Introduction

25/05/2015 08:01:00

Favorite Bar Exam Topics (1999-2008):

Excluded: NIRC Sec. 116-201

Percentage Taxes (Title V, NIRC; Sec. 116-128)

o

Except:

Exempt Transactions (S.109 a, b, c, d, e)

Excise Tax (Sec. 129-172)

Documentary Stamp Tax (Sec. 173-201)

Tax Pyramiding (Ppl v. Sandiganbayan)

Sources of Bar Exam Questions in Tax

1. Income Tax (8.4% 8 Qs)

2. Tax Remedies (6% 7 Qs)
3. General Principles (3% 4 Qs)
4. Estate Tax (1.1%)
5. Donors Tax (1.1%)
6. Local Government Taxation (1.2%)
7. Real Property Taxation (0.8%)
8. TCCP / Customs Duties (1.5%)
9. Value Added Tax (0.5%)

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Title I

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Sources of Income Tax Law

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1. 1997 Tax Reform Act (NIRC): Secs 22-83

favorite: Secs 22-42

50 new rules

10 Salient Features of The Present Income Tax System:

1. Schedular
2. Global
3. Gross Income Taxation
4. Net Income Taxation
5. Income tax Situs
6. Test of Income taxation
7. Basis
8. Income Tax Rates
9. Pay as you file system
10. Substituted Filing

Basic/Salient Features of the Present Income Tax Systemin the light of

amendments introduced by RA 8424 (p.70 Mamalateo)

Also the same as:

o

Systems of income taxation / methods / tax treatment

Features of a Schedular Tax System: 12 Systems of Income Taxation

Method of taxation to which the NIRC belongs

How does the tax code tax income?

Answer:

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Schedular Tax System / Treatment system in law, where the

income tax rules / treatment varies and made to depend on the kind /
category of taxable income of the tax payer (Tan v. del Rosario). It
operates under the following characteristics: (p.1 Dimaampao IT)
1. Categorizes/classifies income: Sec. 32a (memorize!) cf: Secs
24, 25 & 26 (imposes different tax rates) categorizes income
of individual taxpayers(11 types)
2. Provides for different tax treatment
3. Imposes different tax rates

Global Tax System / Treatment a system or tax treatment which

views, indifferently the tax base, and generally treats in common all
categories of taxable income of the taxpayer (Tan v. del Rosario)(p.2
Dimaampao IT)

Provides for uniform tax rules / tax rates

Income Tax of Corporations (Secs 27 & 28)- generally does not

categorize/classify income

Imposes uniform corporate tax rates

Covers:
i. Domestic Corporations (Sec 27)
ii. Resident Foreign Corporations (Sec. 28A)
iii. Non-resident Foreign Corporations (Sec. 28B)

As amended by RA 9337: corporate rate = 30%

effective Jan 1, 2009

Distinguish: Schedular Tax System v. Global Tax System(p.15 UP Bar Ops

Reviewer)

As to

Schedular

Global

Tax Treatment

Different tax

Uniform tax

Classification of

treatment / rules

treatment / rules

Categorizes /

Does not generally

Income

classifies income

classify / categorize income

Tax Rates
Applicability

Imposes different

tax rates

rates

Applies to individual

income taxation

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Imposes uniform tax

Applies to corporate

income taxation

Net / Gross Income Taxation

What is the method of income taxation that allows deductions and grants

personal exemptions? (Allows Taxpayers to claim allowable deductions (Sec 34)& Grants
personal exemptions (Sec 35)) (2000 Q.10)

A: Net income taxation - characteristics

o

Allows taxpayers to claim deductions and personal exemptions

The tax base / the basis of the tax rates is net / taxable income

What is taxable /net income? (Sec. 31) [1977]

A: gross income less allowable deductions and personal exemptions

T/F: Our tax system does not use the gross income taxation

Under exceptional cases, we have adopted gross income taxationw/c applies

to:
o

Non-resident aliens not ETB (Sec. 25: B, C, E)

Non-resident foreign corporations or NRFCs (Sec 28, B 1, 2, 3 & 4)

What is meant / discuss gross income taxation/ what is gross income for

purposes of income tax? (Sec. 32A: enumerate 11 different kinds of income; p. 11

Dimaampao IT)

Gross income does not allow deductions and grants no exemptions.

The tax base is gross income

Distinction between gross income taxation and net income taxation: (p. 13

Dimaampao IT)

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As to
Taxpayers claim

Gross Income

Net Income

Taxation

Taxation

Allows no

for deduction /

deductions, grants no

exemption

exemptions

Tax base

Applicability

Allows deductions,

grants exemptions

Net / taxable income

1. NRA not ETB

Applies to the

2. NRFCs

following individual &

Gross income

corporate taxpayers:

Individual taxpayers

1. RC: Resident Citizen

2. NRC: Non-resident
Citizen
3. RA: Resident Alien
individual
4. NRA ETB
Corporate taxpayers
1. DC: Domestic
Corporations
2. RFCs: Resident Foreign
Corporations

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What is your opinion on the advantages / disadvantages of GI / NI Taxation?

(p.13 Dimaampao IT)

GIT
o

minimize of source of graft & corruption (margin of discretion exercised

by Revenue District Officers)

simplifies income tax system

Just, fair & reasonable (RA 8424 Sec 2) = equitable relief to taxpayers,

NIT
improve levels of disposable income & increase economic activities

Equitable relief = deductions and exemptions

Taxpayers encouraged to engage in income-generating activities

More revenues to the government

Minimizes fraud in claiming deductions

Counter-checking by the BIR

Income Situs (Tan v. del Rosario) = Comprehensive income tax situs (RPN)

1. Residence (Sec. 23)

a. Resident citizen
b. Resident alien individual
c. Resident corporation
2. Place / source of income
a. Could only be taxed from sources within:
i. Non-resident citizen (Sec. 23 b & c)
ii. NRA
iii. RA (amendment)
b. Could be taxed from income sources without:
i. RC
ii. DC

Basis: nationality / citizenship

o

State-Partnership Theory (Comm v. Liglig) state shall provide

PRIC: protection, resources, incentives, climate for production of
income

Emanates between the partnership between the State & its

inhabitants

Protection Theory - Sources of income: PAS - Property, Activity,

Service (British Overseas Airways Corp v. Commissioner)

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BOAC was an Offline international airline but due to transfers,

enjoyed protection of Philippine law (place of sale) not
applicable due to modified meaning of GROSS PHILIPPINE
BILLINGS (p.34 UP Bar Ops reviewer)

Origin of passengers (basis of tax) as per Sec 28A3, as

implemented by RR 25-2002

3. Nationality / citizenship of taxpayer

Test of Taxable Income

Its not the actual receipt, it is the right to receive, that determines when to include an
amount in the gross income. (Filipinas Synthetic Fiber Corp v. CA)

Doctrine of Constructive Receipt (RR 2, Sec 52) p.8-9 Dimaampao I.T.

o

The right to receive must be unconditional, valid and enforceable.

Such amount must be credited to the account of the taxpayer.

If subject to legal restriction not considered as constructively

realized:

E.g. Interest income of bank deposits (Sec. 53, RR 2)

Examples of income constructively realized:

Cash / Property Dividends received by RC, NRC, RA (Sec. 24B

item 2)

Cash / Property Dividends received by NRA ETB (Sec. 25 A 2)

Share of a partner from the NI of a GPP (Sec 26 last par)

Share of a partner from a taxable / business partnership (Sec.

73 D)

Rent income deposited in court by the lessee of the property in

view of the unjustified refusal of the lessor (Limpian Investment
Corp v. Commissioner) cf: Art. 1261 NCC

Basis of the computation of Taxable Income(Sec. 43)

Taxable income shall be computed on the basis of taxpayers annual accounting

period.

2 Accounting Periods:

a. Calendar Year an accounting period of 12 months that starts on Jan 1 and

ends on Dec 31
o

May be adopted by individual and corporate taxpayers

b. Fiscal Yearan accounting period of 12 months, ending on the last day of any
month other than December (Sec. 22q)

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Can only be adopted by corporate taxpayers

Relevance of accounting periods:Tax Remedies (Sec. 229, Sec. 43 & 77b):

Prescriptive period for filing of tax refund is 2 yrs from the date of payment.
o

As far as corporate taxpayers are concerned, the 2yr period

commences to run from the filing of the final adjustment corporate tax
return. April 15 if calendar year (TMX Inc)

If a corporate taxpayer filing tax refund has adopted the fiscal

year period, the deadline for the filing of the final adjustment
corporate tax return is on / before the 15th day of the 4th month
following the close of the fiscal year period.

(Sec. 77b)

E.g. accounting period ended on June 30, 2005. The

deadline of the filing of the final adjustment tax return is
on October 15, 2005. The 2yr period / deadline for filing
of claim of refund is on October 15, 2007.

Income Tax Rates

Individual

Progressive Rates (Sec. 28) tax rate increases as the tax base increases
o

Equitable tax (Art. VI Sec 28 par 1, 2nd sentence 1987 Consti)

Re: VAT & the constitutional provision that Congress shall provide for a
progressive tax system: direct taxes should be preferred, and indirect
taxes should be minimized as much as possible. The mandate of
Congress is not to prescribe, but merely a directive. Thus the VAT law
has been sustained. (Abakada Guro)

Tax Pyramiding (People v. Sandiganbayan) a tax on tax; it does not

have basis in law and has been rejected by Congress.

Corporate

Uniform Corporate Rate of 30% as applied to DC, RFCs (Sec. 27 & 28)

2 Systems

1. Final withholding tax system (Sec 57)

2. Creditable withholding tax system (Sec. 78)

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As to

Items of income

Final withholding tax

Creditable withholding

system

tax system

28 items of income subject

Compensation for services

to FWT (focus on 6:

rendered e.g.

RPWIDS)

compensation income

1. Royalties

(salaries, wages,

2. Prizes - amount more

commissions)

than P10K (if less:

regular income, subject
to regular income tax,
not subject to final tax)
3. Winnings except PCSO
& lotto
4. Interests Income on
Bank deposits
5. Dividends received from
domestic corporations If received by a DC or
RFC tax exempt

Received by
individual
taxpayers

Received by
NRFC

6. Share of a partner from

the NIAT of a business
partnership

If received from
a GPP: part of GI

Tax Withheld

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Cannot be claimed as a tax

Can be claimed as tax credit

credit

to income tax due / payable

- final, complete payment

- withholding agent:

of TPs tax liability

employer

Effect on the Subject

Extinguishes taxpayers tax

Does not extinguish the

Income

liability

taxpayers liability

- need not be reported as

- has to be reported as part

part of the gross income of

of the gross income of the

the taxpayer

taxpayer (thru the ITR)

TP is no longer required to

Taxpayers are required to

file IT Return if the only

file IT returns

Filing of IT Return

sources of income are those

subjected to FWT under
Sec. 57 (Sec. 51A2c)
e.g.
1. NRA not ETB (Sec. 25
B, C, D, E cf: Sec.
51A2c)
2. NRFCs(Sec. 28B items
1, 2, 3, 4) explains
the following concept:
Sec. 52F Every
corporation except
NRFCs are required to
file quarterly corporate
income tax return

Deductible Tax v. Creditable Tax

Deductible Tax

Creditable Tax

may be deducted from gross income (one

deducted, credited against taxpayers

of the allowable deductions)

income tax due / payable

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Pay as You File System (Sec. 56A1) payment is done when you file your

income tax
1. Individuals and Estates (Sec. 62) annual payment on or before Apr 15 (Sec 51c1)
2. CorporateDomestic corporations file their IT quarterly (Secs 75 & 76) qualify by:

For the 1st, 2nd, and 3rd quarters, it must file the summary of its gross income
and expenses, which shall be reported on a cumulative basis. Thereafter, it
shall file its final adjustment return, showing the entire income for the whole
taxable year.

Rationale for quarterly payment & filing:

o

Ensures timeliness of collection of the corporate income tax

Payment in installment eases burden on domestic corporations

Improve the liquidity / cash flow of the government (cf: consistent

withAdministrative Feasibility)

Fundamental Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy sources of revenue must be adequate to meet government

expenditures
2. Administrative Feasibility
3. Theoretical Justice

Any violation of the first 2 principles will not render the law invalid, because
they have no constitutional basis (unlike the principle of theoretical justice)

Determination of the wisdom, expediency, necessity of the tax-measure

belongs to the law-making body of the State

Substituted Filing of Income Tax Return (RR 3-2002) if an individual taxpayer has
complied with the following conditions, he is no longer required to file income tax return:
1. Only source of income is compensation income (purely compensation income earner)
2. One employer in the Philippines
3. The tax withheld by the employer should be equal or the same as the income tax due

If income tax due is more than tax withheld: required to file ITR

A compensation owner whose annual income is not more than P60K. (RR 32002) mere BIR regulation
o

The tax law, however, imposes no limitation(cf: Sec 51A2b)

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BIR Regulations are valid if they are consistent / in harmony with the
tax code

4. Employer must file BIR form 1604 showing tax withheld on employees compensation
income

Such tax withheld is tantamount to a subsequent filing of an income tax

return.

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Title II

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General Principles of Income Taxation

Sources: Only provides rules on sources within & without (Sec 23)

Tax base (WON you could claim deductions) (Secs 24 & 25: Individual, 27,
28: Corporate)
o

answers if a taxpayer could claim allowable deductions

Accounting periods that may be adopted

o

TPs annual accounting period: Calendar year / fiscal year (Sec 43)

Tax rates (Sec 24, 25, 27, 28)

Income Tax Due / Payable

Filing of ITR (Sec 51, 51, 75, 76)

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Classificat

Sour

ion of Taxpayers

ces of

Ta

x base

income

Annu
al

Ta

x Rates

Filin
g of IT

Accounting

Return

Period

Individual

: Sec 23 a, b, c, d

23

Sec

Se

Sec 43

cs 24, 25

cf: Sec 22

RC

GI

& w/o (Sec

Less

ar Year

23A)

W/n

Calend

Se

Secs

cs 24, 25,

51, 52, 75

27, 28

& 76

5-

Req

32% Progressive

uired (Sec

: AD1 (Sec

Rates (Sec

51A1a)

24A1a)

24A1c)

Tax

able IncLess:
PE

IT

Payable

NRC

GI

(Sec 23B &

Less

ar Year

C)

W/n2

Calend

5-

Req

32% Progressive

uired (Sec

: AD (Sec

Rates (Sec

51A1b)

24A1b)

24A1c)

Tax

able IncLess:
PE

IT

Payable

RA

W/n3

GI

Less

51A1c)

24A1c)

24A1c)

Payable

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Req

Rates (Sec

: AD (Sec

Tax

PE

Secs 34 & 35
Effective Jan 1, 1998
Effective Jan 1, 1998

5-

uired (Sec

able IncLess:

32% Progressive

Calendar
Year

IT

NRA ETB45

W/n

(Sec 23D)

GI

Less

Calendar
Year

32% Progressive

: AD (Sec

Rates (Sec

25A1)

24A1c)

5-

Req

uired

Tax

able IncLess:
PE6

IT

Payable

NRA not

W/n

ETB

GI

(no AD/PE)

Calendar
Year

FIT

Not

required
25

(Sec
51A1c)

Special

NRA Not ETB

1.

15

% (b)

Offshore Banking
Units

2.

Regional HQ of
MNCs

3.

Employees of
petroleum
contractors/subcon

Corporate:

Sec 23 e, f

cf: Sec 22

DC

Se

cs 27, 28

W/n

GI

& w/o (Sec

Less

(Sec 23)

CY/FY

form

Uni

Req

uired (Sec

e.g. Mr..., having stayed in the Phils for more than 180 days could only
be taxed on income from sources withinmay claim AD & PE, subject to
recip, may be taxed for his income earned during the CY, applying
progressive rates, required to file ITR.
5
aggregate stay in the Philippines for more than 180 days (Sec 25A1)
e.g. June 15-Dec 15 = 183 days
6

but may only claim PE subject to the rule on reciprocity (Sec 34)

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23)

: AD

RFC8

W/n

(Sec 23F)

Tax

W/n

IT Rate

& 76)

30%7

27a)

GI

Less

52A cf: 72

able Inc(Sec

CY/FY

: AD

NRFC

Corporate

Uni

uired (Sec

Corporate

52A)

IT Rate

Tax

30%9

28A1)

GI

Req

form

able Inc (Sec

CY/FY

(Sec 23F)

FIT

: 30%

Req

uired

(Sec
28B1)
Special NRFCs

(Sec 28B2)
1.

GI
FIT: 25%

NR Dist of

Not

Required

Cinematographic
Films
2.

FIT: 4.5%

NR Lessor of Vessels
Chartered to Phil
Citizens

3.

NR Lessor of Aircraft,

FIT: 7.5%

Mach & Equipment

NRA ETB v. NRA not ETB

NRA ETB

NRA not ETB

Sources

No distinction: only taxable on income from sources within

Tax Base

Can claim deductions, PE

Cannot claim deductions

subject to the rule on recip

Tax Rates

Progressive Rates: 5-32%

FIT (25%, 15%)

Filing of ITR

Required

Not required

Effective Jan 1, 2009 (RA 9337)

Tax Code is silent. But there are tests to determine WON a foreign corp
is doing business in the Phils.
8

Effective Jan 1, 2009 (RA 9337)

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Tests to determine WON a foreign corp is doing business in the

Phils:
1. Transactions must be in line with its Ordinary business
2. Continuity of Commercial Transactions (Mentholatum case)
3. Intention to carry out the body / substance of the foreign
corporation
4. Actual specific, commercial transaction consummated in the Phils.
Therefore, mere exporting of goods does not result in ETB, pursuant
to RA 7042 Sec 3B. (Val. Brothers v. GBTL Mfg Corp)
RA 7742?:Opening of offices, branches, performance of, continuity
of commercial transactions, perfection of contract, entering into
a dealership agreement, management, supervision of business

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Requisites for Validity of BIR Regulations

1. Consistent in harmony with the Tax Code
2. Reasonable
3. Useful & necessary
4. Published in the OG / NGC
-

mere interpretive rules should not change / modify the tax code.

Memorize: Sec 32A

What is GI for purposes of IT?

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Codal

PBC-PRP-WPD-PARI

1. Compensation for services rendered

1. Professional income

2. Business / Trade, Professional Income

2. Business / Trade Income

3. Property Income

3. Compensation Income

4. Interests

4. Property Income

5. Rents

5. Rent Income

6. Royalties

6. Prizes

7. Dividend Income*

7. Winnings

8. Annuities

8. Pensions

9. Prizes, winnings

9. Dividend Income*

10. Pensions

10. Partners Distributive Share from NI of

11. Partners Share from NI of GPP

GPP
11. Annuities
12. Royalties
13. Interests*

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Income
1. Gross Compensation Income compensation for services in whatever form paid,
may include salaries, commissions & similar items (NIRC)
o

Gross Compensation income refers to all renumeration for services

rendered or performed by an employee for his employer, arising
under an employer-employee relationship, unless specifically
excluded by the Tax Code (RR 2-98 Sec. 2.78.1)

Determinative Test: Presence of the employer-employee

relationship(SPDC)

Selection

Payment - compensation

Dismissal

Control

Payment made by a contractor to a contractee, in the absence of an ER-EE

relationship is business / trade income

Payment made to a professional for services rendered, in the absence of

an ER-EE relationship should be taxed as professional income

Importance (Sec. 34 cf: Sec. 35): Allowable Deductions

o

Personal exemptions

Premiums on life / hospital insurance (Sec 34 m)

P2400/yr

Gross Annual income P250,000

Claimed by spouse who will claim additional AD

Taxable compensation income is not only limited to payment made in cash;

payment may be made in kind. (Sec 32A1: in whatever form paid)

o

Life Insurance premiums on the life of the insurance policy of the EE

Cancellation / forgiveness of indebtedness

2 Tax Implications of Payment made for services rendered (tax implication = tax effect
= tax consequence = tax incidents):

EE: Income Tax (Sec 32A1)

ER: Ordinary, unnecessary Expense (Sec 34A1) reasonable allowance for salaries
and wages, and other compensation for personal services actual rendered
o

How much can be treated as compensation? Reasonable, and FV of services

rendered (Sec 34A1a.i.)

P30K (ER)

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P30K compensation income and P20K income derived from whatever

source (EE)

Claim of Right Doctrine illegal / unlawful income, profit / gain is subject

to tax

Death Benefit for the EE from the ER (Sec 32B qualifies Sec 32A) enumerates
exclusions from gross income
o

No income there

Rules on Life Insurance Premiums

o

ER:

ER who pays insurance premiums on the LIP of his manager /

supervisor Taxable Fringe Benefit subject to FT (Sec 33B 10)

When insured is a rank & file EE compensation income: in whatever

form paid (Sec 32E.A1)

LIP paid by the taxpayer - May not be claimed as a deductible expense by the
ER if it is designated as the beneficiary (Sec 36A4 Non-deductible items )

Tax treatment of LIP paid by the ER

Beneficiary Designated

ER (expense)

EE (Income)

Executor, Administrator,

Deductible ordinary &

Estate

necessary expense (Sec 34

FBT, which is a FT (Sec

A 1: other forms of

33 B 10)

compensation for personal

services actual rendered)
ER

Non-deductible expense
whether the ER is

2. R&F: taxable comp inc

(Sec 32 A 1)
No taxable income

No benefits received

directly/indirectly

since basis for IT is

designated as the

benefit/gain

beneficiary (Sec 36 A 4)
Rationale: mere return on
capital

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1. Mgr/Sup: subject to

Cancellation / forgiveness of indebtedness(RR 2, 1940 Sec 50)

1. May result in taxable compensation income for services rendered
2. May constitute a taxable donation
3. May also be considered as a taxable capital transaction
Tax Treatment of Cancellation / Forgiveness of Indebtedness

Situation
ER-Cr

CR
Allowable deduction

EE-Dr

DR
Taxable compensation
income

(Sec 34A1a.i.: Other forms

Consideration: services

of compensation for

(Sec 32A1: Compensation

rendered

personal services rendered)

for services in whatever

form paid)

ER-Cr

Subject to donors tax on a

EE-Dr

direct / indirect donation;

Not subject to income tax

(Sec 32B item 3: donation /

Consideration: Liberality

May be claimed as a bad

(Donation)

debts expense
(Sec 34 e)

Unpaid obligation of

gifts are excluded from GI)

No more donors tax10
The transaction is a taxable

P100K; Dr declared

capital transaction

insolvent, Cr agreed to
accept payment through
dacion en pago

Cr-corporation

Interest on capital /

condoned the debt of the

preferred shares of stock is

Dr-SH

a non-deductible interest.
No exceptions. (RMC 17-

- must be condoned /
renounced w/o prejudice to
the Trust Fund doctrine

10

Abolished by PD 69

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71, Jul 12, 1971)

Taxable as dividend income

(taxable as dividend)

Compensation Income (Sec 32A)v. Fringe Benefits(Sec 33)

Fringe Benefits*

Progressive Rates of

Final Tax

Must be reported by

Need not be reported

Compensation

Income

Rates

5-32%

Reporting

the compensation earner

by the manager / supervisor

Except:

Sec 33C item 3:

FB given to R&F EEs not

taxable subject to final tax
(but should be reported as
part of gross compensation
income)

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Bar Qs

2001 # 1

2003 # 3

2004 # 5

2007 #

Definition of FB: *Memorize Sec 33B

Form: cash, goods, services, other benefits

Recipient: mgrl, supervisory EEs (RR 3-98 adopted Labor Code defns), except
R&F EEs

Source: ER

10 Taxable FBs: (HEV-HIM-EHEL)

i. Housing*
ii. Expense Account
iii. Vehicle
iv. Household personnel
v. Interest on Loan**
vi. Membership benefit in social / other athletic clubs
vii. Expenses for foreign travel***
viii. Holiday & vacation expenses
ix. Educational benefit****
x. Life / health / non-life / accident Insurance Premiums*****

*Housing Benefit: Employers Convenience Rule (RR 3-98) tax-exempt (MTB):

1. Housing unit situated w/n ERs Business premises

Housing unit outside the business premises as long as adjacent (w/n a 50m
perimeter) from the business premises of the ER (RR 3-98)

2. Temporary Housing Unit (RR 3-98)

3 mos or less

3. Military Housing unit - Traditionally exempt housing benefit11

**Actual rate of interest must be less than the market rate

Market Rate: 12% (RR 3-98)

Examples: ER granted loan. Will this result in taxable interest benefit if

interest rate is:
o

11

14% - no

asked in 1995

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12% - no

0-11.99% - yes

***Expenses for foreign travel Requisites / Conditions / Situations under w/c expenses
for foreign travel may not be subject to FBT (RR 3-98):
a. Must be paid / incurred in connection with the business of the ER (business
expense) e.g. conventions, seminars, business meetings
b. Must be supported by receipts / documents (Substantiation)
c. Exempt only up to $300
d. Cost of airplane ticket:
i. Economic class: exempt
ii. First class: exempt up to 70%

****Educational Benefit 2 categories:

1. Granted to the Mgrl / Supervisory EE in the nature of a scholarship grant;

requisites:

Agreement between mgr / supervisor that the EE will stay in the employ of
the ER within a certain period of time, as an expression of gratitude

2. Dependent of the EE ER may adopt competitive exams to be administered by the

ER
******Life / health / non-life / accident Insurance Premiums:
1. SSS
2. GSIS
3.

De Minimis Benefits Implication; Definition & 2 Characteristics:

1. Minimum amount relatively of small amount
2. Purpose/s for grant: Promote CHEG

Contentment

Health

Efficiency

Goodwill

Tax Exempted De Minimis Benefits

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Amount

Type of FB

P125

Medical Cash Benefits Given to the dependent of the EE

300

Laundry Allowance

1,500 (NEW!)

Rice Subsidy / Allowance (increased from P1000 by RR

5-2008, RR 10-2008)

4,000 (NEW!)

Clothing / uniform benefit (increased from P3000 by RR

5-2008, 10-2008)

5,000

Christmas / Anniversary gift (cf: Sec 32 B 7 e lump

sum limitation of P30K to Christmas bonus / productivity

allowance)

10,000

Employees achievement award

Medical benefit granted to EEs (cf: P125 limit if granted

to dependents)

No minimum

amount (RR 3-98 as

1. Govt exempt from receipt of commuted value of unused

amended by RR 52008, RR 10-2008)

Commuted value / monetized of unused VL / SL

VL / SL (no more 10-day rule)

2. Private Apply the 10-day rule

VL unused up to the 10 day VL credits; in excess: taxable

SL taxable (applying strictissimi juris)

Retiree exempt from receipt of all monetized VL / SL

benefits (Zialcita case)

Zialcita (190 SCRA 851) monetized value of unused

VL credits may form part of terminal leave pay, which is exempt

received by the EE on account / cause beyond his control

(compulsory retirement)

Fruits, books & cars, gifts on account of occasions of the

EE

Reasonable

Overtime pay - not more than 25% of the basic

minimum wage
Also considered as taxable FBs (Goods, services or other benefits)
1. Laptop
2. Motor vehicle

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3. Courtesy discount

Sec 32 (Prof income, Business / Trade Income) cf: Sec 74 define self-employment
income; what are considered as self-employment income?
1. Business / Trade Income

Is business / trade income the same as gross income from gross sales /
receipts? NO.
Formula:
Gross sales12/ receipts13:
Less: SD, SRA
Net Sales
Less: CGS& mfgd/ Cost of Sales
Gross Income from conduct of trade / business

1) Gross income from conduct of trade or business (32.A.2) - to come up with this start with
GROSS SALES or RECEIPTS

(2) Gross sales or receipts -. apply to sale of services. Deduct the COST OF INVESTMENT. If
manufacturing, cost of goods sold and manufactured. If merchandising, cost of sales. And also
deduct sales discounts, sales returns and allowances.

2. Professional Income
3. Share of a partner from the income of partnership

Gains Derived from Dealings in Property (Sec 32A) / Property Income cf: Secs 39 & 40

Ordinary v. Capital Asset (Memorize Sec 39A1)

o

Ordinary asset Ordinary assets are limited to the following

4 Kinds of Ordinary Assets (Expressio unios est exlusio alterius)

SOUR:

12
13

from sale of goods

for sale of services

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Stock in trade inventoriable assets (e.g. Mfg)

o

Raw materials

Finished Goods

Work-in-process Goods

Ordinary course of trade / business property primarily held for

sale to customers in the ordinary course of trade / business
(e.g. Real Estate dealers)

Used in trade / business depreciable assets used in trade /

business (e.g. machinery, furniture / fixture in Mfg / Service)

Real Property used in trade / business if not, it will be a

capital asset

Capital assets property held by the TP WON connected to his trade /

business but does not include SOUR (defined by way of exclusion)

Exercises:
o

All properties held by the TP in connection with his trade / business are
ordinary assets FALSE. The definition of a capital asset includes properties
held by a TP in connection to his trade / business, but not covered by SOUR

E.g. Think other assets in B/S: Accounts receivable, collectibles,

marketable securities, investment in stocks, goodwill in business, other
intangible assets from which extra-ordinary gain will be derived if sold,
etc)

Capital assets are always capital assets FALSE.

Capital assets may also become ordinary assets in certain situations.

E.g. Real estate assets of a real estate dealer inherited by heirs,

property w/c was formerly not used in business but improved to
be used in business

Property primarily held for sale to customers in the ordinary

course of trade / business TEST: Substantial Improvement:
When a property has been substantially improved / actively
sold, it may be a property primarily held for sale in the ordinary
course of business. The improvement is substantial if the
amount of the improvement is double the original cost of the
property. (Calazans v. Commissioner, 144 SCRA 664)

Valuable improvement: The improvement is considered valuable

if there is an unmistakable intention of the TP, not only to
liquidate the estate of the decedent, but also to make the
property saleable to the general public. (Tuazon Jr v. Lingad, 58
SCRA 170)
o

Valuable improvements include: (BASIC)

Broker relationship established between the seller

& the broker did he really engage in the
business of buy & sell?

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Area improved e.g. 7ha of land in the Tuazon

case

Subdivision were the lots subdivided? And the

subdivided lots SOLD to the general public?

Improvement there must be an unmistakable

intention of making the lots attractive to the
general public

Continuity of the business

Conversely, ordinary assets may also be converted into capital assets.

Factors to consider when an ordinary asset may still be considered as

an ordinary asset (RR 7-2003) FENCIA inconsistent with Sec 39 A1

Failed business of a real estate business (real estate

developer)*

Engaged in R/E business (developer, lessor)

No longer engaged in the business of real estate

Change in business

Involuntary Transfer of Property may include expropriation or

foreclosure of property

Abandoned, Idle Property

Special Rules (that apply to capital transactions):

1. Holding Period 12months (Sec 39B) a form of tax avoidance

Reduces taxpayers taxable capital gain by 50%if capital asset is sold after the
12month holding period(Statute of Partial Exemption)
o

If sold within the 12month holding period, it will be completely taxable

Only applies to capital assets and individual taxpayers.

o

If the asset were an ordinary asset, the 12month holding period would
not be applicable

If the taxpayer were a corporate taxpayer, it would not be applicable.

2. Capital Loss Limitation (Sec 39C)

Principles:
o

Capital loss is deductible only from capital gain.

Capital loss cannot be deducted from ordinary gain.

Ordinary Loss may be deductible from capital Gain no prohibition in

the tax code

Rationale: Matching (of costs against revenues) principle - Capital loss is a

non-business connected expense, which is not an allowable deduction in Sec
34. Only business expenses are deductible from ordinary income.

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Application:
o

Individual

Corporate

Except trust bank & trust companies

3. Net Capital Loss Carry-over(NELCO) (Sec 39D)

NELCO Sec 39D

NOLCO Sec 34D

Net Capital Loss Carry Over

Net Operating Loss Carry Over

Scope

Capital assets / transactions

Ordinary asset / transaction

Applies toTP

Individual

Individual / Corporate

Period (when Loss

1 yr (only in the succeeding

3 yr period (X: mining

deductible)

year)

companies 5 yrs)

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Net Capital Loss (definition in Sec 39A3) - the excess of the capital loss over capital
gain. (if the capital loss is more than the capital gain)
Statute of Partial Exemption - Long-term capital assetwhich may result in the
reduction of capital gain (held for more than 12 months)

How do you construe provisions of the Tax Code re: capital transactions?
o

A: Strictly construed against taxpayer holding the capital asset

(partakes the nature of exemptions. Therefore strictissimi juris)

Not all capital transactions are covered / subject to Special Rules, but are subject to
other certain special rules (Sec 24, 25, 26, 27):
1. Sale of shares of stock considered as a capital transaction (applies to individual &
corporate taxpayers alike)

Listed considered as capital asset (Title V, Sec 127a): of 1% of the gross

selling price (GSP)

Not listed considered as income tax(FIT)

o

P100K& below - 5% (before: 10%)

Any amount in excess of P100K 10% (before: 20%)

2. (Sec 24D vs Sec 27D sec 5)

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Sale / disposition of real

Sec 24D

Sec 27D5

property not used in trade /

business
Applicability

Individual Taxpayers

Domestic Corporations

Coverage

Real Property (except

Land and building

machinery cf: Sec 199,

RA 716014)
Tax Base

Higher amount between: GSP & zonal value

Tax Rate

6% (before 5%)

Option of applying tax rate

Option granted to the

No option granted to

individual seller

domestic corporations

If the buyer is the govt

buyer may apply
progressive rates of 5-32%
Tax Avoidance Scheme

Tax avoidance Scheme in

Sec 24D2: Principal
Residence is the subject of
sale

Sec 199 of RA 7160 (LGC) amplified definition of machinery in the NCC: Machinery
tend to meet the needs of the business of the owner
1. Whether permanently attached / temporarily attached
2. Must be actually, directly and exclusively used to meet the needs of a particular
business / authority e.g. the business of mining, agricultural, other business
14

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5 Conditions for Exemption under Sec 24D2 (1-4) and RR17-03 (5):
1. Proceeds of the sale must be used to construct / purchase a new principal residence

Dwelling characterized by the element of permanency: animus revertendi (RR

13-99)

2. 30-day notice to the BIR

3. Comply with the 18th month period within which to construct / purchase a new
principal residence
4. 10 yr limitation can only be availed of once every 10yrs
5. RDO & authorized agent bank should execute an ESCROW AGREEMENT with the
seller

the 6% CGT should be deposited under the ESCROW ACCOUNT

within 30 days from the lapse of the 18th month period, the seller could
withdraw the amount.

Presumptive Gain Principle(presumed gain) a.k.a. Gain by Legal Fiction(Sec 24D1)

even if the seller incurred a loss, he can still be made to pay the 6% CGT

remember: the tax base is the higher of the GSP / zonal value; cost not
deductible

applies only to sale of real property considered as capital asset; does not take
into account the costs / loss sustained by the seller because as far as the law
is concerned, there is a presumption that the seller acquired gain

exception to the rule that cost is allowed as deduction to the amount realized
(GR: Formula in Sec 40A)

Formula in Determining Taxable Gain from Deductible Loss from Sale of an Asset /
Property (Sec. 40A)
Selling Price / Amount Received or Realized
Less: Cost / Adjusted Basis - (determined by mode of acquisition)
Taxable Gain / Deductible Loss
How did you acquire the property that you disposed of? (to determine Cost / Adjusted
Basis): PIDI

Purchase (its really the cost)

Inheritance FMV of property at time of death of decedent

Donation FMV of property at time of donation (same basis for the donor)

Insufficient / inadequate Consideration same basis in the hands of the 1st

transferor of the property

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If property was acquired way below its FMV

Alternative Tax Treatment: No Gain / Loss Recognized (Sec 40C2, an exeption

to Sec 40A) gain from initial sale is tax-exempt, but the subsequent sale is taxable

Exempt exchanges of property, shares of stock and securities

Situations covered:
o

In accordance with a plan of merger / consolidation =another form of

tax-avoidance!

Corporate control (Sec 40C6c) 51% (same definition as corporate

control under the Corpo Code) acquired by 5 people (max: a person,
alone or together with others, not exceeding 4 persons in Sec 40C2
last paragraph)

Transactions solely in kind: no cash given

Property for stock

Stock for Stock

Security for Stock

Effect: Gain = tax-exempt; loss = nondeductible

Transaction not solely in kind - If additional cash is given

Effect: Gain = recognized; loss = not recognized

Merger / consolidation includes the ordinary meaning of

merger / consolidation and expanded to cover the acquisition /
transfer of all assets in exchange solely for shares of stock (Sec
40C6b) even if no PLAN of merger/consolidation

Recap: Examples of Tax-Avoidance:

1. Holding Period Rule

2. Sale of Real Property considered as capital asset in Sec 24D
3. Exchange of property/ shares of stock / securities in line with a plan of merger /
consolidation
4. Exchange of property/ shares of stock / securities by maximum of 5 people to gain
control

Gain Recognized, Loss Not Recognized applicable tax treatment to:

1. Transactions not solely in kind
2. Illegal transaction (e.g. income from bribery)

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Illegal / unlawful (Sec 32A) Income derived from whatever source in

accordance with the CLAIM OF RIGHT DOCTRINE (US v. Ratkin)

Illegal loss is non-deductible

3. Related taxpayers(Sec 36B) non-arms length transactions

4 Groups:
o

Members of the same family

Stockholder & corporation factor: corporate control

Sister corporations: 2 corporations who are owned & controlled by

same stockholders

Parties to a trust (Trustor, Trustee, Fiduciary, Beneficiary)

Cf: concept / definition of Stranger (in Donors Tax) (Sec 99B)

4. Wash sale transaction (Sec 38)

Subject:
o

Shares of stock

Securities

Stock options

Seller: must NOT be a dealer in securities

Period:
o

30 days before the sale till 30 days after the sale a.k.a. 61-day sale
seller acquires substantially identical securities

Tax treatment: Gain from wash sale = taxable; Loss = non-deductible

o

Rationale: Loss from wash sale is artificial loss. It is not actually

sustained or incurred.

Sec 34D prescribes requisites for a deduction of a loss

Actually sustained or incurred

Wash Sale (Sec 38) v. Short Sale (Sec 39F1)

Wash Sale

Short Sale

Gain

Taxable

Treated as capital gain

Loss

Not deductible

Treated as capital loss,

which is deductible from
capital gain

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Concept of a Short Sale Transaction represents an obligation payable in kind / goods

Seller merely speculates that on this day the price of the security or share will increase.
If the price decreases, he earns an income. If the price increases, he incurs loss. Hence
there is a short sale, He just borrowed the security or share of another person and he
may promise to buy them in goods / securities.
Failure to Exercise Option to Buy / Sell -

Additional Capital Transactions (in addition to Sec 39 of NIRC)

1. Adjustment of partners interest in a partnership(Secs 142 & 142 of RR-3)
2. Liquidation of a corporation (Secs 143 of RR-3)

Item 4: Interest Income

GR: Taxable
X: (Sec 32B7a)
1. Foreign government
2. Financial institution financed / controlled by foreign government
3. International / regional foreign institution established by foreign government
o

Interest income on deposits made in the Philippines

Interest income from loans extended

Interest income on long-term debentures

4. Income derived from long-term deposits / investment / management account (Sec

22w)

Term: 5yrs

Denomination: P10K

Subject to BSP Regulations

Provisions on exemption
o

If depositor is a RC, NRC, RA - exempt (Sec 24B1)

If depositor is a NRA (Sec 25A2)

ETB exempt

NETB not exempt (Sec 25B)

If depositor is a corporate taxpayer not exempt

5. Interest income from FCDA system same whether individual / corporate taxpayer

If depositor is a non-resident - exempt

If depositors is a resident non-exempt (7.5%)

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*Interest income from government securities is taxable. (Sec 32B)

Items 5 & 6: Rent Income v. Royalties

Tax Treatment

Rent Income

Royalties

Subject to regular

Subject to FIT

Must be reported

Need not be reported

tax

Reporting

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Additional Taxable Rent Income (in addition to Lease Income)

1. Obligations of the lessor assumed paid by the lessee

E.g. Real Property Tax on lease premises

Lessee pays interest of Lessors debt

Insurance Premiums of Lessors property paid by the lessee

2. Value of permanent improvement

long-term contract of lease may contain stipulation that ownership of lease

shall pass to the lessee at the end of the lease contract

2 methods of reporting of value of permanent improvements

o

Outright method upon the completion of such permanent

improvement, such FMV of the same shall be reported as additional
rent income of the lessor in addition to the regular rentals

Spread-out method the depreciated value of the permanent

improvement upon the expiration of the contract of lease; aliquot
portion reported as rent income throughout the remaining period of
lease

Item 7: Dividend Income

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Type of Dividend

Source

Recipient

Tax Treatment

Cash, Property

Domestic

RC, NRC, RA

FIT: 10% (Sec

Dividend

Corporation

24B2)
NRA ETB

FIT: 20% (Sec

25B2)

NRA NETB

FIT: 25% (Sec

25B3)

Domestic

Tax-exempt (Sec

Corporation

27D)

RFC

Tax-exempt (Sec
28Ad)

NRFC

FIT: 15% (Sec.

28B5b)

FC:

Any

Income derived
from sources w/n =
at least 50% of the
NI must be derived
from Phil sources for
the last 3 preceding
taxable yrs (Sec
42A2b)
Stock

tax exempt
rationale: no flow of
wealth so no
realized gain:
Transfer from
surplus account to
capital (Sec 73Bb)

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Exeption re: Redemption of Shares of stock may or may not result in taxable stock
dividend
Source: original capital investment / initial capital subscription redemption does not
result in a taxable gain, as it is merely a return on capital
Source: stock dividend declarations taxable since it may result in a flow of wealth, in
such time and manner essentially equivalent to the declaration of taxable dividend
There has to be flow of wealth so stock redemption may result into taxable income.
(Commissioner v. Andres Soriano Corp 301 SCRA 152)
Is stock dividend received by usufructuary taxable? 2 Views:
Massachusetts view: Tax-exempt
Pennsylvania view: Taxable in accord with Art 566 of the NCC: Usufructruary shall be
entitled to all natural, industrial & civil fruits of the usufruct. Stock dividends are fruits
of the thing in usufruct.
(Basrach v. SEIFERT 87 Phil Rep)
Disguised dividends in Income taxation Taxable
Board declared stock dividends declared not in accordance with the Corporation Law,
requiring presence of unrestricted R/E. But they made it appear that dividends declared
were stock dividends so they could evade the payment of tax on dividends.

Dividends deemed stock: Stocks distributed as dividends were sourced from

another corporation Taxable

Change in SHs interest in a corporation

Common Preferred Shares of Stock issued by a corporation

(Commissioner v. Marin cf: Q1, 1994)

Income Subject to FIT:

Interest Income from Bank Deposit (Arroyo case)

Div received from DC by NRFC, NRA

RPWADS

RPWADS
Royalties
Prizes

More than P10K

Winnings

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Exempt:
o

PCSO

Lotto

Annuities
Dividends Received
Share of a partner from the NIAT of a Taxable Partnership (Sec 24B2 & 25A2)
Income subject to FIT income governed by the Final W/holding Tax system. Under
this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is not required to report the same as part of his income
because such final tax w/held shall serve as full payment / settlement of the tax liability
on income.
Income subject to CWT income governed by the Creditable W/holding Tax System.
Under this system, the w/holding agent shall deduct and w/hold such tax on income. The
recipient of such an income is required to report the same as part of his gross income.
Such tax w/held will not extinguish TPs tax liab on such income. The tax w/held can be
claimed by the TP as creditable tax.
Cash dividend received by an RC/RA from a DC is subject to FIT& not progressive
rates of 5-32% (Sec 24B2)
Rationale:
1. Ensure collection of tax on dividend, which will immediately go to the coffers of govt.
(NIT: no assurance that individual TPs will report dividend income.
2. Easier compliance: By shifting responsibility to the corporations, the BIR could easily
monitor the compliance. (NIT: It would be extremely difficult for the BIR to check
compliance with individual TP)
3. Sure revenue to the government
4. Reportable income which could be offset against a loss
5. Lessen the burden on the taxpayer

Same reasons why Interest Income from bank deposits is subject to FIT (just
qualify individual TPs w/ the term depositors, and substitute banks for
corporations)

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Exclusions from GI

25/05/2015 08:01:00

Exclusions from Gross Income (Sec 32B) LAGCIRM (formerly: LAGICIRM, I =

interest income from bank deposits now subject to income tax)

Life Insurance Policy proceeds*

o

Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be
included / excluded from the Gross Estate)

Included:

Beneficiary is estate, executor, administrator (irrevocable

/ revocable designation)

Third person (may include ER) is revocably designated

beneficiary (determine WON revocable)

Irrevocable designation will exclude LIP proceeds

from the GE

Excluded: Received by any beneficiary

Proceeds of group insurance policy

LIP taken on own life

Irrevocable designation will exclude LIP proceeds from

the GE

Awards & Prizes

Gifts, Donations

Compensation for injuries / sickness**

Retirement Benefits, Exemptions, Etc**

Miscellaneous Items****

Donation: Donor-Donee

Tax Implication of Donation Inter Vivos

1. Donor subject to donors tax

2. Donee not subject to donees tax (abolished by PD 69)
-also not subject to income tax (because donation is excluded from GI)

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Tax Implication of Donation Mortis Causa

1. Testator subject to estate tax

2. Heirs not subject to inheritance tax (abolished by PD 69; Jan 1972)

*Life Insurance Policy proceeds

Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be
included / excluded from the Gross Estate)
o

Included:

Beneficiary is estate, executor, administrator (irrevocable /

revocable designation)

Third person (may include ER) is revocably designated

beneficiary (determine WON revocable)

Irrevocable designation will exclude LIP proceeds from

the GE

Excluded: Received by any beneficiary

Proceeds of group insurance policy

LIP taken on own life

Irrevocable designation will exclude LIP proceeds from the GE

**Compensation for Injuries / Sickness not taxable, no income realized

Q: WON the foregoing damages are taxable:

Hospitalization expenses NOT TAXABLE.

Moral damages 2 views:

o

Taxable - Sec 32A income derived from whatever source; no

exemptions granted; strictissimi juris

NOT TAXABLEIn effect, imposing tax on grounds for MD:

lrbs_ssbc-r_2009

Sec 2217 (NCC): 9 grounds for Moral Damages (MBA-SWS-PAF)

Moral shock, Besmirched reputation, mental Anguish,

Social humiliation, Wounded feelings, Similar injury,
Physical suffering, serious Anxiety, Fright

Cf: Art 2219 par 7 was applied in the Filipinas Broadcasting

case, awarding moral damages to a corporation for defamation

Exemplary damages NOT TAXABLE: Based on sound public policy

Cost of repair of damaged car NOT TAXABLE. Indemnification

Lost profit TAXABLE. He could have earned this if he were not hospitalized

***Retirement Benefits, Pensions, etc

A. Retirement Benefits
o

Received from private ER - 4 requisites for exemption:

Source: BIR-approved retirement plan

Age of retiree EE: 50yrs of age

Length of service: at least 10yrs

Limitation: can only be availed of once

All retirement benefits received from the GSIS (given to public / govt
EEs) are EXEMPT.

B. Separation pay
o

Must be received on account of causes BEYOND the control of the EE /

official

Includes termination due to labor-saving devices, losses

incurred by the ER

Kinds

Death benefit (Sec 32B6)

Physical disability benefit

Sickness benefit

Compulsory retirement is considered a cause beyond the control of the

EE, hence all benefits received, including the so-called terminal leave
pay is exempt. The terminal leave pay covers monetized value of
unused VL/SL credits. (Zialcita case)

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^_^Check out 1999 Bar Qs^_^

Q (1999): A Co., a Philippine corporation, has two divisions manufacturing and

construction. Due to the economic situation, it had to close its construction division and
layoff the employees in that division. A Co. has a retirement plan approved by the BIR,
which requires a minimum of 50 years of age and 10 years of service in the same
employer at the time of retirement.

There are 2 groups of employees to be laid off: 1) Employees who are at least 50

years of age and has at 10 years of service at the time of termination of employment. 2)
Employees who do no meet either the age or length of service A Co. plans to give the
following:

For category (A) employees - the benefits under the BIR approved plan plus an ex

gratia payment of one month of every year of service.

For category (B) employees - one month for every year of service.

For both categories, the cash equivalent of unused vacation and sick leave

credits.
A Co. seeks your advice as to whether or not it will subject any of these payments to
withholding tax. Explain your advice.

A:

All of the payments are not subject to income tax and should not also be subject

to withholding tax. The employees were laid off, hence separated for a cause beyond
their control. Consequently, the amounts to be paid by reason of such involuntary
separation are excluded from gross income, irrespective of whether the employee at the
time of separation has rendered less than ten years of service and/or is below fifty years
of age.
(Section 32(B), NIRC)

Does it necessary follow that retirement benefits are exempt from estate tax? (Sec
86A7) YES.An allowable deduction from Gross Estate, by virtue of RA 7641 in relation
to the LC.
RA 7641 cf: RA 4917, 86A7 salient points:

Retirement benefits that may be given to EEs under the CBA or any other
agreement are exempt.

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If there is no established retirement plan given by the ER, likewise exempt

provided:
o

Tenure: Rendered at least 5yrs of service

Age: 60-65yrs old

Q: What are tax implications of receipt of GSIS benefits and their subsequent deposit in
the bank?

lrbs_ssbc-r_2009

A: GSIS benefits are EXEMPT; If deposited in the bank, interest income therefore will be
subject to tax. (Same as SSS benefits)
****Miscellaneous Items

A. Interest income that derived / may be received by a foreign government, , ,

B. financing institution

C. finance controlled by a foreign govt

D. regional financial institution established by a foreign government

Sources of investment: loans, deposits, stocks, LT cert of indebtedness,

dividends, interest income

Case (Commissioner v. Mitsubishi Metal, 1990): EXIM Bank, an international

financing institution extended loan to Mitsubishi Metal and used it to extend loan to a
Philippine corporation, Atlas Mining Corp. Mitsubishi Metalclaimed that the interest
income was exempt since the amount likewise came from an exempt institution. Loan
P20M Sale Atlas will purchase mining equipment to be sold to Mitsubishi for P50M.
BIR: Mitsubishi is taxable. CTA: Mitsubishi is an agent of the EXIM Bank.

SC: Interest on the loan is taxable. The source is tax-exempt, therefore the

interest should not be taxed. However, there was no clear & convincing evidence that
Mitsubishi was indeed an agent of Japan. When the contract between Mitsubishi & EXIM
was consummated, the money ceased to belong to EXIM15; it was already owned by
Mitsubishi. The other contract of loan was executed between Mitsubishi & Atlas.
Exemptions should be construed strictly against the TP, hence it could claim no
exemption.

Of course, different answer if Mitsubishi were indeed an agent

Income derived by Government / Political Subdivisions

From

Public utility

Exercise of essential governmental function

Accruing to:

Government of the Philippines National / Local (does not qualify

government as national)

15

Citing Art. 1953: When such contract is consummated, the borrower

acquires exclusive ownership over the thing borrowed.
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Mactan Cebu Intl Airport Case Govt of the Philippines is synonymous

as Republic of the Phils. Republic of the Philippines may include
instrumentalities, where GOCCs belong.

Cf: Sec 27C Exempt GOCCs from Corporate Income Tax:

GSIS

SSS

Phil Health Ins Corp

PCSO

Exemption of PAGCOR was withdrawn by RA 9337 (July 1, 2005)

Prizes & Awards (Sec 32B7c & d)

Requisites for

(C)

(D)

Exemption

Conditions must

concur:

SCRA-LEC:

Scientific, charitable,

athlete who participated in

Received by an

religious, artistic, literary,

a competition whether

educational, civic

here or abroad

achievement

No action on his part

to enter the contest

Sanctioned by the

National Sports Association

The Philippine Olympic
Committee must approve
(Law creating the Philippine
Sports Commission)

Unconditional

receipt: should not be

required to render future
services

lrbs_ssbc-r_2009

cf: RA 7549:

The recipient of such an award, exempt from Income Tax.

The donor of such an amount, exempt from Donors Tax. (not yet in the Tax
Code; not in Sec 101A3)

Such amount can be claimed as a deductible contribution. (not yet in the Tax
Code; not in Sec 34H)

Gains from the Sale of Bonds, Debentures or Other Certificates of

Indebtedness

Sale/Exhange/Retirement of Bonds, Debentures / Other CIs more than 5yrs:

exempted; 5yrs or less: taxable

Informers Reward

No longer an exclusion from GI (Sec 32B)

Taxable with 10% FIT (Sec 282)

FCDA

Recipient
o

resident individual / corporate: 7.5%

non-resident: exempt

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Corporate Income Taxation

25/05/2015 08:01:00

18 Exempt Associations, JVs, Entities:

Sec 22B Exempts 3

o

GPPs

Joint venture for purpose of undertaking construction projects

Joint construction for purpose of engaging in petroleum, coal,

geothermal & other energy operations in accordance with the
consortium agreement with the government

Sec 27C Exempts 4 GOCCs

o

GSIS

SSS

Phil Health

PCSO

Sec 30 Exempts 11: remember common characteristics

o

Non-stock, non-profit corporations

No part of the income must inure to the benefit of a particular

member/individual

Social welfare, Religious, Charitable and other non-profit purposes

Par E: 6 exempt corporations: CARS

Charitable

Cultural

Athletic

Religious

Rehabilitation of veterans

Scientific Organizations

Non-stock, non-profit educational institution (H)

Government educational institution (I)

Memorize Sec 30 last par: income of whatever kind / character from

any of their properties, real / personal or any activities conducted for
profit, regardless of the disposition made of such an income shall
be subject to tax imposed under this code.

lrbs_ssbc-r_2009

YMCA v. Commissioner 298 SCRA 83: YMCA is a religious &

charitable institution, but did not qualify as a non-stock, non-profit
educational institution. YMCA advanced that it was exempt under Art
VI, Sec 28 par 3 of the Constitution & Art XIV, Sec 4, par 3 of the
Constitution, contending that it was a non-stock non-profit institution
and should not be taxed for the receipt of rent income. Such an
income should be used to carry out its religious, charitable and
educational purposes.
SC: Rent income from lease of property subject to tax, regardless of
purpose for the income.

Art VI, Sec 28 par 3 of the Constitution only applies to real

property.

Art XIV, Sec 4, par 3 only applied to non-stock non-profit

educational institution, to which YMCA does not belong.

Non-stock non-profit educational institution

Exemption of non-stock non-profit education institution is merely a reiteration of

Art IV of the Constitution: Actually, Directly & Exclusively used for such purposes The
use of the amount is the test of exemption.

Interest income from bank Deposits to avail of exemption from 20% FIT, the
non-stock, non-profit educational institution Cf: DOF 149-95

Cf: DOF 149-95: requires concurrence of the following conditions for

exemption:
o

Proof in the form of certification, issued by the bank of deposit in that

particular bank

Certification re: actual utilization of such amount for educational

purposes

Resolution of the BOT that such amount will be used for expansion of
educational project

Interest on Deposit of bank deposits:

Subject to 20% FIT if depositor: (Sec 30 is categorical: regardless of use /

disposition)

Government educational institution

private educational institution

charitable institution

religious organization

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Exempt

if depositor is Non-stock, non-profit educational institutions: subject to

conditions in the DOF 149-95 (CCP)

Rules on Exemption on:

Income Tax (Sec 30 NIRC)

Property Tax (Art VI Sec 28 par 3 Consti; Lung Center of the Phils v. Roces)

Donors Tax (Sec 101 A3)

Estate Tax (Sec 87D)

lrbs_ssbc-r_2009

Is

Income

exempted

Tax (Sec 30

from

NIRC)

Religious

YES

Property

Tax

Donors

Tax
ADE:

Estate

Tax
YES.

Actually,

Provided

directly,

complies with

exclusively*

conditions

NO

used for
religious
purposes

Educational Institution

Private

NO.

Subject

Actually,

ADE:

to 10%

directly,

preferential

exclusively*

corporate rate if

used for

income from its

educational

unrelated

purposes

NO

NO

May be

NO

NO

YES,

activities is not
more than 50%
of its income.

Govern

ment

YES (Sec

30i)

exempt from
donors tax

Non-

Yes (Sec

YES.

stock, non-

30h, Art XIV

Provided

profit

Sec 4 par 3

complies with

Consti)

conditions

Charitabl

YES (Sec

ADE:

YES.

30e, subject to

Actually,

Provided

provided the

last par)

directly,

complies with

30%

exclusively*

conditions

requirement is

used for
charitable
purposes

lrbs_ssbc-r_2009

complied with

*Exclusively is no longer construed as primarily. Now, the court construes the

meaning of exclusively as solely. Doctrine of incidental purpose no longer exists.

(Lung Center Phils v. Roces)

- partial exemption is allowed (Lung Center of the Philippines v. Quezon City)

9 Donations Exempt from Donors Tax (QARTIER-CPS) with conditions for

exemption

Qualified Donees

Accredited Non-government organizations (RA 8424)

Religious organization

Trust foundations

Educational institutions non-stock non-profit

Research institution

Cultural organization

Philanthropic organization

Social welfare organization

Conditions for exemption:

Non-stock non-profit

Not more than 30% of the donation shall be used for admin purposes

Trustees receive no compensation

Donations for the achievement of purposes as stated in Articles of

Incorporation

Donations Mortis Causa(Sec 87D CSC) subject to condition: Not more than

30% of the donation shall be used for admin purposes

Charitable Institution

Social welfare institution

Cultural

Corporations include partnership no matter how created or organized

registration with the SEC is not required

JV / Association need not comply with the formal requirements of the law
regarding the creation of a partnership. (Collector v. Gatchalian)

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A taxable partnership is formed for as long as parties have the intention to

divide profits among themselves & there is a contribution to a common fund.

Co-ownership not taxable; merely for the enjoyment of the co-owners (not for
profits) seemingly conflicting doctrines:
o

An unregistered taxable partnership was formed between the heirs.

(Unya v. Commissioner 45 SCRA 74, 1972) apartments were
purchased by heirs and they received rent income therefore.

There was no unregistered taxable partnership formed / organized.

(Obillos, 139 SCRA 136, 1985) sold property to divide proceeds only,
not for profit

There was no unregistered taxable partnership formed / organized.

(Pascual & Dragon, 166 SCRA, 1988) 5 parcels of land were
purchased & later on sold by heirs. SC applied test in Art 1769; heirs
shared in gross receipts of sale. Mere sharing in the gross receipts
does not in itself establish partnership.

Significant Rules:

MCIT

IAET

Branch Profits Remittance Tax

Tax sparing credit rule (Sec 28B5b)

MCIT of 2% of GI applicable to DC (Sec 27E), RFC (Sec 28A2)

Rationale / underlying basis: Forestall the prevailing practice of

corporations of over-claiming deductions in order to reduce their income tax
payments (not stated in RR 9-98)

Equitable Provisions of the MCIT:

o

Applies only to a corporation on the commencement of its 4th yr of

corporate operations.

Sec 27E par 1 not automatically imposed on a newly-formed

corporation; proven fact that corporations often operate at a
loss for the 1st 3yrs

Excess of MCIT can be claimed as a tax credit for 3 consecutive taxable

years (Carry-Forward Rule)

Suspended for corporations that suffer losses due to:

Prolonged labor dispute strike that has lasted for more than
6months

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Force majeure

Serious / Legitimate business reverses

Illustration:
o

Actual NIT Payable: P300,000 v. MCIT of 2% of GI: P450K Claim

P450K (since more than actual)

Amendment (RR 12-2007)

o

P150K (P450-P300) can be claimed (carried forward)

Now included in the quarterly IT return (new! Before annual reporting)

Scope of Application:
o

Does not apply to NRFCs

DCs

X but can still be taxed under the 10% Preferential Corporate

Rate

Private educational institution (RR 9-98)

Non-profit hospitals

International carriers exempt from MCIT subject to

RFCs

X:
2.5% FIT

Regional HQ of MNCs, OBUs still subject to 10% FIT

Registered under the PEZA (RA 7916) and BCDA (RA

7227) still subject to the preferred corporate tax of
5%

IAET of 10%(Sec 29) improper accumulation of corporate earnings is taxed

Cases when there is improper accumulation of corporate earnings:

o

When the Corporation, despite presence of unrestricted retained

earnings in excess of 100% of their paid up capital, did not declare
dividends to SH

Reserved earnings are invested in unrelated business / activity

Investment in bonds and other long-term securities

However, accumulation is proper / justified when: PNP

o

Project: Corporate earnings are used for expansion corporate project

Necessary for probable contigencies (p.69 Dimaampao I.T.)

enumeration is not exclusive:

Allowance for increase in accumulation of earnings up to 100%

of paid-up capital as of B/S date inclusive of accumulations
taken from other years

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Definite corporate expansion projects

Earnings reserved for acquisition of equipment, buildings,

machinery

Earnings reserved for compliance with loan covenant

Earnings required by law / regulation in respect of which

distribution is prohibited

All undistributed earnings reserved for distribution in the

Philippines by the subsidiaries of a foreign corporation

Prohibited: Dividend declaration is prohibited by a provision in a loan

agreement

Rationale (RR 2-2001): Regulation IAET of 10% is in the form of penalty to

corporations who should declare dividends when warranted by circumstances
presence of unrestricted R/E. It is a deterrent to possible tax avoidance on
the part of SHs. (Had dividends been distributed, the government could have
imposed a FIT of 10% on stockholders)

Exclusions from coverage:

o

Bank, other non-bank financial intermediaries

Public corporations

Insurance companies

Scope of application:
o

Closed corporations not more than 20 stockholders

Branch Profits Remittance Tax FIT of 15% (Sec 28A5)

Coverage: RFC engaged in trade / business in the Philippines

Acts that constitute doing trade / business & make a foreign corporation an
RFC RA 7042 Sec 3D (POASA)
o

Participation in management, supervision, control of a business in the

Philippines

Opening of a branch in the Philippines

Appointment of an agent

Soliciting contracts

Any act which will imply the continuity of commercial transactions

Tax Base: Branch Profits

o

Effectively connected with conduct of trade / business in the

Philippines: the amount applied / earmarked for remittance (no longer
the amount actually remitted)

Tax Rate: 15% FIT

lrbs_ssbc-r_2009

Case: Marubeni Doctrine (Marubeni v. Commissioner 177 SCRA 500)

o

SC: The remittances is not taxable for not being effectively connected
with conduct of trade / business in the Philippines. The investment of
Marubeni-Japan in a domestic corporation is a business that is different
& distinct from the business carried out by Marubeni. Direct
investment by the mother company in the company has no direct
connection with conduct of trade/business of Marubeni-Philippines.

Tax sparing credit rule(Sec 28B5b) 15% of dividends from DCs

Contemplated situation: NRFC received cash / property dividend from a

domestic corporation

Income covered: Dividend income

Tax Rate: 15% FIT

Rationale for reduction of corporate rate from 30% to 15%: To attract /

encourage foreign investments by reduction of the income tax rate (P&G v.
Commissioner) non-revenue purposes of the Philippines
o

Subject to the condition that the country in which such foreign country
is domiciled shall allow credit against the tax due from NRFC, taxes
deemed paid in the Philippines (Deemed Paid Tax Credit)

P&G-US (NRFC) established P&G-Phils (DC). Because of such

investment made in the Philippines, the rate was reduced so
that the dividend declared by P&G Philippines and distributed to
P&G-US could be taxed at only 15%.

Since P&G established a business in the Philippines, it is

deemed to have paid tax under the Philippines (Sec 902 US IRC
allows American corporations to claim credit as against taxes
deemed paid in other countries).

Other cases: Is proof of amount actually granted required?

SC: There must be proof of actual amount granted as tax credit

so we could impose the reduced credit of 15%. (P&G v.
Commissioner 2nd division)

Motion for recon: The Tax Code does not allow actual
grant (Sec 28B5b). It merely says, shall adopt. No such
word as actual. Nor does any RR provide for this.
PREVAILING VIEW

Proof allowed: enough to prove that there is such a

provision under the Revenue Code of the foreign
government allowing such tax credit

lrbs_ssbc-r_2009

P&G Phils was the w/holding agent insofar as the dividends was
concerned. Does it have legal personality to file a written claim
for refund? NO legal personality

M/R: YES, w/ legal personality.Withholding agent is

not only an agent of the government, but also an agent
of the taxpayer wrt to filing of return & payment of the
tax. Withholding agent is technically considered as
taxpayer, therefore has the personality to file a
written claim of refund.

SC: There is no need of proof of actual amount granted as tax

credit so we could impose the reduced credit of 15%. (Wonder
v. Commissioner 3rd division)

Does the Philippine branch, as w/holding agent of

dividends, have legal personality to file a written claim
for refund? YES.

Withholding agent (Sec 22) v. Taxpayer

Withholding agent

Taxpayer

Required to deduct &

Subject to tax imposed

w/hold the tax under S. 57

under this title

Can file written claim for
refund (S. 204c)

Sec 28A3: Definition of Gross Philippine Billings modified: origin of passengers,

cargo & baggages determines situs of income (no longer the place of sale), partially
amending rule on situs on sale of personal property (Sec 42A6 provides that situs is
place of sale)

Therefore an offline international airline may no longer be taxed, even if it

sells tickets here, if there is no proof that passengers originated in the
Philippines (RR 15-2002)
o

Come to think of it, an offline international airline has no landing rights

in the Philippines in the first place

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Allowable Deductions

Distinguish Allowable Deductions from Personal Exemptions

25/05/2015 08:01:00

Nature

Allowable Deductions

Personal Exemption

Nature of business

Personal expenses

expenses (except:

substitute for the

deductible contribution)

disallowance of family, living

& personal expenses (Sec
36A1)

Amount

Actual business

P50,000 (uniform

expenses paid / incurred, as

basic P/E as of Jan, 200816)

proven / substantiated by

applies to married

receipts

individual, head of family,

unmarried individual w/ no
dependents

arbitrary amount

(may not be enough to

cover 1yr
family/living/personal
expenses)

Claimant

Individual &

corporate TPs

Individual TPs

X:

1. NRA-NETB (Sec

25B: imposes GIT of 25%)

2. NRA-ETB w/ no

reciprocity (NRA-ETB may

claim based on recip rules
but not more than P50K)

Kind / Classification

1. Basic P/E: P50K

deductions

2. Additional P/E:

P25K/dependent child (not

1. Itemized
2. Optional standard

deduction (OSD)

more than 4 children) =

Amendments by 9504

max: P100K17 (prev

P8K/child = max: P32K)

16
17

As amended by RA 9504
As amended by RA 9504

lrbs_ssbc-r_2009

Amendments introduced by RA 950418 re OSD:

claimable by corporate TPs

40%, previously 10% in the NIRC
tax base:
o

for Indiv TPs is now gross sales / receipts (previously gross income)

for corporate TPs is gross income

Re: Wisdom behind RA 9504:

It has been held valid in a long line of cases,

the court cannot question the motive, object, expediency, necessity behind the passage
of a tax law.

Allowable Deductions (Sec 34) from Exclusions from GI (Sec 32B):

Nature

Purpose

Allowable Deduction

Exclusions from GI

Items of expenses,

Items of Income,

which are allowed by law as

which are excluded by law,

deductions from Gross

constitution or the Tax Code

Income

in that they are exempt

Exclusions are

important for purposes of

important for purposes of

determining Taxable Income

determining Gross Income

FAQs on Allowable Deductions

18

Effective: July 6, 2008

lrbs_ssbc-r_2009

Exclusions are

Allowable Deductions under the Tax Code: (LTRB-DBP-CID)

Losses (deductible losses)

Taxes (deductible taxes)*

Research & Devt Expenditures (as introduced by

Business expenses ordinary & necessary

Depreciation (allowance for depreciation)

Bad debts expense**

Pension Trust contribution

Contribution (deductible contribution)

Interest expense***

Depletion expense

Determinative Test for Ordinary & Necessary Expenses (Business

Expenses):(DOM)

Development of the business of the taxpayer

Operation of the taxpayers trade / business (in connection with)

Management of the taxpayers trade / business (in connection with)

GR: Capital expenditures are not allowable deductions; they should be

capitalized and amortized.

X: (Sec 34A2)

Capital expenditure incurred by private educational institution during the

year when the same was incurred (with option to capitalize & claim allowance
for depreciation)

Capital asset19 purchased from proceeds of Interest on loan

Intangible drilling & development costs

Research & development expenditures, subject to certain conditions (NEW!)

19

life of more than 1yr (of course)

lrbs_ssbc-r_2009

Tax Benefit Rule applies to tax refund, recovery of bad debts written off

Provision on deductible tax (Sec 34C)

o

Taxes when refunded shall be included in the GI in the year of recovery

/ receipt to the extent of income tax benefit of said deduction

Must be a deductible tax: Must have been claimed as a

deduction in the preceding taxable year.

Non-deductible taxes: (SIDE)

Special assessment tax

Income tax

Donors tax

Estate tax

Must have been actually claimed as a deduction

Illustration:
NIBT
Less: Tax refund granted the following year
NIAT
x Tax Rate
Income Tax Payable
[Tax
X Tax Rate applied
Tax Benefit]

Provisions on bad debts expense (Sec 34E) - included in the gross income
in the year of receipt or recovery to the extent of income tax benefit of said
reduction

Requisites for deductibility of Bad debts expense (PRC v. Commissioner):

(CUBANO)
o

Charged off - Amount must be charged off / against the books /

accounts of the taxpayer during the taxable year

lrbs_ssbc-r_2009

Uncollectible not only in the current taxable year but also in the
future

Business / Trade / Exercise of profession must arise from

Ascertained to be worthless during the taxable year

Not involving related taxpayers (remember: expenses involving

related taxpayers are not deductible)

Obligation must be subsisting, valid & enforceable

If bad debts were written off during a year when the corporation incurred net
loss, subsequent recovery of the bad debt does not result in taxable income,
because it will merely be a return on capital. (RR 5-99)

When a Bad Debt may be said to be worthless in accordance with sound

business Judgment: BIDS-SAID (RR 5-99)

Bankruptcy of the taxpayer / insolvency

Insufficiency of collaterals

Death of the debtor

Statute of limitations application of the

Success of judicial action

Amount if only P1K & debtor is residing faraway, the cost of collection will be
more than the amount

Injury that may be sustained by the debtor

Destruction of properties, documents & the like

Change of Taxpayers Status (Sec 35C): 8 (2 fr 1st par, 2 fr 2nd par, 4 fr last par)

Marriage of the taxpayer during the taxable year ineffectual due to the
uniform personal exemption

Additional dependent

Death of taxpayer P/E can be claimed by his estate

Death of spouse ineffectual due to the uniform personal exemption

Death of dependent as if the dependent died at the close of the taxable

year, by legal fiction

lrbs_ssbc-r_2009

Dependent becoming more than 21yrs of age during the taxable year as if
the dependent became more than 21yrs old at the close of the taxable year,
by legal fiction

Marriage of dependent during the taxable year (NEW!) as if the dependent

married at the close of the taxable year, by legal fiction (before: automatic
disqualification in the old tax code)

Gainful employment of dependent during the taxable year (NEW!) as if the

dependent became gainfully employed at the close of the taxable year, by
legal fiction(before: automatic disqualification in the old tax code)

Who can claim the P25K additional personal exemptions?

GR: Husband

X:

If the husband is jobless, and the wife is the breadwinner BBB (Bantay Bata
Brigade)

If the husband signs a waiver (made to sign by the wife):

o

IMUS (I am under the saya), RAM, RAMBO, UHAW (union of husbands

afraid of their wives), GHQ (Go Home Quickly),

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General Principles

25/05/2015 08:01:00

Sec 42: Income Tax Situs / Location / Place (last asked: 1957)

Services - where such services are performed / rendered

Sale of real property location of real property

Sale of personal property place of sale (GR; X: Gross Philippine Billings)

Interest income residence of the debtor (National Development Corporation

v Commissioner)

GENERAL PRINCIPLES

Scope Local Taxation (2007) / National Taxation

The power of taxation may be described as(CUPS)

Comprehensive The power to tax reaches to every trade / occupation, to

every object of industry, to every space of possession, and in case of failure to
discharge the same, may be followed by confiscation / forfeiture of property
(e.g. tax is imposable on exercise of profession, possession of property, use /
enjoyment of a right)
o

Consequences in case of failure to pay tax - Distrain of personal

property, Levy

Unlimited subject to inherent & constitutional limitations

Plenary

Supreme

Nature

Inherent

Simple: The power to tax co-exists with the State. It exists independently of
the Constitution. Such Constitutional limitations merely regulate imposed
limitations on the exercise of the power to tax. (p.14 footnote 17)

Authoritative: The power to tax is inherent in the sovereign state because it is

a necessary attribute of sovereignty. Without this power, no state can exist
nor enjoy. The power to tax proceeds from the theory that the existence of
the government is a necessity.
It is an essential and necessary attribute belonging as a matter of right to
every independent state or government. No state can exist w/o the means to
pay its expenses, hence the power to compel the payment of taxes
(Emergence of the power to tax)

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As a principal attribute of sovereignty, the exercise of the power to tax derives

its source from the very existence w/ the State, whose social contract with the
citizens obliges it to promote the common good.

It emanates from the

theory of necessity; without taxes government cannot fulfill its mandate of

promoting the general welfare and well-being of the people.

(Yuchengco, BPI

v. Commissioner)

Legislative

Why is the power to tax legislative in character: (p.15, footnote 18)

Simple: It is legislative because the power to tax is vested exclusively in the

law-making body of the State. It is Congress that has the power to enact tax
laws.

Impressive: It is based on the theory that taxes are a grant of the people,
and this grant shall be made by the immediate representatives of the people.
And where the people have laid this power, then it shall remain to be
exercised.

Explain the Symbiotic Relationship Theory between the State & its inhabitants

as espoused in Commissioner v. Algue

Despite the natural reluctance to surrender part of ones income to the taxing
authorities, every person who is able to must contribute his share in the
burden of running the government. The government for its part is expected
to re-spend in the form of tangible & intangible benefits intended to improve
the lives of the people, and enhance their material & moral values.

Ability to Pay

Taxes must be based on taxpayers ability to pay. Basis of equitable

taxation

Constitutional Basis: Art VI Sec 28 (1)

o

Uniform & equitable

The government on its part emphasizes the reciprocal duty of the

government

Purposes:

Primary: Raise Revenue

Secondary: PIER

lrbs_ssbc-r_2009

Protect local industries against unfair foreign competition (TCCP)

o

Countervailing and dumping duties

Inequalities (reduce) to promote social justice, it must adopt a system

which must impose just, fair & reasonable taxes: progressive system of
taxation

Encourage the growth of local industries& manufacturers Power to tax

includes the power to grant exemptions, tax amnesties, tax condonations

Regulatory purposes as an implement of the police power of the State

Does the power to tax include the power to destroy?

The power to tax does not include the power to destroy as long as the Court sits.

Reconcile these seemingly conflicting pronouncements / opinions (see

p.20 Dimaampao)

Justice Marshall is correct that the power to tax includes the power to destroy if

used validly as an implementing

Justice Holmes is also correct. If it is used solely for the purpose of

The power to tax may be used as an implement of the power of eminent domain.

Taking / expropriation of private property

o

E.g. RA 7432 as amended by RA 9257: Covered establishments are

mandated to grant 20% to Senior citizens. It is now a deductible tax,
no longer a tax credit.

For public use / purpose Has no concrete definition; Test cited: the ultimate
result, general welfare of the people. Special care and attention to Senior
Citizens may create social problems. Thus, it will in effect redound to the
general benefit of the people.
o

If the beneficiary is any of the following, it within the contemplation of

public purpose (Art XIII Sec 11 as cited in Carlos Rach Co. v.
Commissioner):

Elderly

Underprivileged

Women

Children

Disabled

Payment of just compensation Could be claimed as a deductible tax.

lrbs_ssbc-r_2009

Tax Credit v. Deductible Tax

Tax Credit

Reduces TPs tax liab

Reduces TPs taxable

Deductible Tax

income

City Trust v. CA 234 SCRA 348 improved version of the lifeblood doctrine

in Commissioner v. Molina, etc

Taxes are the lifeblood of the nation, through which government agencies
continue to operate, and which the State continues its functions

Is deficiency assessment a bar to a claim for refund?

Deficiency Assessment of a Claim for Refund To avoid multiplicity of suits &

prevent absurdity, the claim of the taxpayer that there is tax deficiencymust first be
settled.

Reason: An error / mistake is not binding on the government.

o

OMEN of government officials, BIR, agents of the government shall not

be binding upon it.

Omissions, mistake, error, negligence

City Trust - 499 SCRA 77: different answer no, it will not bar such claim for

refund. Claim for refund and protest are governed by different rules. If the government
made an assessment, and subsequently the taxpayer files a written claim for refund,

Fundamental Principles of a Sound Tax System (Abakada Guro v. Ermita)

FAT

Fiscal Adequacy -

Administrative Feasibility Art VI Sec 28 par 1

Theoretical Justice / Equality -

To be considered sound, legal / constitutional basis does not necessarily follow.

lrbs_ssbc-r_2009

Inherent Limitations on the Exercise of the Power of Taxation (PINET)

Public purpose (Senior Citizens Act)

International Comity

Non-delegation of the power to tax

o

Art VI Sec 28 Par 2: Tariff power of the president

Art X Sec 5: Power of LGUs

Exercised thru the local legislative council

Subject to guidelines & limitations (Memorize: Fundamental

principles of LG / RP Taxation: Sec 130 principles of local govt
taxation & Sec 198 fundamental principles of LG taxation,
LGC)

Imposes / provides 15 limitations (Sec 133)

Local government units cannot impose national, donors,

estate taxes

No tax may be imposed on instrumentality of the NG, its

agencies, LGUs

Based on sound public policy that the State may

not tax itself (no constitutional prohibition; mere
statutory provision in RA 7160, which Congress
can repeal)

Mactan Cebu Intl Airport Authority v. Marcos (261 SCRA

667, 1996): MCIAA is subject to RPT

Mla Intl Airport Auth case (495 SCRA): MIAA is exempt

from RPT on its airport lands & buildings

Distinctions: MCIAA is a GOCC. All exemptions

granted to GOCCs are withdrawn upon effectivity
of RA 7167 considered as an instrumentality.

MIAA is not an instumentality of the national

government is not qualified under Sec 2 Par XIII
of the Revised Admin Code.
o

Meaning of instrumentality v GOCC

MIAA v. Pasay City

Justice Tinga & Justice Nachura:

Adopted the majority view. MIAA is not

considered as a GOCC (Sec 2 Title X Definition
of instrumentality)

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Now: Exempt from R/PT.

Instrumentalities of National Government

Bangko Sentral ng Pilipinas

UP

PPA

MCIAA instrumentality of the government.

Therefore, exempt

Exemption from tax of Government

Territoriality

Tax Evasion (Estate of Benigno Toda Jr. v. Commissioner) 3 Factors that

concurs for tax evasion to arise:

Unlawful

State of mind must be coupled with bad faith, evil, deliberate

End to be achieved reduce taxpayers liability / evade payment of tax

Double Taxation may either be direct or indirect

Direct double taxation is prohibited.

o

Same

Taxpayer

Taxing authority

Taxable period

Nature of tax

Indirect double taxation is allowed.

o

If taxing authorities are different

International Juridical Double Taxation

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Different taxing authority

Same

Taxpayer

Taxable period

Subject: e.g. Royalties

Methods to mitigate the harshness of double taxation / avoid its

occurrence:

Tax credit method, as embodied in a tax treaty Sec

34C item 3

Exemption method reciprocity

Vanishing deduction - Method under the law on estate

tax designed to mitigate the harshness of double
taxation Requisites:

Death of present decedent must have occurred

within 5 yr period from previous decedent

Identity of the property with that inherited from

prior decedent

Previous taxation

Inclusion of the property in the prior estate

No previous VD

GR: Exemptions are strictly construed against the taxpayer

X: Liberally construed in favor of the TP

Special persons under special circumstances

Agency of the government (Maceda v. Macaraig)

Law provides for liberal interpretation

Traditional exemptees: non-stock, non-profit organizations (e.g. Charitable,

Religious, Philanthropic organizations)

GR: Taxes are not subject to set-off (Mambulao Doctrine 1961, Francia v. Sia

doctrine 1997)

Taxes are not subject to set-off / compensation. A pending claim for tax
credit / tax refund can not be set off against the tax deficiency of the
taxpayer. It may only be allowed if the claim is demandable, due and
liquidated. (Phoenix Mining v. Commissioner)

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X: There was already a law appropriating an amount in payment of the claim of

the TP. [TP and government are not considered Drs-Crs of each other.] (Domingo v.
Garlitos, 1962)

City Trust Case

Taxpayers Suit (Abaya v. Ebdane Jr)

Requires disbursement / illegal expenditure of public fund derived from taxes

came from contributions (Marcos case 65 SCRA 624)

no need to present proof of direct injury, for as long as evidence of illegal

disbursement / expenditure of public fund, TP suit will lie (Maceda case)

illegal contracts which may involve disbursement of public fund (Abaya v.

Ebdane)

Provisions of the Constitution Relative to the Power of Taxation:

REVENUE-LESS-DAN-PTN

Religious privity must be respected free exercise of religious profession &

worship (Art III Sec 5)

Equal protection clause (Art III Sec 1)

Veto power of the president re: appropriation, revenue & tariff bills (Art VI
Sec __, Par 2)

Exemption from property taxation of REC: religious educational charitable

institutions, provided actually, directly & exclusively used for REC purposes
(Art VI, Sec 28 par 3)

Non-impairment clause (Art III Sec 10)

Uniformity of taxation (Art VI Sec 28 par 1)

Exemption shall be approved by majority of all members of Congress

(absolute majority - according to Art VI Sec 28 par 4)

Local government units are constitutionally conferred / constitutionally

delegated with the power of taxation (Art X Sec 5)

Exemption from income tax, property tax, customs duties of non-stock, nonprofit educational institutions (Art XIV, Sec 4 Par 3 of the Constitution)

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Special Fund collected, levied under special law shall only be used for such
purpose (prevents juggling of funds Art VI Sec 29 par 3)

Supreme Court has the jurisdiction to review, reverse, affirm on appeal

decisions of lower courts involving legality, validity of tax, imposts,
assessments or penalties (Art VIII Sec 5 (2b))

Due Process must be observed in the imposition of tax (Art III Sec 1)

Appropriation, revenue and tariff bills shall originate exclusively in the house
of representatives. (Art VI Sec 24)

No public money / property shall be used directly / indirectly for religious

purpose. (Art VI Sec 29 par 2) inline with separation of church and state

Press (freedom of) Art III Sec 4

Tariff power of the president (Art VI Sec 28 Par 2)

Non-imprisonment: No person shall be imprisoned for non-payment of poll tax

/ community tax certificate under Sec 156 RA 7167 (Art III Sec 20)

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