AN ACT AMENDING
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
AND FOR OTHER
PURPOSES
TITLE II
TAX ON INCOME
CHAPTER VII
ALLOWABLE
DEDUCTIONS
SEC.
34. Deductions from Gross Income.
- Except for taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship where no deductions
shall be allowed under this Section other than under subsection (M) hereof,
in computing taxable income subject to income tax under Sections 24 (A);
25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed
the following deductions from gross income;
(A) Expenses.
-
(1) Ordinary
and Necessary Trade, Business or Professional Expenses.-(a) In General.
- There shall be allowed as deduction from gross income all the ordinary
and necessary expenses paid or incurred during the taxable year in carrying
on or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession,
including:(i) A reasonable allowance
for salaries, wages, and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of fringe benefit
furnished or granted by the employer to the employee: Provided, That
the final tax imposed under Section 33 hereof has been paid;(ii) A reasonable
allowance for travel expenses, here and abroad, while away from home in
the pursuit of trade, business or profession;(iii) A reasonable
allowance for rentals and/or other payments which are required as a condition
for the continued use or possession, for purposes of the trade, business
or profession, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a lessee,
user or possessor;(iv) A reasonable
allowance for entertainment, amusement and recreation expenses during the
taxable year, that are directly connected to the development, management
and operation of the trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the conduct of his or
its trade, business or exercise of a profession not to exceed such ceilings
as the Secretary of Finance may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into account the needs as well
as the special circumstances, nature and character of the industry, trade,
business, or profession of the taxpayer: Provided, That any expense
incurred for entertainment, amusement or recreation that is contrary to
law, morals public policy or public order shall in no case be allowed as
a deduction.(b) Substantiation
Requirements. - No deduction from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records: (i) the
amount of the expense being deducted, and (ii) the direct connection or
relation of the expense being deducted to the development, management,
operation and/or conduct of the trade, business or profession of the taxpayer.(c) Bribes, Kickbacks
and Other Similar Payments. - No deduction from gross income shall
be allowed under Subsection (A) hereof for any payment made, directly or
indirectly, to an official or employee of the national government, or to
an official or employee of any local government unit, or to an official
or employee of a government-owned or -controlled corporation, or to an
official or employee or representative of a foreign government, or to a
private corporation, general professional partnership, or a similar entity,
if the payment constitutes a bribe or kickback.(2) Expenses
Allowable to Private Educational Institutions.
- In addition to the expenses allowable as deductions under this Chapter,
a private educational institution, referred to under Section 27 (B) of
this Code, may at its option elect either: (a) to deduct expenditures otherwise
considered as capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities or (b) to deduct allowance
for depreciation thereof under Subsection (F) hereof.(B) Interest.-(1) In General.
- The amount of interest paid or incurred within a taxable year on indebtedness
in connection with the taxpayer's profession, trade or business shall be
allowed as deduction from gross income: Provided, however, That
the taxpayer's otherwise allowable deduction for interest expense shall
be reduced by an amount equal to the following percentages of the interest
income subjected to final tax:Forty-one percent
(41%) beginning January 1, 1998;Thirty-nine percent
(39%) beginning January 1, 1999; andThirty-eight percent
(38%) beginning January 1, 2000;(2) Exceptions.
- No deduction shall be allowed in respect of interest under the succeeding
subparagraphs:(a) If within
the taxable year an individual taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is paid in advance through
discount or otherwise: Provided, That such interest shall be allowed a
a deduction in the year the indebtedness is paid: Provided, further,
That if the indebtedness is payable in periodic amortizations, the amount
of interest which corresponds to the amount of the principal amortized
or paid during the year shall be allowed as deduction in such taxable year;(b) If both the taxpayer
and the person to whom the payment has been made or is to be made are persons
specified under Section 36 (B); or(c)If the indebtedness
is incurred to finance petroleum exploration.(3) Optional
Treatment of Interest Expense.
- At the option of the taxpayer, interest incurred to acquire property
used in trade business or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.(C) Taxes.-
(1) In General.
- Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction,
except
(a) The income tax
provided for under this Title;(b) Income taxes imposed
by authority of any foreign country; but this deduction shall be allowed
in the case of a taxpayer who does not signify in his return his desire
to have to any extent the benefits of paragraph (3) of this subsection
(relating to credits for taxes of foreign countries);(c) Estate and donor's
taxes; and(d) Taxes assessed
against local benefits of a kind tending to increase the value of the property
assessed.Provided, That
taxes allowed under this Subsection, when refunded or credited, shall be
included as part of gross income in the year of receipt to the extent of
the income tax benefit of said deduction.(2) Limitations
on Deductions.
- In the case of a nonresident alien individual engaged in trade or business
in the Philippines and a resident foreign corporation, the deductions for
taxes provided in paragraph (1) of this Subsection (C) shall be allowed
only if and to the extent that they are connected with income from sources
within the Philippines.(3) Credit Against
Tax for Taxes of Foreign Countries.
- If the taxpayer signifies in his return his desire to have the benefits
of this paragraph, the tax imposed by this Title shall be credited with:(a) Citizen and
Domestic Corporation. - In the case of a citizen of the Philippines
and of a domestic corporation, the amount of income taxes paid or incurred
during the taxable year to any foreign country; and(b) Partnerships
and Estates. - In the case of any such individual who is a member of
a general professional partnership or a beneficiary of an estate or trust,
his proportionate share of such taxes of the general professional partnership
or the estate or trust paid or incurred during the taxable year to a foreign
country, if his distributive share of the income of such partnership or
trust is reported for taxation under this Title.An alien individual
and a foreign corporation shall not be allowed the credits against the
tax for the taxes of foreign countries allowed under this paragraph.(4) Limitations
on Credit.
- The amount of the credit taken under this Section shall be subject to
each of the following limitations:(a) The amount of
the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from sources within such country
under this Title bears to his entire taxable income for the same taxable
year; and(b) The total amount
of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which the taxpayer's taxable income from sources
without the Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.(5) Adjustments
on Payment of Incurred Taxes.
- If accrued taxes when paid differ from the amounts claimed as credits
by the taxpayer, or if any tax paid is refunded in whole or in part, the
taxpayer shall notify the Commissioner; who shall redetermine the amount
of the tax for the year or years affected, and the amount of tax due upon
such redetermination, if any, shall be paid by the taxpayer upon notice
and demand by the Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the case of such a tax
incurred but not paid, the Commissioner as a condition precedent to the
allowance of this credit may require the taxpayer to give a bond with sureties
satisfactory to and to be approved by the Commissioner in such sum as he
may require, conditioned upon the payment by the taxpayer of any amount
of tax found due upon any such redetermination. The bond herein prescribed
shall contain such further conditions as the Commissioner may require.(6) Year in
Which Credit Taken.
- The credits provided for in Subsection (C)(3) of this Section may, at
the option of the taxpayer and irrespective of the method of accounting
employed in keeping his books, be taken in the year which the taxes of
the foreign country were incurred, subject, however, to the conditions
prescribed in Subsection (C)(5) of this Section. If the taxpayer elects
to take such credits in the year in which the taxes of the foreign country
accrued, the credits for all subsequent years shall be taken upon the same
basis and no portion of any such taxes shall be allowed as a deduction
in the same or any succeeding year.(7) Proof of
Credits.
- The credits provided in Subsection (C)(3) hereof shall be allowed only
if the taxpayer establishes to the satisfaction of the Commissioner the
following:(a) The total amount
of income derived from sources without the Philippines;(b) The amount of
income derived from each country, the tax paid or incurred to which is
claimed as a credit under said paragraph, such amount to be determined
under rules and regulations prescribed by the Secretary of Finance; and(c) All other information
necessary for the verification and computation of such credits.(D) Losses. -(1) In General.-
Losses actually sustained during the taxable year and not compensated for
by insurance or other forms of indemnity shall be allowed as deductions:(a) If incurred in
trade, profession or business;(b) Of property connected
with the trade, business or profession, if the loss arises from fires,
storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.The Secretary of Finance,
upon recommendation of the Commissioner, is hereby authorized to promulgate
rules and regulations prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embezzlement during the taxable year:
Provided, however, That the time limit to be so prescribed in the
rules and regulations shall not be less than thirty (30) days nor more
than ninety (90) days from the date of discovery of the casualty or robbery,
theft or embezzlement giving rise to the loss.(c) No loss shall
be allowed as a deduction under this Subsection if at the time of the filing
of the return, such loss has been claimed as a deduction for estate tax
purposes in the estate tax return.(2) Proof of
Loss.
- In the case of a nonresident alien individual or foreign corporation,
the losses deductible shall be those actually sustained during the year
incurred in business, trade or exercise of a profession conducted within
the Philippines, when such losses are not compensated for by insurance
or other forms of indemnity. The Secretary of Finance, upon recommendation
of the Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the taxpayer
shall submit a declaration of loss sustained from casualty or from robbery,
theft or embezzlement during the taxable year: Provided, That the
time to be so prescribed in the rules and regulations shall not be less
than thirty (30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the loss;
and(3) Net Operating
Loss Carry-Over.
- The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be carried over
as a deduction from gross income for the next three (3) consecutive taxable
years immediately following the year of such loss: Provided, however,
That any net loss incurred in a taxable year during which the taxpayer
was exempt from income tax shall not be allowed as a deduction under this
Subsection: Provided, further, That a net operating loss carry-over
shall be allowed only if there has been no substantial change in the ownership
of the business or enterprise in that -(i) Not less than
seventy-five percent (75%) in nominal value of outstanding issued
shares., if the business is in the name of a corporation, is held by or
on behalf of
the same persons; or(ii) Not less than
seventy-five percent (75%) of the paid up capital of the corporation,
if the business is in the name of a corporation, is held by or on behalf
of the same
persons.For purposes of this
subsection, the term "not operating loss" shall mean the excess
of allowable deduction over gross income of the business in a taxable year.Provided, That
for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any
of the first ten (10) years of operation may be carried over as a deduction
from taxable income for the next five (5) years immediately following the
year of such loss. The entire amount of the loss shall be carried over
to the first of the five (5) taxable years following the loss, and any
portion of such loss which exceeds, the taxable income of such first year
shall be deducted in like manner form the taxable income of the next remaining
four (4) years.(4) Capital
Losses. -(a) Limitation.
- Loss from sales or Exchanges of capital assets shall be allowed only
to the extent provided in Section 39.(b) Securities
Becoming Worthless. - If securities as defined in Section 22 (T) become
worthless during the taxable year and are capital assets, the loss resulting
therefrom shall, for purposes of this Title, be considered as a loss from
the sale or exchange, on the last day of such taxable year, of capital
assets.(5) Losses From
Wash Sales of Stock or Securities.
- Losses from "wash sales" of stock or securities as provided in
Section 38.(6) Wagering
Losses.
- Losses from wagering transactions shall b allowed only to the extent
of the gains from such transactions.(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.(4) Proof of
Deductions.
- Contributions or gifts shall be allowable as deductions only if verified
under the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.(I) Research and
Development.-(1) In General.
- a taxpayer may treat research or development expenditures which are paid
or incurred by him during the taxable year in connection with his trade,
business or profession as ordinary and necessary expenses which are not
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: Provided, That an individual
who is entitled to and claimed for the optional standard deduction shall
not be required to submit with his tax return such financial statements
otherwise required under this Code: Provided, further, That except
when the Commissioner otherwise permits, the said individual shall keep
such records pertaining to his gross 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. -
(A) In General.
- For purposes of determining the tax provided in Section 24 (A) of this
Title, there shall be allowed a basic personal exemption as follows:
For single individual
or married individual judicially decreed as legally
separated
with no qualified dependents
P20,000
For Head of Family
P25,000
For each married individual
P32,000
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.
For purposes of this
paragraph, the term "head of family" means an unmarried or legally
separated man or woman with one or both parents, or with one or more brothers
or sisters, or with one or more legitimate, recognized natural or legally
adopted children living with and dependent upon him for their chief support,
where such brothers or sisters or children are not more than twenty-one
(21) years of age, unmarried and not gainfully employed or where such children,
brothers or sisters, regardless of age are incapable of self-support because
of mental or physical defect.
(B) Additional
Exemption for Dependents.
- There shall be allowed an additional exemption of Eight thousand pesos
(P8,000) 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.
(C) Change of
Status.
- If the taxpayer marries or should have additional dependent(s) as defined
above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies
during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close
of such year.
If the spouse or any
of the dependents dies or if any of such dependents marries, becomes twenty-one
(21) years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of
the dependents died, or as if such dependents married, became twenty-one
(21) years old or became gainfully employed at the close of such year.
(D) Personal
Exemption Allowable to Nonresident Alien Individual.
- A nonresident alien individual engaged in trade, business or in the exercise
of a profession in the Philippines shall be entitled to a personal exemption
in the amount equal to the exemptions allowed in the income tax law in
the country of which he is a subject - or citizen, to citizens of the Philippines
not residing in such country, not to exceed the amount fixed in this Section
as exemption for citizens or resident of the Philippines: Provided,
That said nonresident alien should file a true and accurate return
of the total income received by him from all sources in the Philippines,
as required by this Title.
SEC.
36. Items Not Deductible.-
(A) General Rule.
- In computing net income, no deduction shall in any case be allowed in
respect to -
(1) Personal, living
or family expenses;(2) Any amount paid
out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate;This Subsection shall
not apply to intangible drilling and development costs incurred in petroleum
operations which are deductible under Subsection (G) (1) of Section 34
of this Code.(3) Any amount expended
in restoring property or in making good the exhaustion thereof for
which an allowance is or has been made; or(4) Premiums paid
on any life insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly
or indirectly a beneficiary under such policy.(B) Losses from Sales
or Exchanges of Property.
- In computing net income, no deductions shall in any case be allowed in
respect of losses from sales or exchanges of property directly or indirectly
-
(1) Between members
of a family. For purposes of this paragraph, the family of an individual
shall include only his brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or(2) Except in the
case of distributions in liquidation, between an individual and corporation
more than fifty percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for such individual; or(3) Except in the
case of distributions in liquidation, between two corporations more than
fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if either one of
such corporations, with respect to the taxable year of the corporation
preceding the date of the sale of exchange was under the law applicable
to such taxable year, a personal holding company or a foreign personal
holding company;(4) Between the grantor
and a fiduciary of any trust; or(5) Between the fiduciary
of and the fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust; or(6) Between a fiduciary
of a trust and beneficiary of such trust.SEC.
37. Special Provisions Regarding Income and Deductions of Insurance
Companies, Whether Domestic or Foreign. -
(A) Special Deduction
Allowed to Insurance Companies. -
In the case of insurance companies, whether domestic or foreign doing business
in the Philippines, the net additions, if any, required by law to be made
within the year to reserve funds and the sums other than dividends paid
within the year on policy and annuity contracts may be deducted from their
gross income: Provided, however, That the released reserve be treated
as income for the year of release.
(B) Mutual Insurance
Companies.
- In the case of mutual fire and mutual employers' liability and mutual
workmen's compensation and mutual casualty insurance companies requiring
their members to make premium deposits to provide for losses and expenses,
said companies shall not return as income any portion of the premium deposits
returned to their policyholders, but shall return as taxable income all
income received by them from all other sources plus such portion of the
premium deposits as are retained by the companies for purposes other than
the payment of losses and expenses and reinsurance reserves.
(C) Mutual Marine
Insurance Companies.
- Mutual marine insurance companies shall include in their return of gross
income, gross premiums collected and received by them less amounts paid
to policyholders on account of premiums previously paid by them and interest
paid upon those amounts between the ascertainment and payment thereof.
(D) Assessment
Insurance Companies.-
Assessment insurance companies, whether domestic or foreign, may deduct
from their gross income the actual deposit of sums with the officers of
the Government of the Philippines pursuant to law, as additions to guarantee
or reserve funds.
SEC.
38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any
loss claimed to have been sustained from any sale or other disposition
of shares of stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale or disposition
and ending thirty (30) days after such date, the taxpayer has acquired
(by purchase or by exchange upon which the entire amount of gain or loss
was recognized by law), or has entered into a contact or option so to acquire,
substantially identical stock or securities, then no deduction for the
loss shall be allowed under Section 34 unless the claim is made by a dealer
in stock or securities and with respect to a transaction made in the ordinary
course of the business of such dealer.
(B) If the amount of
stock or securities acquired (or covered by the contract or option to acquire)
is less than the amount of stock or securities sold or otherwise disposed
of, then the particular shares of stock or securities, the loss form the
sale or other disposition of which is not deductible, shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(C) If the amount of
stock or securities acquired (or covered by the contract or option to acquire
which) resulted in the non-deductibility of the loss, shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
SEC.
39. Capital Gains and Losses. -
(A) Definitions.
- As used in this Title -
(1) Capital
Assets.
- The term "capital assets" means property held by the taxpayer
(whether or not connected with his trade or business), but does not include
stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the allowance
for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.(2) Net Capital
Gain.
- The term "net capital gain" means the excess of the gains from
sales or exchanges of capital assets over the losses from such sales or
exchanges.(3) Net Capital
Loss.
- The term "net capital loss" means the excess of the losses from
sales or exchanges of capital assets over the gains from such sales or
exchanges.(B) Percentage Taken
Into Account.
- In the case of a taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or exchange of
a capital asset shall be taken into account in computing net capital gain,
net capital loss, and net income:
(1) One hundred percent
(100%) if the capital asset has been held for not more than twelve
(12) months; and(2) Fifty percent
(50%) if the capital asset has been held for more than twelve (12) months;(C) Limitation on
Capital Losses.
- Losses from sales or exchanges of capital assets shall be allowed only
to the extent of the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a substantial part
of whose business is the receipt of deposits, sells any bond, debenture,
note, or certificate or other evidence of indebtedness issued by any corporation
(including one issued by a government or political subdivision thereof),
with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to other losses.
(D) Net Capital
Loss Carry-over.
- If any taxpayer, other than a corporation, sustains in any taxable year
a net capital loss, such loss (in an amount not in excess of the net income
for such year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more than twelve
(12) months.
(E) Retirement
of Bonds, Etc.
- For purposes of this Title, amounts received by the holder upon the retirement
of bonds, debentures, notes or certificates or other evidences of indebtedness
issued by any corporation (including those issued by a government or political
subdivision thereof) with interest coupons or in registered form, shall
be considered as amounts received in exchange therefor.
(F) Gains or Losses
From Short Sales, Etc.
- For purposes of this Title -
(1) Gains or losses
from short sales of property shall be considered as gains or losses from
sales or exchanges of capital assets; and(2) Gains or losses
attributable to the failure to exercise privileges or options to buy or
sell
property shall be considered as capital gains or losses.SEC.
40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation
of Gain or Loss.
- The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis
for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount
realized from the sale or other disposition of property shall be the sum
of money received plus the fair market value of the property (other than
money) received;
(B) Basis for
Determining Gain or Loss from Sale or Disposition of Property.
- The basis of property shall be -
(1) The cost thereof
in the case of property acquired on or after March 1, 1913, if such property
was acquired by purchase; or(2) The fair market
price or value as of the date of acquisition, if the same was acquired
by inheritance; or(3) If the property
was acquired by gift, the basis shall be the same as if it would be in
the hands of the donor or the last preceding owner by whom it was not acquired
by gift, except that if such basis is greater than the fair market value
of the property at the time of the gift then, for the purpose of determining
loss, the basis shall be such fair market value; or(4) If the property
was acquired for less than an adequate consideration in money or money's
worth, the basis of such property is the amount paid by the transferee
for the property; or(5) The basis as defined
in paragraph (C)(5) of this Section, if the property was acquired in a
transaction where gain or loss is not recognized under paragraph (C)(2)
of this Section.(C) Exchange of Property.
-(1) General
Rule.
- Except as herein provided, upon the sale or exchange or property, the
entire amount of the gain or loss, as the case may be, shall be recognized.(2) Exception.
- No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation -(a) A corporation,
which is a party to a merger or consolidation, exchanges property solely
for stock in a corporation, which is a party to the merger or consolidation;
or(b) A shareholder
exchanges stock in a corporation, which is a party to the merger or consolidation,
solely for the stock of another corporation also a party to the merger
or consolidation; or(c) A security holder
of a corporation, which is a party to the merger or consolidation, exchanges
his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.No gain or loss shall
also be recognized if property is transferred to a corporation by a person
in exchange for stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said corporation:
Provided, That stocks issued for services shall not be considered
as issued in return for property.(3) Exchange
Not Solely in Kind.
- (a) If, in connection
with an exchange described in the above exceptions, an individual, a shareholder,
a security holder or a corporation receives not only stock or securities
permitted to be received without the recognition of gain or loss, but also
money and/or property, the gain, if any, but not the loss, shall be recognized
but in an amount not in excess of the sum of the money and fair market
value of such other property received: Provided, That as to the
shareholder, if the money and/or other property received has the effect
of a distribution of a taxable dividend, there shall be taxed as dividend
to the shareholder an amount of the gain recognized not in excess of his
proportionate share of the undistributed earnings and profits of the corporation;
the remainder, if any, of the gain recognized shall be treated as a capital
gain.(b) If, in connection
with the exchange described in the above exceptions, the transferor corporation
receives not only stock permitted to be received without the recognition
of gain or loss but also money and/or other property, then (i) if the corporation
receiving such money and/or other property distributes it in pursuance
of the plan of merger or consolidation, no gain to the corporation shall
be recognized from the exchange, but (ii) if the corporation receiving
such other property and/or money does not distribute it in pursuance of
the plan of merger or consolidation, the gain, if any, but not the loss
to the corporation shall be recognized but in an amount not in excess of
the sum of such money and the fair market value of such other property
so received, which is not distributed.(4) Assumption
of Liability. -(a) If the
taxpayer, in connection with the exchanges described in the foregoing exceptions,
receives stock or securities which would be permitted to be received without
the recognition of the gain if it were the sole consideration, and as part
of the consideration, another party to the exchange assumes a liability
of the taxpayer, or acquires from the taxpayer property, subject to a liability,
then such assumption or acquisition shall not be treated as money and/or
other property, and shall not prevent the exchange from being within the
exceptions.(b) If the amount
of the liabilities assumed plus the amount of the liabilities to which
the property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered
as a gain from the sale or exchange of a capital asset or of property which
is not a capital asset, as the case may be.(5) Basis
-(a) The basis of the
stock or securities received by the transferor upon the exchange specified
in the above exception shall be the same as the basis of the property,
stock or securities exchanged, decreased by (1) the money received, and
(2) the fair market value of the other property received, and increased
by (a) the amount treated as dividend of the shareholder and (b) the amount
of any gain that was recognized on the exchange: Provided, That
the property received as "boot" shall have as basis its fair market
value: Provided, further, That if as part of the consideration to
the transferor, the transferee of property assumes a liability of the transferor
or acquires form the latter property subject to a liability, such assumption
or acquisition (in the amount of the liability) shall, for purposes of
this paragraph, be treated as money received by the transferor on the exchange:
Provided, finally, That if the transferor receives several kinds of
stock or securities, the Commissioner is hereby authorized to allocate
the basis among the several classes of stocks or securities.(b) The basis of the
property transferred in the hands of the transferee shall be the same as
it would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.(6) Definitions.
- (a) The term "securities"
means bonds and debentures but not "notes" of whatever class or
duration.(b) The term "merger"
or "consolidation", when used in this Section, shall be understood
to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition
by one corporation of all or substantially all the properties of another
corporation solely for stock: Provided, That for a transaction to
be regarded as a merger or consolidation within the purview of this Section,
it must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden of taxation: Provided, further,
That in determining whether a bona fide business purpose exists, each and
every step of the transaction shall be considered and the whole transaction
or series of transaction shall be treated as a single unit: Provided,
finally , That in determining whether the property transferred constitutes
a substantial portion of the property of the transferor, the term 'property'
shall be taken to include the cash assets of the transferor.(c) The term "control",
when used in this Section, shall mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total voting power of
all classes of stocks entitled to vote.(d) The Secretary
of Finance, upon recommendation of the Commissioner, is hereby authorized
to issue rules and regulations for the purpose "substantially all"
and for the proper implementation of this Section.SEC.
41. Inventories.
- Whenever in the judgment of the Commissioner, the use of inventories
is necessary in order to determine clearly the income of any taxpayer,
inventories shall be taken by such taxpayer upon such basis as the Secretary
of Finance, upon recommendation of the Commissioner, may, by rules and
regulations, prescribe as conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly reflecting the income.
If a taxpayer, after
having complied with the terms and a conditions prescribed by the Commissioner,
uses a particular method of valuing its inventory for any taxable year,
then such method shall be used in all subsequent taxable years unless:
(i) with the approval
of the Commissioner, a change to a different method is authorized; or(ii) the Commissioner
finds that the nature of the stock on hand (e.g., its scarcity,
liquidity, marketability and price movements) is such that inventory gains
should be considered realized for tax purposes and, therefore, it is necessary
to modify the valuation method for purposes of ascertaining the income,
profit, or loss in a more realistic manner: Provided, however, That
the Commissioner shall not exercise his authority to require a change in
inventory method more often than once every three (3) years: Provided,
further, That any change in an inventory valuation method must be subject
to approval by the Secretary of Finance.SEC.
42. Income from Sources Within the Philippines.-
(A) Gross Income
From Sources Within the Philippines.
- The following items of gross income shall be treated as gross income
from sources within the Philippines:
(1) Interests.
- Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligation of residents, corporate
or otherwise;
(2) Dividends.
- The amount received as dividends:
(a) from a domestic
corporation; and(b) from a foreign
corporation, unless less than fifty percent (50%) of the gross income of
such foreign corporation for the three-year period ending with the close
of its taxable year preceding the declaration of such dividends or for
such part of such period as the corporation has been in existence) was
derived from sources within the Philippines as determined under the provisions
of this Section; but only in an amount which bears the same ration to such
dividends as the gross income of the corporation for such period derived
from sources within the Philippines bears to its gross income from all
sources.(3) Services.
- Compensation for labor or personal services performed in the Philippines;(4) Rentals
and Royalties.
- Rentals and royalties from property located in the Philippines or from
any interest in such property, including rentals or royalties for -(a) The use of or
the right or privilege to use in the Philippines any copyright, patent,
design or model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;(b) The use of, or
the right to use in the Philippines any industrial, commercial or scientific
equipment;(c) The supply of
scientific, technical, industrial or commercial knowledge or information;(d) The supply of
any assistance that is ancillary and subsidiary to, and is furnished as
a means of enabling the application or enjoyment of, any such property
or right as is mentioned in paragraph (a), any such equipment as is mentioned
in paragraph (b) or any such knowledge or information as is mentioned in
paragraph (c);(e) The supply of
services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation
of any brand, machinery or other apparatus purchased from such nonresident
person;(f) Technical advice,
assistance or services rendered in connection with technical management
or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and(g) The use of or
the right to use:(i) Motion picture
films;
(ii) Films or
video tapes for use in connection with television; and
(iii) Tapes for use
in connection with radio broadcasting.(5) Sale of
Real Property.
- Gains, profits and income from the sale of real property located in the
Philippines; and(6) Sale of
Personal Property.
- Gains; profits and income from the sale of personal property, as determined
in Subsection (E) of this Section.(B) Taxable Income
From Sources Within the Philippines. -(1) General
Rule.
- From the items of gross income specified in Subsection (A) of this Section,
there shall be deducted the expenses, losses and other deductions properly
allocated thereto and a ratable part of expenses, interests, losses and
other deductions effectively connected with the business or trade conducted
exclusively within the Philippines which cannot definitely be allocated
to some items or class of gross income: Provided, That such items
of deductions shall be allowed only if fully substantiated by all the information
necessary for its calculation. The remainder, if any, shall be treated
in full as taxable income from sources within the Philippines.(2) Exception.
- No deductions for interest paid or incurred abroad shall be allowed from
the item of gross income specified in subsection (A) unless indebtedness
was actually incurred to provide funds for use in connection with the conduct
or operation of trade or business in the Philippines.(C) Gross Income
From Sources Without the Philippines.
- The following items of gross income shall be treated as income from sources
without the Philippines:
(1) Interests other
than those derived from sources within the Philippines as provided in
paragraph (1) of Subsection (A) of this Section;(2) Dividends other
than those derived from sources within the Philippines as provided in
paragraph (2) of Subsection (A) of this Section;(3) Compensation for
labor or personal services performed without the Philippines;(4) Rentals or royalties
from property located without the Philippines or from any interest in
such property including rentals or royalties for the use of or for the
privilege of using
without the Philippines, patents, copyrights, secret processes and formulas,
goodwill,
trademarks, trade brands, franchises and other like properties; and(5) Gains, profits
and income from the sale of real property located without the Philippines.(D) Taxable Income
From Sources Without the Philippines.
- From the items of gross income specified in Subsection (C) of this
Section there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expense,
loss or other deduction which cannot definitely be allocated to some items
or classes of gross income. The remainder, if any, shall be treated in
full as taxable income from sources without the Philippines.
(E) Income From
Sources Partly Within and Partly Without the Philippines.-
Items of gross income, expenses, losses and deductions, other than
those specified in Subsections (A) and (C) of this Section, shall be allocated
or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner. Where items of gross income are separately allocated
to sources within the Philippines, there shall be deducted (for the purpose
of computing the taxable income therefrom) the expenses, losses and other
deductions properly apportioned or allocated thereto and a ratable part
of other expenses, losses or other deductions which cannot definitely be
allocated to some items or classes of gross income. The remainder, if any,
shall be included in full as taxable income from sources within the Philippines.
In the case of gross income derived from sources partly within and partly
without the Philippines, the taxable income may first be computed by deducting
the expenses, losses or other deductions apportioned or allocated thereto
and a ratable part of any expense, loss or other deduction which cannot
definitely be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within the Philippines
may be determined by processes or formulas of general apportionment prescribed
by the Secretary of Finance. Gains, profits and income from the sale of
personal property produced (in whole or in part) by the taxpayer within
and sold without the Philippines, or produced (in whole or in part) by
the taxpayer without and sold within the Philippines, shall be treated
as derived partly from sources within and partly from sources without the
Philippines.
Gains, profits and income
derived from the purchase of personal property within and its sale without
the Philippines, or from the purchase of personal property without and
its sale within the Philippines shall be treated as derived entirely form
sources within the country in which sold: Provided, however, That
gain from the sale of shares of stock in a domestic corporation shall be
treated as derived entirely form sources within the Philippines regardless
of where the said shares are sold. The transfer by a nonresident alien
or a foreign corporation to anyone of any share of stock issued by a domestic
corporation shall not be effected or made in its book unless: (1) the transferor
has filed with the Commissioner a bond conditioned upon the future payment
by him of any income tax that may be due on the gains derived from such
transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer
have been paid. It shall be the duty of the transferor and the corporation
the shares of which are sold or transferred, to advise the transferee of
this requirement.
(F) Definitions.
- As used in this Section the words "sale" or "sold" include
"exchange" or "exchanged"; and the word "produced"
includes "created", "fabricated", "manufactured", "extracted",
"processed", "cured" or "aged".
Harvard
Computer Systems, Inc.