Philippine Income Tax Act of 1919

Policy and guiding intent of taxation

The law provides that income tax applies to gains, profits, and income from all sources subject to the exemptions and deductions granted by the Act.
The law states the intent and purpose that all gains, profits, and income of a taxable class under the Act are charged and assessed with the corresponding normal and additional taxes.
The law directs that tax shall be paid by the owner of the gains, profits, and income, or the proper representative with receipt, custody, control, or disposal of the same, with ownership/liability determined as of the year for which a return is required.

Core definitions: “income” and related concepts

Section 2(a) defines taxable net income to include gains, profits, and income from salaries, wages, compensation, professions, vocations, businesses, trade, commerce, sales or dealings in property, whether real or personal, and income from any source whatever, subject only to exemptions and deductions.
Section 2(b) provides that income of estates of deceased persons during administration or settlement is taxable to the estate, and also applies to income held in trust (including income accumulated for unborn or unascertained persons, contingent interests, and income held for future distribution).
Section 2(b) provides that when income is distributed annually or regularly among existing heirs/legatees/beneficiaries, the rate and method of computing the tax is based on the individual share distributed.
Section 2(c) provides a basis rule for property acquired before March 1, 1913: fair market value as of March 1, 1913 is used to determine gain or loss for that purpose.
Section 3 provides that for the additional tax, taxable income of an individual includes the share he would be entitled to from undistributed corporate gains and profits where such gains and profits are fraudulently accumulated or retained to evade the additional tax.

Tax on individuals: rates, scope, and coverage

Section 1(a) imposes a normal tax of 2% annually on the entire net income received in the preceding calendar year from all sources by every individual citizen or resident, and on net income received within the Philippine Islands by every nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.
Section 1(a) imposes the normal tax on nonresident aliens on income received within the Philippine Islands, including interest on certain obligations.
Section 1(b) imposes an additional income tax on individuals on total net income exceeding specified thresholds, with rates that step by brackets per annum.
Section 1(b) includes dividends in the additional tax base: for purposes of the additional tax, include income derived from dividends or net earnings subject to the tax established in Section 10(a).
Section 1(c) provides that the normal and additional tax rates apply to the entire net income of every taxable person for the calendar year nineteen hundred and nineteen and each year thereafter, subject to the Act’s exceptions.

Additional tax anti-evasion rule (undistributed profits)

Section 3 makes the individual’s taxable income for additional tax include the share he would be entitled to from corporate/joint arrangements/insurance where gains and profits are fraudulently accumulated or retained to evade the additional tax.
Section 3 treats the following as prima facie evidence of fraudulent purpose to escape the additional tax: (i) the entity is a mere holding company, or (ii) gains and profits are permitted to accumulate beyond the reasonable needs of the business.
Section 3 clarifies that surplus accumulation is not evidence of a purpose to escape the tax unless the Secretary of Finance certifies that, in his opinion, the accumulation is unreasonable for business purposes.
Section 3 requires information forwarding when requested by the Collector of Internal Revenue: the corporation/joint arrangement/association/insurance company must forward a correct statement of gains and profits and the names and addresses of individuals/shareholders entitled if distributed.

Individual income tax computation: exemptions and deductions

Section 4 exempts specified incomes from the operation of the Act, including life insurance proceeds to beneficiaries upon death and return of premium/premiums paid under life insurance/endowment/annuity contracts.
Section 4 exempts the value of property acquired by gift, bequest, devise, or descent, while requiring that income from such property is included as income.
Section 4(d) exempts certain interest: United States obligations interest to the extent provided in the authorizing Act, and interest on Government of the Philippine Islands or political subdivision obligations issued after January 1, 1919 only to the extent provided in the authorizing Act.
Section 5(a) provides itemized deductions for citizens/residents, including necessary expenses, business interest (with exclusions), foreign and Philippine taxes (with exclusions for local benefits), losses (including casualty/theft with insurance carve-outs), worthless debts, depreciation, and depletion/flow allowances for oil, gas wells, and mines with limits and rules under regulations by the Collector with Secretary of Finance approval.
Section 5(a)(Ninth) allows charitable/religious/scientific/educational contributions and certain societies (with no private inurement) as deductions up to 5% of the taxpayer’s taxable net income computed without the benefit of that paragraph, and requires verification under rules prescribed by the Collector with Secretary of Finance approval.
Section 5(b) allows, for normal tax only, a credit to a personal return for dividends or net profits subject to the tax established in Section 10(a).
Section 5(c) provides a similar credit for the amount of normal tax that has been paid or withheld at the source under the Act.

Nonresident alien deductions and return condition

Section 6(a) provides deductions for nonresident alien individuals limited to expenses and losses connected with business/trade in the Philippines, a proportional interest deduction tied to income sourced in the Philippines, Philippine-situs taxes, and losses of property in the Philippines from specified casualty/theft situations.
Section 6(a) allows depletion/depreciation deductions within the Philippines, with limits for oil and gas wells and mines, subject to Collector rules with Secretary of Finance approval, and stops further allowances when allowances equal the capital originally invested (or fair market value as of March 1, 1913 for prior acquisitions).
Section 6(b) grants credits specified in Section 5(b) and Section 5(c).
Section 6(c) conditions benefit of the deductions and credits on filing: a nonresident alien individual receives the benefit only by filing (or causing to be filed) a true and accurate return of total income received from all sources in the Philippines; if no return is filed, the Collector of Internal Revenue collects the tax on such income.

Personal exemptions for individuals and estates

Section 7 grants a personal exemption (for normal tax only) of PHP 6,000, plus PHP 2,000 if the taxpayer is a head of a family or a married man with a wife living with him, and plus PHP 2,000 if the taxpayer is a married woman with a husband living with her.
Section 7 prohibits double counting the PHP 2,000 additional exemption by both spouses.
Section 7 mandates that when husband and wife live together, only one deduction of PHP 8,000 is allowed from the aggregate income of both.
Section 7 grants additional exemption of PHP 400 for each legitimate, recognized natural or adopted child dependent on the person making the return, if under 18 years of age, or incapable of self-support because mentally or physically defective.
Section 7 permits guardians or trustees to make this personal exemption for income derived from the property under their charge for each ward/cestui que trust, while limiting the ward/cestui que trust personal exemption to the amount allowed under the section.
Section 7 provides an exemption of PHP 6,000, including deductions allowed under Section 5, for estates of deceased citizens/residents during administration/settlement and for trust or other estates of citizens/residents the income of which is not distributed annually or regularly under Section 2(b).

Returns for individuals: filing, thresholds, fiduciaries

Section 8(a) requires that the tax is computed on net income ascertained under the Act, for each preceding calendar year ending December 31.
Section 8(b) requires an oath-based “true and accurate return” on or before March 1, 1920 and on or before March 1 of each year thereafter for each person of lawful age with income of PHP 6,000 or over for the taxable year.
Section 8(b) specifies filing location: returns go to the Collector of Internal Revenue or the provincial treasurer of the province of legal residence or principal place of business; if there is no legal residence/place of business in the Philippines, the filing is with the Collector of Internal Revenue.
Section 8(b) allows the Collector to grant a reasonable extension of time in meritorious cases.
Section 8(b) allows the return to be made by an agent where illness, absence, or nonresidence prevents the taxpayer from filing; the agent assumes responsibility and incurs penalties for erroneous, false, or fraudulent returns.
Section 8(c) requires fiduciaries (guardians, trustees, executors, administrators, receivers, conservators, and persons acting in fiduciary capacity) to render returns of the income of the person/trust/estate for whom/which they act and to swear to sufficient knowledge and truthfulness; it also allows joint fiduciaries to file one return under regulations prescribed by the Collector with Secretary of Finance approval.
Section 8(c) provides that no return is required for income not exceeding PHP 6,000, except as otherwise provided in the Act.
Section 8(d) treats registered general co-partnership (compañía colectiva) as liable for income tax only in individual capacity of partners: partners report their distributive shares for taxation, subject to stated exclusions/credits for certain exempt income and dividends/net profits subject to the Section 10(a) tax.
Section 8(d) allows general co-partnerships to fix their own fiscal year and make returns on the basis accorded to corporations.
Section 8(e) allows taxpayers using accounting bases other than actual receipts/disbursements to file on such basis only if regulations permit and such basis clearly reflects income.

Assessment rules for individuals and withholding at source

Section 9(a) requires assessments by the Collector of Internal Revenue, with notification on or before June 1 of each successive year, and payment on or before June 15.
Section 9(a) provides that if a taxpayer refuses or neglects to file or makes erroneous/false/fraudulent returns, the Collector may discover and adjust at any time within three years after the return is due, or after it is made, and then assess payable immediately upon notification.
Section 9(a) imposes additions for unpaid tax: for unpaid sums after June 15 and for ten days after notice and demand, there is added 5% plus interest at 1% per month from the time the tax became due, except for estates of insane, deceased, or insolvent persons.
Section 9(b) imposes withholding and deduction at source on specified persons/entities controlling payment of annual/periodical gains, profits, and income of a nonresident alien individual (other than dividends/net profits subject to Section 10(a)), requiring them to withhold a sum sufficient to pay the normal tax and to remit on or before March 1 of each year; such withholding agents are personally liable for the tax and are indemnified against demands by others.
Section 9(c) requires withholding for interest on bonds and mortgages or similar obligations if the obligor has a tax-reimbursement/“interest without deduction” contract, subject to the rules on Sections 9(b), except where the recipient files a signed written notice before February 1 claiming exemption under Section 7.
Section 9(d) requires persons undertaking collection of foreign payments of interest/dividends using coupons, checks, or bills of exchange to obtain a license from the Collector and comply with regulations; knowing collection without license/compliance is a misdemeanor punishable by a fine not exceeding PHP 10,000, imprisonment not exceeding 1 year, or both, per offense.
Section 9(e) directs that normal tax on gains/profits/income not returned/paid under the Act or otherwise by law is assessed through personal return under regulations approved by the Secretary of Finance, with the tax paid by the owner or proper representative.
Section 9(e) provides that Section 9’s provisions (except Section 9(c) on withheld deduction) apply only to the normal tax on nonresident alien individuals.

Corporate income tax: rates and coverage

Section 10(a) imposes an annual income tax of 2% on the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company, partnership, joint-account (cuenta en participación), association, or insurance company organized in the Philippine Islands, excluding duly registered general co-partnerships (compañías colectivas).
Section 10(a) imposes the same 2% on the total net income received from all sources within the Philippine Islands by entities organized/authorized/existing under foreign laws, including interest on bonds/notes/interest-bearing obligations of residents and income from dividends or net profits subject to Section 10(a).
Section 10(a) provides that fair market value as of March 1, 1913 is used to compute gain or loss from disposition of property acquired before March 1, 1913.
Section 10(a) provides the tax rate applies to taxable corporate net income in calendar year nineteen hundred and nineteen and each year thereafter.

Corporate exemptions and deductions

Section 11(a) exempts under the corporate chapter income received by enumerated organizations, including labor/agricultural/horticultural organizations, mutual savings banks without capital stock, cooperative banks without capital stock for mutual purposes, fraternal beneficiary societies operating under the lodge system, certain loan/building associations under the Corporation Law, cemetery companies exclusively for members, and corporations/associations organized and operated exclusively for religious/charitable/scientific/educational purposes with no private inurement, while providing taxability for income from properties except expressly exempt income.
Section 11(a) exempts certain non-stock/profit organizations such as business leagues/chambers of commerce/boards of trade not organized for profit, civic leagues for social welfare, pleasure/recreation clubs not for profit, and various mutual insurance/ditch/irrigation/telephone companies of purely local character whose income consists solely of assessments, dues, and fees for meeting expenses.
Section 11(a) exempts farmers’ or fruit growers’ associations organized and operated as sales agents turning over proceeds less necessary selling expenses to members based on quantity of produce furnished.
Section 11(a) exempts title-holding corporations/associations that collect income and turn over the entire amount less expenses to another tax-exempt organization, and exempts a joint-stock land bank as to income derived from bonds/debentures of other joint-stock land banks or any land bank belonging to such joint-stock land bank.
Section 11(b) exempts income derived from public utilities or exercise of essential governmental function accruing to the Government of the Philippine Islands or political subdivisions; it also provides a contract-based exemption where a province/city entered in good faith into a contract before passage of the Act to acquire/construct/operate/maintain a public utility and taxing that income would impose loss/burden on the local government—while preserving tax for any portion where the recipient is entitled under the contract.
Section 12(a) permits corporate deductions from gross income for entities organized in the Philippines, including:
- ordinary and necessary expenses of maintenance/operation including rentals for continued use/possession of property without title or equity;
- losses actually sustained and charged off within the year not compensated by insurance, including depreciation/flow/depletion allowances with rules and caps (including “no further allowance” once allowances equal original capital or March 1, 1913 fair market value for prior acquisitions), and specific insurance-company reserve/policy/annuity treatment;
- interest paid within the year on indebtedness, subject to limits tied to paid-up capital and interest-bearing indebtedness (and special treatment excluding preferred capital stock from being treated as interest-bearing indebtedness);
- taxes paid within the year to foreign governments and Philippine governments (excluding local benefits).
Section 12(b) provides corresponding deductions for corporations organized/authorized/existing under foreign laws, limited to expenses, losses, and taxes attributable to business/property within the Philippine Islands.

Corporate returns: deadlines, places, fiscal-year option

Section 13(a) allows a taxable corporation to designate the last day of any month as the closing of its fiscal year and compute tax based on net income for the year ending on that designated day instead of the calendar year ending immediately preceding assessment, provided it gives notice to the Collector not less than thirty days prior to the first day of March of the year in which the return would be filed.
Section 13(b) requires corporations to render a sworn, true and accurate return on or before March 1, 1920 and on or before March 1 of each year thereafter, or within sixty days after the close of the designated fiscal year ending prior to December 31, 1920 and each fiscal year thereafter.
Section 13(b) requires returns in the form and manner prescribed by the Collector with Secretary of Finance approval and requiring facts/data/information needed to determine correctness of net income and implement the Act.
Section 13(b) requires the return to be sworn to by the president, vice-president, or other principal officer and by the treasurer or assistant treasurer.
Section 13(b) provides filing/transmittal rules: returns are made to the Collector or provincial treasurer in the province where the principal office is located (where books/data are kept), or for foreign corporations to the Collector/provincial treasurer where principal place of business is located; if no office/agency exists, the filing is with the Collector of Internal Revenue, and the receiving officer must transmit the returns forthwith to the Collector.
Section 13(c) requires that receivers, trustees in bankruptcy, or assignees operating taxable corporations/partnerships/associations must make returns in the same manner and form as the organizations themselves, with tax assessed/collected as if directly against the organizations.
Section 13(d) permits returns based on accounting methods other than actual receipts/disbursements only if such basis clearly reflects income and under regulations by the Collector with Secretary of Finance approval.

Corporate withholding cross-references

Section 13(e) makes withholding/deduction-at-source provisions applicable to tax imposed under Section 10(a) on interest on bonds/mortgages or similar obligations paid to nonresident alien firms/partnerships/companies/corporations/joint-stock companies/partnerships/insurance companies not engaged in business/trade within the Philippines and without office/place of business there.
Section 13(f) likewise makes withholding/deduction-at-source provisions applicable to income derived from dividends on capital stock or net earnings of domestic or resident corporations and similar entities by nonresident aliens not engaged in business/trade within the Philippines and without an office/place of business there.

Corporate assessments and penalties

Section 14(a) requires corporate assessments by the Collector of Internal Revenue with notice on or before June 1 and payment on or before June 15; for corporations computing taxes on a designated fiscal year basis, payment is due within 105 days after required filing of its list/return.
Section 14(a) permits the Collector, when returns are refused/neglected or are erroneous/false/fraudulent, to discover within three years after the return is due or made and make a return based on information or require correction; the assessment becomes payable immediately upon notification.
Section 14(a) imposes additions for unpaid corporate tax: 5% plus interest at 1% per month after June 15 or after 105 days from the date the return is required to be made, with ten days’ notice and demand by the Collector.
Section 14(a) allows taxpayers to file a claim for refund when examination shows tax paid in excess of properly due amounts.
Section 14(b) provides that returns and corrections filed with the Collector constitute public records open to inspection as such upon order of the Governor-General under rules and regulations prescribed by the Secretary of Finance.
Section 14(c) imposes a penalty for failure/refusal to file a return or for false/fraudulent returns: liability of not exceeding PHP 20,000, with authority of the Collector to grant a reasonable extension of time in meritorious cases.
Section 14(d) bars recovery of taxes collected under a second assessment made on the ground that an original list/statement/return was false/fraudulent or contained understatement/undervaluation, unless the taxpayer proves the return was not false/fraudulent and did not contain understatement/undervaluation; the limitation does not apply to statements/returns made in good faith regarding annual depreciation of oil or gas wells and mines.

General administration: assessments and additions

Section 15 vests assessment authority for all income taxes in the Collector of Internal Revenue.
Section 15 requires additions to tax for failure to make and file a return/list within prescribed time: 50% of the tax amount is added, except where a return/list is voluntarily filed without notice after the deadline and failure is due to reasonable cause and not willful neglect.
Section 15 requires 100% addition to tax in cases of willfully made false or fraudulent return/list.
Section 15 requires collection of added amounts at the same time and in the same manner as part of the tax unless the tax was already paid before discovery of neglect/falsity/fraud, in which case added amounts are collected in the same manner as the tax.