UNIVERSITY OF MINDANAO

College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)

Course/Subject: ACC 311 - Income Taxation

Name of Author: GERALENE C. CLARITO

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS
INTENDED USE. THIS IS INTENDED ONLY FOR THE USE OF THE
STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT. EXPECT REVISIONS OF THE MANUAL.

THIS IS NOT FOR COMMERCIAL USE.

 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

TABLE OF CONTENTS
Page No.

Course Outline iii

Course Outline Policy iii

Course Information vi

Big Picture: Week 1-3 Unit Learning Outcomes 1

Big Picture in Focus: Unit Learning Outcome (a,b,c) 1
Metalanguage 1

Essential Knowledge 2
Self-Help 40
Let’s Check 41
Let’s Analyze 46
In A Nutshell 48
QA List 48
Keywords Index 49
Course Schedule 49

Big Picture: Week 4-5 Unit Learning Outcomes 49

Big Picture in Focus: Unit Learning Outcome (a,b,c) 49
Metalanguage 50

Self-Help 63
Let’s Check 63
Let’s Analyze 65
In A Nutshell 67
QA List 68
Keywords Index 68
Course Schedule 68

Big Picture: Week 6-7 Unit Learning Outcomes 69

Big Picture in Focus: Unit Learning Outcome (a,b,c) 69
Metalanguage 69

Self-Help 94
Let’s Check 95
Let’s Analyze 97
In A Nutshell 100
QA List 100
Keywords Index 101
Course Schedule 101

Big Picture: Week 8-9 Unit Learning Outcomes 102

Big Picture in Focus: Unit Learning Outcome 1 102

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Metalanguage 103

Self-Help 121
Let’s Check 122
Let’s Analyze 123
In A Nutshell 124
QA List 125
Keywords Index 125
Course Schedule 126

Online Code of Conduct 126

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Course Outline : ACC 311– Income Taxation

Course Coordinator: Geralene C. Clarito

Email: [email protected]
Student Consultation: By BlackBoard LMS Message
Phone: (082) 3050645 loc. 137
Effectivity Date: August 17, 2020 (1st term/1st Sem)
Mode of Delivery: Blended (On-Line with face to face or virtual sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: ACC 121 – Conceptual framework and Accounting
Standards
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled virtual or face to face sessions.

Course Outline Policy

Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The
face to face sessions shall include the summative
assessment tasks (exams) since this course is
crucial in the CPA licensure examination (CPALE).
Assessment Task Submission Submission of assessment tasks shall be on 3rd,
5th, 7th and 9th week of the term. The assessment
paper shall be attached with a cover page
indicating the title of the assessment task (if the
task is performance), the name of the course
coordinator, date of submission and name of the
student. The document should be emailed to the
course coordinator. It is also expected that you
already paid your tuition and other fees before the
submission of the assessment task.

If the assessment task is done in real time through

the features in the Blackboard Learning
Management System, the schedule shall be
arranged ahead of time by the course coordinator.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Since this course is included in the licensure examination

for CPAs, you will be required to take the Multiple Choice
Question exam inside the University. This should be
scheduled ahead of time by your course coordinator.
This is non-negotiable for all licensure-based programs.
Turnitin To ensure honesty and authenticity, all assessment tasks
Submission (if are required to be submitted through Turnitin with a
necessary) maximum similarity index of 30% allowed. This means
that if your paper goes beyond 30%, the students will
either opt to redo her/his paper or explain in writing
addressed to the course coordinator the reasons for the
similarity. In addition, if the paper has reached more than
30% similarity index, the student may be called for a
disciplinary action in accordance with the University’s
OPM on Intellectual and Academic Honesty.

Please note that academic dishonesty such as cheating

and commissioning other students or people to complete
the task for you have severe punishments (reprimand,
warning, expulsion).
Penalties for Late The score for an assessment item submitted after the
Assignments/Assessments designated time on the due date, without an approved
extension of time, will be reduced by 5% of the possible
maximum score for that assessment item for each day or
part day that the assessment item is late.

However, if the late submission of assessment paper has

a valid reason, a letter of explanation should be submitted
and approved by the course coordinator. If necessary,
you will also be required to present/attach evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2) weeks
Assessments after the submission. This will be returned by email or via
Blackboard portal.

For group assessment tasks, the course coordinator will

require some or few of the students for online or virtual
sessions to ask clarificatory questions to validate the
originality of the assessment task submitted and to ensure
that all the group members are involved.
Assignment Resubmission You should request in writing addressed to the course
coordinator his/her intention to resubmit an assessment
task. The resubmission is premised on the student’s
failure to comply with the similarity index and other
reasonable grounds such as academic literacy

standards or other reasonable circumstances e.g.

illness, accidents financial constraints.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Re-marking of You should request in writing addressed to the program

Assessment Papers and coordinator your intention to appeal or contest the score
Appeal given to an assessment task. The letter should explicitly
explain the reasons/points to contest the grade. The
program coordinator shall communicate with the students
on the approval and disapproval of the request.

If disapproved by the course coordinator, you can elevate

your case to the program head or the dean with the original
letter of request. The final decision will come from the dean
of the college.
Grading System All culled from BlackBoard sessions and traditional contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%

All culled from on-campus/onsite sessions (TBA):

Final exam – 40%

Submission of the final grades shall follow the usual

University system and procedures.

Preferred Referencing Harvard Referencing Style

Style

Student Communication You are required to create a umindanao email account

which is a requirement to access the BlackBoard portal.
Then, the course coordinator shall enroll the students to
have access to the materials and resources of the course.
All communication formats: chat, submission of assessment
tasks, requests etc. shall be through the portal and other
university recognized platforms.

You can also meet the course coordinator in person through

the scheduled face to face sessions to raise your issues
and concerns.

For students who have not created their student email,

please contact the course coordinator or program head.
Contact Details of the Dean Lord Eddie I. Aguilar
Dean Email: [email protected]
Phone: (082) 305 0645 local 137
Contact Details of the Mary Grace S. Sombilon
Asst. Dean and Email:[email protected]
Program Heads Phone: (082) 3050645 local 137

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Jade Solaña
(BSA, BSMA)
Email: [email protected]
Phone: (082) 3050645 local 137

Devzon U. Porras
(BSIA, BSAIS)
Email: [email protected]
Phone: (082) 3050645 local 137

Students with Special Students with special needs shall communicate with the
Needs course coordinator about the nature of his or her special
needs. Depending on the nature of the need, the course
coordinator with the approval of the program coordinator
may provide alternative assessment tasks or extension of
the deadline of submission of assessment tasks. However,
the alternative assessment tasks should still be in the
service of achieving the desired course learning outcomes.
Online Tutorial Through LMS or PM Chats
Registration

Library Contact Brigida E. Bacani

Email: [email protected]
0951 3766681

for inquiries, you can email at

[email protected],
[email protected] or chat with us here
http://library.umindanao.edu.ph
Facebook page: https://www.facebook.com/UM-Learning-
and-Information-Center-Davao-City-962331877193048/
Well-being Welfare Ronadora E. Deala
Support Help Desk Email: [email protected]
09212122846
GSTC Facilitator
Zerdszen P. Ranises
Email:[email protected]
09058924090

GSTC Facebook Page:

https://www.facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour

Course Information – see/download course syllabus in the Black Board LMS

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

CC’s Voice: Hello future Accountants! Welcome to this course ACC 311: Income
Taxation. This is the most complex form of taxation with broad and extensive
rules and regulations. This material will aid us to understand principles, tax laws
and the rule of taxation in our country. All topics in this course are carefully
summarized to develop a devised principle-based structural presentation of
Income taxation that reduced the broad tax rules into simple structures of
interconnected and well-arranged concepts, that shall assist you in your quest
to learn and pass this course with greater excellence.

Enjoy, study well and have fun!!!

CO The course ACC 311 is designed to deepen your knowledge on Income

Taxation. It covers topics related to Introductory concepts of Taxation, Gross
Income, Inclusions, Exclusions and Deductions of Gross Income, including Final
tax, Capital gain tax and dealings in property, Income tax on Individuals, Income
tax on Corporations and Partnerships, Special Income taxation, Employee’s
fringe benefits, and Tax administration and remedies. Thus, at the end of this
course, you are expected to be able to explain, show understanding on the basic
principles of taxation, updated taxation laws and revenue regulations, apply skills
in computing taxes on individual, corporations, improperly accumulated
earnings, partnerships, and special taxpayers and apply skills in the preparation
of BIR tax returns using manual and e-BIR filing system.

Let us begin!

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Big Picture

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

a. Discuss the Introductory concepts of taxation, the general principles, basic tax laws
and different kinds of taxes.
b. Analyze the sources and concept of Income.
c. Explain the elements of Gross Income: Inclusion and exclusion from the gross
income.

Big Picture in Focus:

ULOa. Discuss the Introductory concepts of taxation, the general
principles, basic tax laws and different kinds of taxes
ULOb. Analyze the sources and concept of income
ULOc. Explain the elements of Gross Income: Inclusions and exclusion

Metalanguage

In order to demonstrate the most essential terms relevant to the study of Income
taxation and to demonstrate ULOa, ULOb, and ULOc will be operationally defined to establish
a common frame of refence as to how the terms are used. You will encounter some of these
terms as we go through in our lessons. Please refer to these definitions in case you will
encounter difficulty in understanding Income Taxation.

Taxation. It is the power vested in the legislature to impose burdens or charges upon
persons and property for the purpose of raising revenue to carry out the legitimate
objectives of the government.

Taxes. It is a compulsory financial charge, or some other type of levy imposed upon a
taxpayer by a governmental organization in order to fund various public expenditures.

Inherent Power. It is a power that naturally exist as essential force in order that a
government can command, maintain peace and order and survive, irrespective of any
constitutional provision.

Legislative power. The authority under the constitution to make or enact laws, and to alter
or repeal them.

Taxation power. It is the power of a governing body to impose duties or obligations upon
entities or individuals who are subject to their authority.

Police power. It is the general power of the state to enact laws to protect the well-being of
the people.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Eminent domain. It is the power of the state to take private property for public use with a
just compensation.

Territorial in operation. The power to tax can only be exercised within the territorial
jurisdiction of a taxing authority.

International comity. The courteous recognition, friendly agreement, interaction and

respect accorded by one nation to the laws and institutions of another.

Fiscal adequacy. The sources of revenue should be sufficient to meet the demands of
public expenditures.

Equality or theoretical justice. The tax burden should be proportionate to the taxpayer’s
ability to pay.

Administrative feasibility. Tax laws should be capable of convenient, just and effective
administration.

Constitutional limitations. Those limitation of taxation that expressly found in the

constitution or implied from its provisions.

Inherent limitations. Those limitation that restricts the power of taxation although they are
not embodied in the constitutions.

Ad Valorem. Tax of fixed proportion of the value of the property with respect to which the
tax is assessed. It requires the intervention of assessors or appraisers to estimate the value
of such property before the amount due from the taxpayers can be determined.

Due Process. The constitution states that life, liberty or property cannot be taken unless
the established procedure prescribed by law have been followed. It is the legal requirement
that the state must respect all legal rights that are owed to a person.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge that will be laid down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus, you are
expected to utilize other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.com etc.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

STRUCTURE OF INCOME TAXATION

Introductory
concepts

GROSS INCOME

FINAL CAPITAL
INCOME GAINS
INCOME
TAXATION TAXATION
TAXATION

Fringe benefits Dealings in properties

INDIVIDUAL CORPORATE
TAXPAYERS TAXPAYERS

INTRODUCTION TO TAXATION

TAXATION DEFINED

A power by which an independent state through its LAW MAKING BODY, raises and
accumulates revenue from its inhabitants to pay the necessary expenses of the government.

A process or act of imposing a charge by governmental authority on Property, individuals

or transactions to raise money for public purposes.

It is defined as the:

a. The Inherent power of the sovereign

1) exercised thru the legislature
b. to impose burdens
1.) upon the subject and object

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

2.) within its jurisdiction,

c. for the purpose of raising revenues
d. to carry out the legitimate objectives of the government. (Malcom, p.351-353)

PURPOSES OF TAXATION

a. Revenue objective

The basic purpose of taxation is to raise revenue in order to meet the legitimate objectives
of the government.

b. Non-revenue objective

1. Sumptuary or regulatory purposes

The secondary purposes are sumptuary or regulatory in order to implement police

power objectives in protection of health, safety and morals. The state increases the taxes on
harmful substances making more expensive, thus limiting their consumption. It is employed as
a devise for regulation.

a. Regulatory taxes, defined. Those imposed in the joint exercise of the power of taxation
and police power. They raise taxes and at the same time promote general welfare or protect
the health, safety or morals of the public.

b. Taxes may be levied with regulatory purpose. The so-called “sin taxes” on alcohol and
tobacco help prevent and discourage the consumers from excessive intake of these potentially
harmful products. (Southern Cross Cement Corporation V. Cement manufacturers Association of the
Philippines, et al., G.R. No. 158540, August 3, 2005)

2. Compensatory Objective

The power of taxation maybe exercises in order to

a. Maintain a high level of employment. This is done through the furtherance of the
infrastructure projects, farm support activities such as financial support for purchase of
fertilizer and etc.

b. Control inflation. The government may eliminate excess liquidity by imposing

higher taxes, thus limiting the amount of money circulation.

c. Achieve social justice through redistribution of income using the progressive

system of taxation. The progressive income taxes alleviate the margin between rich and
poor. In recent years, the increasing social challenges of the times expanded the scope of
the state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries. (Southern
Cross Cement Corporation v. Cement manufacturers Association of the Philippines, et al., G.R. No. 158540,
August 3, 2005)

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

BASIS OF TAXATION

The government provides benefit to the people in the form of public services and the
people provide the funds that finance the government.

1. Necessity theory- without money, the government cannot pay its expenses and
therefore cannot exist.
2. Benefits-Received or Compensation Theory (reciprocal duties) - In return for the
contribution of the taxpayer, he receives the general advantages and protection which
the government affords the taxpayer and his property.
3. Ability to pay theory – taxpayer should be required to contribute based on their relative
capacity to pay, those who have more should be taxed more even if they benefit less
and those who have less shall contribute less even if they receive more of the benefits
from the government.

NATURE OF TAXATION

1. It is inherent in sovereignty – it is essential to the existence of every government.

2. It is legislative in character – the power to tax is pecuniary and exclusively vested

to congress.
3. It is subject to limitations - Inherent and Constitution
The nature of taxation power is two-fold. It is both inherent and legislative power.

a. Inherent Power. It is a power that naturally exist as essential force in order that a
government can command, maintain peace and order and survive, irrespective of any
constitutional provision. An attribute of sovereignty. (Cooley, Constitutional Limitations, p.787)

1. Basis: Lifeblood theory – they are essential and indispensable to the continued
subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive
power to activate or operate it. (CIR vs. Algue)
2. Manifestations: a. Imposition even in the absence of constitutional grant.
b. State’s right to select objects and subjects of taxation.
c. No injunction to enjoin collection of tax. ( Domondon, A.T. 2013)

b. Legislative Power. The authority under the constitution to make or enact laws,
and to alter or repeal them. Taxation is vested in the legislative body of the government. In
the Philippines, the Congress has the power to make or enact laws.

The legislative is given the discretion to determine the:

a. The purpose of tax
b. The subject or object to be taxed
c. The amount or rate of tax to be imposed
d. The manner and means of collection
e. The situs or place of taxation ( Carag, et al. v. Del Rosario Jr. 237 SCRA 324)

THE INHERENT POWERS OF THE STATE (PET)

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

a. Police Power – it is the power to enact laws to promote the general welfare of the
people.
b. Eminent Domain – it is the power to take private property for public use upon
payment of just compensation.
c. Taxation Power – it is the power to take property for the support of the government
and for public purpose.

NOTE: Similarities among Taxation, Eminent Domain, and Police Power.

1. They are all necessary attributes of sovereignty.

2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are ways in which the State interferes with private rights and properties.
5. They all exist independently of the Constitution and are exercisable by the
government even without the Constitutional grant. However, the Constitution may
impose conditions or limits to their exercise.
6. They all presuppose an equivalent form of compensation received by the persons
affected by the exercise of the power.
7. The exercise of these powers by the local government units may be limited by the
national legislature.

NOTE: Distinctions among Police Power, Eminent Domain, and Taxation

Point of Difference Taxation Police Power Eminent Domain

1. Exercising Government Government Government and
Authority private utilities
2. Purpose For the support of To protect the For public use
the government general welfare of
the people
3. Persons affected Community of class Community of class Owner of the
of individuals of individuals property
4. Amount of Unlimited (Tax is Limited (Imposition No amount imposed.
imposition based on is limited to cover (The government
government needs.) cost of regulation.) pays just
compensation.)
5. Importance Most important Most superior Important
6. Relationship with Inferior to the “Non- Superior to the Superior to the
the Constitution impairment clause” “Non-impairment “Non-impairment
of the Constitution clause” of the clause” of the
Constitution Constitution
7. Limitation Constitutional and Public interest and Public purpose and
inherent limitations due process just compensation

LIMITATIONS

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Inherent Limitations

1. Levied for Public purpose - for general welfare.

2. Non-delegation of power to tax - the Congress cannot delegate the "power to tax" to
others.
3. Exemption of Government entities from taxation – It is ironic for the state to tax
itself.
4. Taxation laws are subject to International comity - the property of a foreign state
or government may not be taxed by another, friendly relations, interactions and
respect between them.
5. Situs or territoriality - As a rule, the taxing power cannot go beyond the territorial
limit of the taxing authority. Situs of taxation is the State or country which has
jurisdiction to tax a person, property or interest.

6. Subject Situs
Poll tax on persons Residence of the person
Real property tax State where the property is located,
whether the owner is residence or not
Tax on tangible personal State where it is physically located,
properties although the owner resides in another
jurisdiction
Tax on intangible Domicile of the owner
personal property
State where the taxpayer is a citizen
Income tax or resident or place where the income
is derived.
Business, occupation and Place where the business is done, or
transaction tax the occupation is engaged in, or the
transaction took place.
Gratuitous transfer of State where the transferor is/was a
property citizen or resident, or where the
property is located.

Constitutional Limitations

1. Due process of law - the constitution states that life, liberty or property cannot be
taken unless the established procedure prescribed by law have been followed.
2. Equal protection of the law – all persons are treated alike under the same
circumstances, and there shall be no discrimination in the implementation of tax laws.
3. Freedom of religious profession and worship – the Philippine government adopts
free exercise of religion and do not subject its exercise to taxation.
4. Non-impairment of contracts – tax exemptions granted under the contract should be
honored and should not be cancelled by unilateral government actions.
5. No imprisonment for non-payment of tax – no one shall be imprisoned by virtue of
his poverty and no one shall be imprisoned for mere inability to pay debt except if debt
acquired in bad faith constitutes estafa, a criminal offense punishable by law.
6. Revenue, appropriation and tariff bills to originate from the House of
Representatives – the origination of a bill by congress does not necessarily mean
that the house bill must become the final law. It was held constitutional by the
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Supreme court when senate agreed with amendments and changed the entire house
version of a tax bill.
7. Uniformity and equality – all subjects of taxation under the same class shall be
treated alike. Thus, the same rate shall apply and shall be based on the ability of the
individual to pay.
8. Exemption of property actually, directly and exclusively used for religious,
charitable and educational purpose – only properties devoted for religious, charitable
and educational activities are exempt from real property tax.
9. Majority of all members of the congress shall pass laws granting tax exemption
– only the congress can grant or provide exemption from taxation to individuals,
properties or transaction, provided there is a concurrence or approval of the majority of
its members.
10. Non-impairment of the supreme court jurisdiction of tax case – the supreme court
has the final judgement on the legality of any tax law and the penalty imposed thereon.
11. The Philippine President can veto any item in the tax bill approved by congress
– the President has veto powers to refuse in signing a bill enacted by legislative body.
The veto power can either be item veto or pocket veto. Item veto happens when the
President objects to certain items in the proposed bill without affecting the other
provisions. Pocket veto occurs when the President disapproves in totality the bill
enacted by congress.
12. Tax collection is a general fund of the government – all money collected in most
cases, treated as general fund for public purposes except if money collections or any
tax levied is for special purpose, shall be treated as special funds.

SCOPE OF TAXATION

1. The levy of tax is essentially for public purpose.

2. The subjects or objects to be taxed may be persons (natural or juridical) or property
(real or personal, tangible or intangible. The following may be included as
subject/object: business, transaction, rights or privileges.
3. The amount and rate of tax, which shall be uniform and equitable.
4. The manner and mode of enforcement and collection
5. The situs of taxation - may be exercised only within the territorial jurisdiction of the
taxing authority

CHARACTERISTICS OF TAXATION

1. It is an enforced contribution - tax is not voluntary and its imposition is in no way

dependent upon the will or consent of the person being taxed.
2. It is proportionate in character - the share of the taxpayer on the public burden is
essentially based on one's ability to pay.
3. It is levied by the law-making body of the state - the power to tax is vested unto the
Congress i.e. the House of Representatives (from which the tax bill is introduced) and
the Senate. The Congress determines who to tax, what to tax and how the tax shall
be collected. Take note that they are NOT involved in the collection thereof.
4. It is levied for public purpose or purposes - taxes are spent to support government
i.e. they are not supposed to be used for private purpose.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

5. It is generally payable in money - the government, in the exercise of its civil remedy
in collecting the tax due may, by distraint of personal property or by levy of real
property, take the same to satisfy the tax liability if the taxpayer has no money
6. It is levied on persons and property by the State which has jurisdiction.

PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal Adequacy - the source of revenue should be sufficient to meet the demands
of public expenditure. That is the reason why we have budget appropriations.
2. Theoretical Justice - the burden should be in proportion of the taxpayer's ability to
pay.
3. Administrative Feasibility - it should be capable of being enforced; not burdensome;
convenient as to time and manner of payment.

STAGES, ASPECTS OR PROCESSES OF TAXATION

1. Levy - it is the legislative act that determines that a tax of a certain amount or of a
certain percentage shall be imposed on the persons, properties, or acts subject
thereto.
2. Assessment - it is the official action of an officer authorized by law in ascertaining the
amount of tax due under the law from a taxpayer.
3. Collection - It is the getting by the concerned government agencies of the taxes
imposed.

DOUBLE TAXATION

It means taxing a person, property or right twice during the same taxable period. In its
general sense, it does not violate the equal protection and uniformity clauses of the
Constitution. As a rule, double taxation is not prohibited.

a. Direct double taxation or direct duplicate taxation (which violates the equal protection
and uniformity clauses of the constitution) means:
1. Taxing twice
2. By the same taxing authority.
3. Within the same jurisdiction or taxing district.
4. For the same purpose.
5. In the same year (or taxing period).
6. Some of the property in the territory

b. There is no direct double taxation (indirect duplicate taxation) in the following cases:

1. Real Estate tax and income tax collected on the same Real Estate Property
leased for earning purposes.
2. A tax upon the same property imposed by two differing States.
3. By taxing corporate income and stockholder’s dividends from the same
corporation.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

TAX AVOIDANCE VS. TAX EVASION

Forms of escape from taxation:

1. Shifting - the transfer of the burden by the original payer to another. Ex. VAT
2. Capitalization - the reduction in the price of the taxed object equal to the capitalized
value of future taxes which the purchaser expects to be called to pay.
3. Transformation - the manufacturer or producer pays the tax and endeavors to recoup
himself by improving his process of production thereby turning out his units of
products at a lower cost
4. Tax Evasion - the use of illegal or fraudulent means to defeat or lessen the payment
of a tax. This is punishable by law. CODAL REFERENCE: Section 254 of the
National Internal Revenue Code
5. Tax Avoidance - the exploitation of legally permissible alternative rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability. (Tax
minimization - legal)

TAXES

It is a compulsory financial charge or some other type of levy imposed upon a taxpayer by
a governmental organization in order to fund various public expenditures. It is a proportionally
enforced contributions on persons, properties, rights, and transactions levied by the legislative
body for the support of the government.

CLASSIFICATION OF TAXES

As to scope:
a. National – imposed by the National Government (e.g. income tax, estate tax,
donor’s tax, valued-added tax, other percentage taxes, documentary stamp tax).
b. Local or Municipal – imposed by municipal corporations (e.g. real estate tax,
community tax).

As to who bears the burden:

a. Direct – tax which is demanded from the person who also shoulders the burden of
the tax or tax which the taxpayer cannot shift to another (e.g. income tax, estate tax,
donor’s tax).
b. Indirect – tax which is demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another or tax which the taxpayer
can shift to another.

As to determination of amount:
a. Specific – tax of fixed amount imposed by the head or number, or by some standard
of weight or measurement. It requires no assessment other than a listing or
classification of the subjects to be taxed (e.g. excise tax on cigar, cigarettes and
liquors).
b. Ad Valorem – tax of fixed proportion of the value of the property with respect to
which the tax is assessed. It requires the intervention of assessors or appraisers to
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Phone No.: (082)300-5456 Local 137

estimate the value of such property before the amount due from each taxpayer can
be determined (e.g. VAT, income tax, donor’s tax and estate tax).

As to purpose:
a. General/Fiscal/Revenue – tax imposed solely for the general purpose of the
government, i.e., to raise revenue for government expenditures (e.g. income tax,
donor’s tax and estate tax).
b. Special/Regulatory – tax imposed for a specific purpose, i.e., to achieve some
social or economic ends irrespective of whether revenue is actually raised or not
(e.g. tariff and certain duties on imports).

As to object or subject matter:

a. Personal/Poll/Capitation – tax of a fixed amount imposed on individuals, whether
citizens or not, residing within a specified territory without regard to their property or
the occupation in which he may be engaged (e.g. community tax).
b. Property – tax imposed on property, whether real or with some other reasonable
method of apportionment (e.g. real estate tax).
c. Excise – any tax which does not fall within the classification of a poll tax or a property
tax. This is a tax on the exercise of certain rights or privileges (e.g. income tax, estate
tax, donor’s tax, VAT, other percentage taxes).
Note: This is different from the excise tax which is a business tax imposed on
items such as cigar, cigarettes, wines, liquors, automobiles, mineral products,
etc.

As to rates or graduation:
a. Proportional – tax based on a fixed percentage of amount of the property, receipts,
or other basis to be taxed (e.g. VAT, other percentage taxes).
b. Progressive – tax the rate of which increases as the tax base or bracket increases
(e.g. income tax, estate tax and donor’s tax).
c. Regressive – tax the rate of which decreases as the tax base or bracket increases.

Regressive System of Taxation

a. A regressive tax must not be confused with regressive system of taxation. In a
society where the majority of the people have low income, it exists when there are
more indirect taxes imposed than direct taxes.
b. The low-income sector of the population as a whole buy more consumption goods
on which indirect taxes are collected. The burden of indirect taxes rests more on
them than on the more affluent groups.
c. Studies reveal that the progressive elements of the income and other direct taxes
have not sufficiently offset the regressive effects of the indirect taxes as a whole.

Distinction of Tax from Other Charges

Penalty vs. Tax
PENALTY TAX
Designed to regulate conduct Aimed at raising revenue
Imposed by government or private entities Imposed by government only
Debt vs. Tax
DEBT TAX

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Phone No.: (082)300-5456 Local 137

Based on contract Based on law

Assignable Generally not assignable
May be paid in kind Generally payable in money
May be subject to set-off or compensation Generally not subject to set-off or
compensation
No imprisonment for non-payment Imprisonment for non-payment, except poll
tax
Governed by ordinary prescriptive period Governed by special prescriptive period
Draws interest when stipulated or when Does not draw interest except when
there is default delinquent

Special Assessment vs. Tax

SPECIAL ASSESMENT TAX
Levied on land only Levied on persons, property or the exercise
of privilege
Not a personal liability of the person Personal liability of the person taxed
assessed
Based wholly on the special benefits to the Based on the necessities of the government
property assessed without any special benefit directly accruing
to the taxpayer
Exception both as to time and place Has general application

License Fee vs. Tax

LICENSE FEE TAX
Imposed for regulation Imposed for revenue
Involves an exercise of police power Involves exercise of taxing power
Amount is limited to the necessary Amount is generally not limited
expenses of regulations
Imposed on the right to exercise a privilege Imposed on persons, property and the right
to exercise a privilege
Legal compensation or reward of an officer Enforced contribution assessed by
for specific services sovereign authority to defray public
expenses
Failure to pay makes the act or business Failure to pay does not necessarily make
illegal the business illegal

Toll vs. Tax

TOLL TAX
Demand of proprietorship Demand of sovereignty
Paid for use of another person’s property Paid for the support of the government
Amount is based on the cost of construction Amount is based on the necessities of the
or maintenance of the public improvements State
used

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Phone No.: (082)300-5456 Local 137

Other Charges/Fees
a. Penalty – any sanction imposed, as a punishment for violations of law or acts deemed
injurious.
b. Revenue - refers to all the funds or income derived by the government, whether from
tax or any other sources.
c. Debt – is an obligation to pay or render service from a definite future period based on
contract.
d. Toll – is a compensation for the use of somebody else’s property determined by the
cost of the improvement.
e. License fee – is a contribution enforced by the government primarily to restrain and
regulate business occupation.
f. Custom duties – are imposition or imported goods brought into the country to protect
local industry.
g. Tariff - is a schedule or lists of rates, duties of taxes imposed on imported goods.
h. Margin fee – is a tax on foreign exchange designed to curb excessive demands upon
our international reserves.
i. Special assessment – is an amount collected by the government for the purpose of
reimbursing itself for certain extended benefits regarding construction of public works.

SOURCES OF REVENUE (Section 21 of the Tax Code)

1. Income Tax
2. Estate and donor's tax (transfer taxes)
3. Value-added tax
4. Other percentage taxes
5. Excise taxes
6. Documentary stamp tax
7. Such other taxes

TAX LAWS

It is the body of laws including income, estate, gift, excise, stamp and other taxes.

**The tax code is an example of a special law which prevails over a general law such
as Civil code or the Rules of Court.

**Internal revenue laws includes all laws legislated pertaining to national government
taxes which is embodied in the National Internal Revenue code (NIRC). They are generally
civil in nature; they are neither political nor penal in nature.

INTERPRETATION OF TAX LAWS

1. Tax statute must be enforced as written.

2. Imposition of tax burdens is not presumed.
3. Doubts should be resolved liberally in favour of the taxpayer.
4. Tax exemptions are strictly construed against the taxpayer.
5. Tax law are applied prospectively.
6. Tax laws prevail over civil laws.

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Phone No.: (082)300-5456 Local 137

General Rule:

The settled rule is that tax laws must be construed in favor of the taxpayer and strictly
against the government; and that a tax cannot be imposed without clear and express words
for that purpose.

Exemption - strictly construed against the taxpayer. It is incumbent upon the taxpayer to prove
that he is really exempt from tax. In establishing tax exemptions, it should be borne in mind
that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax
exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority. One who claims an exemption from tax payments rests the burden of
justifying the exemption by words too plain to be mistaken and too categorical to be
misinterpreted.

SOURCES OF TAX LAWS

1. Constitution – refers to that body of rules and maxims in accordance with which the
power of sovereignty is habitually exercised.
2. Statutes – these are laws enacted and established by the civil will of the legislative
department of the government.
3. Executive orders – regulations issued by the President or some administrative under
his directions for the purpose of interpreting, implementing, or giving administrative
effect to a provision of the constitution or some law or treaty.
4. Revenue regulations by the department of finance – rules or orders having force of
law issued by executive authority to ensure uniform application of tax.
5. BIR revenue memorandum circulars & Bureau of customs memorandum orders
– are administrative rulings or opinions which are less general interpretation of tax laws
being issued from time to time by the commissioner of internal revenue and bureau of
custom.
6. BIR rulings- expressed official interpretation of the tax laws as applied to specific
transactions.
7. Judicial decisions – the decisions for application made concerning tax issues by the
proper court exercising judicial authority of competent jurisdiction.
8. Local tax ordinances – tax ordinances issued by the province, city, municipality and
barangays/barrios subject to such limitations as provided by the local government code
and the real property tax code.
9. Tax treaties and conventions with foreign countries – refer to the treaties or
international agreements with foreign countries regarding tax enforcement and
exemptions.

INCOME

Income, in a broad sense, means all wealth which flows into the taxpayer other than as
a mere return on capital. It means accession to wealth, gain or flow of wealth. ( Section 36,
Revenue Regulations 2)

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Phone No.: (082)300-5456 Local 137

Income, may be defined as an amount of money coming to a person or corporation

within a specified time, whether as payment for services, interest, or profit from investment.
(Conwi v. CTA 213 SCRA 83)

INCOME

TAXABLE NON-TAXABLE

1. Life insurance proceeds

1. Compensation income 2. Return of premium
2. Business income 3. Gifts, bequest, devises
3. Gains from dealings in property 4. Compensation for injuries
4. Passive income 5. Retirement benefits
5. Other taxable income 6. Other non-taxable income

Capital vs. Income

Capital is the money or wealth needed to produce goods and services. All business
must have capital in order to purchase assets and maintain their operations.
Income is a flow of services rendered by that capital by the payment of money from it
or any other benefit rendered by a fund of capital in relation to such fund through a period of
time. Capital is wealth, income is the service of wealth. Capital is the tree while Income is the
fruit. (Madrigal v. Rafferty, 38 Phil 414)

Sources of Income

This refers to something that provides a regular supply of money. The source from
which individual obtain income. Examples of main sources of income are the following:
a. Earned Income – Income from working a job.
b. Profit income - Income from business profits
c. Interest income – Income from bonds, lending or bank deposits
d. Rental income - Income from renting out property
e. Capital gains - Income from investment profits
f. Dividend Income – Income from profit distributions
g. Royalty income - Income from publishing a book, YouTube videos, etc.
(Anethan, J. M. 2013 – Business Management & Finance)

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There are sources of income from:

1. Sources within the Philippines – If income purely derived in the Philippines.
2. Sources without the Philippines – If income purely derived from outside
the Philippines.
3. Sources partly within and partly without the Philippines – If the ratio is between
50% to 85%. Income is purely without If ratio less than 50%.

Example:
a. Income from Airline Transportation and other services rendered within and
partly without the Philippines.

Computation: Taxable income x Gross receipts, within = Income Within

Total Gross receipts, within and without

TAXABLE INCOME

The tax concept of income is referred to as “GROSS INCOME” under NIRC. A taxable
item is referred to as “item of gross income” or “inclusion in gross income”.

The term “Taxable Income” means the pertinent items of gross income specified in the
National Internal Revenue Code (NIRC), less the deductions, authorized by such types of
income by NIRC or other special laws.

Simply stated, that if you earn money for goods or services, you have to pay tax on the
value of what you have received as taxable income unless NIRC specifically outlines a type of
income as non-taxable. ( Taxact.Blog)

Requisites for income to be taxable

1. There must be a gain or profit.

2. The gain must be realized or received.
3. The gain must not be excluded by law or treaty from taxation – the Philippine law
On income tax allows the exclusion of some income from taxation.

When is income considered received?

1. Actual receipt – require physical possession.

2. Constructive receipt – does not require physical possession, but have the ability
to control or utilize the funds without any restrictions. The
income accruing to the person is already segregated for
his/her favour and can be withdrawn anytime.

Example: Partner’s distributive share in profits of general

Professional partnership is regarded as received
by the partner, although not yet distributed.

CLASSIFICATION OF TAXABLE INCOME

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Phone No.: (082)300-5456 Local 137

1. Compensation Income – all remuneration for services performed by an employee for

their employer under the employer-employee relationship,
unless expressly excluded in the tax code, like compensation
income of minimum wage earners in private sector and
compensation income for employees in public sector with salary
that does not exceed the statutory wage. (RR 10-2008)

The following are included as part gross compensation income:

a. Salaries, wages and fees – Salary is generally an earning paid on regular interval.
Wages are paid on an hourly or daily basis.

- Fee implies payment to an individual in authority, like

Director’s fee, legal fee, accountant’s fee and etc. If Director
Is not an employee of the company, the fee shall fall under?
the classification of income derived from conduct of trade or
business or exercise of profession and shall subject to
withholding tax.

Professional fees to individuals:5% if Gross income is P3m

and below. 10% if exceeding.
Professional fees to Companies: 10% if P720K and below
15% if exceeding P720K.

b. Commission – Payment made based on certain percentage of sales output like salesman
commission. It is taxable even if the employee receiving is a minimum
wage earner.

c. Honoraria – are earnings derived from services usually undertaken by a person with
expertise in a particular field. Ex. Honoraria given to a special lecturer. It is
also taxable regardless if taxpayer is a minimum wage earner.

d. Allowances – it may either be fixed or variable. It is considered fixed if the amount is

set and do not vary and it is attached to the position, and it is variable when
it changes accordingly by certain factors.

The most common type of allowance is:

a. Cost of living allowance (COLA). It does not form part of the

basic salary and therefore not taxable.
b. Representation and Travelling allowance (RATA) –not taxable
if granted to Public officers and government employees or if it is
subject for liquidation but such allowance is taxable if received
regularly by employee and shall form part of the Compensation
income.
c. Personnel Economic Relief Allowance (PERA) – This type of

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allowance is non-taxable if received by government employees.

e.13th month Pay – it is equivalent to the mandatory one basic salary of employees. This is
computed by dividing the total basic salary during the year by 12 mos.
Other benefits include Christmas bonus, productivity incentive bonus,
loyalty award, gifts in cash or in kind and other benefits of similar nature
shall not be subject to tax for a maximum of P90,000. Otherwise stated,
any amount in excess thereof is taxable.

f. Holiday, overtime, night shift differential, and Hazard/Emergency Pay – generally

taxable
except if earned by a minimum wage earner.

g. Separation pay – is taxable and not taxable. It is not taxable if voluntarily made by
employee including those separations pay made on account of sickness,
disability, death, reorganization and bankruptcy of the company.

h. Retirement pay- as general rule, it is taxable except if retirement pay from SSS, GSIS.
Retirement pay from employer and retirement plan has been approved
by BIR commissioner and the retiree should have been connected with
the company for 10 years, and at least 50 years and is availed for the
the first time.

9. Sick leave pay/vacation leave pay – generally taxable except the cash value of unused
10 days or less which was paid by the employee.

h. Fringe benefit – any good, service or other benefit granted in cash or in kind by an
employer to rank and file employees becomes part of compensation
income and it is taxable, however employees occupying supervisory or
managerial position, the fringe benefit is subject to final tax.

2. Income derived from conduct of trade or business or exercise of a profession –

business income from any trade or business, legal or illegal, and whether registered or
unregistered while Professional income are earnings from exercise or practice of professions.
However, the following shall not be included in gross income subject to regular income tax:
a. Business income exempt from income tax
b. Business income subject to special tax regime
c. Business income subject to final tax

3. Gains derived from dealings in property – arise from sale or exchange of real or personal
property. The basic guideline is that any gain on disposal or sale of ordinary or capital asset is
taxable and any loss incurred is deductible.

 Ordinary assets – refer to properties that are used by the business in its operating
activities. They are refer to any property enumerated as follows:
a. Stock in trade of the taxpayer or other property of a kind that
would properly be included in the inventory of taxpayer.
b. Property used in trade or business which is subject for
depreciation.

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c. Real property used in trade or business.

 Capital Assets – properties held by the taxpayer whether or not connected to

business which are not classified as ordinary assets.

 Dealings in ordinary assets (ordinary gain or ordinary loss)– subject to regular

income tax
 Dealings in capital assets, other than domestic stocks and real properties (capital
gain or capital loss) – subject to regular income tax

Determination of Gains or Losses in Dealings in Properties

Selling price P XXX

Less: Tax basis or adjusted basis of the asset disposed XXX
Gain or loss P XXX

 Selling price – sum of money received and fair value of non-cash properties
received
 Tax basis – cost, carrying amount or depreciated cost of an asset

Tax Treatment of Ordinary Gains and Losses

 Ordinary gain – taxable in full
 Ordinary loss – deductible in full

Tax Treatment of Capital Gains and Losses

 Net Capital gain – item of gross income subject to regular income tax
 Net Capital loss – NOT an item of deduction against gross income

 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.

 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.
Determination of net capital gain or net capital loss
A. INDIVIDUAL TAXPAYERS (HOLDING PERIOD RULE):
a. Not more than one year (short-term holding period) – 100% of the capital
gain or loss is recognized
b. More than one year (long-term holding period) – 50% of the capital gain or
loss is recognized

Illustration: Individual taxpayer

Mr. Lee sold various properties as follows during 2019:

Items sold Date acquired Date sold Gain (Loss)
Car 8/14/2017 12/14/2019 P 200,000
Office supplies 6/1/2018 12/5/2019 50,000
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Laptop 4/5/2018 4/5/2019 90,000

Home appliance 7/21/2018 8/24/2019 (140,000)
Books 12/28/2018 11/26/2019 (100,000)
Vacant lot 2/14/2018 12/3/2019 250,000

Answer: The net capital gain or loss computed as follows:

Items sold Holding period Gain (loss) % Gain (loss)

Car Long term P200,000 50% P100,000
Laptop Short term 90,000 100% 90,000
Home appliance long term (140,000) 50% (70,000)
Books short term ( 100,000) 100% (100,000)
________
Total capital gains P 20,000

Note: Vacant lot is a sale of real Property capital asset which is subject to a tax of
6% of the selling price or the fair value, zonal value whichever is higher and
the information given above is a gain of P250,000.

B. CORPORATE TAXPAYERS – 100% of capital gain or loss is recognized

Situs on Dealings in Properties

 If taxable on world income, rules of dealings in properties apply to all properties
regardless of location
 If taxable only on Philippine income, the rules of dealings in properties will be
applied only to properties located in the Philippines

Illustration A: Lee Minhoo, a Filipino citizen, reported the following gains and
(losses) from dealings in properties:

Ordinary assets:
Delivery truck in the Philippines P 120,000
Obsolete inventories in the Philippines ( 40,000)
Commercial building abroad 300,000
Used equipments abroad ( 80,000)
Capital assets:
Domestic bonds, held for 14 months P 100,000
Non-resident foreign corporation stocks, held for 8 month ( 30,000)

Answer: The situs of the ordinary gain or loss below:

Ordinary gains Within Without World

Delivery truck P120,000 - P120,000
Commercial building - P300,000 300,000
________ _________ ________
Total P120,000 P300,000 P420,000

Ordinary losses Within Without World

Obsolete inventories (P40,000) - (P40,000)

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Used equipment - (P80,000) ( 80,000)

________ _________ _________
Total (P40,000) (P80,000) (P120,000)

Net Capital Loss Carry Over

 Allowed for INDIVIDUAL TAXPAYERS as a deduction against NET CAPITAL
GAIN of the following year subject to the following limits:
o Limit 1 – the amount of net income in the year the net capital loss was
sustained, and
o Limit 2 – the available net capital gain in the following year
 Strictly for ONE YEAR ONLY and DOESN’T APPLY to CORPORATE
TAXPAYERS.

Illustration 1: Hanah reported the following in 2018 and 2019:

2018 2019_
Ordinary business income P56,700 P60,800
Interest on time deposit with PNB 2,000 3,000
Short- term Capital gain 5,000 8,500
Long- term Capital gain 3,600 5,200
Short - term capital loss 8,000 2,900
Long – term capital loss 4,400 -

Compute Taxable income in 2018 and 2019:

Answer: See computation as follows:

2018 2019

Ordinary business income P56,700 P60,800

Short-term capital gain (P5,000x100%) 5,000
( 8,500x100%) P 8,500
Long-term capital gain (P3,600x50%) 1,800
( 5,200x50%) 2,600
Short-term capital loss ( 8,000x100%) (8,000)
( 2,900x100%) (2,900)
Long-term capital loss ( 4,400 x50%) (2,200) _______
Net Capital loss ( P 3,400) - P 8,200
Less: Net capital loss carry over 2018 ________ ( 3,400) 4,800
Total Taxable Income P56,700 P65,600

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4. Passive Income – income earned by the taxpayer without any effort or labor exerted.
They are ordinarily subject to final tax. It shall be withheld by the payor who acts as
withholding agent and remits the same to BIR.

The following income is considered passive income subject to final tax:

(PIDRO)
1. Prizes
2. Interest Income
3. Dividends
4. Royalty
5. Other winnings

A. FINAL WITHHOLDING TAX (FWT) ON PASSIVE INCOME

 GENERAL PRINCIPLES
1. Applicable only to passive income from sources within the Philippines.
The payee is not required to file an income tax return for the particular income subjected
to final withholding tax (FWT).

 FORMULA
Passive Income Pxxx
Rate xx%
Final Withholding Tax Pxx

Note: All passive income earned by resident citizen outside the Philippines shall be
included as part of the Gross income subject to basic tax rate.
The following table are Passive incomes and their respective final tax rates:

 INTEREST INCOME
TP RATE
a) Interest from any currency bank deposit; and
b) Yield or any other monetary benefit from: Resident Citizen (RC)
 Deposit substitutes Non-resident citizen (NRC)
 Trust funds Resident Alien (RA)
 Similar arrangements as above Non-resident Alien engage
In Trade or business (NRAETB) 20%
Interest from a depository bank under the expanded RC & RA 15%
foreign currency deposit system (EFCD) NRC, NRA-ETB, NRA-NETB
0%
Interest income from long-term deposit or investment (at RC, NRC, RA, NRA-ETB
least 5 years maturity) 0%
Interest income from long-term deposit or investment,
depending on the holding period:
 5 years or more 0%
 4 years to less than 5 years
RC, NRC, RA, NRA-ETB 5%
 3 years to less than 4 years 12%
 Less than 3 years 20%

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 ROYALTIES
RATE
Royalties from: 10%
a) Books RC, NRC, RA, NRA-ETB
b) Literary works
c) Musical compositions
Other royalties 20%

 DIVIDENDS
TP RATE
a) Dividends actually or constructively received from: RC, NRC, RA 10%
 Domestic Corporation
 Joint Stock Company
 Insurance or mutual fund company; and
 Regional operating headquarters of a multinational
company.
b) Share in the distributable net income after tax of a
partnership (except GPP)
c) Share in the net income after tax of:
1. Association NRA-ETB
2. Joint account 20%
3. Taxable Joint Venture or Consortium

 PRIZES
RATE
If the amount of prize exceeds P10,000 but if prize does RC, NRC, RA, NRA-ETB
not exceed P10,000 the same is subject to BASIC TAX 20%

 WINNINGS
RATE
Philippine Charity Sweepstakes RC, NRC, RA, NRA-ETB 20%
Lotto
Other Winnings Amount won
Dance contest P15,000 3,000
Raffle ticket 35,000 7,000
PCSO swertres 143,000 28,600

B. CAPITAL GAINS TAX (CGT) ON SALE OF REAL PROPERTY

The rules below are applicable to all individual taxpayers:

REQUISITES:
1) The real property must be a capital asset; and
2) It must be located in the Philippines.

FORMULA:

Tax Base Pxxx

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Rate 6%
CGT Pxxx

TAX BASE:
1. Selling Price

Highest
2. Fair Market Value
3. Zonal Value

OPTIONS OF THE SELLER IN CASE OF SALE TO GOVERNMENT:

1. Pay 6% CGT
2. Pay Basic Tax

Illustration:

GCC Company, a domestic stock corporation organized two years ago, engaged in buying
vacant lots for the development and construction of housing units.
During the taxable year, the company purchased two hectares of vacant lot and developed
15 lots with constructed houses ready for disposal. A house and lot has a selling price of
P2,500,000 and a total cost of P1,800,000. The zonal value of a house and lot on the same
date was P2,000,000. The company spent P6,000,000 for its operating expenses during the
taxable year. The 15 lots with complete housing units were sold during the year as follows: 2
lots to the provincial government and 13 lots to private individuals. (Adapted Aduana N., Income
taxation, 2nd edition)

Required: Compute the tax under the following assumptions:

a. The seller opted for 6% final tax
b. The seller opted to be subject to basic tax

Answer a. The seller opted fo 6% final tax

Selling price (or zonal value of P2,000,000 whichever is higher)
( 2 lots x P2,500,000) - P 5,000,000
Multiplied by final tax rate 6%
----------------
Final tax P 300,000

Upon filing the Income tax return at the end of the taxable year the income tax would be:

Sales (13 lots x P2,500,000) P32,500,000

Less: cost of lots (13 lots x P1,800,000) 23,400,000
____________
Gross Income P 9,100,000
Less: operating expenses 6,000,000
Net taxable income P 3,100,000
Tax rate 30%_
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Income tax due P 930,000

Answer b. The seller opted for basic tax

Selling price (or zonal value of P2,000,000 whichever is higher)
( 2 lots x P2,500,000) - P 5,000,000
Multiplied by final tax rate 6%
----------------
Creditable withholding tax P 300,000

Upon filing the Income tax return at the end of the taxable year the income tax would be:

Sales (13 lots x P2,500,000) P32,500,000

Less: cost of lots (13 lots x P1,800,000) 23,400,000
____________
Gross Income P 9,100,000
Less: operating expenses 6,000,000
Net taxable income P 3,100,000
Add: Gain from sale to government
(2 lots x P2,500,000- 1,800,000) 1,400,000
__________
Total gross income P10,500,000
Less: operating expenses 6,000,000
------------------
Taxable net income P4,500,000
Tax rate 30%_
Income tax due P 1,350,000
Less: creditable withholding tax 300,000
----------------
Income tax due and payable P 1,050,000

Classification of withholding taxes

1. Final withholding tax (FWT) – a kind of withholding tax which is prescribed on certain
income payments and is not creditable against the income tax due of the taxpayer. It
constitutes the full and final payment of income tax due of the taxpayer on the particular income
subjected to final withholding tax.

2. Creditable withholding tax (CWT) – is withheld at source by customers or clients but is

not a final tax. It is an advance tax deductible against the annual income tax due of the
taxpayer.
a. Compensation – tax withheld from income payments to individuals arising from
employer-employee relationship.
b. Expanded – kind of withholding taxes which is prescribed on certain income
payments and is creditable against the income tax due of the payee
for the taxable quarter/year in which particular income was earned.
c. Withholding tax on Government Money Payments (GMP)
1. Value Added Tax – tax withheld by all government agencies, before
making any payments to VAT registered

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

suppliers on account of their purchases of goods

and services.
2. Percentage Taxes - tax withheld by all government agencies,
before making any payments to non-VAT
registered suppliers.

Importance of withholding tax system

1. It is considered an effective tool in the collection of taxes.

2. It encourages voluntary compliance.
3. It reduces cost of collection effort.
4. It prevents delinquencies and revenue loss.
5. It prevents dry spell in the fiscal conditions of the government by providing
revenues all throughout the taxable year. (www.bir.gov.ph)

Persons required to withhold withholding taxes

1. Individuals engaged in business or practiced of profession.

2. Non-individuals (Corporations, associations, partnership, cooperatives) whether
engaged in business or not.
3. Government agencies and its instrumentalities such as: National Government
Agencies (NGAs) Government-owned or Controlled Corporations (GOCCs), Local
Government Units including Barangays (LGUs)

Withholding Agent – any person or entity who is in control of the payment subject to
withholding tax and therefore is required to deduct and remit taxes withheld to the government.

C. CAPITAL GAINS TAX ON SHARES

The rules below are applicable to all individual taxpayers.

REQUISITES:
1. The shares of stock sold, bartered, exchanged or disposed must be in a domestic
corporation; and

2. The transaction must be not through the stock exchange.

FORMULA:

Selling Price Pxxx

Cost (xxx)
Selling Expense (xxx)
Net Gain Pxxx
Rate 15%
CGT Pxxx

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Illustration:

Mr. Jason Lim sold 15,000 ordinary shares of Double Company with a par value of P100
for P2,700,000 outside the local stock exchange. The shares were acquired by Mr. Jason Lim
two years ago at cost of P1,800,000. On the date of sale, the stock was selling at P200 per
share. How much is the gain on sale and the capital gain tax?

Answer:
Fair market value (higher than the selling price)
(15,000 shares x P200) - P3,000,000
Less: Acquisition cost 1,800,000
_________
Gain on sale P1,200,000
Multiply by tax rate 15%
-------------
Capital gain tax P 180,000

5. Other Taxable Income

This refers to income earned that cannot be classified as compensation, business

income, earnings from dealings in properties or passive income. Other income includes the
following:

a. Interest income - interest income other than passive interest income subject to final tax are
included as part of the gross income subject to basic tax.
a. Interest income from lending activities to individuals and corporation by banks,
finance companies and other lenders
b. Interest income from bonds and promissory notes
c. Interest income from bank deposits abroad

Exemption:
a. Interest income earned by the landowners in disposing their lands to their tenants in
pursuant to the Comprehensive Agrarian Reform Law.
b. Imputed interest income
Illustration:

Jella Bank has the following income in 2018:

Interest income from loans P 4,000,000
Interest income from deposits with other banks 300,000
Interest income from notes rediscounting 200,000
Interest income from Treasury notes 80,000

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

How much is the interest income subject to regular income tax?

Answer: Interest income from loans P 4,000,000

Interest income from notes rediscounting 200,000
__________
Total interest income subject to regular income tax P 4,200,000

Note: The Interest on deposits with other banks and interest income from treasury notes
Are items of gross income subject to final income tax.

b. Rents – an income arises from leasing out properties to lessee, a passive income but
is not subject to final tax, hence, subject to basic tax.

VALUATION
Rental Payments PXXX
Obligations of the lessor assumed by the lessee XXX
Income from leasehold improvements XXX
Total Rental Income PXXX

A. RENTAL PAYMENTS - Rental income shall be taxable on the year received,

whether earned or unearned, provided, there is no restriction as to its use, and
regardless of method of accounting employed.

B. ADVANCE PAYMENT OR SECURITY DEPOSIT – shall be taxable:

1. Upon forfeiture in favor of the lessor; or
2. Upon application as rental payments.

C. Obligations of lessor assumed by the lessee

1. Interest
2. Taxes
3. Loans
4. Insurance premiums

C. LEASEHOLD IMPROVEMENTS - Improvements made by the lessee shall be

treated as income of the lessor if:
1) The improvements will be owned by the lessor at the end of the lease;
2) The lessor is not required to pay the lessee the value of such improvements.

Income from leasehold improvements is reported as follows:

METHOD VALUATION OF INCOME

1) Outright Fair Market Value of Improvements
2) Spread- Book Value at the end of lease term/Remaining
out term of the lease

Illustration: In January 1, 2019, Bella leased a vacant lot to Oliva under a 20-year
lease contract. Oliva immediately constructed a building on the lot at a
total cost of P6,000,000. The building has useful life of 30 years.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

How much of the leasehold improvement should be recognized as part of

gross income under outright and spread out methods?

Answer: Outright method: Gross income - P6,000,000 (Fair value of the improvement)

Spread-out method: Gross Income – P2,000,000/20 = 100,000 income/year

User Years of usage Allocation Cost

Bella 20 20/30 x P6,000,000 P 4,000,000
Oliva 10 10/30 x P6,000,000 2,000,000
Total 30 P 6,000,000

c. Royalties – are passive income subject to final tax if earned from sources within the
Philippines, but royalties earned from sources outside the Philippines is subject to regular
income tax.

d. Dividend Income – income earned from the distribution of earnings or profit.

Basic guidelines on dividends:

1. Dividend received from domestic corporation

a. If recipient is a domestic & resident foreign corp.– the dividend is tax- exempt.
b. If recipient is non-foreign corporation – subject to final tax rate of 30%.
c. If resident citizen, non-resident citizen or resident alien – subject to 10% final tax.
d. If non-resident alien engages in trade or business in the Philippines – 20% final tax.
e. If non-resident alien not engage in trade or business in the Phil’s. – 25% final tax.

2. Cash & Property dividends - Cash and property dividends shall be taxable upon
declarations.
3. Stock dividend – distribution of stock dividend is not taxable because they are not
realized income, except if stock dividends represent earnings
distribution like option to receive cash/property and option is exercised.

4. Liquidating dividends - Liquidating dividends are tax-exempt because it merely

represents shareholder’s return of capital. However, anything in excess of the cost shall be
considered income and therefore taxable subject to capital gains tax. If the amount received
by the stockholder in liquidation is less than the cost of investment, the loss in the
transaction is deductible to extent allowed for capital losses.

e. Annuities – refers to the amount paid for life insurance in instalment basis. Any interest
thereof is taxable and shall be included in the gross taxable income while return of premium
amount are not taxable.

Illustration: Jadine purchased an annuity contract for P200,000 which shall pay him
P20,000 annually until he dies. How much of the receipts will be part as
gross income subject to regular tax?

Answer: The receipt of the first 10 annual annuity payments is a return of premium,
any further receipt is an item of Gross income subject to regular tax.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

f. Prizes and winnings – prizes and winnings of corporation are subject to regular income
tax.
g. Pensions – are taxable subject to regular tax if it fails to meet the exclusion criteria.

h. Partner’s distributable share from the net income of the general professional
partnership
 General professional partnerships are income tax-exempt.
 The partners share on the net income are the ones subject to regular tax in
general professional partnership.
 The computation of the partner’s share in the net income from the partnership
shall not include the income from items subjected to capital gains tax and final
tax.
Illustration: A1 and A2 practice their profession in a general professional partnership
and share profits 70:30. Their firm reported the following:

Gross receipts P 3,000,000

Less: Professional expenses 1,800,000
Net income from operations P 1,200,000
Interest from bank deposits, net of final tax _ 20,000
Distributive net income P 1,220,000

Answer: Distributive share of A1 ( P1,220,000 x 70%) - P 854,000

Distibutive share of A2 ( P 1,220,000 x 30%) - 366,000
___________
Total distributive net income as accounted for P 1,220,000

Note: The amount of partner’s distributive share in net income which will be included
In gross income of the partner’s income tax exclude items that are subject to
final tax and capital gains tax.

Share of A1 in the Partnership ( P1,200,000 x 70%) - P840,000

Share of A2 in the Partnership ( P1,200,000 x 30%) - 360,000
___________
Total distributive share subject to regular tax P1,200,000

Gross income from whatever sources derived

The law imposes a tax on income from whatever sources whether coming from legal or
illegal.

EXAMPLES:
1) Income from jueteng
2) Income from swindling activities
3) Recovery of bad debts
4) Refund of taxes
5) Unutilized/excess campaign funds
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

6) Forgiveness of indebtedness
OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1. Income distributions from taxable estates or trusts

2. Share from the net income of:
a. Exempt joint venture
b. Exempt co-ownership
3. Income from farming
4. Recovery of past deduction
5. Reimbursement of expenses
6. Cancellation of indebtedness for a consideration

1. Income distribution from taxable estates or trust – subject to regular income tax
provided that such income must not have been subjected to final tax or capital gains tax.

2. Share form the Net Income of exempt joint ventures and co-ownership – same
treatment as for the recognition of share in the net income of a general professional
partnership.

3. Income from farming

a. Raise and sell operation – proceeds on sales of livestock or farm products is

included in gross income subject to regular income tax. Animal raising expenses
are presented as items of deductions against gross income
b. Purchase and sell operation – Gross profit from the sale is included in gross
income.

4. Recovery of Past deductions

a. Recovery of Bad Debts - In order for recovery of bad debts be considered
income, the following must be complied:
1) Bad debts were written off in the previous year/s;
2) Such bad debts were deducted in arriving at taxable income;
3) There is a resulting tax benefit on the deduction.

b. Refund of Taxes - The following are the requirements before refund of taxes be
considered income:
1) There is payment of tax in the previous year/s;
2) The tax paid was deducted in arriving at the taxable income;
3) There is a resulting tax benefit on the deduction.
Illustration 1: Assume that Alice had the following bad debt expense (accounts
written off) and subsequent recoveries of accounts written off:

2018 2019
Net income before bad debt expense P 200,000 P 200,000
(Bad debt expense)/Recoveries ( 80,000) 65,000
Net income after bad debt expense P 120,000 ?
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Required: How much of the P65,000 recovery in 2019 has tax benefit
and thus be reverted back to gross income?

Answer:
2018
Net income before bad debts P200,000
Less: Bad debts expense ( P80,000-65,000) 15,000
Net income if recovery known P 185,000
Net income if subsequent recovery is known - P185,000
Net income as reported ( recovery unknown) - 120,000
Tax benefit of the write off P 65,000

2019
Net income before recovery P200,000
Other taxable income ( bad debts recovery) 65,000
Net income P265,000

Illustration 2: Supposing Alice had the following data:

2018 2019
Net income before bad debt expense P 200,000 P 200,000
(Bad debt expense)/Recoveries ( 220,000) 200,000
Net income after bad debt expense (P 20,000) ?

Required: How much of the P100,000 recovery in 2019 has tax

benefit?

Answer:
2018
Net income before bad debts P200,000
Less: Bad debts expense ( P220,000-200,000) 20,000
Net income if subsequent recovery is known P 80,000

Net income if subsequent recovery is known - P 80,000

Net income as reported - 0
Tax benefit of the write off P 80,000

The P80,000 should be reverted back as item of gross income in 2019.

Illustration 3: Supposing Alice had the following data:

2018 2019
Net income before bad debt expense P 140,000 P 200,000
(Bad debt expense)/Recoveries (190,000) 40,000
Net income after bad debt expense P ( 50,000 ) ?

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Required: How much of the P80,000 recovery in 2019 has tax benefit?

Answer:
2018
Net income before bad debts P140,000
Less: Bad debts expense ( P190,000 - 40,000) 150,000
Net loss P( 10,000)

Net income if subsequent recovery is known - P 0

Net income as reported - 0
Tax benefit of the write off P 0

None of the recovery shall be included in the gross income of 2019.

5. Reimbursement of expenses – expenses incurred by the taxpayer that reimbursed by

the client. It’s an additional income on the part of the taxpayer.
6. Forgiveness of indebtedness
TYPE TAX
TREATMENT
Debtor performs services to the creditor Compensation
Income
Creditor desires to benefit the debtor without any Gift
consideration
Creditor is a corporation and the debtor is a stockholder of Dividend Income
such corporation

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

1. Accounting Method
Kinds: (1) Calendar Year; (2) Fiscal Year

INSTANCES WHEN USE OF CALENDAR YEAR IS REQUIRED

Taxable income shall be computed on the basis of calendar year in the following cases:
a. If the taxpayer’s annual accounting period is other than a fiscal year;
b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts;
d. If the taxpayer is an individual

SHORT PERIOD RETURN

Accounting period may be less than twelve (12) months (Short Accounting Period) may
arise when:
a. A corporation is newly organized
b. When a corporation is dissolved
c. When the taxpayer dies
d. When a corporation changes accounting period

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

EXCLUSIONS FROM GROSS INCOME

The following items shall not be included in gross income and shall be exempt from
income tax:
1) Proceeds of life insurance policy
2) Amount Received by Insured as Return of Premium
3) Gifts, Bequests, and Devises
4) Compensation for Injuries or Sickness
5) Income Exempt under Treaty
6) Retirement Benefits, Pensions, Gratuities, etc.
7) Miscellaneous Items
a) Income Derived by Foreign Government
b) Income Derived by the Government or its Political Subdivisions
c) Prizes and Awards
d) Prizes and Awards in Sports Competition
e) 13th Month Pay and Other Benefits
f) GSIS, SSS, Medicare and Other Contributions
g) Gains from the Sale of Bonds, Debentures or other Certificate of
Indebtedness
h) Gains from Redemption of Shares in Mutual Fund

1. Proceeds of Life insurance – refer to the amount received by the heirs covering life
insurance policy.
General rule: Exempt from tax since it is a mere reimbursement for the loss of life.

Exception: The following shall be taxable:

1. When the insured outlived the policy, the amounts corresponding to the return
2. of premium are not taxable, while the amount in excess are taxable.
3. When the beneficiary is the insured himself subject to estate tax.
4. When the life insurance is transferred to another person with consideration, the
proceeds that exceeds the consideration made are taxable.
5. The interest earned on the insurance policy.

Illustration: Ella is insured in a P2,000,000 life insurance policy with annual premium
payments of P25,000 up to 10 years. If Alberto outlives the policy after the
10th year, he will be paid a P1,000,000 maturity value.

Scenario 1: Ella died on the 8th year of coverage and his heirs collected the
P2,000,000 proceeds.

Answer: The entire proceeds of P2,000,000 is not taxable.

Scenario 2: Upon the death of Ella, the insurance company negotiated for an
extension of the payment of the proceeds wherein the insurance company
shall pay P2,050,000 on the extended payment.
Answer : The P2,000,000 proceeds will not be taxable but the P50,000 excess
is taxable representing interest.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Scenario 3: Ella outlived the policy and collected the maturity value of P1,000,000.

Answer : Total Proceeds P 1,000,000

Return of premium ( P25,000 x 10 ) 250,000

Return on capital – Taxable 750,000

Scenario 4: After 6 years of payment, Ellen assigned the policy to Gina who paid him
P250,000 then Gina continued the premium payments for 2 more years
after which Ellen died. Gina collected the P2,000,000 insurance proceeds.
Answer : The Assignment of policy for P250,000 resulted into P150,000 (P25,000x
6) return of premiums and P100,000 return on capital which is taxable.

Property insurance contracts – the excess of tax basis of the property lost or
destroyed is TAXABLE.

2. Gifts, Bequest & Devises – as a general rule, they are not subject to income tax.
a. Gifts – refers to something given for free or without any consideration.
They are subject to donors tax.

b. Bequest – refers to transferred personal property to another person by will.

They are subject to estate tax.

c. Device – refers to transferred real property to another person by will. They

are subject to estate tax.

3. Compensation for injuries or sickness – refers to amounts received from accidents,

personal injuries or sickness, through health insurance or under Workmen’s Compensation
Acts plus any damages received. They are not taxable except for injuries from damages
for loss of earnings in property, compensatory damages and payment for interest on non-
taxable damages.

Illustration: Josh was hit by a jeepney. He spent 3 months in the hospital and paid
P150,000 for hospitalization expenses. He sued the jeepney driver and
was awarded by the court a total indemnity of P350,000 divided as follows:
P180,000 indemnities for his pain, anguish and sufferings, P70,000 for his
lost salaries and P100,000 as reimbursement for his hospital bills.

Answer : The P180,000 indemnity and the P100,000 reimbursement for his hospital
bills are return of capital and are not taxable. However, the P70,000 for
lost salary is taxable.

4. Income exempt under Treaty- Income of any kind, to the extent required by treaty
obligation binding upon the Government of the Philippines.
5. Retirement benefits, pensions, gratuities, etc.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

1) Retirement benefit – are those received by officials and employees of private firms,
whether individual or corporate, under Republic Act No. 7641 in accordance with a
reasonable private benefit plan maintained by the employer; Provided that:
a) They have been in the service of the same employer for at least ten (10) years;
b) At least fifty (50) years of age at the time of his retirement; and
c) The benefits granted are availed only once.
Illustration 1: Gerah was employed in 1999 when she was 25 years old. In 2019,
she availed of the early retirement program of her employer.

Answer : Gerah is only 45 years old at the time of her retirement in 2019, the
requirement is at least 50 years old. Therefore, it is taxable.

Illustration 2: Assume that Gerah joined another employer and worked therein
for 8 more years after which she retired from her employment.

Answer : Gerah is already more than 50 years old but the requirement is 10
years in residency requirement. Therefore, it is taxable.

Illustration 3: Assume instead that Gera was 30 years old when she joined her
first employer and worked therein for 20 years after which she
retired at 50. She immediately joined another employer and retired
after 10 years of service when she was 60 years old.

Answer : The first retirement is non-taxable but the second retirement is

taxable even if she met the residency requirement because
retirement benefit can be availed only once in a lifetime.

2) Separation or Termination – generally not taxable if:

a) It is due to sickness, death or other physical and mental disability.
b) Due to any causes beyond its control such as redundancy, retrenchment,
closure of employer’s business, employee lay-off, downsizing of employer’s
business, sickness or death of employee
Illustration 1: Jessa is an employee of JJ Company which retired its Company
during the year. Janine’s last paycheck shows the following detail:

Unpaid salary in the last 2 months P 40,000

Current month salary 20,000
Separation pay 100,000
Total pay P 160,000

Answer : Only the separation fee is not taxable.

Illustration 2: Zella’s employer was downsizing its business operations. Zella

was one of the others to be laid off. To avoid implications of
inefficiencies on her part, Zella filed a resignation letter to the
company and received a separation pay of P150,000.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Answer : The separation fee is taxable since the resignation is voluntary and
within the control of the employee.

3) Social security benefits, retirement gratuities pensions and other similar benefits
received by resident or non-resident citizens of the Philippines or aliens who come
to settle permanently in the Philippines from foreign government agencies and other
institutions, private or public.

4) Payments of benefits due or to become due to any person residing in the Philippines
administrated by the UNITED STATES VETERANS ADMINISTRATION (USVA)
under the laws of the United States.

5) Any received benefits or enjoyed under the Social Security System in accordance
with the provision of Republic Act. No. 8282.

6) Any benefits received from the GSIS under Republic Act Np. 8291, including
retirement gratuities received by government officials and employees.

MISCELLANEOUS ITEMS (Section 32 (B7) of the Tax Code.

1) Income derived from investments in the Philippines, in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the Philippines derived
by:

a) Foreign Governments
b) Financing institutions owned, controlled, or enjoying refinancing from foreign
government; and
c) International or regional financing institutions established by foreign
governments.

2) Income derived from any public utility or from the exercise of any essential
government function accruing the Government of the Philippines or to any political
subdivision thereof.

3) Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary, or civic achievement but only if:
a. The recipient was selected without any action on his part to enter the contest or
proceeding;
b. The recipient is not required to render substantial future services as a condition
to receiving the prize or award.

4) All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.

5) Gross benefits from 13th month pay and other benefits received by officials and
employees of public and private entities up to the extent of P90,000.

6) GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

7) Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years.

8) Gains realized by the investor upon redemption of shares of stock in a mutual fund
company as defined in Section 22(BB) of this Code.

EXCLUSIONS vs. DEDUCTIONS

Exclusions – refers to amount not included as reportable gross income in the

Income tax return.

Deductions – included in the amount of gross income but presented separately as

deductions from gross income in the income tax return.

DEDUCTIONS FORM GROSS INCOME

Allowable deductions – there shall be allowable deduction from gross income, other than
compensation income, expenses incurred in the conduct of trade or business to arrive at the
net income.

At the taxpayers option, deductions for expenses may either be:

a. Itemized deduction

b. Optional standard deduction (OSD) – 40%

Individual Corporation
Rate 40% of gross sales/ 40% Gross Income
revenues
Tax Base Excluding passive Excluding passive
income subject to final income subject to final
withholding tax withholding tax
Cost of sales/ services Not allowed to deduct Allowed to deduct COS/
COS/ Services Services
Income subject to Regular Allowable Itemized Deductions

The following items of income are granted with itemized deductions:

1. Business/ professional income derived within and outside the Philippines by a resident
citizen;
2. Business/ professional income derived within the Philippines by a nonresident citizen;
a resident alien; and a nonresident alien;
3. Business/ professional income of a general co-partnership;
4. Business income derived within and outside the Philippines by a domestic corporation;
5. Business income of proprietary educational institution and nonprofit hospitals;
6. Business income of proprietary government-owned or controlled corporation; and
7. Business income within the Philippines earned by a foreign corporation.

COMPOSITION OF REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

1. General business expenses
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 College of Accounting Education
3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

 Salaries, wages, management expenses, commissions, and labor;

 Supplies, repairs and maintenance, and other incidental expenses;
 Operating expenses of transportation equipment used in the trade, profession or
business,
 Rental for the use of business property;
 Advertising and other selling expenses;
 Travelling expenses while away from home solely in the pursuit of trade,
profession or business; and
 Insurance premiums against fire, storm, theft, accident, or other similar losses in
the trade or business.
REQUISITES:
 Ordinary and necessary for the conduct of business or exercise of profession;
 Substantiated with official receipts or any other adequate records;
 Reasonable in amount;
 Withheld with tax and paid to the BIR, if required such as salary expense;
 Not contrary to law, morals, public policy, or public order; and
 Incurred or paid and deducted within the taxable year.
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contribution
9. Research and development
10. Pension and trust
11. Premium payments on health/ and or hospitalization insurance (for individual taxpayer
only)

IMPORTANT:
 REPRESENTATION EXPENSE – these are entertainment, amusement and recreation
(EAR) expenses incurred or paid during the year that are directly connected to the
development, management and operation of the trade, business or profession of the
taxpayer.

Subject to ceilings as prescribed by the rules and regulations by the Secretary of

Finance, as follows:
a. ½% of net sales for taxpayers engaged in the sale of goods/ properties, or
b. 1% of net revenue for taxpayers engaged in sale of services, including exercise
of profession and use or lease of properties.
REQUISITES:
1. It must not be contrary to law, morals, public policy or public order;
2. It must be substantiated with sufficient evidence such as receipts and or
adequate records;
3. It must be limited to the ceiling requirement; and
4. There must be some definite reasonable purpose connected with one’s
business.
 Mere giving of parties to entertain one’s employees and personnel does not
indicate a definite business purpose.
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

ILLUSTRATION:

A business reported a total net revenue of P6,000,000. The actual entertainment and
representation expenses incurred in connection with the conduct of business amounted to
P50,000.

1. If the business is a trading business, the deductible amount of representation and

entertainment expenses is:_____________

Answer:
Net revenue P 6,000,000
Multiply by: Ceiling rate ½%__
Deductible Amount P 30,000

2. If the business is a service business, the deductible amount of representation and

entertainment expenses is:____________

Answer:
Net revenue P 6,000,000
Multiply by: Ceiling rate 1% ___
Total P 60,000_
Deductible amount ( Actual expenses) P 50,000_ ( Lower than the ceiling)

INTEREST EXPENSE
- The cost of money incurred within a taxable year on indebtedness in connection with
the taxpayer’s profession, trade or business.

REQUISITES:
a. There must be a valid indebtedness
b. The indebtedness must be that of the taxpayer.
c. The indebtedness must be connected with the taxpayer’s trade, business or exercise of
profession.
d. Interest expense must have been paid or incurred during the taxable year.
e. Interest must have been stipulated in writing.
f. Interest must be legally due.
g. Interest payments must not be between related parties.
h. Interest must not be incurred to finance petroleum operations.
i. In case of interest incurred in the acquisition of property, used in trade, business or
profession, the same was not treated as capital expenditure.
j. The interest is not expressly disallowed by law to be deducted from gross income of the
taxpayer.

SUBJECT TO LIMIT (ALBITRAGE LIMIT)

 IF THE TAXPAYER HAS INTEREST INCOME SUBJECTED TO 20% FINAL TAX AND
AT THE SAME TIME INCURRED AN INTEREST EXPENSE DURING THE TAXABLE
YEAR, THE INTEREST EXPENSE SHALL BE REDUCED BY THIRTY-THREE
PERCENT (33%) EFFECTIVE JANUARY 1, 2009, AS AMENDED BY R.A. 9337.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 The tax differential rate on interest to reduce the actual interest expense is now 33%
whether the taxpayer is an INDIVIDUAL or CORPORATION as per amendment made
by R.A. 9337

DEDUCTIBLE IN FULL
 The business has no interest income subjected to 20% final tax.
 The interest expense is paid in favor of the government.
 Interest on DLEINQUENT TAXES is DEDUCTIBLE because taxes are considered legal
debt when due. As a rule, interest paid to the government shall not be reduced by tax
differential because the beneficiary of such interest is the government itself.

NONDEDUCTIBLE INTEREST EXPENSE

 Interest payment on indebtedness not business related
 Interest payment in favor of a relative (related debtor and creditor)
 Interest paid in advance
 Interest to purchase or carry tax – exempt transactions.
 Interest paid on indebtedness to finance petroleum explorations;
 Interest on UNCLAIMED SALARY is NOT DEDUCTIBLE from gross income.
Illustration:

JM, a taxpayer had the following interest expense and interest income in 2019:

Interest expense on bank loan P 200,000

Interest income from time deposit, gross 50,000
Interest income from promissory notes 40,000

The deductible interest expense shall be: ______________

Answer:
Gross interest expense P 200,000
Less: Albitrage limit ( P 50,000 X 33%) 16,500
Deductible interest expense P 183,500

Assuming JM paid P 300,000 interest expense from a business loan in 2019 and
received
net Interest income from deposit of P 80,000.

The deductible interest expense shall be computed as:

Answer:
Gross interest expense P 300,000
Less: Albitrage limit ( P80,000/80% x 33% ) 33,000
Deductible interest expense P 267,000

TAXES
 Allowed as deduction when paid or incurred within the taxable year in connection with
the taxpayer’s profession, trade or business.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 In the case of NONRESIDENT ALIEN INDIVIDUAL ENGAGED IN TRADE OR

BUSINESS IN THE PHIL (NRA-ETB). And a RESIDENT FOREIGN CORPORATION,
DEDUCTION SHALL BE ALLOWED ONLY IF AND TO THE EXTENT THAT THEY
ARE CONNECTED WITH INCOME FROM SOURCES WITHIN THE PHILIPPINES.
 At the option of the taxpayer, the income tax paid to any foreign country is treated as
an ITEM OF DEDUCTION or TAX CREDIT.

REQUISITES
 It must be paid or incurred within the taxable year
 It must be paid or incurred in connection with the taxpayer’s profession, trade or
business; and
 The tax must be imposed directly upon the taxpayer.

TAXES DEDUCTIBLE FROM GROSS INCOME

 Percentage tax
 Documentary stamp tax
 Occupational taxes
 Privilege and license taxes
 Excise taxes
 Fringe benefit tax
 Import duties
 Local business taxes, except special assessment
 Automobile registration fees
 Community tax
 Municipal tax; and
 Income tax paid to foreign country if NOT CLAIMED AS TAX CREDIT

TAXES NOT DEDUCTIBLE FROM GROSS INCOME

 Philippine income tax, except fringe benefit tax

a. Final income tax
b. Capital gains tax
c. Regular income tax
 Estate and donor’s taxes
 Foreign income tax, if claimed as tax credit
 Percentage tax on stock transaction
 Value-added tax
 Taxes not related to business, trade, or profession; and
 Other items related to tax such as: SPECIAL ASSESSMENT, SURCHARGES, and
COMPROMISE PENALTY

Illustration:
A domestic corporation reported the following result of operations:

Taxable income from the Philippines P 2,800,000

Taxable income from Japan 2,200,000
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Quarterly estimated income tax paid in the Philippines 500,000

Income tax paid in Japan 800,000
Answer:
Deductible approach

Taxable income from the Philippines P 2,800,000

Taxable income from Japan 2,200,000
Total P 5,000,000
Less: Income tax expense – Japan 800,000
Taxable income – world P 4,200,000
Multiply by: Corporate income tax 30%__
Corporate income tax due P 1,260,000
Less: Philippine quarterly estimated tax payments 500,000
Income tax payable P 760,000

Tax credit approach

Taxable income from the Philippines P 2,800,000
Taxable income from Japan 2,200,000
Total P 5,000,000
Multiply by: Corporate income tax 30%__
Corporate income tax due P 1,500,000
Less: Philippine income tax credit 500,000
Foreign tax credit ** 660,000 1,160,000
Income tax payable P 760,000

***Foreign tax credit

Foreign taxable income_ x Philippine income tax due

World taxable income

Actual foreign income tax paid P 800,000 whichever is

lower
P 2,200,000 x P 1,500,000 = 660,000
5,000,000

Foreign tax credit P660,000

CHARITABLE AND OTHER CONTRIBUTIONS

 Non-operating expense but the law allows some contributions or gifts given within the
taxable year as deductions from gross income.

REQUISITES
 The taxpayer making the charitable contribution must be engaged in a profession, trade
or business;

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 There must be an ACTUAL PAYMENT OF CONTRIBUTION OR GIFT;

 The recipient must be an entity or institution specified by law; and
 The net income of the institution must not inure to the benefit of any individual or private
stockholder.

CONTRIBUTION DEDUCTIBLE IN FULL

 Donations to the government of the Philippines or to any of its agencies, or political
subdivision, including fully owned government corporations exclusively to finance, to
provide for, or to be used in undertaking specific priority activities in
a. Education
b.
c. Health
d. Youth and sports development
e. Human settlements
f. Science and culture; and
g. Economic development

 Donations to international organizations in compliance with agreements, treaties, or

commitments entered into by the Government of the Philippines and the foreign
institutions or international organizations or in pursuance of special laws.

 Donations to accredited non-government organizations subject to the following

requisites to be deducted in full:
a. Not more than 30% of which should be used for administration purposes
b. The contribution must be utilized not later than the fifteenth day of the third
month after the close of its taxable year;
c. Upon dissolution, a court shall distribute the assets of the said NGO to another
nonprofit domestic corporation, or to the state, or to another similar
organization.

NOTE: if not met, the DONATION SHALL BE SUBJECT TO LIMIT

Corporation – 5% of the taxable income derived from business, trade or profession (before
contribution) or the actual contribution, whichever is lower.

Individual – 10% of the taxable income derived from trade or business (before contribution)
or the actual contribution, whichever is lower.

NOTE: to be deductible, THESE DONATIONS MUST BE PROPERLY DOCUMENTED.

Illustration:

Mr. Joey, both employed and self-employed, reported the following during the year:

Gross compensation income P 500,000

Gross income from business 1,000,000
Fully deductible contributions 200,000
Contributions deductible with limit 50,000
Non-deductible contributions 30,000
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Other deductible business expenses 400,000

The contribution deduction limit shall be computed out of business net income before
contribution as follows:

Answer:

Gross income from business P 1,000,000

Less: Other deductible business expense 400,000
Net income before contribution P 600,000
Multiply by: Individual limit percentage 10%__
Deductible limit P 60,000_

The deductible contribution shall be computed as:

Fully deductible contributions P 200,000

Partially deductible contributions P50,000
Limit on partially deductible contributions 60,000 50,000
Total deductible contributions expense P 150,000

CONTRIBUTIONS TO PENSION AND TRUSTS

AMOUNT DEDUCTIBLE

Actual contribution to the extent of pension liability P XXX

Amortization of Past Service Cost XXX_
TOTAL P XXX

 PENSION LIABILITY – normal cost

 PAST SERVICE COST – the excess of actual contributions over the normal cost.
It shall be amortized over ten (10) years.

Illustration: Joen Manufacturing Company established a pension plan for its employees in
2018. Existing employees have average vesting period of six years. Data from the actuary
together with Joen’s annual funding as follows:

2018 2019_
Past service cost P 1,300,000
Current service cost 400,000 410,000
Contribution to the fund 900,000 600,000

The 2018 deductible pension expense shall be:

Answer:
Pension contribution P 900,000

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Funding of current service cost 400,000

Excess-funding of past service cost 500,000 P 500,000
Divide by: Amortization period 10 50,000
Deductible pension expense P 550,000

The 2019 deductible pension expense shall be:

Pension contribution P 600,000

Funding current service cost 410,000 P 410,000
Excess –funding of past service cost 190,000
Divide by: Amortization period 10__ 19,000
Amortization from 2018 funding of prior service cost 50,000_
Deductible pension expense P 479,000

RESEARCH AND DEVELOPMENT (R&D) COSTS

a. Treatments
1. R&D costs related to capital accounts used in business are capitalized
as part of the cost of the property and deducted through depreciation
expense.
2. R&D costs not related to capital accounts are claimable as follows at
the option of the taxpayer:
1. Outright expense
2. Deferred expense and amortized over a period not less than 60
months (5 years) beginning from the month the taxpayer realize
benefits from the R&D expenditures.

Illustration: During 2019, Joan Manufacturing Company incurred P3,000,000 in the

conduct of research relative to a new product to be introduced to the
market. The company finally started full-scale commercial production in
year 2021. Compute the deductible research and development
expenditures for 2019, 2020 and 2021 under outright expense and
capitalized and later amortized.

The deductible research and development expenditures under the two options:

Answer: Outright expense Deferred expense

2019 P 3,000,000 None

2020 None None
2021 None P600,000 (P3,000,00/5)

MINOR OR ORDINARY REPAIRS AND MAINTENANCE

KIND OF REPAIR TREATMENT

Repairs that materially add to the value of the property Capitalize

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Repair that appreciably prolong the life of the property Capitalize

Repair that keep the property in its ordinarily efficient Outright
operating condition Expense

ORGANIZATIONAL AND PRE-OPERATING EXPENSES – considered as CAPITAL

EXPENDITURES. However, upon start of commercial operations, it can be amortized over 60
months.

Self-Help: You can refer to Chapter 4 of the textbook to help you

further understand the lesson. You can use other materials too.
Banggawan, Rex B. (2015). Income Taxation Laws, Principles and applications OBE
Edition. Aduan, Nick (2012). Simplified and Procedural Handbook on Income
Taxation 2nd Edition.

Let’s Check
Activity 1. Now that you know the most essential terms in the study of the General
principles of Taxation, let us try to check your understanding of these terms. In the space
provided, write the term/s being asked in the following statements: (Adapted)

_______________1. It refers to proportional contribution by persons and property levied by

the lawmaking body of the state by virtue of its sovereignty for the support of the government
and all public needs.

_______________2. A canon of taxation which means that the tax laws must be clear and
concise, capable of proper enforcement, and not burdensome, convenient as to time and
manner of payment.

_______________3. Under the basic principle of sound tax system, the government should
not incur a deficit.

_______________4. What basic principle of a sound tax system is met when Congress
evolves a progressive system of taxation as mandated in the Constitution?

_______________5. This is known as a fundamental rule in taxation is that the property of one
country may not be taxed by another country.

_______________6. This describes the statement, “that the State has complete discretion on
the amount to be imposed, after distinguishing between a useful and non-useful activity”

_______________7. A kind of tax system where rate increases as the tax base increases.

_______________8. It comprises of all kinds of funds derived by the government, including

Taxes.
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

_______________9. It refers to the power of taxation that limits its imposition on properties
which are within the physical boundaries of the state imposing it.

______________10. It pertains to the provision in the fundamental law of the land restricting
the exercise of the power of taxation.

Activity 2. Now that you know the important things in your study of the Gross Income the
inclusion and exclusion from Gross Income. You answer the multiple choice questions below:
(Adapted)

1. Julia is one of the board of directors of XYZ Company. During the current taxable year,
Julia received director’s fees amounting to P400,000 from quarterly board meetings he
attended. Such fees should
a. Form part of Pedro’s gross compensation income, whether or not he is at the same
time an employee of the corporation
b. Form part of Julia’s gross compensation income only if he is at the same time an
employee of the corporation
c. Both “a” and “b” are correct
d. Neither “a” nor “b” is correct

2. This income is subject to basic tax

a. Compensation for personal injuries or sickness
b. Salaries or emoluments received during a leave of absence
c. Winnings from PCSO and Philippine lotto
d. Fringe benefits given to managerial employees

3. Which of the following items that reduces salaries of employees in not an exclusion from
gross income?
a. GSIS or SSS Contributions
b. Pag-Ibig Contributions
c. Labor Union Dues
d. None of the choices

4. This income is subject to basic tax

a. Compensation for personal injuries or sickness
b. Salaries or emoluments received during a leave of absence
c. Winnings from PCSO and Philippine lotto
d. Fringe benefits given to managerial employees

5. Which of the following compensation income is taxable?

a. Board and lodging granted for the convenience of the employer

b. Separation pay given where separator from employment is beyond the control of the
employer
c. De minimis monetized vacation leave
d. Fixed/variable allowances subject to liquidation by the employee

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

6. One of the following compensation income of an individual taxpayer is not an exclusion

from gross income:

a. Monetized vacation leaves not exceeding 10 days a year

b. Separation pay of an employee who resigned from his employment
c. Retirement benefits of an employee who has worked for an employer for at least 10
years; who at the time of retirement is not less than 50 years of age, and who avails
of the retirement for the first time
d. All of these

7. Which of the following is taxable?

a. Separation pay received by a 50-year old employee due to the retrenchment

program of the employer
b. Retirement pay received from a benefit plan registered with the BIR where at the
time the employee retired, he was 57 years of age, retiring form employment for the
first time in his life, and was employed with the employer for 8 years
c. Social security benefit received by a balikbayan from employer abroad at age of 30
d. None of the choices

8. The taxpayer was retired by his employer in 2017 and paid P2,000,000 as a retirement
gratuity without any deduction for withholding tax. The corporation became bankrupt in
2019. Can the BIR subject the P2,000,000 retirement gratuity to income tax in 2019?

1st Answer: Yes, if the retirement gratuity was paid based on a reasonable pension
where the taxpayer was 50 years old and has served the corporation.
2nd Answer: No, if the taxpayer was forced by the corporation to retire.

a. 1st and 2nd answers are correct

b. 1st answer is correct but 2nd answer is wrong
c. 1st answer is wrong but 2nd answer is correct
d. 1st and 2nd answers are wrong

9. Which of the following is taxable?

a. SSS and GSIS benefit

b. Social security benefit received by a balikbayan from employer abroad
c. Separation pay received by a 50-year old employee due to retrenchment program
of the employer
d. Interest income on time deposit

10. Annuity payments received by a taxpayer represent a part which is taxable and not
taxable. Which of the following statement is correct?

a. If annuity received represents interest, it is a taxable income

b. If annuity received represents return of premium, it is not a taxable income
c. Both statements are correct
d. Both statements are not correct.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

11. Mr. Lee purchased a life annuity for P200,000 which will pay him P20,000 a year. The
life expectancy of Mr. Lee is 12 years. Which of the following will Mr. Lee be able to exclude
from his gross income?

a. P200,000 c. P20,000
b. P10,000 d. P120,000

12. The following data on net income, bad debt, write-off and recovery show:
2018: Case A Case B Case C
Net income (loss) before write-off P120,000 P60,000 (P40,000)
Less: Bad debt written-off claimed as deduction 40,000 40,000 50,000
Net income (loss) after write-off 80,000 20,000 (90,000)

2019:
Subsequent recovery P40,000 P10,000 P50,000
The taxable recovery is:
Case A Case B Case C
a. P40,000 P20,000
P50,000 b. P40,000 P20,000
P0
c. P40,000 P10,000 P0
d. P40,000 P0 P0

13. Which of the following is not a taxable income?

a. Bad debts previously deducted as item of expense and partially recovered
subsequently
b. Tax expense previously disallowed as deduction from taxable income, fully refunded
subsequently
c. Income from gambling
d. Income from usurious financing
14. Which of the following tax refunds is taxable?
a. Percentage tax on person’s exempt from VAT
b. Estate or donor’s tax
c. Stock transaction tax
d. Income tax paid to a foreign country if claimed as tax credit during the year

15. If an individual performs services for a creditor who in consideration thereof cancels the
debt, the cancellation of indebtedness may amount:
a. To a gift
b. To a capital contribution
c. To a donation inter vivos
d. To a payment of income

16. On July 1, 2017, Mr. V leased his vacant lot for a period of 12 years to Mr. J at an
annual rate of P2,400,000. It was also agreed that Mr. J will pay the following:
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 P4,800,000 representing rental payment for year 2017 and 2018

 Security deposit of 2,400,000
 Annual real property tax of P30,000
The lease contract provides among others that the lessee will construct a 5-storey
building for parking purposes at a cost of P36,000,000. Ownership of the building shall
belong to the lessor upon the expiration or termination of the lease contract.
The building was completed on July 1, 2019 with an estimated useful life of 15 years.
Mr. V shall report total income from the lease for 2017 at
a. P2,430,000 c. P4,830,000
b. P2,400,000 d. P2,640,000

17. Assuming Mr. V will use outright method in recognizing income from leasehold
improvements, how much is the total income from lease for year 2019?
a. P3,030,000 c. P38,430,000
b. P3,630,000 d. P2,400,000
18. Assuming Mr. V will use spread-out method in recognizing income from leasehold
improvements, how much is the total income from lease for year 2019?
a. P3,030,000 c. P14,430,000
b. P3,630,000 d. P2,400,000

19. Assuming that due to the fault of the lessee, the lease contract was terminated on
January 1, 2021, how much income is to be reported by the lessor in 2021?
a. P32,400,000 c. P34,830,000
b. P30,600,000 d. P33,030,000

20. Which among the following dividend income is tax exempt? Dividend income received
from
I. A domestic corporation by a domestic corporation
II. A domestic corporation by a resident foreign corporation
III. A domestic corporation by a nonresident foreign corporation
IV. A resident foreign corporation by a domestic corporation
a. All of the above c. I and II only
b. None of the above d. I, II and III only
21. Which among the following dividend income is tax exempt?
I. Pure stock dividend
II. Pure liquidating dividend
a. I only c. I and II only
b. II only d. None of the choices
22. For income tax purposes, the form of dividend income shall determine the valuation of
dividend income. Which of the following rules on valuing dividend income is incorrect?
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

a. Cash dividend is valued and taxable to the extent of amount of money received by
the shareholder.
b. Property dividend is valued and taxable to the extent of the fair market value of the
property received at the time of distribution.
c. Stock dividend resulting to a change in the proportionate share of the shareholder
is valued and taxable to the extent of the fair market value of the shares received.
d. Scrip dividend is taxable to the extent of its fair market value in the year when the
warrant was issued.

23. Liquidating dividends are return of shareholders’ investment. Which of the following
rules on liquidating dividend is incorrect?
a. The excess amount of liquidating dividend over cost of shares surrendered is
taxable.
b. If a shareholder sustains a loss brought about by the liquidating dividend, such loss
is deductible.
c. If a shareholder sustains a loss brought about by the liquidating dividend, such loss
is not deductible.
d. All of the above.

24. Geralene was selected as the most outstanding “barrio teacher” in Di Mahanap-hanap
town of Tawi-Tawi region. Her name was submitted by the school principal without her
knowledge. She received a trophy and a cash award of P50,000. The amount he received
is
a. Subject to basic income tax
b. Subject to final tax
c. Exempt from income tax
d. Partly taxable, partly exempt
25. The law excludes some of the items of income from taxation because:
a. The transformation of some items of income into economic gain is not essentially
the result of labor or efforts of the taxpayer
b. The law or provides that they are not taxable
c. Some of these items are just return of capital
d. All of the above

26. Which of the following is taxable income?

a. Income derived by a political subdivision of the government performing essential
function of the government
b. Income derived by foreign government in the Philippines
c. Both “a” and “b”
d. Neither “a” nor “b”

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

27. Proceeds of insurance taken by a corporation on the life of an executive to indemnify it

against loss in case of his death is
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable
28. As a general rule, proceeds of insurance are not taxable because they only constitute
a return of what was lost (capital). Which among the following is taxable proceeds?
a. Proceeds of life insurance
b. Proceeds of accident or health insurance
c. Proceeds of property insurance
d. Proceeds of crop insurance
29. Peter, single received the following during the taxable year:
Proceeds of his life insurance paid at an annual P2,000,000
premium of P15,000 within 25 years
Proceeds of his mother’s life insurance paid at 1,000,000
an annual premium of P10,000 within 20 years
House and lot inherited from his mother 4,000,000
Rent income from inherited properties 200,000
For income tax purposes, how much of the above items must be included in his gross
income?
a. P7,200,000 c. P200,000
b. P1,200,000 d. P1,825,000

30. Mr. Basilio insured his life with his estate as beneficiary. In 2010, after Mr. Basilio had
paid P65,000 in premium, he assigned the policy to Mr. Jose Llamado for P60,000, and Mr.
Llamado continued paying the premiums. Mr. Basilio died and Mr. Llamado collected the
total proceeds of P200,000. Mr. Llamado after the assignment and Mr. Basilio’s death, paid
total premiums of P80,000. As a result of the above transaction, Mr. Llamado:
a. May consider the proceeds of P200,000 as exempt from tax
b. Derived a taxable income of P55,000
c. Derived a taxable income of P60,000
d. Answer not given

Let’s Analyze
Activity 1. Answer the following questions and provide solutions to support your answer.

Problem 1: ( Adapted)

Rent income, net of 5% CWT P 475,000

Professional fees, net of 10% CWT 360,000
Interest income, net of 20% final tax 40,000
Dividends from a domestic corporation 10,000
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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

Business expenses 500,000

Required: Determine the total reportable gross income_______________.

Problem 2: (Adapted)
Jose, single received the following during the taxable year:
Proceeds of his life insurance paid at an annual P2,000,000
premium of P15,000 within 25 years
Proceeds of his mother’s life insurance paid at 1,000,000
an annual premium of P10,000 within 20 years
House and lot inherited from his mother 4,000,000
Rent income from inherited properties 200,000

For income tax purposes, how much of the above items must be included in his gross
Income__________________.

Problem 3: (Adapted)
An operator of an illegal horse betting business, single, has the following data:

Receipt from illegal bets P600,000

Rent of space where bets are received, 120,000
gross of 5% withholding tax
Salaries of assistants, gross of creditable 100,000
withholding tax
Bribe money to obtain protection from 50,000
arrest and prosecution

How much is the taxable income______________.

Problem 4: (Adapted)
Mrs. Oliva retired from the government after 30 years of service at the age of 55. He
received a total retirement pay of P1,800,000 plus P400,000 GSIS benefits.
How much will be excluded in gross income_____________.
Problem 5: (Adpated)
Mr. Mallari was one of the passengers who were hurt in a bus accident. He received a total
indemnity of P800,000 from the insurer of the bus. Mr. Dimataling paid P250,000 in hospital
bills due to the accident.
Compute the total amount to be excluded in gross income______________.
Problem 6: ( Adapted)

Gross compensation income, before contributions of SSS, PhilHealth

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Phone No.: (082)300-5456 Local 137

and HDMF totaling P124,000 P 800,000

Fringe benefits 200,000
Gain from redemption of shares in a mutual fund 100,000
Commission income 150,000
Gain on sale of stocks through the PSE 400,000

Determine the total income to be reported by Mr. Lola in gross income___________.

Problem 7-8: ( Adapted)

Summer Corporation, a taxpayer under the accrual basis of accounting, opted to

deduct OSD. The following relates to its results of operations:

Gross sales, net of returns, allowances and discounts P 3,850,000

Gain on sale of building 500,000
Dividend from domestic corporation 50,000

Beginning inventory P 300,000

Net purchases 3,000,000
Ending inventory 800,000

Recorded administrative and selling expenses P 760,000

Compute for the OSD________ and the total taxable net income_________

Problem 9-10: (Adapted)

Corazon resigned in 2015 after 12 years of service. She had the following income during
the year:

Salary, net of P80,000 withholding tax, P20,000 SSS,

P18,000 Philhealth and P40,000 13th month pay P 480,000
Separation pay 1,000,000

Compute the gross income_________ and the allowable deductions____________.

In a Nutshell

1. Why is taxation is very important in our country and in your course?

2. Discuss the meaning and the implications of the statement: “ Taxes are the lifeblood of
government and their prompt and certain availability is an imperious need.”

3. Do you think our country have a sound tax system?

4. How does ABS-CBN circumvent tax obligation and apply tax avoidance remedies.

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Phone No.: (082)300-5456 Local 137

Q&A List

Do you have any question for clarification?

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords Index
This section lists down the keywords that will help you recall the discussions.

Taxation Tax avoidance Gross income Net taxable income

Lifeblood Tax evasion Optional Standard
deduction (OSD) Withholding taxes
Sound tax system Police power
Passive income Inclusions from
Gross income
Inherent limitations Taxation power Dealings in property Exclusions from
Gross income
Constitutional Eminent domain Itemized expenses Deductions of Gross
limitations income

Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.
Activity Date Where to Submit
Orientation BlackBoard LMS
Big Picture A-C: Let’s Check Activities BlackBoard LMS
BigPicture A-C:Let’s Analyze Activities BlackBoard LMS
Big Picture A-C: In A Nutshell BlackBoard LMS

Big Picture A-C: Q&A List BlackBoard LMS – Forum

1st Formative Assessment BlackBoard LMS
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Phone No.: (082)300-5456 Local 137

Big Picture

Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Demonstrate understanding on principles of taxation on individual.
b. Assess the classification of individual taxpayer.
c. Analyze problems and compute Income tax for individual taxpayer.

Big Picture in Focus:

ULOa. Demonstrate understanding on principles of taxation on individual.
ULOb. Assess the classification of individual taxpayer.
ULOc. Analyze problems and compute Income tax for individual taxpayer.

Metalanguage

In order to demonstrate the most essential terms relevant to the study of Income taxation
and to demonstrate ULOa, ULOb, and ULOc will be operationally defined to establish a
common frame of refence as to how the terms are used. You will encounter some of these
terms as we go through in our lessons. Please refer to these definitions in case you will
encounter difficulty in understanding Income Taxation.

Individual taxpayers. They are natural persons categorized as Filipino Citizen or Alien
with income subject to tax. They are required to file income tax return, unless otherwise
exempted.

Income tax return. Taxpayers formal declaration under oath indicating the Gross taxable
income, allowable deductions and the amount of tax due and payable for a specific taxable
year.

Schedular system of taxation. This system categorized income and imposes different tax
rates depending on individual taxpayer’s income level.

Progressive tax rates. The tax rates increase as the taxpayer’s taxable amount increases.

Pay as you file system. The tax liabilities amount computed are paid upon filing return.

Over-the-counter System. The manual process of filing the tax return and payment of tax
due through the Authorized Bank Agent that are certified by the Banko Sentral ng Pilipinas
(BSP) that has satisfied the accreditation criteria to collect internal revenue taxes.

Electronic Filing and Payment System (EFPS). A system developed by BIR primarily to
provide taxpayers with convenient service to process tax returns through online electronic
filing. The taxpayer directly encodes, submit their tax returns and pay their taxes due
through BIR website.

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Phone No.: (082)300-5456 Local 137

Income tax credits. This refers to the taxpayer’s amount paid through withholding agent
which is deductible from the basic tax due.

Final withholding tax (FWT). A kind of withholding tax which is prescribed on certain
income payments and is not creditable against the income tax due of the taxpayer. It
constitutes the full and final payment of income tax due of the taxpayer on the particular
income subjected to final withholding tax.

Creditable withholding tax (CWT). Refers to tax withheld at source by customers or clients
but is not a final tax. It is an advance tax deductible against the annual income tax due of
the taxpayer.

ESTATE. Refers to the properties, rights and obligations of a decedent that are not
extinguished by his death, that which is the subject matter of succession.

TRUST. An agreement whereby one person (grantor or trustor) transfers property to another
person (beneficiary), which will be held under the management of a third party (trustee or
fiduciary).

GROSS INCOME. It includes all income not subject to final withholding tax and not
considered exempt under the law.

Exclusions. Refers to amount not included as reportable gross income in the Income tax
return.

Deductions . Refers to the amount included of gross income but presented separately as
deductions from gross income in the income tax return.

INCOME TAXATION ON INDIVIDUAL

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

1. Resident Citizen (RC)
2. Nonresident Citizen (NRC)
3. Resident Alien
4. Nonresident Alien (NRA)
a. Engaged in trade or business (ETB)
b. Not engaged in trade or business (NETB)
5. Special employees (Repealed under Train Law)
a. Special Alien Employees (SAE)
b. Special Filipino Employees (SFE)

FILIPINO CITIZEN

The following individuals are citizens of the Philippines:

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Phone No.: (082)300-5456 Local 137

1. Those who are citizens of the Philippines at the time of the adoption of the 1987
constitution.
2. Those whose fathers or mothers are citizens of the Philippines.
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine
Citizenship upon reaching the age of majority.
4. Those who are naturalized in accordance with law.

A. RESIDENT CITIZEN (RC)

1. A Filipino citizen residing in the Philippines.
2. Taxable by income derived from sources within and without the Philippines.

B. NONRESIDENT CITIZEN

The following are considered nonresident citizens Section 22 (E), RA 8424):

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner of
the fact of his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time for at
least 183 days during the taxable year;
4. A citizen who has been previously considered as nonresident citizen and who arrives in
the Philippines at any time 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.
5. Overseas contract workers (OCW) or Overseas Filipino Workers (OFW) -RR No. 1-2011
 Contract Workers (OCW’s) are Filipino citizens employed in foreign countries,
commonly referred to as Overseas Filipino Workers (OFW), who are physically
present in a foreign country as a consequence of their employment thereat.
 Their salaries and wages are paid by an employer abroad and is not borne by any
entity or person in the Philippines.
 To be considered as an OCW or OFW, they must be duly registered as such with
the Philippine Overseas Employment Administration (POEA) with a valid Overseas
Employment Certificate (OEC).
 A seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
(Section 23 (C), RA 8424).
 In order for seafarers or seamen to be considered as OCW’s or OFW’s they must
be duly registered as such with the Philippine Overseas Employment Administration
(POEA) with a valid Seafarer’s Identification Record Book (SIRB) or Seaman’s Book
issued by the Maritime Industry Authority (MARINA).
6. Taxable by income from all sources within the Philippines.

D. RESIDENT ALIEN

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 Resident Alien means an individual whose residence is within the Philippines and who
is not a citizen thereof. (Section 22 (F), RA 8424)

Under RR No. 2. The following are considered as resident alien:

1. An alien actually present in the Philippines who is NOT a mere transient or sojourner;
A person who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished as transient.
2. An alien, who comes to the Philippines for a definite purpose, which, by its nature, would
require an extended stay making his home temporarily in the Philippines;
3. An alien who shall come to the Philippines with no definite intention as to his stay
(floating intention). An alien who has acquired residence in the Philippines retains his
status as a resident until he abandons the same and actually depart from the
Philippines.
4. An Alien who shall have stayed in the Philippines for more than one (1) year by the end
of the calendar year.

E. NONRESIDENT ALIEN
1. Engaged in trade or business (Section 25 (A), RA 8424)
 An alien individual ACTUALLY engaged in trade or business or business in the
Philippines; and
 An alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be DEEMED
a non-resident alien doing business in the Philippines.
 Subject to income tax in the same manner as an individual non-resident citizen and
resident alien on taxable income received from all sources within the Philippines.

2. Not engaged in trade or business – those NRA not included in no.1 above.
 An alien individual who stays in the Philippines for an aggregate period of not more
than 180 days in any calendar year.
 They are taxable by income received from all sources within the Philippines such as
interest, cash, rents, salaries and wages, premiums, annuities, remuneration,
emoluments, casual gains, profits, income and capital gains.

F. SPECIAL EMPLOYEES (REPEALED UNDER TRAIN LAW)

1. SPECIAL ALIEN EMPLOYEE – an alien individual employed by the following:
a) Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies (Section 25 (C), RA 8424)
b) Offshore banking units (Section 25 (D), RA 8424)
c) Petroleum service contractors or subcontractors (Section 25 (E), RA 8424)
2. SPECIAL FILIPINO EMPLOYEE – Filipino employees of letters (a) (b) and (c) above
occupying managerial OR technical position.

NOTE: Preferential Tax Rate for Special Employees shall apply only to income derived
prior to 2018 taxable year or prior to the effectivity of RA 10963 (TRAIN LAW). Special
employees, under TRAIN LAW, are now subject to graduated income tax rate on their
compensation income.

ILLUSTRATION

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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

Classify the following taxpayers as resident citizen, non-resident citizen, resident alien or non-
resident alien engage in trade or business in the Philippines.

1. Mr. Wreg Gryan, an Italian, left the Philippines on September 15 of the current taxable
year for a vacation trip in the US. Before he left, he had secured a re-entry document.
Answer: RESIDENT ALIEN

2. Mr. Wrez Chan, a citizen with residence in Cebu City, stayed in Singapore for 250 days
during the current taxable year.
Answer: NONRESIDENT CITIZEN

3. Ms. Wrez Xienly, a non-resident alien, entered the territorial jurisdiction of the
Philippines as a tourist and stayed in Boracay for 280 days
Answer : NONRESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS

4. Ms. Angel Lo, a registered nurse, who worked in St. Luke Hospital in Manila for two
weeks and went back to US thereafter.
Answer : NONRESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS

5. Mr. Lito Sy, an Alien individual who was hired and got employment in Regional
Operating Headquarters of Multinational Companies.
Answer : SPECIAL ALIEN EMPLOYEE

BASIC TAX /REGULAR TAX /NORMAL TAX

GENERAL PRINCIPLES:
 Income subject to basic tax is reflected in the income tax return of the taxpayer.
 It is the payee (income earner) who has the responsibility to file the return and pay
the applicable tax
FORMULA:
Gross Income PXXX
Less: Allowable Deductions ( XXX)
Taxable Income PXXX
Rate (Train law table) XX%
Basic Income Tax PXXX

GROSS INCOME – includes all income not subject to final withholding tax and not
considered exempt under the law.

ALLOWABLE DEDUCTIONS – Business expenses and losses.

1. Classification of Business expenses:
a. Itemized expenses – multiple expenses listed as line items.
b. Optional Standard Deduction OPT - 40% base on Gross sales/receipts.
2. Government regulatory premiums.
a. Social Security System Contribution Premium
b. Philhealth contribution premium
c. Pag-big contribution premium

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Phone No.: (082)300-5456 Local 137

A. MINIMUM WAGE EARNERS (MWEs)

They are exempt from income tax on:
a. Minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential
e. Hazard pay

 Under RR 10-2008, MWE receiving additional “compensation” such as commissions,

honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
P90,000, taxable allowances and other taxable income other than the statutory
minimum wage, overtime pay, holiday pay, hazard pay, night shift differential pay shall
not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax. However, in the case of Soriano vs. Secretary of Finance
with GR No. 184450 promulgated by the Supreme Court on January 24, 2017, it was
held that nothing to this effect can be read from RA 9504. Hence, such MWE shall still
enjoy the benefit of being exempt from tax on compensation income.

 MWE with additional “business” income:

a. Compensation income as MWE = EXEMPT
b. Business income = TAXABLE

B. DETERMINATION OF BASIC TAX OF MARRIED INDIVIDUALS

REQUIREMENTS IN THE FILING OF INCOME TAX RETURN OF MARRIED INDIVIDUALS:

 Married individuals (i.e., husband and wife are required by law to file a consolidated
income tax return, but they shall compute separately their individual income tax.
 Income which cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be equally divided between
the spouses for purposes of determining their taxable income.
 If the spouses are only physically separated and there is no legal separation, they are
required by law to file consolidated or joint returns for which they are considered as
jointly and severally liable to tax.

C. TAXATION OF NRA-NETB. All income (except interest income from FCDU) received by
NRA-NETB is subject to 25% FWT, except for the following:
a. Interest from a depositary bank under the expanded foreign currency deposit
system – EXEMPT
b. Sale of real property and shares subject to capital gains tax.

D. TAXABLE ESTATES AND TRUSTS (ITR -BIR FORM 1701)

a. ESTATE
1. Refers to the properties, rights and obligations of a decedent that are not
extinguished by his death, that which is the subject matter of succession.
2. Under judicial settlement – treated as individual taxpayer; under extrajudicial
settlement – exempt entity

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Phone No.: (082)300-5456 Local 137

Illustration:

The Estate of Mr. Ong has P1,800,000 gross incomes before business expenses of
P300,000. The administrator of the estate distributed P500,000 to the heirs in accordance
with Mr. Ong’s will.

Answer:

Gross Income - P1,800,000

Less:
Regular allowance deductions P300,000
Special allowance deduction
Distribution to heirs 500,000 800,000
Net Taxable Income P 1,000,00

b. TRUST
1. An agreement whereby one person (grantor or trustor) transfers property to another
person (beneficiary), which will be held under the management of a third party (trustee or
fiduciary)
Trustee – refers to someone who manages and preserves the property.
Grantor - refers to the property owner who establishes the trust.
Beneficiary – refers to the person entitled to succeed and received the trust.

2. Irrevocable trust – treated as individual taxpayer; Revocable trust – non-taxable entity

Illustration:

Mr. Ang designated a trust property that is irrevocable in favour of Mr. Ong
and appointed Mr. Te as trustee. The property earned P800,000 incomes before expenses of
P300,000 and trust fees of P50,000. Mr. Te distributed P150,000 to Mr. Ong in accordance
with the trust indenture. Compute the taxable income.

Answer: Gross Income P800,000

Less: Regular allowance deductions P350,000
Special deductions
Income distribution to beneficiaries 150,000 500,000
Net taxable Income P300,000

E. EMPLOYED TAXPAYERS: THE SUBSTITUTED FILING OF TAX RETURN

Conditions of the Substituted Filing System ( RR11-2018 )

1. The employee received purely compensation income during the year.
2. The employee received the income from only one employer in the Philippines
during the taxable year.
3. The amount of tax due from the employee at the end of the year equals the
amount of tax withheld by the employer.

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Phone No.: (082)300-5456 Local 137

4. The employee’s spouse also complies with all 3 conditions stated above.
5. The employer files the annual information return (BIR Form No. 1604-CF)
6. The employer issues BIR Form No. 2316 to each employee and employee uses
BIR form No. 1700 or ITR.

F. CONSOLIDATED/ANNUAL/ADJUSTMENT INCOME TAX RETURNS (RR11-2018)

a. Concurrent employment during the year
b. Successive employment during the year.
c. Receipt of income distribution from a general professional partnership, taxable
trusts or taxable estates, exempt co-ownership or exempt joint ventures
d. Taxpayers with both employment income and business income.

G. WHO ARE REQUIRED TO FILE INCOME TAX RETURNS?

a. INDIVIDUALS - ITR BIR FORM 1700/1701
1. Resident citizens receiving income from sources within and without.
a. Employees deriving purely compensation income from two or more
employers concurrently or successively at any time during taxable yea
b. Employees deriving purely compensation income regardless of the amount
whether from a single or several employers during the taxable year.
c. Self-employed individuals receiving income from the conduct of trade or
business and/or practice of profession.
d. Individuals deriving mixed income. Compensation income and income from
the conduct of trade or business and/or practice of profession.
e. Individuals deriving other non-business, non-professional related income in
addition to compensation income but not subject to final tax.
f. Individuals receiving purely compensation income from a single employer,
although the income of which has been correctly withheld, but whose spouse
spouse is not entitled to substituted filing.
2. A trustee of a trust, guardian of a minor, executor/administrator of an estate, or
any person acting in any fiduciary capacity for any person, where such trust,
estate, minor, or person is engaged in trade or business.
3. Non-resident citizens receiving income from sources within the Philippines.
4. Aliens whether resident or not, receiving income from sources within the
Philippines.

b. NON-INDIVIDUALS – ITR -BIR FORM 1702

1. Corporations including Partnerships, no matter how created or organized.
2. Domestic corporations receiving income from sources within and outside the
Philippines.
3. Foreign corporations receiving income from sources within the Philippines.
4. Estate and trusts engaged in trade or business.

H. WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?

a. Minimum wage earners
b. An individual whose gross income does not exceed his total personal and
additional exemptions
c. An individual whose compensation income derived from one employer does not
exceed P60,000 and the income tax on which has been correctly withheld

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Phone No.: (082)300-5456 Local 137

d. Individuals whose income has been subjected to final withholding tax, such as in
the case of:
i. Special aliens
ii. Non-resident aliens not engaged in trade or business
e. Pure compensation earner qualified under the substituted filing system

I. ANNUAL INFORMATION RETURN (RA-10963)

a. Individuals, estates or trusts, not engaged in business or those earning pure

compensation income, with sole earnings subject to final tax or whose sole income
is exempt – BIR 1705 on or before May 15 of the following year.
b. Self-employed individuals, estates and trusts engaged in business – BIR Form
1701AIF
c. Corporations and partnership in general – BIR Form 1702AIF

NOTE: Persons whose gross quarterly sales, earnings, receipts or output

exceed P150,000 may file their ITR accompanied by balance sheets, profit and
loss statement, other relevant statements duly certified by an independent CPA
in lieu of BIR Forms 1701AIF and 1702AIF.

J. INSTALLMENT PAYMENT OF THE REGULAR INCOME TAX – when the tax due is in
excess of P2,000
a. 1st instalment – the time the return is filed
b. 2nd instalment – on or before October 15 following the close of the calendar year.

K. TAX RATES UNDER TRAIN LAW

Rates of Tax on Taxable Income of Individuals

a. Tax Schedule Effective January 1, 2018 until December 31, 2022:

Not over P250,000 0%

Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over
P400,000
Over P800,000 but not over P130,000 + 30% of the excess over
P2,000,000 P800,000
Over P2,000,000 but not over P490,000 + 32% of the excess over
P8,000,000 P2,000,000
Over P8,000,000 P2,410,000 + 35% of the excess over
P8,000,000

b. Tax Schedule Effective January 1, 2023 and onwards:

Not over P250,000 0%

Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over
P400,000

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Phone No.: (082)300-5456 Local 137

Over P800,000 but not over P102,500 + 25% of the excess over
P2,000,000 P800,000
Over P2,000,000 but not over P402,500 + 30% of the excess over
P8,000,000 P2,000,000
Over P8,000,000 P2,202,500 + 35% of the excess over
P8,000,000

L. SELF-EMPLOYED TAXPAYERS AND THE QUARTERLY TAX RETURNS

Quarterly Tax Deadline
Returns
1st Quarter ITR May 15 of the same calendar
year
nd
2 Quarter ITR August 15 of the same calendar
year
rd
3 Quarter ITR November 15 of the same
calendar year
ANNUAL ITR April 15 of the following
calendar year

Illustration:

Mr. Custodio, a self employed taxpayer, single, with 6 children, has the following
cumulative quarterly gross income and deductions:

Jan.- March April- June July-Sept. Oct. – Dec.

Gross Income P 400,000 P 450,000 P 490,000 P 580,000

Deductions 100,000 150,000 180,000 220,000
Witholding tax 3,000 5,000 8,000 10,000

Required: Determined his quarterly and annual income tax due and payable.

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Phone No.: (082)300-5456 Local 137

Solution:
1st Qtr. 2nd Qtr. 3rd Qtr. Annual ITR
Gross Income P 400,000 P 450,000 P 490,000 P 580,000
Deductions 100,000 150,000 120,000 220,000
Net income, this qtr. P 300,000 P 300,000 P 370,000 P 360,000
Add: income prior qtr. 0 300,000 600,000 900,000
Net Income, to date P 300,000 P 600,000 P 900,000 P1,260,000

Income tax due P 10,000 P 80,000 P 160,000 P 268,000

Less: W/tax 3,000 5,000 8,000 10,000
Wtax, Prior qtr. 0 3,000 8,000 16,000
Total 7,000 72,000 144,000 242,000

Tax paid prior qtr. 0 7,000 72,000 144,000

TOTAL P 7,000 P 65,000 P 72,000 P 98,000

Tax Due:
On 250,000
On excess 0
(300,000-250,000) * 20% 10,000
Total P10,000

Tax due:
On 400,000 30,000
On excess (600,000-400,000) *25% 50,000
Total 80,000
Tax due:
On 800,000 130,000
On excess (900,000-800,000) *30% 30,000
Total 60,000

Tax due:
On 800,000 130,000
On excess (1,260,000-800,000) *30% 138,000
Total 268,000

M. The 8% INCOME TAX RATE

A. Rate of Tax on Income of Purely Self-employed Individuals and/or Professionals

Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not
Exceed the Value-added Tax (VAT) Threshold of P3,000,000 as Provided in RA
10963 and Section 109(BB).

Self-employed individuals and/or professionals shall have the option to avail of

an eight percent (8%) tax on gross sales or gross receipts and other non-operating
income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Subsection (A)(2)(a) of this Section and the
percentage tax under Section 116 of this Code. Provided,

 Illustration A: Ms. ECQ operates a sari-sari store while she offers bookkeeping
services to her clients. In 2018, her gross sales amounted to P900,000, in addition
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Phone No.: (082)300-5456 Local 137

to her receipts from SPA services of 500,000. She already signified her intention to
be taxed at 8% income tax rate in her 1st quarter return.

Solution: Gross Sales – Sari-sari store 900,000

Gross Receipts – SPA 500,000
Total Sales/Receipts 1,400,000
Less: Amount allowed as deduction (250,000)
Taxable Income 1,150,000

Tax Due (1,150,000 * 8%) 92,000

 Illustration B: Ms. ECQ failed to signify her intention to be taxed at 8% income tax
rate on gross sales in her initial quarterly income tax return, and she incurred cost
of sales and operating expenses amounting to 700,000 and 100,000, respectively,
or a total of 800,000.

Solution: Gross Sales/Receipts 1,400,000

Less Cost of Sales 700,000
Gross Income 700,000
Less: Operating Expenses 100,000
Taxable Income 600,000

Tax Due:
On excess (600,000 – 250,000) * 20% 70,000

Note: Since Ms. ECQ failed to signify her intention to be taxed at 8% she is
taxable using graduated tax rates and aside from income tax, Ms. ECQ
is likewise liable to pay business tax.

 Illustration C: Mr. MCQ signified his intention to be taxes at 8% income tax rate
on gross sales in his 1st quarter income tax return. He has no other source of income.
His total sales for the first three quarters amounted to 3,000,000 with 4 th quarter
sales of 3,500,000.

1st Quarter 2nd Quarter 3rd Quarter 4th

(8% rate) (8% rate) (8% rate) Quarter
Total Sales 500,000 900,000 1,500,000 3,500,000
Less: Cost of 300,000 400,000 1,100,000 1,200,000
Sales
Gross Income 200,000 500,000 400,000 2,300,000
Less: Operating 120,000 140,000 360,000 700,000
Expenses
Taxable Income 80,000 360,000 40,000 1,600,000

Solution: Total Sales 6,400,000

Less: Cost of Sales 3,000,000
Gross Income 3,400,000
Less: Operating Expenses 1,320,000
Taxable Income 2,080,000
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Income Tax Due

Tax Due under graduated rates 515,600
Less: 8% income tax previously paid (Q1-Q3)
(2,900,000 – 250,000) * 8% (212,000)
Annual Income Tax Payable 303,600

*Taxpayer is liable for business tax in addition to income tax. For

this purpose, the taxpayer is required to update his registration
from non-VAT to VAT taxpayer. Percentage tax shall be imposed
from the beginning of the year until taxpayer is liable to VAT. VAT
shall be imposed prospectively.

 Illustration D: Ms. GCQ is a Certified Public Accountant (CPA) who offers an

Accounting and Auditing services. Since her career flourished, her total gross
receipts amounted to 5,550,000 for taxable year 2019. Her recorded cost of service
and operating expenses were 3,400,000 and 1,050,000, respectively.

Solution: Gross Receipts 5,550,000

Less: Cost of Service 3,400,000
Gross Income 2,150,000
Less: Operating Expenses 1,050,000
Taxable Income 1,100,000

Tax Due:
On 800,000 130,000
On excess (1,100,000 – 800,000) * 30% 90,000
Income Tax Due 220,000

*Taxpayer is also liable for business tax – VAT and she has no
Option to avail of the 8% tax since her income exceeds 3M.

 Illustration E: In 2019, Mr. CMJ owns a nightclub and videoke bar, with gross
sales/receipts of 3,500,000. His cost of sales and operating expenses are 1,500,000
and 1,100,000, respectively, and with non-operating income of 100,000.

Solution: Gross Sales 3,500,000

Less: Cost of Sales 1,500,000
Gross Income 2,000,000
Less: Operating Expenses 1,100,000
Net Income from Operation 900,000
Add: Non-operating Income 100,000
Taxable Income 1,000,000

Tax Due:
On 800,000 130,000
On excess (1,000,000 – 800,000) * 30% 60,000
Total Income Tax 190,000

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*Taxpayer has no option to avail of the 8% income tax since his

business income is subject to Other Percentage Tax – Amusement
Tax.

B. Rate of Tax for Mixed Income Earners. – Taxpayers earning both compensation
income and income from business or practice of profession shall be subject to the
following taxes:

(1) All Income from Compensation – The rates prescribed under Subsection (A)(2)(a) of
this Section.

(2) All Income from Business or Practice of Profession –

(a) If Total Gross Sales and/or Gross receipts and Other Non-Operating Income Do Not
Exceed the VAT Threshold of P3,000,000 as Provided in Section 109(BB) of this Code.
– The rates prescribed under Subsection (A)(2)(a) of this section on taxable income, or
eight percent (8%) income tax based on gross sales or gross receipts and other non-
operating income in lieu of the graduated income tax rates under Subsection (A)(2)(a)
of this Section and the percentage tax under Section 116 of this Code.

(b) If Total Gross Sales and/or Gross Receipts and Other Non-Operating Income
Exceeds the VAT Threshold of P3,000,000 as Provided in Section 109(BB) of this Code.
– The rates prescribed under Subsection (A)(2)(a) of this Section.

 Illustration A. Ms. GCC, a financial comptroller of JMC, Company, earned annual

compensation in 2019 of 2,500,000, inclusive of 13th month and other benefits in the
amount of 120,000 but net of mandatory contributions to SSS and PHIC. Aside from
employment income, he owns a convenience store, with gross sales of 1,400,000. His
cost of sales and operating expenses are 600,000 and 200,000, respectively, and with
non-operating income of 100,000.

A. If 8% is opted

Solution:
Total Compensation income P 2,500,000
Less: Non-taxable 13th month pay and other benefits 90,000
Taxable Compensation Income 2,410,000

Tax Due:
1. On Compensation:
On 2,000,000 490,000
On excess (2,410,000 – 2,000,000) * 32% 131,200
Tax due on Compensation Income 621,200

2. On Business Income:
Gross Sales 1,400,000
Add: Non-operating Income 100,000
Taxable Business Income 1,500,000

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Income Tax Rate ______8%

Tax Due on Business Income 120,000

Total Income Tax Due (Compensation and Business) P 741,200

B. If graduated tax rate is opted

Solution: Total Compensation Income 2,500,000

Less: Non-taxable 13th month pay and other benefits 90,000
Taxable Compensation Income 2,410,000
Add: Taxable Income from Business
Gross Sales 1,400,000
Less: Cost of Sales 600,000
Gross Income 800,000
Less: Operating Expenses 200,000
Net Income from Operation 600,000
Add: Non-operating Income 100,000 700,000
Total Taxable Income 3,110,000

Tax Due
On 2,000,000 490,000
On excess (3,110,000 – 2,000,000) * 32% 355,200
Total Income Tax 845,200

*In addition to the income tax, Mr. MAG is likewise liable to pay
percentage tax of P42,000.00, which is 3% of 1,400,000.

 Illustration B: Mr. ELAI, an officer of ELLAS International Corp., earned in 2019 an

annual compensation of 1,300,000, inclusive of 13th month and other benefits in the
amount of 120,000. Aside from employment income, he owns a farm, with gross sales
of 4,500,000. His cost of sales and operating expenses are 2,000,000 and 600,000,
respectively, and with non-operating income of 100,000.

Solution: Total compensation income P1,300,000

Less: Non-taxable 13th month pay and other benefit 90,000
Taxable Compensation Income 1,210,000
Add: Taxable Income from Business
Gross Sales 3,500,000
Less: Cost of Sales 2,000,000
Gross Income 1,500,000
Less: Operating Expenses 600,000
Net Income from Operation 900,000
Add: Non-operating income 100,000 1,000,000
Total Taxable Income 2,210,000

Tax Due:

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On 2,000,000 P 490,000
On excess (2,110,000 – 2,000,000) * 32% 35,200
Total income tax due 525,200

SUMMARY and TREATMENT OF DIFFERENT TAXPAYER’S INCOME

Taxpayers Within Outside Itemized Optional Tax Rate
A. Resident Citizen:
Compensation Income Yes Yes No No Schedular
Income from Profession Yes Yes Yes or Yes Schedular
Income from Business Yes Yes Yes or Yes Schedular
Passive Income* Yes Yes* No No Final Tax
*Schedular
B. Nonresident Citizen &
Resident Alien:
Compensation Income Yes No No No Schedular
Income from Profession Yes No Yes or Yes Schedular
Income from Business Yes No Yes or Yes Schedular
Passive Income Yes No No No Final Tax

C. Nonresident Alien Engaged

in Trade and Business in the
Philippines:
Compensation Income Yes No No No Schedular
Income from Profession Yes No Yes No Schedular
Income from Business Yes No Yes No Schedular
Passive Income Yes No No No Final Tax

D. Nonresident Alien Not 25% of

Engaged in Trade and Yes No No No gross
Business in the Philippines income &
apply Sec.
24 C & D

Self-Help: You can refer to Chapter 4 of the textbook to help you

further understand the lesson. You can use other materials too.
Banggawan, Rex B. (2015). Income Taxation Laws, Principles and applications OBE
Edition. Aduan, Nick (2012). Simplified and Procedural Handbook on Income
Taxation 2nd Edition.

Let’s Check
Activity 1. Now that you know the most essential terms in the study of Taxation on
Individual, let us try to check your understanding of these terms. In the space provided, write
the term/s being asked in the following statements:

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_______________1. A foreign individual who have stayed in the Philippines during the
taxable year for more than 180 days but less than one year.

_______________2. For taxation purposes, a Filipino citizen who stayed outside the
Philippines and worked abroad for 182 days during the taxable year.

_______________3. An individual taxpayer that is taxable based on world income.

_______________4. An individual taxpayer which is covered by gross income taxation.

_______________5. An individual taxpayer which is not subject to progressive tax.

_______________6. All passive income earned abroad is subject of regular tax of what
individual taxpayer.

_______________7. Those born before January 17, 1973, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority.

_____________ _8. An individual taxpayer whose residence is within the Philippines and
who is not a citizen thereof.

______________9. What kind of income where an individual taxpayers earning both

compensation income and income from business or practice of profession?

______________10. A Filipino or an alien individual employed by the following:

Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies, offshore banking units or Petroleum service contractors.

Activity 2. Now that you know the important things in your study of taxation on individual.
You answer the multiple choice questions below:

1. A foreign individual who have stayed in the Philippines during the taxable year for more
than 180 days but less than one year is considered a
a. nonresident alien doing business in the Philippines. c. resident alien
b. nonresident alien not doing business in the Philippines. d. resident alien doing
business in the Philippines.

2. For taxation purposes, a Filipino citizen who stayed outside the Philippines and worked
abroad for 182 days during the taxable year is classified as
a. nonresident citizen c. overseas contract worker
b. resident citizen d. special taxpayer

3. An individual taxpayer, whose personal exemption allowed is the lower amount provided
between Philippine Tax Code and his country’s tax code:
Citizenship Residency Business Income

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a. Filipino Within No
b. Filipino Outside Yes
c. Alien Within No
d. Alien Outside Yes

4. Dr. X, an expert American Physicist was hired by a Philippine corp. to assist in its
organization and operation for which he had to stay in the Philippines for an indefinite
period. His coming to the Philippines was for a definite purpose which in its nature would
require an extended stay and to that end makes his home temporarily in the Philippines.
The American management expert intends to leave the Philippines as soon as his job is
finished.

For income tax purposes, the American management expert shall be classified as:
a. Resident alien
b. Nonresident alien not engaged in trade or business
c. Nonresident alien engaged in trade or business
d. Resident citizen.

5. Victoria, an American singer, was engaged to sing for one week at the Victory Plaza after
which she returned to USA. For income tax purposes, she shall be classified as:
a. Resident alien c. Nonresident alien not engaged in trade or business
b. Nonresident alien engaged in trade or business d. Resident citizen.
6. Which of the following is taxable based on world income?
a. Resident alien c. Nonresident citizen
b. Nonresident alien d. Resident citizen

7. It is important to know the source of income for income tax purposes (i.e. from within and
outside the Philippines) because:
a. Some individuals and corporate taxpayers are taxable based on their worldwide income
while others are taxable only on their income from sources within the Philippines.
b. The Philippines imposes income tax only on income from sources within.
c. Some individual taxpayers are citizens while others are aliens.
d. Export sales are not subject to income tax.

8. A nonresident alien deriving income from Philippine sources claims that he is entitled to
personal exemptions. Which of the following is not a condition for the allowance of personal
exemptions to said taxpayer?
b. that he has stayed in the Philippines for an aggregate period of more than 180 days.
c. that his country has an income tax law that allows personal exemptions to Filipinos
not residing therein.
d. that he has filed a true and accurate return of hos total income from all sources within
the Philippines.
e. that he is married to a Filipina.

9. Which of the following statements is incorrect?

a. To be subject to final tax, passive income must be from Philippine sources.
b. An income which is subject to final tax is excluded from the computation of income
subject to Section 24(A).
c. Lotto winnings in foreign countries are exempt from income taxation in the Philippines.

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d. An income which is subject to non-creditable withholding tax is excluded in the

computation of income subject to Section 24(A).

10. Which of the following statements is not correct?

a. Interest income from long term deposit is exempt from income tax.
b. Winnings from Philippine Charity Sweepstakes are exempt from income tax.
c. Royalties on books, literary works and musical compositions are subject to 10% non-
creditable withholding tax.
d. A prize of P10,000 and below is subject to 20% final tax

Let’s Analyze

Mr. Jojo, married, supporting his 6 children (2 of which are gainfully employed) had the
following data for taxable year 2019: (Adapted)

Phil. Abroad
Business income P1,000,000 $20,000
Professional income 400,000 10,000
Salaries 200,000
Business and professional
Expenses 250,000 8,000
Income tax paid 200,000 -

Note: $1=P50

1. If Mr. Jojo is a resident citizen, his income tax payable is: _________
2. If he is a resident alien, his income tax payable is: __________
3. If he is a non-resident alien not engage in trade or business, disregard professional
Income and salaries, his income tax due? _________

Zee had the following data from his employment in 2019:

Annual salary P264,000
Taxes withheld 1,000
Pag-ibig fund contributions 2,500
Union dues 3,400
Philhealth contributions 2,720
SSS Premiums 3,480
13th month pay 22,000
Mid-year bonus 20,000
Loyalty award 5,000

4. The portion of compensation which is excluded from the gross compensation income if Zee
is a rank and file employee:

5. The Tax due and payable of Zee in 2019:

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Francis, married with two dependent children had the following income and expenses in 2019:

Salary, net of withholding tax of P15,000 P285,000

13th month pay 95,000
Gross receipts from profession, net of WT P10,000 130,000
Rent income, net of 5% WT 57,000
Gross receipts from business 1,500,000
Professional and business expenses 978,000

6. The income tax due and payable if he availed itemized deduction __________.

7. The income tax due and Payable if he availed of the Optional standard deduction OSD?

Shallah received the following income in 2019

Business income, Philippines P 500,000

Business income, United States 350,000
Expenses, Philippines 280,000
Expenses, United States 150,000
Interest on deposits with PNB 15,000
Interest on deposits in US ($1=P50) $ 500
Cash Prize won in local contest 9,000
Cash prize won in a contest in US $200
Winnings in local lotto 200,000
Winnings in US lotto $1,000
Dividends from SMC, a domestic corp. 250,000

8. The Taxable Income if Shallah is a resident Citizen_______________.

9. The Tax due and Payable____________.

10. The final tax due______________

In a Nutshell

Let us apply what we have learned from the discussion above. Let’s do the practice. Solve the
problem below and prepare the income tax return using BIR Form No. 1701.

The following information relate to Mr. Jevi. Lim Teh for 2018 taxable year:

1. Name of taxpayer Jevi Lim Teh

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Address 40 San Juan, Poblacion 10, Tagum City.

TIN 132-222-459
Telephone Number 644-2340
Date of birth December 14, 1971

2. Name of spouse Jella Sy Teh

Occupation Housewife
Address 40 Juan Luna Street, Poblacion 10, Tagum City
TIN 321-445-896
Telephone Number 644-2340
Date of birth June 7, 1970

3. Compensation income of the Taxpayer

Employer Jevilla Food Corporation
TIN 775-231-564
Annual salary P350,000 (net of SSS, Medicare, Pag-IBIG and
withholding tax)
13th month pay P30,000
Withholding tax P18,000

4. Income of the taxpayer from business:

Trade Name Tagum City Hardware
TIN 330-898-767
Method of accounting Accrual system
Method of deduction Itemized

Data on business operation:

Sales P3,220,000
Sales discounts and returns 20,000
Merchandise inventory, 650,000
January 1
Purchases 3,450,000
Purchases returns and 100,000
discounts
Merchandise inventory, 1,500,000
December 31
Salaries and wages 420,000
Light and water 18,000
Depreciation 12,000
Taxes and licenses 15,000
Gasoline and oil 14,000
Maintenance of motor vehicle 8,000
Supplies 7,000
Advertising 6,000

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Q&A List

Do you have any question for clarification?

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords Index
This section lists down the keywords that will help you recall the discussions.

Resident citizen Non-resident alien Graduated tax Final withholding tax

engage in trade or
business
Non-resident citizen Non-resident alien Individual taxpayer
not engage in trade Creditable
or business withholding tax
Resident alien Special taxpayer
Tax return Schedular tax rate

Non-resident alien

Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.
Activity Date Where to Submit
Big Picture A-C: Let’s Check Activities BlackBoard LMS
BigPicture A-C:Let’s Analyze Activities BlackBoard LMS
Big Picture A-C: In A Nutshell BlackBoard LMS

Big Picture A-C: Q&A List BlackBoard LMS – Forum

1st Formative Assessment BlackBoard LMS
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Week 6-7: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Assess the classification of corporate taxpayer.
b. Analyze the computation of Income tax for corporation, partnership and
Special corporation
C. Evaluate the computation of improperly accumulated retained
earnings.

Big Picture in Focus:

ULOa. Assess the classification of corporate taxpayer
ULOb. Analyze the computation of Income tax for Corporation,
Partnership and Special corporation.
ULOc. Evaluate the computation of Improperly accumulated
retained earnings

Metalanguage

In order to demonstrate the most essential terms relevant to the study of Income
taxation and to demonstrate ULOa, ULOb, and ULOc will be operationally defined to establish
a common frame of refence as to how the terms are used. You will encounter some of these
terms as we go through in our lessons. Please refer to these definitions in case you will
encounter difficulty in understanding Income Taxation.

Corporation. An artificial being created by operation of law, having the right of

succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. (The Corporation code of the Philippines)

Domestic Corporation. It refers to a corporation organized under the Philippine laws.

Foreign Corporation. It refers to a corporation organized under the laws of foreign

country.

Resident foreign corporation. A foreign corporation engaged in trade or business in

the Philippines.

Non-resident foreign corporation. A foreign corporation not engaged in trade or

business in the Philippines but earned income from sources within the Philippines like
interests, dividends, rents, royalties and etc.

Special Corporation. It refers to a corporation either domestic or foreign subject to

special tax rates as provided by the tax code.

Government-owned or controlled corporations (GOCC). All corporations, agencies

or instrumentalities owned or controlled by the Government.
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Normal Corporate Income Tax ( NCIT). It refers to normal or basic income tax imposed
on corporations of 30% of the net taxable income.

Minimum Corporate Income Tax (MCIT). It refers to the 2% tax rate of the gross
income, applicable on the fourth year of the business operation, the corporate income
tax liability shall be based on the NCIT OF 30% or the MCIT of 2% whichever is higher.

Optional Gross Income Tax (OGIT). It refers to the 15% tax rate of the gross income
allowed by the President, upon the recommendation of the secretary of finance,
effective January 1, 2000.

Improperly Accumulated Earnings Tax (IAET). It refers to the section 29, of the tax
code, as amended, provides that an IAET that is equal to 10% of the improperly
accumulated taxable income shall apply to every corporation.

Partnership. A contract whereby two or more persons bind themselves to contribute

money, property or industry to a common fund, with the intention of dividing the profits
among themselves. (Article 1767 New Civil Code of the Philippines)

General Professional Partnership. One formed by persons for the sole purpose of
exercising their common profession.

General Co-Partnership. These are partnerships other than General Professional

Partnerships and considered corporations and are therefore taxed as corporations.

General Partnership. Those in which each partner is personally liable to the

partnership’s creditors if partnership assets are not sufficient to pay thereof.

Limited Partnership. Those in which one partner is general partner and the remaining
partners are limited partners and their obligations to creditors are limited to their capital
contributions.

Let’s begin!

INCOME TAXATION ON CORPORATION

A. CORPORATION DEFINED

For tax purposes, a “corporation” is defined under Section 22 of RA 8284 as follows:

The term “corporation” shall INCLUDE:

1. Partnerships, no matter how created or organized;

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A contract whereby two or more persons bind themselves to contribute money,

property or industry to a common fund, with the intention of dividing the profits among
themselves. (Article 1767 New Civil Code of the Philippines)

2. Joint stock companies;

A company or association consisting of individuals having a joint stock of
capital represented by shares, organized to conduct a business for gain and having
a joint stock of capital owned individually by the members and transferable without
the consent of the group.

3. Joint accounts (cuentas en participacion);

A bank account in the name of two or more individuals which is account
owners, who jointly share its affiliated rights and liabilities.

4. Associations; or
An association can be called a group of people who come together to achieve
any particular purpose or goal and that too for a limited period of time.

5. Insurance companies
A business that provides coverage, in the form of compensation resulting from
loss, damages, injury, treatment or hardship in exchange for premium
payments.

But does NOT INCLUDE:

1. General professional partnerships; and

2. A joint venture or consortium formed for the purpose of undertaking:
3. Construction projects; or
4. Engaging in petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract with the government

A. CLASSIFICATION OF CORPORATE TAXPAYERS

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CORPORATION

DOMESTIC FOREIGN

NONRESIDENT
RESIDENT FOREIGN
FOREIGN

1) Domestic Corporation (DC) – 30% regular tax on world income.

2) Resident Foreign Corporation (RFC) – 30% regular tax on Philippine taxable

income.

3) Nonresident Foreign Corporation (NRFC) – 30% final tax on Philippine gross

income.

DC, RFC and NRFC may be classified further into:

1) Ordinary Corporation - a corporation either domestic or foreign, which is

subject to basic 30% NCIT or to the 2% MCIT rate.

2) Special Corporation - a corporation either domestic or foreign, which is subject

to special tax rate as provided by existing tax laws.

B. EXEMPT ORGANIZATIONS

The following organizations shall not be subject to income tax (Section 30, RA 8424):

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1) Labor, agricultural or horticultural organization not organized principally for profit;

2) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit;

3) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under a lodge system, or a mutual
aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their dependents;

4) Cemetery company owned and operated exclusively for the benefit of its members;

5) Non-stock corporation or association organized and operated exclusively for religious,

charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;

6) Business league, chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stockholder or
individual;

7) Civil league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

8) A non-stock and nonprofit educational institution;

9) Government educational institution;

10) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely
local character, the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its expenses; and

11) Farmers’, fruit growers’, or like association organized and operated as a sales agent for
the purpose of marketing the products of its member and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of quantity produce
finished by them.

HOWEVER, the income of whatever kind and character of the foregoing organizations
from any of their properties, real of personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to income
tax.

C. DOMESTIC CORPORATIONS
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1. ORDINARY CORPORATIONS

The following taxes apply to ordinary corporations upon generation of income:

a) Final Withholding Tax (FWT)

1. FWT on certain passive income within the Philippines.

2. Capital Gains Tax on sale of land and/or buildings in the Philippines.

b) Capital Gains Tax on Sale of Shares of Stock

c) Basic Income Tax

1. Normal Corporate Income Tax (NCIT); OR

2. Minimum Corporate Income Tax (MCIT)

 FINAL WITHHOLDING TAX ON CERTAIN PASSIVE INCOME WITHIN THE

PHILS:

FORMULA:
Passive Income Pxxx
Rate xx%
Final Withholding Tax Pxxx

1. INTEREST

1) Interest on currency bank deposit (20% for both short term and long term
investments)

2) Yield or any monetary benefit from: (20%)

a. Deposit substitutes

b. Trust funds and similar arrangements

3) Interest income FROM a depositary bank under foreign currency deposit

system (EFCDS) (15%)

4) Interest income derived by a depositary bank under the expanded foreign

currency deposit system from foreign currency transactions WITH:

1) Non-residents 0%

2) Offshore banking units in the Philippines 0%

3) Local commercial banks 0%

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Matina, Davao City
Phone No.: (082)300-5456 Local 137

4) Branches of foreign banks 0%

5) Residents 10%

2. ROYALTIES (20%)

3. DIVIDENDS FROM ANOTHER DC (0%)

Illustration:

Jessa Corporation, a domestic corporation has the following records of income

Expenses in 2019:

Gross income, net of 1% withholding tax P 1,584,000

Expenses 755,000
Rent income, net of 5% withholding tax 137,750
Expenses on rent 45,000
Dividends from domestic corporation 35,000
Royalty 80,000
Interest from bank deposit with PNB, gross tax 20,000

The Income tax and final tax payable by Jessa Corporation is ________.

Answer:

Gross income ( P1,584,000/99%) P 1,600,000

Rent income ( 137,750/95%) 145,000
Total 1,745,000
Less: Deductions
Expenses P755,000
Expenses on rent 45,000 800,000
Taxable income P 945,000
Multiply by tax rate ( NCIT ) 30%
Income tax due P 283,500
Less: Withholding taxes
On gross income ( P1,600,000 x 1%) P 16,000
On rent ( P145,000 x 5%) 7,250 23,250
Income tax payable P 260,250

Royalty ( P80,000 x 20%) P 16,000

Interest ( 20,000 x 20%) 4,000
Total final taxes payable P 20,000

Note: Dividends received from domestic corporation are tax exempt.

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 CAPITAL GAINS TAX ON SALE OF LAND AND/OR BUILDINGS

REQUISITE: The land and/or building must be a capital asset; and it must be
located in the Philippines

FORMULA:
Tax Base Pxx
Rate 6%
Capital Gains Tax Pxx

TAX BASE:
1) Price

Highest
2) Fair Market Value

3) Zonal Value

Illustration:

Ms. Jessie Sy is not engaged in real estate business. He sold a 1,000 square
Meter residential land for P2,500,000 on June 7, 2019 and with a fair market
value of P 2,000,000 and zonal value of P2,100,000. The Land was acquired
by purchase by on February 3, 2010 for P1,200,000. After acquisition, the land
was fenced at a cost of P80,000. A commission of 5% of the sales price was
paid to the sales agent.

How much is the capital gains tax due____________.

Answer:
Selling Price, higher P 3,000,000
Multiply by Tax rate 6%___
Capital gain tax due P 180,000

 CAPITAL GAINS ON SALE OF SHARES OF STOCKS

REQUISITES:
1. The shares of stocks sold, bartered, exchanged or disposed must be
in a domestic corporation; and

2. The transaction must be not through the stock exchange.

FORMULA:
Selling Price Pxxx
Cost (xxx)
Selling Expense (xxx)
Net Gain Pxxx
Rate 15%
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Capital Gains Tax Pxxx

Illustration:

RJ sold 2,500 shares of stocks of Henry Corporation. The par value

per share was P185 but were acquired by him at P190. On the date sale, the
shares had a selling price of P220 per share.

The capital gains tax on the sale if the shares are not listed and traded
In the Philippine Stock exchange _______________.

Answer:

Gross selling price ( 2,500 x P220 ) P 550,000

Less: Cost ( 2,500 x P190) 475,000
Net capital gain P 75,000
Multiply by Tax rate 15%_
Capital gains tax due P 11,250

 NORMAL CORPORATE INCOME TAX (NCIT) – 30%

FORMULA:
Gross Income Pxxx
Allowable Deductions (xxx)
Taxable Income Pxxx
Rate 30%
NCIT Pxxx

GROSS INCOME - includes all income not subject to final withholding tax, capital
gains tax and not considered exempt under the law.

ALLOWABLE DEDUCTIONS:

a. Business expenses & losses (Itemized Deductions); or

b. Optional Standard Deduction (OSD)

Illustration:

Allen Corporation, a corporation engaged in business in the Philippines and

Abroad, has the following data in 2019:

Gross income, Philippines P 985,000

Expenses, Philippines 780,000
Gross income, Japan 850,000
Expenses, Japan 650,000
Interest on bank deposit, Phil 35,000

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

The income tax due if the corporation is _____________

Answer:
Resident Nonresident
Domestic foreign foreign__

Gross income, Phil. P 985,000 985,000 985,000

Gross income, Japan 850,000 - -
Interest on bank deposit, Phil. - - 35,000
Total P1,835,000 985,000 1,020,000
Less: Deductions
Expenses, Phil 780,000 780,000 -
Expenses, Japan 650,000 - -_____
Taxable income P 405,000 205,000 1,020,000
Multiply tax rate (NCIT) 30% 30% 30%__
Income tax due P 121,500 61,500 306,000

Illustration:

Aila Corporation which started with its operations in 2009 has the following records in
2019:

1st Quarter 2nd Quarter 3rd Quarter 4rth quarter

Gross profit P 600,000 P950,000 P 900,000 P 870,000
Expenses 500,000 870,000 740,000 675,000
Dividend-Domestic Co. 25,000 25,000 30,000 30,000
Interest-peso bank dep. 4,000 6,000 4,750 3,250
Income tax withheld 6,000 8,000 9,000 7,750
Rent income, gross of
5% w/tax 37,000 37,000 49,000 49,000

The Company had an excess payment of P13,500 in 2018 from which it had
decided to claim tax credit on the excess.

Answer:
1st Quarter 2nd Quarter 3rd Quarter 4rth Quarter
Gross profit P 600,000 P 1,550,000 P2,450,000 P 3,320,000
Less: Expenses 500,000 1,370,000 2,110,000 2,785,000
Net income 100,000 180,000 340,000 535,000
Add: Rent income 37,000 74,000 123,000 172,000
Taxable income 137,000 254,000 463,000 707,000
Tax rate 30% _ _ 30%__ 30% 30%__
Income tax due 41,100 76,200 138,900 212,100
Less: Tax credits
Excess tax, 2018 13,500 13,500 13,500 13,500
Income tax w/held:
Income tax w/held, 1st Qtr. 6,000 6,000 6,000 6,000

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Income tax w/held, 2nd Qtr. 8,000 8,000 8,000

Income tax w/held, 3rd Qtr. 9,000 9,000
Income tax w/held, 4th Qtr. 7,750
Withholding taxes on rent:
Tax w/held, 1st Qtr. 1,850 1,850 1,850 1,850
Tax w/held, 2nd Qtr. 1.850 1,850 1,850
Tax w/held, 3rd Qtr. 2,450 2,450
Tax w/held, 4rth Qtr. 2,450
Total tax credits 21,350 31,200 42,650 52,850
Less: Tax paid, 1st Qtr. 19,750 19,750 19,750
Tax paid, 2nd Qtr. 25,250 25,250
Tax paid, 3rd Qtr. 51,250
_________ __________ ________ ________
Income tax due P 19,750 P 25,250 P 51,250 P 63,000

 MINIMUM CORPORATE INCOME TAX (MCIT) (2%)

TIME OF IMPOSITION – it is imposed beginning on the fourth taxable year

immediately following the year in which such corporation commenced its
business operations, when the MCIT is GREATER THAN NCIT. Simply stated,
MCIT applies on the X + 4th year of operations.

FORMULA:
Gross Income Pxxx
Rate 2%
MCIT Pxxx

GROSS INCOME COMPUTATION:

1. Seller of Goods

Gross Sales Pxxx

Sales Discount (xxx)
Sales Returns and Allowances (xxx)
Cost of Goods Sold (xxx)
Gross Income Pxxx
Add: Other Income subject to NCIT xxx
Total Gross Income Pxxx

 Cost of Goods Sold

 Trader or Merchandiser

Invoice Cost of the goods sold Pxxx

Import Duties xxx
Freight xxx
Insurance xxx
Total Pxxx

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 Manufacturing Concern

Raw materials used Pxxx

Direct labor xxx
Manufacturing overhead xxx
Freight cost xxx
Insurance premiums xxx
Other costs of production xxx
Total Pxxx

2. Seller of Services

Gross receipts Pxxx

Sales discount (xxx)
Sales returns and allowances (xxx)
Cost of services (xxx)
Gross income Pxxx

 Cost of services:

Salaries, and Employee benefit of personnel, consultants, and

specialists, directly rendering the service
Pxxx
Cost of facilities directly utilized in providing the service
(e.g. rentals and cost supplies)
xxx
Other direct cost and expenses necessarily incurred to provide
the services xxx
Total Pxxx

NOTE: In case of banks, “cost of services” shall include interest

expense.

AMOUNT PAYABLE TO BIR:

1) NCIT Higher
2) MCIT

 CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER). Any

excess of the MCIT over NCIT shall be carried forward and credited
against the NCIT for three (3) immediately succeeding taxable years.

 RELIEF FROM THE MCIT. The Secretary of Finance is authorized to

suspend the imposition of the MCIT on any corporation which suffers
losses on account for:

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

a. Prolonged labor dispute

b. Force majeure
c. Legitimate business reverses

Illustration:

Melvin Corporation has the following:

2018 2019
Sales P 1,800,000 P 2,500,000
Cost of sales 1,100,000 1,525,000
Operating expenses 665,000 895,000

The income tax payable in 2018 ________ and 2019 __________

Answer:
2018 2019___
Sales P 1,800,000 P 2,500,000
Cost of sales 1,100,000 1,525,000
Total P 700,000 P 975,000
Operating expenses 665,000 895,000
Net taxable Income P 35,000 P 80,000
Tax rate 30% 30%
NCIT P 10,500 P 24,000
MCIT ( P700,000 x 2% ) 14,000
( P975,000 x 2% ) - 19,500
Tax due (MCIT) P 14,000 NCIT P 24,000
Difference ( 14,000-10,500) ( 3,500)
Tax due and payable P 20,500

DOMESTIC CORPORATIONS EXEMPT FROM MCIT

1. Proprietary educational institutions and hospitals which are non-profit

2. Depository banks under expanded foreign currency deposit system

2. SPECIAL CORPORATIONS

 PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT

HOSPITALS

The rules applicable to ordinary corporations will also apply to proprietary

educational institutions and hospitals which are non-profit except the following:

1. In computing basic income tax, the rate is 10%

NOTE: If income not related to its primary purpose of function is more

than 50% of its total gross income, the rate applicable is 30%
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Phone No.: (082)300-5456 Local 137

2. It is not subject to MCIT

3. Expenditures for expansion of school facilities may not be capitalized but

instead claimed as outright expense.

Illustration:

Mike School of Business and Administration, is a private educational institution

recognized by the government. The following are the financial data for its fiscal year ending
June 30, 2019:

Tuition fees P 13,500,000

Miscellaneous fees 1.500,000
Interest on bank deposits 12,500
Rent income of school facilities to outsiders 500,000
Salary and bonuses, all personnel 6,500,000
Other operating expenses 5,500,000
Repayment of loan 300,000
Quarterly ( three quarters) Income tax paid 58,000

A building was constructed on April 2, 2019 at a cost of P2,200,000 with a depreciable

life of 50 years.
Assuming the cost of construction is treated as an expense, the income tax payable
by the school for the year ended June 30, 2019 is________________

Answer:
Tuition fees P 13,500,000
Miscellaneous fees 1,500,000
Rent income 500,000
Total P 15,500,000
Less: Deductions
Salary and bonuses P 6,500,000
Other operating expenses 5,500,000
Construction of building 2,200,000 14,200,000
Taxable income P 1,300,000
Tax rate 10%__
Income tax due P 130,000
Less: Quarterly taxes paid 58,000
Income tax payable P 72,000

Note: The applicable tax rate is 10% of taxable income because the income
derived from related activity exceeds 50% of the total gross income,
computed as follows:

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Related Unrelated Total

Tuition fees P 13,500,000 P13,500,000
Misc. fees 1,500,000 1,500,000
Interest on bank dep. P 12,500 12,500
Rent income 500,000 500,000
Total P 15,000,000 512,500 15,512,500

Ratios 96.70% 3.30% 100%__

Assuming the cost of the building construction is capitalized, the income tax payable
is________________.

Answer:

Total income P 15,500,000

Less: Deductions
Salary and bonuses P 6,500,000
Other operating expenses 5,500,000
Depreciation- Bldg. ( 2,200,000/50 x 3/12) 11,000 12,011,000
Taxable income P 3,489,000
Tax rate 10%__
Income tax P 348,900
Less: Quarterly taxes paid 58,000
Income tax due P 290,900

 GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS

All corporations, agencies or instrumentalities owned or controlled by the

Government shall be taxable like “ordinary corporations”. However, the following
shall be exempt:

1. Government Service and Insurance System (GSIS)

2. Social Security System (SSS)

3. Philippine Health Insurance Corporation (PHIC)

4. Local water districts (RA 10026)

NOTE: Philippine Charity Sweepstakes Office (PCSO) is already TAXABLE

upon effectivity of the TRAIN LAW.

3. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

 PERSONS LIABLE. This tax is only applicable to domestic corporations which

are classified as closely-held corporations. The following shall be exempt:

1. Banks and other non-bank financial intermediaries;

2. Insurance companies;

3. Publicly-held corporations;

4. Taxable partnerships;

5. General professional partnerships;

6. Non-taxable joint ventures; and

7. Enterprises duly registered with the;

a. PEZA

b. Pursuant to Bases Conversion and Development act of 1992

c. Special Economic Zones

 TAXABLE EVENT. The taxable event in IAET is the accumulation of earnings

BEYOND the reasonable needs of the business.

REASONABLE NEEDS OF THE BUSINESS - The test used in determining the

reasonable needs of the business is also called “Immediacy Test”. It provides
that “reasonable needs” of the business is equivalent to:
Immediate Needs P xxx
Reasonably anticipated needs xxx
Reasonable Needs P xxx

The following constitute accumulation of earnings for the reasonable needs of

The business:

1. Earnings reserved for definite corporate expansion projects or programs

requiring considerable capital expenditure as approved by the Board of Directors
or equivalent body;

2. Earnings reserved for building, plants or equipment acquisition as approved by

the Board of Directors or equivalent body;

3. Earnings reserved for compliance with any loan covenant or pre-existing

obligation established under a legitimate business agreement;

4. Earnings required by law or applicable regulations to be retained by the

corporation or in respect of which there is legal prohibition against its distribution;

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

5. In the case of subsidiaries of foreign corporation in the Philippines, all

undistributed earnings intended or reserved for investments within the
Philippines as can be proven by corporate records and/or relevant documentary
evidence.

FORMULA
Taxable Income Pxxx
Less: Corporate income tax due xxx
Add: Net operating loss carry-over xxx
Earning from regular income, net of tax Pxxx
Passive income, net of final tax xxx
Capital gains, net of capital gains tax xxx
Exempt or excluded income xxx
Total earnings Pxxx
Less:
Dividends declared Pxxx
Reasonable appropriations xxx xxx
Total Pxxx
Add: Retained Earnings from prior years xxx
Less: Amount That may be retained
(100% of paid-up capital as of year-end) xxx
Improperly Accumulated Earning Pxxx
Rate 10%
Improperly Accumulated Earnings Tax Pxxx

Illustration:
Ian, Inc. was assessed by the BIR for improperly accumulating profits. Ian reported
the following in 2019:

Gross income P 3,100,000

Business expense 2,400,000
NOLCO, prior years 600,000
Dividend income -domestic 80,000
Gross interest income -bank 60,000
Gain on sale of domestic stocks directly buyer 300,000
Gain on sale of land, classified as capital asset
(Selling price =P3,000,000; Fair value = P3,500,000 ) 500,000
Dividends declared 200,000
Appropriation for treasury stocks 60,000
Appropriation for plant expansion 160,000

The improperly accumulated earnings tax shall be computed as follows:

Answer:
Gross income P 3,100,000
Less: Business expense P 2,400,000
NOLCO, Prior years 600,000 3,000,000
Taxable net income P 100,000
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Multiply by: Tax rate 30%__

Normal Corporate Income Tax P 30,000_

Gross income P 3,100,000

Multiply by: MCIT rate 2%___
Minimum corporate income tax (Tax due) P 62,000

Taxable income P 100,000

Less: Corporate income tax due – MCIT 62,000
Add: NOLCO Prior years 600,000
Earnings from regular income P 638,000
Dividend income -domestic 80,000
Interest income bank, net of final tax ( P60,000 x80%) 48,000
Net gain on sale of domestic stocks (P300,000-45,000) 255,000
( P 300,000 x 15% = P45,000 capital gains tax)
Net gain on sale of land, a capital asset (P 500,000-210,000) 290,000
( P 3,500,000 x 6% = P210,000) ________
Total earnings P 1,311,000
Less: Dividends declared P 200,000
Appropriation for treasury stock 60,000
Appropriation for plant expansion 160,000 420,000
Improperly accumulated earnings P 891,000
Multiply by: IAET rate 10%__
Improperly accumulated earnings tax P 89,100

D. RESIDENT FOREIGN CORPORATIONS

1. ORDINARY CORPORATIONS

The income taxes applicable to ordinary domestic corporations upon generation of

income are the same with resident foreign corporations, except:

1. The general principles as to source of taxable income must be considered; and

2. Sale of land and/or buildings is not subject to capital gains tax BUT basic income
tax

3. Interest income from a depositary bank under the expanded foreign currency
deposit system (EFCDS) was not amended under the TRAIN Law, hence, shall
still be subject to 7.5%

4. Capital gains tax on sale of shares of domestic corporation was not amended
under the TRAIN Law, hence, shall be subject to 5% for the first 100,000 of
the gain and 10% in excess of 100,000.

5. RESIDENT FOREIGN CORPORATIONS EXEMPT FROM MCIT:

a. International carrier
b. Offshore banking units

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Phone No.: (082)300-5456 Local 137

c. Regional or area headquarters

d. Regional operating headquarters
e. Firms that are taxed under special tax regime (e.g. Covered by PEZA law &
Bases Conversion Development Act)

2. SPECIAL CORPORATIONS

 INTERNATIONAL CARRIER

FORMULA
Gross Philippine Billings Pxxx
Rate 2.5%
Income Tax Pxxx

GROSS PHILIPPINE BILLINGS (GPB)

a. International Air Carrier – refers to the amount of gross revenue derived

from carriage of persons, excess baggage, cargo and mail:

1. Originating from the Philippines;

2. In a continuous and uninterrupted flight;

3. Irrespective of the place of sale or issue and the place of payment

of the ticket or passage of document.

NOTE:
a. Tickets revalidated, exchanged and/or indorsed to another
international airline form part of the GPB if a passenger boards a
plane in port or point in the Philippines.

b. Flight which originates from the Philippines, but transshipment of

passenger takes place at any port outside the Philippines on
another airline; only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of the GPB.

b. International Shipping – means gross revenue whether the passenger,

cargo, or mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or freight
documents.

Illustration:

Sea Air, a resident foreign air carrier, reported the following summarized results of its
Philippine Operations during a quarter: Compute the income tax due_____________.

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Inbound Outbound
flights flights Total___
Gross receipts P10,000,000 P 9,000,000 P19,000,000
Less:
Direct expenses 6,000,000 5,000,000 11,000,000
Other common expenses 3,000,000
Net income P 5,000,000

Answer:

Gross Philippine billings P 9,000,000

Multiply by: Income tax rate 2.5%__
Income tax due P 225,000

USE OF PREFERENTIAL RATE OR EXEMPTION (inserted by RA 10378)

International carriers may avail of preferential rate or exemptions on basis of:

a) Tax Treaty

b) International agreement

c) Reciprocity – an international carrier, whose home country grants

income tax exemption to Philippine carriers, shall likewise be exempt
from income tax.

 OFFSHORE BANKING UNITS. Income derived by offshore banking units

(OBUs) from foreign currency transactions shall be taxed as follows:

COUNTER PARTY RATE

Non-residents 0%
Other OBUs 0%
Local Commercial Banks 0%
Branches of foreign banks 0%
Residents 10%

NOTE:
 If OBUs earn income other than from foreign currency transactions, it will
be subject to basic income tax (RCIT vs. MCIT, whichever is higher)

 Any income derived by nonresidents (individuals or corporations) from

transactions with OBUs shall not be subject to income tax.

 REGIONAL OR AREA HEADQUARTERS. Regional or area headquarters shall

not be subject to income tax.

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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

 REGIONAL OPERATING HEADQUARTERS. The rules applicable to ordinary

corporations will also apply to Regional Operating Headquarters except the
following:

a. In computing basic income tax, the rate is 10%

b. It is not subject to MCIT

3. BRANCH PROFIT REMITTANCES TAX (BPRT)

FORMULA:
Profit Remittance Pxxx
Rate 15%
BPRT Pxxx

PROFIT REMITTANCE:

PROFIT REMITTED APPLICABLE TAX

Connected with the conduct of its
trade or business in the Philippines Subject to 15% BPRT

Others Exempt

EXEMPT ENTITIES. Activities registered with the following shall be exempt from
BPRT:

a. Philippine Economic Zone Authority (PEZA)

b. Subic Bay Management Authority (SBMA)

c. Clark Development Authority (CDA)

Illustration:

A resident foreign corporation, engaged in wholesale of imported goods, had the

following income statement:

Gross income from sale of goods P6,000,000

Interest income, net of final tax 90,000
Domestic dividends 130,000
Less:
Operating expenses P 3,500,000
Corporate income tax 850,000 4,350,000
Net Profit P1,870,000

Required: Assuming that the corporation earmarked the entire profit remittance abroad,
compute the branch profit remittance tax

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Answer:
Net Profit P 1,870,000
Less: Investment income
Interest income P 90,000
Dividend 130,000 220,000
Taxable Profit P 1,650,000
Multiply by: portion remitted 100%__
Actual profit remittance P 1,650,000
Multiply by: Profit remittance tax rate 15%___
Branch profit remittance tax P 247,500

E. NONRESIDENT FOREIGN CORPORATION

1. ORDINARY CORPORATIONS. Gross income from all sources within the Philippines
shall be subject to 30% final withholding tax, except the following:

INCOME APPLICABLE TAX

Interest income on foreign loans 20% FWT
Intercorporate Dividends
a. With tax sparing 15% FWT
b. Without tax sparing 30% FWT

Net Capital Gains from sale of shares

of stock not traded in the local stock
exchange (not amended under the TRAIN Law)
a. First 100,000 5%
b. In excess of 100,000 10%

2. SPECIAL CORPORATIONS

TYPE TAX BASE RATE

Non-resident Cinematographic
Film owner, Lessor, or Distributor Gross Income 25%

Non-resident owner or Lessor

Of vessels, chartered by Philippine Gross rentals, lease
Nationals or charter fees 4.5%

Non-resident owner or lessor of

Aircraft, machineries and other Gross Rentals,
Equipment charters & other fees 7.5%

F. DEADLINE FOR FILING OF RETURNS

1. Final Withholding Tax on passive income

MANUAL FILING
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Phone No.: (082)300-5456 Local 137

January to November 10th day of the following month following the month
the withholding tax was made.

December January 15 of the succeeding year.

2. Capital Gains Tax

a) Shares of stock

1. Ordinary return – 30 days after each transaction

2. Final Consolidated Return – on or before April 15 of the following year

b) Real property – 30 days following each sale or other disposition

3. Fringe Benefit Tax – 10th day of the month following the end of the calendar quarter
in which the fringe benefits were granted to the recipient,

4. Basic Income Tax

a. Quarterly – on or before the 60th day following the end of the quarter
b. Annual (Final quarter) – April 15 of the succeeding year.

5. BIR FORMS

a. BIR Form 1702-EX – Annual Income Tax Return for Corporation,

Partnership and other Non-Individual Taxpayer EXEMPT under the Tax
Code, as Amended (Sec. 30 and those exempted in Sec. 27 © and Other
Special Laws, with NO other taxable income)

b. BIR Form 1702-MX – Annual Income Tax Return for Corporation,

Partnership and other Non-Individual with MIXED Income subject to
multiple income tax rates or with income subject to
SPECIAL/PREFERENTIAL RATE

c. BIR Form 1702-RT – Annual Income Tax Return for Corporation,

Partnership and other Non-Individual Taxpayer subject only to REGULAR
Income Tax Rate

d. BIR Form 1702Q – Quarterly Income Tax Return

e. BIR Form 1704 – Improperly Accumulated Earning Tax Return

CORPORATION’S TAXABLE BASE AND INCOME TAX RATES

CLASSIFICATIONS DOMESTIC RESIDENT NON-RESIDENT

FOREIGN FOREIGN
SOURCES OF Within and Outside Within the Within the
TAXABLE INCOME the Philippines Philippines Philippines
IN GENERAL

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Phone No.: (082)300-5456 Local 137

TAX BASE TAXABLE INCOME TAXABLE INCOME GROSS INCOME

Normal Tax Rate Normal Tax Rate Final Withholding
Tax Rate

TAX RATE (R.A. 30% EFFECTIVE 30% EFFECTIVE

9337) January 1, 2009 January 1, 2009 30% EFFECTIVE
January 1, 2009
Or Or

GROSS INCOME GROSS INCOME

TAX BASE Minimum Corporate Minimum Corporate NOT APPLICABLE
Income Tax Income Tax

TAX RATE 2% 2% NOT APPLICABLE

NCIT VS MCIT
Summary Application
After three years of NCIT MCIT
operation:
Losses or break-even Not Applicable Applicable
MCIT greater than NCIT Not Applicable Applicable
NCIT greater then MCIT Applicable* Not Applicable
*When the tax to be paid is NCIT the “the Deferred Charges, MCIT” (excess of MCIT over
NCIT) within the past three years can be claimed as a tax credit against NCIT.

CAPITAL GAINS TAX (CORPORATION)

CAPITAL GAINS DOMESTIC RESIDENT NONRESIDENT
WITHIN FOREIGN FOREIGN
1. Capital gains on
sale of shares of
stock NOT traded in 15% (TRAIN Law) First 100,000 – 5% First 100,000 – 5%
the local stock In excess – 10% In excess – 10%
exchange.
6/10 of 1% 6/10 of 1% 6/10 of 1%
2. Percentage tax on
sale of shares of
stock traded in the
local stock
exchange. Based on 6% of Selling Price 30% Regular 30% Regular Income
the selling price. or FMV, whichever is Income Tax on Tax on Gains
higher Gains
3. Capital gain on
sale or exchange or
disposition of lands Not taxable
and or buildings 30% Not taxable
located in the
Philippines.
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4. Net capital gain on

sales or exchange or
disposition of lands
and/ or buildings
located outside the
Philippines

PASSIVE INCOME (CORPORATION)

PASSIVE INCOME WITHIN Domestic and Resident Nonresident Foreign
Foreign
1. Interest from depository
bank under the expanded Domestic – 15% (TRAIN Tax exempt Sec. 27 D (3)
foreign currency deposit Law)
system. Resident Foreign – 7.5%

2. Royalties, yield or Normal Corporate Income

monetary substitutes from 20% Tax
deposits substitutes, trust
funds and similar
arrangements. 20% Normal Corporate Income
Tax
3. Interest on currency bank
deposit

PARTNERSHIP

PARTNERSHIP DEFINED:
A contract whereby two or more persons bind themselves to contribute money, property
or industry to a common fund, with the intention of dividing the profits among
themselves. (Article 1767 New Civil Code of the Philippines)

CLASSIFICATION OF PARTNERSHIPS

Based on Liability of Partners

1. General Partnership. Those in which each partner is personally liable to the

partnership’s creditors if partnership assets are not sufficient to pay thereof.

2. Limited Partnership. Those in which one partner is general partner and the remaining
partners are limited partners and their obligations to creditors are limited to their capital
contributions.

Based on Taxation

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1. General Professional Partnership. One formed by persons for the sole purpose of
exercising their common profession.

2. General Co-Partnership. These are partnerships other than General Professional

Partnerships and considered corporations and are therefore taxed as corporations.

General Professional Partnership

a. Not subject to income tax but required to file annual income tax return for the purpose
of furnishing information as to the items of gross income, deductions of each of the
partners.

b. Partners in general professional partnership are liable for income tax in their separate
and individual capacities.

c. The net income of General professional partnership shall be computed in the same
manner as a corporation.

d. General professional partnership may claim either itemized deductions or optional

standard deductions.

e. The net income determined by either claiming itemized deductions of optional

standard deductions from the general professional partnerships net income is the
distributable net income.

f. Distributable net income is the basis for which each partner’s share is determined

Illustration:

1. If General Professional partnership Opt to choose Optional Standard Deduction

(OSD)

Service income Php 2,500,000

Less: Cost of service 875,000
Gross income 1,625,000
Less: OSD (40%) 650,000
Net income Php 975,000

1. Compute the share of Partner A and B if they agreed to share

a. Equally.
b. A 70%; B 30%

Answer: a. Equally
Partner A ( Php 975,000/2 ) - Php 487,500
Partner B (Php 975,000/2) - Php 487,500

b. A 70%; B 30%
Partner A ( Php 975,000 x70%) Php 682,500
Partner B ( Php 975,000 x30%) 292,500

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2. If General Professional partnership uses Itemized deductions.

Service income Php 2,500,000

Less: Cost of service 875,000
Gross income Php 1,625,000
Less: Itemized deductions (given) 825,000
Net income Php 800,000

2. Compute the share of Partner A and B if they agreed to share

a. Equally
b. A 70%; B 30%

Answer: a. Equally
Partner A ( Php 800,000/2 ) - Php 400,000
Partner B (Php 800,000/2) - Php 400,000

b. A 70%; B 30%
Partner A ( Php 800,000 x70%) Php 560,000
Partner B ( Php 800,000 x30%) 240,000

3. How much is the tax due and payable of the Partnership?

Answer: No tax ( General rule: GPP is exempt for income tax but not
exempt in business tax such as % tax or VAT)

4. Compute the income tax due of Partner A and B using itemized deduction
after receiving their a. equal share b. A 70%; B 30% share in the net income.
( Use schedular train law tax table)

Answer: a. Equally
Share of A & B in the partnership – Php 400,000
Tax due ( Train law tax table) - Php 30,000

b. A 70%; B 30% share

Share of A 70% - Php 560,000
Tax due ( Tax table) 400,000 Php 30,000
Excess 25% x160,000 40,000
Tax due and payable Php 70,000

General Co-Partnership

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a. These are partnerships other than General professional partnership.

b. Considered as Corporations and are therefore taxed as a Corporations.

c. Profits distributed to Partners are treated like a dividends distributed to shareholders.

d. The share of an individual partner in a taxable partnership is subject to a final tax of

10%.

Illustration

Larri, married is a partner in GL partnership, a taxable partnership. Larri for himself,

derives income from his profession as an architect. It is agreed upon that partner Larri is to
receive 75% share in the profit and loss while Partner Garri, 25%. Compute the following:

a. Tax due and payable for GL partnership

b. Final tax of Larri
c. Tax due and payable of Larri

Gross income of GL partnership - Php 1,000,000

Gross income from profession 300,000
Income tax withheld from professional income 30,000
Expenses of GL partnership 300,000
Expenses of Larri in his profession 80,000

Answers:

a. Tax due for GL partnership

Gross income of GL Partnership Php 1,000,000

Less : Expenses of GL Partnership 300,000
Net Income Php 700,000
Multiply by Tax rate 30% __
Tax due and payable Php 210,000

b. Final tax due of Larri

Gross income of GL Partnership Php 1,000,000

Less : Expenses of GL Partnership 300,000
Net Income before tax Php 700,000
Multiply by Tax rate (30%) 210,000
Net income after tax Php 490,000

Share of Larri (Php 490,000 x 75%) Php 367,500

Multiply by Tax rate 10%_
Final tax due Php 36,750

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c. Income Tax due and payable of Larri

Gross Income from his profession Php 300,000

Less: Expenses from his profession 80,000
Net income from profession Php 220,000

Tax due ( Train law table) None

Less: withholding tax Php 30,000
Tax refundable Php ( 30,000)

Comparison of General professional partnership and General co-partnership

General professional partnership General co-partnership

1. As to nature and
and objective Exercise of profession Operates for profit

2. As to tax liability of
the partnership Exempted from income tax Subject to 30% income
tax of 2% MCIT
3. As to liability of
partners on shares
They received Subject to creditable withholding Subject to 10% final tax
tax of 10% and 15%

Co-Ownership

1. It usually exist when there are two or more beneficiaries who inherited the property.
2. If it exist for the purpose of preserving the property. It is tax exempt. The income
derived by co-owner on the property will form part of the individual gross income
subject to regular tax.

3. It it is created voluntarily or based on agreement, it has personality of partnership

subject to tax. The income of each co-owner is treated as dividend subject to final
tax.

4. When shares of co-owners are re-invested in an income producing activity, the

Income derived from such activity is subject to tax, and co-owners constituted
Themselves into a partnership subject to tax.

5. When an inherited property remained undivided for than 10 years and there is no
attempt to divide the inherited property among the co-heirs, the income of
co-ownership is taxable, and the co-ownership is treated as corporation.

6. The general rule, co-ownership is not subject to tax. However, it shall be subject to
tax using the corporate tax under the following cases:

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a. Co-ownership is voluntarily created through agreement.

b. Shares of co-owners are re-invested in the co-ownership with the intention of
producing income
c. Inherited property remains undivided for more than 10 years.

Illustration

During the current taxable year, Jessa and Janine, both married and without qualified
dependents, inherited an income producing property from their deceased widowed father. At
the end of the year, the income generated from the property amounted to Php 1,000,000
which will be divided equally between tem. On their individual capacity, Jessa and Janine
have compensation income of Php 700,000 and Php 850,000 respectively during the year.

Required: Determine the income tax due from Jessa and Janine.

Answer: The law on taxation is silent as to whether the individual shares of the co-owners on
income of the co-ownership property are subject to creditable withholding tax or
not. In this regard, based on the principle that taxation law shall be construed in
favour of the taxpayer, the shares shall not be subject to creditable withholding tax.

The income tax liability of Jessa and Janine is computed as follows:

Jessa Janine
Compensation income Php 700,000 Php 850,000
Share in co-ownership (1,000,000/2) 500,000 500,000
Total income Php 1,200,000 Php 1,350,000
Less: OSD (40% x 500,000) 200,000 200,000

Net Taxable income Php 1,000,000 Php 1,150,000

Tax due
Tax on Php 800,000 Php 130,000 Php 130,000
Tax on excess 200,000 x 30% 60,000
350,000 x 30% 105,000
____________ _____________
Tax due and payable Php 190,000 Php 235,000

Self-Help: You can refer to the textbook to help you further

understand the lesson. You can use other materials too.
Banggawan, Rex B. (2015). Income Taxation Laws, Principles and applications OBE
Edition. Aduan, Nick (2012). Simplified and Procedural Handbook on Income
Taxation 2nd Edition.

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Let’s Check
Activity 1. Answer the multiple choice below.

1) For the purposes of income taxation, which of the following is not considered a
corporation?
a. General partnership in trade
b. General professional partnership
c. Mutual fund Company
d. Regional operating headquarters of multinational company

2) Which of the following is subject to income tax?

a. SSS and GSIS
b. Philippine Health Insurance Corporation (PHIC)
c. Local Water Districts
d. Philippine Amusement and Gaming Corporation (PAGCOR)

3) Which of the following is taxable based on income from all sources, within and without?

a. Domestic Corporation c. Non-resident Foreign Corporation

b. Resident Foreign Corporation d. All of the choices

4) Which of the following does not have the benefit of claiming deductions in computing
income tax?
a. Domestic Corporation c. Non-resident Foreign Corporation
b. Resident Foreign Corporation d. All of the choices

5) The term applies to a foreign corporation engaged in trade or business in the Philippines
a. Resident Foreign Corporation c. Multinational Corporation
b. Non-resident Foreign Corporation d. Petroleum Contractor

6) The following passive income shall be subject to 20% final withholding tax, EXCEPT
a. Interest income from peso bank deposit
b. Dividend income from another domestic corporation
b. Yield from deposit substitutes
d. Royalties

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7) As a rule, there is no income tax if there is no income. Which of the following is the
exception?
a. Capital Gains Tax on sale of land and/or buildings
b. Capital Gains Tax on sale of share of stock outside the local stock exchange
c. Tax on passive income
d. Regular Corporate Income Tax

8) A domestic corporation was registered with the BIR on November 1, 2015. What year
would be the first MCIT be imposed on such corporation?
a. 2016 c. 2018
b. 2017 d. 2019

9) The following statements about MCIT is correct, except?

a. The computation and the payment of MCIT, shall likewise apply at the time of
filing the quarterly corporate income tax
b. In the computation of the tax due for the taxable quarter, if the computed
quarterly MCIT is higher than the quarterly normal income tax, the tax due to be
paid for such taxable quarter at the time of filing the quarterly corporate income
tax return shall be the MCIT which is two percent (2%) of the gross income as of
the end of the taxable quarter.
c. In the payment of the quarterly MCIT, excess MCIT from the previous taxable
year/s shall not be allowed to be credited.
d. Expanded withholding tax, quarterly corporate income tax payments under the
normal income tax, and the MCIT paid in the previous taxable quarter/s are not
allowed to be applied against the quarterly MCIT due.

10) If the taxpayer is a seller of services, which of the following shall not form part of its cost
of services?
a. Salaries and supplies c. Depreciation and rental expenses
b. Employee benefits d. Interest expense

11) One of the following is not accepted basic relief from the MCIT:
a. Prolonged labor dispute c. Legitimate business reverse
b. Force majeure problems d. Law suits filed by the company

12) Which is not a characteristic of corporate income tax?

a. Progressive tax c. General tax
b. Direct tax d. National tax

13) The following is excluded in the “Gross Philippine Billings” for income tax purposes of
an international air carrier, except,
a. Tickets sold outside the Philippines for passengers originating from outside the
Philippines
b. Passage documents sold outside the Philippines for excess baggage originating
from the Philippines

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c. Tickets sold in the Philippines for passengers originating from the Philippines but
are not actually flown
d. Passage documents sold in the Philippines for cargoes originating from outside
the Philippines

14) In order for an international carrier to qualify for exemption on the basis of reciprocity,
what type of tax shall be exempted as well by its home country?
a. Income tax c. Transfer tax
b. Business tax d. Any of the choices

15) If a branch of a foreign corporation in the Philippines remits passive income earned in
the Philippines to the head office, what is the applicable tax on the said transactions?
a. Subject to 30% final withholding tax
b. c. Subject to 15% branch profit remittances tax
c. Subject to 12% creditable withholding tax
d. Exempt from branch profit remittances tax

16) Which of the following shall pay a tax of ten percent (10%) of their taxable income?
I - Regional or area headquarters
II - Regional operating expenses
a. Both I and II c. I only
b. Neither I nor II d. II only

17) (Phil. CPA) Which of the following statements is incorrect?

a. Resident foreign corporations are subject to income tax based on net income
from sources within the Philippines
b. Domestic corporations are subject to income tax based on net income from all
sources
c. Nonresident foreign corporations are subject to income tax based on gross
income from sources within the Philippines
d. Private educational corporations are subject to income tax based on the net
income from sources within the Philippines at the tax rate of 10%

18) A tax imposed in the nature of a penalty to the corporation to prevent the scheme of
accumulating income rather than distribute the same to the stockholders for the purpose
of avoiding tax on dividends.
a. Minimum corporate income tax c. Improperly accumulated earnings tax
b. Optional corporate income tax d. Capital Gains Tax

19) The Improperly Accumulated Earnings Tax shall not apply to the following except?
a. Banks and other non-bank financial intermediaries
b Publicly-held Corporation
c. Insurance companies
b. Closely-held Corporation

20) It is a test used in determining the reasonable needs of the business to justify the
accumulation of earnings which will exempt the corporation from paying Improperly
Accumulated Earnings Tax:
a. Urgency test c. Immediacy Test

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b. Reasonable needs test d. Control Test

Let’s Analyze
Answer the following problem below and show your solutions

Lira Corporation, already on its 5th year of operation, has the following data:

2018 2019
Sales 1,700,000 2,300,000
Cost of sales 1,050,000 1,425,000
Operating expenses 675,000 480,000

1. The income tax payable in 2018 is ___________

2. The income tax payable in 2019 is ___________

CAE University us a proprietary educational institution. It has the following information for the
taxable year 2019:

Tuition fees P 12,800,000

Miscellaneous fees 1,800,000
Interest on bank deposits 12,300
Rent income 350,000
Salary and bonuses, all personnel 7,500,000
Other operating expenses 3,500,000
Quarterly income tax payments 48,000

Additional school building was built and finished on April 1, 2019 at a cost of P2,000,000
with a depreciable life of 50 years.

3. Assuming the University opted to capitalize the cost of building construction as an

outright expense, the income tax payable is: ___________

4. Assuming the university opted to capitalize the cost of building construction, the
income tax payable is: ______________

A domestic corporation, already in its 10th year of operation, provided the following data:
2017 2018 2019
Gross Sales P2,040,000 2,800,000 3,000,000
Sales Returns 40,000 100,000 -
Cost of goods 1,000,000 700,000 1,500,000
Business expenses 950,000 2,100,000 1,200,000

5. The income tax payable for the taxable year 2019 is:______________

GCQ Corporation, a domestic corporation had the following data for the taxable year 2019:

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Sales P 5,000,000
Cost of goods sold 2,000,000
General selling and administrative expenses 500,000
Interest income from Philippines bank deposit 100,000
Rental income (net of 5% withholding tax) 190,000
Dividend income:
From domestic corporation 60,000
From foreign corporation 50,000
Capital gains from sale of domestic shares of
Stocks sold directly to buyer 75,000
Dividend declared and paid during the year 500,000
Retained earnings 12/31/2019 1,000,000
Par value of outstanding shares, 12/31/2019 500,000
Appropriation for future plant expansion 800,000

6. The income tax payable is:____________

7. Based on the foregoing problem, the Improperly Accumulated Earnings Tax

is:_______

LQ Corporation, a corporation engaged in business in the Philippines and abroad which is on

its 3rd year of operations, has the following data in 2019:
Gross Income, Philippines P 1,000,000
Expenses, Philippines 700,000
Gross Income, China 500,000
Expenses, China 350,000
Interest on peso bank deposit 50,000
Interest from Foreign Currency Deposit 80,000
Royalties from books 75,000
Dividend income from another domestic corp. 100,000
Income tax paid in China 60,000

Additional information:

 The corporation sold its stocks in a domestic corporation directly to the buyer for
P240,000. The cost of such shares is P80,000.
 It sold a vacant lot, booked as investment property held for capital appreciation, for
P2,800,000. Fair market value per tax declaration is P3,000,000 while zonal value
is P3,300,000. The lot was acquired for P1,500,000.

8. How much is the income tax payable if the Corporation is domestic?___________

9. How much is the income tax payable if the corporation is resident foreign?________

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10. Based on the preceding number, how much is the total income tax on all income?______

In a nutshell
Compute the problem below and file a quarterly income tax return using 1702Q and annual
income tax return 1702-EX.

Bless Corporation, a domestic corporation, is into buy and sell business. The following
results of operations appear in its records for the quarter ending December 31, 2019:

Gross sales for the 1st quarter 350,000

Cost of sales for the 1st quarter 133,000
Total deductions claimed for the 1st quarter 126,000
Gross sales for the 2nd quarter 210,000
Cost of sales for the 2nd quarter 80,500
Total deductions claimed for the 2nd quarter 84,000
Gross sales for the 3rd quarter 550,000
Cost of sales for the 3rd quarter 350,000
Total deductions for the 3rd quarter 50,000
Gross Sales for the 4rth quarter 730,000
Cost of sales for the 4rth quarter 430,000
Total deductions for the 4rth quarter 120,000

The company has a creditable tax withheld of 15,950.

How much is the total taxable income to date?

How much is the tax payable for the 1st quarter?

How much is the tax payable for the 2 nd quarter?

How much is the tax payable for 3rd quarter?

How much is the annual income tax payable for year 2019?

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Q&A List

Do you have any question for clarification?

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords Index
This section lists down the keywords that will help you recall the discussions.

Domestic Improperly Optional standard

Corporation Partnership accumulated deduction
retained earnings
Resident foreign General Normal corporate
corporation professional income tax Gross income
partnership
Non-resident foreign General Co-
corporation partnership Minimum corporate Net income
income tax
Co- ownership Itemized deductions Passive income
Special Corporation

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Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.

Activity Date Where to Submit

Big Picture A-C: Let’s Check Activities BlackBoard LMS
BigPicture A-C:Let’s Analyze Activities BlackBoard LMS
Big Picture A-C: In A Nutshell BlackBoard LMS

Big Picture A-C: Q&A List BlackBoard LMS – Forum

1st Formative Assessment BlackBoard LMS

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Week 8-9: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Explain the Fringe Benefit Tax.
b. Perform the computation of Fringe Benefit Tax.
c. Discuss the Tax administration remedies and the Power of
BIR and Commissioner.

Big Picture in Focus:

ULOa. Explain the nature and concept of Fringe Benefit.
ULOb. Perform the computation of Fringe Benefit Tax.
ULOc. Discuss the Tax Administration Remedies and the Power of
BIR and Commissioner.

Metalanguage

In order to demonstrate the most essential terms relevant to the study of Income
taxation and to demonstrate ULOa, ULOb, and ULOc will be operationally defined to establish
a common

frame of refence as to how the terms are used. You will encounter some of these terms as we
go through in our lessons. Please refer to these definitions in case you will encounter difficulty
in

understanding Fringe Benefit, Tax administration remedies and the Power of BIR and
Commissioner.

Fringe Benefit. These refers to any good, service, or other benefit furnished or granted by
an employer in cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employee).

Rank- and –file Employees. These are employees who are not holding a managerial or
supervisory position.

Supervisory Employees. These are those employees who, in the interest of employer,
effectively recommend such managerial actions if the exercise of such authority is not
merely routinary or clerical in nature but requires the use of independent judgment.

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Managerial Employees. Include those who are vested with powers or prerogatives to lay
down and execute management policies and/or hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees.

De Minimis Benefits. Refers to facilities and privileges of relatively small value (such as
entertainment, medical services or so-called “ courtesy” discounts or purchases) granted or
offered by an employer to employees as a means of promoting the health, goodwill,
contentment, or efficiency of his/her employees.

Grossed-up tax. 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.

Tax Assessment. Refers to the valuation and appraisal of the subject of taxation. It is an
official action of an officer, authorized by law, to determine the amount of tax due, including
surcharges, penalties, and interest.

Tax deficiency. Refers to the amount of tax levied is more than what the taxpayer paid as
shown in the tax return.

Deficiency assessment. Refers to an assessment made after the examination, inspection

or independent investigation by revenue officer of the taxpayer’s records where deficiency
had been found.

Fraud Assessment. Refers to an assessment arising from false or fraudulent filing

determined by a revenue officer during the conduct of tax examination and evaluation of the
taxpayer’s records.

Distraint of Personal Property. Refers to the seizure of personal property, tangible or

intangible, by the government to effect collection of taxes including penalties.

Levy of Real Property. Refers to the seizure of real property of the taxpayer by the
government to enforce payment of taxes.

Civil Action. Refers to a judicial proceeding undertaken to enforce protection of the private
rights and individuals.

Criminal Action. Refers to a judicial proceeding undertaken to institute punishment for

violations of criminal laws.

Seizure of the Property. Refers to seizure that implies property will be offered for sale in
public. The amount of proceeds will be applied to satisfy the tax liabilities, and any excess
will be returned to the owner of the Property.

Forfeiture of the Property. Refers to forfeiture that is tantamount to confiscation of the

property and ownership is transferred to the government.

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FRINGE BENEFITS

Fringe Benefit Tax (FBT) – is a final withholding tax imposed on the grossed-up monetary
value of the fringe benefit furnished, granted or paid by the employer to managerial or
supervisory employees, whether such employer is an individual, professional partnership or
corporation, regardless of whether the corporation is taxable or not, or the government and its
instrumentalities. (Section 33, RA 8424, RR No. 3-98)

The term “FRINGE BENEFIT” means any good, service, or other benefit furnished or granted
by an employer in cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employee) such as but not limited to the following:
HEV – HIM – HELF
1) Housing
2) Expense Account;
3) Vehicle of any kind;
4) Household personnel, such as maid, driver and others;
5) Interest on loan at less than market rate to the extent of the difference between the
market rate and the actual rate granted;
6) Membership fees, dues and other expenses borne by the employer for the employee in
social and athletic clubs or other similar organizations;
7) Holiday and vacation expenses;
8) Educational assistance to the employee or his dependents; and
9) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
10) Expenses for foreign travel;

FRINGE BENEFITS

Rank-and file employees Managerial/Supervisory

Include as part of the gross Not part of the gross taxable

taxable income subject to income, but subject to fringe
scheduler tax rate benefit tax

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The following fringe benefits are NOT subject to FBT:

1. Housing privilege of military officials of the Armed Forces of the Philippines (AFP);

2. A housing unit which is situated inside or adjacent (within 50 meters from the perimeter
of the business premises) to the premises of a business or factory.
3. Temporary housing for an employee who stays in a housing unit for three (3) months or
less;
4. Expenses incurred by the employee which are paid by the employer and expenses paid
for by the employee but reimbursed by his employer, provided;
a) The expenditures are duly receipted for and in the name of the employer; and
b) It does not partake the nature of a personal expense attributable to the employee;
5. Representation and transportation allowances which are fix in amounts and are
regularly received by the employees as part of their monthly compensation (subject to
basic tax);
6. Inland travel expenses (such as expenses for food, beverages and local transportation)
during foreign travel;
7. Lodging cost in a hotel (or similar establishments) amounting to an average of
US$300.00 or less per day during foreign travel;
8. Cost of economy and business class airplane ticket for foreign travel;
9. 70% of the cost of first class airplane ticket for foreign travel;
10. Educational assistance to the employee, provided:
a) The education or study is directly connected with the employer’s trade, business
or profession; and
b) There is written contract between them that the employee is under obligation to
remain in the employ of the employer for a period of time they have mutually
agreed upon;
11. Educational assistance to the dependents of the employee, provided that the assistance
was provided through a competitive scheme under the scholarship program of the
company;
12. Contributions of the employer for the benefit of the employee;
a) Pursuant to the provisions of existing law, such as under SSS and GSIS; or
b) Similar contributions arising from provisions of any other existing law;
13. The cost of premiums borne by the employer for the group insurance of his employees;
14. Fringe benefits which are authorized and exempted from income tax under the Tax
Code o under any special law;
15. Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
16. Benefits given to the rank and file;
17. The fringe benefit is required by the nature of or necessary to the trade, business or
profession of the employer; or
18. When the fringe benefit is for the convenience or advantage of the employer;
19. De minimis benefits (refer to list under exempt compensation income)

De minimis benefits (in excess over the limits, TAXABLE)

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a. Monetized unused vacation leave credits to private employees not

exceeding ten (10) days during the year.
b. Monetized unused vacation and sick leave credits paid to government
officials and employees
c. Medical cash allowance to dependents of employees not exceeding one
thousand five hundred pesos (P1,500) per employee per semester, or two
hundred fifty pesos (P250) per month;
d. Rice subsidy of two thousand pesos (P2,000) or one (1) sack of 50-kg. rice
per month amounting to not more than two thousand pesos (P2,000);
e. Uniforms and clothing allowance not exceeding six thousand pesos
(P6,000) per annum; (RR 1-2015)
f. Actual medical benefits not exceeding ten thousand pesos (P10,000) per
annum;
g. Laundry allowance not exceeding three hundred pesos (P300) per month;
h. Employee achievement awards, e.g., for length of service, or safety
achievement, which must be in the form of a tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding ten

i. thousand pesos (P10,000) received by the employee under an established

written plan which does not discriminate in favor of highly paid employees;
j. Gifts given during Christmas and major anniversary celebrations not
exceeding five thousand pesos (P5,000) per employee per annum;
k. Daily meal allowance for overtime work not exceeding twenty five percent
(25%) of the basic minimum wage.
l. Benefits received by an employee by virtue of a collective bargaining
agreement and productivity incentive schemes provide that the total annual
monetary value received from both CBA and productivity incentive schemes
combined do not exceed P10,000 per employee per taxable year.

Treatment of taxable de minimis benefits

i. Rank and file employees – other compensation income
ii. Managerial and supervisory employees – fringe benefit subject to
final fringe benefit tax.

FORMULA:
Grossed-up Monetary Value xxx GROSSED-UP MONETARY VALUE
Rate x% 1) GMV = Monetary Value (MV/
GMFactor
FBT Pxxx GMV Factor = 100% - FBT Rate = 65%
2) GMV = MV + FBT

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In GENERAL, the valuation of fringe benefits shall be as follows:

KIND OF FRINGE VALUATION KIND OF FRINGE VALUATION

BENEFIT BENEFIT
1) Money Amount of money
2) Non-cash property Fair Market Value vs. 3.) Non-cash Depreciation value of
and ownership is Zonal Value property and the property
transferred (whichever is higher), ownership is not
if applicable transferred

EXCEPTIONS:
KIND OF FRINGE VALUATION KIND OF FRINGE VALUATION
BENEFIT BENEFIT
HOUSING
 Employer leases MV = Rental Paid x  Employer MV = AC vs ZV,
a residential 50% purchases a whichever is higher
property for the residential
use of his property and
employee transfers
ownership in the
name of
employee
 Employer owns a MV = FMV vs ZV,  Employer MV = (FMV vs. ZV,
residential whichever is higher) purchases a whichever is higher)
property and the x 2.5% residential – Cost to the
same is property and employee
assigned for the transfer
use of his ownership to his
employee employee, at a
price less than
the acquisition
cost
 Employer MV = AC x 2.5%
purchases a
residential
property on AC should be net of
installment basis interest
and allows the
employee to use
the same
MOTOR VEHICLE
 Employer MV = AC  Employer MV = amount
purchases motor shoulders a shouldered by the
vehicle in the portion of the employer
name of the amount of the
employee purchase price of
a motor vehicle
the ownership of
which is placed in
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the name of the

employee
 Employer MV = Cash given  Employer owns MV = AC of al motor
provides cash for and maintains a vehicles for personal
the purchase of a fleet of motor use/ 5 years
motor vehicle vehicles for the
use of the
business and the
employees
 Employer MV = AC / 5 years  Employer leases MV = Rental
purchases the and maintains a payments of all motor
car on fleet of motor vehicles for personal
installment basis, vehicles for the use x 50%
the ownership of use of the
which is placed in business and the
the name of the employees
employee
INTEREST
 Employer lends MV = Principal x 12%  Employer lends MV = Principal x
money to his money to his (12% - Actual Rate)
employee free of employee at a
interest rate lower than
12%

TAX RATES

Taxpayer 2018 Prior

2018
RC, NRC, OCW, RA and 35% 32%
NRA-ETB
NRA-NETB 25% 25%
SFE 15%
SAE 15%

1. Illustration

During 2019, Mr. Maharlika, an area manager of Maharlika Gold Company received the
following in addition to his annual salary of Php 900,000: Cash Php 220,000 for the
educational assistance of his dependent children; cash of Php 700,000 for motor vehicle in
his own name; and free living quarters and meals with an annual value of Php 250,000.

Required: Compute the fringe benefits tax if Maharlika is:

1. A resident citizen

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Phone No.: (082)300-5456 Local 137

2. A non-resident alien not engaged in business in the Philippines

3. An alien individual employed by an offshore banking unit.

Answers

a. The monetary value of fringe benefits is computed as follows:

Cash for educational assistance of independent children - Php 220,000

Cash for the purchase of motor vehicle in the name of employee 700,000
Free living quarters and meals 250,000
_____________
Total monetary value of fringe benefits Php 1,170,000

b. The fringe benefit tax computed as follows:

1. Resident citizen

Grossed up monetary value Php 1,170,000/65% - Php 1,800,000

Multiply by fringe benefit tax 35%___
Fringe benefits tax Php 630,000_

2. Non-resident alien not engaged in trade or business

Grossed up monetary value Php 1,170,000/75% Php 1,560,000

Multiply by fringe benefit tax 25%
______________
Fringe benefit tax Php 390,000__

3. Alien employed in an offshore banking units

Grossed up monetary value Php 1,170,000/85% Php 1,376,471

Multiply by fringe benefit tax 15%
______________
Fringe benefit tax Php 206,471__

2. Illustration

a. Employer Leases Housing unit for the use of Employee

During 2019, AJ Company paid a monthly rental of Php 50,000 for the residential unit
used by its vice-president for Finance.

Required: Compute the fringe benefit tax for the year 2019.
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Phone No.: (082)300-5456 Local 137

Answer:

Annual rental payment ( Php 50,000 x 12 months) Php 600,000

Multiply by the percentage of lease payment 50%__
Monetary value Php 300,000
Divide by grossed-up monetary value 65%__
Grossed-up monetary value Php 461,538
Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 161,538

Journal entry:

Fringe benefits expense Php 600,000

Fringe benefits tax expense 161,538
Cash Php 761,538

b. Employer has its own residential property and assigned it for the use of the
employee.

CJ Company owns a condominium unit located in the Mintal, Davao City with a fair
market value of Php 9,000,000. The zonal value of the said property, as determined by the
BIR Commissioner, was Php 8,000,000. During the 2019 taxable year, the property was
assigned for the use of the area of the vice-president for Mindanao.

Required: Compute the fringe benefit tax for 2019.

Answer:

FMV of Php 9,000,000 is used to determine the monetary value, since it is higher than
the zonal value of Php 8,000,000.

The fringe benefits tax is computed as follows:

Fair market value of the Property (higher) Php 9,000,000

Multiply by 2.5%__
Actual value Php 225,000
Multiply by 50%__
Monetary value Php 112,500
Divide by grossed up monetary value 65%___
Grossed up monetary value Php 173,077
Multiplied by fringe benefit tax rate 35% __
Fringe Benefit Tax Php 60,577_
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Journal entry:

Fringe benefits tax expense Php 60,577

Cash Php 60,577

3. Illustration

Assume that the acquisition cost of the property was Php 6,000,000 and that the
property has estimated remaining useful life of 12 years.

Required: What is the tax treatment of the acquisition cost?

Answer:

Since the acquisition cost of Php 6,000,000 is lower than Php 9,000,000 fair market
value of the property, the excess of Php 3,000,000 ( Php 9,000,000 – 6,000,000) will be
apportioned over the remaining life of 12 years as follows:

Excess amount Php 3,000,000

Divide by remaining useful life 12____
Annual amortization Php 250,000_

Journal entry:

Fringe benefits expense Php 250,000

Fringe benefits tax expense 60,577
Income constructively realized Php 250,000
Cash 60,577

4. Illustration

Purchase of Property on Installment basis for the use of Employee.

During 2019, CG Company purchased on instalment basis a residential property in

Calinan, Davao City for the use of its area manager. The terms of the acquisition were as
follows: Downpayment of Php 3,000,000 and an annual instalment of Php 1,500,000 with
10% interest based on remaining balance for 10 years. During the date of acquisition,
additional acquisition costs incurred amounted to Php 150,000. The cost of money prevailing
in the business community was 10%.

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Phone No.: (082)300-5456 Local 137

Required: Compute the fringe benefit tax for 2019.

Answer:

Downpayment Php 3,000,000

Present value of annual installmets ( Php 1,500,000 x 6.145) 9,217,500
Additional acquisition cost
150,000_
Total Cost Php
12,367,500_

Note: The value 6.145 was taken from the present value annuity table at 10% for 10 periods.
The amount of interest expense on the remaning balance will not form part of the cost of the
property.

The fringe benefit tax is:

Actual value of fringe benefits Php 12,367,500

Multiply by 2.5% __
Total Php 309,188
Multiply by 50%___
Monetary value Php 154,594
Divide by grossed-up-monetary value 65%__

Grossed up monetary value Php 237,837

Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 83,243_

Journal entry:

Fringe benefits tax expense Php 83,243

Cash Php 83,243

5. Illustration

Purchase of residential property and transfer of its ownership to the employee.

During 2019, GJ Company purchased a residential property for Php 6,000,000 in

Toril, Davao City for the use of its area vice president, to whom the ownership of the property
will be transferred. On the date of purchase, the fair market value of the said property was
Php 9,000,000, while the zonal was Php 8,000,000.

Required: Compute the fringe benefit tax.

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Phone No.: (082)300-5456 Local 137

Answer:

Fair market value ( higher) Php 9,000,000

Multiply 100%__
Monetary value Php 9,000,000
Divide by grossed-up monetary rate 65%___
Grossed-up monetary value Php 13,846,154
Multiply by fringe benefits tax rate 35%___
Fringe benefit tax Php 4,846,154_

Journal entry:

Fringe benefits expense Php 6,000,000

Fringe benefits tax expense 4,846,154
Cash Php 10,846,154

6. Illustration

Cash Purchase of a motor vehicle in the name of employee.

During 2019, BJ company purchased a motor vehicle for Php 800,000 for the use
of its operations manager. Additional costs incurred in relation to purchase amounted to P
45,000. The prevailing market value of similar vehicle is Php 950,000.

Required: Compute the fringe benefits tax.

Answer:

Acquisition cost Php 800,000

Additional related cost 45,000
Actual value 845,000
Multiply by 100%
Monetary value 845,000
Divide by grossed-up monetary rate 65%__
Grossed-up monetary value 1,300,000
Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 455,000

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Phone No.: (082)300-5456 Local 137

Journal entry:

Fringe benefits expense Php 845,000

Fringe benefits tax expense 455,000
Cash Php 1,300,000

7. Illustration

Cash is given to the employee for the purchase of the motor vehicle and ownership is
in the name of the employee.

During 2019, Bluer Company gave Php 900,000 to the marketing for the
purchase of a motor vehicle, the title to which was in the name of the employee. The
manager, however, purchased a motor vehicle at cost of P750,000 and used the excess
amount for the repair of his residential house.

Required: Compute the fringe benefits tax.

Answer:

Cash given Php 900,000

Multiplied by 100%_
Monetary value 900,000
Divide by grossed-monetary value 65%_
Grossed up monetary value 1,384,615
Multiply by fringe benefit tax 35%__
Fringe benefit tax Php 484,615

Note: Although the employee utilized only a portion of the cash he received for the
purchase of a motor vehicle, the whole amount of cash received, however, will serve as the
basis for the computation of the monetary value.

Journal entry:

Fringe benefits expense Php 900,000

Fringe benefits tax expense 484,615
Cash Php 1,384,615

8. Illustration

Purchase of Motor Vehicle on installment basis and transfers of its ownership is to

the employee.

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Phone No.: (082)300-5456 Local 137

During 2019, GCC Company purchased a motor vehicle for the use of its marketing
manager. The motor vehicle was purchased on instalment basis under the following terms:
downpayment of Php 450,000, and the balance is payable in five equal instalments of Php
250,000 plus 10% interest based on the outstanding balance. The cash price of the vehicle
was Php 900,000. The ownership of the vehicle was transferred to the name of the employee.
Additional costs related to the acquisition amounted Php 35,000.

Required: Compute the fringe benefits tax.

Answer:

Cash Price of the vehicle Php 900,000

Additional cost 35,000
Actual value of fringe benefits 935,000
Divide by _ 5___
Monetary value 187,000
Divide by grossed-up monetary rate 65%_

Grossed-up monetary value 287,692

Multiply by fringe benefits tax rate 35%_
Fringe benefits tax Php 100,692

Note: In the absence of the FMV of the motor vehicle, the fringe benefits expense is equal to
the total amount paid, which is the sum of the downpayment and all instalment basis.

Journal entry:

Fringe benefits expense Php 1,735,000

Fringe benefits tax expense 100,692
Cash Php 585,692
Note payable 1,250,000

Computation of fringe benefits expense:

Downpayment Php 450,000

Annual instalments of Php 250,000 for 5 years 1,250,000
Additional acquisition costs incurred 35,000
Total Php 1,735,000

Downpayment Php 450,000

Additional cost incurred 35,000
Fringe benefit tax 100,692
Total Php 585,692

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9. Illustration

Purchase of Motor Vehicle where the employer shoulders part of the cost of the
vehicle and transfers its ownership to the employee

During 2019, Golden CMJR Eagle Company purchased a brand new luxury car or
Php 1,800,000 for use of its vice president for finance. The company shouldered part of the
price amounting to Php 1,300,000, and the employee would pay the balance. The vehicle was
placed in the name of the employee.

Required: Compute the fringe benefit tax

Answer:

Amount shouldered by the employer Php 1,300,000

Multiply by 100%_
Monetary value 1,300,000
Divide by grossed-up monetary rate 65%__
Grossed-up monetary value 2,000,000
Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 700,000

Journal entry:

Fringe benefits expense Php 1,300,000

Fringe benefits tax expense 700,000
Cash Php 2,000,000

10. Illustration

The employer owns a fleet of motor vehicles for use of the business and the
employees

During 2019, XYZ Pharmaceutical Company purchased a dozen of motor

vehicles to be used by its medical representatives and its marketing manager. The cost of
each motor vehicle was Php 750,000.

Required : Compute the fringe benefit tax

Answer:

Acquisition cost Php 750,000

Divide by 5___
Total 150,000
Multiply by 50%_
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Monetary value 75,000

Divide grossed-up monetary value 65%_

Grossed-up monetary value Php 115,385
Multiply by 35%_
Fringe benefit tax Php 40,385

Journal entry:

Fringe benefits tax expense 40,385

Cash Php 40,385

11. Illustration

Employer leases and maintains a fleet of motor vehicles for use of the business and
employees.

During 2019, GJM Corporation leased a luxury van to be used for the transport of
line supervisors. The annual rental payment amounted to Php 750,000.

Required: Compute the fringe benefit tax.

Answer:

Rental payment Php 750,000

Multiply by 50%__
Monetary value 375,000
Divide by grossed-up monetary value 65%__
Grossed-up monetary value Php 576,923
Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 201,923

Journal entry:

Fringe benefits expense 750,000

Fringe benefits tax expense 201,923
Cash Php 951,923

12. Illustration

Employer loaned money to employees at less than market rate interest.

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January 2, 2019, PJ Company extended a Php 4,000,000 loan to its Production Manager
at 4% interest payable after one year.

Required: Compute the fringe benefits tax.

Answer :

Benchmark interest rate 12%

Interest charged to employee 4%
Balance 8%
Multiply by amount of loan Php 4,000,000
Total Php 320,000
Divide by grossed-up monetary rate 65%___
Grossed-up monetary value Php 492,308
Multiply by fringe benefit tax rate 35%__
Fringe benefit tax Php 172,308

Journal entry:

Fringe benefits tax expense Php 172,308

Cash Php 172,308

TAX ADMINISTRATION REMEDIES

TAX REMEDIES UNDER THE NIRC

Internal revenue taxes are self-assessing, no further assessment by the Government
is required to create the tax liability (Vitug, 2006).The aspects of taxation are divided into
legislative and administrative.

ASPECTS OF TAXATION

1ST STAGE: 2nd STAGE

Legislative aspect Administrative aspect

Levying of tax 1. Tax assessment

laws 2. Tax collection

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Legislative aspect of taxation – is the process of levying or making taxation laws. It is vested
in the legislative branch of the government, and is purely legislative in character.

Administrative aspect of taxation – refers to the various procedures in tax assessment and
tax collection. Usually, the executive branch of the government, through its various
administrative offices, implements the administrative aspect of taxation.

A. TAXPAYER’S REMEDIES
1. ASSESSMENT
2. COLLECTION
1. ASSESSMENT

a. Concept of Tax assessment

Tax assessment - the process pertains to the computation and determination of tax liability
of taxpayer based on prevailing tax laws.

Tax delinquency and tax deficiency

1. Deficiency - amount still due and collectible from a taxpayer upon audit or investigation.

2. Delinquency - failure of the taxpayer to pay the tax due on the date fixed by law or
indicated in the assessment notice or letter of demand.

b. Requisites for a Valid Assessment

1. Issued by the BIR

2. Based on findings of fact and/or law; actual facts
3. Factual and/or legal bases of the assessment must be stated; otherwise, the assessment
is
null and void.
4. Contain a computation of tax liabilities
5. Contain a demand for payment within the prescribed period (CIR v PASCOR)
6. It must be sent to the taxpayer

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By employing mathematical computations in ascertaining the quantity of finished products,

CIR based its assessment on mere inferences and presumptions. The presumption of
correctness cannot be based on another presumption. (CIR v. Island Garments, 153 SCRA
665)
An assessment is deemed made when the notice to that effect is released, mailed or sent to
the taxpayer for the purpose of giving effect to the assessment. (Republic v. Dela Rama)

c. Assessment process

Tax assessment involves the following basic procedures:

1. Determination of the amount due.

2. Issuance of proper notice to the taxpayer regarding the amount of tax liability.
3. Enforcement or demand for payment simultaneous with the giving of notice.

d. Prescribed period of assessment

The assessment periods allowed under the NIRC are as follows:

I. Three years from the date of filing the return.

1. If the return was filed before the last day of filing, the three year period will start
after

the last day of filing the return..

Example:

Taxpayer filed the return : March 1, 2019

Last day of filing : April 15, 2019
Last day of valid assessment : April 15, 2022 ( 3 year prescribed period )

2. If the return was filed after the mandated period of filing, the three year period of
assessment will start from the date of filing the return

Example:

Taxpayer filed the return : April 15, 2019

Last day of filing : June 30, 2019
Last day of valid assessment : June 30, 2022 ( 3 year prescribed period )

II. Ten years from the date of discovery or omission.

1. Failure to file a return

2. Return filed was false or fraudulent with the intention to evade the tax.

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Example:

Fraudulent return filed : April 15, 2018

Discovery of fraud : June 30, 2019
Last day of valid assessment : June 30, 2029 ( 10 year prescribed period
)

d. Assessment Procedure

Tax assessment is valid if the notice of assessment has been issued within the
allowable period, and also if certain legal procedures are followed:

1. Formal assessment phase procedures

The formal notice of assessment maybe sent by registered mail or by personal

delivery.
If sent by personal delivery, the receipt should be acknowledge by the taxpayer or by
the
representative with signature and date received.

2. Protest phase of the assessment

Within 30 days after the receipt of formal notice of assessment, the taxpayer may
protest the assessment made and request for reinvestigation, otherwise, the tax
assessment will become final and executory. The protest may either cover all the issues
involved in the formal notice of assessment or involve only some issues in the
assessment.
In both types of protest, the taxpayer is required to state all the facts and bases of
the
protest, otherwise such protest will be considered null and void. Likewise, in both cases
also, all the required documents and evidence shall be submitted within 60 days from
the
date of the filing the protest, otherwise, the deficiency tax assessment become final and
regulatory.

3. Appeal on tax assessment decision.

The Taxpayer may protest under the following instances:

a. When the protest has been denied by the revenue officer of BIR.
b. When the BIR made no action within 180 days from the submission of the required
documents.

In both cases the taxpayer may elevate the protest within 30 days from the
receipt
of the decision issued by BIR commissioner or duly authorized representative to the Court
of tax appeal (CTA), otherwise, the decision shall become final and obligatory.

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SUMMARY OF TAX ASSESSMENT PROCEDURE

BIR issues Formal

Assessment Notice (FAN)

Taxpayer may
protest in 30 days
and submit proofs in
60 days from filing
the protest

BIR
1. Deny the protest
2. Not act on proofs
submitted

Taxpayer may
Taxpayer may Taxpayer may appeal to
appeal to CTA appeal to CTA from Supreme
within 30 days from the lapses of 180 Court within 15
receipt of denial days days from
receipt of
denial
BIR decision is final and
executory if
1. No protest
2. No submission of proofs,
3. No appeal

2. COLLECTION

Collection of taxes is an administrative aspect of taxation. This refers to the process

wherein the government devises effective and efficient ways and means to collect taxes. It
also connotes enforcement of tax payment. Generally taxes are payable in money. However,
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in the event the taxpayer cannot pay, the government is equipped with various remedies to
effect the
Collection of taxes.

Remedies for collection of delinquent taxes are:

a. Administrative remedies

1. Distraint of all personal property – refers to the seizure of personal property, tangible or
Intangible.

2. Levy of real property belonging to the taxpayer – refers to seizure of real property.
b. Judicial remedies

1. Civil Action – refers to judicial proceedings undertaken to enforce protection of

private
rights and properties.
2. Criminal Action – refers to judicial proceedings undertaken to institute punishment for
violation of criminal laws.

Either or simultaneously may be pursued in the discretion of the authorities charged with the
collection of the tax once assessed becomes final and demandable. However if the tax
liability is not more than 100 pesos, distraint and levy may not be availed of.

Other Remedies of the Government

To enforce collection of tax liabilities, the government is equipped with administrative or

judicial actions. The other remedies available are:

1. Enforcement of forfeiture of property – refers to the transfer of ownership of the

property
to the government.
2. Enforcement of tax lien – refers to the legal claim on property, real or personal,
established by law to serve as security for payment of tax
Iiabilities in case of default.
3. Entering into compromise of tax cases – contract whereby the parties involved, by
reciprocal concessions, avoid litigation or
put
an end to one already commenced.

Minimum amounts of compromise settlement

a. For cases of financial incapacity – 10% of the basic assessed tax liability for
taxpayer without source of income, has zero
or

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negative networth or non-operating company

for
a period of 3 years or more.

20% of the basic assessed tax liability if

taxpayer is a dissolved corporation, non-
operating company for less than 3 years,
declared bankrupt or insolvent.

40% of the basic assessed tax liability for the

taxpayer that has surplus or earnings deficit
resulting in impairment in the original capital
by at least 50%.

4. Requiring the filing of bonds as an assurance for compliance of tax laws – refers to
file
an appropriate bond in order to assure the
collection of tax due.

5. Giving of rewards to qualified tax informers – any person, except an internal revenue
officer or employee, or other public
official
or relative within the 6th degree of
consanguinity, who voluntarily gives
definite and sworn information of the
BIR
to the discovery of frauds or any
violations thereof, shall be rewarded.

Giving rewards to tax informers are followed;

a. 10% based on revenues, surcharge imposed or collected, for giving of voluntary

sworn information to the BIR.

b. 10% based on tax imposed, including surcharges, and penalties or Php 1,000,000
whichever is lower, for violations of the tax code.

c. 10% based on the fair market value, or Php 1,000,000 whichever is lower, for
discovery and seizure of smuggled goods.

6. Imposition of surcharges for non-payment or late payment – refers to the rates

imposed
for surcharges,
penalties
and interest.
The following are the rates:

a. 25% surcharge – for late filing, late payment of tax due, filing in wrong BIR office
failure to pay deficiency tax assessment on the prescribed time.
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b. 50% surcharge – for willful neglect to file the return, for false or fraudulent return
filed

Willful neglect – implies that there is a habitual late return filing.

False or fraudulent return – there is deliberate and substantial

understatement of taxable sales,
receipts or income, overstatement of
allowable deductions or business
expenses

7. Making arrest, search, and seizure in certain cases – refers to government authority
to
Make arrests and seizures.

8. Deportation of aliens who violated the tax laws – refers to the deportation of alien
after
final decision of the CTA or BIR.

9. Inspection and examination of taxpayer’s records and books of accounts – refers to

the
Section 232 of the tax code.

10. Use of national tax register – refers to record kept and maintained bearing the
names
of persons residing in the community.

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Phone No.: (082)300-5456 Local 137

Flowchart for Tax Administrative Remedies

Upon Issues notice of levy

delinquency
BIR officer
simultaneously or after
distraint

Within 20 days Advertise property

after serving BIR Officer levied with complete
the notice information for 30
days

Possibilities are:

Taxpayer pays all Returns levied

taxes and charges BIR Officer properties to owner

Sale of levied 1. Applies the proceeds

properties to the BIR Officer to all taxes and charges
public 2. Returns excess to the
owner

No bidder or Forfeits levied Taxpayer has one

BIR Officer year to redeem the
insufficient bid price property in favor of
the government forfeited property,
otherwise, its final

Power of the Commissioner

1. Make assessments and prescribe additional requirements for tax administration and
Enforcement.
2. Interpret tax laws and decide tax cases.
3. Obtain information, summon, examine, and take testimony of person.
4. Delegate powers vested by him by the code to any subordinate officer with rank
equivalent
To a division chief of higher.
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5. Suspend business operation of taxpayer.

6. Compromise, abate, and refund or credit taxes.
7. Power to expand its authority to look into a taxpayer’s bank accounts and share obtain
Information with the requesting foreign tax authority ( Republic Act 10021 “ The
exchange
Of information on tax matters act of 2009, signed by the President on March 5, 2010)

Power of the commissioner that cannot be delegated

1. The power to recommend the promulgation and regulations by the secretary of finance,
and the power to issue rulings of first impression or to reverse, revoke or modify rulings
of
BIR.
2. The power to compromise or abate any tax liability.
3. The power to assign or re-assign internal revenue officers to establishments where
articles
Is subject to excise tax are produced of kept.

Power and duties of the Bureau of Internal Revenue ( BIR)

1. Assessment and collection – Tax, fees and charges.

2. Enforcement of all forfeiture, penalties, fines and etc.
3. Execution of judgement in all cases decided in its favour by the court of tax appeals and
Ordinary courts.
4. Administration of supervisory and Police powers conferred or granted to it. To give
effect
to and administer the supervisory and Police power conferred to it by the tax code.

5. To recommend to the secretary of finance all needful rules and regulations for the
effective
enforcement of the provision of the tax code.

Authority of Revenue Officer

1. Perform assessment functions pursuant to the letter of authority issued by the revenue
Regional director.
2. Examine taxpayers within the jurisdiction of the district in order to collect the correct
amount of tax.
3. Recommend the assessment of any deficiency tax due in the same manner that the
said
acts could have been performed by the revenue regional director himself.

Self-Help: You can refer to the textbook to help you further

understand the lesson. You can use other materials too.
Banggawan, Rex B. (2015). Income Taxation Laws, Principles and applications OBE
Edition. Aduan, Nick (2012). Simplified and Procedural Handbook on Income
Taxation 2nd Edition.

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Phone No.: (082)300-5456 Local 137

Let’s Check
Activity 1. Answer the multiple choice below.

1. Which of the following choices is wrong? The fringe benefit tax is

a. Imposed on the employer
b. Withheld at source
c. Imposed on employee
d. Deductible by the employer

2. An employer subject to fringe benefit tax may be a/an

a. An individual
b. General professional partnership
c. Corporation
d. All of the above

3. Which of the following is subject to fringe benefit tax?

a. Compensation of the rank and file employee.
b. Compensation of the supervisory or managerial employee.
c. Fringe benefit of the rank and file employee.
d. Fringe benefit of the supervisory or managerial employee.

4. The following are exempt fringe benefits, except for one

a. Fringe benefits given to rank and file employee.
b. Fringe benefit given for the convenience of the employee.
c. When the fringe benefit is required by the nature of or necessary to the trade, business or
profession of the employer.
d. Rice benefit amounting to P1,500 a month.

5. One of the following does not fall within the powers of the Commissioner of Internal Revenue
a. To interpret tax laws and to decide tax cases
b. To summon, examine, and take testimony of persons.
c. To make assessment and prescribed additional requirements to tax administration and
enforcement
d. To review on tax cases decided by the court of tax appeals.

6. A notice to the effect that the amount therein stated is due from a taxpayer as a tax with a
demand for payment of the same within a stated period of time.
a. Assessment c. Audit engagement letter
b. Forfeiture d. Institution of criminal action

7. Where a return was filed, as a general rule, the prescriptive period for assessment after the
return was filed, whichever is later is within
a. 3 years c. 5 years
b. 10 years d. Answer not given

8. The taxpayer filed his 2018 income tax return on April 14, 2019. On May 20, 2020, he
received an assessment from the BIR. The last day for him to file a request for reconsideration
is
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a. April 15, 2022 c. June 20, 2020

b. April 14, 2022 d. June 19, 2020

9. Date of filing the income tax return : March 28, 2018

Date assessment was received : June 20, 2020
Request for reconsideration was filed : July 4, 2020

The last day for the taxpayer to submit relevant supporting documents is

a. September 4, 2020 c. September 2, 2020

b. July 20, 2020 d. April 15, 2019

10. Assuming that the taxpayer submitted the documents supporting his motion on August 26,
2020. The Bureau of Internal revenue should act on the protest not later than

a. September 26, 2020 c. February 26, 2020

b. April 15, 2021 d. February 22, 2021

Let’s Analyze!

Answer the following problem below. Show your solutions.

1. Included in the compensation package of an executive was the free use of the company’s
residential condominium unit in Camella Davao City, Philippines. Data on the condominium
unit follows:
Fair market value in the Real Property Tax Declaration P4,500,000
Zonal Value 5,440,000
Fair market value per PFRS 6,500,000

How much is the fringe benefit tax?___________

2. Assuming that the residential condominium unit was purchased for P2,220,000 (gross of
interest amounting to P160,000) by the company in installment for the executive’s free use.
How much is the monetary value?___________

3. Assuming the residential condominium unit was purchased by the company in installment,
ownership of which will be transferred to the executive. Acquisition cost was P3,600,000
(P300,000 pertains to interest) while its fair market value is P3,400,000. How much is the
grossed-up monetary value?_____________

4. Assume the residential condominium unit was purchased by the company in installment,
ownership of which will be transferred to the executive. Acquisition cost exclusive of interest
was
P5,400,000 with a fair market value determined at P5,000,000. The employee is required to
pay P2,000,000 to the employer before the transfer of ownership is made. How much is the
fringe benefits tax?__________

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Use the following information for the next questions:

Included in the compensation package of the Chief Accountant is a car plan worth P2,380,000.

5. Assuming that the employer purchase the car in the name of the employee. How much is
the fringe benefit tax?___________

6. Assuming that the employer provides P1,312,500 to the employee to purchase any vehicle
of his desire. Ownership of the car is placed in the name of the employee. The employee
purchased a brand new car worth P1,200,000. Assuming further that the employee is a non-
resident alien not engage in trade or business, how much is the grossed-up monetary
value?_____________

7. Assuming that the employer, an offshore banking unit, purchases the car in installment for
P1,700,000 in the name of the employee, how much is the fringe benefit tax?___________
How much is the allowable deduction from business income of a domestic corporation which
granted and paid P102,000 fringe benefits to its key officers in 2019?_____________

8. In 2019, Jaguars Corp. gave the following fringe benefits to its employees
To managerial employees P1,360,000
To rank and file employees 5,000,000

The allowable deduction from the gross income of the corporation for the fringe benefits given
to employees is___________

9. From a managerial employee for taxable year 2019:

Salaries and wages (net of SSS and medicare amounting to P6,000 and
Withholding tax of P26,000) P354,000
Allowance, not subject to liquidation 48,000
Gasoline allowance, subject to liquidation 30,000
th
13 month pay 20,000
The fringe benefit tax due from the above benefit is ________________

10. The following information are presented to you in connection with the determination of the
fringe benefits tax of Ashley, Vice-President of Jan Corp:

Paid by the company with official receipts in the name of Jan Corp:
 Laptop computer for Ashley’s office use, P80,000
 Air-conditioning unit for Ashley’s office use, P30,000
 Groceries for Ashley’s family consumption, P10,000
 Plumbing materials for use in the repair of Ashley’s residential house, P5,000.

Paid by Ashley and reimbursed by employer with official receipts in the name of Jan Corp:
 Purchase of clothes and shoes for Ashley’s daughter, P15,000
 Samples of merchandise sold in the competitor’s store for marketing study, P12,000

How much is the fringe benefit tax?____________

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Phone No.: (082)300-5456 Local 137

In a nutshell!

Solve the Problem below: Show your solutions.

PROBLEM 1 (Adapted)
Mr. Peter, a self-employed individual, had provided the following fringe benefits during the
2018 taxable year:
a. Housing units provided to the plant supervisor necessary to the business
operation of the employer:
Fair Market value P 900,000
Zonal value 1,000,000
b. Cash payment for the purchase of grocery items 382,500
c. Car benefit in the name of the finance officer acquired on installment basis:
Cash price 750,000
Installment price:
Down payment 400,000
Annual installment for four years at the amount of 400,000

Compute for the total fringe benefits expense and fringe benefits tax.

PROBLEM 2 (Adapted)
Star Company provided the following fringe benefits to its employees during the 2018 taxable
year:
Fringe benefits provided to supervisory and managerial employees P 956,25
Fringe benefits furnished to rank and file employees 430,750
Fringe benefits granted to non-resident aliens not engaged in business
in the Phils. 750,000

Compute the total value of fringe benefits and the total fringe benefits tax.

PROBLEM 3 (Adapted)
Mr. Brown, a self-employed individual, provided the following data during the 2018 taxable
year:
Gross sales from business P 3,200,000
Rental income on machinery 280,000
Interest income on bank deposit in the Philippines 60,000
Local travel expenses paid by the company for the travel of the managers and
members of their families 420,750
De minimis benefits to all employees 80,000
Company contributions to the employees’ retirement, insurance, and
hospitalization benefit plans 120,000

Compute the total value of fringe benefits, the grossed-up monetary value of fringe benefits
and the fringe benefits tax.

PROBLEM 4
The manager of Cream Company received the following during 2018:
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Phone No.: (082)300-5456 Local 137

Annual salary P 6,000,000

Toyota Sedan purchased by Max Company in the name of the manager 1,020,000
Rice allowance 147,200
Medical allowance 101,800

Determine the total fringe benefits expense and fringe benefits tax.

Q&A List

Do you have any question for clarification?

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords Index
This section lists down the keywords that will help you recall the discussions.

Fringe benefit Fringe benefit tax Distraint Surcharges

Grossed-up
monetary value De Minimis benefits Levy Interest

Rank-and-file Tax Assessment Administrative Civil action

employees Proceeding

Managerial Commissioner Judicial Proceedings Criminal action

employees

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Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.

Activity Date Where to Submit

Big Picture A-C: Let’s Check Activities BlackBoard LMS
BigPicture A-C:Let’s Analyze Activities BlackBoard LMS
Big Picture A-C: In A Nutshell BlackBoard LMS

Big Picture A-C: Q&A List BlackBoard LMS – Forum

Final Formative Assessment BlackBoard LMS

Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone and all are
exhorted to exercise self-management and self-regulation.
2. All students are guided by professional conduct as learners in attending On-Line Blended Delivery
(OBD) course. Any breach and violation shall be dealt with properly under existing guidelines,
specifically in Section 7 (Student Discipline) in the Student Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core Values,
specifically in the adherence to intellectual honesty and integrity; academic excellence by giving
due diligence in virtual class participation in all lectures and activities, as well as fidelity in doing
and submitting performance tasks and assignments; personal discipline in complying with all
deadlines; and observance of data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The University shall
institute monitoring mechanisms online to detect and penalize plagiarism.
5. Students shall independently and honestly take examinations and do assignments, unless
collaboration is clearly required or permitted. Students shall not resort to dishonesty to improve the
result of their assessments (e.g. examinations, assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students shall not
post or share their answers, assignment or examinations to others to further academic fraudulence
online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the Online Code of
Conduct, as well as all the requirements and protocols in handling online courses.

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Course prepared by:

GERALENE C. CLARITO
Author

Course reviewed by:

DEVZON U. PORRAS JADE D. SOLAÑA

PH-BSAIS/BSIA PH-BSA/BSMA

MARY GRACE S. SOMBILON

AD

Approved by:

LORD EDDIE I. AGUILAR

Dean

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