SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the Philippine Islands by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.
(b) In addition to the income tax imposed by subdivision (a) of this section, herein referred to as the normal tax, there shall be levied, assessed, collected, and paid upon the total net income of every individual, or, in the case of a nonresident alien, the total net income received from all sources within the Philippine Islands, an additional income tax, herein referred to as the additional tax, of one per centum per annum upon the amount by which such total net income exceeds twenty thousand pesos and does not exceed forty thousand pesos; two per centum per annum upon the amount by which such total net income exceeds forty thousand pesos and does not exceed sixty thousand pesos; three per centum per annum upon the amount by which such total net income exceeds sixty thousand pesos and does not exceed eighty thousand pesos; four per centum per annum upon the amount by which such total net income exceeds eighty thousand pesos and does not exceed one hundred thousand pesos; five per centum per annum upon the amount by which such total net income exceeds one hundred thousand pesos and does not exceed one hundred and fifty thousand pesos; six per centum per annum upon the amount by which such total net income exceeds one hundred and fifty thousand pesos and does not exceed two hundred thousand pesos; seven per centum per annum upon the amount by which such total net income exceeds two hundred thousand pesos and does not exceed two hundred and fifty thousand pesos; eight per centum per annum upon the amount by which such total net income exceeds two hundred and fifty thousand pesos and does not exceed three hundred thousand pesos; nine per centum per annum upon the amount by which such total net income exceeds three hundred thousand pesos and does not exceed five hundred thousand pesos; ten per centum per annum upon the amount by which such total net income exceeds five hundred thousand pesos and does not exceed one million pesos; eleven per centum per annum upon the amount by which such total net income exceeds one million pesos and does not exceed one million five hundred thousand pesos; twelve per centum per annum upon the amount by which such total net income exceeds one million five hundred thousand pesos and does not exceed two million pesos, and thirteen per centum per annum upon the amount by which such total net income exceeds two million pesos.
For the purposes of the additional tax there shall be included as income the income derived from dividends or net earnings subject to the tax established in subsection (a) of section ten.
All the provisions of this Law relating to the normal tax on individuals, so far as they are applicable and are not inconsistent with this subdivision and section three, shall apply to the imposition, levy, assessment, and collection of the additional tax imposed under this subdivision. .
(c) The foregoing normal and additional tax rates shall apply to the entire net income, except as hereinafter provided, received by every taxable person in the calendar year nineteen hundred and nineteen and in each year thereafter.
INCOME DEFINED
SEC. 2. (a) Subject only to such exemptions and deductions as are hereinafter allowed, the taxable net income of a person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains, profits and income derived from any source whatever.
(b) Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust, including such in come accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed.
Such trustees, executors, administrators, and other fiduciaries are hereby indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Law, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries.
(c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.
ADDITIONAL TAX IS LEVIED ON UNDISTRIBUTED PROFITS.
SEC. 3. For the purpose of the additional tax, the taxable income of any individual shall include the share to which he would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations, joint-stock companies, partnerships, joint-accounts (cuentas en participation), associations or insurance companies, however created or organized, when such gains or profits have been fraudulently accumulated or retained for the purpose of evading the payment of the additional tax upon them; and the fact that any such corporation, joint-stock company, partnership, joint-account (cuentas en participacion), association, or insurance company, is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a fraudulent purpose to escape such tax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the said tax in such case unless the Secretary of Finance shall certify that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Collector of Internal Revenue such corporation, joint-stock company, partnership, joint-account (cuenta en participation), association, or insurance company shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed.
INCOME EXEMPT BY LAW.
SEC. 4. The following incomes shall be exempt from the provisions of this Law:
(a) The proceeds of life insurance policies paid to beneficiaries upon the death of the insured.
(b) The amount received by the insured, as a return of premium or 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.
(c) The value of property acquired by gift, bequest, devise, or descent, but the income from such property shall be included as income.
(d) Interest upon the obligations of the United States . to the extent provided in the Act authorizing the issue thereof; interest upon the obligations of the Government of the Philippine Islands or any political subdivision thereof, but in the case of such obligations issued after January first, nineteen hundred and nineteen, only to the extent provided in the Act authorizing the issue thereof.
DEDUCTIONS AND CREDITS ALLOWED.
SEC. 5. In computing net income in the case of a citizen or resident of the Philippine Islands:
(a) For the purpose of the tax there shall be allowed as deductions—
First. The necessary expenses actually paid or incurred in carrying on any business or trade, not including personal, living, or family expenses.
Second. All interest paid within the year on his indebtedness except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as 'income under this Law.
Third. Taxes paid within the year imposed by any foreign government, by the Government of the Philippine Islands, or by any province, city, municipality, or township, not including those assessed against local benefits.
Fourth. Losses actually sustained during the year, incurred in his business or trade, or arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the loss sustained from the sale or other disposition of property, real, personal, or mixed acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss sustained.
Fifth. In transactions entered into for profit but not connected with his business or trade the losses actually sustained therein during the year to an amount not exceeding the profits arising there from.
Sixth. Debts due to the taxpayer actually ascertained; to be worthless and charged off within the year.
Seventh. A reasonable allowance for depreciation of property arising out of its use or employment in the business or trade.
Eighth, (a) In the case of oil and gas wells a reasonable -allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Collector of Internal Revenue with the approval of the Secretary of Finance: Provided, That when the allowances authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made.
Ninth. Contributions or gifts actually paid or made within the year to corporations or associations organized and ; operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual, to an amount not in excess of five per centum of the taxpayer's taxable net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Collector of Internal Revenue with the approval of the Secretary of Finance.
(b) For the purpose of the normal tax only, the income embraced in a personal return shall be credited with the amount received as dividends or net profits subject to the tax established in subsection (a) of section ten.
(c) A like credit shall be allowed as to the amount of income, the normal tax upon which has been paid or with held for payment at the source of the income under the provisions of this Law.
NONRESIDENT ALIENS.
SEC. 6. In computing net income in the case of a nonresident alien—
(a) For the purpose of the tax there shall be allowed as deductions:
First. The necessary expenses paid or incurred in carrying on any business or trade conducted by him within the Philippine Islands, not including personal, living or family expenses.
Second. The proportion of all interest paid within the year by such person on his indebtedness, except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under this Law, which the grows amount of his income for the year derived from sources within the Philippine Islands bears to the gross amount of his income for the year derived from all sources within and without the Philippine Islands, but this deduction shall be allowed only if such person includes in the return required by section eight all the information necessary for its calculation.
Third. Taxes paid within the year imposed by the Government of the United States, the Government of the Philippine Islands, or any province, city, municipality, or township, paid within the Philippine Islands, not including those assessed against local benefits.
Fourth. Losses actually sustained during the year incurred in business or trade conducted by him within the Philippine Islands, and losses of property within the Philippine Islands arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the amount of such loss or losses sustained in the sale or other disposal of real, personal or mixed property acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss or losses.
Fifth. In transactions entered into for profit but not connected with his business or trade, the losses actually sustained therein during the year to an amount not exceeding the profits arising there from in the Philippine Islands.
Sixth. Debts arising in the course of business or trade conducted by him within the Philippine Islands due to the taxpayer actually ascertained to be worthless and charged off within the year.
Seventh. A reasonable allowance for the depreciation of property within the Philippine Islands arising out of its use or employment in the business or trade:
(a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (a) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Collector of Internal Revenue with the approval of the Secretary of Finance: Provided, That when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property, 2nd no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made.
(b) There shall also be allowed the credits specified by subdivisions (b) and (c) of section five.
(c) A nonresident alien individual shall receive the benefit of the deductions and credits provided for in this section only by filing or causing to be filed with the Collector of Internal Revenue a true and accurate return of his total income, received from all sources, corporate or otherwise, in the Philippine Islands, in the manner prescribed by this Law ; and in case of his failure to file such return the Collector of Internal Revenue shall collect the tax on such income.
PERSONAL EXEMPTION.
SEC. 7. For the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income of each citizen or resident of the Philippine Islands, ascertained as provided herein, the sum of six thousand pesos, plus two thousand pesos additional if the person making the return be a head of a family or a married man with a wife living with him, or plus the sum of two thousand pesos additional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of two thousand pesos be deducted by both: Provided, That only one deduction of eight thousand pesos shall be made from the aggregate income of both husband and wife when living together: Provided further, That if the person making the return is the head of a family there shall be an additional exemption of four hundred pesos for each legitimate, recognized natural or adopted child dependent upon such person, if under eighteen years of age, or if incapable of self-support because mentally or physically defective: Provided further, That guardians or trustees shall be allowed to make this personal exemption as to income derived from the property of which such guardian or trustee has charge in favor of each ward or cestui que trust: Provided further, That in no event shall a ward or cestui que trust be allowed a greater personal exemption than as provided in this section, from the amount of net income received from all sources. There shall also be allowed an exemption from the amount of the net income of estates of deceased citizens or residents of the Philippine Islands during the period of administration or settlement, and of trust or other estates of citizens or residents of the Philippine Islands the income of which is not distributed annually or regularly under the. provisions of subdivision (b) of section two, the sum of six thousand pesos, including such deductions as are allowed under section five.
RETURNS.
SEC. 8. (a) The tax shall be commuted upon the net income, ascertained in accordance with the foregoing provisions, of each person subject thereto, received in each preceding calendar year ending December thirty-first.
(b) On or before the first day of March, nineteen hundred and twenty and the first day of March in each year thereafter, a true and accurate return under oath shall be made by each person of lawful age, except as hereinafter provided, having an income of six thousand pesos or over for the taxable year to the Collector of Internal Revenue or provincial treasurer of the province in which such person has his legal residence or principal place of business, or if there be no legal residence or place of business in the Philippine Islands, then with the Collector of Internal Revenue, in such form as the latter, with the approval of the Secretary of Finance, shall prescribe, setting forth specifically the gross amount of income from all separate sources, and from the total thereof deducting the aggregate items of allowances herein authorized: Provided, That the Collector of Internal Revenue shall have authority to grant a reasonable extension of time, in meritorious cases, for filing returns of income: Provided further, That the aforesaid return may be made by an agent when by reason of illness, absence, or nonresidence the person liable for said return is unable to make and render the same, the agent assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.
(c) Guardians, trustees, executors, administrators, receivers, conservators, and all persons, corporations, partnerships, joint-accounts (cuentas en participacion), or associations, acting in any fiduciary capacity, shall render a return of the income of the person, trust or estate for whom or which they act, and be subject to all the provisions of this Law which apply to individuals. Such fiduciary shall make oath that he has sufficient knowledge of the affairs of such person, trust, or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this Law which apply to individuals: Provided, That a return made by one of two or more joint fiduciaries filed in the province where such fiduciary resides, under such regulations as the Collector of Internal Revenue with the approval of the Secretary of Finance may prescribe, shall be a sufficient compliance with the requirements of this paragraph: Provided further, That no return of income not exceeding six thousand pesos shall be required except as in this Law otherwise provided.
(d) Persons carrying on business in general co-partnership (compañia colectiva) duly registered shall be liable for income tax only in their individual capacity, and the share of the profits of the general co-partnership (compañia colectiva) to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this Law: Provided, That from the net distributive interests on which the individual members shall be liable for tax, normal and additional, there shall be excluded their proportionate shares received from interests on the obligations of the United States to the extent provided in the Act authorizing the issue thereof; interest upon the obligations of the Government of the Philippine Islands or any political subdivision thereof, but in the case of such obligations issued after January first, nineteen hundred and nineteen, only to the extent provided in the Act authorizing the issue thereof, and that for the purpose of computing the normal tax there shall be allowed a credit for their proportionate share of the profits derived from the dividends or net profits subject to the tax established in subsection (a) of section ten. Such general co-partnership; (compañia colectiva), when requested by the Collector of Internal Revenue or his authorized deputies, shall render a correct return of its earnings, profits, and income, except income exempt under section four of this Act, setting forth the item of the gross income and the deductions and credits allowed by this Law, and the names and addresses of the individuals who would be entitled to the net earnings, profits, and income, if distributed. A general co-partnership (compania colectiva) shall have the same privilege of fixing its own fiscal year and making returns upon the basis of the same as accorded to corporations.
(e) An individual keeping accounts upon any basis other : than that of actual receipts and disbursements, unless such other basis does not clearly reflect his income, may, subject to regulations made by the Collector of Internal Revenue, with the approval of the Secretary of Finance, make his return upon the basis upon which his accounts are kept, in which case the tax shall be computed upon his income as so returned.
ASSESSMENT.
SEC. 9. (a) All assessments shall be made by the Collector of Internal Revenue and all persons shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year, and said amounts shall be paid on or before the fifteenth day of June, except in cases of refusal or neglect to make such return and in cases of erroneous, false, or fraudulent returns, in which cases the Collector of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, or has been made, make a return upon information obtained as provided for in this Law or by existing law, or require the necessary corrections, to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by such person or persons immediately upon notification of the amount of such assessment; and to any sum or sums due and unpaid after the fifteenth day of June in any year, and for ten days after notice and demand thereof by the Collector, there shall be added the sum of five per centum on the amount of tax unpaid, and interest at the rate of one per centum per month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons.
(b) All persons, corporations, joint-stock companies, partnerships, joint accounts (cuentas en participation),' associations, insurance companies, and general co-partner-ships (compañias colectivas), in whatever capacity acting, including lessees or mortgagors of personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, employers, and all officers and employees of the Government of the Philippine Islands having the control, receipt, custody, disposal, or payment of interests, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinate annual or periodical gains, profits, and income of any nonresident alien individual, other than income derived from dividends or net profits subject to the tax established in subsection (a) of section ten are hereby authorized and required to deduct and withhold from such annual or periodical gains, profits, and income such sum as will be sufficient to pay the normal tax thereon, and shall make return thereof on or before March first of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippine Islands authorized to receive the same; and they are each hereby made personally liable for such tax, and they arc each hereby indemnified against every person, corporation, joint stock company, partnership, joint-account (cusnta en participacion), association, or insurance company, or demand whatsoever by reason of the payment of the said tax.
(c) The normal tax herein before imposed shall also be deducted and withheld from fixed or determinable annual or periodical gains, profits, and income derived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of corporations, joint-stock companies, partnerships, joint-accounts (cuentas on participacion), associations, and insurance companies if such bonds, mortgages, or other obligations contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this Law upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain there from under any law of the Philippine Islands, whether payable annually or at shorter or longer periods and whether such interest is payable to a nonresident alien individual or to a citizen or resident of the Philippine Islands, subject to the provisions of the foregoing subdivision (b) of this section requiring the tax to be withheld at the source and deducted from annual income and returned and paid to the Government, unless the person entitled to receive such interest shall file with the withholding agent, on or before February first, a signed notice in writing claiming the benefit of an exemption under section seven of this Law.
(d) All persons, corporations, joint-stock companies, partnerships, joint-accounts (cuentas en participacion), associations, or general co-partnerships (compañias colectivas) undertaking for profit or otherwise the collection of foreign payments of interest or dividends by means of coupons, checks, or bills of exchange shall obtain a license from the Collector of Internal Revenue, and shall be subject to such regulations enabling the Government to obtain the information required under this Law, as the Collector of Internal Revenue, with the approval of the Secretary of Finance, shall prescribe; and whoever knowingly undertakes to collect such payments as aforesaid without having obtained a license there for, or without complying" with such regulations, shall be deemed guilty of a misdemeanor and for each offense, be fined in a sum not exceeding ten thousand pesos, or imprisoned for a term not exceeding one year, or both, in the discretion of the court.
(e) The tax herein imposed upon gains, profits, and incomes not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal return' under rules and regulations to be prescribed by the Collector of Internal Revenue and approved by the Secretary of Finance. The intent and purpose of this Law is that all gains, profits, and income of a taxable class, as denned by this Law, shall be charged and assessed with the corresponding tax, normal and additional, prescribed by this Law, and said tax shall be paid by the owner of such gains, profits and income, or the proper representative having the receipt, custody, control, or disposal of the same. For the purpose of this Law ownership of such gains, profits and income ; or liability to pay the tax shall be determined as of the year for which a return is required to be rendered.
The provisions of this section, except subdivision (c), relating to the deduction and payment of the tax at the source of income shall only apply to the normal tax herein before imposed upon nonresident alien individuals.
Source: Supreme Court E-Library, Republic of the Philippines. Philippine laws are public documents (works of the government).
