National Internal Revenue Code of 1997: Title II

- Tax on Income
This study guide provides a structured overview of Title II of the National Internal Revenue Code
of 1997, as amended, focusing on the taxation of income in the Philippines. It is designed to help
students organize and comprehend the key definitions, principles, and provisions related to
income tax.

Chapter I: Definitions
This chapter lays the groundwork by defining essential terms used throughout Title II.
Understanding these definitions is crucial for interpreting the subsequent provisions.

Person: Includes an individual, a trust, an estate, or a corporation.

Corporation:
Encompasses partnerships (regardless of organization method), joint-stock companies, joint
accounts, associations, insurance companies, and one-person corporations. It
excludes
general professional partnerships and joint ventures/consortiums formed for specific
construction or energy operations under government contracts.
General Professional Partnerships: Partnerships formed by individuals for the sole
purpose of exercising their common profession, where no part of the income is derived
from trade or business.

Domestic Corporation: A corporation created or organized in the Philippines or under its laws.
Foreign Corporation: A corporation that is not domestic.
Nonresident Citizen:
A Filipino citizen who:
Establishes physical presence abroad with a definite intention to reside there.
Leaves the Philippines to reside abroad as an immigrant or for permanent employment.
Works and derives income abroad, requiring physical presence there most of the time.
Arrives in the Philippines during the taxable year to reside permanently, treated as a
nonresident citizen for income earned abroad until arrival.
Requires proof of intention to reside abroad or return to the Philippines.

Resident Alien: An individual residing in the Philippines who is not a citizen.

Nonresident Alien: An individual whose residence is not within the Philippines and who is not
a citizen.
Resident Foreign Corporation: A foreign corporation engaged in trade or business in the
Philippines.
Nonresident Foreign Corporation: A foreign corporation not engaged in trade or business in
the Philippines.
Fiduciary: A guardian, trustee, executor, administrator, receiver, conservator, or any person
acting in a fiduciary capacity.
Withholding Agent: Any person required to deduct and withhold tax under Section 57.
Shares of Stock: Includes shares, warrants, options, units of participation in partnerships
(except general professional partnerships), joint-stock companies, joint accounts, joint
ventures taxable as corporations, associations, recreation/amusement clubs, and mutual
 fund certificates.
Shareholder: A holder of shares of stock, warrants, options, units of participation, mutual fund
certificates, or a member of an association or club.
Taxpayer: Any person subject to tax under Title II.
Taxable Year: The calendar year or fiscal year ending during the calendar year, used for net
income computation. Includes fractional periods.
Fiscal Year: An accounting period of twelve (12) months ending on the last day of any month
other than December.
Paid or Incurred/Paid or Accrued: Construed according to the taxpayer's accounting method.
Trade or Business: Includes the performance of the functions of a public office.
Securities: Includes shares, participation, or interest in a corporation, commercial enterprise,
or profit-making venture, evidenced by a certificate, contract, or instrument (written or
electronic). This encompasses bonds, debentures, notes, investment contracts, certificates of
interest, fractional oil/gas interests, etc.
Dealer in Securities: A merchant of stocks or securities regularly engaged in buying and
reselling them to customers for profit.
Bank: As defined in Section 2 of Republic Act No. 337, as amended.
Non-bank Financial Intermediary: An authorized financial intermediary performing quasi-
banking activities.
Quasi-banking Activities: Borrowing funds from twenty (20) or more lenders through debt
instruments (other than deposits) for relending or purchasing receivables. Excludes
commercial, industrial, and non-financial companies borrowing for their own needs.
Deposit Substitute: An alternative way of obtaining funds from the public (20 or more
lenders) through debt instruments for relending. Excludes interbank call loans with short
maturities.
Ordinary Income: Gain from the sale or exchange of property that is not a capital asset.
Ordinary Loss: Loss from the sale or exchange of property that is not a capital asset.
Rank and File Employees: Employees not holding managerial or supervisory positions.
Regional or Area Headquarters: A branch of a multinational company in the Philippines that
supervises, communicates, and coordinates for its affiliates but does not earn income in the
Philippines.
Regional Operating Headquarters: A branch of a multinational company in the Philippines
providing specific support services (e.g., planning, finance, R&D) to its affiliates.
Long-term Deposit or Investment Certificate: A certificate of time deposit or investment with
a maturity of at least five (5) years, issued by banks to individuals.
Statutory Minimum Wage: The minimum wage rate fixed by the Regional Tripartite Wage and
Productivity Board.
Minimum Wage Earner: A private sector worker paid the statutory minimum wage or a public
sector employee with compensation not exceeding the statutory minimum wage in their non-
agricultural sector.
Offshore Gaming Licensee: A licensed offshore gaming operator.
Offshore Gaming Licensee-Gaming Agent: A resident agent in the Philippines for an offshore
operator, solely for receiving legal processes and complying with disclosure requirements.
Filing of Return: The act of accomplishing and submitting a tax return.
Payment of Tax/Remittance of Tax: The act of delivering the tax due or withheld.
Passive Income: Income earned without active pursuit of trade or business and not subject to
VAT.

Chapter II: General Principles of Income Taxation

This chapter outlines who is taxed on what income based on their citizenship, residency, and
source of income.
 Resident Citizen: Taxable on all income derived from sources within and without the
Philippines.
Nonresident Citizen: Taxable only on income derived from sources within the Philippines.
Overseas Contract Worker (OCW) / Overseas Filipino Worker (OFW): Taxable only on income
derived from sources within the Philippines. This includes seamen on vessels engaged in
international trade.
Alien Individual (Resident or Nonresident): Taxable only on income derived from sources
within the Philippines.
Domestic Corporation: Taxable on all income derived from sources within and without the
Philippines.
Foreign Corporation (Resident or Nonresident): Taxable only on income derived from sources
within the Philippines.

Chapter III: Tax on Individuals

This chapter details the income tax rates and special provisions for individuals.

A. Income Tax Rates on Individual Citizens and Resident

Aliens
Taxable Income: Defined in Section 31, excluding income subject to Subsections (B), (C), and
(D) of Section 24.
Rates:
Effective January 1, 2018 - December 31, 2022:
Not over P250,000: 0%
P250,000 - P400,000: 20% of the excess over P250,000
P400,000 - P800,000: P30,000 + 25% of the excess over P400,000
P800,000 - P2,000,000: P130,000 + 30% of the excess over P800,000
P2,000,000 - P8,000,000: P490,000 + 32% of the excess over P2,000,000
Over P8,000,000: P2,410,000 + 35% of the excess over P8,000,000

Effective January 1, 2023 onwards:

Not over P250,000: 0%
P250,000 - P400,000: 15% of the excess over P250,000
P400,000 - P800,000: P22,500 + 20% of the excess over P400,000
P800,000 - P2,000,000: P102,500 + 25% of the excess over P800,000
P2,000,000 - P8,000,000: P402,500 + 30% of the excess over P2,000,000
Over P8,000,000: P2,202,500 + 35% of the excess over P8,000,000

Married Individuals: Husband and wife compute their income tax separately based on their
respective taxable incomes. Income not attributable to either spouse is divided equally.
Minimum Wage Earners: Exempt from income tax on their taxable income. Holiday pay,
overtime pay, night shift differential pay, and hazard pay received by minimum wage earners
are also exempt.

B. Rate of Tax on Purely Self-Employed Individuals and/or

Professionals
 Option:
Individuals whose gross sales/receipts and other non-operating income do not exceed the
VAT threshold have the option to:
Pay graduated income tax rates under Subsection (A)(2)(a).
Pay an 8% tax on gross sales/receipts and other non-operating income in excess of
P250,000, in lieu of graduated rates and percentage tax under Section 116.

C. Rate of Tax for Mixed Income Earners

Compensation Income: Taxed at the graduated rates under Subsection (A)(2)(a).
Business/Professional Income:
If Total Gross Sales/Receipts and Other Non-Operating Income do not exceed the VAT
Threshold: Taxed at graduated rates on taxable income OR 8% on gross sales/receipts
and other non-operating income (in lieu of graduated rates and percentage tax).
If Total Gross Sales/Receipts and Other Non-Operating Income exceed the VAT
Threshold: Taxed at the graduated rates under Subsection (A)(2)(a).

D. Rate of Tax on Certain Passive Income (Within the

Philippines)
Interest, Royalties, Prizes, Other Winnings: A final tax of 20% is imposed on interest/yield
from bank deposits, deposit substitutes, trust funds, and similar arrangements; prizes (except
those P10,000 or less); and other winnings (except P10,000 or less from PCSO/Lotto).
Cash and/or Property Dividends: A final tax of 10% is imposed on dividends actually or
constructively received by an individual from domestic corporations, joint-stock companies,
insurance/mutual fund companies, or on the share of an individual in the distributable net
income of partnerships (except general professional partnerships), associations, joint
accounts, or joint ventures taxable as corporations.
Capital Gains from Shares of Stock (Not Traded): A final tax of 15% is imposed on net capital
gains from the sale, exchange, or disposition of shares of stock in a domestic or foreign
corporation, if not traded on a stock exchange.
Capital Gains from Sale of Real Property (Philippines):
A final tax of 6% is imposed on the gross selling price or current fair market value (whichever
is higher) of real property located in the Philippines, classified as capital assets.
Exception: Exempt if proceeds are fully utilized in acquiring/constructing a new principal
residence within 18 months, subject to conditions (e.g., notification, availed only once
every 10 years). Unutilized portions are taxed.

Royalties: A final tax of 20% is imposed. However, royalties on books, literary works, and
musical compositions are taxed at 10%.

Chapter IV: Tax on Corporations

This chapter outlines the income tax rates and special provisions for corporations.

A. Rates of Income Tax on Domestic Corporations

 In General:
A corporate income tax rate of 25% (effective July 1, 2020) is imposed on taxable income
derived from all sources within and without the Philippines.
Reduced Rate: Corporations with net taxable income not exceeding P5,000,000 and total
assets not exceeding P100,000,000 are taxed at 20%.
Enhanced Deductions Regime: Registered business enterprises under this regime are
taxed at 20% on income from registered projects/activities.

Proprietary Educational Institutions and Hospitals (Non-profit):

Taxed at 10% on taxable income.
Reduced Rate: 1% from July 1, 2020, to June 30, 2023.
Condition: If gross income from unrelated trade, business, or activity exceeds 50% of total
gross income, the regular corporate income tax (Subsection A) applies.

Government-Owned or Controlled Corporations: Subject to regular corporate income tax

rates, except for specific government entities (GSIS, SSS, HDMF, PHIC, local water districts).

B. Rates of Tax on Certain Passive Incomes (Domestic

Corporations)
Interest: A final tax of 20% on interest, yield, or monetary benefit from bank deposits, deposit
substitutes, trust funds, etc.
Income under Expanded Foreign Currency Deposit System:
Income from transactions with nonresidents, offshore banking units, and other depository
banks is generally exempt.
Interest income from foreign currency loans to residents (other than OBUs or other
depository banks) is subject to a final tax of 10%.

Intercorporate Dividends:
Dividends received by a domestic corporation from another domestic corporation are not
subject to tax.
Foreign-sourced dividends: Exempt if funds are reinvested in the Philippines within the
next taxable year, for specific purposes (working capital, CAPEX, dividends, investments,
infrastructure). Requires holding at least 20% of the foreign corporation's shares for a
minimum of two years.

Capital Gains from Shares of Stock (Not Traded): A final tax of 15% on net capital gains from
the sale, exchange, or disposition of shares of stock in a domestic or foreign corporation, if
not traded on a stock exchange.
Capital Gains from Sale of Lands and/or Buildings: A final tax of 6% on the presumed gain
from the sale, exchange, or disposition of lands/buildings treated as capital assets (not used
in business).
Royalties: A final tax of 20% on royalties earned as passive income.

C. Minimum Corporate Income Tax (MCIT) on Domestic

Corporations
Imposition:
A minimum corporate income tax of 2% of gross income is imposed starting the fourth
taxable year after commencement of operations, when MCIT is greater than the normal
 income tax.
Reduced Rate: 1% from July 1, 2020, to June 30, 2023.

Carry Forward of Excess Minimum Tax: Excess MCIT can be carried forward and credited
against the normal income tax for the next three succeeding taxable years.
Relief: The Secretary of Finance may suspend MCIT imposition for corporations suffering
losses due to labor disputes, force majeure, or legitimate business reverses.
Gross Income Definition: For MCIT purposes, it means gross sales less sales returns,
discounts, allowances, and cost of goods sold. For services, it's gross receipts less returns,
allowances, discounts, and cost of services.

D. Tax on Offshore Gaming Licensees

Non-gaming revenues of Philippine-based offshore gaming licensees are subject to a 25%
income tax on taxable income.

E. Tax on Accredited Service Providers to Offshore

Gaming Licensees
Subject to the regular corporate income tax rate under Section 27(A), not the gaming tax.

Chapter V: Computation of Taxable Income

This chapter defines what constitutes taxable income.

Taxable Income: Defined as gross income less allowable deductions as authorized by the
Code or other special laws.

Chapter VI: Computation of Gross Income

This chapter defines gross income and lists its inclusions and exclusions.

A. General Definition of Gross Income

Includes all income from whatever source, such as:
Compensation for services (fees, salaries, wages, commissions)
Gross income from trade, business, or profession
Gains from dealings in property
Interests
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partner's distributive share from a general professional partnership.
B. Exclusions from Gross Income (Exempt Income)
Life insurance proceeds paid to heirs/beneficiaries.
Return of premiums paid under life insurance, endowment, or annuity contracts.
Gifts, bequests, and devises (income from such property is taxable).
Compensation for personal injuries or sickness (accident/health insurance, workmen's
compensation), and damages received.
Income exempt under treaty obligations.
Retirement benefits, pensions, gratuities, etc., received under RA 7641 and reasonable private
benefit plans, provided certain service and age requirements are met, and the benefit is
availed of only once. Also includes separation benefits due to death, sickness, or disability.
Social security benefits, pensions from foreign government agencies, and US Veterans
Administration benefits.
GSIS and SSS benefits (RA 8282, RA 8291).
Miscellaneous items:
Income derived by foreign governments or international financial institutions from
investments in the Philippines.
Income derived by the Government or its political subdivisions from public utilities or
essential governmental functions.
Prizes and awards for civic, scientific, artistic, etc., achievements (if recipient was
selected without action and no future services are required).
Prizes and awards in sports competitions sanctioned by national sports associations.
13th Month Pay and Other Benefits up to P90,000.
GSIS, SSS, Medicare, Pag-Ibig contributions, and union dues.
Gains from the sale or exchange of bonds with a maturity of more than five (5) years.
Gains from redemption of shares in a mutual fund company.
Income derived from the sale of gold to the Bangko Sentral ng Pilipinas by registered
small-scale miners and accredited traders.

Chapter VII: Allowable Deductions

This chapter details the expenses and losses that can be deducted from gross income to arrive
at taxable income.

A. Expenses
Ordinary and Necessary Trade, Business, or Professional Expenses: Includes salaries, wages,
other forms of compensation (including grossed-up fringe benefits if tax is paid), travel
expenses, rentals, entertainment expenses (subject to ceilings), and certain labor training
expenses.
Substantiation Requirements: Expenses must be substantiated with official receipts or
adequate records showing the amount and direct connection to the business.
Non-Deductible Payments: Bribes, kickbacks, and similar payments to government officials or
employees are not deductible.
Private Educational Institutions: May deduct expenditures for facility expansion or claim
depreciation allowance.

B. Interest
 Allowed as a deduction if paid or incurred on indebtedness connected with the taxpayer's
trade, business, or profession.
Reduction: Otherwise allowable interest expense deduction is reduced by 20% of the interest
income subjected to final tax.
Exceptions: No deduction for interest paid in advance (discount), interest paid between
related parties (Section 36(B)), or interest on indebtedness incurred to finance petroleum
exploration.

C. Taxes
Taxes paid or incurred in connection with the taxpayer's profession, trade, or business are
deductible,
except
:
Income tax imposed by Title II.
Income taxes imposed by any foreign country (unless credit is not claimed).
Estate and donor's taxes.
Taxes assessed for local benefits that increase property value.

Refunded Taxes: Refunded taxes previously deducted must be included in gross income.
Credit for Foreign Taxes: Citizens and domestic corporations can claim a credit for income
taxes paid to foreign countries, subject to limitations (proportion of income from that country
to total taxable income, and proportion of income from foreign sources to total taxable
income).

D. Losses
Allowable Losses:
Actually sustained during the taxable year and not compensated for by insurance or other
indemnity. Must be:
Incurred in trade, profession, or business.
Of property connected with the trade, business, or profession, arising from fires, storms,
shipwreck, other casualties, or robbery, theft, or embezzlement.

Net Operating Loss Carry-Over (NOLCO): Net operating losses can be carried over as a
deduction for the next three (3) consecutive taxable years. Restrictions apply regarding
substantial changes in ownership.
Capital Losses: Allowed only to the extent of gains from sales or exchanges of capital assets
(see Section 39).
Securities Becoming Worthless: Treated as a loss from sale or exchange on the last day of
the taxable year if they are capital assets.
Wagering Losses: Allowed only to the extent of wagering gains.
Abandonment Losses: Applicable to petroleum operations and mining.

E. Bad Debts
Debts actually ascertained to be worthless and charged off within the taxable year, and
connected with the taxpayer's profession, trade, or business.
Recovery of previously allowed bad debts is included in gross income.

F. Depreciation
 A reasonable allowance for the exhaustion, wear and tear, including obsolescence, of
property used in the trade or business.
Various methods are allowed (straight-line, declining-balance, sum-of-the-years-digit, or
others prescribed by the Secretary of Finance).
Properties used in petroleum operations have specific depreciation rules.

G. Depletion of Oil and Gas Wells and Mines

A reasonable allowance for depletion or amortization computed using the cost-depletion
method.
Exploration and development expenditures may be deductible or amortized, subject to
limitations.

H. Charitable and Other Contributions

Deductible up to a certain percentage of taxable income (10% for individuals, 5% for
corporations), provided they are made to qualified government agencies or accredited
domestic corporations/associations for specific purposes.
Deductible in Full: Donations to the Government for priority activities, certain foreign
institutions/international organizations, and accredited non-government organizations
(NGOs) under specific conditions.

I. Research and Development

Expenditures paid or incurred in connection with trade, business, or profession can be treated
as ordinary and necessary expenses or amortized over a period of not less than 60 months if
elected.

J. Pension Trusts
Employer contributions to a pension trust are deductible.

K. Optional Standard Deduction (OSD)

Individuals (except nonresident aliens) and corporations can elect OSD in lieu of itemized
deductions.
Individuals: 40% of gross sales or gross receipts.
Corporations: 40% of gross income.

Election is irrevocable for the taxable year.

Chapter IX: Returns and Payment of Tax

This chapter covers the requirements for filing income tax returns and paying the tax.

A. Individual Return (SEC. 51)

Requirements: Generally required for citizens and resident aliens on all income, nonresident
citizens and resident aliens on income from sources within the Philippines, and nonresident
 aliens engaged in trade or business in the Philippines on their Philippine-source income.
Exemptions from Filing:
Individuals whose taxable income does not exceed P250,000 (unless engaged in
business/profession).
Individuals with purely compensation income where tax was correctly withheld.
Individuals whose sole income is subject to final withholding tax.
Minimum wage earners.
Overseas Contract Workers/OFWs deriving income solely from abroad.

Filing: Must be filed on or before April 15 of each year.

Married Individuals: Generally file a consolidated return, but separate returns are allowed with
consolidation by BIR.
Capital Gains: Specific returns are required for gains from shares of stock (not traded) and
real property.

B. Substituted Filing (SEC. 51-A)

Employees receiving purely compensation income from a single employer with correct
withholding are exempt from filing an annual income tax return. The employer's withholding
certificate serves as substituted filing.

C. Corporation Returns (SEC. 52)

Requirements: Every corporation subject to tax (except foreign corporations not engaged in
business in the Philippines) must file quarterly income tax returns and a final adjustment
return.
Filing: Sworn to by the president/VP and treasurer/assistant treasurer.
Taxable Year: Can use calendar or fiscal year, but changes require prior approval.
Dissolution or Reorganization: A return must be filed within 30 days of adopting a resolution
for dissolution or reorganization, and a tax clearance must be secured.

D. Payment of Tax (SEC. 56)

In General: The total tax is paid at the time the return is filed.
Installment Payment: Tax exceeding P2,000 can be paid in two equal installments (first on
return filing, second by October 15). Failure to pay an installment makes the entire amount
due.
Capital Gains Tax: Paid on the date the return is filed. Installment payment is allowed for
gains from real property sales if conditions are met.

E. Withholding of Tax at Source (SEC. 57)

Final Tax: Tax imposed on certain passive incomes (interest, dividends, prizes, capital gains)
is withheld by the payor.
Creditable Tax: Tax withheld on certain income payments (e.g., professional fees, rentals) can
be credited against the recipient's income tax liability. Rates are generally up to 15%.
Withholding Agent: Responsible for deducting and remitting the tax.

F. Returns and Payment of Taxes Withheld at Source

(SEC. 58)
 Quarterly Returns and Payments: Taxes withheld must be remitted quarterly.
Statement of Income Payments: Withholding agents must furnish recipients with a statement
of income paid and taxes withheld.
Timing: Obligation to withhold arises when income becomes payable.
Annual Information Return: Withholding agents must submit an annual information return to
the BIR.

Chapter X: Estates and Trusts

This chapter deals with the taxation of income derived from estates and trusts.

A. Imposition of Tax (SEC. 60)

The tax imposed on individuals applies to the income of estates or trusts.
Exceptions: Employee's trusts forming part of qualified pension, stock bonus, or profit-sharing
plans are generally exempt.

B. Taxable Income of Estates and Trusts (SEC. 61)

Computed similarly to individuals, with specific deductions for income:
Currently distributed to beneficiaries.
Properly paid or credited to legatees, heirs, or beneficiaries during the period of
administration or settlement of the estate.

Foreign Trusts: Deductions for distributed income are not allowed if the trust is administered
in a foreign country.

Chapter XI: Other Income Tax Requirements

This chapter covers various reporting and compliance obligations.

A. Information at Source (SEC. 68)

Persons, corporations, etc., making certain payments (interest, rents, salaries, etc.) are
required to render a return to the Commissioner detailing the amount and recipient's name
and address.

B. Disposition of Income Tax Returns (SEC. 71)

Returns become public records and are open to inspection upon order of the President.
The Commissioner may publish lists of taxpayers who have filed returns.

C. Distribution of Dividends or Assets by Corporations

(SEC. 73)
Dividends: Defined as distributions from earnings or profits. Stock dividends are generally not
 taxed unless their distribution is essentially equivalent to a taxable dividend.
Construction of Receipt: Distributions are deemed to be from the most recently accumulated
profits.
Partnerships: Net income declared by a partnership is deemed constructively received by
partners and taxed to them individually.

Chapter XII: Quarterly Corporate Income Tax and

Annual Payments
This chapter outlines the requirements for quarterly declarations and payments of corporate
income tax.

A. Declaration of Quarterly Corporate Income Tax (SEC.

75)
Corporations must file a quarterly summary declaration of gross income and deductions on a
cumulative basis.
The tax is paid not later than 60 days from the close of each of the first three quarters.

B. Final Adjustment Return (SEC. 76)

Corporations must file a final adjustment return for the entire taxable year.
Any balance of tax due is paid, or excess credits can be carried over or refunded.

Chapter XIII: Withholding on Wages

This chapter details the withholding of income tax from wages paid to employees.

A. Definitions (SEC. 78)

Wages: Remuneration for services performed by an employee, including the cash value of
non-cash remuneration. Excludes certain payments like agricultural labor in products,
domestic service, casual labor, and services for foreign governments/international
organizations.
Employee: Any individual recipient of wages, including government officials and officers of
corporations.
Employer: The person for whom services are performed, or the person controlling wage
payments.

B. Requirement of Withholding (SEC. 79)

Employers must deduct and withhold tax from wages paid to employees (except minimum
wage earners).
Year-End Adjustment: Employers must determine the total tax due for the year and adjust
withholding from the December salary or provide a refund by January 25 of the succeeding
year.
C. Liability for Tax (SEC. 80)
Employer: Primarily liable for withholding and remitting the correct tax. If they fail, the tax can
be collected from the employer with penalties.
Employee: Liable if they fail to file a withholding exemption certificate or supply false
information, leading to the employer not withholding the correct tax. Excess taxes withheld
due to employee's fault are forfeited.

D. Filing of Return and Payment of Taxes Withheld (SEC.

81)
Taxes withheld must be remitted quarterly within 25 days from the close of each calendar
quarter.
Withheld taxes are considered trust funds.