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PRESIDENTIAL DECREE NO. 1158 - A
DECREE TO CONSOLIDATE AND CODIFY ALL THE INTERNAL REVENUE LAWS OF THE
PHILIPPINES
|
| WHEREAS,
the present National Internal Revenue Code is the result of the first
codification of our tax laws dating back to the year 1939; WHEREAS, there exists in the said Code a substantial number of provisions which were rendered obsolete by recent amendments introduced by various laws and presidential decrees; WHEREAS, there are not innumerable tax laws enacted since the Code's inception up to the present by various Republic Acts and Presidential Decree that need consolidation and codification; WHEREAS, it is imperative to adopt a consolidated tax code to integrate such amendatory laws and decrees and to harmonize their provisions not only for the proper guidance of the taxpayers but also for the efficient administration thereof: NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Republic of the Philippines, by virtue of the powers in me vested by the Constitution, do hereby order and decree as follows: Section 1. Codification of all internal revenue laws. — All internal revenue laws embodied in the present National Internal Revenue Code and various laws and presidential decrees are hereby consolidated and codified into a single tax code to be known as the National Internal Revenue Code of 1977, which shall form an integral part of this Decree. Section 2. Effectivity. — The provisions of the National Internal Revenue Code of 1977 shall take effect immediately without prejudice, however, to the effectivity dates of the various laws and decrees which have so far amended the provisions of National Internal Revenue Code of 1939, as well as new revenue laws, as consolidated with the National Internal Revenue Code of 1977. Done in the City of Manila, this 3rd day of June, in the year of Our Lord, nineteen hundred and seventy-seven. THE NATIONAL INTERNAL REVENUE CODE OF THE PHILIPPINES AS AMENDED by RA Nos. 7496, 7497 & 7499, and other issuances TITLE OF CODE Section 1. Title of Code. — This Code shall be known as National Internal Revenue Code of 1977. TITLE I. ORGANIZATION AND FUNCTION OF BUREAU Section 2. Chief Officials of the Bureau of Internal Revenue. — The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal Revenue, and two assistant chiefs to be known as Deputy Commissioner. Section 3. Powers and Duties of Bureau. — The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it this Code or other laws. Section 4. Specific Provisions to be Continued in Regulations. — The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying prescribing, or defining: (a) The time and manner in which Revenue Regional Directors shall canvass their respective revenue regions for the purpose of discovering persons and property liable to national internal revenue taxes, and the manner in which their lists and records of taxable persons and taxable objects shall be made kept. (b) The forms of labels, brands, or marks to be required in goods subject to a specific tax, and the manner in which the labeling, branding, or marking shall be effected. (c) The conditions under which and the manner in which goods intended for export, which if not exported would be subject to a specific tax, shall be labelled, branded, or marked. (d) The conditions to be observed by revenue officers, provincial fiscal and other officials respecting the institution and conduct of legal actions and proceedings. (e) The conditions under which goods intended for storage in bonded warehouses shall be conveyed thither, manner of storage, and the method of keeping the entires and records in connection therewith, also the books to be kept by Revenue Inspectors and the reports to be made by them in connection with their supervision of such warehouses. (f) The condition under which denatured alcohol may be removed and dealt in, the character and quantity of the denaturing material to be used, the manner in which the process of denaturing shall be effected, so as to render the alcohol suitably denatured and unfit for oral intake, the bonds to be given, the books and records to be kept, the entries to be made therein, the reports to be made to the Commissioner of Internal Revenue, and the signs to be displayed in the business or by the person for whom such denaturing is done or by whom, such alcohol is dealt in. (g) The manner in which revenue shall be collected and paid, the instrument, document, or object to which revenue stamps shall be affixed, any provision of Republic Act No. 5448 to the contrary notwithstanding, the mode of cancellation of the same, the manner in which the proper books, records, invoices, and other papers shall be kept and entries therein made by the person subject to the tax, as well as the manner in which licenses and stamps shall be gathered up and returned after serving their purposes. (h) The conditions to be observed by revenue officers, provincial fiscals, and other officials respecting the enforcement of Title III imposing a tax on estate of a decedent, and other transfers mortis causa as well as on gifts and such other rules and prohibitions which the Commissioner of Internal Revenue may consider suitable for the enforcement of the said Title III. (i) The manner in which tax returns, information, and reports shall be prepared and reported and the tax collected and paid, as well as the conditions under which evidence of payment shall be furnished the taxpayer, and the preparation and publication of tax statistics. (j) The manner in which internal revenue taxes such as income tax, estate and gift taxes, specific taxes, percentage taxes, documentary stamp taxes, mining taxes, taxes on banks, finance companies, insurance companies, public utilities, taxes on amusements, charges on forest products and such other taxes as may be added thereto shall be paid through the collection agents of the Bureau of Internal Revenue or through authorized agent commercial banks which are hereby deputized to receive payments of such taxes and the returns, papers and statements that may be filed by the taxpayers in connection with the payment of the tax. Section 5. Forms, Receipts, Certificates, and Appliances. (a) Provision and Distribution to Proper Officials. — It shall be the duty of the Commissioner, among other things, to prescribe, provide, and distribute to the proper officials the requisite licenses, internal revenue stamps, labels, all other forms, certificates, bonds, records, invoices, books, receipts, instruments, appliances and apparatus used in administering the laws falling within the jurisdiction of the Bureau. For this purpose, internal revenue stamps, strip stamps and labels shall be caused by the Commissioner to be printed with adequate security features. (b) Receipts for Payments Made. — It shall be the duty of the Commissioner or his duly authorized representative to whom any payment of any taxes is made under the provisions of this Code, to issue to the person marking such payment a receipt, expressing the amount paid and the particular account for which such payment was made. (As amended by PD No. 1994) Section 6. Agents and Deputies for Collection of National Internal Revenue Taxes. — The following are hereby constituted agents of the Commissioner of Internal Revenue: (a) The Commissioner of Customs and his subordinates with respect to the collection of national internal revenue taxes on imported goods; (b) The Commissioner of Land Transportation and his subordinates with respect to the collection of energy tax; and (c) Banks duly accredited by the Commissioner with respect to receipt of payments of internal revenue taxes authorized to be made thru banks. Any officer or employee of a duly accredited bank assigned to receive internal revenue tax payments and transmit tax returns or documents to the Bureau of Internal Revenue shall be subject to the same sanctions and penalties prescribed in Sections 268 and 269 of this Code. (As amended by E.O. No. 273) Section 7. Power of the Commissioner to Obtain Information, Examine, Summon and Take Testimony. — For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax, or collecting any such liability, the Commissioner is authorized: (1) To examine any book, paper, record or other data which may be relevant or material to such inquiry; (2) To obtain information from any office or officer of the national and local governments, government agencies or its instrumentalities including the Central Bank of the Philippines and government owned or controlled corporations; (3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and (5) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. (As amended by PD No. 1994) Section 8. Internal Revenue districts. — With the approval of the Secretary of Finance, the Commissioner of Internal Revenue shall divide the Philippines into such number of revenue districts as may from time to time be required for administrative purposes. Each of these districts shall be under the supervision of a Revenue District Officer. Section 9. Revenue Regional Director. — Under rules and regulations, policies and standards formulated by the Commissioner of Internal Revenue, the Revenue Regional Director shall, within the region and district offices under his jurisdiction, among others: (1) Implement laws, policies, plans, programs, rules and regulations of the department or agencies in the regional area; (2) Administer and enforce internal revenue laws and regulations, including the assessment and collection of all internal revenue taxes, charges and fees; (3) Provide economical, efficient and effective service to the people in the area; (4) Coordinate with regional offices or other departments, bureaus and agencies in the area; (5) Exercise control and supervision over the officers and employees within the region; and (6) Perform such other function as may be provided by law and as may be delegated by the Commissioner. Section 10. Duties of Revenue District Officers and other internal revenue officers. — It shall be the duty of every Revenue District Officer or other internal revenue officers and employees to see that all laws and regulations affecting national internal revenue are faithfully executed and complied with, and tod in the prevention, detection and punishment of frauds or delinquencies in connection therewith. It shall be the duty of every Revenue District Officer to examine into the efficiency of all officers and employees of the Bureau of Internal Revenue under his supervision, and to report in writing to the Commissioner of Internal Revenue, through the Regional Director, any neglect of duty, incompetency, delinquency, or malfeasance in office of any internal revenue officer of which he may obtain knowledge, with a statement of all the facts and any evidence sustaining each case. Section 11. Authority of Revenue Examiner. — A revenue examiner in any district may, in the name of the Revenue District Officer in charge of such district and under the control of such officer as his immediate superior, exercise any power or perform any act which might be exercised or performed by such Revenue District Officer himself. Section 12. Assignment of internal revenue officers to establishments where articles subject to specific tax are produced. — The Commissioner of Internal Revenue shall employ and assign internal revenue officers to regional offices and the Regional Director shall assign them to establishments or places where articles subject to specific tax are produced or kept. Section 13. Assignment of internal revenue officers and other employees to other duties. — The Commissioner of Internal Revenue may, with the approval of the Secretary of Finance assign internal revenue officers and other employees of the Bureau of Internal Revenue without change in their official character or salary to such special duties connected with the administration of the revenue laws as the best interests of the service may require. Section 14. Reports of violation of laws. — When an internal revenue officer discovers evidence of a violation of this Code or of any law or regulation administered by the Bureau of Internal Revenue, of such character as to warrant the institution of criminal proceedings, he shall immediately report the facts to the Commissioner of Internal Revenue, through his immediate superior giving the name and address of the offender and the names of the witnesses, if possible: Provided, That in urgent cases, the Revenue Regional Director or Revenue District Officer, as the case may be, may send the report to the corresponding prosecuting officer. In the latter case, a copy of his report shall be sent to the Commissioner of Internal Revenue. It shall also be the duty of any officer or employee of the Bureau of Internal Revenue to report to the Bureau of Forest Development any violation of the Forestry Reform Code of the Philippines within his knowledge. A duplicate of each such report shall be furnished the Commissioner of Internal Revenue. Section 15. Authority of internal revenue officers to make arrests and seizures. — The Commissioner of Internal Revenue, the Deputy Commissioners of Internal Revenue, the Revenue Regional Directors, the Revenue District Officers and other internal revenue officers shall have authority to make arrests and seizures for the violation of any penal law or regulation administered by the Bureau of Internal Revenue. Any person so arrested shall be forthwith brought before a court, there to be dealt with according to law. Section 16. Power of the Commissioner to make assessments. — (a) Examination of returns and determination of tax. — After a return is filed as required under the provisions of this Code, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency tax so assessed shall be paid upon notice and demand from the Commissioner. Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, that the same may be modified or changed by filing another amended return, statement or declaration. (b) Failure to submit required returns, statements, reports and other documents. — When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise, files a false or fraudulent return or other documents, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. (c) Authority to conduct inventory taking, surveillance and to prescribe presumptive gross sales and receipts. — The Commissioner may at any time during the taxable year, order inventory taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities or may place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sale, or receipts for internal revenue tax purposes. The findings may be used as a basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct. When it is found that a person has failed to issue receipt and invoices in violation of the requirements of Sections 108 and 238 of this Code, or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar business under similar situations or circumstances or after considering other relevant information, may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the correct internal revenue tax liabilities of such person. (d) Authority to terminate taxable period. — When it shall come to the knowledge of the Commissioner that a taxpayer is retiring from the business subject to tax or intends to leave the Philippines, or remove his property therefrom, or hide or conceal his property, or perform any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year, or render the same totally or partly ineffective unless such proceedings are begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time, fixed in the demand made by the Commissioner. (e) Authority of the Commissioner to prescribe real property values. — The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax the value of the property shall be whichever is the higher of: (1) The fair market value determined by the Commissioner; or (2) The fair market value as shown in the schedule of values of the Provincial and City Assessors. (f) Authority of the Commissioner to inquire into bank deposit accounts. — The provisions of Republic Act No. 1405 to the contrary notwithstanding, the Commissioner is hereby authorized to inquire into the bank deposits of a decedent for the purpose of determining the gross estate of such decedent. In case a taxpayer offers to compromise the payment of his tax liabilities on the ground that his financial position demonstrates a clear inability to pay the tax assessed, his offer shall not be considered unless he waives his privilege under the said law and such waiver shall serve as authority of the Commissioner to inquire into the bank deposits of said taxpayer. (g) Authority to accredit and register tax agents. — The Commissioner may require prior accreditation and registration, based on competence and moral fitness, of person and general professional partnerships or their representatives in the preparation and filing of required tax returns, statements, reports, memoranda, or in appearing or in filing protests or papers with the Bureau for taxpayers. For this purpose, the Commissioner is empowered to create national and regional accreditation boards and to designate from among the ranks of senior officials of the Bureau, one chairman and two members in each board and issue the necessary rules and regulations subject to the approval of the Secretary of Finance. (h) Authority of the Commissioner to prescribe additional procedural or documentary requirements. — The Commissioner may prescribe the manner of compliance with any documentary or procedural requirements in connection with the submission or preparation of financial statements accompanying the tax returns. (As amended by E.O. No. 273) Section 17. Authority of officers to administer oaths and take testimony. — The Commissioner of Internal Revenue, Deputy Commissioners, Service Chiefs, Assistant Service Chiefs, Revenue Regional Directors, Assistant Revenue Regional Directors, Chiefs and Assistant Chiefs of Division, Revenue District Officers, special deputies of the Commissioner, internal revenue officers and any other employee of the Bureau thereunto especially deputized by the Commissioner shall have power to administer oaths and to take testimony in any official matter or investigation conducted by them touching any matter within the jurisdiction of the Bureau. Section 18. Contents of Commissioner's annual report. — The annual report of the Commissioner of Internal Revenue shall contain a detailed statement of the collections and disbursements of the Bureau with specifications of the sources of revenue and classes of disbursements. Section 19. Sources of revenue. — The following taxes, fees and charges are deemed to be national internal revenue taxes: (a) Income tax; (b) Estate and gift taxes; (c) Excise taxes; (d) Taxes on business; (e) Documentary stamp taxes; (f) Mining taxes; and (g) Miscellaneous taxes, fees and charges, namely: taxes on banks, finance companies, insurance companies, franchise taxes, taxes on amusements, and charges on forest products, tobacco inspection fees and such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. (As amended by PD. No. 1994) TITLE II. TAX ON INCOME CHAPTER I DEFINITIONS Section 20. Definitions. — When used in this Title — (a) The term "person" means an individual, a trust, estate, or corporation. (b) The term "corporation" includes partnership, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (c) The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws. (d) The term "foreign" when applied to a corporation, means a corporation which is not domestic. (e) (1) The term "non-resident citizen" means one who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside thereto. (2) A citizen leaving the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a more or less permanent basis and contract workers whose contract of employment are renewed from time to time within or during the taxable year under such circumstances as to require them to be physically present abroad most of the time during the taxable year, shall be considered as a nonresident for such taxable year with respect to the income he derived from foreign sources from the date he actually departed from the Philippines. (3) A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (4) The taxpayer shall submit proof to the Commissioner of Internal Revenue to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purposes of this section. (f) The term "resident alien" means an individual whose resident is within the Philippines and who is not a citizen thereof. (g) The term "non-resident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. (h) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. (i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines. (j) The term "fiduciary" means a guardian trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person. (k) The term "withholding agent" means any person required to deduct and withhold any tax under the provision of section fifty-one. (l) The term "stock" includes the share in an association, joint-stock company, or insurance company. (m) The term "shareholder" includes a member in an association, joint-stock company, or insurance company. (n) The term "taxpayer" means any person subject to tax imposed by this Title. (o) The terms "including, when used in a definition contained in this Title, shall not be deemed to exclude other things otherwise within the meaning of the term defined. (p) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. "Taxable year" includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under regulations prescribed by the Department of Finance, the period for which such return is made. (q) The term "fiscal year" means an accounting period for twelve months ending on the last day of any months other than December. (r) The term "paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title. (s) The term "trade or business" includes the performance of the functions of a public office. (t) The term "securities" means shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds, debentures, notes, or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or political subdivision thereof, with interest coupons or in registered form. (u) The term "dealer in securities" means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. (v) The term "bank" means every banking institution as defined in Section 2 of the General Banking Act, Republic Act 337, as amended. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank or a specialized government bank. (w) The term "non-bank financial intermediary" means financial intermediary as defined in Section 2-D (c) of the General Banking Act, R.A. No. 337, as amended, authorized by the Central Bank of the Philippines to perform quasi-banking activities. (x) The term "quasi-banking activities" means borrowing funds from twenty or more personal or corporate lenders at any one time, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits for the borrowers' own account, or through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations; Provided, however, That commercial, industrial and other non-financial companies, which borrow funds through any of these means for the limited purpose of financial their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions. (y) "deposit substitutes" shall mean an alternative form of obtaining funds from the public, other than deposit, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include but need not be limited to banker's acceptances, promissory notes, repurchase agreement, certificates of assignment or participation and similar instruments with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission of the Philippines for commercial, industrial, finance companies and other non-financial companies: Provided, however, That only debt instruments issued for inter-bank call loans to cover deficiency in reserves considered those between or among banks and quasi-banks shall not be considered as deposit substitute debt instruments. (As added by PD No. 1959) (z) The term "ordinary income" includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 34 (a). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as "ordinary income" shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 34 (a). The term "ordinary loss" includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provision of this Title, as "ordinary loss" shall be treated as loss from the sale or exchange of property which is not a capital asset. (As added by Executive Order No. 37, July 31, 1986) CHAPTER II TAX ON INDIVIDUALS Section 21. Tax on citizens or residents. — (a) Taxable compensation income. — A tax is hereby imposed upon the taxable compensation income as defined in Section 27, other than the incomes subject to tax under paragraphs (b), (c), (d), (e) and (f) of this section, received during each taxable year from all sources determined in accordance with the following schedule: Not over P2,500 0% Over P2,500 but not over P5,000 1% Over P5,000 but not over P10,000 P25 + 3% of excess over P5,000 Over P10,000 but not over P20,000 P175 + 7% of excess over P10,000 Over P20,000 but not over P40,000 P875 + 11% of excess over P20,000 Over P40,000 but not over P60,000 P3,075+ 15% of excess over P40,000 Over P60,000 but not over P100,000 P6,075+ 19% of excess over P60,000 Over P100,000 but not over P250,000 P13,675+24% of excess over 100,000 Over P250,000 but not over P500,000 P49,675+29% of excess over 250,000 Over P500,000 P122,175+35% of excess over P500,000 (As amended by R.A. 7496, May 18, 1992) In the case of married individuals, the husband and wife, subject to the provision of Section 44 (d) hereof, shall compute separately their individual income tax based on their respective total taxable incomes; Provided, That if any income can not be definitely attributable to, or identifiable as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of computing their respective taxable income. (As amended by R.A. 7497) (b) Foreign source gross income derived by a non-resident citizen. — A tax is hereby imposed upon the taxable income derived by a non-resident citizen from all sources without the Philippines during each taxable year computed in accordance with the following schedule: If the amount subject to tax is: Not over U.S. $6,000.00 1% Over U.S. $6,000.00 but not over U.S. $20,000.00 U.S. $60 plus 2% of excess over U.S. $6,000 Over U.S. $20,000.00 U.S. $340 plus 3% of excess over U.S. $20,000 (c) Certain passive incomes. — A tax at the rate prescribed below is hereby imposed upon the amount of the following items of gross income received by a citizen or resident alien from sources within the Philippines: (1) Interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements; royalties, prizes (except prizes amounting to P3,000 or less which shall be subject to tax under paragraph (a) and other winnings (except Philippine Charity Sweepstakes winnings) — 20% and (2) Dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Section 24 (a) at the rate of 15% in 1986; 10% effective January 1, 1987; 5% effective January 1, 1988; and 0% effective January 1, 1989. (d) Capital gains from sales of shares of stock. — The provisions of Section 33 (b) notwithstanding, capital gains realized from the sale, exchanges or disposition of shares of stocks in any domestic corporation shall be taxed as follows: (1) Net capital gain as defined in Section 33 (a) (2) realized during each taxable year from the sale, exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% (2) Capital gains presumed to have been realized from the sale, exchange or disposition of shares of stock listed and traded through a local stock exchange — 1/4 of 1% based on the gross selling price of the share or shares of stock. (e) Capital gains from sales of real property. — The provisions of Section 33 (b) notwithstanding, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estate and trust, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21 (a) or under this sub-section, at the option of the taxpayer. (f) Simplified Net Income tax for the Self-Employed and for Professionals Engaged in the Practice of Profession. — A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraph (b), (c), (d) and (e) of this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein determine in accordance with the following schedule: Not over P100,000 3% Over P10,000 but not over P30,000 P300+9%of excess over P10,000 Over P30,000 but not over P120,000 P2,100 + 15% of excess over P30,000 Over P120,000 but not over P350,000 P15,600+20% of excess over P120,000 Over P350,000 P61,600+30% of excess over P350,000 (As added by Republic Act No. 7496, May 18, 1992) Section 22. Tax on non-resident alien individuals. — (a) Non-resident alien engaged in trade or business within the Philippines: (1) In general. — Non-resident aliens engaged in trade or business in the Philippines shall be subject to tax in the same manner as resident citizens and aliens on taxable income received from all sources within the Philippines, except capital gains realized from buying and/or selling shares of stock of Philippine corporations listed in the dollar or any foreign currency board of stock exchange: Provided, That for purposes of this Title, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines, Section 20 (g) of this Code notwithstanding. (2) Dividends, share in the net profits of a taxable partnership, interest, royalties, prizes and other winnings. — Dividends from a domestic corporation, share in the net profits of a partnership taxable under Section 24 (a) interest, royalties (in any form) and prizes (except prizes amounting to P3,000 or less which shall be subject to tax under paragraph (a) of Section 21) and other winnings (except Philippine Charity Sweepstakes winnings), shall be subject to a tax of thirty percent (30%) on the total amount thereof. (3) Capital gains. — Capital gains realized sales of shares of stock in domestic corporations and real properties shall be subject to the tax prescribed under Sub-sections (d) and (e) of Section 21. (b) Non-resident aliens not engaged in trade or business within the Philippines. — There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every non-resident alien individual not engaged in trade or business within the Philippines as interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodical or casual gains, profits, and income, and capital gains (except capital gains realized from buying and/or selling shares of stock of Philippine corporation listed in the dollar or any acceptable foreign currency board of any stock exchange), a tax equal to 30% of such income: Provided, That capital gains realized from sales of shares of stocks in any domestic corporation and real property shall be subject to the tax prescribed under Sub-sections (d) and (e) of Section 21. (c) Aliens employed by regional or area headquarters of multinational corporations. — There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area, headquarter established in the Philippines, by multinational corporations as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters, a tax equal to 15% of such gross income: Provided, That the activities of the said regional headquarters or area headquarters shall be limited to acting as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches of such multi-national corporations. For purposes of this chapter, the term "multinational corporation" means a foreign firm or entity, engaged in international trade with affiliates or subsidiaries or branch office in the Asia Pacific Region. (d) Aliens employed by offshore banking units. — There shall be levied, collected and paid for each taxable year upon the gross income recovered by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, a tax equal to 15% of such gross income. (e) Aliens employed by petroleum service contractors and subcontractors. — Aliens who are permanent residents of a foreign country but who are employed and assigned in the Philippines by service contractors or by subcontractors engaged in petroleum operations in the Philippines shall be liable to a tax of 15% of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractors or subcontractors. Any income earned from all other sources within the Philippines by the alien employees referred to under subsections (c), (d) and (e) hereof shall be subject to the pertinent income tax, as the case may be, imposed under the National Internal Revenue Code, as amended. Section 23. Tax liability of members of general professional partnership. — (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner — (1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions. CHAPTER III TAX ON CORPORATIONS Section 24. Rates of tax on domestic corporations. — (a) In general. — Unless otherwise provided, a tax of 35% is hereby imposed upon the taxable income received during each taxable year from all sources within and without the Philippines by every corporation organized in, or existing under the laws of the Philippines, and partnership, no matter how created or organized, but not including general professional partnerships. (b) Private Educational Institutions. — Private educational institutions, whether stock or non-stock, shall pay a tax of 10% on their taxable income except those covered by paragraph (e) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by any educational institution from all sources, the tax prescribed in paragraph (a) hereof shall be imposed on the entire taxable income of the educational institution. For purposes of this paragraph, the term, "unrelated trade, business or other activity" means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function. A private educational institution is any "private school" maintained and administered by private individuals or group issued a permit to operate by the Department of Education, Culture and Sports (DECS) in accordance with existing laws and regulations. (c) Government-owned or controlled corporations agencies on instrumentalities. — The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Section 26 of this Code shall pay the rates provided in this Section. All corporations, agencies, or instrumentalities owned or controlled by the Government, including the Government Service Insurance System and the Social Security System, shall pay such rate of tax upon their taxable income as are imposed by this section upon associations or corporations engaged in a similar business, industry, or activity. (d) Mutual life insurance companies. — Mutual life insurance companies organized in and existing under the laws of the Philippines shall pay a tax of 10% of their gross investment income consisting of interest, dividends, rents, net capital gains, and income from any other business than life insurance derived from all sources, except those covered by paragraph (e) hereof. (e) Tax on certain incomes derived by domestic corporations. — (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, and royalties. — Interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic corporations; and royalties, derived from sources within the Philippines, shall be subject to a 20% tax. (2) Capital gains from sales of shares of stock. — Capital gains realized from sale, exchange or disposition of shares of stocks in any domestic corporation shall be taxed as follows: (A) Net capital gains as defined in Section 33 (a) (2) realized during each taxable year from sale or exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% (B) Capital gains presumed to have been realized from the sale, exchange or disposition of share of stock listed and traded through a local stock exchange — 1/4 of 1% based on the gross selling price of the share or shares of stock. (3) Tax on income derived under the Expanded Foreign Currency Deposits System. — Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, off-shore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank to transact business with foreign currency depository system units and other depository bank under the expanded foreign currency deposit system shall be exempts from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the used income tax payable by banks: Provided, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than off-shore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. Any income of non-residents from transactions with depository banks under the expanded system shall be exempt from income tax. (4) Intercorporate dividends. — Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax. Section 25. Rates of tax on foreign corporation. — (a) Tax on resident foreign corporations (1) In general. — Unless otherwise provided, a corporation organized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to a tax equivalent to 35% of the taxable income derived in the preceding taxable year from all sources within the Philippines. (2) International carriers. — International carries doing business in the Philippines shall pay a tax of two and one-half percent (2 ½%) on their "Gross Philippine Billings" as defined hereunder: (A) Internationalr carrier. — "Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the world and excess baggage, cargo and mail originating from the Philippines, covered by passage documents sold in the Philippines: Provided, That documents sold outside the Philippines under a "prepaid ticket advice" scheme for passengers originating from the Philippines shall be considered as documents sold in the Philippines. Gross revenue from chartered flights originating from the Philippines shall likewise form part of the "Gross Philippine Billings" regardless of the place of sale or payment of the passage documents. For purposes of determining the taxability of revenue from chartered flights, the term "originating from the Philippines" shall include flights of passengers who stay in the Philippines for more than forty-eight (48) hours prior to embarkation. (B) International Shipping. —"Gross Philippine Billings" means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. (3) Foreign mutual life insurance companies. — Foreign mutual life insurance companies authorized to carry business in the Philippines shall pay a tax of 10% on their gross investment income derived from sources within the Philippines except those covered by subsection (6) hereof. (4) Offshore banking units. — The provisions of any law to the contrary notwithstanding, income derived by off-shore banking units authorized by the Central Bank of the Philippines from foreign currency transactions with non-residents, other offshore banking units, local commercial banks, including branches of foreign banks that may be authorized by the Central Bank to transact business with offshore banking units shall be exempt from all taxes except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the normal income tax payable by banks: Provided, That any interest income derived from foreign currency loans granted to residents other than offshore banking units or local branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with offshore banking units, shall be subject only to a 10% tax. Any income of non-residents from transactions with said offshore banking units shall be exempt from income tax. (5) Tax on branch profits remittances. — Any profit remitted by a branch to its head office shall be subject to a tax of 15% (except those registered with the Export Processing Zone Authority): Provided, That any profit remitted by a branch to its head office authorized to engage in petroleum operations in the Philippines shall be subject to tax at 71/2%. In both cases, the tax shall be collected and paid in the same manner as provided in Sections 51 and 52 of this Code: and Provided, further, That interests, dividends, rents, royalties, including remuneration, for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be considered as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines. (6) Tax on certain incomes received by resident foreign corporations. (A) Interest from deposits and yield or any other monetary benefits from deposit substitutes, trust funds and similar arrangements and royalties. — Interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements and royalties derived from sources within the Philippines shall be subject to a 20% tax. (B) Income derived under the Expanded Foreign Currency Deposit System. — Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Central Bank of the Philippines to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual income tax payable by banks: Provided, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents (other than offshore banking units in the Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. Any income of non-residents from transactions with depository banks under the expanded system shall be exempt from income tax. (C) Capital gains from sales shares of stock. — capital gains realized from sale, exchange or disposition of shares of stock in any domestic corporation shall be taxed as follows: (i) Net capital gains as defined in Section 33 (a) (2) realized during each taxable year from sale or exchange or other disposition of shares of stocks not traded through a local stock exchange shall be taxes as follows: Not over P100,000 10% Over P100,000 20% (ii) Capital gains presumed to have been realized from the sale, exchange or disposition of shares stock listed and traded through a local stock exchange — 1/4 of 1% based on the gross selling price of the share or shares of stock. (D) Intercorporate Dividends. — Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title. (b) Non-resident foreign corporations. — (1) In general. — Unless otherwise provided, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (C). (2) Non-resident cinematographic films owners, lessors or distributors. — Cinematographic film owners, lessors, or distributors shall pay a tax of 25% of their gross income from all sources within the Philippines. (3) Non-resident owners of vessels chartered by Philippine nationals. — Rentals, charter fees derived by non-resident owners of vessels chartered by Philippine nationals and which charter or lease has been duly approved by the Maritime Industry Authority shall be subject to a 4.5% tax. (4) Non-resident lessors ofrcrafts, machineries and other equipment. — Rentals, charter and other fees derived by non-resident lessors ofrcrafts, machineries and other equipment shall be subject to a tax of not less than 5% but not more than 10% to be fixed and determined by the President upon recommendation of the Secretary of Finance: Provided, That the rate of 7 ½% shall be imposed on such rentals, charter and other fees until such time as the President shall have prescribed the rates appropriate for each category of property. (5) Tax on certain incomes received by non-resident foreign corporations. — (A) Interest on foreign loans contracted on or after August 1, 1986 shall be subject to a 20% tax; (B) On dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 50 (a) of the National Internal Revenue Code, as amended, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the different between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this subparagraph; (C) Capital gains realized from sale, exchange or disposition of shares of stock in any domestic corporation shall be subject to tax as follows: (i) Net capital gains as defined in Section 33 (a) (2) realized during each taxable year from sale or exchange or other disposition of shares of stocks not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% (ii) Capital gains presumed to have been realized from the sale, exchange or disposition of shares of stock listed and traded through a local stock exchange — 1/4 1% based on the gross selling price of the share or shares of stock. (As amended by E.O. No. 37). Section 26. Exemptions from tax on corporations. — The following organizations shall not be taxed under this Title in respect to income received by them as such — (1) Government educational institution. (As added by E.O. No. 37) (a) Labor, agriculture, or horticultural organization not organized principally for profit; (b) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (c) Fraternal beneficiary society, order or association, operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system and providing for the payment of life, sickness, accident, or other benefits to the members of such society, order, or association, or their dependents; (d) Cemetery company owned and operated exclusively for the benefit of its members; (e) Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private stockholder or individual; (f) Business league, chamber of commerce, or board of trade, not organized for profits and no part of the net income of which inures to the benefit of any private stockholder or individual: (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (h) Club organized and operated exclusively for pleasure, for recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; (i) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; (j) Farmers,' fruit growers', or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produced finished by them; (k) Corporation or association organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof less expenses, to an organization which is itself exempt from the tax imposed by this Title. Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profits, regardless of the disposition made of such income, shall be subject to tax imposed under this Code. CHAPTER IV COMPUTATION OF TAXABLE COMPENSATION INCOME AND NET INCOME Section 27. Taxable Income. — The term "taxable income" means the pertinent items of gross income specified in this Code less the deductions, if any, authorized by such type of income by this Code or other special laws: Provided, That for purposes of Section 21 (b) "taxable income" means gross income from all sources without the Philippines less the deductions allowed in Section 29 (m). (As amended by E.O. No. 37) Section 28. Gross Income. — (a) General definition. — Gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, and similar items; (2) Gross income derived from business; (3) Gains derived from dealing in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share of the gross income of general professional partnership. (b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title: (1) Life insurance. — The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured, whether in a single sum or otherwise, but if such amount are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount received by insured as return of premium. — The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or descent; but the income from such property shall be included in gross income. (4) Interest on Government securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any political subdivisions thereof, but in the case of such obligations issued after the approval of this Code, only to the extent provided in the Act authorized the issue thereof. (5) Compensation for injuries or sickness. — Amount received through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amount of any damage received whether by suit or agreement on account of such injuries or sickness. (6) Income exempt under treaty. — Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (7) Retirement benefits, pensions, gratuities, etc. — (A) Retirement benefits received by officials and employees of private firms whether individuals or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least 10 years and is not less than 50 year of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only one. For purposes of this subsection, the term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, where contributions are made by such employer for officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said official and employees. (B) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee. (C) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (D) Payments of benefits due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (E) Payments of benefits made under the Social Security Act of 1954, as amended. (F) Benefits received from the GSIS and the retirement gratuity received by government officials and employees. (8) Miscellaneous items. — (A) Income received from their investments in the Philippines in loans stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from them, and (iii) international or regional financing institutions established by governments. (B) Income derived from any public utility or from the exercise of any essential government function accruing to the Government of the Philippines or to any political subdivision thereof. (C) Income derived as rewards under Section 316 (now 281) of this Code, as amended. (D) Interest earned from deposits maintained with a bank under the expanded foreign currency deposit system. (E) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. Section 29. Deductions from gross income. — In computing taxable income subject to tax under Sections 21 (a), 24(a), (b) and (c); and 25 (a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section; Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: (a) Raw materials, supplies and direct labor; (b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light and water; (d) Business rentals; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and (g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business. For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be. (As amended by Republic Act No. 7496, May 18, 1992) In the case of an individual, the optional standard deduction under paragraph (k) shall be allowed in lieu of itemized deductions under said paragraphs (a) to (i). In addition, the appropriate personal and additional exemptions allowed under paragraph (l) may be claimed by an individual whose income is subject to tax under Section 21 (a): Provided, That no deductions other than the deduction provided in paragraph (l) may be allowed from compensation income arising from personal services rendered under an employer-employee relationship. (a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in the pursuit of a trade profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. (2) Expenses allowable to private educational institutions. — In addition to the expenses allowable as deductions under subparagraph (a) (1) (A) above, a private educational institution, referred to under Section 24 (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 paragraph (f) of this section. (b) Interest. — (1) In general. — The amount of interest paid or accrued within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business, except on indebtedness incurred or continued to purchase or carry obligation the interest upon which is exempt from taxation as income under this Title. (2) No deduction shall be allowed in respect of interest under the succeeding sub-paragraphs: (i) If within the taxable year an individual taxpayer reporting income on the case basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: and 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. (ii) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified Section 30 (b). (iii) If the indebtedness is incurred to finance petroleum exploration. (c) Taxes. — (1) In general. — Taxesd or accrued within the taxable year in connection with the taxpayer's profession, trade or business, except: (A) The income tax provided for under this Title; (B) Income war profits, and excess profits 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 gift taxes; (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; and (E) Electric energy consumption tax imposed by Batas Pambansa Blg. 36 (2) Limitations on deductions. (A) In the case of a non-resident alien individual and a 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; and (B) In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not taxable under this Title, only that portion of the taxes paid to such foreign country which corresponds to his taxable income under this Title shall be allowed as deduction. (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 any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country; (B) Alien resident of the Philippines. — In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes allows a similar credit to citizens of the Philippines residing in such country; and |