TAXATION REVIEW: INCOME TAXATION

2015 BAR EXAMINATION

I.
General Principles
A. Nature, concept and purpose of taxation:

Taxation - inherent power.

LGUs have the power to raise revenue to promote self-autonomy -Art. X,

Sec. 5. Const.
Taxation compared with:
a) police power;
b) power of eminent domain
May property rights bow to police power?
Yes - as held in the case of Carlos Superdrug Corp. v. DSWD. June 29, 2007

B. Theory and basis of taxation:

Lifeblood theory
Case: Republic v. Caguioa, 536 SCRA 193
Necessity Theory. Case: Phil. Guaranty Co., Inc. v. CIR, GR No. L-22074,
30 April 1965.
The power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of the
people. That the enforcement of tax laws and the collection of taxes are of
paramount importance for the sustenance of government has been repeatedly
observed.

Benefits-protection theory (Symbiotic relationship)

Case: CIR V. Algue, Inc. GR No. L-28896, 17
Feb. 1988.
Taxation is indispensable and inevitable price for civilized
society; without taxes, the government would be paralyzed (Commissioner
vs. Algue, Inc.)
C. Principles of a sound tax system
F-iscal adequacy
A-dministrative feasibility
T-heoretical justice
Non-delegation of taxing power
* Gen. Rule- being purely a legislative
power;
CASE: Pepsi-Cola Bottling Co., supra
Exceptions
* the details as to the enforcement and
administration
* President may impose tariffs
(Section 28 (2), Article VI, Const.)

Limitations on the Power of Taxation

* 1. Inherent limitations: -P-I-N-E-S

P - public purpose
I - international comity
N - non-delegability
E exemption of the government, political
subdivisions, government agencies
S Situs of place of taxation
2. Constitutional provisions
* Tax lawsa) construction and interpretation
b) Penal provisions of tax laws- how construed
*Tax exemptions, condonations

b) constructions and interpretation;

CASES:
1. RCPI v. Prov. Assessor of South Cotabato, 456 SCRA 1;

2. ABS-CBN Broadcasting Corp. v. Philippine

American
Accident Insurance
Company, Inc., 453 SCRA 668.
Tax rules and regulationsa) Who has the power to issue rules and
regulations
b) Requisites for validity of tax rules and regulations
BIR Rulings concept; effect
G. Taxes :
* Characteristics: P-E-M-S
* Classification of Taxes as to: S-B-A-P-S-G
S - ubject matter
B - urden
A - mount
P - urpose
S - cope
G - raduation
* Tax vs. other imposition or charges
Important Principles/Doctrines in Taxation
* Prospectivity of tax laws
* Imprescriptibility
Reconcile this with the Statute of
NIRC and other tax laws?
* Double taxation
Is it a valid defense against the validity of

Limitations provided by the

a tax measure?

What is International juridical double

taxation ?
* Power to tax involves the power to destroy
* Doctrine of Equitable Recoupment

* Compensation or set-off
* Taxpayers Suit vs. Citizens suit
* Tax Pyramiding; concept and legal basis
* Tax avoidance v. Tax evasion
CASE: Commissioner v. The Estate of
Benigno P. Toda,Jr., G.R. No.
147188
438 SCRA 290, Sept. 14, 2004
* Tax amnesty v. abatement of taxes
The Commissioner of Internal Revenue
* Power to compromise
* Can this be delegated?
Scope and binding effect
II. INCOME TAXATION
Concept of Income and capitalIncome tax systems
* Global system
* Schedular system
Classification of Income Taxpayers
a. Individual Taxpayers:
1) Citizens: a) resident
b) non-resident
2) Aliens: a) resident
b) non-resident
i) engaged in trade or business
ii) not engaged in trade or
business
b. Corporations -include:
Business partnerships, no matter how created
Joint stock company
Joint account
Association
Insurance company
Does not include :
General Professional Partnership
Joint Venture or consortium
1. Domestic corporation
2. Foreign Corp
a. RFC etb
b. NRFC net

3. Partnerships
a. Taxable
b. Non taxable
C. ESTATES AND TRUSTS
Categories of Income - Sec.32 (A)
1. Compensation Income all remuneration
for services performed arising under an
employee-employer relationship- (RR 2-98)
* minimum wage earners (RA 9504)

* Cancellation of debt1) compensation income

2) donation

* De minimis benefits
1. Characteristics:
a) relatively of small value
b) given to promote contentment; health
efficiency and goodwill of employee (CHEG)

2. not included in the P30,000.00

( 2015-Php82,000.00) ceiling on bonuses;
3. received by rank and file employee including managerial and supervisory
4. Tax implication* employee not taxable
* employer deductible as an expense

monetized unused vacation leave

a) private sector -10 days not taxable;
sick leave taxable
b) government employees - EO 291
(Pres. Estrada) RMC-16-2000
Terminal leave pay vacation or sick leave,

granted on a yearly basis exempt from income tax

employee achievement award
* annual monetary value Php10,000
* tangible personal property
* not discriminate against highly
paid employee
daily meal allowance overtime work
25% of basic minimum wage (RR 10-2000)

Fringe benefits - (Sec. 33)

*goods or service or benefit (cash or kind)
* source employer
* recipient managerial or supervisory
* tax rate 32% - final tax (withholding tax)
* tax base gross-up monetary value
* liable to pay employer
Non-taxable fringe benefits:
1. convenience of the employer rule* recipient managerial/supervisory
rank and file
2. deminis benefits within the ceiling
excess amount taxable
* fringe benefit managerial/supervisory
* taxable income rank and file

3. authorized and exempt under special law

4. employers contribution to retirement,
insurance and hospitalization plans
5. benefits granted to rank and fileCBA of not
6. allowances fixed amount and regularly
received as part of salary taxable as
income not as fringe benefit

housing
* military housing
* temporary stay not more than 3 months

* within business premises; if outside,

50 meter perimeter
Interest on loan actual rate is less
than prevailing rate

expenses for foreign travel

* required in the nature of business
* substantiated by receipts
* invitation of business associates
cost of airplane ticket* exempt if economy
* first class 70% exempt
30% taxable fringe benefit
educational assistanceGeneral Rule3: granted to employee - taxable FB
Exceptions:
a. scholarship grant to employee
* directly connected with ERs business
* contract EE to remain in the employ
for a certain period
Tax implication:
employee not subject to FB and income tax employer deduction ordinary
expense
granted to dependents of employee:
General Rule: taxable fringe benefit
Exception: if through competitive scheme
scholarship program of employer
2. Income from trade, business or practice of profession
* business or trade income * professional income
3. Property income- (See Sec. 39 and 40)
Classification of Assets
* Ordinary v. capital assets
Capital assets those which may or not
be used in the business
* Gains from dealings with property.
a) sale, exchange, disposition of real property- presumed gain

* subject to final income tax- capital gains

tax- Sec. (24D) (1) and 27

(d)(5)
1) real property capital asset
2) located in the Phil.
3) seller individual, estate, trust,
domestic corporation
Exemption ftom capital gains tax Sec. 24 (D)
Sale of Principal Place of Residence
Requirements:
1. Notify CIR of such sale within 30 days
2. Cert. of Barangay captain
3. proceeds to be used for the construction or purchase of new place
of residence w/in18 months from sale
4. availed of once every 10 years
5. escrow agreement (6% CGT)
* Gain or loss not recognized
a) property in exchange for stock
b) stock in exchange for stock
c) security in exchange for stock/security
- made in accordance with merger or
consolidation ( Read Sec. 4 (C )(6)(b) as to
the meaning of merger or consolidation)
*subject to creditable withholding tax
1) real property ordinary or capital asset
2) seller (taxpayer)
a) resident foreign corp,;
b) habitually engaged in realty business, and registered with HLURB
rate based on gross selling price
c) individual/corp. not habitually engaged in realty business rate is
7.5%
* Gain is recognized; loss not recognized
Wash sale
* loss in wash sale not deductible loss
Capital Gains Tax on disposition of Shares
of Stock:
CAPITAL ASSET- asset not used in the business.
NET CAPITAL GAIN = SP Cost
SELLING PRICE amount in consideration of the sale (SP or FMV whichever is
higher)
COST purchase price + expense upon purchase
ON SALE OF SHARES OF STOCK HELD AS CAPITAL ASSET (Domestic stock not
listed and traded thru local stock exchange)

On net capital gain:

Not over P100,000
Final tax of 5%
In excess of P100,000
Final tax of 10%
LISTED and traded thru local stock exchange=
Exempt from CGT
Transaction charge Rules that govern capital assets
* holding period rule 12 months
recognized gain is 50%
* capital loss limitation rule
* net loss carry over rule
Ordinary Assets:
1. inventoriable assets
2. property primarily held for sale
to customers in the ordinary course of T/B
3. depreciable assets
4. property used in T/B.
Capital Assets- held by taxpayer whether
for business or not and not classified as
ordinary asset.
Rules that govern capital assets
1. holding period rule more than 12 months taxable gain is 50%
2. capital loss limitation rulerationale: principle of matching of cost
Is ordinary loss deductible from capital gain?
3. net capital loss carry over rule
Net Capital Loss Carry Over:
Ordinary Loss vs. Capital Loss
NOLCO
v.
NCLCO
[Sec. 34(D) (3)]
[Sec. 39 (B)]
1. Ordinary asset
1. capital assets
2. arises from
2. arises from capital
ordinary transaction
transaction
3. carried over for the
3. carried over only
the next 3 consecutive
in succeeding years
4. Apply to individual
4. individual, trust company and
and banks
corporate
4. Interest Income-earned from lending

money and from bank deposits which

does not constitute passive income.
Interest income exempt from income tax:
* on land sold to farmers- PD 27; RA 6557
*on retirement benefit plan fund
*on Expanded Foreign Currency DepositsResident alien -7.5%
Non-Res. Citizen; Non resident alien- exempt
* long term time deposit-investment
RC, NRC, RA, NRAETB- exempt
NRANETB included in the gross income
subject of 25% income tax
5. Rent income
a) coverage of taxable rent income (RR2)
*rental
* advance rental/security deposit
a) prepaid rent no restrictions on
the use of the amount- taxable income
b) security deposit with restrictions on
the use not taxable;
c) loan- in favor of lessor not income
d) security deposit as penalty for pre-termination of lease- taxable

* value of permanent improvements

1) outright method
2) spread method-depreciative value
of improvement
Rent v. Royalties
6. Royalties - not constitute passive income
* not passive income included in the
computation of gross income
* passive income subject to final
income tax- 20% (10% textbooks)citizens; RA, NRAETB
NRANETB part of GI at 25%
patents, trademarks citizens, NRAETB

7. Dividend income

*dividend
- earnings
* intercorporate dividend *disguise dividend
** Improperly accumulated earnings tax
Dividend

Recipient

Giver

Tax Due

1. Sec. 24 (B)(2) Cash/Property RC, NRC, RA DC

- FT- 10
2 Sec. 25 (A)(2) - Cash/Property NRAETB
- DC
GI 20%
3. Sec. 25 (B) Cash/Property NRANETB - all sources w/in GI-20%
4. Sec. 27(D)(4)-IntercorporateDC
DC exempt
5. Sec. 28(A)(7)(d) Intercorporate- RFC DC exempt
6. Sec. 42(A)(2)(b) cash/property - DC/Ind - RFC - proportionate
7. Sec. 28(B)(5)(b) Intercorporate NRFC - DC - 15%
8. Sec. 73(B) stock dividend exempt
Note: Dividend issued by a foreign corporation
to an individual taxpayer (citizen or alien)
is included in the computation of gross income.
8. Annuity* if not exempt from tax included in the
computation of gross income* if an exclusion- not included in the
computation of gross income
*if it fails to comply with the requirements
of a tax-exempt annuity- it is taxable
9. Prizes and Winnings:
* if passive income and not an exclusion included in the
computation of
gross income
* prizes passive income if from sources
within the Phils. and over P10,000
* winnings- passive if from sources w/in
the Phils.
except: PCSO and Lotto tax exempt
Prizes and winnings - Exempt from income tax
1) in recognition of religious, charitable, scientific, artistic, literary or civic
achievement- exempt if:
a) recipient was selected w/o any action
on his part to enter in the contest
b) recipient is not required to render
substantial future services as a
condition to receive said award

2) granted to athletes in local and

entertainment sports competition and
tournaments in the Phils. or abroad and
sanctioned by their national sports
association.
10. Pensions
* forms part of the gross income if not exempt
Retirement pension/benefits exempt from income tax:
* received under RA 4917 and 7614
* received from SSS, GSIS, PVAO
* separation pay granted by foreign corp.,
foreign government;

* separation pay received beyond the control

of employee (regardless of age of length
of service (BIR Ruling 292, Oct. 21, 1992)
Requisites for exemption of retirement/pension from tax:
1. benefit is paid upon retirement;
2. not previously received retirement benefit
from same or another employer who has
qualified retirement plan (RR-1-68)
Note: retirement benefit from GSIS is not
benefit received from same/another employer
(BIR Ruling 125-98, Sept. 4,1998)
11.
Partners distributive share from the
NET INCOME of GPP
EXCLUSIONS FROM GROSS INCOME -Sec.32(B)
1. proceeds of life insurance
2. amount received as a return of premiums
3. gifts, bequest and devisees
4. compensation for injuries or sickness
5. retirement benefits, pensions, gratuities
KINDS OF DEDUCTIONS
1. Itemized Deductions;
2. Optional Standard Deduction (OS);
3. Special Deduction
4. Premium payments on Health and/or hospitalization insurance (PPHHI)
5. Personal Exemptions
SUMMARY RULES ON ALLOWABLE DEDUCTIONS
For Individuals:
1. With gross compensation income from employer-employee relationship only

a. Basic personal and additional exemptions

b. Premium payment on Health and/or hospitalization insurance
2. With gross income from business of exercise of profession:
a. Basic Personal and additional exemptions
b. PPHHI; and
3. OSD or Itemized Deductions
For Corporations
OSD or Itemized Deductions

NRA-NETB and NRFC cannot avail of any deductions from gross

income since their gross income gross income from sources within the
Philippines is subject to a final tax of 25% and 30% respectively.
DEDUCTIONS FROM GROSS INCOME Sec. 34
1. expenses
2. interest
3. taxes
4. losses
5. bad debts
6. depreciation
7. depletion
8. charitable and other contribution
9. research and development
10. pension trusts
Who may claim said deductions?
Individual taxpayers
* RC
*NRC those incurred in the Phils.
*RA those incurred in the Phils.
* NRA ETB incurred in the Phils.
* Professional partners in GPP
Corporate taxpayers
*DC private educ. Instititutions, non-profit hosp.
GOCC
* RFCA. ORDINARY AND NECESSARY TRADE, BUSINESS AND PROFESSIONAL EXPENSES
Requisites for Deductibility
1. It must be paid or incurred during the taxable year
2. It must be substantiated with sufficient evidence such as official receipts or
other adequate records
3. Must be paid in connection with the conduct of trade or business, or the exercise
of profession by the taxpayer, or attributable to the development, management or
operation of the trade business or profession
4. It must be ordinary and necessary

5. If subject to withholding taxes, have been properly

A. ORDINARY AND NECESSARY TRADE, BUSINESS AND PROFESSIONAL EXPENSES
Requisites for Deductibility
5. If subject to withholding taxes, have been properly withheld and remitted on
time to the BIR
6. Not contrary to law, public policy or morals
Necessary and Ordinary Expenses
Ordinary normal or usual in relation to the taxpayers business and the
surrounding circumstances
Necessary appropriate and helpful in the development of the taxpayers business
and are intended to minimize losse3s or to increase profits
B. INTEREST
Compensation for the use or forbearance or detention of money regardless of the
name it is called or denominated. It includes the amount paid for the borrowers
use of money during the term of the load as well as for his detention of money after
the due date for its repayment.
Requisites
1. There must be an indebtedness incurred by the taxpayer based on a bona
fide debtor-creditor relationship.
2. 2. The indebtedness must be that of a the Taxpayer
3. The indebtedness must be connected with the taxpayers, trade, business or
profession.
4. The interest must be stipulated in writing.
5. The interest must be legally due
6. The interest expense must have been paid or incurred during the taxable
year.
7. The interest must not be incurred to finance petroleum operations
8. The interest arrangement must not be between related party transactions
9. The same was not treated as a capital expenditure
Interest paid or incurred by the taxpayer on all unpaid business related taxes shall
be deductible from gross income (RR 13-2000)
Limitation: Interest Arbitrage Rule
The taxpayers other wise allowable deduction for interest expenses shall be
reduced by 33% of the interest income which have been subjected to final
withholding tax.
Purpose: To discourage tax arbitrage wherein back to back loan is used to take
advantage of the lower tax rate on interest income and a higher interest rate on
interest expense deduction.
Interest incurred to Finance Petroleum Explorations
The interest incurred is capitalized as deferred exploration cost
Interest incurred between Related Taxpayers
Related Taxpayers (Sec. 36B)
a. Between members of the family

Family includes only the brothers, sisters, spouse, ancestors, and lineal
descendants of the taxpayer;
b. Between an individual and corporation more than 50% in the value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual
c. Between 2 corporations more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for the same individual if either
one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale or exchange was under the law applicable to
such taxable year, a personal holding company
d. Between the grantor and a fiduciary of any trust
e. Between a fiduciary of a trust an the fiduciary of another trust if the same
person is a grantor with respect to each trust
f. Between a fiduciary of a trust and beneficiary of such trust.
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to acquire property used in the
trade, business or exercise of a profession may be allowed as:
a. Interest expense or
b. Capital expenditure wherein the amount of interest is added to the cost of the
property
The two options are mutually exclusive
C. TAXES
Requisites for Deductibility
a. Payments must be for taxes and not for amounts representing surcharge or
penalties incident to delinquency
b. Paid or incurred during the taxable year in connection with the taxpayers
trade, business or profession
c. Tax must be imposed by the law and payable by the taxpayer
d. Must not be specifically excluded by the law from being deducted from gross
income
All taxes, whether national or local shall be allowed as deduction
Exceptions:
a. Philippine Income Tax
b. Foreign income tax, provided the taxpayer avails of the foreign tax credit;
otherwise, the tax maybe claimed as deduction from gross income
c. Estate and donors tax
d. Special Assessments and taxes assessed against local benefits of a kind that
tends to increase the value of the property assessed
e. Electric energy consumption tax
f. Input VAT, except input taxes attributable to exempt transactions; and
g. Taxes on sale, barter or exchange of shares of stock listed and traded through
the local stock exchange or through initial public offering
Optional Treatment for income taxes paid to any foreign country:
a. Claim as foreign tax credit against Philippine Income Tax Due
b. Claim as deduction from gross income

Tax Credit vs. Tax Deduction

1. Tax credit reduces the Philippine Income Tax Liability
while tax deduction reduces taxable income upon which tax liability is
calculated from
2. Tax credit is subtracted from the tax amount to be paid while tax deduction is
subtracted from gross income before the tax is computed
Tax credit is the amount of tax paid or accrued to a foreign country which is
subtracted from an individual s or entitys tax liability to arrive at the total tax
liability.
Who can Claim Tax Credit
a. Resident citizen
b. Resident aliens under the principle of reciprocity
c. Domestic corporations including partnerships except GPP
d. Beneficiaries of estates and trusts;
e. Members of GPPs
Who are not entitled:
Non resident citizens; resident aliens without reciprocity; non resident aliens; and
foreign corporations, whether residents or non residents
Limitations on Availing Tax Credit
Limitation A: Per Country Limitation
Taxable Income (foreign country
Philippine
----------------------------------------- x
Income Tax
Taxable income (all source)
Limitation B: Over-all limitations
Taxable Income (outside the country
Philippine
----------------------------------------x
Income Tax
Taxable income (all source)
Application:
One foreign country the allowed credit is the one lower between the result of
Limitation A and the foreign income tax paid or accrued
Two or more foreign countries
The credits may at the option of the taxpayer and irrespective of the method of
accounting employed, be taken in the year the taxes were incurred. In such case,
the credits for all subsequent years shall be taken upon the same basis.
D. LOSSES
Requisites for Deductibility
1. The loss must be that of the taxpayer
2. Evidenced by a closed and completed transactions
3. Not claimed as a deduction for estate tax purposes
4. Actually sustained and charged off during the taxable year
5. Not compensated for by insurance or other form of indemnity
6. The loss must be connected with his trade, business or profession or incurred
in any transaction entered into for profit though not connected with his trade,
business or profession

Requisites for Deductibility

7. For casualty losses, declaration of the loss must be filed with the BIR via a
sworn declaration of loss from the date of occurrence or discovery of the
casualty or robbery, theft or embezzlement; and
8. In case of casualty, capital and special losses, the additional special rules and
conditions for their deductibility must be satisfied and the amount to be
deducted must be limited to the amount prescribed.
CLASSIFICATION OF LOSSES
a. Ordinary-incurred in trade or business or practice of profession
b. Casualty Losses incurred by property connected with trade, business or
profession, if the loss arises from fire, storm, shipwreck or other casualties, or
from robbery, theft or embezzlement
c. Capital Losses losses arising from the sale or exchange of capital assets.
These losses must be deductible only to the extent of capital gains
d. Wagering Losses- deductible only to the extent of gain or winnings. Applies
to individuals only
CLASSIFICATION OF LOSSES
e. Abandonment Losses in Petroleum Operations all accumulated exploration
and development expenditures pertaining thereto shall be allowed as
deduction, provided that notice of abandonment shall be filed with the CIR
Net Operating Loss Carry-Over (NOLCO)
It is the excess of allowable deductions over gross income of the business for any
taxable year, which had not been previously offset as deduction from gross income.
General Rule:
NOLCO shall be carried over as a deduction from gross income for the next three (3)
consecutive taxable years immediately following the year of such loss.
Exception:
In the case of oil and gas well, losses incurred in any of the first ten (10) years of
operation may be carried over as a deduction from the gross income for the next
five (5) years following such loss.
E. BAD DEBTS
Concept: Resulting from worthlesness or uncollectibility, in whole or in part, of the
amounts due the taxpayer by others, arising from money lent or from uncollectible
amounts of income from goods sold or services rendered.
Requisites for deductibility
1. Existing, valid and legally demandable indebtedness due to the taxpayer;
2. Must have been reported as receivables in the income tax return of the
current or prior years;
Requisites for deductibility
3. Actually ascertained to be worthless and uncollectible as of the end of the
taxable year;
4. Actually charged off in the books of accounts of the taxpayer as of the end of
the taxable year of worthlessness;
5. Must not be sustained in a transaction entered into between related parties;

6. Connected with the taxpayers trade, business or practice of profession;

7. For insurance or surety companies, bad debts must have been declared
closed due to insolvency or for any such similar reason by the Insurance
Commissioner
Requisites for deductibility
8. For banks, the taxpayer shall submit to the BSP/Monetary Board the written
approval of the writing off of the indebtedness from banks books of accounts
at the end of the taxable year.
Tax Benefit Rule
The recovery of bad debts previously allowed as deduction in the preceding years
shall be included as part of the taxpayers gross income in the year of such recovery
to the extend of the income tax benefit of the said deduction. The total bad debts
recovered will not necessarily form part of the taxpayers income but only to the
extent that he was benefited
Tax Benefit Rule
Shirley was allowed to deduct P200,000 bad debts written off in 2013, where she
had a net income before bad debts of P180,000 and a net loss of P20,000. In 2014,
she was able to recover the bad debts written off in full. Explain the tax benefit rule
in relation to the treatment of the bad debts recovered.
F. DEPRECIATION
Concept: It is the gradual diminution in the service or useful value of tangible
property due from exhaustion, wear and tear and normal obsolescence
Reason: Property gradually approaches a point where its usefulness is exhausted.
By using the property, a gradual sale is made of it, and the depreciation charged is
the measure of he cost which has been sold.
Requisites for Deductibility
1. The allowance for property must be for property arising out of its use in the trade
or business, or out of not being used temporarily during the year.
Requisites for Deductibility
2. It must be charged off during the taxable year;
3. Allowance must be reasonable;
4. Statement of the allowance must be attached to the return;
5. For non-resident alien and foreign corporation, the property must be located
within the Philippines.
Rules on Deductibility of Depreciation of Vehicles (RR 12-2012)
a. The taxpayer must substantiate the purchase with sufficient evidence, which
contain the following, among others:
Rules on Deductibility of Depreciation of Vehicles (RR 12-2012)
a. Specific motor vehicle identification number, chassis number or other
registrable identification numbers of the vehicle;
b. Total price of the specific vehicle subject to depreciation;
c. Direct connection or relation of the vehicle to the development, management,
operation and/or conduct of the trade or business of the taxpayer.

2. Only one vehicle for land transport is allowed for the use of an official or
employee, the value of which shall not exceed P2.4 million
Rules on Deductibility of Depreciation of Vehicles (RR 12-2012)
3. No depreciation shall be allowed for yachts, helicopters and/or aircrafts and
land vehicles which exceed P2.4 million, unless the taxpayers main line of
business is transport operations or lease of transportation equipment and the
vehicles purchased are used in the said operations.
G. DEPLETION OF OIL AND GAS WELLS & MINES
Concept: It is the removal, extraction, or exhaustion of natural resources (wasting
assets) as mines, oil, and gas wells as a result of production or severance from such
mines or wells.
Purpose: As in the case of depreciation, it is that, as the product of the mine sold, a
gradual sale is being made of the taxpayers capital interest in the property.
Depletion allowance enables the taxpayer to recover that capital interest free of
income tax, at its cost on some other basis.
Tax Treatment:
a. If incurred in non-producing wells and/or mines: Outright expense deductible
in the year incurred
b. If incurred in non producing wells and/or mines in same contract area:
Outright expense or capitalized and amortized
The total amount deductible shall not exceed 25% of net income from mining
operation. The excess shall be carried forward to the succeeding year until fully
deducted.
The election to deduct the exploration and development expenditures is irrevocable
and shall be binding in succeeding taxable year.
Who are entitled to Deduct: Allowed only to mining entities which own an economic
interest in mineral deposits
H. CHARITABLE AND OTHER CONTRIBUTIONS
Requisites for Deductibility
1. It must be given to organization specified by law
2. The contribution or gift must actually be paid
3. It must be made within the taxable year
4. It must be evidenced by adequate records or receipts.
Kinds of Deductions
a. Ordinary: Partially Deductible Deduction
b. Special: Fully Deductible Deduction
H. CHARITABLE AND OTHER CONTRIBUTIONS
Ordinary: Partially Deductible Deduction
Those which are subject to limitation as to the amount deductible from gross
income.
Recipient:
1. The government of the Philippines or any of its agencies or political
subdivisions exclusively for public purposes

2. Accredited domestic corporations or associations organized or operated

exclusively for: religious, charitable, scientific, youth and sports
development, educational, rehabilitation of veterans, cultural or social
welfare.
Amount Deductible:
Corporate Taxpayer 5% of taxable income before contributions
Individual Taxpayer 10% of the taxable income before contribution
Special/Fully Deductible Deduction
Recipient is a:
a. The government of the Philippines or any of its agencies, or political subdivisions
including fully owned government corporations exclusively to finance, to provide
for, or to be used in undertaking priority activities in: health, education, youth and
sports development, human settlement,
Economic development, culture or science.
The above activities must conform to he development plan according to NEDA in
consultation with the appropriate government agencies.
Any donation not in accordance with said priority plan shall be subject to the 5/10%
limitation
b. Foreign institutions or international organizations pursuant to agreements,
treaties or commitments by the Philippine government and such institutions
or in pursuance of special laws.
c. Accredited NGOs
I. RESEARCH AND DEVELOPMENT
Concept: All costs incident to the development of an experimental or pilot model, a
plant process, a product, a formula or invention, or similar property, and the
improvement of already existing property of the type mentioned.
Research original and planned investigation undertaken by the taxpayer with the
prospect of gaining new scientific or technical knowledge and understanding.
Development it is the application of research findings or other knowledge to a plan
or design for the production of new or substantially improved materials, devices,
products, process, systems or services before the start of commercial production or
use.
I. RESEARCH AND DEVELOPMENT
Treatment of Research and Development
The taxpayer has the option to:
a. Claim the expense as deduction in the year incurred
b. Treat it as deferred expenses which are charged as capital account and
amortize the same over 60 months beginning with the month in which the
taxpayer first realizes benefits from such expenditures
The option to amortize and the period of amortization shall be irrevocable and
changing to a difference method may be allowed only with the authorization of the
CIR.
J. PENSION TRUST CONTRIBUTION
Requisites for Deductibility

1. Employer must have established a Pension or retirement plan for the

payment of reasonable pension to its employees
2. Pension plan is reasonable and actuarially sound.
3. It is funded by the employer
4. Amount contributed must no longer be subject to the control of the employer
5. Payment has not yet been allowed as deduction
** Applicable only to the employer on account of its contribution to the BIR-qualified
reasonable private plan for the benefit of its employees
OPTIONAL STANDARD DEDUCTION
Sec 34, par L In lieu of the deductions allowed under the paragraphs A to I, the
taxpayer may instead avail of the optional standard deduction of:
Corporation not to exceed 40% of its gross income
Individual not to exceed 40% of it gross receipts
Taxpayers entitled to OSD
1. Individual except non-resident alien
2. Corporation except non resident foreign corporation
OPTIONAL STANDARD DEDUCTION
Concept: A fixed percentage deduction without regard to any actual expenditure, in
lieu of the itemized deductions. It is only a privilege that may be enjoyed by certain
taxpayers.
PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
Who may avail?
1. Only an individual taxpayers
2. In case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction
Requisites for Deductibility
1. Insurance must have actually been taken;
2. The taxpayers family gross income does not exceed P250,000 in a taxable
year; and
3. The amount deductible should only be limited to P2,400 per family or P200
per month
Personal Exemptions
Taxpayers who are allowed personal and additional exemptions
1. Resident Citizens
2. Non Resident Citizens
3. Resident Alien
4. Non Resident Alien-Engaged in trade or business
NRA-ETB subject to the following conditions:
a. Exemption allowed is equal to that allowed in the income tax law in the
country of which NRA-ETB is a subject or citizen, to citizens of the Philippines
not residing in such country (reciprocity rule)
b. The amount of the personal exemption should not exceed the amount fixed
under the NIRC as the exemption for citizens or residents of the Philippines;
and

c. NRA-ETB must file a true and accurate return of the total income received by
him from all sources in the Philippines
Basic Personal Exemption Concept:
This is the subtraction from gross income which is allowed for the theoretical
personal, living and family expenses of an individual taxpayer regardless of status,
whether single or married individual judicially decreed as legally separated with no
qualified dependents or head of the family
Amount Allowed: P50,000 for each individual taxpayer
Married individuals who are both earning are allowed a basic personal exemption of
P50,000 each on their respective income; otherwise, only the earning spouse is
entitled to the exemption. The law treats the husband and wife as separate taxable
units
Additional Exemptions
Concept: These are the exemptions in addition to the basic personal exemptions
that are granted to certain individuals who have dependents that qualify them for
this exemption.
Amount Allowed: P25,000 for each qualified depended child not exceeding 4.
Dependent means a legitimate, illegitimate or legally adopted child of the taxpayer;
chiefly dependent upon and living with the taxpayer; not more than 21 years of age;
unmarried and not gainfully employed; and if such dependent, regardless of age, is
incapable of
Self support because of mental or physical defect.
Chiefly dependent means principal or main support. It means more than one half of
the support required by the dependent.
The husband shall be the proper claimant for the additional exemptions
Exceptions:
1. The wife is employed in the Philippines and the husband is unemployed
2. The husband is a non-resident citizen deriving income from foreign sources
3. The husband explicitly waived his right in the withholding exemption
certificate for all dependents (RR No 10-2008)
In case of legally separated spouses, it shall be claimed only by the spouse who has
custody of the child or children, provided, that the total amount of additional
exemptions that may be claimed by both shall not exceed 4.
Senior Citizens
A benefactor of a Senior Citizen shall be entitled to claim the basic personal
exemption of P50,000, which is the amount of basic personal exemption
Allowed under the NIRC for all taxpayers required to file ITRs. But he shall not be
entitled to claim the additional personal exemption of P25,000 which is allowable
only to individual taxpayers with a qualified child or children (RR 07-2007)
Status at the End of the Year Rule
Whatever is the status of the taxpayer at the end of the3 year shall be used for
purposes of determining his personal and additional exemptions
1. If the taxpayer should die during the taxable year, his estate may claim the
corresponding exemptions as if he died at the close of the year.

Status at the End of the Year Rule

2. If the spouse or any dependent should die or any dependent should marry or
become 21 years old during the year, or should become gainfully employed,
the taxpayer may claim the exemptions as if the spouse or dependent died or
as if such dependent married, became 21 years old or became gainfully
employed at the close of such year.
3. If the taxpayer should have additional dependents during the taxable year,
he may claim the corresponding exemptions in full for such year.
Non Deductible Items
1. Personal living or family expenses these are personal expenses and not
related to the conduct of trade or business.
2. Amount paid out for new buildings or for permanent improvements or
betterment made to increase the value of any property or estate
3. Amount expended in restoring property or in making good the exhaustion
thereof for which an allowance has been made
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate,
When the taxpayer is directly or indirectly a beneficiary under such policy
Estate and Trusts
Rule: Subject to income tax in the same manner as individuals.
Exceptions:
1. Personal exemption is limited only to P20,000
2. No additional exemption is allowed
3. Distribution to the heirs during the taxable year of estate income is
deductible from the taxable income of the estate