KINDS OF INCOME TAXPAYERS

Q:
A:

I.
Q:
A:

Generally, how many kinds of income taxpayers are there?

Under section 22A of NIRC, there are three (3), namely:
1. individual;
2. corporate;
3. estate and trust.
INDIVIDUAL TAXPAYER
How many kinds of individual taxpayers are there?
There are seven (7). Namely:
1. Resident Citizen (23A and 24A);
2. Nonresident Citizen (23B and 24A);
3. OCW and Seaman (23C and 24A);
4. Resident Alien (22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade or Business (22G,
23D and 25A)
6. Nonresident Alien NOT Engaged in Trade or Business
(22G, 23D and 25B)
7. Aliens Engaged in Multinational Companies, Offshore
Banking Units, Petroleum Service Contractors (25C,D
and E)
Resident Citizen (RC)

Q:
A:

How many types of RC?

There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no intention to reside
permanently therein.

An individual whose residence is within the Philippines and

who is not a citizen thereof.
Intention to reside permanently in the Philippines is not a
requirement on the part of the alien.
The requirement under RR#2 is that he is actually present
in the Philippines, neither a sojourner, a traveler, not a tourist.
Whether hes a transient or not is determined by his intent
as to the nature and length of his stay.
Q: Is the intention to permanently reside in the Philippines
necessary?
A: No, so long as he is not a sojourner, tourist or a traveler.
Non-Resident Alien Engaged in Trade or Business
(NRAETB)
A foreigner not residing in the Philippines but who is
engaged in trade or business here.
RR 2-98 has expanded the coverage of the term, engaged
in trade or business to include the exercise of a profession.
Furthermore, by the express provision of the law, a NRA who is
neither a businessman nor a professional but who come to and
stays in the Philippines for an aggregate period of more than
180 days during any calendar year is deemed to a NRAETB in
the Philippines.
Q:
A:

Q: If you are abroad, and you have the intention to

permanently reside therein, can you still be considered a RC?
A: Yes. If such intention to permanently reside therein was not
manifested to the Commissioner and the fact of your physical
presence therein, you may still be considered a RC.
OCW and Seamen
OCW was used and not OFW in the CTRP, because the
classification shall cover only those Filipino citizens working
abroad with a contract. TNTs are not covered.
A Filipino seaman is deemed to be an OCW for purposes of
taxation if he receives compensation for services rendered
abroad as a member of the complement of a vessel engaged
exclusively in international trade.
Consequently, if he is not a member of the complement or
even if he is but the vessel where he works is not exclusively
engaged in international trade, said seaman is not deemed to
be an OCW. He is either a RC or a NRC depending on where he
stays most of the time during the taxable year.
If he stays in the Philippines most of the time during the
taxable year, he is considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you are not the one
being referred to.
The importance of ascertaining whether or not a seaman is
a RC or a NRC, is that if he is a RCm he is taxable on ALL
income derived from all sources within and without. If he is a
NRC, he is taxable only on income derived form sources within
the Philippines.

Q: What is the status of a Chinese who stays here for 200

days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days in 2000 and another
100 days in 2001?
A: He is not a NRAETB. To be considered as such, he must
stay for an aggregate period of more than 180 days during a
calendar year.
Q: What is the income tax applicable to said taxpayer?
A: Net Income Tax (NIT) on all its income derived form sources
within the Philippines.
Non-Resident
Business
Q:
A:

Requirements for a seaman to be considered an OCW:

1. must be a member of the compliment of a vessel;
2. the vessel must be exclusively engaged in international
trade or commerce.

Alien

Not

Engaged

in

Trade

or

How many kinds?

Only one.

The reason why the NRANETB are included in any income

tax law is because they may be deriving income form sources
within the Philippines.
They are subject to tax based on their GROSS INCOME
received form all sources within the Philippines.
Aliens Employed by Regional or Area Headquarters
& Regional Operating Headquarters of Multinational
Companies/ Aliens Employed by Offshore Banking
Units (Aliens Employed by MOP)

Q: What is the significance of using OCW?

A: It only covers Filipinos who works abroad with a contract. It
does not cover TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this classification, they are
considered RC because they work abroad without a contract
and they have not manifested their intention to permanently
reside abroad. (distinguish from an immigrant)

How many types?

There are three (3) types, namely:
1. NRA engaged in trade or business (25a1);
2. NRA who practices a profession (Revenue Regulation
2-98);
3. foreigner who comes and stays in the Philippines for
an aggregate period of MORE THAN 180 days during
any calendar year.

Status: either a RA or NRA depending on their stay here in

the Philippines.
Their status may either be RA or NRA because Section 25 C
and D does not distinguish.
Liable to pay 15% from Gross Income received from their
employer
Income earned from all OTHER sources shall be subject to
the pertinent income tax, as the case may be.
Aliens Employed
Banking Units

Resident Alien (RA)

Q:

in

How are they classified?

Multinational

and

Offshore

A: If they derived income from other sources aside from their

employer, you may classify them either as RA, NRAETB, or
NRANETB.

This is pursuant to the fact that FIT will not reflect in the
ITR of the GPP since the withholding agent is liable for the
payment of the FIT.

Aliens Employed in Petroleum Service Contractors

and Subcontractors

Q: What is the importance of knowing whether the corporation

is exempt or not?
A: To determine their tax liability. This is important to
determine the tax liability of the individual partners of the GPP.

Status: ALWAYS NRA. If they derive income from other

sources, such income shall be subject to the pertinent income
tax, as the case may be.
Income derived or coming from their employer shall be
subject to a tax of 15% of the gross.
II.

CORPORATE TAXPAYER
1.
2.
3.

Domestic Corporation (DC) created or organized

under Philippine laws.
Resident Foreign Corporation (RFC) corporation
created under foreign law, and engaged in trade or
business.
Nonresident Foreign Corporation (NRFC) created
under foreign law, and NOT engaged in trade or
business.

Q: What are deemed corporations under the NIRC?

A: The term corporation shall include partnerships, no matter
how created or organized, joint stock companies, joint
accounts, associations, or insurance companies, but DOES NOT
includes general professional partnerships and a joint venture
or consortium formed of the purpose of undertaking
construction projects or operations pursuant to or engaging in
petroleum, coal, geothermal or consortium agreement under a
service contract with the Government.
1. Partnerships and others no matter how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no matter how created or organized was
interpreted.
Even if the partnership was pursuant to law or not, whether
nonstick, nonprofit, it is still deemed a corporation.
Reason: because of the possibility of earning profits form
sources within the Philippines.
Q: Are partnerships always considered corporations? Is there no
exception?
A: General Rule: a partnership is a corporation.

Section 26 (1st paragraph) provides: a GPP as such shall

not be subject to the Net Income Tax however, persons
engaging in business as partners in a GPP shall be liable for
income tax only in their separate and individual capacities.
In short, each partner will be paying NIT, and the
distributive shares they will be receiving from the net income of
the GPP will be included in the gross income of the partner.
Q: If the GPP is deemed a corporation, will the partners have to
pay for the income tax?
A: No. as far as the share of the GPP is concerned, it is
considered a taxable dividend which is subject to FIT.
Q:
A:

Q: Corporation X and Corporation Y joined together. How

many corporations do we have?
A: Three, namely Corporation X, Y, and X+Y. the joint venture
has a separate and distinct personality from the two
corporations.
Q: When is a joint venture not considered a corporation?
A: It is not deemed a corporation when it is formed for the
purpose of undertaking a (construction?) project or engaging
in petroleum, gas, and other energy operations pursuant to ?
or consortium agreement under a service contract with the
government.
Domestic Corporation
Is one created or organized in the Philippines or under its
laws.
Taxable on all income derived from sources within or
without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade or business in the
Philippines.
Taxable for income derived within the Philippines.

Exception: General Professional Partnerships (GPP)

Q: What is a GPP?
A: It is a partnership formed by persons for the sole purpose
of exercising their profession, no part of the income of which in
derived from any trade or business. (what if a partner has other
businesses not related to the GPP? > read section 26 quoted
hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession not a corporation; exempt
from Corporate Income Tax (CIT)
2) Exercise of a profession and engaged in trade or
business a corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a corporation
exception: GPP
exception to the exception: if the GPP derives income from
other sources, it is considered a corporation, thus liable to pay
corporate income tax.
1.
2.

Rule:
if the income is derived from other sources and such
income is subject to NET INCOME TAX, it is not exempt and it is
considered a corporation.
if the income is derived from other sources and such
income is subject to FINAL INCOME TAX, it is still EXEMPT and it
is not deemed a corporation. ( separate return for this. It will
not reflect in the GPPs ITR)

Is a joint venture a corporation?

Generally, yes, it is a corporation.

Non-Resident Foreign Corporation

Foreign corporations not engaged in trade or business in
the Philippines.
Taxable for income derived within the Philippines.
Both DC and RFC are liable for the payment of the
following:
1) NIT Net Income Tax
2) FIT Final Income Tax
3) 10% income tax on corporations with properly
accumulated earnings.
4) MCIT (Minimum Corporate Income Tax) of 2%
of the Gross Income
5) Optional Corporate Income Tax of 15% of the
Gross Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT Final Income Tax
III.

TRUST AND ESTATE

Q: How many for each?

A: Seven (7) kinds for each because the trust or estate will be
determined by the status of the trustor, grantor, or creator, or
of the decedent.
The status of the estate is determined by the status of the
decedent at the time of his death; so an estate, as an income
taxpayer can be a citizen or an alien.

When a person who owns property dies, the following taxes

are payable under the provision of income tax law:
1) Income Tax for Individuals to cover the period
beginning January to the time of death.
2) Estate Income Tax if the property is transferred to the
heirs.
3) If no partition is made, Individual or Corporate Income
Tax, depending on whether there is or there is no
settlement of the estate. If there is, depending on
whether the settlement is judicial or extrajudicial.
Judicial Settlement
1)
2)

During the pendency of the settlement, the estate

through the executor, administrator, or heirs is liable
for the payment of ESTATE INCOME TAX (Sex, 60 (3)).
If upon the termination of the judicial settlement, when
the decision of the court shall have become final and
executory, the heirs still do not divide the property,
the following possibilities may arise:
a) If the heirs contribute to the estate money,
property or industry with the intention to divide
the profits between and among themselves, an
UNREGISTERED PARTNERSHIP is created and the
estate becomes liable for payment of CIT
(Evangelista vs. Collector (102 Phil 140))
b) If the heirs without contributing money, property
or industry to improve the estate, simply divide
the fruits thereof between
and among
themselves, a CO-OWNERSHIP is created and
Individual Income Tax (IIC) is imposed on the
income derived by each of the heirs, payable in
their separate and individual capacity (Pascual vs.
COMM (165 scra 560) and Obillos vs. COMM (139
SCRA 436))

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The income tax liability
depends on whether or not the unregistered partnership or coownership is created.
Trust
Trusts can be created by will, by contract or by agreement.
The status of a trust depends upon the status of the grantor or
trustor or creator of the trust. Hence, a trust can also be a
citizen or an alien.
Q: Where the trust earns income and such income is not
passive, who among the parties mentioned is liable for
payment of income tax thereon?
A: The TRUST itself, through the trustee or fiduciary but only if
the trust is irrevocable.
If it is revocable, or for the benefit of the grantor, the
liability for the payment of income tax devolves upon the
trustor himself in his capacity as individual taxpayer.

Net Income means Gross Income less deductions and

Formula:
GI
- deductions
Net Income
x Tax Rate
Income Tax Due
Q:
A:

NOTE: the formula allows for deduction, personal exemptions

and tax credit.
Q:
A:

What are the other terms for NIT?

NIRC:
a. taxable income
b. gross income (wlang kasunod)
only income tax from improperly accumulated earnings does
not use this term.
1.
2.

I.

How many kinds of income tax?

There are Six (6), namely:
1. Net Income Tax (NIT);
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT);
4. Minimum Corporate Income Tax of 2% of the Gross
Income (MCIT)
5. Income Tax on Improperly Accumulated Earnings
subject to 10% of the Taxable Income;
6. Optional Corporate Income Tax of 15% on the Gross
Income
NET INCOME TAX

Q: what is the formula?

A: Gross Income Deductions and Personal Exemptions =
Taxable Income
Taxable Income x Tax Rate = Net Income

Due

Taxable Net Income Tax Credit = Taxable Net Income

CFA: to be included in the gross income

Revenue Regulations and Statutes:
a. ordinary way of paying income tax;
b. normal way of paying income tax .

Characteristics:
Q:
A:

Who are not liable to pay NIT?

1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if they derive
income from other sources;

Q:
A:

Is the taxable net income subject to withholding tax?

It is subject to withholding tax if the law says so.

Q:
A:

What if the law is silent?

If the law is silent, it is not subject to withholding tax.

Q: What is another term for withholding tax?

A: It is also known as the creditable withholding tax system
under the income tax law.
Q:
A:

Do we have to determine if there is an actual gain or loss?

Yes because the formula for deductions, etc.

Q:
A:

If you fail to pay, will you be held liable?

Yes, you will be held liable.

II.

GROSS INCOME TAX (GIT)

Q:
A:

What is the formula?

Gross Income x Rate

Q:
A:

How many taxpayers pay by way of the gross?

There are two (2)
individual - NRANETB
corporation - NRFC

KINDS OF INCOME TAX

Q:
A:

What is the rate?

Individual: 32%
Corporation: 35%

NOTE: the formula does not allow any deduction, personal

exemptions and tax credit.
Characteristics:
NRANETB and NRFC, though not engaged in trade or
business, are liable to pay by way of the gross for any income
derived in the Philippines. While not engaged in trade or
business, there is a possibility that they may earn income in the
Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax because the persons
liable are foreigners. This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes depending on
which side of the bench you are.
III.
Q:
A:

FINAL INCOME TAX (FIT)

What is the formula?
(Each Income) x (Particular Rate)

Unlike in the gross income tax where you add all the
income from all the sources and multiply the sum thereof by
the rate of 25% or 35%, as the case may be, in final income
tax, you cannot join all the income in one group because each
income has a particular rate.
Q:
A:

V.

Q: Under what section is this found?

A: Section 27A 4th paragraph and Section 28 A(1) 4 th
paragraph.

What is the rate?

35% as the case may be.

NOTE: like GIT, the formula does not allow deductions, personal
exemptions, and tax credit.
Characteristics:
Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT provided the requisites
for its application are present.

1.
2.

Q:
A:

Is this applicable now?

No. this is not yet implemented.

Q:
A:

To what kind of taxpayer does this apply?

To DC and RFC.

Q: What kind of taxes are applicable or imposed upon the 1 st

five individual taxpayers?
A: Only two (2) kinds are applicable out of the six (6) kinds of
income taxes.
NIT;
FIT;

Q: Do you still have to pay NIT?

A: No. if you are liable for FIT, no need to pay NIT or else there
will be double taxation.

Q: What kind of income tax will apply to AEMOP?

A: Generally, only one kind, 15% FIT with respect to income
derived from their employer.

NOTE: as time passed by, the number of FIT increased.

Income from other sources:

1. Determine the status of the AEMOP;
a. NIT
b. FIT
2. NRANETB
a. GIT
b. FIT

before 1979 proceeds from the sale of real property not

exempt, it is subject to NIT or GIT, as the case may be.
after 1979 capital gains tax. Proceeds from the sale of
real property is exempt.
Q:
A:

If you fail to pay, will you be liable?

No. the withholding agent is liable to pay FIT.

Case of Juday, Richard and Regine

Q:
A:

For one to be liable for the payment of NIT, the income

must be derived on the basis of an employer employee
relationship.
Employer Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
However, in the case of celebrities, there is no employer
employee relationship, they are merely receiving royalties.
Royalties are subject to final withholding tax, thus the agent is
liable to pay. (so, distinguish nature of income, whether royalty
or compensation)
RULE:
1.
2.

1.
2.

OPTIONAL CORPORATE INCOME TAX

for NIT, whether or not subject to Creditable

Withholding Tax (CWT), the taxpayer is always liable if
he fails to pay.
for GIT and FIT, absolute liability to pay is upon the
withholding agent.

Q: Why is it that the rate of withholding is always lower, and

why is it that the rate of GIT and FIT is always equal?
A:
NIT allows deductions;
GIT and FIT do not allow deductions.
Q: Do you have to determine whether there is an actual loss
or gain?
A: No need to determine because the formula does not allow
deductions. Gain is presumed. No liability for final withholding
tax except for the sale of shares of stock. (?)
IV.

MINIMUM CORPORATE INCOME TAX (MCIT)

Q:
A:

What is the formula?

Gross Income x 2%

Q:
A:

Who pays this tax?

DC and RFC only.

Q: May it be applied simultaneous with NIT?

A: No. there must be a computation of the NIT first then apply
which ever is higher. The MCIT is paid in lieu of the NIT.
Reason: to discourage corporations from claiming too many
deductions.

What kind of income tax applies to DC?

Only four (4) kinds will apply out of the six (6)
1. NIT
2. FIT
3. MCIT
4. Improperly Accumulated Earnings

Q: May all of these be applied simultaneously?

A: No. only the NIT, FIT and Improperly Accumulated Earnings
be applied simultaneously. NIT and MCIT cannot be applied
simultaneously. Only one will apply, whichever is higher
between the two.
Q:

What kind of tax will apply to NRFC?

A:

Out of the six (6) kinds, only two (2) will apply:
1. GIT
2. FIT

Q: What is the significance of knowing the classification of

these taxpayers?
A:
1. to determine the kind of income tax applicable to
them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for income within and
income without?
A: Only
1. RC
2. DC
The rest of the taxpayers will be liable for income coming
from sources within.
Income
exempt.

from

sources

without,

no

liability,

therefore

NOTE: The income taxpayer is not a RC or a DC. Determine if

the income came from sources within or without to know the
taxpayers liability.
If the facts are specific, do not qualify your answer.
Answers must be responsive to the question.
Q: Is section 42 relevant to all the taxpayers?
A: NO. SECTION 42 IS NOT MATERIAL TO ALL taxpayers,
particularly the RC and DC because these two are liable for both
income within and without.
Section 42 is applicable only to taxpayers who are liable for
income within, the rest of the taxpayers are otherwise exempt.
Q:

Section 42(A)(1) provides for how many kinds of interests?

A:

It establishes two (2) kinds of interests, namely:

1. interest derived from sources within the Philippines.
2. interest on bonds, notes or other interest bearing
obligations of residents, corporate or otherwise.

Q: What is the determining factor in order to know if the

income is from within?
A:

1.
2.

location if the bank is from within the Philippines

(pursuant to a Revenue Reg.)
residence of the obligor (whether an individual or a
corp.) contract of loan with respect to the interest
earned thereon.

For example the borrower is a NRAETB, he borrowed money

from a RA. The interest earned by the loan will be considered as
an income without. RA is not liable to pay tax since RA is liable
only for income within, therefore exempt from paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F:
The National Development Company (NDC) entered
into a contract with several Japanese shipbuilding
companies for the construction of 12 ocean-going vessels.
The contract was made and executed in Tokyo.
The payments were initially in cash and irrevocable
letters of credit. Subsequently, four promissory notes were
signed by NDC guaranteed by the Government.
Later on, since no tax was withheld from the interest
on the amount due, the BIR was collecting the amount
from NDC.
The NDC contended that the income was not derived
from sources within the Philippines, and thus they are not
liable to withhold anything. NDC said that since the
contract was entered into and was executed in Japan, it is
an income without.
H:
The governments right to levy and collect income tax
on interest received by a foreign corporation not engaged
in trade or business within the Philippines is not planted
upon the condition that the activity or labor and the sale
from which the income flowed had its situs in the
Philippines. Nothing in the law (Section 42(1)) speaks of
the act or activity of nonresident corporations in the
Philippines, or place where the contract is signed. The
residence of the obligor who pays the interest rather than
the physical location of the securities, bonds or notes or
the place of payment is the determining factor of the
source of the income. Accordingly, if the obligor is a
resident of the Philippines, the interest paid by him can
have no other source than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm, becomes a
stockholder of two corporations, a DC and a RFC, and both
corporations declared dividends, what is the liability of the
Indonesian firm if the same received the dividends?
A:
1. Dividends received from DC: the Indonesian firm is
liable to pay taxes. NRFC, under the law, is liable if the
income is derived from sources within. (Sec 42a)
2. Dividends received from RFC: the Indonesian firms
liability will depend on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if the following
requisites are present:
1. at least 50% is income from sources within;
2. the 1st requisite is for the three (3) preceding taxable
years from the time of declaration of the dividends.

In the absence of any or both requisites, the income

will be considered from sources without, thus exempting the
Indonesian firm from payment of income tax.
Q: Same scenario, but this time the shares of stock of the two
corporations were being disposed off. What is the tax liability of
the Indonesian firm?
A:
1. sale of shares of stock of DC: the Indonesian firm will
be liable for the payment of taxes because the income
is from sources within.
2. sale of shares of stock of RFC: the liability will depend
on where the shares of stock were sold. (mejo Malabo
sa notes, please be guided accordingly)

Q: Filipino Executive, assigned to Hong Kong, receiving two

salaries, one from the Philippines, the other from HK. The
performance of the job was in HK. Is he liable for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in HK under contract).
The compensation he received is not subject to tax pursuant to
Section 42(c). Compensation for labor or personal services
performed in the Philippines is considered an income within.
When it comes to services, it is the place where the same is
rendered which is controlling. In the case at bar, the services
were rendered abroad, thus it is an income derived from
sources without, irrespective of the place of payment.
Q: Suppose a DC hired a NRFC to advertise its products
abroad. What is the liability of the NRFC? Will there be a
withholding tax imposed?
A: The income is derived from sources without since the
services in this case were performed abroad. As such, the NRFC
is not liable and therefore exempt from the payment of tax. If
the NRFC is not subject to NIT, then it is not also subject to
withholding tax.
Q: What is the controlling factor?
A: The controlling factor is the place where the services were
performed and not where the compensation therefore was
received.
RENTALS AND ROYALTIES
income from sources within
Q: Granted by who?
A: NRFC
Q: Suppose you are the franchise holder, how much is the
withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how much is the
withholding?
A: 10% (NIT) and in some cases 15%
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM)
a.
b.
c.
d.
e.
f.
g.

right of, or the right to use copyright, patents,

etc
industrial, commercial, scientific equipment
supply of knowledge
supply of services by nonresident
supply of technical assistance
supply of technical advice
right to use: motion picture films, etc.

Q: What is the rule as regards the sale of real property?

A: Gains, profits, and income from the sale of real property
located within the Philippines considered income within.
Q: What about the sale of personal property, what is the rule?
A: Determine first if the property is produced or merely
purchased.
1.
2.

it the property is manufactured in the Philippines and

sold abroad, or vice-versa, it is an income partly within
and partly without.
if the property is purchased, considered derived
entirely from the sources within the country where it is
sold.

EXCEPTION: shares of stock of domestic corporation, it is an

income within wherever it is sold.
COMMISSIONER v. IAC
Q: What is the issue here?
A: They cannot determine if the business expense was
incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not sure, will you
disallow the deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
1,000,000
= 10%
Hence, 10% is the ratable share in the deduction. If the
deduction being asked is 100,000 not all of it will be

allowed. Only 10,000 or 10% of 100,000 will be allowed as

deduction.
CAPITAL GAINS AND LOSSES
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a taxpayer which is not an
ordinary asset.
The following 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 trade or business;
3. property used in trade or business of a character
which is subject to the allowance for depreciation
provided in subsection 1.
4. real property used in trade or business of the taxpayer.
All other property not mentioned
considered capital assets.

in

the

foregoing

are

Q: What is a capital gain? What is a capital loss?

A: Capital gains are gains incurred or received from
transactions involving property which are capital assets. Capital
losses are losses incurred from transactions involving capital
assets.
Q: What is ordinary gain? Ordinary loss?
A: Ordinary gains are those received from transactions
involving ordinary assets. Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a distinction?
A: It is relevant because Section 39B,C, and D apply to capital
assets only.
1. time when property was held (39B) (holding period
applies only to individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I.

CAPITAL ASSETS

Q: What is the holding period?

A: If capital asset is sold or exchanged by an individual
taxpayer, only a certain percentage of the gain is subject to
income tax.
It is the length of time or the duration of the period by
which the taxpayer held the asset.
Q:
A:

What is the requirement?

1.

the taxpayer must be an individual. Section 39B states

in case of a taxpayer, other than a corporation..
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held for not more than
12 months; (short term)
50% if the capital asset has been held for more than 12
months. (long term)
NOTE: the holding period applies to both gains and losses.
Q:
A:

Do you include capital gains in your ITR?

General rule: yes, include in ITR.

EXCEPT:
1. gains in sales of shares of stock not traded in stock
exchange(section 24);
2. capital gains from sale of real property(section 24).
Q:
A:

When will the holding period not apply?

1.
2.
3.

property is an ordinary asset

taxpayer is a corporation
sale of real property considered as ordinary asset

II. LIMITATION ON CAPITAL LOSSES

synonymous to 34D & loss capital rule
this applies to individual and corporate taxpayer
Q: What is the loss limitation rule?

A: Pursuant to Section 39 C, losses from sales or exchange of

capital assets may be deducted only from capital gains, but
losses from the sale or exchange of ordinary assets may be
deducted from capital or ordinary gains. (applies to individual
and corporation)
Q: In connection with 34 D, Losses in Allowable Deduction,
what is the rationale behind this rule?
A: If it is otherwise, it will run counter with the rule that the
loss should always be connected with the trade or business,
capital losses are losses not connected to the trade or business,
thus it is not deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary loss to be
deducted from either the capital gains or ordinary gains?
A: It is already included in ITR,
the gross income less
deductions hence it already carries with it the deduction
TAKE NOTE: Normally if the loss is an ordinary loss there is no
carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q:
A:

What are the requirements?

1.
2.
3.
4.

taxpayer is an individual;
paid in the immediately succeeding year;
applies only to short term capital gain;
capital loss should not exceed net income in the year
that it was incurred.

Q: How does net capital loss carry-over differ from net

operating loss carry-over under Section 34 D (3)?
A: Under the net capital loss carry-over rule, the capital loss
can be carried over in the immediate succeeding year. In net
operating loss carry-over rule, capital loss can be carried over
to the next three (3) succeeding calendar year following the
year when the loss was incurred.
NOTE: only 15% of the loss will be carried over, if the loss is
greater than the gains.
In net operating loss carry-over there is an exception to the
3 year carry-over period. In case of mines other than oil and
gas wells, the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer cannot come into
the possession of the property. EX: shares
CALAZANS v. CIR
F:
The taxpayer inherited the property fro her father and
at the tie of the inheritance it was considered a capital
asset. In order to liquidate the inheritance, the taxpayer
decided to develop the land to facilitate the sale of the lots.
I:
Was the property converted to ordinary asset?
H:
The conversion from capital asset to ordinary asset is
allowed because Section 39 is silent.
Q: Are you allowed to convert ordinary asset to capital asset?
A: General rule: it is not allowed. Read Revenue Regulation 72003
The case at bar still applies despite of the issuance of said
Revenue Regulation.
Q: What is the conversion prohibited
Regulation?
A: Conversion of real estate property.

in

the

Revenue

Q: What is the rationale?

A: Section 24 D final income tax of 6% if the real estate is
capital asset. If it is an ordinary asset, it will be subject to
income tax of 32% for individual taxpayer, and 35% if the
taxpayer is a corporation.
Q: What are the properties involve in the RR 7-2003?
A: 1. those property for sale by the realtors
2. real property use in trade or business not necessary
realtors

Q: That is the conversion allowed by the Revenue Regulation?

Is there an instance when an ordinary asset may be converted
to capital asset?
A: Yes, provided that the property is an asset other the real
property, and it has been idle for two (2) years.
SECTION 24
TAX ON INDIVIDUALS
Q:
A:

What is the tax mentioned in section 24?

NIT

Q: What is taxable income?

A: (memorize section 31) it is the pertinent items of gross
income specified in the NIRC, less the deductions and/or
personal and additional exemptions, if any, authorized for such
types of income by the NIRC or other laws. It refers to NIT
because it allows deductions.
Q: What do you mean by the phrase other than B, C, and D?
A: It means that if the elements of passive income are
present, the taxpayer has to pay FIT.
Q:
A:

Who are the taxpayers mentioned in section 24?

1.
2.
3.
4.

RC
NRC
OCW
RA

Additionally, under Section 25, NRAETB

Q: What is the tax liability of NRAETB?

A: Section 25(1) NRAETB is subject to income
tax in the
same manner as those individuals mentioned in Section 24.
Q:
A:

Q:
A:

What about Domestic Corporations?

1.
2.

Sec. 27 A,B, and C

Sec. 26- GPP is not subject to income tax.

What about Resident Foreign Corporations?

Sec 28(l) it is subject to 35% Net Income Tax

Q: What about Non Resident foreign Corporation and Non

Resident Alien not engaged in Trade or Business?
A: Not Subject to Net Income Tax but they are liable for Gross
Income tax.
Q: Do legally married husband and wife need to file separately
or jointly?
A: It depends if:
1. Pure compensation income- separate
2. Not Pure compensation income- joint
Passive Income
Interest, Royalties, prizes and Other winnings
Interest
Q: Bank Interest, what is the requirement?
A: The bank must be located in the Phils. because the income
must be derived from sources w/in.
Q: Do you include this in your ITR?
A: No! because it is subject already to FIT. The bank is the one
liable for the payment of this.
NOTE: Liability for NIT, GIT, and MCIT will depend on the
elements present.
Q:
A:

4.
5.
6.
7.
8.
9.

Who are liable for bank interest?

1. RC }
2. NRC} Sec. 24 B1
3. RA }
NRAETB
NRANETB Sec. 25 (25%)
AEMOP
DC
RFC
NRFC
Q:

What is the rate of interest?

a.
b.
c.

A:

FIT of 20%

Q:
A:

Is there a lower rate?

7 % if under EFCDS

Q:
A:

What if the depositor is non resident alien?

-W/in FIT
- W/out- exempt

Q: What is the rule on pre- termination?

A: If it is pre terminated before 5 th year a FIT shall be imposed
on the entire income and shall be deducted and withheld by the
depositary bank from the proceeds of the long term deposit
based on the remaining maturity thereof
4 yrs to less than 5 yrs 5%
3 yrs to less than 4 yrs- 12%
Less than 3 yrs- 20%
Q: Does it apply to all individuals?
A: No! It does not apply to 10 NRFC and NRA and NRAETB
because they are liable to GIT.
NOTE: if the depositary is a Non resident it is exempt
Resident citizen is liable to pay tax for bank interest earned
abroad (NIT)
Q: If the money earns interest in abroad who is liable?
A: RC and DC only by NIT, the rest are exempt. No FIT abroad
because we do not have withholding agent abroad.
Q: MCIT applies to DC and RFC in relation to bank interest?
A: If the bank interest is derived abroad, RFC is exempt but
DC is liable.
Impose NIT if it is higher than the MCIT, otherwise apply
MCIT if its higher than the NIT
Prizes
Requirements:
1. Prizes must be derived from sources w/in the Phils.
2. it must be more than P 10,000
Q:
A:

Who are liable? (FIT)

1.
2.
3.
4.
5.
6.

RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)

Not Liable
1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT)
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q:
A:

When can we apply NIT in Prizes?

1. When the taxpayer is RC, RFC and DC
2. For DC and RC it must be derived from income abroad
RFC it must be derived from income w/in
3. amount is more than P10,000

NOTE: If the prize is derived from sources w/in but it is below P

10,000 it is not subject to tax. If derived from sources abroad,
most of them are exempt except for RC and DC who are liable
w/in and w/out.
Q;
A:

Is it possible for RC and DC to pay MCIT?

Yes if MCIT is higher than NIT.

Winnings
Q: Do we apply the P10, 000 req.?
A: No, we do not apply it only applies to prizes. It must not
pertain to illegal gambling.
Thus, the only requirement is it must be derived from
income w/in.
Q:
A:

Who are liable? (FIT)

1.
2.
3.
4.
5.
6.

RC
NRC
OCW
RA
NRAETB
AEMOP (RA, NRAETB)

Q: Assuming that there are 5 Incorporators, the Corporation

has a P5 M Authorized Capital stock. It distributed 1 M stock
dividends, is it taxable?
A: NO, the dividends did not go to the Stock holder but to the
Auth Capital Stock. Only cash and Prop Stock go to the Stock
holder.

Not liable to FIT?

1 NRANETB- GIT
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT
4 RFC- law is silent
5 NRFC- GIT

Sec 24 B does not mention stock dividends because it is

not subject to FIT but it is subject to NIT under Section 73.

Q:
A:

Q: Is there an exception when stock dividends are not

taxable?
A: YES, if the shares of stocks are cancelled and redeemed
meaning it was reacquired by the corp.

When does NIT apply to winnings?

1.
2.
3.

ANSCOR CASE
the stockholders cannot escape the payment of taxes

If Taxpayer is DC or RC
Income is derived abroad
Taxpayer is RFC and income w/in.

Requirement:
Gen Rule- the dividends must be distributed by a DC.
Except- Regular operating- always a foreign corp.

NOTE: If income abroad, most TP are exempt except DC and RC

Q:
A:

MCIT applies when?

It is higher than the NIT

Royalties
Requirement:
The income is from w/in
Rate? 20%. Lower rate? 10% on books, literary works and
musical compositions.

1.
2.
3.
4.
5.
6.

Q: You are a writer for Snoop Dogg are you liable for FIT? What
if for April Boy?
A: Liable for NIT if Income abroad like a writer for Snoop. While
FIT if for April Boy.
Q:
A:
1.
2.
3.
4.
5.
6.

Who are liable (FIT)?

RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)

Not Liable?
1. NRANETB
2. AEMOP
3. DC
4. RFC
5. NRFC

1.
2.
3.

What rate: 10% FIT

Q: Who are liable?

A:
RC
NRC
OCW
RA
NRAETB
AEMOP (RC, NRAETB)
Not
1.
2.
3.
4.
5.

liable?
NRANETB
AEMOP
DC
RFC
NRFC

Shares of association and partnership is taxable

Q: Determine the tax liability of the following?

A:
DC a Stockholder of DC= Exempt
RFC stockholder of DC= Exempt also
DC stockholder of RF= Liable for NIT.
Capital Gains From Sale of Shares of Stock Not Traded
(24C)
1.
2.

NOTE: Lower rate of 10% applies to all except NRANETB

Q:
A:

When do we apply NIT to Royalties?

1.
2.
3.

TP is RC or DC
Income is from w/out
TP is RF and income is w/in

If income is from sources abroad all are exempt except RC

and DC
Dividends

Confined with cash and/or property dividends.

Q: What are dividends?

A: Any distribution made by Corporation to its stockholders
outside of its earnings or profits and payable to its stockholders
whether in money or in property (Sec. 73)
COMM. vs. MANNING
Q: Where did it come from?
A: shares come from another shareholder
Q: What are the dividends included?
A: Sec. 24 refers to cash or property dividend
H: For stock Dividends to be exempt it must come from the
profit of the corporation.
Stock Dividends it is the transfer of the surplus profit from
the authorized capital stocks.

3.
4.
1.
2.

Subj to FIT
Determine whether there is a loss or a gain because
the tax is impose upon the net capital gains realized
from the sale, barter, or exchange or other disposition
of the shares of stock in a domestic corp.
It is uniformly imposed on all taxpayer
not subj to w/holding tax.

Requirements:
Shares of stock of a DC
It must be capital asset
3. must not be traded in the stock market
25 R last part: Capital Gains realized by NRANETB in the
Phils. from the sale of shares of stock in any DC and real prop
shall be subj. to the income tax prescribed under Sub sec (c)
and (d) of Sec. 24.
SEC. 24 B 1&2: If the elements are present NRANETB and
NRFC are liable to pay GIT.
Except: under 24 C for NRANETB. What do you mean by the
phrase the provisions of 39 notwithstanding?
It refers to the holding period. When it comes to capital
gains from sale of shares of stock not traded and capital gains
from the sale of real prop. The holding period does not apply
because the basis will be those provided in 24 C & D and not
under 39B (GSP or FMV)
ELEMENT #1 The share is a share in DC
Q:

What if the share is from foreign corp?

A: Determine the income considered. If income w/in read Sec.

42 (E)

a.
b.
c.

If the shares sold are that of a foreign corp it is subj to the

ff rules:
sold in the Phils= its income w/in
sold in abroad= w/out
Shares of stock in a Dc is always considered an income
w/in regardless where it was sold.
Q: Shares of Foreign Corp sold in Phils. Whos liable? What
tax?
A: Not subj to FIT because one of the elements is not present .
Shares not being that of a DC.
Hence: a) RC, NRC, OCW, NRAETB, AEMOP (RA, NRAETB)
will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD IN THE STOCK
MARKET

if sold in the stock market- it is not subj to FIT

if sold in the stock market, it will be subj to percentage tax,

in lieu of NIT.
ELEMENT # 3 It must be a capital asset.
Q:
A:

When is it considered an ordinary asset?

1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary course of trade or
business
2. to all other assets, it will be considered a capital asset

NOTE: if all elements are present it will be subj to FIT

If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT except NRFC and
NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils: most will pay
except NRANETB and NRFC
b. Income w/out if sold abroad: most will be exempt
except RC and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign corp in the Phil.
2. sale of shares of stock of DC which are ordinary asset
DC and RFC are subj to MCIT which may be imposed if the
NIT is lower than the MCIT2% MCIT will be imposed if MCIT is
higher than NIT.
Capital Gains From Sale of Real Property (24D)
In 39 B the holding period does not apply because the
basis of income tax is the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher- 6% FIT
Requirements:
1. The real prop must be sold w/in the Phils and located
in the Phils.
2. It must be a capital asset
3. The seller must be an individual, estate or trust or a
DC

Q:
A:

Q: Ordinary asset- shall refer to all real property specifically

excluded from the definition of capital asset under Sec. 39
A: Other property not mentioned are capital asset.
Q:
A:

NRFC liable to pay GIT and not FIT

NRANETB liable to pay FIT are all elements are present.

ELEMENT # 3 The real prop must be a capital asset

What if all the elements are not present?

most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT

Q: May a RC be liable to pay NIT even if all the elements are

present?
A: YES, disposition made to the Govt. Thus, the taxpayer has
the option of paying 32% NIT or 6% FIT
Q:
A:

Which is more advantageous?

It depends determine first if theres a loss or a gain.
If theres a gain choose to be taxed at 6% FIT. In this case
the gain is always presumed.
If theres a loss choose to be taxed at 32% because losses
may be considered an allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage contract and the
mortgagee is a bank or financial inst, the FIT does not apply
because the property is not yet transferred because theres a
period of redemption
If after a year the mortgagor failed to redeem the property
that is the only time that the FIT will apply because theres now
a change of ownership. If redeemed w/in 1 yr period FIT will not
apply because theres no change of ownership.
If the mortgagee is an individual the FIT is imposed
whether or not there is a transfer of ownership.
Exceptions (24(D2))
Q: What if the prop being sold was a movie house, can he
claim for the exception?
A: the prop covered by the exemption is a residential lot
Q:
A:

Who can claim the exemption?

Only the taxpayer mentioned in Sec. 24

Requirements:
1. The purpose of the seller is to acquire new residential
real prop
2. the privilege must be availed of w/in 18 mos. From the
sale
3. Comm. must be informed w/in 30 days from the date
of sale with the intention to avail of the exemption
4. the adjusted basis or historical cost of the residence
sold shall be carried over to the new residence.
5. the privilege must be availed only once every 10 yrs
6. Certification of the brgy. Capt where the taxpayer
resides that indeed the prop sold is the principal
residence of the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it was sold only for
2M, what will happen to the unused portion or profit?
A: If the proceeds are not fully utilized, the portions of the
gain is subj to FIT
SEC. 27A RATES OF INCOME TAX
Q:
A:

How many income taxes are paid by a DC?

1.
2.
3.
4.
5.

RFC not liable for FIT but liable to pay NIT if all the
elements are present.

When considered a capital asset?

Read R.R. 7- 2003

NIT
MCIT
FIT
10%Improperly
Accumulated Earnings
Optional corporate income tax of 15% of the gross

DC liable for five, but the optional is not yet applicable so

only 4.
Q:

How many can be applied simultaneously? A:

1. NIT, FIT and 10% IAE

ONLY 3

2.

MCIT, FIT, 10% IAE

2.
3.
4.

SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. & HOSP.

Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non profit only, is it
exempt?
A: No, subject to 10% on their taxable income except those
covered by subsection (D)
PROVIDED that gross income from unrelated business,
trade or activity must not exceed 50% of its total gross income
derived by such educational inst or hospital from all sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated business, trade or
activity must not exceed50% of its total gross income
derived by such educational inst or hospital from all
sources
5. has permit to operate from DECS, TESDA, or CHED
Q: What do you mean by unrelated trade business or activity?
A: It means any trade, Business, or activity which is not
substantially related to the exercise or performance by such
entity of its primary purpose or performance
Q: May a school or hospital be exempt from paying tax? What
are the req?
A:
1. It must be non- stock and non- profit
2. the assets property and revenues must be used
actually, directly, and exclusively fro the primary
purpose
Q: Under what law? Is it the constitution or the NIRC which
provides fro the exemption?
A:
It is under Sec. 30 of NIRC and not under Sec.4 Art. 14
of the Constitution. The provision of the NIRC is the specific law
which prevails over the Constitution which is the general law.
exempt from all taxes and custom duties
Q:
What about exemption from real property tax?
A:
Art. 6 Sec. 28 of the Constitution: charitable institution
churches, .and all lands buildings, actually directly and
exclusively used for religious, charitable, and educational
purposes shall be exempt from taxation.
Not Sec. 4 of Art. 14 of the Constitution.
Q: You donated a property to a school will you be liable for
donors tax?
A: not liable if it falls under Sec. 101 (3) of the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
1. it must be non-stock, non-profit educational inst.
2. not more than 30% of the prop donated shall be used by
such donee for admin purposes.
3. paying no dividends
4. governed by trustees who dont receive any compensation
5. devoting all its income to the accomplishment and
promotion of the purposes stated in its Articles of
Incorporation
Q:
A:

What about exemption from VAT?

Sec. 109 (m) of R-VAT

Q: What about exemption fro Loc Gov Code?

A: If its non-stock, non-profit educational inst. It may be
exempted from local taxation.
Q:
A:

Is Art 14 Sec. 4 of the Consti obsolete?

NO, if the law is silent apply the Consti.

SEC. 23: GOCC, AGENCIES, INST of the GOVT.

GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS

SSS
PHIC
PCSO

PAGCOR no longer included.

Q: If the GOCC is not one of those enumerated does it follow

all of its income is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived from any public
utility or from the exercise of essential government function
accruing to the Govt of the Phils or to any political subd. Are
therefore exempt from income tax.
Therefore, even if the GOCC is one of those enumerated
under Sec. 27 it may still be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q:
A:

What is the difference between Sec. 27 C and 32 b7b?

1.
2.

Sec 27 C exempts those enumerated without any

qualification.
Sec. 32b7b qualification must concur before it may be
exempted.

Q: Can the government impose tax on itself?

A: It depends on who the taxing authority is. If the taxing
authority is the National Govt. as a rule, YES.
Exceptions
1. those entities enumerated under 27 C
2. those GOCC falling under 32b7b
If the taxing authority is the local government units, as a
rule NO. LGUs are expressly prohibited from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities
3. local government units
Exception:
Sec 154 of LGC says that LGUs may fix rate for
the operation of public utilities owned and maintained by the
within their jurisdiction.
PAL CASE July 20 2006
H:
The SC used 133 (o)an exception to pay tax, real
estate tax, imposed by City of PAranaque on NAIA. The SC
said that the airport is not an agency or GOCC but mere
instrumentality of the Govt.
This is Gross ignorance of the law Sec. 133 (o) is for
local taxation not real property taxation which is the one
involved in the present case.
NOTE: Mactan- Cebu Airport case
SEC. 27 D(1)
Q:
A:

How many possible incomes were mentioned?

Two (2): bank interest and royalties

REQ:
1. Bank interest must be received by a Domestic Corp
2. Royalties derived from sources within
Q: When it comes to bank interest, what is the difference if
the taxpayer is an individual or corporation?
A: If individual, they may be exempt from the payment of
interest in case of long term deposit except NRANETB
If DC, they are not exempt from long tem deposit.
Q: What about royalties?
A: If individual, have a lower rate of 10%on books, other
literary and musical compositions. DC have no lower
preferential rate.
SEC 27 D2: CAPITAL GAINS FROM SALE OF SHARES NOT
TRADED
SEC 27 D3: EFCDS
Q: What is the expanded foreign currency?
A: It is a bank authorized by the BSP to transact business in
the Philippine Currency as well as acceptable foreign currency
or both.
Q:

What is the tax to be paid?

A: Normally it is NIT because it is subj under Sec 27 D3 and

28 A
Q:
A:

A:

Who is the income earner?

Depositary banks

Sec. 28 B2 MCIT on RFC

Q: Exempt from what kind of transaction?

A: From foreign currency transaction. If it involves foreign
currency transaction it is not exempt but subject to 35 % NIT

1.
2.
3.
4.
5.

Q: Who are the other parties?

A:
Off shore banking units
branches of foreign banks
local commercial bank
Other depositary banks under EFCDS
Non- residents
if the above enumeration are the parties, then depositary
bank will be exempt from paying the NIT

NIT
MCIT

same with Sec. 27

Sec. 28 A3- INTL CARRIER

1.
2.

Kind:
Air carrier
ships
An intl. carrier doing business in the Phils. shall pay 2 %
on its Gross Phil Billings (GPB)
Q:
A:

Is 28 A3 the Gen. rule or the Exception?

It is the general rule because it is under 28 A3

Foreign Currency Loan

GPB is in the nature of FIT, applies only if all the

requirements are present.

Q:
A:

RFC will be liable for NIT, hence a RFC engaged in common

carriage does not pay GPB but NIT

Who is the lender? Borrower?

Lender- EFCDS
Borrower- RC

EXEMPT
Offshore banking units
Other depositary banks under EFCDS

exemption of NR from EFCDS:

Q:
A:

Who is the income earner?

Non Residents whether individual or Corporations

Q:
A:

Derived from whom?

Depositary Bank under EFCDS

NOTE: Sec. 24 B Nonresident exempt from bank interest under

EFCDS
Q: What is the difference between 24 b1 from 27 D3
A: In 24 B1, NR is exempt only from bank interst derived from
EFCDS while 27D3 exempts NR from any income from
transactions with depositary bank under EFCDS
SEC. 27 D(4)- Inter-corporate dividends- exempt
27 D5 Capital Gains from sale of Real Prop.
Q:
A:

What is the tax?

6% FIT

Q: What is the difference if the seller is an individual and a

DC?
A: Individual can sell all kinds of real property
DC can only dispose land and/or buildings.
SEC 27 (E) MCIT
Q:
A:

Applicable to whom?
DC and RFC

Q:
A:

Can it be applied simultaneously with NIT?

NO, imposed in lieu of the NIT, whichever is higher.

Q:
A:

What is the Rationale?

to prevent corporations from claiming too many deductions

Q:
A:

When will it be imposed?

1.
2.

Q:
A:

On the 4th year immediately ff the year in which

such corp commenced its business.
When the MCIT is higher than the NIT

What is the carry over rule?

Sec 27 E2 states the carry over rule.

In order to avail: only in the year where the MCIT is greater

than the NIT.
Sec 28 A1
Q:

What Kinds of taxes are paid by the RFC?

Income without: EXEMPT

International Carrier:

GPB refers to the amount of revenue derived from:

carriage of persons, excess baggage, cargo and mail
originating from the Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of
payment of the tickets or passage document.
REQ:
1.
2.
3.

Originating from the Phils.

Continuous and uninterrupted flight;
Irrespective of the place of sale or issue and the place
of the payment of tickets or passage document.

Q: Do you consider landing rights to determine liability? (RR

15-2002)
A:
1. If originates from the Phils and has landing rightsONLINE- RFC
2. No landing rights- OFFLINE- NRFC
Q:
A:

If there are stopovers, is it still uninterrupted?

YES, provided that the stopover does not exceed 48 hrs.

Q: When will the place of sale of tickets matter as to the

taxpayers liability?
A: The place of tickets is material only if the two other
elements are not present to be able to know if its subj to NIT or
exempt.
Revalidated, exchanged or indorsed tickets
REQ:
1.
2.

The passenger boards a plane in a port or point in the

Phils.
The tickets must be revalidated, exchanged, or
indorsed to another airline.

Q:
A:

What if its the same airline but different plane?

GPB does not apply, it must be to another airline

Q:
A:

What if it did not originate from the Phils.?

Determine if its income within or without.
if ticket was purchased in the Phils. it is income within
hence apply NIT
if purchased outside, it is income without, hence exempt

Transshipment
REQ:
flight originates from the Phils
transshipment of passenger takes place at any port outside
the Phils.
the passenger transferred on another airline
Q:

How do you apply GPB?

A: Only the aliquot portion of the cost of the ticket

corresponding to the leg flown from the Phils to the point of
transshipment shall from part of the GPB.

NOTE:
1.
2.

Q:
A:

Q;
A:

It is in addition to NIT- Why?

NIT because it is RFC

Q;

What kind of tax is imposed under 28 A5? A:

Is it liable for the whole flight?

From the Phils to the point of transshipment, it is income
w/in
From transshipment to final destination, its income w/outEXEMPT

International Shipping
GPB means gross revenue whether from passenger, cargo,
mail
REQ:
it must originate from the Phils.
up to final destination
regardless of the place of sale or payments of
passenger or freight documents
Sec28 A(4) OFF SHORE BANKING UNITS
OBUs
1.
2.
3.
4.

only acceptable foreign currencies

always a foreign corporation (subj to NIT) except #3
Exempt if income is derived by the OBU from EFCDS
Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils.

When a FC establishes branch, it is always a FC

When a FC establishes DC, it is a RFC

Q: How do you apply the rate?

A: multiplied to the total profit applied or earmarked for
remittance w/o deductions
It applies for branches that are:
1. the profit remitted is effectively connected with the
conduct of its trade or business in the Phils.
2. One not registered with PEZA
MARUBENI CASE
F: A branch was established with AG&P, there was investment
with AG&P
Q: Did the petitioner participate with the negotiation?
A: NO
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax (BPRT)
10% Intercorporate Dividends
Q: Whats the issue?
A: Petitioner maintains that there was overpayment of taxes,
thus the same was asking for a refund of tax erroneously
paid.
Q:
A:
H:

Is is subj to FIT?
NO, exempt if petitioner is RFC
-not correct to pay 15%

Difference with EFCDS:

EFCDS
1. Acceptable foreign currency, Phil. Currency or both
2. Can be a domestic or foreign corporation
3. Exempt if income derived by DC or RFC from EFCDS
4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils
e) Other banks under EFCDS

To be liable for BPRT

1. It is a RFC
2. Branch did not participate in negotiations

FOREIGN CURRENCY LOAN

Q:
A:

10% FIT
If: Lender- OBU
Borrower- Resident Citizen
EXCEPT:
1. OBU
2. Local Commercial Banks

SEC. 28 A6a
Regional or area headquarters (Sec. 22 DD) shall not be
subject to tax exempt from income tax if the requisites are
present.

Transactions of Non Residents:

1. Income earner: Non- Residents
2. Lender: OBUs
NOTE: Non resident exempt from transactions with OBUs and
EFCDS
SEC. 28 A5 TAX ON BRANCH PROFITS, REMITTANCES
profits based on the total profits applied or earmarked fro
remittance remitted by a branch to its head office
Subj to 15% tax
Except: those activities which are registered with PEZA
NOTE: Interests, Dividends, Rents, Royalties including
remuneration for technical sevices, salaries, wages,
premiums, annuities, emoluments, or casual gains, profits,
income and capital gains received by a foreign corporation
during each taxable year from all sources within shall not
be treated as branch profits UNLESS the same are
effectively connected with the conduct of its trade or
business.

15% FIT

What are the requisites?

1.
2.

the HQ do not earn or derive income from the Phils.

Acts
only
as
supervisory,
communications,
coordinating centre for their affiliates, subsidiary or
branches in the Asia- Pacific Region and other foreign
markets.

SEC. 28 A6b
Regional Operating HQ are taxable and liable to pay 10%
taxable income.
Regional Operating HQ is a branch established in the Phils
by a multinational company engaged in any of the services:
1. Gen. Administration and Planning
2. Business Planning and Coordination
3. Sourcing and procurement of Raw materials and
components.
4. Corporate Finance and Advisory Services
5. Marketing Control and sales promotion
6. Training and personal management
7. logistic services
8. research and development services and product
development
9. technical support and maintenance
10. data processing and communication and business
development
Rationale: Why liable? Because the claim for exemption of
resident airlines shall be minimized

Branch Profit Remittance

SEC. 28A7a Interests and Royalties:

Two ways to receive income (FC)

1. Branch
2. Subsidiaries

20%FIT

Interests under EFCDS= 7 %

Sec. 28A7b Income derived under EFCDS

1. Income derived from foreign currency transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the EFCDS

As a Gen Rule: the above transaction is Exempt

EXCEPTION:
Income from such transaction as may be
specified by the secretary of Finance, upon recommendation by
the Monetary Board to be subject to regular income tax payable
by any banks.
2. Interest income from foreign currency loans
granted by depository bank under said EFCDS to others
shall be subject to 10% FIT
Exempt if granted to:
1. Other OBU in the Phils, and
2. Other depository bank under the EFCDS

SEC. 28 A7c: Capital Gains from Shares of Stocks not

Traded in the Stock exchange

5% or 10% as the case maybe

SEC 28A7d: INTERCORPORATE DIVIDENDS

DC- RFC= EXEMPT, not subj to tax

SEC 28 B1
Q:
A:

What kind of tax?

35% GIT on the ff income
1. Interest
2. Dividends
3. Rents
4. Royalties
5. Salaries
6. Premiums( except reinsurance premiums)
7. annuities
8. emoluments
9. Other fixed and determinable Gains, profits and income.

SEC 28 B2 Non Resident Cinematographic film owner,

lessor or distributor

liable for 25% GIT

SEC 28 B3 Non Resident owner or lessor of Vessels

chartered by Philippine Nationals.

liable for 4 GIT

F: Atlas Mining entered into a Loan and Sales Contract with

Mitsubishi Metal Corp. ( A Japanese Corp.) for the purposes
of projected expansion of the productivity capacity of the
formers mines in Cebu. The contract provides that
Mitsibushi will extend a loan to Atlas in the amount 20 M
dollar, so that Atlas will be able install a new concentrator
for copper production.
-Mitsubishi to comply with its obligation, applied for a
loan from Export- Import Bank of Japan (Exim Bank) and
from consortium of Japanese banks.
Pursuant to the contract Atlas paid interst to Mitsubishi
where the corresponding 15% tax thereon was withheld
and only remitted to the Govt.
Subsequently Mitsubishi filed a claim for tax credit
requesting that the same be used as payment for its
existing liabilities despite having executed a waiver and
disclaimer of its interest in favor of Atlas earlier on. It is the
contention of Mitsubishi that it was the mere agent of Exim
Bank which is a financing inst owned and controlled by the
Japanese Govt.
The status of Eximbank as a government controlled
inst became the basis of the claim fro exemption by
Mitsubishi for the payment of interest on loans.
I: WON Mitsubishi is a mere agent of Eximbank
H: NO. The contract between the parties does not contain any
direct reference to Exim Bank, it is strictly between
Mitsubishi as creditor and Atlas as the seller of copper. The
bank has nothing to do with the sale of copper to
Mitsubishi. Atlas and Mitsubishi had reciprocal obligationsMitsubishi in order to fulfill its obligations had to obtain a
loan, in its independent capacity with Exim bank. Laws
granting exemption from tax are construed strictly against
the taxpayer and liberally in favor of the taxing authority.
SEC. 28 D5 b INTERCORPORATE DIVIDENDS:
FIT 15% imposed on the amount of cash and or prop
dividends received from a domestic corporation.
SUBJ TO THE CONDITION: the country where the NRFC is
domiciled allows a credit against the tax due from the NRFC
taxes deemed paid or deemed to have been paid in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the tax deemed paid rule/ reciprocity
rule/ tax sparring rule
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for income within and
income without
2nd : countries liable only for income within.

Elements:
1. Chartered to Filipino Citizens or Corporations
2. Approved by MARINA

MARUBENI Case: 2 Issues

1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but still Marubeni was
NRFC under the old law which is liable to pay 35%, but SC said
liable only to 25% because of the tax treaty

SEC. B(4) Non Resident Owner or Lessor of Aircraft,

Machiniries, and other Equipments.

You cannot refund right away 15% BPRT and 10% Intercorporate Dividends tax has different basis

In P&G who are involved

DC (P&G Phil) and NRFC (P&G US)
DC declares dividends to NRFC
35% was withheld and remitted to the BIR

liable for 7 1/2 % GIT

SEC 28 b5a Interest on Foreign Loans

Must be read with Sec. 32 B7a

Interest on Foreign Loans, if the lender is

1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an exclusion (Sec
32 b7a: income derived by a foreign govt from
investments in the Phils on loans, stocks, bond, and
other domestic securities or from interest on deposits
in banks by:
a) Foreign govt.
b) Financing inst owned controlled or enjoying,
refinancing from foreign govt; and
c) Inter nation or Regional financial inst established
by foreign govt.
COMMISIONER OF INTERNAL REV. vs. MITSUBISHI METAL CORP.
(180 SCRA 214)

What did they discover? (after paying)

they discovered that they are liable only for 15% so
they have a refund of 20%
Q:
A:

In the 1st case did the SC allowed the refund?

NO, denial anchored on 2 grounds:
1. One claiming for refund was not the proper party
2. There was a showing or proof as to the existence of
the tax deemed paid rule

Q:
A:

In 2nd case was there a refund?

YES, the SC reversed itself
1.
2.

Income tax is FIT: the withholding agent is the

proper party because he is liable to pay said taxes
actual proof of payment not necessary, what is
necessary is the law of the domicile of the country

providing fro tax credit equal to 20% of the tax

deemed paid.
Q:
A:

What is the rate if the law is silent?

35% FIT

The rate will only be 15% if theres a law recognizing the

same but this refers to the case of those belonging to the first
category.
WANDER CASE
Q: Who are the parties?
A:
DC(Wander) and FC (Glaxo)- they belong to different
categories
The BIR tried to collect 35% because the law is totally
silent about the tax credit
H: The SC said that the tax should be 15% which applies 2
instances:
1. Foreign law do not provide for tax credit- 35%
2. law provides but the law is silent- 15%
3. law is silent because there is no law- 15%
4. law is silent because theres no law because the subj
matter is not taxable- 15%
SEC. 29 IAET
Q:
A:

What is the rate?

10% of the gross income (taxable income)

It is imposed upon the improperly accumulated taxable

income of the corporation
Q: Applies to what Corp?
A: to DC only under RR 2- 2001( classified as closely held
corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the corporation to declare
dividends.
Q: Why?
A: because if profits are distributed to the shareholders, they
will be liable for the payment of Dividends tax. Now, if the
profits are undistributed the shareholders will not incur liability
on taxes with respect to the undistributed profits of the Corp.
In a way it is in the form of deterrent to the avoidance
of tax upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the pertinent items of
gross income specified in this Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such
types of income by this Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from payment of IAET
(RR2-2001)
A) Corporations failure to declare dividends because of
reasonable needs of business
reasonable needs means are construed to mean immediate
needs of the business including reasonable anticipated needs
Q: What constitutes reasonable accumulation of the
corporations earnings? Examples?
A:
1. allowance for the increase in the accumulation of
earnings up to 100% of the paid- up capital of the
corporation.
2. earnings reserved for the definite corporate expansion
projects or programs approved by the Board
3. Earnings reserved fro buildings, plants, or equipment,
acquisition approved by the Board
4. Earnings reserved for compliance with any loan
agreement or pre- existing obligations
5. Earnings required by law or other applicable statutes
to be retained.
6. In case of subsidiaries of foreign corporation, all
undistributed earnings or profits intended or reserved
for investments

NOTE: the corporations belonging in the 1 st group are normally

liable but they can show that the accumulation of earnings is
justified for reasonable needs of business, they incur no liability
and exempt from payments of the same.
B) Corporations which are exempt whether or not it is for
reasonable needs of the business:
1. Banks, and other non- bank financial intermediaries.
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
a) PEZA
b) Bases Conversion Devt Act of 1992 (RA 9227)
c) Special Economic Zone declared by law
Q: What is a closely- held corporations?
A: Those corporation at least 50% in value of the outstanding
capital stock or at least 50% of the total combined voting power
all classes of stock entitled to vote is owned directly, or
indirectly by or for not more than 20 individuals
NOTE: Publicly held Corp. has more than 20 shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is 2006.
You have 1 year to declare after the close of the taxable year.
2006 is the grace period. You will pay on January 2007.
Q: If youre not mentioned to be exempted, will you still be
liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON CORPORATIONS
Determine the Corporations exemptions under Sec. 30 27
C and 22B.
1. Sec 30, the corporations shall not be taxed under this
title (tax on income) in respect to income receive by
them as such.
2. Sec 27, the corporations enumerated are always
exempt. Thus exemption is unconditional
3. Sec 22B GPP, as a general rule is not a corporation
4. except if it earns income from other business
Joint Venture w/ service contract w/ government not a
corporation, otherwise, it is liable.
Assignment: Sec. 35
August 21, 2006 Midterms
August 14, 2006
Q: What is the reason for not including the corporations
exempt under section 27C and Section 22B under Section 30?
A: Because there is an exemption which does not apply to all
exempt corporation.
The exemption under Section 30 is not absolute while the
exemption under Section 27 C is absolute and without any
conditions. In addition, Section 22B provides that a joint
venture is generally taxable unless it has a service contract
with the government, a generally taxable corporation cannot be
joined with the group as generally not taxable corporation.
General Professional Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
exemption to the exemption: income of whatever kind and
character of the foregoing organizations from:
1. any of their properties, real or personal;
2. any activities conducted for profit
regardless of the disposition of said income, shall be
subject to tax.
Q: Enumerate the exempt corporations under Section 30;
What is the requirement?
A:
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
purpose and without profit;
3. a beneficiary society, order or association, operating
for the exclusive benefit of the members such as
fraternal organization operating under lodge system.
(lodge system: operating world wide) or a mutual old
association or a non-stock corporation:
a. organized by employees;
b. providing for the payment of life, sickness, accident or
other exclusive benefits to its employees and their
dependents;
4.
Cemetery (a) company owned and (b) operated
exclusively for the benefit of its members;
5. Non-stock corporation or association organized and
operated
exclusively
for
Religious,
Charitable,
Scientific, Artistic or Cultural purposes, or for the
Rehabilitation of Veterans (RCSACR), no part of its net
income or asset shall belong ot or inure to the benefit
of any member, organizer, officer, or any specific
person;
6. Business league, chamber of commerce, or Board of
trade, (a) not organized for profit and (b) no part of the
net income of which inures to the benefit of any stock
holder or individual;
7. Civil league or organization not organized for profit but
operated exclusively for the promotion of social
welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the imposition of the
tax?
A: last paragraph of Section 30, because YMCA was
conducting an activity for profit.
F: the CTA and the CA invoked the doctrine laid down in
Herrera and Abra Valley case which involves an exemption
from the payment of Real property Tax.
H: The SC revised the ruling. YMCVA is liable to pay income
tax applying the last paragraph of Section 30.
YMCA Is exempt from the payment of property tax, but
not to income tax on rentals from its property.
The tax code specifically mandates that the income of
exempt organizations (under section 30) from any of their
properties, real or personal, shall be subject to tax,
including the rent income of the YMCA from its real prop.
8. a non-stock and non profit educational institution;
9. govt educational institution;
10. Farmers or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, or like
organization of a purely local character, the income of
which consists solely of assessment, dues and fees,
collected from members for the sole purpose of
meeting its expenses;
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.
TAKE NOTE: income of sales agent is exempt.
Section 31: TAXABLE INCOME

CHAPTER VI: COMPUTATION OF GROSS INCOME

Q: What are the income that are not included, not subject to
NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an exclusion; and
3. Income that are exempt.
Q:
A:

Q:
A:

When do you not apply Sec. 32 A?

it applies to all except:
1. NRANETB
2. NRFC
they do not pay NIT, they pay by way of GIT.
What are included in the Gross income?
1.
Compensation for services in whatever form paid
including but nor limited to fees, salaries, wages,
commissions, and similar items. [Sec. 32 A (1)]

Q: What is compensation?
A: all remuneration for services performed by an employee
for his employer under an employer-employee relationship.
TAKE NOTE: compensation is included in the ITR if the taxpayer
is not liable for NIT. Thus, if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries of a RC is not
included in the ITR?
A: Yes, if the salary is subject to FIT, like when the RC is
employed in Multinational, offshore banking, and petroleum
companies.
2. Gross Income derived from the conduct of trade or
business or the exercise of a profession; [Sec. 32 A (2)]
Q:
A:

What is the income tax here?

NIT, included in the ITR.
3. Gains derived from dealings in property. [Sec. 32 A (3)]

Q: Did the law distinguished?

A: No, the law did not distinguished between real and
personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
if the elements are present, subject to FIT. Thus, it is not
included in the ITR, the withholding agent will be responsible
for this.
Q: Income form the sale of property, do you include this in the
ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent
accomplish the forms
subject to FIT if the following elements are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
Elements are not present, like when the real prop. is
an ordinary asset or when it is capital asset if the taxpayer is
RFC.
TAKE NOTE: R-R 17-2003

SECTION 32: GROSS INCOME

Q: What is the tax treatment? Are these taxable income? Are
these included in the gross income? Is it included in the ITR? Is
it subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to here?
A: NIT. The section refers only to the payment of NIT.
speaks of the NIT.

A: No, Section 32 A states Except when otherwise provided

in this title

It

Q: If the is mentioned under Section 32 A, does it follow that it

is automatically included in the GIT?

Real property sale subject to FWT, the buyer accomplishes

the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to here?
A: interest which is included in the computation of gross
income is interest earned from lending money and interest from
bank deposit which does not constitute passive income.
Bank interest from sources, without or abroad.
Q:

Bank interest from Solid Bank, is it included in the ITR?

A: No, because it is included or considered an income within,

thus subject to FIT. Thus, not included in the ITR.

A:

Included in the gross income if not exempt

never subject to fit (?)
11. Partners distributive share from the net income of the
general professional partnership (GPP).

Q:
A:

What is being referred to?

GPP exempt from payment of corporate income tax

shares of partners subject to NIT Sec. 26

5. Rents. [Sec. 32 A (5)]

subject to NIT, included in the ITR.

6. Royalties; [Sec. 32 A (6)]

Q: What is being referred to here?

A: royalties which does not constitute passive income.
Royalties derived from income without. subject to NIT. Thus
not included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and the rest are
exempt.
1. RC
2. DC

SEC 32 B EXCLUSIONS FROM GROSS INCOME

Q: What do you mean by exclusions? Are these exempt from
income tax?
A: these are not included in the gross income, THUS, exempt.
TAKE NOTE: Exemptions, exclusions, deductions, have the
same characteristics all tax do not apply.
1. Life insurance [Sec. 31 B (1)]

7. Dividends. [Sec. 32 A (7)]

Q:
A:

What kind of dividends?

one that does not constitute a passive income.

TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC DC & RFC = EXEMPT
3. DC NRFC = FWT
only dividends issued by a FC to an individual taxpayer (RC
OR RA) is included in the computation of the gross income.
Thus, included in the ITR.

Q: What is the requirement?

A: only one requirement for exemption: that the proceeds of
the life insurance be payable upon the death of the insured.
Q: Does it matter who the beneficiary is or paid in a lump sun
or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer under an agreement to
pay interest thereon, the interest payment shall be included in
the gross income.
2.
Amount received by
premium [Sec. 32 B (2)]

8. Annuities. [Sec. 32 A (8)]

Q: What kind of annuities?
A: annuities which are not exempt from tax are included in
the computation of the gross income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q:
A:

those that does not constitute passive income; and

those that are not considered as an exclusion. Thus,
exempt.

Passive Income
1. Prizes derived from sources within and over 10,000.00
2. Winnings derived from sources within.
Exempt:
a. winnings: PCSO and Lotto winnings.
b. prizes:
those primarily for recognition of (1)religious, (2)charitable,
(3)scientific, (4)educational, (5)artistic, (6)literary, (7)civic
achievement are exempt PROVIDED:
1. the recipient was selected without any action on his
part to enter the contest or proceedings; and
2. the recipient is not required to render substantial future
services as a condition to receiving the prize or award.
prizes and awards granted to athletes are also exempted
provided:
1. local
or
international
sports
competition
or
tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports association.
Q:
A:

When is
1. when
2. when
3. when

a prize subject to NIT?

derived from income without;
less than 10,000.00;
the income earner is a DC or RC.

Q:
A:

When is winning subject to NIT?

1. When derived from income without;
2. when the income earner is a DC or RC.
10. Pensions [Sec. 32 A (10)]

Q:

What kind of pension?

as

return

of

Q: if the insurance is payable within a certain time, say 10

years and thereafter the insured did not die, how much will be
excluded?
A: only the amount received by the insured as a return of the
premiums.
Ex. 1 M 100 thousand = capital
It is exempt (100K)

What kind of prizes and winnings?

a.
b.

insured

900K is taxable.
Q: Why is it excluded?
A: because the amount received merely represents a return of
capital.
Q: is this subject to Estate Tax under Sec. 85 E? do we have
the same requirement?
A: no, the requirement for exemption is not the same under
Section 85 E.
3.
Proceeds of life insurance: decedent insured
himself, inclusion or exclusion will depend on who
the beneficiary is.
a. the beneficiary is the estate.

subject to Estate tax, included in the gross estate

regardless of whether or not the designation of the
beneficiary is revocable or irrevocable.
b. the beneficiary is a third person other than the estate.
b.1 Revocable Designation subject to estate tax,
included in the gross estate.
Reason: because of the insureds power to modify or
change the beneficiary.
b.2 Irrevocable Designation not subject to Estate tax, not
included in the gross estate.
Reason: the insured loses the power to control, modify and
change the beneficiary.
Q:
A:

Is it subject to VAT?
1. Non-life insurance yes, subject to VAT under 108 (A).
2. Life insurance NO, subject to percentage tax under
Sec. 123 of the Tax Code.
4.

Gifts, Bequest and Devises [Sec. 32 B (3)]

Q: Why is the donee exempt from income tax?

A: Because the law classify it as an exclusion, not important
to know whether property is real or personal.

What is exempted is the value of property acquired by

gift, bequest or devise
TAKE NOTE:
A. GIFTS are excluded because they are subject to donors
tax.
B. BEQUEST and DEVISE are excluded because they are
subject to ESTATE tax.
Q:
A:

what is included in the gross income?

income from such property.

gift, bequest, devise or descent of income from any

property in case of transfers of divided interest.
5. Compensation for injuries or sickness [Sec. 32 B
(4)]
Q: is this the same as those provided under the workmens
compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those under workmens
compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and sickness.

retirement benefits given by the Philippine Govt through

the GSIS, SSS and PVAO are exempt without further
qualifications = automatic exclusions.
August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
ANSWERS = MIDTERMS
Gross Income include both capital and ordinary gains, Sec.
31 says gross income-deductions, that which is ordinary loss.
- may be deducted from capital gains and ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from the service because
of (1) illness, (2)death, (3) physical incapacity or injury, or (4)
causes beyond the control of the employee.
Q: Are there any requirement for separation pay granted by
foreign govt or corp?
A: None, the separation pay granted by the aforementioned
institutions are exempt without further qualifications (other
similar benefits).

Q: What does injury include?

A: The term injury includes death, even if not injured, if the
person dies this will be available.

Q:
A:

Q:
A:

1.

when will the damages recovered be exempt?

General Rule: all damages awarded are tax exempt.
Exception: damages representing loss of income.

Q: Why is it considered an exclusion?

A: because this is just an indemnification for the injuries or
damages suffered.
6. Income exempt under a treaty [Sec. 32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty binding upon the
Phil. Government.
7. Retirement benefits, pensions, gratuities [Sec. 32
B (6)]
Q: Why do we need to distinguish retirement pay, separation
pay and terminal leave pay?
A: because they have different requirements for exemption.
Q: What is retirement pay?
A: the sum of money received upon reaching the maximum
age of employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is approved by the BIR (RR298);
2. the retiring official or employee has been in the
service of the same employer for the last 10 years;
3. he is at least 50 years old at the time of retirement; and
4. the official or employee avails himself/herself of the
benefit only once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at least 60 years old
but not more than 65 years old;
2. the employee or official must have served the
company for at least 5 years;

entitled to 15 days salary and of the 13th month pay for

every year of service.
TAKE NOTE: the retirement benefits under RA4917 and RA7641
are exempt from income tax provided the requirements are
present.
SEC. 32 B(6)(c)
retirement benefits given by foreign government, foreign
corporation, public as well as private to RC, NRC, RA residing
permanently in the Philippines - exempt without further
qualifications automatic exclusions.
SEC. 32 B(6)(d,e,f)

2.

is separation pay an exclusion, therefore, exempt?

No.
GENERAL RULE: Separation pay not exempt (?)
Exception:
Automatic exclusions, thus exempt if due to:
a. illness
b. death
c. physical incapacity or injury.
Conditional exclusion
a. causes beyond the control of the employee- excluded
b. within employees control included.

Examples:
1. registration CBA provides separation pay, within the
control = included.
2. installation of labor saving devises or bankruptcy
beyond the control = excluded.
Q: What is terminal leave pay?
A: the accumulated vacation leave and sick leave benefits
converted to cash or money to be given either every year or
upon retirement or separation.
Terminal Leave Pay granted upon retirement or separation:

uder PD220, TLP in the Govt or in the Private Sector

shall be exempt from income tax if given or granted upon
retirement or separation.
TLP granted on a yearly basis:
1. employee in the private sector:
a. accumulated sick leave subject to income tax.
b. Accumulated vacation leave: if more than 10 days
(meaning 11 pataas) subject to income tax;
If 10 days or less exempt.
2. Govt Employee:

governing law: EO 291 of Pres. Estrada, RMC 16-2000.

Rule: Govt workers (both officers or non-officers) granted TLP
on a yearly basis exempt from income tax.
there is no qualification as to vacation or sick leave.
Take Note of 3 cases.

be reminded of
EO 291, Sec. 2. 78.2 par. 97, RR2-98,
RR16-200 (3).
Case of Zialcita
retired from DOJ, contention: TLP should be exempt from
income tax pursuant to the old law.
SC: on a different ground TLP is exempt because it is similar
to Retirement pay, thus exempt but the rulings application is
limited only to DOJ employees.
Borromeo case:
Same as the Zialcita case
Issues: WON the TLP is subject to income tax and WON COLA
and RATA are included?
SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ officers but also to
CSC commissioners.

COMMISSIONER v. CASTAEDA
- Castaeda DFA officer in Phil. Embassy in England.
1. TLP is exempt.
2. Ruling applies to DFA officers.
Q: Does the rule or decision applies to Govt officials only?
A: No. PD220: Exemption applies to both private and public
sectors(?)
it does not matter if TLP is vacation or sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)

JAN, 1998 the rule applies to both private and public

sectors.
EO291 (SEPT., 2000)

Officer in govt receiving TLP is always exempt whether or

not vacation or sick leave is granted.
Modified RR2-98:

TLP will only apply to private sectors

if granted on a yearly basis may be subject to tax:

VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
8. Miscellaneous items (Sec. 32 B (7)
(a) income derived by foreign Govt [Sec. 32 B (7)
(a)]
Q:
A:

What kind of income?

1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in the Philippines.

Q:
A:

Who are income earners?

1.
2.
3.

foreign government
financing institutions owned, controlled or enjoying refinancing from foreign govts; and
intl or regional financial institutions established by
foreign govts (established in the Philippines)

TAKE NOTE: if plain foreign corp., subject to FIT 20%.

EXAMPLES of exclusions:
a. Brunei Govt earns interest by depositing money in Makati
Bank Exclusion.
b. SMC- Stock dividends to 3. Brunei Govt. exclusion
c. Income derived by the Govt or its political subdivisions
(Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential govt function.

accruing to the govt.

d
prizes and awards (Sec. 32 B 7 c)

primarily
for
religious,
charitable,
scientific,
educational, artistic, literary or civic achievements:
1. recipient was selected without any action on his part to
enter the contest or proceedings;
2. the recipient was not required to render substantial
future services as a condition to receive the prize or
award.
D. prizes and awards in sports (Sec. 32B 7 d)
1. granted to athletes;
2. local or intl competitions;
3. held here or abroad;
4. sanctioned by the natl sports associations.
E. 13th month pay and other benefits (Sec. 32B 7 e)
Q: Do you include Christmas bonus in your ITR?
A: No, because the law says 13th month pay and other
benefits/similar benefits xmas bonus is included in the
category.
Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
Q: Applicable to whom?
A:

1. govt; and
2. Private institutions.
F. GSIS, SSS, Medicare and other contributions (Sec. 32 B 7 f)
must be deducted from the GI not NIT because it is an
exclusion.
-creditable withholding tax is an exclusion- must be deducted
first from the GI before you compute the NIT. Otherwise, you
are including in the GI something that is excluded from the
same.
G. Gains from the Sale of bonds, debentures, or other
Certificate of indebtedness. (Sec. 32 B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to Bank Interest in a
long term deposit.
- Sec. 32 B 7 g is similar or the same as 24 B in long term
deposit.
H. Gains from redemption of shares in mutual fund (Sec. 32 B 7
h)
1. Fiscal Year means an accounting period of 12 months
ending on the last day of any month other than December.
2. Calendar year a period of 12 months beginning on January
and ending on December.
Q: Business expense incurred in February 2006, is it possible to
include it for April 2006?
A: yes, it is possible or it is possible if fiscal year is employed, if
it falls under the fiscal year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to the trade or
business.
TAKE NOTE:
for taxpayers liable for income within and without (RC &
DC)), they can claim deduction for expenses incurred
within and without.
for taxpayers who are liable only for income within, they
can claim a deduction for expenses incurred within the
Philippines.
Sec. 34 A EXPENSES
1. For those business expenses not enumerated under A. You
need to prove that it is an ordinary and necessary expense.
2. For those enumerated under A, all you have to prove is that
it is incurred during the taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is required by law is for it
to be reasonable.
- for other forms of compensation, there must be services
actually rendered.
AGUINLDO Case
F: involves a corporation engaged in selling fish nets, and the
corporation have a land sold through a broker.
there was substantial profits gained from the sale of a land
which was sold by a broker. The profit was in turn given to the
workers as special bonus.
the corporation claimed the bonus as a deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for other forms of
compensation, it must be made or given for services actually
rendered.
in this case, it was proven that the sale was not made by the
employees, no effort or services actually rendered by them
because the sale was made through a broker.

Q: Reasonable Travel Expenses, What is the requirement?

A:
1. Travel must be in pursuit of business,
trade
profession.
2. Travel expense while away from home.

depending on whether or not the principal obligation has been

paid.
or

1. if the entire amount or entire principal obligation has been

paid the entire amount of interest can be claimed as itemized
deduction.

Q: Is there a travel expense which was not in pursuit of

business?
A: yes, those which are considered as fringe benefits (FB),
expenses for foreign travel is considered a FB only if it is not in
pursuit of the trade or business.

2. if only of the obligation had been paid, then the entire

amount of of that interest can be claimed as a deduction.
3. if no payment had been paid on the principal obligation, the
advance interest paid cannot be claimed as a deduction on the
years that it was paid.

Q: can you claim it under Sec. 34 A (1)(a)(ii)?

A: No, you can claim it under Sec. 34 A (1)(a)(i) last paragraph.

REQUIREMENTS FOR REDISCOUNTING OF PAPERS:

Q: Reasonable Allowances for rentals for meralco bills,

requirements?
A:
1. required as a condition for the
continued use or
possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or no
equity
other than a lessor.

1. incurred within the taxable year.

2. individual taxpayer reporting income on a cash basis.

1. if within the taxable year an individual taxpayer reporting

income on the cash basis incurs an indebtedness on which an
interest is paid in advance or through discount or otherwise.

Q: Reasonable allowance for entertainment, amusement and

recreation expenses, what is the requirement?
A:
1. connected with the development,
management, and
operation of the trade
(DOM);
2. Does not exceed the limits or ceiling set
by
the
Secretary of Finance; and
3. Not contrary to law, morals, good
customs,
public
policy or public order.

2. if both taxpayer and the person to whom the payments has

been made or is to be made are persons specified under Sec.
36 (B):
a. member of a family
b. bet. an individual and a corp., more than 50% in advance of
the outstanding stock of which is owned directly or indirectly by
or for such individual;
c. Bet. 2 corp., more than 50% in value of the outstanding stock
of each of which is owned, directly or indirectly, by or for the
same individual.
d. bet. the grantor and a fiduciary of any trust;
e. bet. the fiduciary of a trust and the fiduciary of another trust
if the same person is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary of such trust.

Q: How about bribe, kickbacks, and other similar payments

A: even without this provisions, kickbacks will not pass the
requirement of (i) ordinary and (ii) necessary hence not
deductible
EXPENSES ALLOWABLE
INSTITUTION

TO

PRIVATE

EDUCATIONAL

Q: Who are not allowed to claim interest under sec 36 B?

A: interest incurred between related parties.

Q: Why only private educational institution is mentioned and no

other taxpayers?
A: it refers to section 27 for Private Educational Institution
given to the educational institution.

Q: What if half-brother?
A: not allowed to claim deduction for interest.

GENERAL RULE: 36 A (2) and 36 A (3) expenditures for capital

outlays not deductible as business expense

TAKE NOTE: interest incurred from the exploration of petroleum

refers not just in interest incurred on loan of money but also
interest incurred for installment payments.

EXCEPTION: Private Educ. Institution can claim it under Sec. 34

A (2)

Q: Who are related parties?

A: individuals and corporations.

BUSINESS EXPENSE vs. ALLOWANCE FOR DEPRECIATION

BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is substantial, it cannot
accommodate all of the expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period depending on the life
span of the property.
3. it can accommodate all of the expenses incurred.

taxpayers allowable deduction for interest expense

shall be deducted by an amount equal to 42% (RR 102000) of the interest income subject to FIT.

Q: Who claims this deduction?

A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
interest on debt - when one borrows money to finance his
business interest in connection with the taxpayers profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
a borrower or taxpayer can claim the interest paid in advance
as itemized deduction when he filed his income tax return (ITR)

No deduction shall be allowed in respect to the

following interest:

a.
b.

OPTIONAL TREATMENT OF INTEREST EXPENSE:

1. interest incurred to acquire property used in trade, business
or exercise of profession can be claimed a an itemize
deduction
on interest; or
depreciation (as capital expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a bank so that it will
warn interest. (RR13-2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest of 20%
2. 20% of 1M is Php200,000 but you cannot claim this whole
amount as a deduction.
3. when you deposited the 1M in the bank, it earned a bank
interest subject to FIT worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is the amount you can
claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the taxable year
2. it must be incurred in connection with trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7

Q: Where should it be deducted?

A:
1. if claimed as a deduction, it should be
deducted
from the gross income;
2. if claimed as a tax credit, it should be
deducted
from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens shall create a tax credit
and must be deducted at the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
tax deduction is allowed if the taxes were paid or incurred
within the taxable year and it must be connected to the trade,
business or profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only for NIT)
Q: What is a tax credit?
A: refers to the taxpayers right to deduct from the income
tax due the amount of
tax the taxpayer paid to foreign
country, subject to limitations.
Q: What is the tax credit being referred to under 34 C (3)?
A: credit against taxes for taxes of foreign country.
Q: What are the other tax credit under the code?
A:
1. RA 6452 selling goods and commodities to senior citizens,
the discount claimed is treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: suppose you paid the 100K NIT to US, can you claim as a
deduction the whole 100K? what is the formula?
same procedure for (1) income tax paid to foreign country; (2)
estate tax paid to foreign country; and (3) Donors tax paid to
foreign country.
A: Formula:
STEP 1
GI from sources w/in
NIT: _____________________
GI from entire world
STEP 2
Quotient x RATE = amount w/c can be claimed as a deduction
A: you cannot claim the whole 100K, you can only claim the
product of the quotient times the rate
TAKE NOTE: deduct at the bottom of the formula ( sa
computation ng GI)
Q: Suppose you are a RC, you pay NIT to US, will you be able to
claim it as a tax deduction?
A: 1. generally, you can claim it as tax credit.
2. you can claim under Sec. 34 C (1) b
if the taxpayer did not signify in his return his intention to
avail himself of the benefit of tax credit for taxes paid to foreign
country.
taxes incurred not related to the trade or business, you have
the option to:

a. claim it as tax credit; or

b. claim it as a deduction
law gives you this privilege.
Q: When is taxes not allowed as a deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of any
country;
3. Estate and Donor tax; and
4. taxes assessed against local benefits of
tending to increase the value of
the property.

foreign
a

kind

Q: Who are not allowed to claim deductions?

A: Under 34 C (3) - NRC, NRA; and N/RFC
TAKE NOTE:
1. NRAE and NFC allowed deduction only if and to the extent
that they are connected with income from sources within the
Phils.
2. Taxes that had been allowed as deduction but are later in
refunded should be treated as part of the gross income during
the year that it is received (34 1 last paragraph)
Q: Which would you choose? Tax credit or
deduction?
A: tax credit because it is deducted from the taxable income
while deductions are deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME x RATE = TAXABLE
NET INCOME TAX CREDIT)
34 D LOSSES
Q: Is always a requirement that it is incurred in pursuit of trade,
bus. or profession?
A: No. Sec. 34 D(1) provides for 2 kinds of losses:
a. incurred in pursuit of trade, bus. or profession;
b. property connected with t,b,p, if the
loss arises
from fire, storms, shipwrecks
or other casualties or from
robbery, theft
or embezzlement (arising from natural
calamity).
Q: What is the requirement?
A:
1. Loss actually sustained during the
taxable year
2. Not compensated for by insurance or other
forms
indemnity.
3. Not claimed as a deduction for estate
tax
purposes.
Q: This is your itemized deduction which can
claimed as a deduction from?
A: Gross income

of

be

TAKE NOTE:
The itemized deduction of losses, however, is not confined
to section 34B. it is also found under section 86A (1) (e) which
also pertains to deductions available under the estate tax law.
Losses within six (6) months after the death of the decedent
can be claimed as itemized deduction of losses under Section
34B. However, may be claimed as deduction under estate tax
return provided that the same are not claimed as itemized
deduction of losses under Section 34B.
Q: How many carry-overs do we have under
A: 3. Namely:
1. Section 27 E (32) Carry forward of
Tax
2. Section 39 D Net Capital Loss Carry3. Section 39 D 3 Net Operating Loss

the Code?
excess

minimum

over
Carry-Over.