Notes

Allowable deductions – there shall be allowable deduction from gross income, other
than compensation income, expenses incurred in the conduct of trade or business to
arrive at the net income.
At the taxpayers option, deductions for expenses may either be:
a. Itemized deduction
b. Optional standard deduction (OSD) – 40%

The following items of income are granted with itemized deductions:
1. Business/ professional income derived within and outside the Philippines by a
resident citizen;
2. Business/ professional income derived within the Philippines by a nonresident
citizen; a resident alien; and a nonresident alien;
3. Business/ professional income of a general co-partnership;
4. Business income derived within and outside the Philippines by a domestic
corporation;
5. Business income of proprietary educational institution and nonprofit hospitals;
6. Business income of proprietary government-owned or controlled corporation;
and
7. Business income within the Philippines earned by a foreign corporation.
COMPOSITION OF REGULAR ALLOWABLE ITEMIZED DEDUCTIONS
1. General business expenses
 Salaries, wages, management expenses, commissions, and labor;
 Supplies, repairs and maintenance, and other incidental expenses;
 Operating expenses of transportation equipment used in the trade,
profession or business,
 Rental for the use of business property;
 Advertising and other selling expenses;
 Travelling expenses while away from home solely in the pursuit of trade,
profession or business; and
 Insurance premiums against fire, storm, theft, accident, or other similar
losses in the trade or business.
REQUISITES:
 Ordinary and necessary for the conduct of business or exercise of
profession;
 Substantiated with official receipts or any other adequate records;
 Reasonable in amount;
 Withheld with tax and paid to the BIR, if required such as salary expense;
 Not contrary to law, morals, public policy, or public order; and
 Incurred or paid and deducted within the taxable year.
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contribution
9. Research and development
10.Pension and trust
11.Premium payments on health/ and or hospitalization insurance(for individual

IMPORTANT:
 REPRESENTATION EXPENSE – these are entertainment, amusement and
recreation (EAR) expenses incurred or paid during the year that are directly
connected to the development, management and operation of the trade,
business or profession of the taxpayer.
Subject to ceilings as prescribed by the rules and regulations by the Secretary
of Finance, as follows:
a. ½% of net sales for taxpayers engaged in the sale of goods/ properties,
or
b. 1% of net revenue for taxpayers engaged in sale of services, including
exercise of profession and use or lease of properties.
REQUISITES:
1. It must not be contrary to law, morals, public policy or public order;
2. It must be substantiated with sufficient evidence such as receipts and or
adequate records;
3. It must be limited to the ceiling requirement; and
4. There must be some definite reasonable purpose connected with one’s
business.
 Mere giving of parties to entertain one’s employees and personnel does
not indicate a definite business purpose.

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

The following individuals are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the 1987
constitution.
2. Those whose fathers or mothers are citizens of the Philippines.
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine
Citizenship upon reaching the age of majority.
4. Those who are naturalized in accordance with law.
A. RESIDENT CITIZEN (RC)
1. A Filipino citizen residing in the Philippines.
2. Taxable by income derived from sources within and without the Philippines.
B. NONRESIDENT CITIZEN
The following are considered nonresident citizens Section 22 (E), RA 8424):
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner of
the fact of his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time for
at least 183 days during the taxable year;

SUBJECT TO LIMIT ( ALBITRAGE LIMIT)
 IF THE TAXPAYER HAS INTEREST INCOME SUBJECTED TO 20% FINAL
TAX AND AT THE SAME TIME INCURRED AN INTEREST EXPENSE
DURING THE TAXABLE YEAR, THE INTEREST EXPENSE SHALL BE
REDUCED BY THIRTY-THREE PERCENT (33%) EFFECTIVE JANUARY 1,
2009, AS AMENDED BY R.A. 9337.
 The tax differential rate on interest to reduce the actual interest expense is now
33% whether the taxpayer is an INDIVIDUAL or CORPORATION as per
amendment made by R.A. 9337
DEDUCTIBLE IN FULL
 The business has no interest income subjected to 20% final tax.
 The interest expense is paid in favor of the government.
 Interest on DLEINQUENT TAXES is DEDUCTIBLE because taxes are
considered legal debt when due. As a rule, interest paid to the government shall
not be reduced by tax differential because the beneficiary of such interest is the
government itself.
NONDEDUCTIBLE INTEREST EXPENSE
 Interest payment on indebtedness not business related
 Interest payment in favor of a relative (related debtor and creditor)
 Interest paid in advance
 Interest to purchase or carry tax – exempt transactions.
 Interest paid on indebtedness to finance petroleum explorations;
 Interest on UNCLAIMED SALARY is NOT DEDUCTIBLE from gross income.