PM Reyes Bar Reviewer On Taxation I

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

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?
--------------------------------------------------------------D. Power of Taxation compared with other

powers
---------------------------------------------------------------
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.
Q: Differentiate the power of taxation from

police power and the power of eminent
domain.
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.
--------------------------------------------------------------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.

See table below.
TAXATION
EMINENT
DOMAIN
POLICE
POWER
Authorit
y
who
exercise
s
the
power
Only by the
government
or
its
political
subdivisions
May
be
exercised by
(1)
government
or
political
subdivisions
OR
(2)
granted
to
public utilities
Only
by
government
or its political
subdivisions
Purpose
The property
is taken for
the support
of
the
government
The property
is taken for
public
use
and must be
compensated
The use of
the property
is regulated
for promoting
the general
welfare and
is
not
compensable
Persons
affected
Operates on
a community
or class of
individuals
Operates on
an individual
as owner of a
particular
property
Operates on
a community
or class of
individuals
Effect
The money
contributed
becomes
part of the
public funds
There is a
transfer
of
the right to
property
There is no
transfer
of
title. At most,
there
is
restraint on
the injurious
use
of
property
Benefits
received
It
is
assumed
that
the
He receives
the
market
value of the
The person
affected
receives
Page 2 of 158

individual
receives the
equivalent
of the tax in
the form of
protection
and benefits
he receives
from
the
government
property
taken
from
him
indirect
benefits
as
may
arise
from
the
maintenance
of a healthy
economic
standard of
society
Amount
of
impositi
on
Generally,
there is no
limit on the
amount
of
tax that may
be imposed
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
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
Relatively
free
from
constitutional
limitations; it
is superior to
the
impairment of
contract
provision
--------------------------------------------------------------D. Purposes of taxation

1. Revenue-raising
2. Non-revenue/special or regulatory
--------------------------------------------------------------Q: What are the purposes of taxation?1
_________________________________________
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
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.
Page 3 of 158

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.
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.
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: 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?
Q: How do you determine if an imposition is

a tax or a (regulatory) fee?
No. Jurisprudence provides that such exactions are

considered regulatory fees in light of their purpose.
In determining whether an imposition is a tax or a

regulatory fee, one must inquire into the following:
Some cases:
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?

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

an exercise of the power of taxation but an exercise

of the police power to aid and support the sugar
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.
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.

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
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.
Page 5 of 158

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.
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

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: 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

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.
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
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.
Page 7 of 158

--------------------------------------------------------------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]
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.

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.
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

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.
--------------------------------------------------------------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
--------------------------------------------------------------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
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.
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

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]
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.
--------------------------------------------------------------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: Can tax statutes be applied retroactively?

Yes. While, as a general rule, taxes must only be
imposed prospectively, taxes, as an exception, may
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.
--------------------------------------------------------------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.
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

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.
--------------------------------------------------------------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: 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]
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

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 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])
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 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

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])
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])
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
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
--------------------------------------------------------------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: 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

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.
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.
Q: In the refund of indirect taxes, who is the

proper party to claim the said refund?
_________________________________________
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]
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.
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.

Page 14 of 158

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.
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
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
Page 15 of 158

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 failure
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.
taxes
from
See case digest below.
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.
Page 16 of 158

--------------------------------------------------------------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.
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: 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: 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?

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: 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: 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
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.
Page 17 of 158

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.
--------------------------------------------------------------a) Meaning of exemption from taxation

---------------------------------------------------------------
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.
--------------------------------------------------------------b) Nature of tax exemption

--------------------------------------------------------------Q: What is the nature of tax exemptions?
Q: What is a tax exemption?
Tax exemptions are:
A tax exemption is defined as a grant of immunity,

express or implied, to particular persons or
corporations from the obligation to pay taxes.
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.
Q: Enumerate the instances where tax

exemptions may be granted other than by
act of Congress:

--------------------------------------------------------------c) Kinds of tax exemptions

--------------------------------------------------------------Q: What are the kinds of tax exemptions?
See table.
Page 18 of 158

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.
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
Partial
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
Impersonal
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
--------------------------------------------------------------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.

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
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.
--------------------------------------------------------------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

the abolition of franchise tax on telecommunications

companies in accordance with the VAT law.
amount equal or greater than the tax being collected

(PHILEX MINING V. CIR [294 SCRA 687]).
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.
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])
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.
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
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 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.
Page 20 of 158

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

prospective
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.
--------------------------------------------------------------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
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: 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

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])
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

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
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

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: What is the legislative grace concept?
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
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
Page 23 of 158

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: 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.
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])
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.

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.
--------------------------------------------------------------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.
--------------------------------------------------------------e) Non-retroactive application to taxpayers

--------------------------------------------------------------Q: Can BIR
retroactively?
issuances
be
applied
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
Page 24 of 158

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: 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
Poverty Eradication and Alleviation Certificate (PEAce) Bond

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.
--------------------------------------------------------------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

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.
--------------------------------------------------------------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

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)
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.
Page 26 of 158

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.
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])
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).
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.
--------------------------------------------------------------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
In a turn key contract, the contractor is entrusted to design,

construct, commission and handover the project to the employer
in a completed state.
Page 27 of 158

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.
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.)
--------------------------------------------------------------(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?

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.
--------------------------------------------------------------(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.
Page 28 of 158

--------------------------------------------------------------(c) Situs of property taxes

(1) Taxes on real property
(2) Taxes on personal property
---------------------------------------------------------------
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?
Q: What is the situs of taxes on real

property?
Same rule applies to both.
The situs of taxes on real property is where the

property is located (lex situs)
For citizens, whether resident or non-resident,

and resident aliens: taxed on properties wherever
situated.
Q: What is the situs of taxes on personal

property?
For non-resident aliens: taxed on properties

situated in the Philippines.
If the personal property is tangible: where the

property is physically located although the owner
resides in another jurisdiction
--------------------------------------------------------------(e) Situs of business taxes

---------------------------------------------------------------
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
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?
--------------------------------------------------------------(d) Situs of excise taxes

(1) Estate Tax
(2) Donors Tax
---------------------------------------------------------------
The situs of sales of personal property is the place

where the sales are perfected and consummated
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.
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
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.

Q: What is the situs of VAT?
--------------------------------------------------------------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.
Page 29 of 158

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.
--------------------------------------------------------------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
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
Page 30 of 158

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)
--------------------------------------------------------------(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.
--------------------------------------------------------------(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])

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.
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.
--------------------------------------------------------------(iii) Grant by Congress of authority to the

President to impose tariff rates
(xi) Flexible tariff clause
--------------------------------------------------------------Article VI.
Section 28.
_________________________________________
9
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
Page 31 of 158

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.
--------------------------------------------------------------(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.
--------------------------------------------------------------(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: 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

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.
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]
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: Does the phrase actually, directly, and

exclusively used mean that the exemption
Page 32 of 158

shall
only
cover
property
indispensable to the institution?
actually
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])
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.
Q: The Philippine Lung Center leased

portions of its real property out for
commercial purposes. Are these exempt
from real property taxes?
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
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?
CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER

26, 2012]
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.
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
_________________________________________
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
Page 33 of 158

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).
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
_________________________________________
11
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.

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.
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.
---------------------------------------------------------------
Page 34 of 158

(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.
--------------------------------------------------------------(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.
--------------------------------------------------------------(viii)
Presidents
veto
power
on
appropriation, revenue, tariff bills
--------------------------------------------------------------Article VI.

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.
--------------------------------------------------------------(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,
Page 35 of 158

preacher, minister, or dignitary is assigned to the

armed forces, or to any penal institution, or
government orphanage or leprosarium.
--------------------------------------------------------------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)
--------------------------------------------------------------(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: 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
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.
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.
Page 36 of 158

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 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 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 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
_________________________________________
_________________________________________
12
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.
Page 37 of 158

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.
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.
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

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.
--------------------------------------------------------------(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: Is a tax exemption embodied in a

legislative franchise a contractual tax
Page 38 of 158

exemption (such that it impairs the

obligations of contracts when revoked)?
Q: What are the characteristics or elements

of a tax? (essential elements of a tax)
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].)
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.
--------------------------------------------------------------K. Definition, nature and characteristics of

taxes
--------------------------------------------------------------Q: Define taxes.
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.
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.

Page 39 of 158

--------------------------------------------------------------M. Tax as distinguished from other forms of

exactions
1. Tariff
2. Toll
3. License fee
4. Special assessment
5. Debt
----------------------------------------------------------------------------------------------------------------------------1. Tariff
---------------------------------------------------------------
by
the
government
--------------------------------------------------------------3. License Fee

--------------------------------------------------------------Q: Distinguish a tax from a license fee.
See table below.
for
LICENSE FEE
Imposed for regulatory
purposes
Basis
Imposed under
the power of
taxation
Imposed under the

police power of the
State
Amount
No limit as to
the amount of
tax
Amount of license fee

that can be collected
is limited to the cost of
the license and the
expenses of police
surveillance
and
regulation
Time of
payment
Normally paid
after the start
of business
Normally paid before

the commencement of
the business
Effect of
nonpayment
Failure to pay
the tax does
not make the
business illegal
Failure to pay the

license fee makes the
business illegal
Purpose
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.
--------------------------------------------------------------2. Toll
---------------------------------------------------------------
TAX
Imposed
revenue
purposes
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
Basis
A demand of
sovereignty
A
demand
proprietorship
Amount
No limit as to
the amount of
tax
Amount
of
toll
depends upon the
cost of construction
or maintenance of
the
public
improvement used
Authority
May
imposed
May be imposed by
the government or
Definition
be
only

of
private individuals or
entities
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
Page 40 of 158

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?
Q: Does the above rule apply to all types of

license fees?
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: 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."
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.
--------------------------------------------------------------4. Special Assessment

--------------------------------------------------------------Q: Distinguish
assessment.
tax
TAX
special
SPECIAL
ASSESSMENT
An
enforced
proportional
contribution from
owners of lands
especially
or
peculiarly benefited
by
public
improvements
Definition
Enforced
proportional
contribution from
persons
and
property
Basis
Based
necessity
Subject
Levied on:
(1) persons
(2) Property
(3) Acts
Levied only on land
Scope
Has
It
_________________________________________
14
This shouldnt be a type of license fee. It is instead a license

tax.

See table below.
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
from
on
general
Based wholly on
benefits
is
exceptional
Page 41 of 158

Person
Liable
application
both as to time and

place
It is a personal
liability of the
taxpayer
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
See THE APOSTOLIC PREFECT OF THE MOUNTAIN

PROVINCE V. TREASURER OF BAGUIO [71 PHIL. 547]
Q: Distinguish a tax from a penalty.
--------------------------------------------------------------5. Debt
---------------------------------------------------------------
Definition
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
Purpose
Intended
to
raise revenue
Designed
to
regulate conduct
Authority
May
be
imposed only
by
the
government
May be imposed by
(1) Government; or
(2)
Private
individuals
or
entities
Q: Distinguish a tax from a debt.

See table below.
Basis
Effect
nonpayment
Mode
payment
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
Assignability Not
assignable
Interest
Authority
Can
assigned
be
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 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.
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.
Page 42 of 158

power (e.g. real estate tax)
Q: Distinguish a tax from revenue

Revenue is a broad term that includes not only
taxes but income from other sources as well.
--------------------------------------------------------------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
or
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)
Excise
privilege tax
Taxes assessed on all

property or all property of a
certain class within the
jurisdiction of the taxing

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)
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)
Indirect
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)
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.

according to the determination of amount or
tax rates?
See table below.
Specific
Property Tax
or
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

assessment beyond a listing

and classification of the
subjects to be taxed (e.g.
taxes on distilled spirits)
Ad Valorem
Mixed
tax)
Regressive
Taxes imposed where the tax

rate decreases as the tax
base increases.
Tax upon the value of the

article or thing subject of
taxation (e.g. real estate tax)
Mixed
The tax rates are partly

progressive
and
partly
regressive
A choice between ad valorem

or specific depending on the
condition attached
Proportionate
The tax rates are fixed (in

amounts or in percentage) on
a flat tax base) (e.g. real
estate 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)
Special,
regulatory,
sumptuary
Taxes levied for a special

purpose
(e.g. protective
tariffs, custom duties)
or

according to the scope or imposing
authority?
See table below.
National
(internal
revenue taxes)
Taxes levied by the National

Government (e.g. national
internal revenue taxes)
Local
(real
property
tax,
municipal tax)
Taxes levied by the local

governments subject to such
guidelines and limitations as
the Congress may provide
(e.g. real estate 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

--------------------------------------------------------II. NIRC
----------------------------------------------------------
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.
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.
The current method of taxation under the Tax Code

belongs to a system which is partly scheduler and
partly global.
---------------------------------------------------------A. INCOME TAX

----------------------------------------------------------
Q: How do you distinguish schedular

treatment from global treatment as used
in income taxation?
--------------------------------------------------------------1. Income Tax Systems

a) Global Tax System
b) Schedular Tax System
c) Semi-schedular or semi-global tax
system
---------------------------------------------------------------
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.
Q: What are the kinds of income tax

systems?
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]).
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.
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
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. Features of the Philippine Income Tax

Law
a) Direct tax
b) Progressive
c) Comprehensive
d) Semi-schedular or semi-global tax
system
---------------------------------------------------------------
Page 45 of 158

Q: What are the features of the Philippine

Income Tax system?
4. Types of Philippine Income Tax

---------------------------------------------------------------
The Philippine tax system is:
Q: What are the types of Philippine Income

Tax (under Title II of the NIRC)?
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.
--------------------------------------------------------------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
--------------------------------------------------------------PIERRE MARTIN DE LEON REYES

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.
--------------------------------------------------------------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.
Page 46 of 158

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.
--------------------------------------------------------------a) Individual Taxpayers

----------------------------------------------------------------------------------------------------------------------------(i) Citizens
(a) Resident citizens
(b) Non-resident citizens
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

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)
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

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.
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

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:
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. 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.
Q: When is the residence of an alien

considered lost?
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.
--------------------------------------------------------------(iii) Special class of individual employees

(a) Minimum wage earner
--------------------------------------------------------------Section 22(GG) and (HH), Tax Code
_________________________________________
15
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.
Page 49 of 158

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

---------------------------------------------------------------
Q: Is the tax imposed on trusts applicable to

all trusts?
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)
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)
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
_________________________________________
--------------------------------------------------------------(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
_________________________________________
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.
Page 50 of 158

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])
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
Non-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: 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
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: 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])
Page 51 of 158

--------------------------------------------------------------(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.
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. 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: 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?
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
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.
Absent one of the requirements, the joint venture

formed for construction purposes shall be
considered a taxable corporation.
--------------------------------------------------------------c) Partnerships24
f) Co-ownerships
---------------------------------------------------------------
Q: May joint ventures involving foreign

contractors be treated as a non-taxable
corporation?
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.
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)
Page 52 of 158

income tax. Is the co-ownership taxable as a

corporation?
Q: Is a partnership liable for income tax?

Yes. The term corporations includes partnerships,
no matter how created or organized.
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
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

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: 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])
Q: A and B inherited properties. They did

not partition the same and instead invested
them to a common fund and divide the
Page 53 of 158

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.
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.
--------------------------------------------------------------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
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])
--------------------------------------------------------------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.
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.
Page 54 of 158

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.
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
Non-Resident
Citizen
taxable only on income derived from

[By definition of a non-resident
citizen, this applies to an overseas
contract worker (a citizen working
and deriving income from abroad)]
--------------------------------------------------------------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.
--------------------------------------------------------------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.
Domestic
corporation
taxable on all income derived from

sources within and outside the
Philippines
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.
Foreign
corporation

(This applies whether the foreign
corporation is engaged or not in
trade or business in the Philippines)
Alien (whether
resident or nonresident)
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.

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.
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
Page 55 of 158

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
_________________________________________
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.
Page 56 of 158

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.
Q: When is income considered received for

income tax purposes?
(see Section 52, RR No. 2)
Q:
Distinguish
actual
constructive receipt.
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.
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
1. If actually or physically received by the

taxpayer (actual receipt)
2. If constructively received by the taxpayer
(constructive receipt)
_________________________________________
26
receipt
_________________________________________
27

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
Page 57 of 158

services they are plainly

compensation which is taxable
income COMMISSIONER V. LABUE
[351 US 243]
(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.
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
Economic
Benefits
Test/Doctrine
of
Proprietary Interest
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

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
Flow of Wealth Test
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.
--------------------------------------------------------------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.

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

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: Is a corporation required to use only the

calendar year?
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)
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: In what instances shall taxable income be

computed on the basis of calendar year?
Q: What are two main accounting methods

that may be used by taxpayers?
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
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.
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)

Note: Other methods would include (1) Installment

method; (2) Percentage of Completion Method and (3)
30
Crop year basis.
Q: Distinguish cash method from accrual

method of accounting.
_________________________________________
30
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.
Page 59 of 158

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.
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 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
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: 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.
--------------------------------------------------------------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
Page 60 of 158

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.
--------------------------------------------------------------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
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)
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 source. This indicates
that non-exclusive nature of the enumeration in Section
32(A).
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.
--------------------------------------------------------------c) Gross income vis--vis net income vis-vis taxable income

--------------------------------------------------------------Read Section 31, Tax Code
---------------------------------------------------------------

Page 61 of 158

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)
Taxable Income
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
Net income
This is gross income less the

allowable deductions.
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
Corporation
All Income
Less: Exclusions
All income
Less: Exclusions

= 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
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.
--------------------------------------------------------------d) Classification of income as to source

--------------------------------------------------------------Q: What are the classifications of income as
to source?
1. Gross income and taxable income from
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.
Page 62 of 158

--------------------------------------------------------------(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
---------------------------------------------------------------
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.
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.
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.
Q: Define compensation for income tax

purposes.
(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.
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.
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: What
services?
constitutes
compensation
for
Compensation for services, under an employeremployee relationship, includes payments in

whatever form paid including but not limied to:
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
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:
32
1. Fees
Page 63 of 158

Q: If the compensation is paid after

separation, will it still form part of
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)
34
Q: May compensation earners avail of

deductions as to their compensation
income?
Note: PERA contributions from an employer to an

employee do not form part of his gross income (see RR
17-2011 and RA 9505).
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?
Q: Are living allowances

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 13th month pay and other benefits

included in compensation income?
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 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
_________________________________________
34
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.
Page 64 of 158

such payments. They constitute as income

payments or compensation for beneficial services
provided to members and tenants. [RMC 65-2012]
10. Life or health insurance and other non-life

insurance premiums or similar amounts
in excess of what the law allows.
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]
Q: What is the rationale behind the

Fringe Benefits Tax?
--------------------------------------------------------------(ii) Fringe benefits

(a) Special treatment of fringe benefits
(b) Definition
(c) Taxable and non-taxable fringe benefits
Q: What is a fringe benefit?
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.
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:
What is a fringe benefit tax?
1.
2.
3.
4.
(see Section 33, Tax Code and RR 3-98 [JANUARY

1, 1998])
5.
6.
7.
8.
9.
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

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.
_________________________________________
35
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
Page 65 of 158

If the recipient of
the fringe benefit is
a rank and file
employee and the
benefit is not taxexempt
the value of such fringe

benefit shall form part of
compensation income
if the recipient of
the fringe benefit is
not a rank-and-file
employee and the
benefit is not taxexempt
the same shall not be

included in the compensation
income. A fringe benefit tax
is levied upon the employer.
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?
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
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: 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.)
(see Section 2.33(D)(1), RR 3-98]
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
_________________________________________
38
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.
Page 66 of 158

the employee in the performance of his duties

subject to the following conditions
be taxable as fringe benefits (see Section 2.33(D),

RR No. 3-98)
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
Q: Are interest on loans obtained by the

employee from the employer subject to
fringe benefit tax?
(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
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 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
_________________________________________
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: 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)
39
Dont ask me why theres a distinction. I cant fathom why.

Thats what the law says!

Page 67 of 158

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.
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: 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

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: 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
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]
Page 68 of 158

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.
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
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].

--------------------------------------------------------------(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.
--------------------------------------------------------------(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.
--------------------------------------------------------------(v) Income from dealings in property

(a) Types of properties
(b) Types of gains from dealings in property
---------------------------------------------------------------
Page 69 of 158

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.
--------------------------------------------------------------(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: 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.

(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).
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

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?
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.
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])
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: What is the tax consequence if the

property is sold by a seller-corporation
engaged in real estate business?
General Rule: No, the property is still an ordinary

asset (see Section 3(e), RR No. 7-2003)
50
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
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: 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?
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.
Page 71 of 158

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]
--------------------------------------------------------------(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
---------------------------------------------------------------
ordinary gains taxation
(NELCO)
Deductions are usually

allowed
for
ordinary
gains
Generally no deductions
are allowed from capital
gains
Ordinary
gains
are
subject to the graduated
rates
or
corporate
income tax rate as the
case may be
Capital gains are subject

to final taxes
Ordinary income is to be
included in the annual
income tax return
Income from
capital
gains
tax
are
not
included in the annual
income tax return
Q: Distinguish actual gain from presumed

gain
Read Section 22(Z), Section 39(A)(2), Tax

Code
Actual gain
Presumed gain
Q: Distinguish ordinary gain from capital

gain.
There is actual gain

whenever an individual
or
corporation
sold
shares of stock treated
as a capital asset
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
Actual gain arrived at by

deducting the cost or
adjusted basis of the
property sold from the
amount realized
Presumed gain does not

consider the cost of the
property sold
Ordinary Gain
Capital Gain
any gain from the sale or

exchange of property
which is not a capital
asset or property.
The gains realized from

the sale, exchange, or
other disposition of the
properties of a taxpayer
classified
as
capital
assets.
Derived from property

used
in
trade
or
business
Derived from property

not used in trade or
business whether or not
connected thereto
Ordinary gains are not

adjusted by the holding
period in Section 39(B)
Some types of capital

gains are adjusted by
the holding period
in
Section 39(B)
Only ordinary losses

may be deduced from
ordinary gains
Ordinary losses may be

deducted from certain
types of capital gains
The concept of net

operating loss carryover
(NOLCO) applies to
The concept of net loss

carryover
applies
to
capital gains taxation

Q: Distinguish long-term capital gain v.

short-term capital gain.
Short-term capital gain
Long-term capital gain
If the capital asset has

been held for not more
than 12 months
If the capital asset has

been held for more than
12 months
Page 72 of 158

Q: Distinguish net capital gain and net

capital loss
Net capital gain
Net capital loss
means the excess of the

gains from sales or
exchanges of capital
assets over the losses
from such sales or
exchanges
means the excess of the

losses from sales or
exchanges of capital
assets over the gains
from such sales or
exchanges.
--------------------------------------------------------------(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
_________________________________________
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.
51
The holding period is material only if the capital asset is sold by

an individual. This does not apply to corporations.

Page 73 of 158

Q: What is the net loss carry-over rule

(NELCO)?
Read Section 24(D), Section 25(A)(3),

Section 25(B), Section 27(D)(5), Tax Code
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.
Q: What is the rule on capital gains from

dispositions of real property?
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.
Q: Distinguish Net Loss Carry-over (NELCO)

from Net Operating Loss Carry-Over
(NOLCO).
NELCO
NOLCO
NELCO is a concept in
capital gains taxation
NOLCO is a concept in
ordinary income taxation
NELCO is enjoyed only by

individuals, not corporations
NOLCO is enjoyed by
corporations,
not
individuals
May be availed of only

during the succeeding year
May be availed over a

period three years
--------------------------------------------------------------(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.
--------------------------------------------------------------(7) Dealings in real property situated in the

Philippines
(9) Sale of principal residence
---------------------------------------------------------------

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: 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]
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

(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%.
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
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.

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: 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
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.
Page 75 of 158

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])
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.
_________________________________________
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 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.
56
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

_________________________________________
57
The foreclosure sale in the case on which the question is based

took place prior to the effectivity of the Act.
Page 76 of 158

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.
--------------------------------------------------------------(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.

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])
Page 77 of 158

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.
Q: How do you determine the tax base of

disposition of stock?
Listed
and
traded through
the PSE
FMV is the actual selling price
Sales of stock
listed but not
traded through
the PSE
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
Sales of stock
not listed and
not
traded
through the PSE
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.
(See RR 06-2008 [APRIL 22, 2008])
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
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: If the share of stock is traded through the

stock exchange, what tax is applicable?
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.
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: What are exempted from capital gains tax

on stock transactions?
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

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.
--------------------------------------------------------------(5) Computation of the amount of gain or

loss
---------------------------------------------------------------
(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.
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?
--------------------------------------------------------------(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
Note: Amount realized is the sum of the money received

plus the fair market value of the property (other than
money received).

The loss shall be the excess of the basis or

adjusted basis for determining loss over the amount
realized.
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
The basis is the cost of the property
Inheritance
The FMV as of the date of acquisition

if the same was acquired
Gift
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
Page 79 of 158

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. Shares of stock received by
b.
Stocks
and
Securities
acquired
in
Wash Sales
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
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]
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
(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)
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.
--------------------------------------------------------------(c) Recognition of gain or loss in exchange

of property
(1) General rule

Page 80 of 158

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
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:
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: 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
Page 81 of 158

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.
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

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: 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
Page 82 of 158

corporation entitled to vote. Is the exchange

tax-exempt?
transfer to the Transferee of all the rights, privileges,

and liabilities of the Transferor in the case of de
facto merger.
58
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.
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 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
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 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/
Note that in this BIR Ruling, there were 6 transferors,

Page 83 of 158

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.
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
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!
--------------------------------------------------------------(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
Page 84 of 158

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.
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)
--------------------------------------------------------------(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: 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)
--------------------------------------------------------------(b) Dividend Income

(1) Cash dividend
(2) Stock dividend
(3) Property dividend
(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: 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.
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: 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

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.
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
_________________________________________
59
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.

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: 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.
--------------------------------------------------------------(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
---------------------------------------------------------------
Page 86 of 158

Q: Define rental income
Q: Are improvements made by lessees

taxable as income on the part of the lessor?
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.
--------------------------------------------------------------(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:
Vessel
Aircraft,
machineries
and
other
equipment
Other assets
Non-Resident
foreign
corporation
4.5%
7.5%
Non-Resident
alien
32%
25%
25%
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.
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)
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.
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.
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.

Page 87 of 158

(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
--------------------------------------------------------------(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
--------------------------------------------------------------(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.
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
--------------------------------------------------------------(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.
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

the transaction has the effect of the payment of a

dividend. (see Section 50, RR No. 2).
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.
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
deductions, when refunded or credited, are not

declarable for income tax purposes (income tax,
estate tax, donors tax, and special assessments)
to gross income in recognition of the intent of

Congress to tax all gains except those specifically
exempted.
--------------------------------------------------------------(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.
--------------------------------------------------------------(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]).
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
Page 89 of 158

Q: What are the source of income rules in

the Philippines? (Section 42, Title II, NIRC)
Interests
Services
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.
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
It is income without the Philippines if

the residence of the obligor is
abroad.
Dividends
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

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)
Philippines if rents and royalties are
derived from property located in the
Philippines
Generally, a dividend has its source

in the country where the corporation
paying the dividend is incorporated.
(residence of the corporation
paying the dividend)
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.
Income from services is sourced in

the country where the services are
performed. (place of performance
of the service)
Sale
of
Real
Property
Income from the sale of real

property is sourced in the country
where the real property is located.
(location of real property)
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

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.
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: 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
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.
62

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: 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, 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?
Page 91 of 158

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]).
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: Quill Corp is an office supply retailer with

no physical presence in North Dakota but it
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: 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,
_________________________________________
65
_________________________________________
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.
Page 92 of 158

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.
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 lookthrough 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.

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])
--------------------------------------------------------------(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
---------------------------------------------------------------
Page 93 of 158

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)
--------------------------------------------------------------(1) Rationale for the exclusions

(2) Taxpayers who may avail of the
exclusions
(3)
Exclusions
distinguished
from
deductions and tax credit
---------------------------------------------------------------
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
Tax Credits
Amounts that
are
not
included
in
gross income
Amounts
subtracted from
pertinent items
of gross income
in
order
to
arrive
at
taxable income
upon which the
tax
rate
is
applied
Amounts
subtracted from
the computed
tax in order to
arrive at taxes
payable
Not income
Part of income
Are taxes that

are
not
collected
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.
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.
Q: Distinguish exclusions from gross

income from deductions from gross income.
Exclusions
Deductions
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
Amounts which the law

allows to be subtracted
from gross income in
order to arrive at net
income

--------------------------------------------------------------(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: What income is excluded from gross

income by the Constitution?
The assets and revenues of a non-stock, nonprofit private educational institution used
Page 94 of 158

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.
--------------------------------------------------------------(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
---------------------------------------------------------------
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.
72
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,
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:
Read Section 32(B), Tax Code

Q: What are deemed excluded from (gross)
income under the Tax Code?
_________________________________________
As provided in Section 32(B), NIRC, the following
items shall not be included in gross income and shall
be exempt from income tax
71
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
It is considered as indemnity rather than income

72
They are instead subject to estate or gift taxes (see PIROVANO
VS. COMMISSIONER [JULY 31, 1965])

73
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.
Page 95 of 158

i.
ii.
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. 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
c.
d.
e.
exempt,
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

b.
f.
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

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
--------------------------------------------------------------(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: 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
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.
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.
--------------------------------------------------------------(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.
Page 97 of 158

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.
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?
_________________________________________
74
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)

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: 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.
--------------------------------------------------------------(f) Income exempt under tax treaty

---------------------------------------------------------------
Page 98 of 158

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
--------------------------------------------------------------(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?
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
For the retirement benefits to be exempt from

income tax, the taxpayer is burdened to prove the
concurrence of the following elements:
Note: In other words, the separation must be involuntary

in order for it to be excluded from gross income.
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;
Q: A government employee, retired from

service. Upon retirement, he received,
among other benefits, terminal leave pay
which the CIR withheld a portion allegedly

Page 99 of 158

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]).
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.
--------------------------------------------------------------(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:

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: 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;
Page 100 of 158


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.
--------------------------------------------------------------(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
---------------------------------------------------------------
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]
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
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: Distinguish
exemption
deduction
from
an
Deduction
Exemption
It is a subtraction
It is an immunity or
privilege, a freedom from
a charge or burden to
which others are
subjected to
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 generally a receipt
which is excluded from
taxable income
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

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: 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
_________________________________________
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.
Page 101 of 158


personal and additional exemptions and premium

payments on health and hospitalization insurance.
resident aliens
exemptions
On
incomes
(other
than
compensation
income)
of
citizens, whether
resident
or
nonresident, and
resident aliens
1) Itemized deductions or
optional standard deduction
On income of
non-resident
aliens engaged in
trade, business,
or profession in
the Philippines
1) Itemized deductions but not

allowed
optional
standard
deduction

3) Personal
exemptions
and
additional

3) Personal
exemptions
reciprocity
and additional
subject
to
Non-resident
alien individuals
not engaged in
trade or business
in the Philippines
Their
income
(whether
compensation or other income)
is subject to tax on their gross
income. Hence, no deductions
or exemptions
Domestic
Corporations and
Resident foreign
corporations
1) Itemized deductions or
optional standard deduction
Non-resident
foreign
corporation
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
--------------------------------------------------------------(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,
2. Deductions must be supported by adequate
receipts or invoices
3. Additional
requirement
relating
to
withholding
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!
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

Page 102 of 158


--------------------------------------------------------------(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
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
Sale of stock in
trade by a real
estate dealer and
dealer
in
securities
Sale of services
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

to sellers of inventory of goods.

Their entire gross receipts are
treated as part of income.
--------------------------------------------------------------(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.
Read Section 34 last , Tax Code
Page 103 of 158


--------------------------------------------------------------(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
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?
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
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.
_________________________________________
Q: Discuss the substantiation rule.
77
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.

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
Page 104 of 158


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.
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: 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
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
In the latter case, he may claim depreciation allowance

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: 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: 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

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.
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.
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.
--------------------------------------------------------------2) Salaries, wages and other forms of

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
payments purely for the personal services actually

rendered.
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.
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)
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

relation to the business of the particular

taxpayer.
the deductibility of bonuses is that they are given for

personal services actually rendered.
(see KUENZLE & STREIFF V. COLLECTOR [106 PHIL.

355]; C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF
INTERNAL REVENUE [NOVEMBER 28, 1969])
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?
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: 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

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
--------------------------------------------------------------(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

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?
--------------------------------------------------------------(5) Rentals and/or other payments for

use or possession of property
---------------------------------------------------------------
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)

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
--------------------------------------------------------------(6) Repairs and maintenance

---------------------------------------------------------------
--------------------------------------------------------------(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
2. Expenses paid in the operation and repair of

3.
Q: Discuss the deductibility of repairs

expenses.
4.
5.
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
6.
--------------------------------------------------------------(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)

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
Page 108 of 158


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.
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.
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
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.
--------------------------------------------------------------(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: 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

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.
--------------------------------------------------------------(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
(2) Non-deductible interest expense
(3) Interest subject to special rules
---------------------------------------------------------------
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])
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.
Section 34(B), Tax Code

--------------------------------------------------------------(1) Requisites for deductibility
(2) Non-deductible interest expense
---------------------------------------------------------------
_________________________________________
80
Indebtedness is something owned

unconditionally obligated or bound to pay

by
one
who
Page 110 of 158

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
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
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?
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.
--------------------------------------------------------------(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

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.
--------------------------------------------------------------(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: 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
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
Q:
Do
tax
indebtedness?
obligations
constitute
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
Page 112 of 158

(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.
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,
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
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.
--------------------------------------------------------------(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 all taxes deductible from gross

income?

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

payments should be treated as capital

expenditures and hence are not deductible
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?
--------------------------------------------------------------(5) Tax credit vis--vis deduction

---------------------------------------------------------------
1. Tax credit against the Philippine income tax

due;
2. Deduction from gross income
Q: What is a tax credit?
Note: Rationale for allowing tax credit for foreign

taxes to address indirect double taxation.
A tax credit is the amount subtracted from an

individuals or entitys tax liability to arrive at the
total tax liability.
Q: Who are allowed to avail of credit against

tax for taxes of foreign countries?
Q: Distinguish a tax credit from a tax

deduction.
Tax Credit
Tax Deduction
Reduces the taxpayers

liability peso for peso
Reduces taxable income

upon which the tax
liability is calculated
Subtracted from the tax
Subtracted from the

income before the tax is
computed
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])

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.
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
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.
Page 114 of 158


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.
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) 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
(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.
--------------------------------------------------------------(d) Losses
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

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 ordinary losses?
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
These are losses that are incurred by a taxable

entity as a result of its day to day operations
conducted for profit or otherwise.
RMO 31-2009 [OCTOBER 16, 2009] provides for

policies and guidelines for the reporting of casualty
losses.
Q. What are casualty losses?
--------------------------------------------------------------(2) Other types of losses

(a) Capital losses
(b) Securities becoming worthless
(c) Losses on wash sales of stocks or
securities
(d) Wagering 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
Theft
Embezzlement
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

_________________________________________
82
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: 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.
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.
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
Page 116 of 158


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.

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: 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: Discuss the deductibility of wagering

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

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: 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 merger 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

Page 117 of 158


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
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: 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: 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?

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: 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: 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.
Page 118 of 158


--------------------------------------------------------------(e) Bad Debts

(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.
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 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:

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: 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: 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

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.
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
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.
_________________________________________
83
Not all tangible property can be depreciated. Land, for example,

cannot be depreciated because its value continues to increase.
Page 120 of 158


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

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
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.
RR 12-2012 [OCTOBER 12, 2012] Deductibility

of Depreciation Expense as it relates to
purchase of vehicles
_________________________________________
84
Like those with limited duration

Guidelines to claim depreciation as a deduction in

gross income:
Page 121 of 158


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.
--------------------------------------------------------------(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

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
Sum-of-theyears-digit
method
It is an accelerated method of
depreciation that provides higher
depreciation expense in the earlier
years and lower charges in the later
years.
--------------------------------------------------------------(g) Charitable and other contributions

(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
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

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)
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.
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)

--------------------------------------------------------------(h) Contributions to pension trusts

--------------------------------------------------------------Read Section 34(J), Tax Code
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
--------------------------------------------------------------(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.
Page 123 of 158


2. Republic Act
Development Act)
8502
(Jewelry
Industry
(c) Partnerships
---------------------------------------------------------------
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.
Read Section 34(L), Tax Code
3. Republic Act 8525 (Adopt a school act)
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.
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.
--------------------------------------------------------------(4) Optional Standard Deduction

(a) Individuals, except non-resident
aliens
(b) Corporations, except non-resident
foreign corporations
Q: What is meant by Optional Standard

deduction?
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.
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
Page 124 of 158


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 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.
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: 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?
87
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.
All individual taxpayers, regardless of status, shall

be allowed a basic personal exemption of P50,000.
--------------------------------------------------------------(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
---------------------------------------------------------------
_________________________________________

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.
Page 125 of 158


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: What is the rule for married individuals?
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
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?
In the case of married individuals where only one

spouse is deriving gross income, only such spouse
shall be allowed the personal exemption.
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 are the additional exemptions

allowed to individual taxpayers?
Q: What is the rule for spouses and legally

separated spouses?
There shall be allowed an additional exemption of

89
P25,000 for each dependent not exceeding four.
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?
90
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.
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.

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
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.
Page 126 of 158


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.
--------------------------------------------------------------(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.

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

f.
6.
7.
8.
9.
Between a fiduciary of a trust and a

beneficiary of such trust.
Non-deductible interest
Non-deductible taxes
Non-deductible losses
Losses from wash sales of stock or
securities
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.

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

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
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
Page 128 of 158


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
RR No. 2-2013 [January 23, 2013] Transfer

Pricing Guidelines
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
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
_________________________________________
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.

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.
The Regulations prescribe the 3-step approach in the

application
of
the
arms
length
principle:
Step 1: Conduct a comparability analysis.
3:
2.
3.
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.
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
Page 129 of 158


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.
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

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
The case would have been decided differently if we had an RR

on Transfer Pricing.
Page 130 of 158


--------------------------------------------------------------(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%
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

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

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.
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.

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 taxexempt 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

--------------------------------------------------------------(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
(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.

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
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

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.
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: 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
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: 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: 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.
Page 134 of 158


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.
Q: Differentiate
passive income.
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;
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.
--------------------------------------------------------------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
---------------------------------------------------------------
ordinary
shall be subject to the graduated income tax in

accordance with the following schedule provided
under Section 24
th
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.
_________________________________________
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
Read Section 24(A), Tax Code

Page 135 of 158


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
Not 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
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
--------------------------------------------------------------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.
--------------------------------------------------------------Page 136 of 158


(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.
--------------------------------------------------------------(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.
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.
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.
--------------------------------------------------------------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.
Note: Only a non-resident alien not engaged in trade or

business in the Philippines cannot claim this deduction.

Page 137 of 158


REVENUE
REGULATIONS
NO.
14-2012
[NOVEMBER 7, 2012] Proper Tax Treatment
of Interest Income Earnings on Financial
Instruments and Other Related Transactions
d.
e.
1.
Interest from Philippine currency bank

deposits and yield from deposit substitute
and from trust funds or similar arrangements
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%
f.
g.
h.
If the deposit or investment is pre-terminated, a final tax

shall be imposed on the entire income.
25% (flat tax rate

imposed
on
gross
income)
30%
Interest income derived from government

debt instruments and securities
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.
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
They are exempt from tax, provided the following

requisites are met:
a.
b.
c.
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.
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

Interest income derived from a depository

bank under the expanded foreign currency
deposit system (EFCDS)
Derived from FCDUs:
a. Citizens
b. Resident aliens
c. Domestic
corporation
d. Resident foreign
corporation
a. Non-resident
alien
b. Non-resident
foreign
corporations
7%
Tax-exempt
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
.
Page 138 of 158


investment until maturity. What is the FWT

due?
Derived by FCDUs:
a. Residents
b. Non-residents
5.
Interest income derived

banking units of OBUs
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%
Tax-exempt
from
offshore
10%
Tax-exempt
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)
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)
--------------------------------------------------------------(b) Royalties
28(A)(7), Section 28(B), Tax Code
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

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


Royalties from books,

literary
works,
musical compositions

resident aliens and
non-resident
aliens
engaged in trade or
business
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
a. Non-resident
foreign
corporation
25% - Non-resident
aliens not engaged in
trade or business (shall
form part of their gross
income)
--------------------------------------------------------------(c) Dividends from domestic

Corporations
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.

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

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
individual taxpayers of income derived from
royalties, prizes and other winnings?
10%
20%
Prizes amount to more

than P10,000
25% (flat tax rate

imposed
on
gross
income)
25% - Non-resident aliens

not engaged in trade or
business (shall form part
of their gross income)
Tax-exempt (treated as
inter-corporate
dividends)
Resident

foreign

resident aliens and nonresident aliens engaged in
trade or business
Prizes amounting
P10,000 or less
to
Shall form part of ordinary

income
Page 140 of 158


PCSO
and
Winnings
Lotto
(ii) Passive income not subject to final

tax
---------------------------------------------------------------
Tax-exempt
--------------------------------------------------------------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
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.
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 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.
--------------------------------------------------------------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.
--------------------------------------------------------------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.
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.

Page 141 of 158


However, he shall be exempt under the following

cases:
Q: Define taxable income and gross income

for purposes of corporate income taxes.
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)
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.
Gross Income
Shall mean gross sales less sales

returns, discounts, allowances and
cost of goods sold.
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].)
--------------------------------------------------------------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
---------------------------------------------------------------
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.
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: What is the regular corporate income tax

(RCIT) imposed on corporations?
--------------------------------------------------------------a) Tax payable

(i) Regular tax
(iii) Minimum corporate income tax (MCIT)
---------------------------------------------------------------
For domestic corporations:
--------------------------------------------------------------(i) Regular tax

--------------------------------------------------------------Read Section 27(A), Section
Section 28(B)(1), Tax Code
101
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.
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.

The rate of RCIT imposed on corporations is 30%.
_________________________________________
101
Note that it was 35% effective November 1, 2005 but on

January 1, 2009, the effective rate is now 30%.
Page 142 of 158


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.
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.
--------------------------------------------------------------(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
(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: 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.
Page 143 of 158


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.
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.
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
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.
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 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
_________________________________________
102
This only shows that deductions are not taken into account in
MCIT.
Page 144 of 158


included as part of the taxpayer's gross income for

103
computing MCIT.
Q: Explain the carrying forward of excess

MCIT against normal income tax.
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.
Excess
MCIT
against
RCIT
25,000
Force majeure
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.
40,000
Legitimate
business
reverses
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.
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
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
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: Can the
suspended?
imposition
of
MCIT
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

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)
be
_________________________________________
103
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.
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.
--------------------------------------------------------------14. Taxation of resident foreign corporations

a) General rule
b) With respect to their income from
c) Minimum corporate income tax
d) Tax on certain income
Exclude:
Page 145 of 158

(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.
--------------------------------------------------------------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.
Q: What is the tax treatment on dividends

received from a domestic corporation by a
non-resident foreign corporation?
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.
_________________________________________
106
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.
Page 146 of 158


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

108
1.
"X" Foreign
preferential
Corp. Tax
Liability
"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
with no
rates
400
200
120
120
80
120
Here, the total tax payable of the foreign corporation

is 200.
2. "X" Foreign Corp. Tax Liability with Preferential
Rate
and
without
Tax
Sparing
RP Tax Rate (15%)
Foreign Tax Credit
400
200
60
60
140
60
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
RP Tax Rate (15%)
Foreign Tax Credit
400
200
60
112
120
80
60
The total tax payable of the foreign corporation is

now 140.
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.
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.
_________________________________________
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.

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
Now, 15% effective January 1, 2009.
Page 147 of 158


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
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%.

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%.
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
Page 148 of 158


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.
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
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.
--------------------------------------------------------------16. Improperly Accumulated earnings of

corporations
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.
_________________________________________
116
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.
Page 149 of 158


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.
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 corporations are subject to IAET?

_________________________________________
117
Added by RR 2-01.

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 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 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

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
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

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

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.
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:
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.
--------------------------------------------------------------17. Exemption from tax on corporations

--------------------------------------------------------------Note: I have already discussed this. See exempt
corporations.
by
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
Q: Abbot-Phils, a domestic corporation, is a

wholly owned subsidiary of Abbot-US, a
non-resident foreign corporation. AbbotPhils claims that by virtue of this, it is

exempt from the IAET. Is this contention
correct?
--------------------------------------------------------------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.
Page 152 of 158


--------------------------------------------------------------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.
--------------------------------------------------------------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
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.
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
--------------------------------------------------------------a) Concepts
---------------------------------------------------------------
Q: When does the obligation to withhold

arise?
Q: What is a withholding tax?
Either when:
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.
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
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
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

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.
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.
Q: What are the requisites to be complied

with in a claim for refund of unutilized
withholding tax?

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
CWT
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.
Taxes
withheld
on
certain income payments
are intended to equal or
at least approximate the
tax due of the payee on
said income.
The liability for payment

of the tax rests primarily
on the payor as a
withholding agent.
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
Page 154 of 158


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.
(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: 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)
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.
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)
--------------------------------------------------------------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)

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 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)
--------------------------------------------------------------(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

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: 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: 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.
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 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.
_________________________________________
118
Minimum wage earners are exempt from income tax.

Page 156 of 158


--------------------------------------------------------------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.
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])
--------------------------------------------------------------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.
Q: What are the three general types of

creditable withholding taxes?
The three types of creditable withholding taxes are:

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,
--------------------------------------------------------------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.
(see Section 2.57.4, RR No.

amended by RR No. 12-2001)
2-98,
as
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Page 157 of 158

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.

Page 158 of 158


PM Reyes Bar Reviewer On Taxation I

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PM REYES BAR REVIEWER ON TAXATION I

I. General Principles of Taxation .................... 1

---------------------------------------------------------I. GENERAL PRINCIPLES OF TAXATION

It is the power by which the sovereign raises

--------------------------------------------------------------B. Nature of Taxation