Chapter 13 Principles of Deductions 4

CHAPTER 13 – PRINCIPLES OF DEDUCTIONS
THE RELATED PARTY RULE
o Gains realized between related parties are taxable, but losses are
non-deductible.
o The rule is intended as a control measure due to the fact that

related party transactions can be easily tailored in a way to
evade taxes. This rule is particularly in the claim of losses, bad
debts, and interest expenses.
Who are related parties?
1. Members of a family - includes brothers and sisters (whether half-

blood or full-blood), spouse, lineal ascendants and descendants.
2. Except in cases of distribution in liquidation, the direct or indirect

controlling individual of a corporation
3. Except in cases of distribution in liquidation, corporations under

direct or indirect common control by or for the same individual
4. Grantor and fiduciary of any trust
5. Fiduciaries of trusts with the same grantor
6. Fiduciary of a trust and the beneficiary of such trust
Control means ownership of more than 1/2 % of the voting stocks of a

corporation
THE WITHHOLDING RULE
o Payors of income are required to withhold income taxes on their

payments.
o The failure to comply with this requirement shall result to

disallowances of the expense as deductions
o “NO WITHHOLD, NO DEDUCTIONS”
Types of Withholding Taxes
Types Expense Type BIR Deadline

Form
Withholding tax on Compensation 1601-C On or before the
compensation Exp. 10th day of the
month following
the month in
which
withholding was
made.
Final withholding tax Certain passive 0619-F -

income and fringe
benefits
Expanded withholding Other income 0619-F -

tax payments which
are subject to RT
to the receipts.
Summary of Expanded withholding tax rates
a. Payments to suppliers of goods, in general-1%
b. Payments to suppliers of services, in general-2%, except:
1. Rentals of properties or films and toll fees to refineries

-5%
2. Professional services to:
1. Individual professionals, brokers, agents,

entertainers -5% or 10%
2. corporations - 10% or 15%
3. general professional partnerships - 0%
3. Embalmers by funeral companies -1%

4. Additional payments to government personnel from
importers, shipping and airline companies or their agents for
overtime services-15%
c. Income distribution by
1. Estates and trusts to heirs or beneficiaries -15%.
2. General professional partnerships to partners -10%
d. Payments made by credit card companies-½ of 1%
For purposes of the withholding tax on professional fees, professionals

must submit a sworn declaration that his gross receipts do not exceed
P3,000,000 in a year. The same shall be the basis for the withholding
agent to deduct 5% instead of the 10% the professional is a VAT taxpayer
or if he fails to submit this sworn declaration, he shall be deducted the
10% withholding tax.
For corporate payees of professional services, the corporate taxpayer must

submit a sworn declaration that their gross incomes do not exceed
P720,000 in a year. The same shall be the basis for the withholding agent
to deduct 10% instead of the 15%. If the corporation failed to submit such
sworn declaration; the withholding agent shall deduct the 15%
withholding tax.
The withholding agent-payor must release to the recipient or payee of the

income payments copies of evidence of the withholding:
a. BIR Form 2306 (Certificate of final tax withheld at source)
b. BIR Form 2307 (Certificate of creditable tax withheld at

source)
For income not subject to withholding tax, the withholding agent-payor

sha release to the recipient of income exempt a copy of BIR Form 2304
(Certificate income payment not subject to withholding tax).
Late payment of withholding taxes
o Under the new rule established by RR6-2018, the BIR held that
expenses w be deductible even if the withholding tax, surcharge
including interest of such withholding is paid at the time of audit
investigation or reinvestigation. This reversal of the previous
rule that no deduction is allowed even if the withholding tax and
penalties is subsequent paid.
o For income payments exempt from withholding tax such as salary
payments minimum wage earners, the taxpayer must comply
with certain document requirements of the BIR.
PENALTIES FOR NON-WITHHOLDING OR LATE REMITTANCE WITHHOLDING

TAX
o Non-withholding or late remittance of withholding tax is subject

to the s penalties for late filing or late payments of tax discussed
under Chapter 4.
1. Surcharge
- With notice (50%)
- Before notice from BIR (25%)
2. Interest
- 12% x days/365 (depend on the month)
3. Compromise Penalty
- If the amount not withheld or remitted
E B C
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e p
e n r
d o o
s t m
i
E s
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e s
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5 , 0
, 0 0
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NON-DEDUCTIBLE EXPENSES
- The NIRC lists the following non-deductible expenses:
1. Personal, living, or family expense
2. Amount paid out of new buildings or for permanent, or

betterments made to increase the value of any property or
estate
3. Any amount expended in restoring property or in

making good the exhaustion thereof
4. Premiums paid on life insurance policy of any officer or

employee, or any person financially interested in any trade or
business carried on by the taxpayer individually or corporate,
when the taxpayer is directly or indirectly a beneficiary under
such policy.
TAX REPORTING CLASSIFICATION OF DEDUCTIONS
1. Cost of sales or cost of services – is deducted outright against sales,

revenue, receipts, or fees of individual taxpayers in the
measurement of gross income from operations
2. Regular Allowable Itemized Deductions – pertains to all necessary

and ordinary expenses paid or incurred during the taxable year
including directly attributable cost in carrying on the development,
management, operation and/or conduct of the trade, business or
exercise of profession.
3. Special Allowable Itemized Deductions
1. Actual Compliance Expense – are actual payments or transfers

of funds
2. Deduction Incentives – are not actual expenses, but merely

allowed by law to encourage taxpayers to support government
programs.
4. Net Operating Loss Carry-Over (NOLCO) - pertains to the

excess of expense deductions over income during taxable year which
is allowed by the law to be deducted against the net income of the
following three years.

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CHAPTER 13 – PRINCIPLES OF DEDUCTIONS

THE RELATED PARTY RULE

o The rule is intended as a control measure due to the fact that

Who are related parties?

1. Members of a family - includes brothers and sisters (whether half-

2. Except in cases of distribution in liquidation, the direct or indirect

3. Except in cases of distribution in liquidation, corporations under

4. Grantor and fiduciary of any trust

5. Fiduciaries of trusts with the same grantor

6. Fiduciary of a trust and the beneficiary of such trust

Control means ownership of more than 1/2 % of the voting stocks of a

THE WITHHOLDING RULE

o Payors of income are required to withhold income taxes on their

o The failure to comply with this requirement shall result to

o “NO WITHHOLD, NO DEDUCTIONS”

Types of Withholding Taxes

Types Expense Type BIR Deadline

Final withholding tax Certain passive 0619-F -

Expanded withholding Other income 0619-F -

Summary of Expanded withholding tax rates

a. Payments to suppliers of goods, in general-1%

b. Payments to suppliers of services, in general-2%, except:

1. Rentals of properties or films and toll fees to refineries

2. Professional services to:

1. Individual professionals, brokers, agents,

2. corporations - 10% or 15%

3. general professional partnerships - 0%

3. Embalmers by funeral companies -1%

1. Estates and trusts to heirs or beneficiaries -15%.

2. General professional partnerships to partners -10%

d. Payments made by credit card companies-½ of 1%

For purposes of the withholding tax on professional fees, professionals

For corporate payees of professional services, the corporate taxpayer must

The withholding agent-payor must release to the recipient or payee of the

a. BIR Form 2306 (Certificate of final tax withheld at source)

b. BIR Form 2307 (Certificate of creditable tax withheld at

For income not subject to withholding tax, the withholding agent-payor

Late payment of withholding taxes

PENALTIES FOR NON-WITHHOLDING OR LATE REMITTANCE WITHHOLDING

o Non-withholding or late remittance of withholding tax is subject

- With notice (50%)

- Before notice from BIR (25%)

- 12% x days/365 (depend on the month)

- If the amount not withheld or remitted

- The NIRC lists the following non-deductible expenses:

1. Personal, living, or family expense

2. Amount paid out of new buildings or for permanent, or

3. Any amount expended in restoring property or in

4. Premiums paid on life insurance policy of any officer or

TAX REPORTING CLASSIFICATION OF DEDUCTIONS

1. Cost of sales or cost of services – is deducted outright against sales,

2. Regular Allowable Itemized Deductions – pertains to all necessary

3. Special Allowable Itemized Deductions

1. Actual Compliance Expense – are actual payments or transfers

2. Deduction Incentives – are not actual expenses, but merely

4. Net Operating Loss Carry-Over (NOLCO) - pertains to the

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