Basis of Government’s right to impose tax on income: Partnership theory

Basis of Governments right to impose
tax on income: Partnership theory
2
TAX ON INCOME
Income all wealth which flows into the taxpayer other than a
mere return of capital. It includes the forms of income specifically
described as gains and profits including gains derived from the
sale or other disposition of capital assets
- a sale does not necessarily mean income.
- it includes both taxable and non-taxable income.
Capital denotes the original investment or fund used in order to

generate earnings (income).
Gross Receipts receipts which may constitute capital as well as

income
Revenue refers to all funds/income derived by the government

whether from tax or other sources. Revenue is to the government
as income is to private persons or corporations.
(Commissioner vs. BOAC, 149 SCRA 395)
3
Sources of Income
Property
Labor (Service)
Sale/exchange of capital asset and
activity
For tax purposes, income from

whatever source forms part of the
taxpayers income.
4
Examples:
1. Treasure found or punitive damages

representing profits loss.
2. Amount received by mistake
3. Cancellation of the taxpayers
indebtedness. (Sec. 50, RR. No.2)
a) Payment of income
b) Gift
c) Capital transaction
5
4. Payment of usurious interest
5. Illegal gains - Moral turpitude is
not a touchstone of taxability. (P.
Hsbough Milk Co., 26 T.C. 707)
6. Tax refund
7. Bad debt recovery
6
Classifications of Income Subject to
Philippine Income Tax
1. Compensation Income
2. Professional Income
3. Business Income
4. Passive Income
5. Capital gains
7
Taxable Income means the
pertinent items of gross income
specified in the Tax Code, less the
deductions and/or personal and
additional exemptions, if any,
authorized for such types of income
by the Tax Code or other special
laws. (Sec. 31, NIRC of 1997)
8
Requisites for income to be taxable:
1. There must be gain or profit, whether in

cash or its equivalent. (Existence of
income)
2. The gain must be realized or received.

Thus, not all economic gains constitute
taxable income. (Realization of income)
Gen. Rule: A mere increase in the value of

property without actual realization, either
through sale or other disposition, is not
taxable.
9
A mere expectation of profits is not an income.
Exception: Economic benefit principle (BIR

Ruling No. 029 98, March 19, 1998, Revenue
Memorandum Circular 70-2010)
- receipt here includes constructive receipt.

(Doctrine of Constructive Receipt of Income)
- Income which is credited to the account

of or set apart for a taxpayer and which may
be drawn upon by him at any time is subject to
tax for the year during which so credited or set
apart, although not then actually reduced to
possession.
10
- To constitute receipt in such a case,
the income must be credited to the
taxpayer without any substantial
limitation or restriction as to the time or
manner of payment or condition upon
which payment is to be made. [Section
52, Revenue Regulations 2]
Example: Partners distributive share in
the profits of a general professional
partnership is regarded as received by
the partner, although not yet
distributed.
11
Tests to determine whether income is
earned:
a. Realization test (BIR Ruling 091-99, 8 July 1999);

b. Claim of right doctrine or doctrine of
ownership, command or control (CIR vs. Javier, 199
SCRA 824);
c. Economic benefit test or doctrine of
proprietary interest (BIR Ruling 123-97, 10 Nov. 1997
and BIR Ruling 029-98, 19 Mar. 1998);
d. Severance test
e. All events test
3. The gain must not be excluded by law
or treaty from taxation. (Recognition of
Income)
12
Methods of Accounting (Recognition of Income)
a.) Cash method - recognition of income and expense

dependent on inflow or outflow of cash (meaning, you
recognize the income when you actually receive the
cash payment for the sale, and you recognize the
expense when you actually pay cash for the expense)
b.) Accrual method - method under which income,

gains and profits are included in gross income when
earned whether received or not, and expenses are
allowed as deductions when incurred, although not
yet paid. It is the right to receive and not the actual
receipt that determines the inclusion of the amount in
gross income
Case: CIR vs. Isabela Cultural Corp, 12 Feb. 2007
13
c.) Special Methods
i. Installment
Sales of dealers in personal property
Under Rules and Regulations (R&R)

prescribed by the Sec. of Finance, upon
recommendation of the Commissioner: a person
who regularly sells or otherwise disposes of
personal property on the installment plan may
return as income therefrom in any taxable year
that proportion of the installment payments
actually received in that year, which the gross
profit realized or to be realized when payment is
completed, bears to the contract price.
14
Example: Sale in 2011 payable in 2 equal annual
installments. How to compute for income:
Contract Price/ Installments
Receivable P100,000
Cost 75,000
(GP) P 25,000
* installments payable in 2 equal annual
installments
GP/Contract Price ratio = 25T/100T = 25%
Collections in 2011 = P50T
Income for 2011 = P50T x 25% = P12,500
15
Sales of realty and casual sales of personalty
a) in cases of:
(i) casual sale or other casual disposition of

personal property (other than inventory on hand
of the taxpayer at the close of the taxable year)
for a price > P1,000, or
(ii) sale or other disposition of real property,

if in either case the initial payments do not
exceed 25% of the selling price
- income may be recognized same as in sales of

dealer in personal property in (1)
16
Sales of real property considered as capital asset by
individuals
- individual who sells of disposes of real

property, considered as capital asset & is
otherwise qualified to report the gain under (2)
above may pay the capital gains tax in
installments under R&R to be promulgated by the
Sec. of Finance, upon recommendation of the
Commissioner
ii. Deferred payment
iii. Long-term construction contract percentage
of completion
iv. Farming
17
Income tax a tax on all yearly profits arising from
property, profession, trade or offices or as a tax on
persons income, emoluments, profits and the like.
Nature of Philippine Income Tax:

1. It is a/an
a. direct tax
b. progressive tax (mainly)
c. excise tax
2. It is based on income, either gross or net, realized in

one taxable year.
3. It is comprehensive.
4. It uses a semi-schedular or semi-global tax system.
18
Types of Philippine Income Tax
1. Net income tax

a. Graduated income tax on individuals
b. Normal corporate income tax on corporations
2. Gross income tax
a. Minimum corporate income tax of 2% of the gross income
b. Improperly Accumulated Earnings tax of 10% on
improperly accumulated earnings
c. Optional Corporate Income Tax of 15% on Gross Income.
d. Gross Philippine Billings Tax
e. Gross onshore income Tax
f. Final withholding tax on passive income
g. Capital gains tax
3. Fringe benefit tax
4. Branch profit remittance tax
19
Situs of Income Taxation
(Comprehensive Tax Situs)
- it is determined by the nationality

(Citizenship Principle), residence of
the taxpayer (Residence Principle),
and source of income (Source
Principle).
20
GENERAL CLASSIFICATION OF TAXPAYERS
Who is a taxpayer?
Under Sec 22(N), a taxpayer is any
person subject to [income] tax.
Income taxpayers, with distinction

based on the amount of income subject to
tax, or the applicable tax rates, or both,
are classified as follows:
21
Kinds of Individual Taxpayers
1) Citizens
a) Resident citizens - Those residing in the Philippines unless

he qualifies as a non-resident under Sec. 22 (E)of the NIRC.
b) Non-resident citizens - Those not residing in the

Philippines.
A non-resident citizens means
1.) One who establishes to the satisfaction of the

Commissioner of Internal Revenue (CIR) the fact of his
physical presence abroad with a definite intention to reside
therein.
2.) A citizen of the Phils. who leaves the country during the
taxable year to reside abroad, either as immigrant or for
employment or on permanent basis.
22
3.) A citizen of the Phils. who works and derive
from abroad and whose employment thereat
requires him to be physically present abroad
most of the time (183 days) during the
taxable year.
4.) A citizen who has been previously

considered as non-resident citizen and who
arrives in the Phils. at any time during the
taxable year to reside permanently in the
country.
5.) A citizen who shall have stayed outside the

Phils. for 183 days or more by the end of the
year.
23
NOTA BENE: For purposes of income tax, an
overseas contract worker who is a Filipino
citizen and deriving income from abroad is
deemed a non-resident citizen and
therefore taxed only on income sourced
within the Philippines. However, in order to
qualify as a non-resident citizen, the
worker must be physically present abroad
most of the time or at least 183 days
(continuous or not) during the calendar
year.
24
2) Aliens
a) Resident aliens - Those residing in the Philippines

though not a citizen thereof.
- Those who are actually present in the Phils.

and who are not mere transients or sojourners.
b) Non-resident aliens - Those not residing in the Phils.

and who is not a citizen thereof.
(1) Engaged in trade or business comes and

stays in the Phils. For an aggregate period of more
than 180 days during the calendar year.
-includes performance of personal services
within the Phils.
(2) Not engaged in trade or business
25
Kinds of Corporate Taxpayers
1) Domestic corporations - Those created or

organized in the Phils. or under its laws.
2) Foreign corporations - Those created,

organized or existing under any laws other
than those of the Phils.
a. Resident - Those foreign corporation

engaged in trade or business within the Phils.
b. Non-resident - Those foreign corporation

not engaged in trade or business within the
Phils.
26
Primary Sub-classification/s
Classification
Residents of the Philippines (5%-34%)

Citizens of the
Philippines
Not residents of the Philippines (5%-34%) Sec. 22(E)
Residents of the Philippines (5%-34%) Sec. 22(F)
Engaged in Trade or Business in

the Philippines (5%-34%)
Aliens Not Residents of the
Philippines
Sec. 22 (G)
Not engaged in Trade or Business
in the Philippines (25% of GI)
Individuals
Individual Employed by Regional or Area Headquarters and
Regional
Operating Headquarters of Multinational Companies
(15% of GI)
Individual Employed by Offshore Banking Units
Special classes (15% of GI)
of Individuals
Individual Employed by a foreign service contractor or by a
foreign service
subcontractor engaged in petroleum operations in the
Philippines
27
(15% of GI)
Estates
and
Trusts
Domestic Corporations (30%) Sec. 22 (C )
Foreign Resident Foreign Corporations Sec. 22 (H)

Corporations
Sec. 22(D) Non-resident Sec. 22 (I)
Proprietary educational institutions and non-profit hospitals
Domestic Depositary Bank (Foreign Currency Deposit Units)
Resident international carriers
Corpo- Offshore Banking Units

rations
Special Resident Depositary Bank (Foreign Currency Deposit Units)
Classes
of Regional or Area Headquarters Sec. 22( DD) and Regional
Corporations Operating Headquarters Sec. 22 (EE) of Multinational Companies
Non-resident cinematographic film owners, lessors or distributors
Non-resident owners or lessors of vessels chartered by Philippine

Nationals
Non-resident lessors of aircraft, machinery and other equipment

28
Source Principle
In general, income may be earned from:
1. Within the Philippines

- compensation for labor/service
derived from Philippine sources
(Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue, 121 Phil. 579; 13 SCRA 601 (1965);
Commissioner of Internal Revenue v. British
Overseas Airways Corporation (BOAC), 149 SCRA
395; Commissioner of Internal Revenue v. Baier-Nickel,
G. R. No. 153793, August 29, 2006; )
29
- interest on bonds, notes, deposits and
the like earned in the Philippines (residence
of debtor)
- dividends declared by domestic
corporations
- rentals and royalties from property
located within the Philippines
- gains, profits and income from sale of
real property located in the Phils. as well as
from personal property purchased in the
Philippines.
(CIR vs. Japan Airlines, Inc., G.R. No. 60714, 6 March 1991, The
Municipality of Jose Panganiban, Province of Camarines Norte,
etc. vs. The Shell Company of the Phils, Ltd., G.R. No. L-
18349, 30 July 1966)
30
2. Without the Philippines
- compensation for labor/service
rendered outside the Philippines
- interest on bonds, notes, deposits
and the like earned abroad
- dividends declared by non-resident
foreign corporations
- rentals and royalties from property
located outside the Philippines
- gains, profits and income from sale of
real property as well as from personal
property outside the Philippines
31
3. Partly within and partly without the
Philippines
- transportation or other services
rendered partly within and partly
outside
- the sale of personal property
produced within the sold outside, or
vice versa
32
Tax on Individuals
Pertinent Items of
GROSS INCOME
Subject to Final Tax

(i.e. passive income,
capital gains,
transaction tax)
EXCLUSIONS/EXEMP
TIONS
33
Gross Income means all income derived
from whatever source x x x (Sec. 32)
Income subject to final tax income

collected through the withholding tax
system. It is a final settlement of the income
tax due on said income.
Exclusions - income received or earned but

is not taxable as income because it is
exempted by law or by treaty.
- Income of individuals may either be subject

to graduated income tax rates or to
preferential tax rates.
34
1. Compensation Income - is
considered as having been earned in the
place where the service was rendered
and not considered as sourced from the
place of origin of the money;
- Payment for services, other than

compensation income, is considered as
having been earned at the place
where the activity or service was
performed;
35
- includes salaries, wages,
commissions, fees, tips amd gratuities,
hazard and emergency pay, overtime,
emoluments, honoraria, bonuses, fixed
or variable allowances (BIR Ruling No. DA-233-2007, 17
Apr. 2007, BIR Ruling No. DA-018-2008, 16 Jan. 2008, BIR Ruling No. DA-
778-2009, 15 Dec. 2009) , fringe benefits,
pensions, retirement, separation pay,
proceeds from profit-sharing, COLA,
PERA, etc.
- however, it does not include

compensation for services rendered by
an independent contractor and income
derived from professional partnership.
36
A. Excluded/Exempt
1. Retirement benefits received under

Republic Act 7641 and those received by officials
and employees of private firms under a reasonable
private benefit plan maintained by the employer
which meets the following requirements:
The plan must be reasonable;
The benefit plan must be approved by the BIR;
The retiring official must have been in the service of the
same employer for at least ten (10) years and is not less
than fifty (50) years of age at the time of retirement, and
The retiring official or employee should not have previously
availed of the privilege under the retirement benefit plan of
the same or another employer.
Sec. 32(B)(6)(a)
37
2. Any amount received by an employee or
by his heirs from the employer due to
death, sickness or other physical disability
or for any cause beyond the control of said
employee, such as retrenchment,
redundancy or cessation of business. Sec.
32(B)(6)(b)
3. Amounts received by reason of

involuntary separation will be exempt from
income tax even if the employee, at the
time of separation, had rendered less than
ten (10) years of service and/or is below
fifty (50) years of age.
38
4. Social security benefits, retirement gratuities,
pensions and other similar benefits received by
residents or non-resident citizens or aliens who come to
reside permanently in the Philippines from foreign
government agencies and other institutions, private or
public.
5. Payment of benefits under the law of the United

States administered by the United States Veterans
Administration. Sec. 32(B)(6)(d)
6.Payment of benefits made under the Social Security

System. Sec. 32(B)(6)(e)
7.Benefits received from the GSIS Act of 1937, and the

retirement gratuity received by government officials
and employees. Sec. 32(B)(6)(f)
39
8. Compensation Income shall not include
remuneration paid for:
i. agricultural labor paid entirely in
products of the farm where the labor is
performed; or
ii. Domestic service in a private home;
or
iii. Casual labor not in the course of the
employers trade or business; or
iv. Services by a citizen or resident of
the Philippines for a foreign government of
an international organization. Sec. 78 (A)
40
9. Actual, moral, exemplary and nominal damages in
connection with a final judgment or compromise
agreement arising out of or related to an employer-
employee relationship.
10. Life insurance proceeds paid to the heirs or

beneficiaries upon death of the employee. However,
interest payments agreed under the policy for the
amounts which are held by the insured will be included
in the gross income. Sec. 32(B)(1)
11. Amounts received by the insured as a return of

premium Sec. 32(B)(2)
12. Compensation for injuries or sickness Sec.

32(B)(4)
41
13. Income exempt under any treaty obligation
binding upon the Philippine government Sec.
32(B)(5)
14. Facilities or privileges are of relatively small

value which are offered or furnished by the
employer merely as a means of promoting the
health, goodwill, contentment or efficiency of his
employees.
15. Benefits, privileges, and facilities which are

given to employees for the exclusive benefit or
convenience of the employer. (Convenience of
the Employer Rule) (Revenue Audit Memo No. 1-
87, 23 April 1987)
42
De minimis benefits [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98
as amended by Rev. Regs. No. 8-2000]
a. Monetized unused vacation leave credits of private

employees not exceeding ten (10) days during the year and
the monetized value of leave credits paid to government
officials and employees;
b. Medical cash allowance to dependents of employees not

exceeding P750 per semester or P125 per month;
c. Rice subsidy of P1500 per month or one sack of 50 kg.

Per month amounting to not more than P1,500 granted by
an employer to his employees (RR 5-2008);
d. Uniforms given to employees by the employer not

exceeding P5,000 per annum; (R.R. 8-2012, effective 1
January 2012)
43
e. Medical benefits given to the employees by the
employer not exceeding P10,000 per annum;
BIR Ruling 019-02: To be considered de minimis

medical allowance, the ff. conditions must concur:
i. The amount given to the EE shall be for his own

medical expense;
ii. The amount actually given and actually spent shall

not exceed P10,000 in any given calendar year;
iii. The EE must fully substantiate with or in his name

the medical allowance to be granted.
f. Laundry allowance of P300 per month;
44
g. Employee achievement awards, e.g. for
length of service or safety achievement, which
must be in the form of a tangible personal
property other than cash or gift certificate,
with an annual monetary value not exceeding
P10,000 received by the employee under an
established written plan which does not
discriminate in favor of highly paid employees;
h. Christmas and major anniversary

celebrations not exceeding P5,000 per
employee per annum;
45
i. Company picnics and sports tournaments in
the Philippines and are participated exclusively
by employees; and removed
j. Daily meal allowance for overtime work not

exceeding twenty-five (25%) of the basic
minimum wage.
k. Flowers, fruits, books or similar items given

to employees under special circumstances,
e.g. on account of illness, marriage, birth of a
baby, etc. [as enumerated in RR 03-98, as
amended by RR 10-00] removed (R.R. 5-
2011)
46
The amount of de minimis benefits
conforming to the ceilings herein
prescribed shall not be considered in
determining the 82,000 of other benefits
(#17). However, if the employer pays more
than the ceilings, the excess shall be
taxable to the employee if such excess is
beyond 82,000. (R.R. 3-2015)
47
15. Advances or reimbursements for
travelling, representation and other
ordinary and necessary expenses
incurred by the employee in the
performance of his duties, if the
employee is required to
account/liquidate for said expenses.
The excess of actual expenses over
advances made shall be treated as
taxable income if such amount is not
returned to the employer.
48
16.GSIS, SSS, Medicare and Pag-ibig contributions
and union dues of individual employees. Sec.
32(B)(7)(f) RMC 53-2011, RMC 27-2011
17.Thirteenth (13th) month pay and other benefits

such as Christmas bonus, productivity incentive
bonus, loyalty awards, gifts and other benefits of
similar nature to the extent that the total amount
thereof does not exceed P82,000. Sec. 32(B)(7)(e)
* Revenue Regulation 3-2015
18. Anyone earning at least the minimum wage

(including holiday pay, overtime pay, hazard pay, and
night shift differential) in his/her region and has no
other reportable income will not pay income tax.
(Sec. 6 of R.A. 9504)
49
19.Salaries and stipends in dollars received by
non-Filipino citizens serving as staff of the IRRI
and the Ford Foundation (R.A. 2707)
20.Tax exemption of allowances paid to military

personnel.
21. Tax exemption of qualified senior citizen

provided he qualifies to be a minimum wage
earner in accordance with R.A. 9504. (R.A.
9994, 27 July 2009)
50
B. Subject to Final Tax
Fringe Benefits Tax
Fringe benefits refer to any

good, service, or other benefit
furnished or granted in cash or in
kind by an employer to an individual
employee (except rank and file
employees). Sec. 33(B)
51
Rank and file employees shall mean all
employees who are holding neither
managerial nor supervisory position.
Sec. 22 (AA)
Managerial employee is one who is

vested with powers or prerogatives to
lay down and execute management
policies and/or to hire, transfer,
suspend, lay-off, recall, discharge,
assign or discipline employees. (Labor
Code)
52
Supervisory employees - those who,
in the interest of the employer,
effectively recommend such
managerial actions if the exercise of
such authority is not merely
routinary or clerical in nature but
requires the use of independent
judgment. (Labor Code)
53
1. Housing
Taxable
(a) Lease of residential property for

the use of the employee as his usual
place of residence.
(b) Residential Property owned by
employer and assigned to employee as
his usual place of residence.
(c) Residential property purchased
by employer on installment basis for the
use of employer as his usual place of
residence.
54
(d) Residential property purchased by ER
and ownership is transferred to EE as his usual
place of residence.
(e) Residential property transferred to
employee at less than employers acquisition
cost.
Not taxable
a. housing privilege of military officials of the

AFP located inside or near the military camps;
b. a housing unit which is situated inside or at
most 50 m from the perimeter of the business
premises;
c. temporary housing for an employee for 3
months or less;
55
2. Expense Account
Taxable
a. expenses incurred by the

employee which are paid or reimbursed
by his employer not supported by
receipts in the name of the employer
b. personal expense of the employee
which are paid or reimbursed by his
employer w/n supported by receipts in
the name of the employer
56
c. household expenses of the
employee borne by the employer.
Not taxable
a. Expenditures supported by
receipts in the name of the employer
and expenditure that do not partake the
nature of a personal expense
attributable to the employee
b. Representation and Transportation
Allowances (RATA)
57
3. Motor Vehicle
Taxable when employer:
a. Purchase the motor vehicle in the

name of the employee;
b. provides the employee with cash
for the purchase of a motor vehicle in
the name of the employee;
c. shoulders a portion of the amount
of the purchase price of a motor
vehicle in the name of the employee
58
d. Purchases the car on installment in
the name of the employee;
e. owns and maintains a fleet of motor
vehicle not normally used in business
f. leases and maintains a fleet of motor
vehicles not normally used in business
g. the use of yacht whether owned and
maintained or leased by the employer
* How about use of aircraft (including

helicopters)?
59
Not taxable
Motor vehicles used for sales,

freight, delivery service and other
non-personal uses.
4. Interest on loan at less than market

rate to the extent of the difference
between the market rate and actual
rate granted
60
5. Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs or other similar organizations
6. Expenses for foreign travel
Except:
Where the expenses for foreign travel paid by the

employer for the employee are for the purpose of
attending business meeting or convention. The
exemption covers only the following expenses:
a) Inland travel expenses except lodging cost in

hotel averaging US$ 300 or less per day; and
61
b) Cost of economy or business class
airline ticket. Travel expenses should be
supported by documents proving the actual
occurrences of the meetings or conventions.
Likewise, documents and evidence showing
the business purpose of the employees
travel must be presented otherwise, the
entire cost will be considered taxable fringe
benefit.
However, if the ticket is a first class one,

30% of the cost of the ticket shall be subject
to a fringe benefit tax.
7. Holiday and vacation expenses
62
8. Educational assistance
a. Education granted to employee
Requisites:
(1) Educational grant whereby the study is
directly connected with the trade, business or
profession of the ER.
(2) And there is a written contract obligating the
EE to remain under the employment for a certain
period.
b. Educational Assistance granted to the

dependents of the employee through a
competitive scheme under a scholarship
program of the company.
63
9. Life or health insurance and other non-
life insurance premiums or similar
amounts in excess of what the law
allows.
Except:
a. Contribution of the employer for

the benefits of the employee pursuant
to existing laws.
b. The cost of premium borne by the
employer for the group insurance of his
employees.
64
Fringe Benefits Tax tax imposed on
fringe benefits which are granted or are
paid by an employer to an employee
occupying managerial or supervisory
position.
It is a tax on the income of the

employee although paid by the
employer on behalf of the employee.
The employer can claim the fringe

benefit and the fringe benefit tax as a
deductible expense from his gross
income.
65
Tax Rate and Tax Base [Generally] 32% of
the grossed-up monetary value (GMV)
GMV represents the whole amount of income
realized by the employee.
Special Cases:
For fringe benefits received by non-resident

alien not engaged in trade of business
(NRANETB), the tax rate is 25% of thegrossed-
up monetary value (GMV).
For fringe benefits received by alien individuals
and Filipino citizens employed by regional or
area headquarters, regional operating
headquarters, offshore banking units (OBUs), or
foreign service contractor, the tax rate is 15% of
the grossed-up monetary value (GMV).
66
Benefits not subject to Fringe Benefits Tax:
1. Those that are exempted from income tax.

2. Contributions of the employer for the benefit of
the employee retirement, insurance, and
hospitalization benefit plans.
3. Benefits granted to the rank and file, whether
granted under a CBA or not.
4. De minimis benefits
5. Benefits granted to employees as required by
the nature of, or necessary to the trade,
business or profession of the employer.
6. Benefits granted for the convenience of the
employer. (Convenience of the Employer Rule)
CIR v. CA, 203 SCRA 72
67
C. Part of the Pertinent items of
Gross Income
- compensation income that is

neither exempt/excluded nor subject
to a final tax.
68
Allowed deductions from gross
compensation income:
1. Basic Personal exemption (R.A. 9504);
2. Additional exemption for qualified
dependent child (R.A. 9504);
a "dependent" means a legitimate,
illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer if such dependent is
not more than twenty-one (21) years of age,
unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-
support because of mental or physical defect.
3. Premium payments on health and/or
hospitalization insurance Sec. 34(M)
69
Withholding Taxes is a systematic way
of collecting taxes at source.
Types of withholding at source:
1) final withholding tax; and
Under the final withholding tax system

the amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income due from the
payee on the said income. [1st sentence, 1st
par., Sec. 2.57 (A), Rev. Regs. No. 2-98]
70
2) creditable withholding tax
Under the creditable withholding tax

system, taxes withheld on certain
income payments are intended to equal
or at least approximate the tax due
from the payee on the said income. The
income recipient is still required to file
an income tax return and/or pay the
difference between the tax withheld and
the tax due on the income. [1st and 2nd
sentences, Sec. 257(B), Rev. Regs. No.
2-98]
71
Kinds of creditable withholding taxes:
(a) taxes withheld on income

payments covered by the expanded
withholding tax; and
(b) taxes withheld on

compensation income.
72
Basic Rules on Compensation Withholding Taxes
As a general rule, all salaries earned by persons as

government or non-government employees are subject
to withholding tax, except of the ff. items:
1. Commission paid by an insurance agent to his sub-

agents
2. Compensation for services by a citizen or resident of
the Phils. for a foreign government or an
international organization.
3. Remuneration for casual labor not in the course of
the employers trade/ business
4. Remuneration for private service performed by
maids, cooks, gardener, family drivers and the like
5. Remuneration paid to agricultural labor and paid
entirely in products of the farm.
6. Minimum wage earners
73
2. Income derived from the conduct of
trade or business or the exercise of a
profession
Professional Income - Any other income that is

not derived from personal services or not related
to an employer employee relationship and is
generally subject to tax on net income basis.
- The value derived from an exercise of

profession, business or utilization of capital
assets.
Income from Business - Gains or profits derived

from rendering services, selling merchandise,
manufacturing products, farming and long- term
construction contracts.
74
A. Excluded/Exempt
1. The amount received by the insured, as a return of
premiums paid by him under life insurance,
endowment, or annuity contracts, either during the
term or at the maturity of the term mentioned in the
contract or upon surrender of the contract. Sec.
32(B)(2)
2. 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. Sec. 32(B)(3)
3. Income derived from any public utility or from the
exercise of any essential governmental function
accruing to the Government of the Philippines or to
any political subdivision thereof. Sec. 32(B)(7) (b)
75
4. Income derived from investments in the Philippines in
loans, stocks, bonds or other domestic securities, or
from interest on deposits in banks in the Philippines by
(i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional
financial institutions established by foreign
governments. 32(B)(7) (a)
5. Income exempt under any treaty obligation binding
upon the Philippine government Sec. 32(B)(5)
6. Gains realized from the same or exchange or
retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5)
years.
7. 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.
76
8. Tax-exemption for 10-year period of the income
generated from commercial sale of the invention of
inventors (R.A. 7459).
9. Income earned by Barnagay Micro Business
Enterprise (BMBE)
B. Income subject to final tax

Gross Income
77
GROSS INCOME derived from business
shall be equivalent to gross sales less sales
returns, discounts and allowances and cost
of goods sold.
"Cost of goods sold' shall include all

business expenses directly incurred to
produce the merchandise to bring them to
their present location and use.
GROSS INCOME = NET SALES

COST OF GOODS SOLD/COST OF
SALES
78
CLASSIFICATION OF GROSS INCOME
FROM BUSINESS/PROFESSION:
1. Manufacturing, merchandising, and

servicing
2. Farming
3. Long term contract
* The term trade or business includes

the performance of the functions of a
public office. [Section 22(S), NIRC]
79
In the case of taxpayers engaged in the
sale of service, 'gross income' means
gross receipts less sales returns,
allowances and discounts.
For a trading or merchandising concern,

'cost of goods' sold shall include the
invoice cost of the goods sold, plus
import duties, freight in transporting the
goods to the place where the goods are
actually sold, including insurance while
the goods are in transit.
80
For a manufacturing concern, 'cost of
goods manufactured and sold' shall
include all costs of production of
finished goods, such as raw materials
used, direct labor and manufacturing
overhead, freight cost, insurance
premiums and other costs incurred to
bring the raw materials to the factory
or warehouse.
81
Gross Income from Farming
Income from farming refers to
earnings derived from its operation by a
person. It includes the following:
1. Gross receipts from sale of livestock

and products purchased from others;
2. Cash received from sale of products
raised in the farm;
3. Gains from sale of work animals and
farm equipment; and
4. Miscellaneous income such as rent
received on crop shares, proceeds of
insurance on growing crops, etc.
82
Methods of Computing Gross Income
Derived from Farming:
1. Cash basis
2. Accrual basis
Gross Income from Long Term Construction

Contracts
When income is derived from

construction contracts, the completion
of which usually covers a period over
one year.
83
Allowed deductions from gross
business/professional income
Kinds of Deductions:
1. Itemized deductions
2. Optional standard deduction (OSD)
3. Special deductions
84
General rules:
a) Deductions must be paid or incurred in

connection with the taxpayers trade,
business or profession
It must be directly connected with trade

or business or profession of the taxpayer.
b) Deductions must be supported by

adequate receipts or invoices
The claimed deduction must be

evidenced by official receipts or other
adequate records.
85
The evidence must establish the ff:
a) the amount of expenses being

deducted
b) the direct relation of such

to the development, management,
operation, and/or conduct of the trade,
business or profession of the taxpayer.
Note: Cohan Rule Principle

86
ITEMIZED DEDUCTIONS
I. Expenses
II. Interest
III. Taxes
IV. Losses
V. Bad debts
VI. Depreciation
VII. Depletion
VIII. Charitable and other
contributions
IX. Research and Development
X. Pension and trust contribution
87
I. Expenses
Requisites for deductibility
1. BUSINESS TEST:
a) must be ordinary and necessary,

b) must be paid or incurred during the taxable year,
c) must be paid or incurred in carrying on or which are
directly attributable to the development,
management, operation and/or conduct of the
trade, business or exercise of a profession,
d) must be reasonable, and
e) must not be against public policy, public moral or
law
Cases: Hospital De San Juan De Dios vs. CIR (10 May 1990);
ESSO Standard Eastern Inc. vs. CIR (175 SCRA 158-159);
CIR vs. Isabela Cultural Corporation (12 February 2007)
88
2. SUBSTANTIATION TEST:
It must be substantiated with

sufficient evidence, such as official
receipts or other adequate records,
showing:
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.
89
* The tax required to be withheld on the amount
paid or payable must have been paid to the BIR
by the taxpayer, who is constituted as a
withholding agent of the government.
KINDS OF BUSINESS EXPENSES:

1. Compensation for personal services
2. Travelling expenses
3. Representation and Entertainment expenses
4. Advertising and Promotional expenses
5. Rent expenses
6. Cost of material and supply
7. Repairs
Cases: Aguinaldo Industries vs. CIR (1982); 90

A private educational institution may, at its
option, elect
a) to deduct expenditures otherwise considered as

capital outlays of depreciable assets incurred
during the taxable year for the expansion of
school facilities
b) to deduct allowance for depreciation thereof
Sec. 34(A)(2)
- It must be those referred under section 27
91
- Section 36(A)(2), (3) not applicable
General these expenditures are not deductible
as business expense exception private educational
institution can claim it under Sec. 34(A)(2)
BUSINESS EXPENSE ALLOWANCE FOR DEPRECIATION
No carryover There is carryover
Can be claimed for one only Can claim it for a longer period
year depending on the life span of the
property
If the amount of capital It can accommodate all of the
outlay is substantial, it expenses incurred
cannot accommodate all of
the expenses incurred
92
II. Interest
a) there must be indebtedness.

b) the indebtedness must be that of the
taxpayer
c) the indebtedness must be connected
with the trade, business or profession of
the taxpayer
d) the interest must have been paid or
incurred during the taxable year
93
e) the interest must have been stipulated in
writing
f) the deduction for interest expense shall be

reduced by an amount equal to 33% of the
interest income subject to final tax. (tax
arbitrage)
g) The interest payment arrangement must

not be between related taxpayers as
mandated in Sec. 34(B)(2)(b), in relation to
Sec. 36(B), both of the Tax Code of 1997.
94
*Interest between related taxpayers:
Members of the family

Individual and corp.
Between corps.
Grantor and fiduciary (trustee) of any trust.
Fiduciary and another fiduciary same grantor
Fiduciary and beneficiary or such trust
h) The interest must not be incurred to finance

petroleum operations.
i) In case of interest incurred to acquire property

used in trade, business or exercise of profession,
the same was not treated as a capital expenditure.
*Optional treatment
95
Deductible interest expenses:
Interest on taxes. However, fines, penalties

and surcharges on taxes are not deductible
Interest paid by corporation on script
dividends
Interest on deposits paid by the authorized
bank of the CB
Interest paid by legal or equitable owner
on mortgage of real property
96
Non deductible interest expenses
Interest paid on preferred stock which is

considered interest on capital by virtue of RMC
17-71
Interest on undrawn salaries and bonuses
Interest on capital for cost keeping
Interest paid where parties provide no
stipulation to pay interest in writing
Interest on indebtedness if incurred to finance
petroleum and on interest paid on
indebtedness paid in advance through discount
or otherwise
Section 34(B)(2)
97
III. Taxes
1. It must be paid or incurred within the taxable

year.
2. It must be paid or incurred in connection
with the taxpayers trade, profession or business.
Examples:
a) Import duties
b) Business taxes
c) Occupation taxes
d) Privilege and license taxes
98
e) Excise taxes
f) Documentary stamp taxes
g) Automobile registration fees
h) Real property taxes
3. It must be imposed directly on the

taxpayer.
4. It must not be specifically excluded

by law from being deducted from the
taxpayers gross income.
99
Limitation: In the case of a nonresident
alien individual engaged in trade or
business (NRAETB) and a resident
foreign corporation (RFC), the deductions
for taxes shall be allowed only if and to the
extent that they are connected with
income from sources within the
Philippines.
100
Non-deductible taxes
1. Foreign income tax, if not claimed as tax credit

2. Final Taxes
3. Estate and donors taxes
4. Stock transaction tax on the sale, barter or
exchange of s/s listed and traded through the
local stock exchange.
5. Taxes assessed against local benefits tending to
increase the value of the property
6. Taxes which are not in connection with the
trade, business or profession of taxpayer.
7. Income tax imposed by the Philippine govt.
8. Value added Tax (VAT)
9. Energy Taxes
101
Tax Credit Tax deduction
-- deducted from Phil -- deducted from the gross
income tax income
-- all taxes are allowed to be -- only foreign income
deducted with the taxes may be claimed
exception of the taxes as credits
expressly excluded
102
IV. Losses actually sustained during
the taxable year and not compensated
for by insurance or other forms of
indemnity shall be allowed as
deductions:
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, shipwreck,
or other casualties, or from robbery,
theft or embezzlement.
103
a) The loss must be that of the

taxpayer.
b) There must be an actual loss suffered

in a closed and completed transaction.
c) The loss must be connected with the

taxpayers trade, business or profession.
d) The loss must not be compensated

for by insurance or otherwise.
104
d) The loss must not be compensated for by
insurance or otherwise.
e) The loss must be actually sustained and

charge off during the taxable year.
f) In the case of casualty loss,

declaration of loss must be filed within 45
days from the occurrence of the casualty
loss.
g) The loss must not be claimed as

deduction for estate tax purposes in the
estate tax return.
105
Kinds of losses
1. Transaction losses losses arising from

closed and completed transaction in the
conduct of trade and business.
Example:
a. loss on sale of ordinary assets
b. foreign exchange losses
2. Casualty losses loss of properties used in

trade, business, or practice of profession.
Arising from fires, storms, shipwreck, or other
casualties, or robbery, theft or embezzlement.
106
3. Capital losses losses from capital asset
other than those subjected to capital gains
tax. Deductible only up to the extent of
capital gains.
Examples:
a. sale or exchange of capital
assets;
b. short sales of properties;
c. securities becoming worthless;
d. loss for failure to exercise
option to buy capital asset;
e. wagering/gambling losses.
107
4. Net operating loss carryover (NOLCO)
arises when allowable deductions exceeds
gross income.
Rules:
a. carried over for the next 3 immediately
succeeding years;
b. not applicable under OSD;
c. not applicable against MCIT;
d. forms part of allowable deductions as a
special allowable deduction upon
application.
108
5. Special losses with special or specific
rules based on its nature.
Example:
a. loss on voluntary removal of
buildings;
b. loss from illegal transactions;
c. loss on exchange between
related parties;
d. shrinkage of value of shares;
e. write-off of inventories;
f. abandonment of petroleum
operations.
109
Preferential tax treatment for Capital Gain
(Loss):
1. Net capital gain is added to ordinary gain but

net capital loss is not deductible from
ordinary gain.
2. Net ordinary loss is deductible from net
capital gain.
3. Capital losses are deductible only to the
extent of the capital gain.
4. For the individual the reportable percentages
of capital gain or loss shall be:
a. 100% if the capital asset is held for one year or less
b. 50% if the capital asset is held for more than one year
110
V. Bad debts - Debts due to the taxpayer when
actually ascertained to be worthless and
charged-off within the taxable year.
1) There must be a valid and subsisting debt.

2) The same must be connected with the
taxpayers trade, business or practice of
profession.
3) The same must not be sustained in a
transaction entered into between related parties
enumerated under Sec. 36 (B) of the NIRC.
4) The same must be actually charged-off the
books of accounts of the taxpayer as of the end
of the taxable year.
111
VI. Depreciation - The gradual
diminution in the useful value of
tangible property used in trade or
business resulting from exhaustion,
wear and tear, and normal
obsolescence.
The term is also applied to amortization

of value of intangible assets the use of
which in trade or business is definitely
limited in duration. (Basilan Estates,
Inc. vs. Comm., 5 September 1967)
112
The allowance for depreciation must be

reasonable
It must be for property arising out of its use or

employment in the business or trade, or out of
its not being used temporarily during the year
It must be charged-off during the taxable year;
A statement on the allowance must be attached

to the return.
The property must have a limited useful life.
113
VII. Depletion of oil and gas well and
mines
Depletion is the exhaustion of natural

resources due to production. It is the
reduction of cost or value of natural
resources such as oil and gas wells and
mines as the resources are converted into
inventories.
Limitation: A reasonable allowance for

depletion computed using the cost-depletion
method shall be granted provided that the
allowance for depletion shall not exceed the
capital invested.
114
VIII. Charitable and other contributions
The contribution must actually be paid or made to the

Phil. Government or any of its agencies or political
subdivision or to any domestic corporations or
associations specified by the Tax Code or other entities
as allowed by the Tax Code and existing special laws.
It must be made within the taxable year;
It must not exceed 10% of the individuals taxable

income and 5% of the corporations taxable income
before deducting the contribution (applicable only to
contributions with limit); and
It must be evidenced by adequate records or receipts.
115
The following are subject to limit:
Donations to the Philippine government or any of its agencies or

any political subdivision thereof exclusively for public purposes;
Donations to accredited domestic corporations or associations

organized and operated exclusively for:
Religions;
Charitable;
Scientific;
Youth and sports development;
Cultural; or
Educational purposes; or for the
Rehabilitations of veterans; and
Donations to social welfare institutions or to non-government

organizations in accordance with rules and regulations promulgated
by the Secretary of Finance provided, no part of the net income of
which inures to the benefit of any private stockholders or
individual.
116
Contributions deductible in full under the Tax Code:
Donations to the government of the Philippines or to 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:
Education;
Health;
Youth and sports development;
Human settlements;
Science and culture; and
Economic development
According to the national priority plan determined by NEDA

provided, that donations not in accordance with the said annual
priority plan shall be with limit;
Donations to foreign institutions or international organizations in

pursuance or compliance with agreements, treaties, or
commitments entered into by the government of the and the
foreign laws or international organizations or in pursuance of
special laws, and
Donations to certain accredited non-government organization. 117

IX. Research and development -
are for improvements of processes
and formulas as well as the
development of improved or new
products. As a general rule, R&D only
extends from the laboratory or
drawing board to prototype status;
i.e., so long as an activity still
contains an element of
uncertainty/technical risk, it is within
the realm of R&D.
118
R&D expenditures which are paid or incurred
by a taxpayer during the taxable year in
connection with his trade, business or
profession may be treated EITHER as:
1. Ordinary and necessary expenses allowed

as deduction during the taxable year when
paid or incurred (i.e., as an outright
deduction for the full expenditure), or
2. Deferred asset (or deferred expense)

which is periodically subject to amortization
119
Limitations on Deduction: The above tax
treatment of R&D expenses does NOT
apply to:
1. Any expenditure for the acquisition or

improvement of land or the improvement
of depreciable property, used in connection
with research and development.
2. Any expenditure incurred in ascertaining

the existence, location, extent, or quality of
any deposit of ore or other mineral,
including oil or gas.
120
X. Pension trust
The employer must have established a pension or

retirement plan to provide for the payment of
reasonable pensions to its employees;
The pension plan is reasonable and actuarially sound;
It must be funded by the employer; i.e., the employer

contributes cash to the plan;
The amount contributed must no longer be subject to

its control or disposition; and
The payment has not therefore been allowed as a

deduction.
121
OPTIONAL STANDARD DEDUCTION as amended by
R.A. 9504
- may be taken by an individual, in lieu of itemized

deductions
REQUISITES:
a. Available only to citizens, resident aliens, domestic

corporations and resident foreign corporations;
b. The standard deduction is optional;
i.e., unless the taxpayer signifies in his return his

intention to elect this deduction, he is considered as
having availed of the itemized deductions.
122
c. Such election, when made by the qualified
taxpayer, is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
*Since an individual in business or in the practice

of profession is required to file quarterly income
tax returns, can he choose the OSD in his
quarterly returns and then choose the itemized
deductions in his annual income tax return, or
vice versa?
YES, the OSD or Itemized Deductions is against

the gross income of the year. Quarterly income
tax returns are only interim computations on the
taxable income for the year
123
d. The amount of standard deduction is
limited to forty percent (40%) of:
Gross income DC and RFC

Gross sales or receipts RC, NRC, RA
[However, OSD is not available against

compensation income arising out of an
employer-employee relationship.]
*NOTE: The cost of sales in case of individual

seller of goods, or the cost of services in the
case of individual seller of services, is not allowed
to be deducted for purposes of determining the
basis of the OSD.
124
e. Proof of actual expenses is not
required, but the taxpayer should
keep records pertaining to his gross
income during the taxable year.
Special Deductions
1. Premiums paid on hospitalization
insurance. [Sec. 34 (M)]
2. Income currently distributed to
beneficiaries under estates and
trusts. [Sec. 61 (A)]
125
3. Section 37 of the NIRC
e.i. Net additions, if any, required by

law to be made within the year to
reserve funds and the sums other
than dividends paid within the year
on policy and annuity contracts
(non-life insurance) [Sec. 37 (A)]
4. Basic and Personal Exemptions
126
3. Gains derived from dealings in
property
- includes all gains or losses derived

from the disposition of property (real,
personal or mixed) for money in case
of sale, or for property in case of
exchange, or from a combination of
both sale and exchange.
127
Measurement of gain/loss [Section
40(A)]
- excess of the amount realized

therefrom over the basis or adjusted
basis for determining gain, and
-excess of the basis or adjusted basis

over the amount realized for
determining loss
128
Amount realized = sum of money
received plus the fair market value of
the property (other than money)
received [Sec. 40 (A)]
Basis of property [Sec. 40 (B)]
depends primarily on the manner in

which the taxpayer acquired the
property.
129
1. By purchase:
a.) acquired before 1 March 1913 FMV on

such date
b.) acquired on or after 1 March 1913
Cost plus expenses of acquisition (Sec.
136, Rev. Reg. No. 2)
2. Included in the inventory latest inventory

value (Sec. 136, Rev. Reg. No. 2)
3. By devise, bequest or inheritance FMV or

value of such property at the time of the
acquisition (death of decedent) (Sec. 139,
Rev. Reg. No. 2)
130
4. By gift same basis as it would have been in
the hands of the donor or the last preceding
owner by whom it was not acquired by gift,
except that if such basis is greater than the
FMV of the property at the time of the gift,
then for the purpose of determining loss shall
be such fair market value.
5. Acquired (other than capital assets) for less

than an adequate consideration in money or
moneys worth amount paid by the
transferee
6. Stock or security or property received if the

exchange is one where gain/loss may be
recognized same as the basis of the stock, or
security or property given in exchange
131
7. Stock or security or property received if the
exchange is one where the gain, if any, but
not the loss is to be recognized- basis of
the property, stock or security given in
exchange less cash and FMV of property
given in exchange add dividend and/or gain
recognized
8. Property transferred in the hands of

transferee if the exchange is one where the
gain, if any, but not the loss is to be
recognized same basis as it would be in
the hands of transferor increased by the
amount of gain recognized to the transferor
on the transfer.
132
Two kinds of assets/properties:
1. Ordinary assets [Sec. 39 (A)]
- Refer to properties held by the taxpayer in

the pursuit of his profession, trade or
business, they are:
Stock in Trade;
Property of a kind which would properly be included in
the inventory if on hand at the close of the taxable
year;
Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
Property used in trade or business which in subject to
the allowance for depreciation; and
Real property used in trade or business
133
2. Capital assets
Property held by the taxpayer (whether or not

connected with his trade or business) but does not
include:
Stock in trade;
Property of a kind which would properly be
included in the inventory if on hand at the close of
the taxable year;
Property held by the taxpayer primarily for sale to
customers in the ordinary course of trade or
business;
Property used in trade or business which in subject
to the allowance for depreciation; and
Real property used in trade or business.
134
Classification of Capital assets for income tax
purposes:
1. Sale of shares of stock of a domestic corporation

not listed and traded through a local stock
exchange
2. Sale of real property
3. Sale of capital assets other than stocks and real

property (sale of personal property considered as
capital asset other than shares of stock)
135
Types of Gains from dealings in property
(1) Ordinary income vis--vis Capital gain
Includes any gain from the sale or exchange of property

which is not a capital asset.
(2) Actual gain vis--vis Presumed gain
(3) Long term capital gain vis--vis Short term capital gain
(4) Net capital gain, Net capital loss
Net Capital gainis the excess of the gains from sales or

exchange of capital assets over the losses from such sales or
exchanges.
Net capital Lossis the excess of the losses from sales or

exchanges of capital assets over the gains from such sales or
exchanges.
136
A. Excluded/Exempt [Sec. 40 (C)(2)]
1. Exchange solely in kind in legitimate mergers and consolidation
which includes:
a. Between corporation which are parties to a merger or

consolidation (property for stock)
b. Between a stockholder of a corporation party to a
merger or consolidation and the other party corporation
(stock for stock)
c. Between a security holder of a corporation which is a
party to a merger or consolidation and the other
corporation (securities for securities or stock)
2. Transfer or exchange of property for stock resulting in

acquisition of corporate control (Property for stock)
[Sec. 40 (C)(2)]
3. Sale/disposition of principal residence [Sec.24 (D)(2)]
4. Shares listed and traded in the stock exchange
137
1. Sale, barter, exchange or other disposition of

shares of stock in a domestic corporation not
listed and traded through a local stock exchange.
[Sec. 24(C)]
- If the transferor of the shares is an individual, the rule on

holding period and capital loss carry-over will not apply,
notwithstanding the provisions of Section 39 of the Tax
Code , as amended. (Rev. Reg. No. 6-2008)
2. Sale, barter, exchange or other disposition of real

property located in the Philippines, classified as
capital assets. [Sec. 24(D)(1)]
138
Gross Income
1. Gain from sale, exchange, or other disposition

of real property classified as ordinary assets
(although subject to creditable withholding
tax)
2. Gain from sale, exchange or other disposition
of personal property classified as ordinary
assets except shares of stock.
3. Gain from sale, exchange or other disposition
of other personal property classified as capital
asset.
139
4. Interests
- An earning derived from depositing

or lending of money, goods or credits.
General rule: Interest received by a

taxpayer, whether usurious or not, is
subject to income tax.
Except: When interest income is

exempted by law from income tax.
140
A. Excluded/Exempt
1. Interest income from long-term deposit or investment

in the form of savings, common or individual trust
funds, deposit substitutes, investment management
accounts and other investments evidenced by
certificates in such form prescribed by the BSP. [Sec.
24(B)(1)]
- These must have a maturity period of not less than

five years and must be issued by banks in
denominations of P10,000.
- Applicable only to individual taxpayers except
NRANETB
- If the holder pre-terminate before the 5th year, a tax
shall be imposed on the entire income (final tax)
141
2. Interest earned if received from:
a) By members from duly-registered cooperative (Rev.

Regs. No. 20-2001);
b) BSP prescribed form of investments maturing more than
5 years;
c) Expanded foreign currency deposit system by
nonresidents; and
d) A tenant who paid to a landowner on the price of land
under a tenant-purchaser agreement as part of CARP.
142
1. Interest income from any currency bank deposit or
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements. 20% [Sec. 24(B)(1)]
2. Interest income from a depositary bank under the

expanded foreign currency deposit system. 7 %
[Sec. 24(B)(1)]
3. Interest earnings from long-term deposits or

investments where the holder of the certificate pre-
terminate the deposit or investment before the fifth
year, a final tax shall be imposed on the entire income
and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or
investment certificate. [Sec. 24(B)(1)]
143
Gross Income
1. Interests on bonds, notes or other interest-bearing

obligation of residents, corporate or otherwise
(lending is the main course of business or merely
incidental and not subjected to final withholding tax
)
CIR v. Mitsubishi, G.R. No. L-54908, Jan. 22, 1990
144
5. Rents
- Refers to earning derived from

leasing real estate as well as personal
property. It includes all other
obligations assumed to be paid by the
lessee to the third party in behalf of
the lessor.
* Tax treatments of leasehold improvements,
advance rent and taxes paid by lessee to or
for a lessor?
145
Prepaid Rent if the advance
payment is received without
restrictions as to its use, the entire
amount is taxable in the year it is
received. If the advance payment is a
security deposit which restricts the
lessor as to its use, then such amount
should be excluded in the
determination of rental income.
146
Leasehold improvement when the
lessee erected or built permanent
improvements on the leased property
which will become the property of the
lessor upon the expiration of the
lease, the value of the improvements
should be reported as income of te
lessor.
147
A. Excluded/Exempt none
* however, take note of a CTA case

(Commissioner of Internal Revenue v. De la
Salle University, Inc., CTA EB No. 622,
December 10, 2010)
B. Income subject to final tax none
C. Part of Pertinent items of gross

income
148
6. Royalties
- These are the compensations or

payments for the use of property and
are paid to the owner of a right.
149
A. Excluded/Exempt
1. Income exempt under any treaty obligation binding upon the Philippine
government Sec. 32(B)(5)

1. Royalties on books, literary works and musical compositions
10% [Sec. 24(B)(1)] -paid by domestic corp.
2. Other royalties (eg. Those derived from natural resources or
products such as coal, gas, oil, copper, silver, gold, and other
similar products) 20% [Sec. 24(B)(1)] paid by domestic
corp.
*NRANETB = 25% FWT, NRFC = 32% FWT
C. Part of the Pertinent items of Gross

Income
1. Royalties paid by a foreign corporation to resident citizens
and domestic corporations.
150
7. Dividends - any distribution made by a corporation to its shareholders
out of its earnings or profits and payable to its shareholders, whether in money
or in other property
KINDS:
(1) Cash dividend - A dividend paid in cash and is taxable to
the extent of the cash received.
(2) Stock dividend - Involves the transfer of a portion of

retained earnings to capital stock by action of stockholders.
it simply means the capitalization of retained earnings.
(3) Property dividend - A dividend paid in property of a

corporation such as stock investment, bands or securities
held by the corporation and to the extent of the FMV of the
property received at the time of the distribution.
(4) Liquidating dividend - A dividend distributed to the

shareholders upon dissolution of the corporation.
151
General rule: A mere issuance of stock dividends is not
subject to income tax, because it merely represents capital
and it does not constitute income to its recipient. Before
disposition thereof, stock dividends are nothing but a
representation of interest in the corporate entity.
Exceptions: When stock dividends are subject to tax;
a) These shares are later redeemed for a consideration

by the corporation or otherwise conveyed by the stockholder
to the extent of such contribution. Under the NIRC, if a
corporation, after the distribution of a non-taxable stock
dividend, proceeds to cancel or redeem its stock at such
time and in such manner as to make the distribution and
cancellation or redemption essentially equivalent to the
distribution of a tax of a taxable dividend, the amount
received in redemption
CIR v. A. Soriano Corp., G.R. No. 108576, Jan. 20, 1999
152
or cancellation of the stock shall be treated as a
taxable dividend to the extent that it represents a
distribution of earnings or profits. (Sec.73 (B), NIRC).
Depending on the circumstances, corporate earnings
may be distributed under the guise of initial
capitalization by declaring the stock dividends
previously issued and later redeem or cancel said
dividends by paying cash to the stockholder. This
process amounts to distribution of taxable dividends
which is just delayed so as to escape the tax. (CIR vs.
CA, 301 SCRA 152)
b) The recipient is other than the stockholder.

(Bachrach vs. Seifert, 57 PHIL 483)
c) A change in the stockholders equity results by

virtue of the stock dividend issuance.
153
A. Excluded/Exempt
1. Pure stock dividends
2. Intercorporate dividends (DC to DC or RFC)

1. cash and/or property dividends actually or constructively
2
received by an individual from:
a domestic corporation
a joint stock company
insurance or mutual fund companies
regional operating headquarters of multinational companies
[Sec. 24(B)(2)]
C or RA = 10% FWT, NRAETB = 20% FWT, NRANETB = 25% FWT, NRFC = 15%

Income
1. Dividends received from a foreign corporation
154
7. Annuities, Proceeds from life
insurance or other types of
insurance
Annuities - amounts payable yearly or at other regular

intervals for a certain or uncertain period.They also
represent as installment payments for life insurance
sold by insurance companies.
Proceeds of life insurance paid by reason of the death

of the insured to his estate or to any beneficiary,
directly or in trust.
Return of insurance premium
155
A. Excluded/Exempt
1. Income exempt under any treaty obligation binding upon the Philippine
government Sec. 32(B)(5)

1. The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single
sum or otherwise. [Sec. 32(B)(1)]
2. The amounts received by the insured, as a return of premiums
paid by him under life insurance, endowment, or annuity
contracts, either during the term or at maturity of the term
mentioned in the contract or upon surrender of the contract.
[Sec. 32(B)(2)]

Income
1. Any excess of the return of premiums
156
8. Prizes and awards
-reward for a contest/competition.
- Contest prizes and awards received

are generally taxable. Such payment
constitutes gain derived from labor.
157
A. Excluded/Exempt
1. Prizes and awards received in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievements are exclusions from gross income if:
a. The recipient was selected without any action on his part

to enter a contest or proceedings; and
b. The recipient is not required to render substantial future

services as a condition to receiving the prize or award.
[Sec. 32 (B)(7)(c)]
2. Prizes and awards granted to athletes in local and intl

sports competitions and tournaments held in the Philippines
and abroad and sanctioned by their national associations.
[Sec. 32 (B)(7)(d)]
158
1. Prizes that are more than P10,000 20%

Gross Income
1. Prizes of P10,000 and below

2. Prizes won abroad
159
9. Winnings a reward for an
event that depends on chance.
A. Excluded/Exempt
1. Philippine Charity Sweepstakes and Lotto winnings [Sec.
24(B)(1)

1. All winnings regardless of amount 20%

Gross Income
1. Winnings won outside of the Philippines
160
10. Pensions retirement benefit,
or separation pay
- Pension refers to allowance paid

regularly to a person on his
retirement or to his dependents on
his death, in consideration of past
services, meritorious work, age, loss
or injury.
161
A. Excluded/Exempt
1. Retirement benefits received under RA 7641 and
those received by officials and employees of
private firms in accordance with a reasonable
private benefit plan maintained by the employer.
[Sec. 32(B)(6)(a)]
2. Any amount received by an employee or by his

heirs from the employer as a consequence of
separation of such official or employee from the
service of the employer because of death,
sickness, other physical disability or for any cause
beyond the control of the employee. [Sec.
32(B)(6)(b)]
162
3. The social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come
to reside permanently in the Philippines from foreign
government agencies and other institutions. [Sec.
32(B)(6)(c)]
4. Payments of benefits due or to become due to any person

residing in the Philippines under the laws of the United
States administered by the United States Veterans
Administration [Sec. 32(B)(6)(d)]
5. Benefits received from or enjoyed under the Social

Security System. [Sec. 32(B)(6)(e)]
6. Benefits received from the GSIS, including retirement

gratuity received by government officials and employees.
[Sec. 32(B)(6)(f)]
163
B. Income subject to final tax -
none

Gross Income
1. Pensions that do not comply with the

requirements for exemption provided under
[Sec. 32 (6)]
164
11. Forgiveness of debt
The cancellation and forgiveness

of indebtedness may, dependent upon
the circumstances, amount to:
1. a payment of income;
2. a gift; or
3. a capital transaction.
165
A. Excluded/Exempt
1. When a creditor merely desires to benefit a debtor and without any
consideration cancels the debt, the amount of the debt is a gift not
subject to income tax.

1. If a domestic corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect
of the payment of a dividend, thus subject to a final tax.

Income
1. When an individual performs services for a creditor, who,
in consideration thereof cancels the debt.
166
Primary Sub-classification/s
Classification
Residents of the Philippines (5%-34%)

Citizens of the
Philippines
Not residents of the Philippines (5%-34%) Sec. 22(E)
Residents of the Philippines (5%-34%) Sec. 22(F)
Engaged in Trade or Business in

the Philippines (5%-34%)
Aliens Not Residents of the
Philippines
Sec. 22 (G)
Not engaged in Trade or Business
in the Philippines (25% of GI)
Individuals
Individual Employed by Regional or Area Headquarters and
Regional
Operating Headquarters of Multinational Companies
(15% of GI)
Individual Employed by Offshore Banking Units
Special classes (15% of GI)
of Individuals
Individual Employed by a foreign service contractor or by a
foreign service
subcontractor engaged in petroleum operations in the
Philippines
167
(15% of GI)
Kinds of Individual Taxpayers
1) Citizens
a) Resident citizens - Those residing in the Philippines unless

he qualifies as a non-resident under Sec. 22 (E)of the NIRC.
b) Non-resident citizens - Those not residing in the

Philippines.
A non-resident citizens means
1.) One who establishes to the satisfaction of the

Commissioner of Internal Revenue (CIR) the fact of his
physical presence abroad with a definite intention to reside
therein.
2.) A citizen of the Phils. who leaves the country during the
taxable year to reside abroad, either as immigrant or for
employment or on permanent basis.
168
3.) A citizen of the Phils. who works and derive
from abroad and whose employment thereat
requires him to be physically present abroad
most of the time during the taxable year.
4.) A citizen who has been previously

considered as non-resident citizen and who
arrives in the Phils. at any time during the
taxable year to reside permanently in the
country.
5.) A citizen who shall have stayed outside the

Phils. for 180 days or more by the end of the
year.
169
2) Aliens
a) Resident aliens - Those residing in the Philippines

though not a citizen thereof.
- Those who are actually present in the Phils.

and who are not mere transients or sojourners.
b) Non-resident aliens - Those not residing in the Phils.

and who is not a citizen thereof.
(1) Engaged in trade or business comes and

stays in the Phils. For an aggregate period of more
than 180 days during the calendar year.
-includes performance of personal services
within the Phils.
(2) Not engaged in trade or business
170
Category of Resident Nonresident
Income
CITIZEN ALIEN CITIZEN NRAEBT NRANEBT
all sources Within Within Within within
Compensation,
Business/Profession
GIW 25%
Prizes of P10,000 or
less
Schedular Normal Tax Rate
Proprietary,
N/A
educational/Hospital
Cinematographic Film
GIW 25%
and the like
Interest, Royalty,
Winnings/Prizes of 20% FINAL WITHHOLDING TAX (FWT)
P10,000 & below
Royalties-books, GIW 25%
10% FINAL WITHHOLDING TAX (FWT)
literary, musical
Interest (long term
EXEMPT
investment)
Cash/Property
6%(1998); 10%(2000), FWT GIW 20%
dividends
Interest (Foreign
currency deposit GIW 7.5% FWT EXEMPT
sys.)
171
Capital gains on sale 5% (not over P100,000); 10% (in excess of P100,000) FWT on net capital
of shares gains
Corporations, as used in income taxation,
includes partnerships, no matter how created
or organized, joint stock companies, joint
accounts (cuentas en participacion), and
associations or insurance companies.
However, it does not include:
1. a general professional partnership; and
2. 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 the
government.
172
Kinds of Corporate Taxpayers
1) Domestic corporations - Those created or

organized in the Phils. or under its laws.
2) Foreign corporations - Those created,

organized or existing under any laws other
than those of the Phils.
a. Resident - Those foreign corporation

engaged in trade or business within the Phils.
b. Non-resident - Those foreign corporation

not engaged in trade or business within the
Phils.
173
Corporations may be subjected to the
following income taxes:
1. Normal Corporate Income Tax (NCIT)

30% or Minimum Corporate Income Tax
(MCIT) 2% or Gross Income Tax (GIT)
15%
2. Improperly Accumulated Earnings Tax
(IAET) 10%
3. Brach remittance profit
4. Capital Gains Tax on sale of real
property or on sale of shares of stock
5. Final tax on passive income
174
Estates
and Trusts
Domestic Corporations Sec. 22 (C ) 30% on Taxable Income
Foreign Resident Foreign Corporations Sec. 22 (H) - 30% on Taxable

Corporations Income
Sec. 22(D) Non-resident Sec. 22 (I) - 30% on Gross Income
Proprietary educational institutions and non-profit hospitals 10% of
their taxable income
Domestic Depositary Bank (Foreign Currency Deposit Units) 10% of
gross onshore income
Resident international carriers 2.5% Gross Philippine Billings

Corpo- Offshore Banking Units 10% of gross onshore income
rations
Special Resident Depositary Bank (Foreign Currency Deposit Units) - 10% of
Classes gross onshore income
of
Regional or Area Headquarters Sec. 22( DD) and Regional Operating
Corporations
Headquarters Sec. 22 (EE) of Multinational Companies
Non-resident cinematographic film owners, lessors or distributors -

25% final tax
Non-resident owners or lessors of vessels chartered by Philippine

Nationals 4.5% final tax
175
Non-resident lessors of aircraft, machinery and other equipment -
7.5% final tax
Minimum Corporate Income Tax (MCIT) is
an estimate of the income tax that is due
from a firm. It is equal to 2% of the gross
income of a corporation at the close of each
taxable quarter.
-covers domestic and resident foreign

corporations which are subject to NCIT.
-taxpayer shall pay the MCIT whenever it is

greater than the NCIT.
- it starts on the 4th year of its business

operations.
- carry-forward provision
176
*The Secretary of Finance is authorized to suspend
the imposition of the minimum corporate income
tax on any corporation which suffers LOSSES:
-on account of prolonged labor dispute (losses from

a strike staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
-because of force majeure (acts of God and other

calamity; includes armed conflicts like war or
insurgency), or
-because of legitimate business reverses

(substantial losses due to fire, robbery, theft or
other economic reasons).
177
Gross Income Tax (GIT)
- The President, upon the recommendation of the Secretary
of Finance, may allow domestic corporations the option to be
taxed at fifteen percent (15%) of gross income, after the
following conditions have been satisfied:
Tax effort ratio 20% of GNP
Ratio of IT collection to total tax revenue 40%
VAT tax effort 4% of GNP
Ratio of Consolidated Public Sector Financial Position 0.90%
(CPSFP) to GNP
Ratio of the Corporations Cost of Sales to Gross 55%
Sales Does not exceed
- The election of the gross income tax option by the

corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under
the scheme.
178
Improperly Accumulated Earnings Tax (IAET)
There is imposed for each taxable year, in

addition to other taxes, a tax equal to 10% of
the improperly accumulated taxable income of
domestic and closely held corporations formed or
availed of for the purpose of avoiding the income
tax with respect to its shareholders or the
shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders.
- Only domestic and closely-held corporations are

liable for IAET.
179
Exception:
The use of undistributed earnings and profits
for the reasonable needs of the business
would not generally make the accumulated
or undistributed earnings subject to the tax.
What is meant by reasonable needs of the
business is determined by the IMMEDIACY
TEST.
Immediacy Test - It states that the

reasonable needs of the business are the
1) immediate needs of the business; and

2) reasonably anticipated needs.
180
Exempt Corporations:
1. Banks and other non-bank financial intermediaries;

2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone Authority

(PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227; and
c. under special economic zones declared by law
which enjoy payment of special tax rate on their
registered operations or activities in lieu of other
taxes, national or local.
181
Branch Profit Remittance Tax
Tax base: Profits applied or earmarked

for remittance
Tax Rate: 15% final tax
Condition: Branch profits are effectively
connected with the conduct of its trade or
business in the Philippines.
Exempt: Profits remitted derived from
activities registered with the Philippine
Economic Zone Authority (PEZA)
182
Tax Exempt Corporations (NIRC):
1. Labor, agricultural or horticultural organization not

organized principally for profit;
2. Mutual savings bank not having a capital stock

represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes
and without profit;
3. A beneficiary society, order or association, operating for

the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of
such society, order, or association, or non-stock
corporation or their dependents;
4. Cemetery company owned and operated exclusively for the

benefit of its members;
183
5. Nonstock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for
the rehabilitation of veterans, no part of its net
income or asset shall belong to or inures to the
benefit of any member, organizer, officer or any
specific person;
6. Business league chamber of commerce, or board

of trade, not organized for profit and no part of
the net income of which inures to the benefit of
any private stock-holder, or individual;
7. Civic league or organization not organized for

profit but operated exclusively for the promotion
of social welfare;
8. A nonstock and nonprofit educational institution;

184
9. Government educational institution;
10.Farmers' or other mutual typhoon or fire

insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and
11.Farmers', fruit growers', or like association

organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the proceeds
of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by
them;
185
Tax Exempt GOCCs:
1. GSIS
2. SSS
3. PHILIPPINE HEALTH INSURANCE CORP.
4. PCSO
Tax Exempt Corporations under Special

laws:
1. Cooperatives (Rev. Mem. Cir. 48-91)
2. Foundation created for scientific
advancement (Sec. 24, R.A. 2067)
186
Taxation of Partnerships
Rules:
1. The partnership is subject to the same rules on corporations

(capital gains tax, final tax on passive income, normal tax,
minimum corporate income tax [MCIT] and gross income tax
[GIT]), but is not subject to the improperly accumulated earnings
tax [IAET]. The partnership must file quarterly and year-end
income tax returns.
2. The taxable income of the partnership, less the normal

corporate income tax thereon, is the distributable net income of the
partnership.
3. The share of a partner in the partnerships distributable net

income of a year shall be deemed to have been actually or
constructively received by the partners in the same taxable year
and shall be taxed to them in their individual capacity, whether
actually distributed or not. Such share will be subjected to a final
tax of 10% to be withheld by the partnership.
187
Taxation of General Professional Partnerships
Rules:
1. A GPP as such shall not be subject to the income tax.
2. The partners shall only be liable for income tax only in

their separate and individual capacities.
3. For purposes of computing the distributive share of

the partners, the net income of the GPP shall be computed in
the same manner as a corporation.
4. Each partner shall report as gross income his

distributive share, actually or constructively received, in
the net income of the partnership.
The share of a partner shall be subject to a creditable

withholding income tax of 15%.
188
Taxation on Estates and Trusts
a) Application: The tax imposed upon individuals shall apply to

the income of estates or of any kind of property held in
trust, including:
1. Income accumulated in trust for the benefit of unborn

or unascertained person or persons with contingent
interests, and income accumulated or held for future
distribution under the terms of the will or trust;
2. Income which is to be distributed currently by the

fiduciary to the beneficiaries, and income collected by a
guardian of an infant which is to be held or distributed as the
court may direct;
3. Income received by estates of deceased persons during

the period of administration or settlement of the estate; and
4. Income which, in the discretion of the fiduciary, may be

either distributed to the beneficiaries or accumulated.
189
b) Exception
The tax shall not apply to employee's trust which

forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some
or all of his employees:
i. if contributions are made to the trust by such

employer, or employees, or both for the purpose of
distributing to such employees the earnings and
principal of the fund accumulated by the trust in
accordance with such plan, and
ii. if under the trust instrument it is impossible, at

any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for any part
of the corpus or income to be used for, or diverted to,
purposes other than for the exclusive benefit of his
employees.
190
b) Exception
The tax shall not apply to employee's trust which

forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some
or all of his employees:
i. if contributions are made to the trust by such

employer, or employees, or both for the purpose of
distributing to such employees the earnings and
principal of the fund accumulated by the trust in
accordance with such plan, and
ii. if under the trust instrument it is impossible, at

any time prior to the satisfaction of all liabilities
with respect to employees under the trust, for any part
of the corpus or income to be used for, or diverted to,
purposes other than for the exclusive benefit of his
employees.
191

Basis of Government’s right to impose tax on income: Partnership theory

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basis of Government’s right to impose tax on income: Partnership theory

Uploaded by

Copyright:

Available Formats

Basis of Governments right to impose

tax on income: Partnership theory

Capital denotes the original investment or fund used in order to

Gross Receipts receipts which may constitute capital as well as

Revenue refers to all funds/income derived by the government

(Commissioner vs. BOAC, 149 SCRA 395)

For tax purposes, income from

1. Treasure found or punitive damages

1. There must be gain or profit, whether in

2. The gain must be realized or received.

Gen. Rule: A mere increase in the value of

Exception: Economic benefit principle (BIR

- receipt here includes constructive receipt.

- Income which is credited to the account

a. Realization test (BIR Ruling 091-99, 8 July 1999);

a.) Cash method - recognition of income and expense

b.) Accrual method - method under which income,

Case: CIR vs. Isabela Cultural Corp, 12 Feb. 2007

Sales of dealers in personal property

Under Rules and Regulations (R&R)

(i) casual sale or other casual disposition of

(ii) sale or other disposition of real property,

- income may be recognized same as in sales of

- individual who sells of disposes of real

Nature of Philippine Income Tax:

2. It is based on income, either gross or net, realized in

4. It uses a semi-schedular or semi-global tax system.

1. Net income tax

- it is determined by the nationality

Income taxpayers, with distinction

a) Resident citizens - Those residing in the Philippines unless

b) Non-resident citizens - Those not residing in the

A non-resident citizens means

1.) One who establishes to the satisfaction of the

4.) A citizen who has been previously

5.) A citizen who shall have stayed outside the

a) Resident aliens - Those residing in the Philippines

- Those who are actually present in the Phils.

b) Non-resident aliens - Those not residing in the Phils.

(1) Engaged in trade or business comes and

(2) Not engaged in trade or business

1) Domestic corporations - Those created or

2) Foreign corporations - Those created,

a. Resident - Those foreign corporation

b. Non-resident - Those foreign corporation

Residents of the Philippines (5%-34%)

Residents of the Philippines (5%-34%) Sec. 22(F)

Engaged in Trade or Business in

Domestic Corporations (30%) Sec. 22 (C )

Foreign Resident Foreign Corporations Sec. 22 (H)

Proprietary educational institutions and non-profit hospitals

Domestic Depositary Bank (Foreign Currency Deposit Units)

Resident international carriers

Corpo- Offshore Banking Units

Non-resident cinematographic film owners, lessors or distributors

Non-resident owners or lessors of vessels chartered by Philippine

Non-resident lessors of aircraft, machinery and other equipment

In general, income may be earned from:

1. Within the Philippines

Subject to Final Tax

Income subject to final tax income

Exclusions - income received or earned but

- Income of individuals may either be subject