Tax Codal Reviewer

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 on the taxable income defined in Section 31. (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.)

(a) Derived for each taxable year from all sources within and without the
Philippines be every individual citizen of the Philippines residing therein;

(b) 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;

(c) Derived for each taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established:

Not over P10,000 5%

Over P10,000 but not over P30,000 P500+10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500+15% of the excess over P30,000
Over P70,000 but not over P140,000.. P8,500+20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500+25% of the excess over
P140,000
Over P250,000 but not over P500,000 P50,000+30% of the excess over
P250,000
Over P500,000 P125,000+34% of the excess over P500,000
in 1998.

Note:
Effective January 1, 1999, the top marginal rate shall be thirty-three percent
(33%) and effective January 1, 2000, the said rate shall be thirty-two percent
(32%).
For married individuals, 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.

(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
- The 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
- The 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:
o Four (4) years to less than five (5) years - 5%;
o Three (3) years to less than (4) years - 12%; and
o 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.
-
Note:
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.

General.
- 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,
- 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.

Exception.

- 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

- 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
-
- 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.

- Tax exemption can only be availed of once every ten (10) years:

- 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.

Note:
For this purpose, the gross selling price or fair market value at the 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. -

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.

(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

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.

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.
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

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.
- Tax is 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
- However the same tax treatment shall apply to Filipinos employed and
occupying the same position as those of aliens employed by these
multinational companies.

(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
- A tax equal to fifteen percent (15%) of such gross income
- However, 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
- However 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.

SEC. 26. Tax Liability of Members of General Professional Partnerships.

 - A general professional partnership as such shall not be subject to the
income tax
- Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and individual
capacities.
- 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.

SEC. 27. Rates of Income tax on Domestic Corporations. -

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.

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 reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates 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.

(B) Proprietary Educational Institutions and Hospitals.

- Shall pay a tax of ten percent (10%) on their taxable income.
- 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.
- 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.
-
(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 Philippine Charity
Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in s 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

- 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 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, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.

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, is 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. - 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 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. -
In General
- 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, 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
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 reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by
the taxable income of the corporation for the period, divided by twelve.

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
(b) 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
(c) Provided, 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.

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.

Offshore Banking Units. - any law to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with offshore banking units, including any interest income derived from
foreign currency loans granted to residents, shall be subject to a final income tax at
the rate of ten percent (10%) of such income.

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).

(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 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, including interest income
from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at
the rate of ten percent (10%) of such income.

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. - 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 subparagraphs (C) and (d): Provided, That effective 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%).

(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 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%)
for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and
seventeen percent (17%) thereafter, which represents the difference between
the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent
(34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and the fifteen percent (15%) tax on dividends
as provided in this subparagraph;

(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. 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. -

General Rule - 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.

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:
(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:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.

(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.

(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

(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;
Note:
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.

SEC. 32. 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.

(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 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, further, That the benefits granted under this subparagraph shall be
 availed of by an official or employee only once.
(b) 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.
(c) 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.

(d) 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.

(e) 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.

(f) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.

(g) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.

(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.

(c) 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.

(h) 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.

(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.-
- 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, 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.
-
Fringe Benefit defined.- 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.
 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;
(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.

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:
(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. -, 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
(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 an amount equal to the following
percentages of the interest income subjected to final tax:
o Forty-one percent (41%) beginning January 1, 1998;
o Thirty-nine percent (39%) beginning January 1, 1999; and
o Thirty-eight percent (38%) beginning January 1, 2000;
o

(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);

(c)If the indebtedness is incurred to finance petroleum exploration.

(2) 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
(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.

(3) 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.

(4) 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 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.

(5) 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.
(d) 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 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.

(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.
(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
(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.
(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
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;
(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.

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
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, may elect a standard
deduction in an amount not exceeding ten percent (10%) of his gross income. 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:

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.

Except when the Commissioner otherwise permits, the said individual shall keep such
records pertaining to his gross income during the taxable year, as may be required by
the rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

(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. -

In General.

Basic personal exemption as follows:

- P.50.000 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.

Additional Exemption for Dependents. - There shall be allowed an additional

exemption of 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 defect.

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.

SEC. 36. Items not Deductible.-

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;
(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.

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. 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.

(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
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;

(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.