Pre-Bar Lecture on

Income Taxation

Atty. Jonald R. Vergara

Partner/Principal, Business Tax Services
SGV & Co.

September 29, 2017

Page 1
 Frequently Asked Questions
Survey of Bar Questions on Income Taxation for 2006 to 2016

Topic Frequency
Deductions from gross income 15
General principles of income taxation under Sections
12
22 and 23 of the Tax Code
Tax treatment of sale of real property (whether
9
subject to Capital Gains Tax or Ordinary Income Tax)
Rules on situs of income, particularly on income for
6
services rendered outside the Philippines
Personal and additional exemptions 5
Exclusions from gross income 5

Page 2
 Frequently Asked Questions
Survey of Bar Questions on Income Taxation for 2006 to 2016

Topic Frequency
Tax treatment of sale of shares (whether subject to
Capital Gains Tax, Stock Transaction Tax or to 4
Ordinary Income Tax)
Accounting Period, including changes in accounting
2
period
Accounting for long-term contracts (percentage of
2
completion)
Tax treatment of interest income 2
General principles of withholding taxes 2
Double taxation 2

Page 3
New topics (2015 & 2016 Bar Examinations)

Topic
Minimum corporate income tax (MCIT) vs. Regular corporate
income tax (RCIT)
Tax credit certificates (effect to transferee of post-audit
disqualification)
Requirements on the filing of Income Tax Return (ITR)
Special taxation of hospitals
Sale-leaseback transaction

Page 4
Outline

Philippine taxation overview

General principles
Individual & corporate taxation
Gross income
Exclusions from gross income
Allowable deductions
Others

Page 5
Philippine taxation overview

Page 6
Structure of Philippine tax system

Constitution

Philippine Taxes

National Internal Tariff and Customs 1991 Local Govt

Revenue Code Code Code and Local Tax
Ordinances

Income Tax Tariff

Local Business Tax
Value-Added Tax (VAT)
Customs Duties
Real Property Tax
Excise Tax
Estate and Donors Taxes Community Tax
Other Percentage Taxes Local Fees and Charges
Documentary Stamp Tax
Withholding Tax*

Page 7
Philippine tax administration & adjudication

Supreme Court

Court of Tax Appeals

Bureau of Internal Bureau of Local Government

Revenue Customs Units

Income Tax Tariff Local Business Tax Real Property Tax

Value-Added Tax (VAT) Customs (decided by Regular (decided by LBAA and
Duties Courts before CBAA before appealed
Excise Tax
appealed to CTA) to CTA)
Estate and Donors Taxes
Other Percentage Taxes
Documentary Stamp Tax
Withholding Tax*

Page 8
General principles

Page 9
What is income?

An amount of money coming to a person or corporation, within

a specified time, whether as payment for services, interest or
profit from investment. (Conwi vs. CTA, G.R. No. 48532, G.R.
No. 38533, August 31, 1992)

Page 10
Tests to determine whether income is
earned for tax purposes
Realization test Economic benefit test
(Severance test)
There is no taxable income until there Any economic or financial benefit
is a separation from capital of conferred on the employee as
something of exchangeable value, compensation, whatever the form or
thereby supplying the realization or mode by which it is effected. The
transmutation which would result in employee received "compensation for
the receipt of income. personal service" and hence, taxable
income in each year in which stock
(Eisner vs. Macomber, 252 U.S. 189, was acquired, through effective
as cited in Commissioner of Internal exercise of the option in that year, in
Revenue vs. Court of Appeals, Court the amount of the difference between
Of Tax Appeals and A. Soriano Corp, the option price and the then market
G.R. No. 108576. January 20, 1999) value of the stock.
(Commissioner vs. Smith, 324 U.S.
177, 1945).

Page 11
Tests in determining whether income is
earned for tax purposes
Claim of right doctrine (Doctrine of Ownership,
Command or Control)
A taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite unconditional obligation to return or
repay that which would otherwise constitute gain. Without some bona fide legal
or equitable claim, even though it be contingent or contested in nature, the
taxpayer cannot be said to have received any gain or profit.

(North American Oil v. Burnet, 286 U.S. 417, 1932, as applied in Commissioner
vs. Javier, G.R. No. 78953 July 31, 1991) applied in Ayala Hotels vs.
Commissioner of Internal Revenue, CTA Case No. 6002.

Actual vs. constructive receipt of income (Section 52 of Revenue

Regulations No. 2)

Page 12
Taxation of individuals
Sections 23 and 22, Tax Code

Foreign
Classification Basic Personal Additional
Taxable Income Tax Rates Tax
of Individuals Exemption* Exemption**
Credit

5% to 32%
Resident
Worldwide Allowed Allowed (Creditable Allowed
Citizen
tax)

5% to 32%
Non-resident
Philippine-source Allowed Allowed (Creditable Allowed
Citizen
tax)

5% to 32%
Not
Resident Alien Philippine-source Allowed Allowed (Creditable
Allowed
tax)

Page 13
 Taxation of individuals
Sections 23 and 22, Tax Code
Foreign
Classification Basic Personal Additional
Taxable Income Tax Rates Tax
of Individuals Exemption* Exemption**
Credit

Non-resident
Alien 5% to 32%
Allowed Not
ENGAGED in Philippine-source Not Allowed (Creditable
(reciprocity) Allowed
trade or tax)
business

Non-resident
Alien NOT
25% (Final Not
ENGAGED in Philippine-source Not Allowed Not Allowed
tax) Allowed
trade or
business

* Php50,000 per individual taxpayer per calendar year (R.A. 9504)

** Php25,000 per qualified dependent child not exceeding four (R.A. 9504)

Page 14
Taxation of individuals
Sections 23 and 22, Tax Code
Overseas contract worker is taxable only on income from sources within
the Philippines.
A seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad for a vessel engaged exclusively
in international trade shall be treated as an overseas contract worker.

The term 'nonresident citizen' means:

1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for employment on a
permanent basis.
3. A citizen of the Philippines who works and derives income from abroad
and whose employment thereat requires him to be physically present
abroad most of the time during the taxable year.
Page 15
Taxation of individuals

An alien individual, whether a resident or not of the Philippines, is taxable

only on income derived from sources within the Philippines;
180-day rule - A alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than 180 days during any
calendar year shall be deemed a 'nonresident alien engaged in trade or
business in the Philippines. (Section 25[A][1], Tax Code)

Page 16
Taxation of corporations
Sections 23 and 22, Tax Code
Domestic corporation
Foreign corporation
Resident foreign corporation
Non-resident foreign corporation

Source of Income Tax Rate Tax Base

Domestic Worldwide 30% Net taxable
Corporation income
Resident Foreign Philippine-source 30% Net taxable
Corporation income

Nonresident Philippine-source 30% Gross taxable

Foreign income
Corporation

Page 17
GENERAL PRINCIPLES
Recent jurisprudence/ BIR issuances
Taxability of salaries and emoluments received by ADB
employees who are resident citizens
CTA (First) Division Case 9075, promulgated February 9, 2017

Facts

ADB employees are exempt from income tax

per ADB Charter Agreement.
Garcia RTC nullified Section 2(d)(1) of RMC 31-2013
(only non-Filipino employees are exempt).

Garcia is a Filipino citizen subject to income

tax.
Philippine government held on to the States CIR
power to tax its nationals in the ADB Charter
Agreement.

Page 19
Taxability of salaries and emoluments received by ADB
employees who are resident citizens
CTA (First) Division Case 9075, promulgated February 9, 2017

Issue

Can the BIR subject to income tax the salaries and other
emoluments of resident citizens employed by ADB without
violating the ADB Charter?

Decision

Resident citizens are taxed on income derived

from all sources within and without the
Philippines.
Yes Exception: Citizen is exempt under the
provisions of a treaty, which is binding upon the
Philippine government.

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GENERAL PRINCIPLES
BAR Question and Answer

Q: There is no taxable income until such income is

recognized. Taxable income is recognized when the

A. taxpayer fails to include the income in his income tax return.

B. income has been actually received in money or its equivalent.
C. income has been received, either actually or constructively.
D. transaction that is the source of the income is consummated.

2011 Bar Examinations

Page 21
GENERAL PRINCIPLES
BAR Question and Answer

A: There is no taxable income until such income is

recognized. Taxable income is recognized when the

A. taxpayer fails to include the income in his income tax return.

B. income has been actually received in money or its equivalent.
C. income has been received, either actually or constructively.
D. transaction that is the source of the income is consummated.

2011 Bar Examinations

Page 22
GROSS INCOME

Page 23
Gross income
Section 32 (A), Tax Code

All gains, profits, and income, except passive income

subject to final tax and exempt income (exclusions),
derived during a taxable year by a taxpayer from
whatever source, whether legal or illegal, and in
whatever form (money, property, or services)

Income from whatever source includes all income

not expressly exempted or excluded from the class of
taxable income, irrespective of the action of the taxpayer
in producing the gains (Gutierrez v. Collector, CTA Case
No. 65 dated August 31, 1965), and whether derived from
legal or illegal sources.
Page 24
Gross income
Section 32 (A), Tax Code

Compensation for services in whatever form paid

Gross income derived from trade or business or the exercise of
a profession
Gains derived from dealings in property
Interests
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partners distributive share from the net income of a general
professional partnership

Page 25
Gross income Cont.
Section 32 (A), Tax Code
The following gains, profits, and income are included in gross income:
Gains arising from expropriation of property which constitute income from
dealings in property;
Gambling gains and income derived from illegal business or from
embezzlement;
Compensation for damages if it represents payment for loss of expected
profits (BIR Ruling dated September 8, 1954; BIR Ruling dated
September 20, 1990).
The amount of debt, where the stockholder is indebted to a corporation
and the latter forgives such debt, because the transaction has the effect of
payment of dividend (Sec. 50, RR No. 02-40)
Bad debts previously charged-off but afterwards recovered (Sec. 102, RR
No. 02-40)
Taxes paid and subsequently refunded

Page 26
Situs of income: Philippine-source
Section 42, Tax Code

Interest from sources within the Philippines (residence of

debtor/obligor)
Dividends from domestic corporation (residence of
corporation paying the dividends)
Services compensation for labor or personal services
performed in the Philippines (place of performance)
Rentals and royalties from property located in the
Philippines (location of property or interest in such
property)
Sale of real property located in the Philippines (location
of real property)

Page 27
Situs of income
Section 42, Tax Code

Sale of personal property

Gains, profits & income derived Derived entirely from sources
from the purchase of personal within the country where the
property within the Philippines personal property is sold
and its sale without the
Philippines
Gains, profits & income derived Derived entirely from sources
from the purchase of personal within the country where the
property without the Philippines personal property is sold
and its sale within the Philippines

Gain from the sale of shares of Derived entirely from sources

stock in a domestic corporation within the Philippines regardless
of where the shares are sold.

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Situs of income
Section 42, Tax Code

Sale of personal property

Gains, profits and income from Derived partly from sources within
the sale of personal property and partly from sources without the
produced (in whole or in part) by Philippines
the taxpayer within and sold
without the Philippines

Gains, profits and income from Derived partly from sources within
the sale of personal property and partly from sources without the
produced (in whole or in part) by Philippines
the taxpayer without and sold
within the Philippines

Page 29
Capital vs. ordinary asset

What is a capital asset?

Refers to property held by the taxpayer (whether or not connected
with his trade or business)
Does NOT include:
1. Stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or
2. Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
3. Property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section
34; or
4. Real property used in trade or business of the taxpayer. (Section
39[A][1], Tax Code)
Page 30
Sale of shares of stock in a domestic corporation

Seller or Transferor is a DEALER IN Seller or Transferor is NOT a DEALER IN

SECURITIES SECURITIES
The shares of stock shall be treated as The shares of stock shall be regarded as
ORDINARY ASSETS CAPITAL ASSETS
Ordinary gain Capital gain
In the case of an individual seller Shares Listed and Shares of stock are
graduated income tax rates (5 to 32%) Traded through the not listed, OR listed
Local Stock but not traded in the
In the case of a corporate seller regular
Exchange (LSE) LSE Subject to
corporate income tax (30%)
Subject to of 1% capital gains tax at
stock transaction tax 5% of the net capital
(Section 127[A] of gains not exceeding
Tax Code) P100,000.00 and
10%, on any amount
in excess of
P100,000.00

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Sale of real property located in the Philippines

Seller or Transferor is a REAL ESTATE Seller or Transferor is NOT a REAL ESTATE

DEALER DEALER
The real property will be treated as an Real property sold or transferred is NOT (a) used
ORDINARY ASSET. in the taxpayers business or profession, or (b)
Note: Even if the Seller or Transferor is not a treated as fixed asset used in his/her trade,
real estate dealer, the real property will be business, or profession, subject to depreciation -
regarded as an ORDINARY ASSET if it is (a) it shall be treated as a CAPITAL ASSET.
used in the taxpayers business or profession,
or (b) treated as fixed asset used in his/her
trade, business, or profession, subject to
depreciation.

Ordinary income Capital Gain

Seller is an individual citizen, resident alien, or

nonresident alien engaged in trade or business in Seller is an individual citizen, resident alien, or
the Philippines - graduated income tax rates (5 nonresident alien, or a domestic corporation -
to 32%) Subject to capital gains tax of 6% based on the
gross selling price or fair market value of the
Seller is a domestic corporation corporate property at the same of sale, whichever is higher
income tax (30%)

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Sale of real property located in the Philippines

In the case of resident foreign corporations The gain

from the sale of real property located in the Philippines,
regardless of classification, by a resident foreign
corporation shall be subject to ordinary income tax.
In the case of non-resident foreign corporations The
gain from the sale of real property located in the
Philippines by a non-resident foreign corporation shall be
subject to the final withholding tax at the rate of thirty
percent (30%) imposed under Sec. 2.57.1(I) of Rev.
Regs. No. 2-98, as amended, in relation to Sec. 28(B)(1)
of the Code.

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Sale of real property not located in the
Philippines

Gain realized from the sale, exchange, or other disposition

of real property not located in the Philippines, regardless
of classification, by resident citizens or domestic
corporations shall be subject to the graduated income tax
rates for resident citizens or to ordinary income tax for
domestic corporations.
Income/gain from the sale of real property not located in
the Philippines, realized by non-resident citizens, alien
individuals and foreign corporations shall be exempt from
income tax.
Note: Gains, profits, and income from the sale of personal property
located outside the Philippines are treated as income from sources
outside the Philippines [Sec. 42 (C) of the Tax Code].
Page 34
Taxation of interest income
Revenue Regulations No. 014-12

Interest income from Tax Rate Payee

1. Any currency bank deposit RC,
and yield or any other NRC, RA,
20% FWT
monetary benefit from NRA-ETB
deposit substitutes and DC, RFC
from trust funds and similar NRA-
arrangements derived from 25% FWT
XETB
the Philippines
30% FWT NRFC

Page 35
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
RC, NRC, RA,
2. Long-term deposit or investment EXEMPT, if held for
NRA-ETB
5 years or more
in the form of savings, common or
individual trust funds, deposit Subject to 5%, 12%
or 20% if terminated
substitutes, investment before the 5th year
management accounts and other
investments evidenced by 25% FWT
[Sec. 25(B)of the Tax NRA-NETB
certificates in such form prescribed Code; RMC No. 7-2015]
by the BSP
30% RCIT
[Secs. 27(A) and
28(a)(1) of the Tax DC, RFC
Code; RMC No. 7-2015]

30% FWT
[Sec. 28(B)(1) of the
Tax Code; RMC No. 7- NRFC
2015]

Page 36
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
3. Deposits in a depository bank under 7.5% FWT RC, NRC,
the expanded foreign currency RA
deposit system (EFCDS) DC, RFC
EXEMPT NRA
NRFC
4. Foreign currency loans granted 10% FWT RC, RA
by FCDUs to residents other than DC, RFC
OBUs in the Philippines or other
depository banks under EFCDS

Page 37
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
5. Foreign currency loans granted 10% FWT RC, RA
by OBUs to residents other than DC, RFC
OBUs or local commercial banks,
including local branches of foreign
banks that may be authorized by
the BSP to transact business with
offshore banking units
6. Foreign currency loans contracted 20% FWT NRFC
on or after August 1, 1986
Legend:
RC Resident Citizen DC Domestic Corporation
NRC Nonresident Citizen RFC Resident Foreign Corporation
RA Resident Alien NRFC Nonresident Foreign Corporation
NRA-ETB Nonresident Alien Engaged in Trade or Business
NRA-XTB Nonresident Alien Not Engaged In Trade or Business

Page 38
GROSS INCOME
Recent jurisprudence/ BIR issuances
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax

Iconic Beverage Inc. vs. Commissioner of Internal

Revenue, CTA Case No. 8607, January 6, 2016
Facts:

Iconic Beverage Inc. (Iconic) sought to cancel the assessment issued

against it by the BIR for alleged deficiency income tax. Iconic argued
that it properly declared its royalties as passive income subject to
Final Withholding Tax of 20% on the gross amount.

On the other hand, BIR alleged that the royalty payments received by
Iconic is subject to the regular corporate income tax of 30%
considering that the payments resulted from the active conduct of
trade or business.

Page 40
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax

Iconic Beverage Inc. vs. Commissioner of Internal

Revenue, CTA Case No. 8607, January 6, 2016 (Cont.)
Issue:

Are the royalty payments received by Iconic subject to regular

corporate income tax?

Ruling:

Yes. Royalty payments received by Iconic are generated from the

main purpose of its business, part of which is owning, purchasing,
licensing, acquiring trademarks and other IP rights, necessary for its
business.

Royalties received not passive income and subject to the 30% regular
corporate income tax.
Page 41
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax

Iconic Beverage Inc. vs. Commissioner of Internal

Revenue, CTA Case No. 8607, January 6, 2016 (Cont.)
Ruling:

The 20% FWT provided under Section 27(D) of the Tax Code pertain
to certain passive income.

If the income is generated in the active pursuit and performance of

the corporations primary purposes, the same is not passive
income.

Iconic has (1) no operating expenses incurred for its alleged main
trade or business; (2) no other sources of income other than royalty
and interest; and (3) cash flows from its operating activities consist
only of royalty and interest income.
Page 42
GROSS INCOME
BAR Question and Answer

Q: Keyrand, Inc., a Philippine corporation, sold through the local stock

exchange 10,000 PLDT shares that it bought 2 years ago. Keyrand
sold the shares for P2 million and realized a net gain of P200,000.00.
How shall it pay tax on the transaction?

A. It shall declare a P2 million gross income in its income tax return,

deducting its cost of acquisition as an expense.
B. It shall report the P200,000.00 in its corporate income tax return
adjusted by the holding period.
C. It shall pay 5% tax on the first P100,000.00 of the P200,000.00 and
10% tax on the remaining P100,000.00.
D. It shall pay a tax of one-half of 1% of the P2 million gross sales.

2011 Bar Examinations

Page 43
GROSS INCOME
BAR Question and Answer

A: Keyrand, Inc., a Philippine corporation, sold through the local stock

exchange 10,000 PLDT shares that it bought 2 years ago. Keyrand
sold the shares for P2 million and realized a net gain of P200,000.00.
How shall it pay tax on the transaction?

A. It shall declare a P2 million gross income in its income tax return,

deducting its cost of acquisition as an expense.
B. It shall report the P200,000.00 in its corporate income tax return
adjusted by the holding period.
C. It shall pay 5% tax on the first P100,000.00 of the P200,000.00 and
10% tax on the remaining P100,000.00.
D. It shall pay a tax of one-half of 1% of the P2 million gross
sales.

2011 Bar Examinations

Page 44
Exclusions from gross income

Page 45
Rationale for the exclusions

Exclusions from gross income, i.e. items that are not

included in the determination of gross income because:
1. They represent return of capital or are not income, gain or profit
e.g. payment of a loan
2. They are subject to another kind of internal revenue tax
E.g., Property acquired by gift, bequest, devise or descent which may
be subject to estate tax or donors tax
3. They are income, gain or profit that are expressly exempt from
income tax under the Constitution, tax treaty, Tax Code, or a
general or a special law.

Page 46
Exclusions vs. deductions vs. tax credit
Exclusions Deductions
Tax Credit
Section 32(B) Section 34
Amounts earned or received Amounts spent or paid in Amounts allowed as
by the taxpayer but do not the process of earning deduction from the tax due
form part of gross income gross income in the form of withholding
tax on wages, rents and
other creditable withholding
taxes and foreign income
tax paid or accrued
Pertain to the computation Pertain to the computation Used in computing income
of gross income of net income tax payable
Not part of gross income Deducted from gross Deducted from income tax
because: income to arrive at the due to arrive at the income
1. Represents return of taxable income by express tax payable by the taxpayer
capital provision of the Tax Code
2. Subject to another kind
of internal revenue tax
3. Exempted by the
Constitution, by statute
or by a tax treaty
Page 47
Exclusions from gross income under the
Constitution
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
Section 4(3), Article XIV of the 1987 Constitution

Page 48
Exclusions from gross income under the
Constitution Cont.
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax.
Section 4(3), Article XIV of the 1987 Constitution

Charitable institutions, churches and personages or

convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from
taxation.
Section 28(3), Article VI of the 1987 Constitution
Page 49
Exclusions from Gross Income
Section 32 (B), Tax Code

13th month pay, productivity incentives, Christmas bonuses

and other benefits, up to an aggregate of Php82,000 [amended
by Republic Act No. 10653]
Proceeds from life insurance
Amounts received by an insured as a return of premium
Gifts, bequests, devises
Compensation for injuries or sickness from accident or health
insurance or under the Workers Compensation Acts
Income exempt under treaty provisions
Retirement benefits received pursuant to certain laws or under
a reasonable private benefit plan

Page 50
Exclusions from Gross Income
Section 32 (B), Tax Code

Amounts received as a consequence of separation from

service as a result of death, sickness, physical disability
or any cause beyond the control of the employee
Prizes and awards in recognition of religious, charitable,
scientific, educational, artistic, literary or civic
achievement, as well as awards in authorized sports
competitions
Mandated contributions to the government and private
security systems and housing fund
Gains from the sale of bonds, debentures, or other
certificates of indebtedness with a maturity of longer than
five years
Gains from redemptions of shares in a mutual fund

Page 51
Taxpayer not deprived of treaty benefit for
failure to follow the 15-day requirement
Deutsche Bank AG Manila Branch vs. CIR
Supreme Court (1st Division) G.R. No. 188550 promulgated August 19, 2013

A prior TTRA should not operate to divest entitlement to the benefits

of a treaty, since to do so would constitute a violation of the duty
required by good faith in complying with a tax treaty (pacta sunt
servanda ).

The denial of the tax treaty availment for failure to apply within the 15-
day period would impair the value of the tax treaty.

At most, the application for a tax treaty relief from the BIR is merely
confirmatory. The BIR must not impose additional requirements that
would negate the availment of the reliefs provided for under
international agreements.

Page 52
EXCLUSIONS FROM GROSS INCOME
Recent jurisprudence/ BIR issuances
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities

CIR vs. St. Lukes Medical Center, Inc. G.R. No. 195909; G.R. No.
195960 promulgated September 26, 2012

CIR assessed St. Lukes for deficiency income and expanded

withholding taxes for 1998, arguing that since Section 27(B) of the
Tax Code imposes a 10% preferential tax rate on the income of
proprietary non-profit hospital, the exemption granted under Sec. 30
(E) and (G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare, has been removed.
St. Lukes maintains that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G).
It argues that the making of profit per se does not destroy its income
tax exemption.

Page 54
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities

CIR vs. St. Lukes Medical Center, Inc. (cont.)

Did the introduction of Section 27(B) (rate of 10% for Proprietary

Hospitals) remove the exemption of St. Lukes under Section 30(E) as
a non-stock, non-profit organization and under Section 30(G) as a
civic organization not organized for profit?

Ruling:

No. Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) & (G).

Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax
exemption.

Page 55
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities

CIR vs. St. Lukes Medical Center, Inc. (cont.)

Ruling:

The effect of the introduction of Section 27(B) is to subject the

taxable income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential
rate under Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section 27(A)(1).
Proprietary means private, following the definition of a proprietary
educational institution as any private school maintained and
administered by private individuals and group with a government
permit. Non-profit means no net income or asset accrues to or
benefits any member or specific person.

Page 56
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities

CIR vs. St. Lukes Medical Center, Inc. (Cont.)

I s St. Lukes liable for deficiency income tax under Section 27(B)?

Ruling:

Yes. It is a corporation that is NOT operated exclusively for

charitable or social welfare purposes [as contemplated in Section 30
(E) and (G) of the NIRC] insofar as its revenues from paying patients
are concerned.

However, it remains a proprietary nonprofit hospital entitled to the

10% tax rate on its net income from its for-profit activities under
Section 27(B) of the NIRC as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its
corporate purposes.
Page 57
Taxability of St. Lukes Medical Center
GR No. 203514 dated February 13, 2017

Facts

St. Lukes
Medical Center
(SLMC)
CIR

Charitable nonprofit
organization exempt from Proprietary hospital subject
income tax. [Sec 30(E)/(G) to 10% income tax. [Sec.
of Tax Code] 27(B) of Tax Code]

No quarterly returns filed

BIR assessed compromise penalties

Page 58
Taxability of St. Lukes Medical Center
GR No. 203514 dated February 13, 2017

Issue #1

Are the revenues of SLMC exempt from or subject to 10%

Income Tax?

Decision

Exempt 10% Income Tax

Partial Exclusively for Income from profit

charitable or social activities
purposes

Page 59
Taxability of St. Lukes Medical Center
GR No. 203514 dated February 13, 2017

Issue #2

Is SLMC liable of compromise penalties for non filing of

quarterly income tax returns?

Decision

Good faith
No Honest belief

Page 60
The revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.

CIR v. DLSU, Inc.

CTA En Banc Case No. 622, December 10, 2010

Facts:
DLSU is a NSNP domestic educational institution. BIR assessed
DLSU for deficiency income tax derived from rental income on
restaurants and bookstores.

According to the Commissioner, DLSU's use of its assets for non-

educational or commercial purposes immediately removed such
assets from the exemption coverage under Article XIV, Section 4 (3) of
the 1987 Philippine Constitution.

Page 61
The revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.

CIR v. DLSU, Inc. Contd.

CTA En Banc Case No. 622, December 10, 2010

Issue:
Is DLSUs rental income exempt from income tax?

Ruling

Yes, the revenue derived from rental income on restaurants and

bookstores were actually, directly and exclusively used for educational
purposes.

Page 62
Revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.

CIR v. DLSU, Inc. Contd.

CTA En Banc Case No. 622, December 10, 2010
Ruling

The rental revenue from canteens and bookstores are specifically used to
pay DLSU's promissory note to Philippine Trust Company, the loan used
in the construction of the University Physical Education Sports Complex
and repairs and renovation of the physical assets. It has a policy to obtain
funding for all disbursements for educational purposes primarily from
rental revenue earned from its lease contracts.

It is essential to ascertain how the taxpayer as a non-stock and non-profit

educational institution utilizes income earned sought to be exempted.
Revenues, howsoever generated, are covered by the constitutional
exemption provided they will be used for educational purposes or
will be held in reserve for such purposes.

Page 63
Taxability of government educational institutions
BIR Ruling No. 259-2017 dated May 29, 2017

Facts

University of the Philippines Los Banos requested for tax

exemption as a government educational institution.

Issue

Are government educational institutions exempt from income

tax?

Page 64
Taxability of government educational institutions
BIR Ruling No. 259-2017 dated May 29, 2017

Ruling

Government educational institutions

Exempt from income tax
Income used actually, directly and
Yes exclusively for educational purposes

[Section 30 (I) of the Tax Code and paragraph 3,

Section 4, Article XIV of the 1987 Philippine
Constitution]

Page 65
Exclusion from 13th month pay and other benefits increased
to PhP82,000

Republic Act No. 10653: An Act Adjusting the 13th Month

Pay and Other Benefits Ceiling Excluded from the
Computation of Gross Income for Purposes of Income
Taxation.
Effective date: March 2, 2015
raises the tax exemption ceiling on 13th month pay, Christmas
bonuses, and other workers' benefits to Php82,000 from
Php30,000
gross benefits received by officials and employees of public and
private entities up to a maximum amount of P82,000 are excluded
from the computation of the gross income
gives the President the authority to adjust the threshold amount
every three years after the effectivity thereof based on the
Consumer Price Index
Page 66
Exclusion from 13th month pay and other benefits increased
to PhP82,000

Revenue Regulation No. 3-2015 dated March 9, 2015

Implements the provisions of RA No. 10653 on the increase to
PhP82,000 of the total amount of exclusion from gross income for 13th
month pay and other benefits.

The exclusion from gross compensation income of the amount of

PhP82,000 shall apply only to the 13th month pay and other benefits
paid or accrued beginning January 1, 2015, and shall in no case apply
to other compensation received by an employee under an employer-
employee relationship, such as basic salary and other allowances.
Further, said exclusion from gross income is not applicable to self-
employed individuals and income generated from business.

Page 67
EXCLUSION
BAR Question and Answer

Q: Mr. A, a citizen and resident of the Philippines, is a professional

boxer. In a professional boxing match held in 2013, he won prize
money in United States (US) dollars equivalent to P300,000,000.

a) Is the prize money paid to and received by Mr. A in the US taxable

in the Philippines? Why? (2%)

b) May Mr. A's prize money qualify as an exclusion from his gross
income? Why? (2%)

c) The US already imposed and withheld income taxes from Mr. A's
prize money. How may Mr. A use or apply the income taxes he paid
on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (4%)

2015 Bar Examinations

Page 68
EXCLUSION
BAR Question and Answer

a) Is the prize money paid to and received by Mr. A in the US taxable

in the Philippines? Why? (2%)

Suggested Answer:

a) Yes, Mr. A as a resident citizen is taxable on his income from

sources within and outside the Philippines.

2015 Bar Examinations

Page 69
EXCLUSION
BAR Question and Answer

b) May Mr. A's prize money qualify as an exclusion from his gross
income? Why? (2%)

Suggested Answer:

b) No, prizes and awards that may be excluded from the computation
of gross income are those received from authorized sports
competitions, which do not include a professional boxing match.

2015 Bar Examinations

Page 70
EXCLUSION
BAR Question and Answer

c) The US already imposed and withheld income taxes from Mr. A's
prize money. How may Mr. A use or apply the income taxes he paid
on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (4%)

Suggested Answer:

c) The tax paid in the US may be claimed as a tax credit in the

Philippines, as a valid deduction (not exclusion) from the income
tax due to arrive at the income tax payable by Mr. A.

2015 Bar Examinations

Page 71
Deductions from gross income

Page 72
General rules
Substantiation requirements

No deduction from gross income shall be allowed under

Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official
receipts or other adequate records:
the amount of the expense being deducted, and
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.
Section 34(A)(1)(b) of the Tax Code

Page 73
Deductions from gross income

Specific provisions of the statute must authorize the

deduction and taxpayer must prove entitlement to the
deduction

Any amount paid or payable which is otherwise

deductible from gross income shall be allowed as
deduction only if it is shown that the tax required to
be withheld therefrom has been paid to the BIR

Deductions for income tax purposes partake the nature

of tax exemptions hence, must be strictly construed

Page 74
Itemized deductions
Ordinary and necessary expenses
Interest
Taxes
Losses
Bad debts
Depreciation of property
Depletion of oil and gas wells and mines
Charitable and other contributions
Research and development
Pension trust contributions of employees
Premium payments on health and/or hospitalization
insurance

Page 75
Ordinary and necessary trade, business or
professional expenses

Requisites for Deductibility:

1. It must be ordinary and necessary;
2. It must be paid or incurred during the taxable year;
3. It must be paid or incurred in carrying on or which are directing
attributable to the development, management, operation and/or
conduct of the trade, business, or exercise of profession;
4. It is not contrary to law, public policy, or morals;
5. It must be substantiated by sufficient evidence, such as official
receipts or other adequate records;
6. It must be shown that the tax required to be deducted and
withheld from the expense has been paid to the BIR, in
accordance with Sections 58 and 81 of the Tax Code.

Page 76
Ordinary and necessary trade, business or
professional expenses Cont.

A taxpayer is entitled to deduct the necessary expenses

paid in carrying on his business from his gross income
from whatever source. (Section 65, RR No. 2)
An expense is ordinary when it connotes a payment,
which is normal in relation to the business of the taxpayer
and the surrounding circumstances. An expense is
necessary where the expenditure is appropriate or
helpful in the development of the taxpayers business or
that the same is proper for realizing a profit or minimizing
a loss. (General Electric [P.I.] vs. Collector, CTA Case No. 1117, July 14,
1963)

Page 77
General rules
Additional requirement relating to withholding

Revenue Regulations No. 12-2013, July 12, 2013

Section 2.58.5 of RR 2-98, as amended, is further amended to read
as follows:
Section 2.58.5. Requirements for Deductibility Any income
payment which is otherwise deductible under the Code shall be
allowed as a deduction from the payors gross income only if it is
shown that the income tax required to be withheld has been paid to
the Bureau in accordance with Sections 57 and 58 of the Code.
No deduction will also be allowed notwithstanding payments of
withholding tax at the time of the audit investigation or
reinvestigation/reconsideration in cases where no withholding of tax
was made in accordance with Sections 57 and 58 of the Code.

Page 78
Interest Expense

Requisites for Deductibility:

1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such
indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayers trade,
business or exercise of profession;
5. The interest expense must have been paid or incurred during the
taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;

Page 79
Interest Expense Cont.

Requisites for Deductibility:

8. The interest payment arrangement must not be between related
taxpayers as mandated in Section 34(B)(2)(b), in relation to
Section 36(B), both of the Tax Code of 1997;
9. The interest must not be incurred to finance petroleum
operations;
10. 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.

Page 80
Interest Expense Cont.

Tax Arbitrage [Section 34 B(1) of the Tax Code]

The amount of interest expense paid or incurred by a

taxpayer in connection with his trade, business or exercise
of a profession shall be reduced by an amount equal to 33%
of the interest income of the taxpayer which has been
subjected to final withholding tax.

The tax arbitrage scheme is aimed at equalizing the

taxpayers liability for interest income and the tax benefit of
interest expense.

Page 81
Taxes

Requisites for deductibility:

1. It must be paid or incurred during the taxable year;
2. It must be paid or incurred in connection with the taxpayers trade,
profession, or business;
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 (i.e. income tax).

Page 82
Losses

Requisites for deductibility:

1. The loss must be that of the TAXPAYER.
2. The loss must be ACTUALLY sustained and charged off within the taxable
year.
3. The loss is evidenced by a CLOSED and completed transaction.
4. The loss is not claimed as a DEDUCTION for estate tax purposes.
5. The loss must not be compensated by INSURANCE or other forms of
indemnity.
6. The loss must be connected with the taxpayers TRADE, business or
profession.
7. In the case of casualty loss, declaration of loss (Sworn DECLARATION of
Loss) must be filed within 45 days from the occurrence of the casualty
loss. (RR 12-77)
Page 83
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.

The NOLCO shall be carried over as a deduction from

gross income for the next 3 consecutive taxable years
immediately following the year of such loss.

Can be claimed by domestic corporation and resident

foreign corporation subject to normal income tax

Page 84
Net operating loss carry-over
Illustration:
Gross income Deductions NOLCO
2012 100,000 200,000 (100,000)
2013 150,000 300,000 (250,000)
2014 250,000 100,000 ?

NOLCO of 100,000 in 2012 can be carried over until 2015.

NOLCO of 150,000 in 2013 can be carried over until 2016.

In the year 2014, the remaining NOLCO is 100,000 (250,000 [100,000 +

150,000] 150,000 [250,000 100,000]), which can be utilized as a
deduction up to the year 2016 since it arose in 2013.

Page 85
Bad debts

Requisites for deductibility:

1. Existing indebtedness due to the taxpayer which must be valid
and legally demandable;
2. Connected with the taxpayer's trade, business or practice of
profession;
3. Must not be sustained in a transaction entered into between
related parties;
4. Actually ascertained to be worthless and uncollectible as of the
end of the taxable year;
5. Actually charged off in the books of accounts of the taxpayer as of
the end of the taxable year.

Page 86
Depreciation of property

Requisites for Deductibility:

1. The allowance for depreciation must be for property used in the
TRADE or business, or those not being used temporarily during
the year ;
2. The asset must have a limited USEFUL life;
3. The allowance for depreciation must be REASONABLE;
4. The allowance must be CHARGED off during the taxable year
from the taxpayers books of accounts;
5. The total allowances must not EXCEED the cost of the property.

Page 87 Presentation title

Charitable and other contributions

Requisites for Deductibility:

1. The contribution or gift must be actually paid;
2. It must be given to the organizations specified in the Tax Code;
3. The net income of the institution must not inure to the benefit of
any private stockholder or individual.
Limitation
- It must not exceed 10% of the individuals taxable income before
deduction of contribution
- It must not exceed 5% of the corporations taxable income before
deduction of contribution

Page 88
Charitable and other contributions Cont.

Contributions deductible in full [Section 34 (H)(2)]

donations to the following institutions or entities shall
be deductible in full:
Donations to the Government of the Republic 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,
etc.
Donations to certain foreign institutions or international
organizations
Donations to Accredited NGOs

Page 89
Research and development

Optional Treatment of R & D Expenditures:

A taxpayer may treat R&D expenditures as ordinary and
necessary expenses deductible from gross income.
At the election of the taxpayer, the expenditures may be treated
as deferred expenses which shall be allowed as a deduction in
computing taxable income.

Page 90
Pension trust contributions of employees

Requisites for Deductibility:

1. The employer (ER) must have established a pension or
retirement plan to provide for the payment of reasonable pensions
to his/her employees (EEs);
2. The pension plan must be reasonable and actuarially sound;
3. It must be funded by the ER (he/she contributed cash to the plan)
4. The amount contributed must no longer be subject to his/her
control or disposition
5. The amount has not been allowed before as a deduction
6. The amount is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer or
payment is made.

Page 91
Premium payments on health and/or
hospitalization insurance

Requisites for Deductibility:

1. Family has gross income of P250,000 or less for the taxable
year;
2. In case of married taxpayers, only the spouse claiming the
additional exemption for dependents may enjoy this deduction;
3. Ceiling for this type of deduction is P2,400 per family or
P200/month paid during the taxable year.

Page 92
Optional Standard Deduction (OSD)

In lieu of the itemized deductions

Individual Corporation
A citizen or a resident alien, Domestic corporation or resident
whose income is not entirely from foreign corporation
compensation
40% of his gross sales or receipts 40% of its gross income

Gross Income shall mean the gross sales less returns,

discounts, allowances and cost of goods sold

For sellers of services, gross income means gross receipts less

sales returns, allowances, discounts and cost of services

Page 93
Optional Standard Deduction (OSD)

Unless the taxpayer signifies in his return his intention to

elect the OSD, he shall be considered as having availed
himself of the itemized deductions allowed in Section 34
of the Tax Code.

Such election, when made in the return, shall be

irrevocable for the taxable year for which the return is
made.

(R.A. No. 9504 or the An Act Amending Section 22, 24, 34, 35, 51,
And 79 Of Republic Act No. 8424, As Amended Otherwise Known As
The National Internal Revenue Of 1997)

Page 94
Optional Standard Deduction
Illustrative Example in Determining the basis of the 40% OSD for
Corporations

Gross sales P1, 000,000

Less: Cost of Goods Sold 800,000
Basis of the OSD P 200,000
x OSD Rate (maximum) 40%
OSD Amount P 80,000

Income Tax Computation using OSD

Gross Income 200,000

Less: OSD 80,000
Taxable Income 120,000
Multiplied by: Tax Rate 30%
Income Tax Due 36,000
Page 95
Basic personal and additional exemptions

Personal exemptions
An arbitrary amount allowed by law to cover the personal, living or
family expenses of the taxpayer.
Kinds:
Basic personal exemption - PhP50,000 for each individual
taxpayer, whether single, married or head of the family.
Additional exemption PhP25,000 per dependent child, but not
to exceed four (4)
(R.A. No. 9504 or the An Act Amending Section 22, 24, 34, 35, 51, And
79 Of Republic Act No. 8424, As Amended Otherwise Known As The
National Internal Revenue Of 1997)

Page 96
Basic personal and additional exemptions
Cont.
Who is a dependent for purposes of claiming
additional exemptions?
1. A taxpayers child, whether legitimate or illegitimate or legally
adopted child
2. Chiefly dependent for support upon the taxpayer
3. Living with the taxpayer
4. Not more than 21 years old, unmarried and not gainfully
employed; OR regardless of age, is incapable of self-support
because of mental or physical defect.

Page 97
Basic personal and additional exemptions
Cont.
Who may claim personal exemptions?
1. Citizens (whether resident or non-resident)
2. Resident aliens may avail of basic personal and additional
exemptions
3. Non-resident aliens engaged in trade or business may avail of
basic personal exemption only by way of reciprocity.
Limit of basic personal exemption allowed: An amount equal to
the exemption allowed by the non-resident aliens country to
Filipino citizens not residing therein but deriving income
therefrom, but not to exceed the amount fixed by the Tax Code.

Page 98
Basic personal and additional exemptions
Cont.
Status at the end of the year rule
The status of the taxpayer at the end of the calendar year shall be
used for determining his personal and additional exemptions.
A change of status of the taxpayer during the taxable year
generally benefits, but does not prejudice him.

Page 99
DEDUCTIONS
Recent jurisprudence and BIR issuances
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.

Acer Philippines, Inc. vs. CIR

CTA Case No. 8372 dated March 31, 2016
Facts:

Acer Philippines, Inc. was assessed by BIR with deficiency income

tax, among others, for calendar year 2005.

BIRs comparison of the salaries and wages reflected in Acers

Alphalist vs. AFS disclosed a discrepancy in the amount of
PhP1,887,603.30, and treated the discrepancy as undeclared income.

Page 101
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.

Acer Philippines, Inc. vs. CIR Cont.

CTA Case No. 8372 dated March 31, 2016
Acers reason that the said discrepancy is not subject to Income Tax:
1. Difference is a permanent reconciling item in determining the income per tax return
against income per AFS, as a result of accrual basis of accounting.

2. Annual ITR for 2005 shows that PhP1,890,604.00, accrued bonus, was deducted
from the net income per books for 2005, hence, an additional expense, to arrive at
the taxable income/loss for the year 2005.

Issue:

Is the discrepancy between the Alphalist and AFS subject to Income

Tax?

Page 102
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.

Acer Philippines, Inc. vs. CIR Cont.

CTA Case No. 8372 dated March 31, 2016
Held:

No, the difference does not represent undeclared income.

Reason:
1. Income, in a broad sense, means all wealth which flows into the taxpayer other
than as return of capital. The accrual of the PhP1,890,604.00 bonus due to
employees does not involve an inflow of wealth.

2. However, the accrued bonus of PhP1,890,604.00 was a proper deduction in 2004,

not in 2005.

3. Acer is liable for deficiency income tax on the overclaimed salaries and allowances
of PhP1,887,603.30 for taxable year 2005.

Page 103
Taxpayer should signify in its ITR the intention to elect the optional
standard deduction (OSD) to avail of the 40% standard deduction

Section 34(L) of the Tax Code dictates that the taxpayer should signify
in its return the intention to elect the OSD. Otherwise, it shall be
considered to have availed of the other deductions allowed in Sec. 34
of the Tax Code.

2009 ITR of Iconic shows that it declared itemized deductions in the

total amount of PhP150,009,617.40 which resulted to a net loss in the
same amount. There was nothing in ITR which would show that it
opted to avail of the OSD. Thus, OSD should not be applied.

(Iconic Beverage, Inc. vs. CIR, CTA Case No. 8607

dated January 6, 2016)

Page 104
DEDUCTIONS
BAR Question and Answer

Q: Dr. Taimtim is an alumnus of the College of Medicine of Universal University

(UU), a privately-owned center for learning which grants yearly dividends to its
stockholders.

UU has a famous chapel located within the campus where the old folks used to
say that anyone who wanted to pass the medical board examinations should
offer a dozen roses on all the Sundays of October. This was what Dr. Taimtim
did when he was still reviewing for the board examinations. In his case, the folk
saying proved to be true because he is now a successful cardiologist. Wanting
to give back to the chapel and help defray the costs of its maintenance, Dr.
Taimtim donated P50,000.00 to the caretakers of the chapel which was
evidenced by an acknowledgment receipt.

In computing his net taxable income, can Dr.Taimtim use his donation to the
chapel as an allowable deduction from his gross income under the National
Internal Revenue Code (NIRC)? (4%)

2014 Bar Examinations

Page 105
DEDUCTIONS
BAR Question and Answer

Suggested Answer:

No, Dr.Taimtim may not use his donation to the caretakers of the chapel as an
allowable deduction from his gross income.

Contributions which may be deductible under the NIRC are those given to
accredited domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to nongovernment organizations, and provided that the
net income of such institution does not inure to the benefit of any private
stockholder or individual.

2014 Bar Examinations

Page 106
OTHERS

Page 107
Accounting Period

Taxable year
Calendar year or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed. (Section
22[P] of the Tax Code)
Fiscal year
An accounting period of twelve (12) months ending on the last day
of any month other than December. (Section 22[Q] of the Tax
Code)

Page 108
Accounting Period

Change of accounting period

Applicable to a taxpayer, other than an individual
The corporation shall not change the accounting period employed
without prior approval from the Commissioner (Section 52[B] of the
Tax Code)
The net income shall, with the approval of the Commissioner,
be computed on the basis of such new accounting period (Section
46 of the Tax Code)
Subject to the provisions of Section 47 on Final or Adjustment
Returns for a Period of Less than Twelve (12) Months

Page 109
Accounting for Long-Term Contracts

Long-term contracts
Refers to building, installation or construction contracts covering a
period in excess of one (1) year.

Percentage of completion
An accounting method for persons whose gross income is derived
in whole or in part from long-term contracts shall report such
income upon the basis of percentage of completion.
The return should be accompanied by a certificate of architects or
engineers showing the percentage of completion during the
taxable year of the entire work performed under contract, subject
to deductions for all expenditures made during the taxable year on
account of the contract. (Section 48 of the Tax Code)

Page 110
Income Tax Return

An Income Tax Return (ITR) is a sworn statement in which

the taxpayer discloses the nature and extent of his tax
liability by formally making a report of his income and
allowable deductions or the taxable year in the prescribed
form.
Classes of ITR:
1. Individual income ITR;
2. Corporate ITR;
3. Fiduciary ITR; and
4. Miscellaneous returns

Page 111
Income Tax Return Cont.

General requirements of ITR

1. The return must be signed and verified under oath;
2. It must be filed by the taxpayer or his authorized agent or
representative;
3. It must be filed in duplicate and in the form prescribed by the BIR;
and
4. It must cover a taxable period of one year only except when
otherwise specifically authorized by law.

Page 112
Income Tax Return Cont.

Individuals required to file ITR [Section 51(A)(1), Tax

Code]
1. Every Filipino citizen residing in the Philippines;
2. Every Filipino citizen residing outside the Philippines, on
his income from sources within;
3. Every alien residing in the Philippines, on income derived
from sources within; and
4. Every non-resident alien engaged in trade or business or
in the exercise of profession in the Philippines

Page 113
Income Tax Return Cont.

Individuals NOT required to file ITR

1) An individual whose gross income does not exceed his
total personal and additional exemption for dependents.
BUT a citizen and any alien individual engaged in business or
practice or profession within the Philippines shall file ITR regardless
of the amount of gross income.
2) An individual with respect to pure compensation income,
derived from sources within, from one employer, the income
tax on which has been correctly withheld under Sec. 79 of
the Tax Code.
BUT an individual deriving compensation from two or more
employers at any time during the taxable year shall file an ITR.
Page 114
Income Tax Return Cont.

Individuals NOT required to file ITR

3) An individual whose sole income has been subjected to FWT pursuant
to Sec. 57(A) of the Tax Code.
4) A minimum wage earner or an individual who is exempt from IT under
the Tax Code and other laws, general or special.

Note: Under RA 7432, a senior citizen shall be exempted from the

payment of individual IT, provided his annual taxable income does not
exceed the poverty level as determined by NEDA.
Senior citizen any resident citizen of the Philippines at least 60 years old,
including those who have retired from both government and private
enterprises and has an income of not more than PhP60,000 per annum
subject to review by NEDA every three years.

Page 115
Income Tax Return Cont.

Corporations required to file returns

Corporations subject to tax having an existence during any taxable year:
a) The return must be filed notwithstanding that it had no income or it had no
business transactions during the year;
However, a corporation which has received a charter but has never
perfected its organization and which has transacted no business and had no income is
not required to file.
b) Corporations in process of liquidation or under receivership;
c) Insurance companies transacting business in the Philippines or deriving
income from sources within; and
d) Foreign corporations having income from sources within the Philippines.
Note: RR 9-2001 makes it mandatory for Large Taxpayer and optional for certain identified
Non-Large Taxpayers to avail of the Electronic Filing and Payment System (eFPS) in
the filing of their ITR and the payment of taxes due thereon.

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Income Tax Return Cont.

Date of Payment of Tax

Individuals, In general, the total amount shall be paid on or before April 15,
estates and following the close of the calendar year by the person subject to
trusts tax.

Where tax is in excess of PhP2,000 The taxpayer may elect to pay in

two equal installments (the first installment shall be paid on or before
April 15, following the close of the calendar year, and the second
installment, on or before the 15th day of July following the close of the
calendar year)
Corporations A corporation subject to IT under Sections 27 (A) and 28 (A)
shall file a return of its estimated net taxable income for each
quarter and pays the tax thereon within 60 days from the close
of each of the first three quarters, whether the corporation is on
a calendar or fiscal year basis.
The final payment of corporate IT shall be made on the filing of
the final or adjustment return.

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General principles on withholding tax

The withholding taxes in the Philippines may either be

creditable or final .

The liability for payment of the tax rests primarily on the

payor as a withholding agent.

In case of failure to withhold the tax or in case of under

withholding, the deficiency tax shall be collected from the
payor/withholding agent.

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General principles on withholding tax

Final withholding tax (FWT) Creditable withholding tax (CWT)

Income tax withheld by the withholding Taxes withheld are intended to equal or at
agent is constituted as a full and final least approximate the tax due from the
payment of the income tax due from payee on said income
the payee on the said income
Tax withheld shall be allowed as a tax
credit against the income tax liability of
the payee in the quarter of the taxable
year in which the income was earned
Payee is not required to file an income Payee is still required to report the income
tax return for the particular income (file ITR) and pay the difference between
the tax withheld and the tax due

Taxes withheld on income payments

covered by the expanded withholding tax
and compensation income are creditable
in nature (Section 2.57, RR No. 2-98).

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Minimum Corporate Income Tax (MCIT)

MCIT imposed:
On domestic and resident foreign corporations
Whenever such corporation has zero or negative taxable
income or
Whenever the amount of MCIT is greater than the
Regular Corporate Income Tax (RCIT)
Beginning on the 4th year immediately following the year
of start of commercial operation

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Minimum Corporate Income Tax

Tax Rate: 2%

Tax Base: Gross income subject to RCIT less cost of

goods sold or direct costs and expenses

Carry Forward of Excess MCIT for 3 years

MCIT applies to quarterly Income Tax Returns

The final comparison between the RCIT payable by the
corporation and the MCIT shall be made at the end of taxable year

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Improperly Accumulated Earnings Tax

Imposed in addition to income tax

On the improperly accumulated taxable income of every

corporation formed for the purpose of avoiding income tax with respect
to its shareholders by permitting profits to accumulate instead of being
distributed

Exceptions:
- Banks and other non-bank financial intermediaries
- Insurance companies
- Publicly-held corporations
- Taxable partnerships
- General professional partnerships
- Non-taxable joint ventures
- Entities duly registered with PEZA, BCDA, and other special economic zones
which enjoy payment of special tax rate on their registered operations

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Improperly Accumulated Earnings Tax

Evidence of Purpose to Avoid Income Tax

Prima Facie Evidence The fact that any corporation is a

mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax on its
shareholders or members

Evidence Determinative of Purpose The fact that the

profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative
of the purpose to avoid the tax upon its shareholders

Profits accumulated exceed 100% of the paid-up capital

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OTHERS
BAR Question and Answer

Q: Indicate whether each of the following individuals is required or not

required to file an income tax return:

a) Filipino citizen residing outside the Philippines on his income from

sources outside the Philippines. (1%)
b) Resident alien on income derived from sources within the
Philippines. (1%)
c) Resident citizen earning purely compensation income from two
employers within the Philippines, whose income taxes have been
correctly withheld. (1%)
d) Resident citizen who falls under the classification of minimum wage
earners. (1%)
e) An individual whose sole income has been subjected to final
withholding tax. (1%)

2015 Bar Examinations

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OTHERS
BAR Question and Answer

A: Indicate whether each of the following individuals is required or not

required to file an income tax return:

a) Filipino citizen residing outside the Philippines on his income from

sources outside the Philippines. (1%) NO.
b) Resident alien on income derived from sources within the
Philippines. (1%) YES.
c) Resident citizen earning purely compensation income from two
employers within the Philippines, whose income taxes have been
correctly withheld. (1%) YES.
d) Resident citizen who falls under the classification of minimum wage
earners. (1%) NO.
e) An individual whose sole income has been subjected to final
withholding tax. (1%) NO.

2015 Bar Examinations

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Questions?

Atty. Jonald R. Vergara

jonald.r.vergara@ph.ey.com