- Chapter Overview and Objectives

- This chapter discusses the concept of tax income, the situs of income,
and the types of taxpayers.

- After this chapter, readers are expected to comprehend and

demonstrate knowledge on the following:
1. The concept of gross income
2. The types of income taxpayer
3. . The general rules in income taxation

4. The income tax situs rules

5.
- The Concept of Income

- Why is income subject to tax?

- Income is regarded as the best measure of taxpayers’ ability to pay

tax.

- It is an excellent object of taxation in the allocation of government

costs.

- What is income for taxation purposes?

- The tax concept of income is simply referred to as “gross income”

under the NIRC.

- A taxable item of income is referred to as an “item of gross income” or

“inclusion in gross income”.

- Gross income simply means taxable income in layman’s term.

 - Gross income is broadly defined as any inflow of wealth to the taxpayer
from whatever source, legal or illegal, that increases net worth.

- Elements of Gross Income

1. It is a return on capital that increases net worth.

2.
3. It is a realized benefit.
4.

3. It is not exempted by law, contract, or treaty.

- Return on Capital

- Capital means any wealth or property.

- Gross income is a return on wealth or property that increases the

taxpayer’s net worth.

- The return on capital that increases net worth is income subject to

income tax.

- Return of capital merely maintains net worth; hence, it is not taxable.

- Capital Items Deemed with Infinite Value

- There are capital items that have infinite value and are incapable of
pecuniary valuation.
 - Anything received as compensation for their loss is deemed a return of
capital.

- Examples:

1. Life
2.
3. Health
4.

3. Human reputation

- Life

- The value of life is immeasurable by money.

- The proceeds of a life insurance contract collected by an employer as a

beneficiary from the life insurance of an officer or any person directly
interested with his trade are likewise exempt.

- However, the following are taxable return on capital from insurance

policies:

- Any excess amount received over premiums paid by the insured upon
surrender or maturity of the policy

- Gain realized by the insured from the assignment or sale of his

insurance policy

- Interest income from the unpaid balance of the proceeds of the policy
- Any excess of the proceeds received over the acquisition costs and
premium payments by an assignee of a life insurance policy

- Health

- Any compensation received in consideration for the loss of health such

as compensation for personal injuries or tortuous acts is deemed a
return of capital.

- Human Reputation

- The value of one’s reputation cannot be measured financially.

- Any indemnity received as compensation for its impairment is deemed

a return of capital exempt from income tax.

- Examples include moral damages received from:

- Oral defamation or slander

- Alienation of affection

- Breach of promise to marry

- Recovery of Lost Capital vs. Recovery of Lost Profits

- The loss of capital results in decrease in net worth while the loss of
profits does not decrease net worth.
- The recovery of lost capital merely maintains net worth while the
recovery of lost profits increases net worth.

- Therefore, the recovery of lost profits is a return on capital.

- Taxable Recovery of Lost Profits

- The recovery of lost profits through insurance, indemnity contracts, or

legal suits constitutes a taxable return on capital.

- The following are taxable recoveries of lost profits:

- Proceeds of crop or livestock insurance

- Guarantee payments

- Indemnity received from patent infringement suit

- Realized Benefit

- What is meant by realized benefit?

- The term “benefit” means any form of advantage derived by the

taxpayer.
- There is benefit when there is an increase in the net worth of the
taxpayer.

- An increase in net worth occurs when one receives income, donation or

inheritance.

- The following are not benefits, hence, not taxable:

- Receipt of a loan – properties increase but obligations also increase

resulting in an offsetting effect in net worth.

- Discovery of lost properties – under the law, the finder has an

obligation to return the same to the owner.

- Receipt of money or property to be held in trust for, or to be remitted

to, another person.

- The “Realized” Concept

- The term realized means earned.

- It requires that there is a degree of undertaking or sacrifice from the

taxpayer to be entitled of the benefit.

- Requisites of a Realized Benefit

1. There must be an exchange transaction.

 2.
3. The transaction involves another entity.
4.

3. It increases the net worth of the recipient.

- Types of Transfers

1. Bilateral transfers or exchanges

2.
- Sale

- Barter

- These are referred to as “onerous transactions”.

3. Unilateral transfers
4.
- Succession

- Donation

- These are also referred to as “gratuitous transactions”.

3. Complex transactions

- Complex transactions are partly gratuitous and partly onerous.

- These are commonly referred to as “transfers for less than full and
adequate consideration”.
- The gratuitous portion of the transaction is subject to transfer tax while
the benefit from the onerous portion is subject to income tax.

- What is Meant by Another Entity?

- Every person, natural or juridical, is an entity.

- Natural persons are living persons while juridical persons are those
created by law such as partnerships and corporations.

- Gains or income derived between relatives, corporations and between

a partner and the partnership are taxable since it is made between
separate entities.

- However, the sales of a home office to its branch office are not taxable
because they pertain to one and the same taxable entity.

- Benefits in the Absence of Transfers

- The increase in wealth of the taxpayer in the form of appreciation or

increase in the value of his properties or decrease in the value of his
obligations in the absence of a sale or barter transaction is not taxable.

- These are referred to as unrealized gains or holding gains because they

have not yet materialized in an exchange transaction.

- Examples of unrealized gains or holding gains:

- Increase in value of investments in equity or debt securities

- Increase in value of real properties held

- Decrease in value of foreign currencies held or receivable

- Increase in value of foreign currency denominated debt by virtue of

favorable fluctuation in exchange rates

- Birth of animal offspring, accruals of fruits in an orchard or growth of

farm vegetables

- Increase in value of land due to the discovery of mineral reserves

- Rendering of Services

- The rendering of services for a consideration is an exchange but does

not cause a loss of capital.

- Hence, the entire consideration received from rendering of services

such as compensation income or service fees is an item of gross
income.

- Basis of Exemption of Unrealized Income

- Normally, taxpayers will have the ability to pay tax when their income
materializes in an exchange transaction since tax is generally payable
in money.
- Income realized in non-cash properties are, in effect, received in cash
but the taxpayer used the same to acquire the non-cash property.

- Income received in non-cash considerations is taxable at the fair value

of the property received.

- Mode of Receipt/Realization Benefits

- Taxable items of income may be realized by the taxpayer in two ways:

1. Actual receipt
2.
- Actual receipt involves actual physical taking of the income in the form
of cash or property.

3. Constructive receipt
4.
- Constructive receipt involves no actual physical taking of the income
but the taxpayer is effectively benefited.

- Inflow of Wealth Without Increase in Net Worth

- The inflow of wealth to a person that does not increase his net worth is
not income due to the total absence of benefit.

- Examples:

- Receipt of property in trust

 - Borrowing of money under an obligation to return

- Not Exempted by Law, Contract, or Treaty

- An item of gross income is not exempted by the Constitution, law,

contracts or treaties from taxation.

- The following items of income are exempted by law from taxation;

hence, they are not considered items of gross income:

1. Income of qualified employee trust fund

2.
3. Revenues of non-profit, non-stock educational institutions
4.

3. SSS, GSIS, Pag-IBIG, or PhilHealth benefits

5. Salaries and wages of minimum wage earners and qualified senior

citizen
6.
5. Regular income of Barangay Micro-business Enterprises (BMBEs)
6.
7. Income of foreign governments and foreign government-owned and
controlled corporations
8.
7. Income of international missions and organizations with income tax
immunity under Exclusions in Gross Income in Chapter 8.
8.
- Types of Income Taxpayers

1. Individuals
2.
- Citizen
 - Resident citizen

- Non-resident citizen

Okay, I will create a concise summary in the form of an outline, visual

organizer, or graphic organizer for each term.

- Types of Income Taxpayers

- Individuals

- Alien

- Resident alien

- Non-resident alien

- engaged in trade or business

- not engaged in trade or business

- Taxable estates and trusts

- Corporations

- Domestic corporation

- Foreign corporation

- Resident foreign corporation

- Non-resident foreign corporation

- Individual Income Taxpayers

- Citizens

- Those who are citizens of the Philippines at the time of adoption of the
Constitution on February 2, 1987

- Those whose fathers or mothers are citizens of the Philippines

- Those born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority

- Those who are naturalized in accordance with the law

- Classification of Citizens

- Resident citizen – A Filipino citizen residing in the Philippines

- Non-resident citizen includes:

- 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;

- A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for an employment on a
permanent basis;

- 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;

- A citizen who has been previously considered as non-resident citizen and

who arrives in the Philippines at anytime during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines

- Types of Income Taxpayers

- Individuals

- Alien

- Resident alien
- Non-resident alien

- Engaged in trade or business

- Not engaged in trade or business

- Taxable estates and trusts

- Corporations

- Domestic corporation

- Foreign corporation

- Resident foreign corporation

- Non-resident foreign corporation

- Individual Income Taxpayers

- Citizens

- Those who are citizens of the Philippines at the time of adoption of the
Constitution on February 2, 1987

- Those whose fathers or mothers are citizens of the Philippines

- Those born before January 17, 1973 of Filipino mothers who elected
Filipino citizenship upon reaching the age of majority

- Those who are naturalized in accordance with the law

- Classification of Citizens

- Resident citizen – A Filipino citizen residing in the Philippines

- Non-resident citizen includes:

- 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;

- A citizen of the Philippines who leaves the Philippines during the

taxable year to reside abroad, either as an immigrant or for an
employment on a permanent basis;

- 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;

- A citizen who has been previously considered as non-resident citizen

and who arrives in the Philippines at anytime during the taxable year
to reside permanently in the Philippines shall likewise be treated as a
non-resident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad
until the date of his arrival in the Philippines
- Alien

- Resident alien – an individual who is residing in the Philippines but is

not a citizen thereof, such as:

1. An alien who lives in the Philippines without definite intention as to his

stay; or
2.
3. One who comes to the Philippines for a definite purpose which in its
nature would require an extended stay, and to that end makes his
home temporarily in the Philippines, although it may be his intention at
all times to return to his domicile abroad.
4.
- Non-resident alien – an individual who is not residing in the Philippines
and who is not a citizen thereof

1. Non-resident aliens engaged in business (NRA-ETB)- aliens who stayed

in the Philippines for an aggregate period of more than 180 days
during the year
2.
3. Non-resident aliens not engaged in business (NRA-NETB) – include:
4.
- Aliens who come to the Philippines for a definite purpose which in its
nature may be promptly accomplished;

- Aliens who shall come to the Philippines and stay therein for an
aggregate period of not more than 180 days during the year
The General Classification Rule for Individuals

1. Intention
- The intention of the taxpayer regarding the nature of his stay within or
outside the Philippines shall determine his appropriate residency
classification.
- The taxpayer shall submit to the CIR of the BIR documentary proofs
such as visas, work contracts and other documents indicating such
intention

- Examples
- An alien is normally non-resident.
- A citizen is normally resident.

Length of Stay

In default of such documentary proof, the length of stay of the

taxpayer is considered:
- Citizens staying abroad for a period of at least 183 days are considered
non-resident.
- Aliens who stayed in the Philippines for more than 1 year as of the end
of the taxable year are considered resident.
- Aliens who are staying in the Philippines for not more than 1 year but
more than 180 days are deemed non-resident aliens engaged in
business.
- Aliens who stayed in the Philippines for not more than 180 days are
considered non-resident aliens not engaged in trade or business.

- Taxable Estates and Trusts

1. Estate
2.
- Estate refers to the properties, rights, and obligations of a deceased
person not extinguished by his death.
- Estates under judicial settlement are treated as individual taxpayers.

- The Income of the properties left by the decedent.

3. Trust
4.
- A trust is an arrangement whereby one person (grantor or trustor)
transfers (i.e. donates) property to another person (beneficiary) which
will be held under the management of a third party (trustee or
fiduciary).

- A trust that is irrevocably designated by the grantor is treated in

taxation as if it is an individual taxpayer.

- Trusts that are designated as revocable by the grantor are not taxable
entities and are not considered as individual taxpayers.

- The Income of properties held under revocable trusts is taxable to the

grantor not to the trust.

- Corporate Income Taxpayers

- The term ‘corporation’ shall include one person corporations (OPCs),

partnerships, no matter how created or organized, joint-stock
companies, joint accounts, association, or insurance companies, except
general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal, and other energy operations
pursuant to an operating consortium agreement under a service
contract with the government.
- Domestic Corporation

- A domestic corporation is a corporation that is organized in accordance

with Philippine laws.

- It includes one-person corporations (OPC) owned and registered by

resident citizens in the Philippines.

- Foreign Corporation

- A foreign corporation is one organized under a foreign law.

- Types of foreign corporations:

1. Resident foreign corporation (RFC) – a foreign corporation which

operates and conducts business in the Philippines through a
permanent establishment (i.e. a branch).
2.
3. Non-resident foreign corporation (NRFC) – a foreign corporation which
does not operate or conduct business in the Philippines
4.
- Other Corporate Taxpayers

1. One-person corporation (OPC)

2.
- A one-person corporation is a corporation with a single stockholder
who may be a natural person, trust or an estate.

3. Partnership
4.
- A partnership is a business organization owned by two or more persons
who contribute their industry or resources to a common fund for the
purpose of dividing the profits from the venture.

- Types of Partnership

- General professional partnership (GPP)

- A GPP is a partnership formed by persons for the sole purpose of

exercising a common profession, no part of the income of which is
derived from engaging in any trade or business.

- A GPP is not treated as a corporation and is not a taxable entity.

- Business partnership

- A business partnership is one formed for profit.

- It is taxable as a corporation.

- Joint Venture

- A joint venture is a business undertaking for a particular purpose.

- It may be organized as a partnership or a corporation.

- Types of joint ventures:

- Exempt joint ventures

- Exempt joint ventures are those formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium
agreement under a service contract with the Government.

- Taxable joint ventures

- All other joint ventures are table as corporations.

- Co-ownership

- A co-ownership is joint ownership of a property formed for the purpose

of preserving the same and/or dividing its income.

- A co-ownership that is limited to property preservation or income

collection is not a taxable entity and is exempt but the co-owners are
taxable on their share on the income of the co-owned property.

- The Residency and Citizenship Rule

- Taxpayers who are residents and citizens of the Philippines such as

resident citizen and domestic corporations are taxable on all income
from sources within and without the Philippines.

- Basis of the extraterritorial taxation

- Resident citizens and domestic corporations derive most of the
benefits from the Philippine government compared to all other classes
of taxpayers by virtue of their proximity to the Philippine government.

- The Issue of International Double Taxation

- The rule on extraterritorial taxation on resident citizens and domestic

corporations exposes these taxpayers to double taxation.

- However, the NIRC allows a tax credit for taxes paid in foreign
countries.

- Situs of Income

- The situs of income is the place of taxation of income.

- It is the jurisdiction that has the authority to impose tax upon the
income.

- Income Situs Rules

1. Interest income – Debtor’s residence

2.
3. Royalties – Where the intangible is employed
4.
2. Rent income – Location of the property
3.
4. Service income – Place where the service is rendered
5.
- Dividend Income From:

1. Domestic corporation – presumed earned within

2.
3. Foreign corporation – situs depends on pre-dominance test
4.
- The pre-dominance test

- If the ratio of the Philippine gross income over the world gross income
of the resident foreign corporation in the three-year period preceding
the year of dividend declaration, or for such part of the period as the
corporation has been existence, is:

- At least 50%, the portion of the dividend corresponding to the

Philippine gross income ratio that is earned within

- Less than 50%, the entire dividends received is deemed earned abroad

- Merchandising Income

- Earned where the property is sold

- Manufacturing Income

- Earned where the goods are manufactured and sold

- Operations and Remarks:

- Production Within, Distribution Within: Total income from production
and distribution is earned within the Philippines

- Production Without, Distribution Without: Total income from production

and distribution is earned without the Philippines

- Production Within, Distribution Without: Production income is earned

within, Distribution income is earned without

- Production Without, Distribution Within: Distribution income is earned

within, Production income is earned without

CHAPTER 4

- Income Taxation Schemes

- There are three income taxation schemes under the NIRC:

1. Final income taxation

2.
3. Capital gains taxation
4.
3. Regular income taxation
4.
- Mutually Exclusive Coverage

- The tax schemes are mutually exclusive.

 - An item of gross income that is subject to tax in one scheme
will not be taxed by the other schemes.

- Final Income Taxation

- Final income taxation is characterized by final taxes wherein

full taxes are withheld by the income payor at source.

- Final taxation is applicable only on certain passive income

listed by the law.

- Passive Income vs. Active Income

- Passive incomes are earned with very minimal or even without

active involvement of the taxpayer in the earning process.

- Active or regular income arises from transactions requiring a

considerable degree of effort or undertaking from the
taxpayer.

- It is the direct opposite of passive income.

- Examples of passive income:

1. Interest income from banks

2.
3. Dividends from domestic corporations
4.

3. Royalties
 - Examples of active income:

1. Compensation income
2.
3. Business income
4.

3. Professional income

- Capital Gains Taxation

- Capital gains tax is imposed on the gain realized on the sale,

exchange and other dispositions of certain capital assets.

- Capital assets are assets not used in business, trade or

profession.

- Regular Income Taxation

- The regular income tax is the general rule in income taxation

and covers all other income such as:

1. Active income
2.
3. Other income
4.
- Gains from dealings in properties, not subject to capital gains
tax

- Other passive income not subject to final tax

- Accounting Period

- Accounting period is the length of time over which income is

measured and reported.

- Types of Accounting Periods

1. Regular accounting period – 12 months in length

2.
- Calendar – Jan 1 – and Dec 31

- Fiscal – any 12-month period ending on a date other than Dec

31st

3. Short accounting period – less than 12 months

4.

- Calendar Year

- The calendar accounting period starts from January 1 and ends

December 31.

- Fiscal Year

- A fiscal accounting period is any 12-month period that ends on

any day other than December 31.
- The fiscal accounting period is available only to corporate
income taxpayers and is not allowed to individual income
taxpayers.

- Deadline of Filing the Income Tax Return

- Under the NIRC, the return is due for filing on the fifteenth day
of the fourth month following the close of the taxable year of
the taxpayer.

- Instances of Short Accounting Period

1. Newly commenced business – The accounting period covers the

date of the start of the business until the designated year-end
of the business.
2.
3. Dissolution of business – The accounting period covers the
start of the current year to the date of dissolution of the
business.
4.

- Change of Accounting Period by Corporate Taxpayers

- The accounting period covers the start of the previous

accounting period up to the designated year-end of the new
accounting period.

- Note that BIR approval is required in changing an accounting

period.

- Death of the Taxpayer

 - The accounting period covers the start of the calendar year
until the death of the taxpayer.

- Termination of the Accounting Period of the Taxpayer by the

Commissioner of Internal Revenue

- The accounting period covers the start of the current year until
the date of the termination of the accounting period.

- Accounting Methods

- Accounting methods are accounting techniques used to

measure income.

- Types of Accounting Methods

1. The general methods

2.
- Accrual basis

- Cash basis

3. Installment and deferred payment method

4.

3. Percentage of completion method

5. Outright and spread-out method

6.
5. Crop year basis
6.
- Accrual Basis

- Under the accrual basis of accounting, income is recognized

when earned regardless of when received.

- Expense is recognized when incurred regardless of when paid.

- Cash Basis

- Under the cash basis of accounting, income is recognized when

received and expense is recognized when paid.

- Prepaid Expense is Non-deductible

- Prepaid expenses are advanced payment for expenses of

future taxable periods. These are not deductible against gross
income in the year paid.

- Special Tax Accounting Requirement Must Be Followed

- There are cases where the tax law itself provides for a specific
accounting treatment of an income or expense.

- The Tax Accrual Basis Income is Determined as Follows:

- Cash income
- Accrued (uncollected) income

- Advanced income

- Gross income

- The Tax Accrual Basis Expense is Determined as Follows:

- Cash expenses

- Accrued (unpaid) expense

- Amortization of prepayments and depreciation of capital

expenditures

- Deductions

- The Tax Cash Basis Income is Determined as Follows:

- Cash income

- Advanced income

- Gross income

- The Tax Cash Basis Expense is Determined as Follows:

- Cash expenses

- Amortization of prepayments and depreciation of capital

expenditures

- Deductions

- Points to Consider in Converting GAAP Accrual Basis to Tax

Accrual Basis

1. In accounting accrual basis, income is recognized when earned

even if not yet received. Advanced income is inherently not
included in net income. For purposes of taxation, advanced
income is taxable. Hence, it must be added to accrual basis
gross income.
2.
3. In accounting, expense is recognized when accrued even if not
yet paid. Prepaid expenses are inherently not deducted.
Hence, no adjustment for prepayments is necessary under
accrual basis.
4.

- Points to Consider in Converting GAAP Cash Basis to Tax Cash

Basis

1. Under the accounting cash basis, income is recognized when

received not when it is earned.
2.
3. Under accounting cash basis, expense is deducted when paid
including prepaid expenses.
4.
- Sellers of Goods

- The gross income of taxpayers selling goods is determined as

follows:

- Sales

- Less: Cost of goods sold

- Gross income

- The cost of sales is computed using the inventory method:

- Beginning inventory

- Add: Purchases

- Total goods available for sale

- Less: Ending inventory

- Cost of goods sold

- Hybrid Basis

- The hybrid basis is any combination of accrual basis, cash

basis, and/or other methods of accounting.
 - Sale of Goods with Extended Payment Terms

- The sale of goods with extended payment terms may be

reported using the accrual basis, installment method, or
deferred payment method.

- Installment Method

- Under the installment method, gross income is recognized and

reported in proportion to the collection from the installment
sales.

- Installment method is available to the following taxpayers:

1. Dealers of personal property on the sale of properties they

regularly sell
2.
3. Dealers of real properties, only if their initial payment does not
exceed 25% of the selling price
4.

3. Casual sale of non-dealers in property, real or personal, when

their selling price exceeds P1,000 and their initial payment does not
exceed 25% of the selling price

- Initial Payment

- Initial payment means total payments by the buyer, in cash or

property, in the taxable year the sale was made.
- Selling Price

- Selling price means the entire amount for which the buyer is
obligated to the seller.

- It is computed as follows:

- Cash received and/or receivable

- Fair market value of property received or receivable

- Mortgage or any indebtedness assumed by the buyer

- Selling price

- Contract Price

- The contract price is the amount receivable in cash or other

property from the buyer.

- Accrual Basis

- Under the accrual basis, the entire P800,000 gross profit shall
be reported as gross income in 2023, the year of sale.

- Installment Basis
 - Malaybay cannot readily use the installment method because it
is a dealer of cars rather than a dealer of machineries.

- With Indebtedness Assumed by the Buyer

- The application of the installment method will slightly vary when

the buyer assumes indebtedness on the property sold.

- Indebtedness Assumed Exceeds Tax Basis of Property Sold

- When the indebtedness assumed by the buyer exceeds the tax

basis of the property sold, the excess is an indirect receipt
realized by the seller.

- The Contract Price Shall Be Computed as Follows:

- Selling price

- Less: Mortgage assumed by buyer

- Cash collectible

- Add: Excess indebtedness – constructive receipt

- Contract price

- The Initial Payment Shall Be Computed as Follows:

- Downpayment

- Installment in the year of sale

- Excess of mortgage over tax basis

- Initial payment

- Deferred Payment Method

- The deferred payment method is a variant of the accrual basis

and is used in reporting income when a non-interest bearing
note is received as consideration in a sale.

- Under the deferred payment method, the gross income is

computed based on the present value (discounted value) of a
note receivable from the contract.

- The discount interest term on the note is amortized (i.e.,

spread) as interest income over the installment term.

- The Percentage of Completion Method for Construction

Contracts

- Under the percentage of completion method, the estimated

gross income from construction is reported based on the
percentage of completion of the construction project.
- Income from Leasehold Improvement

- Leasehold Improvements are tangible improvements made by

the lessee to the property of the lessor.

- Under Revenue Regulations No. 2, the income from leasehold

improvement can be reported using either of the following
method at the option of the taxpayer:

1. Outright method
2.
3. Spread-out method
4.

- Outright Method

- Under the plain wordings of Section 49 of Revenue Regulations

No. 2, Ivan shall recognize the entire P4,500,000 fair value of
the improvement as gross income upon completion of the
improvement in 2023.

- Spread-Out Method

- The depreciated value of the property at the termination of the

lease is the value of the years of usage of the lessor.

- Agricultural or Farming Income

- Farming income is commonly measured using the cash basis or
accrual basis.

- Crop Year Basis

- Under the crop year basis, farming income is recognized as the

difference between the proceeds of harvest and expenses of
the particular crop harvested.

- Use of Different Accounting Methods

- Taxpayers with more than one type of business using different

accounting methods can consolidate the income reported using
the different methods.

- Selection of an Accounting Method

- The NIRC allows taxpayers to determine the most appropriate

accounting method that apply to themselves.

- Change in Accounting Period

- The change in accounting period requires prior BIR notice.

- Types of Returns to the Government

 1. Income tax returns – provide details of the taxpayer’s income,
expense, tax due, tax credit and tax still due the government.
2.
3. Withholding tax returns – provide reports of income payments
subjected to withholding tax by the taxpayer-withholding
agent.
4.

3. Information returns

- Mode of Filing Income Tax Returns

1. Manual Filing System

2.
- E-BIR Forms

- The BIR introduced the e-BIR Forms with an offline or online

version.

- Electronic Filing and Payment System (eFPS)

- The eFPS is a paperless tax filing system developed and

maintained by the BIR.

- Grouping of Taxpayers under EFPS

1. Group A
2.
3. Group B
4.
- Payment of Income Taxes

- The general rule is “pay as you file”.

- Penalties for Late Filing or Payment of Tax

1. Surcharge
2.
3. Interest
4.

- Compromise Penalty

- Compromise penalty is an amount paid in lieu of criminal

prosecution over a tax violation.

- Penalties for Non-Filing or Late Filing of Information Return

- For each failure to file a separate information return,

statement or list, or keep any record, or supply any
information required by the Code or by the Commissioner on
the date prescribe therefor, unless it is shown that such failure
is due to reasonable cause not to willful neglect, shall be
subject to a penalty off P1,000 for each such failure.

CHAPTER 5
- Features of Final Income Taxation

1. Final tax
2.
3. Tax withholding at source
4.
3. Territorial imposition
4.
5. Imposed on certain passive income and persons not engaged
in business in the Philippines
6.
- The Final Withholding System

- The final withholding system imposes upon the person making

income payments the responsibility to withhold the tax.

- Passive Income

- Items of passive income are earned with very minimal

involvement from the taxpayer and are generally irregular in
timing and amount.

- Non-Resident Persons Not Engaged in Business in the

Philippines

- Non-resident persons not engaged in trade or business in the

Philippines, such as non-resident aliens not engaged in trade
or business (NRA-NETBs) and non-resident foreign
corporations (NRFCs), have high risk of non-compliance.
- Passive Income Subject to Final Tax

1. Interest or yield from bank deposits or deposit substitutes

2.
3. Domestic dividends, in general
4.
- Final Tax on Individuals and Corporations

- Unless otherwise indicated, the final tax rates to be discussed

in the following sections apply to all taxpayers (individuals and
corporations) other than:

- Non-resident alien not engaged in trade or business (NRA-

NETB)

- Non-resident foreign corporation (NRFC)

- Interest Income or Yield

- Interest income or yield from local currency bank deposits,

deposit substitutes trust funds and similar arrangements are
subject to final tax as follows:

- Short Term Deposits

- Short term deposits are those made for a period of less than
five years.

- Long-Term Deposits
- Long-term deposits or investment certificates refer to
certificate of time deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes
investment management accounts, and other investments with
a maturity of not less than five years, the form of which shall
be prescribed by the BSP and issued by bank only (not by non-
bank financial intermediaries or finance companies) to
individuals in denominations of P10,000 and other
denominations as may be prescribed by the BSF (RMC 14-2012)

- Savings or Time Deposits with Cooperatives are Not Subject to

Final Tax

- The final tax is limited to banks and shall not be applied with
time and savings account deposit maintained by members with
cooperatives and by primary cooperatives with their
federations.

- Deposit Substitutes

- Deposit substitute means an alternative form of obtaining

funds from the public other than deposits through the
issuance, endorsement, or acceptance of debt instruments for
the borrowers own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer.

- The 19-Lender Rule

- The mere flotation of a debt instrument is not considered to be

a public borrowing and is not deemed a deposit substitute if
 there are only 19 or less individual or corporate lenders at any
one time.

- Classification of Debt Instruments

- Issuer of debt instrument

- Corporate issuer

- Government including BSP

- Timing of Withholding of Final Tax

1. Zero coupon instruments or securities – upon origination

2.
3. Interest-bearing instruments or securities – upon payment of
interest
4.
- Illustration 1

- John earns interest income from the following investment

placements in various debt instruments:

- Trust Funds or Investment Management Accounts

- Investments in trust funds of banks (except qualified exempt

employee trust funds) or investment management accounts
are subject to the same final tax rules.
- Illustration 1

- Mr. Acebo appointed the trust department of RCBC Bank to

manage his money through a trust agreement.

- Illustration 2

- ABC Company wants to take advantage of the decreasing

interest rates.

- Pre-Termination of Long-Term Deposits or Investment of

Individuals

- If the deposit or investment placement of individual taxpayers

is pre-terminated before 5 years, any previously untaxed or
exempted interest income will be subjected to the following
final taxes upon pre-termination:

- Pre-Termination, Transfer or Negotiation of Investment

Certificates

- For purposes of applying the pre-termination rates for

individual taxpayers on long-term investment certificates, the
remaining maturity of the instrument must still satisfy the 5-
year requirement.
- Foreign Currency Deposit with Foreign Currency Depositary
Banks

- The interest income from foreign currency deposits under the

foreign currency deposit system or expanded foreign currency
deposit system by residents is subject to a final tax of 15%.

- Joint Accounts on Forex Deposits

- If the bank account is jointly in the name of a non-resident and

a resident taxpayer, 50% of the interest shall be exempt while
the other 50% shall be subject to the 15% final tax.

- Interest Income Subject to Regular Tax

- Interest income from the following sources is subject to

regular income tax, not to final tax:

- Dividends

- “Dividends” means 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.

- Types of Dividends

1. Cash dividends – paid in cash

2.
3. Property dividends – paid in non-cash properties including
stocks or securities of another corporation
 4.

3. Scrip dividends – those paid in notes or evidence of indebtedness

of the corporation

5. Stock dividends – paid in the stocks of the corporation

6.
5. Liquidating dividends – distribution of corporate net asset
6.
- Stock Dividends

- Stock dividends representing transfer of surplus to capital

account shall not be subject to tax.

- Liquidating Dividends

- Under the NIRC, the receipt of liquidating dividends is not

viewed as income but as exchange of properties.

- Taxability of Stock Dividends

- Normally, stock dividends are exempt from income tax.

- Stock Dividend vs. Stock Split

- Stock dividend is a capitalization of earnings while stock split

results in reduction in the par value of stock and an increase in
the number of shares of shareholders.

- Presumptive Source of Dividend Distribution

 - Any distribution made to the shareholders or members of a
corporation shall be deemed to have been made from the most
recently accumulated profits or surplus, and shall constitute a
part of the annual income of the distributee for the year in
which received.

- Exempt Dividends

1. Inter-corporate dividends from domestic corporations

2.
3. Dividends from cooperatives
4.

3. Qualified foreign-sourced dividends

- Inter-Corporate Dividends from Domestic Corporations

- Inter-corporate dividends received by a domestic corporation

and resident foreign corporation from a domestic corporation
are exempted under the NIRC to minimize double taxation.

- Dividends from Cooperatives

- Under RA 9520, the distribution of dividends by an exempt

cooperative to its members either representing interest on
capital or as patronage refunds shall not be subject to tax.

- Inter-Corporate Dividends from Foreign Corporations

- Dividends received by corporations from foreign corporations
are generally subject to regular income tax.

- Real Estate Investment Trust or REIT

- A REIT is a publicly listed corporation established principally

for the purpose of owning income-generating real estate
assets.

- Business Partnership, Taxable Associations, Joint Venture, Joint

Accounts or Co-ownerships

- The share in net income from these unincorporated entities are

subject to tax as follows:

- Share in Business Partnership Net Income

- The “share in net income” includes the share in the residual

profit and provisions for salary, interest and bonus to an
individual partner.

- Royalties

- Passive royalty income received from sources within the

Philippines is subject to the following final tax rates:

- Passive vs. Active Royalties

- Royalties of a passive nature such as royalties of claim owners
or land owners of mining properties, royalties of inventors
from companies that manufacture and sell their invention, and
royalty from licensing agreements that transfers the use of
trademark or technology are subject to 20% final tax.

- Prizes

- The taxation of prizes varies. Prizes may be exempt from

income tax or subject to either final tax or regular income tax.

- Exempt Prizes

1. Prizes received by a recipient without any effort on his part to

join a contest.
2.
3. Prizes from sports competitions that are sanctioned by their
respective national sport organizations
4.
- Taxable Prizes

- For individual income taxpayers, taxable prizes are subject to

either final tax or regular tax depending on the amount of the
prize.

- Winnings

- For individual income taxpayers, winnings received from

sources within the Philippines are generally subject to 20%
 final tax, except winnings from Philippine Charity Sweepstakes
Office (PCSO) games amounting to P10,000 or less.

- Tax Informer’s Reward

- A cash reward may be given to any person instrumental in the

discovery of violations of the National Internal Revenue Code
or discovery and seizure of smuggled goods.

- Requisites of Tax Informer’s Reward

1. Definite sworn information which is not yet in the possession

of the BIR
2.
3. The information furnished lead to the discovery of fraud upon
internal revenue laws or provisions thereof.
4.

3. Enforcement results in recovery of revenues, surcharges, and

fees and/or conviction of the guilty party or imposition of any fine or
penalty.

5. The informer must not be a:

6.
- Amount of Cash Reward

- Whichever is the lower of the following per case:

- Tax-Free Corporate Covenant Bonds

- Interest income of non-resident aliens, citizens or residents of
the Philippines on bonds, mortgages, deeds of trust, or other
similar obligations of domestic or resident foreign corporations
with tax-free or tax-reduction provision where the obligor
shoulders in whole or in part any tax on the interest shall be
subject to a final withholding tax of 30%.

- Exceptions to the General Final Tax on Non-Resident Persons

Not Engaged in Trade or Business in the Philippines

- Capital Gains Tax

- As a rule, NRA-ETBs and NRFCs do not file income tax returns.

- Illustration: NRA-NETBs

- In 2023, Mr. Wang Lu, an NRA-NETB, was hired by Raha

Humabon Company (RHC), a domestic manufacturer, to install
his invention in RHC’s factory.

- The Tax Sparing Rule

- NRFCs shall be subject to a 15% final tax on dividend income

instead of the 25% general final tax if the country of domicile
of the NRFC credits against the tax due of such NRFC taxes
presumed to have been paid by such NRFC from the Philippines
equivalent to 10% of the dividends.
 - Other Final Income Taxes

1. Fringe benefits of managerial or supervisory employees

2.
3. Income payments of residents other than depositary banks
under the expanded foreign currency deposit system (EFCDS)
and expanded foreign currency deposit units (EFCDUs)
4.

3. Income payments to oil exploration service contractors or sub-

contractors

- Fringe Benefits Tax

- Fringe benefits include all remunerations under an employer-

employee relationship that do not form part of compensation
income.

- Interest and Other Income Payments to Depositary Banks

Under the Expanded Foreign Currency Deposit System

- Residents, other than depositary banks under the expanded

foreign currency deposit system, shall withhold 10% final tax
on income payments such as interest income on loans from
expanded foreign currency deposit units (FCDUs).

- Income Payments to Sub-Contractors of Petroleum Service

Contractors

- Under PD 1354, every subcontractor, whether domestic or

foreign, entering into a contract with a service contractor
engaged in petroleum operations in the Philippines shall be
liable to a final income tax equivalent to eight percent (8%) of
 its gross income derived from such contract, such tax to be in
lieu of any and all taxes, whether national or local.

- Final Withholding Tax Return

- The final withholding tax return (BIR Form 0619-F), Monthly

Remittance Return of Final Income Taxes Withheld, shall be
filed in triplicate by every withholding agent or payor who is
either an individual or corporation for the first two months of
the quarter.

- Deadline and Place for Monthly Manual Filing

- The return shall be filed and the tax shall be paid on or before
the 10th day of the month following the month in which
withholding was made with:

- Monthly Deadline for eFPS Filing

- In accordance with the schedule set forth in RR No. 26-2002,

the deadline for e-filing of returns is as follows:

- Quarterly Filing

- The withholding agent shall file (BIR Form 1601-FQ), Quarterly

Remittance Return of Final Income Taxes Withheld, on or
before the last day of the month after each quarter.

- Penalties for Late Filing or Remittance of Final Income Taxes

Withheld
 - The same penalties for late payment of income taxes as
discussed in Chapter 4 apply for non-withholding or non-
remittance of final taxes.

- Entities Exempt from Final Income Tax

1. Foreign governments and foreign government-owned and

controlled corporations
2.
3. International missions or organizations with tax immunity
4.

3. General professional partnership

5. Qualified employee trust fund

6.
5. Personal Equity Retirement Account fund
CHAPTER 6

Chapter 6: Capital Gains Taxation

- Overview:

- Gross income items subject to capital gains tax.

- Tax rules for two types of capital tax under NIRC.

- Objectives:
 1. Identify ordinary vs. capital assets.
2.
3. Recite asset classification rules.
4.

3. Memorize capital gains types, tax rates, and bases.

5. Master 15% and 6% capital gains tax computations.

6.
6. Master wash sales and tax-free exchange rules.
7.
7. Master 6% capital gains tax exceptions.
8.
8. Memorize documentary stamp tax on stock and real property
sales.
9.

Classification of Taxpayer’s Properties

1. Ordinary Assets: Assets used in business.

2.
- Examples:

- Stock in trade (inventory).

- Real property for sale to customers.

- Real property used in business (subject to depreciation).

- Real property used in trade or business.

- Ordinary assets are:

 - Assets held for sale (inventory).

- Assets held for use (supplies, equipment, buildings).

3. Capital Assets: Any asset NOT an ordinary asset.

4.
- Business Definition: Habitual engagement in commercial
activity for profit.

Visual Organizer Suggestion:

- Main Branches: Ordinary Assets, Capital Assets

- Sub-Branches (Ordinary Assets):

- Definition/Purpose

- Examples (Inventory, Real Property for Sale, etc.)

- Sub-Branches (Capital Assets):

- Definition (Any asset not ordinary)

Capital Assets

- Definition:
 - Personal (non-business) assets of individual taxpayers.

- Business assets of any taxpayers:

- Financial assets (cash, receivables, prepaid expenses,

investments).

- Intangible assets (patents, copyrights, leasehold rights,

franchise rights).

Analysis of Properties Held by Taxpayers

- Individual Taxpayers:

- Personal Asset: All are capital assets.

- Business Asset:

- Ordinary assets.

- Capital assets.

- Corporate Taxpayers:

- Ordinary assets.

- Capital assets.
Asset Classification – Relativity

- Classification depends on:

- Nature of the taxpayer’s business.

- Usage by the business.

Examples:

1. Domestic Stock:
2.
- Ordinary asset: to a dealer in securities.

- Capital asset: to a non-security dealer.

3. Vacant Lot:
4.
- Ordinary asset: to a real estate business (realty dealer,
developer, lessor).

- Capital asset: to those not in the real estate business.

Visual Organizer Suggestion:

- Main Sections: Capital Assets, Analysis of Properties, Asset

Classification

- Capital Assets:
 - List types (Personal, Business) with examples.

- Analysis of Properties:

- Flowchart showing Individual vs. Corporate Taxpayers

branching into asset types.

- Asset Classification:

- Note on relativity with examples in a table.

Revenue Regulations & Asset Classification

- ROPA (Real and Other Properties Acquired by Banks):

- Classified as ordinary assets, even if banks aren’t in the real

estate business.

- Domestic Stocks Held by Banks:

- Classified as capital assets.

- Stocks Classified as Capital Assets:

- Means all stocks and securities held by taxpayers other than

dealers in securities.
Asset Classification Rules

- A. Property purchased for future business use:

- Ordinary asset, even if the purpose is later thwarted.

- B. Discontinuance of active use:

- Doesn’t change its character as a business property.

- C. Real properties used, being used, or previously used in

trade:

- Ordinary assets.

- D. Properties classified as ordinary for business use by non-

real estate entities:

- Automatically converted to capital assets if not used in

business for 2+ years.

- E. Depreciable asset:

- Ordinary asset, even if fully depreciated or depreciation was

not taken.

- F. Real properties used by exempt corporations:

 - Capital assets.

- G. Property transferred by sale, barter, exchange, inheritance,

donation, or dividends:

- Classification depends on acquirer’s use.

- H. Real properties subject to involuntary transfer

(expropriation, foreclosure):

- Involuntariness doesn’t affect classification.

- I. Change in business from real estate to non-real estate:

- Doesn’t change classification of previously held ordinary

assets.

Real Estate Business Definition

- Includes real estate dealer, developer, lessor, and those

habitually engaged in real estate business.

- Habitually engaged: Registered with HLURB/HUDCC or 6+

taxable real estate sales in the preceding year.

Visual Organizer Suggestion:

 - Main Sections: Regulations, General Rules, Real Estate
Business

- Regulations:

- ROPA, Stocks – brief notes on classification

- General Rules:

- Table with two columns: Rule Letter, Summary of Rule

- Real Estate Business:

- Definition and criteria for “habitually engaged”

Building Classification

- Building A-1: Capital asset (employed in non-taxable

operations).

- Building A-2: Ordinary asset (employed in taxable operations).

Types of Gains on Dealings in Properties

1. Ordinary Gain:
2.
- From sale, exchange, etc., of ordinary assets.
 3. Capital Gain:
4.
- From sale, exchange, etc., of capital assets.

Taxation of Gains on Dealings in Properties

Capital Gains Subject to Capital Gains Tax

1. Sale of domestic stocks sold directly to buyer.

2.
3. Sale of real properties not used in business.
4.

Scope of Capital Gains Taxation

Capital Gain on Sale of Domestic Stocks

- Domestic stocks: Evidence of ownership in a domestic

corporation.

- Examples:

1. Preferred stocks
2.
3. Common stocks
4.

3. Stock rights
Visual Organizer Suggestion:

- Main Sections: Building Classification, Gain Types, Taxation,

Scope, Domestic Stocks

- Building Classification:

- Bulleted list of A-1 and A-2 with their classifications.

- Gain Types:

- Definitions of Ordinary and Capital Gains.

- Taxation:

- Table summarizing taxation schemes.

- Scope:

- Table summarizing gains and tax rates.

- Domestic Stocks:

- Definition and examples.

Capital Gains Tax Coverage

 - Sales of domestic stocks for cash.

- Exchange of domestic stocks in kind.

- Other dispositions of domestic stocks:

1. Foreclosure of property in settlement of debt.

2.
3. Pacto de retro sales (sale with buyback agreement).
4.

3. Conditional sales (sales perfected upon conditions).

5. Voluntary buyback by issuing corporation (redemption of

shares which may be re-issued).
6.
5. Stock options.
6.
7. Stock warrants.
8.
7. Unit of participation in associations/clubs (golf, polo, etc.).
8.
- Other Disposition Exclusions:

1. Issuance of stocks by a corporation.

2.
3. Exchange of stocks for services.
4.

3. Redemption of shares in a mutual fund.

5. Voluntary buyback by issuing corporation (redemption of

shares not intended for re-issuance/cancellation).
 6.
5. Redemption of stocks for cancellation by the issuing
corporation.
6.
7. Gratuitous transfer of stocks.
8.

Issue of Stocks Including Treasury Stocks

- Issuing stock is a financing transaction, not a sale.

- Excess of fair value over par value is additional capital.

Treasury Stocks

- Treated as investments if corporation trades them as its own

shares.

- Treasury share premium is viewed as capital gain.

- Treasury share premium is not subject to capital gains tax.

Exchange of Stocks for Services

- Not considered an exchange for property.

- No gain/loss if it involves payment of expense in kind.

Redemption of Shares in a Mutual Fund

 - Gains are exempt from income taxation.

Visual Organizer Suggestion:

- Main Sections: Capital Gains Coverage, Treasury Stocks, Other

Transactions

- Capital Gains Coverage:

- Bulleted list of covered dispositions.

- Separate list of exclusions.

- Treasury Stocks:

- Notes on accounting treatment and tax implications.

- Other Transactions:

- Brief explanations of stock issuance, exchange for services,

and mutual fund redemptions.

Worthlessness of Stocks

- Considered a capital loss.

- Subject to rules of regular income tax.

Redemption of Stocks by Issuing Corporation

- Mandatory redemption for stock cancellation: Subject to

regular income tax for the investor.

- Voluntary buyback that may be re-issued: Taxable under

capital gains taxation for the investor.

Gratuitous Transfer of Stocks

- Donation inter-vivos or donation mortis causa: Subject to

transfer tax, not income tax.

- Insufficient consideration: Difference between fair value and

selling price is subject to donor’s tax.

Modes of Disposing Domestic Stocks

1. Philippine Stock Exchange (PSE).

2.
3. Directly to buyer.
4.

Tax on Sale of Domestic Stocks Through the PSE

- Classified as capital assets.

- Not subject to capital gains tax.

 - Subject to stock transaction tax of 0.6% of 1% of the selling
price.

Illustration 1: Non-Dealer in Stocks

- Mr. San Juan sells stocks through PSE.

Visual Organizer Suggestion:

- Main Sections: Stock Value, Redemption, Transfer, Disposal,

PSE Sale

- Stock Value:

- Note on worthlessness as capital loss.

- Redemption:

- Separate notes for mandatory and voluntary redemptions.

- Transfer:

- Notes on gratuitous transfers and insufficient consideration.

- Disposal:

- List of modes of disposal.

 - PSE Sale:

- Note on transaction tax and illustration example.

Capital Gains Tax on Sale of Domestic Stocks Directly to Buyer

Nature of the CGT:

1. Universal Tax:
2.
- Applies to all taxpayers disposing stocks classified as capital
assets.

- Regardless of taxpayer classification.

- Applies even if the sale is executed outside the Philippines.

3. Annual Tax:
4.
- Imposed on annual net gain on sale of domestic stocks directly
to buyer.

Net Gain Determination:

- Net gain = Selling price – Basis of stocks disposed – Selling

expenses – Documentary stamp tax on the sale

Illustration 2: Dealer in Stocks

 - Same data as previous illustration, but Mr. San Juan is a dealer.

- Not subject to stock transaction tax since stocks are ordinary

assets.

- Subject to rules of regular income tax.

Visual Organizer Suggestion:

- Main Sections: CGT Nature, Net Gain, Dealer Illustration

- CGT Nature:

- Bulleted list of key characteristics (Universal, Annual).

- Net Gain:

- Formula: Net Gain = Selling Price – (Basis + Expenses + DST)

- Dealer Illustration:

- Note that dealers are subject to regular income tax, not CGT.

Selling Price Definition

 - Cash Sale: Total consideration received per deed of sale.

- Partial Money/Property: Sum of money and fair value of

property received.

- Exchanges: Fair value of the property received.

Illustration: Selling Price Calculation

- Mr. Real receives building, goods, and cash for his stocks.

- Selling Price = Fair value of building + Fair value of goods +

Cash

Tax Basis of Stocks

- Acquired by Purchase: Cost of the property, determined in this

order:

1. Specific identification (if shares can be identified).

2.
3. Moving average method (if books are maintained).
4.

3. First-in, first-out (FIFO) method (if stocks cannot be specifically

identified).

- Acquired by Devise, Bequest, or Inheritance: Fair value at the

time of death.
 - Acquired by Gift: Lower of fair market value at the time of gift
or basis in the hands of the donor.

- Acquired for Inadequate Consideration: Amount paid by the

transferee.

- Acquired Under Tax-Free Exchanges: Substituted basis of the

stocks.

Illustration 1: Cost of Acquisition

- Mrs. Excellence purchases stocks and pays broker’s

commission.

- Cost Basis = Cash paid + Obligations assumed + Broker’s

commission

Visual Organizer Suggestion:

- Main Sections: Selling Price, Tax Basis, Acquisition Cost

- Selling Price:

- Bulleted list of definitions for different transaction types.

- Tax Basis:

- Flowchart or decision tree for determining tax basis based on

acquisition method.
 - Acquisition Cost:

- Formula: Total Cost = Cash + Obligations + Commission

Purchase for Inadequate Consideration

- Assuming shares bought by Mrs. REO from Don Bosco for only
P1,200,000.

- Basis of shares to Mrs. REO is P1,200,000.

Stocks Sold for Inadequate Consideration

- Excess of fair value over selling price is a gift.

- Subject to donor’s tax if intended as a donation.

Illustration

- Seller sells stocks to a friend for P500,000.

- Shares have a basis of P300,000 excluding P10,000 expenses.

- Case 1: Shares are readily marketable, seller opts to sell at fair

value of P650,000.
 - P150,000 gratuity is subject to transfer tax.

- P200,000 gain is subject to capital gains tax.

- Case 2: Shares have fair value of P650,000, seller is under

immediate need of cash.

- P200,000 gain is still subject to capital gains tax.

- P150,000 discount is not considered donation.

Capital Gains Tax Rate

- Simplified to a 15% flat rate under TRAIN law and CREATE law.

Illustration

- Taxpayer disposes stocks costing P100,000 for P240,000.

- Pays commission, broker’s fee, and documentary stamp tax.

Visual Organizer Suggestion:

- Main Sections: Inadequate Consideration, Illustration, Tax Rate

- Inadequate Consideration:
 - Notes on gift and donor’s tax.

- Illustration:

- Separate sections for Case 1 and Case 2 with tax implications.

- Tax Rate:

- Note on 15% flat rate.

Capital Gains Tax Computation

- Selling Price

- Less: Cost and Expenses

- Purchase Cost

- Commission Expense

- Documentary Stamp Tax Expense

- Capital Gain

- Multiply by Applicable Rate (15%)

 - Capital Gains Tax Due

Tax Compliance

1. Transactional Capital Gains Tax:

2.
- Stocks are registrable securities.

- BIR tax clearance is required before transfer of ownership.

- Tax returns are required after each sale/exchange.

- Use BIR Form 1707.

3. Annual Capital Gains Tax:

4.
- 15% CGT is an annual tax.

- Recomputed on annual net gains.

- Reported through a final consolidated return (BIR Form 1707A)

on or before the 15th day of the fourth month following the
taxable year.

No Loss Scenario

- Due to the flat 15% tax, no capital gains tax payable in the
final consolidated return if all transactions during the year
resulted in a gain.
 - Filing of BIR Form 1707A may not even be necessary.

Illustration

- Taxpayer disposes equity securities directly to a buyer for the

fiscal year ending June 30, 2021.

Transactional Compliance

- CGT shall be paid within 30 days of each sales transaction.

Visual Organizer Suggestion:

- Main Sections: Computation, Tax Compliance, Illustration

- Computation:

- Formula: CGT = (Selling Price – Costs) * 15%

- Tax Compliance:

- Separate sections for transactional and annual tax with

requirements.

- Illustration:

- Table summarizing security sales, gains/losses, and total CGT.

With Loss Scenario

- Best to offset losses first with subsequent gains.

- Residual tax payable must be settled.

- Intra-period loss carry-over procedure is necessary to avoid

overpaying the government.

- Seeks refunds at year-end, causing unnecessary workload.

Illustration 1

- Individual taxpayer has the following transactions:

Annual Compliance

- Annual Net Gain: P200,000

- Multiply by CGT Tax Rate (15%): P30,000

- Annual CGT Tax Due: P30,000

- Less: Transactional CGT Tax Paid: 0

 - Capital Gains Tax Payable: P30,000

Transactional Compliance

- File BIR Form 1707 for every sales transaction.

Capital Gains Tax

- The capital gains tax would simply be P110,000 x 15% =

P16,500.

- No capital gains tax payable in BIR Form 1707 indicating

interim refund.

- P10,000 loss is inconclusive until year-end.

- Net gain/loss is carried over in the next transaction.

Visual Organizer Suggestion:

- Main Sections: Loss Scenario, Illustration, Compliance

- Loss Scenario:

- Notes on offsetting losses and avoiding overpayment.

- Illustration:
 - Table summarizing transactions, gains/losses, and CGT.

- Compliance:

- Separate sections for annual and transactional compliance.

Capital Gains Tax – Illustration 1 (Continued)

- 8/14: Taxable gain is (P90,000 – P10,000) or P80,000. Taxpayer

pays P80,000 x 15% = P12,000.

- 11/17: No capital gains tax payable. File BIR Form 1707.

Annual Compliance

- File BIR Form 1707A to claim refund for tax overpayment.

- Annual Net Capital Gain: P170,000

- Multiply by CGT Tax Rate: 15%

- Annual Capital Gains Tax Due: P25,500

- Less: Total Transactional CGT Paid (P16.5K + P12K): P28,500

- Capital Gains Tax Payable (Overpayment): (P3,000)

Inter-Period Carry-Over

- Not allowed.

- Taxpayer cannot roll over the P20,000 capital loss.

Illustration 2

- Taxpayer has gains and losses on sale of domestic stocks:

Transactional Compliance

- Transaction 1: File Form 1707 and pay P200,000 x 15% or

P30,000 capital gains tax.

- Transaction 2: Pay zero tax.

- Transaction 3: Pay zero tax since P60,000 – P240,000 is a net

loss.

Annual Compliance (Illustration 2)

- File BIR Form 1707A to claim refund for the tax overpayment.

- Annual Net Capital Gain: P20,000

- Multiply by CGT Tax Rate: 15%

 - Annual Capital Gains Tax Due: P3,000

- Less: Total Transactional CGT Paid: P30,000

- Capital Gains Tax Payable (Overpayment): (P27,000)

Visual Organizer Suggestion:

- Main Sections: Illustration 1, Illustration 2, Carry-Over

- Illustration 1:

- Table summarizing transactions and CGT.

- Illustration 2:

- Table summarizing transactions and CGT.

- Carry-Over:

- Note on the prohibition of inter-period carry-over.

Installment Payment of Capital Gains Tax

- Capital gains tax can be paid in installments if:

 - Selling price exceeds P1,000.

- Initial payment does not exceed 25% of the selling price.

Illustrative Case: Basic

- On November 1, 2023, Mr. Batanes sells domestic stocks

costing P700,000 for P1,000,000.

- Buyer agrees to pay P100,000 monthly starting November 30.

Annual Compliance

- BIR Form 1707A may no longer be needed.

- No possible claim for refund.

Capital Gains Tax

- Selling Price: P1,000,000

- Less: Cost of Shares Sold: P700,000

- Net Capital Gain: P300,000

- Multiply by: 15%

 - Net Capital Gains Tax Due: P45,000

Illustration 1: No Mortgage on the Shares Sold

- Initial Payment:

- First Installment (November 30): P100,000

- Second Installment (December 31): P100,000

- Total Initial Payment: P200,000

- Ratio of Initial Payment (P200,000/P1,000,000): 20%

Installment Method

- Taxpayer is qualified to pay capital gains tax by installment.

- Tax will be paid based on the pattern of collection of the

contract price.

- Contract price is the total sum of money collectible from the

shares sold.

Visual Organizer Suggestion:

- Main Sections: Installment Conditions, Basic Case, Illustration

 - Installment Conditions:

- Bulleted list of conditions for installment payment.

- Basic Case:

- Summary of the transaction.

- Illustration:

- Calculation of initial payment and ratio.

- Note on qualification for installment method.

Capital Gains Tax in Installments

- Ratio of initial payment (P150,000/P1,000,000): 15%

- Taxpayer is qualified to pay capital gains tax in installments.

- Capital gains tax shall be as follows:

- For the sale: P50,000/P300,000 x P45,000 = P7,500

- For every installment: P50,000/P300,000 x P45,000 = P7,500

Special Tax Rules in Capital Gain or Loss Measurement

1. Wash Sales of Stocks

2.
3. Tax-Free Exchanges
4.

Wash Sales Rule

- Wash sale is deemed to occur within 30 days before and 30

days after losing sale (61-day period).

- Taxpayer acquires or enters into a contract or option to acquire

the same or substantially identical securities.

- Capital losses on wash sales by non-dealers are not deductible.

- Taxpayer effectively let go of the shares.

- Immediate reacquisition makes the loss a theoretical or

feigned loss.

Securities for 61-Day Rule

- Include stocks and bonds.

- Wash sales rule has significance on the recognition of

reportable capital losses on domestic stocks sold directly to
buyer.
Substantially Identical Securities

- Stocks or bonds of the same class with the same features.

- Common stock is not substantially identical to preferred stock.

- Participating and non-participating preferred stocks are not

substantially identical.

Illustration 1: Acquisition of Identical Shares Before a Losing Sale

- Mr. Donald had the following transactions in 2023:

- Mr. Donald uses FIFO method in costing security transactions.

Visual Organizer Suggestion:

- Main Sections: Installment Payment, Wash Sales, Illustration

- Installment Payment:

- Formula for calculating capital gains tax for the sale and each
installment.

- Wash Sales:

- Explanation of the rule, including the 61-day period and

substantially identical securities.
 - Illustration:

- Table summarizing transactions and cost basis.

Rationale of the Wash Sales Rule

- Intended to prevent taxpayers from feigning temporary losses.

- Enables manipulation of reportable taxable net gain.

- Not an absolute rule.

- A form of deferral of loss.

Wash Sales Rule Applicability

- Not applicable to dealers in securities.

- Normal way of business to buy and sell stocks.

- Result in gains or losses within a short duration of time.

Tax-Free Exchanges

- A. Corporate Reorganization
 - B. Initial Acquisition of Control

Corporate Reorganization

- No gain or loss recognized if reorganization is pursuant to a

plan.

Reorganization Definition

1. A corporation is a party to a merger/consolidation.

2.
3. Acquisition by one corporation of stocks of another
corporation.
4.

3. Acquisition by one corporation of properties of another

corporation.

5. Recapitalization or readjustment of stocks/bonds of a

corporation.
6.
5. Reincorporation or formation of the same corporate business.
6.

Substantially All the Properties

- Acquisition by one corporation of at least 80% of the assets.

- Includes cash.

Visual Organizer Suggestion:

 - Main Sections: Wash Sales, Tax-Free Exchanges,
Reorganization

- Wash Sales:

- Explanation of the rule’s rationale and applicability.

- Tax-Free Exchanges:

- Note that no gain or loss is recognized.

- Reorganization:

- Bulleted list of the different types of reorganization.

- Definition of “substantially all the properties.”

Merger or Consolidation

- Merger: One corporation acquires all or substantially all

properties of another corporation.

- Consolidation: Two or more corporations merge to form one

corporation.
 - “Securities” include notes or debentures but does not include
notes of whatever class or duration.

- Gains/losses on share-for-share swaps pursuant to a plan of

merger/consolidation are not recognized.

- The transaction involves a replacement of shares of stocks of

the shareholders of the acquired corporation.

Illustration

- Mr. Fernando surrenders Zambales Inc. shares for Baler shares.

- Total fair value of Baler shares: P1,200,000.

- Zambales shares were previously purchased for P1,000,000.

Tax Implications

- Fair Value of Baler Shares Received: P1,200,000

- Less: Cost of Zambales Shares Exchanged: P1,000,000

- Indicated Gain: P200,000

- The P200,000 indicated gain is not taxable as the exchange

involves stocks for stocks.
 - The P1,000,000 tax basis of the Zambales shares is carried
over as the substituted basis of the Baler shares.

Share Swap Resulting in a Control

- Acquisition of control in another corporation by acquisition of

majority of its voting shares or assets is tax-free if the
acquiring corporation exchanged therewith:

- A. Its own shares, or

- B. Shares of its controlling parent corporation.

Visual Organizer Suggestion:

- Main Sections: Merger/Consolidation, Illustration, Share Swap

- Merger/Consolidation:

- Definitions of merger and consolidation.

- Note on non-recognition of gains/losses.

- Illustration:

- Summary of the transaction and tax implications.

- Share Swap:
 - Conditions for tax-free share swap resulting in control.

Initial Acquisition of Control

- No gain or loss recognized if property is transferred to a

corporation by a person in exchange for stocks or units of
participation.

- As a result of such exchange, said person, alone or together

with others, gains control of said corporation.

“Control” Definition

- Ownership of stocks in a corporation.

- Amounting to at least 51% of the total voting power of all

classes of stocks entitled to vote.

- Relevant only to the capital gains tax or the recognition of

capital gains when stocks are exchanged in the acquisition of
corporate control.

Visual Organizer Suggestion:

- Main Sections: Recapitalization, Reincorporation, Control

 - Recapitalization:

- Explanation of the debt-to-equity conversion.

- Reincorporation:

- Summary of the reincorporation process.

- Control:

- Definition of “control” and tax implications.

- Illustration of the acquisition of control.

Tax Basis of Maharlika Shares

- The tax basis of the Maharlika shares received shall be

P2,000,000.

- Same as the tax basis of the Gapan shares exchanged.

Exchange Not Solely for Stocks

- In tax-free exchanges, if stocks are exchanged not solely for

stocks but with other consideration (cash, properties), gains
(not losses) are recognized up to the extent of cash and other
properties received.
Illustration 1: Cash and Property Received Exceed Indicated Gain

- Mr. Fernando surrenders Zambales Inc. shares for Bataan

shares, cash, and goods.

Tax Implications

- Total Consideration Received: P1,200,000

- Less: Cost of Stocks Exchanged: P1,000,000

- Indicated Gain: P200,000

- Realized Return on Capital (to the extent of the indicated

gain): P200,000

- Return of Capital (in excess of the indicated gain): P100,000

- Total Cash and Other Properties Received: P300,000

- The P200,000 gain is reported as a capital gain.

Substituted Basis of Bataan Shares

- Basis of Zambales Shares Exchanged: P1,000,000

- Less: Return of Capital: P100,000

 - Basis of Bataan Shares Received: P900,000

Regulatory Formula on Tax Substituted Basis

- Tax Basis of Old Shares Exchanged

- Add: Gain Recognized on the Transfer

- Less: Cash or Other Properties Received

- Tax Basis of New Shares Received

Visual Organizer Suggestion:

- Main Sections: Tax Basis, Non-Stock Exchanges, Illustration

- Tax Basis:

- Note on the tax basis of the Maharlika shares.

- Non-Stock Exchanges:

- Explanation of the tax implications.

- Illustration:
 - Summary of the transaction and tax implications.

- Formula for calculating the substituted basis.

Substituted Basis of Bataan Shares (Computed)

- Tax Basis of Zambales Shares Exchanged: P1,000,000

- Add: Gain Recognized on the Transfer: P200,000

- Less: Cash or Other Properties Received: P300,000

- Tax Basis of the Bataan Shares Received: P900,000

Illustration 2: Indicated Gain Exceeds Cash and Other Properties

Received

- Mr. Fernando surrenders Zambales Inc. shares for Bataan

shares and cash.

Tax Implications

- Total Consideration Received: P1,200,000

- Less: Cost of Stocks Exchanged: P1,000,000

- Indicated Gain: P200,000

 - Realized Gain (up to the value of cash): P150,000

- Unrealized Return on Capital (in excess of cash): P50,000

- Total Indicated Gain: P200,000

Substituted Tax Basis of Bataan Shares

- Basis of Zambales Shares Exchanged: P1,000,000

- Basis of Bataan Shares Received: P1,000,000

Alternatively

- Tax Basis of Zambales Shares Exchanged: P1,000,000

- Add: Gain Recognized on the Transfer: P150,000

- Less: Cash or Other Properties Received: P150,000

- Tax Basis of Bataan Shares Received: P1,000,000

Minimum Public Float Requirement

- Listed corporations must maintain a minimum public

ownership under Philippine Stock Exchange (PSE) regulations.
Visual Organizer Suggestion:

- Main Sections: Substituted Basis, Illustration, Public Float

- Substituted Basis:

- Formula for calculating the substituted basis.

- Illustration:

- Summary of the transaction and tax implications.

- Public Float:

- Note on the minimum public float requirement for listed

corporations.

Minimum Public Ownership

- Higher of:

1. 10% of issued and outstanding shares.

2.
3. Minimum public ownership required by the Securities and
Exchange Commission or the Philippine Stock Exchange.
4.
- Non-compliance results in de-listing of stocks in the PSE.
 - Sale of listed stocks falling below the requirement is subject to
15% capital gains tax, not 6/10 of 1% stock transaction tax.

Illustration 1: Sale by a Security Dealer

- Benjamin, a security dealer, sold domestic stocks for

P1,200,000 (net of expenses).

- Stocks were acquired at a cost of P800,000.

- Capital gains tax is nil because domestic stocks are ordinary

assets to a security dealer.

- The P400,000 net gain is an ordinary gain subject to regular

income tax.

Illustration 2: Sale of Domestic Bonds

- Nonoy, not a security dealer, sold domestic bonds directly to a

buyer at a net gain of P200,000.

- Nonoy is not a dealer of domestic bonds.

- Capital gains tax is nil.

- The gain on the sale of domestic bonds is a capital gain subject

to regular income tax.
 - A bond is a debt instrument rather than an equity instrument
like stocks.

Illustration 3: Exchange of Stocks for Other Securities

- Debbie Wong exchanged domestic stocks costing P300,000 for

bonds with a fair value of P400,000.

- The P100,000 capital gain is subject to capital gains tax.

- The same rule applies for share-for-share swap not pursuant to

a plan of merger or consolidation.

- Non-resident persons are subject to the capital gains tax and

must file the capital gains tax return.

Illustration 4: Issuance of Stocks

- Iba Inc. issued 10,000 P10-par ordinary shares for a vacant lot
owned by KIT Inc.

- The fair value of the vacant lot is P500,000.

- The transaction involves the issue of Iba Inc.’s own shares of

stock.

- P300,000 is part of Iba’s corporate capital, not income.

- Not subject to capital gains tax.

Visual Organizer Suggestion:

- Main Sections: Public Ownership, Illustrations

- Public Ownership:

- Explanation of the minimum public ownership requirements.

- Illustrations:

- Summary of each illustration and its tax implications.

Persons Not Liable to the 15% Capital Gains Tax

1. Dealers in Securities
2.
3. Investors in Shares of Stocks in a Mutual Fund Company
4.

3. All Other Persons Specifically Exempt

Sale, Exchange, and Other Disposition of Real Property

- Subject to a tax of 6% of the selling price or the fair value,

whichever is higher.
Visual Organizer Suggestion:

- Main Sections: Ex-Dividend, Exemptions, Real Property

- Ex-Dividend:

- Summary of the transaction and capital gain computation.

- Exemptions:

- List of persons not liable to the 15% capital gains tax.

- Real Property:

- Note on the tax rate for the sale of real property.

Fair Value of Real Property (Under NIRC)

- Higher of:

- Zonal Value: Prescribed by the Commissioner of Internal

Revenue.

- Fair Market Value: As shown in the schedule of market values

of the Provincial and City Assessors.

- Normally, only land has zonal value.

 - Both land and improvements have fair market value in the
Provincial or Assessor’s Office.

Capital Gains Tax for Lands

- 6% of whichever is the highest of the selling price, zonal value,

or Provincial/City Assessor’s fair value.

- Independent appraisal valuation is not used in the

computation.

Illustration 1 – Land Only

- Terry sold vacant agricultural land for P5,000,000.

- The land was previously purchased for P4,000,000.

- Appraisal value: P8,000,000.

- Zonal value: P7,000,000.

- Assessor’s fair value: P6,000,000.

- Assessed value: P2,400,000.

- Highest is the zonal value (P7,000,000).

 - Capital gains tax: P7,000,000 x 6% = P420,000.

Illustration 2 – Land and Improvement

- Anjo sold residential house and lot for P5,000,000.

- Purchased the lot and constructed the house for P2,500,000.

Fair Value Details

- BIR Valuation:

- Zonal Value (Lot): P4,000,000

- House: n/a

- Assessor’s Valuation:

- Fair Value (Lot): P3,500,000

- Fair Value (House): P2,000,000

- Highest of Zonal Value and Assessor’s Fair Value: P6,000,000

- Capital Gains Tax: P6,000,000 x 6% = P360,000

Visual Organizer Suggestion:

 - Main Sections: Fair Value, Illustrations

- Fair Value:

- Explanation of the fair value determination.

- Illustrations:

- Summary of each illustration and its capital gains tax

computation.

BIR Tax Clearance

- No registration of any document transferring real property

shall be effected unless the Commissioner or his
representative has certified that such transfer has been
reported and the capital gains tax has been paid.

- The certificate is referred to as the “Certificate Authorizing

Registration (CAR)”.

Nature of the 6% Capital Gains Tax

- A. Presumption of Capital Gains

- Applies even if the sale resulted in a loss.

 - Gain is always presumed to exist.

- The basis of taxation is the selling price or fair value,

whichever is higher.

- B. Non-consideration to the Involuntariness of the Sale

- Applies even if the sale is involuntary or forced.

- C. Final Tax

- Shall be withheld by the buyer against the selling price of the

seller and remit the same to the government.

Scope and Applicability of the 6% Capital Gains Tax

- The 6% capital gains tax is applicable to all individual

taxpayers and domestic corporations.

- The NIRC did not impose final capital gains tax on foreign
corporations.

- In cases where foreign corporations realize gains from the sale

of real property, the capital gain is subject to the regular
income tax.

Visual Organizer Suggestion:

 - Main Sections: Illustration, BIR Clearance, 6% CGT, Scope

- Illustration:

- Summary of the transaction and tax implications.

- BIR Clearance:

- Explanation of the requirement for tax clearance.

- 6% CGT:

- Explanation of the nature of the 6% capital gains tax.

- Scope:

- Table summarizing the scope and applicability of the tax.

Sale of Real Property Located Abroad

- Not subject to capital gains tax.

- Withholding of the capital tax cannot be imposed abroad.

- Actual gains realized abroad are subject to regular income tax

if the taxpayer is taxable on global income.
Exceptions to the 6% Capital Gains Tax

1. Alternative Taxation Rule

2.
3. Exemption Rules
4.
- A. Exemption under the NIRC

- B. Exemption under Special Laws

Alternative Taxation

- An individual seller of real property capital assets has the

option to be taxed at either:

- A. 6% capital gains tax or

- B. The regular income tax

- Permissible only when:

1. The seller is an individual taxpayer.

2.
3. The buyer is the government.
4.

Illustration

- Gretchen sold a vacant lot to the government for P800,000.

 - Purchased for P200,000 in 1980.

- Assessor’s fair value: P400,000.

- Zonal value: P500,000.

- Gretchen may opt to be subject to tax at 6% of P800,000 or

report the P600,000 actual capital gain in her annual regular
income tax return.

Basis of Alternative Taxation

- Intended to ease the burden of government expropriation.

Illustration

- An individual taxpayer bought a house and lot near a highway

for P2,000,000.

- The government invoked its power of eminent domain to buy

the property.

- The property has a fair value of P1,800,000.

- The taxpayer would be forced to incur a P200,000 loss and still

pay the 6%.

Visual Organizer Suggestion:

 - Main Sections: Property Abroad, Exceptions, Alternative Tax,
Illustrations

- Property Abroad:

- Note on the tax implications of real property located abroad.

- Exceptions:

- List of exceptions to the 6% capital gains tax.

- Alternative Tax:

- Explanation of the alternative taxation rule.

- Illustrations:

- Summary of each illustration and its tax implications.

Exemption to the 6% Capital Gains Tax Under the NIRC

- The sale of a principal residence by individual taxpayers is

exempt from the 6% capital gains tax.

Principal Residence
 - The house and lot which is the primary domicile of the
taxpayer.

- If the taxpayer has multiple residences, his principal residence

is that one shown in his latest tax declaration.

Requisites of Exemption

1. The seller must be a citizen or resident alien.

2.
3. The sale involves the principal residence of the seller-taxpayer.
4.

3. The proceeds are utilized in acquiring a new principal residence.

5. The BIR is duly notified within 30 days of the sale through a

prescribed return (BIR Form 1706) and “Sworn Declaration of
Intent.”
6.
5. The reacquisition of the new residence must be within 18
months from the date of sale.
6.
7. The capital gain is held in escrow in favor of the government.
8.
7. The exemption can only be availed of once in every 10 years.
8.
9. The historical cost of the principal residence sold shall be
carried over to the new principal residence.
10.
- The sale of the principal residence must precede the
acquisition of the new principal residence to be exempt.

Illustration 1
 - Gamboa sold her principal residence with a fair market value
of P6,000,000 for P5,000,000.

- Gamboa purchased the residence for P3,000,000 several years

ago.

- The impossible capital gains tax is 6% of P6,000,000 or

P360,000.

- Gamboa should indicate her intention to apply for exemption

and deposit the P360,000 capital gains tax in an escrow
account.

Full Utilization of Proceeds is Exempt

- Assuming Gamboa acquires a new principal residence for

P5,200,000 within 18 months, the P360,000 capital gains tax in
escrow will be released to her.

- Illustration:

- Summary of the illustration and its tax implications.

Capital Gains Tax Exemption Under Special Laws

1. Sale of land under the Comprehensive Agrarian Reform

Program
2.
 - The sale of agricultural lands by land owners pursuant to the
Comprehensive Agrarian Reform Program of the government
shall be exempt from capital gains tax.

- Interest income on the selling price that may have been agreed
by the land owner and the tenant-buyer shall be exempt from
income tax.

3. Sale of Socialized Housing Units by the National Housing

Authority
4.
- The sale of socialized housing units for the underprivileged
and homeless citizens by the National Housing Authority (NHA)
pursuant to the Urban Development and Housing Act of 1992 is
exempt from the capital gains tax.

- This exemption is limited to socialized housing units only.

- The BIR ruled that the sale of the NHA of commercial lots is
subject to capital gains tax or regular tax and documentary

CHAPTER 7

Exclusions from Gross Income

- Exclusions from gross income are income which will not be

subject to income tax.

- Under Sec. 32(B) of the NIRC, the following items shall not be
included in gross income and shall be exempt from taxation:
- Proceeds of life insurance policy

- Amount received by the insured as a return of premium

- Gift, bequest, devise, or descent

- Compensation for injuries or sickness

- Income exempt under treaty

- Retirement benefits, pensions, gratuities, etc.

- Miscellaneous items

- Income in the Philippines of foreign government or foreign

government-owned and controlled corporations

- Income of the government and its political subdivisions

- Prizes and awards in recognition of religious, charitable,

scientific, educational, artistic, literary, or civic achievements

- Prizes and awards in athletic sports competitions

- Contributions to GSIS, SSS, PhilHealth, Pag-IBIG, and union

dues
 - Employer’s contributions to Personal Equity Retirement
Account (PERA)

- PERA investment income and PERA distributions

Visual Organizer Suggestion:

- Main Sections: Exclusions

- Exclusions:

- Explanation of exclusions from gross income.

- List of the items that shall not be included in gross income and
shall be exempt from taxation.

Exclusion From Gross Income

- Proceeds of a Life Insurance policy

- Amount received by the Insured as a return of premium

Visual Organizer Suggestion:

- Main Sections: Exclusion, Illustration

- Exclusion:
 - Explanation of exclusion from gross income.

Property insurance contracts

- The proceeds of property insurance contracts in excess of the

tax basis of the property lost or destroyed is a taxable return
on capital.

Gifts, Bequests, and Devises or Descent

- 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.

Visual Organizer Suggestion:

- Main Sections: Scenario, Life, Property, Gifts

- Scenario:

- Outline of the life insurance contracts.

- Explanation of the different scenarios.

 - Life:

- Explanation of life insurance of company officers.

- Property:

- Explanation of property insurance contracts.

- Gifts:

- Explanation of gifts, bequests, and devises or descent.

Gift distinguished from exchange

- The transferor’s intention or motive must be evaluated in

determining whether a transfer is a gift or an exchange.

- Gifts are characterized by pure liberality or disinterested

generosity and are given without any consideration.

Employment Gratuities

- Gratuities given under an employer-employee relationship are

normally treated in exchange for services rendered by
employees. Hence, they are subject to income tax.
 - The transfer of properties by the employer to managerial or
supervisory employees is generally subject to fringe benefit
tax.

Compensation for injuries and sickness

- Amounts received through accident or health insurance or

under Workmen’s Compensation Acts as compensation for
personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on account of such
injuries or sickness.

Visual Organizer Suggestion:

- Main Sections: Transfer, Gift, Employment, Compensation

- Transfer:

- Explanation of the transfer of business properties.

- Gift:

- Explanation of gift distinguished from exchange.

- Employment:

- Explanation of employment gratuities.

 - Compensation:

- Explanation of compensation for injuries and sickness.

- Explanation of the different scenarios.

Income exempt under treaty

- Income items that are excluded by international agreement to

which the Philippine government is a signatory are excluded
from income tax.

Retirement Benefits, Pensions, Gratuities and others benefits

- Retirement benefit 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.

- Requisites of exemption: (Mnemonic: 1-10-50-RPBP)

- This is the first time availment of retirement benefit

exemption.

- The retiring official or employee has been in the services of the

same employer for at least ten (10) years.

- The retiring employee is at least fifty (50) years of age at the

time of retirement.
 - The employer maintains a reasonable private benefit plan.

- A reasonable private benefit plan means a pension, gratuity,

stock bonus or profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the
officials or employees, or both, for the purpose of distributing
to such officials and employees the earnings and principal of
the fund thus accumulated.

- To be exempt, the retirement benefit plan must be a trusteeed

plan where the fund is held under the management of a
trustee free from both employer and employee control.

- The 10-year service period requirement pertains to cumulative

years of employment with the same employer.

Visual Organizer Suggestion:

- Main Sections: Income, Retirement

- Income:

- Explanation of income exempt under treaty.

- Retirement:
 - Explanation of retirement benefits, pensions, gratuities and
others benefits.

- Explanation of the requisites of exemption.

- Explanation of the reasonable private benefit plan.

- Explanation of the 10-year service period requirement.

- Explanation of the illustration.

Retirement benefit under RA. 7641 received by officials and

employees in the absence of a retirement plan

- Requisites of exemption:

- The retiring employee is at least 60 years of age

- He must have served the employer for at least 5 years

Separation or Termination

- Requisite of exemption:

- The separation or termination must be due to job-threatening

sickness, deaths, or other physical disability; and
 - The same must be due to any cause beyond the control of the
employee or official such as:

- Redundancy

- Retrenchment

- Closure of employer’s business

- Employee lay-off

- Downsizing of employer’s business

- Sickness or death of the employee

- The phrase “beyond the control of the employee” connotes

involuntariness on the part of the employee.

Visual Organizer Suggestion:

- Main Sections: Illustration, Retirement, Separation

- Illustration:

- Explanation of the different scenarios.

- Retirement:
 - Explanation of retirement benefit under RA. 7641 received by
officials and employees in the absence of a retirement plan.

- Separation:

- Explanation of separation or termination.

Visual Organizer Suggestion:

- Main Sections: Income, Retirement

- Income:

- Explanation of income exempt under treaty.

- Retirement:

- Explanation of retirement benefits, pensions, gratuities and

others benefits.

- Explanation of the requisites of exemption.

- Explanation of the reasonable private benefit plan.

- Explanation of the 10-year service period requirement.

- Explanation of the illustration.

 - Abandonment of office such as the registration and
subsequent appointment to another office is considered as a
voluntary separation and does not fall within the purview of
the phrase “for any cause beyond the control of such official or
employee”.

- The exemption of termination or separation benefits does not

extend to:

- Backwages or illegal deductions repaid by the employer upon

termination

- Terminal leave pay or the commutation of accumulated unused

leave credits

- To avail of the tax exemption, the employee or his heirs shall

request for a ruling or certificate of exemption (CTE) from the
BIR.

Social Security Benefits, Retirement Gratuities, and Other similar

benefits

- From foreign government agencies and other institutions,

private or public, received by resident or non-resident citizens
or aliens who come to settle permanently in the Philippines.
United States Veterans Administration (USVA) – administered
benefits

- Under the laws of the United States received by any person

residing in the Philippines.

Social Security Systems (SSS) benefits under RA 8282

GSIS benefits under RA 8291 including retirement gratuity received

by government officials and employees

Miscellaneous items

- Income derived on investments in the Philippines in loans,

stocks, bonds, or other domestic securities, or from interest on
deposits in banks in the Philippines by:

- Foreign governments

- Financing institutions owned, controlled, or enjoying

refinancing from foreign government

- International or regional financial institutions established by

foreign governments

Visual Organizer Suggestion:

- Main Sections: Social, United, SocialS, GSIS, Miscellaneous

- Social:

- Explanation of Social Security Benefits, Retirement Gratuities,

and Other similar benefits.

- Explanation of the illustration.

- United:

- Explanation of United States Veterans Administration (USVA) –

administered benefits.

- Explanation of the illustration.

- SocialS:

- Explanation of Social Security Systems (SSS) benefits under RA

8282.

- GSIS:

- Explanation of GSIS benefits under RA 8291 including

retirement gratuity received by government officials and
employees.

- Miscellaneous:

- Explanation of Miscellaneous items.

Income derived by the government and its political subdivisions
from:

- Any public utility or

- Exercise of essential government function

- The general rule with government agencies and

instrumentalities is exemption because of their public service
nature.

- However, taxation applies when they engage in income-

producing activities which are proprietary or commercial in
nature.

- This exemption does not extend to government-owned and

controlled corporations (GOCCs).

Prizes and Awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic
achievements but only if:

- The recipient was selected without any action on his part to

enter the contest or proceeding; and

- The recipient is not required to render substantial future

services as a condition to receiving the prize or award.
 - Examples of exempt prizes:

- Nobel Prize award

- Gawad ng Sining Award

- CNN Hero of the Year

- Most Outstanding Citizen

Prizes and Awards in Sports Competitions granted to athletes:

- In local or international competitions and tournaments;

- Whether held in the Philippines or abroad; and

- Sanctioned by their national sports associations.

Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of

individuals

- These pertain to the employee share in the premium

contributions to GSIS, SSS, PhilHealth, Pag-Ibig and union
dues.

- The portion of the salary thus contributed is exempt from

income tax.
Visual Organizer Suggestion:

- Main Sections: Income, Prizes, PrizesA, Contributions

- Income:

- Explanation of Income derived by the government and its

political subdivisions.

- Prizes:

- Explanation of Prizes and Awards made primarily in recognition

of religious, charitable, scientific, educational, artistic, literary,
or civic achievements.

- PrizesA:

- Explanation of Prizes and Awards in Sports Competitions

granted to athletes.

- Contributions:

- Explanation of Contributions for GSIS, SSS, PhilHealth, Pag-Ibig

and Union dues of individuals.
Income derived by the government and its political subdivisions
from:

- Any public utility or

- Exercise of essential government function

- The general rule with government agencies and

instrumentalities is exemption because of their public service
nature.

- However, taxation applies when they engage in income-

producing activities which are proprietary or commercial in
nature.

- This exemption does not extend to government-owned and

controlled corporations (GOCCs).

Prizes and Awards made primarily in recognition of religious,

charitable, scientific, educational, artistic, literary, or civic
achievements but only if:

- The recipient was selected without any action on his part to

enter the contest or proceeding; and

- The recipient is not required to render substantial future

services as a condition to receiving the prize or award.

- Examples of exempt prizes:

 - Nobel Prize award

- Gawad ng Sining Award

- CNN Hero of the Year

- Most Outstanding Citizen

Prizes and Awards in Sports Competitions granted to athletes:

- In local or international competitions and tournaments;

- Whether held in the Philippines or abroad; and

- Sanctioned by their national sports associations.

Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of

individuals

- These pertain to the employee share in the premium

contributions to GSIS, SSS, PhilHealth, Pag-Ibig and union
dues.

- The portion of the salary thus contributed is exempt from

income tax.

Visual Organizer Suggestion:

- Main Sections: Income, Prizes, PrizesA, Contributions

- Income:

- Explanation of Income derived by the government and its

political subdivisions.

- Prizes:

- Explanation of Prizes and Awards made primarily in recognition

of religious, charitable, scientific, educational, artistic, literary,
or civic achievements.

- PrizesA:

- Explanation of Prizes and Awards in Sports Competitions

granted to athletes.

- Contributions:

- Explanation of Contributions for GSIS, SSS, PhilHealth, Pag-Ibig

and Union dues of individuals.

- Under RMC No. 21-2011, the exclusion pertains only to the

mandatory or compulsory monthly contributions.

- Voluntary contributions to Pag-Ibig II, GSIS or SSS in excess of

the mandatory monthly contribution are taxable.
Gains realized from redemption of shares in a mutual fund company
by the investor

- The term mutual fund company shall mean an open-end and

close-end investment company as defined under the
Investment Company Act.

- Mutual funds pool the money invested by different investors

and invest the money to earn investment income which shall
add up to the net assets of the fund.

Income derived from the sale of gold pursuant to RA7076 or the

People’s Small-Scale Mining Act of 1991

- Gold is a highly precious commodity which is part of the

international reserves of every country.

- Mining is an important sector of the Philippine economy

providing employment and livelihood to many mining
communities.

Visual Organizer Suggestion:

- Main Sections: Gains, Income

- Gains:
 - Explanation of Gains realized from redemption of shares in a
mutual fund company by the investor.

- Explanation of the illustration.

- Income:

- Explanation of Income derived from the sale of gold pursuant

to RA7076 or the People’s Small-Scale Mining Act of 1991.

Gains realized from redemption of shares in a mutual fund company

by the investor

- The term mutual fund company shall mean an open-end and

close-end investment company as defined under the
Investment Company Act.

- Mutual funds pool the money invested by different investors

and invest the money to earn investment income which shall
add up to the net assets of the fund.

Income derived from the sale of gold pursuant to RA7076 or the

People’s Small-Scale Mining Act of 1991

- Gold is a highly precious commodity which is part of the

international reserves of every country.
 - Mining is an important sector of the Philippine economy
providing employment and livelihood to many mining
communities.

Visual Organizer Suggestion:

- Main Sections: Gains, Income

- Gains:

- Explanation of Gains realized from redemption of shares in a

mutual fund company by the investor.

- Explanation of the illustration.

- Income:

- Explanation of Income derived from the sale of gold pursuant

to RA7076 or the People’s Small-Scale Mining Act of 1991.

- Registered SSMs refer to Filipino citizens who have organized

themselves as an individual miner or cooperative duly licensed
by the Mines and Geosciences Bureau (MGB) to engage in the
extraction of minerals or ore-bearing materials from the
ground under the terms of a small-scale mining contract.

- Accredited traders refer persons and/or entities engaged in the

business of buying and selling gold that have complied with
the BSP’s gold trader accreditation procedures.
 - For our purpose, black market refers to any gold hoarders,
traders or buyers other than the BSP and accredited gold
traders.

- Small-Scale Mining Contract refers to the co-production, joint

venture, or mineral production sharing agreement between the
government and a small-scale mining contractor for the small-
scale utilization of a plot of mineral inside a Small-Scale Mining
Area or Minahang Bayan.

- To avail of income exemption on the sale of gold, SSMs and

gold traders must be registered with the BSP.

- Only registered SSMs and registered gold traders are exempt.

- The P800,000 gross profit is an inclusion in gross income.

- Eugene will not be exempted even if he sells directly to the

BSP because he is an unregistered trader.

OTHER EXEMPT INCOME UNDER THE NIRC AND SPECIAL LAWS

- Minimum wage and certain benefits of Minimum wage earners

- COVID-19 benefits under Bayanihan to Heal as One Act

- Income of Barangay Micro-Business Enterprises Act (RA 9178)

 - Income of cooperatives and non-stock, non-profit entities

- Income of qualified employee trust funds and PERA accounts

- Lifetime monthly gratuity to Medal of Valor awardee

- Business or professional income of self-employed and or

professionals who opted to the 8% income tax

Visual Organizer Suggestion:

- Main Sections: Illustration, Other

- Illustration:

- Explanation of the different scenarios.

- Other:

- Explanation of OTHER EXEMPT INCOME UNDER THE NIRC AND

SPECIAL LAWS.

Minimum Wage Earners

- A minimum wage earner is an individual recipient of a

minimum wage as fixed by the Regional Tripartite Productivity
 Wage and Productivity Board of the Department of Labor and
Employment.

- A minimum wage earner is exempt from income tax on the

minimum wage including holiday pay, overtime pay, night shift
differential pay, and hazard pay.

COVID-19 Benefits

- As part of the government’s response to the COVID-19

pandemic crisis, RA 11494 provides for the following exempt
special benefits for health workers:

- COVID-19 Special Risk Allowance

- Actual hazard duty pay

- Compensation to health workers who contracted COVID-19 in

the line of duty

- COVID-19 Special Risk Allowance is an allowance paid to both

private and public health workers directly catering to or in
contact with COVID-19 patients for every month that they are
serving during the state of national emergency due to COVID-
19 as declared by the President.

- Actual Hazard Duty Pay is a compensation given to temporary

Human Resource for Health (HRH) serving in the front line
during the state of emergency due to COVID-19.
 - Compensation to health workers who contracted COVID-19 in
the line of duty:

- P1,000,000 in case of death; or

- P100,000 in case of severe or critical sickness

- P15,000 in case of mild or moderate sickness

Barangay Micro-Business Enterprise (BMBE)

- A BMBE is a business entity or enterprise engaged in the

production, processing or manufacturing of products or
commodities, including agro-processing, trading and services,
whose total assets including those arising from loans but
exclusive of the land on which the business entity’s office,
plant, and equipment are situated, do not exceed P3,000,000.

- The term service excludes those rendered by licensed

professionals and partnership and corporations engaged in
consultancy, advisory and similar services which are
essentially carried out through licensed professionals.

Visual Organizer Suggestion:

- Main Sections: Minimum, COVID, Barangay

- Minimum:

- Explanation of Minimum Wage Earners.

 - COVID:

- Explanation of COVID-19 Benefits.

- Barangay:

- Explanation of Barangay Micro-Business Enterprise (BMBE).

- To qualify as a BMBE, an enterprise must not be a branch or a

subsidiary of a large scale enterprise and its policies, and
modus operandi must not be determined by a large scale
enterprise such as in the case of franchises.

- To avail of the benefits and privileges of a BMBE, an applicant

must secure a certificate of authority to operate as a BMBE
from the Office of the Treasurer of the city or municipality that
has jurisdiction.

Tax Exemption on Income from Operations

- Aside from other incentives afforded by the law, the income of

BMBE from their operation is exempt; hence, excluded from
the gross income subject to regular income tax.

- BMBEs file an Annual Information Return in lieu of the income

tax return.
 - However, their non-operating, passive, and capital gains are
subject to the appropriate type of income tax.

Revocation of BMBE Tax Exemptions

- The income tax exemption of a BMBE may be revoked for any

of the following reasons:

- Transfer of place of business

- Value of assets exceeds P3,000,000

- Voluntary surrender of the Certificate of Authority

- Death of the registered individual owner; violation or non-

compliance with the provisions of RA 9178

- Merger or consolidation with an entity which is not eligible to

be a BMBE

- Sale or transfer of the BMBE if a sole proprietorship without

prejudice to the transferee applying for registration

- Submission of fake or falsified documents

- Retirement from business, or cessation/suspension of

operations for one year
 - Making false or omitting required declarations or statements

Cooperatives

- Cooperatives that transact business purely with members are

exempt from all taxes and fees.

- Cooperatives that transact business with non-members are

likewise exempt from all taxes and fees if their accumulated
reserve and undivided savings do not exceed P10M.

- Otherwise, the amount of surplus allocated for interest on

capitals is subject to regular tax.

- However, the income of any cooperative from non-related

sources is fully taxable to regular tax.

Non-Stock and Non-profit Entities

- Non-stock entities that are not organized for profit are exempt
from income tax on their income from operations.

- However, their income from unrelated sources is taxable.

Qualified Employees’ Trust Fund

- An employees’ trust fund which forms part of a pension, stock

bonus or profit sharing plan of an employer for the benefit of
some or all his employees is exempt from any income tax
under the NIRC.
Conditions for exemptions of employee trust funds

- 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.

- The asset of the fund shall not be diverted for other purposes
other than the exclusive benefit of the employees.

Visual Organizer Suggestion:

- Main Sections: Revocation, Cooperatives, Non-Stock, Qualified

- Revocation:

- Explanation of Revocation of BMBE Tax Exemptions.

- Cooperatives:

- Explanation of Cooperatives.

- Non-Stock:

- Explanation of Non-Stock and Non-profit Entities.

- Qualified:
 - Explanation of Qualified Employees’ Trust Fund.

Income of PERA Accounts

- Income of the contributor from the investments and

reinvestments of the PERA assets in the maximum amount
allowed shall be exempt from any income taxes.

- Non-income taxes, if applicable, relating to the investment

income such as percentage tax, VAT, stock transaction tax and
DST shall still be imposable.

Lifetime Gratuity to Medal of Valor Awardee

- The lifetime monthly gratuity of P20,000 to Medal of Valor

awardee or in case of his death his spouse or children shall not
be included in gross income subject to income tax.

QUALIFICATION OF EXEMPTION OF EXEMPT ENTITIES

- Tax incentive or exemption is highly disfavored in law.

- It is not automatic.

- Taxpayers with exemptions or tax incentives under any

existing laws or contracts must establish their entitlement by
filing required documents with the BIR.
 - BMBEs need to secure a Certificate of Authority.

- Cooperatives need to secure a Certificate of Tax

Exemption/Ruling (CTE).

INCOME OF SELF-EMPLOYED OR PROFESSIONALS WHO OPTED TO BE

TAXED AT 8% INCOME TAX

- The income of self-employed and or professionals who opted to

be taxed to the 8% income tax shall be excluded in gross
income subject to regular tax.

- The 8% income tax is in lieu of the 3% percentage tax and the

progressive income tax.

INCOME SUBJECT TO FINAL TAX OR CAPITAL GAINS TAX

- Items of income that are subject to final income tax or capital

gains tax are not items of gross income subject to regular
income tax.

- Also, income items that are exempted in the coverage of final

tax or capital gains tax are not taxable to the regular income
tax.

EXCLUSIONS VS. DEDUCTIONS

- Exclusions from gross income are not included in the amount

of reportable gross income in the income tax return.
 - The amount of deductions is initially included in the amount of
gross income but is separately presented as deduction against
gross income in the income tax return.

Visual Organizer Suggestion:

- Main Sections: Income, Lifetime, QUALIFICATION, INCOME,

EXCLUSIONS

- Income:

- Explanation of Income of PERA Accounts.

- Lifetime:

- Explanation of Lifetime Gratuity to Medal of Valor Awardee.

- QUALIFICATION:

- Explanation of QUALIFICATION OF EXEMPTION OF EXEMPT

ENTITIES.

- INCOME:

- Explanation of INCOME OF SELF-EMPLOYED OR PROFESSIONALS

WHO OPTED TO BE TAXED AT 8% INCOME TAX.

- Explanation of INCOME SUBJECT TO FINAL TAX OR CAPITAL

GAINS TAX.
 - EXCLUSIONS:

- Explanation of EXCLUSIONS VS. DEDUCTIONS.

Minimum Wage Earners

- A minimum wage earner is an individual recipient of a

minimum wage as fixed by the Regional Tripartite Productivity
Wage and Productivity Board of the Department of Labor and
Employment.

- A minimum wage earner is exempt from income tax on the

minimum wage including holiday pay, overtime pay, night shift
differential pay, and hazard pay.

COVID-19 Benefits

- As part of the government’s response to the COVID-19

pandemic crisis, RA 11494 provides for the following exempt
special benefits for health workers:

- COVID-19 Special Risk Allowance

- Actual hazard duty pay

- Compensation to health workers who contracted COVID-19 in

the line of duty
 - COVID-19 Special Risk Allowance is an allowance paid to both
private and public health workers directly catering to or in
contact with COVID-19 patients for every month that they are
serving during the state of national emergency due to COVID-
19 as declared by the President.

- Actual Hazard Duty Pay is a compensation given to temporary

Human Resource for Health (HRH) serving in the front line
during the state of emergency due to COVID-19.

- Compensation to health workers who contracted COVID-19 in

the line of duty:

- P1,000,000 in case of death; or

- P100,000 in case of severe or critical sickness

- P15,000 in case of mild or moderate sickness

Barangay Micro-Business Enterprise (BMBE)

- A BMBE is a business entity or enterprise engaged in the

production, processing or manufacturing of products or
commodities, including agro-processing, trading and services,
whose total assets including those arising from loans but
exclusive of the land on which the business entity’s office,
plant, and equipment are situated, do not exceed P3,000,000.

- The term service excludes those rendered by licensed

professionals and partnership and corporations engaged in
 consultancy, advisory and similar services which are
essentially carried out through licensed professionals.

Visual Organizer Suggestion:

- Main Sections: Minimum, COVID, Barangay

- Minimum:

- Explanation of Minimum Wage Earners.

- COVID:

- Explanation of COVID-19 Benefits.

- Barangay:

- Explanation of Barangay Micro-Business Enterprise (BMBE).

- To qualify as a BMBE, an enterprise must not be a branch or a

subsidiary of a large scale enterprise and its policies, and
modus operandi must not be determined by a large scale
enterprise such as in the case of franchises.

- To avail of the benefits and privileges of a BMBE, an applicant

must secure a certificate of authority to operate as a BMBE
from the Office of the Treasurer of the city or municipality that
has jurisdiction.
Tax Exemption on Income from Operations

- Aside from other incentives afforded by the law, the income of

BMBE from their operation is exempt; hence, excluded from
the gross income subject to regular income tax.

- BMBEs file an Annual Information Return in lieu of the income

tax return.

- However, their non-operating, passive, and capital gains are

subject to the appropriate type of income tax.

Revocation of BMBE Tax Exemptions

- The income tax exemption of a BMBE may be revoked for any

of the following reasons:

- Transfer of place of business

- Value of assets exceeds P3,000,000

- Voluntary surrender of the Certificate of Authority

- Death of the registered individual owner; violation or non-

compliance with the provisions of RA 9178
 - Merger or consolidation with an entity which is not eligible to
be a BMBE

- Sale or transfer of the BMBE if a sole proprietorship without

prejudice to the transferee applying for registration

- Submission of fake or falsified documents

- Retirement from business, or cessation/suspension of

operations for one year

- Making false or omitting required declarations or statements

Cooperatives

- Cooperatives that transact business purely with members are

exempt from all taxes and fees.

- Cooperatives that transact business with non-members are

likewise exempt from all taxes and fees if their accumulated
reserve and undivided savings do not exceed P10M.

- Otherwise, the amount of surplus allocated for interest on

capitals is subject to regular tax.

- However, the income of any cooperative from non-related

sources is fully taxable to regular tax.

Non-Stock and Non-profit Entities

 - Non-stock entities that are not organized for profit are exempt
from income tax on their income from operations.

- However, their income from unrelated sources is taxable.

Qualified Employees’ Trust Fund

- An employees’ trust fund which forms part of a pension, stock

bonus or profit sharing plan of an employer for the benefit of
some or all his employees is exempt from any income tax
under the NIRC.

Conditions for exemptions of employee trust funds

- 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.

- The asset of the fund shall not be diverted for other purposes
other than the exclusive benefit of the employees.

Visual Organizer Suggestion:

- Main Sections: Revocation, Cooperatives, Non-Stock, Qualified

- Revocation:

- Explanation of Revocation of BMBE Tax Exemptions.

 - Cooperatives:

- Explanation of Cooperatives.

- Non-Stock:

- Explanation of Non-Stock and Non-profit Entities.

- Qualified:

- Explanation of Qualified Employees’ Trust Fund.

Income of PERA Accounts

- Income of the contributor from the investments and

reinvestments of the PERA assets in the maximum amount
allowed shall be exempt from any income taxes.

- Non-income taxes, if applicable, relating to the investment

income such as percentage tax, VAT, stock transaction tax and
DST shall still be imposable.

Lifetime Gratuity to Medal of Valor Awardee

- The lifetime monthly gratuity of P20,000 to Medal of Valor

awardee or in case of his death his spouse or children shall not
be included in gross income subject to income tax.
QUALIFICATION OF EXEMPTION OF EXEMPT ENTITIES

- Tax incentive or exemption is highly disfavored in law.

- It is not automatic.

- Taxpayers with exemptions or tax incentives under any

existing laws or contracts must establish their entitlement by
filing required documents with the BIR.

- BMBEs need to secure a Certificate of Authority.

- Cooperatives need to secure a Certificate of Tax

Exemption/Ruling (CTE).

INCOME OF SELF-EMPLOYED OR PROFESSIONALS WHO OPTED TO BE

TAXED AT 8% INCOME TAX

- The income of self-employed and or professionals who opted to

be taxed to the 8% income tax shall be excluded in gross
income subject to regular tax.

- The 8% income tax is in lieu of the 3% percentage tax and the

progressive income tax.

INCOME SUBJECT TO FINAL TAX OR CAPITAL GAINS TAX

 - Items of income that are subject to final income tax or capital
gains tax are not items of gross income subject to regular
income tax.

- Also, income items that are exempted in the coverage of final

tax or capital gains tax are not taxable to the regular income
tax.

EXCLUSIONS VS. DEDUCTIONS

- Exclusions from gross income are not included in the amount

of reportable gross income in the income tax return.

- The amount of deductions is initially included in the amount of

gross income but is separately presented as deduction against
gross income in the income tax return.

Visual Organizer Suggestion:

- Main Sections: Income, Lifetime, QUALIFICATION, INCOME,

EXCLUSIONS

- Income:

- Explanation of Income of PERA Accounts.

- Lifetime:

- Explanation of Lifetime Gratuity to Medal of Valor Awardee.

 - QUALIFICATION:

- Explanation of QUALIFICATION OF EXEMPTION OF EXEMPT

ENTITIES.

- INCOME:

- Explanation of INCOME OF SELF-EMPLOYED OR PROFESSIONALS

WHO OPTED TO BE TAXED AT 8% INCOME TAX.

- Explanation of INCOME SUBJECT TO FINAL TAX OR CAPITAL

GAINS TAX.

- EXCLUSIONS:

- Explanation of EXCLUSIONS VS. DEDUCTIONS.

CHAPTER 9

ITEMS OF GROSS INCOME

- The term items of gross income or inclusions in gross income is

a broad category pertaining to all items of income subject to
taxation, namely:

- Gross income subject to final tax

 - Gross income subject to capital gains tax

- Gross income subject to regular tax

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX

- Gross income includes, but is not limited to, the following

items:

- Compensation for services in whatever form paid

- Gross income from the conduct of trade, business, or exercise

of a profession

- Gains derived from dealings in properties

- Interest

- Rents

- Royalties

Visual Organizer Suggestion:

- Main Sections: ITEMS, ITEMS1

- ITEMS:
 - Explanation of ITEMS OF GROSS INCOME.

- ITEMS1:

- Explanation of ITEMS OF GROSS INCOME SUBJECT TO REGULAR

TAX.

Compensation for services in whatever form paid

- Under current tax rules, the term “compensation income”

technically pertains to the types of employee benefits that are
subject to regular tax.

- The fringe benefits of managerial or supervisory employees

are not considered compensation income and are subject to
final tax.

Gross income from the conduct of trade, business or exercise of a

profession

- This includes income from any trade or business, legal or

illegal, and whether registered or unregistered.

The following business income shall not be included in gross income

subject to regular income tax:

- Business income exempt from income tax such as:

 - Gross income from a Barangay Micro-Business Enterprise
(BMBE) under RA 9178

- Gross income from enterprises enjoying tax holiday incentives

under the CREATE law which have not yet graduated to their
income tax holiday incentives

- Business income subject to special tax such as:

- Philippine Economic Zone Authority (PEZA)-registered

enterprises subject to 5% gross income tax

- Tourism Infrastructure and Enterprise Zone Authority (TIEZA)-

registered enterprises subject to 5% gross income tax

- Income of self-employed and or individuals (SE/P) who opted to

be taxed under the 8% income tax

- Business income subject to final tax when not subjected to

final tax by-the payor

- Subcontractors of petroleum service contractors subject to 8%

final tax

- Business income of foreign currency deposit units (FCDUs) and

expanded FCDUs from Philippine residents subject to 10% final
tax

Visual Organizer Suggestion:

 - Main Sections: Compensation, Gross, The

- Compensation:

- Explanation of Compensation for services in whatever form

paid.

- Gross:

- Explanation of Gross income from the conduct of trade,

business or exercise of a profession.

- The:

- Explanation of The following business income shall not be

included in gross income subject to regular income tax.

Gains from Dealings in properties

- The gains or losses in dealing in ordinary assets are subject to

regular income tax.

- Dealings in capital assets other than domestic stocks and real

properties are also subject to regular income tax.

- Ordinary gains are included as items of gross income.

 - Ordinary losses are items of deductions against gross income.

Interest income

- This particularly refers to interest income other than passive

interest income subject to final tax.

- A taxable interest income must have been actually paid out of

an agreement to pay interest.

- Examples of interest income subject to regular income tax:

- Interest income from lending activities to individuals and

corporations by banks, finance companies, and other lenders

- Interest income from corporate bonds and promissory notes

- Interest income from bank deposits abroad

Exempt interest income

- The following are exempt from regular income taxation:

- Interest income earned by landowners in disposing their lands

to their tenants pursuant to the Comprehensive Agrarian
Reform Law

- Imputed interest income

Visual Organizer Suggestion:

- Main Sections: Gains, Interest, Exempt

- Gains:

- Explanation of Gains from Dealings in properties.

- Interest:

- Explanation of Interest income.

- Exempt:

- Explanation of Exempt interest income.

Rents

- Rent income arises from leasing properties of any kind.

- It is a passive income but is not subject to final tax under the

NIRC; hence, it is subject to regular income tax.

Special considerations on rent

- Obligations of the lessor that are assumed by the lessee are

additional rental income to the lessor.
 - Advance rentals are:

- Item of gross income upon receipt if:

- Unrestricted or

- Restricted to be applied in future years or upon the

termination of the lease

- Not an item of gross income if:

- It constitutes a loan

- It is a security deposit to guarantee payment or rent subject to

contingency which may or may not happen

- Leasehold improvements made by the lessee on the leased

property are recognized by the lessor as income using the
spread-out method or outright method discussed in Chapter 4.

Royalties

- Royalties earned from sources within the Philippines are

generally subject to final income tax except when they are
active by nature.

- Active royalty income and royalties earned from sources

outside the Philippines are subject to regular income tax.
Visual Organizer Suggestion:

- Main Sections: Rents, Royalties

- Rents:

- Explanation of Rents.

- Royalties:

- Explanation of Royalties.

ITEMS OF GROSS INCOME

- The term items of gross income or inclusions in gross income is

a broad category pertaining to all items of income subject to
taxation, namely:

- Gross income subject to final tax

- Gross income subject to capital gains tax

- Gross income subject to regular tax

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX

 - Gross income includes, but is not limited to, the following
items:

- Compensation for services in whatever form paid

- Gross income from the conduct of trade, business, or exercise

of a profession

- Gains derived from dealings in properties

- Interest

- Rents

- Royalties

Visual Organizer Suggestion:

- Main Sections: ITEMS, ITEMS1

- ITEMS:

- Explanation of ITEMS OF GROSS INCOME.

- ITEMS1:
 - Explanation of ITEMS OF GROSS INCOME SUBJECT TO REGULAR
TAX.

Compensation for services in whatever form paid

- Under current tax rules, the term “compensation income”

technically pertains to the types of employee benefits that are
subject to regular tax.

- The fringe benefits of managerial or supervisory employees

are not considered compensation income and are subject to
final tax.

Gross income from the conduct of trade, business or exercise of a

profession

- This includes income from any trade or business, legal or

illegal, and whether registered or unregistered.

The following business income shall not be included in gross income

subject to regular income tax:

- Business income exempt from income tax such as:

- Gross income from a Barangay Micro-Business Enterprise

(BMBE) under RA 9178
 - Gross income from enterprises enjoying tax holiday incentives
under the CREATE law which have not yet graduated to their
income tax holiday incentives

- Business income subject to special tax such as:

- Philippine Economic Zone Authority (PEZA)-registered

enterprises subject to 5% gross income tax

- Tourism Infrastructure and Enterprise Zone Authority (TIEZA)-

registered enterprises subject to 5% gross income tax

- Income of self-employed and or individuals (SE/P) who opted to

be taxed under the 8% income tax

- Business income subject to final tax when not subjected to

final tax by-the payor

- Subcontractors of petroleum service contractors subject to 8%

final tax

- Business income of foreign currency deposit units (FCDUs) and

expanded FCDUs from Philippine residents subject to 10% final
tax

Visual Organizer Suggestion:

- Main Sections: Compensation, Gross, The

- Compensation:
 - Explanation of Compensation for services in whatever form
paid.

- Gross:

- Explanation of Gross income from the conduct of trade,

business or exercise of a profession.

- The:

- Explanation of The following business income shall not be

included in gross income subject to regular income tax.

Gains from Dealings in properties

- The gains or losses in dealing in ordinary assets are subject to

regular income tax.

- Dealings in capital assets other than domestic stocks and real

properties are also subject to regular income tax.

- Ordinary gains are included as items of gross income.

- Ordinary losses are items of deductions against gross income.

Interest income
 - This particularly refers to interest income other than passive
interest income subject to final tax.

- A taxable interest income must have been actually paid out of

an agreement to pay interest.

- Examples of interest income subject to regular income tax:

- Interest income from lending activities to individuals and

corporations by banks, finance companies, and other lenders

- Interest income from corporate bonds and promissory notes

- Interest income from bank deposits abroad

Exempt interest income

- The following are exempt from regular income taxation:

- Interest income earned by landowners in disposing their lands

to their tenants pursuant to the Comprehensive Agrarian
Reform Law

- Imputed interest income

Visual Organizer Suggestion:

- Main Sections: Gains, Interest, Exempt

 - Gains:

- Explanation of Gains from Dealings in properties.

- Interest:

- Explanation of Interest income.

- Exempt:

- Explanation of Exempt interest income.

Dividends

- These pertain to foreign-sourced dividends or those declared

by foreign corporations.

- Those declared by domestic corporations are subject to the

rules of final tax discussed in Chapter 5.

- Foreign sourced dividends are generally subject to regular tax

subject to the pre-dominance tests discussed in Chapter 3.

- Cash, property, and script dividends from foreign corporations

are generally items of gross income subject to regular income
tax.

Stock dividend
 - It should be recalled that stock dividends are exempt from
income tax, but when the declaration confers to the recipient a
different interest or right after the stock dividend declaration
or when stocks dividends are subsequently redeemed such
that it amounts to payment of cash dividend, the fair market
value of the stock dividends received is taxable.

Liquidating dividends

- Liquidating dividend is not income.

- The liquidating dividends are considered an amount in

exchange for the investment of the investor and are subject to
the rules of dealings in properties in Chapter 12.

Visual Organizer Suggestion:

- Main Sections: Illustration, Dividends, Stock, Liquidating

- Illustration:

- Explanation of Illustration 1 and 2.

- Dividends:

- Explanation of Dividends.

- Stock:
 - Explanation of Stock dividend.

- Liquidating:

- Explanation of Liquidating dividends.

Exemption of foreign-sourced dividends received by domestic

corporation

- Under the CREATE law, inter-corporate dividends received by

domestic corporations from foreign corporations are generally
subject to regular tax.

Visual Organizer Suggestion:

- Main Sections: Comprehensive, Illustration, Exemption

- Comprehensive:

- Explanation of Comprehensive summary of rules on dividends.

- Illustration:

- Explanation of Illustration – Foreign-sourced dividends

received by individual taxpayers.
 - Exemption:

- Explanation of Exemption of foreign-sourced dividends

received by domestic corporation.

Exemption of foreign-sourced dividends received by domestic

corporation

- Under the CREATE law, inter-corporate dividends received by

domestic corporations from foreign corporations are generally
subject to regular tax.

Visual Organizer Suggestion:

- Main Sections: Comprehensive, Illustration, Exemption

- Comprehensive:

- Explanation of Comprehensive summary of rules on dividends.

- Illustration:

- Explanation of Illustration – Foreign-sourced dividends

received by individual taxpayers.

- Exemption:
- Explanation of Exemption of foreign-sourced dividends
received by domestic corporation.

- If the ratio in the predominance test is less than 50% the

foreign-sourced dividends shall be exempt if the following
conditions concur:

- The domestic corporation directly owns at least 20% in value

of the outstanding shares of the NRFC.

- The shareholdings in the NRFC must have been held

uninterruptedly for a minimum of 2 years at the time of
dividend distribution or throughout the entire existence of the
NRFC if it is operational for less than 2 years.

- The foreign-sourced dividend received or remitted must be

reinvested within the next taxable year in business operations,
namely:

- Working capital requirements

- Capital expenditures

- Dividend payments

- Investment in domestic subsidiaries

- Infrastructure projects
 - Foreign-sourced dividends that are not utilized in the following
taxable year shall be declared as taxable income subject to
surcharges, interest and penalties.

- If the ratio in the predominance test is at least 50% the

foreign-sourced dividends received by the domestic
corporation shall be exempt from income tax even if the
above-mentioned conditions are not met.

Visual Organizer Suggestion:

- Main Sections: If, Illustration

- If:

- Explanation of If the ratio in the predominance test is less than

50%.

- Explanation of If the ratio in the predominance test is at least

50%.

Annuities

- The excess of annuity payments received by the recipient over

premium paid is taxable income in the year of receipt.

Prizes and winnings

 - Prizes and winnings that are exempted from final tax are not
items of gross income subject to regular income tax.

Exempt prizes and winnings:

- Prizes received without effort to join a contest

- Prizes in athletic competitions sanctioned by their respective

national sports association

- Winnings from PCSO games, not exceeding P10,000 in amount

Summary rules of prizes and winnings: Individual taxpayers

Pensions

- These pertain to pensions and retirement benefits that fail to

meet the exclusion criteria and hence subject to regular tax.

Taxable partnership and taxable joint venture or co-ownership

- Taxable partnership, joint ventures or co-ownerships are

taxable as corporations.

- The distributive share in the net income of these

unincorporated entities shall be taxable as follows:
Visual Organizer Suggestion:

- Main Sections: Summary, Pensions, Taxable

- Summary:

- Explanation of Summary rules of prizes and winnings:

Individual taxpayers.

- Explanation of Summary rules of prizes and winnings:

Corporate taxpayers.

- Pensions:

- Explanation of Pensions.

- Taxable:

- Explanation of Taxable partnership and taxable joint venture or

co-ownership.

Partner’s distributable share in the net income of a general

professional partnership

- A general professional partnership (GPP) is not subject to

income tax.
 - The partners are the ones subject to regular tax on their share
in the net income of the GPP.

GENERAL CRITERIA FOR ITEMS OF GROSS INCOME

- Items of gross income subject to regular income tax are not

limited to the list mentioned in the NIRC.

- Not subject to final tax, capital gains tax, and special tax
regime, and

- Not excluded or exempted by law, treaty, or contract from

taxation.

OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME

TAX

- Income distributions from taxable estates or trusts

- Share from the net income of other pass-through entities:

- Exempt joint venture

- Exempt co-ownership

- Farming income
 - Recovery of past deductions

- Reimbursement of expenses

- Cancellation of indebtedness for a consideration

Visual Organizer Suggestion:

- Main Sections: Partner, GENERAL, OTHER

- Partner:

- Explanation of Partner’s distributable share in the net income

of a general professional partnership.

- GENERAL:

- Explanation of GENERAL CRITERIA FOR ITEMS OF GROSS

INCOME.

- OTHER:

- Explanation of OTHER SOURCES OF GROSS INCOME SUBJECT TO

REGULAR INCOME TAX.

Income Distribution from taxable estates or trusts

 - Any income distribution received by an heir or beneficiary from
a taxable estate or trust shall be included in his gross income
subject to regular tax.

Income Distribution from taxable estates or trusts

- Any income distribution received by an heir or beneficiary from

a taxable estate or trust shall be included in his gross income
subject to regular tax.

Share from the net income of exempt joint ventures and co-
ownerships

- The same tax treatment on recognition of share in the net

income of a general professional partnership applies to the
share from the net income of exempt joint ventures and co-
ownerships.

Farming income

- Farming operations can be classified as:

- Raise and sell operation

- The proceeds on the sales of livestock or farm products is

included in gross income subject to regular income tax.

- Purchase and sell operation

 - The gross profit from the sale (sales less cost of purchase) is
included in gross income.

Visual Organizer Suggestion:

- Main Sections: Income, Share, Farming

- Income:

- Explanation of Income Distribution from taxable estates or

trusts.

- Share:

- Explanation of Share from the net income of exempt joint

ventures and co-ownerships.

- Farming:

- Explanation of Farming income.

- It should be recalled that the proceeds of crop or livestock

insurance constitute a taxable item of gross income because
they are recovery of lost profits.

RECOVERIES OF PAST DEDUCTIONS

 - When past year deductions from gross income are
subsequently recovered by the taxpayer or when accrued
expense previously deducted are subsequently paid at an
amount less than the deduction claimed, they should be
analyzed whether or not they resulted in tax benefit to the
taxpayer.

Examples of recoveries of past deductions:

- Recovery of previously claimed bad debt expense

- Refund of local tax expense

- Refund of foreign tax previously claimed as deduction

- Recommissioning of abandoned petroleum service contracts or

mining tenements

- Release of reserve funds of insurance companies

- Interest expense which were subsequently condoned by the

lender

- Past deductions that created tax benefit to the taxpayer must

be reverted back to gross income in the year of recovery so
that the government will recover the tax lost from the
deduction.

Tax benefit
 - There are two ways a taxpayer may benefit from a deduction:

- Directly, through reduction of taxable income in the year

deduction is made

- Indirectly, through reduction of future taxable income through

carry-over of net operating loss

Refund of non-deductible expenses

- Expenses or payments which are non-deductible against gross

income in the computation of taxable net income will never
create tax benefit to the taxpayer.

- As such, their recovery should not be included in gross income.

- Hence, the refund of the following non-deductible items is not

taxable:

- Philippine income tax

- Estate or donor’s tax

- Income tax paid or incurred to a foreign country if the taxpayer

claimed a credit for such tax in the year it was paid or
incurred.
 - Stock transaction tax in disposing stocks through the
Philippine Stock Exchange

- Special assessment

REIMBURSEMENTS OF EXPENSES

- Expenses of the taxpayer that are reimbursed or paid by the

customer or client constitute additional income to the
taxpayer.

CANCELLATION OF INDEBTEDNESS

- The cancellation of indebtedness may amount to gratuity or

payment of income.

- The cancellation of debt:

- In consideration of service or goods – treated as income

- As an act of gratuity – treated as gift; not as income

- As capital transaction such as forfeiting the right to receive

dividends in exchange of the debt – treated as dividend income

Visual Organizer Suggestion:

- Main Sections: Refund, REIMBURSEMENTS, CANCELLATION

 - Refund:

- Explanation of Refund of non-deductible expenses.

- REIMBURSEMENTS:

- Explanation of REIMBURSEMENTS OF EXPENSES.

- CANCELLATION:

- Explanation of CANCELLATION OF INDEBTEDNESS.

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

- Accounting methods

- Situs rules

- Effect of value added tax

- Creditable withholding tax

- Power of the CIR to redistribute income and expenses

ACCOUNTING METHOD
 - The accounting method adopted by the taxpayer has a direct
effect on the reportable amount of gross income subject to
regular income tax.

SITUS RULES

- The situs of taxation also affects the extent of income included

as items of gross income of the taxpayer.

- It must be recalled that all taxpayers are taxable only on

Philippine income except resident citizens and domestic
corporations which are taxable on global income.

- For taxpayers taxable only on Philippine income, only their

items of gross income subject to regular tax from sources
within the Philippines are included in gross income.

- For taxpayers taxable on global income, their items of gross

income subject to regular tax from sources within and without
the Philippines are included in gross income.

Visual Organizer Suggestion:

- Main Sections: SPECIAL, ACCOUNTING, SITUS, Integrative

- SPECIAL:

- Explanation of SPECIAL CONSIDERATIONS IN REPORTING OF

GROSS INCOME.
 - ACCOUNTING:

- Explanation of ACCOUNTING METHOD.

- SITUS:

- Explanation of SITUS RULES.

- Integrative:

- Explanation of Integrative Illustration 1.

CREDITABLE WITHHOLDING TAX

- Creditable withholding taxes (CWT) deducted by income payors

against the gross income of the taxpayer are not exclusions in
gross income.

- These should be added back to the reportable amount of gross

income.

- CWTs are tax credits that are deductible against the annual
income tax due of the taxpayer.

Creditable withholding tax and VAT

 - VAT taxpayers shall revert back to gross income amounts of
withholding tax but excludes therefrom the amount of VAT
charged to customers or clients.

POWER OF THE CIR TO REDISTRIBUTE INCOME AND DEDUCTIONS

- In the case of two or more organizations, trades or businesses

(whether or not incorporated and whether or not organized in
the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he
determined that such distribution, apportionment or allocation
is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any such organization, trade or business.

The Problem of Unfair Pricing between Associated Enterprises

- There is a risk that the pricing of the transfer of goods and

services between associated enterprises will be controlled in
such a way to further the interests of the associated
enterprises as a whole in disregard of their social
responsibility on taxes.

Examples:

- A domestic corporation which is subject to 25% corporate tax

in the Philippines has a subsidiary that operates in a tax haven
country where no income tax is imposed.
 - A foreign corporation subject to 10% corporate tax in its home
country has a branch in the Philippines which is subject to the
25% corporate income tax herein.

- Mr. Wais has also a business enjoying a tax holiday under an

investment promotion law.

The transfer pricing guideline

- Those enumerated scenarios are just a few of the problems in

taxation brought about by unfair pricing practices.

Visual Organizer Suggestion:

- Main Sections: POWER, The Problem, Examples, The transfer

- POWER:

- Explanation of POWER OF THE CIR TO REDISTRIBUTE INCOME

AND DEDUCTIONS.

- The Problem:

- Explanation of The Problem of Unfair Pricing between

Associated Enterprises.

- Examples:

- Explanation of Examples.
 - The transfer:

- Explanation of The transfer pricing guideline.

What are associated enterprises?

- Under RR2-2013, two or more enterprises are associated if one

participates directly or indirectly in the management, control,
or capital of the other, or if the same persons participate
directly or indirectly in the management, control, or capital of
the enterprises.

- Associated enterprises are also called “related parties.”

Examples of associated enterprises:

- Parent corporation and its subsidiary corporation

- Sister companies or businesses owned by the same parent

corporation

- All corporations controlled under the same holding company

- Businesses owned by the same person

The arm’s length principle

 - Under RR2-2013, transfer pricing between associated
enterprises shall be made under comparable conditions and
circumstances as those entered into between independent
parties where market forces drive the terms and conditions of
the transaction rather than being controlled solely by reason
of special relationship between the associated enterprises.

- In other words, an uncontrolled pricing method determined by

free market forces, also called arm’s length pricing, is
preferred.

- The failure to comply may expose the taxpayer to a transfer

pricing adjustment where the BIR re-computes the proper
income of the associated enterprises.

- The arm’s length principle shall be applied to:

- Cross-border transactions between associated enterprises

- Domestic transactions between associated enterprises

- When operations are conducted cross-border, the taxpayer

may enter into an “advanced pricing agreement” with the BIR
where a pricing rate is pre-agreed to apply for a period of
time.

Transfer pricing methods

- When the pricing methods between associated enterprises do

not reflect arm’s length pricing, the BIR will adjust the
controlled transactions to their arm’s length values using the
 most appropriate of the following method considering the
circumstance of the taxpayer:

Visual Organizer Suggestion:

- Main Sections: What, Examples, The arm’s, Transfer

- What:

- Explanation of What are associated enterprises?

- Examples:

- Explanation of Examples of associated enterprises.

- The arm’s:

- Explanation of The arm’s length principle.

- Transfer:

- Explanation of Transfer pricing methods.

- Comparable uncontrolled price (CUP) method – The transaction

is valued in reference to the amount charged in a comparable
uncontrolled transaction under comparable circumstances.
- Resale price method (RPM) – The transaction is valued based
on the functions performed by the reselling party to the
product.

- Cost plus method (CPM) – The transaction is measured by

valuing the function performed by the supplier of the property
or services.

- Profit split method (PSM) – The profit or loss on the transaction

is split based on the division of profits (or losses) that
independent enterprises would have expected to realize from
engaging in the transaction or transactions.

- Residual profit split approach – Profit is first allocated to

provide a basic return appropriate for the type of transaction
the participant is engaged in.

- Contribution profit split approach – The combined profits from

controlled transactions are divided between associated
enterprises in a single stage based upon the parties’ relative
contribution to the profit or the relative value of the functions
performed by each of the associated enterprises participating
in the controlled transactions.

- Transactional net margin method (TNMM) – This is similar to

the cost plus and the resale price methods in the sense that it
uses the margin approach by reference to the operating profit
earned in comparable uncontrolled transactions.

- When no comparatives can be derived within the industry of

the subject taxpayer, the BIR may consider:
 - Extension of the transfer pricing methods using comparatives
derived from another industry segment

- Use a combination of the transfer pricing methods or other

methods

Visual Organizer Suggestion:

- Main Sections: Comparable, Resale, Cost, Profit, Transactional,

Illustration

- Comparable:

- Explanation of Comparable uncontrolled price (CUP) method.

- Resale:

- Explanation of Resale price method (RPM).

- Cost:

- Explanation of Cost plus method (CPM).

- Profit:

- Explanation of Profit split method (PSM).

 - Transactional:

- Explanation of Transactional net margin method (TNMM).

Selection of Transfer Pricing Method

- To minimize the risks of transfer pricing adjustments,

taxpayers may also consider using the transfer pricing
methods used by the BIR in pricing their transactions with
associated enterprises.

- The taxpayer must support the propriety of the method

adopted through proper documentation.

PERIOD IN WHICH ITEMS OF GROSS INCOME ARE INCLUDED

- The amount of all items of gross income shall be included in

the gross income for the taxable year in which received by the
taxpayer, unless, under methods of accounting permitted, any
such amounts are to be properly accounted for as of a different
period.

Visual Organizer Suggestion:

- Main Sections: Selection, PERIOD

- Selection:

- Explanation of Selection of Transfer Pricing Method.

 - PERIOD:

- Explanation of PERIOD IN WHICH ITEMS OF GROSS INCOME ARE

INCLUDED.

CHAPTER 10

Employer-Employee Relationship

- Employer: Refers to any person for whom an individual

performs any service.

- An employer is the person who controls the payment of

employee remuneration.

- If the person is a non-resident not engaged in trade or

business in the Philippines, the employer is deemed the person
paying remuneration on their behalf.

- Employee: Refers to any individual who receives wages,

including officers, employees, or elected officials of the
Government of the Philippines or its subdivisions/agencies.

- Also includes an officer of a corporation.

Elements of Employer-Employee Relationship (Case Law)

1. Selection & Engagement: Screening process for hiring.

2.
 3. Payment of Wages: Employer fixes and controls wage
payments.
4.

3. Power of Dismissal: Employer can terminate employees due to

losses or other reasons.

5. Power of Control: Employer controls the means and methods of

work.
6.
- If arrangement doesn’t manifest all elements, it’s an
independent contract, not an employer-employee relationship.

- Not Considered Employees:

1. Consultants
2.
3. Directors without management function
4.

3. Talents/artists on TV/radio (Sonza vs. ABS-CBN)

- Income is business/professional income, not compensation.

Types of Employees (Function)

1. Managerial: Given powers to execute policies; can hire,

transfer, suspend, etc.
2.
3. Supervisory: Effectively recommend managerial actions;
requires independent judgment.
4.

3. Rank and File: Hold neither managerial nor supervisory functions.

Types of Employees (Taxability)

1. Minimum Wage Earners: Exempt from income tax on

compensation.
2.
3. Regular Employees: Subject to regular progressive income tax.
4.
- Minimum Wage Earner Definition: Worker in private sector or
employee in public sector paid minimum wage.

The Tax Model on Compensation Income

- Gross Compensation Income

- Less: Non-Taxable Compensation

- Taxable Compensation Income

Gross Compensation Income

- Generally includes all remunerations received under an

employer-employee relationship.

Non-Taxable Compensation

- A. Mandatory Deductions:

- Employee contributions to:

 - GSIS (Government Service Insurance System)

- SSS (Social Security System)

- PhilHealth

- HDMF (Home Development Mutual Fund)

- Union dues

- B. Exempt Benefits:

1. Benefits excluded and/or exempted under the NIRC and special

laws.
2.
3. Benefits exempt under treaty or international agreements.
4.

3. Benefits necessary for the trade, business, or conduct of

profession of the employer.

5. Benefits for the convenience or advantage of the employer.

6.

Exempt Benefits Under the NIRC, as Amended, and Special Laws

1. Remunerations Received as Incidents of Employment:

2.
- A. Exempt retirement benefits under RA 7641 (including
exempt retirement gratuities to government officials and
employees).
- B. Exempt termination benefits.

- C. Benefits from the United States Veterans Administration.

- D. Social security, retirement gratuities, pensions, and similar

benefits from foreign government agencies/institutions.

- E. Benefits from SSS under the SSS Act of 1954, as amended.

- F. Benefits from GSIS under the GSIS Act of 1937, as amended.

- G. COVID-19 benefits to health workers under RA 11494

(BAYANIHAN 2):

- A. Special Risk Allowance

- B. Actual Hazard Duty Pay

- C. Compensation paid to private and public health workers who

contracted COVID-19 in the line of duty

1. De Minimis Benefits
2.
- Facilities or privileges (entertainment, medical services,
discounts) of relatively small value.
- Furnished by employer to promote health, goodwill,
contentment, or efficiency.

- Exempt from income tax.

- Other petty fringe benefits falling under de minimis are also

exempt.

- Restricted under RR5-2011 and RR11-2018:

1. Monetized unused vacation leave credits (private employees)

not exceeding 10 days/year.
2.
3. Monetized unused vacation and sick leave credits (government
officials/employees).
4.
3. Medical cash allowance to dependents (₱1,500/semester or
₱250/month).
4.
5. Rice subsidy (₱2,000 or 1 sack of 50-kg rice/month).
6.
5. Uniform and clothing allowance (₱6,000/annum).
6.
7. Actual Medical Assistance (medical allowance, check-up,
maternity assistance; not exceeding ₱10,000/annum).
8.
7. Laundry allowance (₱300/month).
8.
9. Employee achievement award (tangible property; not
exceeding ₱10,000/year; under written plan, non-
discriminatory).
10.
9. Gifts (Christmas, anniversary; not exceeding
₱5,000/employee/year).
10.
 11. Daily meal allowance (overtime/night shift; not exceeding
25% of basic minimum wage).
12.
3. 13th Month Pay and Other Benefits Not Exceeding ₱90,000
4.

3. Certain Benefits of Minimum Wage Earners

1. Benefits from CBA/Productivity Incentive Schemes

2.
- Total annual monetary value from both CBA and productivity
incentive schemes should not exceed P10,000 per employee
per taxable year.

- Note: Only CBA benefits and productivity incentives amounting

to P10,000 or less are de minimis. If it exceeds P10,000, the
entire amount is a taxable “other benefit.”

3. Taxable De Minimis Benefits

4.
1. Excess de minimis over regulatory limits.
2.
3. Other benefits of relatively small value not included in the list
of de minimis benefits.
4.

3. Treatment of Taxable De Minimis Benefits

- A. For rank and file employees: taxable de minimis is treated

as other compensation income under the category “13th-month
pay and other benefits.”
 - B. For managerial and supervisory employees: taxable de
minimis is treated as a fringe benefit subject to final fringe
benefit tax.

1. De Minimis Benefits (Continued)

2.
- Only meals for overtime or graveyard shifts are considered de
minimis. Other meal benefits are no longer considered de
minimis.

- Excess de minimis benefits for managerial or supervisory

employees are considered other fringe benefits subject to
fringe benefits tax.

3. Note to Readers
4.
- Treating excess de minimis benefits as part of 13th-month pay
and other benefits is based on an erroneous interpretation.

- This was clarified under RMC20-2011: excess de minimis

benefits for managerial or supervisory employees are subject
to final fringe benefits tax, not part of 13th-month pay and
other benefits.

3. Commutation of Accumulated Leave Credits

- Terminal leave pay or commutation of unused leave credits due

to involuntary separation is now treated as de minimis benefits
subject to the 10-day leave credit limit, and is no longer
exempt as part of exempt termination benefits.
5. 13th Month Pay and Other Benefits Not in Excess of P90,000
6.
- The composition of the “13th month pay and other benefits”
will be discussed later under taxable benefits.

5. Benefits Exempt Under Treaty or International Agreements

6.
- Employee benefits of non-Filipino nationals and/or non-
permanent residents of the Philippines from foreign
governments, embassies, or international organizations in the
Philippines are exempt from income tax.

7. Exemption from Withholding Tax Does Not Mean Income Tax

Exemption
8.
- Foreign government embassies, diplomatic missions, and
international organizations are immune from income tax,
including the obligation to withhold income tax.

- This exemption does not extend to their Filipino employees; it

applies only to non-Filipino nationals and/or non-residents of
the Philippines.

1. Filipino Employees of Foreign Entities

2.
- Filipino employees of foreign governments, international
missions, and organizations are taxable, except those
employed by:

1. United Nations (UN)

2.
3. Specialized Agencies of the United Nations
4.
 3. Australian Agency for International Development (USAID)
4.
5. Food and Agriculture Organization (FAO)
6.
5. World Health Organization (WHO)
6.
7. United Nations Development Programme (UNDP)
8.
7. International Organization for Migration (IOM)
8.
9. International Seabed Authority (ISA)
10.
- Some organizations have exemption provisions extending to
their Filipino employees.

2. Confirmation of Tax Exemptions

- Tax exemption for Filipino employees is not automatic.

- Filipinos claiming exemptions under international agreements

or special laws must file an application with the BIR’s
International Tax Affairs Division (ITAD).

- Confirmation certificate serves as proof of exemption; without

it, the employee is taxable.

3. Employees of Philippine Embassies or Consulate Offices

- Employees working in Philippine embassies or consulate offices

are not considered non-resident citizens and are subject to
Philippine income tax.
 1. Benefits/Allowances – “Necessity of the Employer Rule”
2.
- Benefits or allowances furnished by the employer to enable
employees to execute their duties effectively.

- Exempt from income tax.

- Examples:

1. Necessary traveling, transportation, representation, or

entertainment expenses subject to accounting or liquidation.
2.
3. Allowances reimbursing government personnel for official
expenses:
4.
- A. Representation and Transportation Allowance (RATA) for
public officers/employees under the General Appropriation Act

- B. Personnel Economic Relief Allowance (PERA) (RR10-2008)

3. Reasonable reimbursements/advances for employees

traveling/representing, pre-computed daily, paid on
assignment/duty.
4.
- Amounts are expenses of the employer, not income to the
employee.

- Not employee benefits; are advances or replenishments, not

compensation income.

2. Benefits/Allowances – “Convenience of the Employer Rule”

 - Benefits/allowances furthering the employer’s business
interests or ensuring smooth operations.

- Exempt from income tax.

- Examples:

1. Work-related mobile phone/transportation allowance for call

center employees on 24-hour duty (BIR Ruling DA-233-07).
2.
3. Outstation allowance for employees visiting lotto franchise
holders for repairs/inspections (BIR Ruling No. 013-02).
4.

3. Housing privilege for employees working at distant/remote

facilities (BIR Ruling No. 055-99).

5. Car incentives to on-call medical doctors.

6.
5. Scholarship grants to employees under contract to remain in
service upon study completion.
6.

1. Housing Privilege (Military)

2.
- Housing for military officials of the AFP (Armed Forces of the
Philippines) located in/near military camps.

- Considered business expenses, not employee reward.

- Implement employer’s business to ensure employer’s

convenience.
 3. Unreasonable/Excessive Expenses
4.
- If expense is unreasonably excessive, departing from a
reasonable business expense, and deliberately granted to
include a benefit for the employee, it’s a taxable fringe
benefit.

- These are “hybrid expenses” (partially business expense,

partially employee benefits).

3. Composition of Taxable Compensation Income

1. Regular Compensation: Fixed remunerations received every

payroll period.
2.
3. Supplemental Compensation: Performance-based pays
with/without regard to the payroll period.
4.

3. Adjunct Category: Incentive pays and other taxable employee

benefits not classifiable as regular or supplemental compensation.
13th-month pay and other benefits not exceeding P90,000 is an
exclusion from gross income. The excess above P90,000 is added to
supplemental compensation.

5. Regular Compensation Income

6.
- Includes fixed remunerations received every period:

1. Basic salary
2.
3. Fixed allowances (cost-of-living, fixed housing, representation,
transportation, other allowances) paid every payroll period.
4.

1. Fixed Allowances
2.
- Allowances fixed in amounts and regularly received as part of
basic monthly, bi-weekly, weekly, or daily salaries/wages.

- Part of regular compensation, even if a portion is used in the

employer’s business.

- Exception Rule (Taxability):

- A. Ordinary and necessary allowances for traveling,

representation, or entertainment expenses incurred in the
pursuit of the employer’s trade, business, or profession.

- B. Expense is subject to accounting or liquidation.

- C. Excess advances are returned to the employer.

- Variable and liquidated allowances not subject to tax. However,

amounts retained by the employee are considered
compensation.

3. Paid Vacation and Sick Leave Allowances

4.
- Paid absences applied against vacation or sick leave credits
normally received as part of the regular salary are part of
regular compensation.
3. Non-Compensation Items

1. Fees: Retainer fees of consultants, talents, and directors

without management function are professional income, not
compensation income.
2.
3. Commissions: Commissions to non-employees (independent
sales agents) are business income to the sales agent.
4.

3. Tips and Gratuities: Paid directly to an employee by customers,

not accounted for by the employee to the employer, are not
compensation income but reported as “other income” in the
employee’s income tax return.

5. Valuation of Compensation Paid In Kind

6.
- Compensation in kind is taxable at the fair value of the
consideration received.

- If received in shares, the fair value of the shares at the date

services were provided is used.

Supplementary Compensation

- Supplementary or additional compensation includes

performance-based remunerations to an employee in addition
to the regular compensation with or without regard to the
payroll period.

- Additional Compensation (Current Tax Rules):

 1. Overtime pay
2.
3. Hazard pay
4.

3. Night shift differential pay

5. Holiday pay
6.
5. Commissions
6.
7. Fees, including director’s fees (if the director is an employee)
8.
7. Emoluments and honoraria
8.

1. Taxable Retirement and Separation Pay

2.
3. Value of Living Quarters or Meals
4.

3. Gains on Exercise of Stock Options

5. Profit Sharing and Taxable Bonuses

6.
5. Overtime, Holiday, Hazard, and Night Differential Pay
6.
- Constitute additional compensation, except when derived by a
minimum wage earner.

7. Commissions, Emoluments, and Honoraria

8.
- Commissions are incentives to stimulate sales (profit
sharing/performance bonus).
- Emoluments pertain to any pay in general.

- Honoraria are additional payments for special

tasks/assignments.

7. Living Quarters or Meals

8.
- If an employee receives free living quarters/meals in addition
to salary, the value is included in compensation income.

- If furnished for the convenience/necessity of the employer’s

business, the value is not compensation income, but a
business expense.

9. Stock Option Plans

10.
- Employers give stock options to motivate employees and
reward appreciation of stock price.

- Option has value when the stock value exceeds the exercise
price at grant date.

- Types of Options:

1. Equity-settled options: Employee purchases shares at a pre-

determined exercise price fixed on grant date.
2.
3. Cash-settled options: Employee receives cash equal to the
excess of the fair value of stocks over the exercise price
without delivering stocks.
4.
- Tax Treatment (Upon Exercise of Option):
 - Excess of book value or fair value (whichever is higher) less
the exercise price at grant date:

- A. Additional compensation income (rank and file employee)

- B. Fringe benefits (managerial/supervisory employee)

- This rule applies regardless of option type (RMC 79-2014).

Profit Sharing or Taxable Bonus

- Reward for churning the business to post a profit.

- Controls all factors influencing profit (marketing, sales,

productivity, administrative).

- Enjoyed by individual employees (salesmen, division heads,

key officers) or all employees collectively.

1. Bonuses
2.
- Supplemental or additional compensation.

- If linked solely to productivity under the employer’s

productivity incentive plan (RA 6971), they are considered de
minimis benefits.
 3. Productivity Incentive Bonus
4.
- Linked to improvements in productivity (waste reduction,
efficient labor utilization, increase in volume of production).

- Under RA 10653, productivity incentive is now a de minimis

benefit.

3. Productivity Incentive vs. Profit Sharing Bonus

- Productivity incentive is anchored on improvements in

production factors and enjoyed collectively.

- Based on cost savings; payable even if the business poses a

loss.

- Profit sharing is payable only when the business posts a profit.

5. 13th Month Pay and Other Benefits

6.
- Includes:

1. 13th-month pay
2.
3. Other benefits:
4.
- A. Christmas bonus of private employees

- B. Cash gifts other than Christmas/anniversary gifts (RR2-98,

RR5-2011)
- C. Additional compensation allowance (ACA) of government
personnel (RR8-2000)

- D. 14th-month pay, 15th-month pay, etc.

- E. Other fringe benefits of rank and file employees

5. 13th Month Pay

6.
- A. Government employees: Christmas bonus equivalent to one-
month salary plus P5,000 cash gift (RA 8441).

- B. Private employees: Equivalent to one-month salary.

7. Christmas Bonus and Christmas Gift

8.
- Government employees: Christmas bonus is their 13th-month
pay.

- Private companies: “Christmas bonus” may pertain to the 13th-

month pay, a separate incentive pay, or profit sharing.

- Christmas bonus of private employees (non-performance-

based incentive pay) is part of other benefits. Christmas bonus
in the nature of profit sharing is additional compensation
income, not “other benefits.”

1. Christmas Bonus (Private Employees)

2.
- The nature of the Christmas bonus of private employees
determines its tax classification.
 - The Christmas gift of government employees is specifically
designated as part of “13th month pay and other benefit”
under Sec. 32(B)(7)€(I) of the NIRC.

- RRS-2011 includes Christmas gifts in the list of de minimis

benefits, but this should apply only to Christmas gifts of
private employees.

3. Bonus vs. Gift

4.
- Bonus is performance-based and non-discretionary.

- Gift is a gratuity and discretionary.

3. Other Fringe Benefits

- Include all other taxable fringe benefits not specifically

included in compensation income as regular, supplementary, or
13th-month pay.

- Examples:

1. Employee personal expenses shouldered by the employer.

2.
3. Taxable de minimis benefits:
4.
- A. Excess de minimis

- B. Benefits not included in the de minimis list

5. Employee Personal Expenses
6.
- Even if receipted in the name of the employer (rental of
residence, grocery, association/club membership dues,
travel/vacation expense, tuition fees), they constitute fringe
benefits to the employee.

5. Taxable De Minimis Benefits

6.
- All other benefits of relatively small value not included in the
de minimis list are ordinary fringe benefits.

- Excess de minimis benefits are taxable ordinary fringe

benefits.

7. Tax Treatment of Other Fringe Benefits

8.
- A. Rank and file employees: treated as compensation income
as part of “other benefits” under “13th month pay and other
benefits.”

- B. Managerial/supervisory employees: treated as fringe benefit

subject to fringe benefit tax.

1. Other Fringe Benefits (Managerial/Supervisory)

2.
- “Other fringe benefits” of managerial or supervisory
employees are excluded from their “13th-month pay and other
benefits.”

3. Tax Treatment of 13th Month Pay and Other Benefits

4.
- RR2-98: 13th-month pay and other benefits are exempt from
withholding on compensation provided they do not exceed
P90,000.

- The excess above P90,000 is subject to withholding tax on

compensation.

- RR3-98: The revenue regulation implementing the fringe

benefit tax does not cover benefits forming part of
compensation income subject to withholding tax on
compensation.

- Excess of “13th-month pay and other benefits” over P90,000 is

treated as compensation income subject to regular income tax.

1. Fringe Benefits Tax (Managerial/Supervisory Employees)

2.
- The fringe benefits of managerial or supervisory employees
are subject to a grossed-up final tax at 35%.

- Computation:

- Taxable fringe benefits: P 42,200

- Divide by: Gross-up by rate (65%):

- Grossed-up monetary value: P 64,923

- Multiply by: Tax rate (35%):

 - Fringe benefits tax: P 22,723

- The fringe benefits tax is a final tax paid by the employer to

the government, presumed withheld out of the fringe benefits
of the managerial or supervisory employee.

3. Taxability of Minimum Wage Earners (MWE)

4.
- Minimum wage earners are exempt from income tax on:

1. Basic minimum wage

2.
3. Other benefits (HHON):
4.
- A. Holiday pay

- B. Hazard pay

- C. Overtime pay

- D. Night shift differential pay

- These are presented as exempt benefits under non-taxable

compensation income; exempt benefits of MWEs are not
subject to withholding tax.

2. Receipt of Other Taxable Income by MWEs

- MWEs are still exempt from income tax on the foregoing
exempt benefits even if they earn other taxable items of
compensation or other income from concurrent employers,
trade, business, or practice of a profession.

- MWEs are subject to tax only to the extent of income other

than the aforementioned exempt benefits (RR11-2018).

- Additional compensation such as commissions, honoraria,

fringe benefits, benefits in excess of the allowable amount of
P90,000, taxable allowances, and other taxable income given
by the same employers to MWEs are subject to withholding
tax.

- MWEs will actually pay income tax only if their total taxable
income exceeds P250,000 for the year.

5. Rules of Change in Status as a Minimum Wage Earner during a

Year
6.
- When an employee becomes a minimum wage earner during
the year, they are subject to income tax only on compensation
earned before becoming a minimum wage earner.

1. Taxation of Employees Becoming Minimum Wage Earners

2.
- Anthony shall be taxed on his income from January 1 to June 30
because he is not yet a minimum wage earner.

- The employer shall regularly deduct the withholding tax on

compensation from his salary but shall stop withholding by
June 30.
 - Anthony’s compensation starting July 1 (including overtime
pay and year-end 13th-month pay) shall be tax-exempt.

- If the exact amount of income taxes had been withheld by the

employer for the January 1 to June 30 compensation, Anthony
need not file an income tax return.

- Otherwise, Anthony shall file an adjustment return reflecting

his compensation from January 1 to June 30 and shall pay the
tax still due or claim for refund in case of excess withholding.

- This rule may also apply in cases of:

- A. Transfer to an employer paying salary at the minimum wage

- B. Transfer of employment to a region with a higher minimum

wage

3. Taxation When an Employee Ceases to Be a Minimum Wage

Earner
4.
- When an employee ceases to be a minimum wage earner
during the year due to an increase in salary, only the income
for the rest of the year is taxable.

3. Illustration 2
- Andrea is a minimum wage earner. She was promoted and
given a salary raise above the minimum wage starting August
1, 2021.

- Andrea shall be exempt from income tax from January 1 to July

31 because she is a minimum wage earner.

- Effective August 1, 2021, Andrea shall be subject to tax.

- The employer shall start deducting the withholding tax on

compensation from Andrea’s salaries effective the same date.

- If the employer properly withheld the income tax for the period
August 1 to December 31, Andrea need not file an income tax
return.

- Otherwise, she shall file an adjustment return reflecting her

compensation for the same period and shall pay the tax still
due or claim for refund in case of excess withholding.

- This rule applies in cases of:

- A. Transfer to an employer paying salary above the minimum

wage

- B. Transfer of employment to a region with a lower statutory

minimum wage

5. Taxation When an Employee Ceases to Be a Minimum Wage

Earner by Disqualification
6.
 - When an employee ceases to be a minimum wage earner
during the year by disqualification (i.e., earning taxable
income).

- Note that if the taxable income of the employee does not

exceed P250,000 for the year, there will be no income tax due
for the period under the tax table.

5. Treatment of Cost-of-Living Allowance of MWEs

6.
- Under RMC23-2011, COLA, which forms part of the new wage
rates prescribed to be the statutory minimum wage, should be
treated as part of the minimum wage and shall not be treated
as a separate or other benefit.

1. The Withholding Tax on Compensation

2.
- A method of collecting income tax at source upon receipt of
the income.

- Applies to all employed individuals (citizens or aliens).

- The employer is constituted as the withholding agent.

3. Revised Withholding Tax Table

4.

3. Procedural Computation of the Withholding Tax on Compensation

 1. Determine the total monetary and non-monetary compensation
of the employee for the payroll period (monthly, semi-monthly,
weekly, or daily). Segregate non-taxable benefits, mandatory
contributions, and supplemental compensation.
2.
3. Determine the bracket that applies to the regular
compensation of the employee for the applicable payroll
period. Determine the basic tax for the bracket.
4.

3. Add supplemental compensation to the excess of the regular

compensation. Subject the total to the incremental tax rate for the
bracket.

5. Total the basic tax and the incremental basic tax.

6.

2. Year-End Tax Adjustment

- The total amount withheld on every payroll date may not

exactly match the annual tax due.

- The income of the employee needs to be reckoned at the end

of the year and adjustment is made as necessary.

- Under-withholding shall be deducted on the final payroll of the

employee.

- Over-withholding shall be refunded to the employee.

3. Benefits Not Subject to Withholding Tax on Compensation Under

RR2-98, as Amended:
 1. Remunerations received as incidents of employment.
2.
3. Remuneration paid for agricultural labor and paid entirely in
products of the farm where the labor is performed.
4.

3. Remuneration for domestic services

- The minimum wage for domestic workers or “kasambahay”

prescribed under Sec. 24, Art. IV of RA 10361 or the Domestic
Workers Act or Batas Kasambahay of 2013 ranges from P1,500
to P2,500 a month – too low compared to the tax-exempt
minimum wage for commercial, industrial, or agricultural
workers.

5. Remuneration for casual labor not in the course of an

employer’s trade or business – treated as other income.
6.
5. Compensation for services by a citizen or resident of the
Philippines for a foreign government or an international
organization.
6.
- Under RMC 31-2013, this is not compensation income subject
to withholding, but it is still taxable compensation income;
hence, it must be reported by the employee.

7. Damages paid by the employer to employees.

8.
7. Proceeds of life insurance.
8.
9. Amounts received by an insured employee as a return of
premium.
10.
9. Compensation for injuries or sickness.
10.
1. Exempt Benefits (Continued)
2.
11. – Income exempt under treaty
12.
11. – 13th-month pay and other benefits not exceeding a total
of P90,000
12.
13. SSS, PhilHealth, and other contributions
14.
13. – Compensation income including overtime pay, holiday
pay, night shift differential pay, and hazard pay of Minimum
Wage Earners
14.
15. – Compensation income of employees in the public sector
if the same does not exceed those of minimum wage earners in
the non-agricultural sector
16.
- These listed benefits are not considered compensation income;
hence, they are exempt from the withholding tax on
compensation.

3. Deadline of Filing and Remittance of the Withholding Tax on

Compensation
4.
- Employers shall file the BIR Form 1601-C (Monthly Remittance
Return of Income Taxes Withheld on Compensation) on or
before the 10th day of the following month the withholding was
made except for taxes withheld for December which shall be
filed/paid on or before January 15 of the succeeding year.

- Employers are also required to file BIR Form 1604-CF (Annual

Information Return of Income Taxes Withheld on Compensation
and Final Withholding Taxes) on or before January 31 of the
following calendar year in which the compensation income
payments and passive income payments were made.

- Employers shall furnish each employee-taxpayer a copy of BIR

Form 2316 (Certificate of Compensation Payment or Income
Tax Withheld) on or before January 31 of the succeeding year.
3. Penalties for Non-Compliance

- Employers are subject to the same penalties discussed in

Chapter 4 for non-compliance of withholding tax requirements.

5. Treatment of the Withholding Tax on Compensation

6.
- If the employee has other items of income that are subject to
regular income tax such as income from business or
profession, income from other employment or casual income,
he must file a consolidated income tax return to include such
items of income for the entire taxable year.

- The withholding tax on compensation is credited against the

total tax due in the consolidated income tax return.

5. Substituted Filing of Tax Return

6.
- Under the substituted filing system, the employer files the
income tax return of the employee.

- If the amount of tax is correctly withheld by the employer, the

employee no longer needs to file an annual income tax return.

Chapter 11 – Fringe Benefit Tax

1. Fringe Benefits
2.
- Under labor laws, fringe benefits pertain to all other benefits
or incentives of employees other than the basic pay.
 - The basic pay is the fixed regular salary or wages of employees
every payroll period.

- Under the NIRC, the term “fringe benefit” was defined to

pertain to goods, services, or other benefits furnished by the
employer to the employees.

3. Tax Treatments of Fringe Benefits

4.
- Under current tax rules, however, items of fringe benefits in
the strict sense are treated differently depending on their
nature.

- A. Fringe benefits that are fixed every payroll period are

considered regular compensation.

- For example: Fixed transportation allowance

- B. Fringe benefits that are variable and performance-based are

considered supplemental compensation.

- For example: commission, profit sharing, and overtime pay

3. Chapter Overview and Objectives

- This chapter discusses fringe benefits of managerial and

supervisory employees subject to final fringe benefit tax and
the procedural computations of the fringe benefit tax.

- After this chapter, readers are expected to demonstrate:

 1. Understanding of the nature of fringe benefits
2.
3. Appreciation of the convenience of the employer rule and
hybrid expense
4.

3. Ability to distinguish exempt benefit, partially exempt, and fully

taxable fringe benefits

5. Understanding of the scope of the final fringe benefit tax

6.
5. Knowledge of the characteristics of fringe benefits tax
6.
7. Understanding of the procedures of fringe benefit tax
computation
8.
7. Comprehension on the general rules on monetary value
8.
9. Comprehension on monetary value rules as applied to actual
scenarios
10.
9. Mastery of the procedures for the computation of the fringe
benefit tax
10.
11. Knowledge of the list of exempt fringe benefits
12.

Chapter 11 – Fringe Benefit Tax

1. Fringe Benefits in the Form of Incentives

2.
- Considered 13th-month pay and other benefits.

3. Fringe Benefits Furnished for the Employer’s Convenience or

Necessity
 4.
- Are exempt from income tax.

3. Other Fringe Benefits

- As mentioned in the previous chapter, other fringe benefits not

included or classifiable as items of compensation income and
which are not exempted under the law are treated as follows:

1. For rank and file employees – included as “other benefits”

under “13th-month pay and other benefits.”
2.
3. For managerial and supervisory employees – excluded in
compensation income and are subjected to final fringe benefit
tax.
4.
5. Scope of the Fringe Benefit Tax
6.
- The fringe benefit tax covers only the taxable fringe benefits of
managerial or supervisory employees.

- For purposes of the fringe benefit tax, RR3-98 clarifies that

taxable fringe benefits exclude those items considered as
compensation income.

- An excellent understanding of the items of compensation

income is extremely important in highlighting the bounds
between compensation income and the fringe benefits subject
to fringe benefit tax.

5. General Categories of Fringe Benefits Subject to Final Tax

6.
1. Management perquisite benefits
2.
 3. Employee personal expenses shouldered by the employer
4.

3. Taxable de minimis benefits

- A. Excess de minimis over their limits

- B. Benefits not included in the de minimis list

5. Management Perquisite Benefits

6.
- Perquisite benefits, also called “management perks,” are
highly privileged incentives given only to a special group of
employees.

- These benefits are non-performance-based and are given as

incentives to management employees.

- Perquisite benefits are not considered as compensation income

but as fringe benefits subject to fringe benefit tax.

- In practice, the boundary between fringe benefits subject to

final tax and compensation income subject to regular tax
sometimes overlaps.

- Based on past rulings, however, the BIR seemed to maintain

the view that performance-based benefits are compensation
income while benefits in the nature of incentive or perks are
fringe benefits.

1. Safety Net Recommendation

2.
 - It is best recommended for taxpayers to secure BIR rulings on
the proper treatment of income in their compensation plans to
avoid inconvenience.

3. Employee Personal Expenses

4.
- When an expense takes the nature of an employee personal
expense or expenditure and is paid or assumed by the
employer in default of a proximate business necessity, it is
deemed a fringe benefit in its entirety even if the expense is
receipted in the name of the employer.

3. Illustration

- Mr. Lakewood, a managerial expatriate employee, was granted

by his employer a P30,000 monthly housing allowance in
addition to his regular salary.

- The actual monthly rent of Mr. Lakewood’s residence is

P25,000.

- The P25,000 personal expense assumed by the employer

constitutes a taxable fringe benefit subject to fringe benefit
tax.

- The monthly fixed P5,000 excess is a taxable additional

compensation. (BIR Ruling No. 512-2011)

5. Hybrid Expenses
6.
- When the employer incurs expenses which is purported partly
for business and partly for employee’s incentive, only 50% of
 the expense representing the employee incentive is subject to
the fringe benefit tax.

- The following are hybrid expenses under RR3-1998:

1. Housing benefits in the form of rental accommodation

2.
- When an employer leases a residential unit for the use of the
employee and the business, the rental expense is deemed half
business expense and half fringe benefit to the employee.

3. Allowing an employee free use of business property

4.
- When the employer allows its employee to use business
properties, the rental value or depreciation value of the
business property over the period of usage is deemed half
business expense and half fringe benefit to the employee.

1. Safety Net Recommendation

2.
- It is best recommended for taxpayers to secure BIR rulings on
the proper treatment of income in their compensation plans to
avoid inconvenience.

3. Employee Personal Expenses

4.
- When an expense takes the nature of an employee personal
expense or expenditure and is paid or assumed by the
employer in default of a proximate business necessity, it is
deemed a fringe benefit in its entirety even if the expense is
receipted in the name of the employer.
3. Illustration

- Mr. Lakewood, a managerial expatriate employee, was granted

by his employer a P30,000 monthly housing allowance in
addition to his regular salary.

- The actual monthly rent of Mr. Lakewood’s residence is

P25,000.

- The P25,000 personal expense assumed by the employer

constitutes a taxable fringe benefit subject to fringe benefit
tax.

- The monthly fixed P5,000 excess is a taxable additional

compensation. (BIR Ruling No. 512-2011)

5. Hybrid Expenses
6.
- When the employer incurs expenses which is purported partly
for business and partly for employee’s incentive, only 50% of
the expense representing the employee incentive is subject to
the fringe benefit tax.

- The following are hybrid expenses under RR3-1998:

1. Housing benefits in the form of rental accommodation

2.
- When an employer leases a residential unit for the use of the
employee and the business, the rental expense is deemed half
business expense and half fringe benefit to the employee.

3. Allowing an employee free use of business property

 4.
- When the employer allows its employee to use business
properties, the rental value or depreciation value of the
business property over the period of usage is deemed half
business expense and half fringe benefit to the employee.

2. Exempt Fringe Benefits

- The following fringe benefits are exempt from the fringe

benefit tax:

1. Fringe benefits which are authorized and exempted from tax

under special laws
2.
- Examples: Employer’s contribution to SSS, PhilHealth, HDMF,
or group insurance, except excess over the mandatory
amounts set by law

3. Benefits required by the nature of, or necessary to the trade,

business, or profession of the employer
4.

3. Benefit given for the convenience or advantage of the employer

5. Contributions of the employer for the benefit of the employee

to retirement, insurance, and hospitalization benefit plans
6.
5. Benefit given to rank and file employees whether or not
granted under a collective bargaining agreement
6.
- The taxable fringe benefits of rank and file employees are
exempt from fringe benefit tax but are subject to regular
income tax as part of compensation income.
 7. De minimis benefits within their legal limits
8.

3. “Necessity or Convenience of the Employer” Rule

- If an expense is necessitated by the nature of the trade,

business, or profession of the employer, or is furnished
principally for the employer’s convenience or advantage, it is
an ordinary business expense.

- The personal advantage of the employee is merely incidental

to the expense.

- These fringe benefits are not viewed as taxable fringe benefits

under the NIRC.

5. Examples of Exempt Benefits Under This Rule

6.
1. Scholarship program for an employee to study and acquire
competence for future use of the business
2.
3. Car incentives to medical doctors so they will be available for
duty anytime
4.

3. Free transportation services to employees working at distant

facilities

5. Mobile phone allowance to corporate secretaries who are

required to handle off-duty client inquiries
6.
5. Sleeping quarters to field engineers and staff working on
remote facilities
6.
1. Exempt Benefits (Continued)
2.
7. – Helicopters assigned to fishing employees for locating
schools of fish offshore or to mining engineers for mineral
exploration purposes
8.
7. – Personal aircraft to a chief executive officer managing
business affiliates and subsidiaries spread across different
countries
8.
9. – Car incentive to a travelling company salesman
10.
9. – Sleeping quarters near the camp furnished to military
personnel so they will be available for duty at any time of
insurgency
10.
11. – Housing units for an employee and his family near the
employer’s place of business to ensure the employee’s
availability anytime when the employer needs him
12.
3. The Fringe Benefit Tax
4.
- The fringe benefit tax is a final tax imposed on the fringe
benefit furnished, granted, or paid by the employer to the
employee, except rank and file employees, whether such
employer is an individual, a professional partnership, or a
corporation, regardless of whether the corporation is taxable
or not, or the government and its instrumentalities.

- For the purposes of the fringe benefit tax, fringe benefit means
any good, service, or other benefits furnished or granted in
cash or in kind by the employer to individual employees
(except rank and file employees) such as, but not limited to,
the following:

1. Housing benefits
 2.
3. Expense account
4.

3. Vehicles of any kind

5. Household personnel, such as maid, driver, or others

6.
5. Interest, for the difference between the market rate (12%) and
the actual interest granted
6.
7. Membership fees, dues, and other expenses borne by the
employer for the employee in social and athletic clubs or other
similar organizations
8.
7. Expense for foreign travel
8.
9. Holiday and vacation expenses
10.
9. Educational assistance to the employee or his dependents
10.
11. Life or health and other non-life insurance premiums or
similar accounts in excess of what the law allows
12.

3. Characteristics of the Fringe Benefit Tax

1. Final tax
2.
- The fringe benefit tax is a final tax which is withheld by the
employer at source.

- Thus, the employee need not report the fringe benefits in his
income tax return.
1. Tax on the Fringe Benefits of Managerial or Supervisory
Employees
2.
- The fringe benefit tax is not a tax to the employer.

- It is a tax upon the fringe benefit realized by the managerial or

supervisory employee.

- It is a tax to the employee; hence, it applies regardless of the

identity of the employer.

- Therefore, it applies even if the employer is a sole proprietor,

partnership, corporation whether taxable or exempt, or the
government.

3. Paid by the Employer

4.
- As a final tax, the tax is presumed withheld at source and
remitted by the employer to the government.

3. Grossed-Up Tax
4.
- The monetary value or the amount of fringe benefit realized or
taken home by the employee is effectively net of the final tax
which is to be withheld at source.

- Hence, the monetary value is first grossed-up by the

complement percentage of the applicable fringe benefit tax
rate before the fringe benefit tax rate is applied.

5. Due Quarterly
6.
- The fringe benefit tax is due for remittance quarterly based on
the accounting period (fiscal or calendar) selected by the
employer.

- The monetary value of each taxable fringe benefit is

determined and reported quarterly through BIR Form 1603Q.

- The quarterly fringe benefit tax is due on or before the last day
of the month following the quarter in which withholding was
made.

5. Procedures in Computing the Fringe Benefit Tax

6.
1. Determine the monetary value.
2.
- Monetary value refers to the taxable amount of benefits taken
home or realized by the managerial or supervisory employee.

- The monetary value is presumed net of the final tax.

3. Determine the gross-up rate and fringe benefit tax rate

applicable for the taxpayer.
4.
- The gross-up rate is the complement of the fringe benefit tax
rate.

- If the fringe benefit tax rate is 35%, the gross-up rate is (100%
less 35%) or 65%.

- If the fringe benefit tax rate is 25%, the gross-up rate is 75%.
3. Determine the grossed-up monetary value by dividing the
monetary value by the gross-up rate.

5. Determine the fringe benefit tax by multiplying the fringe

benefit tax rate to the grossed-up monetary value.
6.
1. Rules on Valuation of Fringe Benefits
2.
1. Benefits Paid in Cash
2.
- When the benefit is given in cash or paid for in cash, the
monetary value is the amount paid for in cash.

- Note: The only exception here is when the employer pays for
the rent of the residence of the employee.

- Monetary value is 50% of the rental payment.

3. Benefits Paid in Kind

4.
- When the benefit is given in kind, the monetary value is the
fair value of the thing given unless its book value is higher.

- Book value is the cost less any provision for depreciation for
depreciable properties.

- Simply stated, the monetary value is the fair value or the book
value of the thing given, whichever is higher.

- When ownership over the property is transferred to the

employee, the monetary value is the entire fair value of the
property even if the property is partially used in the business
of the employer.
3. Benefits That Are Furnished
4.
- When the benefit is given in the form of free use of the
employer’s property, the monetary value is 50% of the rental
value of the property.

- If the property has no available rental value, the depreciation

value is used.

- For purposes of the depreciation value, the presumptive useful

lives of the property are:

- A. 20 years for real properties.

- Hence, the depreciation value is computed as 1/20 or 5% of the

value of the property.

- B. 5 years for movable properties.

- Hence, the depreciation value is computed as 1/5 or 20% of the

value of the property.

- Since the fringe benefit tax is paid quarterly, the valuation and
reporting of monetary value is also done quarterly.

- In the case of use of employer properties, the reporting of

monetary value ceases from the month the free use is
discontinued.
1. Taxable Housing Benefits (Continued)
2.
- Interests but have a cash price of P2,000,000.

- For accounting purposes, Cotabato Corporation opted to

capitalize the interest and recorded the P2,200,000 contract
price as acquisition cost of the property.

- The monetary value shall be determined as follows:

- Annual depreciation value = P2,000,000 x 5% = P 100,000

- Quarterly value = P100,000 / 4 quarters = P 25,000

- Quarterly monetary value = P25,000 x 50% = P 12,500

- Note: The purchase price is the cost net of interest.

3. – Purchase by the employer of residential property and

transfer of ownership in the name of the employee, the value
of the benefit is whichever is higher of the acquisition cost or
zonal value
4.

- Monetary value = 100% of the value of the benefit

- Illustration: A non-profit corporation bought a residential

dwelling for P5,000,000 and transferred ownership to its
president. The property has P3,000,000 zonal value.
 - Since there is a transfer of ownership, the monetary value is
the entire P5,000,000, the higher of book value (i.e. cost in
this case) and zonal value.

5. – Purchase by the employer of property and transfer of title to

employee for less than adequate consideration, the value is
[(fair market value or zonal value, whichever is higher) less
consideration paid by employee.
6.

- Monetary value = 100% of the value of the benefit

- Illustration: Denzy, a professional practitioner, transferred his

residential property in the name of his managerial employee
for P2,000,000. The property has fair value per tax declaration
of P3,400,000 and P5,000,000 zonal value.

- Since there is a transfer of ownership (i.e. title), the monetary

value is P3,000,000, computed as P5,000,000 zonal value less
the P2,000,000 consideration paid.

2. Exempt Housing Privileges

1. Military officials of the Armed Forces of the Philippines (AFP),

Philippine Air Force (PAF), Philippine Army, and Philippine Navy
on their quarters which are within or accessible from the
military camp so they can be readily available on call to meet
the exigencies of their military service.
2.
3. Housing unit situated or adjacent to the premises of a business
or factory (within a maximum of 50 meters) from the perimeter
of the business premises.
4.
 - The 50-meter rule may be relaxed when upon the basis of
health or safety requirements such as in the case of chemical
manufacturing, the housing needs to be located at a farther
location.

1. Exempt Housing Privileges (Continued)

2.
3. – Temporary housing for an employee in a housing unit for 3
months or less (i.e., not exceeding one quarter)
4.

2. Expense Account

- Expenses incurred by an employee but which are paid by his

employer or incurred and paid by the employee but reimbursed
or advanced by the employer are taxable fringe benefits.

- The monetary value is the amount paid by the employer.

3. Properly Documented Employer Expense

- When the expense is receipted for and in the name of the

employer and the expenditure does not partake of the nature
of a personal expense attributable to the employee, it is not a
taxable fringe benefit because it is a business expense.

5. Personal Expenses
6.
- Personal expenses of the employee such as groceries for the
personal consumption of the employee and/or his family, if
paid or reimbursed by the employer, are taxable fringe
benefits whether or not receipted in the name of the employer.
5. Fixed and Regular RATA
6.
- Fixed and regular RATA are treated as part of regular
compensation income and are subject to creditable
withholding taxes, not to fringe benefit tax.

7. Motor Vehicles of Any Kind

8.
1. – Purchase by employer of motor vehicle in the name of the
employee regardless of whether the same is used partially in
the business of the employer
2.

- Monetary value = 100% of the cost of the motor vehicle

1. Motor Vehicles of Any Kind (Continued)

2.
- Note that the monetary value shall be reported in the quarter
of purchase.

3. – Cash benefit to employee for the purchase of a vehicle, even

if the vehicle is partly used in the business of the employer
4.

- Monetary value = 100% of the cash benefit, except when the

amount is subjected to withholding tax on compensation
- Car benefits that are paid in cash and are subjected to
withholding tax on compensation are subject to regular tax,
not to fringe benefit tax.

- If subject to fringe benefit tax, the monetary value shall be

reported in the quarter of payment.

3. – Purchase of car on installment basis by the employer with

ownership placed in the name of the employee even if the car
is used partly for the employer’s business, the benefit is the
acquisition cost divided by 5 years
4.

- Monetary value = (1/5) or 20% of the acquisition cost

- Illustration: An employer purchased a car for P1,000,000

payable in four installments plus 10% interest on the
outstanding unpaid balance of the car.

- The entire acquisition cost shall be recognized as monetary

value since there is a transfer of ownership but the regulation
requires amortization over 5 years.

- Hence, the employer shall recognize P1,000,000/5 or P200,000

monetary value annually for five years.

- For every quarter, the employer shall report P200,000/4 or

P50,000 monetary value until the cost is fully reported over 5
years.

5. – Employer shoulders a portion and is placed in the name of

the employee, even if partially used in business
6.

- Monetary value = the portion shouldered by the employer

- Illustration: An employer assisted its managerial employee in

purchasing a brand-new car for P4,000,000; 60% of the value is
deductible against future salaries of the managerial employee.

- The monetary value shall be P1,600,000 computed as

P4,000,000 x 40% representing the portion shouldered by the
employer.

- This will be reported in the quarter the employer’s share is

paid.

5. – Fleet of motor vehicles owned for the use of the business and
the employees, the value of benefit is the cost of all motor
vehicles not used for sales, freight, delivery service, and other
non-personal uses divided by 5 years
6.

- Monetary value = 50% of the value of benefit

- It should be noted that the cost of motor vehicles not used in

business is amortized over 5 years.

- There being no transfer of title, 50% of the benefit is

recognizable as monetary value.

- The quarterly recognition of monetary value continues until

the free usage is terminated.
1. Motor Vehicles of Any Kind (Continued)
2.
- It must be noted that because of the inherent difficulty of
tracing the realization of the fringe benefits to a particular
employee considering the collective enjoyment of the benefit
by the employees (managerial, supervisory, or possibly
including rank and file alike), the regulations simply subjected
it to the final fringe benefit tax.

7. – Fleet of motor vehicles leased for the use of the business and
the employee, the value of the benefits is the rental payments
for motor vehicles not normally used for sales, freight, delivery
service, and other non-personal use
8.

- Monetary value = 50% of the value of the benefit

7. – Aircrafts including helicopters are deemed solely for business

use; hence, they are not subject to fringe benefit tax.
8.
9. – Yachts whether owned and maintained or leased by the
employer are presumed not for business use; hence, taxable as
fringe benefits.
10.

- If owned or maintained, the value of the benefit is measured

as the depreciation value over 20 years.

- Illustration: Assume a corporation acquired a P10,000,000

yacht for the use of its executives.
- The monetary value shall be determined as:

- Annual depreciation value = P10,000,000/20 = P 500,000

- Quarterly monetary value = P500,000/4 = P 125,000

- A yacht is considered immovable by virtue of the fact that it is

fixed and cannot be removed from water.

- Hence, the 20-year presumptive useful life for real properties

is used.

- If this is leased, the entire rental payment is the monetary

value.

- Note that the 50% rule is not applied by the regulation.

- Supposing the yacht is purchased and transferred to the name

of the executive, the monetary value shall be the entire
P10,000,000.

3. Note on Aircrafts and Yachts

4.
- The high cost of ownership of aircrafts makes it inherently
prohibitive or impractical to be for personal use.

- Thus, aircrafts are deemed by the regulations as solely for

business use; hence, they are exempt from fringe benefit tax.
- Yachts, though pricey on the other hand, generally lack any
sensible business purpose aside from being for personal
pleasure; hence, its depreciation value is subject to fringe
benefit tax in full.

- Exceptionally, if the yacht is used solely for the entertainment

of guests or prospective clients, it is not subject to the fringe
benefit tax.

- In this case, the depreciation of the yacht qualifies as

“entertainment, amusement, and recreation expense”.

1. Household Expenses
2.
- Employee expenses borne by the employer for household
personnel, salaries of household help, personal driver of the
employee, and other personal expenses such as homeowners
association dues, garbage dues, electricity, and water are
taxable fringe benefits.

- The monetary value is the amount paid.

3. Interest on Loan at Less Than Market Rate

4.
- The interest forgone by the employer representing the
difference between 12% and the actual interest charged is a
taxable fringe benefit.
3. Membership Fees, Dues, and Other Expenses

- Membership fees, dues, and other expenses borne by the

employer for his employees in social and athletic clubs or other
similar organizations constitute taxable fringe benefits.

- The monetary value is the amount paid.

5. Expenses for Foreign Travel

6.
- Reasonable business expenses for foreign travel for attending
business meetings and conventions are exempt, such as the
following:

1. Inland travel expenses such as food, beverage, and local

transportation costs
2.
3. Lodging costs in hotel or similar establishment amounting to
an average of $300/day or less.
4.

3. Economy and business class airplane tickets

5. 70% of the cost of first-class ticket

6.

- Note that 30% of the cost of first-class ticket in foreign travels

is considered a fringe benefit.

- Note also that the foregoing rules apply only on foreign

travels.
 - The cost of domestic travel is generally considered as
reasonable and hence deductible.

1. Expenses for Foreign Travel (Continued)

2.
- Substantiation requirement: The above rules apply if the
expenses were supported by documentations proving the
actual occurrences of the meeting or convention; otherwise,
they shall be subject to fringe benefit tax.

- Business meetings must be supported by an official

communication from business associates abroad indicating the
purpose of the meeting.

- Business conventions must be supported by an official

invitation or communication from the host organization or
entity abroad.

- Expenses for the family members of the employee shouldered

by the employer are taxable fringe benefits in full.

3. Holiday and Vacation Expenses

4.
- Holiday and vacation expenses are taxable fringe benefits if
shouldered by the employer.

- The monetary value is the amount paid or shouldered by the

employer.

3. Educational Assistance to the Employee or his Dependents

- Educational assistance to the employee is generally taxable
except when it is incurred for the convenience or furtherance
of the employer’s business, such as:

1. Educational Assistance to the Employee or his Dependents

(Continued)
2.
- The education or study is directly connected with the
employer’s trade, business or profession; and

- There is a written contract (i.e., employee bond) that the

employee is under obligation to remain at the employ of the
employer for a period of time they mutually agreed upon.

- Educational assistance granted to dependents of the employee

is generally taxable except when the assistance was provided
through a competitive scheme under a scholarship program of
the company.

1. Educational Assistance to the Employee or his Dependents

(Continued)
2.
- The education or study is directly connected with the
employer’s trade, business or profession; and

- There is a written contract (i.e., employee bond) that the

employee is under obligation to remain at the employ of the
employer for a period of time they mutually agreed upon.

- Educational assistance granted to dependents of the employee

is generally taxable except when the assistance was provided
 through a competitive scheme under a scholarship program of
the company.

- Only the tuition fee of the accounting supervisor is subject to

fringe benefit tax and shall be reported in the quarters it is
paid.

- Even if covered by an employee bond, his field of study is

neither related to the nature of his job nor to the employer’s
business.

- The fringe benefit of all the other employees will neither be

subject to the fringe benefit tax nor the regular income tax
under the “convenience of the employer” rule.

3. Life or Health Insurance and Other Non-Life Insurance

Premiums or Similar Amounts in Excess of What the Law Allows
4.
- These are taxable fringe benefits except the following
insurance or premium contributions allowed or required by
law:

1. Contributions of the employer for the benefit of the employee

pursuant to the provisions of existing law such as
contributions to SSS, GSIS, PhilHealth, and HDMF
2.
3. Cost of premium for group insurance of employees
4.
*Includes resident citizens, non-resident citizens, and resident
aliens

3. Grossed-Up Monetary Value

4.
- The basis of the fringe benefit tax is the grossed-up monetary
value of the fringe benefit.

- The grossed-up monetary value is the monetary value of

benefits divided by the appropriate grossed-up rate for the
employee.

- The grossed-up monetary value is inclusive of the fringe

benefit tax.

2. Accounting Entries

- Accounting entries shall be classified as follows:

1. Taxable benefits paid for in cash or in kind

2.
3. Taxable benefits which do not involve payment of cash or
transfer of property
4.

3. Exempt benefits paid for in cash or in kind

5. Exempt benefits which do not involve payment of cash or

transfer of property
6.
1. Accounting Entries (Continued)
2.
- Benefits Paid for in Cash or in Kind

- Taxpayers shall record fringe benefits paid for in cash or in

kind in their books as follows:

- Fringe benefit expense (monetary value) xxx

- Fringe benefit tax expense xxx

- Cash/Tax basis of property given xxx

- Fringe benefit tax payable xxx

- Benefits Which Do Not Involve Payment of Cash or Properties

- Taxpayers shall record fringe benefits without outflow of cash

or properties in their books as follows:

- Fringe benefit expense (monetary value) xxx

- Fringe benefit tax payable xxx

1. Accounting Entries (Continued)

2.
- Of capital asset where no depreciation is allowable, fringe
benefit tax rules shall not inappropriately allow the claim of
deduction.

- The rules of deductions will be explained in Chapter 13.

- Exempt Benefits Paid for in Cash or in Kind

- The taxpayer shall record exempt fringe benefits paid in cash

or in kind as follows:

- Fringe benefit expense (monetary value) xxx

- Cash/Property given xxx

1. Accounting Entries (Continued)

2.
- Note: The fringe benefit is taxable even if provided by an
exempt employer (i.e. cooperative, non-profit or government
agency) because the tax is imposed upon the employee not
upon the employer.

3. Tax Treatment of the Total Fringe Benefit Expense

4.
- The total fringe benefit expense including the fringe benefit
tax expense is a deductible expense of the employer against
his gross income in the computation of his taxable income.
 - It must be noted that a deductible fringe benefit expense
exists only when the benefit is paid in cash or in kind.

- The expense is measured at the actual cost or tax basis of

consideration given as fringe benefits.

Chapter 12 – Dealings in Properties

1. Chapter Overview and Objectives

2.
- This chapter discusses tax rules on the measurement and
recognition of gains and losses arising from dealings in
properties not subject to capital gains tax, but subject to the
regular income tax.

- After this chapter, readers are expected to be able to:

1. Distinguish capital gains subject to regular tax from those

subject to capital gains tax
2.
3. Understand what constitutes selling price and the rules on tax
basis
4.
3. Understand the tax treatment of gain or loss on ordinary
assets and other capital assets
4.
5. Master the rules on the measurement of the net capital gain or
loss and the rules on net capital loss carry over
6.
5. Comprehend the rules on tax-free exchanges on recognition of
gain or loss and the determination of basis of stocks received
in
6.
7. Master the rules on wash sales as they relate to capital losses
subject to the rules of regular income tax
8.
7. Be able to interrelate the rules of regular income tax to the
rules of capital gains tax
8.
9. Familiarize themselves with the list of transactions considered
as exchanges
10.
3. Dealings in Properties
4.
- Dealings in properties involve the sale, exchanges, and other
disposition of properties such as ordinary assets or capital
assets.

- It should be recalled that ordinary assets are assets used in

the business of the taxpayer such as inventories, supplies, and
property, plant and equipment.

- Capital assets are assets other than ordinary assets.

- Dealings in ordinary assets are subject to regular income tax.

- Dealings in capital assets, other than domestic stocks and real

properties, are also subject to regular income tax.

- Dealings in ordinary assets may result in an ordinary gain or

an ordinary loss.

- Dealings in capital assets may likewise result in a capital gain

or a capital loss.

3. Determination of Gains or Losses in Dealings in Properties

 4.
- Selling price P xxx

- Less: Tax basis or adjusted basis of the asset disposed P xxx

- Gain or loss P xxx

1. What is Selling Price?

2.
- Selling price includes the amount realized from the sale and
other disposition of property which shall include:

1. The sum of money received and

2.
3. Fair value of non-cash properties received
4.
3. What is Tax Basis?
4.
- Tax basis refers to the cost, carrying amount, or depreciated
cost of an asset.

- The cost of an asset is the value forgone to acquire it.

- Generally, it is the purchase price or the fair value of

consideration paid in acquiring the property disposed of.

- Advanced rules on tax basis are discussed later in this chapter.

3. Tax Treatment of Ordinary Gains and Losses

- Ordinary gains are separate items of gross income subject to
regular income tax.

- Ordinary losses are items of deductions from gross income in

the determination of net income from business or profession.

- Ordinary gain is taxable in full.

- Ordinary loss is deductible in full.

- The gain or loss on sale by dealers of properties is an ordinary

gain or loss.

- Exceptionally, bonds, debentures, notes, or other certificates

of indebtedness issued by any corporation or by the
government are considered ordinary assets by the NIRC if
owned by banks or trust companies.

- The gain or loss on these debt instruments by banks or trust

companies are deemed ordinary gains or loss.

- Also under the regulations, the real and other properties

acquired (ROPA) by banks, although they are not involved in
the realty business, are considered ordinary assets.

- Hence, gain or loss on sale of banks of their ROPA is an

ordinary gain or ordinary loss.

5. Tax Treatment of Capital Gains and Losses

6.
- Under the NIRC, capital losses are deductible only up to the
extent of capital gains from dealings in capital assets other
than domestic stocks and real properties.

- Hence, capital gains and capital losses are offset.

- A net capital gain is an item of gross income subject to regular

income tax.

- A net capital loss is not an item of deduction against gross

income.

- The law views net capital losses as unnecessary expenses

since capital assets are not used in the business or trade of
the taxpayer.

5. Determination of Net Capital Gain or Net Capital Loss

6.
- The determination of net capital gains or net capital loss on
capital assets, other than domestic stocks and real properties,
depends upon whether the taxpayer is an individual or a
corporation.

1. Determination of Net Capital Gain or Net Capital Loss

(Continued)
2.
- For Individual Taxpayers:

- The holding period rule: If the capital asset is held by an

individual taxpayer for a period of:
1. of the capital
gain or loss is
recognized
2.
3. of the capital
gain or loss is
recognized
4.
- For Corporate Taxpayers:

- Regardless of the length of the holding period, 100% of the

capital gain or capital loss is recognized.

- The holding period rule does not apply to corporations.

- Note:

1. The sale of the vacant lot is excluded since it is subject to the

6% capital gains tax.
2.
3. The gain on the sale of the office supplies is excluded in the
net capital gain computation since it is an ordinary gain
separately reportable as an item of gross income.
4.

1. Determination of Net Capital Gain or Net Capital Loss

(Continued)
2.
- Note: The ordinary gains or losses are recognized at their full
amounts.
- The holding period rule is applicable only to the measurement
of gains or losses from capital assets other than stocks and
real properties.

- Assuming Pantukan is a Corporation

- The net capital gain of Pantukan Corporation shall be

computed as follows:

- Foreign bonds – P100,000 x 100% P 100,000

- Domestic bonds – (P150,000) x 100% ( 150,000)

- Foreign stocks – P40,000 x 100% 40,000

- Net capital loss ( P 10,000)

- Presentation in the Income Tax Return

- The reportable gains and losses shall be presented in the

income tax return of Pantukan Corporation as follows:

- Sales/Revenues/Receipts/Fees P 800,000

- Less: Cost of sales or services 300,000

- Gross Income from operations P 500,000

- Add: Other taxable income not subject to final tax

- Ordinary gain on equipment P 20,000 20,000

- Total gross income P 520,000

- Less: Allowable deductions

- Business expenses P 240,000

- Ordinary loss on old machine 25,000 265,000

- Taxable net income P 255,000

- Note: A net capital loss is not deductible as an item of

deduction for both individuals and corporations.

3. Rationale of the Holding Period Rule

4.
- Capital gains normally build up over time.

- However, the annual capital gains build up is not taxed

because they are unrealized gains.

- In accordance with the ability to pay theory, these gains are

taxable only when realized or severed from the capital through
disposal by sale or exchange.
- Individual taxpayers are subject to progressive tax where
higher income is subject to higher tax and lower income to
lower tax.

- The one-time or lump sum taxation of the capital gains upon

realization on disposal results to higher income tax compared
to the total of taxes assuming the annual build-up of capital
gains is taxed annually.

- As a legislative compromise, only 50% of long-term capital

gains and losses upon disposal are recognized for taxation
purposes.

- Corporate taxpayers are subject to a proportional or flat tax

rate regardless of the level of income.

- The one-time taxation of the gain on disposal and the annual

taxation of the capital gain as it builds up over time will yield
the same amount of tax.

- Thus, the holding period rule is held not to apply to corporate

taxpayers.

1. Effects of Situs on Dealings in Properties

2.
- If the taxpayer is taxable on world income such as in the case
of resident citizens and domestic corporations, the rules of
dealings in properties apply to all properties regardless of
location.
- However, if the taxpayer is taxable only on Philippine income,
the rules of dealings in properties apply only to properties
located in the Philippines.

- Considering situs rules, the net capital gain or loss from

capital assets, other than domestic stocks and real property,
are as follows:

1. Effects of Situs on Dealings in Properties (Continued)

2.
- Note:

1. The global net capital gain or loss shall be considered if John

Hampton is taxable on world income such as when John
Hampton is a resident citizen.
2.
3. Only the Philippine net capital gain or loss shall be considered
if John Hampton is taxable only in the Philippines such as when
John Hampton is a nonresident citizen, resident alien, or non-
resident alien engaged in business in the Philippines.
4.
3. Net Capital Loss Carry Over
4.
- Individual taxpayers are allowed to carry-over net capital loss
as a deduction against net capital gain of the following year
subject to the following limits:

1. Limit 1 – The amount of net income in the year the net capital
loss was sustained, and
2.
3. Limit 2 – The available net capital gain in the following year
4.
- In other words, the amount of the net capital loss carry-over
shall be whichever is the lowest of the actual net capital loss,
Limit 1, and Limit 2.

- Note that the net capital loss carry-over is strictly for one year
only and is applicable only to individual taxpayers.

- Corporate taxpayers are not allowed under the NIRC to carry

over net capital loss.

- Needless to say, there is no capital loss carry-over when the

taxpayer incurs a net operating loss in the period the net
capital loss was sustained and when the following year results
to a net capital loss.

3. Rationale of the First Limit: Net Income at Incurrence of

Capital Loss
4.
- The amount of capital loss carry-over shall not exceed the net
income before dealings in capital assets in the year the net
capital loss was sustained.

- This rule is anchored on the tax benefit rule.

- If the law allowed full deductibility of capital loss, the taxpayer

would be benefited only up to the amount of the net income
which the capital loss will erase and save from taxation.

- The excess of the capital loss above this amount will not have
a tax benefit.
- To be fair, the carry over shall not result in allowing the
taxpayer more than what he could have claimed assuming full
deductibility of capital loss is allowed by the law.

- In other words, the carry-over should not result in undue

enrichment to the taxpayer.

3. Rationale of the Second Limit: Net Capital Gain in the

Following Year
4.
- The amount of capital loss carry-over shall not exceed the net
capital gain in the following year.

- Allowing capital loss carry-over in excess of the net capital

gain in the following year will create another net capital loss in
the following year which will breach the one-year carry-over
rule under the NIRC.

5. Special Rules in the Determination of Tax Basis

6.
- A. For assets acquired by purchase, the tax basis is the:

1. Acquisition cost for:

2.
- Capital assets

- Non-depreciable ordinary assets such as land

- Any asset purchased for an inadequate consideration or those

acquired at less than their fair value at the date of acquisition
1. Special Rules in the Determination of Tax Basis (Continued)
2.
- 2. Depreciated cost for depreciable ordinary assets

- Acquisition costs include the purchase price, tax assumed, and

acquisition-related costs such as commissions paid in acquiring
the asset.

- B. Other assets received by exchange, fair value of asset

received

- C. For assets received by way of gratuitous title:

1. Donation – whichever is lower of:

2.
- A.) the tax basis on the hand of the donor or the last preceding
owner by whom it was not acquired by donation or

- B.) fair market value at the date of gift (Sec. 40 (B)(3), NIRC)

- If the basis is greater than the market value of the property at

the time of donation, then for purposes of determining the
loss, the basis shall be such market value.

3. Inheritance – fair value of the property on the date of death of

the decedent
4.

1. Special Rules in the Determination of Tax Basis (Continued)

2.
- C. For assets received by way of gratuitous title (Continued):

- D. For shares received by way of tax-free exchanges

- A. For pure share-for-share swap, the tax basis of the shares

exchanged or given is the tax basis of the shares received

- B. For share-swap with non-cash consideration, the tax basis

shall be the substituted basis computed as follows:

- Properties received as ‘boot’ shall have the same basis as their

fair market value.

- Boot refers to the money received and other property received

in excess of the stocks or securities received by the transferor
on a tax-free exchange.

- Properties received as ‘boot’ shall have the same basis as their

fair market value.

- Boot refers to the money received and other property received

in excess of the stocks or securities received by the transferor
on a tax-free exchange.
- The rules on tax basis of stocks received pursuant to a plan of
merger or consolidation under capital gains taxation are also
relevant to regular income tax for the determination of the
substituted basis of:

- A. Stocks, domestic or foreign, received by dealers in

securities pursuant to a plan of merger or consolidation

- B. Foreign stocks received by non-dealers in securities

pursuant to a plan of merger or consolidation

3. Tax Free Exchanges

4.
1. – Corporate reorganization
2.
3. – Initial acquisition of control
4.
- The same principles and rules on tax-free exchanges as
discussed in Chapter 6 applies when foreign stocks or bonds
which are subject to regular tax are involved.

- The adjusted tax basis of properties received shall be

discussed in the following illustrations.

1. Tax Free Exchanges (Continued)

2.
- Similarly, DEF Company shall not be subject to tax as this is a
capital transaction involving the issue of its shares to an
investor.
- The P1,000,000 excess of fair value of the properties received
over the par value of shares, commonly referred to as “share
premium” in accounting, is not income but is part of capital.

- No income can be imputed because the issuance of capital

stock is a financing transaction similar to the issuance of a
promissory note to obtain cash loan.

3. Initial Acquisition of Corporate Control

4.
- No gain or loss shall be recognized if property is transferred to
a corporation by a person in exchange for the stocks or unit of
participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation.

- Provided that stocks issued for services shall not be

considered as issued in return for property.

1. Initial Acquisition of Corporate Control (Continued)

2.
- No gain or loss shall be recognized in the exchange as it
resulted in corporate control.

- The placement of investment which resulted in corporate

control either solely or with up to four other persons is viewed
by the law as an investing transaction rather than an income-
generating exchange transaction.
3. Taxable Exchanges
4.
1. – Share-for-share swap transactions or property-for-share
transaction that are not in pursuant to a plan of merger or
consolidation are taxable. Losses are recognized subject to the
applicable tax rules.
2.
3. – Transfer of properties to a corporation alone or with four
others which did not result in the acquisition of corporate
control
4.
3. – Transfer of properties to a controlled corporation after the
initial acquisition of control is taxable. Losses are non-
deductible since the transferee is a related party to the
transferor. Related party rules will be discussed in Chapter 13.
4.
3. Exchanges Not Plainly for Stocks
4.
- The exemption rule to stockholders on share-for-share swap
and to security holders on security-for-share swap both
pursuant to a plan of merger or consolidation proceeds from
the theory that there is no realization.

- The shareholder or security holder is still part of the same

corporate entity, and the transaction merely involves a
replacement of stocks or securities by stocks.

- Hence, there is no realization of income.

1. Taxable Exchanges (Continued)

2.
- However, if the transferor received considerations other than
stocks in the exchange, gains but not losses shall be
recognized to the extent of cash and/or properties received.
- The taxation of the income shall consider situs rules.

- In the case of foreign stocks, the gain shall be taxable only if

the taxpayer is taxable on global income.

- Tax basis of the King shares

- The tax basis of the King shares received shall be computed

using the regulatory formula as follows:

1. Properties Sold for Less than Adequate Consideration

2.
- The excess of the fair market value over the selling price shall
be deemed a gift subject to transfer tax.

- The difference between the selling price and the tax basis of
the property shall be accounted for as gain or loss.

3. Capital Gains and Losses of a General Professional Partnership

4.
- Under the NIRC, the net income of partnership shall be
determined similar to corporations.

- Hence, the rules on dealings on capital assets by corporations

apply to partnership including a general professional
partnership.

3. Sale of Properties with Excess Mortgage Assumed by the Buyer

4.
- If the amount of the indebtedness assumed by the buyer
exceeds the tax basis of the property disposed of, any
consideration received including the excess of mortgage over
the basis of the property sold constitutes gain.

5. Wash Sales
6.
- The wash sales rules discussed under Capital Gains Taxation in
Chapter 6 also apply to the regular income tax particularly to
sale by non-dealers of securities of:

- A. Foreign shares

- B. Debt securities, foreign or domestic

- Readers may wish to review the rules on wash sales in Chapter

6.

- This section focuses on advanced application and integration.

- It should be recalled that wash sales occur when, within 30

days before and 30 days after the date of disposal of securities
at a loss, known as the “61-day period”, the taxpayer acquired
or entered into a contract or option to acquire substantially
identical securities.

1. Wash Sales (Continued)

2.
- “Substantially identical securities” means securities with the
same features.

- Preferred stocks and common stocks are not substantially

identical.

- A participating preferred stock and a non-participating

preferred stock are not substantially identical.

- Bonds with different lengths of maturities or with different

interest rates are also not substantially identical.

- The gains from a wash sales transaction are taxable, but the
losses are not deductible.

- The wash sales rule is not applicable to dealers in securities.

- Required: Determine the reportable gains per year assuming

that the taxpayer is subject to tax on global income and is:

1. an individual non-dealer in securities

2.
3. an individual dealer in securities
4.
3. a corporate non-dealer in securities
4.
5. a corporate dealer in securities
6.
- Taxpayer is an individual, not a dealer in stocks

- Both the wash sales rule and the holding period rule apply.
 - The P10,000 loss in July 15, 2023 for the sale of 5,000 shares is
preceded by a purchase of 3,000 shares within the 61-day
period.

- Since the replacement shares within the 61-day period is less

than the shares sold, the loss shall be split as follows:

2. Taxpayer is an individual dealing in stocks

- Both the wash sales rule and the holding period rule do not
apply.

- The gains and the loss shall be recognized and reported as

ordinary gains or loss in their entirety as follows:

3. Taxpayer is a corporation, not a dealer in stocks

- The wash sales rule but not the holding period rule applies.

- The same analysis on the wash sales shall be made.

- The reportable net capital gain or loss for each year shall be
computed as follows:
5. Taxpayer is a corporation dealing in stocks
6.
- Both the wash sales rule and the holding period rule do not
apply.

- The reportable ordinary gains or loss shall be the same as with

individual taxpayers.

- What if the taxpayer is taxable only in the Philippines?

- None of the gains or losses shall be recognized for Philippine

income tax as the situs on gain on sale of foreign stocks is
abroad.

- Required: Determine the reportable gain or loss assuming the

taxpayer is:

1. A dealer in securities
2.
3. Not a dealer in securities
4.

- The taxpayer is a dealer in securities

 - The taxpayer shall include the following ordinary gains as
items of gross income subject to tax:

2. What if both bonds have maturity of six years?

- Ordinary gains or capital gains realized from the sale of bonds

with more than 5-year maturity shall not be subject to income
tax.

3. Transactions Considered Exchanges

- The following are therefore subject to the rules of dealings in

properties:

1. Retirement of bonds, debentures, notes, or certificates and

other evidence of indebtedness
2.
- The amount received by the holder upon retirement of the
indebtedness is deemed received in exchange thereof.

1. Short Sale of Properties

2.
- Short sale is a sale by a speculator of securities borrowed in
anticipation of a decline in security value.

- When the security price falls, the speculator gains by buying at

the lower price and replacing the borrowed securities he sold.
3. Failure to Exercise a Privilege or Option to Buy or Sell Property
that is a Capital Asset
4.
- Loss for failure to exercise an option is not an expense, but a
capital loss deductible against capital gain.

- However, the gain or loss realized by security dealers from

trading stock options is an ordinary gain or loss.

3. Security Becoming Worthless

4.
- This occurs when the issuer of a debt or equity security
becomes bankrupt such that none is recoverable by the
investor.

- Decline in market value is not considered worthlessness.

- As a rule, loss on securities becoming worthless is a capital

loss.

- However, for banks, trust companies and dealers in securities,

the same is an ordinary loss deductible as “bad debts
expense.”

5. Receipt of Liquidating Dividends

6.
- Liquidating dividends is viewed as consideration in exchange
for the investment of the investor-shareholder.

- The difference between the proceeds of the liquidating

dividends and the cost of the investment is a capital gain or
loss which is subject to the rules of regular income tax and not
to the 15% capital gains tax. (Sec. 8 of RR6-2008)
5. The Amount Received in Liquidation of a Partnership is Also
Deemed in Exchange of the Partner’s Interest on the
Partnership
6.
- It should be noted that for a business partnership, the
resultant capital gain or loss from such liquidation is subject to
capital gains tax.

- The capital gain or loss from the liquidation of a general

professional partnership is subject to regular income tax.

7. Redemption of Shares for Cancellation or Retirement by a

Corporation is Considered Exchange to an Investor, but Not to
the Redeeming Corporation
8.
- Under RR6-2008, the gain on the redemption of its own stocks
by a domestic corporation for the purpose of cancellation is
not subject to the capital gains tax.

- Hence, gain or loss realized by the investor from the buy-back

of corporate stocks, domestic or foreign, shall be subject to
regular income tax.

7. Voluntary Buy-Back of Shares to be Held in Treasury is

Considered Exchange to the Investor, but Not to the Corporate
Issuer of the Shares
8.
- Gains or losses on voluntary share buy-back by the issuing
corporation which is not for the purpose of cancellation shall
be subject to the capital gains tax in cases of domestic stocks
but to regular income tax in cases of foreign stocks.