REYES Bar Reviewer On Taxation I (v.3)

PM REYES BAR REVIEWER ON TAXATION I
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013) This is the first installment of my two-part reviewer on taxation. This covers two topics: (1) General Principles of Taxation; and (2) Income Tax. It is a consolidated and updated version of my reviewers in Tax 1 and Taxation Law Review. This reviewer is based on notes from Atty. Montero and Assoc. Dean Gruba and the books and reviewers of Atty. Mamalateo and Atty. Domondon. I also added some stuff from Atty. Mickey Ingles reviewer and Justice Dimaampao. References have also been made to the 2013 Bedan Red Book and the 2012 UP Tax Reviewer. Further, I added the recent and relevant revenue regulations and other BIR issuances (especially those issued in 2012) and the latest SC and CTA jurisprudence (as of January 31, 2013). Most of the digests were sourced from Du Baladad and Associates (BDB Law) and from Baniqued & Baniqued. The reviewer will make reference to codal provisions. Thus, I recommend that you read this with a copy of the NIRC and other Laws Codal (2012 edition) by Atty. Sacadalan-Casasola Possessors may reproduce and distribute my reviewer provided my name remains clearly associated with my work and no alterations in the form and content of my reviewer are made. If you find this reviewer useful, please share it to others. May this reviewer prove useful to you. If it does, please share it to others. Happy studying! ---------------------------------------------------------------------------
It is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burden.
--------------------------------------------------------------B. Nature of Taxation --------------------------------------------------------------Q: What is the nature of the power of taxation?
The nature of the power of taxation is two-fold. It is both an inherent power and a legislative power. 1. An inherent power The power of taxation is inherent in the State, being an attribute of sovereignty. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it M ACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY VS. M ARCOS [261 SCRA 667]. This is so because the very existence of the State is dependent on taxes. 2. Legislative in character The power of taxation is essentially a legislative function. Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption in favor of legislative determination. Public policy decrees that since upon the prompt collection of revenue depends the very existence of government itself, whatever determination shall be arrived at by the legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition. [SARASOLA VS. TRINIDAD [40 PHIL. 252] It is a legislative power because it involves the promulgation of rules. The Constitution has allocated to the legislative department the enactment of law
TABLE OF CONTENTS
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I. General Principles of Taxation .................... 1 II. NIRC A. Income Tax .............................................. 45
---------------------------------------------------------I. GENERAL PRINCIPLES OF TAXATION -----------------------------------------------------------------------------------------------------------------------A. Definition and Concept of Taxation --------------------------------------------------------------Q: Define taxation
Taxation is the inherent power of the sovereign exercised through the legislature to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It is the mode of raising revenue for public purposes. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Page 1 of 158 Last Updated: 30 July 2013(v3)

(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
Q: May the legislature enact a law to raise revenues even in the absence of a constitutional provision granting the said body the power to tax?
Yes. The power to tax can be exercised by the government even if the Constitution is entirely silent on the subject. There is no need for a constitutional grant for the State to exercise this power. The power to tax is inherent in the State, being an attribute of sovereignty. This is so because the State can neither exist nor endure without taxes. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of power to the Government, but instead merely constitute as limitations upon a power which would otherwise be practically without limit Q: Why is the power to tax considered inherent in sovereignty? It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a government is a necessity. No sovereign State can continue to exist without the means to pay its expenses, and, for those means, it has the right to compel all citizens and properly within its limits to contribute; hence, the emergence of the power to tax.
--------------------------------------------------------------D. Power of Taxation compared with other powers --------------------------------------------------------------Q: Differentiate the power of taxation from police power and the power of eminent domain.
See table below.
TAXATION
EMINENT DOMAIN May be exercised by (1) government or political subdivisions OR (2) granted to public utilities The property is taken for public use and must be compensated
POLICE POWER Only by government or its political subdivisions
Authorit y who exercise s the power
Only by the government or its political subdivisions
Purpose
The property is taken for the support of the government
--------------------------------------------------------------C. Characteristics of Taxation --------------------------------------------------------------Note: This should properly refer to Characteristics or Elements of a Tax, not Characteristics of Taxation. In the event the question is asked, answer as if the question refers to characteristics of a tax. See Chapter 1, K. Characteristic of Tax. With reservations, however, as to the source, the 2013 Beda tax reviewer enumerates as characteristic of taxation the following: (1) Comprehensive (2) Unlimited (3) Plenary and (4) Supreme. It is submitted that the proper answer would make reference to the inherent limitations to the power of taxation. Atty. Domondon states that the inherent limitations on the power of taxation is also known as the elements, tenets or characteristics of taxation.
The use of the property is regulated for promoting the general welfare and is not compensable Operates on a community or class of individuals
Persons affected
Operates on a community or class of individuals
Operates on an individual as owner of a particular property There is a transfer of the right to property
Effect
The money contributed becomes part of the public funds
There is no transfer of title. At most, there is restraint on the injurious use of property The person affected receives
Benefits received
It is assumed that the
He receives the market value of the
PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

individual receives the equivalent of the tax in the form of protection and benefits he receives from the government Amount of impositi on Generally, there is no limit on the amount of tax that may be imposed
property taken from him
indirect benefits as may arise from the maintenance of a healthy economic standard of society
1. Revenue purposes: The basic purpose of taxation is to raise revenues. 2. Sumptuary or regulatory purpose: The secondary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of inhabitants
Q: What are non-revenue (or sumptuary) objectives of taxation?

1. Taxation can strengthen anemic enterprises; 2. Taxes may be increased in period of prosperity to curb spending power and halt inflation and lowered in periods of slump to expand business and ward off depression 3. Taxes on imports may be increased to protect local industries 4. Taxes on imported goods may be used as a bargaining tool by a country by setting trarrif rates first at a relatively high level before trade negotiations 5. Taxes can discourage certain business (e.g. tobacco and alcohol) 6. Taxes can also minimize inequity Some cases illustrating the non-revenue or sumptuary objectives of taxation: In PHILIPPINE COCONUT PRODUCERS FEDERATION VS. PCGG [178 SCRA 236], the Supreme Court held that the coconut industry is one of the major industries supporting the national economy. It is therefore, the States concern to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability. In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR [554 SCRA 411], the Supreme Court, on the issue of whether Health maintenance organizations (HMOs) were exempt from Documentary Stamp Tax (DST), held that it is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. HMOs, just like any concern organized
No amount imposed but rather the owner is paid the market value of property taken
Amount imposed should not be more than sufficient to cover license and necessary expenses Relatively free from constitutional limitations; it is superior to the impairment of contract provision
Relation ship to Constitu tion
Subject to certain constitutiona l limitations; including the impairment of obligation of contracts
Inferior to the impairment of obligations of contracts prohibition; government cannot expropriate property which under a contract it had previously bound itself to purchase
--------------------------------------------------------------D. Purposes of taxation 1. Revenue-raising 2. Non-revenue/special or regulatory --------------------------------------------------------------Q: What are the purposes of taxation?1
_________________________________________
1
Atty. Mamalateo enumerated six purposes or objectives of taxation, namely: (1) Revenue; (2) Regulatory; (3) Promotion of General Welfare; (4) Reduction of social inequity; (5) Encourage economic growth by granting incentives and exemptions; and (6)
protectionism. Note: It is submitted that items (3) to (6) can be considered subsumed under the regulatory purpose.

for a lawful economic activity have a right to maintain a legitimate business. Hence, HMOs should not be arbitrarily and unjustly included in the DST coverage. In TIO VS. VIDEOGRAM REGULATORY BOARD [151 SCRA 208], the Supreme Court held that the levy of 30% tax on videogram operators was imposed primarily to answer the need for regulating the video industry, particularly rampant film piracy and flagrant violation of intellectual property rights.
The distinction made by the Supreme Court in PROGRESSIVE DEVELOPMENT CORPORATION V. QUEZON CITY [172 SCRA 629] is particularly instructive. The Court stated that: If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if the regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax Thus, a (regulatory) fee is imposed for purposes of regulation (in exercise of police power) while a tax is imposed for revenue generation purpose (the power of taxation).
Q: May a tax be validly imposed in the exercise of police power and not of the power to tax?
Yes. The power of taxation may be used as an implement of police power of the State with the end in view of regulating a particular activity.
Note: Some authors and jurisprudence still refer to the imposition levied for the purpose of regulation as a tax. This is inaccurate and adds to confusion. The proper term, as used by the Supreme Court in numerous decisions should be regulatory fee or fee. In earlier cases, they were referred to as license fees. It is submitted that the use of the term tax should only be used to refer to an imposition for the purposes of revenue while the term fee is used for an imposition for purposes of regulation. As you will see later, the distinction between a tax and a fee is relevant as certain inherent and constitutional limitations apply only to one and no to the other. It is also important for purposes of tax exemptions.
Q: When an exaction is imposed to discourage certain businesses, is the exaction a tax?

No, it is a regulatory fee. In COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA 367], the Supreme Court held that the municipal license fees for the privilege to engage in the business of selling liquor or alcoholic beverages were imposed for regulatory purposes as such products are potentially harmful to public health and morals.
Q: When an exaction is imposed to provide means for the rehabilitation and stabilization of a threatened industry, is the exaction a tax?
No. Jurisprudence provides that such exactions are considered regulatory fees in light of their purpose. Some cases: In OSMENA V. ORBOS [220 SCRA 703], in determining whether the taxes collected for the Oil Price Stabilization Fund are taxes or regulatory fees, the Supreme Court stated that while the funds were referred to as taxes, they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. . In REPUBLIC V. BACOLOD-MURCIA MILLING [17 SCRA 632], in determining whether the levy for the Philippine Sugar Institute Fund is a fee or a tax, the Supreme Court held that such levy was not so much Page 4 of 158 Last Updated: 30 July 2013(v3)
Q: How do you determine if an imposition is a tax or a (regulatory) fee?

In determining whether an imposition is a tax or a regulatory fee, one must inquire into the following: 1. The purpose of the imposition 2. The amount of the exaction 3. The designation
Note: The criteria is based on Atty. Monteros lecture. This is particularly useful in analyzing whether an imposition is a tax or a fee.
The purpose of the imposition Q: How do you distinguish a tax from a regulatory fee in terms of its purpose?

an exercise of the power of taxation but an exercise of the police power to aid and support the sugar industry.
Q: Should universal charges (for electricity end-users) be considered a tax or a fee?

Universal charges are regulatory fees. In GEROCHI V. DOE [G.R. NO. 159796, JULY 17, 2007], in determining whether the Universal Charge imposed on electricity end-users by distributors is a tax, the Supreme Court held in the negative and stated that the universal charge is a regulatory fee levied to ensure the viability of the countrys electric power industry
Q: When the exaction is imposed to make a private company viable, is it a fee or a tax?
The exaction should be considered a tax. In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 SCRA 485], an Letter of Instruction was issue imposing a capital recovery component on the domestic sales of all fertilizer grades and such exaction shall be collected until adequate capital was raised to make Planters Product, a private company, viable. The Supreme Court held that the levy was invalid for not serving a public purpose as the ultimate beneficiary was a private company. Hence, the primary purpose was for revenue generation.
The amount of the exaction Q: How do you distinguish a tax from a regulatory fee in terms of the amount of the exaction?
If the amount levied is too high and/or if the amount levied is not related to costs of regulation, the exaction should be considered a tax as it is levied for revenue purposes. Some cases: In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA 270], in determining whether the exaction of P50.00 from aliens securing an employment permit (from the Mayor of Manila) is a fee or a tax, the Supreme Court held that the amount was too excessive and that there was no logic or justification in the exaction from aliens who have been cleared for employment. The Court opined that it was obvious that the purpose of the exaction is to raise money under the guise of regulation. In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 SCRA 485], the Supreme Court held that the amount collected from the imposition on the domestic sales of fertilizer grades was too excessive to serve a mere regulatory purpose. In AMERICAN M AIL LINE V. CITY OF BASILAN [2 SCRA 309], the Supreme Court stated that for fees to be regulatory in nature, the same must be no more than sufficient to cover the actual cost of inspection or examination.
Q: Are royalty fees (on a per liter basis) imposed on the movement of petroleum fuel to and from special economic zones a tax or a fee?
The royalty fees imposed on the movement of petroleum fuel are regulatory fees. As held in CHEVRON PHILIPPINES V. BCDA [SEPTEMBER 15, 2010], the royalty fees were exacted on a per liter basis because the higher the volume of fuel entering the special economic zone, the greater the extent and frequency of supervision and inspection required to ensure safety, security and order within the zone.
Q: Should margin fees be considered a tax or a fee?

Margin fees are regulatory fees. In ESSO STANDARD EASTERN V. CIR [175 SCRA 149], the company sought to deduct the margin fees it paid from its gross income. The Supreme Court held that the margin fees cannot be deducted as they are not taxes. Margin fees are imposed to curb excessive demand upon the international reserves in order to stabilize the currency. It is applied to strengthen the countrys international reserves and is not imposed for revenue purposes. Hence, as they are not taxes, they cannot be considered as a deductible business expense.

ANGELES UNIVERSITY V. CITY OF ANGELES [G.R. 189999, JUNE 27, 2012],

DOCTRINE: (1) A charge which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. (2) The fact that revenue is incidentally raised does not make the imposition a tax. FACTS: Angeles University Foundation (AUF), a nonstock, non-profit educational institution, filed with the City of Angeles a building permit for the construction of the building of the AUF Medical Center. The City Treasurer assessed AUF a Building Permit Assessment. AUF argues that it is exempt from the payment of the building permit fees (because it is a tax). The City argues that they are not exempt (because it is a regulatory fee). HELD: The building permit fees are regulatory fees. A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. In this case, AUF failed to demonstrate that the building fees were arbitrarily determined or unrelated to the activity being regulated. Neither has AUF adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection. While it is conceded that the revenue from the building fees is generated for the benefit of LGUs, the fact that the revenue is incidentally raised does not make the imposition a tax.
the effect that motor vehicle registrations fees are regulatory fees.
The Designation Q: Does designation matter in determining whether an exaction is a fee or a tax?
No. In Victorias Milling Co. vs. CIR [22 SCRA 13], the Supreme Court stated that the designation given by the authorities does not decide whether the imposition is properly a tax or a fee.
Note: It is submitted that the purpose of the exaction is the primary factor to consider. In GEROCHI V. DOE [527 SCRA 696], the Supreme Court stated the conservative and pivotal distinction between the power of taxation and police power rests in the purpose for which the charge is made.
Q: Can an exaction be considered both a tax and a regulatory fee?

There two views. FIRST VIEW: No, simply because they are levied for different purposes. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes ( G.A. CUUNJIENG V. PATSTONE [42 PHIL 818]; AMERICAN M AIL LINE V. CITY OF BASILAN [2 SCRA 309]) SECOND VIEW: Yes. An exaction can be considered both a tax and a regulatory fee through a combined exercise of police power and the power of taxation. This view finds support in the case of PCGG V. COJUANGCO [G.R. NO. 147062-64, DECEMBER 14, 2001] where the Supreme Court held that the coco levy funds were raised through the States police and taxing powers.
Note: It is submitted that the first view is the more acceptable view as it is consistent with the distinctions made between a tax and a fee. Thus, the rule should be plain and simple: If the imposition is for revenue purposes, it is a tax and it is in the exercise of the power to tax; if it is for regulatory purposes, it is a fee and it is in the exercise of police power.
Q: Can an imposition which, at first, was regulatory in nature be considered a tax because of the substantial increase in the amount collected?
Yes. In PAL V. EDU [164 SCRA 320], in determining whether the motor vehicle registration fees (MVRF) were taxes or fees, the Supreme Court held that while the MVRFs were originally intended for regulation, as motor vehicles became absolute necessities and vehicular traffic exploded in number, the registration of vehicles because a convenient way of raising revenues. Thus, their nature has become that of taxes notwithstanding the fact onefifth or less of the amount collected is set aside for operating expenses of the agency administering the program.
Note: This case reversed the doctrine previously held in REPUBLIC V. PHILIPPINE RABBIT BUS LINES [32 SCRA 211] to
Q: May the power of taxation be used as an implement of the power of eminent domain?
Yes. In CIR VS. CENTRAL LUZON DRUG CORPORATION [456 SCRA 413], the Supreme Court stated that the taxation power can be used as an implement for the Page 6 of 158 Last Updated: 30 July 2013(v3)

exercise of the power of eminent domain. It noted that the tax credit granted to private establishments giving senior citizen discounts can be deemed as their just compensation for private property taken by the State for public use.
--------------------------------------------------------------F. Principles of a sound tax system 1. Fiscal Adequacy 2. Administrative Feasibility 3. Theoretical Justice --------------------------------------------------------------Q: What the basic principles of a sound tax system?
The basic principles are the following: 1. Fiscal Adequacy The source of government revenue must be sufficient to meet governmental expenditures and other public needs 2. Theoretical Justice a good tax system must be based on the taxpayers ability to pay 3. Administrative feasibility taxes should be capable of being effectively enforced. In CHAVEZ V. ONGPIN [186 SCRA 331] , at issue was the validity of the increase, via an Executive Order, of the property values for purposes of real property taxes. The Supreme Court held that such was valid. One of the justifications was based on fiscal adequacy. The Court stated that fiscal adequacy requires that the sources of revenue must be adequate to meet government expenditures. To continue collecting at valuations arrived at several years ago is not in consonance with a sound tax system.
Note: The basic principles of a sound tax system are also known as the Canons of Taxation.
asserted that the substantiation requirements for claiming the input VAT were impractical and incapable of implementation as in order to claim input VAT, the name, address and TIN of the toll way user must be indicated in the VAT receipt or invoice. In addition, the rounding off of the toll rate and putting the excess collection in an escrow is illegal while the giving of the change to meet the exact toll rate would be a logistical nightmare. The Supreme Court held that while administrative feasibility is a canon of a sound tax system, the non-observance thereof will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.
Note: J. Dimaampao is of the view that if the tax law runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. It is submitted that this should be qualified. As to a violation of the principle of theoretical justice on the basis of uniformity, I submit that it would amount to a violation of the Constitution, specifically the equal protection clause. However, as to a violation of the principle of theoretical justice on the basis of equity, it is submitted that such would not be constitutionally infirm. The basis of this view can be found in the case of TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628] which held that the system of taxation need not be always progressive.
--------------------------------------------------------------G. Theory and Basis of Taxation 1. Lifeblood Theory 2. Necessity Theory 3. Benefits-Protection Theory (Symbiotic relationship) 4. Jurisdiction over subject and objects --------------------------------------------------------------Note: As explained by Atty. Domondon, the theory of taxation and the basis or rationale for taxation are two different concepts. The theory of taxation explains why there is a need to impose taxes while the basis or rationale for taxation explains the reason why a State may impose taxes. The theory of taxation refers to the lifeblood theory (and the necessity theory which is but an extension of the lifeblood theory). The basis or rationale of taxation refers to (1) the symbiotic relationship and (2) jurisdiction by the state over persons and property within its territory.
Q: Will a violation of the abovementioned principles render a tax law unconstitutional?

It depends. This was settled in the case of DIAZ V. SEC. OF FINANCE [JULY 19, 2011]. One of the grounds raised in assailing the validity of the imposition of VAT on the collection of toll way operators was that it violated the principle of administrative feasibility. Particularly, the petitioner PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

--------------------------------------------------------------1. Lifeblood Theory --------------------------------------------------------------Q: What is the lifeblood theory?

As stated in the case of CIR vs. Algue [158 SCRA 9], the existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. CIR vs. Algue [158 SCRA 9] The lifeblood theory states that an assessment of a tax is enforceable despite it being contested because of the urgency to collect taxes, this being the governments primary source of revenue. CIR v. Cebu Portland [156 SCRA 535]
In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], the Supreme Court stated that the requirement that the withholding agent should withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Likewise, validity of a tax cannot be assailed until after the taxpayer has paid the tax under protest. By questioning a taxs legality without first paying it, a taxpayer, in collusion with BIR officials, can unduly delay, if not totally evade, the payment of such tax. In CIR v. CTA [234 SCRA 348], the Supreme Court held that government cannot and must not be stopped in matters involving taxes as they are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457 SCRA 32], the Supreme Court held that the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon taxation depends the Governments ability to serve the people for whose benefit the taxes are collected. Neglect or omission of government officials entrusted to collect taxes should not be allowed to bring harm or detriment to the people. In SEC. OF FINANCE VS. ORO M AURA SHIPPING LINES [593 SCRA 14], the Supreme Court opined that assuming further that MARINA merely committed a mistake in approving the vessels proposed cost and that the Collector of the Port of Manila similarly erred, we reiterate the legal principle that estoppel generally finds no application against the State when it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials and agents irrespective of rank. The rule holds true even if the rectification prejudices parties who had meanwhile received benefits.
The lifeblood theory can be manifested in the following cases:

1. The prohibition against set-off of taxes [see Section 204(C), NIRC] 2. The prohibition against the issuance of an injunction to restrain the collection of taxes 3. Presumption of correctness of assessments Illustrative cases: In CIR v. Cebu Portland [156 SCRA 535], the taxpayer argued that that the deficiency assessment cannot be enforced because it is still being contested. The Supreme Court held that this argument loses sight of the urgency of the need to collect taxes as the lifeblood of the government. If the payment of taxes could be postponed by simply questioning heir validity, the machinery of the state would grind to a halt and all government functions would be paralyzed.
Q: What is the exception to the prohibition on the issuance of an injunction to restrain the collection of taxes?
An injunction may be issued to restrain the collection of taxes when in the opinion of the Court the collection may jeopardize the interest of the Page 8 of 158 Last Updated: 30 July 2013(v3)

Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. (See Section 11, RA 1125, as amended by RA 9282).
Note: It must be noted, however, that the CTA cannot issue a writ of injunction to restrain the collection of taxes in the exercise of its original jurisdiction. It can only issue such a writ of injunction in its appellate jurisdiction. The Supreme Court held in CIR vs. J.C. Yuseco [G.R. No. L12518, October 28, 1961] that nowhere does the law vest in the CTA original jurisdiction to issue writs of prohibition or injunction independently of, and apart from, an appealed case. The writ of prohibition or injunction that it may issue to suspend the collection of taxes, is merely ancillary to and in furtherance of its appellate jurisdiction. Taxes being the chief source of revenue for the government to keep it running, must be paid immediately and without delay. A taxpayer who feels aggrieved by a decision of a revenue officer and appeals to the CTA must pay the tax assessed, except if the CTA opines that collection would jeopardize the interest of the Government and/or taxpayer, it could suspend the collection and require the taxpayer to deposit the amount claimed or to file a bond.
support between the State and its inhabitants. In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. In CIR VS. ALGUE [158 SCRA 9], the Supreme Court stated that taxes are what we pay for civilized society. Hence, despite the natural reluctance to surrender part of ones hard-earned income, every person who is able must contribute his share in the running of the government and the latter, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power
--------------------------------------------------------------4. Jurisdiction over subjects and objects --------------------------------------------------------------Q: Explain the jurisdiction of the State over persons and property within its territory as a basis or rationale of taxation.
Jurisdiction is a reason why citizens must provide support to the state so the latter could continue to give protection. It is the country, state or sovereign that gives protection that has the right to demand the payment of taxes with which to finance activities so it could continue to give protection. The basis or rationale of taxation is also used to explain why taxation is basically territorial in character because it is only within the territorial boundaries of the taxing authority where tax laws may be enforced. This is so because it is only within the confines of its territory that a country, state or sovereign may give protection.
--------------------------------------------------------------2. Necessity Theory --------------------------------------------------------------Q: What is the necessity theory?

As stated in the case of PHILIPPINE GUARANTY V. CIR [13 SCRA 775], taxation is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the States territory and facilities and protection which a government is supposed to provide
Q: Discuss the meaning and implications of the following statement: the power to tax involves the power to destroy.
Taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for support of the government. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in Page 9 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------3. Benefits-Protection theory (Symbiotic relationship) --------------------------------------------------------------Q: What is the benefits-protection theory?
According to this principle, the basis of taxation is found in the reciprocal duties of protection and PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

the Government this power must be used justly and not treacherously. ROXAS VS. CTA [23 SCRA 276]; REYES V. ALMANZOR [196 SCRA 322]; CIR V. TOKYO SHIPPING [244 SCRA 332]
be imposed retroactively if the law expressly provides and if it will not amount to a denial of due process. Hence, in resolving the issue of whether a statute favorable to a taxpayer-heir can be given retroactive effect, the Supreme Court held in LORENZO VS. POSADAS [64 PHIL. 353] that inheritance taxation is governed by the statute in force at the time of the death of the decedent, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect which is not the case. And such Revenue laws are not to be classed penal laws, so even if favorable, should not be given retroactive effect.
Q: Justice Marshall said that the power to tax involves the power to destroy. On the other hand, Justice Holmes stated later that the power to tax is not the power to destroy while the court sits. Reconcile the apparently inconsistent statements.
The two statements can be reconciled on three levels. First, the imposition of a valid tax could not be judicially restrained merely because it would prejudice the taxpayers property. Second, an illegal tax could be judicially declared invalid and should not work to prejudice a taxpayers property. Third, J. Marshalls view refers to a valid tax while J. Holmes view refers to an invalid tax.
--------------------------------------------------------------2. Imprescriptibility --------------------------------------------------------------Q: Are taxes imprescriptible?

As a general rule, taxes are imprescriptible. However, as an exception, the tax law may provide otherwise. In particular, the NIRC and LGC provides for prescriptive periods for assessment and collection of taxes.
--------------------------------------------------------------H. Doctrines in Taxation 1. Prospectivity of tax laws 2. Imprescriptibility 3. Double Taxation 4. Escape from Taxation 5. Exemption from Taxation 6. Compensation and Set-off 7. Compromise 8. Tax Amnesty 9. Construction and Interpretation ----------------------------------------------------------------------------------------------------------------------------1. Prospectivity of tax laws --------------------------------------------------------------Q: Are tax statutes prospective in its application?
Yes. As held in CEBU PORTLAND V. COLLECTOR [G.R. NO. 18649, FEBRUARY 27, 1965], the general rule under the Civil Code that laws shall have prospective application applies to tax laws.
Q: What is the rationale behind providing for a statute of limitations in the collection of taxes?
As held in the case of REPUBLIC VS. ABLAZA [108 PHIL 1105, the law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. In CIR V. B.F. GOODRICH PHILS [FEBRUARY 24, 1999], the Supreme Court noted that our tax laws provides for a statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment. Page 10 of 158 Last Updated: 30 July 2013(v3)
Q: Can tax statutes be applied retroactively?

Yes. While, as a general rule, taxes must only be imposed prospectively, taxes, as an exception, may PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: How should said statute of limitations in taxation be construed?

The law on prescription being a remedial measure should be liberally construed in order to afford protection. On the other hand, the exceptions to the law on prescription should be strictly construed. Thus, in the case of CIR VS. PHILIPPINE NATIONAL BANK [G.R. No. 161997, October 25, 2005], the Court held that even if the 2-year prescriptive period for a claim for tax refund has already lapsed, the same may be suspended for equity and special circumstances.
Q: Is double taxation prohibited under the Constitution?

It depends. The Constitution does not prohibit the imposition of double taxation in the broad sense. However, if double taxation amounts to a direct double taxation, then it becomes legally objectionable for being oppressive and inequitable. It violates the equal protection and uniformity clauses of the Constitution.
Q: What are the elements of (direct) double taxation?

There is direct double taxation if the two taxes are imposed: 1. 2. 3. 4. 5. 6. On the same subject matter For the same purpose By the same taxing authority Within the same jurisdiction During the same taxing period The taxes must be of the same kind or character PEPSI-COLA BOTTLING COMPANY V. MUN. OF TANAUAN [69 SCRA 460]
--------------------------------------------------------------3. Double Taxation a) Strict sense b) Broad sense c) Constitutionality of double taxation d) Modes of eliminating double taxation --------------------------------------------------------------Q: What is double taxation?
Double taxation is defined as taxing the same property twice when it should be taxed but once. It has also been defined as taxing the same person twice by the same jurisdiction over the same thing. It is sometimes known as duplicate taxation.
Q: What are the two types of double taxation?

Double taxation may be direct (strict sense) or indirect (broad sense). In the strict sense, double taxation means direct double taxation. This means that the same property is taxed twice when it should be taxed only once and that both taxes are imposed on the same subject matter for the same purpose, by the same taxing authority within the same jurisdiction during the same taxing period and covering the same kind of tax. In the broad sense, double taxation means indirect double taxation. Double taxation is indirect where some elements of direct double taxation are absent. It applies to all cases in which there are two or more pecuniary impositions.
Q: Bank As gross receipts from passive income is subject to 20% final withholding tax. At the same time, the total gross receipt of Bank A is subject to 5% gross receipts tax (GRT). Is the imposition of the FWT and GRT a form of double taxation?
No. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to Page 11 of 158 Last Updated: 30 July 2013(v3)

withholding, while the GRT is a percentage tax not subject to withholding. Hence, there is no double taxation. (see CIR VS. SOLIDBANK CORP [416 SCRA 436]; CHINA BANKING CORP VS. CA [403 SCRA 634])
Q: Under the Tax Code, Bank A is subject to 1% reserve deficiency tax if it incurs reserve deficiencies. Under the General Banking Law, Bank A must 1/10 of 1% for incurring reserve deficiencies. Is there double taxation?
No. One is a penalty; the other is a tax. The payment of 1/10 of 1% for incurring reserve deficiencies is clearly a penalty as the primary purpose is regulation; while the payment of 1% for the same violation is a tax for the generation of income which is the primary purpose for this instance. (REPUBLIC BANK VS. CTA [213 SCRA 266])
Q: A municipality imposed a storage fee for the storage of copra within its jurisdiction. A multinational company doing business in the Philippines stored copra in its warehouse located in the municipality and was thus assessed the storage fee. The MNC argues that it was already being taxed for the manufacture of copra so there was double taxation. Decide.
There is no double taxation. In PROCTER & GAMBLE V. MUNICIPALITY OF JAGNA [94 SCRA 894], the Supreme Court stated that there is double taxation when the same person is taxed twice by the same jurisdiction for the same thing. A tax on products is different from a tax on the privilege of storing copra in a bodega situated within the territorial jurisdiction of the municipality. Furthermore, in the former, the taxing authority is the national government while in the latter; the taxing authority is the local government.
Q: A City passed an ordinance imposing license tax on persons engaged in the business of operating tenement houses. Is there double taxation given that buildings pay real estate taxes and also income taxes besides the tenement tax imposed by the ordinance?
No. In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax. It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. Furthermore, while it is true that they are taxable as real estate dealers (income tax) and still taxable under the ordinance, the argument against double taxation may not be invoked. The same tax may be imposed by the national government as well as by the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the State and a political subdivision thereof. (VILLANUEVA V. CITY OF ILOILO [26 SCRA 578]) PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: A municipality enacted two ordinances. The first levies and collects from soft drinks producers a tax for every bottle corked while the second levies and collects on soft drinks produced and manufactured within its territorial jurisdiction. Is there double taxation?
Yes. All the elements of double taxation are present. However, it must be noted, that while the factual milieu provided is similar to the case of PEPSI COLA V. MUNICIPALITY OF T ANUAN [69 SCRA 460], Supreme Court ruled that there was no double taxation in the said case because the second ordinance repealed the first ordinance. Otherwise, there would have been double taxation.
Q: A city passed two ordinances. The first ordinance imposed a tax on the privilege of selling liquor while the second ordinance imposed a tax on the sales of liquor. Is there double taxation?
No. In COMPANIA GENERAL DE TABACOS V. CITY OF M ANILA [8 SCRA 367], the Supreme Court held that both a license fee and a tax may be imposed on the same business and occupation and such as not a violation of the rule against double taxation. The Page 12 of 158 Last Updated: 30 July 2013(v3)

impositions are of a different character. The first is a license fee for the privilege of engaging in the sale of liquor in the exercise of police power while the other is imposed for revenue purposes based on the sales made.
Q: Company A, engaged in the manufacture of tobacco, is subject to the payment of tobacco inspection fees aside from other taxes it pays to the national government. Is there double taxation?
No. Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of the miscellaneous taxes provided for under the Tax Code. The Code specifically provides for the collection and manner of payment of the said inspection fees. Tobacco inspection fees are levied and collected for purposes of regulation and control. Tobacco inspection fees are of a different kind and character from other taxes imposed. (LA SUERTE VS. CTA [134 SCRA 36])
SCRA 442], the Supreme Court stated that the NIRC levies a tax on all quarry resources whether extracted from public or private land. Thus, the local government unit cannot impose taxes on quarry resources as they are already taxed under the NIRC. However, by express provision in the Local Government Code, the LGU may levy on quarry resources extracted from public land.
Q: What are the modes of elimination double taxation?

The usual methods of avoiding the occurrence of double taxation are: 1. Allowing reciprocal exemption either by law or by treaty 2. Allowance of tax credit for foreign taxes paid 3. Allowance of deduction for foreign taxes paid; and 4. Reduction of the Philippine tax rate
Q: A city ordinance imposed a license fee on any person, firm, entity or corporation doing business in the City. A contends that the ordinance constitutes double taxation as he already pays taxes imposed by the national government. Is A correct?
No. It has been expressly affirmed by the Supreme Court that such an argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof. (CITY OF BAGUIO VS. DE LEON [25 SCRA 938])
--------------------------------------------------------------4. Escape from Taxation a) Shifting of tax burden b) Tax Avoidance c) Tax Evasion ----------------------------------------------------------------------------------------------------------------------------a) Shifting of tax burden --------------------------------------------------------------Q: What is meant by shifting the tax burden?
Shifting of tax burden is the process by which the burden of a tax is transferred from the statutory taxpayer or the one whom the tax was assessed or imposed to another without violating the law.
Q: A local government unit wishes to levy excise taxes on quarry resources found within its jurisdiction. The national government argues that it may not do so as such articles are already taxed by the NIRC. Decide.
The local government unit may levy a tax on quarry resources extracted from public lands but not from private lands. In PROVINCE OF BULACAN V. CA [299 PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: What is the meaning of impact and incidence of taxation?

Impact of taxation and incidence of taxation are two different concepts. Impact of taxation (liability) is the point on which a tax is originally imposed while incidence of taxation (burden) is that point on which the tax burden finally rests or settles down. Page 13 of 158 Last Updated: 30 July 2013(v3)

Q: Enumerate the ways of shifting the tax burden and define each.
1. Forward shifting - When the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. 2. Backward shifting When the burden of the tax is transferred from the consumer or purchaser through the factors of distribution 2 to the factors of production. 3. Onward shifting When the tax is shifted two or more times either forward 3 or backward.
In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the refund ( SILKAIR VS. CIR [FEBRUARY 25, 2010]) As held in the case of EXXONMOBIL V. CIR [G.R. NO. 180909, JANUARY 19, 2011], in the case of indirect taxes, it is the manufacturer of the goods who is entitled to claim any refund thereof. Indirect taxes paid by the manufacturers or producers of the goods cannot be refunded to the purchasers of the goods because the purchasers are not the taxpayers. CONTEX CORPORATION VS. CIR [433 SCRA 577] The liability for the payment of the indirect tax lies only with the seller of the goods or services, not in the buyer thereof. In indirect taxes, when the seller passes on the tax to his buyer, he, in effect, shifts the burden, not the liability to pay it, to the purchaser as part of the price of goods sold or rendered. CIR v. PLDT [478 SCRA 61]
Q: What taxes can be shifted?

Only indirect taxes may be shifted.
Q: How do you determine if a tax is direct or indirect?

Direct taxes are taxes wherein the impact or liability for the payment of the tax as well as the incidence or burden of the tax falls on the same person. On the other hand, indirect tax are taxes wherein the impact or the tax liability for the payment of the tax falls on one person but the incidence or burden thereof can be shifted or passed to another. In CIR v. PLDT [478 SCRA 61]), the Supreme Court distinguished direct taxes from indirect taxes by stating that direct taxes are those that are extracted from the very person who, it is intended or desired, should pay them while indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.
DIAGEO PHILIPPINES V. CIR [G.R. NO. 183553, NOVEMBER 12, 2012]

DOCTRINE: The claimant for the refund of excise taxes related to exported products shall be the same person who paid the taxes. FACTS: Diageo Philippines, Inc. purchased raw alcohol from its supplier for use in the manufacture of its beverage and liquor products. The supplier imported the raw alcohol and paid the related excise taxes thereon before the same were sold to the petitioner. The purchase price for the raw alcohol included, among others, the excise taxes paid by the supplier. Subsequently, petitioner exported its locally manufactured liquor products and received the corresponding foreign currency proceeds of such export sales. Petitioner then filed applications for tax refund/ issuance of tax credit certificates corresponding to the excise taxes which its supplier paid but passed on to it as part of the purchase price of the subject raw alcohol invoking Section130(D) of the Tax Code. HELD: The Court ruled that the right to claim a refund or be credited with the excise taxes belongs to its supplier. Any excise tax paid thereon shall be credited or refunded requires that the claimant be the same person who paid the excise tax.
Q: In the refund of indirect taxes, who is the proper party to claim the said refund?
_________________________________________
2
As an example, the purchaser may shift the tax to the producer by purchasing only when the price is reduced. 3 As an example, the producer/manufacturer may pass the tax burden to the retailer/seller of the goods who in turn will pass the tax burden to the purchaser.

SILKAIR V. CIR [G.R. NO. 166482, JANUARY 25, 2012]

DOCTRINE: The proper party to question or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. FACTS: Petitioner filed an administrative claim for refund on the excise taxes paid on the purchase of jet fuel from its supplier oil company for the period of July 1, 1998 to December 31, 1998, which it alleged to have been erroneously paid based on Section 135(a) and (b) of the Tax Code of 1997. Due to inaction by respondent Commissioner, petitioner filed a Petition for Review with the Court of Tax Appeals. The CTA denied the petition and ruled that while petitioners country indeed exempts from excise taxes petroleum products sold to international carriers, petitioner nevertheless failed to comply with the second requirement under Section 135 (a) of the 1997 Tax Code as it failed to prove that the jet fuel delivered by Petron came from the latters bonded storage tank . Upon the denial of the motion of reconsideration, petitioner elevated the case to the CA. The CA affirmed the denial and ruled that petitioner is not the proper party to seek for the refund of the excise taxes paid. HELD: The Supreme Court held that excise taxes, which apply to articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines, is basically an indirect tax. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from its place of production or from the customs custody, the tax, in reality, is actually passed on to the end consumer as part of the transfer value or selling price of the goods, sold, bartered or exchanged. The proper party to question, or seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another . Petitioner, as the purchaser and end-consumer, ultimately bears the tax burden, but this does not transform its status into a statutory taxpayer.
exempted from absorbing the burden of indirect taxation and it is the seller then that shall shoulder this burden. The tax exemption of the buyer cannot be the basis of a claim for tax exemption of the manufacturer (PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056]) In PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056], Philippine Acetylene claimed an exception on the indirect taxes it paid for the oxygen and acetylene gases it sold to NPC. The Supreme Court ruled that NPC is a tax-exempt entity and the said tax is due from the manufacturer. In CIR V. GOTAMCO [148 SCRA 36], at issue was whether Gotamco & Sons should pay the contractors tax (an indirect tax) on gross receipts it realized from the construction of the WHO building in Manila. The Supreme Court ruled in the affirmative. The Court opined that WHO, as a tax-exempt entity, cannot be made liable for the indirect taxes. In M ACEDA V. M ACARAIG [197 SCRA 771], the Supreme Court ruled that the tax burden may not be shifted to the NPC, a tax-exempt entity, by the oil companies. As NPC is exempt from direct and indirect taxation, it must be held exempted from absorbing the economic burden of taxation. Thus, the oil companies must absorb all or part of the economic burden of the taxes. Had not NPC been exempt from indirect taxes, the oil companies could have shift the burden to NPC.
CIR v. PILIPINAS SHELL [G.R. 188497, APRIL 25, 2012]

DOCTRINE: Oil companies are not exempt from the payment of excise tax on petroleum products manufactured and sold by them to international carriers. FACTS: The taxpayer filed with the Large Taxpayers Audit & Investigation Division II of the (BIR) the several formal claims for refund or tax credit for various years. It filed petitions for review since no action was taken by the BIR on its claims. The CTAs First Division ruled that the taxpayer is entitled to the refund of excise taxes in the reduced amount. It relied on a previous ruling rendered by the CTA En Banc in a previous case involving the same taxpayer, where the CTA also granted the taxpayers claim for refund on the basis of excise tax exemption for petroleum products sold to international carriers of foreign registry for their use or consumption outside the Philippines. On appeal, the CTA En Banc upheld the ruling
Q: Can the seller claim an exemption on indirect taxes if it sold products to buyers who, under the law, are tax-exempt entities?
No. The seller cannot claim an exemption or a refund on the indirect taxes it paid for those goods sold or services rendered to an entity exempt from indirect taxes. As a tax-exempt entity, the buyer is PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

of the First Division. HELD: The Supreme Court held that both the earlier amendment in the 1977 Tax Code and the present Sec. 135 of the 1997 NIRC did not exempt the oil companies from the payment of excise tax on petroleum products manufactured and sold by them to international carriers. Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys petroleum products from the local manufacturers. Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods. The Supreme Court pointed out that the taxpayers f ailure to make a distinction on the exemption under Sections 134 and 135 of the Tax Code, apparently led it to mistakenly assume that the tax exemption under Sec. 135 (a) attaches to the goods themselves such that the excise tax should not have been paid in the first place. The exemption found in Sec. 134 makes reference to the nature and quality of the goods manufactured (domestic denatured alcohol) without regard to the tax status of the buyer of the said goods while Sec. 135 deals with the tax treatment of a specified article (petroleum products) in relation to its buyer or consumer. Further, it held that Sec. 135 (a) in relation to the other provisions on excise tax and from the nature of indirect taxation, may only be construed as prohibiting the manufacturers-sellers of petroleum products from passing on the tax to international carriers by incorporating previously paid excise taxes into the selling price. In other words, the taxpayer cannot shift the tax burden to international carriers who are allowed to purchase its petroleum products without having to pay the added cost of the excise tax. Furthermore, considering that the excise taxes attaches to petroleum products as soon as they are in existence as such, there can be no outright exemption from the payment of excise tax on petroleum products sold to international carriers. The sole basis then of the taxpayers claim for refund is the express grant of excise tax exemption in favor of international carriers under Sec. 135(a) for their purchases of locally manufactured petroleum products. Citing its ruling in Philippine Acetylene, it held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers.
Q: Distinguish indirect withholding taxes.

See case digest below.
taxes
from
ASIA INTERNATIONAL AUCTIONEERS V. CIR [G.R. 179115, SEPT. 26, 2012]

DOCTRINE: See held. FACTS: Asia International Auctioneers (AIA) received an assessment from the BIR for deficiency VAT. AIA availed of the tax amnesty program under RA 9480. The BIR contends that AIA is disqualified under RA 9480 which, among others, enumerates withholding agents as persons to whom the tax amnesty shall not extend to. The BIR argues that AIA is a withholding agent. HELD: AIA is not a withholding agent. Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. Due to this difference, the deficiency VAT cannot be deemed as withholding taxes merely because they constitute indirect taxes. Moreover, records in this case support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.

--------------------------------------------------------------b) Tax Avoidance c) Tax Evasion --------------------------------------------------------------Q: What is the difference between tax avoidance and tax evasion?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
Note: An example of tax avoidance is when a taxpayer avails of deductions allowed by law.
This is only a case of tax avoidance. In DELPHER TRADES CORPORATION V. INTERMEDIATE APPELLATE COURT [157 SCRA 349], the Supreme Court opined that there was nothing wrong or objectionable about the "estate planning" scheme resorted to by the taxpayers. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. In the said case, the taxpayers acquired 2,500 original unissued no par value shares of stocks of the corporation in exchange for their properties. By virtue of this exchange, the taxpayers became stockholders of the corporation by subscription. In effect, they changed the nature of their ownership from unincorporated to incorporated form by organizing the corporation to take control of properties and at 4 the same save on inheritance taxes.
Q: What is the substance over form doctrine?

The doctrine provides that taxability is determined by the reality of the transaction rather than the appearance which may be contrived.
Q: ABC corporation sold its building to A, who in turn, sold during the same day the same property to XYZ Corporation. Is the scheme designed to avoid taxes or evade taxes?
This is a case of tax evasion. In CIR VS. THE ESTATE OF BENIGNO TODA, JR. [483 SCRA 293], the Supreme Court held that the three factors in tax evasion were present. The two transfers were tainted with fraud since the intermediary transfer (from the corporation to a natural person) was prompted only by the desire to mitigate tax liabilities and not for any business purpose.
Q: What are the three factors to be considered in determining if a scheme is designed to evade taxes?
The three factors to be considered are: 1. The end to be achieved (which is payment of less taxes than that known by the taxpayer to be legally due or non-payment of a tax when it is shown that a tax is due); 2. An evil or deliberate state of mind; and 3. A course of action which is unlawful.
Q: ABC Corporation owns the ABC building. It sold the said building to A, a close business associate of ABC Corporation, on 30 August 1989. After a week, A sold the same to XYZ Corporation. Is the scheme designed to avoid taxes or evade taxes?
This is a case of tax evasion. The scheme sought to make it appear that there were two sales of the _________________________________________
4
Q: Husband and wife own a lot of real estate. Upon advice of their lawyer, they decided to organize a corporation to take control of their properties. The husband and wife were issued 2,500 original unissued no par value shares of stock in exchange for their properties. Is the scheme designed to avoid taxes or evade taxes?
If the properties were to be held by the spouses in the case, it would be tied to the succession proceedings and the consequential payment of estate taxes when the owner dies. On the other hand, a corporation does not die and can hold the property for a period of at least 50 years.

subject properties. It is obvious that the objective of the sale to Z was to reduce the amount of tax to be paid especially that the transfer from Z to XYZ would then be subject to only 6% capital gains tax, and not the 30% corporate income tax. The intermediary transaction which was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion (CIR v. CA [327 Phil. 1]).
--------------------------------------------------------------5. Exemption from taxation a) Meaning of exemption from taxation b) Nature of tax exemption c) Kinds of tax exemption d) Rationale/grounds for exemption e) Revocation of tax exemption --------------------------------------------------------------Note: Tax exemption of special entities under the Constitution shall be discussed under Chapter 1.I.2.a.(iv) Prohibition against Taxation of religious, charitable entities and educational entities, (v) Prohibition against taxation of non-stock, non-profit institutions, (xii) exemption from real property taxes.
1. Where the President exercises his power under the flexible tariff clause to remove existing protective tariff rates (see Section 28(2), Article VI, 1987 Constitution) 2. The local government may grant exemptions from the payment of local taxes without congressional approval consequent to its power to levy taxes, fees and other charges. (see Section 5, Article X, 1987 Constitution) 3. Where the President enters into and ratify a tax treaty granting certain exemptions subject only to Senate occurrence.
Q: May tax exemptions exist by implication?

No. In NDC v. CIR [151 SCRA 472], at issue was whether the undertaking signed by the Secretary of Finance in the promissory note can be considered an exemption on taxes on the interest remitted. The Supreme Court ruled in the negative and opined that tax exemptions cannot be merely implied but must be categorically and unmistakably expressed.
--------------------------------------------------------------a) Meaning of exemption from taxation --------------------------------------------------------------Q: What is a tax exemption?

A tax exemption is defined as a grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes.
--------------------------------------------------------------b) Nature of tax exemption --------------------------------------------------------------Q: What is the nature of tax exemptions?
Tax exemptions are: 1. Mere personal privileges to the grantees; 2. Generally revocable by the government unless founded on contract which is protected by the non-impairment clause; 3. Implies a waiver on the part of the Government of its right to collect what otherwise would be due; and 4. Not necessarily discriminatory so long as the exemption has a rational basis.
Q: Who has the power to grant tax exemptions?

Both the power to tax and to exempt certain persons are vested in the legislature. In particular, ARTICLE VI, SECTION 28 OF THE CONSTITUTION provides that No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.
--------------------------------------------------------------c) Kinds of tax exemptions --------------------------------------------------------------Q: What are the kinds of tax exemptions?
See table.
Q: Enumerate the instances where tax exemptions may be granted other than by act of Congress:

As to source Constitutional Statutory Contractual Treaty Ordinance Exemption originates from the Constitution Emanating from legislation Based on contractual stipulation Based on treaty provisions Based on an ordinance exempting payment of local government taxes.
Q: What is exemptions?
the
rationale
behind
tax
Tax exemptions are given because: 1. Public interest will be served by the exemption allowed; and 2. Such public benefit or interest is sufficient to offset the monetary loss entailed in the grant of the exemption
Q: What are the grounds of tax exemption?

Tax exemption may be based on: 1. Contract; 2. Some ground of public policy; and 3. Treaty created on grounds of reciprocity or to lessen the rigors of international double or multiple taxation
As to manner of creation Express Implied Expressly granted by organic or statute law Whenever particular persons, properties, or excises are deemed exempt as they fall outside the scope of the taxing provision. As to scope of extent Total When certain persons, property or transactions are exempted from all taxes When certain persons, property or transactions are exempted from certain taxes As to object Personal Those granted directly in favor of such persons as are within the contemplation of the law granting the exemption Those granted directly in favor of a certain class of property
Q: Can be there be a tax exemption on the ground of equity?

No. The Supreme Court held in DAVAO GULF V. CIR [293 SCRA 76], that there is no tax exemption solely on the ground of equity.
Partial
--------------------------------------------------------------e) Revocation of tax exemption --------------------------------------------------------------Q: May a tax exemption be revoked?

Yes. Since taxation is the rule and exemption therefrom is the exception, the exemption may be withdrawn at the pleasure of the taxing authority. Hence, in MCIAA V. M ARCOS [261 SCRA 667], the Supreme Court noted that Section 234 of the the Local Government Code unequivocally withdrew exemptions from payments of real property taxes granted to natural or juridical persons, including government-owned and control corporations. Since MCIAA is a GOCC, it follows that its exemption granted under a charter prior to the LGC has been withdrawn. In SMART V. CITY OF DAVAO [565 SCRA 237], the Supreme Court noted that the in lieu of all taxes clause in its charter has become functus officio with Page 19 of 158 Last Updated: 30 July 2013(v3)
Impersonal
--------------------------------------------------------------d) Rationale/grounds for exemption --------------------------------------------------------------Note: The rationale for exemption and the grounds for exemption are two different things. The rationale asks the question why tax exemptions are given while the grounds tell us why the State can provide tax exemptions.

the abolition of franchise tax on telecommunications companies in accordance with the VAT law. in REPUBLIC V. CAGUIOA [536 SCRA 194] held that there is no vested right in a tax exemption and more so when the latest expression of legislative intent renders it continuance doubtful. In the said case, RA 7227 granted private domestic corporations doing business in the Subic SEZ tax exemptions on importations of general merchandise. However, RA 9334 withdrew the tax exemption on the importations of cigars, cigarettes, distilled spirits, fermented liquors and wines. In NITAFAN V. CIR [152 SCRA 284], the Supreme Court held that the salaries of members of the judiciary are subject to income tax as applied to all taxpayers. The payment of income tax by Justices and Judges do not fall within the constitutional protection against decrease of their salaries during their continuance in office.
amount equal or greater than the tax being collected (PHILEX MINING V. CIR [294 SCRA 687]). Taxes cannot be the subject of set-off because they are not in the nature of contracts between parties but grow out of a duty to, and, are positive acts, of the Government, to the making and enforcing of which, the personal consent of the taxpayer is not required (REPUBLIC V. M AMBULAO LUMBER [4 SCRA 622]) The erroneous payment of final withholding tax cannot be used to offset or be treated as advance tax payment, and cannot be used against the succeeding final withholding tax. COMMISSIONER OF INTERNAL REVENUE VS. GOULDS PUMPS (PHILS.) INCORPORATED, AUGUST 22, 2012
Note: In one case, DOMINGO V. GARLITOS [8 SCRA 443], the Supreme Court allowed the set-off between taxes and debts. It opined that if the obligation to pay taxes and the taxpayers claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. In the said case, the taxpayer who has been assessed municipal taxes was allowed to assign in favor of the municipality a final judgment obtained by him against the said municipality to cover the assessment. Atty. Domondon reconciled the rulings of the Supreme Court in DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC [162 SCRA 753] by stating that in the former case, both claims being overdue, demandable, and fully liquidated while in the latter case, the claim against the government was not overdue and demandable as it was already settled. Atty. Domondon submits that when confronted with a bar problem, we follow the doctrine laid down in FRANCIA V. IAC [162 SCRA 753] unless the facts would involve the (1) the application of the principle of solutio indebiti or (2) it involves local government taxes.
Q: Is there an exception to the above doctrine?

Yes. The exemption cannot be withdrawn if the exception was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and thus covered by the non-impairment clause of the Constitution (MCIAA V. M ARCOS [261 SCRA 667]).
--------------------------------------------------------------6. Compensation and set-off --------------------------------------------------------------Q: Can taxes be the subject of compensation between the government and the taxpayer?
No. As held in CALTEX VS. COA [208 SCRA 727], taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (see FRANCIA V. IAC [162 SCRA 753]) There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay taxes on the ground that the government owes him an PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: Is the civil concept of solutio indebiti applicable to taxation?

Yes. In the case of FILINVEST DEVELOPMENT CORPORATION VS. CIR [529 SCRA 605], the Court held that in the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. Hence, under the principle of solutio indebiti, the Government has to restore to petitioner the sums representing erroneous payments of taxes.

Q: What is recoupment?
the
doctrine
of
equitable Q: What is a tax condonation/remission?

The condonation of a tax liability is equivalent and is in the nature of a tax exemption. Hence, it is a grant of immunity, express or implied, to particular persons or corporations from the obligation to pay taxes.
The doctrine provides that where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now barred by prescription. This doctrine is inapplicable in the Philippines in light of the lifeblood theory. (UST V. COLLECTOR [104 PHIL. 1062]
--------------------------------------------------------------7. Compromise --------------------------------------------------------------Q: Can taxes compromise? be the subject of a
--------------------------------------------------------------9. Construction and interpretation of: a) Tax Laws b) Tax Exemption and exclusion c) Tax Rules and Regulations d) Penal Provisions of Tax Laws e) Non-retroactive application to taxpayers --------------------------------------------------------------Q: What are the sources of tax laws?
The sources of tax laws are: 1. Constitution; 2. NIRC as amended RA 9648; 3. Tariff and Custom Code as amended RA 8181; 4. Local Government Code; 5. Local Tax Ordinance/City/Municipal Tax Code; 6. Tax Treaties/International Agreements; 7. Presidential Decree/ Executive Order; 8. Decisions of SC/CTA/CA; and 9. Revenue Rules and Regulations, Rulings implemented by the BIR
Yes. Compromises are allowed and enforceable when the subject matter thereof is not prohibited from being compromised and the person entering into it is duly authorized to do so. In fact, under SECTION 204 OF THE TAX CODE, payment of internal revenue taxes may be compromised on the grounds of (1) doubtful validity of the assessment or (2) financial incapacity.
--------------------------------------------------------------8. Tax Amnesty --------------------------------------------------------------Q: What is a tax amnesty?

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax. REPUBLIC V. IAC [196 SCRA 335]
Q: What is the nature of tax laws?

1. Not political in character 2. Civil in nature, not subject to ex post facto law prohibition 3. Not penal in character 4. Not retroactive in its application
Q: Distinguish a tax amnesty from a tax exemption.

Tax Amnesty immunity from all criminal, civil and administrative liabilities arising from nonpayment of taxes applies only to past tax periods Tax Exemption immunity from civil liability only
Q: Do tax laws continue in force even during a period of enemy occupation?

Yes. In HILADO V. CIR [100 SCRA 288], the Supreme Court held that internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect actually enforced by the occupation government. Income tax returns filed during such Page 21 of 158 Last Updated: 30 July 2013(v3)
has application.
prospective

period and income tax payments effected are considered valid and legal.
Q: Do rules and regulations issued by administrative or executive officers (implementing tax laws) have the force and effect of law
Yes. Rules and regulations issued by administrative or executive officers pursuant to the procedure or authority granted by law upon the administrative agency have the force and effect, or partake of the nature of a statute and are just as binding as if they have been written in the statute itself. As such, they have the force and effect of law and enjoy the presumption of constitutionality and legality until they are set aside with finality in an appropriate case by a competent court ( ABAKADA GURO PARTY LIST VS. PURISIMA [562 SCRA 251])
and determine the classification of the imported article before tariff may be imposed. Unfortunately, CMO 232007 has already classified the article even before the customs officer had the chance to examine it. In effect, petitioner Commissioner of Customs diminished the powers granted by the Tariff and Customs Code with regard to wheat importation when it no longer required the customs officers prior examination and assessment of the proper classification of the wheat. It is well-settled that rules and regulations, which are the product of a delegated power to create new and additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted by the legislature to the administrative agency. It is required that the regulation be germane to the objects and purposes of the law; and that it be not in contradiction to, but in conformity with, the standards prescribed by law.
--------------------------------------------------------------a) Tax laws --------------------------------------------------------------Q: State the rule on construction interpretation of tax laws? or
COMMISSIONER OF CUSTOMS V. HYPERMIX FEEDS [G.R. NO. 179579, FEBRUARY 1, 2012]

DOCTRINE: Rule and regulations, which are the product of a delegated power to create new and additional legal provisions that have effect of law, should be within the scope of the statutory authority granted by the legislature to the administrative agency. FACTS: Petitioner issued Customs Memorandum Order (CMO) No. 27-2003 prescribing guidelines, for tariff purposes, in the applicable to importation of wheat. Respondent filed a Petition for Declaratory Relief with the Regional Trial Court (RTC) of Las Pinas City. Petitioner filed a Motion to Dismiss and alleged that the RTC did not have jurisdiction over the subject matter of the case because respondent was asking for a judicial determination of the classification of wheat, thus, action for declaratory relief is improper. HELD: The Supreme Court held that the determination of whether a specific rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power, which includes the authority of the courts to determine the validity of the acts of the political departments. Also, Section 1403 of the Tariff and customs law mandates that the customs officer must first assess
As a general rule, there is no need for statutory construction if the tax law is clear. Where the law is clear and unambiguous, the law must be taken as it is devoid of judicial addition or subtraction. As an exception, if there is an ambiguity in the law, statutory construction is but proper and tax laws shall be liberally interpreted in favor of the taxpayer and strictly against the taxing authority.
Q: What is the rationale behind the liberal construction or interpretation of tax statutes?
As held in the case of PHILIPPINE HEALTH CARE PROVIDERS V. CIR [554 SCRA 411], tax statutes are strictly construed against the taxing authority because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.
Q: Is the construction of a tax statute by predecessors binding on the successors?

No. The construction of a statute by predecessors is not binding on their successors if thereafter the latter Page 22 of 158 Last Updated: 30 July 2013(v3)

becomes satisfied that a different construction should be given.
only an exemption from property taxes on the poles, wires, and transformers.
--------------------------------------------------------------b) Tax Exemption and exclusion --------------------------------------------------------------Q: How are tax exemptions construed and interpreted?
Tax exemptions should be strictly construed against the taxpayer. As held in the case of QUEZON CITY V. ABS-CBN [567 SCRA 495], statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. A tax exemption must be strictly construed against the one claiming the exemption because it is contrary to the lifeblood theory which is the underlying basis for taxes. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed (CIR V. MITSUBISHI METAL [181 SCRA 215]). In LUZON STEVEDORING V. CTA [163 SCRA 647], in resolving the issue on whether tugboats are embraced and included in the term cargo vessel, the Supreme Court ruled in the negative. Any claim for exemption from the tax statute should be strictly construed against the taxpayer. Thus, tugboats cannot be considered cargo vessels as they are not meant to carry and transport persons or goods by themselves but are mainly for towing. In MERALCO V. VERA [67 SCRA 352], the issue to be resolved was whether MERALCO was exempt from excise tax on its poles, wires, and transformers. The Supreme Court held that the in lieu of all taxes provision is limited in scope to taxes upon the privileges, earnings, income, franchise and poles, wires, transformers, and insulators of the grantee. Construing this provision strictly against MERALCO, the Supreme Court held that the provision covers PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: What is the legislative grace concept?

The legislative grace concept provides that any tax relief provided is the result of specific acts of Congress that must be applied and interpreted strictly. In NDC V. CIR [151 SCRA 472], the Supreme Court ruled that the fact that the Secretary of Finance guaranteed the loans of the NDC cannot be taken to mean that the payments of NDC to the Japanese creditors are exempt from withholding since the undertaking was not tantamount to a waiver of collection to taxes which must be express
Q: Should the doctrine of strict interpretation of tax exemptions be applied first as a precondition to the application of the principle of tax exemption?
Yes. Before applying the principles of tax exemption, doctrine of strict interpretation must first be applied. There must first be a determination who are covered by the tax statute before a determination of who are exempted. In CIR V. CA & ADMU [271 SCRA 605], the Supreme Court, before resolving the issue on whether the Institute of Philippine Culture (IPC) of the Ateneo De Manila University was an independent contractor (and as such liable for contractors tax), noted that it is an error to apply the principle of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. The Supreme Court found that the IPC never sold its services for a fee to anyone or was ever engaged in a business apart from or independently from the academic purposes of the Ateneo. Thus, it is not an independent contractor.
Q: What are the reasons for strictissimi juris interpretation of tax laws?
1. Lifeblood theory 2. To minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers 3. Taxation is a high prerogative of sovereignty whose relinquishment is never presumed

Q: What the exceptions to the strictissimi juris interpretation of tax laws?

1. When the statute granting exemption provides for liberal construction thereof 2. In case of special taxes relating to special cases and affecting only special classes of persons 3. If exemption refer to the public property 4. In cases of exemptions granted to charitable and educational institutions or their property 5. In cases of exemptions in favor of a government political subdivision or instrumentality
Q: How are tax condonations construed?

As held in SURIGAO CONSOLIDATED MINING VS. CIR [9 SCRA 728], being in the nature of tax exemptions, it should be sustained only when expressed in explicit terms, and it cannot be extended beyond the plain meaning of those terms. Hence, it must construed strictly against the grantee and liberally in favor of the taxing authority.
--------------------------------------------------------------c) Tax rules and regulations --------------------------------------------------------------Q: How are tax rules and regulations construed?
As they have the force and effect of law, tax rules and regulations are construed strictly against the government and liberally in favor of the taxpayer.
Q: Is the rule of strict construction to tax exemptions applicable to government political subdivisions and instrumentalities?
No. As held in the case of M ACEDA V. M ACARAIG [197 SCRA 771], it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political subdivision or instrumentality.
--------------------------------------------------------------d) Penal provisions of tax laws --------------------------------------------------------------Q: How are penal provisions of tax laws construed?
Penal provisions of tax laws are strictly construed against the State and liberally in favor of the taxpayer.
Q: Why is the rule of strict construction to tax exemptions inapplicable to government political subdivisions and instrumentalities?
The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non tax liability of such agencies. (M ACEDA V. M ACARAIG [197 SCRA 771])
--------------------------------------------------------------e) Non-retroactive application to taxpayers --------------------------------------------------------------Q: Can BIR retroactively? issuances be applied
Q: How are tax amnesties construed?

As held in the case of CIR V. M ARUBENI CORPORATION [204 SCRA 377], a tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.
Yes. BIR issuances may be applied retroactively if its application will not be prejudicial to the taxpayer. (see Section 246, NIRC)
Q: When will BIR issuances be not given retroactive application?

As provided in SECTION 246 OF THE NIRC, rulings and circulars, rules and regulations promulgated by the CIR would have no retroactive application if to so apply them would be prejudicial to the taxpayers

In CIR V. CA [267 SCRA 557], the taxpayer relied and implemented a computation by virtue of a BIR Ruling. The said issuance was later reversed in a subsequent BIR Ruling. The Supreme Court held that the later BIR ruling cannot be given retroactive application as such would be prejudicial to the taxpayer. The same doctrine was applied in the case of ABS-CBN V. CTA [108 SCRA 143] with regard to its reliance on a Memorandum Circular on the withholding of taxes on film rentals which was revoked by a subsequent memorandum circular.
Q: Is the failure of a taxpayer to consult the BIR before relying on a BIR Ruling imply bad faith on the part of the former?
No. In CIR V. CA [267 SCRA 557], the Supreme Court in resolving the argument that failure to consult with the BIR amounted to bad faith opined that such failure does not imply bad faith especially when the BIR Ruling relied upon was clear and categorical leaving no room for interpretation.
Q: When can BIR issuances be given retroactive application even if such would be prejudicial to taxpayers?
SECTION 246 OF THE NIRC provides for the following exceptions: 1. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR; 2. Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or 3. Where the taxpayer acted in bad faith. Jurisprudence also provides for another exception. In PBCOM V. CIR [302 SCRA 241], The Supreme Court opined that the non-retroactivity of rulings by the CIR is inapplicable where the nullity of the issuance was declared by the Courts and not by the CIR. In BIR RULING NO. 370-2011 [OCTOBER 7, 2011] the issue was whether RCBC is liable to pay the final withholding tax on interest income realized from the 5 purchase of PEAce Bonds. Relying upon previous BIR Rulings in 2001, RCBC paid no final tax upon the issuance of the bonds. However, the rulings were all reversed by a BIR Ruling in 2004. RCBC invoked the non-retroactivity principle of BIR Rulings. The Supreme Court in resolving this matter stated that the non-retroactivity principle does not apply when the ruling involved is null and void for being contrary to the law, such as the previous rulings on the PEACe bonds. _________________________________________
5
--------------------------------------------------------------I. Scope and Limitation of Taxation 1. Inherent Limitations 2. Constitutional Limitations --------------------------------------------------------------Q: What is the scope of the legislatures taxing power?
The legislative taxing power or discretion extends to the following: 1. nature (kind of tax to be collected); 2. object (purpose for which the tax shall be levied); 3. extent (amount or rate of tax to be collected); 4. coverage (the persons, property or occupation to be taxed); 5. apportionment of the tax (general or limited to a particular locality or partly general or partly local); 6. method of collection; and 7. situs (place) of taxation.
--------------------------------------------------------------1. Inherent Limitations a) Public purpose b) Inherently legislative c) Territorial d) International comity e) Exemption of government entities, agencies, and instrumentalities --------------------------------------------------------------What are the inherent limitations on the power to tax?
The inherent limitations are those limitations which exist despite the absence of an express constitutional provision thereon. Page 25 of 158 Last Updated: 30 July 2013(v3)
Poverty Eradication and Alleviation Certificate (PEAce) Bond

The inherent limitations are: 1. Public purpose the revenues collected from taxation should be devoted to a public purpose. 2. Inherently legislative or non-delegability of the taxing power Only the legislature can exercise the power of taxes unless the same is delegated by the constitution or through a law which does not violate the constitution 3. Territoriality or situs of taxation the taxing power should be exercised only within the territorial jurisdiction of the taxing authority 4. Principle of Comity Comity is respect accorded by nation to each others as co-equals. As taxation is an act of sovereignty, such power should be imposed upon equals out of respect. 5. Tax exemption of the State
Note: The inherent limitations on the power of taxation is also known as the elements, tenets or characteristics of taxation.
rampant film piracy and intellectual property rights.
flagrant
violation
of
--------------------------------------------------------------b) Inherently legislative (i) General Rule (ii) Exceptions (a) Delegation to local governments (b) Delegation to the President (c) Delegation to administrative agencies --------------------------------------------------------------Q: Is the power to tax delegable?
As a general rule, the power to tax is purely legislative and it cannot be delegated. As exceptions, delegation is allowed in the following cases: a. Delegation of tariff powers to the President under the flexible tariff clause. (see Sec. 28(2), Article 6, 1987 Constitution) b. When the delegation relates merely to 6 administrative implementation (see M ACEDA VS. M ACARAIG [197 SCRA 771]) c. Delegation of emergency powers to the President (see Section 23(2), Article VI, 1987 Constitution)
--------------------------------------------------------------a) Public purpose --------------------------------------------------------------Q: What is meant by public purpose as an inherent limitation on the power to tax?
The right of taxation can only be used in aid of a public purpose. In PASCUAL V. SECRETARY OF PUBLIC WORKS [110 SCRA 331], the Supreme Court explained that the right of the legislature to appropriate public funds is correlative with its right to tax and as such the power of taxation may only be exercised for public purposes. In that case, the appropriation of public funds for the construction of feeder roads on land owned by a private person is invalid for being made for other than a public purpose. The rule can also be seen in PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA 460] where the Supreme Court held that one of the requisites for the valid exercise of the power of tax is that the tax must be for a public purpose. In TIO VS. VIDEOGRAM REGULATORY BOARD [151 SCRA 208], the Supreme Court held that the levy of 30% tax on videogram operators is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly
d. Delegation to the President to enter into executive agreements and to ratify tax treaties subject to the concurrence by the Senate e. Delegation to the people at large
Q: Do local governments have the power to tax?

Yes. The power to tax is no longer vested exclusively on Congress. The local governments are now given direct authority to levy taxes, fees and other charges pursuant to Section 5, Article X, of the _________________________________________
6
The delegation to be valid must comply with the completeness test and the existence of sufficiently determinate standards test.

1987 Constitution. NAPOCOR V. CITY CABANATUAN [G.R. NO. 149110, APRIL 9, 2003].
OF
Note: Previously, the power of taxation is exclusively with the Legislature and that such is merely delegated to local governments in respect of matters of local concern. PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA 460]. Now, there is a direct grant of taxing power by the Constitution to the local governments. Thus, the reference of the 2013 Bar Syllabus as delegation to local governments as an exception to the general rule that the power of taxation is inherently legislative is inaccurate.
A, who sold a parcel of land which he inherited, refused to pay and argued that such tax can only be collected by the National Government. On the other hand, the Municipality argues that under the Constitution, it has the power to create its own sources of revenue. Resolve the controversy.
None of them is correct. In fact, the ordinance is void. Under the Local Government Code, only provinces and cities can impose a tax on the transfer of ownership of real property. Municipalities are prohibited from imposing said tax that provinces are specifically authorized to levy.
Q: Does the direct grant of taxing power to the local governments mean that the legislature may no longer provide limitations and guidelines to such power?
No. While the power to tax may be exercised by local governments, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by the Constitution, the basic doctrine on local taxation remains the same in that the power to tax is primarily vested in Congress. QUEZON CITY V. ABS-CBN [G.R. NO. 166408, OCTOBER 6, 2008] It must be noted, further, that the power is not inherent in the local government unlike in the national government. M ANILA ELECTRIC COMPANY VS. PROVINCE OF LAGUNA [306 SCRA 750]. A municipal corporation has no inherent right to impose taxes. Its power to tax must always yield to a legislative act which is superior having been passed by the state itself which has the inherent power to tax. (see BASCO VS. PAGCOR [197 SCRA 52])
--------------------------------------------------------------c) Territorial (i) Situs of Taxation --------------------------------------------------------------.
Q: Explain the territoriality rule as a limitation on the power of taxation.

However broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction. Thus, in ILOILO BOTTLERS INC. VS. CITY OF ILOILO [164 SCRA 607], the Supreme Court, on the issue of whether a bottling company which sells soft drinks in Iloilo City but operates its bottling plant in another is liable for the excise tax imposed by said City on the distribution, manufacture and bottling of soft drinks, held that since truck sales were made in the City, the acts or privileges of the company is within its jurisdiction. In CIR V. M ARUBENI [204 SCRA 377], what was 7 involved was a contract on a turn-key basis which the CIR sought to tax as an indivisible contract. The Supreme Court held that the contract actually involved two taxing jurisdictions. While the _________________________________________
7
Q: May Congress abolish the power to tax of local governments?

No, Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local governments exercise of the power to tax.
Q: The Municipality of XYZ passed an ordinance imposing a tax on the sale or transfer of real property (local transfer tax).
In a turn key contract, the contractor is entrusted to design, construct, commission and handover the project to the employer in a completed state.

construction and installation work were completed in the Philippines, some pieces of equipment and supplies were completely designed and engineered in Japan. These services made and completed in Japan are not subject to contractors tax as they are rendered outside the taxing jurisdiction of the Philippines. In REAGAN V. CIR [30 SCRA 968], the Supreme Court held that bases under lease to the US under the Military Bases Agreement remain part of Philippine territory. It is not foreign territory for purposes of income tax legislation. The power to tax has been preserved except for those matters where an appropriate exemption was provided for.
Due to the variance in the concept of domicile for tax purposes and considering the multiple relationships that may arise with respect to intangible property and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or intangible property may be subject to taxation in several taxing jurisdictions.
Q: How do we address multiplicity of situs of taxation?

The taxing jurisdiction may: 1. provide for exemptions or allowance of deduction or tax credit for foreign taxes; and/or 2. enter into tax treaties with other States.
Q: What are the territoriality rule?
exceptions
to
the
1. Where tax laws operate outside territorial jurisdiction (i.e. taxation of resident citizens on their incomes derived from abroad) 2. Where tax laws do not operate within the territorial jurisdiction of the state (i.e. when exempted by treaty obligations and when exempted by international comity.)
--------------------------------------------------------------(b) Situs of Income tax (1) From sources within the Philippines (2) From sources without the Philippines (3) Income partly within and partly without the Philippines --------------------------------------------------------------Q: What is the situs of taxation of income?
1. From sources within the Philippines: all kinds of taxpayers are subject to income tax on income derived from sources within the Philippines. 2. From sources without the Philippines: only Resident Citizens and Domestic Corporations are liable to income tax on income derived from sources without the Philippines 3. Income partly within and partly without the Philippines: Taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance.
Note: The general principles of income taxation under Section 23 of the Tax Code is also known as the situs of income taxation.
--------------------------------------------------------------(i) Situs of Taxation (a) Meaning (b) Situs of Income tax (c) Situs of property taxes (d) Situs of excise taxes (e) Situs of business tax --------------------------------------------------------------Q: Define situs of taxation.
The situs of taxation is the place or authority that has the right to impose and collect taxes.
Q: What are the basis or determinants of the situs of taxation?

1. The symbiotic relationship 2. Jurisdiction, state or political unit that gives protection has the right to demand support
Q: What is the effect of multiplicity of situs of taxation?

--------------------------------------------------------------(c) Situs of property taxes (1) Taxes on real property (2) Taxes on personal property --------------------------------------------------------------Q: What is the situs of taxes on real property?
The situs of taxes on real property is where the property is located (lex situs)
occupation is being conducted. This is so because that is the place which gives protection to the business or occupation.
Q: What is the situs of estate and donors taxes?

Same rule applies to both. For citizens, whether resident or non-resident, and resident aliens: taxed on properties wherever situated. For non-resident aliens: taxed on properties situated in the Philippines.
Q: What is the situs of taxes on personal property?

If the personal property is tangible: where the property is physically located although the owner resides in another jurisdiction If the personal property is intangible: As a general rule, the situs is the domicile of the owner (mobilia sequuntur personam). The exceptions are as follows: 1. where the intangible personal property has acquired a business situs in another 8 jurisdiction. 2. When the law provides for the situs of the subject of the tax
--------------------------------------------------------------(e) Situs of business taxes --------------------------------------------------------------Q: What is the situs of sales of real property?
The situs of sales of real property is where the real property is located
Q: What is the situs of sales of personal property?

The situs of sales of personal property is the place where the sales are perfected and consummated
--------------------------------------------------------------(d) Situs of excise taxes (1) Estate Tax (2) Donors Tax --------------------------------------------------------------Note: Instead of Situs of Excise taxes, this should have been properly referred to as Situs of transfer taxes. While transfer taxes are considered excise taxes, note that VAT was placed under Situs of Business taxes when in fact it is also an excise tax.
Q: What is the situs of VAT?

The situs of VAT is the place where the transaction is made. It is either where the property is sold and consumed or where the service is to be performed.
Q: What is the situs of excise taxes?

The situs of excise taxes is where the transaction was performed. It is the place where the business or _________________________________________
8
--------------------------------------------------------------d) International Comity --------------------------------------------------------------Q: Explain the principle of comity as a limitation on the power of taxation.
The property or income of a foreign state or government may not be the subject of taxation by another.
As an example, the tax imposed on gains from sale of shares of stock of a domestic corporation are treated as derived entirely from sources within the Philippines regardless of where the said shares are sold.

As held in TANADA V. ANGARA [272 SCRA 18], by their voluntary act, nations may surrender some aspects of their state power in exchange for greater benefits granted or derived from a convention of pact. The underlying consideration in this partial surrender of sovereignty is the reciprocal commitment of the other contracting states in granting the same privilege and immunities to the Philippines, its officials and its citizens. The point is that a portion of sovereignty may be waived without violating the Constitution, based on the rationale that the Philippines "adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of . . . cooperation and amity with all nations." Note that the principle of comity entails an exchange in benefits. Thus, in SEA-LAND SERVICE V. CA [357 SCRA 441], the Supreme Court ruled that the hauling and transport of household goods and personal effects of U.S. military personnel were not tax exempt under the RP-US Military Bases Agreement as they do not directly contribute to the defense and security of the Philippines. In CIR V. MITSUBISHI METAL CORP [181 SCRA 214], the Supreme Court held that scrupulous care must be taken when international comity is invoked on the representation that funds involved in the loans are those of a foreign government as we should avoid opening the floodgates to the violation of our tax laws.
Q: Can local governments tax the national government, its agencies, and instrumentalities?
No. In MIAA v. CA [495 SCRA 591], the Supreme Court, in resolving the issue on whether the lands and buildings owned by the Manila International Airport Authority were subject to real property tax, ruled in the negative. The Supreme Court opined that since MIAA is not a GOCC but instead as government instrumentality vested with corporate powers or a government corporate entity, it is exempt from real property tax. By express provision of the Local Government Code, local governments cannot levy taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities. Furthermore, the said lands and buildings are property of the public dominion and therefore owned by the State. They are devoted to public use. Thus, they cannot be auctioned as they are outside the commerce of man. However, the portions of the property leased to private entities are subject to real property tax.
--------------------------------------------------------------2. Constitutional Limitations a) Provisions directly affecting taxation --------------------------------------------------------------Q: What are the constitutional provisions directly affecting taxation?
The direct constitutional provisions on taxation are: 1. Non-imprisonment for non-payment of polltax (Article III, Sec. 20) 2. Uniformity, equitability and progressivity of taxation ( Article VI, Section 28, par. 1). 3. Grant by Congress of authority to the President to fix tariff rates, import and export quotas, etc ( Article VI, Section 28, par. 2) 4. Tax exemption of properties actually, directly, and exclusively used for religious, charitable and educational purposes ( Article VI, Section 28, par. 3) 5. Exemption from taxes of the revenues and assets of educational institutions including grants, endowments, donations or
--------------------------------------------------------------e) Exemption of government entities, agencies, and instrumentalities --------------------------------------------------------------Q: Is the State subject to tax?
Generally, the State may not be subject to taxation. However, while this may be so, sovereignty being absolute and taxation being an act of high sovereignty, the State may tax itself including its political subdivisions.
Q: Are GOCCs subject to local government taxes?

Yes. Exemptions of GOCCs from local government taxes have been withdrawn by the the Local Government Code PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

6.
7.
8.
9.
10.
contributions. ( Article XVI, Section 4, par. 3) Presidents veto power on appropriation, revenue, tariff bills (Article VI, Section 27, par. 2) Non-impairment of the Supreme Courts jurisdiction in tax cases ( Article VIII, Sec. 5, par. 2(b)) Power of local governments to create its own sources of revenue and to levy taxes subject to Congressional limitations ( Article X, Section 6) Voting requirement in connection with the legislative grant of tax exemption ( Article VI, Section 28, par. 4) The provision which mandates that money collected on a tax levied for a public purpose shall be paid out for such purpose only (Article VI, Section 29, par. 3)
Q: What is meant by equitable?

Equitable means fair, just, reasonable proportionate to ones ability to pay. and
In ABAKADA GURO PARTY-LIST V. ERMITA [469 SCRA 1], the Supreme Court ruled that the 12% VAT imposition was equitable as it imposes safeguards and limits in the form of VAT exemption granted to gross sales below P1.5 million. In KAPATIRAN V. TAN [163 SCRA 372], the Supreme 9 Court held that EO 278 is equitable as it is imposed only on sales of goods or services by persons engaged in a business with an aggregate gross annual sales exceeding P200,000 while small corner sari-sari stores are consequently exempt as well as sales of farm and marine products.
--------------------------------------------------------------(i) Prohibition against imprisonment for nonpayment of poll tax --------------------------------------------------------------Article III. Section 20. No person shall be imprisoned for debt or non-payment of a poll tax.
Q: Should the system of taxation be always progressive?

No. The Supreme Court in TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628] explained that what Congress is required by the Constitution to do is only to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities or for the promotion of the right to "quality education." These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights. Thus, even if the VAT is regressive because it is an indirect tax, it is not prohibited by the Constitution.
--------------------------------------------------------------(ii) Uniformity and equality of taxation --------------------------------------------------------------Article VI. Section 28. 1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.
Q: What is meant by uniformity?

Uniformity requires that all subjects or objects of taxation similarly situated are to be treated alike or put on equal footing both in privileges and liabilities (SISON V. ANCHETA [130 SCRA 654]; see also CIR V. LINGAYEN GULF [164 SCRA 27])
--------------------------------------------------------------(iii) Grant by Congress of authority to the President to impose tariff rates (xi) Flexible tariff clause --------------------------------------------------------------Article VI. Section 28.
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EO 278 imposing a 10% VAT on the value added by every seller with aggregate gross annual sales of articles and/ or services exceeding P200,000 to his purchase of goods and services

2.
The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.
6. All lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes. The exemption provided for under Article VI, Section 28 pertains only to real property taxes ( LLADOC V. CIR [14 SCRA 292]). Under Article XIV, Section 4(3), all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.
--------------------------------------------------------------(iv) Prohibition against taxation or religious, charitable entities, and educational entities (x) Exemption from real property taxes --------------------------------------------------------------Article VI. Section 28. 3. Charitable institutions, churches and personages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
Q: What is meant by actual, direct, and exclusive use?

What is meant by actual, direct, and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purpose for which the charitable institution is organized. LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119]
--------------------------------------------------------------(v) Prohibition against taxation of non-stock, non-profit institutions --------------------------------------------------------------Article XIV. Section 4. 3. All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law
Q: If a hospital also admits paying patients, does it lose its character as a charitable institution?
No. In CIR V. BISHOP OF MISSIONARY DISTRICT [14 SCRA 991], the Supreme Court held that the admission of pay patients does not detract from the charitable character of a hospital if its funds are devoted exclusively to the maintenance of the institution as a public charity (see also HERRERA V. QCBAA [3 SCRA 186]) In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], the Supreme Court stated that, as a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients , whether out-patient or confined in the hospital or receives subsidies from the government, as long as the money received is devoted or used altogether to the charitable object which it is intended to achieve, and no money inures to the private benefit of the persons managing or operating the institution.
Q: What are special entities that are granted tax exemptions by the Constitution?
Under Article VI, Section 28, the following are exempt from real property taxes: 1. 2. 3. 4. 5. Charitable institutions Churches Parsonages or convents appurtenant thereto Mosques Non-profit cemeteries; and
Q: Does the phrase actually, directly, and exclusively used mean that the exemption

shall only cover property indispensable to the institution?
actually
charged parking fees on the lots beside its building. Can the CIR tax YMCA for such income?
Yes. In CIR V. CA [298 SCRA 83], the Supreme Court ruled that the income from the lease and parking fees were not exempt. The last paragraph of Section 27 of the NIRC clearly provides that profits realized by exempt organizations (non-profit clubs) from real property from whatever source and wherever used are taxable. The Court noted that while YMCA is exempt from real property taxes, it is not exempt from income tax on the rentals from its property. Further, YMCA failed to prove that it was a non-stock, non-profit educational institution under Article XIV, Section 4(3) of the Constitution.
No. As held in HERRERA V. QCBAA [3 SCRA 186], the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable but extends to facilities which are incidental to or reasonably necessary for the accomplishment of its purposes.
Q: A hospital has a school for training nurses and midwifes. Substantial profit is derived from the operation of the said school. Is the school exempt from taxes?
As to the lands, buildings, and improvements, such is beyond the taxing power of the State irrespective of the substantial profits as all lands, buildings and improvements used exclusively for religious, charitable or educational purposes are exempt from real property taxes. The school is a facility incidental or reasonably necessary for the accomplishment of the purposes of the hospital as the students practice therein. (see HERRERA V. QCBAA [3 SCRA 186]) As to the profits, it will be exempt from taxes if it proves that it is within the coverage of Article XIV, Section 4(3) which exempts all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes
Q: The Philippine Lung Center leased portions of its real property out for commercial purposes. Are these exempt from real property taxes?
No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], the Supreme Court held that the hospital was not exempt from real property tax on the portions of its property not actually, directly, and exclusively used for charitable purposes. Thus, those leased out for commercial purposes are subject to real property tax. Those used by the hospital even if used for paying patients remain exempt from real property taxes.
Q: Is a vegetable garden and an unused cemetery adjacent to a convent exempt from payment of real property taxes?
Yes. As held in BISHOP OF SEGOVIA V. PROV. BOARD OF ILOCOS NORTE [51 SCRA 352], the exemption from the payment of the land tax in favor of the convent includes not only the land actually occupied by the building, but also the adjacent ground or vegetable garden destined to the incidental use of the parish priest in his ordinary life. The unused cemetery is also exempt as it is not used for commercial purposes and instead is used as a place for those who participate in the religious festivities.
CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26, 2012]

DOCTRINE: A proprietary non-profit hospital is subject to 10% tax under Section 27(B) of the Tax Code. FACTS: St. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. It admits both paying and non-paying patients. The CIR claimed that St. Lukes was liable for income tax at 10% as provided under 10 Section 27(B) of the NIRC. St. Lukes argues that it is a non-stock, non-profit institution for charitable and social
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Q: YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. YMCA leased part of its premises to small canteen owners and
10
Section 27(B) provides that proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income

welfare purposes exempt from income tax under Section 11 30(E) and (G) of the NIRC. HELD: St. Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is a non-profit hospital. For Section 27(B) to apply, the hospital must be non-profit which means that no net income or asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. On the other hand, Section 30(E) and (G), while providing for an exemption is qualified by the last paragraph which, in turn, provides that activities conducted for profit shall be taxable. Section 30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be completely exempt from income tax. In this case, however, St. Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients are concerned. Such revenue is subject to income tax at 10% under Section 27(B).
charitable. This is affirmed in the constitutional provision with regard to non-stock, non-profit educational institutions. For their income to be exempt, their revenues and assets must be used actually, directly, and exclusively for educational purposes. The rule now can be laid down as follows: For the income of a non-stock, non-profit corporation to be totally exempt, it must be organized and operated exclusively for educational or charitable purposes. In such case, it will fall within the coverage of Section 30(E) and (G) of the Tax Code. However, if it conducts for-profit activities, like the admission of paying patients, it will not be exempt with regard to that particular income. Section 27(B) will apply and the income will be taxed at the preferential rate of 10%. RMC 67-2012 [October 31, 2012] was issued by the BIR to implement this decision of the Supreme Court on all private non-profit hospitals and educational institutions starting from January 1, 1998.
Note: This case is very important because it reconciles the following constitutional and statutory provisions: Section 28, Article VI (tax exemption of real property actually, directly, and exclusively used for religious, charitable or educational purposes); Section 4(3) Article XIV (tax exemption of income of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes); Section 27(B), Tax Code (10% preferential tax rate to income of proprietary educational institutions); Section 30(E) and (G) (tax exemption of the income of non-stock non-profit corporations organized and operated exclusively for charitable purposes.). With regard to taxation of real property, the doctrine laid down in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119] still holds. The lands, buildings, and improvements actually, directly and exclusively used for religious, charitable and educational purposes shall remain exempt from real property taxes even if there is, in the case of a hospital, admission of paying patients. If the hospital were to lease to private persons portions of its property for profit, the real property will not be exempt from real property taxes. Thats for real property taxes. Income taxation is another thing. With regard to income taxation, the statement of the Court must be noted: Non-profit does not necessarily mean
Q: Is the existence of paying patients material to the real property tax exemption of the building, land and improvements of St. Lukes?
No. The lands, buildings, and improvements of St. Lukes remain exempt from real property taxes even if it admits paying patients. This is consistent with the ruling in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119] where the Supreme Court held that a charitable institution does not lose its character as such and its exemption from real property taxes simply because it derives income from paying patients
Q: If St. Lukes were to lease to private persons portions of its property for profit, is the property and the profits exempt from taxes?
The property will not be exempt from real property taxes and also the profits will not be exempt from income tax. Pursuant to the ruling in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], those portions of real property not actually used for charitable purposes shall not be exempt from real property taxes. Consistent with the ruling in CIR V. CA [298 SCRA 83], profits realized from real property by exempt institutions from whatever source or wherever used are taxable.
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Section 30(E), NIRC provides that a non-stock corporation or association organized and operated exclusively for charitable purposes is exempt from income tax while Section 30(G) provides that a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare is likewise exempt.
---------------------------------------------------------------

(vi) Majority vote of Congress for grant of tax exemption --------------------------------------------------------------Article VI. Section 28. 4. No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.
Section 27. 2. The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.
--------------------------------------------------------------(ix) Non-impairment of jurisdiction of the Supreme Court --------------------------------------------------------------Article VIII. Section 5. The Supreme Court shall have the following powers: 2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.
--------------------------------------------------------------(vii) Prohibition on use of tax levied for a special purpose --------------------------------------------------------------Article VI. Section 29. 3. All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.
In determining whether the creation of the OPSF violate the above provision, the Supreme Court in OSMENA VS. ORBOS [220 SCRA 703] opined that in order for the funds to fall under the prohibition, it must be shown that they were collected as taxes as a form of revenue. In this case, while the funds were referred to as taxes, they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. The OPSF is actually a special fund. It is segregated from the general fund; and while it is placed in what the law refers to as a trust liability account, the fund nonetheless remains subject to the scrutiny and review of the COA. These measures comply with the constitutional description of a special fund.
--------------------------------------------------------------(x) Grant of power to the local government units to create its own sources of revenue --------------------------------------------------------------Article X. Section 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.
--------------------------------------------------------------(xiii) No appropriation or use of public money for religious purposes --------------------------------------------------------------Article VI. Section 29. 2. No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, other religious teacher, or dignitary as such, except when such priest,
--------------------------------------------------------------(viii) Presidents veto power on appropriation, revenue, tariff bills --------------------------------------------------------------Article VI.

preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium.
Q: How does the principle of uniformity relate to the equal protection clause?
The test of uniformity is based on the requisites for a valid classification under the equal protection clause. As held in SISON V. ANCHETA [130 SCRA 654], uniformity of taxation is quite similar to the standard of equal protection. Under the equal protection classification to be valid, it must: clause, for a
--------------------------------------------------------------2. Constitutional Limitations a) Provisions indirectly affecting taxation --------------------------------------------------------------Q: What are the general (indirect) constitutional limitations on the taxing power?
The general constitutional limitations are: 1. 2. 3. 4. Due process (Article III, Section 1) Equal protection ( Article III, Section 1) Religious Freedom (Article III, Section 5) Non-Impairment of Contracts (Article (Article III, Section 10)
1. Rest on substantial distinctions; 2. Be germane to the purpose of the law; 3. Not be limited to existing conditions only; and 4. Apply equally to all members of the same class.
Q: Is there a violation of the uniformity of taxation or equal protection when the State gives preferential tax treatment to locators inside special economic zones?
No. As held in TIU V. CA [301 SCRA 278], there are substantial differences between the big investors who are being lured to establish and operate their industries in the special economic zones and those business operators outside the zones. One of these is that the former bring in billion-peso investments and thousands of new jobs. The Supreme Court also stated that the equal protection guarantee does not require territorial uniformity of laws.
--------------------------------------------------------------(i) Due Process (ii) Equal Protection --------------------------------------------------------------Article III. Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.
Q: How is the due process clause applied to taxation?

In PEPSI-COLA BOTTLING COMPANY VS. MUNICIPALITY OF T ANAUAN, LEYTE [69 SCRA 460], the Supreme Court held that taking of property without due process of law may not be passed over under the guise of taxing power, except when the latter is exercised lawfully as when: 1. the tax is for a public purpose; 2. the rule on uniformity of taxation is observed; 3. either the person or property taxed is within the jurisdiction of the government levying the tax; and 4. in the assessment and collection of taxes notice and opportunity for hearing are provided
Q: Should tax incentives be uniform for all special economic zones?

Not necessarily. In JOHN HAY V. LIM [414 SCRA 356], at issue was the extension of benefits given to the Subic SEZ under RA 7227 to the John Hay SEZ via a proclamation, the Supreme Court ruled that tax exemptions must be strictly and expressly provided for and that the power to grant exemption is only within Congress. The same rationale was used with respect to locators in the Clark SEZ in the case of COCONUT OIL REFINERS ASSOCIATION V. TORRES [465 SCRA 48]. The implication of these two cases is that special economic zones can have different tax incentives. However, it must be noted that by virtue of RA 9400, the same incentives have been granted to Clark, John Hay, Poro Point and Morong SEZs.

Q: Does the Attrition Law (RA 9335), which gives incentives to BOR/BOC employees, violate the equal protection clause?
No. In ABAKADA GURO PARTY-LIST V. PURISIMA [562 SCRA 251], the Supreme Court held that there was no violation of the equal protection clause. The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. The subject of the Attrition Law was revenue generation and collection of the BIR and BOC, thus, the incentives and sanctions should logically pertain to them and not to other government agencies. This has been reiterated in the recent case of BOCEA V. TEVES [G.R. 181704, DEC. 6, 2011].
Q: Does RR 17-99 (implementing RA 8240 but applying the higher tax rule on the January 1, 2000 increase)13 violate the equal protection clause?
Yes. In CIR V. FORTUNE TOBACCO [SEPTEMBER 28, 2011], the Supreme Court ruled that the higher tax rule only applies on the transition period. To implement the higher tax rule on the January 1, 2000 increase would violate the rule of uniformity since brands belonging to the same category would be imposed with different tax rates.
Q: Does the classification freeze scheme12 under RA 9334 violate the equal protection clause?
No. In British American Tobacco v. Camacho [562 SCRA 511], the Supreme Court held that the classification freeze does not violate the equal protection clause as it passes the rational basis test and is meant to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with state interests. It addresses the concerns in the simplification of tax administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of projection of revenues.
Q: Does the adoption of a gross system of income taxation to compensation income and a system of net income taxation as regards professional and business income violate the rule on uniformity?
No. In SISON V. ANCHETA [130 SCRA 654], the Supreme Court noted that taxpayers who are recipients of compensation income have practically no overhead expenses and thus, they should not be entitled to make deductions for income tax purposes. On the other hand, professionals and businessmen have no uniformity in terms of costs or expenses necessary to produce their income. Thus, it would be unjust to disregard such disparities and giving them all zero deductions and impose on all the same tax rates.
Q: Does the rule on uniformity require territorial uniformity?

No. As held in TIU V. CA [301 SCRA 278], the equal protection guarantee does not require territorial uniformity of laws. In VILLANUEVA V. CITY OF ILOILO [26 SCRA 578], in determining whether the imposition of a municipal license tax on tenement houses violates the equal protection clause as such taxes are not imposed in other cities, the Supreme
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12
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13
Under the classification freeze scheme, after a brand of cigarette is classified based on its current net retail price, the classification is frozen and only Congress can thereafter reclassify the same. Under this scheme, it would be possible that over time the net retail price of a previously classified brand would increase to a point that its net retail price pierces tha tax bracket to which it was previously classified byt nonetheless it would still be subject to the excise tax rate under the lower tax bracket.
RA 8240 which took effect January 1, 1997 provides for a shift from ad valorem taxes to specific taxes on cigarettes. The law provided that (1) the specific tax due from any brand of cigarette within 3 years shall not be lower than the tax due before the new law (higher tax rule) and (2) the specific tax rate shall be increased by 12% on January 1, 2000. In effect, what RR 17-99 did was to implement the higher tax rule for the January 1, 2000 increase.

Court ruled in the negative as the rule on uniformity does not require taxes for the same purpose should be imposed in different territorial subdivisions at the same time. It is enough that the tax falls equally and impartially on all owners or operations of tenement houses similarly classified or situated. The statement made by the Court in CIR V. LINGAYEN GULF [164 SCRA 27] to the effect that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found should not be taken to mean that territorial uniformity is required.
thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.
Q: A municipality passed an ordinance which imposes a tax on the sale of bibles. Is the ordinance valid?
No. As held in AMERICAN BIBLE SOCIETY VS. CITY OF M ANILA [101 SCRA 386], the municipal ordinances imposing a tax on the sale of bibles were declared unconstitutional as it would impair the free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious beliefs.
Q: A municipal ordinance was passed imposing a tax on the sale of soft drinks or carbonated beverages by agents/consignees of dealers doing business outside the municipality. Is there a violation of the equal protection clause?
Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24 SCRA 789], under the said municipal ordinance, sales of local dealers not acting for or on behalf of merchants established outside the municipality would be exempt from the tax while those acting as agents and consignees of dealers outside the municipality would have to pay the tax. The Supreme Court ruled that this was a violation of the uniformity required by the Constitution.
--------------------------------------------------------------(iv) Non-impairment of obligations of contracts --------------------------------------------------------------Article III. Section 10. No law impairing the obligation of contracts shall be passed.
Q: When can the non-impairment clause be rightly invoked against the withdrawal of a tax exemption?
In PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC [181 SCRA 38], the Supreme Court held that the non-impairment clause may be rightly invoked against contractual tax exemptions. Contractual tax exemptions are those agreed by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its government immunity (see also MERALCO V. PROVINCE OF LAGUNA [306 SCRA 750]) What constitutes an impairment of the obligation of contract is the revocation of an exemption which is founded on a valuable consideration because it takes the form and essence of a contract.
Q: A tax ordinance was passed expressly providing for the entity which shall be subject to tax. Is there a violation of the equal protection clause?
Yes. In ORMOC SUGAR V. TREASURER [22 SCRA 603], the Supreme Court held that a reasonable classification should be in terms applicable to future conditions. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established entity from the coverage of the tax.
--------------------------------------------------------------(iii) Religious Freedom --------------------------------------------------------------Article III. Section 5. No law shall be made respecting an establishment of religion, or prohibiting the free exercise
Q: Is a tax exemption embodied in a legislative franchise a contractual tax

exemption (such that it impairs the obligations of contracts when revoked)?

No. As held in PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC [181 SCRA 38], a franchise does not take the nature of a contractual tax exemption, which cannot be revoked without impairing the obligations of contracts. It is a unilateral tax exemption. A legislative franchise can be withdrawn through amendment or repeal. (see also CAGAYAN ELECTRIC POWER V. CIR [138 SCRA 629]; LEALDA ELECTRIC V. CIR [7 SCRA 928].)
Q: What are the characteristics or elements of a tax? (essential elements of a tax)

1. Enforced contributions 2. Generally payable in money 3. Proportional in character, since taxes are based on ones ability to pay 4. Levied on persons, property, or exercise of a right or privilege 5. Levied by the State having jurisdiction 6. Levied by the legislature 7. Levied for a public purpose 8. Paid at regular periods or intervals
--------------------------------------------------------------J. Stages of taxation 1. Levy 2. Assessment and collection 3. Payment 4. Refund --------------------------------------------------------------Q: Enumerate the three (3) stages or aspects of taxation. Explain each.
The three stages or aspects of taxation are: 1. Levy This refers to the enactment of a law by Congress imposing a tax 2. Assessment and collection This is the act of administration and implementation of the tax law by the executive department through the administrative agencies 3. Payment This is the act of compliance by the taxpayer including whatever remedies are available to him under the law
Note: Refund is one of the remedies of the taxpayer. It is not a separate stage of taxation. It is deemed included in the stage of payment.
Q: Can stockholders be held personally liable for the unpaid taxes of a dissolved corporation?
No, a corporation is vested by the law with a personality that is separate and distinct from those of the persons composing it. However, they may be held liable for the unpaid taxes: a. If it appears that the corporate assets have passed into their hands b. When the stockholders have unpaid subscriptions to the capital of the corporation (liable only to the extent of their unpaid subscriptions).
--------------------------------------------------------------L. Requisites of a Valid Tax --------------------------------------------------------------Q: What are the requisites of a valid tax?
1. The tax should be within the jurisdiction of the taxing authority 2. It must be for a public purpose 3. The rule of taxation must be uniform 4. It guarantees against injustice to individuals, especially by way of notice and opportunity to be heard be provided. 5. It must not impinge on the inherent and Constitutional limitations on the power of taxation.
--------------------------------------------------------------K. Definition, nature and characteristics of taxes --------------------------------------------------------------Q: Define taxes.

Taxes are enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of the government and for all its public needs.

--------------------------------------------------------------M. Tax as distinguished from other forms of exactions 1. Tariff 2. Toll 3. License fee 4. Special assessment 5. Debt ----------------------------------------------------------------------------------------------------------------------------1. Tariff --------------------------------------------------------------Q: Distinguish a tax from a tariff?
A tax is an all embracing term to include various kinds of enforced contributions imposed upon persons for the attainment of public purposes, while a tariff should be understood to mean a kind of tax imposed on articles which are traded internationally.
by the government
private individuals or entities
--------------------------------------------------------------3. License Fee --------------------------------------------------------------Q: Distinguish a tax from a license fee.

See table below. TAX Imposed revenue purposes LICENSE FEE Imposed for regulatory purposes
Purpose
for
Basis
Imposed under the power of taxation No limit as to the amount of tax
Imposed under the police power of the State Amount of license fee that can be collected is limited to the cost of the license and the expenses of police surveillance and regulation Normally paid before the commencement of the business Failure to pay the license fee makes the business illegal
Amount
--------------------------------------------------------------2. Toll --------------------------------------------------------------Q: Distinguish a tax from a toll.

See table below. TAX Enforced proportional contributions from persons and property TOLL Sum of money for the use of something, a consideration which is paid for the use of a property which is of a public nature A demand proprietorship of Time of payment
Normally paid after the start of business Failure to pay the tax does not make the business illegal
Definition
Effect of nonpayment
Basis
A demand of sovereignty No limit as to the amount of tax
Amount
Amount of toll depends upon the cost of construction or maintenance of the public improvement used May be imposed by the government or
Authority
May imposed
be only
As held in the case of PROGRESSIVE DEVELOPMENT CORPORATION VS. QUEZON CITY [172 SCRA 629], the term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax: a license fee is imposed in the exercise of police power primarily for purposes of regulation, while a tax is imposed under the taxing power primarily for purposes of raising revenues (see also COMPANIA GENERAL DE

TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA 367]. )
be of sufficient amount to include the cost of licensing, regulating and surveillance.
Q: What is the importance of determining whether a particular imposition is a tax or a license fee?
It is necessary because some limitations apply only to one and not to the other, and for the reason that exemption from taxes may not include exemption from license fees.
Q: Does the above rule apply to all types of license fees?

No. In the case of license fees for non-useful occupations, wider discretion in fixing the amount is given to municipal corporations and the exaction may be very large without necessarily being a tax. This is so because municipal corporations are authorized to enact ordinances to provide for the health and safety and promote the morality, peace and general welfare of its inhabitants. Thus, in the case of PHYSICAL THERAPY ORGANIZATION OF THE PHILIPPINES V. MUNICIPAL BOARD OF THE CITY OF M ANILA [101 PHIL. 1142], the Supreme Court found the imposed license fee as reasonable as the practice of hygienic and aesthetic massage not as a useful and beneficial occupation which will promote and is conducive to public morals.
Q: What are the three types of license fees?

The three types of license fees are: 1. License for the regulation of useful occupation or enterprises 2. License for the regulation or restriction of nonuseful occupation or enterprises 14 3. License for revenue only (See VICTORIAS MILLING CO. VS. CIR [22 SCRA 13])
Q: What is a license tax and how do you distinguish it from a license fee?
As explained by the Supreme Court in the case of VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to designate impositions exacted for the exercise of various privileges." It does not refer solely to a license for regulation. In many instances, it refers to "revenueraising exactions on privileges or activities." On the other hand, license fees are commonly called taxes. But, legally speaking, license taxes are "for the purpose of raising revenues," in contrast to license fees which are imposed "in the exercise of police power for purposes of regulation."
--------------------------------------------------------------4. Special Assessment --------------------------------------------------------------Q: Distinguish assessment.

See table below. TAX Definition Enforced proportional contribution from persons and property SPECIAL ASSESSMENT An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements Based wholly on benefits Levied only on land
tax
from
special
Q: What should be the extent of the exaction for it to be considered a license fee?
As held in the case of G.A. CUUNJIENG V. PATSTONE [42 PHIL 818], the amount of the exaction must only _________________________________________
14
Basis
Based necessity Levied on: (1) persons (2) Property (3) Acts Has
on
Subject
This shouldnt be a type of license fee. It is instead a license tax.
Scope PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
general
It
is
exceptional

application
both as to time and place Not a personal liability of the person assessed; his liability is limited only to the land involved
individuals Prescription Prescriptive periods for tax are determined under the NIRC Civil Code governs the prescriptive period of debts
Person Liable
It is a personal liability of the taxpayer
See THE APOSTOLIC PREFECT OF THE MOUNTAIN PROVINCE V. TREASURER OF BAGUIO [71 PHIL. 547]
Q: Distinguish a tax from a penalty.

TAX Enforced proportional contributions from persons and property PENALTY Sanction imposed as punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Designed to regulate conduct May be imposed by (1) Government; or (2) Private individuals or entities
--------------------------------------------------------------5. Debt --------------------------------------------------------------Q: Distinguish a tax from a debt.

See table below.
Definition
Basis
Effect nonpayment
TAX DEBT Based on Based on law contract or judgment of Taxpayer No may be imprisonment imprisoned for failure to pay for his failure a debt to pay the tax of Generally May be payable payable in in money, money property and services Can assigned be
Purpose
Intended to raise revenue May be imposed only by the government
Authority
Mode payment
Q: Distinguish a tax from a subsidy?

A subsidy is a legislative grant of money in aid of a private enterprise deemed to promote a public welfare. It is not a tax although it may be necessary to raise the money to pay the subsidy by means of a tax.
Assignability Not assignable Interest
Does not Draws interest if draw interest stipulated or unless delayed delinquent Imposed by Can public imposed authority private be by
Q: Distinguish a tax from customs duties and fees

Customs Duties and fees are those charged upon commodities on their being imported in or exported from the country. Customs duties are taxes but a tax is a broader term to include not only customs duties but other taxes as well.
Authority

Q: Distinguish a tax from revenue

Revenue is a broad term that includes not only taxes but income from other sources as well. Excise privilege tax or
power (e.g. real estate tax) Taxes laid upon the manufacture, sale or consumption of commodities within the country; upon licenses to pursue certain occupations and upon corporate privileges (e.g. value-added tax)
--------------------------------------------------------------N. Kinds of taxes 1. As to object a) Personal, capitation, or poll tax b) Property tax c) Privilege tax 2. As to burden or incidence a) Direct b) Indirect 3. As to tax rates a) Specific b) Ad valorem c) Mixed 4. As to purposes a) General or fiscal b) Special, regulatory, or sumptuary 5. As to scope or authority to impose a) National internal revenue taxes b) Local real property tax, municipal tax 6. As to graduation a) Progressive b) Regressive c) Proportionate --------------------------------------------------------------Q: What are the classes or kinds of tax according to subject or object?
See table below. Personal, capitation, poll tax Taxes of a fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property or the occupations of businesses in which they may be engaged (e.g. community tax) Taxes assessed on all property or all property of a certain class within the jurisdiction of the taxing
Q: What are the classes or kinds of tax according to who bears the burden?
See table below. Direct Taxes wherein both the tax liability as well as the impact or burden of the tax falls on the same person (e.g. corporate and individual income tax) Taxes wherein the tax liability falls on one person but the burden thereof may be shifted or passed to another. (e.g. value-added tax, percentage taxes)
Indirect
Q: Classify the taxes imposed under the Tax Code into direct and indirect taxes.
Income tax, estate tax and donors tax are considered as direct taxes. On the other hand, value-added tax, excise tax, other percentage tax and documentary stamp tax are indirect taxes.
or
Q: What are the classes or kinds of tax according to the determination of amount or tax rates?
See table below. Specific Tax which imposes a specific sum by the head or number or by some standard of weight or measurement and which requires no Page 43 of 158 Last Updated: 30 July 2013(v3)
Property Tax

assessment beyond a listing and classification of the subjects to be taxed (e.g. taxes on distilled spirits) Ad Valorem Tax upon the value of the article or thing subject of taxation (e.g. real estate tax) A choice between ad valorem or specific depending on the condition attached
tax) Regressive Taxes imposed where the tax rate decreases as the tax base increases. The tax rates are partly progressive and partly regressive The tax rates are fixed (in amounts or in percentage) on a flat tax base) (e.g. real estate tax)
Mixed
Mixed
Proportionate
Q: What are the classes or kinds of tax according to purpose?

See table below. General or fiscal or revenue Taxes levied for the general or ordinary purposes of Government (e.g. income tax, value-added tax) Taxes levied for a special purpose (e.g. protective tariffs, custom duties)
Special, regulatory, sumptuary
or
Q: What are the classes or kinds of tax according to the scope or imposing authority?
See table below. National (internal revenue taxes) Local (real property tax, municipal tax) Taxes levied by the National Government (e.g. national internal revenue taxes) Taxes levied by the local governments subject to such guidelines and limitations as the Congress may provide (e.g. real estate tax)
Q: What are the classes or kinds of tax according to graduation?

See table below. Progressive Taxes imposed where the tax rate increases as the tax base increases (e.g. income Page 44 of 158 Last Updated: 30 July 2013(v3)

--------------------------------------------------------II. NIRC ---------------------------------------------------------Note: This Chapter will include A. Income Tax, B. Estate Tax, C. Donors Tax, E. Value-Added Tax and F. Tax Remedies. Other percentages taxes, Excise taxes and documentary stamp tax are not discussed as they are excluded from the bar coverage.
compensation, capital gains, passive income, or other income subject to final withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized by the taxpayer during the year. The current method of taxation under the Tax Code belongs to a system which is partly scheduler and partly global.
---------------------------------------------------------A. INCOME TAX -----------------------------------------------------------------------------------------------------------------------1. Income Tax Systems a) Global Tax System b) Schedular Tax System c) Semi-schedular or semi-global tax system --------------------------------------------------------------Q: What are the kinds of income tax systems?
The types of income tax systems are as follows: 1. Global Tax System where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income.
Note: Simply put, one rate for all types of gross income.
Q: How do you distinguish schedular treatment from global treatment as used in income taxation?
Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate (see TAN VS. DEL ROSARIO [OCTOBER 3, 1994]).
Note: The Philippines had adopted both the global system and the schedular system of taxation. The global system can be found in the income taxation of corporations. The Tax Code subjects them to either the regular corporate income tax or minimum corporate income tax irrespective of the tax base. On the other hand, the schedular system can be found in the income taxation of individuals where the tax rates are progressive in character.
2. Schedular Tax System where there are different tax treatments of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis.
Note: Simply put, varying taxes are imposed on passive income.
3. Semi-Schedular or Semi-Global Tax System where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or professional income or mixed income compensation and business or professional income) or (b) schedular (e.g. taxpayer with PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------2. Features of the Philippine Income Tax Law a) Direct tax b) Progressive c) Comprehensive d) Semi-schedular or semi-global tax system ---------------------------------------------------------------

Q: What are the features of the Philippine Income Tax system?

The Philippine tax system is: 1. Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed. 2. Income tax is a progressive tax since the tax base increases as the tax rate increases. 3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. 4. The Philippines follows the semi-schedular or semi-global system of income taxation.
4. Types of Philippine Income Tax --------------------------------------------------------------Q: What are the types of Philippine Income Tax (under Title II of the NIRC)?
The types of Income tax under Title II of the NIRC are: 1. Graduated income tax on individuals 2. Normal corporate income tax on corporations 3. Minimum corporate income tax on corporations 4. Special income tax on certain corporations (e.g. private educational institutions, FCDUs, and international carriers) 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset 6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital asset 7. Final withholding tax on certain passive investment incomes 8. Fringe benefit tax 9. Branch profit remittance tax; and 10. Tax on improperly accumulated earnings.
--------------------------------------------------------------3. Criteria in imposing Philippine income tax a) Citizenship principle b) Residence principle c) Source principle --------------------------------------------------------------Q: What are the criteria in imposing Philippine income tax?
1. Citizenship or nationality principle A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines (b) only on his Philippine source income, if he qualifies as a non-resident citizen where his foreign-source income shall be tax-exempt. 2. Residence or domicile principle An alien is subject to Philippine income tax because of his residence in the Philippines. A resident alien is liable to pay Philippine income tax only from his income from Philippine sources but is tax-exempt from foreign-source income 3. Source of income principle An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines
--------------------------------------------------------------5. Taxable Period --------------------------------------------------------------Note: This is apparently misplaced in the Syllabus. For better understanding of the concepts, I moved this to the discussion on Income right before Methods of Accounting.
--------------------------------------------------------------6. Kinds of Taxpayers --------------------------------------------------------------Note: It is important to know the different kinds of taxpayers in order to determine the following: (1) gross income for tax purposes (2) exclusions from gross income; (3) exemptions; (4) deductions and (5) income tax rates. The only two exceptions where knowing the taxpayer is immaterial are where the transaction involves (1) sales of shares of stock of a domestic corporation because it is subject to of 1% of stock transaction tax or 5%/10% capital gains tax on net capital gain whether the seller is an individual, citizen or alien or a corporation, domestic or foreign and (2) where the real property sold is a capital asset located in the Philippines which is subject to 6% capital gains tax.
--------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Q: What are the kinds of income taxpayers?

The kinds of income taxpayers under Title II of the NIRC are: A. Individuals 1. Citizens (Section 24, NIRC) a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens (Section 24, NIRC) b. Nonresident Aliens (Section 25, NIRC) i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines 3. Estates and Trusts (Section 60, NIRC) a. Revocable trust b. Irrevocable trust B. Corporations 1. Domestic Corporations (Section 27, NIRC) 2. Foreign Corporations (Section 28, NIRC) a. Resident foreign corporations b. Nonresident foreign corporations 3. Partnerships a. Taxable partnership (Section 73(D), NIRC) b. Exempt partnership i. General Professional Partnership (Section 26, NIRC) ii. Joint venture or consortium undertaking construction activity or engaged in petroleum operations with operating contract with the government
Note: The depiction of the kinds of taxpayers in the 2013 Bar Syllabus is inaccurate. It is suggested that you classify the taxpayers in the manner above. Note: It is important to know the classification of Philippine citizens on whether they are resident citizens or nonresident citizens to determine what incomes are subject to tax in the Philippines. Resident citizens are taxable on all income derived from sources within and without the Philippines while non-resident citizens are taxable only on income derived from sources within the Philippines. (see Section 22, Tax Code)
Q: Who is a resident citizen?

A resident citizen is a citizen of the Philippines without the intention of transferring his physical presence abroad whether to stay permanently or temporarily as an overseas contract worker.
Q: Who are citizens of the Philippines?

The following are considered citizens of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the Constitution 2. Those whose fathers or mothers are citizens of the Philippines 3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law
Read Section 22(E), Tax Code Q: Who is a non-resident citizen?

The term non-resident citizen means a citizen of the Philippines: 1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein 2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment on a permanent basis 3. one who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. Page 47 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------a) Individual Taxpayers ----------------------------------------------------------------------------------------------------------------------------(i) Citizens (a) Resident citizens (b) Non-resident citizens --------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

4. who has been previously considered a nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines with respect to his income derived from sources abroad [See Section 22(E), NIRC] Note that Section 2, RR No. 01-79 [January 8, 1979] enumerates who are deemed non-resident citizens: 1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured 2. Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis 3. Contract worker one who leaves the Philippines on account of a contract of employment which is renew from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days)
Ruling 33-00 [September 5, 2000], however, the CIR held that for overseas contract workers, the time spent abroad is not material as all that is required is for the workers employment contract to pass through and be registered with the POEA.
Q: If a natural-born Philippine citizen who became a citizen of the United States is later on granted Philippine dual citizenship under RA 9225, is he required to pay taxes for income earned in the United States?
No. In BIR Ruling DA-095-05 [March 29, 2005], the CIR held that such a person would be a non-resident citizen, and hence, will not be required to pay Philippine tax for income earned in the United States.
--------------------------------------------------------------(ii) Aliens (a) Resident Aliens (b) Non-resident Aliens (1) Engaged in trade or business (2) Not engaged in trade or business --------------------------------------------------------------Note: It is important to know the classification of alien taxpayers to know (1) the tax rates to be imposed on their income derived from sources within the Philippines and (2) allowable exemptions and deductions. As to (1): Tax rates A non-resident alien not engaged in trade or business within the Philippines is subject to a flat tax of 25% on income within the Philippines. (see Section 25(B), Tax Code). A resident alien is or non-resident alien engaged in trade or business is subject to the graduated income tax rates (see Section 23, Tax Code) As to (2): Deductions Resident aliens can avail of deductions while non-resident aliens not engaged in trade or business cannot avail of deductions. Exemptions Resident aliens are allowed personal and additional exemptions while non-resident aliens engaged in trade or business in the Philippines are entitled to personal exemptions only by way of reciprocity and not to additional exemptions.
Q: Should a non-resident citizen file an income tax return or information return covering his income earned abroad?
No. Previously, under RR No. 01-79, non-resident citizens were required to do so. In RR No. 9-99, nonresident citizens were required to file an information return. However, under RR 05-01 [July 31, 2001], non-resident citizens are no longer required to file the same on their income derived from sources outside the Philippines.
Q: What is meant by the phrase most of the time as used in determining whether a citizen who derives income from abroad and is physically present abroad is a nonresident?
RR No. 01-79 states that to be physically present abroad most of the time during the taxable year, a contract worker must have been outside the Philippines for not less than 183 days during such taxable year.
Note: As can be seen from the wording of RR No. 01-79, most of the time applies to a contract worker. In BIR
Read Section 22(F) and (G), Tax Code Q: Who is a resident alien?
A resident alien is an individual whose residence is within the Philippines and who is not a citizen Page 48 of 158 Last Updated: 30 July 2013(v3)

Q: How is the residency of an alien determined?

An alien is considered a non-resident if he stays here for a definite short period of time. An alien will be considered a resident if the stay here is either: 1. definite and extended; 2. indefinite An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. In GARRISON V. CA [JULY 19, 1990], in resolving the contention of US nationals that they cannot be considered resident aliens as they intend to go back to the US on termination of their employment in the Philippines, the Supreme Court held that what the law requires is merely physical or bodily presence in a given place for a period of time, not the intention to make it a permanent place of abode. The Supreme Court further held that, as laid clearly in RR No. 2, whether an alien is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him as a transient. If he lives in the Philippines and has no 15 definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose, which in its nature may be promptly 16 accomplished, is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes the Philippines his temporary home, he becomes a resident, although he intends to 17 return to his domicile abroad.
RR 2 provides that an alien who has acquired residence in the Philippines retains his status as a resident until he abandons the same and actually departs from the Philippines. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien.
Q: Who is a non-resident alien?

A non-resident alien is an individual: 1. whose residence is not within the Philippines; and 2. who is not a citizen thereof
Note: Determination is by his intention with regard to the length and nature of his stay (see Section 5, RR 2). Again, remember, that an alien is considered a nonresident if he stays here for a definite short period of time.
Q: What are two kinds of non-resident aliens?

1. Engaged in trade, business, or the practice of a profession in the Philippines 2. Not engaged in trade business, trade or exercise of a profession within the Philippines
Read Section 25(A)(1), Tax Code Q: How do you determine if a non-resident alien is engaged in trade or business?
Once a taxpayer is determined to be a non-resident alien, the test to determine whether the alien is a non-resident alien engaged in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days.
Q: When is the residence of an alien considered lost?

_________________________________________
15
--------------------------------------------------------------(iii) Special class of individual employees (a) Minimum wage earner --------------------------------------------------------------Section 22(GG) and (HH), Tax Code
In other words, stay is indefinite. 16 In other words, the stay is for a definite short period of time. 17 In other words, the stay is definite but extended.
Note: This is not a kind of taxpayer. A minimum wage worker is actually a resident citizen only that it is exempt from income tax.

Q: Is the income of minimum wage earners subject to the graduated income tax rates?
No. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Further, their holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall likewise be exempt from income tax (see Section 24, Tax Code as amended by RA 9504)
Read Section 61, Tax Code Q: To whom shall the income of a trust be taxable to?
If the trust instrument is irrevocable, the income shall be taxable to the fiduciary. If the trust 21 instrument is revocable, the income shall be taxable to the grantor.
--------------------------------------------------------------e) Estates18 and trusts19 --------------------------------------------------------------Note: This is discussed first because they should be properly treated as individuals as their taxable income is computed in the same manner and on the same basis as in the case of an individual (see Section 61, Tax Code)
Q: Is the tax imposed on trusts applicable to all trusts?

No. If the trust were an employees trust which forms part of an employers pension, stock or profitsharing plan that complies with the requirements of tax exemption under Section 60(B) the NIRC, its income would be exempt from income tax.
Q: Define estate for purposes of income taxation.

The Tax Code does not provide a definition. However, Atty. Domondon suggests that the word estate refers to the mass of properties and assets left behind by the deceased. The income that is subject to income taxation is the income received by estates of deceased persons during the period of administration or settlement of the estate. (see 20 Section 60, Tax Code)
--------------------------------------------------------------(b) Corporations --------------------------------------------------------------Read Section 22(B), Tax Code --------------------------------------------------------------(i) Domestic Corporations (ii) Foreign Corporations (a) Resident foreign corporations (b) Non-resident foreign corporations --------------------------------------------------------------Read Section 22(C), (D), (H) and (I), Tax Code
Note: It is important to know the classification of Philippine citizens on whether they are domestic corporations or foreign corporations to determine what incomes are subject to tax in the Philippines. A domestic corporation is
Q. How are the incomes of estates and trusts taxed?

The taxable income of estates and trusts is computed in the same manner and on the same basis as in the case of an individual subject to certain exceptions _________________________________________
18
_________________________________________
An estate is created by operation of law, when an individual dies, leaving properties to his compulsory or other heirs. 19 A trust is a legal arrangement whereby the owner of the property (the trustor) transfers ownership to a person (the trustee) who is to hold and control the property according to the owners instructions, for the benefit of a designated person(s) (the beneficiary). Legal title to the trust property is vested in the trustee while equitable title belongs to the beneficiary. 20 To illustrate by way of example: A died leaving a condo unit which he rents out. The rentals that would accrue prior to the settlement of As estate would be subject to income tax.
21
The trust instrument is revocable where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested: a. in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom b. in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust.

taxed on its income from sources within and without the Philippines, but a foreign corporation is taxed only on its income from sources within the Philippines. It is important to know the kinds of foreign corporations for income taxation purposes to determine the allowable deductions. While a resident foreign corporation is taxable on income solely from sources within the Philippines, it is permitted to deductions from gross income but only to the extent connected with income earned in the Philippines. On the other hand, non-resident foreign corporations cannot avail of deductions. (see N.V. REEDERIJ AMSTERDAM VS. CIR [JUNE 23, 1988])
tax of 10%. ABC argues that following the principal-agent relationship theory, ABC is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation. Is ABC correct?
No. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. (see M ARUBENI CORPORATION VS. CIR [SEPTEMBER 14, 1989]).
Q: Enumerate the kinds taxpayers and define each.
of
corporate
A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax, corporations are classified into (a) domestic corporations and (b) foreign corporations. Foreign corporations are further classified into (1) resident foreign corporations and (2) nonresident foreign corporations. For definitions, see table below.
Domestic corporation Foreign Corporation Resident foreign Corporation one created or organized in the Philippines or under its laws. one created or organized under the laws of a foreign country. a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein. a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein.
Q: XYZ is a foreign shipping company. It does not have a branch office in the Philippines and it made only two calls in Philippine ports. What kind of foreign corporation is XYZ?
XYZ is a foreign corporation not authorized or licensed to do business in the Philippines. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. Accordingly, its taxable income for purposes of our income tax law consists of its gross income from all sources within the Philippines. ( see N.V. REEDERIJ AMSTERDAM VS. CIR [JUNE 23, 1988])
Non-resident foreign corporation
Q: ABC Corporation, a foreign corporation in Japan and licensed to do engage in business in the Philippines (hence, a resident foreign corporation) has equity investments in XYZ Company, a domestic corporation. XYZ declared and paid cash dividends to ABC. XYZ directly remitted the cash dividends to ABCs head office in Japan (hence, a non-resident foreign corporation) net not only of the 10% final dividend tax but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding

--------------------------------------------------------------(iii) Joint venture and consortium22 --------------------------------------------------------------Q: Are joint ventures taxable?
Generally, yes. However, a joint venture or consortium undertaking construction projects or engaged in petroleum operations with an operating contract with the government are not liable for income tax.
1. covered by a special license as contractor by the PCAB; and 2. construction project is certified by the appropriate government office as a foreign financed/internationally-funded project and that international bidding is allowed under the bilateral agreement between the Philippine government; and foreign/international financing institution.
Q: What are the requirements in order for a joint venture formed for construction purposes be not liable for income tax?
In RR No. 010-12 [JUNE 1, 2012], a joint venture or consortium formed for the purpose of undertaking construction projects which is not considered as a taxable corporation should be: 1. For the undertaking of a construction project; 2. Should involve joining or pooling of resources by licensed local contractors, licensed by the Philippine Contractors Accreditation Board (PCAB) of the DTI; 3. The local contractors are engaged in construction business; 4. The joint venture itself must likewise be duly licensed as such by the PCAB Absent one of the requirements, the joint venture formed for construction purposes shall be considered a taxable corporation.
Q: Two local contractors entered into a joint development agreement to construct a residential subdivision. One local contractor shall contribute the parcel of land while the other shall contribute the construction and development of the parcel of land into a subdivision. Each shall receive an allocation of saleable house and lot units from the project. Is the joint venture liable for income tax?
No. In BIR Ruling No. 108-2010 [October 19, 23 2010], involving a joint venture between Avida and Aurora, the CIR held that the joint development agreement between the two is not subject to income tax because joint ventures formed by local contractors for construction purposes are deemed as not falling under the definition of a taxable corporation.
--------------------------------------------------------------c) Partnerships24 f) Co-ownerships --------------------------------------------------------------Note: Co-ownerships have been included in this discussion because in most cases, the Court has been asked to determine whether there exists a taxable (unregistered) partnership and not a mere co-ownership.
Q: May joint ventures involving foreign contractors be treated as a non-taxable corporation?

Yes, provided that the member foreign contractor is:
_________________________________________ _________________________________________
23 22
The requisites of a joint venture are as follows: 1. Contribution by each party 2. Profits are shared among the parties 3. There is joint right of mutual control over the subject matter 4. There is a single business transaction rather than a general or continuous transaction.
It is also important to note in this BIR Ruling that the CIR held that the allocation of saleable units does not constitute as a taxable event as no income is actually realized by Avida or Aurora. 24 By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (see Article 1767, Civil Code)

Q: Is a partnership liable for income tax?

Yes. The term corporations includes partnerships, no matter how created or organized.
income tax. Is the co-ownership taxable as a corporation?

No. A co-ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. Here, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. (see OBILLOS v. CIR [OCTOBER 29, 1985] and PASCUAL V. CIR [OCTOBER 18, 1988]).
Q: What are the kinds of partnerships under the Tax Code?

1. Taxable partnerships these are business partnerships or partnerships which are organized for the purpose of engaging in trade or business. They are subject to income tax as if they were corporations whether or not registered with the SEC as a partnership 2. Exempt partnerships these are partnerships not considered as taxable entities for income tax purposes i.e. General Professional Partnerships).
Q: How do you determine if a partnership is taxable? (elements of a taxable partnership)

1. An intent to form the same 2. Generally participating in both profits and losses 3. Such a community of interest, as far as third persons are concerned as enables each party to make contract, manage he business and dispose of the whole property.
Q: Is a co-ownership corporation?
taxable
as
Q: A group of insurance companies in the Philippines decided to form a pool and entered into a reinsurance treaty with a nonresident reinsurance company. Is such a pool subject to corporate taxes and withholding taxes on dividends paid to the non-resident reinsurance company?
Yes. Where several local insurance ceding companies enter into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with a non-resident foreign reinsurance company, the resulting pool having a common fund, and functions through an executive board and its work is indispensable, beneficial and economically useful to the business of the ceding companies and the foreign firm, such circumstances indicate a partnership or an association taxable as a corporation (see AFISCO INSURANCE CORPORATION VS. CIR [JANUARY 25, 1999])
No. The common ownership of property does not by itself create a partnership between the owners, though they may use it for purposes of making gains. Article 1769(3) of the Civil Code provides that the sharing of gross returns does not by itself establish a partnership whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
Q: A and B, co-owners, bought 3 parcels of land in one transaction and bought 2 more parcels of land in another. They decided to sell the 3 parcels to C and the 2 parcels to D. They realized a net profit gain and paid CGT. CIR assessed them for deficiency corporate
Q: A and B inherited properties. They did not partition the same and instead invested them to a common fund and divide the

profits therefrom. Should they be classified as an unregistered partnership subject to corporate income tax?
Yes. The income from inherited properties may be considered as individual income of the respective heirs only as long as the inheritance or estate is not distributed, or, at least, partitioned. But the moment their respective known shares are used as part of the common assets of heirs to be used in making profits, it is but proper that the income from such shares should be considered as part of the taxable income of an unregistered partnership. (see ONA V. CIR [M AY 25, 1972]).
Note: Thus, we make a distinction. Before the partition of property, the income of the co-ownership arising from the death of a decedent is not subject to income tax, if the activities of the co-owners are limited to the preservation of the property and the collection of the income therefrom. However, after partition, should the co-owners invest the income of the co-ownership in any income-producing properties, they would be constituting themselves into an unregistered partnership which is consequently subject to income tax as a corporation.
income of which is derived from engaging in any trade or business.
Q: Is a GPP liable for income tax?

No. A GPP is not considered a taxable entity for income tax purposes. Section 26 of the NIRC provides that persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities computed on their respective distributive shares of the partnership profit.
Q: Distinguish between a GPP and an ordinary business partnership.

A general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits (see CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES VS. DEL ROSARIO [OCTOBER 3, 1994])
Q: A and B bought 3 parcels of land in 1976 and 2 parcels of land in 1977. In 1988 they sold the first three to Z and the other two were sold to Y in 1989. A and B realized a net profit from the sale and they individually paid he corresponding capital gains tax. The CIR assessed them for deficiency income tax arguing that they formed an unregistered partnership. Is the contention of the CIR correct?
No. Isolated transactions by two or more persons do not warrant their being considered as an unregistered partnership. They will instead be considered as mere co-owners; no corporate income tax is due on mere co-ownerships.
--------------------------------------------------------------7. Income Taxation a) Definition b) Nature c) General Principles --------------------------------------------------------------Q: Define Income tax.
Income tax is a tax on all yearly profits arising from property, professions, trades and offices. In CONWI V. CTA [AUGUST 31, 1992], the Supreme Court defined income tax as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment.
--------------------------------------------------------------d) General Professional Partnerships (GPP) --------------------------------------------------------------Q: What is a GPP?

General professional partnership (GPP) are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: What is the nature of income tax?

An income tax is an excise tax and not a tax on property. It is levied upon the privilege of receiving income or profit.

As stated by the Supreme Court in REPUBLIC OF THE PHILIPPINES VS. M ANILA ELECTRIC COMPANY [NOVEMBER 15, 2002], income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities.
--------------------------------------------------------------8. Income a) Definition b) Nature c) When Income is taxable d) Tests in determining whether income is earned for tax purposes --------------------------------------------------------------Note: The outline provided in the 2013 Syllabus on Income was not well thought of. This is how the discussion is going to be: First, I will discuss the (a) Definition and (b) Nature of Income. Second, I will discuss (c) when income is taxable (excluding methods of accounting) and (d) tests in determining whether income is earned for tax purposes. Third, I will discuss taxable income (not in the Syllabus), taxable periods (recall that I said earlier that I would move the discussion here in Income), and then (iv) methods of accounting.
Q: What are the general principles of income taxation?

Note: We will discuss this again and in more detail and with cases when we discuss situs of income taxation and source of income rules under Part 9 (Gross Income) of Chapter 2 of the Syllabus.
Under Section 23, Title II, Tax Code, the general principles are:
Resident Citizen taxable on all income derived from sources within and outside the Philippines taxable only on income derived from sources within the Philippines [By definition of a non-resident citizen, this applies to an overseas contract worker (a citizen working and deriving income from abroad)] taxable only on income derived from sources within the Philippines
Non-Resident Citizen
--------------------------------------------------------------a) Definition b) Nature --------------------------------------------------------------Q: Define income for tax purposes.

Income means the gain derived from capital, from labor, or from both combined, including profits gained from dealings in property or as well as any asset clearly realized whether earned or not. Income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. It refers to all wealth which flows into the taxpayer other than as a mere return on capital. (RR No.2) Thus, as stated in FISHER V. TRINIDAD [OCTOBER 30, 1922], mere advance in the value of property or a corporation in no sense constitutes the income specified in the law. Such advance constitutes and can be treated merely as an increase in capital.
Alien (whether resident or nonresident) Domestic corporation
taxable on all income derived from sources within and outside the Philippines taxable only on income derived from sources within the Philippines (This applies whether the foreign corporation is engaged or not in trade or business in the Philippines)
Foreign corporation
Note: Simply put, only resident citizens and domestic corporations are taxable on their worldwide income (both income inside and outside the Philippines) while the other types of individual and corporate taxpayers (i.e. nonresident citizen, non-resident alien, foreign corporation) are taxable only on income derived from sources within the Philippines.
Q: What is the nature of income?

Income is that flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. Income is the

fruit of capital or labor severed from the tree. (see M ADRIGAL VS. RAFFERTY [AUGUST 7, 1918]).
Q: What is the difference between income and capital?

Income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return on capital while capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. Income is gain derived and severed from capital. (see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO [M ARCH 9, 2010]). Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (see M ADRIGAL VS. RAFFERTY [AUGUST 7, 1918]).
However, stock dividends constitute as income if a corporation redeems stock issued so as to make a 25 distribution. This is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. (see COMMISSIONER VS. M ANNING [AUGUST 7, 1975])
Q: Is money received as exemplary damages (punitive damages) income?

Yes. In COMMISSIONER V. GLENSHAW GLASS CO. [348 U.S. 426], Glenshaw Co was engaged in a protracted litigation with Hartford-Empire Co where the former demanded exemplary damages for fraud and treble damages for injury to its business by reason of the latters violation of federal antitrust laws. The parties settled. Glenshaw did not report the money received as damages from the settlement in its income tax return. The Commissioner assessed Glenshaw for the deficiency. Glenshaw contended that punitive damages, as windfalls flowing from culpable conduct of third parties are not taxable income. The US Supreme Court held that money received as damages must be reported as they constitute income. The mere fact that such payments were extracted from wrongdoers cannot detract from their character as taxable income. The Court also stated that punitive damages cannot be classified as gifts.
Q: Are stock dividends income or capital?

Generally, stock dividends represent capital and do not constitute as income to its recipient. Mere issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of capital investment. Such are considered unrealized gain and cannot be subjected to income tax until that gain has been realized. As explained by the Supreme Court in FISHER V. TRINIDAD [OCTOBER 30, 1922], when a corporation issues stock dividends, it shows that the corporations accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution. The stockholder receives nothing out of the corporate assets for his separate use and benefit but a representation of his increased interest in the capital of the corporation. The capital still belongs to the corporation as there is no separation of interest.
Q: Is money received as compensatory damages income?

Yes. In MURPHY V. IRS [493 F.3d 170], the US Court of Appeals (District of Columbia), held that the amount received as compensatory damages on for emotional distress and loss of reputation constitutes taxable income.
Note: It must be noted, however, that in the Murphy case, what was involved was physical injuries. Note under our Tax Code, amounts received as compensation for personal injuries are excluded from gross income and hence, not taxable. Thus, we must make a distinction. If its non-physical injuries like mental anguish, the damages are included in gross income and hence taxable but if its
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25
The exception to the rule that stock dividends do not constitute income shall be discussed more extensively later. Knowing that there is an exception will suffice for now.

physical injuries, it is excluded from gross income.
--------------------------------------------------------------c) When income is taxable (i) Existence of income (ii) Realization of income (a) Tests of realization (b) Actual vis--vis constructive receipt (iii) Recognition of income --------------------------------------------------------------Q: When is income taxable? (elements of a taxable income)
Income, gain or profit is subject to income tax when the following conditions are present: 1. There is income, gain or profit (existence of 26 income) 2. The income, gain or profit is not exempt from 27 income tax. 3. The income, gain or profit is received or realized 28 during the taxable year; (realization of income)
Note: As to (1) for tax purposes, income does not only refer to the money a taxpayer receives but includes anything of value. As to (2) An income may have other elements but the law may specifically exclude the same from income for tax purposes i.e. certain passive incomes excluded from income as they are already subject to final taxes. As to (3) Even if there is material gain, not excluded by law, if the material gain is not yet realized by the taxpayer, then there is no income to speak of.
(see Section 52, RR No. 2)
Q: Distinguish actual constructive receipt.
receipt
from
Actual receipt may be actual or physical receipt 29 while constructive receipt occurs when money consideration or its equivalent is placed at the control of the person who rendered the service without restriction by the payor (see Section 4.108A, RR 16-2005).
Q: What doctrine?
is
the
constructive
receipt
The constructive receipt doctrine provides than an item is treated as income when it is credited to the account of the taxpayer, or made unconditionally available to the taxpayer; no physical possession is required. (see Section 52, RR No. 2-40) Income is received not only when it is actually handed to a taxpayer but also when it is merely constructively received by him. In LIMPAN INVESTMENT V. CIR [JULY 26, 1966], the lessees opted to deposit their payments when the lessor refused to accept the same in 1957. The lessor did not report these payments in his 1957 income tax return. The Supreme Court held that the failure to report the said rental income is unjustified as, when the payments were deposited, the lessor was deemed to have constructive received such rentals.
Q: When is income recognized?

Following the realization principle, income is generally recognized when both the following conditions are met: 1. The earning process is complete or virtually complete 2. An exchange has taken place
Q: When is income considered received for income tax purposes?

1. If actually or physically received by the taxpayer (actual receipt) 2. If constructively received by the taxpayer (constructive receipt) _________________________________________
26 27
As opposed to mere reimbursements or return on capital. Examples of those exempt from income tax: de minimis benefits and professional fees of GPPs. 28 As opposed to the common examples of unrealized forex gains or mere revaluation increments.
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29
Examples of income constructively received: (1) deposits in banks (2) interest coupons; (3) undistributed share of a partner in the profits of a general partnership

(see M ANDARIN HOTELS V. CIR, CTA CASE NO, 5046, M ARCH 24, 1997]
--------------------------------------------------------------d) Tests in determining whether income is earned for tax purposes (i) Realization test (ii) Claim of right doctrine or doctrine of ownership, command or control (iii) Economic benefit test, doctrine of proprietary interest (iv) Severance test (v) All events test --------------------------------------------------------------Note: The enumeration is inaccurate in that realization test and severance test is one and the same. Also it does not include the Flow of Wealth Test.
services they are plainly compensation which is taxable income COMMISSIONER V. LABUE [351 US 243] All Events Test Income is reportable when all the events have occurred that fix the taxpayers right to receive the income and the amount can be determined with reasonable accuracy. CIR V. ISABELA CULTURAL CORPORATION, G.R. NO. 172231, FEBRUARY 12, 2007 The test of taxability is the source (the property, activity or service that produced the income determins whether any gain was derviced from the transaction COLLECTOR V. ADMINISTRATRIX OF THE ESTATE OF ECHARRI, G.R. NO. 45544, APRIL 25, 1939.
Flow of Wealth Test
Q: Enumerate the different tests for income determination and define each.
Realization/Severance test There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. Income is not deemed realized until the fruit has been plucked from the tree EISNER V. MACOMBER [252 US 426] Claim of Right Doctrine/Doctrine of Ownership, Command or Control The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid HELVERING V. HORST [311 U.S. 112] Where stock, options, shares of stock or other assets are transferred by an employer to an employee to secure better
--------------------------------------------------------------Taxable Periods --------------------------------------------------------------Read Section 22(P) and (Q), Tax Code Q: What are the different taxable periods provided for in the Tax Code?
1. Calendar period or calendar year is an accounting period which starts from January 1 and ends on December 31 2. Fiscal period or fiscal year - is an accounting period of 12 months ending on the last day of any month other than December 31. 3. Short period is an accounting period wherein income shall be computed on the basis of a period less than 12 months.
Read Section 43, Tax Code Q: What is the general rule for computing the taxpayers taxable income?
The taxable income shall be computed upon the basis of the taxpayers annual accounting period fiscal year or calendar year as the case may be. Page 58 of 158 Last Updated: 30 July 2013(v3)
Economic Benefits Test/Doctrine of Proprietary Interest

Q: Can an individual compute his income on the basis of a fiscal year?

No. Individual taxpayers cannot use the fiscal period. They are required to use only the calendar year. (RR 2-40). This would include Estates and Trusts and General Professional Partnerships
Q: Can a taxpayer change his accounting period?

Yes, but this applies only to corporate taxpayers. If the corporate taxpayer wishes to change his accounting period from fiscal to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the CIR, be computed on the basis of such new accounting period. (see Section 46, Tax Code)
Q: Is a corporation required to use only the calendar year?

No. As a general rule, income tax returns, whether individuals or for corporations, are required to be made and their income computed for each calendar year. However, corporations may with the approval of the CIR, file their returns and compute their income on the basis of a fiscal year. (see Section 43, Tax Code).
--------------------------------------------------------------(iv) Methods of accounting (a) Cash method vis--vis accrual method (b) Installment payment vis--vis deferred payment vis--vis percentage completion (in long term contracts) --------------------------------------------------------------Q: What are two main accounting methods that may be used by taxpayers?
The methods are: 1. Cash Method a method of accounting whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expenses actually paid shall be claimed as deductions during the year 2. Accrual Method method of accounting for income in the period it is earned, regardless of whether it has been received or not. Expenses are accounted for in the period they are incurred and not in the period they are paid.
Note: Other methods would include (1) Installment method; (2) Percentage of Completion Method and (3) 30 Crop year basis.
Q: In what instances shall taxable income be computed on the basis of calendar year?
1. Taxpayers accounting period is other than fiscal year 2. Taxpayer has no annual accounting period 3. Taxpayer does not keep books 4. Taxpayer is an individual 5. Taxpayer is a general professional partnership 6. Taxpayer is an estate or a trust
Q: In what instances shall taxable income be computed on the basis of a short period?
The general rule is that the taxable period is always 12 months. The exceptions (where a taxpayer may have a taxable period of less than 12 months) are: 1. Taxpayer, other than an individual, changes his accounting period from fiscal to calendar year or from calendar year to fiscal year or from one fiscal year to another (Section 46, Tax Code) 2. Taxpayer dies 3. Corporation is newly organized 4. Corporation is dissolved 5. Tax period is terminated by the CIR by authority of law (Section 6(D), Tax Code)
Q: Distinguish cash method from accrual method of accounting.

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30
Read Section 46, Tax Code
Crop Year Basis is a method of accounting applicable only for farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal of the harvest. Expenses paid or incurred are deductible in the year the gross income from the sale of the crops is realized.

In cash method, income is reported in the year payments are received while expenses are deducted in the year paid. On the other hand, in accrual method, income is reported in the year it is earned while expenses are deducted in the year it is incurred, regardless of receipt or disbursement of cash.
initial payment, the income realized from the discounting itself is still a separate taxable income in the year it was converted into cash because it was at this year that there was actual gain on the discounted notes.
Q: Explain the percentage of completion method.

Percentage of Completion Method is a method of accounting applicable in the case of a building, installation or construction contract covering a period in excess of one year, whereby gross income derived from such contract may be reported upon the basis of percentage of completion. (see Section 48, Tax Code)
Q: Can a taxpayer use a combination of two or more methods of accounting?

No. The rule is that a taxpayer may use any one method of accounting but not a combination of two or more methods of accounting for each type of business during the taxable year. The use of a hybrid method of accounting is not allowed ( see CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])
Q: Explain the deferred payment method.

Deferred payment method is a method of accounting considered when payments are made at a later date. When the asset sold is an ordinary asset or a capital asset other than property subject to capital gains tax, the income from deferred payment sale of property may be reported under the instalment method or deferred payment method.
Q: Explain the installment method

Installment Method is a method of accounting considered appropriate when collections of the proceeds of sales and incomes extend over relatively long periods of time and there is strong possibility that full collection will not be paid. As customers make installment payments, the seller recognizes the gross profit on sale in proportion to the cash collected during the year. (see Section 49, Tax Code)
Q: A sold lots to ABC Corp and was paid less than 25%, the balance was covered by 4 checks. On the same day, the checks were discounted (exchange for cash at an amount lower than face value) also ABC Corp. A reported as income for the year of the sale for the year of the sale only the cash amount received from sale and excluded the amount received from the discounted checks. The balance was reported as income only in the next four years. A argues that initial payment excludes evidence of indebtedness. Is As contention correct?
Yes. As held in BANAS V. CA [FEBRUARY 10, 2000], The transaction remains to be an instalment (not cash) sale as the law expressly excludes evidence of indebtedness in the determination of how much was paid for the year. However, even if the proceeds of discounted note is not considered as part of the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------9. Gross Income --------------------------------------------------------------Note: Previously, in Item 6 of Chapter 2 of the 2013 Bar Syllabus, we looked into the types of taxpayers. In Item 8, we determined when income is taxable. In this item, we determine what is included in gross income (because there are those already subject to final tax), what is excluded, what is deducted, and what exemptions can be availed of. In this part, I will focus more on the concepts, nature and components of gross income, deductions, exclusions, and exemptions. While I may provide certain tax rates on some sources of income, tax rate tables will be provided in greater detail and for easier comprehension in the discussion in Items 10-15 of Chapter 2 (NIRC) of the 2013 Syllabus on Taxation of the different kinds of taxpayers. For now, let us understand the concepts. At the end of the day, the whole point of knowing what constitutes gross income and what can be availed of as deductions, exclusions, and exemptions is to know how much the taxpayer must pay. Two factual situations can

be inferred from most cases on income taxation. Its either the taxpayer overpaid and hence, he wants a refund or the taxpayer underpaid and hence, the government assesses him for deficiency taxes. This is why it is important to understand the inclusions in gross income, deductions, exclusions and exemptions because the controversy between the taxpayer and the government in most cases would be in one of these areas.
b) Concept of income from whatever source derived --------------------------------------------------------------Q: Is the enumeration provided in Section 32(A) exclusive?
No. Section 32(A) does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines (see CIR VS. AMERICAN AIRLINES [DECEMBER 19, 1989]).
Note: Note that the statutory definition contains the phrase all income derived from whatever s ource. This indicates that non-exclusive nature of the enumeration in Section 32(A).
--------------------------------------------------------------9. Gross Income a) Definition b) Concept of income from whatever source derived c) Classification of income as to source --------------------------------------------------------------Read Section 32(A), Tax Code --------------------------------------------------------------a) Definition --------------------------------------------------------------Q: Define gross income. inclusions of gross income) (statutory
Q: What is meant by the phrase all income derived from whatever source"
The phrase all income derived from whatever source encompasses all accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. A gain constitutes taxable income when its recipient has such control over it that as a practical matter, he derives readily realizable economic value from it. Income from whatever sources refers to all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income GUTIERREZ V. CIR, CTA CASE NO. 65, AUGUST 31, 1965] Gains, money or otherwise derived from all other illegal source fall within the ambit of income derived from whatever source and is subject to income tax.
Note: Income derived from whatever source will be discussed in greater detail later.
Except when otherwise provided, all income derived from whatever source, including, but not limited to, the following items: 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions; and 11. Partners distributive share from the net income of the GPP (see Section 32(A), NIRC)
--------------------------------------------------------------c) Gross income vis--vis net income vis-vis taxable income --------------------------------------------------------------Read Section 31, Tax Code
---------------------------------------------------------------

Q: Distinguish gross income from net income and taxable income

Gross Income All income minus exclusions. (In other words, all income subject to income tax) All pertinent items of gross income less deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws (see Section 31, NIRC) This is gross income less the allowable deductions.
Taxable Income
= Gross Income Less: Deductions = Net Income Less: Personal and Additional Exemptions = Taxable net income x Tax Rate = Tax Due
= Gross Income Less: Deductions = Taxable net income x Tax Rate = Tax Due
Net income
Note: Some minor matters: 1. Why do you stop at (2) when it comes to corporations? Well, corporations cannot avail of personal and additional exemptions. By their nature, personal and additional exemptions apply only to natural persons. 2. Why dont you follow the computation if the income is subject to final tax or when the gross compensation income tax system applies? Well, theres no need to go through the computation, because the law provides for a final tax. Its final already and you just have to pay it. No deduction, no exclusions, nothing. As to gross compensation income tax system, this applies in the case of a non-resident alien not engaged in trade and business in the Philippines, he just has to pay a tax equal to 25% of such gross income. No deduction, no exclusions, nothing. I hope that placed things into perspective and highlights the importance and relationship of the concepts of gross income, deductions, exclusions and exemptions.
Note: To connect to concepts of gross income, taxable income, net income, deductions, exclusions and exemptions together, one must have an idea on how a taxpayer would go about computing how much income tax he is going to pay.
Q: How do you determine the net income tax payable?

In all cases, other than when a final tax is imposed or when the gross compensation income tax system applies, the income tax is imposed on the net taxable income computed as follows: (1) All income minus exclusions equals gross income; (2) Gross income less allowable deductions equals net income (in case of corporations, this is already the taxable net income) (3) Net income less personal and additional exemptions (when applicable) equals taxable net income (4) Taxable net income times income tax rates (on the graduated basis or corporate tax rate as the case may be) equals net income tax due (5) Income tax less creditable withholding tax and/or tax credit equals net income tax payable. To simplify: Individual All Income Less: Exclusions Corporation All income Less: Exclusions
--------------------------------------------------------------d) Classification of income as to source --------------------------------------------------------------Q: What are the classifications of income as to source?
1. Gross income and taxable income from sources within the Philippines 2. Gross income and taxable income from sources without the Philippines 3. Income partly within or partly without the Philippines
Note: Ill discuss this in greater detail under (x)(e) Source Rules in determining income from within and without and (f) Situs of Taxation of this Item in the Syllabus. Lets know first the different incomes that would be considered part of gross income and then we determine whether it is within or without. Its pointless to determine the source of the income if you dont know if its actually income in the first place. Again, the 2013 Bar Syllabus was not well thought of.

--------------------------------------------------------------(e) Sources of income subject to tax (i) Compensation Income (ii) Fringe benefits (iii) Professional Income (iv) Income from business (v) Income from dealings in property (vi) Passive investment income (vii) Annuities, proceeds from life insurance or other types of insurance (viii) Prizes and Awards (ix) Pensions, retirement benefit or separation pay (x) Income from any source whatever ----------------------------------------------------------------------------------------------------------------------------(i) Compensation Income --------------------------------------------------------------Read Section 78, Tax Code
Note: There are two components to compensation income: (1) the basic compensation income (which we will discuss here) and (2) fringe benefits which is specially treated by the Tax Code.
2. 3. 4. 5.
Salaries Wages Commissions; and Similar items
(see Section 32(A)(1))
Q: What are the items not included in compensation income?

1. For agricultural labor paid entirely in products of the farm where the labor is performed 2. For domestic service in a private home 31 3. For casual labor not in the course of the 32 employers trade or business 4. For services by a citizen or resident of the Philippines for a foreign government or an international organization. (see Section 78, NIRC)
Note: As to (2) (a) A private home is the fixed place of aboard of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted and should be included in compensation income. (b) The services of a household personnel furnished to an employee (except rank and file employee) by an employer shall be subject to fringe benefit tax. As to (3) (a) Any remuneration paid for casual labor and does not promote or advance the employers trade or business is not considered compensation income. However, any remuneration paid for casual labor but in the course of the employers trade or business is considered as compensation.
Q: Define compensation for income tax purposes.

Compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Tax Code. This includes the cash value of all remuneration paid in any medium other than cash. (see Section 78, NIRC, Section 2.78.3, RR No. 2-98). Compensation may be paid in money, or in some medium other than money as for example, stocks, bonds, or other forms of property.
Q: What is the test to determine whether an income is compensation or not?

The test is whether such income is received by 33 virtue of an employer-employee relationship. _________________________________________
31 32
Q: What services?
constitutes
compensation
for
Compensation for services, under an employeremployee relationship, includes payments in whatever form paid including but not limied to: 1. Fees PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Casual labor means occasional, incidental or irregular. This means that the labor does not promote or advance the trade or business of the employer. 33 To determine the existence of an employer-employee relationship, follow the four-fold test:

Q: If the compensation is paid after separation, will it still form part of compensation income?
Yes. Remuneration for services constitutes compensation even if the employer-employee relationship no longer exists at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them (see Section 2.78.1(A) RR No. 2-98]
No. They are not included in compensation income. In fact, they are excluded from gross income (see Section 32(B)(7)(e), Tax Code)
Q: Are GSIS, SSS, Medicare and other contributions included in compensation income?
No. GSIS, SSS, Medicare and Pag-Ibig contributions and union dues of individuals are not included in compensation income as they are excluded from gross income (see Section 32(B)(7)(f), Tax Code)
Note: PERA contributions from an employer to an employee do not form part of his gross income (see RR 17-2011 and RA 9505).
34
Q: May compensation earners avail of deductions as to their compensation income?

No. Section 34 expressly provides that no deductions shall be allowed for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship. The deductions are not necessary for the taxpayer to earn the pure compensation income which arose out of an employer-employee relationship.
Q: If an employer pays the income taxes assessable against an employee, is the payment by the employer taxable income on the part of the employee?
Yes. In OLD COLONY TRUST CO. V. COMMISSIONER [279 U.S. 716], the US Supreme Court held that the payment of the tax by the employer was in consideration of services rendered by the employee. The payment constituted income to the employee. The Court also added that it cannot be argued that the payment was a gift. The payment for services, even though voluntary, was nevertheless compensation for services rendered.
Q: Are living allowances compensation income?
treated
as
A: Generally, living allowances should be treated as income of the recipient. However, if any amount thereof is paid directly by the employer and paid for the convenience of the latter, the excess of what the recipient employee would have ordinarily incurred for his own subsistence is not taxable income but a business expense of the employer. This exemplifies the employers convenience rule (see COLLECTOR VS. HENDERSON [1 SCRA 649])
Q: Are association dues, membership fees and other assessment charges collected by a condominium corporation from its members and tenants subject to income tax?
Yes. Such amounts form part of the gross income of the corporation. This is because the condominium corporation furnishes its members and tenants with benefits, advantages and privileges in return for _________________________________________
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Q: Are 13th month pay and other benefits included in compensation income?
1.
2. 3. 4.
The employer has the power to control the employee with respect to the means and methods by which the work is to be accomplished Selection and management of the employee Power of dismissal Payment of wages
"Personal Equity and Retirement Account (PERA)" refers to the voluntary retirement account established by and for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines. The Contributor shall retain the ownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds.

such payments. They constitute as income payments or compensation for beneficial services provided to members and tenants. [RMC 65-2012]
Note: Pursuant to Section 18 of RA 9904 (Magna Carta for Homeowners and Homeowners Association), the association dues and income derived from rentals of the homeowners associations may be exempted from tax subject to the following conditions: (a) The homeowners association must be a duly constituted Association as defined under Section 3(b) of RA 9904; (b) The LGU having jurisdiction over the homeowners association must issue a certification identifying the basic services being rendered by the association and its lack of resources to render such services; and (c) the association must present proof that the income and dues are used for the cleanliness, security and other basic services need by members, including maintenance of the facilities in their respective subdivisions and villages. (RMC 9-2013 [January 29, 2013]
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
Q: What is the rationale behind the Fringe Benefits Tax?

As a general rule, the income recipient is the person liable to pay the income tax. In order to improve collection of income on the compensation income of employees, the State requires the employer to withhold the tax upon payment of the compensation income. However, it has been observed that many of the fringe benefits paid by the employer to his employees are not subjected to income tax and withholding tax on compensation. To plug this loophole, RA 8424 was passed. It imposed a fringe benefits tax on the fringe benefits received by supervisory and managerial employees. The law mandates that the employer shall assume the fringe benefits tax imposed on the taxable fringe benefits 35 36 of the managerial or supervisory employees, but allows the employer to deduct such fringe benefit tax as a business expense from its gross income. However, the fringe benefits of rank-and-file 37 employees are treated as part of his compensation income, which must be withheld and deducted by his employer from the compensation income of the employee.
--------------------------------------------------------------(ii) Fringe benefits (a) Special treatment of fringe benefits (b) Definition (c) Taxable and non-taxable fringe benefits --------------------------------------------------------------Read Section 33, Tax Code Q: What is a fringe benefit?
As defined by Section 33(B), the term fringe benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: 1. 2. 3. 4. 5. Housing; Expense account; Vehicle of any kind; Household personnel, such as maid, driver and others; Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; Expenses for foreign travel; Holiday and vacation expenses; Educational assistance to the employee or his dependents; and
What is a fringe benefit tax?

A fringe benefit tax is a final withholding tax (at 32%) imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee except rank and file employees by the employer. (see Section 33, Tax Code and RR 3-98 [JANUARY 1, 1998]) _________________________________________
35
6.
7. 8. 9.
A managerial employee refers to one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees 36 A supervisory employee is one who, in the interest of the employer, effectively recommends such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. 37 A rank-and-file employee means all employees who are holding neither managerial or supervisory position

If the recipient of the fringe benefit is a rank and file employee and the benefit is not taxexempt if the recipient of the fringe benefit is not a rank-and-file employee and the benefit is not taxexempt
the value of such fringe benefit shall form part of compensation income
subcontractors, the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and under their respective rates of income tax.
Q: In what instances is the housing privilege subject to fringe benefit tax?

the same shall not be included in the compensation income. A fringe benefit tax is levied upon the employer. 1. Employer leases residential property and assigns the same for use by the employee 2. Employer owns a residential property on installment basis and allows use by the employee 3. Employer purchases a residential property and transfers ownership to the employee 4. Employees provides a monthly fixed amount for the employee to pay his landlord
Note: (1) The fringe benefits tax shall be treated as a final tax on the employee which shall be withheld and paid by the employer (see Section 2.33(A), RR 3-98). (2) On the taxation of fringe benefits There is a difference in tax treatment between supervisory and managerial employees on one hand and rank-and-file employees on the other. It can be argued that such contravenes the fundamental principle that the income tax shall be imposed based on the taxpayers ability to pay.
Q: What housing privileges are not subject to fringe benefit tax?

1. Housing privilege of military officials of the 38 AFP 2. Housing unit which is situated inside or adjacent to the premises of a business or factory (it is considered adjacent if its located within the maximum of 50 meters from the perimeter of the business premises) 3. Temporary housing for an employee who stays in a housing unit for three months or less (see Section 2.33(D)(1), RR 3-98]
Q: What is meant by grossed-up monetary value of the fringe benefit?

As defined in RR 3-98 [JANUARY 1, 1998], the grossed-up monetary value of the fringe benefit represents the whole amount of income received by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of the fringe benefit tax thereon otherwise due from the employee, but paid by the employer for and in behalf of his employee. In essence, the purpose of getting the grossed-up monetary value is to preserve the benefit to the employer as a whole.
Q: Are expense accounts taxable fringe benefits?

General Rule: Expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits Exception: They are not taxable fringe benefits if incurred or reasonably expected to be incurred by _________________________________________
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Q: How is the grossed-up monetary value of the fringe benefit determined?

It is determined by dividing the actual monetary value of the fringe benefit by 68% (effective January 1, 2000.)
Note: The above determination is not absolute. In the case of non-resident aliens not engaged in trade or business and alien and Filipino individuals employed in RHQs, ROHQs of MNCs, OBUs and petroleum
Why? Pursuant to the employers convenience rule, by providing the quarters, the government can avail of the services of soldiers anytime their services are desired.

the employee in the performance of his duties subject to the following conditions 1. Expenditures are duly receipted for and in the name of the employer 2. Expenditures do not partake of the nature of a personal expense attributable to the employee (see Section 2.33(D)(2)(a), RR 3-98)
Note: Personal expenses of the employee paid or reimbursed by the employer to the employee shall be treated as a taxable fringe benefit whether or not the same are duly receipted for in the name of the employer
be taxable as fringe benefits (see Section 2.33(D), RR No. 3-98)
Q: Are interest on loans obtained by the employee from the employer subject to fringe benefit tax?
Yes. If the employer lends money to his employee free of interest or a rate lower than 12%, such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of 12% shall be treated as a taxable fringe benefit (see Section 2.33(D)(5)(a), RR No. 3-98)
Q: When is a motor vehicle privilege considered a taxable fringe benefit?

1. Employer purchases vehicle in employees name 2. Employer provides employee cash for vehicle purchase 3. Employer purchases car on installment in name of employee 4. Employer shoulders a portion of purchase price 5. Employer owns and maintains a fleet of motor vehicles for use of business and employees 6. Employer leases and maintains a fleet of motor vehicles for the use of the business and employees. (see Section 2.33(D)(3), RR No. 3-98)
Note: The use of an aircraft is not subject to fringe benefits tax but the use of yacht is subject to fringe benefit 39 tax. (see Section 2.33(D)(3)(g) and (h), RR No. 3-98).
Q: Are membership fees, dues and other expenses in social and athletic clubs subject to fringe benefit tax?
Yes. Membership fees, dues, and other expenses borne by the employer for his employee in social and athletic clubs or other smiliar organizations shall be treated as taxable fringe benefits of the employee in full (see Section 2.33(D)(6), RR No. 3-98)
Q: Are expenses for foreign travel by the employee subject to fringe benefits tax?
General Rule: Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. Exception: In the absence of documentary evidence showing that the travel abroad was in connection with business meetings or conventions, the expense shall be treated as a taxable fringe benefit. (see Section 2.33(D)(7), RR No. 3-98)
Note: (1) Travelling expenses of family members of the employee borne by the employer shall be subject to fringe benefits tax (see Section 2.33(D)(7)(c), RR No. 3-98) (2) Holiday and vacation expenses treated of the employee borne by the employer shall be treated as taxable fringe benefits. (see Section 2.33(D)(8), RR No. 3-98)
Q: Are household expenses of employees subject to fringe benefits tax?

Yes. Expenses of the employee which are borne by the employer for household personnel such as salaries of household help, personal driver of the employee, or other similar personnel expenses shall _________________________________________
39
Dont ask me why theres a distinction. I cant fathom why. Thats what the law says!

Q: Is the cost of educational assistance to the employee or his dependents subject to fringe benefit tax?
General rule: Yes. The cost of educational assistance to the employee and his dependents borne by the employer shall be subject to fringe benefits tax (see Section 2.33(D)(9)(a) and (b), RR No. 3-98) Exceptions: 1. Education of the employee is directly connected with employers trade or business 2. With a written contract that employee shall remain employed with the employer for a period of time mutually agreed upon by the parties 3. In case of dependents, the assistance was provided through a competitive scheme under the scholarship program of the company employer.
4. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement; and 5. De minimis benefits
Note: Exemption from fringe benefit tax is not an exemption from other income taxes unless such benefit is also stated expressly to be exempt from other income taxes (refer to the exclusions). Section 2.23(C), RR No. 398 provides that fringe benefits exempted from the payment of the fringe benefits tax may however still form part of the employees basic compensation income which is subject to income tax.
Q: What are de minimis benefits?

As defined by RR 3-98 [MAY 21, 1998], de minimis benefits are benefits of relatively small value offered or furnished by the employer to his/her employees as a means of promoting the health, goodwill, contentment, efficiency of his/her employees. These benefits are exempt from the withholding tax on compensation income, and consequently from income tax, regardless of whether or not the recipients of the benefits are managerial or rank-and-file employees.
Q: Is the cost of life or health insurance paid for by the employer subject to fringe benefit tax?
The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employees shall be treated as taxable fringe benefits except: 1. Contributions of the employer for the benefit of the employee to the SSS, GSIS and other similar contributions 2. The cost of premiums borne by the employer for the group insurance of his employees (see Section 2.33(D)(10), RRR No. 3-98)
Q: What are deemed de minimis benefits?

As provided in RR No. 005-11 [March 16, 2011], as amended recently by RR No. 008-12 [M AY 11, 2012], the following shall be considered de minimis benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: 1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days 40 during the year; 2. Monetized value of vacation and sick leave credits paid to government officials and 41 employees; 3. Medical cash allowance to dependents of employees, not exceeding P750 per employee 42 per semester or P125 per month; _________________________________________
40
Q: Enumerate benefits.
the
non-taxable
fringe
1. Fringe benefits are required by the business or for the convenience of the employer 2. Fringe benefits exempted by law 3. Contributions of the employer for the benefit of the employee to retirement, insurance, and hospitalization benefit plans
This was included in RR 3-98 and in RR 8-00 [August 21, 2000] but referred to employees in general. RR No. 005-11 [March 16, 2011] specifically provided private employees. 41 Introduced by RR 10-00 [December 14, 2000] 42 Provided under RR 3-98 and RR 8-00 [August 21, 2000]

4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than 43 P1,500; 5. Uniform and clothing allowance not exceeding 44 P5,000 per annum; 6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical check-up, maternity assistance, and routine consultations, not 45 exceeding P10,000 per annum; 7. Laundry allowance not exceeding P300 per 46 month; 8. Employees achievement awards, e.g. for length of service or safety achievement, with an annual 47 monetary value not exceeding P10,000; 9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 48 per employee per annum; 10. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the 49 basic minimum wage per region basis.
--------------------------------------------------------------(iii) Professional Income --------------------------------------------------------------Q: Define professional income

Professional income refers to fees received by a professional from the practice of his profession provided that there is no employer-employee relationship between him and his clients. It includes the fees derived from engaging in an endeavor requiring special training as a professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like (see RR No. 2-98)
Q: Distinguish professional income from compensation income.

The existence or absence of an employer-employee relationship determines whether the income shall be treated as compensation income or professional income. If there is an employer-employee relationship, then it is considered compensation income. Otherwise, it is considered professional income.
Note: Professional income shall be subject to creditable withholding tax on the rates prescribed under Section 2.57.2 of RR No. 2-98.
Q: Is the enumeration of de minimis benefits exclusive?

Yes. As provided in RR No. 005-11 [March 16, 2011], all other benefits given by employers which are not included in the enumeration shall not be considered de minimis benefits, and, hence, shall be subject to income tax as well as withholding tax on compensation income.
_________________________________________
43
--------------------------------------------------------------(iv) Income from business --------------------------------------------------------------Q: What is business income?

Business income refers to gross income derived from the conduct of trade or business or the exercise of a profession.
Note: Business income shall be subject to the graduated rates in the case of individuals and the corporate income tax in the case of corporations.
Under RR 3-98, the amount was P350. RR 8-00 [August 21, 2000] increased this to P1,000 and added the alternative 1 sack of 50kg of rice. This was increased by RR 5-2008 [APRIL 17, 2008] to P1,500. 44 RR 3-98 did not provide for an amount. RR 8-00 [August 21, 2000] provided for an amount of P3,000. RR No. 005-11 [March 16, 2011] provided for an amount of P4,000. This was again increased by RR No. 008-12 [MAY 11, 2012] to P5,000. 45 RR 3-98 simply said medical benefits with no corresponding amount. RR 8-00 [August 21, 2000] provided the amount of P10,000 as the ceiling. 46 RR 3-98 provided for an amount of P150. RR 8-00 [August 21, 2000] increased it to P300. 47 RR 3-98 provided for a ceiling of month of the basic salary of the employee. RR 8-00 [August 21, 2000] changed the ceiling amount to P10,000. 48 RR 3-98 did not provide for a ceiling amount. RR 8-00 [August 21, 2000] introduced the P5,000 ceiling. 49 Introduced by RR 8-00 [August 21, 2000].
--------------------------------------------------------------(v) Income from dealings in property (a) Types of properties (b) Types of gains from dealings in property ---------------------------------------------------------------

Q: What gains from dealings in property are included in the gross income?
Only gains derived from the sale or exchange of property considered as ordinary assets.
Note: Thus, if what is sold is an ordinary asset, any gain from the sale thereof shall form part of the ordinary income which shall be subject either to graduated income tax rates (if individual) or corporate income tax (if corporation). On the other hand, if what is sold is a capital asset, it is subject to capital gains tax.
(2) There is no rigid or fixed formula to determine with finality whether property is a capital or ordinary asset. Each case must rest upon its own peculiar facts and circumstances (see CALASANZ V. CIR [144 SCRA 664]
Q: What is the importance of knowing if an asset/income is capital or ordinary

The tax treatment will vary depend on the nature of the asset. For example, if real property is a capital asset, the gain from the sale thereof shall be subject to the final capital gains tax of 6%. If it is an ordinary asset, any gain from the sale thereof shall form part of the ordinary income which shall be subject either to graduated income tax rates (if an individual) or corporate income tax (if a corporation).
--------------------------------------------------------------(a) Types of properties (1) Ordinary Assets (2) Capital Assets --------------------------------------------------------------Read Section 39(A)(1), Tax Code Q: What are ordinary assets?
1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business 3. Property used in trade or business of a character that is subject to allowance for depreciation 4. Real property used in trade or business of the taxpayer (see Section 39 Tax Code, and Section 132, RR 2)
Q: A inherited from his father an agricultural land. He had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit. The Revenue examiner adjudged A as engaged in business as real estate dealers and required him to pay the real estate dealers tax and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for ordinary income and not as capital gains at capital gain rates. Is the Revenue Examiner correct?
Yes. The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of asset involved in the transaction. In this case, the activities of A are indistinguishable from those invariably employed by one engaged in the business of selling real estate. One strong factor is the business element of development which is very much in evidence. A did not sell the land in the condition in which he acquired it. In the course of selling the subdivided lots, A engaged in the real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full (see CALASANZ VS. COMMISSIONER [OCTOBER 9, 1986]) Page 70 of 158 Last Updated: 30 July 2013(v3)
Q: What are capital assets?

The term capital assets means property held by the taxpayer whether or not connected with his trade or business, except those enumerated as ordinary assets in Section 39.
Note: (1) The statutory definition of capital assets is negative in nature. If the asset is not among the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.

Q: Y inherited from his mother several tracts of land. When his mother was still alive, these lands were subdivided into lots and leased. Y sold the leased lots to the occupants except for one lot which needed filling because of low elevation. Said lot was filled and subdivided into smaller lots and sold to the public. Y reported his income from the sales as long-term capital gains. The CIR denied this and ruled that Y was engaged in the business of leasing the lots and the subsequent sale are sales of real property used in trade or business of the taxpayer. Is the CIR correct?
Yes. In this case, the properties should be regarded as ordinary assets. When Y obtained by inheritance the parcels in question, transferred to him was not merely the duty to respect the terms of any contract thereon, but as well the correlative right to receive and enjoy the fruits of the business and property which the decedent had established and maintained. Under the circumstances, Ys sales of the several lots forming part of his rental business cannot be characterized as other than sales of ordinary assets. The sales concluded on installment basis of the subdivided lots comprising the last lot do not deserve a different characterization for tax purposes. The following circumstances in combination show unequivocally that the petitioner was, at the time material to this case, engaged in the real estate business (see TUASON VS. LINGAD [JULY 31, 1974])
engaged n real estate business but without any specification as to whether the property is capital or ordinary. The CIR stated that it is necessary to first determine the character of the real property being sold. If the real property is a land or building which is not actually used in the business of the sellercorporation and is treated as a capital asset, , then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value, whichever is higher of such land and/or building. This rule applies, whether or not the sellercorporation is engaged in real estate business. If the real property being sold is an ordinary asset, withholding tax rates shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price.
Q: Is an equity investment a capital asset?

Yes. As ruled by the Supreme Court in CHINABANK V. CA [JULY 19, 2000], an equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss.
Q: Can an ordinary asset be converted to a capital asset?

General Rule: No, the property is still an ordinary asset (see Section 3(e), RR No. 7-2003) Exceptions: Properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to the consummation of the taxable transactions involving the properties. (BIR RULING NO. 142-2011; Sec. 3(e), RR No. 7-2003)
Note: The conversion from ordinary assets to capital assets is only allowed if the taxpayer is not engaged in the real estate business.
Q: What is the tax consequence if the property is sold by a seller-corporation engaged in real estate business?
It depends. In BIR RULING 27-02 [JULY 15, 2002], the CIR was asked to rule on the tax consequences of certain transactions involving a seller that is _________________________________________
50
50
This ruling also stated that registration with the HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in the real estate business. If the seller/transferor is not registered with HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence

Q: Can a capital asset be converted to an ordinary asset?

Yes. While RR No. 7-2003 provides a rule that once an asset is ordinary, it cannot be converted to a capital asset (subject to the two year waiting period), jurisprudence has consistently held that a capital asset may become an ordinary asset. CALASANZ V. CIR [144 SCRA 664]
ordinary gains taxation Deductions are usually allowed for ordinary gains Ordinary gains are subject to the graduated rates or corporate income tax rate as the case may be Ordinary income is to be included in the annual income tax return
(NELCO) Generally no deductions are allowed from capital gains Capital gains are subject to final taxes
--------------------------------------------------------------(b) Types of gains from dealings in property (1) Ordinary gain vis--vis capital gain (2) Actual gain vis--vis presumed gain (3) Long term capital gain vis--vis shortterm capital gain (4) Net capital gain, net capital loss --------------------------------------------------------------Read Section 22(Z), Section 39(A)(2), Tax Code Q: Distinguish ordinary gain from capital gain.
Ordinary Gain any gain from the sale or exchange of property which is not a capital asset or property. Capital Gain The gains realized from the sale, exchange, or other disposition of the properties of a taxpayer classified as capital assets. Derived from property not used in trade or business whether or not connected thereto Some types of capital gains are adjusted by the holding period in Section 39(B) Ordinary losses may be deducted from certain types of capital gains The concept of net loss carryover applies to capital gains taxation
Income from capital gains tax are not included in the annual income tax return
Q: Distinguish actual gain from presumed gain

Actual gain There is actual gain whenever an individual or corporation sold shares of stock treated as a capital asset Presumed gain There is presumed gain whenever an individual sold real property treated as a capital asset located in the Philippines or a corporation sold land/building treated as a capital asset located in the Philippines Presumed gain does not consider the cost of the property sold
Derived from property used in trade or business
Actual gain arrived at by deducting the cost or adjusted basis of the property sold from the amount realized
Q: Distinguish long-term capital gain v. short-term capital gain.

Short-term capital gain If the capital asset has been held for not more than 12 months Long-term capital gain If the capital asset has been held for more than 12 months
Ordinary gains are not adjusted by the holding period in Section 39(B)
Only ordinary losses may be deduced from ordinary gains The concept of net operating loss carryover (NOLCO) applies to

Q: Distinguish net capital gain and net capital loss

Net capital gain means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges Net capital loss means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.
Q: What is the allowable extent of losses from sales or exchanges of capitals assets? (capital loss limitation rule)
Losses from sales of exchanges of capital assets shall be allowed to be deducted only to the extent of the gains from such sales or exchanges. In CHINABANK V. CA [JULY 19, 2000], Chinabank made a 53% equity investment in the First CBC Capital (Asia) Ltd, a Hong Kong subsidiary. First CBC became insolvent. With BSP approval, Chinabank wrote-off the investment in its ITR as a bad debt or as an ordinary loss deductible from its gross income. The BIR disallowed the deduction on the basis that the debt was not worthless. The Supreme Court ruled that the equity investment is not indebtedness in the first place but rather capital, not an ordinary, asset. Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. The Court further stated that assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary, loss. The rule thus is that capital loss can be deducted only from capital gains. The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless.
Note: The exception (where the capital loss limitation rule will not apply) If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits sells any bond, debenture, note or certificate or other evidence of indebtedness issued by an corporation with interest coupons or in registered form, any losss resulting from such sale shall not be subject to the above limitations and shall not be included in determining the applicability of such limitation to other losses. See Section 39(C), Tax Code.
--------------------------------------------------------------(5) Computation of the amount of gain or loss --------------------------------------------------------------Note: This involves Section 40 of the Tax Code (Determination of Amount and Recognition of Gains or Loss). Ill discuss this after I complete the discussion on Section 39 (Capital Gains and Losses)
--------------------------------------------------------------(6) Income tax treatment of capital loss (a) Capital loss limitation rule (b) Net loss carry-over rule --------------------------------------------------------------Read Section 39(B), (C), (D), Tax Code Q: Is the capital gain from the sale or exchange of a capital asset always taxable in full? (Holding period)
No. In the case of a taxpayer other than a 51 corporation, the following percentages of the gain upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain: 1. 100% if the capital asset has been held for not more than 12 months 2. 50% if the capital asset has been held for more than 12 months
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The holding period is material only if the capital asset is sold by an individual. This does not apply to corporations.

Q: What is the net loss carry-over rule (NELCO)?

If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.
Note: The capital limitation rule applies to both individual and corporate taxpayers while NELCO only applies to individuals and cannot be availed of by corporate taxpayers.
Read Section 24(D), Section 25(A)(3), Section 25(B), Section 27(D)(5), Tax Code Q: What is the rule on capital gains from dispositions of real property?
The rate of 6% shall be imposed on capital gains presumed to have been realized by the seller from the sale, exchange, or other disposition of real properties located in the Philippines classified as capital assets, including lacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined by the CIR, whichever is higher. The tax base shall be the entire selling price. The capital gains tax must be paid within 30 days following each sale or disposition. In case of installment sale, the return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the subsequent installment payments.
Q: Distinguish Net Loss Carry-over (NELCO) from Net Operating Loss Carry-Over (NOLCO).
NELCO NELCO is a concept in capital gains taxation NELCO is enjoyed only by individuals, not corporations NOLCO NOLCO is a concept in ordinary income taxation NOLCO is enjoyed by corporations, not individuals May be availed over a period three years
Q: What are the transactions covered by the capital gains tax?

1. Sale 2. Exchange; or 3. Other disposition, including pacto de retro sales and other forms of conditional sales
Note: (1) The phrase sale, exchange, or other disposition includes taking by the government through expropriation GONZALES V. CTA [121 PHIL. 861]
May be availed of only during the succeeding year
--------------------------------------------------------------(7) Dealings in real property situated in the Philippines (8) Dealings in shares of stock of Philippine corporations --------------------------------------------------------------Note: Again, to reiterate, whether its real property or shares of stock that is the subject of the sale, if it is an ordinary asset, it forms part of the ordinary income which shall be subject either to graduated income tax rates (if individual) or corporate income tax (if corporation). On the other hand, if its a capital asset, it is subject to capital gains tax.
Q: What is the basis of the 6% capital gains tax?

Whichever is the higher of: 1. The gross selling price; or 2. Current fair market value as determined below: a. The FMV of real properties located in each zone or area as determined by the CIR after consultation with competent appraisers both from the private and public sectors b. The fair market value as shown in the schedule of values of the provincial and city assessors Page 74 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------(7) Dealings in real property situated in the Philippines (9) Sale of principal residence ---------------------------------------------------------------

(see Section 24(D)(1) in relation to Section 6(E), Tax Code)
Q: What is the special rule for disposition of real property made by an individual to the government?
As provided in RR 8-98, in case of disposition of real property made by an individual to the government or to any of its political subdivisions or agencies or to government-owned or controlled corporations, the seller may elect to: 1. compute the tax on the gain derived from such sale under the normal income tax rates; or 2. under a final capital gains tax of 6%.
4. The historical cost or adjusted basis of his old principal residence sold, exchanged disposed shall be carried over to the cost basis of his new principal residence 5. If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal residence, he shall be liable for deficiency 54 capital gains tax of the utilized portion.
Note: The exemption applies to resident citizens and aliens. This is logical because if they are not residents, then there is no principal place of residence.
Q: Define principal residence

It is the dwelling house, where the husband or wife or unmarried individual residence; actual occupancy is not interrupted or abandoned by temporary absence
Q: What are the conditions for the exemption of capital gains tax on the sale by a natural person of his principal residence?
As provided in RR 13-99 [JULY 26, 1999], as 52 amended by RR 14-2000 [NOVEMBER 20, 2000]: 1. The 6% capital gains tax due shall be deposited in an account with an authorized agent bank under an Escrow Agreement. It can only be released upon showing that the proceeds have been fully utilized within 18 months. 2. The proceeds from the sale, exchange or disposition must be fully utilized in acquiring or constructing his new principal residence within 18 calendar months from date of its 53 sale. Proof must be submitted. 3. The tax exemption may be availed of only once every 10 years _________________________________________
52
Q: Who is liable to pay the capital gains tax?

The seller is liable to pay the capital gains tax. As provided in RR NO. 8-98 [AUGUST 25, 1998], the capital gains tax return will be filed by the seller within 30 days following each sale or disposition of real property.
Q: Can the buyer pay the capital gains tax?

Yes. The buyer can retain the amount for the capital 55 gains tax and pay it upon authority of the seller, or the seller can pay the tax, depending on the agreement of the parties.
Q: Is the payment of the capital gains tax a pre-requisite to the transfer of ownership to the buyer?
No. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer. The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale. (see CHUA V. CA [APRIL 9, 2003]) _________________________________________
54
RR 14-2000 added the escrow agreement requirement and conditions relating thereto. 53 To ensure compliance, he must within 30 days from the lapse of the said period the required documents to prove full utilization. If he fails to submit the required documents within 30 days after the lapse of the 18-month period, it shall be presumed that he did not fully utilize the proceeds of the sale, exchange or disposition of his old principal residence, and shall be assessed deficiency capital gains tax. The escrow shall be applied in payment of this. If the same is insufficient to cover the entire amount assessed, he shall remain liable for the remaining balance of the assessment. The excess of the deposit in escrow, if any, shall be returned to him.
This is inclusive of 20% interest per annum, computed from the 31st day after the date of sale or disposition of the said old principal residence. 55 The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name.

Note: In the next two questions, I will be discussing capital gains taxation of foreclosed mortgaged real properties. The relevant BIR issuances (RR 4-99) and relevant cases are outdated and do not reflect the changes introduced by Section 47 of the General Banking Law. The most recent case SUPREME TRANSLINER V. BPI FAMILY SAVINGS BANK [FEBRUARY 23, 2011] involved a foreclosure sale which took place prior to the effectivity of the General Banking Law. The updated BIR issuance on the matter is RMC 552011 [November 10, 2011]. RMC 55-2011 provides that the 1-year period on the foreclosed asset of natural persons and the period within which to pay CGT or CWT and DST on the foreclosure of Real Estate Mortgage shall be reckoned from the date of registration of the sale in the Office of the Register of Deeds For juridical persons in an extrajudicial foreclosure, Section 47 of the General Banking Law provides that its right of redemption shall be until, but not after the registration of the certificate of sale with the Register of Deeds, which in no case shall be more than 3 months after foreclosure, whichever is earlier. (RMC No. 55-2011 [November 10, 2011]). The right of redemption shall be reckoned from the approval of the executive judge [ CIR v. UPCB [October 23, 2009])
Note: (1) To summarize, no capital gains taxes if foreclosed properties is redeemed. If there is nonredemption, capital gains must be paid.
Q: ABC Company took out a loan from XYZ bank and mortgaged one of its properties as collateral. ABC was unable to pay so XYZ extrajudicially foreclosed the property and bought it. Before the expiration of the oneyear redemption period,57 the mortgagor notified the bank of its intention to redeem the property. Is XYZ liable to pay the capital gains tax as a result of the foreclosure sale?
No. In foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption. This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor. SUPREME TRANSLINER V. BPI FAMILY SAVINGS BANK [FEBRUARY 23, 2011]
Q: If a mortgagee foreclosed the mortgaged property but the mortgagor exercises his right of redemption within the applicable period, will capital gains tax still be imposed on the foreclosure sale?
RR 4-99 [M ARCH 9, 1999] provides that in case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of 56 sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. If the mortgagor does not exercise his right of redemption, capital gains tax on the foreclosure sale shall become due. In such case, the capital gains tax due will be based on the bid price of the highest bidder. _________________________________________
56
Q: If title to property is transferred to one spouse as a result of a court decision in an annulment case, is the transfer subject to capital gains tax?
No. In BIR Ruling DA-029-08 [JANUARY 23, 2008], title to a house and lot was transferred to the husband by virtue of a decision of the court declaring his marriage with his wife null and void. In BIR Ruling DA 287-07 [M AY 8, 2007], title to a condominium unit was transferred to the wife as a result of an agreement to distribute communal property executed in the course of annulment proceedings. In both BIR Rulings, the CIR held that the transfer of the title of the subject properties are not subject to capital gains tax, as such transfers are equivalent to a conveyance but without monetary consideration, made in accordance with the Court's Decision granting parties agreement for the distribution of communal property.
Note Section 47 of the General Banking Act, judicial persons whose property is being sold pursuant to an extrajudicial foreclosure shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale with the Register of Deeds which in no case shall be more than 3 months after foreclosure
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The foreclosure sale in the case on which the question is based took place prior to the effectivity of the Act.

Q: Is the assignment and delivery of the developed units to joint owners in a BuildTo-Own (BTO) scheme subject to capital gains tax?
In a BTO, the developer makes it appear that it merely manages the construction of the condominium project, and that the funds as contributed by the individual investors are pooled in a bank with the developer, as project manager, receiving a project management fee, In that scheme, it is claimed that the assignment and delivery to the individual investors of the developed units is not taxable as it is merely a transfer of property held in trust by the Trustee for the individual trustors. Previous BIR rulings have exempted the assignment from capital gains tax. In In BIR RULING DA-455-07 [AUGUST 17, 2007], the conveyance of the condominium units by the trustee to the individual trustors pursuant to the terms of the BTO contract and without consideration was held not subject to capital gains tax. However, in RMC NO. 055-10 [JUNE 28, 2010], the CIR nullified all BIR Rulings exempting the scheme from capital gains tax. Thus, the present rule is that the assignment and delivery in BTO schemes are subject to capital gains tax.
Q: Who are liable for capital gains tax on shares of stock?

1. Individual taxpayer, whether citizen or alien 2. Corporate taxpayer, whether domestic or foreign 3. Other taxpayers other than (1) and (2) such as estates, trusts, trust funds, and pension funds,
Q: Who are exempt from capital gains tax on shares of stock?

1. Dealer in securities 2. Investors in shares of stock in a mutual fund company in connection with the gains realized by said investor upon redemption of the said shares of stock 3. All other persons, whether natural or juridical, who are specifically exempt from NIRC taxes under existing investment schemes and other special laws.
Q: What is the rule on capital gains from sales of shares of stock?

Capital gains tax shall be imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares, sold or disposed through the stock exchange. The final tax imposed shall be: Capital gains not over P100,000 5% Capital gains over P100,000 10% The tax base shall only be the gain on the sale and such sale will always be subject to capital gains tax without any exemption. The capital gains tax must be paid within 30 days following each sale or disposition. In case of installment sale, the return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the subsequent installment payments. (See RR 06-2008 [APRIL 22, 2008])
--------------------------------------------------------------(8) Dealings in shares of stock of Philippine corporations (a) Shares listed and traded in the stock exchange (b) Shares not listed and traded in the stock exchange --------------------------------------------------------------Read Section 22(L), (T), (U), Section 24(C), Section 25(A)(3), Section 25(B), Section 27(D), Section 28(A) and Section 28(B), Tax Code Q: What are stocks classified as capital assets?
Stocks classified as capital assets mean all stocks and securities held by taxpayers other than dealers in securities.

Note: This is how you construe the rate of capital gains tax for shares of stock The tax rate is 5% for a net capital gain not exceeding P100,000 and 10% for any excess.
REVENUE REGULATIONS NO. 16-2012

Tax Treatment of Sales, Barters, Exchanges or Other Dispositions of Shares of Stock of Publicly-listed Companies Whose Public Ownership Levels Fall Below the Mandatory Minimum Public Ownership (MPO) Level, Monitoring of these Companies and their Stock Transactions, and Amending Revenue Regulations No. 06-08 for the Purpose Revenue Regulations No. 16-2012 prescribes the tax treatment of sales, barters, exchanges or other dispositions of shares of stock of publicly-listed companies that are required to maintain the minimum public ownership (MPO) of ten percent (10%) of issued and outstanding shares, or such percentage as may be prescribed by the Securities and Exchange Commission (SEC) or Philippine Stock Exchange (PSE), whichever is higher. The taxes to be imposed on sales, barters, exchanges and other dispositions of shares of stocks of publicly-listed companies that do not comply with the MPO are: a. Transactions up to December 31, 2012 stock transaction tax of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock. b. Transactions after December 31, 2012 final tax of 5% on the net capital gain up to P100,000.00 and 10% of the net capital gain in excess thereof, and documentary stamp
Q: How do you determine the tax base of disposition of stock?

Listed and traded through the PSE Sales of stock listed but not traded through the PSE FMV is the actual selling price
FMV is the closing price on the day when the shares were sold, transferred, etc (if no sale was made on that day in the PSE, then the closing price on the day nearest to the date of sale ,transfer, or exchange of the said shares The FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent CPA nearest to the date of sale.
Sales of stock not listed and not traded through the PSE
(See RR 06-2008 [APRIL 22, 2008])

Note: That under RR 6-2013 [April 11, 2013], the FMV shall be determined using the Adjusted Net Asset Method. All assets and liabilities are to be adjusted to fair market values, and the net value thereof shall be the value of the equity.
tax under Section 175 of the NIRC.
Q: What are exempted from capital gains tax on stock transactions?

1. Gains derived by dealers in securities 2. Gains from sales of stock to the extent invested in new shares of stocks in banks, financial intermediaries, and corporations organized primarily to hold equities in banks 3. All other gains which hare specifically exempt from income tax under existing investment incentives and other special laws.
Q: If the share of stock is traded through the stock exchange, what tax is applicable?
A percentage tax of of 1% is imposed on the gross selling price of shares of stock if they are listed and sold, exchanged or transferred through the facilities of the local stock exchange.( see Section 127(A) and RR 06-2008 [APRIL 22, 2008]) However, even if traded through the stock exchange, a sale of shares by companies not complying with the 10% minimum public float shall be subject to capital gain tax (see RR 16-2012 [November 7, 2012])
Q: Is an assignment of deposits on stock subscriptions subject to capital gains tax?

Yes. The assignment of the deposits on stock subscriptions results in a net gain. A tax on the profit of sale on net capital gain is the very essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the government of its due and Page 78 of 158 Last Updated: 30 July 2013(v3)

unduly set free from tax liability persons who profited from said transactions (see COMPAGNIE FINANCIERE SUCRES ET DENREES VS. CIR [AUGUST 28, 2006])
Q: What is the effect of non-payment of capital gains tax on stock transactions?

As provided in Section 11 of RR 06-2008, no sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipts of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. RMC 37-2012 [AUGUST 3, 2012] clarified RR 062008 in stating that a Certificate Authorizing Registration [CAR] is still necessary before any transfer of shares of stock not traded in the Stock Exchange may be transferred in the books of a corporation.
(a) Meaning of merger, consolidation, control securities (b) Transfer of a controlled corporation --------------------------------------------------------------Disclaimer: I would advise that you get a pack of tissue and some pain relievers. You may experience headaches and nose bleeding in this part.
--------------------------------------------------------------(a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment --------------------------------------------------------------Read Section 40(A), (B) (C)(5), Tax Code Q: How is gain from the sale or other disposition of property computed?
The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain.
--------------------------------------------------------------(5) Computation of the amount of gain or loss --------------------------------------------------------------Note: Section 40 (Determination of Amount and Recognition of Gain or Loss) can be divided into two parts: (1) Computation of Gain or Loss/Basis for Determining Gain or Loss from Sale or Disposition of Property and the more important topic (2) tax-free exchanges. The 2012 Bar Syllabus broke down this topic. In the discussions below, I shall follow the said outline, to wit:
Q: How is loss from the sale or other disposition of property computed?

The loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized.
Note: Amount realized is the sum of the money received plus the fair market value of the property (other than money received).
--------------------------------------------------------------(a) Cost or basis of the property sold (b) Cost or basis of the property exchanged in corporate readjustment (1) Merger (2) Consolidation (3) Transfer to a controlled corporation (tax-free exchanges) (c) Recognition of gain or loss in exchange of property (1) General rule (a) Where no gain or loss shall be recognized (2) Exceptions
Q: What is the cost or basis for determining gain or loss from the sale or exchange of property
If the property is acquired by:
Purchase Inheritance The basis is the cost of the property The FMV as of the date of acquisition if the same was acquired the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it
Gift

was not acquired by gift except if such basis is greater than FMV of the property at the time of the gift then, for purpose of determining loss, the basis shall be such FMV For less than an adequate consideration in money or moneys worth Tax-free exchanges the basis of such property is the amount paid by the transferee for the property
(a) Where no gain or loss shall be recognized (2) Exceptions (a) Meaning of merger, consolidation, control, securities (b) Transfer of a controlled corporation --------------------------------------------------------------Read Section 40(C)(1) to (3), Tax Code Q: What is the general rule in the recognition of gain or loss in an exchange of property?
As a general rule, the entire amount of the gain or loss shall be recognized upon the sale or exchange of property. In other words, if there are gains, the gains shall be taxable. If there are losses, the losses shall be allowed as deductions.
Note: The phrase where no gain or loss is recognized means that if there is an exchange of property and there is a gain, the resulting gain is not subject to tax. If there is a loss, the loss could not be used as a deduction from gross income. This does not refer to the general rule because in the general rule the gain or loss is recognized. The phrase appropriately refers to Section 40(C)(2) (merger or consolidation and transfer of a controlled corporation)
a. Shares of stock received by

transferor original basis less the money received and fair market value of property received, plus the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange Property transferred in the hands of the transferee same as it would be in the hands of transferor increased by the amount of the gain recognized to the transferor on the transfer
b.
Stocks and Securities acquired in Wash Sales
The basis of the substantially identical stock so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the stock or securities was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. [see Section 143, RR 2]
Q: What are the exceptions to the general rule?

1. No gains or loss recognized if in pursuance of a plan of merger or consolidation where there is an exchange solely in kind (see Section 40(C)(2)) 2. Gains recognized but loss not recognized in transactions between related parties (see Section 36(B)) 3. Gains recognized but loss not recognized where the exchange is not solely in kind (see Section 40(C)(3))
Note: No. 2 will be discussed in Part 6 (Items not deductible) of the Syllabus. In this part, I will focus on Items 1 and 3.
To be entitled to the computation of the gain or loss from the sale of an investment of a non-resident stockholder using a functional currency other than the Philippine peso, the following elements must be present, to wit: (1) such non-resident stockholder made the said investment in such functional currency, and not in Philippine peso; and (2) the investee company in the Philippines uses a functional currency other than the Philippine peso for its financial statements. CE PHILIPPINES LTD. VS. CIR, CTA EB 770 (CTA 7688), SEPTEMBER 20, 2012
--------------------------------------------------------------(c) Recognition of gain or loss in exchange of property (1) General rule

Q: What are the instances where no gain or loss is recognized (tax-free exchanges or exchanges of property solely in kind)
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: 1. A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation, which is a party to the merger or consolidation (property for stock) 2. A shareholder exchanges stock in a corporation, which is a party to a merger or consolidation solely for the stock of another corporation also a party to a merger or consolidation (stock for stock) 3. A security holder of a corporation, which is a party to a merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation (security for stock) 4. If property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four (4) persons gains control of said corporation provided that stocks issued for services shall not be considered as issued in return for property. (estate planning or transfer of a controlled corporation)
Note: (1) An exchange solely in kind is an exchange of property with property with no money involved. (2) Control means ownership or stocks in a corporaion possessing at least 51% of the total voting power of all classes of stock entitled to vote
1. It must be undertaken for a bona fide business purpose and not solely for escaping the burden of taxation 2. In determining if a bona fide transaction exists, the whole transaction or series of transactions shall be treated as a single unit and every step of the transaction shall be considered 3. In determining if the property transferred constitutes a substantial portion of the property of the transferor, property shall be taken to include cash assets.
Q: What is the basic consideration in determining whether a consolidation or merger is tax-free?

The basic consideration is the purpose of the merger or consolidation. The merger or consolidation must be undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation.
Q: A owns all the stock of ABC Corp. ABC Corp. had 1,000 shares of XYZ Corp. A formed a new corporation called DEF Corp. A had ABC transfer all 1,000 XYZ shares to DEF. She then dissolved DEF and liquidated the assets (the XYZ shares). A then sold the XYZ shares and paid the corresponding CGT based on a lower cost basis. Is the transfer valid?
No. As held in GREGORY V. HELVERING [293 US 465, JANUARY 7, 1935], a transfer of assets by one corporation to another must have a business purpose. Here, it was a mere device which followed the form of a corporate reorganization to conceal its real character which was a transfer of stock of XYZ shares to A.
Q: Define merger of consolidation in relation to tax-free exchanges.

Merger or consolidation shall be understood to mean 1. the ordinary merger or consolidation; or 2. the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock (de facto merger) For a transaction to be regarded as a merger or consolidation under Section 40: PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: A, B, C were majority stockholders of ABC Theatrical Co. They were also majority stockholders of XYZ Theatrical Co which was engaged in the same business. ABC and XYZ agreed to merge. Under the agreement, all business, property, assets and goodwill of ABC will be transferred to XYZ in exchange for XYZ stocks for each

stock held in ABC. Is the exchange subject to capital gains tax?

No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It is well established that where stocks for stocks were exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of reorganization, such exchange is exempt from capital gains tax. The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation." It is clear, in fact, that the purpose of the merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which all the assets and obligations of the former had been transferred. The exemption from the tax of the gain derived from exchanges of stock solely for stock of another corporation was intended to encourage corporations in pooling, combining or expanding their resources conducive to the economic development of the country. The merger in question involved a pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of the NIRC exempting from the capital gains tax exchanges of property.
for he assets to be transferred. In effect, the transfer takes the nature of a donation made by the subsidiaries to their parent company contrary to what is contemplated in Section 40(C)(2) of the NIRC. Also, the intended merger has the effect of dissolving and liquidating the subsidiaries without payment of corresponding taxes. BIR RULING NO. 614-12 [NOVEMBER 9, 2012]
Q: Filinvest Development Corporation (FDC), a holding company, is the owner of 80% of the outstanding shares of Filinvest Alabang, Inc. (FAI) and 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transfer in favor of the latter parcels of land in exchange for shares of stock of FLI. The CIR argues that the taxable gain should be recognized for the exchange as FDCs controlling interest in FLI was decreased as a result of the exchange. Is the CIRs contention correct?
No. The Supreme Court in CIR V. FILINVEST DEVELOPMENT CORPORATION (JULY 19, 2011] stated that the requisites for the non-recognition of gain or loss of a transfer of property for shares of stock are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee. Rather than isolating FDC, the shares issued to FDC should be appreciated in combination with the new shares issued to FAI. Together, FDC and FAIs shares add to 70.99% of FLIs shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote, the exchange of property for stocks between FDC-FAI and FLI clearly qualify as a tax-free transaction.
Q: A Corp, a domestic corporation, entered into a merger with its wholly-owned domestic subsidiaries B Corp and C Corp. A Corp is the surviving corporation. Pursuant to the merger, B Corp and C Corp will transfer all their assets and liabilities to A Corp. However, since B Corp and C Corp are wholly-owned by A Corp prior to the merger, A Corp will not longer issue any shares of stock in consideration of the assets and liabilities transferred. Is the merger between A Corp, B Corp, and C Corp considered a tax free merger under Section 40(C)(2)?
No. The intended merger between subsidiaries where issuing any shares re-organization is an upstream a parent company and its the parent company will not be ot the subsidiaries in exchange
Q: ABC is a domestic corporation. Shareholders transferred their real property in exchange for more shares in the corporation. In effect, they gained control of more than 51% of the shares of the

corporation entitled to vote. Is the exchange tax-exempt?

It depends. In BIR Ruling 274-87, the CIR ruled that no gain or loss would be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange, said person alone or together with others, not exceeding four persons, gains control of said corporation. The term "control" shall mean ownership of stocks in a corporation possessing at least 51% of the total voting power of all classes of stocks entitled to vote. In determining the 51% stock ownership, only those persons who transferred property for stock in the same transaction may be counted up to a maximum of five.
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transfer to the Transferee of all the rights, privileges, and liabilities of the Transferor in the case of de facto merger.
Q: What are the similarities and differences between a de facto merger and a transfer of property for shares under Section 40(C)(2) of the Tax Code?
De facto merger is in procedure similar to a transfer to a controlled corporation under the same Section 40(C)(2) of the Tax Code of 1997, except that at least 80% of the Transferor's assets, including cash, are transferred to the Transferee, with the element of permanence and not merely momentary holding. However, a de facto merger and a transfer to a controlled corporation are different in that, (1) the Transferor in a de facto merger is a corporation, while in a transfer to a controlled corporation, the Transferors may either be a corporation or an individual, and (2) in a de facto merger, there is no requirement that the transferor gains control (that is, 51% of the total voting powers of all classes of stocks of the Transferee entitled to vote) of the Transferee as a prerequisite to enjoying the benefit of non-recognition of gain or loss. What is essential in a de facto merger is that the Transferee acquires all or substantially all of the properties of the Transferor. (see RMC 1-02 [April 25, 2002])
Q: What is a de facto merger?

To constitute a de facto merger, the following elements must concur: 1. There must be a transfer of all or substantially all of the properties of the transferor corporation solely for stock, and 2. It must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. (see RMC 1-02 [April 25, 2002])
Q: What is meant by substantially all?

As provided by RR 2, "substantially all" means the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation, which has the element of permanence and not merely momentary holding
Q: What are the administrative requirements in case of tax-free exchanges?

1. The parties who are applying for confirmation that the transaction is indeed a tax-free exchange shall submit the following: a. A sworn certification on the basis of the property to be transferred b. Certified true copies of the TCT and/or CCT of real properties transferred c. Certified true copies of the corresponding latest Tax Declaration of the real properties to be transferred d. Certified true copies of the certificates of stocks evidencing shares of stocks to be transferred e. Certified true copy of the inventory of other property/ies to be transferred/
Q: What are the differences between a de facto merger and a statutory (ordinary) merger?
In a de facto merger, the Transferor is not automatically dissolved unlike in the case of a statutory merger. Likewise, there is no automatic _________________________________________
58
Note that in this BIR Ruling, there were 6 transferors,

2. The BIR shall issue a certification or ruling confirming that an exchange of property for shares complies with the requisites for it to be tax-free. The certification or ruling shall contain the substituted basis of the properties. 3. The Certificate Authorizing Registration (CAR) or Tax Clearance (TCL) shall be issued by the RDO/Authorized Internal Revenue Officer on the basis of the BIR certification or ruling 4. The information that the transaction is a tax-free exchange and the substituted basis of the properties shall be annotated in the TCT and/or CCT. 5. The applicant/taxpayer shall pay the processing and certification fee of P5,000 for each application not involving more than 10 real properties and/or certificates of stock. An additional P100 shall be paid for every TCT/CCT and/or certificate of stock in excess of 10. 6. Every official, agent, or employee of the Registry of Deeds and corporate secretary or the duly authorized officer of the corporation who fails to annotate the information shall be subject to a penalty.
amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, shall be treated as capital gain. 3. If the transferor corporation receives money and/or property in addition to the stock, then: a. If the corporation distributes it in pursuance of the plan of merger or consolidation, no gain shall be recognized b. If the corporation does not distribute it, the gain, if any, but not the loss shall be recognized but not in an amount not in excess of the sum of such money and the fair market value of the property so received.
Q: What is the effect of the assumption of the transferee of the liabilities of the transferor in addition to the transfer of property?
Section 40(C)(4) provides that if the taxpayer receives the stock as if it were the sole consideration, and, as part of the consideration, another party to the exchange assumes a liability of the taxpayer or acquires property subject to a liability, such assumption or acquisition shall not be treated as money and/or property and shall not prevent the exchange from being tax-free. However, if the amount of liabilities assumed plus the amount of liabilities to which the property is subjected to exceed the total adjusted basis of the property, then such excess shall be considered either a capital gain or ordinary gain, as the case may be. Note: Take a walk and have a break muna!
Q: Is there a prescriptive period for rulings issued in connection to tax-free exchanges?

Yes. RMC 40-2012 [August 3, 2012] provides that rulings issued under Section 40 (C) (2) of the NIRC, as amended, shall be valid only for ninety (90) days counted from the date of receipt of the ruling by any of the parties to the exchange transaction. The properties and shares of stocks involved in the transfer should be conveyed to the transferee/s and transferor/s, respectively, within this period.
Read Section 40(C)(3) to (4), Tax Code Q: What is the effect if the tax-free exchange is not solely in kind?
1. If an individual, shareholder, security holder or corporation receives money and/or property in addition to the stock, the gain, but not the loss, shall be recognized but in amount not in excess of the sum of the money and the fair market value of such other property received. 2. As to the shareholder, if the money and/or property has the effect of a distribution of a taxable dividend, there shall be taxed an PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------(vi) Passive investment income (a) Interest Income (b) Dividend Income (c) Royalty Income (d) Rental Income --------------------------------------------------------------Note: Earlier we discussed capital gains from dealings in real property and shares of stock. These two along with

certain passive incomes are subject to final tax. The importance of knowing that an income is subject to final tax is that it is no longer included in his gross income reportable in the annual income tax return.
(4) Liquidating dividend --------------------------------------------------------------Q: What are dividends?

The term dividends means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.
Note: To simplify matters If the distribution is in money, it is called a cash dividend. If it is in property, it is called a property dividend. If it is in stock, it is called a stock dividend. If it results from the distribution by a corporation of all its property or assets in complete liquidation or dissolution, it is called a liquidating dividend.
Q: Define passive income

Passive income is income derived from any activity in which the taxpayer does not materially participate.
Q: What is the tax treatment of passive income?

Passive income may be subject to: 1. Schedular rates (e.g. dividend income received by a domestic corporation from a foreign corporation) 2. Final tax (e.g. interest income from foreign currency bank deposits by a resident citizen)
Q: When is dividend income subject to tax?

It is taxable at the time of their declaration by the corporation, and not at the time of actual payment of dividends, since dividend income is taxable whether actually or constructively received.
--------------------------------------------------------------(a) Interest Income --------------------------------------------------------------Q: Define interest income

Interest income means the amount of compensation paid for the use of money or forbearance from such use.
Q: Are property dividends taxable?

Yes. As provided in Section 251, RR No. 2, dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders.
Q: What is the tax treatment of interest income?

Interests received or credited to the account of the depositor or investors are included in their gross income, unless they are exempt from tax or subject to a final tax.
Note: This will be discussed in greater detail later in the taxation of individual and corporate taxpayers as I tackle the new BIR issuance on the matter - REVENUE MEMORANDUM CIRCULAR NO. 77-2012 (Clarifying certain provisions of RR 14-2012 on the proper tax treatment of interest income on financial instruments and other related transactions)
Q: Are stock dividends subject to income tax?

No. As discussed earlier, a stock dividend only represents the transfer of surplus to capital account and, as such, is not subject to income tax.
Q: What are the exceptions to the rule that stock dividends are not subject to income tax?
1. Change in the stockholders equity, right or interest in the net assets of the corporation 2. Recipient is other than the shareholder 3. Cancellation or redemption of shares of sock 4. Distribution of treasury stocks 5. Dividends declared in the guise of treasury stock dividend to avoid the effects of income Page 85 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------(b) Dividend Income (1) Cash dividend (2) Stock dividend (3) Property dividend

taxation 6. Different classes of stocks were issued. Stock dividends constitute as income if a corporation redeems stock issued so as to make a distribution. This is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. ( see COMMISSIONER VS. MANNING [AUGUST 7, 1975]) The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. (see CIR VS. CA [JANUARY 20, 1999]) As provided in Section 252, RR No. 2: A stock dividend constitutes income if its gives the shareholder an interest different from that which is former stock holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests that did the old.
all previous rulings to that effect. The rule now is that they are subject to income tax.
Q: What are disguised dividends?

These are payments, usually for services, made in the form of dividends in order to evade the higher taxes imposed on gross income. They are not dividends in legal contemplation because they are not return from investments. They are payment for services rendered and as such, they are taxable as part of compensation income or income derived from self-employment or exercise of a profession.
--------------------------------------------------------------(c) Royalty Income --------------------------------------------------------------Q: Define royalties.

Royalties are any payment of any kind received as consideration for the use of or right to use any patent, trademark, design or model, secret formula or process, industrial commercial or scientific equipment, information concerning industrial, commercial or scientific experience.
Q: Are liquidating dividends subject to income tax?

Yes. Where a corporation distributes all of its property or assets in complete liquidation or 59 dissolution, the gain realized from the transaction by the stockholder, whether individual or corporate, 60 is taxable income or a deductible loss, as the case may be.
Note: Previously, the CIR has ruled in BIR RULING 039-02 [NOVEMBER 11, 2002] and other previous rulings that the transfer by a liquidating corporation of its remaining assets to its stockholders and the receipt of the shares surrendered by the shareholder are not subject to income tax. However, in BIR RULING 479-11 [DECEMBER 5, 2011], the CIR reversed and set aside the above-cited ruling and
Q: What is the tax treatment of royalty income?

A sale of royalty on a regular basis for a consideration is considered an active business and any gain therefrom shall be subject to the normal corporate income tax (see RMC 77-2003). Where a person pays royalty to another for the use of its intellectual property, such royalty is passive income of the owner and is therefore subject to final withholding tax.
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There must be a bona fide plan of liquidation involving the transfer of all assets. 60 If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, the loss in the transaction is deductible.
--------------------------------------------------------------(d) Rental Income (1) Lease of personal property (2) Lease of real property (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease ---------------------------------------------------------------

Q: Define rental income

Rental income refers to the amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of the property. It includes all amount or property received from the lease contract, whether used in business or not.
Q: Are improvements made by lessees taxable as income on the part of the lessor?
Yes, provided that such buildings or improvements are not subject to the removal by the lessee. The lessor may either: (1) report the improvements as income at the time when such improvements are completed based on its fair market value; or (2) spread over the life of the lease the estimated depreciate value of the improvements at termination of the lease and report as income for each year of the lease an aliquot part thereof (Section 49, RR No. 2)
--------------------------------------------------------------(1) Lease of personal property --------------------------------------------------------------Q: What is the tax treatment of income received from lease of personal property?
Rental income on the lease of personal property located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows: Non-Resident foreign corporation 4.5% 7.5% Non-Resident alien 25% 25%
Q: Should the improvement be capable of being separated from the land in order to be considered a taxable gain?
No. The US Supreme Court in HELVERING V. BRUUN [309 US 461] stated that it is not necessary to recognition of taxable gain that the lessor be able to sever the improvement begetting the gain from his original capital.
Vessel Aircraft, machineries and other equipment Other assets
Q: What is the tax treatment of VAT added to rental or VAT paid by the lessee?
Any additional amount paid, directly or indirectly, by the lessee in consideration for the lease is considered rental. Therefore, taxes paid by the lessee on leased property are part of rental income of the landlord.
32%
25%
--------------------------------------------------------------(2) Lease of real property (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease --------------------------------------------------------------Q: What is the tax treatment of income received from lease of real property?
The lease of real property shall be considered as conduct of trade or business on the part of the lessor, hence, the rental income therefrom shall be considered as business income which shall be included in the computation of the year-end gross income of the lessor, and not as a passive investment income subject to withholding tax.
Q: What is the tax treatment of advanced rental paid by the lessee?

Prepaid or advance rental is taxable income to the lessor in the year received, if so received under a claim of right and without restriction as to its use, and regardless of method of accounting employed. Security deposit applied to the rental of the terminal month or period of contract must be recognized as income at the time it is applied. Note: If the security deposit is merely to ensure compliance with the contract (security deposit with acceleration clause), it is not income to the lessor until the lessee violates any provision of the contract.
--------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 87 of 158 Last Updated: 30 July 2013(v3)

(vii) Annuities, proceeds from life insurance or other types of insurance --------------------------------------------------------------Q: What is an annuity for purposes of income taxation?
An annuity refers to the periodic installment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. The portion of proceeds from insurance that represent a mere return of the premiums is not taxable while the portion that represents the interests is taxable.
Note: The taxability of proceeds from life insurance and returns of premiums from annuity contracts will be discussed later in Exclusions from Gross Income
Q: What is the tax treatment of separation pay?

Separation pay may or may not be taxable depending on the voluntariness or involuntariness of the cause of separation.
Note: The taxability of pensions, retirement benefit

or separation pay will be discussed later in Exclusions from Gross Income
--------------------------------------------------------------(viii) Prizes and Awards --------------------------------------------------------------Q: What are prizes and awards for purposes of income taxation?
It refers to the amount of money in cash or in kind received by chance or through luck. Prizes and awards are generally taxable except if specifically mentioned under the exclusions from the computation of gross income
Note: The taxability of prizes and awards will be discussed later in Exclusions from Gross Income and Taxation of Individual and Corporate Taxpayers
--------------------------------------------------------------(x) Income from any source whatever (a) Forgiveness of indebtedness (b) Recovery of accounts previously written off (c) Receipt of tax refunds or credit (d) Income from any source whatever --------------------------------------------------------------Q: What is meant by the phrase all income derived from whatever source"
The phrase all income derived from whatever source encompasses all accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. A gain constitutes taxable income when its recipient has such control over it that as a practical matter, he derives readily realizable economic value from it. It includes all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. GUTIERREZ V. CIR [CTA CASE NO. 65, AUGUST 31, 1965]. The source of the income may be legal or illegal.
--------------------------------------------------------------(ix) Pensions, retirement benefit or separation pay --------------------------------------------------------------Q: What is pension for purposes of income taxation?
It refers to the amount of money received in lump sum or on staggered basis in consideration of services rendered given after an individual reaches the age or retirement. They are generally taxable to the extent of the amount received, except if there is a BIR approved pension plan. PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: May cancellation or forgiveness of indebtedness amount to a gain subject to income tax?

Yes. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift. If a corporation to which a stockholder is indebted forgives the debt, Page 88 of 158 Last Updated: 30 July 2013(v3)

the transaction has the effect of the payment of a dividend. (see Section 50, RR No. 2).
to gross income in recognition of the intent of Congress to tax all gains except those specifically exempted.
Q: What is the Tax Benefit Rule in relation to recovery of accounts previously written off?
Under the Tax Benefit Rule or Equitable Doctrine of Tax Benefit, the recovery of amounts deducted in previous years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction if the said bad debt written-off, then his subsequent recovery shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income.
--------------------------------------------------------------(f) Situs of income taxation --------------------------------------------------------------Note: The situs of income taxation refers to the General Principles of Income Taxation. Just to reiterate again Only resident citizens and domestic corporations are taxable on their worldwide income (both income inside and outside the Philippines) while the other types of individual and corporate taxpayers (i.e. nonresident citizen, non-resident alien, foreign corporation) are taxable only on income derived from sources within the Philippines. Now, that we know who are the taxpayers that can be taxed on income within, without or both. Let us discuss when is income considered within the Philippines and without the Philippines.
Q: Should taxes previously claimed and allowed as deductions but subsequently refunded or granted as tax credit be considered part of gross income?
Yes. RMC No. 13-80 [April 10, 1980] provides if a taxpayer receives a tax credit certificate or refund for erroneously paid tax which was claimed as a deduction from his gross income that resulted in a lower net taxable income or a higher net operating loss that was carried over to the succeeding taxable year, he realizes taxable income that must be included in his income tax return in the year of the receipt.
Note: However, taxes which are not allowable as
--------------------------------------------------------------(e) Source rules in determining income from within and without (1) Interests (2) Dividends (3) Rentals (5) Royalties (6) Sale of real property (7) Sale of personal property (8) Shares of stock of domestic corporation --------------------------------------------------------------Q: What is meant by source of income?
The source of an income is the property, activity or service that produced the income. It is the physical source where the income came from. (see CIR VS. BAIER-NICKEL [AUGUST 29, 2006]).
deductions, when refunded or credited, are not declarable for income tax purposes (income tax, estate tax, donors tax, and special assessments)
Q: Is an unlawful gain subject to income tax?

Yes. In JAMES V. US [366 US 213], the Supreme Court ruled that embezzled money constitutes gross income. It opined that unlawful, as well, as lawful gain are comprehended within the term gross income. The Court has given a liberal construction PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 89 of 158 Last Updated: 30 July 2013(v3)

Q: What are the source of income rules in the Philippines? (Section 42, Title II, NIRC)
Interests The source of an interest payment is the place of residence of the person obligated to make that payment (residence-of-the-obligor/debtor rule). It is income within the Philippines if the residence of the obligor is in the Philippines. It is income without the Philippines if the residence of the obligor is abroad.
Services
Income from services is sourced in the country where the services are performed. (place of performance of the service) Thus, it is income within the Philippines if the service is performed in the Philippines. It is income without the Philippines if it is performed abroad.
Rents and Royalties
The rental income and royalty income derived from the use of property has its source in the country where the property is used or located. (location of the property or interest in such property) Thus, it is income within the Philippines if rents and royalties are derived from property located in the Philippines
Dividends
Generally, a dividend has its source in the country where the corporation paying the dividend is incorporated. (residence of the corporation paying the dividend) Sale of Real Property
Thus, if the dividend is received from a domestic corporation, it is income within the Philippines. If the dividend is from the foreign corporation, it is income without the Philippines. The exception to the general rule that dividends paid by a foreign corporation are from sources without the Philippines is when a foreign corporation derives 50 percent of its gross income from sources within the Philippines for a three-year period ending with the close of its taxable year preceding the declaration of its dividends
Income from the sale of real property is sourced in the country where the real property is located. (location of real property) Thus, it is income within the Philippines if the real property is located in the Philippines. It is income without if the real property is located abroad.
Sale of Personal Property
It depends: 1. Personal property produced (in whole or in part) by the taxpayer within the Philippines and sold without or produced (in whole or in part) by the taxpayer without and sold within the Philippines the income shall be treated as derived partly from sources within and party from sources without. 2. Purchase of personal property within and its sale without the Philippines, or Page 90 of 158 Last Updated: 30 July 2013(v3)

purchase of personal property without and its sale within the Philippines - any income shall be treated as derived entirely from sources within the country in which sold. 3. Shares of stock in a domestic corporation gains from sale of shares of stock of a domestic corporation are treated as derived entirely from sources within the Philippines regardless of where the said shares are sold.
Philippines. Is the sale of the tickets taxable as income from sources within the Philippines?
Yes. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In ABCs case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here in the country and the payments for fares were also made with Philippine currency. The site of the source of payments is the Philippines. The absence of flight operations to and from the Philippines is not determinative of the source of income/site of income taxation for the test of taxability is the source. (see CIR VS. JAPAN AIRLINES [MARCH 6, 1991]; CIR VS. BOAC [APRIL 30, 1987])
Q: In CIR v. MARUBENI [DECEMBER 18, 2001],61 assuming that Marubeni was disqualified from availing of the income tax amnesty, would the income from the services rendered in connection with the turn-key projects constitute as income from Philippine sources?
The answer is both yes and no. The answer is yes with regard to those services performed in the Philippines. The answer is, however, no with regard to those services rendered in Japan. Such services were rendered outside the taxing jurisdiction and thus constitute as income without the Philippines. Marubeni, being a foreign corporation, is taxable only on income within the Philippines and, hence, income from services rendered in the Philippines.
Q: XYZ entered into reinsurance contracts with foreign insurance companies not doing business in the Philippines. XYZ was to cede portions of premiums underwritten in the Philippines to the foreign corporations in consideration for the assumption of risk. Is the cession of the premiums taxable as income from sources within the Philippines?
Yes. Sources means the activity, property, or service giving rise to the income. The original insurance undertakings took place in the Philippines. It is not required that the foreign corporation be engaged in business in the Philippines. What is controlling is no the place of business, but the place of activity that created the income. Thus, the income is subject to income tax. (see PHILIPPINE GUARANTY V. CIR [APRIL 30, 1965] and HOWDEN & CO. V. CIR [APRIL 14, 1965]).
Q: ABC Airways is a foreign airline.62 While it did not carry passengers and/or cargo to or from the Philippines, ABC maintains a general sales agent of its tickets in the
_________________________________________
61 62
Remember that case I provided in General Principles. It is a resident foreign corporation. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character. ABC maintained a general sales agent and it was engaged in selling or issuing tickets, which is considered the main lifeblood of an airline.
Q: ABC, a domestic corporation, entered into a Management Service Agreement with XYZ, a non-resident foreign corporation under which the latter shall provide services for ABCs US branch and advice on ABCs corporate structure, all performed abroad. Is the compensation for services taxable as income from sources within the Philippines?

Yes. The services covered by the management service agreement fall under the meaning of royalties. It is immaterial if the non-resident foreign corporation has no properties in the Philippines. The test of taxability is the source and the source of an income is that activity which produced the income. It is not the presence of any property from which one 63 derives rentals and royalties that is controlling, but rather as expressed under the expanded meaning of royalties, it includes royalties for the supply of scientific, technical, industrial, or commercial, knowledge or information; and the technical advice, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme. (see PHILAMLIFE V. CTA [CA-GR SP. NO. 31283, APRIL 25, 1995]).
has a licensed computer software program that its customers in North Dakota use for checking Quills current inventories and for placing orders directly. North Dakota attempted to impose a use tax65 on Quill. Is Quill liable for the tax?
Yes. In QUILL CORP V. NORTH DAKOTA [504 US 298, M AY 26, 1992], the US Supreme Court ruled that there must be physical presence in a state for the corporation to be liable for sales and use taxes. It applied its ruling in NATIONAL BELLAS HESS V. DEPARTMENT OF REVENUE OF ILLINOIS [386 US 753] where it held that a seller whose only connection with customers in the State is by common carrier or the mail lacked the requisite minimum contacts with the State. Thus, such vendors are free from stateimposed duties to collect sales and use taxes. Nevertheless, the US Supreme Court opined that if interstate commerce would be subject to intolerable or undesirable burdens because of this, Congress has the power to legislate make such vendors liable 66 for sales and use taxes.
Q: A, a non-resident citizen, was engaged by a domestic corporation as a commission agent. A will receive a sales commission on all sales actually concluded. A argues that the income is not taxable as A does not reside in the Philippines and that the place of payment of the income is outside the Philippines. Is As contention correct?
No. The source of an income is the property, activity or service that produced the income. With respect of rendition of labor or personal service, as in the instant case, it is the place where the labor or service is performed that determines the source of income. There is therefore no merit in As interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income. (see CIR VS. BAIER64 NICKEL [AUGUST 29, 2006])
Q: Vodafone International Holdings (VIH), a corporation in the Netherlands, acquired a controlling interest of CGP holdings, a company in the Cayman Islands. By virtue of this controlling interest, VIH acquired a 52% stake in Hutchinson Essar Limited (HEL)67 in India from Hutchinson Telecom International Limited (HTIL). Simply stated, VIH acquired control over CGP and its subsidiaries, including HEL. The Indian tax authorities contended that the transfer of shares was subject to income tax. VIH argues that the transfer of shares took place outside the Indian taxing jurisdiction, and,
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65
Q: Quill Corp is an office supply retailer with no physical presence in North Dakota but it
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63
This confirms the acceptance of the Philippine taxing jurisdiction of the rule that as to intangible property, the country of use is the country that protects the owner of that property against its unauthorized use by other persons. 64 Note that in this case, Baier-Nickel argued that the services were done in Germany. However, she failed to prove hat such was the fact. Thus, the services were deemed performed in the Philippines, and, as such, is subject to income tax.
A use tax is a type of excised tax levied in the United States upon otherwise "tax free" tangible personal property purchased by a resident of the assessing state for use, storage or consumption of goods in that state (not for resale), regardless of where the purchase took place. 66 Note that, as of this updated version, the BIR plans to impose a sales tax on online retailers in the opinion that such sellers are no different from merchants who sell their goods in physical stores. A RR on the matter is forthcoming. 67 HEL was an Indian joint venture between HTIL, a corporation in Hong Kong, and Essar, an Indian corporation.

hence, is not taxable. Which contention is correct?

The contention of VIH was held to be correct. In VODAFONE INTERNATIONAL HOLDINGS B.V. V. UNION OF INDIA (SUPREME COURT OF INDIA, CIVIL APPEAL NO. 68 733 OF 2012, JANUARY 20, 2012), the Indian Supreme Court ruled that VIH had no liability to withhold tax as the transaction was between two non-residents with no taxable presence in India. Under Section 9(1) of the Income Tax Act of India, all income accruing or arising, whether directly or indirectly through transfer of capital assets situated 69 in India shall be deemed to accrue or arise in India. The Supreme Court stated that the section clearly applied to a transfer of capital asset situated in India and could not be expanded to cover indirect transfers of capital assets or property situated in India. The words directly or indirectly go with the 70 income and not with the transfer of a capital asset.
generated from constructive trading and commission income derived from brokering activities of Philippine branches of foreign corporations engaged in trading activities. RAMO No. 01-95 [March 21, 1995] expanded RAMO No. 1-86 to cover taxation of Philippine branches of foreign corporations engaged in soliciting orders, purchases, service contracts, trading, construction and other activities.
Q: ABC, a multinational company, claimed as deduction from gross income its share of the overhead expenses of its foreign head office. Can these overhead expenses of the foreign head office be deducted from the gross income of the Philippine branch?
It depends. Either it can be deducted in full or partly. Where an expense is clearly related to the production of Philippine-derived income or to Philippine operations (e.g. salaries of Philippine personnel, rental of office building in the Philippines), that expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. However, where there are items included in the overhead expenses incurred by the parent company, all of which cannot be definitely allocated or identified with the operations of the Philippine branch, the company may claim as its deductible share a ratable part of such expenses based upon the ratio of the local branch's gross income to the total gross income, worldwide, of the multinational corporation. ( see COMMISSIONER VS. CTA & SMITH KLINE [JANUARY 17, 1984]; see also RAMO 4-86 [April 5, 1986])
Q: Is the gross income of branches of foreign corporations generated from solicitation of orders from local importers where the branches merely relay to its head office abroad said purchase orders and where the head office is the entity which actually consummates the sale liable for income tax?
Yes. By virtue of RAMO No. 1-86 [April 25, 1986], an income tax is imposed on the gross income _________________________________________
68
It is also important to note, that in this case, the Indian Supreme Court stated that, on the context of taxation of a holding company structure, the corporate veil may be lifted only if it is established that the transaction was a sham or there was abuse. In this case, the shares of CGP were transferred only for a commercial benefit and not with the object of tax evasion. The structure was in existence over a decade, it was not created or used as an instrument for tax avoidance, VIH was not a short-time investor and it did not introduce any new practice to grant itself a controlling interest. 69 The Indian taxing authorities argued that this was a look through provision a look through provision so that if there was a transfer, of a capital asset, situated in India, it meant income from capital gains accruing or arising outside India would be fictionally deemed to accrue or arise in India. 70 The Indian Supreme Court also noted that the existence of the Direct Tax Code Bill of 2010 which expressly stated that income accuring even from indirect transfer of capital assets situated in India would be deemed to accrue in India but this is not yet in force.
--------------------------------------------------------------(g) Exclusions from gross income (1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit (4) Under the Constitution (5) Under the Tax Code (6) Under Special laws ---------------------------------------------------------------

Q: What are exclusions?

The term exclusions refers to items that are not included in the determination of gross income because: 1. They represent return of capital or are not income, gain or profit (e.g. life insurance) 2. They are subject to another kind of internal revenue tax (e.g. gifts, bequests, devices) 3. They are income, gain or profits that are expressly exempt from income tax under the Constitution, tax treaty, Tax Code, or general or special law. (e.g. PEZA) Pertain to computation of income the gross Pertains to computation of taxable income
Exclusions are something received or earned by the taxpayer but which do not form part of gross income
Deductions are something spent or paid in earning gross income
Q: Distinguish exclusions from deductions and tax credits.

Exclusions Deductions Amounts subtracted from pertinent items of gross income in order to arrive at taxable income upon which the tax rate is applied Part of income Tax Credits Amounts subtracted from the computed tax in order to arrive at taxes payable
--------------------------------------------------------------(1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit --------------------------------------------------------------Q: What is the rationale for the exclusions?
Some receipts are excluded from gross income because they are not income. Even if they are by definition income, the exclusions are not subject to tax because of policy considerations such as to avoid the effects of double taxation or to provide incentives for certain socially desirable activities.
Amounts that are not included in gross income
Not income
Are taxes that are not collected
Q: Who are the taxpayers who may avail of the exclusions?

All taxpayers can avail of exclusions because excluded receipts are not considered as income for tax purposes.
--------------------------------------------------------------(4) Under the Constitution (a) Income derived by the government or its political subdivisions from the exercise of any essential government function --------------------------------------------------------------Note: There is no express provision in the Constitution which provides that income derived by the State is excluded from gross income. On this point, the Syllabus is wrong. It is an inherent limitation of the power of taxation that the State be exempt from taxes. This part should have instead referred to non-stock, non-profit educational institutions as there is an express provision for their exemption from income tax.
Q: Distinguish exclusions from gross income from deductions from gross income.
Exclusions Flow of wealth to the taxpayer which is not treated as part of gross income because it is exempted or it does not come within the definition of income Deductions Amounts which the law allows to be subtracted from gross income in order to arrive at net income
Q: What income is excluded from gross income by the Constitution? The assets and revenues of a non-stock, nonprofit private educational institution used

directly, actually and exclusively for educational purposes shall be exempt from income taxation. (see Section 4(3), Article XIV, 1987 Constitution)
Note: Although not expressly provided for, remember that the State as a general rule is exempt from taxation. It is an inherent limitation. Thus, the income of the State are generally excluded from gross income. As to GOCCs If they are performing government functions, they are exempt unless expressly subject to tax; If they are performing proprietary functions, they are subject to tax unless expressly exempted. See discussions in General Principles and Exempt Corporations.
amounts are held by the insurer under an agreement to pay interest. 2. Amounts received by the insured as return of premiums paid under life insurance, endowment or annuity contracts, either during the term or at the maturity of the contract or upon the surrender thereof. 3. Gifts, bequests, and devises but not the income from such property; if the amount received is on account of services rendered whether constituting a demandable debt or not such as remuneratory donations or the use or opportunity or use of capital, the receipt is income. 4. Compensation for injuries or sickness whether by suit or agreement including amounts received through accident or health insurance or under the Workmens compensation Act, but not damages or compensation recovered for loss of profit in loss or damage to property which would be taxable 5. Income exempt under treaty binding upon the Government of the Philippines. 6. Certain retirement benefits, gratuities, more particularly: pensions,
72
--------------------------------------------------------------(5) Under the Tax Code (a) Proceeds from life insurance policies (b) Return of premium paid (c) Amounts received under life insurance, endowment, or annuity contracts (d) Value of property acquired by gift, bequest, devise or descent (e) Amount received through accident or health insurance (f) Income exempt under tax treaty (g) Retirement benefits, pensions, gratuities, etc. (h) Winnings, prizes, and awards, including those in sports competition --------------------------------------------------------------Read Section 32(B), Tax Code Q: What are deemed excluded from (gross) income under the Tax Code?
a. Retirement benefits received under RA 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a 73 reasonable private benefit plan maintained by the employer provided:
_________________________________________ As provided in Section 32(B), NIRC, the following items shall not be included in gross income and shall be exempt from income tax 1. Proceeds of life insurance, payable upon the death of the insured to the heirs or beneficiaries, but not the interest payments thereon if such _________________________________________
71 72
They are instead subject to estate or gift taxes (see PIROVANO
VS. COMMISSIONER [JULY 31, 1965])

73
71
It is considered as indemnity rather than income
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, wherein contributions are made by such employer for the 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 its 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 officials and employees.

i.
that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement That the benefits granted shall be availed of by an official or employee only once.
b.
ii.
c.
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 because of 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 nonresident 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 or to become due to any person (residing in the Philippines) under the laws of the United States administered by the United States Veterans Administration. e. Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. f. Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. 7. Miscellaneous including: items, likewise exempt,
d.
e.
f.
a. Income of foreign governments or financing institutions owned, controlled or enjoying refinancing from such foreign governments and of international or regional financial institutions established by foreign governments
g.
h.
from their passive investments in the Philippines Income of the Philippine government and its political subdivisions derived from public utilities or in the exercise of essential governmental functions 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 proceedings; and ii. The recipient is not required to render substantial future services as a condition to receiving the prize or award All prizes and wards granted to athletes in local and international sports competitions whether held in the Philippines or abroad. Gross benefits received by officials and employees of public and private entities provided, however, that the total exclusion shall not exceed P30,000 which shall cover: i. Benefits received by officials and employees of the national and local government pursuant to RA 6686 ii. Benefits received by employees pursuant to PD 851 iii. Benefits received by officials and employees not covered by PD 851 iv. Other benefits such as productivity incentives and Christmas bonus provided that the ceiling of P30,000 may be increased through the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. GSIS, SSS, Medicare and Pag-ibig contributions and union dues of individuals Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years Gains from the redemption of shares of stock in a mutual fund company Page 96 of 158 Last Updated: 30 July 2013(v3)

Also, under Section 33(C), NIRC, the following fringe benefits are not taxable: 1. Fringe benefits authorized and exempted from tax under special laws; 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization plans; 3. Benefits given to rank and file employees, whether granted under a CBA or not; 4. De minimis benefits.
Note: As to 7(a) A financing institution wholly-owned and controlled by a foreign government is exempt from income tax and final withholding tax with respect to its income derived from investments in T-bonds. GOVERNMENT OF SINGAPORE INVESTMENT CORPORATION PTE LTD. VS. CI, CTA 8030, SEPTEMBER 5, 2012
that may result as the death of the insured partner 4. The recipient of the insurance proceeds is a partnership in which the insured is a partner and the insurance was taken to compensate the partnership for any loss in come that may result from the dissolution of the partnership caused by the death of the insured partner 5. The recipient of the life insurance proceeds is a corporation which the insured was an employee or officer. (see RR No. 2-40)
Q: What is the tax treatment of the interests paid on life insurance proceeds?
If the amounts of life insurance proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in the gross income. (see Section 32(B)(1), Tax Code)
Note: Rationale The interests do not form part of the indemnity but are earnings or income from the use of capital which are taxable.
--------------------------------------------------------------(a) Proceeds from life insurance policies --------------------------------------------------------------Q: What are the conditions for the exclusion from gross income of life insurance proceeds?
The proceeds of life insurance policies must be: 1. Paid to the heirs or beneficiaries 2. Upon the death of the insured 3. whether in a single sum or otherwise
Note: (1) Payment by reason other than death Payment for reasons other than death are subject to tax up to the extent of the excess of the premiums paid. (2) Reason for the Exclusion They partake more of indemnity or compensation rather than gain to the recipient
Q: Is the concept of revocability or irrevocability in the designation of the beneficiary relevant for purposes of exclusion?
No. There is no need for the determination of the revocability or irrevocability in the designation of the beneficiary for purposes of exclusion of the life insurance proceeds from the gross estate. It is material only in determining whether the proceeds form part of the gross estate or not.
Q: In what instances are life insurance proceeds not excluded from gross income?
1. Life insurance policy is used to secure a money obligation 2. Life insurance policy was transferred for a valuable consideration 3. The recipient of the insurance proceeds is a business partner of the deceased and the insurance was taken to compensate the partner-beneficiary for any loss in income PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------(b) Return of premium paid (c) Amounts received under life insurance, endowment, or annuity contracts --------------------------------------------------------------Note: Items (b) and (c) refer to the same thing. In fact, that is Section 32(B)(2) which refers to amounts received by insured as return of premium paid by him undr life insurance, endowment or annuity contracts.

Q: What are the conditions for amounts received by insured as return of premiums be excluded from gross income?
1. The amounts are received by the insured 74 2. Under a life insurance, endowment, or 75 annuity contract 3. Either: a. during the term or b. at maturity of the term mentioned in the contract or c. upon surrender of the contract (see Section 32(B)(2), Tax Code)
Note: The amount returned is not income but return of capital. They represent earnings which were previously taxed.
It is excluded from gross income and hence not subject to income tax. However, the income from the property acquired and transfers of divided interests shall be included in gross income. (see Section 32(B)(3), Tax Code).
Note: Rationale The property is subject to donors or estate taxes as the case may be. As to the income from the property, what is only excluded is the property itself
--------------------------------------------------------------(e) Amount received through accident or health insurance --------------------------------------------------------------Q: What kinds of of compensation or damages for injuries or sickness are excluded from gross income?
1. Amounts received through Accident or Health Insurance or Workmens Compensation Act as compensation for personal injuries or sickness 2. Amounts of any damages received whether by suit or agreement on account of such injuries or sickness
Note: The above amounts are absolutely excluded from gross income. Rationale they are mere compensation for injuries or sickness suffered and not income
Q: What is the tax treatment of proceeds received under endowment policies?

1. If the insured dies, and the benificary recives the life insurance proceeds not taxable and excluded from gross income 2. If the insured does not die and survives the designated period the amount pertaining to the premiums are excluded from gross income but the excess shall be considered part of his gross income
--------------------------------------------------------------(d) Value of property acquired by gift, bequest, devise or descent --------------------------------------------------------------Q: What is the tax treatment of property acquired by gift, bequest, devise or descent?
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74
Q: Is the compensation for unearned income as a result of personal injuries or sickness excluded from gross income?
Yes. They are also excluded from gross income as they were not earned by the taxpayer as a result of the personal injuries or sickness.
Note: (1) Rationale It is meant to restore the injured party whole as before the injury. (2) Note that this is the popular view. The other view is that it is not excluded because such damages merely replace the income which would have been subjected to tax if earned.
An endowment is where the insurer agrees to pay a sum certain to the insured if he outlives a designated period. If he dies before that date, the proceeds are to be paid to the designated beneficiary. 75 An annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property whose ownership is transferred to him at once with the burden of the income (see Art. 2021, NCC)
--------------------------------------------------------------(f) Income exempt under tax treaty ---------------------------------------------------------------

Q: What is the reason for the exclusion of income exempt under treaty?
Although it is income, it is excluded from gross income by reasons of public policy which recognizes the principles of reciprocity and comity among States.
Q: A domestic corporation entered into a loan and sales contract with a foreign corporation where the latter shall extend a loan to the former and the former shall sell to the latter all copper concentrates to be produced from the machine to be purchased using the loaned amount. The foreign corporation applied for the loan from one of its government financing institutions. Is the interest income from the loans automatically exempt from withholding tax?
No. As held in CIR V. MITSUBISHI METAL CORPORATION [JANUARY 22, 1990], the burden of proof rests upon the party claiming an exemption to prove that it is in fact covered by the exemption. In the said case, the Supreme Court found that the foreign government financing institution had nothing to do with the sales and loans agreement. It is the foreign corporation, not the foreign government financing institution that is the sole creditor of the domestic corporation
3. the retiring official or employee is not less than fifty (50) years of age at the time of his retirement; and 4. the benefit had been availed of only once 5. The retirement plan must be submitted to and approved by the BIR (see INTERCONTINENTAL BROADCASTING CORPORATION VS. AMARILLA [OCTOBER 29, 2006])
Q: An employer maintains an employees trust to provide retirement, pension, disability benefits to its employees. The trust made investments and earned therefrom interest income. Is it proper to subject the interest income to withholding tax?
No. As held by the Supreme Court in CIR V. CA & GCL RETIREMENT PLAN [M ARCH 23, 1992], said retirement benefits received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer shall be exempt from all taxes
Q: What are the conditions in order that separation pay may be excluded from gross income?
1. Amount received by an official, employee, or by his heirs 2. From the employer 3. As a consequence of separation of such official or employee from the service of the employer a. Because of death, sickness, or other physical disability or b. For any cause beyond the control of such official or employee , such as i. Retrenchment ii. Redundancy iii. Cessation of business
Note: In other words, the separation must be involuntary in order for it to be excluded from gross income.
--------------------------------------------------------------(g) Retirement benefits, pensions, gratuities, etc. --------------------------------------------------------------Q: What are the conditions to exempt retirement benefits paid from an employer maintained reasonable private retirement plan from income tax?
For the retirement benefits to be exempt from income tax, the taxpayer is burdened to prove the concurrence of the following elements: 1. a reasonable private benefit plan is maintained by the employer; 2. the retiring official or employee has been in the service of the same employer for at least ten (10) years; PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: A government employee, retired from service. Upon retirement, he received, among other benefits, terminal leave pay which the CIR withheld a portion allegedly

representing income tax thereon. Is terminal leave pay considered part of gross income of the recipient?
No. In COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA [OCTOBER 17, 1991], the Supreme Court held that terminal leave pay received by a government official or employee is not subject to withholding (income) tax. The rationale behind the employees entitlement to an exemption from withholding tax on his terminal leave is that commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax. (see RE: REQUEST OF ATTY. BERNANDINO ZIALCITA [OCTOBER 18, 1990]).
1. Made primary in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement 2. The recipient was selected without any action on his par to enter the contest or proceeding and 3. The recipient is not required to render substantial future services as a condition to receiving the prize or award.
Q: What are the requisites for the exclusion from gross income of prizes and awards in sports competitions?
1. The prizes and awards granted to athletes 2. In local and international sports tournaments and competitions 3. Whether held in the Philippines or abroad 4. Sanctioned by their national sports associations
--------------------------------------------------------------(6) Under Special laws (a) Personal Equity and Retirement Account --------------------------------------------------------------Note: Special laws granting tax corporations shall be discussed Corporations. exemptions to under Exempt
Q: Are contributions to SSS, GSIS, PHIC and Pag-Ibig in excess of the mandatory contributions subject to income tax?
Yes. Previously, SSS, GSIS, PHIC and Pag-Ibig contributions in excess of the mandatory contributions were considered exempt from income tax. However, because it was deemed to have been abused and the excess contributions are being made as a form of investment, RMC No. 027-11 [JULY 1, 2011] now considers the excess contributions as not excludible from gross income and not exempt from income and withholding tax.
Q: Is income earned by a contributor from the investments and reinvestments of his Personal Equity and Retirement Act (PERA) assets subject to income tax?
No. As provided in RR No 017-11 [OCTOBER 27, 2011], implementing the tax provisions of RA 9505, otherwise known as the Personal Equity and Retirement Account (PERA) Act of 2008, investment income of a contributor consisting of all income earned from the investments and reinvestments of his PERA assets in the maximum amount allowed shall be exempt from the following taxes as may be applicable: 1. Final withholding tax on interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, including a depository bank under the EFCDS;
--------------------------------------------------------------(h) Winnings, prizes, and awards, including those in sports competition --------------------------------------------------------------Q: What are the requisites to be met before prizes and awards are excluded from gross income?
The prizes and awards are:

2. Capital gains tax on the sale, exchange, retirement or maturity of bonds, debentures or other certificates of indebtedness; 3. 10% tax on cash and/or property dividends actually or constructively received from a domestic corporation, including a mutual fund company; 4. Capital gains tax on the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation; 5. Regular income tax.
exemption for head of a family.
Q: What is the nature of deductions?

Deductions partake of the nature of tax exemptions. Hence, they are likewise strictly construed against the taxpayer. CIR V. ISABELA CULTURAL CORPORATION [G.R. NO. 172231, FEBRUARY 12, 2007]
--------------------------------------------------------------(h) Deductions (1) General Rules (2) Return of Capital (3) Itemized Deductions (4) Optional Standard Deduction (5) Personal and additional exemption (6) Items not deductible --------------------------------------------------------------Q: What are deductions?
Deductions are items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income.
Q: What are the kinds of deductions?

1. The itemized deductions in Section 34(A) to J and (M) available to all kinds of taxpayers engaged in trade or business or practice of 76 profession in the Philippines 2. The optional standard deduction in Section 34(L) available to all kinds of taxpayers engaged in trade or business or practice of a profession in the Philippines 3. The special deductions in Section 37 and 38 as well as in special laws 4. The personal and additional exemptions and deductions in Section 35 for premium payments on health and/or hospitalization insurance in Section 34(M) available both to individual taxpayers earning purely compensation income and individual taxpayers engaged in trade or business or practice of a profession
Note: As to (2) In Atty. Mamalateos book, he still states that OSD is available only to an individual taxpayer, other than a nonresident alien. This no longer holds true in light of the amendment introduced by RA 9504. Domestic and resident foreign corporations may now avail of OSD.
Q: Distinguish exemption
Deduction It is a subtraction
deduction
from
an
Exemption It is an immunity or privilege, a freedom from a charge or burden to which others are subjected to It is generally a receipt which is excluded from taxable income
Q: Who can avail of the deductions provided for under the law?
On compensation income of citizens, whether resident or nonresident, and 1) Deductions for premium payments on health and/or hospitalization insurance 2) Personal and additional
It is not a receipt but an expenditure which is permitted to be subtracted from income to determine the amount subject to tax It is a reduction of wealth which helped earn the income subject to tax, such as ordinary and necessary expenses
A person exemption is the theoretical personal family and living expense of an individual, such as the personal
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76
As it requires that they be engaged in a trade, or business, or profession, this excludes citizens and alien residents earning purely compensation income.

resident aliens On incomes (other than compensation income) of citizens, whether resident or nonresident, and resident aliens
exemptions 1) Itemized deductions or optional standard deduction 2) Deductions for premium payments on health and/or hospitalization insurance 3) Personal exemptions and additional
personal and additional exemptions and premium payments on health and hospitalization insurance.
On income of non-resident aliens engaged in trade, business, or profession in the Philippines
1) Itemized deductions but not allowed optional standard deduction 2) Deductions for premium payments on health and/or hospitalization insurance 3) Personal exemptions reciprocity and additional subject to
--------------------------------------------------------------(1) General Rules (a) Deductions must be paid or incurred in connection with the taxpayers trade, business or profession (b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding
---------------------------------------------------------------
Q: What are the general rules to be observed regarding deductions?

1. Deductions must be paid or incurred in connection with the taxpayers trade, business or profession 2. Deductions must be supported by adequate receipts or invoices 3. Additional requirement relating to withholding
Non-resident alien individuals not engaged in trade or business in the Philippines Domestic Corporations and Resident foreign corporations Non-resident foreign corporation
Their income (whether compensation or other income) is subject to tax on their gross income. Hence, no deductions or exemptions 1) Itemized deductions or optional standard deduction
Read Section 34(K), Tax Code Q: What are the general requisites before deductions are allowed?
1. There must be a specific provision of law allowing the deductions, since deductions do not exist by implication 2. The requirements of deductibility must be met 3. There must be proof of entitlement to the deductions 4. The deductions must not have been waived 5. The withholding and payment of the tax required must be shown
Note: Remember this! In fact, please memorize it as these are the requisites common to all deductions. Each deduction would add some requisites in the enumeration. So remember the general requisites!
Their income (whether compensation or other income) is subject to tax on their gross income. Hence, no deductions or exemptions
Note: In sum, all taxpayers except: 1. 2. Nonresident aliens not engaged in trade or business; and Nonresident foreign corporations or those foreign corporations not engaged in trade or business in the Philippines
However, with respect to itemized deductions, they cannot be availed by citizens and resident aliens whose income is purely compensation income. They are entitled only to

--------------------------------------------------------------(2) Return of Capital (a) Sale of inventory of goods by manufacturers and dealers of properties (b) Sale of stock in trade by a real estate dealer and dealer in securities (c) Sale of services --------------------------------------------------------------Q: Discuss deduction. return of capital as a
to sellers of inventory of goods. Their entire gross receipts are treated as part of income.
Income tax is levied only in income, which may be gross income or net income; hence, the amount representing return of capital should be deducted from the proceeds from sales of assets and should not be subject to income tax (see Section 65, RR No. 2) Sale of inventory of goods by manufacturers and dealers of properties The amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of manufacturers) or cost of sales (in the case of dealers) is deducted from gross sales to arrive at gross income. They are not ordinarily allowed to compute the amount representing return of capital through cost of sales. Rather, they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged. The resulting gain or loss is subject to income tax. Seller of services do not buy and carry nor sell any stock in trade or inventory of property; hence, they do not take or assume any risk of loss similar
--------------------------------------------------------------(3) Itemized Deductions (a) Expenses (b) Interest (c) Taxes (d) Losses (e) Bad Debts (f) Depreciation (g) Charitable and other contributions (h) Contributions to pension trusts (i) Deductions under special laws --------------------------------------------------------------Note: I will not be discussing Depletion and Research and Development as they are not included in the 2013 Syllabus.
Q: What are the allowable under the Tax Code? (Itemized deductions)
The allowable and itemized deductions include: 1. Business Expenses (Expenses in connection with taxpayers trade, business or profession) 2. Interest on Indebtedness 3. Taxes in connection with taxpayers business, trade or profession [except income taxes, estate and donors taxes, special assessments, and foreign income taxes (unless the taxpayer does not make use of the tax credit privilege)] 4. Losses 5. Bad debts 6. Depreciation 7. Depletion 8. Charitable and other contributions 9. Research and development expenditures 10. Contributions to pension trusts
Note: The Secretary of Finance may prescribe ceilings for the allowable itemized deductions.
Sale of stock in trade by a real estate dealer and dealer in securities
Sale of services
Read Section 34 last , Tax Code

--------------------------------------------------------------(a) Expenses (1) Requisites for deductibility (2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossedup monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (3) Travelling/transportation expenses (4) Cost of materials (5) Rentals and/or other payments for use or possession of property (6) Repairs and maintenance (7) Expenses under lease agreements (8) Expenses for professionals (9) Entertainment/Representation expenses (10) Political campaign expenses (11) Training expenses --------------------------------------------------------------Read Section 34(A), Tax Code Q: What are the requisites for deductibility of business expenses?77
The requisites are: 1. The expense must be ordinary and necessary 2. Paid or incurred during the taxable year 3. In carrying on the trade or business of the taxpayer 4. It must be supported by adequate invoices and receipts 5. Must not be against law, morals, public 78 policy, or public order 6. It must be reasonable
7. The tax required to be withheld on the expense paid or payable is shown to have been remitted to the BIR
Q: What is meant by ordinary and necessary expenses?

An expense is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. An expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business
Q: What is meant by paid or incurred during the taxable year?

Paid or incurred during the taxable year means that the deduction shall be taken for the taxable year in which paid or accrued or paid or incurred dependent on the accounting method in which net income is computed
Q: ABC Corp failed to claim expenses for professional services that accrued in past years. May ABC Corp still claim these expenses as deductions?
No. In COMMISSIONER OF INTERNAL REVENUE VS. ISABELA CULTURAL CORPORATION (FEBRUARY 12, 2007), Isabela Corp failed to claim the expenses for professional services that accrued in 1984 and 1985 during the said years. Instead, it sought to claim them as deductions during the taxable year of 1986. The Supreme Court held that one of the requisites for the deductibility of a business expenses is that it must have been paid or incurred during the taxable year. Hence, the professional fees should have been claimed as deductions during the years where they were paid or incurred.
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77
Q: Discuss the substantiation rule.

It is required that before business or professional expenses are allowed as deductions from gross income, the taxpayer must satisfy the BIR that the deductions being claimed are indeed ordinary and necessary expenses incurred during the taxable year carrying on any trade or business. The taxpayer shall substantiate the expense being
This is the general rule which is to be followed for all business expenses. The enumeration provided in certain business expenses provide for additional requisites. 78 We said that illegal income will form part of gross income because the Code provides for income from whatever source. However, one cannot deduct the illegal income from gross income. It is against law and public policy. Ninakaw mo na nga, gusto mo pa ng deduction. Kapal ng face.

deducted with sufficient evidence such as official receipts or other adequate records. Note: The burden is on the taxpayer to prove entitlement to a claimed deduction.
No. A taxpayer is entitled to deduct the ordinary and necessary expenses paid in carrying on his business from his gross income from whatever source.
Q: What is the Cohan Principle?

If there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayers taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. Cohan v. Commissioner [39 F. 2d 540, 2d Cir. 1930]
Q: Are advertising expenses deductible from gross income?

It depends on the nature of the advertising expense. In COMMISSIONER OF INTERNAL REVENUE VS. GENERAL FOODS (PHILS.) INC. [APRIL 24, 2003], General Foods claimed as deductions its advertising expenses for its product Tang. The CIR disallowed the deduction arguing that the advertising expenses are not business expenses but capital expenditures. The Supreme Court ruled in favor of the CIR. Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital expenditure which should be spread out over a reasonable period of time. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures. The advertising expense incurred by General Foods fall under the second type.
Q: What are the types of business expenses specifically included in the Tax Code as deductions?
As provided in Section 34(A)(1)(a), these are: 1. Reasonable allowance for salaries or other compensation for personal services actually rendered to the taxpayer 2. Reasonable allowance for travel expenses in the pursuit of trade, business or profession 3. Reasonable allowance for rentals and or other payments required for the continued use or premium of the property for the purpose of the trade or business and to which property the taxpayer has not taken or is not taking title or in which he has no 79 equity. 4. Reasonable allowance for entertainment, amusement and recreation expenses provided that they are connected to the development and operation of the trade, business or profession and that it is not contrary to law, morals, public policy or public order.
Q: Is the enumeration of business expenses provided in the Tax Code exclusive?

_________________________________________
79
Q: ABC Corporation paid a PR firm to campaign for the sale of ABCs additional capital stock. Is the compensation paid to the PR firm deductible as a business expense?
No. In ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27, 1981), the Supreme Court held that this is not deductible because it is a capital Page 105 of 158 Last Updated: 30 July 2013(v3)
In the latter case, he may claim depreciation allowance

expenditure. Expenses relating to the recapitalization and reorganization of the corporation, promotion expenses and commission or fees for the sale of stock reorganization are capital expenditures.
payments purely for the personal services actually rendered.
Q: Are litigation expenses deductible as a business expense?

No. As held in ATLAS CONSOLIDATED MINING & DEVELOPMENT CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE (JANUARY 27, 1981), litigation expenses incurred in defense or protection of title are capital in nature and not deductible.
Q: What are some factors that may be considered in determining the reasonableness of the compensation paid for services?
They are: 1. 2. 3. 4. 5. 6. 7. 8. The payment must be made in good faith The character of the taxpayers business The volume and amount of its net earnings The locality in which the business is in The type and extent of the services rendered The salary policy of the corporation The size of the particular business The employees qualifications and business venture 9. The general economic conditions There is no fixed test in determining the reasonableness of a given bonus as compensation. This depends on many factors and the situation must be considered as a whole.
Are police protection fees and gifts for an exhibition for charitable purposes deductible as a business expense? No. In CALANOC VS. COLLECTOR OF INTERNAL REVENUE [NOVEMBER 29, 1961], at issue in this case is the deductibility of the expenses incurred for police protection and for gifts and parties in connection with the boxing and wrestling exhibition that Calanoc financed and promoted whose proceeds would be given to the orphans and destitute children of the Child Welfare Workers Club of the Social Welfare Commission. The Supreme Court held that the police protection fees were not deductible as they are illegal since it was consideration for the performance of functions required of policemen by law. As to the gifts and parties, they were deemed excessive considering that the purpose of the exhibition was for a charitable cause.
Q: Are salaries deductible?

Yes provided that they comply with the following requisites: 1. The salaries must be for personal services actually rendered 2. The salaries must be reasonable in amount. (see Section 70, RR No. 2)
Note: To determine if reasonable, you look at what is ordinarily paid for such service in like enterprise in like circumstances (see Section 70, RR No. 2-40)
--------------------------------------------------------------2) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossedup monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid --------------------------------------------------------------Q: What is the rule on the deductibility of compensation payments?
The test of deductibility in the case of compensation payments is whether they are reasonable and PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: Are bonuses to employees allowable deductions from gross income?

Yes provided that: 1. They are made in good faith 2. They are given for personal services actually rendered 3. The bonus when added to salaries is reasonable when measured by the amount and quality of the services performed with Page 106 of 158 Last Updated: 30 July 2013(v3)

relation to the business of the particular taxpayer. (see KUENZLE & STREIFF V. COLLECTOR [106 PHIL. 355]; C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF INTERNAL REVENUE [NOVEMBER 28, 1969])
the deductibility of bonuses is that they are given for personal services actually rendered.
Q: A, an experienced realtor, was paid supervision fees in the amount of P100,000 annually by XYZ Corporation for a threeyear project, an amount when combined with his salary and bonuses is double the XYZs income. Are the supervision fees deductible?
No. In C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF INTERNAL REVENUE [NOVEMBER 28, 1969], Hoskins & Co. claimed as deductions the payment of P100,000 to its founder and controlling stockholder, Hoskins representing 50% of the 8% supervision fees the company received as managing agent for Paradise Farms. In this case, the Supreme Court held that such was not deductible for failing to pass the reasonableness test. If allowed, Hoskin would be receiving on his salary, bonus, and supervision fees at total of P185,000 which is double the companys reported net income. The Supreme Court stated that if it was a one-time payment, it could have been deducted since Hoskin was an experienced realtor. However, the P100,000 supervision fee was being paid every year (for three years) for the entire duration of the companys project with Paradise Farms.
Q: ABC Corporation claimed as deductions bonuses it gave to its non-resident president and vice-president and the bonuses it gave to its resident officers and employees. The company gave its resident officers and employees much more. The deductions for bonuses given to resident officers and employees were disallowed for being excessive and for no special reason. Is the disallowance proper?
It would depend on the nature, extent, and quality of the services actually rendered by the resident officers and employees. In KUENZLE & STREIFF, INC. VS. COLLECTOR OF INTERNAL REVENUE [OCTOBER 20, 1959], the Supreme Court held that the bonuses to its resident officers and employees were reasonable taking into account the situation at the time when the services were rendered: unsettling conditions after the war, the imposition of controls on exports and imports, and he use of foreign exchange which resulted in diminution of the amount of business.
--------------------------------------------------------------(3) Travelling/transportation expenses --------------------------------------------------------------Q: What are the requisites for deductibility of travelling or transportation expenses?
1. It must be paid or incurred while away from home 2. It must be incurred in the pursuit of the taxpayers trade or business 3. It must be reasonable and necessary
Q: Can a bonus given to corporate officers be deducted from gross income from the sale of one of its properties on the representation that corporate officers, by virtue of their positions, contributed to the consummation of the sale?
No. In AGUINALDO INDUSTRIES CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 25, 1982], Aguinaldo Industries sought to claim as deductions the bonuses given to its corporate officers from the sale of one of its properties.The Supreme Court held that the said bonuses cannot be deducted because there is no evidence that the said officers did any work which would be the basis of the grant of the bonuses. One of the requisites for
--------------------------------------------------------------(4) Cost of materials --------------------------------------------------------------Q: What are the requisites for deductibility of cost of materials?
The charges for materials and supplies shall be only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such Page 107 of 158 Last Updated: 30 July 2013(v3)

materials and supplies has not been deducted in determining the net income for any previous year (see Section 67, RR No. 2-40)
Q: What are the allowable deductions by a lessee?

The lessee may deduct the amount of rent paid or accrued including all expenses which under the terms of the agreement, the lessee is required to pay to, or for the account of the lessor. If the payments are so arranged as to constitute advance rentals, such payment will be duly apportioned over the lease term (see Section 3.01, RR No. 19-86)
--------------------------------------------------------------(5) Rentals and/or other payments for use or possession of property --------------------------------------------------------------Q: What are the requisites for deductibility of rental expenses?
1. Made as a condition to the continued use or possession of property 2. Taxpayer has not taken or is not taking title to the property or has no equity other than that of a lessee, use or possessor 3. Property must be used in trade or business 4. Subjected to withholding tax of 5%; otherwise, it shall be disallowed as a deduction
--------------------------------------------------------------(8) Expenses for professionals --------------------------------------------------------------Q: What are the allowable deductions for professionals? 1. The cost of supplies used by him in the
practice of his profession
--------------------------------------------------------------(6) Repairs and maintenance --------------------------------------------------------------Q: Discuss the deductibility of repairs expenses.
The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinary working condition, may be deducted as a business expense. However, extraordinary repairs (those which prolong its life or add material value) are not deductible
2. Expenses paid in the operation and repair of 3. 4. 5. 6.

transportation equipment used in making professional calls Dues to professional societies and subscriptions to professional journals The rent paid for office rooms The expenses of the fuel, light, water, telephone, etc. used in such offices; and The hire of office assistants
--------------------------------------------------------------(9) Entertainment/Representation expenses --------------------------------------------------------------Q: What is the rule on the deductibility of representation or entertainment, amusement and recreation expenses?
Such expenses must: 1. Must be paid or incurred during the taxable year 2. be directly related to or in furtherance of the conduct of the trade, business or exercise of the profession 3. not be contrary to law, morals, public policy or public order 4. does not constitute a bribe, kickback or other similar payment
--------------------------------------------------------------(7) Expenses under lease agreements --------------------------------------------------------------Q: What are the allowable deductions by a lessor?
Since the rentals are considered as income of the lessor (owner of the property, such lessor may deduct all ordinary and necessary expenses paid or incurred during the taxable year which are attributable to the earning of the income. (see Section 2.01, RR No. 19-86)

5. must be duly substantiated by adequate proof 6. The appropriate amount of withholding tax if applicable should have been withheld therefrom and paid to the BIR 7. not exceed such ceilings prescribed by the Secretary of Finance.
determine from all available data, the amount properly deductible as representation expenses. In view of this, the Supreme Court held CTA did not commit error in allowing as promotion expenses in As income tax returns at merely one-half.
Q: Is there a ceiling on entertainment, amusement and recreational expenses?

Yes. RR 10-2002 [JULY 10, 2002] provides that: 1. Sellers of goods or properties 0.5% of their net sales as representation expenses 2. Sellers of services 1% of their net revenues as representation expenses. However, when supporting documents reflect a lower amount, then such lower amount shall be used.
--------------------------------------------------------------(10) Political campaign expenses --------------------------------------------------------------Note: I will use this as an opportunity to discuss the import of RR 8-2009 in relation to RMC 63-09 and RR 7-2011 in relation to RMC 15-2013 which are recent BIR issuances on the matter of political campaign expenses. We know (or should know) that contributions given to candidates or political parties are not subject to donors tax (see Section 13, RA 7166). It may, however, be subject to income tax. In order for the campaign expenditure to be tax-exempt, it must be fully utilized. If it is not fully utilized, it is subject to income tax (see Section 2, RR 7-2011). These contributions are intended to finance the operation expenditures of a candidate. Any unexpended balance from any contribution to a candidate or party shall be subject to income tax. Further, if the candidate fails to include certain campaign expenditures in the Statement of Expenditures to be filed with the COMELEC, such amounts will be automatically subjected to income tax. RMC 15-2013 requires every candidate, treasurer of the party and person acting under authority of that candidate or treasurer a) to keep detailed, full and accurate records of all contributions received and expenditures incurred; b) to be responsible for the preservation of the records of contributions and expenditures together with all pertinent documents, for at least three years after the holding of the election to which they pertain and for the productions for inspection by the COMELEC or its duly authorized representative, or upon presentation of a subpoena duces tecum duly issued by the COMELEC. Now, with that said, we now answer whether political campaign expenses are deductible.
Q: A, a hotel owner, claimed as deduction promotion expenses incurred by his wife for the promotion of the hotel. Half of the said expenses were disallowed as deductions because on the finding that his wife went abroad on a combined business and medical trip. Is the disallowance proper?
Yes. In ZAMORA VS. COLLECTOR OF INTERNAL REVENUE [M AY 31, 1963], Zamora, a hotel owner, claimed as deduction promotion expenses incurred by his wife for the promotion of the hotel. On appeal, the CTA only allowed 50% of the promotional expenses as deductions because it was found in the Central Bank dollar allocation that his wife went abroad on a combined business and medical trip. The Supreme Court stated that promotional expenses are deductible but must be substantiated. When some of the representation expenses claimed by the taxpayer were evidenced by vouchers or chits, but others were without vouchers or chits, documents or supporting papers; that there is no more than oral proof to the effect that payments have been made for representation expenses allegedly made by the taxpayer and about the general nature of such alleged expenses; that accordingly, it is not possible to determine the actual amount covered by supporting papers and the amount without supporting papers, the court should PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: Are political deductible?
campaign
expenses
We must distinguish between (1) the candidate, political party, or contributor and (2) the supplier of the goods and services pertaining to the campaign expenditures. As to the candidate, political party, or contributor, the political campaign expenses are not deductible. If they are fully utilized, they are tax exempt and thus theres no need for any deduction at all. If they are Page 109 of 158 Last Updated: 30 July 2013(v3)

not fully utilized and hence subject to income tax, it is submitted that they cannot still be deducted either as a business expense or as a contribution. MONTENEGRO V. COMMISSIONER, CTA CASE 695, APRIL 30, 1965) However, as to the supplier of the goods or services, he may avail of a deduction. RR 8-2009 subjects the following to a 5% creditable withholding tax: (a) payments made by the political parties and candidates of local and national elections for their campaign expenditures; and (b) payments made by individuals or juridical persons for their purchases of goods and services intended to be given as campaign contributions to political parties and candidates. RMC 63-2009 provides that such 5% creditable withholding tax shall be allowed as a tax credit or deduction against the total income tax liability of the supplier of goods or services.
Q: What are the requisites for the deductibility of interest expenses from gross income?
The requisites are: 80 1. There must be indebtedness 2. There should be an interest expense paid or incurred upon such indebtedness 3. The indebtedness must be that of the taxpayer 4. The indebtedness must be connected with the taxpayers trade, business or exercise of profession 5. The interest expense must have been paid or incurred during the taxable year. 6. The interest must be legally due 7. the interest payment arrangement must not be between related taxpayers 8. the interest must not be incurred to finance petroleum operations 9. in case of interest incurred to acquire property used in trade, business, or exercise of profession, the same was not treated as a capital expenditure 10. The interest must have been stipulated in writing 11. The allowable deduction have been reduced by an amount equal to 33% of the interest income subject to final tax (see RR 13-2000 [NOVEMBER 20, 2000])
--------------------------------------------------------------(11) Training expenses --------------------------------------------------------------Q: Discuss the deductibility of training expenses as a business expense.
The training expenses must constitute ordinary and necessary business expenses of a taxpayer.
--------------------------------------------------------------(b) Interest (1) Requisites for deductibility (2) Non-deductible interest expense (3) Interest subject to special rules --------------------------------------------------------------Section 34(B), Tax Code --------------------------------------------------------------(1) Requisites for deductibility (2) Non-deductible interest expense ---------------------------------------------------------------
Q: When is interest expense not deductible from gross income?

1. an indebtedness on which an interest is paid in advance through discount or otherwise. Such interest shall be allowed as a deduction in the year the indebtedness is paid. If the indebtedness is payable in periodic amortization, 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. _________________________________________
80
Indebtedness is something owned unconditionally obligated or bound to pay
by
one
who
is

2. If both the taxpayer and the person to whom the payment has been made or is to be made are related persons specified under Section 36(B). 3. If the indebtedness is used to finance petroleum exploration. 4. Interest expense equal to 33% of the interest income subject to final tax
Such interest shall be allowed as a deduction in the year the indebtedness is paid.
Q: What is the rule on interest periodically amortized?

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.
Q: Enumerate the cases when no deduction is allowed because the loan is between related taxpayers.
1. Between members of the family (brother, sisters, ascendant, lineal descendant) 2. Between an individual and a corporation where the individual paid interest on a loan granted by the corporation more than 50% of the capital stock of which is owned by the individual 3. Between two corporations where one corporation owns more than 50% of the other 4. Between a grantor and fiduciary of a trust 5. Between the fiduciary of a trust and the fiduciary of another trust with the same grantor 6. Between a fiduciary of a trust and a beneficiary of such trust
--------------------------------------------------------------(c) Interest expense incurred to acquire property for use in trade, business, profession ---------------------------------------------------------------
Q: May the taxpayer choose to treat interest expense as capital expenditure?

Yes. Section 34(B)(3) provides that at the option of the taxpayer, interest incurred to acquire property used in trade, business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. However, should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments because that would constitute double tax benefits which is not authorized by law In PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1, 1995], Paper Industries claimed as deductions against gross income interest payments on loans for the purchase of machinery and equipment. The CIR disallowed the deduction on the ground that because the loans had been incurred for the purchase of machinery and equipment, the interest payments on the said loans should have been capitalized instead and claimed as a depreciation deduction taking into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful life of such assets. The Supreme Court ruled that Paper Industries is entitled to its claimed deduction for interest payments on loans for, among other things, the purchase of machinery and equipment. The general Page 111 of 158 Last Updated: 30 July 2013(v3)
Read Section 36(B), Tax Code --------------------------------------------------------------(3) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade, business, profession (d) Reduction of interest expense/interest arbitrage ----------------------------------------------------------------------------------------------------------------------------(a) Interest paid in advance (b) Interest periodically amortized --------------------------------------------------------------Q: What is the rule on interest paid in advance?

rule is that interest expenses are deductible against gross income and this certainly includes interest paid under loans incurred in connection with the carrying on of the business of the taxpayer. In this case, the CIR does not dispute that the interest payments were made on loans incurred in connection with the carrying on of the registered operations of Paper Industries, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations of Paper Industries. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such loans, and in fact paid by Paper Indusries during the tax year. The CIR has been unable to point to any provision of the Tax Code or any other Statute that requires the disallowance of the interest payments made by Paper Industries. The general rule that interest payments on a legally demandable loan are deductible from gross income must be applied.
tax) thus benefiting by 12% representing the difference the 32% deduction and the 20% withholding tax. It does not matter if the taxpayer actually intended to save taxes. In BIR RULING NO. 006-00 [JANUARY 5, 2000], PNB requested the BIR to exclude the interest income derived by it from treasury bonds in the determination of the interest expense not allowable as deduction as gross income. PNB argues that the said bonds were given by the Government for payment for its liabilities to PNB and hence, it has not engaged in a tax arbitrage scheme. Although as a general rule, the amount of interest expense paid or incurred by a taxpayer within a taxable year on indebtedness in connection with his trade, business or exercise of profession shall be allowed as a deduction from his gross income, the said interest expense, however, shall be reduced if the taxpayer has derived certain interest income which had been subject to final withholding tax. The CIR ruled that this limitation on the deductibility of interest expenses applies whether or not a tax arbitrage scheme was entered into by the taxpayer
--------------------------------------------------------------(d) Reduction of interest expense/interest arbitrage --------------------------------------------------------------Q: What is the limitation on the amount of interest expense allowed to be deductible?
The amount of interest expense paid or incurred by a taxpayer in connection with his trade, business, or exercise of a profession from an existing indebtedness shall be reduced by an amount equal to 33% of the interest income earned which had been subject to final withholding taxes.
Q: Do tax indebtedness?
obligations
constitute
Q: What is interest arbitrage?

Interest arbitrage results in the reduction of the interest expense by a percentage of the interest income subject to final tax. It is also defined as a circumstance which is presumed to exist because by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to avoid the 32% tax which will happen if the same funds are invested in revenue-generating activities. Another illustration of this is when a taxpayer borrows money from the bank (interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in a bank (and subsequently suffers only a 20% final withholding PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Yes. In COMMISSIONER OF INTERNAL REVENUE VS. VDA. DE PRIETO [SEPTEMBER 30, 1960], Vda. de Prieto conveyed real property by way of gifts to her four children. She was assessed for donors gift taxes including interests due thereon. She claimed as deduction the total interest on account of the delinquency. She contends that the interests due from her tax obligations are deductible from gross income. The Supreme Court held that although interest payment for delinquent taxes is not deductible as tax under Section 34(C) of the Tax Code, the taxpayer is not precluded thereby from claiming said interest payment as deduction under Section 34(B) of the same Code. It is a well-settled rule that tax obligations constitute indebtedness for purposes of deduction from gross income of the amount of interest paid on indebtedness.
--------------------------------------------------------------(c) Taxes (1) Requisites for Deductibility


(2) Non-deductible taxes (3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment (5) Tax credit vis--vis deduction --------------------------------------------------------------Read Section 34(C), Tax Code --------------------------------------------------------------(1) Requisites for Deductibility (2) Non-deductible taxes --------------------------------------------------------------Q: Who are entitled to deduct taxes from gross income?
Taxes are deductible as such only by the taxpayer upon which they are imposed.
No. Section 34(C)(1) provides that all taxes, national or local, paid or accrued during the taxable year in connection with the trade or business or profession of the taxpayer are deductible from gross income except: 1. Philippine income tax 2. Foreign income taxes unless the taxpayer does not make use of the tax credit privilege under Section 34(C)(3). 3. Estate and donors taxes 4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (special assessments) 5. VAT
Note: In the case of nonresident alien individual or a foreign corporation, deduction is only allowed if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines.
Q: What are the requisites deductibility of taxes?
for
the
1. The payments must be for taxes 2. It must be paid or incurred within the taxable year 3. It must be incurred in connection with trade, business or profession 4. Tax must be imposed by law on and payable by the taxpayer (indirect taxes not included) 5. Taxes are not specifically excluded by law from being deducted from the taxpayers gross income
--------------------------------------------------------------(3) Treatments of surcharges/interests/fines for delinquency (4) Treatment of special assessment --------------------------------------------------------------Q: Are surcharges, interest and fines for delinquency deductible?
No. To allow them to be deducted defeats the prescribed punishment. GUITIERREZ V. COLLECTION [14 SCRA 33]
Note: However, as discussed, Interest on deficiency taxes may be allowed as deduction (considered as interest on indebtedness).
Q: What is the effect of a refund or credit of deducted taxes?

The taxes that are allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction (Tax Benefit Rule) (see Section 34(C)(1))
Q: Are special assessments deductible?

It depends. 1. Maintenance or repair of local benefits deductible as an expense incurred in trade, business or exercise of a profession if the payment of such assessment is ordinary and necessary to the conduct of trade, business or profession 2. Construction of local benefits which increase the value of the property assessed the Page 113 of 158 Last Updated: 30 July 2013(v3)
Q: Are all taxes deductible from gross income?

payments should be treated as capital expenditures and hence are not deductible (see Section 83, RR No. 2-40)
Q: What are the remedies for a taxpayer who has paid income taxes to a foreign country for which he would also be liable for Philippine income tax?
1. Tax credit against the Philippine income tax due; 2. Deduction from gross income
Note: Rationale for allowing tax credit for foreign taxes to address indirect double taxation.
--------------------------------------------------------------(5) Tax credit vis--vis deduction --------------------------------------------------------------Q: What is a tax credit? A tax credit is the amount subtracted from an individuals or entitys tax liability to arrive at the total tax liability. Q: Distinguish a tax credit from a tax deduction.
Tax Credit Reduces the taxpayers liability peso for peso Tax Deduction Reduces taxable income upon which the tax liability is calculated
Q: Who are allowed to avail of credit against tax for taxes of foreign countries?
Only those subject to tax on worldwide income (resident citizen and domestic corporations) may avail of tax credits because they pay taxes for foreign sources income twice (in the Philippines and abroad) and the tax credit is meant to lessen the impact of double taxation.
Note: This would include members of GPPs and estates.
Subtracted from the tax
Subtracted from the income before the tax is computed
Q: May a resident alien deduct from their gross income income taxes they paid to their government?
No. In COMMISSIONER OF INTERNAL REVENUE VS. 81 LEDNICKY [JULY 31, 1964], US citizens residing in the Philippines who derives income wholly from sources within the Philippines, sought to deduct from their gross income the income taxes they have paid to the US government. The Supreme Court held that to allow an alien resident to deduct from his gross income whatever taxes he pays to his own government is incompatible with the status of the Philippines as a sovereign state. This is because the foreign government will have the power to reduce the tax income of the Philippine government simply by increasing their tax rates. _________________________________________
81
Q: Is the 20% sales discount granted by establishments to qualified senior citizens considered a tax credit or a tax deduction?
In M.E. HOLDING CORPORATION V. COURT OF APPEALS [M ARCH 3, 2008], the Supreme Court noted that under RA 9257 or the Expanded Senior Citizens Act of 2003, starting taxable year 2004, the 20% sales discount shall be treated as a tax deduction and no longer as a tax credit.
Q: What is the difference between a tax credit and tax deduction?

A tax credit is a peso-for-peso deduction from the taxpayers tax liability or a full recovery while a tax deduction only benefits the taxpayer to the extent of a percentage of the amount granted as a discount. (See CARLOS SUPERDRUG CORP. V. DSQS [JUNE 29, 2007] and M.E. HOLDING CORPORATION V. COURT OF APPEALS [M ARCH 3, 2008])
Note that at the time this case was decided, resident aliens were still allowed to claim a tax credit. The present rule is that only resident citizens and domestic corporations can claim a tax credit. Also, in this case, their net income for foreign sources was zero and, thus, there was no need to apply the tax credit.

Note: Also important is this case is the statement made by the court on the exception: a taxpayer may only be allowed to deduct from his gross income, taxes paid to a foreign country when such taxpayer is entitled to a foreign tax credit and he does not choose to exercise such right. The right to deduct foreign tax paid is only an alternative to the taxpayers right to the foreign tax credit.
Q: What are the limitations on credit for foreign taxes?

The amount of the credit shall be subject to the following limitations:
1.
(2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering Losses (e) NOLCO --------------------------------------------------------------Read Section 34(D), Tax Code Q: What are the conditions for deductibility of losses?
In order that losses may be allowed as deductions, the following conditions must concur: 1. The losses must actually be sustained and charged off within the taxable year 2. Evidenced by a closed and completed transaction 3. Loss is not compensated by insurance or otherwise 4. In the case of an individual, the loss must have been incurred in the business, trade or profession of the taxpayer or incurred in any transaction entered into for profit though not connected with his trade or business 5. In the case of casualty loss, declaration of loss is filed within 45 days from the occurrence of the casualty loss
Note: (1) Losses are deductible only by the person sustaining them. They are purely personal and cannot be used as deductions by another
The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year.
Note: For those who have not yet been rendered mathematically impaired by law school, the formula is this:
2.
The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.
Note: Again for the mathematically unimpaired, the formula is this:
(2) The loss shall not be allowed as a deduction if such loss was claimed as a deduction for estate tax purposes (see Section 34(D)(1)(c)) (3) It is not required that the loss must be a result of transactions in the taxable year only. The taxpayer need only prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise.
Note: Actually, mas madali naman i-memorize ang formula instead of trying to memorize and make some sense out of those two sentences.
Q: How shall the amount of the loss deductible be determined?

The amount of loss deductible is limited to the difference between the value of the property immediately preceding the loss and its value immediately thereafter but shall not exceed an Page 115 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------(d) Losses (1) Requisites for deductibility


amount equal of the cost or other adjusted basis of the property, or depreciated cost reduced by any 82 insurance or other compensation received.
Q: What are the kinds of losses allowed to be deducted from gross income?
1. Ordinary losses 2. Losses from casualty, theft or embezzlement (casualty losses) 3. Net operating loss (where there is a carryover of deductions)
Q: What are the substantiation requirements for losses arising from casualty, robbery, theft, or embezzlement?
Generally, under RR 12-77 [OCTOBER 6, 1977], the substantiation requirements are: 1. A declaration of loss filed with the CIR or his deputies within a certain period as prescribed in the RR after the occurrence of the casualty, robbery, theft, or embezzlement 2. Proof of the elements of the loss claimed RMO 31-2009 [OCTOBER 16, 2009] provides for policies and guidelines for the reporting of casualty losses.
Q: What are ordinary losses?

These are losses that are incurred by a taxable entity as a result of its day to day operations conducted for profit or otherwise.
Q. What are casualty losses?

These are the loss or physical damage suffered by property used in trade, business, or the profession that results from unforeseen, identifiable events that are sudden, unexpected, and unusual in character.
Q: Define casualty, theft, and embezzlement for purposes of tax deduction

Casualty means the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature. Criminal appropriation of anothers property to the use of the taker Fraudulent appropriation of anothers property by a person to whom it has been entrusted or into whose hands it has lawfully come
--------------------------------------------------------------(2) Other types of losses (a) Capital losses (b) Securities becoming worthless (c) Losses on wash sales of stocks or securities (d) Wagering Losses --------------------------------------------------------------Q: Discuss the deductibility of capital losses.
Capital losses may not be deducted from ordinary gains; such capital losses may only be deducted from capital gains unless a final tax on the capital transaction is imposed.
Theft
Embezzlement
Q: What is the rule with respect to loss resulting from shrinkage in the value of the stock
A person cannot deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuations of the market or otherwise.
(see Section 1, RR No. 12-77) _________________________________________

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For example, you purchased a piece of machinery for the value of 200,000 to be depreciated for 20 years. On the 10th year, it was lost due to fire and for the loss, you received P50,000 from your insurance. How much can you deduct? Get the depreciated cost which is now 100,000 and deduct the insurance received. The amount that can be deducted is then 50,000.
Q: What is the rule with respect to loss resulting from stocks becoming worthless?
If the securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be considered as a loss from the

sale or exchange, on the last day of such taxable year, of capital assets. Shares of stock becoming worthless in the hands of an investor are capital assets, as such capital losses are allowed to be deducted only to the extent of capital gains.
--------------------------------------------------------------(e) NOLCO --------------------------------------------------------------Q: What is a net operating loss?

Net Operating loss refers to the excess of allowable deduction over gross income of a business for any taxable year.
Read Section 38, Tax Code Q: What is a wash sale?

Wash sale is a sale or other disposition of stock or securities where substantially identical securities are acquired or purchased within a 61-day period, beginning 30 days before the sale and ending 30 days after the sale.
Q: What are the requisites for the deductibility of NOLCO from gross income?
1. The net operating loss of the business or enterprise 2. for any taxable year immediately preceding the current taxable year 3. which had not been previously offset as deduction from gross income 4. shall be carried over as a deduction from gross income 5. for the next 3 consecutive taxable years immediately following the year of such loss 6. Provided, any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction 7. Provided, further, a net operating loss carryover shall be allowed only if there has been no substantial change in the ownership of the business or enterprise.
Q: Are losses from wash sales deductible?

No. This is an exception to the general rule that losses from sales or exchanges of stock or securities are deductible as losses from sales or exchange of property. This will not apply to a loss incurred by a dealer in securities. A loss incurred by a dealer in securities with respect to a transaction made in the ordinary course of the business of such dealer is deductible. Example: A, whose taxable year is the calendar year, on December 1, 2012, purchased 100 shares of common stock in the ABC Company for P100,000 and on December 15, 2012, purchased 100 additional shares for P80,000. On January 2, 2012, he sold the 100 shares purchased on December 1, 2012, for P80,000. Because of the provisions of Section 38, no loss from the sale is allowable as a deduction. (see Section 38, Tax Code and Section 131, RR 2)
Q: What is meant by substantial change in the ownership of the business or enterprise?

The 75% equity rule or ownership or interest rule shall only apply to a transfer or assignment of the taxpayers net operating losses as a result of or arising from the said taxpayers m erger or consolidation or business combination with another person. The transferee or assignee shall not be entitled to claim the same as a deduction from gross income except when as a result of the said merger, consolidation, or combination, the shareholders of the transferor/assignor, or the transferor gains control of: (a) not less than 75% in nominal value of outstanding issued shares or paid up capital of
Q: Discuss the deductibility of wagering losses.

Losses from wagering transaction shall be allowed only to the extent of the gains from such transactions.

the transferee/assignee in case transferee/assignee is a corporation or
the
(b) Not less than 75% of the interest in the business of the transferee/assignee in case he transferee/assignee is not a corporation.
Q: Who are the taxpayers who are entitled to the deduct NOLCO from gross income?
1. Any individual engaged in trade or business or in the exercise of his profession 2. Domestic and resident foreign corporations subject to normal corporate income tax
No. In PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1, 1995], the Supreme Court ruled that the deduction was improper. NOLCO of the taxpayer shall not be transferred or assigned to another person, whether directly or indirectly, such as, but not limited to, the transfer or assignment thereof through merger, consolidation or any form of business combination of such taxpayer with another person. To allow the deduction claimed by the surviving corporation would be to permit one corporation or enterprise to benefit from the operating losses accumulated by another corporation or enterprise.
Q: Discuss the relationship between NOLCO and the Minimum Corporate Income Tax (MCIT)
Domestic and resident foreign corporations are liable to the 2% MCIT (computed based on gross income) whenever the amount of MCIT is greater than the normal income tax due (which would be computed with the benefit of NOLCO if any). Thus, such corporation cannot enjoy the benefit of NOLCO when it is subject to MCIT.
Q: If several corporations enter an agreement to integrate their respective businesses, can each of the corporations continue to carry-over their respective net operating losses?
It depends on the nature of the integration plan. In BIR RULING 30-00 [AUGUST 10, 2000], three cement companies (Republic, Fortune and Blue Circle) sought the opinion of the CIR on the tax implications of their integration plan. With regard to NOLCO, the CIR held that since, under the plan, the corporation are not dissolved but merely integrated for a specific bona fide purpose, the net operation losses of each of the cement corporations are preserved after the proposed share swap and may be carried over and claimed as a deduction from their respective gross income because there is no substantial change in the ownership of either of the three cement companies.
Q: Will the three-year reglementary period on the carry-over of NOLCO continue to run notwithstanding that the corporation is subject to MCIT (and hence, cannot avail of the benefit of NOLCO)?
Yes. RR 14-01 [AUGUST 27, 2001] provides that the three-year reglementary period on the carry-over of NOLCO shall continue to run notwithstanding the fact that the corporation paid its income tax under the MCIT computation
Q: Are foreign exchange losses deductible?

No. In BIR RULING 206-90 [OCTOBER 30, 1990] and BIR RULING NO. 144-85 [AUGUST 26, 1985], the CIR held that, with regard to foreign exchange losses, the annual increase in value of an asset is not taxable income because such increase has not yet been realized, The increase in value could only be taxed when a disposition of the property occurred which was of such a nature as to constitute a realization of such gain. The same conclusion obtains to losses. The annual decline in the value of property is not normally allowable as a deduction. Hence, to be allowable the loss must be realized.
Q: XYZ entered into a merger agreement with ABC. Under this agreement, the rights, properties, privileges, powers and franchises of the said ABC were to be transferred, assigned and conveyed to XYZ as the surviving corporation. Before merger, the company had over preceding years accumulated losses. XYZ claimed these losses as a deduction against its gross income. Should the deduction be allowed?

--------------------------------------------------------------(e) Bad Debts (1) Requisites for deductibility (2) Effect of recovery of bad debts --------------------------------------------------------------Read Section 34(E), Tax Code Q: What are bad debts?
Bad debts shall refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or form uncollectable amounts of income from goods sold or services rendered.
1.
2.
The BSP, through the Monetary Board, shall ascertain the worthlessness and uncollectibility of the bad debts and it shall approve the writing off of the said indebtedness from the banks; books of accounts at the end of the taxable year. In no case may a receivable from an insurance or surety company be written-off from the taxpayer's books and claimed as bad debts deduction unless such company has been declared closed due to insolvency or for any such similar reason by the Insurance Commissioner
In both cases, requisites nos. 1-4 should still be complied with.
Q: What is meant by actually ascertained to be worthless?

The phrase means that a debt is not worthless simply because it is of doubtful value or difficult to collect. Conclusive evidence must be presented to show that the taxpayers receivable from a debtor has definitely become worthless.
Q: How do you distinguish bad debts from loss?

Voluntary cancellation or forgiveness of a debt does not give rise to a deductible loss. However, if the debt is actually worthless, there may be a bad debt deduction. That deduction would be allowed because the debt was worthless, not because it was forgiven.
Q: What is meant by actually charged off?

The phrase means that the amount of money lent by the taxpayer to his debtor has been recorded in his books of account as a receivable that has actually become worthless of as of the end of the taxable year, that the said receivable has been cancelled and written-off from the said taxpayers books of account.
Q: What are the conditions for bad debts to be deductible?

As provided in RR 5-99 [March 10, 1999], the requisites for deductibility of bad debts are: 1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable 2. The same must be connected with the taxpayers trade, business or practice of profession 3. The same must not be sustained in a transaction entered into between related parties 4. The same must actually be charged-off within the taxable year 5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. 6. The debts are uncollectible despite diligent efforts exerted by the taxpayer
Note: RR 5-99 [March 10, 1999] provides for two exceptions to requisite no. 5, namely:
Q: ABC mining entered into a management contract with XYZ mining. ABC made advances of cash and property. However, XYZs mine suffered continuing losses which led to ABC;s withdrawal as manager and cessation of mine operations. ABC and XYZ entered into two compromises: the first involved alleged indebtedness by XYZ from the advances of ABC and the second involved long-term loans guaranteed by ABC. ABC deducted the amounts as bad debt. Is the deduction proper?
No. In PHILEX MINING CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE [APRIL 16, 2008], the Supreme Court held that Philex cannot deduct the amounts as bad debt. The agreement provided for a distribution of assets of the mine upon termination, a provision that is more consistent with Page 119 of 158 Last Updated: 30 July 2013(v3)

a partnership than a creditor-debtor relationship. In this connection, there is no contractual basis for the execution of the two compromise agreements in which Baguio Gold recognized a debt in favor of Philex. Philexs advances should be treated as investments in a partnership. The advances were not "debts" of Baguio Gold to Philex inasmuch as the latter was under no unconditional obligation to return the same to the former. As for the amounts that Philex paid as guarantor to Baguio Golds creditors, the debts were not yet due and demandable at the time that Philex paid the same. Philex cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case, Philex failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction. Is the declaration by the taxpayer that a debt is worthless sufficient for it to claim a bad debt deduction? No. In PHILIPPINE REFINING COMPANY VS. COURT OF APPEALS [M AY 8, 1996], at issue was PRCs (now Unilever) claimed of bad debt deduction. On appeal, the CTA disallowed the same as there was no iota of documentary evidence to prove the worthlessness of the debts sought to be deducted. The Supreme Court stated that before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. PRC here failed to prove the worthlessness of the amounts receivable.
30, 1969], the Supreme Court held that the deduction was improper. The Court opined that assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of paying the debt, the debt is still not deductible as a worthless debt because the debtor was still in operation. It has been held that if the debtor corporation, although losing money or insolvent, was still operating at the end of the taxable year, the debt is not considered worthless and therefore not deductible.
Q: What is the effect of recovery of bad debts?

The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction (equitable doctrine of tax benefit or tax benefit rule)
--------------------------------------------------------------(f) Depreciation (1) Requisites of computing depreciation allowance (2) Methods of computing depreciation allowance (a) Straightline method (b) Declining-balance method (c) Sum-of-the-years-digit method --------------------------------------------------------------Read Section 34(F), Tax Code --------------------------------------------------------------(1) Requisites of computing depreciation allowance --------------------------------------------------------------Q: What is depreciation?
Depreciation is the gradual diminution in the useful 83 value of tangible property resulting from wear and tear and normal obsolescense. _________________________________________
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Q: ABC, an investment company made advances to XYZ under an agreement that a portion of its net profits would go to ABC. XYZ suffered substantial losses but continued to operate. ABC made a partial write-off of the losses and deducted the amount in its return. Is the deduction proper?
No. In FERNANDEZ HERMANOS, INC. VS. COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Not all tangible property can be depreciated. Land, for example, cannot be depreciated because its value continues to increase.

The term is also applied to amortization of the value 84 of intangible assets, the use of which in the trade or business is definitely limited in duration.
Q: What is depreciation?
the
rationale
behind
Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. It is entitled to see to it that from earnings the value of the property invested is kept unimpaired so that at the end of any given term of years, the original investment remains as it was in the beginning
aside some money to buy a replacement or, in other words, to gradually recover the acquisition cost. The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. The reason is that deductions from gross income are privileges, not matters of right. More importantly, the recovery, free of income tax, of an amount more than the invested capital in an asset will run counter to the purpose of a depreciation allowance. For then, the taxpayer can not only recover the acquisition cost, but also make some profit. Recovery in due time through depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation. The BIR found that ABC claimed excessive depreciation of its buildings. In its defense, ABC Limpan argued that that some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation than those adopted by the BIR in its assessment. On appeal, the CTA found that the depreciation was excessive. Should the findings of the CTA be affirmed? Yes provided there no arbitrariness and abuse of discretion on the part of the CTA. In LIMPAN INVESTMENT CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE [JULY 26, 1966], the Supreme Court opined that depreciation is a question of fact and is not measured by theoretical yardstick, but should be determined by a consideration of actual facts. The findings of the tax court in this respect should not be disturbed when not shown to be arbitrary or in abuse of discretion. Limpan has not shown any arbitrariness or abuse of discretion on the part of the CTA. In fact, the CTA applied rates of depreciation in accordance with Bulletin F of the US Federal Internal Revenue Service, which the Supreme Court, has pronounced as having strong persuasive effect.
Q: What are the requisites for the deductibility of a depreciation expense?

1. The allowance for depreciation must be reasonable 2. It must be for property used in the trade, business, or profession 3. It must be charged off during the taxable year; and 4. A statement on the allowance must be attached to the return
Q: Can an asset be depreciated beyond its acquisition cost?

No. In BASILAN ESTATES, INC. VS. COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER 5, 1967], Basilan Estates claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. In 1950, however, it changed the depreciable value of the assets by increasing it to conform with the increase in cost of their replacement. Accordingly, in 1950 to 1953, the company deducted from gross income the value of the depreciation based on this reappraised value. The Supreme Court held that such value cannot be deducted from gross income as it was beyond the acquisition cost. Depreciation as a deduction is allowed so that the owner of the assets can set _________________________________________
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RR 12-2012 [OCTOBER 12, 2012] Deductibility of Depreciation Expense as it relates to purchase of vehicles
Guidelines to claim depreciation as a deduction in gross income:
Like those with limited duration

1. Only one vehicle for land transport is allowed for the use of an official or employee 2. The value of which should not exceed P2,400,000 3. It must be substantiated with sufficient evidence, such as official receipts or other adequate records; and 4. There is a direct connection or relation of the vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer Generally, no deduction in the gross income shall be allowed for depreciation of the following: 1. Yachts, helicopters, airplanes, and/or aircrafts; and 2. Land vehicles with a value of more than P2,400,000 Exception: the taxpayer is in the business of transport operations or lease of transportation equipment and the vehicles purchased are used in such operations. In addition, the following shall be disallowed as deductions in the gross income: 1. All maintenance expenses on account of nondepreciable vehicles; 2. Input taxes on the purchase of non-depreciable vehicles and all input taxes on maintenance expenses.
in a constant charge over the useful life. Decliningbalance method It is an accelerated method of depreciation which writes off a relatively larger amount of the assets cost nearer the start of its useful life than does the straight line. It results in a decreasing charge over the useful life It is an accelerated method of depreciation that provides higher depreciation expense in the earlier years and lower charges in the later years.
Sum-of-theyears-digit method
--------------------------------------------------------------(g) Charitable and other contributions (1) Requisites for deductibility (2) Amount that may be deducted --------------------------------------------------------------Read Section 34(H), Tax Code Q: What are the conditions for deductibility of charitable contributions?
The requisites are: 1. Actually paid or made to the Philippine Government or any political subdivision thereof, or any of the domestic corporation or association specified in the Tax Code 2. Made within the taxable year 3. Not exceeding 10% (individuals) or 5% (corporations) of the taxpayers taxable income before charitable contributions 4. Evidenced by adequate receipts or records
--------------------------------------------------------------(2) Methods of computing depreciation allowance (a) Straightline method (b) Declining-balance method (c) Sum-of-the-years-digit method --------------------------------------------------------------Q: What are the methods of computing depreciation allowance and define each?
Straight-line method The annual depreciation charge is calculated by allocating the amount to be depreciated equally over the number of years of the estimated useful life of the property. It results
Q: What contributions are deductible in full?

Donations to the following institutions are deductible in full: 1. Donations to the Government, its entities, political subdivisions or fully owned corporations exclusively for undertaking priority activities in accordance with the national priority plan to be determined by NEDA Page 122 of 158 Last Updated: 30 July 2013(v3)

2. Donations to foreign institutions or international organizations pursuant to agreements, treaties entered into by Government or special laws 3. Donations to accredited Non-Government Organizations (non-profit domestic 85 corporation)
--------------------------------------------------------------(h) Contributions to pension trusts --------------------------------------------------------------Read Section 34(J), Tax Code Q: What are the requisites for deductibility of contributions to pension trust?
1. Employer must have established a pension or retirement plan for the payment of reasonable pension to its employees 2. Pension plan is reasonable and actuarially sound 3. Funded by the employer (employer contributes cash) 4. Amount contributed must no longer be subject to the control of the employer 5. Payment has not yet been allowed as deduction
Q: When are limitations?
donations
subject
to
When the donation is made to: 1. The government for public purposes 2. Accredited domestic corporations for religious, charitable, scientific, etc. purposes 3. Social welfare institutions 4. NGOs (not accredited) The limitations are 10% of net income for individual taxpayers and 5% of net income for corporate taxpayers.
Note: A non-government organization shall refer to a non-stock, non-profit domestic corporation organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes or a combination thereof, no part of the net income of which inures to the benefit of any private individual.
--------------------------------------------------------------(i) Deductions under special laws --------------------------------------------------------------Q: Name some special laws which provide for deductible business expenses.
1. Republic Act 10028 (Expanded Breastfeeding Promotion Act) The law provides that the expenses incurred by a private health and non-health facility, establishment or institution, in complying with the provisions of this Act, shall be deductible expenses for income tax purposes up to twice the actual amount incurred provided: 1. That the deduction shall apply for the taxable period when the expenses were incurred 2. That all health and non-health facilities, establishments and institutions shall comply with the provisions of this Act within six (6) months after its approval 3. That such facilities, establishments or institutions shall secure a "Working MotherBaby-Friendly Certificate" from the Department of Health to be filed with the Bureau of Internal Revenue, before they can avail of the incentive.
Q: Is an international NGO qualified to be granted accreditation?

No. In BIR RULING 19-01 [M AY 10, 2001], at issue was whether or not international organizations with home offices based abroad are qualified to be granted donee institution status (accreditations as NGO), the CIR ruled that a non-stock, non-profit corporation or organization must be created or organized under Philippine laws and that an NGO must be a non-profit domestic corporation, a foreign corporation whether resident or non-resident cannot be accredited as a done institution.
_________________________________________
85
NGOs are accredited by the PCNC (Philippine Council for NGO Certification)

2. Republic Act Development Act)
8502
(Jewelry
Industry
(c) Partnerships --------------------------------------------------------------Read Section 34(L), Tax Code Q: What is meant by Optional Standard deduction?
Section 34(L) provides that in lieu of the itemized deductions, an individual subject to tax excluding a nonresident alien may elect a standard deduction of not exceeding 40% of his gross sales or gross receipts, as the case may be. In the case of a domestic corporation and a resident foreign corporation, it may elect a standard deduction in an amount not exceeding 40% of its gross income. A non-resident alien (whether engaged or not) and a non-resident foreign corporation cannot claim OSD. The election to use OSD when made in the return shall be irrevocable for the taxable year for which the return is made.
The law provides for a deduction from taxable income of fifty percent (50%) of expenses incurred in training schemes in connection with the Act and which shall be deductible during the financial year the expenses were incurred. 3. Republic Act 8525 (Adopt a school act) The law provides for a deduction from the gross income equivalent to fifty percent (50%) of expenses incurred in connection with the said act. 4. Republic Act 9999 (Free Legal Assistance Act) The law provides that a lawyer or professional partnerships rendering actual free legal services, as defined by the Supreme Court, shall be entitled to an allowable deduction from the gross income, the amount that could have been collected for the actual free legal services rendered or up to ten percent (10%) of the gross income derived from the actual performance of the legal profession, whichever is lower 5. RA No. 9994 (Expanded Senior Citizens Act) in relation to RR 7-2010 [July 20, 2010] The law provides that discounts given to senior citizens on certain goods and services shall be deductible from gross income. Also, private establishments employing senior citizens shall be entitled to additional deductions from gross income equivalent to fifteen (15%) of the total amount paid as salaries and wages to senior citizens. 6. RA No. 7277, as amended (Magna Carta of Disabled Persons) in relation to RR 7-2010 [July 20, 2010] The law provides that sales discounts given to persons with disabilities shall be deductible from gross income subject to certain conditions.
Q: Who may avail of the OSD?

1. A citizen, whether resident or non-resident 2. Resident alien 3. Taxable estate or trust
Note: A non-resident alien and a non-resident foreign corporation cannot claim OSD.
Q: What are the rules in the determination of the amount of OSD?

RR 16-2008 [NOVEMBER 26, 2008] provides for the following rules: 1. For individuals a. If on accrual basis of accounting, the OSD shall be based on gross sales b. If on cash basis of accounting, the OSD shall be based on gross receipts c. Cost of sales and cost of services are not allowed to be deducted for purposes of determining the basis of the OSD 2. For corporations a. It shall be based on gross income
--------------------------------------------------------------(4) Optional Standard Deduction (a) Individuals, except non-resident aliens (b) Corporations, except non-resident foreign corporations

Note: The basis of the 40% OSD for individual taxpayers shall be gross sales or gross receipts, not gross income, because the cost of sales and the cost of services are not allowed to be deducted for purposes of determining the basis of OSD.
Q: What is the rationale behind personal and additional exemptions under the Tax Code?
Exemptions are fixed at arbitrary amounts intended to substitute for the disallowance of personal or living expenses as deductible items from the taxable income of certain individual taxpayers. The amounts represent roughly the equivalent of the taxpayers minimum subsistence and those of his dependents.(see PANSACOLA V. CIR [NOVEMBER 16, 2006])
Q: What are the rules in the determination of the amount of OSD of GPPs?
RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6 to 7 of RR 16-2008 with respect to the determination of the OSD of GPPs. A GPP is not subject to income tax but the partners shall be liable to pay income tax on their separate and individual capabilities for their respective distributive share in the net income of the GPP. For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation. The GPP may claim itemized deductions or in lieu thereof may opt to avail of the OSD allowed to corporations. The net income determined by either claiming the itemized deductions or OSD from the GPPs gross income is the distributable net income from which the share of each partner is determined. If the GPP availed of the itemized deductions in computing its net income, a partner may still claim itemized deductions from his share in the net income of the partnership. However, if the GPP availed of the OSD in computing its net income, the partner can no longer claim further deduction from his share in the said net income.
Q: Which kinds of individual taxpayers can avail of personal and additional exemptions?
Citizens and resident aliens are allowed personal and additional exemptions; nonresident aliens engaged in trade or business in the Philippines are entitled to personal exemptions only by way of 86 reciprocity but not to additional exemptions.
Q: How should credited?
these
exemptions
be
These exemptions must first be credited against gross compensation income; the excess, if any, can be used to offset taxable net income.
Q: What is personal exemption allowed to individual taxpayers?

All individual taxpayers, regardless of status, shall be allowed a basic personal exemption of P50,000.
87
--------------------------------------------------------------(5) Personal and additional exemption (RA. 9504, Minimum Wage Earner Law) (a) Basic Personal Exemptions (b) Additional exemptions for taxpayer with dependents (c) Status-at-the-end-of-the-year rule (d) Exemptions claimed by non-resident aliens --------------------------------------------------------------Read Section 35, Tax Code
_________________________________________
86
Thus, for a nonresident alien, his entitlement to personal and additional exemption depends on whether he is engaged in trade or business and his country of residence allows exemption to Filipinos. If not engaged, he will not be allowed the exemption. Note as well that employees of ROHQs, OBUs, and FCDUs are not entitled to personal and additional exemptions as they are subject to tax on gross income without the benefit of deductions/ exemptions. 87 Note that, previously, the amount of personal exemption depended on the status of the individual taxpayer. It was P20,000 for single individuals, P32,000 for legally married and P25,000 for head of a family. As amended by RA 9504, all individuals, regardless of status, are entitlted to a basic personal exemption of P50,000.

Q: Can a benefactor88 of a PWD whose civil status is single avail of the head of family status to be entitled to personal exemption?
It is no longer necessary. RA 9442, which amends RA 7277 or the Magna Carta for Persons with Disability, provides that a benefactor of a PWD whose civil status is single shall be considered as head of family and, as such, shall be entitled to personal exemption. However, the terms head of family and his/her dependents for purposes of availing personal exemption have been eliminated in view of an amendment brought about by RA 9504. The rule is that individual taxpayers regardless of status are entitled to the personal exemption. [see RR NO. 001-09 [DECEMBER 9, 2008].
Q: May parents and siblings be considered as additional exemptions?

No. parents and siblings are considered dependents only for purposes of qualifying an individual to become head of a family but not for purposes of additional exemptions.
Q: Are senior citizens supported and living with a taxpayer considered as additional tax exemptions?
No. The word dependent does not include senior citizens.
Q: Is a foster child considered a dependent?

Yes. RA 10165 or The Foster Care Act of 2012 amended the NIRC to include a foster child in the term dependent. Thus, foster parents may claim an addition exemption of P25,000 for each dependent (which includes the foster child) not exceeding 4.
Q: What is the rule for married individuals?

In the case of married individuals where only one spouse is deriving gross income, only such spouse shall be allowed the personal exemption.
Q: What are the additional exemptions allowed to individual taxpayers?

There shall be allowed an additional exemption of 89 P25,000 for each dependent not exceeding four.
Q: What is the rule for spouses and legally separated spouses?

The additional exemption for dependents can be claimed by only one of the spouses. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children.
Q: Who is a dependent under the Tax Code?

A dependent means a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.
90
Q: What is the status-at-the-end-of-theyear rule or the change-of-status rule with respect to personal and additional exemptions?
This means that whatever is the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions. As held in PANSACOLA V. CIR [NOVEMBER 16, 2006], what the law should consider for the purpose of determining the tax due from an individual taxpayer is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid.
Q: Are illegitimate children considered for additional exemptions?

Yes. By express wording of the law, a dependent includes an illegitimate child. _________________________________________
88
A benefactor refers to any person, whether related or not to the person with disability, who takes care of him/her as a dependent 89 Previously, the amount was P8,000. 90 Note that Illegitimate children are included in the definition of dependents and in the entitlement for additional exemption.

A change of status of the taxpayer during the taxable year generally benefits, but does not 91 prejudice him. In the following cases, the rule is applied as follows: 1. If the taxpayer marries or should have additional dependents during the taxable year, he may claim the corresponding additional exemption in full for such year. 2. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependents as if he died at the close of such year. 3. If the spouse or any of the dependents dies or if any such dependent marries, becomes 21 years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any oth e dependents died, or if such dependents married, became 21 years old or became gainfully employed at the close of such year.
Read Section 36, Tax Code
Q: What items are not deductible from gross income?

A: No deduction shall in any case be allowed in respect to: 1. Personal, living or family expenses 2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. (Capital expenditures, see COMMISSIONER VS. SORIANO) 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (capitalized interest, see PAPER INDUSTRIES VS. CA). 4. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer, individual, or corporate when the taxpayer is directly or indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property directly or indirectly between related persons a. Between members of a family b. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned by such individual (except in the case of distributions in liquidation) c. Between two corporations more than 50% in value of the outstanding stock of each of which is owned by the same individual if either one of the companies is a holding company d. Between the grantor and a fiduciary of any trust e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust Page 127 of 158 Last Updated: 30 July 2013(v3)
--------------------------------------------------------------(6) Items not deductible (a) General Rules (b) Personal, living or family expenses (c) Amount paid for new buildings or for permanent improvements (Capital expenditures) (d) Amount expended in restoring property (major repairs) (e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested (f) Interest expense, bad debts, and losses from sales of property between related parties (g) non-deductible interest (h) non-deductible taxes (i) non-deductible losses (k) losses from wash sales of stock or securities --------------------------------------------------------------_________________________________________
91
The rule of thumb is that which will be beneficial to the taxpayer.

f.
Between a fiduciary of a trust and a beneficiary of such trust.
6. 7. 8. 9.
Non-deductible interest Non-deductible taxes Non-deductible losses Losses from wash sales of stock or securities
true taxable income or to prevent evasion of taxes. RR 22013 [January 23, 2013] which provides the guidelines on transfer pricing implements this authority of the CIR to review controlled transactions among associated enterprises and to allocate or distribute their income and deductions in order to determine the appropriate revenues and taxable income of the associated enterprises involved in controlled transactions
Note: Since we mentioned related parties, I shall discuss an important topic in light of RR No. 2-2013 [January 23, 2013] or the Transfer Pricing Guidelines. Previously, the Philippines does not have any guidelines on transfer pricing unlike in other jurisdictions. RMC 026-08 [March 24, 2008] states that while the BIR is still revising the final draft of the RR on transfer pricing, the BIR as a matter of policy subscribes to the OECD Transfer Pricing Guidelines in the interim. Now, we have Transfer pricing guidelines which give life to Section 50 of the Tax Code.
Read Section 50, Tax Code Q: What is transfer pricing?

Transfer pricing is generally defined as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises. Typically, a transfer price occurs between a taxpayer of a country with high income taxes and a related or associated enterprise of a country with low income taxes. . While transfer pricing issue typically occurs in crossborder transactions, it can also occur in domestic transactions. One context where transfer pricing issue occurs domestically is where one associated enterprise, entitled to income tax exemptions, is being used to allocate income away from a company subject to regular income taxes. is a domestic transfer pricing issue when income are shifted in favor of a related company with special tax privileges such as Board of Investments (BOI) Incentives and Philippine Economic Zone Authority (PEZA) fiscal incentives or when expenses of a related company with special tax privileges are shifted to a related company subject to regular income taxes or in other circumstances, when income and/or expenses are shifted to a related party in order to minimize tax liabilities (see RR 22013 [January 23, 2013])
Note: Section 50 of the Tax Code refers to the power of the CIR to distribute, apportion, allocate, and shift income and expenses between related taxpayers to reflect their
Q: GSK purchased a pharmaceutical ingredient from Adechsa, a related nonresidency company for between $1,512 and $1,651 per kg. During the same period, two Canadian pharmaceutical companies purchase the same ingredient for between $194 and $304 per kg from arms length suppliers. Canadas minister for internal revenue reassessed GSK because the prices it paid for the ingredient were greater than an amount that would have been reasonable in the circumstances had they been dealing at arms length. GSK argues the License and Supply Agreement it entered with Adechsa should be considered in determining if it is an arms length transaction. Is GSKs contention correct?
Yes. As held by the Supreme Court of Canada in HM V. GLAXOSMITHKLINE [2012 SCC 52, OCTOBER 18, 2012], a proper application of the arms length principle requires that regard be had for the economically relevant characteristics of the arms length and non-arms length circumstances to ensure they are sufficiently comparable. The economically relevant characteristics of the situations being compared may make it necessary to consider other transactions that impact the transfer price under consideration. Such circumstances will include agreements that may confer rights and benefits in addition to the purchase of property where those agreements are linked to the purchasing agreement. The objective is to determine what an arms length purchaser would pay for the property and the rights and benefits together where the rights and benefits are linked to the price paid for the property. In this case, GSK was paying for at least some of the rights and benefits under the Licence Agreement as part of the purchase prices for ranitidine from Adechsa. As such, the Licence Agreement could not be ignored in determining the reasonable amount paid to Adechsa

which applies not only to payment for goods but also to payment for services.
Q: What is the arms length bargaining standard with respect to the determination of the taxable income on inter-company loans or advances in relation to transfer pricing?
RMC 026-08 [M ARCH 24, 2008] adopts the arms length standard as the ultimate test for determining the fairness of related party transactions. The standard to be applied in every case is that of an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer. Thus, where a member of a group of controlled entities makes a loan or advances directly or indirectly or becomes a creditor of another member of such group and charges no interest, or chargest interest at a rate which is not equal to an arms92 length rate, the CIR may make appropriate allocations to reflect an arms length interest rate for use of such loan or advance.
Note: RR No. 2-2013 [January 23, 2013] also adopted the arms length principle as the most appropriate standard to determine transfer prices of related parties
situations being compared can materially affect the price or margin being compared, or (2) reasonably accurate adjustments can be made to eliminate the effect of any such differences. Step 2: Identify the tested party and the appropriate transfer pricing method. The tested party is the entity to which a transfer pricing method can be most reliably applied to and from which the most reliable comparables can be found. For an entity to become a tested party, the Bureau requires sufficient and verifiable information on such entity The selection of a transfer pricing method is aimed at finding the most appropriate method for a particular case. Accordingly, the method that provides the most reliable measure of an arms length result shall be used. (see methods below) Step 3: Determine the arms length results.
Once the appropriate transfer pricing method has been identified, such is applied on the data of independent party transactions to arrive at the arms length result. In some cases, it will be possible to apply the arms length principle to arrive at a single figure or specific ratio (e.g. price or margin) that is the most reliable to establish whether the conditions of a transaction are arm's length. However, it is generally difficult to arrive at a specific ratio or range of deviation that may be considered as arms length. More likely, the transfer pricing analysis would lead to a range of ratios. 1. If the relevant condition of the controlled transaction (i.e. price or margin) is within the arms length range, no adjustment should be made. If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arms length range asserted by the Bureau, the taxpayer should present proof or substantiation that the conditions of the controlled transaction satisfy the arms length principle, and that the result falls within the arms length range (i.e. that the arms length range is different from the one asserted by the tax administration). If the taxpayer is unable to establish this fact, the Bureau must determine the point within the arms length range to which it will adjust the condition of the controlled transaction.
RR No. 2-2013 [January 23, 2013] Transfer Pricing Guidelines

The Regulations prescribe the 3-step approach in the application of the arms length principl e: Step 1: Conduct a comparability analysis. The arms length principle is based on a comparison of the prices or margins adopted or obtained by related parties with those adopted or obtained by independent parties engaged in similar transactions. For such price or margin comparisons to be meaningful, all economically relevant characteristics of the situations being compared should be sufficiently similar so that: (1) none of the differences (if any) between the
2.
3.
_________________________________________
92
The arm's length interest rate shall be the rate of interest which was charged or would have been charged at the time the indebtedness arose in independent transaction with or between unrelated parties under similar circumstances.
The Regulations also adopt the following arms length pricing methodologies to be used as appropriate: 1. Comparable Uncontrolled Price (CUP) Method The CUP Method evaluates whether the amount charged in a controlled transaction is at arms length by reference

to the amount charged in a comparable uncontrolled transaction in comparable circumstances. Any difference between the two prices may indicate that the conditions of the commercial and financial relations of the associated enterprises are not arms length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. 2. Resale Price Method (RPM) - RPM is applied where a product that has been purchased from a related party is resold to an independent party. Essentially, it seeks to value the functions performed by the reseller of a product. The resale price method evaluates whether the amount charged in a controlled transaction is at arms length by reference to the gross profit margin realized in comparable uncontrolled transactions. This method is generally appropriate where the final transaction is made with an independent party. 3. Cost Plus Method (CPM) - CPM focuses on the gross mark-up obtained by a supplier who transfers property or provides services to a related purchaser. Essentially, the method attempts to value the functions performed by the supplier of the property or services. CPM is most useful where semi-finished goods are sold between associated enterprises or where the controlled transaction involves the provision of services. 4. Profit Split Method (PSM) - PSM seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate) by determining the division of profits (or losses) that independent enterprises would have expected to realize from engaging in the transaction or transactions. 5. Transactional Net Margin Method (TNMM) - TNMM operates in a manner similar to the cost plus and resale price methods in the sense that it uses the margin approach. This method examines the net profit margin relative to an appropriate base such as costs, sales or assets attained by the member of a group of controlled taxpayers from a controlled transaction. Note: The case below would have been decided differently if we had an RR on Transfer Pricing at that time.
demanded in the absence of a stipulation to that effect. Is FDCs contention correct?

Yes. According to the case of CIR V. FILINVEST DEVELOPMENT CORPORATION [JULY 19, 2011], Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under Section 50, the same does not include the power to impute theoretical interest even with regard to controlled taxpayers transactions. This is true even if the CIR is able to prove that the interest expense was in fact claimed by FDC. The term in the definition of gross income that even those income from whatever source derived is covered still requires that there must be actual or at least probable receipt or realization of the time of gross income sought to be apportioned, distributed or reallocated. Finally, under the Civil Code, no interest 93 shall be due unless expressly stipulated in writing.
Q: Are margin fees deductible business expenses?

No. In ESSO STANDARD EASTERN, INC. VS. COMMISSIONER OF INTERNAL REVENUE [JULY 7, 1989], Esso made profit remittances to its New York Head Office. Esso claims that the margin fees it paid to the Central Bank on the remittances are ordinary and necessary expenses and should be deducted from its gross income. The Supreme Court held that margin fees are not necessary and ordinary expenses. The margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines.. Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively _________________________________________
93
Q: Filinvest Development Corporation (FDC) extended advances in favour of its affiliate. The BIR assesses FDC for deficiency income by unilaterally imputing an arms length interest rate on its advances. FDC disputes this by saying the CIR lacks authority to impute theoretical interest and the rule is that interests cannot be
The case would have been decided differently if we had an RR on Transfer Pricing.

--------------------------------------------------------------(7) Exempt Corporations (a) Proprietary educational institutions and hospitals (b) Government owned or controlled corporations (c) Others ----------------------------------------------------------------------------------------------------------------------------(a) Proprietary educational institutions and hospitals --------------------------------------------------------------Read Section 27(B), Tax Code Q: What is the tax treatment of proprietary education institutions and hospitals which are non-profit?
Section 27(B) of the Tax Code provides that they shall pay a tax of 10% on their taxable income except: 1. Certain passive incomes subject to final tax 2. If the gross income from unrelated trade, 94 business, or other activity exceeds 50% of the total gross income derived by such 95 proprietary educational institution and hospital which are non-profit from all sources, the tax shall be imposed on the entire taxable income at 30%
or asset devoted to the institutions purposes and all its activities. As noted by the Supreme Court IN CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26, 2012], non-profit does not necessarily mean charitable.
Q: What is meant by unrelated trade, business, or other activity?

It means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such institution of its primary purpose or function.
Q: What are the guidelines for the tax exemption of non-stock, non-profit educational institutions, non-stock, nonprofit corporations and private educational institutions as provided in RMC 76-03?
Non-stock, non-profit educational institutions 1. Their exemption refers only to revenues derived from assets used actually, directly, and exclusively for educational purposes 2. Income from cafeterias, canteens and bookstores are also exempt if they are owned and operated by the educational institution and are located within the school premises 3. However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institution of their educational purposes or functions 4. The interest income on bank deposits and yields from deposit substitutes may be exempt from income tax if there is showing that said income will be used actually, directly, and exclusively for educational purposes. Non-stock, non-profit corporations While generally exempt, they remain liable for 1. Income derived from any of their real properties 2. Any activity conducted from profit regardless of disposition thereof Page 131 of 158 Last Updated: 30 July 2013(v3)
Q: What is meant by the terms proprietary and non-profit?

Proprietary means private while non-profit means no net income or asset accrues to or benefits any member or specific person, with all the net income _________________________________________
94
Means any trade, business, or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. 95 Is any private schoolm maintained and administered by private individuals or groups with an issued permit to operation from the Department of Education or CHED, or TESDA, as the case may be

3. Interest income from any bank deposits or yield on deposit substitutes, including foreign currency deposits. 4. They shall be withholding agents for their employees compensation income subject to withholding tax. Private educational institutions They shall be exempt from VAT but must be accredited with either the DepEd or CHED. 1. However, income derived from trade, business or other activity is still taxable 2. Bank deposits and foreign currency deposits are exempt from withholding tax but they must show proof that such income is used to fund proposed projects for their institutions improvement 3. They shall be withholding agents for their employees compensation income subject to withholding tax.
hospital. For Section 27(B) to apply, the hospital must be non-profit which means that no net income or asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. On the other hand, Section 30(E) and (G), while providing for an exemption is qualified by the last paragraph which, in turn, provides that activities conducted for profit shall be taxable. Section 30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be completely exempt from income tax. In this case, however, St. Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients are concerned. Such revenue is subject to income tax at 10% under Section 27(B).
Q: Reconcile the tax treatment of proprietary educational institutions and hospitals which are non-profit under Section 27(B) and nonstock, non-profit charitable institutions under Section 30(E) and (G).
To be exempt from income taxes, Section 30(E) requires that the charitable institution must be organized and operated exclusively for charitable purpose. It is nevertheless allowed to engage in activities conducted for profit without losing its tax exempt status for its not-for-profit activities. The consequence, however, is that such income from activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax. For proprietary educational institutions and hospitals which are non-profit to avail of the preferential tax rate, no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institutions purposes and all its activities. Thus, in CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26, 2012], while the St. Lukes did not qualify as a non-profit, non-stock charitable institution under Section 30(E) as it was not operated exclusively for charitable purposes, it remains to be a proprietary non-profit hospital under Section 27(E) as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Lukes, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. Page 132 of 158 Last Updated: 30 July 2013(v3)
Q: St. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. It admits both paying and nonpaying patients. The CIR claimed that St. Lukes was liable for income tax at 10% as provided under Section 27(B)96 of the NIRC. St. Lukes argues that it is a non-stock, nonprofit institution for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC.97 Decide.
In CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER 26, 2012], the Supreme Court ruled that St. Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is a non-profit _________________________________________
96
Section 27(B) provides that proprietary educational institutions and hospitals which are non-profit shal pay a tax of ten percent (10%) on their taxable income 97 Section 30(E), NIRC provides that a non-stock corporation or association organized and operated exclusively for charitable purposes is exempt from income tax while Section 30(G) provides that a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare is likewise exempt.

--------------------------------------------------------------(b) Government owned or controlled corporations --------------------------------------------------------------Read Section 27(C), Tax Code Q: Are GOCCs, agencies and instrumentalities owned and control by the government liable to pay income tax?
All corporations, agencies, or instrumentalities owned or controlled by the government shall pay such rate of tax upon their taxable income except: 1. 2. 3. 4. 5. GSIS SSS Phil Health 98 Local Water Districts PCSO
2005 which the BIR issued to implement the VAT law subjecting PAGCOR to VAT is invalid for being contrary to RA 9337. PAGCOR V. BIR [M ARCH 15, 2011]
--------------------------------------------------------------(c) Others --------------------------------------------------------------Read Section 30, Tax Code Q: What are the exempt corporations enumerated in Section 30 of the Tax Code?
1. Labor, agricultural or horticultural organization not organized principally for profit 2. 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 3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents 4. Cemetery company owned and operated exclusively for the benefit of its members 5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person 6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual 7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare 8. A non-stock and non-profit educational institution 9. Government educational institution 10. Farmers or mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company or like Page 133 of 158 Last Updated: 30 July 2013(v3)
(see Section 27(C), Tax Code)

Note: That is the general rule. The provisions of special laws or general laws may provide otherwise.
Q: RA 9337 amended Section 27(C) of the Tax Code and excluded PAGCOR from the enumeration of GOCCs exempt from the payment of corporate income tax. Is PAGCOR subject to income tax?
No. The Supreme Court held that the original exemption of PAGCOR from corporate income tax was not made pursuant to a valid classification based on substantial distinction so that the law may operate only on some and not on all. Instead, the same was merely granted to the acquiescence of the House Committee on Ways and Means to the request of PAGCOR. The argument that the withdrawal of the exemption violates the nonimpairment clause will not hold since any franchise is subject to amendment, alteration or repeal by Congress. The Court, however, made clear that PAGCOR remains to be exempt from VAT. Nowhere in RA 9337 is it provided that PAGCOR can be subjected to VAT. Thus, the provision of RR 16_________________________________________
98
Inserted by RA 10026.

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; and 11. Farmers, fruit growers, or like association 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 produce finished by them.
Note: The exemption refers to income received by these corporations from undertakings which are essential to or necessarily connected with the purposes for which hthey were organized and operated. They are subject to income tax on income of whatever kind and character from any of their properties (real or personal) or from any of their activites (unrelated) conducted for profit, regardless of the disposition made of such income.
preferential treatment accorded to members of cooperatives who are exempt in the same way as the cooperative themselves. (see DUMAGUETE CREDIT COOPERATIVE V. CIR [JANUARY 22, 2010]).
Q: Are all the activities of the enumerated exempt corporations exempt from tax?
No. Notwithstanding that they are exempt corporations, the income of whatever kind and character of the organizations mentioned above from any of their properties, real or personal, or form any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under the Code.
Q: Are recreational clubs exempt from income tax?

No. As clarified by RMC 35-2012 [AUGUST 3, 2012], clubs which are organized and operated exclusively for pleasure, recreation, and other non-profit purposes (hereinafter referred to as "recreational clubs") are not exempt from income tax. The provision in the National Internal Revenue Code of 1977 which granted income tax exemption to such recreational clubs was omitted in the current list of tax exempt corporations under National Internal Revenue Code of 1997, as amended.
Q: If a non-stock, non-profit educational institution charges tuition and other fees for the different services it renders, does the institution lose its tax-exempt status?
No. In CIR V. G. SINCO EDUCATIONAL CORP [OCTOBER 23, 1956], the Supreme Court held that the amount of fees charged by the school depends upon the policy and a given administration at a given time and is not conclusive of the purposes of the institution. It does not in itself make a school a profitmaking enterprise.
Q: A credit cooperative was assessed deficiency withholding tax on interest from savings and time deposits of its members. The CTA ruled against the credit cooperative stating that withholding tax on income payments subject to FWT includes said interests as interests from similar arrangements. Is CTAs ratio correct?
No. Since interest from any Philippine currency bank deposit yield or any other monetary benefit from deposit substitutes are paid by banks, other entities such as cooperative are not required to withhold the corresponding tax on the interest from savings and time deposits of its members. The fact that similar arrangements is preceded by banking terms means that those subject to withholding must have deposit peculiarities. This is also consistent with the PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: What is the difference in tax treatment on interest income from currency bank deposits and yield, etc and on interest income from a depository bank under the EFCDS of non-stock, non-profit corporations and non-stock, non-profit educational institutions?
As provided in RMC 76-03 [November 14, 2003]: For non-stock non-profit corporation, their interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangement, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax and interest income derived by them from a depository bank under the expanded foreign currency deposit system shall be subject to 71/2% final withholding tax.

Unlike non-stock, non-profit corporations, for nonstock non-profit education institutions, the interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 % tax on interest income under the expanded foreign currency deposit system imposed provided they submit on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following: 1. Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 % tax on interest income under the expanded foreign currency deposit system. 2. Certification of actual utilization of the said income; and 3. Board Resolution by the school administration on proposed projects to be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year.
Note: I stated several pages back that I would focus on the concepts first and that I would discuss the tax rates at a later time. That time is now. If you look closely at Part 10 to 15 of the reviewer which deals with the taxation of the different taxpayers, its basically a summary of what we already have discussed except for a few topics. Those topics I have discussed previously, I will no longer discuss or I will not discuss extensively. Again, my focus on these parts will be the tax rates and no longer the concepts and principles.
Q: Differentiate passive income.
ordinary
income
from
Ordinary income is income other than capital gain and those incomes which fall under the category of passive income. On the other hand, if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not passive income. Generally, passive income is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings.
Q: What is the income tax rate imposed on ordinary income?

It shall be subject to the graduated income tax with 99 rates from 5% to 32%. In relation to Section 23 of the NIRC, the taxable income derived for each taxable year: 1. From all sources within and without the Philippines by resident citizens; 2. From all sources within the Philippines only by a non-resident citizen including overseas contract workers; 3. From all sources within the Philippines only, by a resident alien or a non-resident alien engaged in trade or business in the 100 Philippines; shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24
Note: Again for the n time. Resident citizens are taxable on income from all sources within and without the Philippines. All other individuals are taxable only on income from sources within the Philippines.
th
--------------------------------------------------------------10. Taxation of resident citizens, nonresident citizens, non-resident aliens a) General rule that resident citizens are taxable on income from all sources within and without the Philippines b) Taxation on compensation income c) Taxation of business income/income from practice of profession d) Taxation of passive income e) Taxation of capital gains --------------------------------------------------------------Read Section 24(A), Tax Code
_________________________________________
99
For ordinary income over P10,000 but not over P30,000 and upper brackets, a fixed amount is added to the taxable amount subject to the graduated income tax rate. 100 Only difference really is the source of income

Q: Differentiate the tax treatment of the income of non-resident aliens engaged in trade or business in the Philippines and those nonresident aliens not so engaged.
Engaged in trade or business Subject to income tax in the same manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines Not engaged in trade or business
--------------------------------------------------------------b) Taxation on compensation income (i) Inclusions (iii) Exclusions (iii) Deductions ----------------------------------------------------------------------------------------------------------------------------(i) Inclusions (a) Monetary compensation (1) Regular salary/wage (2) Separation pay/retirement benefit Not otherwise exempt (3) Bonuses, 13th month pay, and Other benefits not exempt (4) Directors fees (b) Non-monetary compensation (1) Fringe benefit not subject to tax --------------------------------------------------------------Note: Lets just reiterate and clarify the topics here. As to (a)(2) Separation pay is part of taxable compensation income when the separation is involuntary. As to (a)(3) Retirement benefits shall be part of taxable compensation income if such benefits were received by an employee who fails to meet the minimum requirements of a reasonable private benefit plan (e.g. age or length of service. When the aggregate amount of monetary benefits th like bonuses, and 13 month pay in addition to the basic salary/wage exceed P30,000, they shall be included in the taxable compensation income. As to (a)(4) Directors fees, if the director is at the same time an employee of the employer/corporation constitute compensation income. If he is not an employee of the corporation, it is not treated as compensation income because of the absence of an employer-employee relationship. It is instead income derived from the conduct of trade or business or exercise of a profession As to (b)(1) The following fringe benefits form part of compensation income: 1. Fringe benefits given to rank-and-file employees 2. De minimis benefits granted by an employer to employees, whether rank-and-file or managerial or supervisory in excess of the ceiling prescribed. Note that the value of such fringe benefits and de minimis in excess of the ceiling is included in the determination of the P30,000 benefits excluded from gross income. If the total exceeds P30,000, the excess shall be taxable gross income.
The tax is 25% of the entire or gross income received from sources within the Philippines and 15% of the gross income received as compensation, salaries and other emoluments by reason of his employment by: 1. RHQ or ROHQ of MNCs 2. OBUs 3. Foreign petroleum service contractor or subcontractors
Q: How is the income tax of married individuals computed?

Married individuals shall compute separately their individual income tax based on their respective total taxable income. If any cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between them for the purpose of determining their respective taxable income
Q: Is the income of minimum wage earners be subject to the graduated income tax rates?
No. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Further, their holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall likewise be exempt from income tax.
Q: What incomes graduated rates?
are
subject
to
the
1. Compensation income 2. Business income and income from practice of profession 3. Passive income not subject to final tax 4. Gains not subject to capital gains tax PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------Page 136 of 158 Last Updated: 30 July 2013(v3)

(iii) Exclusions (a) Fringe benefits subject to tax (b) De minimis benefits (c) 13th month pay and other benefits and payments specifically excluded from taxable compensation income --------------------------------------------------------------Note: We need not discuss this any further. Remember our previous discussions.
Well, you should know by now that theyre not entitled to any deduction or exemptions.
--------------------------------------------------------------c) Taxation of business income/income from practice of profession --------------------------------------------------------------Note: We already discussed this. What is important to note is that such income is subject to the graduated income tax rates. The next part I will discuss extensively and with the corresponding final tax rates.
--------------------------------------------------------------(iii) Deductions (a) Personal exemptions and additional exemptions (b) Health and hospitalization insurance (c) Taxation of compensation income of a minimum wage earner --------------------------------------------------------------Note: Again, we shouldnt dwell too much here especially on personal exemptions and additional exemptions. Some points lang. As to (iii)(c) Id like to reiterate that the exemption of the minimum wage is actually an exclusion, not a deduction. It is tax-exempt! We have also discussed that in the kinds of taxpayers. Also note that following income of a minimum wage worker are also exempt from tax: 1. Holiday pay 2. Overtime pay 3. Nightshift differential; and 4. Hazard pay Lets discuss briefly health and hospitalization insurance.
--------------------------------------------------------------d) Taxation of passive income (i) Passive income subject to final tax (a) Interest income (b) Royalties (c) Dividends from domestic Corporations (d) Prizes and other winnings (ii) Passive income not subject to final tax ----------------------------------------------------------------------------------------------------------------------------(a) Interest income --------------------------------------------------------------Read Section 24(B)(1), Section 25(A)(2), Section 25(B), Section 27(D)(1), Section (D)(3), Section 28(A)(7), Section 28(B)(1), Section (B)(5), Tax Code
Note: The relevant and recent BIR issuance on the matter is RR No. 14-2012 [NOVEMBER 7, 2012] which clarifies and sums up the proper tax treatment of interest income earnings on financial instruments and other related transactions. To simplify matters, I will include the tax rates for all taxpayers instead of separating the discussion. This is to make it easier to memorize and so we can better highlight the differences in tax treatment.
Read Section 34(M), Tax Code Q: May a taxpayer deduct from his gross income premium payments for health and hospitalization insurance?
Yes. An individual taxpayer can claim as deduction from his gross income the premium payment for health and/or hospitalization insurance for an amount not exceeding P2,400 per family during the taxable year provided the gross family income does not exceed P250,000 for the taxable year. Only one spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Note: Only a non-resident alien not engaged in trade or business in the Philippines cannot claim this deduction.

REVENUE REGULATIONS NO. 14-2012 [NOVEMBER 7, 2012] Proper Tax Treatment of Interest Income Earnings on Financial Instruments and Other Related Transactions
1. Interest from Philippine currency bank deposits and yield from deposit substitute and from trust funds or similar arrangements
d. e. f.
a. Citizens b. Resident aliens c. Non-resident aliens engaged in trade or business d. Domestic corporation e. Resident foreign corporation a. Non-resident alien not engaged in trade or business a. Non-resident foreign corporation
2.
20%
g. h.
the form of savings, common or individual trust funds, deposit substitutes, etc evidences by certificates in the BSP-prescribed form The long-term deposits or investments must be issued by banks only; The long-term deposits or investments must have a maturity period of not less than 5 years The long-term deposits or investments must be in the denominations of P10,000 and other BSPprescribed denominations The long-term deposits or investments should not be pre-terminated. Except those specifically exempted by law, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.
If the deposit or investment is pre-terminated, a final tax shall be imposed on the entire income. Four years to less than five year 5%. Three years to less than four years 12% If less than three years 20%. Note: As clarified in RMC 77-2012 [November 22, 2012] Interest income derived by domestic and resident foreign corporations from long-term deposits NOT issued by banks or investment certificates that are NOT considered deposits or deposit shall be subject to 30% regular corporate income tax. The interest payors in such a case are required to withhold 20% creditable withholding tax pursuant to section 7 of RR 14-2012 4. Interest income derived from a depository bank under the expanded foreign currency deposit system (EFCDS)
25% (flat tax rate imposed on gross income)
30%
Interest income derived from government debt instruments and securities
They are considered deposit substitutes. The same tax treatment as above is applied. Note: As clarified in RMC 77-2012 [November 22, 2012] The mere issuance of government debt instruments and securities is deemed as falling within the coverage of "deposit substitutes" irrespective of the number of lenders at the time of origination. Thus, subject to 20% final withholding tax. The final withholding tax shall accrue, in case of zero-coupon instruments and securities upon their original issuance. In case of interest bearing, final withholding tax shall accrue upon payment of the interest. 3. Interest derived from long long-term deposits or investments
Derived from FCDUs:
They are exempt from tax, provided the following requisites are met: a. Depositor is an individual citizen (resident or nonresident), a resident alien or a nonresident alien engaged in trade or business in the Philippines; The long-term deposit or investment certificates under name of the individual; The long-term deposits or investments must be in
a. Citizens b. Resident aliens c. Domestic corporation d. Resident foreign corporation a. Non-resident alien b. Non-resident foreign corporations
7%
Tax-exempt
b. c.
Note: If the bank account is jointly in the name of a nonresident and a resident, 50% shall be treated as exempt and the remaining 50% shall be subject to the final tax of 7 .

Derived by FCDUs:
investment until maturity. What is the FWT due?

10% Tax-exempt
from offshore
a. Residents b. Non-residents
5.
Interest income derived banking units of OBUs
The individual depositor or investor who acquired the instrument shall be subject to 20% FWT on his interest income because the remaining maturity period is less than 5 years (RMC 81-2012)
a. If the foreign currency transactions are with residents other than OBUs and local commercial banks, b. Income derived by OBUs from foreign currency transactions with nonresidents, other OBUs, and local commercial banks
6.
10%
Q: Using the abovementioned facts, let us say the investors held the instrument for less than 5 years upon exercising his call option. What is the FWT due?
The individual depositor or investor who acquired the instrument shall be subject to the graduated rates of FWT provided in Sections 24(B)(1) and Sections 25(A)(2) depending on the period he held the same (RMC 81-2012)
Tax-exempt
--------------------------------------------------------------(b) Royalties --------------------------------------------------------------Read Section 24(B)(1), Section 25(A)(2), Section 25(B), Section 27(D)(1), Section 28(A)(7), Section 28(B), Tax Code Q: What is the proper tax treatment on individual taxpayers of income derived from royalties?
Royalties (except books, literary works, musical compositions 20% - Citizens, whether resident or nonresident, resident aliens and non-resident aliens engaged in trade or business and domestic corporations and resident foreign corporations 25% - Non-resident aliens not engaged in trade or business (shall form part of their gross income) 30% - Non-resident foreign corporation (shall form part of their gross income Page 139 of 158 Last Updated: 30 July 2013(v3)
Interest income derived all other instruments
Any other debt instrument not within the coverage of deposit substitutes shall be subjected to a creditable withholding tax of 20%. Note: As clarified in RMC 77-2012 [November 22, 2012] The 20% creditable withholding tax (CWT) on interest income derived from any other debt instrument shall be imposed on each Interest payment to be made beginning on November 23, 2012 (date of effectivity of RR 12-2012), irrespective of the instruments and securities date of issuance. This covers all interest income from current outstanding instruments, securities, or accounts as of November 23, 2012.
Q: An individual depositor or investor (a citizen, resident alien, or non-resident alien engaged in trade or business in the Philippines) invests in a long-term deposit or investment which has a remaining maturity period of less than 5 years and said investor holds the said deposit or

Royalties from books, literary works, musical compositions
10% - Citizens, whether resident or nonresident, resident aliens and non-resident aliens engaged in trade or business 25% - Non-resident aliens not engaged in trade or business (shall form part of their gross income)
a. Non-resident foreign corporation
corporation, however, are subject to the 15% branch profit remittance tax 1. Tax treaty rate, if applicable 2. 15% if no tax treaty but satisfies the tax-sparing provision 3. 30% if no tax treaty and does not comply with the tax-sparing provision
--------------------------------------------------------------(c) Dividends from domestic Corporations --------------------------------------------------------------Read Section 24(B)(2), Section 25(A)(2), Section 25(B), Section 27(D)(4), Section 28(A)(7)(d) and Section 28(B)(5)(b), Tax Code
Note: Ill discuss the tax treatment of dividends of all kinds of taxpayers here na so its simpler. Just the tax rates. I shall discuss later the topic of tax treatment on dividends received from a domestic corporation by a non-resident foreign corporation in relation to the tax-sparing provision and tax treaties. For now, just the basics lang muna for dividends received by corporate taxpayers.
Q: What is the proper tax treatment on dividends from foreign corporations?

The income shall form part of the gross income of the corporation but the situs of the income becomes material except for a resident citizen and domestic corporation which is taxed on worldwide income.
Note: In other words, only resident citizens and domestic corporations would be subject to tax on dividends received from foreign corporations as they taxable on income without the Philippines.
--------------------------------------------------------------(d) Prizes and other winnings --------------------------------------------------------------Read Section 24(B)(1), Section 25(A)(2), and Section 25(B), Tax Code Q: What is the proper tax treatment on individual taxpayers of income derived from royalties, prizes and other winnings?
Prizes amount to more than P10,000 20% - Citizens, whether resident or nonresident, resident aliens and nonresident aliens engaged in trade or business 25% - Non-resident aliens not engaged in trade or business (shall form part of their gross income) Prizes amounting P10,000 or less to Shall form part of ordinary income
Q: What is the proper tax treatment on dividends from domestic corporations?

a. Citizens b. Resident aliens a. Non-resident engaged in trade or business a. Non-resident aliens not engaged in trade or business a. Domestic corporation b. Resident foreign corporation 10% 20%
25% (flat tax rate imposed on gross income)
Tax-exempt (treated as inter-corporate dividends) Resident foreign

PCSO and Winnings
Lotto
Tax-exempt
(ii) Passive income not subject to final tax --------------------------------------------------------------Q: What is the tax treatment of passive incomes which do not meet the conditions for them to be subject to final tax?
Such incomes shall be included in gross income of the taxpayer and shall be subject to the graduated income tax rates.
--------------------------------------------------------------e) Taxation of capital gains (i) Income from sale of shares of stock of a Philippine corporation (a) Shares traded and listed in the stock exchange (b) Shares not listed and traded in the stock exchange (ii) Income from the sale of real property situated in the Philippines (iii) Income from the sale, exchange, or other disposition of other capital assets --------------------------------------------------------------Note: This applies to all taxpayers, whether an individual or a corporation.
Q: What is the tax treatment on capital gains on sales or exchanges of capital stock and real property?
On sale of shares of stock of a domestic corporation not listed and not traded through a local stock exchange held as a capital asset a. Capital gains not over P100,000 b. Capital gains in excess of P100,000 On sale of real property in the Philippines held as a capital asset
--------------------------------------------------------------11. Taxation of non-resident aliens engaged in trade or business a) General rules b) Cash and/or property dividends c) Capital gains Exclude: Non-resident aliens not engaged in trade or business --------------------------------------------------------------Note: There is no need for an extensive discussion here. The
general rule is that non-resident aliens engaged in trade or business shall be subject to the graduated income tax rate like citizens and resident aliens. In the case of dividends, non-resident aliens engaged in trade or business are taxed at 20%. As to capital gains, remember that is the only tax which makes no distinction as to who the taxpayer is so we follow the standard rates.
5% of the net capital gains 10% of the net capital gains
6% of the gross selling price, or the current market value at the time of sale, whichever is higher.
--------------------------------------------------------------12. Individual taxpayers exempt from income tax a) Senior citizens b) Minimum wage earners c) Exemption granted under international agreements --------------------------------------------------------------Note: No need to discuss minimum wage earners. As to exemption granted under international agreements, certain persons and entities are exempt from taxation because the Philippines is a signatory to tax treaties which provide for such exemptions. Lets discuss the treatment of senior citizens.
Note: (1) Shares listed and traded in the stock exchange are not subject to capital gains tax. Instead, such shall be subject to the of 1% stock transaction tax. (2) If the real property is not a capital asset, the gain will form part of ordinary income, subject to the graduated income tax rates.
Q: What is the tax treatment of senior citizens for purposes of income tax?
Generally, qualified senior citizens deriving returnable income during the taxable year, whether from compensation or otherwise, are required to file their income tax return and pay the tax.
--------------------------------------------------------------PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013 Page 141 of 158 Last Updated: 30 July 2013(v3)

However, he shall be exempt under the following cases: 1. The returnable income is in the nature of compensation income but he qualifies as a minimum wage earner; and 2. If the aggregate amount of gross income earned by the Senior Citizen during the taxable year does not exceed the amount of his personal exemptions (basic and additional) Note that the exemption of senior citizens from income tax does not extend to all types of income earned during the taxable year such as those subject to final taxes. (see RR No. 007-10 [JULY 20, 2010].)
Q: Define taxable income and gross income for purposes of corporate income taxes.
Taxable Income means the pertinent items of gross income specified in the Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by the Code or other special laws. For corporations, taxable income would mean net income. Net income and taxable income is used interchangeably when it comes to corporations. Shall mean gross sales less sales returns, discounts, allowances and cost of goods sold.
Gross Income
--------------------------------------------------------------13. Taxation of domestic corporations a) Tax payable b) Allowable deductions c) Taxation of passive income d) Taxation of capital gains e) Tax on proprietary educational institutions and hospitals f) Tax on government-owned or controlled corporations, agencies, or instrumentalities --------------------------------------------------------------Note: I will no longer discuss Items (b) to (e). We already discussed those. Just refer to the previous discussions. Lets focus instead on Item (a) so we can discuss the normal corporate income tax rate and the minimum corporate income tax (MCIT).
Q: Why is the distinction of the two relevant for purposes of corporate income tax? 1. For domestic corporations and resident foreign corporations, Regular Corporate Income Tax (RCIT) is imposed on taxable income. For nonresident foreign corporations, RCIT is imposed on its gross income. 2. When applicable, MCIT is imposed on the gross income of domestic and resident foreign corporations.
Q: What is the regular corporate income tax (RCIT) imposed on corporations?

The rate of RCIT imposed on corporations is 30%. For domestic corporations: 1. The rate is imposed on taxable income from sources within and without the Philippines. 2. Different rates of tax apply on certain passive incomes. For resident foreign corporations: 1. The rate is imposed on taxable income from sources within the Philippines. _________________________________________
101
101
--------------------------------------------------------------a) Tax payable (i) Regular tax (iii) Minimum corporate income tax (MCIT) ----------------------------------------------------------------------------------------------------------------------------(i) Regular tax --------------------------------------------------------------Read Section 27(A), Section Section 28(B)(1), Tax Code 28(A)(1),
Note: I will discuss the regular or normal corporate income tax rate as it applies to resident foreign corporations and nonresident foreign corporations here na rin.
Note that it was 35% effective November 1, 2005 but on January 1, 2009, the effective rate is now 30%.

2. Different rates of tax apply on certain passive incomes. For nonresident foreign corporations: 1. The rate is imposed on gross income from all sources within the Philippines. 2. The gross income includes those income sourced from certain passive incomes including capital gains. 3. However, capital gains from sales of shares of stock not traded in the stock exchange are, not included in the gross income as well as interest from foreign loans and intercorporate dividends which are subject to final tax rates.
(d) Corporations exempt from MCIT (e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system --------------------------------------------------------------Section 27(E) and Section 28(A)(2), Tax Code Q: What is the minimum corporate income tax (MICT?)
A minimum corporate income tax of 2% of gross income shall be imposed on a domestic corporation and resident foreign corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations when: 1. the MCIT is greater than the RCIT for the taxable year. 2. such operation has zero or negative taxable income (see Section 27(E), Section 28(A)(2), Tax Code and RR 9-98 [August 5, 1998], as amended by RR 12-2007 [October 10, 2007])
Q: May the President allow domestic and resident foreign corporations the option to be taxed on their gross income?
Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the President upon recommendation of the Secretary of Finance may allow domestic and resident foreign corporations the option to be taxed at 15% of gross income after the following conditions have been satisfied: 1. a tax effort ratio of 20% of the GNP 2. a ratio of 40% of income tax collection to total tax revenues 3. a VAT tax effort of 4% of GNP 4. a 0.9% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP This option is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%. Upon election of the gross income tax option, it shall be irrevocable for 3 consecutive taxable years during which the corporation is qualified
Note: Im sure when you read the enumeration, you thought of this: WTF is this shit?!?! Well, just memorize it nalang. Lets not waste time and energy explaining each item of the enumeration. Baka dumugo mga ilong natin.
Q: Which corporate taxpayers can be subject to MCIT?

1. Domestic corporation 2. Resident Foreign corporation
Q: Which corporate taxpayers are exempted from MCIT?

1. Resident foreign corporations engaged in business as international carriers 2. Resident foreign corporations engaged as OBUs 3. Resident foreign corporations engaged in business as ROHQs 4. Firms that are taxed under a special income tax regime.
--------------------------------------------------------------(iii) Minimum corporate income tax (MCIT) (a) Imposition of MCIT (b) Carry forward of excess minimum tax (c) Relief from the MCIT under certain conditions

Q: What is the purpose of MCIT?

As held in the case of CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO [MARCH 9, 2010]), the primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.
tax cannot cover MCIT since the basis for the first is the annual net taxable income; while the basis for the second is gross. Thus, MCIT is included in all other taxes from which PAL is exempted.
Q: For purposes of MCIT, what is gross income?

As provided in RR 9-98 [August 5, 1998], as amended by RR 12-2007 [October 10, 2007]: For purposes of MCIT, the term "gross income" means gross sales less sales returns, discounts, and allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discounts, allowances and cost of services/direct cost, in case of sale of services.
Note: Cost of goods sold shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use while cost of services shall mean all direct costs and expenses necessarily incurred to provide the services required by 102 the customs and clients.
Q: Is MCIT a tax on capital and an additional tax imposition?

The Supreme Court in CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO [MARCH 9, 2010] answered this in the negative. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by the corporation in the sale of its goods, i.e. the cost of goods and other direct expenses from gross sales. Thus, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the RCIT.
As noted by the Supreme Court in COMMISSIONER VS. PAL [JULY 7, 2009], inclusions and exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the taxpayers business. It is thus more limited than the gross income used in the computation of basic corporate income tax.
Q: What is the difference between RCIT and MCIT?

The tax base of RCIT is taxable income while the tax base of MCIT is gross income. In COMMISSIONER VS. PAL [JULY 7, 2009], PAL under PD 1590 (its franchise) was liable only for basic corporate income tax or franchise tax, whichever is lower and this is in lieu of all other taxes, except real property. The CIR contends that PAL is subject to MCIT while it was the contention of PAL that the MCIT was included in the in lieu of all other taxes provision. The Supreme Court noted there is a distinction between taxable income, which is the basis for basic corporate income tax; and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably. Hence, the basic corporate income PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
Q: What if apart from the income from core business activities, other items of gross income are realized or earned by the corporation, are these items included as part of gross income?
Yes. If apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax, the same items must be
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102
This only shows that deductions are not taken into account in MCIT.

included as part of the taxpayer's gross income for 103 computing MCIT.
Yes, the Secretary of Finance can suspend its imposition on any corporation which suffers losses on account of Prolonged labor dispute Defined as losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations. It means a cause due to an irresistible force as by "Act of God" like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency. It shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.
Q: Explain the carrying forward of excess MCIT against normal income tax.
Any excess MCIT against the normal income tax is creditable within the next three (3) years from payment thereof. For the carry-over to apply, the normal tax should be higher than the MCIT. To illustrate: Year RCIT MCIT Excess MCIT against RCIT 25,000
Force majeure
1998
50,000
1999
60,000
2000
100,000 (tax to be 105 paid)
75,000 (tax to be 104 paid) 100,000 (tax to be paid) 60,000
40,000
Legitimate business reverses
In the year 2000, since the RCIT is greater than MCIT, the firm will have to pay the RCIT of P100,000. To this amount, the corporation can credit the excess MCIT is has so far which totals 65,000. The amount of income tax payable now becomes 35,000. Note that with respect to the excess MCIT of 25,000, that can be claimed as tax credit against the normal income tax up to the year 2001 or three years from payment of the MCIT in 1998 and only when the RCIT is greater than MCIT. You cannot credit the MCIT against the MCIT or other losses.
Q: Discuss the applicability of the MCIT where the corporation is governed by both under the regular income tax system and special tax income tax system.
In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system. (see Section 2.27(E)(1), RR No. 9-98)
Note: So, in the case of a BOI-registered enterprise, its registered activity shall be subject to the special tax regime tax while its unregistered activity shall be subject to the RCIT.
Q: Can the suspended?
imposition
of
MCIT
be
_________________________________________
103
This means that the term "gross income" will also include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax 104 This is the tax to be paid because MCIT > RCIT 105 This Is the tax to be paid because MICT < RCIT
--------------------------------------------------------------14. Taxation of resident foreign corporations a) General rule b) With respect to their income from sources within the Philippines c) Minimum corporate income tax d) Tax on certain income Exclude:

(i) International carrier (ii) Offshore banking units (iii) branch profits remittances (iv) Regional or area headquarters And regional operating headquarters Of multinational companies --------------------------------------------------------------Note: I will not discuss this part na. We have already discussed them in domestic corporations. Just to stress the point, a resident foreign corporation is taxed in the same manner as a domestic corporation. It may be subject to RCIT or MCIT as the case may be. The rates are just different for certain passive incomes.
For non-resident foreign corporations, the dividend is subject to: 1. Tax treaty rate, if applicable 2. 15% if no tax treaty but satisfies the tax-sparing provision 3. 30% if no tax treaty and does not comply with the tax-sparing provision
Q: What is a tax-sparing provision?

As explained in the case of CIR V. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A more general way of mitigating the impact of double taxation is to recognize the foreign tax as a tax credit. However, the principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35 percent but a concession rate accrues to the country of the 106 investor rather than to the investor himself. To obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been fully paid. In the Philippines, the 15% tax on dividends received by a non-resident foreign corporation from a domestic corporation is imposed subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 15%, which represents the different between the regular income tax of 30% and 107 the 15% tax on dividends.
--------------------------------------------------------------14. Taxation of nonresident foreign corporations a) General rule b) Tax on certain income (i) interest on foreign loans (ii) intercorporate dividends (iii) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: (i) Non-resident cinematographic film owner, lessor or distributor (ii) Non-resident owner of lessor of vessels chartered by Philippine nationals (iii) Non-resident owner or less or aircraft machineries and other equipment --------------------------------------------------------------Note: As a general rule, nonresident foreign corporations are also subject to RCIT only that it is imposed on their gross income as compared to domestic and resident foreign corporations (on their taxable income). This is so because theyre not entitled to deductions. They cannot be subject to MCIT. MCIT is imposed on gross income. The RCIT in the case of nonresident foreign corporation is already imposed on gross income! The gross income would include those income sourced from certain passive incomes except capital gains from sales of shares of stock, interest from foreign loans and intercorporate dividends. I will not discuss the other topics here. I will zero in on dividends. Ito medyo madugo.
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106
Q: What is the tax treatment on dividends received from a domestic corporation by a non-resident foreign corporation?
This means that, at the end of the day, the foreign investor would be paying the same total amount of taxes due to the foreign country and the Philippines. 107 Note that previously, it was 20% which represents the difference between the RCIT of 35% and the 15% tax on dividends.

Q: Illustrate the application of the taxsparing provision by providing an example.

108
The total tax payable of the foreign corporation is now 140.
1. "X" Foreign preferential
Corp. Tax
Liability
with no rates
"X" Foreign Corporation income 109 Foreign Tax rate (50%) 110 RP Tax Rate (30%) Foreign Tax Credit 111 "X" tax payable to Foreign "X" tax payable to RP
400 200 120 120 80 120
Q: Is it required that the foreign country must give a deemed paid tax credit for the dividend tax waived by the Philippines making applicable the preferred dividend tax rate of 15%?
As ruled in CIR V. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2, 1999], the Tax Code does not require that the foreign countrys tax laws deemed the parent-corporation to have paid the dividend tax waived by the Philippines. The Code only requires that the foreign country shall allow the corporation a deemed paid tax credit in an amount equivalent to the percentage points waived by the Philippines.
Here, the total tax payable of the foreign corporation is 200. 2. "X" Foreign Corp. Tax Liability with Preferential Rate and without Tax Sparing "X" Foreign Corporation income Foreign Tax rate (50%) RP Tax Rate (15%) Foreign Tax Credit "X" tax payable to Foreign "X" tax payable to RP 400 200 60 60 140 60
Q: When does a non-resident foreign corporation become entitled to the 15% FWT?
In INTERPUBLIC GROUP OF COMPANIES, INC. VS. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7796 DATED FEBRUARY 21, 2011], a US Corporation, who owns 30% of the total and outstanding voting capital stock of a Philippine advertising company filed a claim for the refund or issuance of a TCC for overpaid FWT on dividends withheld and remitted by the Philippine company. In the administrative claim, the US corporation alleged that, as a non-resident foreign corporation, it may avail of the preferential FWT rate of 15% on cash dividends received from a domestic corporation during the taxable year 2006. The CIR, in response, raised the question of whether the US corporation is entitled to the FWT at the rate of 15% or the rate of 20% in accordance with the RP-US Tax Treaty. The CTA, applying the ruling in CIR V. PROCTER & GAMBLE PHILIPPINES [DECEMBER 2, 1999], concluded that if the country of domicile of the recipient corporation allows a credit against the tax imposable 113 by it an amount equivalent to 20% of the dividends remitted from a Philippine domestic corporation to corporations domiciled therein, the _________________________________________
113
Here, the total tax payable of the foreign corporation is still the same at 200. 3. "X" Foreign Corp. Tax Liability with Preferential Rate and with Tax Sparing "X" Foreign Corporation income Foreign Tax rate (50%) RP Tax Rate (15%) Foreign Tax Credit "X" tax payable to Foreign "X" tax payable to RP 400 200 60 112 120 80 60
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108
The example provided in the case of CIR v. Procter & Gamble uses the old rates. This example modifies the example provided in the case and uses the current rates effective January 1, 2009. Note that the foreign tax rate and the foreign corporation income are hypothetical. 109 Income (400) x Foreign Tax Rate (50%) = 200 110 Income (400) x RP Tax Rate (30%) = 120 111 [Income (400) x Foreign Tax Rate (50%)] Foreign Tax Credit (120) = 80 112 The additional 60 will be considered as tax deemed paid or also known as the phantom tax. It is the foreign jurisdiction that will allow the deemed paid tax credit.
Now, 15% effective January 1, 2009.

dividends remitted are subject to FWT at the preferential rate of 15% in accordance with Section 28 (b)(5)(b) of the Tax Code of 1997, as amended.
Q: Is there a need for an application for a tax treaty relief with the International Tax Affairs Division (ITAD)114 in order to avail of the benefit?
FIRST VIEW: Yes. In MIRANT V. CIR [CTA CASE NO. 7796, FEBRUARY 21, 2011], Mirant made income payments to VHL enterprises, a US nonresident foreign corporation and to WES World, a UK nonresident foreign corporation. It accordingly withheld the tax due on these interest payments. Thereafter, Mirant filed for a refund contending that the two foreign corporations have created permanent establishments in the Philippines and thus making applicable the lower withholding tax rate under the RP-UK and RP-US tax treaties. The CTA noted that under those treaties, VHL and WES World, while not having a fixed place of business have established permanent establishments in the Philippines because they have furnished services through their employees or other personnel for a period or periods the aggregate of which is more than 183 days in a twelve-month period." However, under RMO 01-2000, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). A foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation.The CTA noted that Mirant did not make such application. Thus, the CTA finally held that the income payments of Mirant to VHL and WES, which are both non-resident foreign 115 corporations, are subject to the final tax of 32%. _________________________________________
114
Note: In SAL OPPENHEIM J R. & CIE KOMMANDITGESELLSCHAFT AUF AKTIEN VS. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7923, FEBRUARY 27, 2012], the CTA held that an availment of a tax treaty provision must be preceded by an application for a tax treaty relief with the BIR's International Tax Affairs Division.
SECOND VIEW: No. In INTERPUBLIC GROUP OF COMPANIES, INC. VS. COMMISSIONER OF INTERNAL REVENUE [CTA CASE NO. 7796 DATED FEBRUARY 21, 2011], the CIR also contended that the US companys transactions were bereft of any tax treaty relief application with the International Tax Affairs Division (ITAD). On this point, the CTA ruled that the same is not necessary. The CTA stated that even with respect to the applicability of the 20% FWT under the RP-US Tax Treaty, a tax treaty relief application is not made a condition precedent by law.
Note: For purposes of the bar, it is submitted that we adopt the first view.
Q: If the foreign country does not impose a tax on the dividend, is the dividend received by the non-resident foreign corporation subject to the 15% FWT?
Yes. In BIR RULING DA-145-07 [M ARCH 8, 2007], SM Investments asked for the BIRs opinion on whether the cash dividends declared by them to Asia Opportunities Limited, a corporation organized and existing under the laws of the British Virgin Islands are subject to 15% FWT. The CIR noted that the International Business Companies Ordinance of the Territory of the British Virgin Islands does not impose any tax on dividends from foreign sources, which logically would include those received from Philippine corporations. As such, the dividend is subject only to the FWT of 15%.
As provided in RMO 072-10 [AUGUST 25, 2010], the ITAD is the sole office charged with the receiving of tax treaty relief applications (TTRA). All tax treaty relief applications relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). All rulings relative to the application, implementation and interpretation of the provisions of Philippine tax treaties shall emanate from ITAD. 115 Note that the applicable tax rate is now 30%.
Q: What is the meaning of most-favoured nation (MFN) and how is it applied to applications for tax treaty reliefs?
The most-favoured nation simply means that a country which is the recipient of this treatment must, receive equal advantages as the "most favoured nation" by the country granting such treatment. Most tax treaties would have a MFN clause making a

benefit which is more advantageous accorded to one country demandable. In ITAD RULING 102-02 [M AY 28, 2002], Energizer Philippines claims that its royalty payments to Eveready Battery are subject to the preferential tax rate of 15% pursuant to the MFN clause of the RPUS Tax Treaty in relation to the RP-Netherlands Tax Treaty. The CIR applied the ruling in CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, 1999], where the Supreme Court interpreted the MFN clause, or the phrase paid under similar circumstances as referring to the manner of payment of taxes and not the subject matter of the tax which is royalties. The CIR found that the RP-US and RP-Netherland tax treaties show a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. Thus, the royalty payments by Energizer to Eveready are subject to the preferential tax rate of 15% of the gross amount of royalties pursuant to the "most-favored-nation" provision of the RP-US tax treaty in relation to the RP-Netherlands tax.
the Philippines as those allowed to their German counterparts. Further, the RP-Germany Tax Treaty allows for crediting against German income and corporate tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, the RP-US Tax Treaty does not provide for the similar crediting of 20% of the gross amount of royalties paid. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, XYZ cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.
Q: XYZ Corporation is a domestic corporation which entered into a license agreement with ABC Corporation, a nonresident foreign corporation based in the US pursuant to which the former was granted the right to use trademark, patents and technology owned by the latter. For such use, XYZ paid royalties to ABC and subjected the same to the 25% withholding tax on royalty payments. XYZ claimed for a refund and argues that the withholding tax should only be 10% pursuant to the mostfavoured nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Is XYZs contention correct?
No. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, 1999], the Supreme Court held that the concessional tax rate of 10% provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances and do not contain similar provisions on tax crediting. It is not proved that the RP-US Tax Treaty grants similar tax reliefs to residents of the US in respect of the taxes imposable upon royalties earned from sources within PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013
--------------------------------------------------------------16. Improperly Accumulated earnings of corporations --------------------------------------------------------------Read Section 29, Tax Code Q: What is an improperly accumulated earnings tax?
This is the income tax imposed on a corporation if its earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders. An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the improperly accumulated taxable income of each corporation. It is imposed on domestic corporations which are 116 classified as closely-held corporations. _________________________________________
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Closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.

Q: Define improperly accumulated taxable income.

The term improperly accumulated taxable income means taxable income adjusted by: 1. 2. 3. 4. Income exempt from tax Income excluded from gross income Income subject to final tax; and The amount of net operating loss carry-over deducted; and 5. Reduced by the sum of: a. dividends actually or constructively paid; and b. income tax paid for the taxable year c. amount reserved for the reasonable needs of 117 the business In relation to 5(c), RMC 35-2011 [March 14, 2011] states that the amount that may be retained, taking into consideration the reasonable needs of the business shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock. Any excess capital over and above the par shall be excluded.
As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits accumulate instead of being divided or distributed. As provided in RR 2-01, this refers to all domestic corporations which are classified as closely held corporations. A closely held corporation are those at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock is owned directly or indirectly by not more than 20 individuals. As exceptions, the IAET shall not apply to: 1. Publicly-held corporations 2. Banks and other non-bank financial intermediaries; and 3. Insurance companies 4. GPPs 5. Non-taxable joint ventures 6. Enterprises registered under SEZs (see RR 2-01 [FEBRUARY 12, 2001]).
Q: What is the purpose and nature of IAET?

The imposition of IAET discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed (see CYNAMID PHILIPPINES INC VS. CA [JANUARY 20, 2000]) The IAET is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation (see RR 2-01 [FEBRUARY 12, 2001]).
Q: What is the main factor to consider in holding a corporation liable for IAET?
The touchstone of the liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, the 10% improperly accumulated earnings tax shall be imposed. [see RR 2-01 [FEBRUARY 12, 2001]).
Q: What corporations are subject to IAET?

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Q: What circumstances are indicative of a purpose to avoid the income tax with respect to shareholders?
The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (see Section 29(C)(1), Tax Code) Page 150 of 158 Last Updated: 30 July 2013(v3)
Added by RR 2-01.

Moreover, the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs (including reasonably anticipated needs) of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence shall prove the contrary (see Section 29(C)(2), Tax Code) RR 2-01 adds three more instances, namely: 1. Investment of substantial earnings in unrelated business or in stock or securities of an unrelated business 2. Investment in bonds and other long term securities 3. Accumulation of earnings in excess of 100% of paid up capital
3. Earnings reserved for compliance with any loan or obligation established under a legitimate business agreement 4. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments in the Philippines. 5. Earnings required by law to be retained 6. Anticipated losses or reserves in business.
Q: What is the Immediacy Test?

The Immediacy Test is used to determine the reasonable needs of business in order to justify an accumulation of earnings. Under this test, the term "reasonable needs of the business" are hereby construed to mean the immediate needs of the business, including reasonably anticipated needs. The corporation should be able to prove an immediate need for the accumulation of the earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and the penalty tax would apply. In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], Manila Wine Merchants (MWM) invested in several companies and bought shares in Wack Wack Golf and Country Club and likewise acquired US Treasury Bills. CIR found that MWM had unreasonably accumulated a surplus. On appeal, the CTA ruled that the purchase of shares were harmless. However, the CTA also ruled that the purchase of US Treasury Bills was in no way related to the business of importing and selling wines and ordered MWM to pay IAET on the said treasury bills. One of the contentions of MWM was that it will be used to aid its importations The Supreme Court ruled against MWM. It noted that the bonds were bought in 1951 and until 1961; it was never used to aid MWMs importations. To justify an accumulation of earnings and profits for the reasonably anticipated future needs, such accumulation must be used within a reasonable time after the close of the taxable year. In CYNAMID V. CA [JANUARY 20, 2000], Cynamid argued that the increase of working capital by a corporation justifies accumulating income. It invoked the Bardahl Formula which allowed retention, as working capital reserve, sufficient amounts of liquid assets to carry the company though one operating Page 151 of 158 Last Updated: 30 July 2013(v3)
In CIR v. TUASON [M AY 15, 1989], the CIR assessed Tuason, Inc. for IAET. The CIR presumed that when Tuason, Inc. accumulated profits, the purpose was to avoid the income tax on its shareholders on the finding that it was a mere holding or investment company. Tuason contended it was for the purpose of expanding their business as a real estate broker. The Supreme Court ruled that Tuason was liable for IAET. Tuason was a mere holding company as it was not involved itself in the development of the subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income from interest, dividends, and rental from the sale of realty. The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. The company's failure to distribute dividends to its stockholders was clearly for reasons other than the reasonable needs of the business.
Q: What is meant by reasonable needs?

Reasonable needs means the immediate needs of the business. Examples of what can be considered reasonable needs include: 1. Allowance for the increase of accumulated earnings up to 100% of the paid-up capital 2. Earnings reserved for building, plant or equipment acquisitions

cycle and pay all of its current liabilities and any extraordinary expenses reasonably anticipated. The Supreme Court ruled that, as stressed by American authorities, the formula is used only for administrative convenience and not a precise rule. The Court found that in companies where the formula was applied, they had operating cycles shorten than that of Cynamid. The ratio of current assets to current liabilities should be used to determine the sufficiency of working capital which ideally should be 2:1. Cyanamids ratio is 2.21:1 and, thus, there was no need to infuse working capital.
non-resident foreign corporation. AbbotPhils claims that by virtue of this, it is exempt from the IAET. Is this contention correct?
Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR ruled that Abbot-Phils was exempt from IAET. Since Abbott-Phils. is a wholly-owned subsidiary of AbbottUS, such shares will be considered as being owned proportionately by the Abbott-US shareholders. The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation. As of the year-end 2000, Abbott-US had 101,272 shareholders holding a combined 1,545,934,133 shares of common stock and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US' issued and outstanding shares. Thus, Abbot-Phils is a publicly-held corporation exempt from IAET.
Q: In determining if profits are reasonably accumulated for business needs, the intention of the taxpayer is reckoned at what time?
It is reckoned at the time of accumulation. In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], one of the contentions of MWM was that it held on to said bonds for several years to wait for 60% of its stock to be owned by Filipinos so it can purchase its own lot and building. The Supreme Court stated that to determine if profits are reasonably accumulated for business needs, the controlling intention is that manifested at the time of accumulation and not later ones. The second reason given by MWM was too indefinite and was a mere afterthought.
Q: Are there ways by which to avoid liability from IAET?

Yes, when the accumulation is justified reasonable needs of the business such as: by
--------------------------------------------------------------17. Exemption from tax on corporations --------------------------------------------------------------Note: I have already discussed this. See exempt corporations.
1. Accumulation up to 100% of the paid-up capital 2. For definite corporate expansion projects or programs 3. For buildings, plants or equipment acquisitions 4. For compliance with a loan covenant or preexisting obligation under a legitimate business agreement 5. When there is a legal prohibition for its distribution 6. In the case of Philippine subsidiaries of foreign corporations, undistributed earnings intended or reserved for investments within the Philippines
--------------------------------------------------------------18. Taxation of partnerships --------------------------------------------------------------Note: We already discussed this. To reiterate, all partnerships si subject to income tax in the same manner and at the same rate as a corporation except: a. GPP b. Joint venture of consortium formed for the purpose of: i. Undertaking construction projects ii. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government.
Q: Abbot-Phils, a domestic corporation, is a wholly owned subsidiary of Abbot-US, a


--------------------------------------------------------------19. Taxation of general professional partnerships --------------------------------------------------------------Note: I already discussed GPPs. Just remember that these three points. First, the GPP as an entity is not liable for income tax. However, the persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities for their respective distributive share in the net income of the GPP. Second, the net income of the GPP shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. Third, GPPs may claim OSD.
4. To minimize tax evasion, thus resulting in a more efficient tax collection system?
Q: Who is the withholding agent?

The withholding agent is the one who has control, custody, or receipt of the funds that is subject to income tax and to be withheld and remitted to the BIR. The withholding agent holds the amount withheld from the income of another person in trust for the government until paid. The duty to withhold is different from the duty to pay income tax. The obligation to withhold is imposed upon the buyer-payor of income but the burden of tax is really upon the seller-income earner. The obligation to withhold is compulsory as it makes such withholding agent personally liable for payment of the tax. Such liability of the withholding agent is direct and independent from the liability of the income recipient.
--------------------------------------------------------------20. Withholding tax a) Concepts b) Kinds c) Withholding of VAT d) Filing of return and payment of taxes withheld e) Final withholding tax at source f) Creditable withholding tax g) Timing of withholding --------------------------------------------------------------Read Section 57 to 58 Tax Code --------------------------------------------------------------a) Concepts --------------------------------------------------------------Q: What is a withholding tax?
Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. It is not a tax.
Q: Who are required by law to withhold on income payments?

1. Agents or employees of withholding agents 2. Persons having control of the payment and claiming the expense 3. Payor having control of the payment where payment is made through brokers
Q: When does the obligation to withhold arise?

Either when: 1. It is paid 2. It becomes payable (i.e. it is legally due, demandable, or enforceable) 3. It is accrued as an asset or expense In FILIPINAS SYNTHETIC FIBER CORPORATION V. CA [OCTOBER 12, 1999], the Supreme Court stated that the Tax Code is silent as to when the duty to withhold taxes arises. In this case, to determine when the duty to withhold the taxes arose, the Court inquired into the nature of accrual method of accounting, the procedure used by the taxpayer, and to the modus vivendi of withholding tax at source come. It noted that under the accrual basis method of accounting, income is reportable when all the Page 153 of 158 Last Updated: 30 July 2013(v3)
Q: What is the purpose of the withholding tax system?

1. To provide the taxpayer a convenient manner to meet his probable income tax liability 2. To ensure the collection of the income tax which could otherwise be lost or substantially reduced through the failure to file the corresponding returns 3. To improve the governments cash flow PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

events have occurred that fix the taxpayers right to receive the income and the amount can be determined with reasonable accuracy. Such method is allowed by law in reporting incomes.
Q: May a withholding agent file a claim for tax refund?

Yes. Generally, the person entitled to claim a tax refund is the taxpayer. However, if the taxpayer does not file the claim, the withholding agent may file the same. In CIR V. SMART COMMUNICATIONS [AUGUST 25, 2010], it was submitted that rule allowing the withholding agent to file the claim is applicable only when the withholding agent and the taxpayer are related parties. The Supreme Court disagreed and stated that such relationship is not required. A withholding agent has a legal right to file a claim for refund. First, he is considered a taxpayer under the Tax Code as he is personally liable for the withholding tax as well as for deficiency assessments, surcharges, and penalties, should the amount withheld be finally found to be less than the amount that should have been withheld. Second, as an agent of the taxpayer, his authority to file the income tax return and remit the tax withheld to the government includes the authority to file a claim for refund and to bring an action for recovery of such claim.
1. The claim must be filed with the BIR within the two-year period from the date of payment of the tax 2. It must be shown on the return that the income received was declared as part of the gross income 3. The fact of withholding must be established by a copy of statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld (see CIR V. MIRANT [JUNE 15, 2011])
--------------------------------------------------------------b) Kinds (i) Withholding of final tax on certain incomes (ii) Withholding of creditable tax at source --------------------------------------------------------------Q: What are the two kinds of withholding tax?
1. Final withholding tax (FWT) 2. Creditable Withholding Tax (CWT)
Q: Differentiate final withholding tax (FWT) from creditable withholding tax (CWT).
The differences are as follows: FWT The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. CWT Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.
Q: Is the withholding agent who filed the claim for tax refund obliged to remit the same to the taxpayer?
Yes. The right of the withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibility to return the same to the taxpayer.In CIR V. SMART COMMUNICATIONS [AUGUST 25, 2010], the Supreme Court ruled that while the withholding agent has the right to recover the taxes erroneously or illegally collected, he nevertheless has the obligation to remit the same; otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a claim for refund.
The liability for payment of the tax rests primarily on the payor as a withholding agent.
Q: What are the requisites to be complied with in a claim for refund of unutilized withholding tax?
Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income. The payee also has the right to ask for a refund if the tax withheld is more than

the tax due. The payee is not required to file an income tax return for the particular income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC.
Q: What are the other obligations of the withholding agent with respect to the return and payment of the tax withheld?
1. He shall furnish the recipient of the income a written statement showing the income or other payments made by him during such quarter or year, and the amount of the tax deducted and withheld therefrom. 2. He shall submit an annual information return containing the list of payees and income payments, amount of taxes withheld for each payee and other pertinent information. (see Section 58(B) and (C), Tax Code)
(see Section 2.57(A) and (B), RR 2-98 [April 17, 1998] and CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO [M ARCH 9, 2010])
--------------------------------------------------------------c) Withholding of VAT --------------------------------------------------------------Note: Wait lang. Last time I checked Income Tax ang pinaguusapan natin. Naligaw ito sa 2013 Syllabus. Anyway, lets enumerate for now the types of withholding VAT leaving an extensive discussion of withholding VAT kapag were in VAT na.
Q: Since CWT is but an approximation, what happens if there is excess payment or deficiency in payment?
The excess of the amount of tax so withheld over the tax due on his return shall be refunded. If the income tax collected at source is less than the tax due on his return, the difference shall be paid. (see Section 58(D), Tax Code)
Q: What are the types of withholding VAT?

1. Payments are made to a non-resident whose services are considered as VAT-taxable in which case the 12% will be withheld by the payor (final withholding VAT) 2. Payments by government agencies, in which case the government entity will withhold 5% on its payments. (creditable withholding VATT)
Q: What is the effect of non-payment of CWT to the transfer of real property?

No registration of any document transferring real property shall be effected by the Register of Deeds unless the CIR or his duly authorized representative has certified that such transfer has been reported and the capital gains or CWT, if any, has been paid. (see Section 58(E), Tax Code)
--------------------------------------------------------------d) Filing of return and payment of taxes withheld (i) Return and payment in case of government employees (ii) Statement and returns --------------------------------------------------------------Q: Who is obliged to file the return and pay the tax withheld?
The withholding agent shall file the return and pay the tax: 1. FWT - within 25 days from the close of each calendar quarter for FWT 2. CWT - not later than the last day of the month following the close of the quarter during which withholding was made. (see Section 58(A), Tax Code)
--------------------------------------------------------------(i) Return and payment in case of government employees --------------------------------------------------------------Read Section 78 to 83, Tax Code
Note: I will discuss employees in the private sector na rin.
Q: What income payments are exempted from the requirement of withholding tax on compensation?
As provided in SECTION 2.78, RR 2-98 [APRIL 17, 1998], as amended by RR 1-2006 [DECEMBER 29, 2005]: Page 155 of 158 Last Updated: 30 July 2013(v3)

1. Compensation income of individuals that do not exceed the statutory minimum wage or P5,000 pesos per month, whichever is higher. 2. Compensation income of government employees with salary grades 1 to 3.
Q: Are backwages, allowances and benefits awarded in a labor dispute subject to withholding tax?
Yes. Backwages, allowances, and benefits awarded in a labor dispute constitute remunerations for services that would have been performed by the employee in the year when actually received, or during the period of his dismissal from the service which was subsequently ruled to be illegal. The said back wages, allowances and benefits are subject to withholding tax on wages. (see RMC 39-2012 [August 3, 2012])
Q: Who is obliged to deduct, withhold, file the return and pay the tax upon wages?
Every employer making payment of wages shall deduct and withhold upon such wages the applicable tax except in the case of minimum wage 118 earners. (see Section 79(A), Tax Code) The return shall be filed and the payment made within 25 days from the close of each calendar quarter (see Section 81, Tax Code) However, if the employer is the Government or any political subdivision, agency, or instrumentality, the return of the amount deducted and withheld upon any wage shall be made: 1. by the officer or employee having control over the payment of such wage, or 2. by any officer duly designated for the purpose (see Section 82, Tax Code)
Q: Who should withhold the tax due thereon?

The employers are mandated to withhold taxes on wages and this includes those backwages, allowances, and benefits awarded in a labor dispute.
Q: If the backwages, allowances, disputes are received by virtue of a labor dispute award through garnishment of debts due to the employer and other credits to which the employer is entitled to subject to withholding tax?
In RMC 39-2012 [August 3, 2012], the CIR answered this question in the affirmative. Persons having control of the payment of wages or salaries are authorized to deduct and withhold upon such wages or salaries the withholding tax due thereon. In this case, the garnishees are the persons owning debts due to the employer or in possession or control of credits to which the employer are entitled. Accordingly, they are in control of the payment of backwages, allowances and benefits. Thus, in order to ensure the collection of the appropriate withholding taxes on wages, garnishees of a judgment award in a labor dispute are constituted as withholding agents with the duty of deducting the corresponding withholding tax on wages due thereon in an amount equivalent to five percent (5%) of the portion of the judgment award representing the taxable backwages, allowances and benefits.
Q: What are the other obligations of the employer with respect to the withholding of tax on wages?
1. Every employer shall furnish to each such employee a written statement confirming wages paid by the employer during the calendar year and the amount of tax deducted and withheld 2. Every employer shall submit to the CIR an annual information return containing a list of employees, the total amount of compensation income of each employee, the total amount of taxes, accompanied by copies of the written statements, and other information as may be deemed necessary.
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Minimum wage earners are exempt from income tax.

--------------------------------------------------------------e) Final withholding tax at source --------------------------------------------------------------Q: What is meant by withholding tax at source?
Since the withholding taxes are deducted by the withholding agent when the income payments are paid or payable, they are described as withholding taxes-at-source. This means that the income tax of the recipient of income is withheld and deducted at the source and at the time of accrual or payment of the expense by the withholding agent-payer of income.
1. Expanded withholding tax on certain income payments made by private persons to resident taxpayers (e.g. professional fees, income payments to brokers, income payments to partners of GPPs, etc) 2. Withholding tax on compensation income for services done in the Philippines 3. Withholding tax on money payments made by the government
Q: What is the rule on creditable withholding of income payments to medical petitioners as laid down in RR 13-98 [August 14, 1998]?
It shall be presumed that the hospital or clinic has collected the professional fee of the said medical practitioner and shall, accordingly, be liable for the withholding of the tax vis-a-vis each and every patient admitted into the hospital or clinic under the care of the said medical practitioner. However, the withholding tax shall not apply whenever there is proof that no professional fee has in fact been charged by the medical practitioner and paid by his patient,
Q: What are the four general types of income payments subject to FWT?
1. Passive Incomes 2. Income payments to entities where their gross income is subject to tax (i.e. non-resident aliens not engaged in trade or business, non-resident foreign corporations, special aliens) 3. Fringe Benefits 4. Informers Reward to Persons Instrumental in the Discovery of the Violations of the Tax Code. (see Section 2.57.1, RR 2-98 [April 17, 1998])
--------------------------------------------------------------g) Timing of withholding --------------------------------------------------------------General rule: The obligation of the payor to deduct and withhold tax arises at the time an income payment is paid or payable or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payors books, whichever comes first. Exception: Where the income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payors books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
--------------------------------------------------------------f) Creditable withholding tax (i) Expanded withholding tax (ii) Withholding tax on compensation --------------------------------------------------------------Q: What is meant by creditable withholding tax?
Under the CWT tax system, taxes withheld on certain payments are but intended to approximate the tax due from the payee. The withheld taxes remitted to the BIR are treated as deposits or advances on the actual tax liability of the taxpayer, subject to adjustment at the proper time when the actual tax liability can be fully and finally determined.
(see Section 2.57.4, RR No. amended by RR No. 12-2001)
2-98,
as
Q: What are the three general types of creditable withholding taxes?

The three types of creditable withholding taxes are:
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its not so much to ask, pray that my girlfriend and I do well and pass the bar exams. Ateneo Law Batch 2013 and all the other barristers who will come to possess this reviewer, good luck to us all. AMDG. For comments, corrections, and suggestions, please email me at [email protected].
Prayer to St. Joseph of Cupertino for success in Examinations

O Great St. Joseph of Cupertino who while on earth did obtain from God the grace to be asked at your examination only the questions you knew, obtain for me a like favour in the examinations for which I am now preparing. In return I promise to make you known and cause you to be invoked. Through Christ our Lord. St. Joseph of Cupertino, Pray for us. Amen.

REYES Bar Reviewer On Taxation I (v.3)

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REYES Bar Reviewer On Taxation I (v.3)

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PM REYES BAR REVIEWER ON TAXATION I

I. General Principles of Taxation .................... 1 II. NIRC A. Income Tax .............................................. 45

Page 1 of 158 Last Updated: 30 July 2013(v3)

PM REYES BAR REVIEWER ON TAXATION I

POLICE POWER Only by government or its political subdivisions

Authorit y who exercise s the power

Only by the government or its political subdivisions

The property is taken for the support of the government

Operates on a community or class of individuals

The money contributed becomes part of the public funds

It is assumed that the

He receives the market value of the

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Page 2 of 158 Last Updated: 30 July 2013(v3)

PM REYES BAR REVIEWER ON TAXATION I

property taken from him

Q: What are non-revenue (or sumptuary) objectives of taxation?

Relation ship to Constitu tion

Subject to certain constitutiona l limitations; including the impairment of obligation of contracts

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Page 3 of 158 Last Updated: 30 July 2013(v3)

PM REYES BAR REVIEWER ON TAXATION I

Q: When an exaction is imposed to discourage certain businesses, is the exaction a tax?

Q: How do you determine if an imposition is a tax or a (regulatory) fee?

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

PM REYES BAR REVIEWER ON TAXATION I

Q: Should universal charges (for electricity end-users) be considered a tax or a fee?

Q: Should margin fees be considered a tax or a fee?

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Page 5 of 158 Last Updated: 30 July 2013(v3)

PM REYES BAR REVIEWER ON TAXATION I

ANGELES UNIVERSITY V. CITY OF ANGELES [G.R. 189999, JUNE 27, 2012],

Q: Can an exaction be considered both a tax and a regulatory fee?

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

PM REYES BAR REVIEWER ON TAXATION I

Q: Will a violation of the abovementioned principles render a tax law unconstitutional?

Page 7 of 158 Last Updated: 30 July 2013(v3)

PM REYES BAR REVIEWER ON TAXATION I

--------------------------------------------------------------1. Lifeblood Theory --------------------------------------------------------------Q: What is the lifeblood theory?

The lifeblood theory can be manifested in the following cases:

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

PM REYES BAR REVIEWER ON TAXATION I

--------------------------------------------------------------2. Necessity Theory --------------------------------------------------------------Q: What is the necessity theory?

PM REYES BAR REVIEWER ON TAXATION I

--------------------------------------------------------------2. Imprescriptibility --------------------------------------------------------------Q: Are taxes imprescriptible?

Q: Can tax statutes be applied retroactively?

PM REYES BAR REVIEWER ON TAXATION I

Q: How should said statute of limitations in taxation be construed?

Q: Is double taxation prohibited under the Constitution?

Q: What are the elements of (direct) double taxation?

Q: What are the two types of double taxation?

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

PM REYES BAR REVIEWER ON TAXATION I

PM REYES BAR REVIEWER ON TAXATION I

Q: What are the modes of elimination double taxation?

Q: What is the meaning of impact and incidence of taxation?

PM REYES BAR REVIEWER ON TAXATION I

Q: What taxes can be shifted?