o ublic sector 4 not more than the statutor! minimum wage in the non8

agricultural sector where he-she is assigned

ependent*ec 63. #9& or purposes of this *ubsection, a AdependentA means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!8one #/1& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self8supportbecause of mental or ph!sical defect.

ependent is aK

o

"egitimate, illegitimate or legall! adopted child and living with the taxpa!ero ho must be:

@ot more than /1, 2nmarried, and

@ot gainfull! emplo!ed, O% if such, ependent, regardless of age, is incapable of self8support because of

mental or ph!sical defect.

To summarie, individual taxpa!ers are classified into:1. Citiens, who are divided into:

o %esident citiens 4 those citiens whose residence is within the hilippines; and

o @on8resident citiens 4 those citiens whose resident is not within the hilippines.

/. 'liens, who are divided into:

o %esident aliens 4 those individuals whose residence is within the hilippines and

are not citiens thereof; and

o @on8resident aliens 4 those individuals whose residence is not within the

hilippines but temporaril! in the countr! and are not citiens thereof. The! are: Those engaged in trade or business within the hilippines; and

Those who are not so engaged. #see *ec /68/3&

)inds of income and income ta* of individuals



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Tax formula*5C. /. Income Tax %ates. 8#'& %ates of Income Tax on Individual Citien and Individual %esident 'lien of the hilippines.#1& 'n income tax is hereb! imposed:

#a& On the taxable income defined in *ection 61 of this Code, other than income sub>ect to tax under *ubsections#9&, #C& and #& of this *ection, derived for each taxable !ear from all sources within and without the hilippinesbe ever! individual citien of the hilippines residing therein;

#b& On the taxable income defined in *ection 61 of this Code, other than income sub>ect to tax under *ubsections#9&, #C& and #& of this *ection, derived for each taxable !ear from all sources within the hilippines b! anindividual citien of the hilippines who is residing outside of the hilippines including overseas contract worers

referred to in *ubsection#C& of *ection /6 hereof; and#c& On the taxable income defined in *ection 61 of this Code, other than income sub>ect to tax under *ubsections#b&, #C& and #& of this *ection, derived for each taxable !ear from all sources within the hilippines b! anindividual alien who is a resident of the hilippines.#/& %ates of Tax on Taxable Income of Individuals. 8 The tax shall be computed in accordance with and at the ratesestablished in the following schedule: #>ust see chart below, it)s the same thing&

or married individuals, the husband and wife, sub>ect to the provision of *ection 31 #& hereof, shall computeseparatel! their individual income tax based on their respective total taxable income: +rovided , that if an! incomecannot be definitel! attributed to or identified as income exclusivel! earned or realied b! either of the spouses,the same shall be divided eBuall! between the spouses for the purpose of determining their respective taxableincome.A+rovided , That minimum wage earners as defined in *ection // #JJ& of this Code shall be exempt from the

pa!ment of income tax on their taxable income: +rovided , further , That the holida! pa!, overtime pa!, night shiftdifferential pa! and haard pa! received b! such minimum wage earners shall liewise be exempt from income tax.

@ot over 10,000 3L

Over 10,000 but not over 60,000 300 + 10L of the excess over10,000

Over 60,000 but not over D0,000 /,300 + 13L of the excess over60,000

Over D0,000 but not over 10,000 F,300 + /0L of the excess over

D0,000

Over 10,000 but not over /30,000 //,300 + /3L of the excess over10,000

Over /30,000 but not over 300,000 30,000 + 60L of the excess over/30,000

Over 300,000 1/3,000 + 6/L of the excess over300,000

7ross Income

"ess: eductionsTaxable Income

Tax %ateTax ue

)now the ta* %ase and the ta* rate

Onl! resident citiens and domestic corporations are taxed on income derived from

abroad. orldwide taxable=

The tax is imposed upon taxable compensation or emplo!ment income, businessincome, and income derived from the practice of professions derived b! citiens and

resident aliens.

$arried individuals shall compute separatel! their individual income tax based on their

respective total taxable income.


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rovided, however, That the tax on dividends shall appl! onl! on income earned on or after Manuar! 1, 1EEF.Income forming part of retained earnings as of ecember 61, 1EED shall not, even if declared or distributed on orafter Manuar! 1, 1EEF, be sub>ect to this tax.

#C& Capital 7ains from *ale of *hares of *toc not Traded in the *toc 5xchange. 8 The provisions of *ection 6E#9&notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains realied

during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domesticcorporation, except shares sold, or disposed of through the stoc exchange.@ot over 100,000KKKKKKKKKKK........ 3LOn an! amount in excess of 100,000KKKK 10L

#& Capital 7ains from *ale of %eal ropert!. 8

#1& In 7eneral. 8 The provisions of *ection 6E#9& notwithstanding, a final tax of six percent #L& based on thegross selling price or current fair maret value as determined in accordance with *ection #5& of this Code,whichever is higher, is hereb! imposed upon capital gains presumed to have been realied from the sale,exchange, or other disposition of real propert! located in the hilippines, classified as capital assets, includingpacto de retro sales and other forms of conditional sales, b! individuals, including estates and trusts: rovided,That the tax liabilit!, if an!, on gains from sales or other dispositions of real propert! to the government or an! of its political subdivisions or agencies or to government8owned or controlled corporations shall be determined eitherunder *ection / #'& or under this *ubsection, at the option of the taxpa!er.#/& 5xception. 8 The provisions of paragraph #1& of this *ubsection to the contrar! notwithstanding, capital gainspresumed to have been realied from the sale or disposition of their principal residence b! natural persons, theproceeds of which is full! utilied in acBuiring or constructing a new principal residence within eighteen #1F&

calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this*ubsection: rovided, That the historical cost or ad>usted basis of the real propert! sold or disposed shall becarried over to the new principal residence built or acBuired: rovided, further, That the Commissioner shall have

been dul! notified b! the taxpa!er within thirt! #60& da!s from the date of sale or disposition through a prescribedreturn of his intention to avail of the tax exemption herein mentioned: rovided, still further, That the said taxexemption can onl! be availed of once ever! ten #10& !ears: rovided, finall!, that if there is no full utiliation of the proceeds of sale or disposition, the portion of the gain presumed to have been realied from the sale ordisposition shall be sub>ect to capital gains tax. or this purpose, the gross selling price or fair maret value at thetime of sale, whichever is higher, shall be multiplied b! a fraction which the unutilied amount bears to the gross

selling price in order to determine the taxable portion and the tax prescribed under paragraph #1& of this*ubsection shall be imposed thereon.

*ec // #?& The term /deposit su%stitutes/ shall mean an alternative from of obtaining funds from the public #theterm NpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& otherthan deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers ownaccount, for the purpose of relending or purchasing of receivables and other obligations, or financing their ownneeds or the needs of their agent or dealer. These instruments ma! include, but need not be limited to banersN

acceptances, promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b!and between the 9ango *entral ng ilipinas #9*& and an! authoried agent ban, certificates of assignment orparticipation and similar instruments with recourse: rovided, however, That debt instruments issued for interbancall loans with maturit! of not more than five #3& da!s to cover deficienc! in reserves against deposit liabilities,including those between or among bans and Buasi8bans, shall not be considered as deposit substitute debtinstruments.

Tax ate on Certain Passive Income on Citioint stoc compan!,

insurance or mutual fund compan!, regional operating headBuarters of multinational compan! or share in the distributive net income after tax o

10L #vs /0L fornon8resident aliens


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a partnership #except a general professional partnership&, >oint stoc or

>oint venture or consortium taxable as a corporation

But what a%out dividends from foreign corporations for citi&ens

1not resident aliens2# ell, the income here enters into the

computation for *ec / #a& tax calendar. or resident aliens, the!

are not taxed since it)s income derived from abroad.

engaged intrade-bi&

F. Interest on long8term deposit or investment in bans #with maturit! of 3 !ears or more&

exempt

rie 4 the result of an effort #lie a prie in a beaut! contest&inning 4 the result of a transaction where the outcome depends upon

chance #lie betting&eposit substitute 4 a means of borrowing mone! from the public #/0 or

more individual or corporate lenders& other than b! wa! of deposit withbans through the issuance of debt instruments #lie baner)s

acceptances, promissor! notes, repurchase agreements, certificates of assignment or participation&

Tax ate on Interest Income from "orei-n Currenc# Deposit )

1'%!*

1. Interest income actuall! received b! a resident citien or resident alien

from C

D.3L final

withholding tax

/. If it was deposited b! an OC or seaman or nonresident citien 5xempt

6. If it was in a ban account in the >oint names of an OC and hisspouse #who is a resident&

30L exempt-30L final

withholding taxof D.3L

. Interest income actuall! received b! a domestic corporation orresident foreign corporation from C

D.3L finalwithholding tax

Interest income which is actuall! or constructivel! received b! a resident citien of the

hilippines or b! a resident alien individual from a foreign currenc! ban deposit will be

sub>ect to a final withholding tax of D.3L. The depositor! ban will withhold and remitthe tax. If a ban account is >ointl! in the name of a non8resident citien, 30L of theinterest income from such ban deposit will be treated as exempt while the other 30L

will be sub>ect to a final withholding tax of D.3L. The %egulations will appl! on taxable

income derived beginning Manuar! 1, 1EEF pursuant to the provisions of *ection F of %'F/. In case of deposits which were made in 1EED, onl! that portion of interest which

was actuall! or constructivel! received b! a depositor starting Manuar! 1, 1EEF is

taxable. #%% 108EF&

Tax ate on Capital Gains

1. On sale of shares of stoc of a domestic corporation 034

listed and 034 traded thru a local stoc exchange held as

a capital asset ,o Capital gains not over 100,000

o Capital gains in excess of 100,000 #see %% 8/00F

below&

3L of the net capital gains10L of the net capital gains

/. On sale of real propert! in the hilippines held as a capital

asset #see %% F8EF below& L of the gross sellingprice, or the current maret

value at the time of sale,whichever is higher


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Tax ate on Income from 9ale> Barter> Exc6an-e or

ot6er Disposition of 96ares of 9toc? ) @2''!*

If shares of stoc are listed and traded through the local

stoc exchange

P of 1L #or .003L& of the

gross selling price or grossvalue in mone! of the

shares of stocIf shares not traded through the local stoc exchange

o Capital gains not over 100,000

o Capital gains in excess of 100,000

3L of the net capital gains10L of the net capital gains

ho are liable<

1. Individual taxpa!er, whether citien or alien;/. Corporate taxpa!er, whether domestic or foreign;

6. Other taxpa!ers not falling under #1& and #/& above, such as estate, trust, trustfunds and pension funds, among others.

ho are exempt<

1. ealers in securities/. Investors in shares of stoc in a mutual fund compan!, as defined in *ec // #99&,

and *ection /#s& of these %egulations, in ocnnection with the gains realied b! saidinvestor upon redemption of said shares of stoc in a mutual fund compan!l and

6. 'll other persons, whether natural or >uridical, who are specificall! exempt fromnational internal revenue taxes under existing investment incentives and other

special laws.

$o to determine t6e tax 3ase of disposition

of stoc? ) @2''!*

"air (ar?et ;alue

*ales of stoc listed and traded through the "*5 $Q is the actual selling price

*ales of stoc listed but not traded through the

"*5

$Q is the closing price on the da!

when the shares were sold, transferred,etc #if no sale was made on that da! inthe "*5, then the closing price on the

da! nearest to the date of sale,transfer, or exchange of the said

shares&

*ales of stoc not listed and not traded throughthe "*5

$Q is the boo value of the shares of stoc as shown in the financial

statements dul! certified b! anindependent C' nearest to the date of

sale

"inal Tax ate on 9ales> Exc6an-es> or Transfers or ealProperties Classified as Capital Assets ) !%!*

*ale of real propert! in the hilippines L of the gross selling

price, or the currentmaret value at the time

of sale, whichever ishigher

If sale was made to the government or to 7OCCs 5ither L of the grossselling price-current


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maret value or under

the normal income tax

rate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es or

Transfers of eal Properties classified as &rdinar# Assets

) !%!*1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than 300,000

o *elling price is 300,000 to /m

o *elling price is above /m

1.3L6L

3L of gross sellingprice-current maret

value, whichever ishigher

/. If the seller is not habituall! engaged in the real estatebusiness

D.3L of gross sellingprice-current maret

value, whichever ishigher

6. If the seller is exempt from creditable withholding tax as per%% /8EF Exempt

Conditions to 3e exempt from capital -ains tax of @ on t6e sale> exc6an-e> or

disposition of a principal residence ) 1+%%*1. The proceeds from the sale, exchange, or disposition of his principal residence must

be full! utilied in acBuiring or construing a new principal residence within 1Fmonths. There must be proof.

/. This can onl! be availed of O@"? O@C5 ever! 10 !ears6. The historical cost of his old principal residence shall be carried over to the cost basis

of his new residence

. If there is no full utiliation, he shall be liable for the deficienc! capital gains tax of the utilied portion

3. If the principal residence is disposed in exchange for a condo, and if it is used as hisnew residence, then he is exempt

. The L capital gains tax otherwise due must be deposited in escrow with an

authoried agent ban, and can onl! be released when sufficient proof is shown thatthe proceeds have been full! utilied within 1F months.

hat is the principal residence an!wa!< # 12'''*

o It is the dwelling house, where the husband or wife or unmarried individual

resides; actual occupanc! is not interrupted or abandoned b! temporar! absencedue to travel, studies, or wor abroad

o If the ownership of the land and the dwelling house belong to different persons,

onl! the dwelling house shall be treated as principal residence

a!ment of capital gains tax on foreclosure of mortgaged propert! # %%*

o

If the mortgagor exercises his right of redemption within 1 !ear 4 no capitalgains tax because none has been derived and no transfer of propert! wasrealied

In case of non8redemption, the capital gains will be due based on the bid price of the

highest bidder

ersonal and 'dditional 5xemptions9EC. +8. Allowance of Personal Exemption for Individual Taxpayer. -


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)A* In General . 8 or purposes of determining the tax provided in *ection / #'& of this Title, there shall beallowed a basic personal exemption amounting to 30,000 for each individual taxpa!er.

In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shallbe allowed the personal exemption.

)B* Additional Exemption for Dependents. 8 There shall be allowed an additional exemption of twent! fivethousand pesos #/3,000& for each dependent not exceeding four #&.

The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of marriedindividuals.In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse who

has custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimedb! both shall not exceed the maximum additional exemptions herein allowed.

or purposes of this *ubsection, a AdependentA means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!8one #/1& !ears of age, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self8supportbecause of mental or ph!sical defect. #'mended b! %' E30&

Personal and additional exemption for individual taxpa#er

9asic personal exemption for each individual taxpa!er

o If married and onl! one of the spouses is deriving gross income,

onl! such spouse shall be allowed the personal exemption.

30,000

'dditional exemption for each dependent, not exceeding four #&o Claimed b! onl! one spouse in case of married individuals

o If legall! separated, additional exemptions claimed onl! b!

spouse who has custod!; should not exceed maximum

additional exemptions allowed

/3,000 perdependent

5xemption statutes are not retroactive. #ensacola v CI%&

iscounts for senior citiens is now treated as tax deductions, as per %' E/3D. This

sucs for the taxpa!er because he doesn)t get the Gpeso for pesoH benefit which hewould have gotten if it were considered a tax credit as before. #$.5. Joldings Corp v CI%

CT'&

*enior Citiens are

o %esident citiens

o 't least 0 !ears old

The! are not exempt from income taxes unless the! are consideredminimum wage earners. #%' EEE, which also too out the previous

0,000 reBuirement&

Change of status9ec +8. )C* C6an-e of 9tatus. 8 If the taxpa!er marries or should have additional dependent#s& as defined aboveduring the taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, infull for such !ear.

If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additionalexemptions for himself and his dependent#s& as if he died at the close of such !ear.

If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!8one#/1& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the same

exemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!8one#/1& !ears old or became gainfull! emplo!ed at the close of such !ear.

ersonal exemption allowable to nonresident alien individuals9ec. +8 )D* Personal Exemption Alloa3le to 0onresident Alien Individual. 8 ' nonresident alien individualengaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personal

exemption in the amount eBual to the exemptions allowed in the income tax law in the countr! of which he is asub>ect 8 or citien, to citiens of the hilippines not residing in such countr!, not to exceed the amount fixed inthis *ection as exemption for citiens or resident of the hilippines: rovided, That said nonresident alien shouldfile a true and accurate return of the total income received b! him from all sources in the hilippines, as reBuiredb! this Title.


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Personal Exemptions alloa3le to

nonresident alien individuals

If engaged in trade, business or in the exercise of

a profession

5ntitled to a personal exemption in the

amount eBual to the exemptionsallowed in the income tax law of hiscountr! for ilipinos, but it shouldn)t

exceed the amount fixed here for

exemptions

If not engaged in trade, business or in the exercise

of a profession

@one, because *ec /3 #9& states that

he will be taxed upon his entireincome.

e "eon states that nonresident aliens are not entitled to additional e*emptions for

dependents. #. 163, undamentals of Taxation /00E&

Optional *tandard eduction9ec. + )* &ptional 9tandard Deduction. 8 In lieu of the deductions allowed under the preceding *ubsections,an individual sub>ect to tax under *ection /, other than a nonresident alien, ma! elect a standard deduction in anamount not exceeding fort! percent #0L& of his gross sales or gross receipts, as the case ma! be. In the case of

a corporation sub>ect to tax under section /D#'& and /F#'&, it ma! elect a standard deduction in an amount notexceeding fort! percent #0L& of it gross income as defined in *ection 6/ of this Code. 2nless the taxpa!ersignifies in his return his intention to elect the optional standard deduction, he shall be considered as havingavailed himself of the deductions allowed in the preceding *ubsections. *uch election when made in the returnshall be irrevocable for the taxable !ear for which the return is made: rovided, That an individual who is entitledto and claimed for the optional standard shall not be reBuired to submit with his tax return such financialstatements otherwise reBuired under this Code: rovided, further, That except when the Commissioner otherwisepermits, the said individual shall eep such records pertaining to his gross sales or gross receipts, or the saidcorporation shall eep such records pertaining to his gross income as defined in *ection 6/ of this Code during thetaxable !ear, as ma! be reBuired b! the rules and regulations promulgated b! the *ecretar! of inance, uponrecommendation of the Commissioner.

Optional standard deduction is the deduction which an individual other than a non8

resident alien, or a corporation, sub>ect to income tax, ma! elect in an amount notexceeding 0L of his gross sales or gross receipts, as the case ma! be, or a

corporation, in an amount not exceeding 0L of its gross income, in lie of taingitemied deductions.

The O* ma! be availed of b!:

o ' citien, whether resident or non8resident

o %esident alien, and

o Taxable estate and trust.

' non8resident alien cannot claim O*.

The O* allowed to individual taxpa!er shall be a maximum of 0L of gross sales or

gross receipts during the taxable !ear.o If one uses the accrual basis of accounting for his income and deductions, the

O* shall be based on the gross sales during the taxable !ear.o If one uses the cash basis, the O* shall be based on his gross receipts during

the taxable !ear.

o The law is specific that for individual taxpa!ers the basis of the 0L O* shall be

gross sales or gross receipts, not gross income, for which reason the Gcost of salesH and the Gcost of servicesH are not allowed to be deducted for purposes of

determining the basis of the O*.o or other individual taxpa!ers allowed b! law to report their income and

deductions under a different method of accounting, the gross sales or gross


1/


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eductions are items or amounts which the law allows to be deducted under certain

conditions from the gross income of a taxpa!er in order to arrive at the taxable income.

9oth reduce actual gross income although exclusions are not included in the income tax

return.

*ome general principals governing deductions include:

o The taxpa!er seeing a deduction must point to some specific provision of the

statute authoriing the deduction; ando Je must be able to prove that he is entitled to the deduction authoried or

allowed.

The! are allowed onl! where there is a clear provision in the statute for the

deduction claimed.

Taxable gross income is affected b! exclusions because the latter are omitted from the

former and are not reported on the income tax return but is not affected b! deductionsbecause the! are subtracted after gross income is determined and are reported on the

return.

Rinds of deductions:

1. eductions from compensation income./. eductions from business-professional income.

6. eductions from corporate income.. *pecial deductions

3. eductions allowed b! special laws.

Tax on non8resident aliens@on8resident aliens engaged in business in the hilippines9EC. 28. Tax on "onresident Alien Individual. 8)A* "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines. 8

#1& "n 7eneral . 8 ' nonresident alien individual engaged in trade or business in the hilippines shall be sub>ect toan income tax in the same manner as an individual citien and a resident alien individual, on taxable incomereceived from all sources within the hilippines. ' nonresident alien individual who shall come to the hilippinesand sta! therein for an aggregate period of more than one hundred eight! #1F0& da!s during an! calendar !earshall be deemed a Nnonresident alien doing business in the hilippinesN. *ection // #7& of this Codenotwithstanding.

#/& Cash and-or ropert! ividends from a omestic Corporation or Moint *toc Compan!, or Insurance or $utualund Compan! or %egional Operating JeadBuarters or $ultinational Compan!, or *hare in the istributable @etIncome of a artnership #5xcept a 7eneral rofessional artnership&, Moint 'ccount, Moint Qenture Taxable as aCorporation or 'ssociation., Interests, %o!alties, ries, and Other innings. 8 Cash and-or propert! dividendsfrom a domestic corporation, or from a >oint stoc compan!, or from an insurance or mutual fund compan! or froma regional operating headBuarters of multinational compan!, or the share of a nonresident alien individual in thedistributable net income after tax of a partnership #except a general professional partnership& of which he is apartner, or the share of a nonresident alien individual in the net income after tax of an association, a >oint account,or a >oint venture taxable as a corporation of which he is a member or a co8venturer; interests; ro!alties #in an!form&; and pries #except pries amounting to Ten thousand pesos #10,000& or less which shall be sub>ect to taxunder *ubsection #9& of *ection /& and other winnings #except hilippine Charit! *weepstaes and "ottowinnings&; shall be sub>ect to an income tax of twent! percent #/0L& on the total amount thereof: +rovided,however, that ro!alties on boos as well as other literar! wors, and ro!alties on musical compositions shall besub>ect to a final tax of ten percent #10L& on the total amount thereof: +rovided, further , That cinematographic

films and similar wors shall be sub>ect to the tax provided under *ection /F of this Code: +rovided, furthermore,

That interest income from long8term deposit or investment in the form of savings, common or individual trustfunds, deposit substitutes, investment management accounts and other investments evidenced b! certificates insuch form prescribed b! the 9ango *entral ng ilipinas #9*& shall be exempt from the tax imposed under this*ubsection: +rovided, finally, that should the holder of the certificate pre8terminate the deposit or investmentbefore the fifth #3th& !ear, a final tax shall be imposed on the entire income and shall be deducted and withheld b!

the depositor! ban from the proceeds of the long8term deposit or investment certificate based on the remainingmaturit! thereof:0 our #& !ears to less than five #3& !ears 8 3L;0 Three #6& !ears to less than four #& !ears 8 1/L; and0 "ess than three #6& !ears 8 /0L.


1


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#6& 6apital 7ains. 8 Capital gains realied from sale, barter or exchange of shares of stoc in domestic corporationsnot traded through the local stoc exchange, and real properties shall be sub>ect to the tax prescribed under*ubsections #C& and #& of *ection /.

' nonresident alien engaged in trade or business in the hilippines is sub>ect to the

same income tax rate as citiens and resident aliens, on taxable income received from

all sources within the hilippines. ' nonresident alien who sta!s in the hilippines for an aggregate period of more than

1F0 da!s shall be deemed as nonresident alien doing business in the hilippines.

Tax ate on Certain Passive Income on 0onresident AliensEn-a-ed in Trade> Business or Exercisin- a Profession

"inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem exempt

/. %o!alt! from boos, literar! wors, musical compositions 10L

6. %o!alt! other than above /0L

. Interest on an! current ban deposit, !ield or other monetar! benefits

from deposit substitute, trust fund similar arrangement

/0L

3. rie exceeding 10,000 /0L

. Other winnings, except hil Charit! *weepstaes "otto /0L

D. ividend from a domestic corp, or from a >oint stoc compan!,insurance or mutual fund compan!, regional operating headBuarters of multinational compan! or share in the distributive net income after tax o

a partnership #except a general professional partnership&, >oint stoc or >oint venture or consortium taxable as a corporation

hat about dividends from foreign corps< 5xempt. @onresident

aliens are not taxed worldwide.

/0L #comparewith citiens and

resident aliens&

F. 7ross income from cinematographic films similar wors /3L

E. Interest on long8term deposit or investment in bans #with maturit! of

3 !ears or more&

exempt

Tax ate on Capital Gains )same it6 residents> and

nonresident aliens not en-a-ed in 3usiness*/. On sale of shares of stoc of a domestic corporation 034


a capital asset ,



3L of the net capital gains



asset L of the gross sellingprice, or the current maret

value at the time of sale,

whichever is higher

@on8resident aliens not engaged in business in the hilippines9ec. 28 )B* "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 8There shall be levied, collected and paid for each taxable !ear upon the entire income received from all sources

within the hilippines b! ever! nonresident alien individual not engaged in trade or business within the hilippinesas interest, cash and-or propert! dividends, rents, salaries, wages, premiums, annuities, compensation,remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,and capital gains, a tax eBual to twent!8five percent #/3L& of such income. Capital gains realied b! a nonresidentalien individual not engaged in trade or business in the hilippines from the sale of shares of stoc in an! domesticcorporation and real propert! shall be sub>ect to the income tax prescribed under *ubsections #C& and #& of

*ection /.


13


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@onresident aliens not engaged in business are taxed /3L of their entire income within

the hilippines.

That means the! have no deductions=

Their capital gains are the same with nonresident aliens engaged in business #see table

above=&

*pecial aliens9ec. 28 )C* Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin#

Head(uarters of *ultinational +ompanies. 8 There shall be levied, collected and paid for each taxable !earupon the gross income received b! ever! alien individual emplo!ed b! regional or area headBuarters and regionaloperating headBuarters established in the hilippines b! multinational companies as salaries, wages, annuities,compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area

headBuarters and regional operating headBuarters, a tax eBual to fifteen percent #13L& of such gross income:+rovided, however , That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing the same positionas those of aliens emplo!ed b! these multinational companies. or purposes of this Chapter, the termNmultinational compan!N means a foreign firm or entit! engaged in international trade with affiliates or subsidiariesor branch offices in the 'sia8acific %egion and other foreign marets.

#& Alien "ndividual 9mployed %y 3ffshore Baning :nits. 8 There shall be levied, collected and paid for each

taxable !ear upon the gross income received b! ever! alien individual emplo!ed b! offshore baning unitsestablished in the hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments,

such as honoraria and allowances, from such off8shore baning units, a tax eBual to fifteen percent #13L& of suchgross income: +rovided, however, That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing thesame positions as those of aliens emplo!ed b! these offshore baning units.

#5& Alien "ndividual 9mployed %y +etroleum Service 6ontractor and Su%contractor. 8 'n 'lien individual who is apermanent resident of a foreign countr! but who is emplo!ed and assigned in the hilippines b! a foreign servicecontractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liableto a tax of fifteen percent #13L& of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: +rovided,however, That the same tax treatment shall appl! to a ilipino emplo!ed and occup!ing the same position as analien emplo!ed b! petroleum service contractor and subcontractor.

'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under*ubsections #C&, #& and #5& hereof shall be sub>ect to the pertinent income tax, as the case ma! be, imposedunder this Code.

9pecial Aliens

1. 5mplo!ed b! regional or area headBuarters regional

operating headBuarters established in the hilippines b!

multinational;

13L on gross income

/. 5mplo!ed b! offshore baning units 13L on gross income

6. ermanent resident of a foreign countr! but who is emplo!ed

and assigned in the hilippines b! a foreign service contractor orb! a foreign service subcontractor engaged in petroleum

operations in the hilippines

13L

rovided the same tax shall appl! to ilipinos emplo!ed and occup!ing the same position

as these aliens.

These appl! onl! to positions of a highly technical or highly managerial nature. # Atty.Montero2 'll income earned from all other sources within the hilippines b! the special alien

emplo!ees shall be sub>ect to the pertinent income tax imposed b! the Code.

Tips on answeringThought process in answering problems:

1. Is this income< If not, then it)s not reall! a income tax problem./. ho)s the taxpa!er< 'nd what)s the source< %efer to *ec /6=


1


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+amdg


6. hat)s the specific rate< *ee sec /8/3=

or example, what is the tax rate of on income derived from dividends from foreigncorporations for 1. Citiens /. %esident aliens and 6. @onresident aliens engaged in trade or

business<

1. Citiensa. ?es, it)s income.

b. The source is outside the hilippines. 're the! liable for sources from outsidethe hilippines< ?es= Citiens are taxed worldwide=

c. hat)s the specific tax rate< JmmK since it)s not in an! of the charts, butthe! still have to be taxed, then the income the! derive from dividends from

foreign corporations will be considered in computing the tax rate based on thetax calendar of *ec /#a&

/. %esident aliensa. ?es, it)s income.

b. The source is outside the hilippines. 're the! liable for sources from outside

the hilippines< @o= The! aren)t taxed worldwide.6. @onresident aliens engaged in trade or business

a. ?es, m! dear, it)s income.b. The source is outside the hilippines. 're the! liable for source from outside

the hilippines< @o= The! aren)t taxed worldwide either.

D. Definitions *ection //, Tax Code

efinition of corporations9ec 22 )B* The term AcorporationA shall include partnerships, no matter how created or organied, >oint8stoccompanies, >oint accounts #cuentas en participacion&, association, or insurance companies, but does not includegeneral professional partnerships and a >oint venture or consortium formed for the purpose of undertaingconstruction pro>ects or engaging in petroleum, coal, geothermal and other energ! operations pursuant to anoperating consortium agreement under a service contract with the 7overnment. A7eneral professionalpartnershipsA are partnerships formed b! persons for the sole purpose of exercising their common profession, nopart of the income of which is derived from engaging in an! trade or business.

Corporations include:

o artnerships, no matter how created or organied

o Moint8stoc companies

o Moint accounts

o 'ssociations

o Insurance companies

It does not include

o 7eneral professional partnerships;

o Moint venture or consortium formed for the purpose of undertaing construction

pro>ects, or engaging in petroleum, coal, geothermal and other energ! operations

pursuant to an operating or consortium agreement under a service contract withthe government.

%emember !our partnership lessons= #'I*CO and ascual cases&

'll co8owernships are not deemed unregistered partnerships.#Obillos v CI%&

The moment inheritance shares are used as part of the common assets to be used in

maing profits, it is considered part of the taxable income of an unregistered

partnership. #Ona v CI%&

%eBuisites of a MQ:

1. Contribution b! each part!


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/. rofits are shared among the parties6. There is >oint right of mutual control over the sub>ect matter

. There is a single business transaction rather than a general or continuous transaction#9I% %uling 61D8E/, in this case, the first agreement of the two parties to construct the

D30 9ldg was not taxable because the! had not derived income-profits from it. theconstruction of the building was mere return of the capital which the! shelled out.

Jowever, once the two corporations were placed under one sole management to operatethe business affairs of the two, the MQ was taxable separate from the two corporations

comprising it. The distribution b! the MQ to the two constituent corporations was nottaxable because it was considered intra8corporate dividends.&

E. Income Tax ates9EC. 27. 'ates of Income tax on Domestic +orporations. -

#'& In 7eneral. 8 5xcept as otherwise provided in this Code, an income tax of thirt!8five percent #63L& is hereb!

imposed upon the taxable income derived during each taxable !ear from all sources within and without thehilippines b! ever! corporation, as defined in *ection //#9& of this Code and taxable under this Title as acorporation, organied in, or existing under the laws of the hilippines: rovided, That effective Manuar! 1, /00E,the rate of income tax shall be thirt! percent #60L&.In the case of corporations adopting the fiscal8!ear accounting period, the taxable income shall be computed

without regard to the specific date when specific sales, purchases and other transactions occur. Their income andexpenses for the fiscal !ear shall be deemed to have been earned and spent eBuall! for each month of the period.The corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of monthscovered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period, divided b!twelve.rovided, further, That the resident, upon the recommendation of the *ecretar! of inance, ma! effective Manuar!1, /000, allow corporations the option to be taxed at fifteen percent #13L& of gross income as defined herein, afterthe following conditions have been satisfied:#1& ' tax effort ratio of twent! percent #/0L& of 7ross @ational roduct #7@&;#/& ' ratio of fort! percent #0L& of income tax collection to total tax revenues;#6& ' Q'T tax effort of four percent #L& of 7@; and#& ' 0.E percent #0.EL& ratio of the Consolidated ublic *ector inancial osition #C*& to 7@.

The option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of salesto gross sales or receipts from all sources does not exceed fift!8five percent #33L&.

The election of the gross income tax option b! the corporation shall be irrevocable for three #6&

consecutive taxable !ears during which the corporation is Bualified under the scheme.or purposes of this *ection, the term Ngross incomeN derived from business shall be eBuivalent to grosssales less sales returns, discounts and allowances and cost of goods sold. ACost of goods soldA shall include allbusiness expenses directl! incurred to produce the merchandise to bring them to their present location and use.

or a trading or merchandising concern, Acost of goodsA sold shall include the invoice cost of the goodssold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold, including

insurance while the goods are in transit.or a manufacturing concern, Acost of goods manufactured and soldA shall include all costs of production

of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurancepremiums and other costs incurred to bring the raw materials to the factor! or warehouse.

In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less salesreturns, allowances and discounts.

Tax rate of omestic Corporations 60L of taxable income from all sources within

and outside the hilippines, or

/L of gross income if $CIT applies, or 13L of gross income if the following conditionsare met:

1. tax effort ratio of /0L of 7@/. ratio of 0L of income tax collection to

total tax revenues6. Q'T tax effort of L of 7@; and

. .EL ratio of the Consolidated ublic *ectorinancial osition #C*& to 7@ #this last


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+amdg


one has !et to be implemented&

Option to be taxed based on gross income shall be available onl! to firms whose ratio of

cost of sales to gross sales or receipts from all sources does not exceed 33L

5lection of the gross income tax option b! the corporation shall be irrevocable for

6 consecutive taxable !ears

omestic corporations are sub>ect to an! or some of the following:

Capital gains tax inal tax on passive income

@ormal tax

$inimum corporate income tax #$CIT&

7ross income tax #7IT& Improperl! accumulated earnings tax #I'5T&

Gross Income Computation

7ross *ales

"ess: *ales %eturns

iscounts

'llowances

Co7* #all business expenses directl! incurred to produce the merchandise and bring

them to their present location or use&Total 7ross Income

CoG9 for a Tradin- or (erc6andise Concern

Invoice cost of goods sold

Import duties

reight in transporting the goods to the place where the goods are actuall! sold

Insurance while the goods are in transit

CoG9 for a (anufacturin- Concern

'll costs of production of finished goods such as raw materials, direct labor manufacturingoverhead

reight cost

Insurance premiums

Other costs incurred to bring the raw materials to the factor! or warehouse

Gross Income Computation for a 9ervice Concern

7ross *ales

"ess: *ales %eturns

iscounts

'llowances

Cost of *ervices #all direct costs expenses necessaril! incurred to provide the

services reBuired b! the customers clients including:

*alaries emplo!ee benefits of personnel, consultants specialists

directl! rendering the service

Cost of facilities directl! utilied in providing the service such asdepreciation or rental of eBuipment use cost of supplies

If it)s a ban, interest expense is included

Total 7ross income of a service concern

". Proprietar# Educational Institutions and $ospitals#9& roprietar! 5ducational Institutions and Jospitals. 8 roprietar! educational institutions and hospitals which arenonprofit shall pa! a tax of ten percent #10L& on their taxable income except those covered b! *ubsection #&hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent


1E


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#30L& of the total gross income derived b! such educational institutions or hospitals from all sources, the taxprescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. or purposes of this *ubsection,the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct of which is not substantiall! related to the exercise or performance b! such educational institution or hospital of itsprimar! purpose or function. ' Aroprietar! educational institutionA is an! private school maintained andadministered b! private individuals or groups with an issued permit to operate from the epartment of 5ducation,

Culture and *ports #5C*&, or the Commission on Jigher 5ducation #CJ5&, or the Technical 5ducation and *illsevelopment 'uthorit! #T5*'&, as the case ma! be, in accordance with existing laws and regulations.

roprietar! educational institution is:

o 'n! private school maintained administered b! private individuals or groups

o ith an issued permit to operate from the 5C* or CJ5 or T5*'

Tax rate of proprietar! educationalinstitutions and hospitals

10L on their taxable income #except for passiveincome&, or

60L on their entire taxable income if the grossincome from unrelated trade, business or other

activit! exceeds 30L of the total gross income of the institution

2nrelated trade, business or other activit! means

o 'n! trade, business or other activit!

o The conduct of which is not su%stantially related to the exercise or performance

b! such its institution of its primar! purpose or function.

or non8stoc, non8profit educational institutions, all revenues use actuall!, directl! and

exclusivel! for educational purposes are exempt.

o Their exemption refers onl! to revenues derived from assets used actuall!,

directl! and exclusivel! for educational purposes.

o Income from cafeterias, canteens boostores are also exempt if the! are

owned operated b! the educational institution and are located within the school

premises.o Jowever, the! shall be sub>ect to internal revenue taxes on income from trade,

business or other activit!, the conduct of which is not related to the exercise orperformance b! such educational institutions of their educational purposes or

functions, i. e. rental pa!ment from their building-premises. # 7@2''+* or non8stoc, non8profit corporations who are exempt, the! are still liable for taxes on:

o Income derived from an! of their real properties #rental pa!ment form their

building premises&

o 'n! activit! conducted from profit regardless of disposition thereof

o Interest income from an! ban deposits or !ield on deposit substitutes #final tax

of /0L&

o If its foreign currenc! deposit, final tax of D.3L #ep Order 1E8E3, 1EE3&

o The! shall also be withholding agents for their emplo!ee)s compensation income

sub>ect to withholding tax # 7@2''+*

or private educational institutions, the! are exempt from Q'T, but the! must be

accredited with either 5C* or CJ5.

o Jowever, income derived from trade, business or other activit! is still taxable.o Their ban deposits and foreign currenc! deposits are exempt from withholding

taxes but the! must show proof that such income is used to fund proposedpro>ects for their institution)s improvement.

o The! shall also be the withholding agents for their emplo!ee)s compensation

income sub>ect to withholding tax.

G. G&CCs9ec. 27 )C* Government-owned or +ontrolled-+orporations, A#encies or Instrumentalities. 8 The


/0


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+amdg


provisions of existing special or general laws to the contrar! notwithstanding, all corporations, agencies, orinstrumentalities owned or controlled b! the 7overnment, except the 7overnment *ervice Insurance *!stem#7*I*&, the *ocial *ecurit! *!stem #***&, the hilippine Jealth Insurance Corporation #JIC&, and the hilippineCharit! *weepstaes Office #C*O&, shall pa! such rate of tax upon their taxable income as are imposed b! this*ection upon corporations or associations engaged in s similar business, industr!, or activit!.

7OCCs are taxed on the same rate upon their taxable income upon corporations or

associations engaged in similar business, industr!, or activit!.

o 5xempt 7OCCs:

7*I* ***

JIC C*O

's per %' E66D, '7CO% was deleted from the list of exempt 7OCCs.

$. Passive Income9ec. 27 )D* 'ates of Tax on +ertain Passive Incomes. -

#1& "nterest from (eposits and ;ield or any other Monetary Benefit from (eposit Su%stitutes and from 4rust -unds

and Similar Arrangements, and Royalties. 8 ' final tax at the rate of twent! percent #/0L& is hereb! imposed uponthe amount of interest on currenc! ban deposit and !ield or an! other monetar! benefit from deposit substitutesand from trust funds and similar arrangements received b! domestic corporations, and ro!alties, derived from

sources within the hilippines: +rovided, however, That interest income derived b! a domestic corporation from adepositor! ban under the expanded foreign currenc! deposit s!stem shall be sub>ect to a final income tax at therate of seven and one8half percent #D 1-/L& of such interest income.#/& 6apital 7ains from the Sale of Shares of Stoc 0ot 4raded in the Stoc 9*change. 8 ' final tax at the ratesprescribed below shall be imposed on net capital gains realied during the taxable !ear from the sale, exchange orother disposition of shares of stoc in a domestic corporation except shares sold or disposed of through the stocexchange:@ot over 100,000KKKKKKKKK..... 3L'mount in excess of 100,000KKKKK.. 10L#6& 4a* on "ncome (erived under the 9*panded -oreign 6urrency (eposit System. - Income derived b! a

depositor! ban under the expanded foreign currenc! deposit s!stem from foreign currenc! transactions withnonresidents, offshore baning units in the hilippines, local commercial bans including branches of foreign bansthat ma! be authoried b! the 9ango *entral ng ilipinas #9*& to transact business with foreign currenc! deposit

s!stem shall be exempt from all taxes, except net income from such transactions as ma! be specified b! the*ecretar! of inance, upon recommendation b! the $onetar! 9oard to be sub>ect to the regular income taxpa!able b! bans: +rovided, however, That interest income from foreign currenc! loans granted b! such depositor!bans under said expanded s!stem to residents other than offshore baning units in the hilippines or otherdepositor! bans under the expanded s!stem shall be sub>ect to a final tax at the rate of ten percent #10L&.

'n! income of nonresidents, whether individuals or corporations, from transactions with depositor! bans underthe expanded s!stem shall be exempt from income tax

#& "ntercorporate (ividends. 8 ividends received b! a domestic corporation from another domestic corporationshall not be sub>ect to tax.

#3& 6apital 7ains Reali&ed from the Sale, 9*change or (isposition of 5ands and'or Buildings. 8 ' final tax of sixpercent #L& is hereb! imposed on the gain presumed to have been realied on the sale, exchange ordisposition of lands and-or buildings which are not actuall! used in the business of a corporation and

are treated as capital assets, based on the gross selling price of fair maret value as determined inaccordance with *ection #5& of this Code, whichever is higher, of such lands and-or buildings.

Tax ate on Passive Income of Domestic Corporations "inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem D.3L

/. %o!alt! of all t!pes within the hilippineso %o!alt! from abroad< 5nters the taxable income 60L tax rate

/0L

6. Interest on an! current ban deposit, !ield or other monetar! benefitsfrom deposit substitute, trust fund similar arrangement

/0L


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. ividend from domestic corporations #inter8corporate dividend& exempt

Tax ate on Capital Gains )same as individuals*

6. On sale of shares of stoc of a domestic corporation 034 listed and 034 traded thru a local stoc exchange held as

a capital asset ,o Capital gains not over 100,000





asset L of the gross sellingprice, or the current maret

value at the time of sale,whichever is higher

Tax ate of BA0/9 on Income Derived under t6e Expanded "CD9#stem

"inal Tax

1. Income derived b! a depositor! 9'@R from foreign currenc!

transactions with non8residents, O92s, etc

exempt

/. Interest income from foreign currenc! loans granted b! a ban to

residents other than O92s

10L

Income of non8residents #individuals or corporations& from transactions with depositor!

ban under the expanded C s!stem are exempt.

hat are deposit substitutes<#?& The term Adeposit substitutesA shall mean an alternative from of obtaining funds from the public #the termNpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& other thandeposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or theneeds of their agent or dealer. These instruments ma! include, but need not be limited to banersN acceptances,

promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and betweenthe 9ango *entral ng ilipinas #9*& and an! authoried agent ban, certificates of assignment or participation

and similar instruments with recourse: rovided, however, That debt instruments issued for interban call loanswith maturit! of not more than five #3& da!s to cover deficienc! in reserves against deposit liabilities, includingthose between or among bans and Buasi8bans, shall not be considered as deposit substitute debt instruments.

' deposit substitute is a means of borrowing mone! from the public #/0 or more

individual or corporate lenders& other than b! wa! of deposit with bans through theissuance of debt instruments.

*ale of shares

Tax ate on Income from 9ale> Barter> Exc6an-e orot6er Disposition of 96ares of 9toc? ) @2''!*

If shares of stoc are listed and traded through the local

stoc exchange

P of 1L #or .003L& of the

gross selling price or grossvalue in mone! of the

shares of stocIf shares not traded through the local stoc exchange





C2

Income of non8residents #individuals or corporations& from transactions with depositor!

ban under the expanded C s!stem are exempt.


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Intercorporate dividends

ividends received b! a domestic corporation from another domestic corporation shall

not be sub>ect to tax.o h!< "aw assumes that the dividends received will be in>ected to the capital,

which will eventuall! be taxed when the corporation gets income from the use of the capital.

*ale of realt!

"inal Tax ate on 9ales> Exc6an-es> or Transfers or ealProperties Classified as Capital Assets ) !%!*

*ale of real propert! in the hilippines L of the gross sellingprice, or the current

maret value at the timeof sale, whichever is

higher

If sale was made to the government or to 7OCCs 5ither L of the gross

selling price-currentmaret value or under

the normal income taxrate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es or

Transfers of eal Properties classified as &rdinar# Assets) !%!*

1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than 300,000

o *elling price is 300,000 to /m

o *elling price is above /m

1.3L

6L

3L of gross sellingprice-current maret

value, whichever is

higher

/. If the seller is not habituall! engaged in the real estatebusiness

D.3L of gross sellingprice-current maretvalue, whichever is

higher

6. If the seller is exempt from creditable withholding tax as per

%% /8EFExempt

If the mortgagor exercises his right of redemption within 1 !ear, no capital gains tax.

In case of non8redemption, the capital gains will be due based on the bid price of the

highest bidder. #%% 8EE&

I. (inimum Corporate Income Tax )(CIT*9ec 27 )E* *inimum +orporate Income Tax on Domestic +orporations . #1& "mposition of 4a*. 8 ' minimum corporate income tax of two percent #/L0 of the gross income as of the end of

the taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on thefourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations,

when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for thetaxable !ear.#/& 6arry -orward of 9*cess Minimum 4a* . 8 'n! excess of the minimum corporate income tax over the normalincome tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against thenormal income tax for the three #6& immediatel! succeeding taxable !ears.#6& Relief from the Minimum 6orporate "ncome 4a* :nder 6ertain 6onditions. 8 The *ecretar! of inance is hereb!

authoried to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losseson account of prolonged labor dispute, or because of force ma>eure, or because of legitimate business reverses.The *ecretar! of inance is hereb! authoried to promulgate, upon recommendation of the Commissioner, the


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necessar! rules and regulation that shall define the terms and conditions under which he ma! suspend theimposition of the minimum corporate income tax in a meritorious case.#& 7ross "ncome (efined. 8 or purposes of appl!ing the minimum corporate income tax provided under*ubsection #5& hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowancesand cost of goods sold. /6ost of goods sold


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#1& "n 7eneral . 8 5xcept as otherwise provided in this Code, a corporation organied, authoried, or existing underthe laws of an! foreign countr!, engaged in trade or business within the hilippines, shall be sub>ect to an incometax eBuivalent to thirt!8five percent #63L& of the taxable income derived in the preceding taxable !ear from allsources within the hilippines: +rovided, That effective Manuar! 1, 1EEF, the rate of income tax shall be thirt!8fourpercent #6L&; effective Manuar! 1, 1EEE, the rate shall be thirt!8three percent #66L&, and effective Manuar! 1,/000 and thereafter, the rate shall be thirt!8two percent #6/L&.

In the case of corporations adopting the fiscal8!ear accounting period, the taxable income shall be computedwithout regard to the specific date when sales, purchases and other transactions occur. Their income and expensesfor the fiscal !ear shall be deemed to have been earned and spent eBuall! for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed b! multipl!ing the number of months covered b! the new rates within the fiscal !ear b! the taxable income of the corporation for the period,divided b! twelve.

+rovided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent#13L& on gross income under the same conditions, as provided in *ection /D #'&.

#/& Minimum 6orporate "ncome 4a* on Resident -oreign 6orporations. 8 ' minimum corporate income tax of twopercent #/L& of gross income, as prescribed under *ection /D #5& of this Code, shall be imposed, under the sameconditions, on a resident foreign corporation taxable under paragraph #1& of this *ubsection.

' foreign corporation is one which is not domestic #ie organied-incorporated here&. Itma! be a resident or non8resident corporation.

' resident corporation is a foreign corporation engaged in business in the hilippines.

o ' foreign corporation can engage in business in the hilippines onl! after it had

registered with, and had been allowed b!, the regulator! agencies of thehilippine government to engage in business in the hilippines.

Tax rate of "orei-n esident

Corporations

60L of taxable income from all sources within the

hilippines, or /L of gross income if $CIT applies, or

13L of gross income #again, the 7"4 has yet to%e implemented2

Tax ate on Passive Income of "orei-n esident Corporations "inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem D.3L

/. %o!alt! of all t!pes within the hilippines

o %o!alt! from abroad< Exempt. #remember, onl! taxed from

sources within the hilippines&

/0L

6. Interest on an! current ban deposit, !ield or other monetar! benefits

from deposit substitute, trust fund similar arrangement

/0L

. ividend from domestic corporations #inter8corporate dividend& exempt

Tax ate on Capital Gains

. On sale of shares of stoc of a domestic corporation 034


a capital asset ,





/. On sale of real propert! in the hilippines 0o provision for capital

gains for sale of realty. Atty. Montero says that you

apply it to the normal


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corporate ta* of >?@

International Carrier*ec /F #'&

#6& "nternational 6arrier . 8 'n international carrier doing business in the hilippines shall pa! a tax of two and one8half percent #/ 1-/L& on its /7ross +hilippine Billings/ as defined hereunder:#a& "nternational Air 6arrier. 8 /7ross +hilippine Billings/ refers to the amount of gross revenue derived from

carriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous anduninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the ticet or passagedocument: +rovided, That ticets revalidated, exchanged and-or indorsed to another international airline form part

of the 7ross hilippine 9illings if the passenger boards a plane in a port or point in the hilippines: +rovided,further , That for a flight which originates from the hilippines, but transshipment of passenger taes place at an!port outside the hilippines on another airline, onl! the aliBuot portion of the cost of the ticet corresponding to theleg flown from the hilippines to the point of transshipment shall form part of 7ross hilippine 9illings.#b& "nternational Shipping. 8 /7ross +hilippine Billings/ means gross revenue whether for passenger, cargo or mailoriginating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passageor freight documents.

Tax rate for international carriers is /.3L of 7ross hilippine 9illings

7ross hilippine 9illings refers to

o 7ross revenue derived from carriage of persons, excess baggage, cargo and mail

o 3riginating from the +hilippines in a continuous and uninterrupted flighto "rrespective of the place of sale or issue and the place of pa!ment of the ticet or

passage document

In CI% v 9O'C, 9ritish Overseas 'irwa!s did not have an! landing rights here nor did

the! have license to operate here. The! also did not carr! passengers or cargo to or

from the hilippines. The! did, however, have a general sales agent which sold 9O'Cticets. The! were taxed for the sale of the ticets #because of the situs of taxation

principle&, even if the service to be rendered was outside the hilippines. The! weren)tliable for carrier)s tax though.

o oing business has no specific criterion. 's long as there was a continuit! of

conduct and intention to establish a continuous business and not one of a

temporar! character, then !ou are doing business in the hilippines. #%emember!our corp=&

'n offline airline which has a branch-agent in the hilippines and sells passage

documents to cover offline flights of its principal or other airlines in considered engaged

in business as an international air carrier in the countr! and is @OT sub>ect to the 79nor to the 6L common carrier)s tax.

If the airline has flights which originate from an! point in the hilippines, it is sub>ect to

the /.3L 79 tax unless it is sub>ect to a different tax rate under a tax treat! to which

the hilippines is a signator!.

In a nutshell, if an international air carrier maintains flights to and from the hilippines,

it shall be taxed at the rate of /.3L 79 while international air carriers that do not have

flights to and from the hilippines but nonetheless earn income from other activities in

the countr! will be taxed at the rate of 6/L of such income. #*outh 'frican 'irwa!s, eb1, /010&

hat is included in computing the 79<o 7ross revenue from passage of persons #actual amount as reflected in the tax

coupon part of the plane ticet&

o 5xcess baggage

o Cargo and mail originating from the hilippines in a continuous and uninterrupted

flight

To compute the 79: #monthl! average net fare of all the tax coupons of plane ticets

per point of final destination, per class of passage, per classification of passenger&


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$2"TI"I5 b! the #total number of passengers flown for the month as declared in theflight manifest&

In case of passengers) flights from an! point in the hilippines and bac, that portion of

revenue pertaining to the return trip to the hilippines is @OT included as part of the

79. # 182''2*

Offshore 9aning 2nits#& 3ffshore Baning :nits. 8 The provisions of an! law to the contrar! notwithstanding, income derived b!offshore baning units authoried b! the 9ango *entral ng ilipinas #9*& to transact business with offshorebaning units, including an! interest income derived from foreign currenc! loans granted to residents, shall be

sub>ect to a final income tax at the rate of ten percent #10L& of such income.'n! income of nonresidents, whether individuals or corporations, from transactions with said offshore baning unitsshall be exempt from income tax.

Tax rate of offshore baning units authoried b! the 9* #including an! interest income

foreign currenc! loans granted to residents& is 10L final tax.

Income of nonresidents from transactions with O92s shall be exempt from income tax.

'n offshore baning unit is a branch of a foreign ban whish is authoried b! the 9* to

transact offshore baning business in the hilippines.

' foreign currenc! deposit unit is a department of a local ban or an inexisting local

branch of a foreign ban which is authoried b! the 9* to operated under the expandedforeign currenc! deposit s!stem.

7ross onshore income covers all income arising from transactions allowed b! the 9*

conducted b! and between an offshore ban with another offshore ban or with an C2or with a non8resident. # 1'7@*

The following are included in computing the gross onshore income of O92s and C2s<

o 7ross interest income arising from foreign currenc! loans and advances and

investments with residents

o ees, commissions and other charges which are integral parts of the income from

foreign currenc! loan transactions are 55$T. The! are not to be included in

computing the final tax. # 177*o

Tax ate on Interest Income from "orei-n Currenc# Deposit ) 1'%!*

1. Interest income actuall! received b! a resident citien or resident alienfrom C

D.3L finalwithholding tax

/. If it was deposited b! an OC or seaman or nonresident citien 5xempt

6. If it was in a ban account in the >oint names of an OC and his

spouse #who is a resident&

30L exempt-

30L finalwithholding tax

of D.3L

. Interest income actuall! received b! a domestic corporation or

resident foreign

Tax1 Updated

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