Income Tax Provisions

TITLE I: ORGANIZATION AND FUNCTION OF THE BIR
TITLE I
ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL
REVENUE
SECTION 1. Title of the Code. - This Code shall be known as the National Internal Revenue
Code of 1997.
SEC. 2. Powers and duties of the Bureau of Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines
connected therewith, including the execution of judgments in all cases decided in its favor by
the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred to it by this Code or other laws.
SEC. 3. Chief Officials of the Bureau of Internal Revenue. - The Bureau of Internal Revenue
shall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to
as the Commissioner and four (4) assistant chiefs to be known as Deputy Commissioners.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The
power to interpret the provisions of this Code and other tax laws shall be under the exclusive
and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine,

and Take Testimony of Persons. - In ascertaining the correctness of any return, or in
making a return when none has been made, or in determining the liability of any person for
any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance,
the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be relevant or
material to such inquiry;
(B) To Obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office or
officer of the national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned
or -controlled corporations, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies,
joint accounts, associations, joint ventures of consortia and registered partnerships,
and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in
the summons and to produce such books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry; and
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(E) To cause revenue officers and employees to make a canvass from time to time of
any revenue district or region and inquire after and concerning all persons therein
who may be liable to pay any internal revenue tax, and all persons owning or having
the care, management or possession of any object with respect to which a tax is
imposed.
The provisions of the foregoing paragraphs notwithstanding, nothing in this Section

shall be construed as granting the Commissioner the authority to inquire into bank
deposits other than as provided for in Section 6(F) of this Code.
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional

Requirements for Tax Administration and Enforcement. -
(A) Examination of Returns and Determination of Tax Due. - After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however; That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.
The tax or any deficiency tax so assessed shall be paid upon notice and demand from
the Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive the
same shall not be withdrawn: Provided, That within three (3) years from the date of
such filing , the same may be modified, changed, or amended: Provided, further,
That no notice for audit or investigation of such return, statement or declaration has
in the meantime been actually served upon the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and other Documents. -
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and
regulations or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax on the best
evidence obtainable.
In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or other
document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all legal purposes.
(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive

Gross Sales and Receipts. - The Commissioner may, at any time during the taxable
year, order inventory-taking of goods of any taxpayer as a basis for determining his
internal revenue tax liabilities, or may place the business operations of any person,
natural or juridical, under observation or surveillance if there is reason to believe
that such person is not declaring his correct income, sales or receipts for internal
revenue tax purposes. The findings may be used as the basis for assessing the taxes
for the other months or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in violation of
the requirements of Sections 113 and 237 of this Code, or when there is reason to
believe that the books of accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be filed under the
provisions of this Code, the Commissioner, after taking into account the sales,
receipts, income or other taxable base of other persons engaged in similar
businesses under similar situations or circumstances or after considering other
relevant information may prescribe a minimum amount of such gross receipts, sales
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and taxable base, and such amount so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax liabilities of such person.
(D) Authority to Terminate Taxable Period. _ When it shall come to the knowledge of
the Commissioner that a taxpayer is retiring from business subject to tax, or is
intending to leave the Philippines or to remove his property therefrom or to hide or
conceal his property, or is performing any act tending to obstruct the proceedings
for the collection of the tax for the past or current quarter or year or to render the
same totally or partly ineffective unless such proceedings are begun immediately,
the Commissioner shall declare the tax period of such taxpayer terminated at any
time and shall send the taxpayer a notice of such decision, together with a request
for the immediate payment of the tax for the period so declared terminated and the
tax for the preceding year or quarter, or such portion thereof as may be unpaid, and
said taxes shall be due and payable immediately and shall be subject to all the
penalties hereafter prescribed, unless paid within the time fixed in the demand
made by the Commissioner.
(E) Authority of the Commissioner to Prescribe Real Property Values. - The

Commissioner is hereby authorized to divide the Philippines into different zones or
areas and shall, upon consultation with competent appraisers both from the private
and public sectors, determine the fair market value of real properties located in each
zone or area. For purposes of computing any internal revenue tax, the value of the
property shall be, whichever is the higher of;
(1) the fair market value as determined by the Commissioner, or

(2) the fair market value as shown in the schedule of values of the
Provincial and City Assessors.
(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. -

Notwithstanding any contrary provision of Republic Act No. 1405, Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, and
other general or special laws, the Commissioner is hereby authorized to inquire into
the bank deposits and other related information held by financial institutions of:
(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax
liability under Sec. 204 (A) (2) of this Code by reason of financial
incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his

tax liabilities on his claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not be considered
unless and until he waives in writing his privilege under Republic act No.
1405, Republic Act No. 6426, otherwise known as the Foreign Currency
Deposit Act of the Philippines, or under other general or special laws, and
such waiver shall constitute the authority of the Commissioner to inquire
into the bank deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of

tax information from a foreign tax authority pursuant to an international
convention or agreement on tax matters to which the Philippines is a
signatory or a party of; Provided, that the information obtained from the
banks and other financial institutions may be used by the Bureau of
Internal Revenue for tax assessment, verification, audit and enforcement
purposes.
In case of a request from a foreign tax authority for tax information held by
banks and financial institutions, the exchange of information shall be done
in a secure manner to ensure confidentiality thereof under such rules and
regulations as may be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
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The Commissioner shall provide the tax information obtained from banks
and financial institutions pursuant to a convention or agreement upon
request of the foreign tax authority when such requesting foreign tax
authority has provided the following information to demonstrate the
foreseeable relevance of the information to the request:
(a) The identity of the person under examination or investigation;
(b) A statement of the information being sought including its nature

and the form in which the said foreign tax authority prefers to
receive the information from the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in

the Philippines or is in the possession or control of a person within
the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person
believed to be in possession of the requested information;
(f) A statement that the request is in conformity with the law and
administrative practices of said foreign tax authority such that if the
requested information was within the jurisdiction of the said
foreign tax authority then it would be able to obtain the information
under its laws or in the normal course of administrative practice
and that it is in conformity with a convention or international
agreement; and
(g) A statement that the requesting foreign tax authority has

exhausted all means available in its own territory to obtain the
information, except those that would give rise to disproportionate
difficulties.
The Commissioner shall forward the information as promptly as possible

to the requesting foreign tax authority. To ensure a prompt response, the
Commissioner shall confirm receipt of a request in writing to the
requesting tax authority and shall notify the latter of deficiencies in the
request, if any, within sixty (60) days from receipt of the request.
If the Commissioner is unable to obtain and provide the information

within ninety (90) days from receipt of the request, due to obstacles
encountered in furnishing the information or when the bank or financial
institution refuses to furnish the information, he shall immediately inform
the requesting tax authority of the same, explaining the nature of obstacles
encountered or the reasons for refusal.
The term foreign tax authority as used herein, shall refer to the tax
authority or tax administration of the requesting State under the tax treaty
or convention to which the Philippines is a signatory or a party of.
(G) Authority to Accredit and Register Tax Agents. - The Commissioner shall accredit
and register, based on their professional competence, integrity and moral fitness,
individuals and general professional partnerships and their representatives who
prepare and file tax returns, statements, reports, protests, and other papers with or
who appear before, the Bureau for taxpayers. Within one hundred twenty (120)
days from January 1, 1998, the Commissioner shall create national and regional
accreditation boards, the members of which shall serve for three (3) years, and shall
designate from among the senior officials of the Bureau, one (1) chairman and two
(2) members for each board, subject to such rules and regulations as the Secretary
of Finance shall promulgate upon the recommendation of the Commissioner.
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Individuals and general professional partnerships and their representatives who are
denied accreditation by the Commissioner and/or the national and regional
accreditation boards may appeal such denial to the Secretary of Finance, who shall
rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the
Secretary of Finance to rule on the Appeal within the prescribed period shall be
deemed as approval of the application for accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary

Requirements. - The Commissioner may prescribe the manner of compliance with
any documentary or procedural requirement in connection with the submission or
preparation of financial statements accompanying the tax returns.
SEC. 7. - Authority of the Commissioner to Delegate Power. - The Commissioner may

delegate the powers vested in him under the pertinent provisions of this Code to any or such
subordinate officials with the rank equivalent to a division chief or higher, subject to such
limitations and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of finance, upon recommendation of the Commissioner:
Provided, However, That the following powers of the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify
any existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any
tax liability: Provided, however, That assessments issued by the regional offices
involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less,
and minor criminal violations, as may be determined by rules and regulations to be
promulgated by the Secretary of finance, upon recommendation of the
Commissioner, discovered by regional and district officials, may be compromised by
a regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and
Collection Divisions and the Revenue District Officer having jurisdiction over the
taxpayer, as members; and
(d) The power to assign or reassign internal revenue officers to establishments

where articles subject to excise tax are produced or kept.
SEC. 8. Duty of the Commissioner to Ensure the Provision and Distribution of forms,
Receipts, Certificates, and Appliances, and the Acknowledgment of Payment of Taxes.-
(A) Provision and Distribution to Proper Officials. - It shall be the duty of the
Commissioner, among other things, to prescribe, provide, and distribute to the
proper officials the requisite licenses internal revenue stamps, labels all other
forms, certificates, bonds, records, invoices, books, receipts, instruments, appliances
and apparatus used in administering the laws falling within the jurisdiction of the
Bureau. For this purpose, internal revenue stamps, strip stamps and labels shall be
caused by the Commissioner to be printed with adequate security features.
Internal revenue stamps, whether of a bar code or fuson design, shall be firmly and
conspicuously affixed on each pack of cigars and cigarettes subject to excise tax in
the manner and form as prescribed by the Commissioner, upon approval of the
Secretary of Finance.
(B) Receipts for Payment Made. - It shall be the duty of the Commissioner or his duly
authorized representative or an authorized agent bank to whom any payment of any
tax is made under the provision of this Code to acknowledge the payment of such
tax, expressing the amount paid and the particular account for which such payment
was made in a form and manner prescribed therefor by the Commissioner.
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SEC. 9. - Internal Revenue Districts. - With the approval of the Secretary of Finance, the
Commissioner shall divide the Philippines into such number of revenue districts as may from
time to time be required for administrative purposes. Each of these districts shall be under
the supervision of a Revenue District Officer.
SEC. 10. - Revenue Regional Director. - Under rules and regulations, policies and standards
formulated by the Commissioner, with the approval of the Secretary of Finance, the Revenue
Regional director shall, within the region and district offices under his jurisdiction, among
others:
(a) Implement laws, policies, plans, programs, rules and regulations of the
department or agencies in the regional area;
(b) Administer and enforce internal revenue laws, and rules and regulations,
including the assessment and collection of all internal revenue taxes, charges and
fees.
(c) Issue Letters of authority for the examination of taxpayers within the region;
(d) Provide economical, efficient and effective service to the people in the area;
(e) Coordinate with regional offices or other departments, bureaus and agencies in
the area;
(f) Coordinate with local government units in the area;
(g) Exercise control and supervision over the officers and employees within the
region; and
(h) Perform such other functions as may be provided by law and as may be
delegated by the Commissioner.
SEC. 11. Duties of Revenue District Officers and Other Internal Revenue Officers. - It
shall be the duty of every Revenue District Officer or other internal revenue officers and
employees to ensure that all laws, and rules and regulations affecting national internal
revenue are faithfully executed and complied with, and to aid in the prevention, detection and
punishment of frauds of delinquencies in connection therewith.
It shall be the duty of every Revenue District Officer to examine the efficiency of all officers
and employees of the Bureau of Internal Revenue under his supervision, and to report in
writing to the Commissioner, through the Regional Director, any neglect of duty,
incompetency, delinquency, or malfeasance in office of any internal revenue officer of which
he may obtain knowledge, with a statement of all the facts and any evidence sustaining each
case.
SEC. 12. Agents and Deputies for Collection of National Internal Revenue Taxes. - The
following are hereby constituted agents of the Commissioner:
(a) The Commissioner of Customs and his subordinates with respect to the
collection of national internal revenue taxes on imported goods;
(b) The head of the appropriate government office and his subordinates with
respect to the collection of energy tax; and
(c) Banks duly accredited by the Commissioner with respect to receipt of payments
internal revenue taxes authorized to be made thru bank.
Any officer or employee of an authorized agent bank assigned to receive internal

revenue tax payments and transmit tax returns or documents to the Bureau of
Internal Revenue shall be subject to the same sanctions and penalties prescribed in
Sections 269 and 270 of this Code.
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SEC. 13. - Authority of a Revenue Offices. - subject to the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a
Revenue Officer assigned to perform assessment functions in any district may, pursuant to a
Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the
jurisdiction of the district in order to collect the correct amount of tax, or to 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.
SEC. 14. Authority of Officers to Administer Oaths and Take Testimony. - The
Commissioner, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs, Revenue
Regional Directors, Assistant Revenue Regional Directors, Chiefs and Assistant Chiefs of
Divisions, Revenue District Officers, special deputies of the Commissioner, internal revenue
officers and any other employee of the Bureau thereunto especially deputized by the
Commissioner shall have the power to administer oaths and to take testimony in any official
matter or investigation conducted by them regarding matters within the jurisdiction of the
Bureau.
SEC. 15. Authority of Internal Revenue Officers to Make Arrests and Seizures. - The
Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue
District Officers and other internal revenue officers shall have authority to make arrests and
seizures for the violation of any penal law, rule or regulation administered by the Bureau of
Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to
be dealt with according to law.
SEC. 16. Assignment of Internal Revenue Officers Involved in Excise Tax Functions to
Establishments Where Articles subject to Excise Tax are Produced or Kept. - The
Commissioner shall employ, assign, or reassign internal revenue officers involved in excise
tax functions, as often as the exigencies of the revenue service may require, to establishments
or places where articles subject to excise tax are produced or kept: Provided, That an internal
revenue officer assigned to any such establishment shall in no case stay in his assignment for
more than two (2) years, subject to rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
SEC. 17. Assignment of Internal Revenue Officers and Other Employees to Other Duties.
- The Commissioner may, subject to the provisions of Section 16 and the laws on civil service,
as well as the rules and regulations to be prescribed by the Secretary of Finance upon the
recommendation of the Commissioner, assign or reassign internal revenue officers and
employees of the Bureau of Internal Revenue, without change in their official rank and salary,
to other or special duties connected with the enforcement or administration of the revenue
laws as the exigencies of the service may require: Provided, That internal revenue officers
assigned to perform assessment or collection function shall not remain in the same
assignment for more than three (3) years; Provided, further, That assignment of internal
revenue officers and employees of the Bureau to special duties shall not exceed one (1) year.
SEC. 18. Reports of violation of Laws. - When an internal revenue officer discovers evidence
of a violation of this Code or of any law, rule or regulations administered by the Bureau of
Internal Revenue of such character as to warrant the institution of criminal proceedings, he
shall immediately report the facts to the Commissioner through his immediate superior,
giving the name and address of the offender and the names of the witnesses if possible:
Provided, That in urgent cases, the Revenue Regional director or Revenue District Officer, as
the case may be, may send the report to the corresponding prosecuting officer in the latter
case, a copy of his report shall be sent to the Commissioner.
SEC. 19. Contents of Commissioner's Annual Report. - The annual Report of the
Commissioner shall contain detailed statements of the collections of the Bureau with
specifications of the sources of revenue by type of tax, by manner of payment, by revenue
region and by industry group and its disbursements by classes of expenditures.
In case the actual collection exceeds or falls short of target as set in the annual national
budget by fifteen percent (15%) or more, the Commissioner shall explain the reason for such
excess or shortfall.
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SEC. 20. Submission of Report and Pertinent Information by the Commissioner.
(A) Submission of Pertinent Information to Congress. - The provision of Section 270

of this Code to the contrary notwithstanding, the Commissioner shall, upon request
of Congress and in aid of legislation, furnish its appropriate Committee pertinent
information including but not limited to: industry audits, collection performance
data, status reports in criminal actions initiated against persons and taxpayer's
returns: Provided, however, That any return or return information which can be
associated with, or otherwise identify, directly or indirectly, a particular taxpayer
shall be furnished the appropriate Committee of Congress only when sitting in
Executive Session Unless such taxpayer otherwise consents in writing to such
disclosure.
(B) Report to Oversight Committee. - The Commissioner shall, with reference to

Section 204 of this Code, submit to the Oversight Committee referred to in Section
290 hereof, through the Chairmen of the Committee on Ways and Means of the
Senate and House of Representatives, a report on the exercise of his powers
pursuant to the said section, every six (6) months of each calendar year.
SEC. 21. Sources of Revenue. - The following taxes, fees and charges are deemed to be
national internal revenue taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau
of Internal Revenue.
END OF TITLE I
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TITLE II
TAX ON INCOME
CHAPTER I - DEFINITIONS
SEC. 22. Definitions - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or corporation.
(B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.
(C) The term 'domestic,' when applied to a corporation, means created or organized in the
Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a corporation which is not
domestic.
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the

Commissioner the fact of his physical presence abroad with a definite intention to
reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most of
the time during the taxable year.
(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 nonresident 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) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be for purpose of this Section.
(F) The term 'resident alien' means an individual whose residence is within the Philippines
and who is not a citizen thereof.
(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in
trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged
in trade or business within the Philippines.
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(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver,
conservator or any person acting in any fiduciary capacity for any person.
(K) The term 'withholding agent' means any person required to deduct and withhold any tax
under the provisions of Section 57.
(L) The term 'shares of stock' shall include shares of stock of a corporation, warrants and/or
options to purchase shares of stock, as well as units of participation in a partnership (except
general professional partnerships), joint stock companies, joint accounts, joint ventures
taxable as corporations, associations and recreation or amusement clubs (such as golf, polo or
similar clubs), and mutual fund certificates.
(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or
option/s to purchase shares of stock of a corporation, as well as a holder of a unit of
participation in a partnership (except general professional partnerships) in a joint stock
company, a joint account, a taxable joint venture, a member of an association, recreation or
amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund certificate,
a member in an association, joint-stock company, or insurance company.
(N) The term 'taxpayer' means any person subject to tax imposed by this Title.
(O) The terms 'including' and 'includes', when used in a definition contained in this Title,
shall not be deemed to exclude other things otherwise within the meaning of the term
defined.
(P) The term 'taxable year' means the calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed under this Title. 'Taxable
year' includes, in the case of a return made for a fractional part of a year under the provisions
of this Title or under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for which such return is made.
(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the
last day of any month other than December.
(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the
method of accounting upon the basis of which the net income is computed under this Title.
(S) The term 'trade or business' includes the performance of the functions of a public office.
(T) The term 'securities' means shares of stock in a corporation and rights to subscribe for or
to receive such shares. The term includes bonds, debentures, notes or certificates, or other
evidence or indebtedness, issued by any corporation, including those issued by a government
or political subdivision thereof, with interest coupons or in registered form.
(U) The term 'dealer in securities' means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers; that is, one who, as
a merchant, buys securities and re-sells them to customers with a view to the gains and
profits that may be derived therefrom.
(V) The term 'bank' means every banking institution, as defined in Section 2 of Republic Act
No. 337, as amended, otherwise known as the General banking Act. A bank may either be a
commercial bank, a thrift bank, a development bank, a rural bank or specialized government
bank.
(W) The term 'non-bank financial intermediary' means a financial intermediary, as defined
in Section 2(D)(C) of Republic Act No. 337, as amended, otherwise known as the General
Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking
activities.
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(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower's own
account, or through the issuance of certificates of assignment or similar instruments, with
recourse, or of repurchase agreements for purposes of relending or purchasing receivables
and other similar obligations: Provided, however, That commercial, industrial and other non-
financial companies, which borrow funds through any of these means for the limited purpose
of financing their own needs or the needs of their agents or dealers, shall not be considered as
performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from
the public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance, endorsement,
or acceptance of debt instruments for the borrowers own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing their own needs or
the needs of their agent or dealer. These instruments may include, but need not be limited to
bankers' acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP)
and any authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for interbank
call loans with maturity of not more than five (5) days to cover deficiency in reserves against
deposit liabilities, including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments.
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property
which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale
or exchange of property which is treated or considered, under other provisions of this Title,
as 'ordinary income' shall be treated as gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss
from the sale or exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a
capital asset.
(AA) The term 'rank and file employees' shall mean all employees who are holding neither
managerial nor supervisory position as defined under existing provisions of the Labor Code
of the Philippines, as amended.
(BB) The term 'mutual fund company' shall mean an open-end and close-end investment
company as defined under the Investment Company Act.
(CC) The term 'trade, business or profession' shall not include performance of services by
the taxpayer as an employee.
(DD) The term 'regional or area headquarters' shall mean a branch established in the
Philippines by multinational companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
(EE) The term 'regional operating headquarters' shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following services:
general administration and planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance advisory services;
marketing control and sales promotion; training and personnel management; logistic
services; research and development services and product development; technical support
and maintenance; data processing and communications; and business development.
(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of
time deposit or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments with a maturity period
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of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng
Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and
finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and
other denominations as may be prescribed by the BSP.
CHAPTER II GENERAL PRINCIPLES

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the
Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad
as an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
CHAPTER III TAX ON INDIVIDUALS

SEC. 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B), (C) and (D) of this Section,
derived for each taxable year from all sources within and without the
Philippines be every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B), (C) and (D) of this Section,
derived for each taxable year from all sources within the Philippines by an
individual citizen of the Philippines who is residing outside of the
Philippines including overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (b), (C) and (D) of this Section,
derived for each taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.
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(2) Rates of Tax on Taxable Income of Individuals The tax shall be computed in
accordance with and at the rates established in the following schedule
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 +10% of the excess over
P10,000
Over P30,00 but not over P70,000 P2,500 + 15% of the excess
over P30,000
over P70,000
over P140,000
over P250,000
Over P500,000 P125,000 + 32% of the excess

over P 500,000
For married individuals, the husband and wife, subject to the provision of Section 51
(D) hereof, shall compute separately their individual income tax based on their
respective total taxable income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, that minimum wage earners as defined in Section 22(HH) of this Code
shall be exempt from the payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt from income
tax.
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements; royalties, except on books, as well as
other literary works and musical compositions, which shall be imposed a final tax of
ten percent (10%); prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under Subsection (A) of Section 24;
and other winnings (except Philippine Charity Sweepstakes and Lotto winnings),
derived from sources within the Philippines: Provided, however, That interest
income received by an individual taxpayer (except a nonresident individual) from a
depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income: Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally,
That should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall
be deducted and withheld by the depository bank from the proceeds of the long-
term deposit or investment certificate based on the remaining maturity thereof:
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Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be
imposed upon the cash and/or property dividends actually or constructively
received by an individual from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional operating headquarters
of multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the net income after tax of
an association, a joint account, or a joint venture or consortium taxable as a
corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on income earned on
or after January 1, 1998. Income forming part of retained earnings as of December
31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be
subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.
Not over P100,000.. 5%

On any amount in excess of P100,000 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of conditional sales,
by individuals, including estates and trusts: Provided, That the tax liability, if any, on
gains from sales or other dispositions of real property to the government or any of
its political subdivisions or agencies or to government-owned or controlled
corporations shall be determined either under Section 24 (A) or under this
Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30) days from the date
of sale or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided, finally, that if there is no
full utilization of the proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject to
capital gains tax. For this purpose, the gross selling price or fair market value at the
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time of sale, whichever is higher, shall be multiplied by a fraction which the

unutilized amount bears to the gross selling price in order to determine the taxable
portion and the tax prescribed under paragraph (1) of this Subsection shall be
imposed thereon.
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the

Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter
or Multinational Company, or Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation, or from a joint stock
company, or from an insurance or mutual fund company or from a regional
operating headquarter of multinational company, or the share of a nonresident alien
individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share of a
nonresident alien individual in the net income after tax of an association, a joint
account, or a joint venture taxable as a corporation of which he is a member or a co-
venturer; interests; royalties (in any form); and prizes (except prizes amounting to
Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection
(B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes
and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on
the total amount thereof: Provided, however, that royalties on books as well as
other literary works, and royalties on musical compositions shall be subject to a
final tax of ten percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax provided under
Section 28 of this Code: Provided, furthermore, That interest income from long-
term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided,
finally, that should the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining
maturity thereof:
Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of
stock in domestic corporations not traded through the local stock exchange, and real
properties shall be subject to the tax prescribed under Subsections (C) and (D) of
Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon the entire
income received from all sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines as interest, cash and/or property
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dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration,

emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and
income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Companies. - There shall be levied, collected and
paid for each taxable year upon the gross income received by every alien individual employed
by regional or area headquarters and regional operating headquarters established in the
Philippines by multinational companies as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, from such regional
or area headquarters and regional operating headquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, That the same tax treatment shall apply to
Filipinos employed and occupying the same position as those of aliens employed by these
multinational companies. For purposes of this Chapter, the term 'multinational company'
means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien
individual employed by offshore banking units established in the Philippines as salaries,
wages, annuities, compensation, remuneration and other emoluments, such as honoraria and
allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such
gross income: Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same positions as those of aliens employed by these offshore
banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An

Alien individual who is a permanent resident of a foreign country but who is employed and
assigned in the Philippines by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of
fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowances, received from such contractor or
subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino
employed and occupying the same position as an alien employed by petroleum service
contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income
tax, as the case may be, imposed under this Code.
SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general

professional partnership as such shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a general professional partnership shall
be liable for income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership.
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CHAPTER IV TAX ON CORPORATIONS

SEC. 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income
shall be computed without regard to the specific date when specific sales, purchases and
other transactions occur. Their income and expenses for the fiscal year shall be deemed to
have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying the
number of months covered by the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance,
may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent
(15%) of gross income as defined herein, after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent
(55%).
The election of the gross income tax option by the corporation shall be irrevocable for three
(3) consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be
equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.
"Cost of goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of
the goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs
of production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts
less sales returns, allowances and discounts.
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(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions

and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided, that if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions or hospitals from all sources, the tax
prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'Proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case
may be, in accordance with existing laws and regulations.
(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except
the Government Service Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the local water districts (LWDs), and the
Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in a similar
business, industry, or activity.
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. -
A final tax at the rates prescribed below shall be imposed on net capital gains
realized during the taxable year from the sale, exchange or other disposition of
shares of stock in a domestic corporation except shares sold or disposed of through
the stock exchange:
Not over P100,000. 5%

Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency depository system units and other depository banks
under the expanded foreign currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to be subject to the regular
income tax payable by banks. Provided, however, That interest income from foreign
currency loans granted by such depository banks under said expanded system to
residents other than offshore banking units in the Philippines or other depository
banks under the expanded system, shall be subject to a final tax at the rate of ten
percent (10%).
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Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt
from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from

another domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed
to have been realized on the sale, exchange or disposition of lands and/or buildings
which are not actually used in the business of a corporation and are treated as
capital assets, based on the gross selling price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings.
(E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The
Secretary of Finance is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation which suffers losses on account
of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulation that shall
define the terms and conditions under which he may suspend the imposition of the
minimum corporate income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income
tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold. "Cost of
goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the
place where the goods are actually sold including insurance while the goods are in
transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred
to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services. 'Cost of
services' shall mean all direct costs and expenses necessarily incurred to provide
19
the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however,
That in the case of banks, 'cost of services' shall include interest expense.
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines: Provided, That effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year by
the taxable income of the corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option
to be taxed at fifteen percent (15%) on gross income under the same conditions, as
provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum

corporate income tax of two percent (2%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the same conditions, on a
resident foreign corporation taxable under paragraph (1) of this Subsection.
(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings'
as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the

amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in
a port or point in the Philippines: Provided, further, That for a 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 Gross
Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means gross

revenue whether for 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.
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(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with offshore banking units shall be exempt from all
taxes except net income from such transactions as may be specified by the Secretary
of Finance, upon recommendation of the Monetary Board which shall be subject to
the regular income tax payable by banks: Provided, however, That any interest
income derived from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including local branches of
foreign banks that may be authorized by the BSP to transact business with offshore
banking units, shall be subject only to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from transactions

with said offshore banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen (15%) which shall be based on the total
profits applied or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the same manner
as provided in Sections 57 and 58 of this Code: provided, that interests, dividends,
rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a foreign corporation
during each taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the conduct of its
trade or business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies.
(a) Regional or area headquarters as defined in Section 22(DD) shall not be

subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay
a tax of ten percent (10%) of their taxable income.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. -
Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the Philippines
shall be subject to a final income tax at the rate of twenty percent (20%) of
such interest: Provided, however, That interest income derived by a
resident foreign corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income.
(b) Income Derived under the Expanded Foreign Currency Deposit System. -
Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local commercial banks including
branches of foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency deposit system
units and other depository banks under the expanded foreign currency
deposit system shall be exempt from all taxes, except net income from such
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transactions as may be specified by the Secretary of Finance, upon

recommendation by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks under said
expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system shall be
subject to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be
exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock exchange:
Not over P100,000 5%

On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign

corporation from a domestic corporation liable to tax under this Code shall
not be subject to tax under this Title.
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five
percent (35%) of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains,
except capital gains subject to tax under subparagraph 5(C): Provided, That effective
1, 2009, the rate of income tax shall be thirty percent (30%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five
percent (25%) of its gross income from all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A

nonresident owner or lessor of vessels shall be subject to a tax of four and one-half
percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. -

Rentals, charters and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty
percent (20%) is hereby imposed on the amount of interest on foreign
loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen

percent (15%) is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation, which shall be collected
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and paid as provided in Section 57 (A) of this Code, subject to the condition
that the country in which the nonresident foreign corporation is domiciled,
shall allow a credit against the tax due from the nonresident foreign
corporation taxes deemed to have been paid in the Philippines equivalent
to twenty percent (20%), which represents the difference between the
regular income of thirty-five percent (35%) and the fifteen percent (15%)
tax on dividends as provided in this subparagraph: Provided, that effective
January 1, 2009, the credit against the tax due shall be equivalent to fifteen
percent (15%), which represents the difference between the regular
income tax of thirty percent (30%) and the fifteen percent (15%) tax on
dividends.
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock
exchange:
Not over P100,000.. 5%

On any amount in excess of P100,000 10%
SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -
(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for
each taxable year on the improperly accumulated taxable income of each corporation
described in Subsection B hereof, an improperly accumulated earnings tax equal to ten
percent (10%) of the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax imposed in the preceding
Section shall apply to every corporation formed or availed for the purpose of
avoiding the income tax with respect to its shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate instead of being
divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under
this Section shall not apply to:
(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company
or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term
'improperly accumulated taxable income' means taxable income' adjusted by:
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(1) Income exempt from tax;

(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(a) Dividends actually or constructively paid; and

(b) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income
as of December 31, 1997. In the case of corporations adopting the fiscal year
accounting period, the improperly accumulated income not subject to this tax, shall
be reckoned, as of the end of the month comprising the twelve (12)-month period of
fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable
needs of the business' includes the reasonably anticipated needs of the business.
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) 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;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock 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 nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of its net income or asset shall belong to or inures to the benefit of any member,
organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or
individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) 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
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(K) Farmers', fruit growers', or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back to them the proceeds
of sales, less the necessary selling expenses on the basis of the quantity of produce finished by
them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
CHAPTER V COMPUTATION OF TAXABLE INCOME

SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of
gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.
CHAPTER VI COMPUTATION OF GROSS INCOME

SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means
all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional
partnership.
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise,
but if such amounts are held by the insurer under an agreement to pay interest
thereon, the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or
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annuity contracts, either during the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest,
devise, or descent: Provided, however, That income from such property, as well as
gift, bequest, devise or descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - Amounts received, through Accident or

Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the retiring official or
employee has been in the service of the same employer for at least ten (10)
years and is not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan'
means a pension, gratuity, stock bonus or profit-sharing plan maintained
by an employer for the benefit of some or all of his officials or employees,
wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
wherein its is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from
the service of the employer because of death sickness or other physical
disability or for any cause beyond the control of the said official or
employee.
(c) The provisions of any existing law to the contrary notwithstanding,

social security benefits, retirement gratuities, pensions and other similar
benefits received by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in

the Philippines under the laws of the United States administered by the
United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.
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(7) Miscellaneous Items. -
(a) Income Derived by Foreign Government. - Income derived from

investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on deposits in banks in the Philippines by (i)
foreign governments, (ii) financing institutions owned, controlled, or
enjoying refinancing from foreign governments, and (iii) international or
regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income

derived from any public utility or from the exercise of any essential
governmental function accruing to the Government of the Philippines or to
any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition
of religious, charitable, scientific, educational, artistic, literary, or civic
achievement but only if:
(i) The recipient was selected without any action on his part to
enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future

services as a condition to receiving the prize or award.
(d) Prizes and Awards in sports Competition. - 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.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials
and employees of public and private entities: Provided, however, That the
total exclusion under this subparagraph shall not exceed Thirty thousand
pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national

and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential

Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by

Presidential decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas

bonus: Provided, further, That the ceiling of Thirty thousand
pesos (P30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the
same of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and
Pag-ibig contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of

Indebtedness. - Gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of
more than five (5) years.
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(h) Gains from Redemption of Shares in Mutual Fund. - 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.
SEC. 33. Special Treatment of Fringe Benefit.-
(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998;
thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective
January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees as defined
herein) by the employer, whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or profession of the employer,
or when the fringe benefit is for the convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax shall be paid in the same manner as
provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe
benefit shall be determined by dividing the actual monetary value of the fringe benefit by
sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective
January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter:
Provided, however, That fringe benefit furnished to employees and taxable under Subsections
(B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat:
Provided, further, That the grossed -Up value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by the difference between one
hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C),
(D), and (E) of Section 25.
(B) Fringe Benefit defined.- For purposes of this Section, the term 'fringe benefit' means
any good, service or other benefit furnished or granted in cash or in kind by an employer to
an individual employee (except rank and file employees as defined herein) such as, but not
limited to, the following:
(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 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) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or

similar amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
28
(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by

the Secretary of Finance, upon recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar nature and special need of the
trade, business or profession of the employer.
CHAPTER V II ALLOWABLE DEDUCTIONS

SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation
income arising from personal services rendered under an employer-employee relationship
where no deductions shall be allowed under this Section other than under subsection (M)
hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26;
27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross
income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all
the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise
of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of

compensation for personal services actually rendered, including
the grossed-up monetary value of fringe benefit furnished or
granted by the employer to the employee: Provided, That the
final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad,

while away from home in the pursuit of trade, business or
profession;
(iii) A reasonable allowance for rentals and/or other payments

which are required as a condition for the continued use or
possession, for purposes of the trade, business or profession, of
property to which the taxpayer has not taken or is not taking title
or in which he has no equity other than that of a lessee, user or
possessor;
(iv) A reasonable allowance for entertainment, amusement and

recreation expenses during the taxable year, that are directly
connected to the development, management and operation of the
trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as
the Secretary of Finance may, by rules and regulations prescribe,
upon recommendation of the Commissioner, taking into account
the needs as well as the special circumstances, nature and
character of the industry, trade, business, or profession of the
taxpayer: Provided, That any expense incurred for entertainment,
amusement or recreation that is contrary to law, morals public
29
policy or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be

allowed under Subsection (A) hereof unless the taxpayer shall substantiate
with sufficient evidence, such as official receipts or other adequate
records: (i) the amount of the expense being deducted, and (ii) the direct
connection or relation of the expense being deducted to the development,
management, operation and/or conduct of the trade, business or
profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from

gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local government
unit, or to an official or employee of a government-owned or -controlled
corporation, or to an official or employee or representative of a foreign
government, or to a private corporation, general professional partnership,
or a similar entity, if the payment constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to the

expenses allowable as deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code, may at its option elect
either: (a) to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F)
hereof.
(B) Interest.-
(1) In General. - The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall
be allowed as deduction from gross income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall be reduced by forty-two
percent (42%) of the interest income subjected to final tax; Provided, That effective
January 1, 2009, the percentage shall be thirty-three percent (33%).
(2) Exceptions. - No deduction shall be allowed in respect of interest under the

succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on

the cash basis incurs an indebtedness on which an interest is paid in
advance through discount or otherwise: Provided, That such interest shall
be allowed a a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as deduction in such
taxable year;
(b)If both the taxpayer and the person to whom the payment has been
made or is to be made are persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer,

interest incurred to acquire property used in trade business or exercise of a
profession may be allowed as a deduction or treated as a capital expenditure.
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with
the taxpayer's profession, trade or business, shall be allowed as deduction, except
30
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this
deduction shall be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of paragraph (3) of
this subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited,
shall be included as part of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual

engaged in trade or business in the Philippines and a resident foreign corporation,
the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be
allowed only if and to the extent that they are connected with income from sources
within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies
in his return his desire to have the benefits of this paragraph, the tax imposed by
this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the

Philippines and of a domestic corporation, the amount of income taxes
paid or incurred during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a
member of a general professional partnership or a beneficiary of an estate
or trust, his proportionate share of such taxes of the general professional
partnership or the estate or trust paid or incurred during the taxable year
to a foreign country, if his distributive share of the income of such
partnership or trust is reported for taxation under this Title.
An alien individual and a foreign corporation shall not be allowed the

credits against the tax for the taxes of foreign countries allowed under this
paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall
be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred
to any country shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable
income from sources within such country under this Title bears
to his entire taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the taxpayer's taxable income from sources without the
Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid

differ from the amounts claimed as credits by the taxpayer, or if any tax paid is
refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall
redetermine the amount of the tax for the year or years affected, and the amount of
tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice
31
and demand by the Commissioner, or the amount of tax overpaid, if any, shall be
credited or refunded to the taxpayer. In the case of such a tax incurred but not paid,
the Commissioner as a condition precedent to the allowance of this credit may
require the taxpayer to give a bond with sureties satisfactory to and to be approved
by the Commissioner in such sum as he may require, conditioned upon the payment
by the taxpayer of any amount of tax found due upon any such redetermination. The
bond herein prescribed shall contain such further conditions as the Commissioner
may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of
this Section may, at the option of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken in the year which the taxes of
the foreign country were incurred, subject, however, to the conditions prescribed in
Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the
year in which the taxes of the foreign country accrued, the credits for all subsequent
years shall be taken upon the same basis and no portion of any such taxes shall be
allowed as a deduction in the same or any succeeding year.
(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be

allowed only if the taxpayer establishes to the satisfaction of the Commissioner the
following:
(a) The total amount of income derived from sources without the
Philippines;
(b) The amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit under said paragraph, such
amount to be determined under rules and regulations prescribed by the
Secretary of Finance; and
(c) All other information necessary for the verification and computation of
such credits.
(D) Losses. -
(1) In General.- Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is

hereby authorized to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, however, That the time
limit to be so prescribed in the rules and regulations shall not be less than
thirty (30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the

time of the filing of the return, such loss has been claimed as a deduction
for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign

corporation, the losses deductible shall be those actually sustained during the year
incurred in business, trade or exercise of a profession conducted within the
32
Philippines, when such losses are not compensated for by insurance or other forms
of indemnity. The secretary of Finance, upon recommendation of the Commissioner,
is hereby authorized to promulgate rules and regulations prescribing, among other
things, the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the taxable
year: Provided, That the time to be so prescribed in the rules and regulations shall
not be less than thirty (30) days nor more than ninety (90) days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss;
and
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss: Provided, however, That
any net loss incurred in a taxable year during which the taxpayer was exempt from
income tax shall not be allowed as a deduction under this Subsection: Provided,
further, That a net operating loss carry-over shall be allowed only if there has been
no substantial change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of

outstanding issued shares., if the business is in the name of a corporation,
is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the
corporation, if the business is in the name of a corporation, is held by or on
behalf of the same persons.
"For purposes of this subsection, the term 'not operating loss' shall mean the excess
of allowable deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without
the benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over as a deduction from taxable
income for the next five (5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of the five (5) taxable
years following the loss, and any portion of such loss which exceeds, the taxable
income of such first year shall be deducted in like manner form the taxable income
of the next remaining four (4) years.
(4) Capital Losses.
(a) Limitation. - Loss from sales or Exchanges of capital assets shall be

allowed only to the extent provided in Section 39.
(b) Securities Becoming worthless. - If securities as defined in Section 22 (T)

become worthless during the taxable year and are capital assets, the loss
resulting therefrom shall, for purposes of this Title, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital
assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of
stock or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to
the extent of the gains from such transactions.
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(7) Abandonment Losses.
(a) In the event a contract area where petroleum operations are

undertaken is partially or wholly abandoned, all accumulated exploration
and development expenditures pertaining thereto shall be allowed as a
deduction: Provided, That accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all cases, notices of
abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized

costs thereof, as well as the undepreciated costs of equipment directly
used therein , shall be allowed as a deduction in the year such well,
equipment or facility is abandoned by the contractor: Provided, That if
such abandoned well is reentered and production is resumed, or if such
equipment or facility is restored into service, the said costs shall be
included as part of gross income in the year of resumption or restoration
and shall be amortized or depreciated, as the case may be.
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year except those not connected with profession,
trade or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of
the gross income in the year of recovery to the extent of the income tax benefit of
said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are

ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part
of whose business is the receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year,
of capital assets.
(F) Depreciation. -
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable

allowance for the exhaustion, wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or business. In the case of property held
by one person for life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the property and shall be
allowed to the life tenant. In the case of property held in trust, the allowable
deduction shall be apportioned between the income beneficiaries and the trustees
in accordance with the pertinent provisions of the instrument creating the trust, or
in the absence of such provisions, on the basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used
in the preceding paragraph shall include, but not limited to, an allowance computed
in accordance with rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate
which would have been used had the annual allowance been computed
under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
34
(d) any other method which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where

under rules and regulations prescribed by the Secretary of Finance upon
recommendation of the Commissioner, the taxpayer and the Commissioner have
entered into an agreement in writing specifically dealing with the useful life and rate
of depreciation of any property, the rate so agreed upon shall be binding on both the
taxpayer and the national Government in the absence of facts and circumstances not
taken into consideration during the adoption of such agreement. The responsibility
of establishing the existence of such facts and circumstances shall rest with the
party initiating the modification. Any change in the agreed rate and useful life of the
depreciable property as specified in the agreement shall not be effective for taxable
years prior to the taxable year in which notice in writing by certified mail or
registered mail is served by the party initiating such change to the other party to the
agreement:
Provided, however, that where the taxpayer has adopted such useful life and
depreciation rate for any depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written objection on the part of the
Commissioner or his duly authorized representatives, the aforesaid useful life and
depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset
shall be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance

for depreciation in respect of all properties directly related to production of
petroleum initially placed in service in a taxable year shall be allowed under the
straight-line or declining-balance method of depreciation at the option of the service
contractor.
However, if the service contractor initially elects the declining-balance method, it

may at any subsequent date, shift to the straight-line method.
The useful life of properties used in or related to production of petroleum shall be

ten (10) years of such shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated

under the straight-line method on the basis of an estimated useful life of five (5)
years.
(5) Depreciation of Properties Used in Mining Operations.- an allowance for

depreciation in respect of all properties used in mining operations other than
petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years
or less; or
(b) Depreciated over any number of years between five (5) years and the
expected life if the latter is more than ten (10) years, and the depreciation
thereon allowed as deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of the depreciation
period which depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or

Business or Resident Foreign Corporations. - In the case of a nonresident alien
individual engaged in trade or business or resident foreign corporation, a
reasonable allowance for the deterioration of Property arising out of its use or
employment or its non-use in the business trade or profession shall be permitted
only when such property is located in the Philippines.
35
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance
for depletion or amortization computed in accordance with the cost-depletion
method shall be granted under rules and regulations to be prescribed by the
Secretary of finance, upon recommendation of the Commissioner. Provided, That
when the allowance for depletion shall equal the capital invested no further
allowance shall be granted: Provided, further, That after production in commercial
quantities has commenced, certain intangible exploration and development drilling
costs: (a) shall be deductible in the year incurred if such expenditures are incurred
for non-producing wells and/or mines, or (b) shall be deductible in full in the year
paid or incurred or at the election of the taxpayer, may be capitalized and amortized
if such expenditures incurred are for producing wells and/or mines in the same
contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum

operations which in itself has no salvage value and which is incidental to and
necessary for the drilling of wells and preparation of wells for the production of
petroleum: Provided, That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the allowance for depreciation
except that the allowances for depreciation on such property shall be deductible
under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a

deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In

computing taxable income from mining operations, the taxpayer may at his option,
deduct exploration and development expenditures accumulated as cost or adjusted
basis for cost depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year: Provided, That
the amount deductible for exploration and development expenditures shall not
exceed twenty-five percent (25%) of the net income from mining operations
computed without the benefit of any tax incentives under existing laws. The actual
exploration and development expenditures minus twenty-five percent (25%) of the
net income from mining shall be carried forward to the succeeding years until fully
deducted.
The election by the taxpayer to deduct the exploration and development

expenditures is irrevocable and shall be binding in succeeding taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross
income from operations less 'allowable deductions' which are necessary or related
to mining operations. 'Allowable deductions' shall include mining, milling and
marketing expenses, and depreciation of properties directly used in the mining
operations. This paragraph shall not apply to expenditures for the acquisition or
improvement of property of a character which is subject to the allowance for
depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for
the exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent or quality of any deposit of
ore or other mineral, and paid or incurred before the beginning of the development
stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during

the development stage of the mine or other natural deposits. The development stage
36
of a mine or other natural deposit shall begin at the time when deposits of ore or
other minerals are shown to exist in sufficient commercial quantity and quality and
shall end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident
Alien individual or Foreign Corporation. - In the case of a nonresident alien
individual engaged in trade or business in the Philippines or a resident foreign
corporation, allowance for depletion of oil and gas wells or mines under paragraph
(1) of this Subsection shall be authorized only in respect to oil and gas wells or
mines located within the Philippines.
(H) Charitable and Other Contributions. -
(1) In General. - Contributions or gifts actually paid or made within the taxable year
to, or for the use of the Government of the Philippines or any of its agencies or any
political subdivision thereof exclusively for public purposes, or to accredited
domestic corporation or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of veterans, or to social welfare
institutions, or to non-government organizations, in accordance with rules and
regulations promulgated by the Secretary of finance, upon recommendation of the
Commissioner, no part of the net income of which inures to the benefit of any
private stockholder or individual in an amount not in excess of ten percent (10%) in
the case of an individual, and five percent (%) in the case of a corporation, of the
taxpayer's taxable income derived from trade, business or profession as computed
without the benefit of this and the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the

preceding subparagraph, donations to the following institutions or entities shall be
deductible in full;
(a) Donations to the Government. - Donations to the Government of the

Philippines or to any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to finance, to provide
for, or to be used in undertaking priority activities in education, health,
youth and sports development, human settlements, science and culture,
and in economic development according to a National Priority Plan
determined by the National Economic and Development Authority (NEDA),
In consultation with appropriate government agencies, including its
regional development councils and private philantrophic persons and
institutions: Provided, That any donation which is made to the
Government or to any of its agencies or political subdivisions not in
accordance with the said annual priority plan shall be subject to the
limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations.

- donations to foreign institutions or international organizations which are
fully deductible in pursuance of or 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;
(c) Donations to Accredited Nongovernment Organizations. - the term

'nongovernment organization' means a non profit domestic corporation:
(1) Organized and operated exclusively for scientific, research,

educational, character-building and youth and sports
development, health, social welfare, cultural or charitable
purposes, or a combination thereof, no part of the net income of
which inures to the benefit of any private individual;
37
(2) Which, not later than the 15th day of the third month after the
close of the accredited nongovernment organizations taxable
year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the
purpose or function for which it is organized and operated,
unless an extended period is granted by the Secretary of Finance
in accordance with the rules and regulations to be promulgated,
upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an

annual basis, conform with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed thirty percent (30%)
of the total expenses; and
(4) The assets of which, in the even of dissolution, would be

distributed to another nonprofit domestic corporation organized
for similar purpose or purposes, or to the state for public
purpose, or would be distributed by a court to another
organization to be used in such manner as in the judgment of said
court shall best accomplish the general purpose for which the
dissolved organization was organized.
Subject to such terms and conditions as may be prescribed by the
Secretary of Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including

administrative expenses) paid or utilized to accomplish
one or more purposes for which the accredited
nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held

for use) directly in carrying out one or more purposes
for which the accredited nongovernment organization
was created or organized.
An amount set aside for a specific project which comes

within one or more purposes of the accredited
nongovernment organization may be treated as a
utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has
established to the satisfaction of the Commissioner that
the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, but not to
exceed five (5) years, and the project is one which can
be better accomplished by setting aside such amount
than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than
money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions

only if verified under the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
(I) Research and Development.-
(1) In General. - a taxpayer may treat research or development expenditures which

are paid or incurred by him during the taxable year in connection with his trade,
business or profession as ordinary and necessary expenses which are not
38
chargeable to capital account. The expenditures so treated shall be allowed as

deduction during the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the

election of the taxpayer and in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
the following research and development expenditures may be treated as deferred
expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business
or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a

character which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction

ratably distributed over a period of not less than sixty (60) months as may be
elected by the taxpayer (beginning with the month in which the taxpayer first
realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year
beginning after the effectivity of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable year. The method so elected,
and the period selected by the taxpayer, shall be adhered to in computing taxable
income for the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change to a different
method is authorized with respect to a part or all of such expenditures. The election
shall not apply to any expenditure paid or incurred during any taxable year for
which the taxpayer makes the election.
(3) Limitations on deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and
development of a character which is subject to depreciation and depletion;
and
(b) Any expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit of ore or other mineral,
including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for
the payment of reasonable pensions to his employees shall be allowed as a deduction (in
addition to the contributions to such trust during the taxable year to cover the pension
liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this
Section ) a reasonable amount transferred or paid into such trust during the taxable year in
excess of such contributions, but only if such amount (1)has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid
or payable which is otherwise deductible from, or taken into account in computing gross
income or for which depreciation or amortization may be allowed under this Section, shall be
allowed as a deduction only if it is shown that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58
and 81 of this Code.
(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding
Subsections, an individual subject to tax under Section 24, other than a nonresident alien,
39
may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross
sales or gross receipts, as the case may be. In case of a corporation subject to tax under
Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding
forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intention to elect the optional standard deduction, he shall
be considered as having availed himself of the deductions allowed in the preceding
Subsections. Such election when made in the return shall be irrevocable for the taxable year
for which the return is made: Provided, That an individual who is entitled to and claimed for
the optional standard deduction shall not be required to submit with his tax return such
financial statements otherwise required under this Code: Provided, further, That except when
the Commissioner otherwise permits, the said individual shall keep such records pertaining
to his gross sales or gross receipts, or the said corporation shall keep such records pertaining
to his gross income as defined in Section 32 of this Code during the taxable year, as may be
required by the rules and regulations promulgated by the Secretary of Finance, upon
(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual

Taxpayer. - the amount of premiums not to exceed Two thousand four hundred pesos
(P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for
health and/or hospitalization insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income: Provided, That said family has
a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the
taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming
the additional exemption for dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a public hearing shall have been held for this
purpose, may prescribe by rules and regulations, limitations or ceilings for any of the
itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes
of determining such ceilings or limitations, the Secretary of Finance shall consider the
following factors: (1) adequacy of the prescribed limits on the actual expenditure
requirements of each particular industry; and (2)effects of inflation on expenditure levels:
Provided, further, That no ceilings shall further be imposed on items of expense already
subject to ceilings under present law.
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title,
there shall be allowed a basic personal exemption amounting to Fifty Thousand Pesos
(P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouses is deriving gross income,
only such spouse shall be allowed the personal exemption.
(B) Additional Exemption for Dependents. - There shall be allowed an additional

exemption of Twenty-five Thousand Pesos (P25,000) for each dependent not exceeding four
(4).
The additional exemption for dependent shall be claimed by only one of the spouses in the
case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children: Provided, That the total amount of additional
exemptions that may be claimed by both shall not exceed the maximum additional
exemptions herein allowed.
For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally

adopted child chiefly dependent upon and living with the taxpayer if such dependent is not
more than twenty-one (21) years of age, unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-support because of mental or physical
40
defect.
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents died,
or as if such dependents married, became twenty-one (21) years old or became gainfully
employed at the close of such year.
(D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien

individual engaged in trade, business or in the exercise of a profession in the Philippines shall
be entitled to a personal exemption in the amount equal to the exemptions allowed in the
income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines
not residing in such country, not to exceed the amount fixed in this Section as exemption for
citizens or resident of the Philippines: Provided, That said nonresident alien should file a true
and accurate return of the total income received by him from all sources in the Philippines, as
required by this Title.
SEC. 36. Items not Deductible.-
(A) General Rule. - In computing net income, no deduction shall in any case be allowed in
respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible under Subsection (G) (1) of
Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions
shall in any case be allowed in respect of losses from sales or exchanges of property directly
or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and

corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations

more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if either one of such
41
corporations, with respect to the taxable year of the corporation preceding the date
of the sale of exchange was under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies,
Whether Domestic or Foreign. -
(A) Special Deduction Allowed to Insurance Companies. - In the case of insurance

companies, whether domestic or foreign doing business in the Philippines, the net additions,
if any, required by law to be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be deducted from their
gross income: Provided, however, That the released reserve be treated as income for the year
of release.
(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers'
liability and mutual workmen's compensation and mutual casualty insurance companies
requiring their members to make premium deposits to provide for losses and expenses, said
companies shall not return as income any portion of the premium deposits returned to their
policyholders, but shall return as taxable income all income received by them from all other
sources plus such portion of the premium deposits as are retained by the companies for
purposes other than the payment of losses and expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall
include in their return of gross income, gross premiums collected and received by them less
amounts paid to policyholders on account of premiums previously paid by them and interest
paid upon those amounts between the ascertainment and payment thereof.
(D)Assessment Insurance Companies.- Assessment insurance companies, whether

domestic or foreign, may deduct from their gross income the actual deposit of sums with the
officers of the Government of the Philippines pursuant to law, as additions to guarantee or
reserve funds.
SEC. 38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any loss claimed to have been sustained from any sale or other disposition
of shares of stock or securities where it appears that within a period beginning thirty (30)
days before the date of such sale or disposition and ending thirty (30) days after such date,
the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain
or loss was recognized by law), or has entered into a contact or option so to acquire,
substantially identical stock or securities, then no deduction for the loss shall be allowed
under Section 34 unless the claim is made by a dealer in stock or securities and with respect
to a transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to
acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss form the sale or other disposition of which is
not deductible, shall be determined under rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option to
acquire which) resulted in the non-deductibility of the loss, shall be determined under rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
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SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Subsection (F) of
Section 34; or real property used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains
from sales or exchanges of capital assets over the losses from such sales or
exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses
from sales or exchanges of capital assets over the gains from such sales or
exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation,
only the following percentages of the gain or loss recognized upon the sale or exchange of a
capital asset shall be taken into account in computing net capital gain, net capital loss, and net
income:
(1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months;
(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a substantial part of whose business
is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation and shall not be included in determining
the applicability of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any
taxable year a net capital loss, such loss (in an amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a
capital asset held for not more than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder
upon the retirement of bonds, debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued by a government or political
subdivision thereof) with interest coupons or in registered form, shall be considered as
amounts received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this Title -
(1) Gains or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy
or sell property shall be considered as capital gains or losses.
43
SEC. 40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair market value of the
property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis
of property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if
such property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same was
acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be
in the hands of the donor or the last preceding owner by whom it was not acquired
by gift, except that if such basis is greater than the fair market value of the property
at the time of the gift then, for the purpose of determining loss, the basis shall be
such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money
or money's worth, the basis of such property is the amount paid by the transferee
for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was
acquired in a transaction where gain or loss is not recognized under paragraph
(C)(2) of this Section.
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or
property, the entire amount of the gain or loss, as the case may be, shall be
recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of

merger or consolidation
(a) A corporation, which is a party to a merger or consolidation, exchanges

property solely for stock in a corporation, which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the

merger or consolidation, solely for the stock of another corporation also a
party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or

consolidation, exchanges his securities in such corporation, solely for stock
or securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of participation in
such a corporation of which as a result of such exchange said person, alone
or together with others, not exceeding four (4) persons, gains control of
said corporation: Provided, That stocks issued for services shall not be
considered as issued in return for property.
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(3) Exchange Not Solely in Kind. -
(a) If, in connection with an exchange described in the above exceptions,

an individual, a shareholder, a security holder or a corporation receives
not only stock or securities permitted to be received without the
recognition of gain or loss, but also money and/or property, the gain, if
any, but not the loss, shall be recognized but in an amount not in excess of
the sum of the money and fair market value of such other property
received: Provided, That as to the shareholder, if the money and/or other
property received has the effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the shareholder an amount of the gain
recognized not in excess of his proportionate share of the undistributed
earnings and profits of the corporation; the remainder, if any, of the gain
recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions,
the transferor corporation receives not only stock permitted to be received
without the recognition of gain or loss but also money and/or other
property, then (i) if the corporation receiving such money and/or other
property distributes it in pursuance of the plan of merger or consolidation,
no gain to the corporation shall be recognized from the exchange, but (ii) if
the corporation receiving such other property and/or money does not
distribute it in pursuance of the plan of merger or consolidation, the gain, if
any, but not the loss to the corporation shall be recognized but in an
amount not in excess of the sum of such money and the fair market value
of such other property so received, which is not distributed.
(4) Assumption of Liability. -
(a) If the taxpayer, in connection with the exchanges described in the

foregoing exceptions, receives stock or securities which would be
permitted to be received without the recognition of the gain if it were the
sole consideration, and as part of the consideration, another party to the
exchange assumes a liability of the taxpayer, or acquires from the taxpayer
property, subject to a liability, then such assumption or acquisition shall
not be treated as money and/or other property, and shall not prevent the
exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the
liabilities to which the property is subject exceed the total of the adjusted
basis of the property transferred pursuant to such exchange, then such
excess shall be considered as a gain from the sale or exchange of a capital
asset or of property which is not a capital asset, as the case may be.
(5) Basis -
(a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis of
the property, stock or securities exchanged, decreased by (1) the money
received, and (2) the fair market value of the other property received, and
increased by (a) the amount treated as dividend of the shareholder and (b)
the amount of any gain that was recognized on the exchange: Provided,
That the property received as 'boot' shall have as basis its fair market
value: Provided, further, That if as part of the consideration to the
transferor, the transferee of property assumes a liability of the transferor
or acquires form the latter property subject to a liability, such assumption
or acquisition (in the amount of the liability) shall, for purposes of this
paragraph, be treated as money received by the transferor on the
exchange: Provided, finally, That if the transferor receives several kinds of
stock or securities, the Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
45
(b) The basis of the property transferred in the hands of the transferee
shall be the same as it would be in the hands of the transferor increased by
the amount of the gain recognized to the transferor on the transfer.
(6) Definitions. -
(a) The term 'securities' means bonds and debentures but not 'notes" of
whatever class or duration.
(b) The term 'merger' or 'consolidation', when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or substantially all the properties of
another corporation solely for stock: Provided, That for a transaction to be
regarded as a merger or consolidation within the purview of this Section, it
must be undertaken for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation: Provided, further, That in
determining whether a bona fide business purpose exists, each and every
step of the transaction shall be considered and the whole transaction or
series of transaction shall be treated as a single unit: Provided, finally ,
That in determining whether the property transferred constitutes a
substantial portion of the property of the transferor, the term 'property'
shall be taken to include the cash assets of the transferor.
(c) The term 'control', when used in this Section, shall mean ownership of
stocks in a corporation possessing at least fifty-one percent (51%) of the
total voting power of all classes of stocks entitled to vote.
(d) The Secretary of Finance, upon recommendation of the Commissioner,

is hereby authorized to issue rules and regulations for the purpose
'substantially all' and for the proper implementation of this Section.
SEC. 41. Inventories. - whenever in the judgment of the Commissioner, the use of inventories
is necessary in order to determine clearly the income of any taxpayer, inventories shall be
taken by such taxpayer upon such basis as the Secretary of Finance, upon recommendation of
the Commissioner, may, by rules and regulations, prescribe as conforming as nearly as may
be to the best accounting practice in the trade or business and as most clearly reflecting the
income.
If a taxpayer, after having complied with the terms and a conditions prescribed by the
Commissioner, uses a particular method of valuing its inventory for any taxable year, then
such method shall be used in all subsequent taxable years unless:
(i) with the approval of the Commissioner, a change to a different method is

authorized; or
(ii) the Commissioner finds that the nature o the stock on hand (e.g., its scarcity,
liquidity, marketability and price movements) is such that inventory gains should be
considered realized for tax purposes and, therefore, it is necessary to modify the
valuation method for purposes of ascertaining the income, profits, or loss in a move
realistic manner: Provided, however, That the Commissioner shall not exercise his
authority to require a change in inventory method more often than once every three
(3 years: Provided, further, That any change in an inventory valuation method must
be subject to approval by the Secretary of Finance.
SEC. 42. Income from Sources Within the Philippines.-
(A) Gross Income From Sources Within the Philippines. - The following items of gross
income shall be treated as gross income from sources within the Philippines:
46
(1) Interests. - Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligation of residents, corporate or
otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the
gross income of such foreign corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such
dividends or for such part of such period as the corporation has been in
existence) was derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount which bears the
same ration to such dividends as the gross income of the corporation for
such period derived from sources within the Philippines bears to its gross
income from all sources.
(3) Services. - Compensation for labor or personal services performed in the

Philippines;
(4) Rentals and royalties. - Rentals and royalties from property located in the
Philippines or from any interest in such property, including rentals or royalties for -
(a) The use of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial,
commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge

or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any such
property or right as is mentioned in paragraph (a), any such equipment as
is mentioned in paragraph (b) or any such knowledge or information as is
mentioned in paragraph (c);
(e) The supply of services by a nonresident person or his employee in

connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with

technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television;

and
(iii) Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - gains, profits and income from the sale of real property
located in the Philippines; and
47
(6) Sale of Personal Property. - gains; profits and income from the sale of personal
property, as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
(1) General Rule. - From the items of gross income specified in Subsection (A) of
this Section, there shall be deducted the expenses, losses and other deductions
properly allocated thereto and a ratable part of expenses, interests, losses and other
deductions effectively connected with the business or trade conducted exclusively
within the Philippines which cannot definitely be allocated to some items or class of
gross income: Provided, That such items of deductions shall be allowed only if fully
substantiated by all the information necessary for its calculation. The remainder, if
any, shall be treated in full as taxable income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed
from the item of gross income specified in subsection (A) unless indebtedness was
actually incurred to provide funds for use in connection with the conduct or
operation of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. - The following items of gross
income shall be treated as income from sources without the Philippines:
(1) Interests other than those derived from sources within the Philippines as
provided in paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as
provided in paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any
interest in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, franchises and other like properties;
and
(5) Gains, profits and income from the sale of real property located without the
Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the items of gross
income specified in Subsection (C) of this Section there shall be deducted the expenses, losses,
and other deductions properly apportioned or allocated thereto and a ratable part of any
expense, loss or other deduction which cannot definitely be allocated to some items or classes
of gross income. The remainder, if any, shall be treated in full as taxable income from sources
without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of
gross income, expenses, losses and deductions, other than those specified in Subsections (A)
and (C) of this Section, shall be allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. Where items of gross income are separately allocated
to sources within the Philippines, there shall be deducted (for the purpose of computing the
taxable income therefrom) the expenses, losses and other deductions properly apportioned
or allocated thereto and a ratable part of other expenses, losses or other deductions which
cannot definitely be allocated to some items or classes of gross income. The remainder, if any,
shall be included in full as taxable income from sources within the Philippines. In the case of
gross income derived from sources partly within and partly without the Philippines, the
taxable income may first be computed by deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or classes of gross income; and the portion
of such taxable income attributable to sources within the Philippines may be determined by
48
processes or formulas of general apportionment prescribed by the Secretary of Finance.

Gains, profits and income from the sale of personal property produced (in whole or in part)
by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the Philippines, shall be treated as derived partly from
sources within and partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale
without the Philippines, or from the purchase of personal property without and its sale within
the Philippines shall be treated as derived entirely form sources within the country in which
sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation
shall be treated as derived entirely form sources within the Philippines regardless of where
the said shares are sold. The transfer by a nonresident alien or a foreign corporation to
anyone of any share of stock issued by a domestic corporation shall not be effected or made in
its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon
the future payment by him of any income tax that may be due on the gains derived from such
transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and
due on the gain realized from such sale or transfer have been paid. It shall be the duty of the
transferor and the corporation the shares of which are sold or transferred, to advise the
transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or
'exchanged'; and the word 'produced' includes 'created', 'fabricated,' 'manufactured',
'extracted,' 'processed', 'cured' or 'aged.'
CHAPTER VIII ACCOUNTING PERIODS

AND METHODS OF ACCOUNTING
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the books of such
taxpayer, but if no such method of accounting has been so employed, or if the method
employed does not clearly reflect the income, the computation shall be made in accordance
with such method as in the opinion of the Commissioner clearly reflects the income. If the
taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or
if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is
an individual, the taxable income shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of
gross income shall be included in the gross income for the taxable year in which received by
the taxpayer, unless, under methods of accounting permitted under Section 43, any such
amounts are to be properly accounted for as of a different period. In the case of the death of a
taxpayer, there shall be included in computing taxable income for the taxable period in which
falls the date of his death, amounts accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in
this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred',
dependent upon the method of accounting the basis of which the net income is computed,
unless in order to clearly reflect the income, the deductions should be taken as of a different
period. In the case of the death of a taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death, amounts accrued up to the date of his death
if not otherwise properly allowable in respect of such period or a prior period.
SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from
one fiscal year to another, the net income shall, with the approval of the Commissioner, be
computed on the basis of such new accounting period, subject to the provisions of Section 47.
49
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer,
other than an individual, with the approval of the Commissioner, changes the basis of
computing net income from fiscal year to calendar year, a separate final or adjustment return
shall be made for the period between the close of the last fiscal year for which return was
made and the following December 31. If the change is from calendar year to fiscal year, a
separate final or adjustment return shall be made for the period between the close of the last
calendar year for which return was made and the date designated as the close of the fiscal
year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment
return shall be made for the period between the close of the former fiscal year and the date
designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment
return is made under Subsection (A) on account of a change in the accounting period, and in
all other cases where a separate final or adjustment return is required or permitted by rules
and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, to be made for a fractional part of a year, then the income shall be computed
on the basis of the period for which separate final or adjustment return is made.
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be
reported for tax purposes in the manner as provided in this Section. As used herein, the term
'long-term contracts' means building, installation or construction contracts covering a period
in excess of one (1) year. Persons whose gross income is derived in whole or in part from
such contracts shall report such income upon the basis of percentage of completion. The
return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under
contract. There should be deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the material and supplies on
hand at the beginning and end of the taxable period for use in connection with the work
under the contract but not yet so applied. If upon completion of a contract, it is found that the
taxable net income arising thereunder has not been clearly reflected for any year or years, the
Commissioner may permit or require an amended return.
SEC. 49. Installment Basis.
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, a person who regularly
sells or otherwise disposes of personal property on the installment plan may return as
income therefrom in any taxable year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be realized when payment is
completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other
casual disposition of personal property (other than property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a
price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real
property, if in either case the initial payments do not exceed twenty-five percent (25%) of the
selling price, the income may, under the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, be returned on the basis and in the
manner above prescribed in this Section. As used in this Section, the term 'initial payments'
means the payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual

who sells or disposes of real property, considered as capital asset, and is otherwise qualified
to report the gain therefrom under Subsection (B) may pay the capital gains tax in
installments under rules and regulations to be promulgated by the Secretary of Finance, upon
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(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of
Subsection (A) elects for any taxable year to report his taxable income on the installment
basis, then in computing his income for the year of change or any subsequent year, amounts
actually received during any such year on account of sales or other dispositions of property
made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations,
trades or businesses (whether or not incorporated and whether or not organized in the
Philippines) owned or controlled directly or indirectly by the same interests, the
Commissioner is authorized to distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or
clearly to reflect the income of any such organization, trade or business.
CHAPTER IX RETURNS AND PAYMENT OF TAX

SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals
are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources
within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise

of profession in the Philippines.
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal
and additional exemptions for dependents under Section 35: Provided,
That a citizen of the Philippines and any alien individual engaged in
business or practice of profession within the Philippine shall file an income
tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in

Section 32 (A)(1), derived from sources within the Philippines, the income
tax on which has been correctly withheld under the provisions of Section
79 of this Code: Provided, That an individual deriving compensation
concurrently from two or more employers at any time during the taxable
year shall file an income tax return: Provided, further, That an individual
whose compensation income derived from sources within the Philippines
exceeds Sixty thousand pesos (P60,000) shall also file an income tax
return;
(c) An individual whose sole income has been subjected to final

withholding tax pursuant to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in Section 22 (HH) of this Code or

an individual who is exempt from income tax pursuant to the provisions of
this Code and other laws, general or special.
51
(3) The forgoing notwithstanding, any individual not required to file an income tax
return may nevertheless be required to file an information return pursuant to rules
and regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
(b) A nonresident citizen - on his income derived from sources within the
Philippines;
(c) A resident alien - on his income derived from sources within the
Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on

his income derived from sources within the Philippines.
(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return
shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his legal residence
or principal place of business in the Philippines, or if there be no legal residence or place of
business in the Philippines, with the Office of the Commissioner.
(C) When to File. -
(1) The return of any individual specified above shall be filed on or before the
fifteenth (15th) day of April of each year covering income for the preceding taxable
year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local
stock exchange as prescribed under Section 24(c) shall file a return within
thirty (30) days after each transaction and a final consolidated return on
or before April 15 of each year covering all stock transactions of the
preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall
file a return within thirty (30) days following each sale or other
disposition.
(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident
aliens, who do not derive income purely from compensation, shall file a return for the taxable
year to include the income of both spouses, but where it is impracticable for the spouses to
file one return, each spouse may file a separate return of income but the returns so filed shall
be consolidated by the Bureau for purposes of verification for the taxable year.
(E) Return of Parent to Include Income of Children.- The income of unmarried minors
derived from properly received from a living parent shall be included in the return of the
parent, except (1) when the donor's tax has been paid on such property, or (2) when the
transfer of such property is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return
may be made by his duly authorized agent or representative or by the guardian or other
person charged with the care of his person or property, the principal and his representative
or guardian assuming the responsibility of making the return and incurring penalties
provided for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed
return shall be prima facie evidence for all purposes that the return was actually signed by
52
him.
SEC. 52. Corporation Returns. -
(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign
corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a
true and accurate quarterly income tax return and final or adjustment return in accordance
with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-
president or other principal officer, and shall be sworn to by such officer and by the treasurer
or assistant treasurer.
(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal
year as a basis for filing its annual income tax return: Provided, That the corporation shall not
change the accounting period employed without prior approval from the Commissioner in
accordance with the provisions of Section 47 of this Code.
(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every

corporation shall, within thirty (30) days after the adoption by the corporation of a resolution
or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock,
including a corporation which has been notified of possible involuntary dissolution by the
Securities and Exchange Commission, or for its reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the terms of such resolution or plan and such
other information as the Secretary of Finance, upon recommendation of the commissioner,
shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and
Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined
by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue
which certificate shall be submitted to the Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the
Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange
of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c),
25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days
after each transactions and a final consolidated return of all transactions during the taxable
year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the
taxable year.
SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases,
grant a reasonable extension of time for filing returns of income (or final and adjustment
returns in case of corporations), subject to the provisions of Section 56 of this Code.
SEC. 54. Returns of Receivers, Trustees in Bankruptcy or Assignees. - In cases wherein

receivers, trustees in bankruptcy or assignees are operating the property or business of a
corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees
shall make returns of net income as and for such corporation, in the same manner and form
as such organization is hereinbefore required to make returns, and any tax due on the income
as returned by receivers, trustees or assignees shall be assessed and collected in the same
manner as if assessed directly against the organizations of whose businesses or properties
they have custody or control.
SEC. 55. Returns of General Professional Partnerships. - Every general professional

partnership shall file, in duplicate, a return of its income, except income exempt under Section
32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this
Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of
the partners.
53
SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -
(A) Payment of Tax. -
(1) In General. - The total amount of tax imposed by this Title shall be paid by the
person subject thereto at the time the return is filed. In the case of tramp vessels, the
shipping agents and/or the husbanding agents, and in their absence, the captains
thereof are required to file the return herein provided and pay the tax due thereon
before their departure. Upon failure of the said agents or captains to file the return
and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and
prevent its departure until proof of payment of the tax is presented or a sufficient
bond is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two thousand pesos
(P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2)
equal installments in which case, the first installment shall be paid at the time the
return is filed and the second installment, on or before July 15 following the close of
the calendar year. If any installment is not paid on or before the date fixed for its
payment, the whole amount of the tax unpaid becomes due and payable, together
with the delinquency penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and
prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall
be paid on the date the return prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of his intention to avail himself of
the benefit of exemption of capital gains under existing special laws, no such
payments shall be required : Provided, further, That in case of failure to qualify for
exemption under such special laws and implementing rules and regulations, the tax
due on the gains realized from the original transaction shall immediately become
due and payable, subject to the penalties prescribed under applicable provisions of
this Code: Provided, finally, That if the seller, having paid the tax, submits such proof
of intent within six (6) months from the registration of the document transferring
the real property, he shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.
"In case the taxpayer elects and is qualified to report the gain by installments under Section
49 of this Code, the tax due from each installment payment shall be paid within (30) days
from the receipt of such payments.
No registration of any document transferring real property shall be effected by the Register of
Deeds unless the Commissioner or his duly authorized representative has certified that such
transfer has been reported, and the tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the
Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency
income tax so discovered shall be paid upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as
the tax by the taxpayer upon his return; but the amount so shown on the return
shall be increased by the amounts previously assessed (or collected without
assessment) as a deficiency, and decreased by the amount previously abated,
credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return, or if no return
is made by the taxpayer, then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment) as a deficiency; but such
amounts previously assessed or collected without assessment shall first be
decreased by the amounts previously abated, credited returned or otherwise repaid
in respect of such tax.
54
SEC. 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner,
requiring the filing of income tax return by certain income payees, the tax imposed or
prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same conditions
as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year.
(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other
similar obligations of domestic or resident foreign corporations, contain a contract or
provisions by which the obligor agrees to pay any portion of the tax imposed in this Title
upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest
without deduction for any tax which the obligor may be required or permitted to pay thereon
or to retain therefrom under any law of the Philippines, or any state or country, the obligor
shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or
other payments are payable annually or at shorter or longer periods, and whether the bonds,
securities or obligations had been or will be issued or marketed, and the interest or other
payment thereon paid, within or without the Philippines, if the interest or other payment is
payable to a nonresident alien or to a citizen or resident of the Philippines.
SEC. 58. Returns and Payment of Taxes Withheld at Source. -
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld
under Section 57 by withholding agents shall be covered by a return and paid to, except in
cases where the Commissioner otherwise permits, an authorized Treasurer of the city or
municipality where the withholding agent has his legal residence or principal place of
business, or where the withholding agent is a corporation, where the principal office is
located.
The taxes deducted and withheld by the withholding agent shall be held as a special fund in
trust for the government until paid to the collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-five
(25) days from the close of each calendar quarter, while the return for creditable withholding
taxes shall be filed and the payment made not later than the last day of the month following
the close of the quarter during which withholding was made: Provided, That the
Commissioner, with the approval of the Secretary of Finance, may require these withholding
agents to pay or deposit the taxes deducted or withheld at more frequent intervals when
necessary to protect the interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent
required to deduct and withhold taxes under Section 57 shall furnish each recipient, in
respect to his or its receipts during the calendar quarter or year, a written statement showing
the income or other payments made by the withholding agent during such quarter or year,
and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at
the request of the payee, but not late than the twentieth (20th) day following the close of the
quarter in the case of corporate payee, or not later than March 1 of the following year in the
case of individual payee for creditable withholding taxes. For final withholding taxes, the
statement should be given to the payee on or before January 31 of the succeeding year.
55
(C) Annual Information Return. - Every withholding agent required to deduct and withhold
taxes under Section 57 shall submit to the Commissioner an annual information return
containing the list of payees and income payments, amount of taxes withheld from each payee
and such other pertinent information as may be required by the Commissioner. In the case of
final withholding taxes, the return shall be filed on or before January 31 of the succeeding
year, and for creditable withholding taxes, not later than March 1 of the year following the
year for which the annual report is being submitted. This return, if made and filed in
accordance with the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the requirements
of Section 68 of this Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable
extension of time to furnish and submit the return required in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld
at source under Section 57 shall be included in the return of its recipient but the excess of the
amount of tax so withheld over the tax due on his return shall be refunded to him subject to
the provisions of Section 204; if the income tax collected at source is less than the tax due on
his return, the difference shall be paid in accordance with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and
regulations are hereby considered trust funds and shall be maintained in a separate account
and not commingled with any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been reported, and the capital
gains or creditable withholding tax, if any, has been paid: Provided, however, That the
information as may be required by rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, shall be annotated by the Register of
Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided,
further, That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred recognition of income in
accordance with Section 40, the information as may be required by rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall
be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or
Condominium Certificate of Title of the real property involved: Provided, finally, That any
violation of this provision by the Register of Deeds shall be subject to the penalties imposed
under Section 269 of this Code.
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under
this Title upon gains, profits, and income not falling under the foregoing and not returned and
paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal
return under rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. The intent and purpose of the Title is that all gains,
profits and income of a taxable class, as defined in this Title, shall be charged and assessed
with the corresponding tax prescribed by this Title, and said tax shall be paid by the owners
of such gains, profits and income, or the proper person having the receipt, custody, control or
disposal of the same. For purposes of this Title, ownership of such gains, profits and income
or liability to pay the tax shall be determined as of the year for which a return is required to
be rendered.
56
CHAPTER X ESTATES AND TRUSTS

SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income
of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant which is to be held or distributed as the court
may direct;
(3) Income received by estates of deceased persons during the period of administration
or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms
part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or
all of his employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income to be (within the
taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income of the estate or trust
and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable
trusts) and Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more
trusts, the creator of the trust in each instance is the same person, and the beneficiary in
each instance is the same, the taxable income of all the trusts shall be consolidated and
the tax provided in this Section computed on such consolidated income, and such
proportion of said tax shall be assessed and collected from each trustee which the taxable
income of the trust administered by him bears to the consolidated income of the several
trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same
manner and on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for the taxable year which is to be distributed currently
by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an
infant which is to be held or distributed as the court may direct, but the amount so allowed as a
deduction shall be included in computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be
allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable
year.
(B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the discretion of the
fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an
additional deduction in computing the taxable income of the estate or trust the amount of the
57
income of the estate or trust for its taxable year, which is properly paid or credited during such
year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included
in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any
income included in the return of said trust shall not be included in computing the income of the
beneficiaries.
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in
this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the
income of the estate or trust.
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part
of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, the income of such part of the trust shall be included in
computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the disposition of such part of the income may
be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the disposition of such part of
the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the disposition of such part of the income may
be applied to the payment of premiums upon policies of insurance on the life of the grantor, such
part of the income of the trust shall be included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the
grantor, either alone or in conjunction with any person not having a substantial adverse interest in
the disposition of the part of the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers,

conservators and all persons or corporations, acting in any fiduciary capacity, shall render, in
duplicate, a return of the income of the person, trust or estate for whom or which they act, and be
subject to all the provisions of this Title, which apply to individuals in case such person, estate or
trust has a gross income of Twenty thousand pesos (P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of
the affairs of such person, trust or estate to enable him to make such return and that the same is, to
the best of his knowledge and belief, true and correct, and be subject to all the provisions of this
Title which apply to individuals: Provided, That a return made by or for one or two or more joint
fiduciaries filed in the province where such fiduciaries reside; under such rules and regulations as
the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe, shall be a
sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors,
administrators and other fiduciaries are indemnified against the claims or demands of every
beneficiary for all payments of taxes which they shall be required to make under the provisions of
this Title, and they shall have credit for the amount of such payments against the beneficiary or
principal in any accounting which they make as such trustees or other fiduciaries.
58
CHAPTER XI OTHER INCOME TAX REQUIREMENTS

SEC. 67. Collection of Foreign Payments. - All persons, corporations, duly registered
general co-partnerships (companias colectivas) undertaking for profit or otherwise the
collection of foreign payments of interests or dividends by means of coupons, checks or bills
of exchange shall obtain a license from the Commissioner, and shall be subject to such rules
and regulations enabling the government to obtain the information required under this Title,
as the Secretary of Finance, upon recommendation of the Commissioner, shall prescribe.
SEC. 68. Information at Source as to Income Payments. - all persons, corporations or duly
registered co- partnerships (companias colectivas), in whatever capacity acting, including
lessees or mortgagors of real or personal property, trustees, acting in any trust capacity,
executors, administrators, receivers, conservators and employees making payment to
another person, corporation or duly registered general co-partnership (compania colectiva),
of interests, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments or other fixed or determinable gains, profits and income, other than payment
described in Section 69, in any taxable year, or in the case of such payments made by the
Government of the Philippines, the officers or employees of the Government having
information as to such payments and required to make returns in regard thereto, are
authorized and required to render a true and accurate return to the Commissioner, under
such rules and regulations, and in such form and manner as may be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, setting forth the amount of
such gains, profits and income and the name and address of the recipient of such payments:
Provided, That such returns shall be required, in the case of payments of interest upon bonds
and mortgages or deeds of trust or other similar obligations of corporations, and in the case
of collections of items, not payable in the Philippines, of interest upon the bonds of foreign
countries and interest from the bonds and dividends from the stock of foreign corporations
by persons, corporations or duly registered general co-partnerships (companias colectivas),
undertaking as a matter of business or for profit or otherwise the collection of foreign
payments of such interests or dividends by means of coupons or bills of exchange.
SEC. 69. Return of Information of Brokers. - Every person, corporation or duly registered
general co-partnership (compania colectiva), doing business as a broker in any exchange or
board or other similar place of business, shall, when required by the Commissioner, render a
correct return duly verified under oath under such rules and regulations as the Secretary of
Finance, upon recommendation of the Commissioner, may prescribe, showing the names of
customers for whom such person, corporation or duly registered general co-partnership
(compania colectiva) has transacted any business, with such details as to the profits, losses or
other information which the Commissioner, may require as to each of such customers as will
enable the Commissioner to determine whether all income tax due on profits or gains of such
customers has been paid.
SEC. 70. Returns of Foreign Corporations. -
(A) Requirements. - Under rules and regulations prescribed by the Secretary of

finance, upon the recommendation of the Commissioner, any attorney, accountant,
fiduciary, bank, trust company, financial institution or other person, who aids,
assists, counsels or advises in, o with respect to; the formation, organization or
reorganization of any foreign corporation, shall, within thirty (30) days thereafter,
file with the Commissioner a return.
(B) Form and Contents of Return. - Such return shall be in such form and shall set
forth; under oath, in respect of each such corporation, to the full extent of the
information within the possession or knowledge or under the control of the person
required to file the return, such information as the Secretary of Finance, upon
recommendation of the Commissioner, shall prescribe by rules and regulations as
necessary for carrying out the provisions of this Title. Nothing in this Section shall
be construed to require the divulging of privileged communications between
attorney and client.
59
SEC. 71. Disposition of Income Tax Returns, Publication of Lists of Taxpayers and
Filers. - After the assessment shall have been made, as provided in this Title, the returns,
together with any corrections thereof which may have been made by the Commissioner, shall
be filed in the Office of the Commissioner and shall constitute public records and be open to
inspection as such upon the order of the President of the Philippines, under rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
The Commissioner may, in each year, cause to be prepared and published in any newspaper
the lists containing the names and addresses of persons who have filed income tax returns.
Income tax returns of specific taxpayers subject of a request for exchange of information by a
foreign tax authority pursuant to an international convention or agreement on tax matters to
which the Philippines is a signatory or a party of, shall be open to inspection upon the order
of the President of the Philippines, under rules and regulations as may be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an
assessment is made in case of any list, statement or return, which in the opinion of the
Commissioner was false or fraudulent or contained any understatement or undervaluation,
no tax collected under such assessment shall be recovered by any suit, unless it is proved that
the said list, statement or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns
made or to be made in good faith regarding annual depreciation of oil or gas wells and mines.
SEC. 73. Distribution of dividends or Assets by Corporations. -
(A) Definition of Dividends. - The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or

dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to

capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the
extent that it represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits. - Any distribution made to the shareholders or members of a corporation
shall be deemed to have been made form the most recently accumulated profits or
surplus, and shall constitute a part of the annual income of the distributee for the
year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by

Partners. - The taxable income declared by a partnership for a taxable year which is
subject to tax under Section 27 (A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not.
60
CHAPTER XII QUARTERLY CORPORATE INCOME TAX

ANNUAL DECLARATION AND
QUARTERLY PAYMENTS OF INCOME TAXES
SEC. 74. Declaration of Income Tax for Individuals. -
(A) In General. - Except as otherwise provided in this Section, every individual subject to
income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment
income, whether it constitutes the sole source of his income or in combination with salaries,
wages and other fixed or determinable income, shall make and file a declaration of his
estimated income for the current taxable year on or before April 15 of the same taxable year.
In general, self-employment income consists of the earnings derived by the individual from
the practice of profession or conduct of trade or business carried on by him as a sole
proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with
respect to income from without the Philippines, and nonresident aliens not engaged in trade
or business in the Philippines, are not required to render a declaration of estimated income
tax. The declaration shall contain such pertinent information as the Secretary of Finance,
upon recommendation of the Commissioner, may, by rules and regulations prescribe. An
individual may make amendments of a declaration filed during the taxable year under the
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of
estimated income as defined in Subsection (C) with respect to which a declaration is required
under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid
at the time of the declaration and the second and third shall be paid on August 15 and
November 15 of the current year, respectively. The fourth installment shall be paid on or
before April 15 of the following calendar year when the final adjusted income tax return is
due to be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term 'estimated
tax' means the amount which the individual declared as income tax in his final adjusted and
annual income tax return for the preceding taxable year minus the sum of the credits allowed
under this Title against the said tax. If, during the current taxable year, the taxpayer
reasonable expects to pay a bigger income tax, he shall file an amended declaration during
any interval of installment payment dates.
SEC. 75. - Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in
duplicate a quarterly summary declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters upon which the income tax, as
provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall
be decreased by the amount of tax previously paid or assessed during the preceding quarters
and shall be paid not later than sixty (60) days from the close of each of the first three (3)
quarters of the taxable year, whether calendar or fiscal year.
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall
file a final adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the corporation shall
either:
(A)Pay the balance of tax still due; or
(B)Carry-over the excess credit; or
(C)Be credited or refunded with the excess amount paid, as the case may be.
61
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried
over and credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate shall be
allowed therefor.
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -
(A)Place of Filing. -Except as the Commissioner otherwise permits, the quarterly income tax
declaration required in Section 75 and the final adjustment return required I Section 76 shall
be filed with the authorized agent banks or Revenue District Officer or Collection Agent or
duly authorized Treasurer of the city or municipality having jurisdiction over the location of
the principal office of the corporation filing the return or place where its main books of
accounts and other data from which the return is prepared are kept.
(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be
filed within sixty (60) days following the close of each of the first three (3) quarters of the
taxable year. The final adjustment return shall be filed on or before the fifteenth (15 th) day of
April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of
the fiscal year, as the case may be.
(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly
returns and the final adjustment income tax returns computed in accordance with Sections 75
and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by
the Commissioner.
CHAPTER XIII WITHHOLDING TAXES

SEC. 78. Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public
official) for services performed by an employee for his employer, including the cash value of
all remuneration paid in any medium other than cash, except that such term shall not include
remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is
performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government
or an international organization.
If the remuneration paid by an employer to an employee for services performed during one-
half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days
constitutes wages, all the remuneration paid by such employer to such employee for such
period shall be deemed to be wages; but if the remuneration paid by an employer to an
employee for services performed during more than one -half (1/2) of any such payroll period
does not constitute wages, then none of the remuneration paid by such employer to such
employee for such period shall be deemed to be wages.
(B) Payroll Period. - The term 'payroll period' means a period for which payment of wages
is ordinarily made to the employee by his employer, and the term 'miscellaneous payroll
62
period' means a payroll period other than, a daily, weekly, biweekly, semi-monthly, monthly,
quarterly, semi-annual, or annual period.
(C) Employee. - The term 'employee' refers to any individual who is the recipient of wages
and includes an officer, employee or elected official of the Government of the Philippines or
any political subdivision, agency or instrumentality thereof. The term 'employee' also
includes an officer of a corporation.
(D) Employer. - The term 'employer' means the person for whom an individual performs or
performed any service, of whatever nature, as the employee of such person, except that:
(1) If the person for whom the individual performs or performed any service does
not have control of the payment of the wages for such services, the term 'employer'
(except for the purpose of Subsection(A) means the person having control of the
payment of such wages; and
(2) In the case of a person paying wages on behalf of a nonresident alien individual,
foreign partnership or foreign corporation not engaged in trade or business within
the Philippines, the term 'employer' (except for the purpose of Subsection(A) means
such person.
SEC. 79. Income Tax Collected at Source.-
(A) Requirement of Withholding. Except in the case of a minimum wage earner as

defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner:
(B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this Chapter,
fails to deduct and withhold the tax as required under this Chapter, and thereafter the tax
against which such tax may be credited is paid, the tax so required to be deducted and
withheld shall not be collected from the employer; but this Subsection shall in no case relieve
the employer from liability for any penalty or addition to the tax otherwise applicable in
respect of such failure to deduct and withhold.
(C) Refunds or Credits. -
(1) Employer. - When there has been an overpayment of tax under this Section,
refund or credit shall be made to the employer only to the extent that the amount of
such overpayment was not deducted and withheld hereunder by the employer.
(2) Employees. -The amount deducted and withheld under this Chapter during any
calendar year shall be allowed as a credit to the recipient of such income against the
tax imposed under Section 24(A) of this Title. Refunds and credits in cases of
excessive withholding shall be granted under rules and regulations promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or
credited within three (3) months from the fifteenth (15th) day of April. Refunds or credits
made after such time shall earn interest at the rate of six percent (6%) per annum, starting
after the lapse of the three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman, Commission on
Audit or the latter's duly authorized representative as an exception to the requirement
prescribed by Section 49, Chapter 8, Subtitle B, Title 1 of Book V of Executive Order No. 292,
otherwise known as the Administrative Code of 1987.
63
(D) Personal Exemptions. -
(1) In General. - Unless otherwise provided by this Chapter, the personal and
additional exemptions applicable under this Chapter shall be determined in
accordance with the main provisions of this Title.
(2) Exemption Certificate. -
(a) When to File. - On or before the date of commencement of employment

with an employer, the employee shall furnish the employer with a signed
withholding exemption certificate relating to the personal and additional
exemptions to which he is entitled.
(b) Change of Status. - In case of change of status of an employee as a

result of which he would be entitled to a lesser or greater amount of
exemption, the employee shall, within ten (10) days from such change, file
with the employer a new withholding exemption certificate reflecting the
change.
(c) Use of Certificates. - The certificates filed hereunder shall be used by

the employer in the determination of the amount of taxes to be withheld.
(d) Failure to Furnish Certificate. - Where an employee, in violation of this

Chapter, either fails or refuses to file a withholding exemption certificate,
the employer shall withhold the taxes prescribed under the schedule for
zero exemption of the withholding tax table determined pursuant to
Subsection (A) hereof.
(E) Withholding on Basis of Average Wages. - The Commissioner may, under rules and
regulations promulgated by the Secretary of Finance, authorize employers to:
(1) estimate the wages which will be paid to an employee in any quarter of the
calendar year;
(2) determine the amount to be deducted and withheld upon each payment of
wages to such employee during such quarter as if the appropriate average of the
wages so estimated constituted the actual wages paid; and
(3) deduct and withhold upon any payment of wages to such employee during ;such
quarter such amount as may be required to be deducted and withheld during such
quarter without regard to this Subsection.
(F) Husband and Wife. - When a husband and wife each are recipients of wages, whether
from the same or from different employers, taxes to be withheld shall be determined on the
following bases:
(1) The husband shall be deemed the head of the family and proper claimant of the
additional exemption in respect to any dependent children, unless he explicitly
waives his right in favor of his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance with the
schedule for zero exemption of the withholding tax table prescribed in Subsection
(D)(2)(d) hereof.
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in trade or
business in the Philippines shall be subject to the provisions of this Chapter.
(H) Year-end Adjustment. - On or before the end of the calendar year but prior to the
payment of the compensation for the last payroll period, the employer shall determine the tax
due from each employee on taxable compensation income for the entire taxable year in
accordance with Section 24(A). The difference between the tax due from the employee for the
64
entire year and the sum of taxes withheld from January to November shall either be withheld
from his salary in December of the current calendar year or refunded to the employee not
later than January 25 of the succeeding year.
SEC. 80. Liability for Tax. -
(A) Employer. - The employer shall be liable for the withholding and remittance of the
correct amount of tax required to be deducted and withheld under this Chapter. If the
employer fails to withhold and remit the correct amount of tax as required to be withheld
under the provision of this Chapter, such tax shall be collected from the employer together
with the penalties or additions to the tax otherwise applicable in respect to such failure to
withhold and remit.
(B) Employee. - Where an employee fails or refuses to file the withholding exemption
certificate or willfully supplies false or inaccurate information thereunder, the tax otherwise
required to be withheld by the employer shall be collected from him including penalties or
additions to the tax from the due date of remittance until the date of payment. On the other
hand, excess taxes withheld made by the employer due to:
(1) failure or refusal to file the withholding exemption certificate; or
(2) false and inaccurate information shall not be refunded to the employee but shall
be forfeited in favor of the Government.
SEC. 81. Filing of Return and Payment of Taxes Withheld. - Except as the Commissioner
otherwise permits, taxes deducted and withheld by the employer on wages of employees
shall be covered by a return and paid to an authorized agent bank; Collection Agent, or the
duly authorized Treasurer of the city or municipality where the employer has his legal
residence or principal place of business, or in case the employer is a corporation, where the
principal office is located.
The return shall be filed and the payment made within twenty-five (25) days from the close of
each calendar quarter: Provided, however, That the Commissioner may, with the approval of
the Secretary of Finance, require the employers to pay or deposit the taxes deducted and
withheld at more frequent intervals, in cases where such requirement is deemed necessary to
protect the interest of the Government.
The taxes deducted and withheld by employers shall be held in a special fund in trust for the
Government until the same are paid to the said collecting officers.
SEC. 82. Return and Payment in Case of Government Employees. - If the employer is the
Government of the Philippines or any political subdivision, agency or instrumentality thereof,
the return of the amount deducted and withheld upon any wage shall be made by the officer
or employee having control of the payment of such wage, or by any officer or employee duly
designated for the purpose.
SEC. 83. Statements and Returns. -
(A) Requirements. - Every employer required to deduct and withhold a tax shall furnish to
each such employee in respect of his employment during the calendar year, on or before
January thirty-first (31st) of the succeeding year, or if his employment is terminated before
the close of such calendar year, on the same day of which the last payment of wages is made, a
written statement confirming the wages paid by the employer to such employee during the
calendar year, and the amount of tax deducted and withheld under this Chapter in respect of
such wages. The statement required to be furnished by this Section in respect of any wage
shall contain such other information, and shall be furnished at such other time and in such
form as the Secretary of Finance, upon the recommendation of the Commissioner, may, by
rules and regulation, prescribe.
(B) Annual Information Returns. - Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall, on or before January thirty-first (31st) of
the succeeding year, submit to the Commissioner an annual information return containing a
65
list of employees, the total amount of compensation income of each employee, the total
amount of taxes withheld therefrom during the year, accompanied by copies of the statement
referred to in the preceding paragraph, and such other information as may be deemed
necessary. This return, if made and filed in accordance with rules and regulations
promulgated by the Secretary of Finance, upon recommendation of the Commissioner, shall
be sufficient compliance with the requirements of Section 68 of this Title in respect of such
wages.
(C) Extension of time. - The Commissioner, under such rules and regulations as may be
promulgated by the Secretary of Finance, may grant to any employer a reasonable extension
of time to furnish and submit the statements and returns required under this Section.
END OF TITLE II
66

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TITLE I: ORGANIZATION AND FUNCTION OF THE BIR

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine,

The provisions of the foregoing paragraphs notwithstanding, nothing in this Section

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional

(C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presumptive

(E) Authority of the Commissioner to Prescribe Real Property Values. - The

(1) the fair market value as determined by the Commissioner, or

(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. -

(1) a decedent to determine his gross estate; and

In case a taxpayer files an application to compromise the payment of his

(3) A specific taxpayer or taxpayers subject of a request for the supply of

(a) The identity of the person under examination or investigation;

(b) A statement of the information being sought including its nature

(d) Grounds for believing that the information requested is held in

(g) A statement that the requesting foreign tax authority has

The Commissioner shall forward the information as promptly as possible

If the Commissioner is unable to obtain and provide the information

(H) Authority of the Commissioner to Prescribe Additional Procedural or Documentary

SEC. 7. - Authority of the Commissioner to Delegate Power. - The Commissioner may

(d) The power to assign or reassign internal revenue officers to establishments

(f) Coordinate with local government units in the area;

Any officer or employee of an authorized agent bank assigned to receive internal

SEC. 20. Submission of Report and Pertinent Information by the Commissioner.

(A) Submission of Pertinent Information to Congress. - The provision of Section 270

(B) Report to Oversight Committee. - The Commissioner shall, with reference to

(a) Income tax;

(b) Estate and donor's taxes;

(c) Value-added tax;

(d) Other percentage taxes;

(e) Excise taxes;

(f) Documentary stamp taxes; and

(A) The term 'person' means an individual, a trust, estate or corporation.

(E) The term 'nonresident citizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the

CHAPTER II GENERAL PRINCIPLES

CHAPTER III TAX ON INDIVIDUALS

(1) An income tax is hereby imposed:

Not over P10,000 5%

Over P500,000 P125,000 + 32% of the excess

(B) Rate of Tax on Certain Passive Income.

Four (4) years to less than five (5) years - 5%;

Six percent (6%) beginning January 1, 1998;

Not over P100,000.. 5%

(D) Capital Gains from Sale of Real Property. -

time of sale, whichever is higher, shall be multiplied by a fraction which the

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the

Four (4) years to less than five (5) years - 5%;

dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration,

(C) Alien Individual Employed by Regional or Area Headquarters and Regional

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general

CHAPTER IV TAX ON CORPORATIONS

(3) A VAT tax effort of four percent (4%) of GNP; and

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The

(D) Rates of Tax on Certain Passive Incomes. -