REVIEWER TAX

FINALS

March 11, 2016

What is DIVIDEND Income?

Definition: Dividend income are earnings derived from the profits of the corporation
to be distributed to the stockholders. This pertains to dividends declared by foreign
corporations.
It should be recalled that dividends declared by domestic corporations are generally
subject to 10% final tax if the recipient is an individual tax payer and exempt if the
recipient is a domestic or a resident foreign corporation. Cash, property and script
dividends from foreign corporations are items of gross income subject to regular
income. (Banggawan)
It is an income received either by individuals or corporation representing return of
capital or investment. The same may either be taxable or exempt either in the form
of cash or property. The nationality of the taxpayer, the source of income whether
form sources within or without bears important determining the tax consequence of
the dividence.
Any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or property.
1. Example: Php 5.00 Declared 5 pesos / share (Came from Unrestricted
retained earnings of a corporation, only Unreserved)
A- Stockholder who has 1,000 shares / common stocks meron tayong preferred
at common share. If preferred Mas mauunang magreceive ng share tong
mga to kesa sa mga Common.
Meaning 1,000 shares x 5 / shares = 5000 dividend income of A.
Retained Earnings Naiwan na profit ng Corporation while Unrestricted Retained
Earnings Yung mga corporation pwede niyang itabi for future expansion /
investment or eto yung mga FREE portion of the Retained earnings eto yung
pwedeng idistribute sa shareholders.
2. Example:
On 2015, may naiwan na RE Php1,000,000 nagissue ng 100,000 shares yung
Php 1,000,000 ay madidistribute sa may 100,000 shares.
Ang dividend income ay: PHP1,000,000 / Php 100,000 = 10 Pesos / Share
Reckoning Period: Upon the declaration kahit may declaration for the
year 2015 pero babayarin nya yung mga shareholders for the following year (2016),
kelan niya idedeclare yung dividend income? 2015.
Forms of Dividend Income: Cash, Property and Stock dividends
TAXATION
PURPOSES
Cash Bibigay ng company for each shareholder
TAXABLE
Property Investment sa ibang company called Property Dividend
TAXABLE

FOR

Stock Own shares to be distributed Stock Dividend

TAXABLE

NOT

Upon dissolution ng Corporation, all assets ay ipupunin ng Company at ididistribute

yan. Then it is called Liquidating Dividend. Liquidating Dividend are not considered
income because it is only a mere return of investment / capital.
CASH and PROPERTY Mababawasan asset ng company kaya deemed as Income
of the income earner. Kung Cash yan na 1,000,000 nailabas mo sa corporation,
nabawasan ang Corporation ng Php 1,000,000. Same through kapag Property.
STOCK DIVDEND Yung inissue mong common shares ay common shares din ng
company naiwan rin lang within the company yung retained earnings. However
kapag Stocks naman ang naissue sayo within that company parin naiiwan ang
retained earnings.
1. First Treatment of Dividend Income :
Three Kinds of Taxability of Dividend Income:
a. Interest Income without Exempt,
b. subject to Final or
c. Subject to Normal Tax.
Subject to Normal Received in the Ordinary Course of Trade
I.
Tax Exempt
a. Inter corporate dividends (Section 27 (D) 4 )
Intercorporate Dividends Received by a domestic corporation from
another domestic corporation shall NOT be subject to tax.
Example: Jollibee Food Corporation issued dividend income to San Miguel
Corporation (NOT SUBJECT to Tax)

b. Resident Foreign Corporation from Domestic Corporation

(Section 28(A) (7) (d)

Intercorporate Dividends Dividends received by a RESIDENT FOREIGN

CORPORATION from a DOMESTIC CORPORATION liable to tax under this
Code shall NOT be subject to tax under this title.

c. Pure Liquidating Dividend in cases of Dissolution of a

Corporation. Section 73(A)
Reason why not Taxable: Mere Return of Stockholders Investment. It
arises from the distribution of assets by a Corporation to its
stockholders upon dissolution.
d. Dividends received from a Cooperative R.A 6938
-

Any Interest earned by the Cooperative on the Loan of its

Members are Exempt from the Tax. (EXEMPTED)
Dividends declared for the members of the Cooperatives
(EXEMPTED)
Exempted on the Interest income and Dividend Income

e. STOCK Dividends
General Rule: Not Taxable

Reason: There is no flow of wealth so no realized gain. It is just

transfer of Surplus account to the capital account.
Exceptions:
a. Change in the Stockholders Interest in the net equity of the
Corporation.
Changes on the three things:
a. Net Income or Losses, b. Payment of Dividends, and c. Share
issuance or repurchase.
Examples: Stock Holder A owns 1,000shares 10% of the total
shares
Upon declaration of the Dividend Income diba nadagdagan ng
100 shares. Pero lahat ng shareholders nadagdagan din ng same
amount so magbabago yung interest nya sa company? NO. The
same 10%
The exception dito change of interest, instead of 10% due to the
dividend income naging owner na siya ng 15% ng corporation
ibig sabihin merong income. Kaya siya exempted. Kasi may
income dapat 10% lang siya, upon declaration may 15% may
income on the part of the stockholder meaning may additional
profit. TAXABLE
NOTE: Always take note kung may additional profit on the part
of the taxpayer, kung may additional profit or income then
TAXABLE sya except provided by law, special law, rules or under
NIRC.

b. When it is received by a usufructuary (Skipped)

Stock dividends cannot be issued to a person who is not a
stockholder in payment for services rendered. Stock dividends
can be issued only to stockholders and not to strangers or nonstockholders
c. Board of Directors declared dividend not in accordance
with the Corporation Code of the Philippines.
d. Redemption or cancellation of the Stock dividend
distributed. Reason: Resorting to devious means to
circumvent the law and evade the tax.
e. Disguised dividends
II.

FINAL TAX FROM DOMESTIC CORPORATION

10 % - RESIDENT CORPORATION, NON RESIDENT CORPORATION,
RESIDENT ALIEN
15 % - NON RESIDENT FOREIGN CORPORATION (W/ RECIPROCITY)
20 % - NON RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
25 % - NON RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS
30 % - NON RESIDENT FOREIGN CORPORATION W/O RECIPROCITY

NOTE:
DIVIDENDS RECEIVED BY A RESIDENT FOREIGN CORPORATION FROM
DOMESTIC CORPORATION EXEMPT
DIVIDENDS RECEIVED BY A DOMESTIC CORPORATION FROM A FOREIGN
CORPORATION ARE SUBJECT TO CORPORATE TAX

Under Reciprocity: When one country gives country to other person

which are foreign country, the other country must also give same
exemption
Example case of Pacquiao : Pacquiao earn income from boxing and
under US law he is subject to an income tax.
Resident Citizen All income derived within and without the
Philippines.
300,000 TAX DUE. May binayaran na siya sa US. Pwede niya ng iclaim
as Tax Credit. For example binayaran mo 50,000. Ang babayaran niya
nalang is 250,000.
Such is subject to reciprocity rule, under the US Law kung may na earn
ang citizen nila dito kung makakaclaim ng credit dito sa ating bansa ay
makakaclaim din ang Pinoy sa ibang bansa.
III.

NORMAL TAX
1. From Resident Foreign Corporation or Non Resident Foreign
Corporation (PHIL. INCOME AT LEAST 50% OF WORLD INCOME)
2. RECEIVED BY PARTNERS IN GPP
GPP v. GPT
General Professional Partnership v. General Partnership engaged
in Trade.
GPT Treated as Corporation subject to a Normal tax of 30%
GPP Practice of Profession not considered as Corporation which
is Taxable Magbabayad parin in the form yung mismong
partners ay magdedeclared ng income nila as income so kung
ano ang dinistribute ng GPP. It is called Dividend Income.
For example: 100,000 naiwan to be distributed to A and B tig
50,000. Kung may common fund ay ipapasok mo lahat items
subject to normal tax and add it to get total taxable income.
Kung si A nakatanggap ng 50,000 ilalagay niya sa Common fund
subject to Normal Tax Rate (5% TO 32%)

ANNUITIES: (Section 32 A(8) Installments payments received

for life insurance sold by insurance company.
-The excess of Annuity payments received by the recipient over
premium paid is taxable income in the year of receipt.
General Rule: Taxable if it represents mere Interest.
However if the annuity represents only a mere return of Capital or
Premium it is non-taxable AMOUNT and NOT INCOME.
Example : Andrew purchased an annuity contract for P100,000 which shall
pay him P10,000 annually until he dies.
The receipt of the first 10 annuity payments is a return of Capital . 10,000x10
= P100,000 (Mere return of Investment) . Any further receipt from year 11
and onward is an item of gross income subject to regular income tax.

PRIZES and WINNINGS: Section 32A(9)

Prizes: A reward for a contest or a competition. In other words, a prize
is a remuneration of an effort reflecting ones superiority, like prize
money of a boxing contest. Prizes and Winnings that are exempted
from final tax are not items of gross income subject to regular income
tax.
GR : Taxability of Prizes: More than Php10,000 Subject to
Final Tax 20%
*If a person gets Php 15,000, the whole 15,000 shall be subject to 20%
EXCEPTIONS : 32 (B) (7) (C)
PRIZES AND AWARDS MADE PRIMARILY IN RECOGNITION
OF RELIGIOUS, CHARITABLE, SCIENTIFIC, EDUCATIONAL,
ARTISTIC, LITERARY, OR CIVIL ACHIEVEMENT BUT ONLY IF :
(i)

The recipient was selected without any action on

his part to enter the contest or proceeding; and (Ex.
Outstanding women league )

(ii)

The recipient is not required to render substantial

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

d. All prizes and awards granted to athletes in local and

international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned
by their sports associations.

Less than Php 10,000 Subject to Normal

Tax shall be included on Common Fund.
Winnings: A reward for an event that depends by chance.
For example: Winnings from Gamblings, Lottery, or Raffle Ticket.
WINNINGS:
GR: Winnings regardless of Any amount are subject to Final Tax of
20%
Exceptions: Lotto and PCSO
If deal or no deal it is subject to Final Tax of 20% because only
ILLUSTRATION:
Regine Velasquez
won the following prizes / winnings during the year:
Lotto and PCSO
are exempted.
FIRST PRIZE Singing Contest
P 10,000
Resident
Citizen
won
outside
the
Philippines
Subject
FIRST PRIZE Philippine Charity Sweepstakes Winning P1,
000, 000 to Normal
Tax.
Section
(B) Ticket
(1) Winnings
THIRD
PRIZE: 24
: Raffle
P 5, 000
Which of the prizes is subject to normal tax, final tax and tax exempt?
Answer: The prize from singing contest being earned in a contest and within threshold
amount of Php 10,000 and below is subject to Normal Tax (Section 24 (A), NIRC).
The winning on raffle ticket being earned by chance is subject to final tax of 20% even if
the amount is less than P10,000 and
the winning from the Philippine Charity Sweepstake is tax exempt.

PENSIONS
This pertains to pensions and retirement benefits that fail to meet
the exclusion criteria and hence subject to regular tax.

OTHER SOURCES OF INCOME (March 12,

2016)
1. BAD DEBTS Definition: A portion of account receivable of a company which is
already unrecoverable or worthless.
Requisites for Recovery of Bad Debts:
CUBAN
C- Charged of or written of against the books of the tax payer
U The amount written off must be uncollectible in the near future, no slim chance of
recovery collecting such an amount.
B- It must arise from business trade / profession
A- Ascertain to be worthless
N- Not arising from transactions between related taxpayers.

ILLUSTRATION:
Example: Nestle Philippines as the seller we have Tax Payer A a sari sari
store owner as the Buyer.
Nestle Philippines Seller
Store Owner A Buyer

(TAXPAYER A) Sari-Sari

SCENARIO: Nestle nagbenta siya ng grocery kay A worth Php100,000 upon the
selling of the Goods, the seller must declare the goods as the Sale which is subject
to Tax. However, these goods were sold on CREDIT, under the books of the Seller,
irerecognize niya as account receivable or PAUTANG or Collectible the amount
of 100,000 from A assuming it is done on 2012.
On 2013, hindi niya na malocate si A. Now anong mangyayari sa Pautang? It is
deemed paid off on the part of the Seller since hindi niya na makolekta on the year
2012 which is subjected to the corporate tax. As a claim for deduction the amount
of 100k shall be recognized as BAD DEBTS. Kung merong masamang utang ang
isang buyer ang gagawin ng seller is to 1.) Charged off or written off against the
books of the Tax Payer which is tatanggalin niya na yung utang ni Buyer.
For the year 2013, Nestle reported sales of Php50,000 from the other buyer , sabi
natin pwede siyang mag claim ng worthless account na Php 100,000. In effect yung
taxable income niya naging wala na kasi dun sa worthless account.

If hindi niya clinaim yung recovery sa Bad debts magbabayad sana siya ng
50,000 subject to 30% (Corporate Tax) . Yung clinaim niya yung Bad Debts
natanggal na yung babayaran mo.
Pano naman siya nagiging income? Nag abroad kasi. Upon recovery of
the bad debts, theres a deemed income on the part of tax payer. However may
condition yun , up to the extent of the tax benefit or principle of tax benefit or
Recapture Rule.

Meaning of UP TO THE EXTENT OF THE TAX BENEFIT

On the year 2016, si Nestle nag report ng income amounting to Php 100,000 and
then narecover niya yung na write off niya or charged off dati na utang ni Buyer
kaya idadag niya as an ITEM OF GROSS INCOME so iadd niya as item of gross
income yung bad debts recovered amounting to 100k . Doon na papasok yung tax
benefit rule. Magkano ba yung nabenefit ng tax payer dito? Only the amount of 50k
kasi eto lang yung inabsorb niya. Etong 50k lang ang inabsorb niya nag karoon ng
benefit ng tax payer. Kaya ang iclaclaim niya dito ay only 50k
. At the year of the claim of Bad Debts, magkano dapat ang due mo? 15k sana.
50,000 x 30% (Corporate Tax) = 15,000. Pero mag kano sana yung actually na
binayaran mo = 0. Kasi recovery of bad debts. Magkano yung benefit mo
15,000/tax rate. Yun lang yung extent na pwede mong iclaim.

2012
NESTLE
PHILIPPINES
(SELLER) sold
Php 100,000
grocery to A-

Hindi na malocate si Tax Payer A

Hindi niya na macocollecta yung utang ni A
kasi nga nag abroad siya ma write off na
ito at considered as BAD DEBTS.

2013
Php50,000 na collect
niya from other sales.
Dahil may 100k siyang
Bad Debts, ang
magiging TAX DUE
niya ay 0.

2016
Narecover niya yung 100,000 na
bad debts niya or yung utang na
100k from 2012. Ngayon iadd
mo yung Tax Benefit mo nuong
2013 na 15,000. (50,000 x 30% =
15,000 benefited.
SO ANG GROSS INCOME MO AY

PRINCIPLE OF TAX BENEFIT RULE KNOWN AS RECAPTURE RULE

- States that : If a tax payer deducted an item on his income tax return and enjoyed
a tax benefit and in the subsequent year recovers all or part of that item, he will
recognize gross income in the year the deducted item is recovered.
2. TAX REFUND / CREDIT
GR : Refunds from taxes are Taxable

EXCEPTION: Refunds of taxes paid in estate or donors tax, Philippine Income

Tax, Stock Transaction Tax and VAT
- It shall be included as part of gross in the year of receipt to the extent of the
income tax benefit of said deduction.
3. OTHER SOURCES: ILLEGALLY OBTAINED INCOME ALL INCOME
FROM WHATEVER SOURCES (LEGAL OR ILLEGAL). EX. Gambling,
Kidnapping.

EXCLUSIONS FROM GROSS INCOME

Section 32 (b) Exclusions from Gross Income The following items shall not be included in
gross income and shall be exempt from taxation under this Code.

EXCLUSIONS FROM GROSS INCOME Refer to a flow of wealth to the taxpayer which are
not treated as part of gross income due to the following reasons:
FROM
GROSS INCOME
Refer to a flow of wealth to the taxpayer which
a.EXCLUSIONS
It is exempted by
the Fundamental
Law (Constitution);
are not treated as part of gross income due to the following reasons:
b. It is exempted by the Statute;
a. It is exempted by the Fundamental Law (Constitution);
c. It does not come within the definition of the income.
b. It is exempted by the Statute;
c. It does not come within the definition of the income.
While Deductions from gross income are those amounts w/c the law allows to be deducted from

1. Life Insurance The proceeds of life insurance. It is a contract of Indemnity. Interest

payments shall be included in the Gross Income. Indemnifying the life insured, it is considered
as Gross Income.
GR : Proceeds from the Life Insurance is Included in the Determination of Gross Estate.
EXCLUDED: If the designation of the beneficiary is IRREVOCABLE and if represents
proceeds from Group Insurance Policy.
Example: Ikaw yung heir, namatay yung tatay nila and then yung anak nakatanggap ng proceeds
from the life insurance ng father. Yung heir additional income ba on his part? It is a contract of
indemnity because iniindemnify yung life ng tatay.
It shall not included as the Gross Income Section (32)(B)(1) but however it shall form part
as Gross Estate Section 85(E) of the deceased person. Kung ang beneficiary mo ay Revocable,
pwedeng mapalitan, however kapag namatay na hindi na pwedeng palitan. Ang mangyayari is
macocollate na sya sa estate ng decedent. ALWAYS EXCLUDED IN THE IRRESPECTIVE
OF THE BENEFICIARY DESIGNATED IN THE POLICY

INSURANCE PREMIUMS PAID BY THE EMPLOYER

INSURANCE PREMIUMS PAID BY THE EMPLOYER

IF THE BENEFICIARY DESIGNATED:
1. Family, Executor or
Administrator or Heirs

EMPLOYEE can claim as

COMPENSATION INCOME
IF : The employee is RANK
AND FILE.
If the employee is a
manager or supervisor
such insurance paid by
the employe will be

EMPLOYER CAN CLAIM AS

AN EXPENSE

2. Amount Received by Insured as Return of Premium The amount received by the insured
as a return of Premiums paid by him under life insurance, endowment or annuity of contracts,
either during the term or at the maturity of the term mentioned in the contract or upon surrender
of the contract. Dito papasok yung return of Capital / return of premium paid
REASON: It is just a mere return of Capital.
EXAMPLE
In life insurance, endowment or annuity payments, either during or at the
maturity of the contract
Annuity payment represents
INTEREST

Annuity payment represents RETURN OF

PREMIUM
NOT TAXABLE

TAXABLE

CASH SURRENDER VALUE OF THE POLICY

-

NOT TAXABLE

But , if the amount received exceeds the aggregate premiums paid, the excess
shall be included in the Gross Income and is taxable.

3. Gifts, Bequests and Devises The value of property acquired by gift , bequest, devise or
descent : Provided, however, That income from such property as well as gift , bequest, devise or
descent of income from any property in cases of transfers of divided interest, shall be included in
gross income.
DONOR
DONATION
INTERVIVOS

DONATION
MORTIS CAUSA

DONEE

LIABLE FOR DONORS TAX

NEITHER SUBJECT TO
DONORS TAX NOR INCOME
TAX

LIABLE FOR ESTATE TAX

NEITHER SUBJECT TO
DONORS TAX NOR INCONME
TAX OR ESTATE TAX

Reason : It is NOT a product of capital or industry. They are gratuitously given and they are
already subject to Donors tax in case Donation Intervivos / Estate in case of Donation Mortis
Causa where in both instance the Donee neither subject to Donors Tax nor Income Tax nor
Estate Tax. Thats the reason why Gifts, Bequests and Devises are excluded from Gross Income.
- It is not a product of a Capital or services rendered, wala kang pinuhanan dito, binigyan ka ng
Gift na merong value. That value does not form part of the Gross Income. However, when the
property donated earns income, that income shall form part of the Gross income subject to tax.
4. Compensation for Inuries or Sickness Amounts received, through accident or health
insurance or under workmens compensation acts, as a compensation for personal injuries or

sickness, plus the amounts of any damages received, whether by suit or agreement, on account of
such injuries or sickness. Compensation for persons sickness or injuries, when yung inaward is
compensation for personal injuries then it is not subject to tax. But when the award was the loss
of income earned because of incapacity, the award for that loss shall be subject to tax.
Reason: It is Compensatory, NOT GAIN / PROFIT. It adds nothing to the individual.
SUMMARY:
SUMMARY:
MORAL DAMAGES NOT TAXABLE
EXEMPLARY DAMAGES NOT TAXABLE / EXEMPT
Damages for Loss of Earnings / Income - TAXABLE

5. Income exempt under Treaty Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines. (SECTION 32 (B) (5)
REASON: Adherence to the Generally Accepted Principle.
6. Retirement, Benefits, Pensions, Gratuities - Under R.A. 7641
-Separation benefits due to death , sickness or other physical disability or any causes beyond the
control of the said official or employee.
Conditions: at least 10 years service, at least 50 years of age at the time of retirement.
Under R.A 7651: retirement benefit of the employee who is retiring at 60 65 years old, and has
rendered service for at least 5 years.
MISCELLANEOUS ITEMS (G)
G. Gains from the sale of Bonds, Debentures or other certificate of Indebtedness gains from
realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years. Kapag binili mo yung bonds na yun,
to earn an income kelangan mong ibenta yun . Yung certificate of Indebtedness kailangan mong
ibenta yun, it is not important kung gano mo katagal nahawakan yung bond nay un as long as
it has a maturity of five years then it is exempted to five (5) years.
H. Gains from Redemption of Shares in Mutual Fund Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22(BB) of this
code.
22- BB The term mutual fund company shall mean an open end and close end investment
company as defined under Investment Company Act.
I. (Additional from Maam Ngoslab) Income received by Minimum Wage earners (RA 9504)

CORPORATE INCOME TAX

KINDS OF CORPORATIONS:
1. Domestic Section 27.
Note: Under Royalties (SECTION 27(D) on Passive Income Rate 20% :

Except : Literary Works, Books and Musical (10%) however under Corporation hindi
dinistinguished yung LBM it is therefore understood na lahat ng Royalties Acquired by
domestic are tax at 20%.
2. Foreign Resident Foreign Corporation and Non Resident Foreign Corporation
3. Partnership . General partnership engaged in trade and
General Professional Partnership( not considered as Corporation)
Co-Ownership are not considered as Corporation however they are considered as Corporation
when the Co-Ownership becomes an Unregistered Corporation.
Co-Ownership per se refers to the ownership of the property by two or more individuals. NOT
INCOME GENERATING.
UNREGISTERED PARTNERSHIPS: TAXABLE if the following requisites are present : 1.There must be an agreement, oral or in writing, to contribute money , property or industry to a
common fund;
2. There is an intention to divide the profits.
A and B co-ownership GR : It is not Corporation which is taxable however when the COOWNED PROPERTY is already: 1. income generating and 2. No proper registration as
partnership between A and B so that it will become unregistered partnership. Hindi enough
na income generating lang pero walang intention yung co-owners to registers it as partnership
Therefore: The Co-Ownership shall be taxable if it is Converted to Unregistered Parnetship.
-If the properties and income are used as common fund with intention to produce profits after the
co-ownership partitioned, the shares of the heirs are held under a single management for profit
making.
4. Other kinds of Corporation under Section 22 (B) The term corporation shall include
partnerships (GPT) , no matter how created or organized, joint-stock companies, joint accounts,
associations or insurance companies but does not include general professional partnership and a
joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with Government.
General Professional partnerships are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in
any trade or business.
5. GOCCs (Section 27)(C) The provisions of existing special or general laws to the contrary
notwithstanding, all corporations, agencies or instrumentalities owned or controlled by the
Government except GSIS, SSS, Phil health Insurance Corporation, the local water districts,
LWDs and Philippine Charity Sweepstakes Office shall pay such rate tax upon their taxable
income as are imposed by this Section upon Corporations or Associations engaged in A similar
business, industry or activity which INCLUDES UNDER SPECIAL LAW PAGIBIG
GR: Taxable
EXCEPT: GSIS, SSS, PhilHealth, PCSO, Local Water District, Pagibig (Special Law)
PAGCOR Under RA 9337, PAGCOR was deleted as GOCC and subject to Income tax and
subject to Franchise tax of 5% of its Gross Earnings.
6. EXEMPT on Tax Corporation UNDER SECTION 30 from A K (not for profit)

However the last paragraph states The income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal or from any of their activities
conducted for profit regardless of the disposition made of such income shall be subject to tax
imposed under this Code.
Example : Education institution pinaparent nila yung real property nila. Any income derived
from that property shall be subject to tax.
NOTE : Even though they are included as Exempted Under Section 30, they are not
automatic because the Corporation or Entities requires confirmatory ruling issued by the
BIR stating they are exempted from the Income Tax.

TAX LIABILITY
1.

Domestic Corporation are taxed Within and Without the Philippines

subject to the rate of 30% , rate on their taxable income or net income.(Section 27)
Note: Under Royalties (SECTION 27(D) on Passive Income Rate 20% : Except :
Literary Works, Books and Musical (10%) however under Corporation hindi
dinistinguished yung LBM it is therefore understood na lahat ng Royalties Acquired by
domestic are tax at 20%.

SPECIAL KINDS OF DOMESTIC CORPORATIONS:

1. Proprietary Educational Institutions

SECTION 27 (B)

2. Non Profit Hospitals

They are taxed at 10% on their taxable income except those covered by Subsection (D)
hereof. They are considered as Special because they are enjoying the Preferential rate of
10% instead of the General Rate of 30%.
Kung may binigay na educational institution huwag agad sasagot kasi Under Section 30,
nakalagay na NONSTOCK & NON-PROFIT INSTITUTIONS EDUCATIONAL
INSTITUTION AND GOVERNMENT EDUCATIONAL INSTITUTION where they are
exempted from the TAX however if it is Proprietary (Can be owned by Individual or by the
Corporation) tax rate is 10%.
SECTION 27 (B) Provided Provided that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by
such educational institutions or hospitals from all sources, the tax prescribed in Subsections
A hereof shall be imposed on the entire taxable income.
MEANING: If the Proprietary Educational Institutions or Non Profit Hospital has
unrelated trade, we need to determine the gross income from the UNRELATED TRADE.
EXAMPLE:
PROPRIETARY EDUCATIONAL INSTITUTION
Source of Income: Tuition Fees
Unrelated Trade of: a. Operation of Canteen

80 %
20 %

b. Bookstore
c. Related Space
________________________________________
GROSS INCOME: 100 %gross income subject to 10% TAX

THE UNRELATED TRADE DOES NOT EXCEED 50 % SHALL BE SUBJECT TO 10% TAXABLE of
THEIRINCOME

Source of Income: Tuition Fees

40 %

Unrelated Trade of: a. Operation of Canteen

60 %

b. Bookstore
c. Related Space
________________________________________
GROSS INCOME :

100% subject to 30% TAX

THE UNRELATED TRADE DOES EXCEED 50% SUBJECT TO 30% OF THEIR

TAXABLE INCOME. YUNG PREFERENTIAL DOMESTIC CORPORATION or the
PROPPRIETARY EDUCATIONAL INSTUTION ay naconvert na sa GENERAL
DOMESTIC CORPORATION.
RATIONALE: Para hindi privilege on the part of Hospital or Educational Institution
having a lower rate of Tax they must also charge lower the tuition fees or hospital expenses.

2. RESIDENT FOREIGN CORPORATION

Taxable on sources within the Philippines at the rate of 30% based taxable
income/net income. (Section 28 (A)).
Tax Liability: 30% of their Net Income / Taxable Income
General Rule: A corporation organized, authorized or existing under the laws
of any foreign country, engaged in trade or business within the Philippines
(Definition)
Beginning January 01, 2009- The taxable rate of Resident Foreign
Corporation (RFC) shall be 30% based on taxable income.
Special Resident Foreign Corporation Includes (Section28 (A) (3) (4) (5) (6))
Special Resident Foreign Corporation (SRFC) It is called Special Resident
Foreign Corporation because they are taxed at a different rate than the normal

tax rate of 30%. The different kind of SRFC are as follows: (NO NEED TO
REVIEW just a quick reference to SRFC and these are not discussed
during the lectures)
a. International Carrier 2 % Tax on its Gross Philippine Billings.
b. Offshore Banking Units 10% Final Tax Rate
c. Tax on Branch Profits Remittances 15% which is based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof.
d. Regional or Area Headquarters and Regional Operating HeadQuarters of Multinational
Companies
-Under Section 22 (DD) Those Established in the Philippines by multinational
companies and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and the like are exempted from the Tax.
-Under Section 22(EE) Engaged in general administration and planning, business
planning and coordination, sourcing and procurement of raw materials and components,
corporate finance, marketing control and sales promotion subject to 10%- Taxable on
their Taxable income of 10%

3. NON RESIDENT FOREIGN CORPORATION

-Taxed on all sources derived from WITHIN the Philippines.
Tax Liability: 30% based on their Gross Income
4. SPECIAL NON-RESIDENT FOREIGN CORPORATION (SEC.
28(B)
a. Nonresident Cinematographic Film Owner Lessor Owner or Distributor
25% of its gross income from all sources within the Philippines
b. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals
4 % of gross rentals, lease or charter fees from leases or charters to
Filipino Citizens or Corporations APPROVED BY MARITIME INDUSTRY
AUTHORITY.
c. Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipments 7 % of gross rentals or fees
______________________________________________________________
MINIMUM CORPORATE TAX ON DOMESTIC CORPORATION
(MCIT) Section 27 E.
A. -Section 27 E A minimum corporate income tax of two percent of the gross income as
of the end of the taxable year, as defined herein is hereby imposed on corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income
tax is greater than that tax computed under Subsection (A) of this Section for the taxable
year.

NOTE: MCIT is
a. only applicable to Domestic Corporation and Resident Foreign Corporation on
b. the tax rate of 2% of gross income and applicable only to the
c. 4th year of registration on Bureau of Internal Revenue.
Example:
You registered on January 01, 2010, when is your fourth year of Operation?
2010
2013
First Year of Operation

2011
2nd year

2012
3 rd year

4th year

2013 IS THE 4TH YEAR OF OPERATION

Example 2:
You registered on June 30, 2010, when is your fourth year of Operation?
2010
First Year of Operation

2011
2nd year

2012

2013

3 rd year

4th year

2013 IS THE 4TH YEAR OF OPERATION

Example 3:
You registered on December 31, 2010, when is your fourth year of Operation?
2010
First Year of Operation

2011
2nd year

2012

2013

3 rd year

4th year

2013 IS THE 4TH YEAR OF OPERATION (THE SAME, EVEN THOUGH

KAHIT ISANG ARAW NALANG) Dun lang mag cocopute ng MCIT.

COMPARE WITH NORMAL TAX RATE 30% based on Taxable Income dito
applicable ang Domestic Corporation and Foreign Corporation.
GROSS SALES
LESS : Lost Of Sales
= Gross Income (2%)
LESS : Allowable Deductions
=Taxable Income (30%) Isipin nalang NET Income.

RATIONALE OF IMPOSING MCIT: To circumvent the overstating

allowable deductions in order to pay lower tax due. In order to
prevent such, the taxable income shall be based on Gross Income
for the computation of MCIT.

Rule : Ang babayaran ng Corporation whichever is higher between

Minimum Corporate Income Tax and Normal Income Tax.
Kaya siya Minimum Corporate Income Tax, hindi mo pwedeng
bayaran lower than MCIT.
EXAMPLE:
MCIT Php 5,000
Computed Income Tax (NIT) Php 1,000
How much ang babayaran mo? Php 5,000 . Since minimum siya hindi ka
pwedeng magbayad lower than the amount kaya WHICH EVER IS HIGHER
ANG RULE.
EXAMPLE 2:
MCIT Php 4,000
Computed Income Tax (NIT) Php 6,000
How much ang babayaran mo? Php 6,000 . Since minimum siya hindi ka
pwedeng magbayad lower than the amount kaya WHICH EVER IS HIGHER
ANG RULE.

B.
Carry Forward of Excess Minimum Tax (Section
27 (2) ) Any excess of the minimum corporate income tax over the
normal tax as computed under Subsection A of this section shall be
carried forward and credited against the normal income tax for the
three(3) immediately succeeding taxable years.

- Kung ano daw yung difference between the MCIT and NIT
in the case of :
MCIT P 5,000
NIT --P 1,000
________
P4, 000 (Excess) May sobrang 4,000 kasi dapat ang
babayaran mo lang ay 1,000 dahil yun ang computed
Normal Income Tax eto lang yung na earn mo e however
pwede mo siyang I carry over and claim as deduction for
three consecutive succeeding years).
CONDITION : However on the next year, higher na dapat
ang NORMAL INCOME TAX kasi kung MCIT parin ang
HIGHER you cannot claim as the Tax credit the MCIT from
the previous year.

GENERAL EXAMPLE.

EXAMPLE: On the 4th year of Operation:

NIT Php 5,000
MCIT Php 10,000
Babayaran Php 10,000
Difference: Php5, 000
Tax Credit mo : 5,000 , may sobra kang 5,000 which can be carried
over for three consecutive years (5th year , 6th , and 7th year).
Provided the NIT on the following year is more than.
CONTINUATION

Example 3 :
5TH YEAR NIT- 8,000
MCIT- 6,000
Carry Over yung 5,000 sa General Example so ang TAX
DUE:
3,000.
Example
4: NIT 2,000
MCIT
1,000 5,000 (difference from the last example)
Kasi 8,000
Tax 2,000 due
However may Sobra ka dun sa 5,000 so cacarry over mo 2,000 ang
Naiwan sa balanse 3,000 (GENERAL EXAMPLE) NOTE : Ang cacarry
over mo lang ay yung 2,000 or tax due mo.
SA 6TH YEAR pwede mo pang I Exhaust yung naiwan na 3k, same
hanggang sa 7th year

Example 5:

EXAMPLE: On the 4th year of Operation:

NIT Php 5,000
MCIT Php 10,000
Babayaran Php 10,000
Difference: 5, 000
____________________________________
5th year 4,000 NIT
5,000 MCIT
Tax Due: Php5,000
Difference or sobra : Php 1,000 (yung 4,000 lang sana kasi babayaran mo)
__________________________________________
6th year 10,000 NIT
1,000 MCIT
TAX DUE: 10,000
Forward from 4th year: 5,000
Carry Over from 5th year: 1,000
Tax due: 4,000

IMPOSITION OF IMPROPERLY ACCUMULATED EARNINGS

TAX (SECTION 29)
a. In General In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable
income of each corporation described in Subsection B hereof, an improperly
accumulated earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.

Applying the Dividends income, from the Not appropriated Retained Earnings dito siya
kukuha ng dividends mag dedeclare yung Company ng Dividends to stockholders and then
the dividends is called Dividend Income subject to 10% final Tax.
Pag IAE naman yung Company instead of Declaring Dividends from Unrestricted Retained
Earnings they failed to declare dividends, hindi nila dinistribute yung Unrestricted Retained
Earnings sa stockholders ginawa nila is minaintain nila as a penalty thereof to declare
dividends will constitute Improperly Accumulated Earnings which is subject to 10%. Kung
magkano sana ang pupunta sa government na tax dividends ganun din sa may IAE subject
to 10%.

Application of Improperly Accumulated Earnings shall cover:

B. Coverage: All Corporations
Exceptions:
(a) Publicly-held Corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance Companies
Reason why they are not included: They are strongly held by the Government and all the
documents or financial statements of such are public in nature then there is no Improperly
Accumulated Earnings.
C. Evidence of Purpose to Avoid Income Tax(1) Prima Facie Evidence. The fact that any corporation is a mere holding company or
investment company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members.
(2) Evidence Determinative of Purpose- The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its shareholders or members unless
the corporation, by the clear preponderance of evidence, shall prove to the contrary.
Reasonable Needs of business 29(E) For purposes of this Section, the term
reasonable needs of the business includes the reasonably anticipated needs of
the business.
NOTE: This is the justification why Corporations have Accumulated Earnings.
For example : Kailangan nila yun for future expansion or future investment kaya sila nag
seset aside at dun papasok yung Appropriated Retained Earnings itatabi nila for the
Reasonable Needs.

D.Improperly Accumulated Taxable Income. For the purposes of this Section, the term
improperly accumulated taxable income means taxable income adjusted by:
(1) . Income Exempt from Tax;
(2) Income Excluded from gross income;
(3) Income Subject to final tax; and
(4) The amount of net operating loss carry over deducted;

And reduced by the sum of :

a. Dividends actually or constructively paid; and
b. Income tax paid for the taxable year.

FORMULA: Get first the taxable income to be adjusted by or added to the Four (4) from 1-4
then less the (2) from a and b to get the Improperly Accumulated Earnings subject to the
rate of 10% to get the Improperly Accumulated Tax.
TAXABLE INCOME
ADD Income Excluded from Gross Income
ADD Income Subject to Final Tax
ADD Amount of NOLCO
LESS Dividends actually or constrictuctively paid
LESS Income tax paid during the taxable year
IAE X 10% = IAET

ALLOWABLE DEDUCTIONS (Section 34)

1. Personal Exemptions (TOPIC)
2. PPHHI (Premiums Paid on Health and Hospitalization
of the Individual taxpayer)
3. Itemized Deductions
4. Optional Standard Deductions
In general, deductions or allowable deductions are business expenses and
losses incurred which the law allows to reduce gross business income to
arrive at net income subject tax.
Deductions are strictly construed against the taxpayer. They are not
presumed but allowable only by reason of specific provisions of law and not
under any general equitable or Constitution.
PURPOSE: To provide taxpayer a just and reasonable taxable amount as the
basis of income tax. It is because many taxpayers spend adequate
expenditures in order to obtain a legitimate income.
Except for taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship where no
deductions shall be allowed under this Section other than under

Subsection M in computing taxable income subject to income tax under

Sections 24(a); 25(a); 26; 27(A), (B) and (C) AND 28 (a) (1).
SUBSECTION M Premiums Payments on Health and / or Hospitalization
Insurance of an Individual Tax Payer. (PPHHI)
Meaning all Employees earning Compensation Income shall not allow any
deductions except those under PHHII and PERSONAL EXEMPTIONS. (Yun lang
ang pwedeng exemptions)

KINDS OF DEDUCTIONS:
1. Personal Exemptions (Section 35)(A)
ESTATE Tax & Trust (SEC
62) Php 20,000 Single Tax
Payer.

BASIC Personal
Exemption P50,000
P

In General: For the purpose of Determining the tax provided in Section

24(A) of this title, there shall be allowed a basic personal exemption
amounting to 50,000 for each individual tax payer. However on
Estate Tax & Trust under Section 62, there are no amendments as to
the Personal Exemptions therefore the Estate Tax & Trust are exempted
only for the first P20, 000 according to the B.I.R rules and NIRC.
In the case of married individual where only one of the spouses
deriving gross income, only such spouse shall be allowed the personal
exemption.
Exemptions are applicable to:
a. Compensation Income Earner; and
b. Business Income Earner.

2. ADDITIONAL EXEMPTIONS Applicable for QUALIFIED

DEPENDENTS (SECTION 35)(B)
-There shall be allowed an additional exemption of twenty five
thousand pesos (P25,000) for each dependent not exceeding four
(4). Max: 4
-The additional exemption for dependents shall be claimed by only
one of the spouses in the case of married individuals.
WHO CAN CLAIM EXEMPTIONS? :
a. H + W = Sino yung may trabaho
b. If both are working = In default the Husband
However, the Husband can execute a waiver in favor of the Wife.
-In the case of legally separated spouses, additional exemptions may
be claimed only by the spouse who has the custody over the children.
Provided, that the total amount of additional exemptions that may be
claimed by both shall not exceed the maximum additional exemptions
herein allowed.

Qualifications of Dependent:
a. Dependent must not be more than 21 years of age
b. The dependent must be single or unmarried
c. Living with the taxpayer or their custody (Pano kung yung
dependent ay nag aaral sa ibang lugar? Considered parin as
dependent for as long as temporary parin yung tirahan niya dun)
d. Dependent on the Tax Payer for Chief Support (Ibig sabihin sa
parents parin siya kumukuha ng allowance or support)
e. Unemployed
f. Legitimate
g. Illegitimate
h. Legally Adopted
Example:
-Live in si Man and Woman and nagkaroon sila ng Dependent without
benefit of marriage. By default sino mag claclaim ng deductions then in
default yung Mother unless the Mother executes a waiver. Iniiwasan
ditto ay yung Double Deductions.

EXAMPLE:
1. For the year 2015 si Dependent ay 21 years old mag 22 siya on
January 02, 2015. Qualified Dependent ba siya?
For taxation purposes the dependent is deemed to turn 22 at the
end of taxable year on December 31. Meaning January 01 to
December 31 Qualified Dependent parin siya.
2 .On December 30, 2015 Yung wife nanganak , yung child ba
considered na as exempted? Yes. He is deemed exempted at the
start of January 2016 for taxation purposes.

NOTE: the only portion of the taxation that is in favor of the

tax payer.
SECTION 35
- If the spouse or any of the dependents dies or if any of
such dependents marries, becomes twenty-one (21) years
old or becomes gainfully employed during the taxable
year, the taxpayer may still claim the same exemptions as
if the spouse or any of the dependents died, or as if such
dependents married, became twenty one (21) years old or
became gainfully employed at the close of such year.
Example:
Dependent January 02, 2015 (Magiging 21 years old siya)
On January 01, 2015 (20 Years old siya) kung nag 20
kana on January 01, 2015, then it is considered na 20 years
old ka the entire taxable year. On 2016 doon ka mag 21 for
taxation purposes.

PURPOSE FOR ALLOWING THE PERSONAL and ADDITIONAL

EXEMPTIONS:
-To cover family, personal and living expenses.

PPHHI
Compensation Income Earners are allowed only to claim: Personal
Exemptions and PPHHI (Premiums Paid, Health / Hospitalization of the
Taxpayer)

ALLOWABLE DEDUCTIONS
a. Personal Exemptions
b. PPHHI (TOPIC)
c. Itemized Deductions (Discussion for this
Matter already) SECTION 34 A J
d. Optional Standard Deductions
2. PREMIUM PAID ON HEALTH or HOSPITALIZATION OF THE
INDIVIDUAL TAXPAYER
Section 34(M)- The amount of Premiums paid not to exceed two
thousand four hundred pesos (P2400) per family or Two hundred
Pesos (P200) a month paid during the taxable year for health and or
hospitalization insurance taken by the taxpayer for himself including his
family, shall be allowed as deduction from his Gross Income.
CONDITIONS:
a.
b.
c.

amount premiums paid not to exceed two thousand four

hundred pesos per family or 200 a month
The combined income of the Family shall not exceed P250,000
in a year.
In case married taxpayer, only the spouse claiming the
additional exemption for dependents shall be entitled to this
deduction.

NOTE: Health and Hospitalization lang ang kasama ditto NOT LIFE.
EXAMPLE :
Compensation Income : 180,000
LESS: a. PPHHI P2400

b.Personal Exemptions of P50,000

Taxable Income : Php127,600
Subjected to a tax of 5 32% NORMAL TAX- (Tax Rate)
Kung magkano ang Net Amount divide it by 12 yun lang ang sahod mo

SECTION 34: Allowable Deductions:

e. Personal Exemptions
f. PPHHI
g. Itemized Deductions (Discussion for this
Matter already) SECTION 34 A J
h. Optional Standard Deductions
Itemized Deductions are applicable to: Professional whether
Corporation or Individual, Business Income.
However NOT applicable to Non Resident Alien Not
Engaged In trade or Business (NRA-NETB) and to Non
Resident Foreign Corporation
Reason: They are taxed based on their Gross Income even though
they will claim Itemized deduction there are no effect on their
taxation.
The following are the Allowed as deductions from gross income:
a. Expenses
b. Interests
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion
h. Charitable and Other Contributions
i. Research and Development
j. Pension and Trusts

SECTION 34(A) Expenses:

(1)

Ordinary and Necessary Trade, Business or Professional

Expenses
(a)
In General: There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on or which are

directly attributable to , the development, management,
operation and/ or conduct of the trade, business or exercise of
profession.

A. EXPENSES:
1. Ordinary and
BUSINESS
2. Necessary

IN CONNECTION WITH THE TRADE OR

ARE DEEMED ALLOWED AS DEDUCTIONS
NOTE : NOT PERSONAL

Under the Enumeration, we can CLAIM:

a.
b.
c.
d.

Salaries and Wages

Travel Expenses
Rentals
Entertainment,
Amusement,
Recreation
Representation. (Example : SPA and Massage)

and

- Directly
attributable
to,
the
development,
management, operation and or conduct of the
trade or business or exercise of a profession.
EXAMPLE: Andoks pinupurchase para makabenta ng Manok: Raw
Chicken
Liligawan mo yung supplier para makuha mo yung Supplier Yung
expenses na ma aaccrue niya in connection with the business
pwede niyang ma claim as deductions.
However there is a limitation:
a. If you are selling goods it should not exceed 0.5 % of your
net sales
b. Sales of Services 1% of net revenue

SECTION 34(b)
Substantiation Requirements: No deductions from
gross income shall be allowed under Subsection (A) hereof unless
the taxpayer shall be substantiate with sufficient evidence, such
as official receipts or other adequate records: (i) the amount of
the expense being deducted, and (ii) the direct connection or
relation of the expense being deducted to the development,

management, operation and / or conduct of the trade, business or

profession of the taxpayer.
Official Receipts vs Invoices
Official Receipts Sales of Service
Invoices Goods
Under the COHAN Principle If the taxpayer fails to
substantiate any part of his expenses the BIR can set any amount
as a valid expenses for the taxpayer.
For example: Travel Expense, hindi niya masubstantiate kasi
nawawala yung Resibo yung BIR hindi niya pwedeng idisallowed
agad yung the whole amount. Yung BIR magseset siya ng amount
na reasonable as a valid expense of the taxpayer.
SECTION 34( c) Bribes, kickbacks and Other Similar
Payments
No deduction from gross income shall be allowed under
Subsection A hereof for any payment made directly or indirectly
to an official or employee of the NATIONAL Government or to an
official or employee of any local government unit or to an official
or employee of a government owned or controlled corporation or
to an official or employee or representative of a foreign
government or to a private corporation, general professional
partnership or similar entity if the payment constitutes a bribe or
kickback.
Example: Government agency may event siya or seminar
kailangan niya ng supplier ng Food then magcoconduct ng
bidding where supplier A and B bids. Para makuha ni A yung
supplier na yun bibigyan niya ng 10% ng total amount if si A ang
makukuha as the highest bidder. Yung inispend niyang 10%
pwede niya bang iclaim as expense? - NO.

B .Interest
In general The amount of Interest paid or incurred within a
taxable year on indebtedness in connection with the taxpayers
profession, trade or business shall be allowed as deduction from
gross income.
EXAMPLE: Most common interest ay yung Interest on Bank Deposits:
Kung naka earn ka ng interest in Bank Deposits, kung magkano total
interest nun 33% of that interest shall be deducted from interest
expense nabawasan yung pwede mong iclaim.

INTEREST EXPENSE
LESS: Interest Income subject to Final Tax
RATIONALE: Why do you have to make loans or ask for
indebtedness if you have savings or deposits in banks? In
order to get rid of the overstatement of expenses
According to Atty. Cleo Sabado-Andrada
INTEREST:
33% Corporation
COMPUTATION:
1. Normal Tax
Less: Final Tax Rate
Difference:
DIVIDED BY NTR:
TAXABLE ON INTEREST:

C.

38% on Individual
CORPORATION
30%
20%
10%
30%
33%

INDIVIDUAL
32%
20%
12%
32%
37.5% ~ 38%

TAXES

General Rule: Taxes paid or incurred within the taxable year in

connection with the taxpayers profession, trade or business shall be
allowed as Deduction.
Exceptions:
a.

The income Tax provided for under this title

b.

Income Taxes imposed by authority of any foreign country

c.
Estate and Donors Taxes
d.
Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
Provided, That taxes allowed under this Subsection when refunded or
credited, shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction.
Kapag clinaim mo yung deduction yung taxes and eventually claimed
also for refund, the refund or credit shall be added as Gross Income.

D. LOSSES (SECTION 34 (D)

GR: Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity
shall be allowed as deductions:
REQUISITES FOR DEDUCTIBILITY:
a. If incurred in trade, profession or business
b. Of property connected with the trade, business or
profession if the loss arises from fires, storms ship wreck

or other casualties or from robbery, theft or

embezzlement
c. No loss shall be allowed as deduction under this
Subsection if at the time of the filing of the return, such
loss has been claimed as deduction for estate tax
purposes in the estate tax return.
d. (According to Atty. Ngoslab) Proof of Loss wherein a tax
payer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embezzlement during
the taxable year.
RULE : SHALL NOT BE COMPENSATED FOR BY INSURANCE but if naka claim ka sa insurance
company equivalent for your losses hindi mo siya pwedeng I claim as deductibility.

Once na nasunugan yung tax payer gagawin niya is to file a

report notifying the BIR na nasunugan yung tax payer at kelangan
niyang I ocular yung place na nasunugan. This is one of the
important thing to do that a REPORT MUST BE MADE.
3) NOLCO Net Operating Loss Carry Over
NET OPERATING LOSS means EXCESS of the allowable
deduction over gross income of the business in a taxable year.
SECTION 34(3) The net operating loss of the business or
enterprise for any taxable year immediately preceding the current
taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross
income shall be carried over as deduction from gross income for
the next three (3) consecutive taxable years immediately
following the year of such loss.
Provided however, that any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not
be allowed as a deduction under this subsection.
Provided, further, that a net operating loss carry-over shall be
allowed only if there has been NO SUBSTANTIAL change in the
ownership of the business or the enterprise.
(i)

(ii)

Not less than seventy five percent (75%) in nominal

value of outstanding issued shares, if the business is in
the name of a corporation is held by or on behalf of the
same persons; or
Not less than seventy five percent (75%) of the paid up
capital of the corporation, if the business is in the name
of a corporation is held by or on behalf of the same
persons.

When the taxpayer incurred Net Operating Loss for the

taxable year pwedeng I- carry over for the following
three (3) years.
Kung may NET OPERATING LOSS yung Company WALA Siyang
babayarang tax , anong mangyayari sa loss niya? Pwede niyang
icarry over for the next succeeding years kung nag carry over ka
pwede mong iclaim as deduction like for EXAMPLE:
EXAMPLE:
For the year 2016, naka earn ka ng NET OPERATING income na
P20,000 as a way of deduction si Net Operating Loss can be
claimed as Deduction
EXAMPLE:
2018

2015

2016

2017

NOL 12,000
Can Carry Over and can be considered as Deduction for 3 years.
WAGERING LOSSES :
Section 34 (6): Losses from wagering transactions shall be
allowed only to the extent of the gains from such transactions In
short : Gambling Loss
Losses from Illegal Sources: Talo ka sa drug dealing company,
hindi mo pwedeng iclaim as losses. Pero pag naka earn ka ng
Income then taxable.
NET OPERATING LOSS FOR MINES OTHER THAN OIL AND GAS
WELLS
For mines other than oil and gas wells, a NOLCO without
benefit of incentives provided for under EO 226, as amended
incurred in any of the first ten years of operations may be carried
over as deduction from taxable income for the next five years
immediately following the year of such loss. The entire amount of
the loss shall be carried to the first of the five taxable years
following the loss, and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in like manner
from the taxable income of the remaining four years.

E.BAD DEBTS

Requisites for deductibility: CUBAN

Requisites for Recovery of Bad Debts:
CUBAN
C- Charged of or written of against the books of the tax payer
U The amount written off must be uncollectible in the near future, no slim chance
of recovery collecting such an amount.
B- It must arise from business trade / profession
A- Ascertain to be worthless
N- Not arising from transactions between related taxpayers.

F.

DEPRECIATION from the ordinary wear and tear of the

company
GR: There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear of property used in the
trade or business. In the case of property held by one person for life
with remainder to another person , the deduction shall be computed as
if the life tenant were the absolute owner of the property and shall be
allowed to the life tenant. In the case of property held in trust, the
allowable deduction shall be apportioned between the income
beneficiaries and trustees in accordance with the pertinent provisions
of the instrument creating the trust, or in the absence of such
provisions on the basis of the trust income allowed to each.
- In depreciation it is like you are distributing the
amount of your assets into useful life.
BASIC METHOD: STRAIGHT LINE METHOD

Example: Machinery purchased at Php 1,000,000 yung tax payer mag seset
siya ng estimated Useful life for example 20 years.
Under the straight line method, magkano yung iclaclaim mo as depreciation
of the Machinery : 50,000 / Year. Every year for 20 years, magclaclaim ka ng
DEDUCTION of the Machinery amounting to P50,000 per year. So at the end
of the twenty years, fully depreciated na yung machinery. Pag fully
depreciated na yung machinery wala ka nang pwedeng iclaim as deduction.
Pag na outlive niya yung life nya for 25 years, for the 21st, 22nd , 23rd and so
on wala kanang dapat iclaim na deduction.

G.

DEPLETION (34 (G) )

-

APPLICABLE ONLY ON: Depletion of Oil and Gas wells

and Mines

GR : In the case of oil and gas wells or mines, a reasonable

allowance for depletion or amortization computed in
accordance with the cost depletion method shall be granted
under rules and regulations to be prescribed by the Secretary
of Finance, upon recommendation of the Commissioner:
Provided, that when the allowance for depletion shall be equal
the capital invested no further allowance shall be granted.

Provided further, that after production in commercial

quantities has commenced, certain intangible exploration and
development drilling costs:
(a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells and or
mines
(b) shall be deductible in full in the year paid or incurred or at
the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing
wells and or mines in the same contract area.

H.

CHARITABLE INSTITUTIONS

In General. - Contributions or gifts actually paid or made within the taxable

year to, or for the use of the Government of the Philippines or any of its
agencies or any political subdivision thereof exclusively for public purposes,
or to accredited domestic corporations or associations organized and
operated exclusively for religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to nongovernment organizations,
in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, no part of the net
income of which insures to the benefit of any private stockholder or
individual in an amount not in excess of ten percent (10%) in the case
of an individual, and five percent (5%) in the case of a corporation, of
the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit of this and the following subparagraphs.

RULE: Contributions to Corporation an actual contribution amounting to 100,000

however you cannot claim the whole amount of the Charitable Contributions
titignan mo muna kung pasok siya sa Limit.
To get the Limit: Taxable Income x 5% (Corporation)
For example: Taxable Income Php 1,000,000 x 5%
Limit 50,000
50,000 pwedeng I claim
100,000 - pwedeng I claim ng individual (10% instead of 5%)
(2)

CONTRIBUTIONS DEDUCTIBLE IN FULL notwithstanding the provisions of

the preceding subparagraph donations to the provisions of the preceding
subparagraph donations to the following institutions or entities shall be
deductible in full : (WITHOUT LIMIT)
a. Donations to the Government
b. Donations to Certain Foreign Institutions
c. Donations to Accredited Non-Governmental Organizations

I. RESEARCH AND DEVELOPMENT

In General. - A taxpayer may treat research or development expenditures which are paid
or incurred by him during the taxable year in connection with his trade, business or profession as
ordinary and necessary expenses which are not chargeable to capital account. The expenditures
so treated shall be allowed as deduction during the taxable year when paid or incurred.

J. PENSION TRUSTS

An employer establishing or maintaining a pension trust to provide for the payment of

reasonable pensions to his employees shall be allowed as a deduction (in addition to the
contributions to such trust during the taxable year to cover the pension liability accruing during the
year, allowed as a deduction under Subsection (A)(1) of this Section) a reasonable amount
transferred or paid into such trust during the taxable year in excess of such contributions, but only
if such amount: (1) has not theretofore been allowed as a deduction, and (2) is apportioned in
equal parts over a period of ten (10) consecutive years beginning with the year in which the
transfer or payment is made.

ALLOWABLE DEDUCTIONS
a. Personal Exemptions
b. PPHHI (TOPIC)
c. Itemized Deductions (Discussion for this
Matter already) SECTION 34 A J
d. Optional Standard Deductions (TOPIC)

4 .Optional Standard Deductions

SECTION 34(L)- in lieu of the Optional Deduction, the tax payer
may claim OSD amounting to 40% however yung bases ng 40%
will depend kung yung taxpayer ay isang Individual or
Corporation.
In cases of Individual based on Gross Sales
In cases of Corporation based on Gross Income
REASON WHY DIFFERENT: Pag individual kasi ikaw lang ang PERPETRATOR, kapag
Corporation is more than perpetrator. Once you choose OSD for a Quarter for First Quarter
hindi mo na pwedeng I revoke yan for the whole year the OSD. Advantageous kung onti lang
yung Allowable Deductions.
Like for Example: Rental Income ( Allowable Deductions : Repair (bihira kang mag repair) )
Rental income Php1,000,000
And Itemized Deduction for Php100,000
Kung Optional Standard Deduction ay 40% = 400,000
Mas magandang iclaim ang 400,000 ( mas madali pang iclaim kasi no need to show proof of
the deduction)

GROSS SALES FORMULA:

Sales
- Cost of Sales
= Gross Income

RA 10165 Foster Parent can claim additional deduction of a

foster child provided that a Foster Child is under a care for at least
1 year of taxable year. Additional Exemption of 25,000
As a rule: When the taxpayer fails to claim the deduction for the
taxable year when incurred or paid he cannot anymore claim for
the deduction on the next succeeding year.
SECTION 36 NON-DEDUCTIBLE EXPENSES
GR: In computing Net Income, NO Deduction shall in any case be
allowed in respect to: MUST RELATE TO BUSINESS
a. Personal, Living or Family Expense;
b. Any amount paid out for new buildings or for permanent
improvements or betterments made to increase the value
of any property or estate.
Example: A company has a building and in addition
construction of Annex the cost of construction will not
be part of deduction but will be considered as Asset.
For example: Cost of Building P1,000,000
Annex Building 500,000
VALUE
P 1,500,000
Pwedeng bawiin for Depreciation
c. Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or
has been made (MAJOR REPAIR, Capitalized and not to be
deducted as Expense)
d. Premiums paid on any life insurance. You can claim only
the amounts of Paid on PPHHI but in case of Life Insurance
you cannot claim it as Deductions.

TRANSFER TAX
Transfer Taxes

those imposed upon the gratuitous disposition of private property

Gratuitous Without Consideration
Onerous With Consideration (EX. Transfer of Property)

Under our law, they are taxes levied on the transmission of private properties from a
prior decedent to his heirs in the case of estate tax, or from a donor to a donee in the
case of donors tax.

1. ESTATE TAX (Donation Mortis Causa)

- Transfer for a ascendant to his heirs

- Tax on the privilege to transmit property at the death and on certain transfer w/c are made
the equivalent of testamentary disposition by the statute.
2. DONORS TAX (Donation Inter Vivos)
- Tax levied on the tramsmission of properties for a living person to another person.

DONATION MORTIS CAUSA:

DONATION INTER VIVOS:

a. Made in consideration of
death w/o the donors
intention to lose the thing
conveyed.
b. Embodied with in the last will
and testament
c. Transfer would be void if the
transferor survived the
transferee
d. No acceptance is required.

a. Made without such

consideration but out of the
donors generosity, although
property is not delivered at
once
b. Embodied in a VALID will
c. Its effect produced while the
donor is still alive
d. Acceptance is required

NATURE OF ESTATE TAX:

-

It is an excise tax on privilege tax and its object is to tax shifting of

economic benefits and enjoyment of property for the dead to the living.
Privilege on transferring from decedent to heirs or donors.

It is not a direct tax on property nor is it a capitation tax, that is, the
tax is laid neither on the property, nor on the transferee or transferor,
but on the right of the decedent to transmit his estate.
It is not a property tax but an excise tax.

DISTINCTION BETWEEN DONORS AND ESTATE TAX

DONORS TAX

ESTATE TAX

Tax on the privilege to transmit property

during the lifetime of the donor

Tax on the privilege to transmit property

upon ones death

Tax rates are lower (2 to 15)

Tax rates are higher (5 to20)

Exemption is only P 100,000.00

Tax exemption is P200,000.00

Notice of
required

donation

is

generally

not

Notice of death is required

Extension of payment is not provided

Extension of payment may be granted by

the Commissioner of Internal Revenue

Payable within 30 days from the date of

gift

Payable within 6 months from the date of

death

Imposed on the net gift

Imposed on the net estate

SECTION 84

Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the
transfer of the net estate as determined in accordance with Sections 85 and 86 of
every decedent, whether resident or nonresident of the Philippines, a tax based on
the value of such net estate, as computed in accordance with the following
schedule:
If the net estate is:
charoblesv irtuallawlibrary

OVER

BUT NOT
OVER

THE TAX
SHALL BE

PLUS

OF THE
EXCESS OVER

P 200,000

Exempt

P 200,000

550,000

5%

P 200,000

500,000

2,000,000

P 15,000

8%

500,000

2,000,000

5,000,000

135,000

11%

2,000,000

5,000,000

10,000,000

465,000

15%

5,000,000

10,000,000

And Over

1,215,000

20%

10,000,00

SECTION 85 of the NIRC states that The value of the gross estate of the
decedent shall be determined by including the value at the time of his death
of all property, real or personal, tangible or intangible, wherever they are
situated. Provided, however, that in the case of a nonresident decedent who
at the time of his death was not a citizen of the Philippines (NON RESIDENT
ALIEN), only that part of the entire of the gross estate is situated in the
Philippines shall be included in his taxable estate.
SECTION 85
The value of the gross estate of the decedent shall be determined by including the
value at the time of his death of all property, real or personal, tangible or intangible,
wherever situated.

The total value of all property, whether real or personal, tangible or intangible
belonging to the decedent at the time of his death, situated within or outside the
Philippines, where such decedent was a resident or citizen of the Philippines.
In the case of a nonresident alien decedent, it shall include only property situated in
the Philippines.

1. VALUATION OF THE GROSS ESTATE OF DECEDENT: VALUE OF THE PROPERTY AT THE

TIME OF DEATH OF DECEDENT
2, VALUATION OF THE REAL PROPERTY(SECTION 60) ZONAL or FAIR MARKET VALUE
SET BY LOCAL ASSESSORS OFFICE WHICHEVER IS HIGHER
a) FMV as determined by the Commissioner
- This is the zonal value (of the land) as fixed by the CIR, and can be obtained from the
BIR website or regional office
b) FMV fixed by the provincial or city assessor
-

This is the value as shown in the tax declaration of the property

Use this amount for real properties with no zonal values (i.e. real properties other
than land such as buildings and improvements)

3. VALUATION OF PERSONAL PROPERTY: FAIR MARKET VALUE

4. TANGIBLE PROPERTIES:
TANGIBLE REAL PROPERTIES: By going getting ZONAL or FAIR MARKET VALUE whichever
is higher
TANGIBLE PERSONAL PROPERTIES: Acquisition Cost
REVOCABLE TRANSFER - SECTION 85( C) - To the extent of any interest therein, of
which the decedent has at any time made a transfer (except in case of bona fide sale for an
adequate and full consideration in money or money's worth) by trust or otherwise, where the
enjoyment thereof was subject at the date of his death to any change through the exercise
of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when or from what source the
decedent acquired such power), to alter, amend, revoke or terminate, or where any such
power is relinquished in contemplation of the decedent's death.
EXAMPLE:
Contract of sale subject to the condition na hindi pwedeng itransfer yung property sa name
ng buyer and the transfer of the property will only take effect at the death of the seller.

GROSS ESTATE INCLUDES ALL REAL, PERSONAL,

TANGIBLE AND INTANGIBLE PROPERTIES OF THE
DECEDENT.
Resident Alien, Non Resident Citizen and Resident Citizen
Same Rule, all the properties wherever situated shall be included on the
Gross Estate of the deceased.

Non- Resident Alien Only those situated in the Philippines

ILLUSTRATION:
A non-resident citizen having a property in the USA and in the
Philippines wherein he is both required to pay estate tax because of different
jurisdiction. Anong gagawin niya sa tax na binayaran niya sa ibang bansa?
Can he claim it as a tax credit?
SECTION 86 ( E ) Tax Credit for Estate Tax paid to a Foreign Country
General Rule The tax is imposed by this Title shall be credited with the
amounts of any estate tax imposed by the authority of a foreign country.
Limitations as on Credit: The amount the credits taken under this section
shall be subject to each of the following limitations:
a. The amount of the credit in respect to the tax paid to any country shall not exceed
the SAME PROPORTION of the tax against which credit is taken, which the decedents
net estate is situated within such country taxable under this Title bears to his entire
net estate; and
b. The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the decedents net estate is situated outside
the Philippines taxable under this Title bears to his entire net estate.

*Hindi pwedeng iclaim yung buong tax credit as a WHOLE AMOUNT,

subject to the limitation na iproportion nila yung property located
outside over total value of the gross estate.
INCLUDED IN THE GROSS ESTATE:

SECTION 85 of the NIRC states that The value of the gross estate of the
decedent shall be determined by including the value at the time of his death
of all property, real or personal, tangible or intangible, wherever they
are situated, in addition to this :
Property Included in the Gross Estate (INCLUSIONS):
A. In case of resident citizens, nonresident citizens and resident aliens:
1. Real Property within and without the Philippines;
2. Tangible personal property within and without the Philippines; and
3. Intangible personal property within and without the Philippines.
B. In cases of nonresident aliens:
1. Real property within the Philippines;
2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless there is
reciprocity in which case, it is not taxable.
Note: These are either:
A) Properties actually owned at the time of death
B) Properties deemed by law to be owned by the decedent
under Sec. 85

GENERALLY: ALL PROPERTY WHETHER REAL OR PERSONAL,

TANGIBLE OR INTANGIBLE and IN ADDITION, the following are included in
the gross estate:
a. Decedents interest (Section 85(A) )
To the extent of the interest therein of the decedent at the time of his
death;
Examples:
(1) Any share of the decedent in the partnership profits. Yung expected
share niya on the partnership profit shall be included in the Gross
Estate
(2) Dividend Income, any dividend income shall be included.
b. Transfer in Contemplation of Death (Section 85(B))
The transfer made is very near on the date the person dies.
To the extent of any interest therein of which the decedent has at any
time made a transfer, by trust or otherwise, in contemplation of or
intended to take effect in possession or enjoyment at or after death, or
of which he has at any time made a transfer, by trust or otherwise,
under which he has retained for his life or for any period which does
not in fact end before his death (1) the possession or enjoyment of, or
the right to the income from the property, or (2) the right, either alone
or in conjunction with any person, to designate the person who shall
possess or enjoy the property or the income therefrom; except in case

of a bona fide sale for an adequate and full consideration in money or

money's worth.
-

A transfer with the thought of death.

The term in contemplation of death means that the impelling or
controlling motive is the thought of death, regardless of whether the
transferor is near the possibility of death or not, which induces the
disposition of the property for the purpose of avoiding the tax.

Example:
A person suffering from an incurable disease where he made several
inter vivos donations and one month after he died, the intention of the
deceased is to evade the estate tax. The reason is that Donors tax is
lower than estate tax. However, valid sale before the death is not
considered as in transfer in contemplation of death.
-

Determination if the Transfer is in Contemplation of Death :

The consideration of the property is not in full. When the value of the
property is P1M but was sold only to 100k it shows that the transfer is
in contemplation of death.
Example: donation was made concurrently with the execution of a will
(Vidal de Rocs vs. Posadas, 58 Phil 108)

Circumstances taken into account in determining in whether the transfer

was made in contemplation of death:
A.) Age and state of health of the decedent at the time of the gift;
B.) Length of time between the gift and the date of death; and
C.) Concurrent making of a will or making a will within a short time after
the transfer.

c. Revocable Transfer (SECTION 85 )

"(1)
To the extent of any interest therein, of which the decedent has at any time
made a transfer (except in case of bona fide sale for an adequate and full
consideration in money or money's worth) by trust or otherwise, where the
enjoyment thereof was subject at the date of his death to any change through the
exercise of a power (in whatever capacity exercisable) by the decedent alone or by
the decedent in conjunction with any other person (without regard to when or from
what source the decedent acquired such power), to alter, amend, revoke or
terminate, or where any such power is relinquished in contemplation of the
decedent's death.
This refers to property that had been transferred but the transferor, personally or
through another person, retained for life the right to alter, amend, revoke, or
terminate the enjoyment by the transferee of the property transferred.
Here, a property no longer owned by the decedent still forms part of his gross estate.
This is another situation where estate tax applies to transfer of property made during

the lifetime of the transferor. If the donors tax had been paid, it is simply credited to
the amount of estate tax due.
Example (1): Once nakalagay na siya sa will and then Generally Revocable siya
during the lifetime of the decedent.
Example (2): In a Contract of sale Transfer of property subject to the
condition that the transfer of property shall take effect upon death of
seller. During the time of its effectively of the contract or at the time of
seller subject to the revocation parin ng seller.

d. Property Passing Under General Power of Appointment

(DONEES ESTATE)
To the extent of any property passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of,
or intended to take effect in possession or enjoyment at, or after his death, or (3) by
deed under which he has retained for his life or any period not ascertainable without
reference to his death or for any period which does not in fact end before his death
(a) the possession or enjoyment of, or the right to the income from, the property, or
(b) the right, either alone or in conjunction with any person, to designate the persons
who shall possess or enjoy the property or the income therefrom; except in case of a
bona fide sale for an adequate and full consideration in money or money's worth.
Three persons are involved here: The Donor, Donee and Appointed under the
GPA.
Under this paragraph, a property which the decedent never owned in his lifetime now
forms part of his gross estate. There are three persons involved here. The transferor,
the first transferee, and the second transferee. The first transferee is the decedent.

A transfer where the donor of the power of appointment

authorizes the donee of such power to designate any person he
chooses to be given the right over the appointed property.
- The transferee may choose freely any person who will own the
property after he dies
- Rationale: the will of the transferee is followed; hence, part of
transferees estate
* Note: the decedent is the transferee in this provision
If the transferor died, the same property would form part of his (transferor) gross
estate under sec. 85 (a) of the tax code.

Power of Appointment power to select the holder of a particular job or position

Donor Prior Decedent

Donee Decedent (Ang pinag uusapan natin ngayon ay yung estate
ng Decedent, with the condition that Donee will designate a person for
the benefit of the Donors heirs)

General power of appointment vs. special power of appointment:

A.) A power is general, when it authorizes the donee of the power to

appoint any person he pleases including himself, thus having a full
dominion over the property as if he owned it.
B.) It is special when, the donee can appoint only among a restricted
or designated class of persons other than himself.
Note:
If the power of appointment is general, it makes the appointed
property a part of the donees property.

Under a general power of appointment, title to the property is

legally transferred to the donee. Therefore the property shall form part
of the gross estate of the donee.
ALL PROPERTIES of whether Real or Personal, Intangible or Tangible
where those enumerated on A-J are not obvious as part of the Estate of
the decedent however by operation of law they are the rightful owner.
E. Proceeds of Life Insurance- this contemplates a situation where
a person insures his own life if the beneficiary is his estate,
represented by his administrator, executor or heir- irrespective of
whether the designation of said beneficiary is revocable or irrevocableproceeds therefrom form part of his gross estate.
SECTION 85 (E) . To the extent of the amount receivable by the estate
of the deceased, his executor, or administrator, as insurance under
policies taken out by the decedent upon his own life, irrespective of
whether or not the insured retained the power of revocation, or to the
extent of the amount receivable by any beneficiary designated in the
policy of insurance, except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.
On Gross Income, the life insurance of proceeds are not taxable as
gross income however, it is subject to Estate tax if the beneficiary is
revocable the proceeds of the life insurance is included in the
determination of Gross Estate.
But if the beneficiary is a third person, proceeds of life insurance form
part of the gross estate of the decedent only if the designation of said
beneficiary is revocable.
F) Prior Interests. SECTION 85 (F)- Except as otherwise specifically
provided therein, Subsections (B), (C) and (E) of this Section shall
apply to the transfers, trusts, estates, interests, rights, powers and
relinquishment of powers, as severally enumerated and described
therein, whether made, created, arising, existing, exercised or
relinquished before or after the effectivity of this Code.
EXAMPLE: Dividends in Corporations

DECEDENTS INTEREST Includes interest anything having value or

capable of being valued and capable of being transferred at the time of
the death of decedent.
Example: Interest came from business Income. Yung mga hindi nakuha
ng Decedent when he was still alive. May partnership share siya, na
determine na magkano yung share niya hindi nga lang na transfer.
PRIOR INTEREST Interest on the Cash on Loan; It applies to the
transfers, trusts, estates, interests, rights, powers and relinquishment
of powers, as severally enumerated and described therein, whether
made, created, arising, existing, exercised or relinquished before or
after the effectivity of this Code.
(G) Transfers of Insufficient Consideration.
SECTION 85 (G) If any one of the transfers, trusts, interests, rights
or powers enumerated and described in Subsections (B), (C) and (D) of
this Section is made, created, exercised or relinquished for a
consideration in money or money's worth, but is not a bona fide sale
for an adequate and full consideration in money or money's worth,
there shall be included in the gross estate only the excess of the fair
market value, at the time of death, of the property otherwise to be
included on account of such transaction, over the value of the
consideration received therefor by the decedent.
A transfer that is not a bona fide sale of property for an adequate and
full consideration in money or moneys worth. The excess of the fair
market value at the time of death over the value of the consideration
received by the decedent shall form part of his gross estate.
However, if the purported absolute sale inter vivos by the decedent is
shown to be fictitious, then the total value of the property transferred
is subject to inclusion in the taxable estate.
1. Example: Value of the Property is 1,000,000 however the sale
executed stated that the property valued only for 50,000. Only 950,000
shall be included on the Gross Estate.
Ex: X owns a house and lot, he wants to help Y so he sells his house
worth P5M for only P1M. At the time of Xs death, his house and lot is
worth P10M.
How much is included in the gross estatre of X? 10-1 = 9M

H) Capital of the Surviving Spouse Misplaced under the NIRC, The

capital of the surviving spouse of a decedent shall not, for the purpose
of this Chapter be deemed part of his or her estate. Must be included
on Section 87

1. ) DEDUCTIONS ALLOWED to the ESTATE OF

DECEDENT
A. Expenses, Losses, Indebtedness and Taxes
B. Property Previously Taxed (Vanishing Deductions)
C. Transfer for Public Use
D. The family home
E. Standard Deduction
F. Medical Expenses
G. Amount Received by Heirs under R.A 4917

SECTION 86 For the purpose of the tax imposed in this Chapter, the
value of the net estate shall be determined:
(A) Deductions allowed to the Estate of a Citizen or a
Resident
1. Expenses, Losses, Indebtedness and Taxes
Funeral Expense: Actual Funeral Expense or Amount Equal to five
percent (5%) of the gross estate (Whichever is LOWER)
BUT NOT EXCEEDING Php200,000
- Actual funeral expenses are those which were actually incurred in
connection with the interment or burial of the deceased and paid for
from the estate of said deceased.
- Funeral expenses include:
a)
b)
c)

Costs of coffin, tombstone, mausoleum, and burial lot;

Funeral parlor fees;
Mourning clothing of the surviving spouse and the unmarried minor
children;
d)
Costs of obituary notices; and
e)
Expenses during the wake.
- The following cannot be deducted under funeral expenses:
a) Cash advances of the surviving spouse and the heirs;
b) Expenses paid by the relatives and friends; and
Expenses after the burial.
Requisites:
a) The expenses must be due to the interment, wake and burial; hence,
expenses on the death anniversary are not included
b) The expenses must have been shouldered by the estate and not by
other people

2. Judicial Expenses
Requisite: administration expenses to those actually incurred in the
administration of the estate.
-

- Examples:
a)
b)
c)
d)
e)
f)
g)

fees of the executor or administrator;

attorneys fees;
accountants fees;
court fees;
salaries of employees; and
All other expense related to the administration of the estate.
Publication Part of Judicial Expense

Note:
This includes all expenses necessary to settle or preserve the estate
hence, extrajudicial expenses are included.
Expenses not essential to the proper settlement of the estate but
incurred for the individual benefit of the heirs, legatees, or devisees are
not allowed as deductions.
- ex: expenses to be declared as administrator vs. an oppositor is a
personal expense

3. Claims against the decedents estate

- Debts or obligations of the decedent that is enforceable
provided that the following requisites are met:

against the estate

a) They were contracted in good faith and for an adequate and full
consideration in money or moneys worth.
b) They must be existing against the estate.
c)

They must be legally enforceable obligations of the decedent and

ought to be enforced by the claimants.

d) They must be reasonably certain in amount; and;

e) At the time the indebtedness was incurred, the debt instrument was
duly notarized and if the loan was contracted within three (3)
years before the death of the decedent, the administrator or
executor shall submit a statement showing the disposition of
the proceeds of the loan. (Condition)
NOTE: Without the Statement of Disposition the claims for
deductions shall be disallowed by the Law.
EXAMPLE: Simple loan of the Decedent

4.
-

Claims against the insolvent persons

Requisites for deductibility:

a) The amount of said claims has been initially included as part of the
gross estate; and

b) The incapacity of the debtors to pay their obligations is proven and

not merely alleged.
Decedent nagpautang however the debtor is declared as insolvent so it is
not enough that alleged lang yung insolvency ng debtor. It must be prove
and declared that he is insolvent. It must be included in the Gross
Estate. (Dito papasok yung prior interest, meron siyang pautang kasi part
ng Gross Estate ng Decedent however yung perang yun hindi mo na
pwedeng ilagay sa Gross Estate kasi nga pinautang mo, so pwede mong
iclaim as deduction.)
THE CONDITION TO BE ALLOWED AS DEDUCTION: Must be included in the
Gross Estate.

5. Unpaid mortgages indebtedness - Real estate mortgage

na naexecute between decedent and creditor ang ginamit
niyang collateral is yung real property nya so any unpaid
mortgage shall be claim as deduction of the gross estate.
Ibig sabihin yung kabuuan ng property nya idistribute yung
heirs tatanggalan muna yung babayaran sa estate.
Requisites for deductibility:

a) The fair market value of the property mortgaged without deducting

the mortgage indebtedness has been initially included as part of his
gross estate;
b) The mortgage indebtedness was contracted in good faith and for an
adequate and full consideration in money or moneys worth.
- ex: X obtained a 3M loan from Y and executed a Real Estate Mortgage
over his house and lot worth 5M. X paid 1M. X died.
Effect: in the estate of X, include the 5M in the gross estate of X and
claim as deduction the unpaid 2M.

B. VANISHING DEDUCTIONS ( PROPERTY PREVIOUSLY

TAX)
Section 86(A) (2) Property Previously Taxed. - An amount equal to the
value specified below of any property forming a part of the gross
estate situated in the Philippines of any person who died within five (5)
years prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death, where
such property can be identified as having been received by the
decedent from the donor by gift, or from such prior decedent by gift,
bequest, devise or inheritance, or which can be identified as having
been acquired in exchange for property so received:

Property Previously Tax kanino galing? Prior Decedent / by way of gift

by Donor.
The property that passed on to the Present decedent is already
included on the gross estate of the prior decedent, nabayaran niya na
dito yung estate tax. Donation by way of gift Provided that the
decedent died within 5 years from the date of death of prior decedent
or the date of donation. Kaya siya vanishing deduction kasi hindi siya
yung whole property na idededuct nyo sa estate, subject niyo sa sa
gross estate.

If namatay siya within 1 year from the date kung kelan

namatay yung prior decedent, or kung kelan namatay yung
gift the whole property divided by 100% bilang as Vanishing
deduction .
LESS THAN ONE (1) YEAR
1-2 YEARS
2-3 YEARS
3-4 YEARS
4-5 YEARS

- 100%
80%
- 60%
- 40%
- 20%

Reason why decreasing: Within that period pwedeng napakinabangan

nan g decedent yung property for Four Years.
For example : From the death of prior decedent up to the death of the
present decedent e four years yun, napakinabangan nya yung property
for 4years , the deductions na pwede niyang iclaim is up to 5 years
lang.

After 5 years hindi niya na pwedeng iclaim as deduction yun , yung

property yun inherited from prior decedent or from prior donor will be
included on the Gross Estate however hindi siya maiinclude as
deduction.

FORMULA:
PROPERTY AT THE TIME OF THE PRESENT DECEDENT X
PERCENTAGES first estate and donors tax must be paid . If
walang binayarang estate tax dito hindi ka pwedeng mag
claim as Vanishing deduction.
C. TRANSFER FOR PUBLIC USE
Transfers for Public Use - The amount of all the bequests,
legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines, or any
political subdivision thereof, for exclusively public
purposes.

- Property of the decedent which is part of the gross estate

but the heirs cannot use this because so therefore this would
be used as a deduction.
D. The Family Home. - An amount equivalent to the
current fair market value of the decedent's family home:
Provided, however, That if the said current fair market
value exceeds One million pesos (P1,000,000), the excess
shall be subject to estate tax. As a sine qua non condition
for the exemption or deduction, said family home must
have been the decedent's family home as certified by the
barangay captain of the locality.
When we say Family home, it includes the house and lot.
The valuation:
1. )Fair Market Value at the time of death
(Zonal Value)
2. ) Fair Market Value (Fixed by assessor)
-Whichever is higher between both
Actual amount of property
lower
1 Million

whichever is

Walang problema kung single yung namatay

If conjugal property
H and W
Lot 2million
House 4m
GROSS ESTATE: 6M
As way of deduction how much can he
claim?
If conjugal home, divide it by two 6m / 3m
share of husband = 3m each.
As a way of limitation, Actual amount
of the property or amount of 1million
whichever is lower.
E. STANDARD DEDUCTION
Standard Deduction. - An amount equivalent to One
million pesos (P1,000,000) Without any qualifications or
conditions.

SECTION 86 - Applicable only to RESIDENT OR A

CITIZEN of the Philippines not applicable to Non Resident
Alien.
F.

Medical Expenses. - Medical Expenses incurred by the decedent

within one (1) year prior to his death which shall be duly
substantiated with receipts: Provided, That in no case shall the
deductible medical expenses exceed Five Hundred Thousand Pesos
(P500,000).

- Requisites:
a. Must be incurred by the decedent within one (1) year prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000

Yung mga covered ng PhilHealth kasama ba siya sa actual

medical expense? Hindi na kukunin ditto ang PhilHealth.
Kung covered ng PhilHealth hindi na covered ng Medical
Expense.
Amounts Received by Heirs under RA 4917 From
The Decedents Employer As A Consequence Of The
Death Of The DecedentEmployee, Provided That Such
Amount Is Included In The Gross Estate Of The
Decedent.
G.

- Retirement benefits
- Requisite: include in gross estate
RULE : RULE ALWAYS INCLUDE IN THE GROSS ESTATE

H. NET SHARE OF THE SURVIVING SPOUSE IN

THE CONJUGAL / COMMUNITY PROPERTY.
- Requisite: Include the entire amount in the gross estate then deduct the
share of the surviving spouse
- Ex: H owns a car worth 1M and a house and lot worth 5M
W owns a truck worth 2M and jewelry worth 10M
H and W owns a conjugal lot worth 20M
H died.
Gross estate of H:
Exclusive

Conjugal

5 M house and lot

20 M lot

1M car _________

_______

6M
Total gross estate = 26 M

20 M

Then claim as deduction is 10M, which is the share of the surviving spouse in the
conjugal lot.

- Ex: H and W died simultaneously. In computing the gross estate of H and W, their shares
shares as to the conjugal lot may immediately be split as there is no surviving spouse left.
FORMULA OF ESTATE TAX :
GROSS ESTATE
LESS: Allowable Deductions
=Net Estate
From the Net Estate Get the Estate Tax Due

SUMMARY:
DEDUCTIONS
ALLOWABLE DEDUCTIONS

ORDINARY
SPECIAL DEDUCTIONS
SSS (SEPARATE)

SPECIAL ALLOWABLE DEDUCTIONS :

1. Family Home
2. Standard Deductions
3. Medical Expense
4. Amounts Received by the Heirs under

RA 4917

ALL THE REST ARE ORDINARY DEDUCTIONS

SECTION 89 Notice of Death
SEC. 89 Notice of Death to be filed. - In all cases of
transfers subject to tax, or where, though exempt from
tax, the gross value of the estate exceeds Twenty
thousand pesos (P20,000), the executor, administrator
or any of the legal heirs, as the case may be, within two
(2) months after the decedent's death, or within a
like period after qualifying as such executor or
administrator, shall give a written notice thereof to the
Commissioner.
-Kahit hindi pa ready yung heirs kapag more than 20, 000
na yung estate Iinform niya yung BIR.
ELEMENTS / REQUIREMENTS: A. Notice of death
B. More than 20,000 of gross estate must be informed to
the BIR
C. Within 2 mos after the death of decedent

SECTION 90 CERTIFIED PUBLIC ACCOUNTANT(CPA)

CERTIFICATE
Filing of Return and Payment of Tax

1.)
By whom?
An estate tax return under oath is required by law to be filed by the
executor, administrator, or any of the legal heirs:
a.) Where the gross value of the estate exceeds P200,000 though
exempt from the estate tax; or
b.) Regardless of the gross value of the estate, where the said estate
consists of registered or registrable real property, such as real
property (land, bank accounts, others with definite records), motor
vehicle, shares of stock or other similar property for which a
clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the
name of the transferee.
2.)

3.)

When to file?
The return shall be filed within 6 months from the decedents death.
The Commissioner shall have the authority to grant, in meritorious
cases, a reasonable extension not exceeding 30 days for filing the
return.
Where to file?

Except in cases where the Commissioner otherwise permits, the return

shall be filed with: (Where the decedent domiciled ) permanent
* if the decedent is a resident
a)
b)
c)
d)

an authorized agent bank

Revenue District Officer
Revenue Collection Officer
duly authorized treasurer of the city or municipality where the
decedent was domiciled at the time of his death, or

* if the decedent is a non-resident

a) with the Revenue District Office where his executor/administrator is
registered
b) with the Revenue District Office having jurisdiction over the
residence of the executor/administrator
e) with the Office of the Commissioner if the decedent has no executor
or administrator
4.) Copies:

The return shall be filed in triplicate, two (2) for the BIR and one (1) copy
for the taxpayer.

5.) When to Pay

Pay the estate tax at the time you will file your estate tax return. (Pay as
you file system)

6.) Extension for Payment:

- allowed in meritorious cases when the Commisioner finds that the
payment of the esate tax on the due date would impose undue hardships
upon the estate or any heirs
At most 2 years if estate extrajudicially settled
At most 5 years if estate judicially settled
- NOTE: The taxpayer must not be guilty of
a) negligence
b) intentional disregard of the rules and regulations, or
c) fraud
- the taxpayer may also be required to pay a bond not exceeding double the
amount of tax and with such sureties, as the Commissioner deems necessary

* Note: The filing of the estate tax return is not sufficient to obtain a tax
clearance, the administrator/executor/heir must submit additional documents
to determine the correctness of the values stated by him in the estate tax
return.
- such as the title of the land, tax declaration of the land and its
improvements or Certificate of No-improvement, vicinity map to fix the exact
location and zonal value, etc.

* Note: To avoid the imposition of penalties while there is no extra/judicial

settlement yet, any heir may file a sworn declaration to the BIR stating the
fact of death, that the estate has not yet been settled and the list of the
properties included in the estate, as basis for payment of estate tax.

If Gross Estate >2M, additional requirement:

-

must submit a certificate of an independent CPA stating:

1. itemized assets of the decedent with corresponding gross value at the
time of his death;
or if NRA, that part of his gross estate situated in the Philippines
2. itemized deductions from the gross estate
3. amount of tax due, whether paid or still due and outstanding

DONORS TAX
Donation / Gift
- An act of liberality whereby a person disposes gratuitously of a thing or
right in favor of another who accepts it.
- For tax purposes, the term has a much wider meaning, it includes:
a. any transfer in trust or otherwise, whether the gift is direct or indirect, and whether
the property is real or personal, tangible or intangible. (Sec. 98)
b. any transfer of property by gift, except in forced sales and in the sale of real property
which is a capital asset, for less than and adequate and full consideration in money or
moneys worth. (Sec. 100)
c. Condonation or remission of debt, where the creditor merely desires to benefit a
debtor and without any consideration therefore cancels the debt.

DETERMINATION OF THE GROSS GIFT:

REAL PROPERTY VALUATION- Fair Market Value at the Time of the
Donation regardless of the amount it must be in a Public Instrument.
PERSONAL PROPERTY VALUATION Current Market Value at the time of
Donation. When the value of the property exceeds 5,000 it must be in
writing.
Requisites of a Taxable Gift:
1.) CAPACITY of the donor to make the donation;
2.) DONATIVE INTENT or INTENT on the part of the donor to make a
gift;
3.) DELIVERY, whether actual or constructive, of the gift; and
4.) ACCEPTANCE of the gift by the donee

EXEMPTIONS (DEDUCTED FROM GROSS GIFT) :

1.

Dowries (SECTION 101) - Dowries or gifts made on account of marriage

before its celebration or within one year thereafter by parents to each of their legitimate,
illegitimate or adopted children to the extent of the first P10,000.00.AS LONG AS ON
ACCOUNT OF MARRIAGE IT IS CONSIDERED AS DOWRIES EXEMPTED ON DONORS
TAX / ONE YEAR AFTER THE MARRIAGE.
LIMIT: 10,000 within a year each parent.
Requisites:
1. The donation must be given on account of marriage.
2. The parent must give it to his child.
3. The child must be either the legitimate, recognized natural or legally adopted child of the
donor, and;
4. It must be given before or one year after the celebration of the marriage.
EXAMPLE:
H
W
Motor Vehicle 500,000
250,000
250,000
Less: Exemption Dowry
10,000
10,000
For EACH DONOR, husband and wife are distinct and separate from each other.

2.
Gifts made to or for the use of the National Government or any of its agencies which
is not conducted for profit, or to any political subdivision of the said government.

3.
Gifts in favor of educational, charitable, religious, cultural or social welfare corporation,
institutions, foundations, trust or philanthropic organization, research institution or organization,
or accredited non-government organization. Provided, that no more than 30% of said gifts shall
be used by such donee for administration purposes.
PROVIDED, However,that not more than 30% of said gifts shall be used by such
done for administration purposes. For purposes of exemption, a non-profit educational
and/or charitable corporation, institution, accredited non-government organization, trust or
philanthropic organization is defined as:

school, trust or university and/ or charitable corporation, foundation trust or philanthropic

organization and/ or research institution or organization incorporated as a non-stock
entity:
paying no dividends.
governed by trustees who receive no compensation; and
devoting all its income to the accomplishment and promotion of the purposes enumerated
in its articles of incorporation.

STRANGERS vs RELATIVE
B. FACTORS AFFECTING LIABILITY FOR GIFT TAXES

1. Relationship of the donor and the donee

a) when the donee is considered a stranger to the donor, the donors tax
shall be 30% of the net gifts.
b) when the donee is a relative of the donor, the tax shall be based on
the 2-15% table under Sec. 99(A).

Stranger (WHO IS A STRANGER)

1.) one who is not a (a) brother/sister (whole or half blood), spouse, ancestor and lineal
descendant
b) relative by consanguinity in the collateral line within the fourth degree of relationship
2.) donations made between individuals and business organizations are considered donations to
strangers
3.) donations made between business organizations are considered donations made to strangers
(RR 2-2003)
Note: Donees who have no blood relation to the donor are considered strangers to the donor,
such as those made to ones in-laws or to juridical persons.
2. Value of the Gift
- the higher the value of the gift, the higher the gift taxes
EXAMPLE:
MV 500 K
LESS : DOWRY
TOTAL NET GIFT:

H
125K
10K
115

A
W
125K
10K
115

B
H
125K
0
125(30%)

W
125K
0
125K (30%)

Dahil stranger si B at ang Anak ni H + W ay si A. Kaya ang iimpose na tax

kay B ay 30% at ang iimpose na tax kay a yung nasa 2-15%