Philippine National Internal Revenue Code 1939

Bureau of Internal Revenue (BIR) functions

Section 2 establishes that the Bureau has one Collector of Internal Revenue and one Deputy Collector of Internal Revenue.
Section 3 provides that the Bureau’s powers and duties include:
- collection of all national internal-revenue taxes, fees, and charges, and
- enforcement of all forfeitures, penalties, and fines connected therewith.
Section 3 also provides that the Bureau administers the supervisory and police power conferred to it by this Code or other laws.
Section 17 requires the Collector to submit an annual report containing a detailed statement of collections and disbursements, with specifications of revenue sources and classes of disbursements.

Mandatory BIR regulations

Section 4 directs that BIR regulations must specify, prescribe, or define numerous operational matters, including:
- how provincial treasurers canvass provinces to discover persons and property liable to national internal revenue taxes, and how lists/records are kept;
- labeling/branding/marking requirements for goods subject to specific tax and the treatment of goods intended for export;
- procedures respecting institution and conduct of legal actions and proceedings by revenue officers and other officials;
- recordkeeping conditions for persons authorized to have and keep prohibited drugs;
- import conditions for opium, including storage, removal, and prior removal marking/labeling;
- conditions for transfer of prohibited drugs between authorized possessors;
- rules for bonded warehouse conveyance and storage, including record entries, books kept by storekeepers, and reports;
- rules for denaturing alcohol for arts/industries, including denaturing materials, bonds, records, entries, reports, and displayed signs;
- how revenue is collected and paid, including instruments for revenue collection, stamp affixation and cancellation, book/record/invoice requirements, and handling of licenses and stamps;
- enforcement-related conditions for Title III on estate, inheritances, legacies, acquisitions mortis causa, gifts, and other related rules and prohibitions; and
- the manner income tax returns, information, and reports are prepared and reported, evidence of payment furnished, and preparation/publication of income tax statistics.
Section 4 requires these regulatory provisions as the Bureau’s administrative implementation mechanism across the Code’s operational and enforcement areas.

Collector, agents, officers, and authority

Section 5 requires the Collector to prescribe, provide, and distribute to proper officials the necessary licenses, internal-revenue stamps, labels/tags for sealing weights and measures, and all other forms, certificates, bonds, records, invoice books, instruments, and appliances/apparatus used in administering Bureau laws.
Section 6 constitutes:
- the Insular Collector of Customs and subordinates as agents of the Collector of Internal Revenue for collection on imported articles, and
- provincial and City treasurers and deputies as deputies for collection of other national internal revenue and enforcement of Bureau laws.
Section 8 empowers the Collector, with approval of the Department Head, to divide the Philippines into internal-revenue inspection districts, each supervised by a provincial revenue agent.
Section 9 imposes duties on provincial revenue agents and officers to:
- faithfully execute and ensure compliance with laws and regulations affecting national internal revenues;
- aid prevention, detection, and punishment of frauds or delinquencies connected with national internal revenue;
- examine efficiency of Bureau officers/employees and report in writing neglect of duty, incompetency, delinquency, or malfeasance with facts and evidence.
Section 9 authorizes a provincial revenue agent to suspend from duty any storekeeper or secret service agent by written notice, requires immediate notification to the Collector, and requires reporting action and reasons within three days.
Section 10 allows an assistant or examiner to exercise, in the name of the provincial revenue agent and under immediate superior control, any power or perform any act that the provincial revenue agent may do.
Section 11 directs the Collector to employ and assign storekeepers or secret service agents to establishments or places where specific-tax articles are produced or kept.
Section 12 allows the Collector, with approval of the Secretary of Finance, to assign Bureau agents, officers, and employees to special duties connected with administration of revenue laws without change in official character or salary.
Section 13 requires immediate reporting by an internal-revenue officer who discovers evidence of a violation warranting criminal proceedings, including offender name/address and witness names if possible; it also provides for direct reporting in urgent cases with a copy to the Collector.
Section 14 grants authority to specified BIR and treasurer personnel to make arrests and seizures for violation of any penal law or regulation administered by the Bureau, and mandates that persons arrested be forthwith carried before a magistrate for treatment according to law.
Section 16 authorizes specified Bureau officers and deputized employees to administer oaths and take testimony in official matters or investigations within Bureau jurisdiction.

Revenue collection costs and assessments

Section 7 requires that expenses incurred by provincial, city, and municipal authorities in collecting national internal revenue and enforcing Bureau laws—including court appearance expenses in internal-revenue cases—are borne by the respective provinces and cities.
Section 15 empowers the Collector to make assessments when:
- a report required as a basis for assessment is not forthcoming within the time fixed by law or regulation, or
- there is reason to believe such report is false, incomplete, or erroneous.
Section 15 requires the Collector to assess the proper tax on the best evidence obtainable.
Section 15 authorizes special termination/acceleration of tax periods when the Collector learns a taxpayer is retiring, leaving the Philippines, removing property, hiding or concealing property, obstructing collection proceedings for the past or current quarter or year, or rendering such proceedings totally or partly inefficient.
Section 15 mandates notice to the taxpayer requesting immediate payment of the tax for the declared terminated tax period and the preceding year/quarter (or unpaid portion), and provides that the taxes are due and payable immediately and subject to penalties unless paid within the request time.

Income Tax: application window and scope

Section 20 provides that Title II applies only to income received from January first, nineteen hundred and thirty-nine.
Section 21 imposes annual income tax on the entire net income received in the preceding taxable year of the Philippines by citizens or residents of the Philippines.
Section 22 imposes income tax on non-resident alien individuals based on whether they are engaged in trade or business within the Philippines or have an office/place of business therein.
Section 24 imposes annual corporate income tax on corporations organized in, or existing under, the laws of the Philippines and on foreign corporations for income within the Philippines, with an explicit exception for duly registered general co-partnerships (compania colectivas).
Section 27 provides institutional exemptions from corporate taxation for enumerated categories of organizations as income received by them as such.

Rates and personal exemptions for individuals

Section 21 sets progressive tax rates for citizens or residents of the Philippines computed annually on entire net income, expressed as percentages “per annum” on the excess over specified peso thresholds, including:
- 1% up to 2,000 pesos,
- 2% on the excess over 2,000 to 4,000,
- 3% on the excess over 4,000 to 6,000,
- 4% on the excess over 6,000 to 10,000,
- 5% on the excess over 10,000 to 20,000,
- 6% on the excess over 20,000 to 30,000,
- 7% on the excess over 30,000 to 40,000,
- 8% on the excess over 40,000 to 50,000,
- 9% on the excess over 50,000 to 60,000,
- 10% on the excess over 60,000 to 70,000,
- 11% on the excess over 70,000 to 80,000,
- 12% on the excess over 80,000 to 90,000,
- 13% on the excess over 90,000 to 100,000,
- 14% on the excess over 100,000 to 120,000,
- 15% on the excess over 120,000 to 140,000,
- 17% on the excess over 140,000 to 160,000,
- 19% on the excess over 160,000 to 180,000,
- 21% on the excess over 180,000 to 200,000,
- 23% on the excess over 200,000 to 225,000,
- 25% on the excess over 225,000 to 275,000,
- 29% on the excess over 275,000 to 300,000,
- 31% on the excess over 300,000 to 350,000,
- 33% on the excess over 350,000 to 400,000,
- 35% on the excess over 400,000 to 450,000,
- 37% on the excess over 450,000 to 500,000,
- 39% on the excess over 500,000 to 600,000,
- 41% on the excess over 700,000 to 800,000,
- 42% on the excess over 800,000 to 1,000,000,
- 43% on the excess over 1,000,000 to 1,500,000,
- 44% on the excess over 1,500,000 to 2,000,000,
- 45% on the excess over 2,000,000.
Section 22(a) imposes that non-resident aliens engaged in trade or business within the Philippines or having an office/place of business are taxed under Section 21.
Section 22(b) imposes an 8% tax on non-resident aliens not engaged in trade/business and not having an office/place of business on their entire net income from sources within the Philippines for each taxable year.
Section 22(b) provides that if the total net income exceeds 80,000 pesos, the rates established in Section 21 apply.
Section 22(b) provides that if the non-resident alien files a true and accurate return on or before the date fixed for filing returns under this Title, the tax is computed at Section 21 rates regardless of income declared.
Section 23 establishes personal exemptions:
- 1,000 pesos for single individuals or married persons legally separated.
- 2,500 pesos for married persons not legally separated or heads of family, with only one 2,500 pesos exemption for the aggregate income of both spouses when not legally separated.
- “Head of a family” includes unmarried persons with dependent parents/siblings/children under specified age/ dependency criteria.
- 500 pesos additional exemption per dependent legitimate/recognized natural/adopted child under 21 years of age or incapable of self-support due to mental/physical disability, but only if the taxpayer is the head of a family.
- For status changes during the taxable year, exemptions are apportioned by months, disregarding a fractional part of a month unless it amounts to more than half a month, in which case it is considered a month.
- Non-resident alien individuals may claim personal exemptions equal to the exemptions allowed in their home country for citizens not residing there, but not exceeding the amount in Section 23 for citizens/residents, provided they file a true and accurate return of total income from all sources in the Philippines.

Corporate income tax and anti-avoidance

Section 24 imposes a tax of 8% on total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under, the laws of the Philippines, except duly registered general co-partnerships (compania colectivas).
Section 24 imposes a like 8% tax on foreign corporations for total net income received in the preceding taxable year from sources within the Philippines.
Section 24 provides that for dividends received by a corporation liable to tax under this Chapter, only 25% of dividends are returnable for purposes of the section’s tax.
Section 25 imposes an additional tax of 25% of the undistributed portion of accumulated profits or surplus for each taxable year if a corporation (except banks, insurance companies, or personal holding companies) is formed or availed of to prevent tax on shareholders by accumulating gains/profits instead of distributing them.
Section 25(a) characterizes the additional tax as in addition to Section 24, to be computed, collected, and paid in the same manner and subject to the same provisions, including penalties.
Section 25(b) provides that a mere holding company is prima facie evidence of a purpose to avoid shareholder/member tax, and that investment companies with more than 50% of outstanding stock owned (directly or indirectly) by one person face a similar presumption.
Section 25(c) provides that permitting corporate earnings/profits to accumulate beyond the reasonable needs of the business is determinative of avoidance purpose unless the corporation proves otherwise by clear preponderance of evidence.
Section 26 provides that persons carrying on business in a duly registered general co-partnership (compania colectiva) are liable for income tax only in their individual capacity, and partners must return for taxation their entitled shares of profits whether divided or otherwise.

Corporate tax exemptions

Section 27 exempts enumerated organizations from tax under Title II in respect of income received by them as such, including:
- labor, agricultural, or horticultural organizations;
- mutual savings bank without capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;
- fraternal beneficiary societies/orders/associations operating under the lodge system or exclusively for members’ benefit and providing specified life/sick/accident/other benefits;
- loan and building associations operating under the Corporation Law provisions referenced in the section (sections 171 to 190 as amended);
- cemetery companies owned and operated exclusively for the benefit of members;
- corporations/associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural, or educational purposes with no part of net income distributed to private stockholders/individuals.
Section 27 provides that even for the religious/charitable/scientific/athletic/cultural/educational exemption, income from properties (real/personal) is generally liable unless expressly exempted by Title II.
Section 27 exempts business leagues, chambers of commerce, or boards of trade not organized for profit and with no inurement of net income to private stockholders/individuals.
Section 27 exempts civic leagues/organizations not organized for profit operated exclusively for the promotion of social welfare.
Section 27 exempts clubs organized and operated exclusively for pleasure, recreation, and other non-profitable purposes with no inurement to private stockholders/members.
Section 27 exempts specified mutual/local organizations such as farmers’ or mutual typhoon or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, and similar organizations of a purely local character if their income consists solely of assessments/dues/fees from members solely to meet expenses.
Section 27 exempts farmers’/fruit growers’ or similar associations organized and operated as sales agents to market members’ products and turn back proceeds less necessary selling expenses based on quantity furnished.
Section 27 exempts corporations/associations organized for the exclusive purpose of holding title to property, collecting income, and turning over the entire amount thereof less expenses to an organization that itself is exempt under Title II.

Net income computation and definitions

Section 28 defines “net income” as gross income computed under Section 29 less deductions allowed under Section 30.
Section 29(a) defines “gross income” as gains, profits, and incomes derived from salaries/wages/compensation, professions/vocations/trades/business/commerce/sales/dealings in property, interests/rents/dividends/securities, and gains/profits/income from any source whatever.
Section 29(b) provides exclusions from gross income (exempt from taxation under Title II) including proceeds of life insurance paid upon death (and interest payments if held by insurer under an agreement to pay interest), return of premium on life insurance/endowment/annuity contracts, gifts/bequests/devise/descent (but income from such property is included), interest on U.S. obligations and Government of the Philippines obligations (with limits tied to the authorizing acts), compensation for injuries or sickness under insurance/Workmen’s Compensation Acts plus damages for injuries/sickness, income required by treaty obligations, and specified miscellaneous items including foreign government investment income in the Philippines and certain essential governmental function/public utility income to the Government or a political subdivision.
Section 30 allows deductions in computing net income, including:
- ordinary and necessary trade/business expenses (including reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in pursuit of trade or business; rentals or other payments required for continued use/possession of property not owned or not held with equity);
- interest paid within the taxable year on indebtedness, excluding interest on indebtedness incurred/continued to purchase/carry obligations whose interest is exempt under Title II;
- taxes paid or accrued within the taxable year excluding income tax under Title II and several other taxes listed, including estate/inheritance/gift taxes and taxes assessed against local benefits tending to increase property value.
Section 30(c)(1) excludes from taxes deductions:
- the income tax provided for under Title II;
- income, war-profits, and excess-profits taxes imposed by specified governments/foreign countries (with an exception referenced for credit for taxes of foreign countries);
- estate, inheritance and gift taxes; and
- taxes assessed against local benefits tending to increase property value.
Section 30(c)(3) authorizes credits against tax for foreign taxes for taxpayers who signify in the return, with limits on who gets the credit and how it is computed.
Section 30(c)(4) limits credits:
- the credit for tax paid to any country cannot exceed the proportion of the tax against which credit is taken based on net income from sources within that country taxable under Title II; and
- the total credit cannot exceed the proportion of the tax based on net income from sources without the Philippines taxable under Title II.
Section 30(c)(5) requires taxpayer notice when accrued taxes differ from claimed credits or when tax paid is refunded, and empowers the Collector to predetermine amounts for affected years; any due amount must be paid upon notice and demand, or overpayments credited/refunded.
Section 30(c)(6) allows credits to be taken in the year the foreign taxes accrue at taxpayer option (subject to paragraph (5)), and mandates that if elected for accrued-year credits, subsequent years follow the same basis and no portion of the foreign taxes is allowed as deduction in the same or any succeeding year.
Section 30(c)(7) requires that credits are allowed only if the taxpayer proves to the Collector’s satisfaction:
- total income from sources without the Philippines,
- income by each country for which credits are claimed, with the amounts determined under rules/regulations by the Secretary of Finance,
- and other information necessary for verification and computation.
Section 30(d) allows losses sustained during the taxable year with detailed rules for individuals, corporations, and non-resident aliens/foreign corporations, including limits for capital losses, wash sales, wagering losses, and casualty/robbery-theft/embezzlement rules.
Section 30(e) allows bad debts actually ascertained to be worthless and charged off within the taxable year, with separate treatment for non-resident aliens/foreign corporations.
Section 30(f) allows depreciation via reasonable allowance for deterioration arising from use or non-use in the business/trade, with conditions where allowances equal capital invested (or fair market value as of March 1, 1913 for certain purchases), and special computation/apportionment rules for life estates and trusts.
Section 30(g) allows depletion for oil/gas wells and mines under detailed constraints, including maximum depletion for mines not exceeding the market value in the mine of products mined and sold during the year, and requiring deductions under rules/regulations by the Secretary of Finance, with corresponding limitations for non-resident aliens/foreign corporations tied to Philippines locations.
Section 30(h) allows charitable contributions/donations made within the taxable year or for use of the Government of the Philippines or political subdivisions for exclusively public purposes, or to qualifying domestic corporations/associations for specified purposes, subject to percentage caps:
- not in excess of 6% of the taxpayer’s taxable net income for individuals, and
- 3% for corporations,
- with deductions allowed only if verified under rules/regulations of the Secretary of Finance.
Section 30(i) conditions non-resident alien deduction benefits on filing a true and accurate return of total income from all sources in the Philippines; otherwise, the Collector collects tax on such income.
Section 30(j) allows employers establishing or maintaining pension trusts to provide reasonable pensions to employees a deduction for reasonable amounts transferred/paid into the trust in excess of contributions covering pension liability accruing during the year, but only if:
- the amount has not heretofore been allowable as a deduction, and
- the amount is apportioned in equal parts over ten consecutive years beginning with the year of transfer/payment.

Non-deductible items and related-loss limitations

Section 31(a) prohibits any deductions for:
- personal, living, or family expenses;
- amounts paid for new buildings or permanent improvements/betterments increasing property/estate value;
- amounts expended restoring property or making good exhaustion for which an allowance is or has been made; and
- premiums on life insurance policy covering an officer/employee or a financially interested person when the taxpayer is directly or indirectly a beneficiary under the policy.
Section 31(b) prohibits deductions for losses from sales or exchanges of property between specified related parties and fiduciary/trust relationships, including:
- between members of a family (defined for this section to include specified blood relatives, spouse, ancestors, and lineal descendants);
- between an individual and a corporation with more than 50% stock ownership by the individual (with a liquidation exception stated);
- between two corporations with more than 50% stock ownership by the same individual where specified personal holding company conditions exist;
- between a grantor and fiduciary of a trust; between fiduciaries of two trusts where the same person is grantor of both; between fiduciary of a trust and beneficiary of such trust.
Section 32 establishes special insurance-company computation rules:
- insurance companies may deduct net additions required by law to reserve funds and sums other than dividends paid on policy and annuity contracts;
- mutual insurance companies treat premium deposits returned to policyholders as not returning part of premium deposits as income, while taxing income from other sources plus retained premium deposits for purposes other than losses/expenses and reinsurance reserves;
- mutual marine insurance companies include gross premiums collected/received less reinsurance payments, and may deduct amounts repaid to policyholders for premiums previously paid, plus interest between ascertainment and payment;
- life insurance companies do not include as income actual premium portions paid back/credited/treated as premium abatement within the year for the policyholder;
- assessment insurance companies treat actual deposits made with Government officers pursuant to law as payments required by law to reserve funds.
Section 33 disallows wash sale losses where substantially identical stock/securities are acquired within a period beginning 30 days before after the sale or disposition date, except for dealers in stocks/securities whose claims are made in ordinary course.
Section 34 defines “capital assets” and provides capital gain/loss computation rules:
- capital assets are property held by the taxpayer (whether or not connected with trade/business) but exclude stock in trade/inventory-type property, property held primarily for sale to customers, and depreciable property under depreciation rules.
- only 50% of gain or loss recognized on sale/exchange of capital assets is taken into account.
- capital losses are allowed only to the extent of capital gains, subject to exceptions for banks/trust companies on specified bonds/debentures/notes/certificates.
- retirement proceeds for specified bonds/debentures/notes/evidence of indebtedness are treated as amounts received in exchange.
- short sale gains/losses and option failure gains/losses are treated as capital gains/losses.
Section 35 requires determining gain or loss from disposition under a schedule:
- property acquired before March 1, 1913 is valued using fair market price/value as of March 1, 1913;
- property acquired on or after March 1, 1913 is valued using cost if acquired by purchase or fair market price/value as of acquisition date if acquired by gratuitous title;
- for exchanges, property received is treated as equivalent of money equal to its fair market value on the exchange date.
Section 36 authorizes the Collector to require inventories when necessary to clearly determine income, using a basis set by Secretary of Finance regulations conforming to best accounting practice and clearly reflecting income.
Section 37 provides rules for income from sources within the Philippines, including specific items such as:
- interest derived from sources within the Philippines and interest on bonds/notes/other obligations of residents; and
- dividends received from domestic corporations and specified foreign corporation dividend rules.