Income Tax Syllabus Notes II

F.
Exclusions from Gross Income

1. Specific Items Excluded:
a. Sec. 32(B) of the NIRC as amended by RA 10963
Exclusions from Gross Income. - The following items shall not be included in gross income
and shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but
if such amounts are held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned in
the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest,
devise, or descent: Provided, however, that income from such property, as well as gift,
bequest, devise or descent of income from any property, in cases of transfers of divided
interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or
Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received
by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For purposes
of this Subsection, the term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein contributions are made
by such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the fund
thus accumulated, and wherein it is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
1|INCOME TAXATION REVIEWER II

(b) Any amount received by an official or employee or by his heirs from the employer
as a consequence of separation of such official or employee from the service of the
employer because of death sickness or other physical disability or for any cause
beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government agencies and other
institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United States
Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.
(7) Miscellaneous Items. -

(a) Income Derived by Foreign Government. - Income derived from investments in
the Philippines in loans, stocks, bonds or other domestic securities, or from interest
on deposits in banks in the Philippines by (i) foreign governments, (ii) financing
institutions owned, controlled, or enjoying refinancing from foreign governments,
and (iii) international or regional financial institutions established by foreign
governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income
derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political
subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest
or proceeding; and
(ii) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
(d) Prizes and Awards in sports Competition. - All prizes and awards granted to
athletes in local and international sports competitions and tournaments whether
held in the Philippines or abroad and sanctioned by their national sports
associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed eighty-two thousand pesos
(P82,000) which shall cover:
(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential
decree No. 851, as amended by Memorandum Order No. 28, dated August 13,
1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus:
Provided, That every three (3) years after the effectivity of this Act, the
President of the Philippines shall adjust the amount herein stated to its present
value using the Consumer Price Index (CPI), as published by the National
Statistics Office.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness.
- Gains realized from the same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the
investor upon redemption of shares of stock in a mutual fund company as defined
in Section 22 (BB) of this Code.
2. Are Damages Taxable?

a. O'Gilvie v. United States, 519 U.S. 79 (1996)
Facts: Petitioners, the husband and two children of a woman who died of toxic shock
syndrome, received a jury award of $1,525,000 actual damages and $10 million
punitive damages in a tort suit based on Kansas law against the maker of the product
that caused decedent's death. They paid federal income tax insofar as the award's
proceeds represented punitive damages, but immediately sought a refund.
Procedurally speaking, this litigation represents the consolidation of two cases
brought in the same Federal District Court: the husband's suit against the Government
for a refund, and the Government's suit against the children to recover the refund that
the Government had made to the children earlier. The District Court found for
petitioners under 26 U. S. C. § 104(a)(2), which, as it read in 1988, excluded from "gross
income" the "amount of any damages received ... on account of personal injuries or
sickness." (Emphasis added.) The court held on the merits that the italicized language
includes punitive damages, thereby excluding such damages from gross income. The
Tenth Circuit reversed, holding that the exclusionary provision does not cover punitive
damages.

Held: Petitioners' punitive damages were not received "on account of" personal injuries;
hence the gross-income-exclusion provision does not apply, and the damages are
taxable.
b. Take note of exempt damages mentioned in Confederation for Unity, Recognition and
Advancement of Government Employees vs. Commissioner - BIR, GR No. 213446 dated July
3, 2018
The following allowances, bonuses or benefits, excluded by the NIRC of 1997, as

amended, from the employee's compensation income, are exempt from
withholding tax on compensation:
xxx
14. Actual, moral, exemplary and nominal damages received by an employee or his
heirs pursuant to a final judgment or compromise agreement arising out of or
related to an employer-employee relationship [Section 32(B)(4) of the NIRC of 1997,
as amended and Section 2.78.1 (B)(6) of RR No. 2-98]
3. Retirement Pay
a. Sec. 32(B)(6)(a) of the NIRC
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer: Provided, That the
retiring official or employee has been in the service of the same employer for at least
ten (10) years and is not less than fifty (50) years of age at the time of his retirement:
Provided, further, That the benefits granted under this subparagraph shall be availed of
by an official or employee only once. For purposes of this Subsection, the term
'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein its is provided in said
plan that at no time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the said officials and
employees.
(b) Any amount received by an official or employee or by his heirs from the employer as
a consequence of separation of such official or employee from the service of the
employer because of death sickness or other physical disability or for any cause beyond
the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident
or nonresident citizens of the Philippines or aliens who come to reside permanently in
the Philippines from foreign government agencies and other institutions, private or
public.
(d) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance
with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
b. Art. 287 of the Labor Code, as amended

"Art. 287. Retirement. - Any employee may be retired upon reaching the retirement
age established in the collective bargaining agreement or other applicable
employment contract.
"In case of retirement, the employee shall be entitled to receive such retirement
benefits as he may have earned under existing laws and any collective bargaining
agreement and other agreements: Provided, however, that an employee's
retirement benefits under any collective bargaining and other agreements shall not
be less than those provided herein.
"In the absence of a retirement plan or agreement providing for retirement benefits
of employees in the establishment, an employee upon reaching the age of sixty (60)
years or more, but not beyond sixty-five (65) years which is hereby declared the
compulsory retirement age, who has served at least five (5) years in the said
establishment, may retire and shall be entitled to retirement pay equivalent to at
least one-half (1/2) month salary for every year of service, a fraction of at least six
(6) months being considered as one whole year.
"Unless the parties provide for broader inclusions, the term one-half (1/2) month
salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay
and the cash equivalent of not more than five (5) days of service incentive leaves.
"Retail, service and agricultural establishments or operations employing not more

than (10) employees or workers are exempted from the coverage of this provision.
"Violation of this provision is hereby declared unlawful and subject to the penal
provisions provided under Article 288 of this Code."
Sec. 2. Nothing in this Act shall deprive any employee of benefits to which he may be
entitled under existing laws or company policies or practices.

Sec. 3. This Act shall take effect fifteen (15) days after its complete publication in the
Official Gazette or in at least two (2) national newspapers of general circulation,
whichever comes earlier.
c. International Broadcasting Corporation, Inc. vs. Amarilla, GR No. 162775 dated October 27,
2006
FACTS: Four employees retired from the company and received, on staggered basis, their
retirement benefits under the 1993 Collective Bargaining Agreement (CBA) between IBC
and the bargaining unit of its employees. In the meantime, a P1,500.00 salary increase
was given to all employees of the company, current and retired, effective July 1994.
However, when the four retirees demanded theirs, IBC refused and instead informed
them via a letter that their differentials would be used to offset the tax due on their
retirement benefits in accordance with the National Internal Revenue Code (NIRC). The
four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station Manager
Louella F. Cabañero for unfair labor practice and non-payment of backwages before the
NLRC. The complainants averred that their retirement benefits are exempt from income
tax under Article 32 of the NIRC. Sections 28 and 72 of the NIRC, which petitioner relied
upon in withholding their differentials, do not apply to them since these provisions deal
with the applicable income tax rates on foreign corporations and suits to recover taxes
based on false or fraudulent returns.
For its part, IBC averred that under Section 21 of the NIRC, the retirement benefits
received by employees from their employers constitute taxable income. While retirement
benefits are exempt from taxes under Section 28(b) of said Code, the law requires that
such benefits received should be in accord with a reasonable retirement plan duly
registered with the Bureau of Internal Revenue (BIR) after compliance with the
requirements therein enumerated. Since its retirement plan in the 1993 CBA was not
approved by the BIR, complainants were liable for income tax on their retirement
benefits. Petitioner claimed that it was mandated to withhold the income tax due from
the retirement benefits of said complainants. It was not estopped from correcting the
mistakes of its former officers. Under the law, complainants are obliged to return what
had been mistakenly delivered to them.
ISSUE: Whether the retirement benefits of respondents are part of their gross income
and thus taxable.
RULING: We agree with IBC’s contention that, under the CBA, it is not obliged to pay for
the taxes on the respondents’ retirement benefits. We have carefully reviewed the CBA
and find no provision where petitioner obliged itself to pay the taxes on the retirement
benefits of its employees.

We also agree with petitioner’s contention that, under the NIRC, the retirement benefits
of respondents are part of their gross income subject to taxes. Section 28 (b) (7) (A) of the
NIRC of 198623 provides:
Sec. 28. Gross Income. –

xxxx
(b) Exclusions from gross income. - The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
xxxx
(7) Retirement benefits, pensions, gratuities, etc. - (A) Retirement benefits received by
officials and employees of private firms whether individuals or corporate, in accordance
with a reasonable private benefit plan maintained by the employer: Provided, That the
retiring official or employee has been in the service of the same employer for at least ten
(10) years and is not less than fifty years of age at the time of his retirement: Provided,
further, That the benefits granted under this subparagraph shall be availed of by an
official or employee only once. For purposes of this subsection, the term "reasonable
private benefit plan" means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his officials or employees,
where contributions are made by such employer for officials or employees, or both, for
the purpose of distributing to such officials and employees the earnings and principal of
the fund thus accumulated, and wherein it is provided in said plan that at no time shall
any part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said official and employees.
Revenue Regulation No. 12-86, the implementing rules of the foregoing provisions,
provides:
(b) Pensions, retirements and separation pay. – Pensions, retirement and separation pay
constitute compensation subject to withholding tax, except the following:
(1) Retirement benefit received by official and employees of private firms under a
reasonable private benefit plan maintained by the employer, if the following
requirements are met:
(i) The retirement plan must be approved by the Bureau of Internal Revenue;
(ii) The retiring official or employees must have been in the service of the same employer
for at least ten (10) years and is not less than fifty (50) years of age at the time of
retirement; and
(iii) The retiring official or employee shall not have previously availed of the privilege
under the retirement benefit plan of the same or another employer.
Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements: (1) a reasonable private
benefit plan is maintained by the employer; (2) the retiring official or employee has been
in the service of the same employer for at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the time of his retirement; and (4) the benefit
had been availed of only once.
Respondents were qualified to retire optionally from their employment with petitioner.
However, there is no evidence on record that the 1993 CBA had been approved or was
ever presented to the BIR; hence, the retirement benefits of respondents are taxable.
d. BIR Ruling No. DA-151-04 dated March 31, 2004

This refers to your letters dated May 23, 2003 and February 17, 2004requesting for
clarificatory ruling on the following facts:
"6. In the light of the foregoing background, several employees of GCHS since January
1, 1998 (when the 1997 NIRC took effect) have been compulsorily retired after
twenty (20) years of service, pursuant to Section 1, Article X of the GCHS Retirement
Plan quoted above. These retirees, however, have not reached age fifty (50). The
question squarely raised is whether their retirement benefits are subject to
withholding.
"It is our opinion that since R.A. No. 7641 provides that "any employee may be retired
upon reaching the retirement age established in the collective bargaining
agreement or other applicable employment contract," and the GCHS Retirement
Plan is part of the terms and conditions of employment of GCHS employees and
therefore an "applicable employment contract", and a GCHS employee may be
compulsorily retired after completing 20 years of service, even if he is not yet fifty
(50) years old at the time of retirement. Similarly, a GCHS employee may be
compulsorily, retired upon reaching sixty (60) years, even if he has not served for
at least ten (10) years.
"And since both have met the two requirements of R.A. No. 7641 which give them a
right to the retirement benefit, namely, (a) that he is retired according to the CBA
or other applicable employment contract, and (b) that he "has served at least five
(5) years in the said establishment" their retirement benefits are not subject to
income tax pursuant to Section 32(B)(6)(a) of the Tax Code. And this exemption
applies, even if R.A. No. 4917, under which the GCHS Retirement Plan was
established, requires at least ten years of service and age fifty for the tax exemption
of retirement benefits.
"We request a confirmation of the following opinion, because of the growing

confusion among banks as to whether it is the conditions of R.A. No.7641 or R.A.
No. 4917 that would apply to the two cases explained above."

In reply thereto, please be informed that Section 32(B)(6)(a) of the Tax Code of 1997
provides as follows:
"(6) Retirement Benefits, Pensions, Gratuities, etc. —
"(a) Retirement benefits received under R.A. No. 7641 and those received by officials
and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer: Provided, That
the retiring official or employee has been in the service of the same employer for
at least ten (10) years and is not less than fifty(50) years of age at the time of his
retirement: Provided, further, that the benefits granted under this subparagraph
shall be availed of by an official or employee only once. . . . ."
It will be observed that under the afore-quoted provisions, retirement benefits may
be received either under R.A. No. 7641 and in accordance with a reasonable private
benefit plan maintained by the employer under then R.A. No. 4917 (now Section
32(B)(6)(a) of the Tax Code of 1997.Section 1 of R.A. No. 7641, otherwise known as
an "Act Amending Article287 of Presidential Decree No. 442, as amended,
otherwise known as The Labor Code of the Philippines, by Providing for Retirement
Pay to Qualified Private Sector Employees in the Absence of any Retirement Plan in
the Establishment" provides,
viz:
"Section 1, Article 287 of Presidential Decree No. 442, as amended, otherwise known
as the Labor Code of the Philippines, is hereby amended to read as follows:
"Art. 287. Retirement — Any employee may be retired upon reaching the retirement
age established in the collective bargaining agreement or other applicable
employment contract.
"In case of retirement, the employee shall be entitled to receive such retirement
benefits as he may have earned under existing laws and any collective bargaining
agreement and other agreements: Provided, however, that an employee's
retirement benefits under any collective bargaining and other agreements shall not
be less than those provided herein.
"In the absence of a retirement plan or agreement providing for retirement benefits
of employees in the establishment, an employee upon reaching the age of sixty (60)
years or more, but not beyond sixty-five (65) years which is hereby declared the
least one half (1/2) month salary for every year of service, a fraction of at least six
(6) months being considered as one whole year."

Thus, R.A. No. 7641 providing for Retirement Pay to Qualified Private Sector
Employees shall apply only in the absence of any Retirement Plan, collective
bargaining agreement or other applicable employment contract in the
establishment. Accordingly, under RA 7641, an employee upon reaching the age of
sixty (60) years or more, but not beyond sixty-five (65) years which is declared the
least one half (1/2) month salary for every year of service, a fraction of at least six
(6) months being considered as one whole year.
Under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], it is required
that the following conditions must be present in order that the employee benefits
may be granted tax exemptions: (1) the employee had been in the service of the
same private firm for at least ten (10) years; and (2) he is at least fifty (50) years old
at the time of retirement.
Thus, if there is a retirement plan duly approved by the BIR, collective bargaining
agreement or other applicable employment contract providing for retirement
benefits, the same shall be followed and R.A. No. 7641 shall not apply. In your letter
dated February 17, 2004, you opined that the tax exemption under R.A. No. 7641
and the tax exemption under R.A. No. 4917 must be reconciled and harmonized in
a way that would not lead to such absurd results as:
1. An employer who sets up a reasonable private benefit plan, but does not secure
B.I.R. approval, will have all retirement benefits subject to tax, even if the retiree is
50 years old and has served 10years. The retiree cannot qualify under R.A. No. 4917
because his employer's retirement plan is not approved by the B.I.R. Neither can
be qualify under R.A. No. 7641 because it applies only "in the absence of a
retirement plan or agreement providing for retirement benefits"; here there is a
retirement plan, although not approved by the B.I.R., or
2. An employer enters into a collective bargaining agreement providing retirement

benefits to employees who complete twenty years of service even if below age 50,
or to employees who reach age 60, provided they have served for at least five years;
in this situation, these retirees qualify for the tax exemption under R.A. No. 7641;
but the moment the employer obtains approval of the B.I.R. for a retirement plan
containing those provisions, the retirement benefits for these employees become
taxable.
And that you submit that the reasonable reconciliation of the tax exemption under
R.A. No. 4917 and R.A. No. 7641 is to hold:
10 | I N C O M E T A X A T I O N R E V I E W E R I I
1. That any retiree who satisfies the requirements of R.A. No. 7641(retirement under
a CBA or other applicable employment, and service for at least five years) is entitled
to the tax exemption, even if he is a member of a reasonable private benefit plan
established by his employer and approved by the B.I.R., if the retirement benefit
he receives from the Plan is equal to or less than the minimum retirement benefit
provided by R.A. No. 7641. This would avoid the absurd situation where an
employee who fails to meet the 50 years retirement age or 10 years’ service
requirements will be taxed if he receives the retirement benefit from a B.I.R.
approved retirement plan, but not if his employer does not have such a retirement
plan or if the retirement plan is not B.I.R. approved.
2. That if he receives from the B.I.R. approved plan a retirement benefit in excess of
the minimum retirement benefit provided by R.A. 7641, he must satisfy the
requirements or conditions of R.A. No. 4917, which means that he must be at least
50 years old and must have served 10 years, in order to enjoy the tax exemption.
This is but fair since it is clear that the retirement benefit comes from the B.I.R.
approved voluntary plan and not from the requirements of R.A. No. 7641.
3. It is needless to add that the tax treatment of retirement benefits received by

employees outside of a B.I.R. approved retirement plan will be governed by R.A.
No. 7641.
This Office is amenable to your proposal that if the retirement benefit to be received
by a member of a private benefit plan established by the employer under R.A. No.
4917 and duly approved by the BIR is equal to or less than the minimum retirement
benefit provided by R.A. No. 7641, said benefits shall be exempt from income tax
to prevent an absurd situation where the retirement benefits will be exempt if an
employer does not have such a retirement plan or if the retirement plan is not
approved by the BIR.
However, if the employee receives from the BIR approved plan a retirement benefit in
excess of the minimum retirement benefit provided by R.A. No. 7641, he must
satisfy the requirements or conditions of R.A. No. 4917, which means that he must
be at least fifty (50) years old and must have served the company for at least ten(10)
years in order that his retirement benefits may be tax exempt. This is but fair since
it is clear that the retirement benefit comes from the BIR approved voluntary plan
and not from the requirement of R.A. No. 7641.
Finally, retirement benefits received by employees not from a BIR approved

retirement plan shall be governed by R.A. No. 7641.
e. BIR Ruling No. 052-00 dated October 30, 2000
BOOKKEEPING REGULATIONS - The sole proprietors and non-VAT taxpayers shall use
denying the request of Mr. Norberto Go-Soco for the imprimatur and accreditation
of this Office the accounting and bookkeeping method books which the authored.
There is no provision in Revenue Regulations No. V-1, otherwise known as the
Bookkeeping Regulations nor in any other tax laws directing this Office to accredit
books of account and bookkeeping methods that shall be used by a class of
taxpayer. (BIR Ruling No. 056-2000 dated October 30, 2000)
4. Terminal Leave Pay – is the amount received arising from the accumulation of sick leave
or vacation leave credits (Commutation of leave credits)
a. CIR vs. CA, GR No. 96016 dated October 17, 1991

Facts: Private respondent Efren P. Castaneda retired from the government service as
Revenue Attache in the Philippine Embassy in London. Upon retirement, he received,
among other benefits, terminal leave pay from which petitioner Commissioner of Internal
Revenue withheld P12,557.13 allegedly representing income tax thereon. Castaneda filed
a formal written claim with CIR for a refund of the P12,557.13, contending that the cash
equivalent of his terminal leave is exempt from income tax.
Issue: Whether or not terminal leave pay received by a government official or employee
on the occasion of his compulsory retirement from the government service is subject to
withholding (income) tax.
Ruling: NO. The Court has already ruled that the terminal leave pay received by a
government official or employee is not subject to withholding (income) tax. In the recent
case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032,
31 July 1991, the Court explained the rationale behind the employee's entitlement to an
exemption from withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave, is

applied for by an officer or employee who retires, resigns or is separated from the
service through no fault of his own. (Manual on Leave Administration Course for
Effectiveness published by the Civil Service Commission, pages 16-17). In the
exercise of sound personnel policy, the Government encourages unused leaves to
be accumulated. The Government recognizes that for most public servants,
retirement pay is always less than generous if not meager and scrimpy. A modest
nest egg which the senior citizen may look forward to is thus avoided. Terminal
leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.
In fine, not being part of the gross salary or income of a government official or employee
but a retirement benefit, terminal leave pay is not subject to income tax.
b. In Re: Zialcita, AM No. 90-6-015-SC dated October 18, 1990
"The terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement
can never be considered a part of his salary subject to the payment of income tax but falls
under the phrase `other similar benefits received by retiring employees and workers’,
within the meaning of Section 1 of PD No. 220 and is thus exempt from the payment of
income tax. That the money value of his accrued leave credits is not a part of his salary is
further buttressed by Sec. 3 of PD No. 985, otherwise known as ‘The Budgetary Reform
Decree on Compensation and Position Classification of 1976’ particularly Sec. 3 (a)
thereof, which makes it clear that the actual service is the period of time for which pay
has been received, excluding the period covered by terminal leave."
c. BIR Ruling No. 496-14 dated December 12, 2014
Withholding tax on effectively connected income
The income payment made by a domestic corporation to its head office abroad, which
has a branch office in the Philippines, shall not be entitled to preferential tax treatment if
the income is effectively connected to the branch office. However, if the business
transactions that created the income came from a separate and independent transaction
from the branch in the Philippines, then such income may be subject to the preferential
tax rate under the tax treaty.
In case of dividends paid to a resident of Japan by a domestic corporation that has a

branch in the Philippines, Section 28(B)(1) of the Tax Code provides that such dividends
shall be subject to 30 percent tax. However, the same dividends may be subject to a
reduced tax rate pursuant to the Philippines-Japan Tax Treaty. Under paragraphs 2 and 3
of Article 10 of the Philippines-Japan Tax Treaty, dividends arising from the Philippines
and paid to a resident of Japan may be taxed at a lower rate of 10 percent or 15 percent
under certain conditions.
However, the preferential tax rates shall not apply if the nonresident foreign corporation
has a permanent establishment in the Philippines and the subject dividend income is
effectively connected to a permanent establishment, which includes, among others, a
branch. In the instant case, the recipient of the dividends is a foreign corporation
organized and existing under the laws of Japan, with a branch in the Philippines. The
shares held or acquired by the nonresident foreign corporation in the domestic
corporation were acquired without the participation of its branch in Philippines.
Moreover, the Philippine branch does not hold any shares of stock in the domestic
corporation. Citing the case of Marubeni Corporation v. Commissioner of Internal
Revenue (GR 76573, September 14, 1989), a foreign corporation is considered the same
juridical entity as its branch if the former’s business is conducted through its branch office,
following the principal-agent relationship theory. However, where the foreign
corporation transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside, and the transaction becomes one of the foreign
corporation, not the branch. Considering that the rights and obligations of the
nonresident foreign corporation arising from its investment in the domestic corporation
are solely for its own account and are not in any way effectively connected with the
business activity of its branch in the Philippines, the BIR held that the dividends paid by
the domestic corporation to its nonresident foreign shareholder in Japan are not
considered as effectively connected to the Philippine branch of the nonresident foreign
corporation. Accordingly, the dividends paid by the domestic corporation to the
nonresident foreign corporation are subject to lower income tax rate pursuant to the
Philippines-Japan Tax Treaty.
5. Income of the government

a. CIR vs. Mitsubishi Metal Corporation, GR No. 54908 dated January 22, 1990
Ruling: The nature of the above contract shows that the same is not just a simple
contract of loan. It is not a mere creditor-debtor relationship. It is more of a
reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide
the funds in the installation of a new concentrator at the former's Toledo mines in
Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of
15 years, the entire copper concentrate that will be produced by the installed
concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the
specified term was the consideration of the granting of the amount of $20 million
to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds.
Hence, it had to secure a loan or loans from other sources. And from what sources,
it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the
$20 million from the EXIMBANK, of Japan and the consortium of Japanese banks
financed through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent
capacity as a private entity and not as a conduit of the consortium of Japanese
banks or the EXIMBANK of Japan. While the loans were secured by MITSUBISHI
primarily "as a loan to and in consideration for importing copper concentrates from
ATLAS," the fact remains that it was a loan by EXIMBANK of Japan to MITSUBISHI
and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the
latter contract, it is not EXIMBANK, that was intended to be benefited. It is
MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be
any clearer. The only signatories to the same were MITSUBISHI and ATLAS.
Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf
of EXIMBANK, of Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule
that when a contract of loan is completed, the money ceases to be the property of
the former owner and becomes the sole property of the obligor (Tolentino and
Manio vs. Gonzales Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK,
of Japan, said amount ceased to be the property of the bank and became the
property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely
different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan.
What was the subject of the 15% withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the
loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is

complete in itself, does not appear to be suppletory or collateral to another
contract and is, therefore, not to be distorted by other considerations aliunde. The
application for the loan was approved on May 20, 1970, or more than a month after
the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is
true that under the contract of loan with Eximbank, Mitsubishi agreed to use the
amount as a loan to and in consideration for importing copper concentrates from
Atlas, but all that this proves is the justification for the loan as represented by
Mitsubishi, a standard banking practice for evaluating the prospects of due
repayment. There is nothing wrong with such stipulation as the parties in a contract
are free to agree on such lawful terms and conditions as they see fit. Limiting the
disbursement of the amount borrowed to a certain person or to a certain purpose
is not unusual, especially in the case of Eximbank which, aside from protecting its
financial exposure, must see to it that the same are in line with the provisions and
objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's
charter prevents it from making loans except to Japanese individuals and
corporations. We are not impressed. Not only is there a failure to establish such
submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution
would deliberately circumvent its own charter to accommodate an alien borrower
through a manipulated subterfuge, but with it as a principal and the real obligee.
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to
Eximbank, assuming the truth thereof, is too tenuous and conjectural to support
the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of
the interest payments may also be logically viewed as an arrangement in paying
Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by
Eximbank and Mitsubishi as to the manner or procedure for the payment of the
latter's obligation is their own concern. It should also be noted that Eximbank's loan
to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis
contract with Atlas merely states that the "interest on the amount of the loan shall
be the actual cost beginning from and including other dates of releases against
loan."
It is too settled a rule in this jurisdiction, as to dispense with the need for citations,
that laws granting exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption so claimed, which
onus petitioners have failed to discharge. Significantly, private respondents are not
even among the entities which, under Section 29 (b) (7) (A) of the tax code, are
entitled to exemption and which should indispensably be the party in interest in
this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a
supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed
funds. Nor can we close this discussion without taking cognizance of petitioner's
warning, of pervasive relevance at this time, that while international comity is
invoked in this case on the nebulous representation that the funds involved in the
loans are those of a foreign government, scrupulous care must be taken to avoid
opening the floodgates to the violation of our tax laws. Otherwise, the mere
expedient of having a Philippine corporation enter into a contract for loans or other
domestic securities with private foreign entities, which in turn will negotiate
independently with their governments, could be availed of to take advantage of
the tax exemption law under discussion.
6. Gains from Bonds
a. BDO vs. Republic of the Philippines, GR No. 198756 dated January 13, 2015 and dated
August 16, 2016 (motion for reconsideration).
Issues:
First, the proper interpretation and application of the 20-lender rule under Section
22(Y) of the National Internal Revenue Code, particularly in relation to issuances of
government debt instruments;
Second, whether the seller in the secondary market can be the proper withholding
agent of the final withholding tax due on the yield or interest income derived from
government debt instruments considered as deposit substitutes;
Ruling:
Generally, a corporation may obtain funds for capital expenditures by floating

either shares of stock (equity) or bonds (debt) in the capital market. Shares of stock
or equity securities represent ownership, interest, or participation in the issuer-
corporation. On the other hand, bonds or debt securities are evidences of
indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the first time in the
primary market. Transactions in the primary market involve an actual transfer of
funds from the investor to the issuer of the new security. The transfer of funds is
evidenced by a security, which becomes a financial asset in the hands of the
buyer/investor.
New issues are usually sold through a registered underwriter, which may be an
investment house or bank registered as an underwriter of securities.101 An
underwriter helps the issuer find buyers for its securities. In some cases, the
underwriter buys the whole issue from the issuer and resells this to other security
dealers and the public. 102 When a group of underwriters pool together their
resources to underwrite an issue, they are called the "underwriting syndicate."103
On the other hand, secondary markets refer to the trading of outstanding or

already-issued securities. In any secondary market trade, the cash proceeds
normal_ly go to the selling investor rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A
bonds. The proceeds of the sale go to A, the issuer. The sale between A and Xis a
primary market transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's
indebtedness. The cash paid for the bonds no longer go to A, but remains with X,
the s_elling investor/holder. The transfer of A bonds from X to Y is considered a
secondary market transaction. Any difference between the purchase price of the
assets (A bonds) and the sale price is a trading gain subject to a different tax
treatment, as will be explained later.
When Y trades its A bonds to Z, the sale is still considered a secondary market
transaction. In other words, the trades from X to Y, Y to Z, and Z to subsequent
holders/investors are considered secondary market transactions. If Z holds on to
the bonds and the bonds mature, Z will receive from A the face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to
the issuer and the issuer pays interest on the invested amount. However, unlike
bank deposits, bonds are marketable securities. The market mechanism provides
quick mobility of money and securities. 104 Thus, bondholders can sell their bonds
before they mature to other investors, in tum converting their· financial assets to
cash. In contrast, deposits, in the form of savings accounts for instance, can only be
redeemed by the issuing bank.
111.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for the
use of the lender’s money.105 For interest-bearing bonds, interest is normally
earned at the coupon date. In zero-coupon bonds, the discount is an interest
amortized up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity
date or when redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield from deposit
substitute does not apply to the gains derived from trading, retirement, or
redemption of the instrument.
It must be stressed that interest income, derived by individuals from long-term

deposits or placements made with banks in the form of deposit substitutes, is
exempt from income tax. Consequently, it is likewise exempt from the final
withholding tax under Sections 24(B)(l) and 25(A)(2) of the National Internal
Revenue Code. However, when it is pre-terminated by the individual investor,
graduated rates of 5%, 12%, or 20%, depending on the remaining maturity of the
instrument, will apply on the entire income, to be deducted and withheld by the
depository bank.
With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of
the National Internal Revenue Code provides:
Sec. 32. Gross Income. –
....
(B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness.
- Gains realized from the sale or exchange or retirement of bonds, debentures
or other certificate of indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those
with a maturity of more than five years) in the secondary market, are exempt from
income tax. These "gains" refer to the difference between the selling price of the
bonds in the secondary market and the price at which the bonds were purchased
by the seller. For discounted instruments such as the zero-coupon bonds, the
trading gain is the excess of the selling price over the book value or accreted value
(original issue price plus accumulated discount from the time of purchase up to the
time of sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when
the bonds are redeemed at maturity, which is the difference between the proceeds
from the retirement of the bonds and the price at which the last holder acquired
the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those with
a maturity of less than five years) in the secondary market are subject to regular
income tax rates (ranging from 5% to 32% for individuals, and 30% for corporations)
under Section 32107 of the National Internal Revenue Code.
111.C
The Secretary of Finance, through the Bureau of Treasury, 108 is authorized under
Section 1 of Republic Act No. 245, as amended, to issue evidences of indebtedness
such as treasury bills and bonds to meet public expenditures or to provide for the
purchase, redemption, or refunding of any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to
lenders/investors through a network of licensed dealers (called Government
Securities Eligible Dealers or GSEDs ). 109 GSEDs are classified into primary and
ordinary dealers. A primary dealer enjoys certain privileges such as eligibility to
participate in the competitive bidding of regular issues, eligibility to participate in
the issuance of special issues such as zero-coupon treasury bonds, and access to
tap facility window. On the other hand, ordinary dealers are only allowed to
participate in the noncompetitive bidding. Moreover, primary dealers are required
to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled auction.
b. Must have total awards of at least 2% of the total amount of bills or bonds awarded
within a particular quarter. This requirement does not cover special issues.
c. Must be active in the trading of GS [government securities] in the secondary market.
A primary dealer who fails to comply with its obligations will be dropped from the
roster of primary dealers and classified as an ordinary dealer.
The auction method is the main channel used for originating government securities.
114 Under this method, the Bureau of Treasury issues a public notice offering
treasury bills and bonds for sale and inviting tenders. The GSEDs tender their bids
electronically; after the cut-off time, the Auction Committee deliberates on the bids
and decide on the award.
The Auction Committee then downloads the awarded securities to the winning
bidders' Principal Securities Account in the Registry of Scrip less Securities (RoSS).
The RoSS, an electronic book-entry system established by the Bureau of Treasury,
is the official Registry of ownership of or interest in government securities. All
government securities floated/originated by the National Government under its
scripless policy, as well as subsequent transfers of the same in the secondary
market, are recorded in the RoSS in the Principal Securities Account of the GSED.
A GSED is required to open and maintain Client Securities Accounts in the name of its
respective clients for segregating government securities acquired by such clients
from the GSED' s own securities holdings. A GSED may also lump all government
securities sold to clients in one account, provided ·that the GSED maintains
complete records of ownership/other titles of its clients in the GSED's own books.
Thus, primary issues of treasury bills and bonds are supposed to be issued only to
GSEDs. By participating in auctions, the GSED acts as a channel between the Bureau
of Treasury and investors in the primary market. The winning GSED bidder acquires
the privilege to on-sell government securities to other financial institutions or final
investors who need not be GSEDs. Further, nothing in the law or the rules of the
Bureau of Treasury prevents the GSED from entering into contract with another
entity to further distribute government securities.
In effecting a sale or distribution of government securities, a GSED acts in a certain

sense as the "agent" of the Bureau of Treasury. In Doles v. Angeles, the basis of an
agency is representation. The question of whether an agency has been created may
be established by direct or circumstantial evidence. For an agency to arise, it is not
necessary that the principal personally encounter the third person with whom the
agent interacts. The law contemplates impersonal dealings where the principal
need not personally know or meet the third person with whom the agent transacts:
precisely, the purpose of agency is to extend the personality of the principal
through the facility of the agent. It was also stressed that the manner in which the
parties designate the relationship is not controlling. If an act done by one person
on behalf of another is in its essential nature one of agency, the former is the agent
of the latter, notwithstanding he or she is not called.
Through the use of GSEDs, particularly primary dealers, government is able to ensure
the absorption of newly issued securities and promote activity in the government
securities market. The primary dealer system allows government to access
potential investors in the market by taking advantage of the GSEDs' distribution
capacity. The sale transactions executed by the GSED are indirectly for the benefit
of the issuer. An investor who purchases bonds from the GSED becomes an indirect
lender to government. The financial asset in the hand of the investor represents a
claim to future cash, which the borrower-government must pay at maturity date.
Accordingly, the existence of 20 or more lenders should be reckoned at the time when
the successful GSED-bidder distributes (either by itself or through an underwriter)
the government securities to final holders. When the GSED sells the · government
securities to 20 or more investors, the government securities are deemed to be in
the nature of a deposit substitute, taxable as such.
On the other hand, trading of bonds between two (2) investors in the secondary
market involves a purchase or sale transaction. The transferee of the bonds
becomes the new owner, who is entitled to recover the face value of the bonds
from the issuer at maturity date. Any profit realized from the purchase or sale
transaction is in the nature of a trading gain subject to a different tax treatment, as
explained above.
Respondents contend that the literal application of the "20 or more lenders at any one
time" to government securities would lead to: (1) impossibility of tax enforcement
due to limitations imposed by the Bank Secrecy Law; (2) possible uncertainties130;
and (3) loopholes. These concerns, however, are not sufficient justification for us
to deviate from the text of the law. Determining the wisdom, policy, or expediency
of a statute is outside the realm of judicial power. These are matters that should
be addressed to the legislature. Any other interpretation looking into the purported
effects of the law would be tantamount to judicial legislation.
IV
Section 57 prescribes the withholding tax on interest or yield on deposit substitutes,

among others, and the person obligated to withhold the same. Section 57 reads:
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the
Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees,
the tax imposed or prescribed by Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5);
28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(l), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33 and 282 of the Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section 58 of
this Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National
Internal Revenue Code relative to the Withholding on Income subject to the
Expanded Withholding Tax and Final Withholding Tax) states that the liability for
payment of the tax rests primarily on the payor as a withholding agent. Section 2.57
reads:
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -
(A) Final Withholding Tax - Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee of said income. The liability for
payment of the tax rests primarily on the payor as a withholding agent. Thus, in
case of his failure to withhold the tax or in case of under withholding the deficiency
tax shall be collected from the payor/withholding agent[.] (Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold
and remit the 20% final tax on interest income or yield from deposit substitutes.
This does not mean, however, that only the payor-borrower can be constituted as
withholding agent. Under Section 59 of the National Internal Revenue Code, any
person who has control, receipt, custody, or disposal of the income may be
constituted as withholding agent:
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed
under this Title upon gains, profits, and income not falling under the foregoing and
not returned and paid by virtue of the foregoing or as otherwise provided by law
shall be assessed by personal return under rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner. The
intent and purpose of the Title is that all gains, profits and income of a taxable class,
as defined in this Title, shall be charged and assessed with the corresponding tax
prescribed by this Title, and said tax shall be paid by the owners of such gains,
profits and income, or the proper person having the receipt, custody, control or
disposal of the same. For purposes of this Title, ownership of such gains, profits and
income or liability to pay the tax shall be determined as of the year for which a
return is required to be rendered. (Emphasis supplied)
The intent and purpose of the National Internal Revenue Code provisions on
withholding taxes is also explicitly stated, i.e., that all gains, profits, and income "re
charged and assessed with the corresponding tax" and said tax paid by "the owners
of such gains, profits and income, or the proper person having the receipt, custody,
control or disposal of the same."
The obligation to deduct and withhold tax at source arises at the time an income
subject to withholding is paid or payable, whichever comes first. In interest-bearing
bonds, the interest is taxed at every instance that interest is paid (and income is
earned) on the bond. However, in a zerocoupon bond, it is expected that no
periodic interest payments will be made. Rather, the investor will be paid the
principal and interest (discount) together when the bond reaches maturity.
As explained by respondents, "the discount is the imputed interest earned on the

security, and since paymnet is made at maturity, there is an accreted interest that
causes the price of a zero coupon instrument to accordingly increase with time, all
things being constant."
In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in
the first period, i.e., the value of the instrument does not equal par at the end of
the first period. The total discount is earned over the life of the instrument.
Nonetheless, the total discount is considered earned on the year of sale based on
current value.
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the
primary responsibility to withhold the 20% final withholding tax on the interest
valued at present value, when its sale and distribution of the government securities
constitutes a deposit substitute transaction. The 20% final tax is deducted by the
buyer from the discount of the bonds and included in the remittance of the
purchase price.
The final tax withheld by the withholding agent is considered as a "full and final
payment of the income tax due from the payee on the said income [and the] payee
is not required to file an income tax return for the particular income." Section 10
of Department of Finance Department Order No. 020-10140 in relation to the
National Internal Revenue Code also provides that no other tax shall be collected
on subsequent trading of the securities that have been subjected to the final tax.
In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-

NGO as the winning bidder in the primary auction. At the same time, CODE-NGO
got RCBC Capital as underwriter, to distribute and sell the bonds to the public.
The Underwriting Agreement and RCBC Term Sheet for the sale of the PEACe bonds
show that the settlement dates for the issuance by the Bureau of Treasury of the
Bonds to petitioners-intervenors RCBC/CODENGO and the distribution by
petitioner-intervenor RCBC Capital of the PEA Ce Bonds to various investors fall on
the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-
building process, a customary method of initial distribution of securities by
underwriters, where it could collate orders for the securities ahead of the auction
or before the securities were actually issued. Through this activity, the underwriter
obtains information about market conditions and preferences ahead of the auction
of the government securities.
The reckoning of the phrase "20 or more lenders" should be at the time when
petitioner-intervenor RCBC Capital sold the PEACe bonds to investors. Should the
number of investors to whom petitioner-intervenor RCBC Capital distributed the
PEACe bonds, therefore, be found to be 20 or more, the PEACe Bonds are
considered deposit substitutes subject to the 20% final withholding tax. Petitioner-
intervenors RCBC/CODE-NGO and RCBC Capital, as well as the final bondholders
who have recourse to government upon maturity, are liable to pay the 20% final
withholding tax.
We note that although the originally intended negotiated sale of the bonds by
government to CODE-NGO did not materialize, CODE-NGO, a private entity-still
through the participation of petitioners-intervenors RCBC and RCBC Capital-ended
up as the winning bidder for the government securities and was able to use for its
projects the profit earned from the sale of the government securities to final
investors.
Giving unwarranted benefits, advantage, or preference to a party and causing undue

injury to government expose the perpetrators or responsible parties to liability
under Section 3(e) of Republic Act No. 3019. Nonetheless, this is not the proper
venue to determine and settle any such liability.
7. Rule on Excess De Minimis Benefits
a. Q5/A5 of RMC No. 50-2018 dated May 11, 2018

Q5: What shall be the tax treatment of the "de minimis" benefits given to employees
which are beyond the prescribed amount of benefits?
A5: The benefits given in excess of the maximum amount allowed as "de minimis"
benefits shall be included as part of "other benefits" which is subject to income tax,
and consequently, to the withholding tax on compensation.
Example: Ms. A received annual clothing allowance amounting to P10,000. Her 13th
month pay is P80,000.00. No other benefits were received for the entire year. In
this case, since the prescribed maximum amount for clothing allowance is only
P6,000.00 the excess P4,000.00 shall be added to the 13th month pay, thereby the
entire benefits received amount to P84,000.00. In this scenario, the same shall still
be exempt from income tax since the ceiling amount for these other benefits is
P90,000.00
G. Fringe Benefits Tax

1. Sec. 33 of the NIRC (as amended by RA 10963)
Sec. 33. Special Treatment of Fringe Benefit. -

A. Imposition of Tax. - effective January 1, 2018 and onwards, a final tax of thirty-five
percent (35%) is hereby imposed on the grossed up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid in
the same manner as provided for under Section 57(A) of this Code. The grossed-up
monetary value of the fringe benefit shall be determined by dividing the actual monetary
value of the fringe benefit by sixty-five percent (65%) effective January 1, 2018 and
onwards: and taxable under Subsections (B), (C),(D) and (E) of Section 25 shall be taxed
at the applicable rates imposed thereat: Provided, further, That the grossed-up value of
the fringe benefit shall be determined by dividing the actual monetary value of the fringe
benefit by the difference between one hundred percent (100%) and the applicable rates
of income tax under Subsections (B), (C),(D), and (E) of Section 25. (As amended by Section
10 of RA 10963)
B. Fringe Benefit Defined. - For purposes of this Section, the term ‘fringe benefit’
means any good, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank-and-file employees as defined herein)
such as, but not limited to, the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life and health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.
C. Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
1. Fringe benefits which are authorized and exempted from tax under special
laws;
2. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
3. Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
4. De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, such rules and regulations as are
necessary to carry out efficiently and fairly the provisions of this Section,
taking into account the peculiar nature and special need of the trade,
business or profession of the employer.
2. RR No. 3-98 dated May 21, 1998 as amended by RR No. 11-2018 dated January 31, 2018
(exclude tax accounting rules)
Fringe Benefits Granted to the Employee (Except Rank and File Employee). – [formerly
under letter (J)] – On the grossed-up monetary value of the fringe benefits granted or
furnished by the employer to his employees (except rank-and file as defined in the Code).
–
Employee is a citizen/resident alien/nonresident alien engaged in trade or business

within the Philippines - Thirty-five percent (35%)
Employee is a non-resident alien not engaged in trade or business within the Philippines
- Twenty-five percent (25%)
The grossed-up value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by the difference between one hundred percent
(100%) and the applicable rate of income tax. The actual monetary value of the fringe
benefit shall be divided by sixty-five percent (65%) to get the grossed-up value subject to
35% fringe benefit tax (FBT); while the divisor shall be seventy five percent (75%) to get
the grossed-up value subject to 25% FBT.
Fringe benefits, however, which are required by the nature of or necessary to the trade,
business or profession of the employer, or where such fringe benefit is for the
convenience and advantage of the employer shall not be subject to the fringe benefit tax.
The term fringe benefit means any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee (except rank and file employees)
such as but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows. 4 / 47
(H) Informer’s Reward to Persons Instrumental in the Discovery of Violations of the
National Internal Revenue Code and the Discovery and Seizure of Smuggled Goods
[formerly under letter (K)] - xxx
3. CIR vs. Secretary of Justice and PAGCOR, GR No. 177387 dated November 9, 2016
Facts: Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has
operated under a legislative franchise granted by Presidential Decree No. 1869 (P.O. No.
1869), its Charter, whose Section 13(2) provides that:
(2) Income and other Taxes - (a) Franchise Holder:
No tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall he assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in any way to
the earnings of the Corporation, except a Franchise Tax of five percent (S(X1) of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise.
Such tax shall be due and payable quarterly to the National Government and shall be in
lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government
authority. (bold emphasis supplied)
Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue
(BIR) issued several assessments against PAGCOR for alleged deficiency value-added tax
(VAT), final withholding tax on fringe benefits, and expanded withholding tax.
On December 18, 2002, PAGCOR filed a letter-protest with the BIR against Assessment
Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99.
On March 31, 2003, PAGCOR filed a letter-protest against Assessment Notice No. 33-
2000, in which it reiterated the asse1iions made in its December 18, 2002 letter-protest.
In reply to both letters-protest, the BIR requested PAGCOR to submit additional

documents to enable the conduct of the reinvestigation.
The CIR did not act on PAGCOR’s letter-protest against Assessment Notice No. 33-
1996/1997 /1998 and Assessment Notice No. 33-99 within the 180-day period from the
latter's submission of additional documents. Hence, PAGCOR filed an appeal with the
Secretary of Justice on January 5, 2004 relative to Assessment Notice No. 33-1996/1997
/1998 and Assessment Notice No. 33-99.
Meanwhile, in response to PAGCOR’s letter-protest dated March 31, 2003, BIR Regional
Director Teodorica Arcega issued a letter dated December 15, 2003 reiterating the
assessment for deficiency VAT for taxable year 2000, stating thusly:
In a memorandum to the Regional Director dated December 15, 2003 the Chief Legal
Division, this Region, confirmed the taxability of PAGCOR under Section 108(A) of the
1997 Tax Code, as amended, effective Jan. 1, 1996 (VAT Review Committee Ruling No.
041-2001 ).
In view of the confirmation of the Legal Division we hereby reiterate the assessments
forwarded to your office under Final Assessment No. 33-2000 dated March 18, 2003
amounting to ₱2,097,426,943.00.
However, the BIR only recomputed the deficiency final withholding tax on fringe benefits
and expanded withholding tax, and reduced the assessments to ₱l2,212, 199.85 and
₱6,959,525. l0, respectively.
PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the
180-day period prescribed by law also lapsed without any action on the part of the CIR.
Consequently, on August 4, 2004, PAGCOR brought another appeal to the Secretary of
Justice covering Assessment Notice No. 33-2000.
The Secretary of Justice consolidated PAGCOR's two appeals.
After the parties traded pleadings, the Secretary of Justice summoned them to a
preliminary conference to discuss, inter alia, any possible settlement or compromise.
When no amicable settlement was reached, the consolidated appeals were considered
submitted for resolution.
On December 22, 2006, Secretary of Justice Raul M. Gonzales rendered the first assailed
resolution declaring PAGCOR exempt from the payment of all taxes except the 5%
franchise tax provided in its Charter.
On March 12, 2007, Secretary Gonzales issued the second assailed resolution denying the
CIR's motion for reconsideration.
Hence, this special civil action for certiorari.
Issue: Whether or not PAGCOR is liable for the payment of withholding taxes.
Ruling: PAGCOR is liable for the payment of withholding taxes
Through the letters dated December 12, 200343 and December 15, 2003,44 the BIR
recomputed the assessments for deficiency final withholding taxes on fringe benefits
under Assessment No. 33-99 and Assessment No. 33-2000,
The amount of the assessment for deficiency expanded withholding tax under
Assessment No. 33-99 remained at ₱3,790,916,809.16.
We now resolve the validity of the foregoing assessments.
Final Withholding Tax on Fringe Benefits
The recomputed assessment for deficiency final withholding taxes related to the car plan
granted to PAGCOR's employees and for its payment of membership dues and fees.
Under Section 33 of the NIRC, FBT is imposed as:
A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent
(33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000
and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein)
by the employer, whether an individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience or advantage of the
employer). The tax herein imposed is payable by the employer which tax shall be paid in
the same manner as provided for under Section 57 (A) of this Code.
FBT is treated as a final income tax on the employee that shall be withheld and paid by
the employer on a calendar quarterly basis.45 As such, PAGCOR is a mere withholding
agent inasmuch as the FBT is imposed on PAGCOR's employees who receive the fringe
benefit. PAGCOR's liability as a withholding agent is not covered by the tax exemptions
under its Charter.
The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe
benefit as defined under Section 33 of the NIRC. To avoid the imposition of the FBT on
the benefit received by the employee, and, consequently, to avoid the withholding of the
payment thereof by the employer, PAGCOR must sufficiently establish that the fringe
benefit is required by the nature of, or is necessary to the trade, business or profession
of the employer, or when the fringe benefit is for the convenience or advantage of the
employer.
PAGCOR asserted that the car plan was granted "not only because it was necessary to the
nature of the trade of PAGCOR but it was also granted for its convenience." The records
are lacking in proof as to whether such benefit granted to PAGCOR's officers were, in fact,
necessary for PAGCOR's business or for its convenience and advantage. Accordingly,
PAGCOR should have withheld the FBT from the officers who have availed themselves of
the benefits of the car plan and remitted the same to the BIR.
As for the payment of the membership dues and fees, the Court finds that this is not
considered a fringe benefit that is subject to FBT and which holds PAGCOR liable for final
withholding tax. According to PAGCOR, the membership dues and fees are:
57. x x x expenses borne by [respondent] to cover various memberships in social, athletic

clubs and similar organizations. x x x
58. Respondent's nature of business is casino operations and it derives business from its
customers who play at the casinos. In furtherance of its business, PAGCOR usually attends
its VIP customers, amenities such as playing rights to golf clubs. The membership of
PAGCOR to these golf clubs and other organizations are intended to benefit respondent's
customers and not its employees. Aside from this, the membership is under the name of
PAGCOR, and as such, cannot be considered as fringe benefits because it is the customers
and not the employees of PAGCOR who benefit from such memberships.
Considering that the payments of membership dues and fees are not borne by PAGCOR
for its employees, they cannot be considered as fringe benefits which are subject to FBT
under Section 33 of the NIRC. Hence, PAGCOR is not liable to withhold FBT from its
employees.
4. Rules on Health Insurance and Housing
 Some tidbits from R.R. 13-1998
On housing privileges Monetary value
If employer leases a residential property for 50% of the monthly rental paid
the use of the employee and the property is
the usual place of residence of the employee
If the employer purchases a residential (Acquisition x 5%) x 50%

property on installment basis and allows the
employee to use it as his usual place of
residence
If the employer purchases a residential Acquisition cost of FMV,

property and transfers ownership to the whichever is higher. If less than
employee ER’s cost: FMV-EE’s acquisition
cost
Housing of military officials Exempt
Housing which is situated inside or adjacent Exempt

to the premises of a business or factory
(within 50 meters)
Premiums for Insurance Monetary

Value
If the contribution is pursuant to existing law such as to the GSIS Exempt

or SSS
Life or health insurance and other non-life insurance 100%
5. De Minimis Benefits
a. Q4/A4 of RMC No. 50-2018 dated May 11, 2018
Q4: What are the benefits classified as "de minimis"? Are there any updates in the
amount of "de minimis" benefits?
A4: As of January 1, 2018, the following are the "de minimis" benefits:
a. Monetized unused vacation leave credits of private employees not exceeding ten
(10) days during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees not exceeding P1,500.00 per
employee per semester or P250.00 per month;
d. Rice subsidy of P2,000.00 or one (1) sack of 50kg. rice per month amounting to not
more than P2,000.00;
e. Uniform and clothing allowance not exceeding P6,000.00 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/ executive checkup, maternity assistance, and routine
consultations, not exceeding P10,000.00 per annum;
g. Laundry allowance not exceeding P300.00 per month;
h. Employees achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by
the employee under an established written plan which does not discriminate in
favor of highly paid employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic minimum wage on a per region basis; and
k. Benefits received by an employee by virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes provided that the total annual monetary
value received from both CBA and productivity incentive schemes combined do not
exceed ten thousand pesos (P10,000.00) per employee per taxable year.
All other benefits given by employers which are not included in the above enumeration
shall not be considered as "de minimis" benefits, and hence, shall be subject to
income tax as well as withholding tax.
b. Q5/A5 of RMC No. 50-2018 dated May 11, 2018

Q5: What shall be the tax treatment of the "de minimis" benefits given to employees
which are beyond the prescribed amount of benefits?
A5: The benefits given in excess of the maximum amount allowed as "de minimis"
benefits shall be included as part of "other benefits" which is subject to income tax,
and consequently, to the withholding tax on compensation.
Example: Ms. A received annual clothing allowance amounting to P10,000. Her 13th
month pay is P80,000.00. No other benefits were received for the entire year. In
this case, since the prescribed maximum amount for clothing allowance is only
P6,000.00 the excess P4,000.00 shall be added to the 13th month pay, thereby the
entire benefits received amount to P84,000.00. In this scenario, the same shall still
be exempt from income tax since the ceiling amount for these other benefits is
P90,000.00
H. Deductions from Gross Income

1. Expenses
a. Sec. 34(A) of the NIRC
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation
income arising from personal services rendered under an employer-employee
relationship where no deductions shall be allowed under this Section other than
under subsection (M) hereof, in computing taxable income subject to income tax
under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be
allowed the following deductions from gross income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or Professional Expenses. -
(a) In General. - There shall be allowed as deduction from gross income all the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on or
which are directly attributable to, the development, management, operation
and/or conduct of the trade, business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by the employer to the employee: Provided,
That the final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required as
a condition for the continued use or possession, for purposes of the trade, business
or profession, of property to which the taxpayer has not taken or is not taking title
or in which he has no equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation expenses

during the taxable year, that are directly connected to the development,
management and operation of the trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as the Secretary of
Finance may, by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special circumstances,
nature and character of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment, amusement or recreation
that is contrary to law, morals public policy or public order shall in no case be
allowed as a deduction.
b. RR No. 10-02 dated July 10, 2002

Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997,
Authorizing the Imposition of a ceiling on "Entertainment, Amusement and Recreational
Expenses"
Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 34(A)(1)(a)(iv) of
the same Code, these Regulations are hereby promulgated to provide a ceiling on the
amount of entertainment, amusement and recreation expense claimed by the individual
taxpayers engaged in business or in the practice of their profession and of domestic or
resident foreign corporations, to arrive at the taxable income subject to income tax under
Sections 24(A); Sections 25(A)(1); 26; 27(A), (B), (C); 28(A)(1); 28(A)(6)(b) and Section 61,
all of the Tax Code of 1997.
Section 1. COVERAGE - These regulations shall cover entertainment, amusement and

recreation expenses of the following taxpayers:
a. Individuals engaged in business, including taxable estates and trusts;

b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships, including its members.
Section 2. DEFINITION OF TERMS - For purposes of these Regulations, the term

"Entertainment, Amusement and Recreation Expenses" includes representation expenses
and/or depreciation or rental expense relating to entertainment facilities, as described
below.
The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in

connection with the conduct of his trade, business or exercise of profession, in
entertaining, providing amusement and recreation to, or meeting with, a guest or guests
at a dining place, place of amusement, country club, theater, concert, play, sporting
event, and similar events or places. For purposes of these Regulations, representation
expenses shall not refer to fixed representation allowances that are subject to
withholding tax on wages pursuant to appropriate revenue regulations.
In the case particularly of a country, golf, sports club, or any other similar club where the
employee or officer of the taxpayer is the registered member and the expenses incurred
in relation thereto are paid for by the taxpayer, there shall be a presumption that such
expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove
that these are actually representation expenses. For purposes of proving that said
expense is a representation expense and not fringe benefits, the taxpayer should
maintain receipts and adequate records that indicate the (a) amount of expense (b) date
and place (c) purpose of expense (d) professional or business relationship of expense (e)
name of person and company and company entertained with contact details.
The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or
condominium; and (2) any similar item of real or personal property used by the taxpayer
primarily for the entertainment, amusement, or recreation of guests or employees. To be
considered an entertainment facility, such yacht, vacation home or condominium, or item
of real or personal property must be owned or form part of the taxpayer's trade, business
or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation or
rental expense. A yacht shall be considered an entertainment facility under these
Regulations if its use is in fact not restricted to specified officers or employees or positions
in such a manner as to make the same a fringe benefit for purposes of imposing the fringe
benefits tax.
The term "Guests" shall mean persons or entities with which the taxpayer has direct
business relations, such as but not limited to, clients/customers or prospective
clients/customers. The term shall not include employees, officers, partners, directors,
stockholders, or trustees of the taxpayer.
SECTION 3. EXCLUSIONS - the following expenses are not considered entertainment,

amusement and recreation expenses as defined under Section 2 hereof:
a. Expenses which are treated as compensation or fringe benefits for services rendered
under employer-employee relationship, pursuant to revenue regulations 2-98,3-98
and amendments thereto;
b. Expenses for charitable or fund-raising events;
c. Expenses for bonafide business meeting stockholders, partners or directors;
d. expenses for attending or sponsoring an employee to a business league or
professional organization meeting;
e. Expenses for events organized for promotion, marketing and advertising including
concerts, conferences, seminars, workshops, conventions, and other similar
events;
f. Other expenses of a similar nature.
Notwithstanding the foregoing, such items of exclusions may nonetheless, qualify as
items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for
deductibility stated therein.
SECTION 4. REQUISITES OF DEDUCTIBILITY OF "ENTERTAINMENT, AMUSEMENT AND

RECREATION EXPENSE" - The following are requisites for deductibility of entertainment,
amusement and recreation expense as defined above subject to the ceiling prescribed
under Section 5 of these Regulations:
a. It must be paid or incurred during the taxable year;

b. It must be: (i) directly connected to the development, management and operation
of the trade, business or profession of the taxpayer; or (ii) directly related to or in
furtherance of the conduct of his or its trade, business or exercise of a profession;
c. It must not be contrary to law, morals, good customs, public policy or public order;
d. it must not have been paid, directly or indirectly, to an official or employee of the
national government, or any local government unit, or of any government-owned
or controlled corporation (GOCC), or of a foreign government, or to a private
individual, or corporation, or general professional partnership (GPP), or a similar
entity, if it constitutes a bribe, kickback or other similar payment;
e. It must be duly substantiated by adequate proof. The official receipts, or invoices,
or bills or statements of accounts should be in the name of the taxpayer claiming
the deduction; and
f. The appropriate amount of withholding tax, if applicable, should have been withheld
therefrom and paid to Bureau of Internal Revenue.
c. Sec. 36(A) of the NIRC

SEC. 36. Items not Deductible. -
(A) General Rule. - In computing net income, no deduction shall in any case be allowed in
respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred in
petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this
Code.
(3) Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy.
d. Sec. 45 of the NIRC

SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in
this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred',
dependent upon the method of accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the income, the deductions should be taken
as of a different period. In the case of the death of a taxpayer, there shall be allowed as
deductions for the taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly allowable in respect of such period
or a prior period.
e. Sec. 34(K) of the NIRC

(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or
payable which is otherwise deductible from, or taken into account in computing gross
income or for which depreciation or amortization may be allowed under this Section, shall
be allowed as a deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with
this Section 58 and 81 of this Code.
f. CIR vs. Isabela Cultural Corporation, GR No. 172231 dated February 12, 2007
FACTS: BIR disallowed Isabela Cultural Corp. deductible expenses for services which were
rendered in 1984 and 1985 but only billed, paid and claimed as a deduction on 1986.
After CA sent its demand letters, Isabela protested. CTA found it proper to be claimed in
1986 and affirmed by CA.
ISSUE: Whether the CA correctly sustained the deduction of the expenses for professional
and security services from ICC’s gross income.
HELD: The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of
the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided
for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or
incurred’, dependent upon the method of accounting upon the basis of which the net
income is computed
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer;
and
(d) it must be supported by receipts, records or other pertinent papers.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method
of accounting, expenses not being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same for the next
year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy merely
of time of payment.
The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability
of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test does
not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies something less than an
exact or completely accurate amount.
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.
In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
and for reimbursement of the expenses of said firm in connection with ICC’s tax problems
for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since
the 1960’s. - failed to prove the burden
g. CIR vs. General Foods, Inc., GR No. 143672 dated April 24, 2003
h. Atlas Consolidated Mining & Dev’t Corp., GR No. L-29111 dated January 27, 1981
FACTS: CIR Commissioner, petitioner, assails the resolution of the Court of Appeals
reversing the decision of the Court of Tax Appeals which denied the protest filed
by respondent General Foods (Phils.), Inc., regarding the assessment made against
the latter for deficiency taxes.
On June 14, 1985, General Foods, manufacturer of beverages such as “Tang,”

“Calumet” and “Kool-Aid,” filed its ITR for the fiscal year ending February 28, 1985.
In said tax return, it claimed as a deduction for business expenses, the amount of
P9,461,246 for media advertising for “Tang.”
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction
claimed by respondent corporation.
The parties are in agreement that the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in carrying on a trade or
business. Hence, it was necessary. However, their views conflict as to whether or
not it was ordinary.
To be deductible, an advertising expense should not only be necessary but also

ordinary.
These two requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on
the ground that it failed the two conditions set by U.S. jurisprudence:
a) “reasonableness” of the amount incurred
b) the amount incurred must not be a capital outlay to create “goodwill” for the
product and/or private respondent’s business.
Otherwise, the expense must be considered a capital expenditure to be spread out

over a reasonable time.
Consequently, General Foods was assessed deficiency income taxes in the amount of
P2,635, 141.42. The latter filed a motion for reconsideration but the same was
denied. On September 1989, General Foods appealed to the CTA but the appeal
was dismissed. General foods, filed a petition for review at the CA which rendered
a decision reversing and setting aside the decision of the CTA: claiming that the
deduction was not sufficiently established as excessive.
ISSUE: Whether or not the subject media advertising expense for “Tang” incurred by
respondent corporation was an ordinary and necessary expense fully deductible
under the National Internal Revenue Code (NIRC).
HELD: No, CA committed reversible error when it declared the subject media
advertising expense to be deductible as an ordinary and necessary expense on the
ground that “it has not been established that the item being claimed as deduction
is excessive.
We find the subject expense for the advertisement of a single product to be

inordinately large. Therefore, even if it is necessary, it cannot be considered an
ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.
The P9,461,246 media advertising expense for the promotion of a single product,
almost one-half of petitioner corporation’s entire claim for marketing expenses for
that year, inclusive of other advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly unreasonable.
Furthermore, the subject advertising expense was of the second kind. Not only was
the amount staggering; Gen Foods also admitted that the subject media expense
was incurred in order to protect its brand franchise.
The protection of brand franchise is analogous to the maintenance of goodwill or title

to one’s property. To protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and
therefore expenses related thereto were not to be considered as business expenses
but as capital expenditures
Hence, we consider that the subject advertising expense as a capital outlay since it
created goodwill for its business and/or product.
CA decision REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax
Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its deficiency
income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment
and 20% annual interest computed from August 25, 1989, the date of the denial of
its protest, until the same is fully paid.
DOCTRINE INVOLVED:
1. Deductions for income tax purposes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.
2. To be deductible from gross income, the subject advertising expense must comply
with the following requisites:
a. the expense must be ordinary and necessary;
b. it must have been paid or incurred during the taxable year;
c. it must have been paid or incurred in carrying on the trade or business of the
taxpayer;
d. it must be supported by receipts, records or other pertinent papers
3. Advertising is generally of two kinds:

a. 1stkind: Advertising to stimulate the current sale of merchandise or use of
service: except as to the question of the reasonableness of amount, there is no
doubt such expenditures are deductible as business expenses.
b. 2nd kind: Advertising designed to stimulate the future sale of merchandise or

use of services: The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayer’s trade or
business or for the industry or profession of which the taxpayer is a member.
If, however, the expenditures are for advertising of the second kind, then normally
they should be spread out over a reasonable period of time.
i. H. Tambunting Pawnshop, Inc. vs. CIR, GR No. 173373 dated July 29, 2013
Ruling: The rule that tax deductions, being in the nature of tax exemptions, are to be
construed in strictissimi juris against the taxpayer is well settled.20 Corollary to this
rule is the principle that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the law allows.21 An item
of expenditure, therefore, must fall squarely within the language of the law in order
to be deductible.22 A mere averment that the taxpayer has incurred a loss does
not automatically warrant a deduction from its gross income.
As the CTA En Banc held, Tambunting did not properly prove that it had incurred
losses. The subasta books it presented were not the proper evidence of such losses
from the auctions because they did not reflect the true amounts of the proceeds of
the auctions due to certain items having been left unsold after the auctions. The
rematado books did not also prove the amounts of capital because the figures
reflected therein were only the amounts given to the pawnees. It is interesting to
note, too, that the amounts received by the pawnees were not the actual values of
the pawned articles but were only fractions of the real values.
As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977 provides:
(a) Expenses. — (1) Business expenses.— (A) In general. — All ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered; traveling expenses while away from home in
the pursuit of a trade, profession or business, rentals or other payments required
to be made as a condition to the continued use or possession, for the purpose of
the trade, profession or business, of property to which the taxpayer has not taken
or is not taking title or in which he has no equity.
The requisites for the deductibility of ordinary and necessary trade or business
expenses, like those paid for security and janitorial services, management and
professional fees, and rental expenses, are that: (a) the expenses must be ordinary
and necessary; (b) they must have been paid or incurred during the taxable year;
(c) they must have been paid or incurred in carrying on the trade or business of the
taxpayer; and (d) they must be supported by receipts, records or other pertinent
papers.23
In denying Tambunting’s claim for deduction of its security and janitorial expenses,
management and professional fees, and its rental expenses, the CTA En Banc
explained:
Contrary to petitioner’s contention, the security/janitorial expenses paid to Pathfinder

Investigation were not duly substantiated. The certification issued by Mr. Balisado
was not the proper document required by law to substantiate its expenses.
Petitioner should have presented the official receipts or invoices to prove its claim
as provided for under Section 238 of the National Internal Revenue Code of 1977,
as amended, to wit:
"SEC. 238. Issuance of receipts or sales or commercial invoices. — All persons subject
to an internal revenue tax shall for each sale or transfer of merchandise or for
services rendered valued at ₱25.00 or more, issue receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity,
unit cost and description of merchandise or nature of service; Provided, That in the
case of sales, receipts or transfers in the amount of ₱100.00 or more, or, regardless
of amount, where the sale or transfer is made by persons subject to value-added
tax to other persons also subject to value-added tax; or, where the receipts is issued
to cover payment made as rentals, commissions, compensation or fees, receipts or
invoices shall be issued which shall show the name, business style, if any, and
address of the purchaser, customer, or client. The original of each receipt or invoice
shall be issued to the purchases, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of profession, shall keep
and preserve the same in his place of business for a period of 3 years from the close
of the taxable year in which such invoice or receipt was issued, while the duplicate
shall be kept and preserved by the issuer, also in his place of business, for a like
period.
With regard to the misclassified items of expenses, petitioner's statements were self-
serving, likewise it failed to substantiate its allegations by clear and convincing
evidence as provided under the foregoing provision of law.
Bearing in mind the principle in taxation that deductions from gross income partake
the nature of tax exemptions which are construed in strictissimi juris against the
taxpayer, the Court en banc is not inclined to believe the self-serving statements of
petitioner regarding the misclassified items of office supplies, advertising and rent
expenses.
Among the expenses allegedly incurred, courts may consider only those supported by
credible evidence and which appear to have been genuinely incurred in connection
with the trade or business of the taxpayer.
2. Interest
a. Sec. 34(B)of the NIRC
(1) In General. - The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession, trade or business shall
be allowed as deduction from gross income: Provided, however, That the
taxpayer's otherwise allowable deduction for interest expense shall be reduced by
forty-two percent (42%) of the interest income subjected to final tax: Provided,
That effective January 1, 2009, the percentage shall be thirty-three percent (33%).
(2) Exceptions. - No deduction shall be allowed in respect of interest under the

succeeding subparagraphs:
(a) 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 through discount or
otherwise: Provided, That such interest shall be allowed as a deduction in the year
the indebtedness is paid: Provided, further, That if the indebtedness is payable in
periodic amortizations, the amount of interest which corresponds to the amount
of the principal amortized or paid during the year shall be allowed as deduction in
such taxable year;
(b) If both the taxpayer and the person to whom the payment has been made or is to
be made are persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest
incurred to acquire property used in trade business or exercise of a profession may
be allowed as a deduction or treated as a capital expenditure.
b. Sec. 36 of the NIRC

(A) General Rule. - In computing net income, no deduction shall in any case be allowed
in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs incurred
in petroleum operations which are deductible under Subsection (G) (1) of Section
34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing net income, no

deductions shall in any case be allowed in respect of losses from sales or exchanges
of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and
corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more
than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the corporation preceding the
date of the sale of exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
c. RR No. 13-00 dated November 20, 2000
Requisites for deductibility of interest expense:

1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon the indebtedness
(incurred meaning that it was due and demandable)
3. The indebtedness must be that of the taxpayer;
4. It must be connected with the taxpayer’s trade, business or profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing
7. The interest must be legally due
8. The interest payment arrangement must not be between related taxpayers
9. The interest must not be incurred to finance petroleum operations
10. In case the interest was incurred to acquire property used in trade, business or
profession, it was not treated as capital expenditure.
a. In cases like this, the taxpayer has the option to treat the interest expenses
as either
i. Interest expense deductible in full or
ii. As a capital expenditure and claim as deduction only the periodic
amortization/ depreciation.
- But he can only choose one, or else double deduction, that is
not allowed (mutually exclusive)
The RR provides for the requirements for deductibility of interest expense from the
gross income of a corporation or as an individual engaged in trade, business or in
the practice of a profession.
d. Tax Arbitrage Rule/Scheme
e. CIR vs. Vda. De Prieto, GR No. L-13912 dated September 30, 1960
FACTS: Respondent Vda. de Prieto conveyed by way of gifts a real property to her
children. The Commissioner of Internal Revenue appraised the property donated
at P1,231,268.00, and assessed the total sum of P117,706.50 as donor's gift tax,
interest and compromises due thereon. Of the total sum of P117,706.50 paid by
respondent on April 29, 1954, the sum of P55,978.65 represents the total interest
on account of delinquency. Said sum was claimed as deduction, among others, by
respondent in her 1954 income tax return. Petitioner disallowed the claim and as a
consequence of such disallowance assessed respondent for 1954 deficiency income
tax due on the aforesaid P55,978.65, including interest 1957, surcharge and
compromise for the late payment.
ISSUE: Whether or not interest paid for the late payment of tax is deductible from
gross income.
HELD: YES.
For interest to be deductible, it must be shown that:

(1) There be an indebtedness,
(2) There should be interest upon it, and
(3) What is claimed as an interest deduction should have been paid or accrued within
the year.
In this case, the last two requirements are undisputed. The only question is if interest
on account of late payments of taxes be considered as indebtedness. Indebtedness
has been defined as an unconditional and legally enforceable obligation for the
payment of money. Within the meaning of that definition, it is apparent that a tax
may be considered indebtedness. Although taxes already due have not, strictly
speaking, the same concept as debts, they are, however, obligations that may be
considered as such. Where statute imposes a personal liability for a tax, the tax
becomes, at least in a board sense, a debt. It follows that the interest paid by herein
respondent for the late payment of her donor's tax is deductible from her gross
income.
In conclusion, interest payment for delinquent taxes is not deductible as tax but the
taxpayer is not precluded thereby from claiming said payment as deduction on
account of interest.
f. Paper Industries Corporation of the Philippines vs. CA, GR Nos. 106949-50 dated December
1, 1995
Facts: Paper Industries Corporation of the Philippines (PICOP) is a Philippine corporation

registered with the Board of Investment (BI) as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise
with respect to its integrated plywood and veneer mills. Petitioner received from the
Commissioner of Internal Revenue (CIR) two (2) letters of assessment and demand (a) one
for deficiency transaction tax and for documentary and science stamp tax; and (b) for
deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. PICOP
protested the assessment of deficiency transaction tax, the documentary and science
stamp taxes, and the deficiency income tax assessment. CIR did not formally act upon
these protests, but issued a warrant of distraint on personal property and a warrant of
levy on real property against PICOP, to enforce collection of the contested assessments,
thereby denying PICOP's protests. Thereupon, PICOP went before (CTA) appealing the
assessments.
On 15 August 1989, CTA rendered a decision, modifying the CIR's findings and holding
PICOP liable for the reduced aggregate amount of P20,133,762.33. Both parties went
to the Supreme Court, which referred the case to the Court of Appeals (CA).
CA denied the appeal of CIR and modified the judgment against PICOP holding it liable for
transaction tax and absolved it from payment of documentary and science stamp tax
and compromise penalty. It also held PICOP liable for deficiency of income tax.
Issue: Whether or not PICOP is liable for transaction tax
Held: YES, PICOP is liable for transaction tax.
A transaction tax is an income tax as held by the Supreme Court in the case of Western
Minolco Corporation vs. Commissioner of Internal Revenue. The 35% transaction tax
is an income tax on interest earnings to the lenders or placers. The latter are actually
the taxpayers, Therefore, the tax cannot be a tax imposed upon the petitioner. The
contention of the PICOP that they are exempted from the payment of transaction tax
by virtue of its tax exemption under R.A. No. 5186, as amended, known as the
Investment Incentives Act is not tenable. The PICOP tax exemption under R.A. 5186,
as amended, does not include exemption from the 35% transaction tax which is
considered an income tax.
g. Sky Internet, Inc. vs. CIR, CTA Case No. 6587 dated August 10, 2005
Facts: Respondent (CIR) assessed Petitioner (Sky Internet) of deficiency income taxes due
to the disallowance of the following interest expenses claimed by the petitioner:
1. Interest expense of P 3,872,767.82 which it paid to Sky Vision (a wholly owned

subsidiary of the petitioner);
2. Interest expense of P 90,954.22, which was not deducted against interest income,
subjected to final withholding tax.
The disallowance on the first item was made pursuant to Sec. 34 (B)(2) of the 1997 NIRC
which states that if both the taxpayer and the person to whom the payment has been
made or is to be made are persons under Section 36(B), then the interest expense
incurred or shall be incurred shall not be allowed as deduction from gross income.
Further Section 36 (B)(3) of the 1997 NIRC provides, two corporations will be
considered related parties, if they satisfy the following requirements:
a.) More than 50% in value of the outstanding stock of each is owned directly or
indirectly by or for the same individual; and
b.) If either one of such corporations is with respect to the taxable year of the
corporation preceding the date of the sale or exchange, was, under the law
applicable to such taxable year, a personal holding company or a foreign personal
holding company.
ISSUE: Whether or not the interest expense claimed is allowable as deduction?
HELD: The interest expense should be ALLOWED as deduction. It was shown that there
was an indebtedness incurred by the petitioner and there was legal liability to pay
interest.
The subject transaction is NOT AN EXCEPTION under Section 34 (B)(2) in relation to

Section 36 of the 1997 NIRC because Sky Internet and Sky Vision are NOT RELATED
PARTIES since no individual owns, directly or indirectly more than 50% of the
outstanding capital stock of petitioner and Sky Vision.
It was erroneous on the part of the respondent to disallow the interest expense of P
90,954.22 claimed by petitioner since this amount was never claimed as deduction.
The total interest expense claimed was already net of the amount of P 90,954.22 (the
reduction in the interest expense claimed based on 41% interest income earned by the
petitioner pursuant to Section 34 (B)(1) of the 1997 NIRC
3. Taxes
a. Sec. 34(C)of the NIRC
(C) Taxes. -
(1) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except:
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) of this subsection (relating to
credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall
be included as part of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged

in trade or business in the Philippines and a resident foreign corporation, the
deductions for taxes provided in paragraph (1) of this Subsection (C) shall be
allowed only if and to the extent that they are connected with income from sources
within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his
return his desire to have the benefits of this paragraph, the tax imposed by this
Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and
of a domestic corporation, the amount of income taxes paid or incurred during the
taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a
general professional partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general professional partnership or the
estate or trust paid or incurred during the taxable year to a foreign country, if his
distributive share of the income of such partnership or trust is reported for taxation
under this Title.
An alien individual and a foreign corporation shall not be allowed the credits against
the tax for the taxes of foreign countries allowed under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall
not exceed the same proportion of the tax against which such credit is taken, which
the taxpayer's taxable income from sources within such country under this Title
bears to his entire taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from
sources without the Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from
the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in
whole or in part, the taxpayer shall notify the Commissioner; who shall re-
determine the amount of the tax for the year or years affected, and the amount of
tax due upon such re-determination, if any, shall be paid by the taxpayer upon
notice and demand by the Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the case of such a tax incurred but
not paid, the Commissioner as a condition precedent to the allowance of this credit
may require the taxpayer to give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he may require, conditioned upon
the payment by the taxpayer of any amount of tax found due upon any such
redetermination. The bond herein prescribed shall contain such further conditions
as the Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this
Section may, at the option of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken in the year which the taxes of
the foreign country were incurred, subject, however, to the conditions prescribed
in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the
year in which the taxes of the foreign country accrued, the credits for all
subsequent years shall be taken upon the same basis and no portion of any such
taxes shall be allowed as a deduction in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed
only if the taxpayer establishes to the satisfaction of the Commissioner the
following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which
is claimed as a credit under said paragraph, such amount to be determined under
rules and regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such
credits.
b. CIR vs. Vda. De Prieto, GR No. L-13912 dated September 30, 1960
Late payment of tax is considered a debt, and therefore interest on taxes is interest
on indebtedness and is this deductible.
4. Losses
a. Sec. 34(D)of the NIRC
(D) Losses. -
(1) In General. - Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby

authorized to promulgate rules and regulations prescribing, among other things,
the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the taxable
year: Provided, however, That the time limit to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than ninety (90) days
from the date of discovery of the casualty or robbery, theft or embezzlement giving
rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the
filing of the return, such loss has been claimed as a deduction for estate tax
purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation,
the losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when
such losses are not compensated for by insurance or other forms of indemnity. The
secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations prescribing, among other things,
the time and manner by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or embezzlement during the taxable
year: Provided, That the time to be so prescribed in the rules and regulations shall
not be less than thirty (30) days nor more than ninety (90) days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss;
and
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss: Provided, however, That
any net loss incurred in a taxable year during which the taxpayer was exempt from
income tax shall not be allowed as a deduction under this Subsection: Provided,
further, That a net operating loss carry-over shall be allowed only if there has been
no substantial change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
shares., if the business is in the name of a corporation, is held by or on behalf of
the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation,
if the business is in the name of a corporation, is held by or on behalf of the same
persons.
For purposes of this subsection, the term 'net operating loss' shall mean the excess of
allowable deduction over gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the
benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over as a deduction from taxable
income for the next five (5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of the five (5) taxable
years following the loss, and any portion of such loss which exceeds the taxable
income of such first year shall be deducted in like manner form the taxable income
of the next remaining four (4) years.
(4) Capital Losses. -
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be allowed only to
the extent provided in Section 39.
(b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become

worthless during the taxable year and are capital assets, the loss resulting
therefrom shall, for purposes of this Title, be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock
or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum operations are undertaken is partially
or wholly abandoned, all accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1, 1979 shall be allowed as a
deduction only from any income derived from the same contract area. In all cases,
notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the un-amortized costs

thereof, as well as the un-depreciated costs of equipment directly used therein ,
shall be allowed as a deduction in the year such well, equipment or facility is
abandoned by the contractor: Provided, That if such abandoned well is re-entered
and production is resumed, or if such equipment or facility is restored into service,
the said costs shall be included as part of gross income in the year of resumption
or restoration and shall be amortized or depreciated, as the case may be.
b. Casualty Losses
i. RMO 31-09 dated October 16, 2009 - providing for the substantiation requirements on
losses arising from casualty, robbery, theft or embezzlement that may be claimed as
deduction. (in relation to Section 34, D). Declaration of loss is needed within 45 days from
time of loss.
ii. H. Tambunting Pawnshop, Inc. vs. CIR, GR No. 173373 dated July 29, 2013
To be entitled to claim a tax deduction, the taxpayer must competently establish
the factual and documentary bases of its claim.
Antecedents: H. Tambunting Pawnshop, Inc. (petitioner), appeals the adverse

decision promulgated on April 24, 2006,1 whereby the Court of Tax Appeals En
Banc (CTA En Banc) affirmed the decision of the CTA First Division ordering it to
pay deficiency income taxes in the amount of ₱4,536,687.15 for taxable year
1997, plus 20% delinquency interest computed from August 29, 2000 until full
payment, but cancelling the compromise penalties for lack of basis.
Issue: Whether or not Petitioner was able to prove loss. NO
Ruling: Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of P.D.
1158 (NIRC of 1977) then in effect, is clear enough, to wit:
(2) By corporation. — In the case of a corporation, all losses actually sustained and
charged off within the taxable year and not compensated for by insurance or
otherwise.
(3) Proof of loss. — In the case of a non-resident alien individual or foreign

corporation, the losses deductible are those actually sustained during the year
incurred in business or trade conducted within the Philippines, and losses
actually sustained during the year in transactions entered into for profit in the
Philippines although not connected with their business or trade, when such
losses are not compensated for by insurance or otherwise. The Secretary of
Finance, upon recommendation of the Commissioner of Internal Revenue, is
hereby authorized to promulgate rules and regulations prescribing, among other
things, the time and manner by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft, or embezzlement during the
taxable year: Provided, That the time to be so prescribed in the regulations shall
not be less than 30 days nor more than 90 days from the date of the occurrence
of the casualty or robbery, theft, or embezzlement giving rise to the loss.
The implementing rules for deductible losses are found in Revenue Regulations No.
12-77, as follows:
SECTION 1. Nature of deductible losses.— Any loss arising from fires, storms or
other casualty, and from robbery, theft or embezzlement, is allowable as a
deduction under Section 30 (d) for the taxable year in which the loss is sustained.
The term "casualty" is the complete or partial destruction of property resulting
from an identifiable event of a sudden, unexpected, or unusual nature. It
denotes accident, some sudden invasion by hostile agency, and excludes
progressive deterioration through steadily operating cause. Generally, theft is
the criminal appropriation of another’s property for the use of the taker.
Embezzlement is the fraudulent appropriation of another's property by a person
to whom it has been entrusted or into whose hands it has lawfully come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the burden of

proving and substantiating his claim for deduction for losses allowed under
Section 30 (d) and should comply with the following substantiation
requirements:
(a) A declaration of loss which must be filed with the Commissioner of Internal
Revenue or his deputies within a certain period prescribed in these regulations
after the occurrence of the casualty, robbery, theft or embezzlement.
(b) Proof of the elements of the loss claimed, such as the actual nature and
occurrence of the event and amount of the loss.
SECTION 3. Declaration of loss. — Within forty-five days after the date of the
occurrence of casualty or robbery, theft or embezzlement, a taxpayer who
sustained loss therefrom and who intends to claim the loss as a deduction for
the taxable year in which the loss was sustained shall file a sworn declaration of
loss with the nearest Revenue District Officer. The sworn declaration of loss shall
contain, among other things, the following information:
(a) The nature of the event giving rise to the loss and the time of its occurrence;
(b) A description of the damaged property and its location;
(c) The items needed to compute the loss such as cost or other basis of the property;
depreciation allowed or allowable if any; value of property before and after the
event; cost of repair;
(d) Amount of insurance or other compensation received or receivable.
Evidence to support these items should be furnished, if available. Examples are
purchase contracts and deeds, receipted bills for improvements, and pictures
and competent appraisals of the property before and after the casualty.
SECTION 4. Proof of loss.— (a) In general. — The declaration of loss, being one of
the essential requirements of substantiation of a claim for a loss deduction, is
subject to verification and does not constitute sufficient proof of the loss that
will justify its deductibility for income tax purposes. Therefore, the mere filing of
a declaration of loss does not automatically entitle the taxpayer to deduct the
alleged loss from gross income. The failure, however, to submit the said
declaration of loss within the period prescribed in these regulations will result in
the disallowance of the casualty loss claimed in the taxpayer's income tax return.
The taxpayer should therefore file a declaration of loss and should be prepared
to support and substantiate the information reported in the said declaration with
evidence which he should gather immediately or as soon as possible after the
occurrence of the casualty or event causing the loss.
xxxx
(b) Casualty loss. — Photographs of the property as it existed before it was damaged
will be helpful in showing the condition and value of the property prior to the
casualty. Photographs taken after the casualty which show the extent of damage
will be helpful in establishing the condition and value of the property after it was
damaged. Photographs showing the condition and value of the property after it
was repaired, restored or replaced may also be helpful.
Furthermore, since the valuation of the property is of extreme importance in

determining the amount of loss sustained, the taxpayer should be prepared to
come forward with documentary proofs, such as cancelled checks, vouchers,
receipts and other evidence of cost.
The foregoing evidence should be kept by the taxpayer as part of his tax records and
be made available to a revenue examiner, upon audit of his income tax return
and the declaration of loss.
(c) Robbery, theft or embezzlement losses. - To support the deduction for losses
arising from robbery, theft or embezzlement, the taxpayer must prove by
credible. evidence all the elements of the loss, the amount of the loss, and the
proper year of the deduction. The taxpayer bears the burden of proof, and no
deduction will be allowed unless he shows the property was stolen, rather than
misplaced or lost. A mere disappearance of property is not enough, nor is a mere
error or shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer.
On the other hand, a mere report of alleged theft or robbery to the police
authorities is not a conclusive proof of the loss arising therefrom. (Bold
underscoring supplied for emphasis)
In the context of the foregoing rules, the CT A En Bane aptly rejected Tam bunting's
claim for deductions due to losses from fire and theft. The documents it had
submitted to support the claim, namely: (a) the certification from the Bureau of
Fire Protection in Malolos; (b) the certification from the Police Station in Malolos;
(c) the accounting entry for the losses; and (d) the list of properties lost, were
not enough. What were required were for Tambunting to submit the sworn
declaration of loss mandated by Revenue Regulations 12-77. Its failure to do so
was prejudicial to the claim because the sworn declaration of loss was necessary
to forewarn the BIR that it had suffered a loss whose extent it would be claiming
as a deduction of its tax liability, and thus enable the BIR to conduct its own
investigation of the incident leading to the loss. Indeed, the documents
Tambunting submitted to the BIR could not serve the purpose of their
submission without the sworn declaration of loss.
c. Net Operating Loss Carry-Over

i. RR No. 14-01 dated August 27, 2001
The RR implements certain provisions of the Tax Code relative to the allowance of
Net Operating Loss Carry-Over (NOLCO) as a deduction from gross income. (in
relation to Section 34, D, 3)
ii. Paper Industries Corporation of the Philippines vs. CA, GR Nos. 106949-50 dated
December 1, 1995
5. Bad Debts
a. Sec. 34(E)of the NIRC
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year except those not connected with profession,
trade or business and those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of
the gross income in the year of recovery to the extent of the income tax benefit of
said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are

ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part
of whose business is the receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year,
of capital assets.
b. RR No. 5-99 (March 16, 1999) as amended by RR No. 25. 2002 (December 16, 2002),
implementing Section 34(E) of the Tax Code of 1997 relative to the requirements for
deductibility of bad debts from gross income. (in relation to Sec 34, E)
c. Philippine Refining Company vs. CA, GR No. 118794 dated May 8, 1996
FACTS: Out of the sixteen (16) accounts alleged as bad debts, only three (3) accounts
have met the requirements of the worthlessness of the accounts, hence were
properly written off as bad debts.
ISSUE: What are the requirements for a debt to be considered as worthless?
HELD: For debts to be considered as worthless, and thereby qualify as bad debts
making them deductible, the taxpayer should show that:
(1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and uncollectible during
the taxable year;
(3) the debt must be charged off during the taxable year; and
(4) the debt must arise from the business or trade of the taxpayer.
Additionally, before a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future. Furthermore, there are steps
outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts
to collect the debts, viz:
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.

Mere allegations cannot prove the worthlessness of debts.
d. Fernandez Hermanos vs. CIR, GR No. L-21551 dated September 30, 1969
Antecedent: These four appears involve two decisions of the Court of Tax Appeals
determining the taxpayer's income tax liability for the years 1950 to 1954 and for
the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo respectively, appealed from the Tax
Court's decisions, insofar as their respective contentions on particular tax items
were therein resolved against them. Since the issues raised are interrelated, the
Court resolves the four appeals in this joint decision.
Ruling on Bad debts: Disallowance of losses in or bad debts of Palawan Manganese

Mines, Inc. (1951). — The taxpayer appeals from the Tax Court's disallowance of its
writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had
advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's findings on
this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of

which are also the controlling stockholders of petitioner corporation, requested
financial help from petitioner to enable it to resume it mining operations in Coron,
Palawan. The request for financial assistance was readily and unanimously
approved by the Board of Directors of petitioner, and thereafter a memorandum
agreement was executed on August 12, 1945, embodying the terms and conditions
under which the financial assistance was to be extended, the pertinent provisions
of which are as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945,
has agreed to extend to the SECOND PARTY the requested financial help by way of
accommodation advances and for this purpose has authorized its President, Mr.
Ramon J. Fernandez to cause the release of funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to
extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen per
centum (15%) of its net profits.
"NOW THEREFORE, for and in consideration of the above premises, the parties hereto
have agreed and covenanted that in consideration of the financial help to be
extended by the FIRST PARTY to the SECOND PARTY to enable the latter to resume
its mining operations in Coron, Palawan, the SECOND PARTY has agreed and
undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY fifteen
per centum (15%) of its net profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese
Mines, Inc. yearly advances starting from 1945, which advances amounted to
P587,308.07 by the end of 1951. Despite these advances and the resumption of
operations by Palawan Manganese Mines, Inc., it continued to suffer losses. By
1951, petitioner became convinced that those advances could no longer be
recovered. While it continued to give advances, it decided to write off as worthless
the sum of P353,134.25. This amount "was arrived at on the basis of the total of
advances made from 1945 to 1949 in the sum of P438,981.39, from which amount
the sum of P85,647.14 had to be deducted, the latter sum representing its pre-war
assets. (t.s.n., pp. 136-139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner
decided to maintain the advances given in 1950 and 1951 in the hope that it might
be able to recover the same, as in fact it continued to give advances up to 1952.
From these facts, and as admitted by petitioner itself, Palawan Manganese Mines,
Inc., was still in operation when the advances corresponding to the years 1945 to
1949 were written off the books of petitioner. Under the circumstances, was the
sum of P353,134.25 properly claimed by petitioner as deduction in its income tax
return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner
did not expect to be repaid. It is true that some testimonial evidence was presented
to show that there was some agreement that the advances would be repaid, but
no documentary evidence was presented to this effect. The memorandum
agreement signed by the parties appears to be very clear that the consideration for
the advances made by petitioner was 15% of the net profits of Palawan Manganese
Mines, Inc. In other words, if there were no earnings or profits, there was no
obligation to repay those advances. It has been held that the voluntary advances
made without expectation of repayment do not result in deductible losses. 1955
PH Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27
AFTR 395; George B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner gave
advances to Palawan Manganese Mines, Inc., without expectation of repayment.
Petitioner could not sue for recovery under the memorandum agreement because
the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15% of its
net profits, not the advances. No bad debt could arise where there is no valid and
subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and that the
debtor was incapable of paying the debt in 1951, when petitioner wrote off the
advances and deducted the amount in its return for said year, yet the debt is not
deductible in 1951 as a worthless debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner continued to give advances in those
years. It has been held that if the debtor corporation, although losing money or
insolvent, was still operating at the end of the taxable year, the debt is not
considered worthless and therefore not deductible.
The Tax Court's disallowance of the write-off was proper. The Solicitor General has
rightly pointed out that the taxpayer has taken an "ambiguous position " and "has
not definitely taken a stand on whether the amount involved is claimed as losses
or as bad debts but insists that it is either a loss or a bad debt." We sustain the
government's position that the advances made by the taxpayer to its 100%
subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951
were investments and not loans. The evidence on record shows that the board of
directors of the two companies since August, 1945, were identical and that the only
capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in
the taxpayer's balance sheet as its investment in its subsidiary company. This fact
explains the liberality with which the taxpayer made such large advances to the
subsidiary, despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as against the
Tax Court's finding that under their memorandum agreement, the taxpayer did not
expect to be repaid, since if the subsidiary had no earnings, there was no obligation
to repay those advances, becomes immaterial, in the light of our resolution of the
question. The Tax Court correctly held that the subsidiary company was still in
operation in 1951 and 1952 and the taxpayer continued to give it advances in those
years, and, therefore, the alleged debt or investment could not properly be
considered worthless and deductible in 1951, as claimed by the taxpayer.
Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for
deduction by corporations of losses actually sustained and charged off during the
taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad
debts actually ascertained to be worthless and charged off within the taxable year,
can there be a partial writing off of a loss or bad debt, as was sought to be done
here by the taxpayer. For such losses or bad debts must be ascertained to be so
and written off during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code authorizing partial
deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not
be deducted for the year 1951, as the subsidiary was still in operation in 1951 and
1952. The taxpayer, on the other hand, claims that its advances were irretrievably
lost because of the staggering losses suffered by its subsidiary in 1951 and that its
advances after 1949 were "only limited to the purpose of salvaging whatever ore
was already available, and for the purpose of paying the wages of the laborers who
needed help." The correctness of the Tax Court's ruling in sustaining the
disallowance of the write-off in 1951 of the taxpayer's claimed losses is borne out
by subsequent events shown in Cases L-24972 and L-24978 involving the taxpayer's
1957 income tax liability. (Infra, paragraph 6.) It will there be seen that by 1956,
the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97
in 1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that the
subsidiary decided to cease operations.
6. Optional Standard Deduction

a. Sec. 34(L) of the NIRC (as amended by RA 10963)
(L) Optional Standard Deduction (OSD). - In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not exceeding
forty percent (40%) of his gross sales or gross receipts, as the case maybe. In the
case of a corporation subject to tax under Sections 27(A) and 28 (A)(1), it may elect
a standard deduction in an amount not exceeding forty percent (40%) of its gross
income as defined in Section 32 of this Code. Unless the taxpayer signifies in his
return his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the preceding
Subsections. Such election when made in the return shall be irrevocable for the
taxable year for which the return is made: Provided, That an individual who is
entitled to and claimed for the optional standard deduction shall not be required
to submit with his tax return such financial statements otherwise required under
this Code: Provided, further, That except when the Commissioner otherwise
permits, the said individual shall keep such records pertaining to his gross sales or
gross receipts, or the said corporation shall keep such records pertaining to his
gross income as defined in Section 32 of this Code during the taxable year, as may
be required by the rules and regulations promulgated by the Secretary of Finance,
upon, recommendation of the Commissioner.
b. Sec. 8 of RR No. 8-2018 dated January 25, 2018

SECTION 8. DEDUCTIONS FROM GROSS INCOME. - In general, there shall be allowed at
the option of the taxpayer, itemized deductions or an Optional Standard Deduction
(OSD) at the rate of forty percent (40%). In case of individual taxpayers, OSD shall
be computed at the rate of forty percent (40%) of gross sales/ receipts, as the case
may be. Corporations may elect standard deduction in an amount not exceeding
forty percent (40%) of its gross income.
However, no deductions shall be allowed to individual taxpayers earning

compensation income arising from personal services rendered under an employer-
employee relationship, and those who opted to be taxed at 8% income tax rate on
their income from business/ practice of profession.
The following are the allowable itemized deductions:
A. Expenses;
B. Interest;
C. Taxes;
D. Losses;
E. Bad Debts;
F. Depreciation;
G. Depletion of Oil and Gas wells and Mines;
H. Charitable and Other Contributions;
I. Research and Development; and
J. Pension Trusts.
Unless the taxpayer, who is taxable under the graduated income tax rate, signifies in
the income tax return the intention to elect the OSD, it shall be considered as
having availed of the itemized deductions. Such election of the option, when made
in the return, shall be irrevocable for the taxable year for which the return is made.
the election to claim either the itemized deductions or the OSD for the taxable year
must be signified by checking the appropriate box in the income tax return filed for
the first quarter or the initial quarter of the taxable year after the commencement
of a new business/ practice of profession. Once the election is made, it must be
consistently applied to all the succeeding quarterly returns and in the final income
tax return for the taxable year.
The OSD allowed to individual taxpayers, except non-resident aliens, shall be forty
percent (40%) of gross sales/ receipts during the taxable year. An individual who is
entitled to and claimed for the OSD shall not be required to submit with the tax
return such Financial Statements otherwise required under the Tax Code, as
amended. A General Professional Partnership (GPP) may avail of the OSD only once,
either by the GPP or the partners comprising the partnership.
Illustration 12: Ms. RPSV is a prominent independent contractor who offers

architectural and engineering services. since RPSV's career flourished, her total
gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded cost
of service and operating expenses were P2,150,000.00 and P1,000,000.00,
respectively. she opted to avail of the 40% OSD.
OSD will be computed as follows:

Gross Receipts - Architectural and Engineering Services P4,250,000.00
Multiply by OSD Rate 40%
Deductible OSD P1,700,000.00
Net Taxable Income will be computed as follows:

Gross Receipts -Architectural and Engineering Services P4,250,000.00
Less: OSD P1,700,000.00
Net Taxable Income P2,550,000.00
Income tax liability will be computed as follows:

On P2,000,000.00 P 490,000.00
On Excess (P2,550,000.00 - P2,000,000.00) x 32% 176,000.00
Income Tax Due P 666,000.00
*The individual taxpayer elected OSD in the computation of her taxable income and
the election is irrevocable for the taxable year for which the return was made.
*Taxpayer is not required to submit her financial statements with his tax return.
*The gross receipts exceeded the VAT threshold of P3,000,000.00, thus, the taxpayer
is subject to the graduated income tax rates and liable for VAT, in addition to
income tax.
Illustration 13: Ms. MRU operates a convenience store while she offers bookkeeping
services to her clients. In 2018, her gross sales amounted to P1,800,000.00, in
addition to her gross receipts from bookkeeping services of P400,000.00. Her
recorded cost of goods sold, and operating expenses were P1,325,000.00 and
P320,000.00, respectively.
A. Ms. MRU opted avail of the OSD. The OSD and taxable income shall be computed
as follows:
Gross Sales -Convenience Store P1,800,000.00

Gross Receipts -Bookkeeping 400,000.00
Total P2,200,000.00
Less: OSD (P2,200,000.00 x 40%) 800,000.00
Net Taxable Income P1,320,000.00
Tax Due:
On P800,000.00 P 130,000.00
On Excess (P1,320,000.00 - P800,000.00) x 30% 156,000.00
Total tax due P 286,000.00
*The taxpayer elected OSD in the computation of her taxable income, thus the
graduated income tax rate shall be applied.
*The election of OSD is irrevocable for the taxable year for which the return is made.
*Taxpayer is not required to submit for financial statements with her tax return.
*Taxpayer is liable for business tax - Percentage Tax, in addition to income tax.
B. Ms. MRU's income tax liability, if she signifies in her 1st Quarter return her intention
to be taxed at 8% income tax rate, will be computed as follows:
Gross Sales -Convenience Store P1,800,000.00

Gross Receipts -Bookkeeping 400,000.00
Total P2,200,000.00
Less: Amt. allowed as deduction under Sec. 24(A)(2)(b) 250,000.00
Net taxable Income P1,950,000.00
Tax Due:
8% of P1,950,000.00 P 156,000.00
*The gross sales and receipts did not exceed the VAT threshold of P3,000,000.00.
*Taxpayer opted to be taxed at 8% income tax rate on gross sales/receipts.
*Taxpayer's source of income is purely from self-employment; thus she is entitled to

the amount allowed as deduction of P250,000.00.
*Taxpayer is not liable for percentage tax under Section 116 of the Tax Code, as
amended, since the 8% income tax rate is also in lieu of the percentage tax.
Illustration 14: The gross sales of GEAL Corporation for 2018 amounted to
P6,000,000.00, with cost of sales amounting to P4,000,000.00. It incurred operating
expenses amounting P1,000,000.00, and on the filing of its First Quarter Income
Tax Return, it signified its intention to avail of the OSD.
Computation of OSD and Tax Due:

Gross Sales P6,000,000.00
Less: Cost of Sales 4,000,000.00
Gross Income P2,000,000.00
Less: OSD (P2,000,000.00 x 40%) 800,000.00
Taxable Income P1,200,000.00
Tax Due:
30% of P1,200,000.00 P 360,000.00
*OSD for corporation is based on gross income.
*Income tax rate of corporation is currently at 30%
Determination of Optional Standard Deduction for General Professional (GPPs) and

Partner of GPPs.
GPP is not subject to income tax imposed pursuant to Sec. 26 of the Tax Code, as
amended. However, the partners shall be liable to pay income tax on their separate
and individual capacities for their respective distributive share in the net income of
the GPP.
The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-
through" entity where its income is ultimately taxed to the partners comprising it.
Section 26 of the Tax Code, as amended, likewise provides that- "for purposes of
computing the distributive share of the partners, the net income of the GPP shall
be computed in the same manner as a corporation." As such, a GPP may claim
either the itemized deductions allowed under Section 34 of the Code or in lieu
thereof, it can opt to avail of the OSD allowed to corporations in claiming the
deductions in an amount not exceeding forty percent (40%) of its gross income.
In computing taxable income defined under Section 31 of the Tax Code, as amended,
the following may be allowed as deductions:
a. Itemized expenses which are ordinary and necessary, incurred or paid for the
practice of profession; OR
b. Optional Standard Deduction (OSD).
The distributable net income of the partnership may be determined by claiming either
itemized deductions or OSD. The share in the net income of the partnership,
actually or constructively received, shall be reported as taxable income of each
partner. The partners comprising the GPP and are not allowed to avail of the 8%
income tax rate option since their distributive share from the GPP is already net of
cost and expenses.
If the partner also derives other income from trade, business or practice of profession
apart and distinct from the share in the net income of the GPP, the deduction that
can be claimed from the other income would either be the itemized deductions or
OSD.
Illustration 15: Mr. JMLH is a partner of AMBS & Co., a general professional
partnership, and owns 25% interest. The gross receipts of AMBS & Co. amounted
to P10,000,000.00 for taxable year 2018. The recorded cost of service and
operating expenses of AMBS & Co. were P2,750,000.00 and P1,500,000.00,
respectively.
If AMBS & Co. availed of the OSD, the deductions and net income shall be computed
as follows:
Gross Receipts P10,000,000.00

Less: Cost of Services 2,750,000.00
Gross Income P 7,250,000.00
Less: OSD (P7,250,000.00 x 40%) 2,900,000.00
Net Income for distribution to partners P 4,350,000.00
*There is no income tax liability for AMBS & Co. since it is a general professional
partnership under Section 26 of the Tax Code, as amended.
*The GPP elected OSD in the computation of its net income and its election is
irrevocable for the taxable year for which the return is made.
*The GPP is liable to business tax.
The income tax liability of Mr. JMLH will be computed as follows:
Share in Distributive Profit (P4,350,000.00 x 25%) P 1,087,500.00

Tax Due:
On P800,000.00 P 130,000.00
On Excess (P1,087,500.00 - P800,000.00) x 30% 86,250.00
Income Tax Due P 216,250.00
*Individual partner is not allowed to claim further deduction from his distributive
share since this is already net of cost and expenses.
*Taxpayer is not allowed to avail of the 8% income tax rate option since their
distributive share from GPP is already net of cost and expenses.
Illustration 16: Ms. GEAL is a partner of CCF & Co., a general professional partnership,
and owns 25% interest. The gross receipts of CCF & Co. amounted to
P10,000,000.00 for taxable year 2018. The recorded cost of service and operating
expenses of CCF & Co. were P2,750,000.00 and P1,500,000.00, respectively.
The Net Income of CCF & Co. will be computed as follows:

Gross Receipts P10,000,000.00
Less: Cost of Services 2,750,000.00
Gross Income P 7,250,000.00
Less: Operating Expenses 1,500,000.00
Net Income for distribution to partners P 5,750,000.00
*There is no income tax liability for CCF & Co. being a general professional partnership
under Section 26 of the Tax Code, as amended.
*The GPP elected itemized deduction in the computation of its net income and
election is irrevocable for the taxable year for which the return is made.
*The GPP is liable to business tax.
The income tax liability of Ms. GEAL will be computed as follows:

Share in Distributive Profit (P5,750,000.00 x 25%)
Tax Due:
On P800,000.00
On Excess (P1,437,500.00 -P800,000.00) x 30%
Income Tax Due
*Individual Partner is not allowed any deduction on his distributive share since this is
already net of cost and expenses.
*Taxpayer is not allowed to avail of the 8% income tax rate option since her
distributive share from GPP is already net of cost and expenses.
I. Gains and Losses from Sale or Exchange of Property
1. Capital Gains and Losses

2. Capital Assets vs. Ordinary Assets
a. Sec. 39(A)(1) of the NIRC
SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include 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 or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
b. Secs. 1 to 3 of RR No. 7-03 dated February 11, 2003
SECTION 1. SCOPE. – Pursuant to Section 244 of the National Internal Revenue Code
of 1997 (Code), these Regulations are hereby promulgated to implement
Sec. 39(A)(1), in relation to Secs. 24(D), 25(A)(3), 25(B) and 27(D)(5), and Secs. 24(A),
25(A) & (B), 27(A) or 27(E), 28(A)(1) or 28(A)(2), and 28(B)(1), all of the said Code,
providing for the purpose the guidelines in determining whether a particular real
property is a capital asset or an ordinary asset.
SEC. 2. DEFINITION OF TERMS. – For purposes of these Regulations, the following

terms shall be defined as follows:
a. Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec.39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real 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; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a

character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in
the real estate business for purposes of determining the applicable rate of
withholding tax imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98, as
amended.
c. Real property shall have the same meaning attributed to that term under Article 415
of Republic Act No. 386, otherwise known as the “Civil Code of the Philippines.”
d. Real estate dealer shall refer to any person engaged in the business of buying and
selling or exchanging real properties on his own account as a principal and holding
himself out as a full or part-time dealer in real estate.
e. Real estate developer shall refer to any person engaged in the business of
developing real properties into subdivisions, or building houses on subdivided lots,
or constructing residential or commercial units, townhouses and other similar units
for his own account and offering them for sale or lease.
f. Real estate lessor shall refer to any person engaged in the business of leasing or
renting real properties on his own account as a principal and holding himself out as
lessor of real properties being rented out or offered for rent.
g. Taxpayers engaged in the real estate business shall refer collectively to real estate
dealers, real estate developers, and/or real estate lessors. Conversely, the term
“taxpayers not engaged in the real estate business” shall refer to persons other
than real estate dealers, real estate developers and/or real estate lessors.
A taxpayer whose primary purpose of engaging in business, or whose Articles of

Incorporation states that its primary purpose is to engage in the real estate
business shall be deemed to be engaged in the real estate business for purposes of
these Regulations.
SEC. 3. GUIDELINES IN DETERMINING WHETHER A PARTICULAR REAL PROPERTY IS A
CAPITAL ASSET OR ORDINARY ASSET.-
a. Taxpayers engaged in the real estate business. – Real property shall be classified
with respect to taxpayers engaged in the real estate business as follows:
1. Real Estate Dealer. - All real properties acquired by the real estate dealer shall be
considered as ordinary assets.
2. Real Estate Developer. – All real properties acquired by the real estate developer,
whether developed or undeveloped as of the time of acquisition, and all real
properties which are held by the real estate developer primarily for sale or for lease
to customers in the ordinary course of his trade or business or which would
properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year and all real properties used in the trade or business, whether in the
form of land, building, or other improvements, shall be considered as ordinary
assets.
3. Real Estate Lessor. – All real properties of the real estate lessor, whether land and/or
improvements, which are for lease/rent or being offered for lease/rent, or
otherwise for use or being used in the trade or business shall likewise be considered
as ordinary assets.
4. Taxpayers habitually engaged in the real estate business. - All real properties
acquired in the course of trade or business by a taxpayer habitually engaged in the
sale of real estate shall be considered as ordinary assets. Registration with the
HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a
taxpayer to be considered as habitually engaged in the sale of real estate. If the
taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or
developer, he/it may nevertheless be deemed to be engaged in the real estate
business through the establishment of substantial relevant evidence (such as
consummation during the preceding year of at least six (6) taxable real estate sale
transactions, regardless of amount; registration as habitually engaged in real estate
business with the Local Government Unit or the Bureau of Internal Revenue, etc.,).
A property purchased for future use in the business, even though this purpose is
later thwarted by circumstances beyond the taxpayer’s control, does not lose its
character as an ordinary asset. Nor does a mere discontinuance of the active use of
the property change its character previously established as a business property.
b. Taxpayer not engaged in the real estate business. - In the case of a taxpayer not
engaged in the real estate business, real properties, whether land, building, or
other improvements, which are used or being used or have been previously used
in the trade or business of the taxpayer shall be considered as ordinary assets.
These include buildings and/or improvements subject to depreciation and lands
used in the trade or business of the taxpayer. A depreciable asset does not lose its
character as an ordinary asset, for purposes of the instant provision, even if it
becomes fully depreciated, or there is failure to take depreciation during the period
of ownership. Monetary consideration or the presence or absence of profit in the
operation of the property is not significant in the characterization of the property.
So long as the property is or has been used for business purposes, whether for the
benefit of the owner or any of its members or stockholders, it shall still be
considered as an ordinary asset. Real property used by an exempt corporation in
its exempt operations, such as a corporation included in the enumeration of
Section 30 of the Code, shall not be considered used for business purposes, and
therefore, considered as capital asset under these Regulations. Real property,
whether single detached; townhouse; or condominium unit, not used in trade or
business as evidenced by a certification from the Barangay Chairman or from the
head of administration, in case of condominium unit, townhouse or apartment, and
as validated from the existing available records of the Bureau of Internal Revenue,
owned by an individual engaged in business, shall be treated as capital asset.
c. Taxpayers changing business from real estate business to non-real estate business.
– In the case of a taxpayer who changed its real estate business to a non-real estate
business, or who amended its Articles of Incorporation from a real estate business
to a non-real estate business, such as a holding company, manufacturing company,
trading company, etc., the change of business or amendment of the primary
purpose of the business shall not result in the re-classification of real property held
by it from ordinary asset to capital asset. For purposes of issuing the certificate
authorizing registration (CAR) or tax clearance certificate (TCL), as the case may be,
the appropriate officer of the BIR shall at all times determine whether a corporation
purporting to be not engaged in the real estate business has at any time amended
its primary purpose from a real estate business to a non-real estate business.
d. Taxpayers originally registered to be engaged in the real estate business but failed
to subsequently operate. – In the case of subsequent nonoperation by taxpayers
originally registered to be engaged in the real estate business, all real properties
originally acquired by it shall continue to be treated as ordinary assets.
e. Treatment of abandoned and idle real properties. - Real properties formerly forming
part of the stock in trade of a taxpayer engaged in the real estate business, or
formerly being used in the trade or business of a taxpayer engaged or not engaged
in the real estate business, which werelater on abandoned and became idle, shall
continue to be treated as ordinary assets. Real property initially acquired by a
taxpayer engaged in the real estate business shall not result in its conversion into
a capital asset even if the same is subsequently abandoned or becomes idle.
Provided however, that properties classified as ordinary assets for being used in
business by a taxpayer engaged in business other than real estate business as
defined in Section 2 (g) hereof are automatically converted into capital assets upon
showing of proof that the same have not been used in business for more than two
(2) years prior to the consummation of the taxable transactions involving said
properties.
f. Treatment of real properties that have been transferred to a buyer/transferee,

whether the transfer is through sale, barter or exchange, inheritance, donation or
declaration of property dividends. Real properties classified as capital or ordinary
asset in the hands of the seller/transferor may change their character in the hands
of the buyer/transferee. The classification of such property in the hands of the
buyer/transferee shall be determined in accordance with the following rules:
1. Real property transferred through succession or donation to the heir or donee who
is not engaged in the real estate business with respect to the real property inherited
or donated, and who does not subsequently use such property in trade or business,
shall be considered as a capital asset in the hands of the heir or donee.
2. Real property received as dividend by the stockholders who are not engaged in the
real estate business and who do not subsequently use such real property in trade
or business shall be treated as capital assets in the hands of the recipients even if
the corporation which declared the real property dividend is engaged in real estate
business.
3. The real property received in an exchange shall be treated as ordinary asset in the
hands of the transferee in the case of a tax free exchange by taxpayer not engaged
in real estate business to a taxpayer who is engaged in real estate business, or to a
taxpayer who, even if not engaged in real estate business, will use in business the
property received in the exchange.
g. Treatment of real property subject of involuntary transfer. - In the case of

involuntary transfers of real properties, including expropriation or foreclosure sale,
the involuntariness of such sale shall have no effect on the classification of such
real property in the hands of the involuntary seller, either as capital asset or
ordinary asset, as the case may be.
For example, real properties forming part of the inventory of a real estate dealer,
which are foreclosed, shall, for purposes of determining the applicable tax on such
foreclosure sale, be treated as ordinary assets. On the other hand, the nature of
such real property in the hands of the foreclosure buyer shall be determined in
accordance with the rules stated in sub-paragraph (f) hereof.
c. Sec. 22(Z) of the NIRC
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property
which is not a capital asset or property described in Section 39(A)(1). Any gain from
the sale or exchange of property which is treated or considered, under other
provisions of this Title, as 'ordinary income' shall be treated as gain from the sale
or exchange of property which is not a capital asset as defined in Section 39(A)(1).
The term 'ordinary loss' includes any loss from the sale or exchange of property
which is not a capital asset. Any loss from the sale or exchange of property which
is treated or considered, under other provisions of this Title, as 'ordinary loss' shall
be treated as loss from the sale or exchange of property which is not a capital asset.
d. Calasanz vs. CIR, GR No. L-26284 dated October 8, 1986

Facts: Petitioner Ursula Calasanz inherited from her father de Torres an agricultural
land located in Rizal with an area of 1.6M sqm. In order to liquidate her inheritance,
Ursula Calasanz had the land surveyed and subdivided into lots. Improvements,
such as good roads, concrete gutters, drainage and lighting system, were
introduced to make the lots saleable. Soon after, the lots were sold to the public at
a profit.
In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized
from the sale of the subdivided lots, and reported fifty per centum thereof or
P15,530.03 as taxable capital gains.
Upon an audit and review of the return thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers, as defined in the NIRC, and
required them to pay the real estate dealer's tax and assessed a deficiency income
tax on profits derived from the sale of the lots based on the rates for ordinary
income. Tax court upheld the finding of the CIR, hence, the present appeal.
ISSUES:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed
tax. YES
b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates. ORDINARY INCOME
RATIO:
The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly
defines capital assets as follows:
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, 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,
or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business of a
character which is subject to the allowance for depreciation provided in subsection
[f] of section thirty; or real property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. If the asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions
are ordinary assets. And necessarily, any gain resulting from the sale or exchange
of an asset is a capital gain or an ordinary gain depending on the kind of asset
involved in the transaction.
However, there is no rigid rule or fixed formula by which it can be determined with
finality whether property sold by a taxpayer was held primarily for sale to
customers in the ordinary course of his trade or business or whether it was sold as
a capital asset. Although several factors or indices have been recognized as helpful
guides in making a determination, none of these is decisive; neither is the presence
nor the absence of these factors conclusive. Each case must in the last analysis rest
upon its own peculiar facts and circumstances.
Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the
activity was in furtherance of or in the course of the taxpayer's trade or business.
Thus, a sale of inherited real property usually gives capital gain or loss even though
the property has to be subdivided or improved or both to make it salable. However,
if the inherited property is substantially improved or very actively sold or both it
may be treated as held primarily for sale to customers in the ordinary course of the
heir's business.
In this case, the subject land is considered as an ordinary asset. Petitioners did not sell
the land in the condition in which they acquired it. While the land was originally
devoted to rice and fruit trees, it was subdivided into small lots and in the process
converted into a residential subdivision and given the name Don Mariano
Subdivision. Extensive improvements like the laying out of streets, construction of
concrete gutters and installation of lighting system and drainage facilities, among
others, were undertaken to enhance the value of the lots and make them more
attractive to prospective buyers. The audited financial statements submitted
together with the tax return in question disclosed that a considerable amount was
expanded to cover the cost of improvements. There is authority that a property
ceases to be a capital asset if the amount expended to improve it is double its
original cost, for the extensive improvement indicates that the seller held the
property primarily for sale to customers in the ordinary course of his business.
Another distinctive feature of the real estate business discernible from the records is
the existence of contracts receivables, which stood at P395,693.35. The sizable
amount of receivables in comparison with the sales volume of P446,407.00 during
the same period signifies that the lots were sold on installment basis and suggests
the number, continuity and frequency of the sales. Also of significance is the
circumstance that the lots were advertised for sale to the public and that sales and
collection commissions were paid out during the period in question.
Petitioners argument that they are merely liquidating the land must also fail. In
Ehrman vs. Commissioner, the American court in clear and categorical terms
rejected the liquidation test in determining whether or not a taxpayer is carrying
on a trade or business The court observed that the fact that property is sold for
purposes of liquidation does not foreclose a determination that a "trade or
business" is being conducted by the seller.
One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not
lose the benefits of the capital gain provision of the statute unless he enters the
real estate business and carries on the sale in the manner in which such a business
is ordinarily conducted. In that event, the liquidation constitutes a business and a
sale in the ordinary course of such a business and the preferred tax status is lost.
e. China Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000
Facts: Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hong kong subsidiary engaged in
financing and investment with "deposit-taking" function. In the course of the
regular examination of the financial books and investment portfolios of petitioner
conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia),
Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-
off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987
Income Tax Return and treated it as a bad debt or as an ordinary loss deductible
from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed
petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of
surcharge, interest and compromise penalty. The disallowance of the deduction
was made on the ground that the investment should not be classified as being
"worthless" and that, although the Hongkong Banking Commissioner had revoked
the license of First CBC Capital as a "deposit-taking" company, the latter could still
exercise, however, its financing and investment activities. Assuming that the
securities had indeed become worthless, respondent Commissioner of Internal
Revenue held the view that they should then be classified as "capital loss," and not
as a bad debt expense there being no indebtedness to speak of between petitioner
and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax
court sustained the Commissioner, holding that the securities had not indeed
become worthless and ordered petitioner to pay its deficiency income tax for 1987
of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision
was appealed to the Court of Appeals, the latter upheld the CTA. In its instant
petition for review on certiorari, petitioner bank assails the CA decision.
Issue: 1. Is the equity investment capital asset or an ordinary asset?
Ruling: 1. An equity investment is a capital, not ordinary, asset of the investor the sale
or exchange of which results in either a capital gain or a capital loss. The gain or the
loss is ordinary when the property sold or exchanged is not a capital asset. A capital
asset is defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include 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,
or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business, of a
character which is subject to the allowance for depreciation provided in subsection
(f) of section twenty-nine; or real property used in the trade or business of the
taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC,
would be ordinary assets only to a dealer in securities or a person engaged in the
purchase and sale of, or an active trader (for his own account) in, securities. Section
20(u) of the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether
an individual, partnership or corporation, with an established place of business,
regularly engaged in the purchase of securities and their resale to customers; that
is, one who as a merchant buys securities and sells them to customers with a view
to the gains and profits that may be derived therefrom."
3. Holding Period Rule

a. Sec. 39(B) of the NIRC
(B) Percentage Taken into Account - In the case of a taxpayer, other than a
corporation, only the following percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into account in computing net capital
gain, net capital loss, and net income.
(1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months;
4. Loss Limitation Rule

a. Sec. 39(C) of the NIRC
(C) Limitation on Capital losses. - Losses from sales or exchange capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or
trust company incorporated under the laws of the Philippines, a substantial part of
whose business is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof), with interest coupons
or in registered form, any loss resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in determining the applicability of
such limitation to other losses.
b. China Banking Corporation vs. CA, GR No. 125508 dated July 19, 2000
Ruling: Capital losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and not from
any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a
subsidiary corporation of petitioner bank whose shares in said investee
corporation are not intended for purchase or sale but as an investment.
Unquestionably then, any loss therefrom would be a capital loss, not an ordinary
loss, to the investor. Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed
only to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid

Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets
shall be allowed only to the extent of the gains from such sales or exchanges. If a
bank or trust company incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.
The exclusionary clause found in the foregoing text of the law does not include all
forms of securities but specifically covers only bonds, debentures, notes,
certificates or other evidence of indebtedness, with interest coupons or in
registered form, which are the instruments of credit normally dealt with in the
usual lending operations of a financial institution. Equity holdings cannot come
close to being, within the purview of "evidence of indebtedness" under the second
sentence of the aforequoted paragraph. Verily, it is for a like thesis that the loss
of petitioner bank in its equity investment in the Hongkong subsidiary cannot also
be deductible as a bad debt. The shares of stock in question do not constitute a
loan extended by it to its subsidiary (First CBC Capital) or a debt subject to
obligatory repayment by the latter, essential elements to constitute a bad debt,
but a long-term investment made by CBC.
5. Net Capital Loss Carry-over Rule

a. Sec. 39(D) of the NIRC
(D) Net Capital Loss Carry-Over. - If any taxpayer, other than a corporation, sustains
in any taxable year a net capital loss, such loss (in an amount not in excess of the
net income for such year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more than twelve (12)
months.
6. Tax Free Exchanges
a. Sec. 40(C)(2) of the NIRC – Basic provisions only
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation -
(a) A corporation, which is a party to a merger or consolidation, exchanges property

solely for stock in a corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or

consolidation, solely for the stock of another corporation also a party to the merger
or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation,

exchanges his securities in such corporation, solely for stock or securities in such
corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a

person in exchange for stock or unit of participation in such a corporation of which
as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That stocks
issued for services shall not be considered as issued in return for property.
J. Estates and Trusts

1. Secs. 60-66 of the NIRC (as amended by the RA 10963)
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the
income of estates or of any kind of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant which is to be held or distributed as the
court may direct;
(3) Income received by estates of deceased persons during the period of administration
or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at any
time prior to the satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive benefit of his employees:
Provided, That any amount actually distributed to any employee or distributee shall
be taxable to him in the year in which so distributed to the extent that it exceeds the
amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income of the estate or trust
and shall be paid by the fiduciary, except as provided in Section 63 (relating to
revocable trusts) and Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more
trusts, the creator of the trust in each instance is the same person, and the beneficiary
in each instance is the same, the taxable income of all the trusts shall be consolidated
and the tax provided in this Section computed on such consolidated income, and such
proportion of said tax shall be assessed and collected from each trustee which the
taxable income of the trust administered by him bears to the consolidated income of
the several trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in
the same manner and on the same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate
or trust the amount of the income of the estate or trust for the taxable year which is
to be distributed currently by the fiduciary to the beneficiaries, and the amount of the
income collected by a guardian of an infant which is to be held or distributed as the
court may direct, but the amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction under this Subsection shall not be allowed as
a deduction under Subsection (B) of this Section in the same or any succeeding taxable
year.
(B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the
discretion of the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any legatee,
heir or beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount
of any income included in the return of said trust shall not be included in computing
the income of the beneficiaries.
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided
for in this Title, there shall be allowed an exemption of Twenty thousand pesos
(P20,000) [39] from the income of the estate or trust.
*Note Section 62 of the NIRC that prescribed on the exemption allowed to estates and
trusts was repealed under Section 19 of RA 10963.
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to
any part of the corpus of the trust is vested (1) in the grantor either alone or in
conjunction with any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, or (2) in any person
not having a substantial adverse interest in the disposition of such part of the corpus
or the income therefrom, the income of such part of the trust shall be included in
computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor. -
(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of
any person not having a substantial adverse interest in the disposition of such part of
the income may be held or accumulated for future distribution to the grantor, or (2)
may, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income may be
applied to the payment of premiums upon policies of insurance on the life of the
grantor, such part of the income of the trust shall be included in computing the taxable
income of the grantor. `
(B) As used in this Section, the term 'in the discretion of the grantor' means in the
discretion of the grantor, either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of the part of the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers,

conservators and all persons or corporations, acting in any fiduciary capacity, shall
render, in duplicate, a return of the income of the person, trust or estate for whom or
which they act, and be subject to all the provisions of this Title, which apply to
individuals in case such person, estate or trust has a gross income of Twenty thousand
pesos (P20,000) [40] or over during the taxable year. Such fiduciary or person filing the
return for him or it, shall take oath that he has sufficient knowledge of the affairs of
such person, trust or estate to enable him to make such return and that the same is,
to the best of his knowledge and belief, true and correct, and be subject to all the
provisions of this Title which apply to individuals: Provided, That a return made by or
for one or two or more joint fiduciaries filed in the province where such fiduciaries
reside; under such rules and regulations as the Secretary of Finance, upon
recommendation of the Commissioner, shall prescribe, shall be a sufficient compliance
with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors,
administrators and other fiduciaries are indemnified against the claims or demands of
every beneficiary for all payments of taxes which they shall be required to make under
the provisions of this Title, and they shall have credit for the amount of such payments
against the beneficiary or principal in any accounting which they make as such trustees
or other fiduciaries.
2. Employees’ Trust
a. Sec. 60(B) of the NIRC
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit
of his employees: Provided, That any amount actually distributed to any employee
or distributee shall be taxable to him in the year in which so distributed to the
extent that it exceeds the amount contributed by such employee or distributee.
b. RMC 39-14 dated May 12, 2014

There are pension, stock bonus and profit-sharing plans that are permitted by
their charters to disburse benefits (i.e. dividends) to the beneficiary-employees.
As a general rule, Section 60 (A) of the National Internal Revenue Code (NIRC) of
1997, as amended, subjects the income of any kind of property held in trust to
income tax. By way of exception, Section 60 (B) exempts from income tax an
employee's trust which forms part of a pension, stock bonus or profit-sharing plan
of an employer for the benefit of some or all of his employees subject to the
following conditions:
1. Contributions are made to the trust by such employer, or employees, or both

for the purpose of distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such plan; and
2. Under the trust instrument it is impossible, at any time prior to the satisfaction
of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or diverted
to purposes other than for the exclusive benefit of his employees.
As an exception to the above, Section 60(B) subjects to income tax, in the year in
which so distributed, any amount actually distributed to any employee or
distributee to the extent that it exceeds the amount contributed by such
employee or distributee.
Prescinding from the foregoing, the entire amounts of benefits paid by a pension,
stock bonus or profit-sharing plan of an employer for the benefit of employees are
taxable on the part of the employees in the year so distributed. This tax treatment,
however, does not apply to payouts representing a return of an employee's
personal contributions to the fund and to retirement benefits exempt under
Section 32(B)(6)(a) of the NIRC.
Illustrations. -
Situation No.1. Non-contributory Pension Plan. - ABC Labor Union represents all
the daily paid employees of VCC Corporation. As a result of their collective
bargaining agreement, ABC Labor Union and VCC Corporation established a
provident fund. The plan sets forth the terms and conditions of membership
therein and the benefits to be provided. Under the terms of the agreement, VCC
Corporation is obligated to established a trust fund and to make contributions
thereto at specified rates. The daily paid employees of VCC Corporation are not
allowed to contribute to the provident plan.
a. The provident fund distributed dividends to the covered employees. As a result,
the entire amount of the dividends is subject to income tax on the part of the
covered employees in the year so distributed.
b. Mr. Q, an employee covered by the provident plan, resigned from VCC

Corporation. He received benefits from the provident plan that do not qualify as
tax-exempt separation or retirement benefits. These benefits are subject to
income tax on the part of Mr. Q to the extent of the entire amount received in the
year so distributed.
Situation No. 2. Contributory Pension Plan. - Same facts as Situation No.1, except
that in this situation, the daily paid employees of VCC Corporation are allowed to
contribute up to Twenty Thousand Pesos (P20,000.00) each year to the provident
plan.
a. That provident fund distributed dividends to the covered employees. The

dividends do not constitute a return of the employees' voluntary contributions.
As a result, the entire amount of the dividends is subject to income tax on the part
of the covered employees in the year so distributed.
b. Ms. M, an employee covered by the provident plan, contributed a total of Sixty

Thousand Pesos (P60,000.00) to the provident fund. Upon her resignation from
VCC Corporation, she received benefits from the provident plan in the amount of
Three Hundred Thousand Pesos (P300,000) that do not qualify as tax-exempt
separation or retirement benefits. Of this amount, Sixty Thousand Pesos
(P60,000.00) constitutes a return of her contribution to the provident fund. The
entire amount Two Hundred Forty Thousand Pesos (P240,000.00) that Ms. M
received in excess of her contribution (or Three Hundred Thousand Pesos
[P300,000.00] less Sixty Thousand Pesos [P60,000.00]) is subjec to income tax on
the part of Ms. M in the year so distributed.
c. Ossorio Pension Foundation, Inc., vs. CA, GR No. 162175 dated June 28, 2010
Facts: Petitioner, a non-stock and non-profit corporation, was organized for the
purpose of holding title to and administering the employees’ trust or retirement
funds (Employees’ Trust Fund) established for the benefit of the employees of
Victorias Milling Company, Inc. (VMC).
Petitioner decided to invest part of the Employees’ Trust Fund to purchase a lot in
the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner bought
the MBP lot through VMC. Petitioner’s share in the MBP lot is 49.59%.
Petitioner invested ₱5,504,748.25 of the funds of the Employees' Trust Fund to
purchase the MBP lot. When the MBP lot was sold, the gross income of the
Employees’ Trust Fund from the sale of the MBP lot was ₱40,500,000. However,
7.5% withholding tax of ₱3,037,500 and broker’s commission were deducted from
the proceeds.
Petitioner maintains that the tax exemption of the Employees’ Trust Fund
rendered the payment of ₱3,037,500 as illegal or erroneous; and that it should be
refunded.
The BIR, through its Revenue District Officer, wrote petitioner stating that under
Section 26 of the Tax Code, petitioner is not exempt from tax on its income from
the sale of real property.
The CTA held that under Section 53(b) [now Section 60(b)] of the Tax Code, it is
not petitioner that is entitled to exemption from income tax but the income or
earnings of the Employees’ Trust Fund. The CTA stated that petitioner is not the
pension trust itself but it is a separate and distinct entity whose function is to
administer the pension plan for some VMC employees.
The CA affirmed said decision, stating that petitioner's claim for refund of
withheld creditable tax is bereft of solid juridical basis.
Issue: WON petitioner or the Employees’ Trust Fund is entitled to tax exemption
for its share in the proceeds from the sale of the MBP lot.
Ruling: Yes. According to the SC, the tax-exempt character of the Employees’ Trust
Fund has long been settled.
In an earlier case held by the CTA involving the same petitioner, it affirmed the
BIR ruling that the pension plan funds and assets, as assigned and transferred to
petitioner in trust, is exempt from income tax pursuant to Republic Act 4917, in
relation to in relation to Section 56(b), now Section 60 (b), of the Tax Code.
It is also settled that petitioner, under a Memorandum of Understanding with

VMC, exists for the purpose of holding title to, and administering, the tax-exempt
Employees’ Trust Fund established for the benefit of VMC’s employees. As such,
petitioner has the personality to claim tax refunds due the Employees' Trust Fund.
As held in the case of Commissioner of Internal Revenue vs. The Honorable Court
of Appeals, The Court of Tax Appeals and GCL Retirement Plan, the Supreme Court
held:
There can be no denying either that the final withholding tax is collected from
income in respect of which employees’ trusts are declared exempt (Sec. 56(b),
now 53(b), Tax Code). The application of the withholdings system to interest on
bank deposits or yield from deposit substitutes is essentially to maximize and
expedite the collection of income taxes by requiring its payment at the source. If
an employees’ trust like the GCL enjoys a tax-exempt status from income, we see
no logic in withholding a certain percentage of that income which it is not
supposed to pay in the first place.
Similarly, the income of the trust funds involved herein is exempt from the
payment of the creditable withholding tax on the sale of their real property.
Since the income from the sale of the MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of the Employees’ Trust Fund, is
entitled to claim the tax refund of ₱3,037,500 which was erroneously paid in the
sale of the MBP lot.
Rationale for the tax-exemption privilege of income derived from employees’

trusts
It is evident that tax-exemption is likewise to be enjoyed by the income of the

pension trust. Otherwise, taxation of those earnings would result in a diminution
of accumulated income and reduce whatever the trust beneficiaries would receive
out of the trust fund.
This would run afoul of the very intendment of the law (Commissioner of Internal
Revenue v. Court of Appeals).
K. Returns and Payment of Tax under the NIRC

1. Persons not Required to File Income Tax Returns
a. Sec. 51(A)(2) of the NIRC (as amended by RA 10963)
(2) The following individuals shall not be required to file an income tax return:
(a) An individual whose gross income does not exceed Two hundred fifty thousand
pesos (P250,000.00) under Section 24(A)(2)(a): Provided, that a citizen of the
Philippines and any alien individual engaged in business or practice of profession
within the Philippine shall file an income tax return, regardless of the amount of
gross income;
(b) An individual with respect to pure compensation income, as defined in Section 32

(A)(1), derived from sources within the Philippines, the income tax on which has
been correctly withheld under the provisions of Section 79 of this Code: Provided,
That an individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax return.
(c) An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in section 22 (HH) of this Code or an individual
who is exempt from income tax pursuant to the provisions of this Code and other
laws, general or special.
2. Substituted Filing
a. Sec. 51-A of the NIRC (as amended by RA 10963)
“Sec. 51-A. Substituted Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income.— Individual taxpayers receiving purely compensation
income, regardless of amount, from only one employer in the Philippines for the
calendar year, the income tax of which has been withheld correctly by the said
employer (tax due equals tax withheld) shall not be required to file an annual
income tax return. The certificate of withholding filed by the respective employers,
duly stamped ‘received’ by the BIR, shall be tantamount to the substituted filing of
income tax returns by said employees.”
b. RR No. 03-02 dated March 22, 2002, as amended

RR No. 03-02 dated March 22, 2002, amends certain provision of RR No. 2-98, as
amended, relative to the submission of the Alphabetical Lists of Employees/Payees
in diskette form and the substituted filing of the Income Tax returns of
payees/employees receiving purely compensation income from only one employer
for one taxable year whose tax due is equal to tax withheld and individual-payees
whose compensation income is subject to Final Withholding Tax.
An individual whose sole income has been subjected to final Withholding Tax shall not
be required to file an Income Tax return. For purposes of documentation, as may
be required by other government agencies, as well as to establish the financial
capacity of said individual for bank loans or credit card applications and other
purposes, the BIR Form No. 2306 duly signed by the employer and the employee
shall suffice.
Individual taxpayers receiving purely compensation income (regardless of amount)

from only one employer in the Philippines for the calendar year, the Income Tax of
which has been withheld correctly by the said employer (tax due equals tax
withheld ), shall not be required to file Income Tax return (BIR Form No. 1700). The
Annual Information Return of Income Taxes Withheld on Compensation and Final
Withholding Taxes (BIR form No. 1604-CF) filed by the respective employers with
the BIR shall be tantamount to the substituted filing of Income Tax returns by said
employees.
The following individuals, however, are not qualified for substituted filing and are
therefore, still required to file BIF Form No. 1700:
1. Individuals deriving compensation from two or more employers concurrently or
successively during the taxable year;
2. Employees deriving compensation income, regardless of the amount, whether,
from a single employer or several employers during the calendar year, the
Income Tax of which has not been withheld correctly resulting to collective or
refundable return;
3. Employees whose monthly gross compensation income does not exceed Five
thousand pesos or the statutory minimum wage, whichever is higher, and opted
for non-withholding of tax on said income;
4. Individuals deriving other non-business, non-profession-related income in
addition to compensation income not otherwise subject to a final tax;
5. Individuals receiving purely compensation income from a single employer,
although the Income Tax of which has been correctly withheld, but whose
spouse is not qualified for substituted filing (only one tax return shall be filed);
and
6. Non-resident aliens engaged in trade or business in the Philippines deriving
purely compensation income or compensation income and other non-business,
non-profession-related income.
The employee who is qualified for substituted filing of Income Tax return and the
employer shall issue a joint certification to the effect that the employer's filing of
BIR Form No. 1604-CF shall be considered a substituted filing of the employee's
Income Tax return, to the extent that the amount of compensation and tax
withheld appearing in BIR Form No. 1604-CF (filed with the BIR) is consistent with
the corresponding amounts indicated in BIR Form No. 2316 and the certification,
for taxable year 2001, the joint certification shall be executed on or before April 15,
2002 (copies to be retained by both employer and employee), and subsequently on
or before January 31 of the following year, together with BIR Form No. 2316.
The joint certification shall serve the same purpose as if a BIR Form No. 1700 had been
filed, such as proof of financial capacity for purposes of loan, credit card, or other
applications, or for the purpose of availing tax credit in the employee's home
country and for other purposes with various government agencies. this may also
be used for purposes of securing travel exemption, when necessary.
Non-filing of BIR Form No. 1700 for employees who are qualified for substituted filing
shall be optional for the taxable year 2001. Thereafter, substituted filing, where
applicable, shall be mandatory.
In addition to the submission of manually prepared alphabetical list of employees and

list of payees who are recipients of income payments subjected to creditable and
final withholding taxes (which form part of the Annual Information Returns - BIR
Form Nos. 1604-CF/1604-E), the withholding agent may, at his option, submit 3.5
inch floppy diskettes, containing the said list.
Taxpayers whose number of employees or income payees are ten (10) or more are,
however, mandatorily required to submit the said lists in 3.5 inch floppy diskettes,
using the existing CSV data file format, together with the manually prepared
alphabetical list.
c. Section 13 of RR No. 11-2018 dated January 31, 2018

SECTION 13. Section 2.83.4 of RR No. 2-98 is hereby amended to read as follows:
"SECTION 2.83.4. Substituted Filing Income Tax Returns by Employees Receiving Purely
Compensation Income. - Individual taxpayers receiving purely compensation
income, regardless of amount, from only one employer in the Philippines for the
calendar year, the income tax of which has been withheld correctly by the said
employer (tax due equals tax withheld) shall not be required to file Annual Income
Tax Return for Individuals Earning Purely Compensation Income (BIR Form No.
1700). In lieu of BIR Form No. 1700, the Certified List of Employees Qualified for
Substituted compensation paid, tax due and tax withheld, filed by the employer
with the concerned BIR office and stamped "Received" by the latter shall be
tantamount to the substituted filing ITRs by concerned employees.
The following individuals, however, are not qualified for substituted filing and
therefore, still required to file Income Tax Return in accordance with the existing
regulations:
A. Individuals deriving compensation from two or more employers concurrently or

successively at any time during the taxable year.
B. Employees deriving compensation income, regardless of the amount, whether from

a single or several employers during the calendar year, the income tax of which has
not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting
to collectible or refundable return.
C. Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to a final tax.
D. Individuals receiving purely compensation income from a single employer, although

the income tax of which has been correctly withheld, but whose spouse falls under
Section 2.83.4(A), 2.83.4(B) and 2.83.4(C) of these regulations.
E. Non-resident aliens engaged in trade or business in the Philippines deriving purely

compensation income, or compensation income and other business, non-
professional-related income.
3. Creditable Withholding Tax vs. Final Withholding Tax

a. CREBA vs. Romulo, GR No. 160756 dated March 9, 2010
Ruling: RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424
imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale
of a capital asset based on its GSP or FMV. This final tax is also withheld at source.
The differences between the two forms of withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same manner as capital assets. Final
withholding tax (FWT) and CWT are distinguished as follows:
FWT CWT
a) The amount of income tax a) Taxes withheld on certain
withheld by the withholding income payments are
agent is constituted as a full intended to equal or at least
and final payment of the approximate the tax due of the
income tax due from the payee on said income.
payee on the said income.
b)The liability for payment of b) Payee of income is required

the tax rests primarily on the to report the income and/or
payor as a withholding agent. pay the difference between
the tax withheld and the tax
due on the income. The payee
also has the right to ask for a
refund if the tax withheld is
more than the tax due.
c) The payee is not required
to file an income tax return c) The income recipient is still
for the particular income. required to file an income tax
return, as prescribed in Sec. 51
and Sec. 52 of the NIRC, as
amended.
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT
is imposed on the sale of ordinary assets. The inherent and substantial differences
between FWT and CWT disprove petitioners contention that ordinary assets are being
lumped together with, and treated similarly as, capital assets in contravention of the
pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of
transaction are contrary to the provisions of RA 8424 on the manner and time of filing of
the return, payment and assessment of income tax involving ordinary assets.
The fact that the tax is withheld at source does not automatically mean that it is
treated exactly the same way as capital gains. As aforementioned, the mechanics of the
FWT are distinct from those of the CWT. The withholding agent/buyers act of collecting
the tax at the time of the transaction by withholding the tax due from the income payable
is the essence of the withholding tax method of tax collection.
b. Time of Withholding
SEC 58. xxx
(C) Annual Information Return. - Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments, amount of
taxes withheld from each payee and such other pertinent information as may be
required by the Commissioner. In the case of final withholding taxes, the return
shall be filed on or before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following the year for which
the annual report is being submitted. This return, if made and filed in accordance
with the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this
Subsection.
c. Sec. 2.57 of RR No. 2-98, as amended by RR No. 12-2001.

Sec. 2.57 of RR No. 2-98, as amended by RR No. 12-2001. issued September 10, 2001
amends pertinent provisions RR Nos. 1-98. 2-98 and 6-2001 relative to the revision
of Withholding Tax rates on certain income payments subject to Withholding Tax,
deferment of the new deadline dates or filing selected tax returns, reporting
requirements for recipients of talent fees, among others.
The revised Creditable Withholding Tax rate on professional fees, talent fees, etc. for
services rendered by the following individuals (residing in the Philippines) is 20%, if
their gross income for the current year exceeds P720,000, and 10% if otherwise:
1. Professional entertainers, such as, but not limited to, actors and actresses,
singers and emcees;
2. Professional athletes, including basketball players, pelotaris and jockeys;
3. All directors involved in movies, stage, radio, television and musical production;
and
4. Other recipients of talent fees.
The amounts subject to Withholding Tax in the preceding paragraph shall include not
only fees, but also per diems, allowances and any other form of income payments
not subject to Withholding Tax compensation. In the case of professional
entertainers, professional athletes, directors involved in movies, stage, radio,
television and musical productions and other recipients of talent fees, the amounts
subject to Withholding Tax shall also include amounts paid to them in consideration
for the use of their names or pictures in print, broadcast, or other media or for
public appearances, for purposes of advertisements or sales promotions.
To determine the applicable rate (10% or 20%) to be applied/withheld by the

withholding agent, said individuals shall submit to the BIR a notarized sworn
declaration of their gross income for the current year. The disclosure shall be filed
on June 30 of each year or within 15 days after the end of the month the talent's
income reaches P720,000, whichever comes earlier. In case the talent's total gross
income is less than P720,000 as of June 30, he/she shall submit a second disclosure
within 15 days after the end of the month that his/ her gross income for the current
year to date reaches P720,000. The initial disclosure shall be filed on or before
September 30,2001 or within 15 days after the effectivity of the Regulations,
whichever comes later. In case of failure to submit the annual declaration/
disclosure to the BIR. the payor shall withhold the tax at the rate of 20%.
If an individual recipient receives talent fees in addition to salaries from the same
payor, the said talent fees shall be considered as supplemental compensation and,
thus, be subject to the Withholding Tax on compensation.
The obligation of the payor to deduct and withhold the tax arises at the time an income
payment is paid or payable, or the income payment is accrued or recorded as an
expense or asset, whichever is applicable, in the payor's books, whichever comes
first. Provided, however, that where income is not yet paid or payable but the same
has been recorded as an asset or expense, the obligation to withhold shall arise in
the last month of the return period in which the same is claimed as an expense or
amortized for tax purposes.
d. Sec. 2.78 and 2.83 of RR No. 2-98.
SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on

compensation income is a method of collecting the income tax at source upon
receipt of the income. It applies to all employed individuals whether citizens or
aliens, deriving income from compensation for services rendered in the
Philippines. The employer is constituted as the withholding agent.
SECTION 2.83. Statement and Returns.
SECTION 2.83.1. Employees Withholding Statements (BIR Form No. 2316). — In

general, every employer or other person who is required to deduct and withhold
the tax on compensation and fringe benefits shall furnish every employee from
whose compensation taxes have been withheld the Certificate of Income Tax
Withheld on Compensation (Form No. 2316, formerly Form No. W-2) on or before
January 31 of the succeeding calendar year, or if his employment is terminated
before the close of such calendar year, on the day on which the last payment of
compensation is made.
The employer shall furnish each employee with the original and duplicate copies
of Form No. 2316 showing the name and address of the employer; employer's TIN;
name and address of the employee; employee's TIN; amount of exemptions
claimed; amount of premium payments on medical insurance not exceeding
P2,400.00, if any; the sum of compensation paid including the non-taxable
benefits; the amount of tax due; the amount of tax withheld during the calendar
year and such other information as may be required. The statement must be
signed by both the employer or other authorized officer and the employee, and
shall contain a written declaration that it is made under the penalties of perjury.
If the employer is the Government of the Philippines, its political subdivision,
agency or instrumentality or government-owned or controlled corporation, the
statement shall be signed by the duly designated officer or employee.
An extra copy of Form 2316 shall be furnished by the employee, duly certified by
him, to his new employer.
SECTION 2.83.2. Annual Information Return of Income Tax Withheld on

Compensation (Form No. 1604, Formerly Form No. 1743IR). — Every employer or
other person required to deduct and withhold the tax shall, on or before January
thirty-first of the succeeding year, file with either the Collection Agent or
Authorized Municipal Treasurer or Revenue District Officer or Commissioner the
Annual Information Return of Income Tax Withheld on Compensation (BIR Form
No. 1604), to be submitted with an alphabetical list of employees, both in
duplicate copies.
(A) The Annual Information Return of Income Tax Withheld on Compensation

must show among others, the following:
(1) Withholding Agent's registered name, address and Taxpayer's Identification

Number (TIN);
(B) The alphabetical list of employees must show the following:
(1) Name and TIN of employees;
(2) Gross compensation paid by present and previous employers for the calendar
year;
(3) (a) Taxable 13th month pay/Other benefits for the rank and file employees
(b) Taxable fringe benefits for managerial employees
(4) Non-taxable 13th month pay/Other benefits (Present employer)
(5) Amount of exemptions;
(6) Amount of premium payments on medical insurance not exceeding P2,400.00,

if any;
(7) Tax required to be withheld computed in accordance with Sec. 24(A) of the
Code;
(8) Tax withheld by all present employers for calendar year; and
(9) Adjustment, if any.
(C) The alphabetical list of employees shall be prepared indicating among others,
separate listings of the following:
(1) Employees as of December 31 of the taxable year without previous

employment during the year;
(2) Employees as of December 31 of the taxable year with previous employment
within the year;
(3) Employees who were terminated prior to the year-end adjustment

computation showing the month of termination/month of last payment of
compensation during the year of termination; and
(4) Alien employees subject to final withholding tax.

In cases where no information was provided by a previous employer, such fact
should be annotated in Form 1604 and the present employer shall not be liable to
any penalties.
SECTION 2.83.3. Requirement for Income Payees List. — In lieu of the manually
prepared alphabetical list of employees and list of payees and income payments
subject to creditable and final withholding taxes which are required to be attached
as integral part of the Annual Return (Form No. 1604), the Withholding Agent may,
at its option, submit computer-processed tapes or cassettes or diskettes, provided
that the said list has been encoded in accordance with the formats prescribed by
Form 1604.
SECTION 2.83.4. Filing of Income Tax Returns by Employees Receiving Purely

Compensation Income. — Individual taxpayers receiving purely compensation
income from Philippine sources which does not exceed an aggregate amount of
P60,000 for the calendar year and the income tax on which has been withheld
correctly by the employer (tax withheld equals tax due) shall no longer file an
income tax return (1700) required under Sec. 51 of the Code. The following
individuals, however, are still required to file their income tax returns:
(A) Individuals deriving compensation concurrently from two or more employers

at anytime during the taxable year.
(B) Individuals whose purely compensation income for the taxable year exceeds
P60,000.
(C) Individuals receiving a combination of compensation and business income

(mixed income). This includes a married individual receiving purely compensation
income whose spouse derives income from business.
In case of married individuals who are still required to file returns, only one return
for the taxable year shall be filed by either spouse to cover the income of both
spouses.
(D) Employees whose total compensation income, regardless of the amount,

whether from a single or several employers during the calendar year, the income
tax of which has not been withheld correctly, that is, that the total withholding
tax does not equal the total tax due on total compensation income for the taxable
year.
(E) In case of married individuals where one of the spouses received compensation
income exceeding P60,000, a return shall be filed to include the income of the
other spouse whose compensation is P60,000 or less.
SECTION 2.83.5. Registration as Withholding Agent. — Every person who makes

payment or expects to make payment of compensation in the amount of sixty
thousand pesos (P60,000.00) or more a year or five thousand pesos (P5,000.00)
monthly, to any single employee shall register by filing in duplicate, with the
Revenue District Office (RDO) of the City or Municipality where his legal residence
or place of business is located, an Application for Registration as a withholding
agent using the form prescribed by the Bureau not later than ten (10) days after
becoming an employer.
SECTION 2.83.6. Applicability of Constructive Receipt of Compensation. — The

withholding tax on compensation shall apply to compensation actually or
constructively paid. Compensation is constructively paid within the meaning of
these Regulations when it is credited to the account of or set apart for an
employee so that it may be drawn upon by him at any time although not then
actually reduced to possession. To constitute payment in such a case, the
compensation must be credited or set apart for the employee without any
substantial limitation or restriction as to time or manner of payment or condition
upon which payment is to be made, and must be made available to him so that it
may be drawn upon at any time, and its payment brought with his control and
disposition. A book entry, if made, should indicate an absolute transfer from one
account to another. If the income is not credited, but it is set apart, such income
must be unqualifiedly subject to the demand of the taxpayer. Where a corporation
contingently credits its employees with a bonus stock, which is not available to
such employees until some future date, the mere crediting on the books of the
corporation does not constitute payment.
SECTION 2.83.7. Extension of Time for Furnishing Statements to Employee. — An

extension of time, not exceeding thirty (30) days, within which to furnish the
Certificate of Income Tax Withheld on Compensation (Form No. 2316) required by
Sec. 2.83 of these Regulations upon termination of employment is hereby granted
to any employer with respect to any employee whose employment is terminated
during the calendar year. In the case of intermittent or interrupted employment
where there is a reasonable expectation on the part of both employer and
employee or further employment, there is no requirement that an employee's
withholding statement be immediately furnished the employee; but when such
expectation cease to exist, the statement must be furnished within thirty (30) days
from the date of termination of employment. The extension mentioned under this
Section refers to extension of time for furnishing the Certificate of Income Tax
Withheld on Compensation (Form No. 2316) upon termination of employment.
e. ING Bank vs. CIR, GR No. 167679 dated July 22, 2015
FACTS: Petitioner ING Bank, N.V. (ING Bank) received a Final Assessment Notice
covering deficiency assessments for several internal revenue taxes for taxable years
1996 and 1997. ING Bank filed a protest on the deficiency assessments with the BIR
but were denied by the latter.
The CTA Division held that ING Bank is liable for the withholding tax on compensation
and documentary stamp tax (DST) on special savings accounts and deficiency
onshore tax. ING Bank then filed a Petition for Review before the CTA En Banc in
which the latter dismissed for lack of merit. While the case was pending before the
SC, ING Bank availed for the tax amnesty under R.A. No. 9480 or the Tax Amnesty
Act of 2007 with respect to its liabilities for deficiency DST and onshore tax.
As to the deficiency assessment on the withholding tax on compensation, ING Bank

insists that the bonus accruals in 1996 and 1997 were not yet subject to withholding
tax because the bonuses were actually distributed only in the succeeding years of
their accrual (namely, 1997 and 1998) when the amounts were finally determined.
The CIR contends that ING Bank’s act of claiming the subject bonuses as deductible
expenses in its taxable income although it has not yet withheld and remitted the
corresponding withholding tax to the BIR contravened Section 34(k) of the NIRC.
ISSUE: Whether or not the bonus accruals in 1996 and 1997 are not yet subject to
withholding tax since the bonuses were only to be distributed in the succeeding
years of their accrual when the amounts are fully determined.
RULING: Yes, the bonus accruals in 1996 and 1997 are subject to withholding tax
because the duty to withhold income tax arises upon its accrual. The obligation of
the employer to deduct and withhold the related withholding tax arises at the time
the income was paid or accrued or recorded as an expense in the employer’s books,
whichever comes first.
The tax on compensation income is withheld at source under the creditable

withholding tax system wherein the tax withheld is intended to equal or at least
approximate the tax due of the payee on the said income. It was designed to enable
(a) the individual taxpayer to meet his or her income tax liability on compensation
earned; and (b) the government to collect at source the appropriate taxes on
compensation. Taxes withheld are creditable in nature. Thus, the employee is still
required to file an income tax return to report the income and/or pay the difference
between the tax withheld and the tax due on the income. For over withholding, the
employee is refunded. Therefore, absolute or exact accuracy in the determination
of the amount of the compensation income is not a prerequisite for the employer’s
withholding obligation to arise.
Furthermore, the duty to withhold the tax on compensation depends on the method
of accounting income and expenses adopted by the taxpayer. If the taxpayer is on
cash basis, the expense is deductible in the year it was paid regardless of the year
it was incurred; or if he is on the accrual method, he can deduct the expense upon
accrual thereof.
In the case at bar, ING Bank accrued or recorded the bonuses as deductible business
expense in its books. In this sense, there was already a constructive payment for
income tax purposes as these accrued bonuses were already allotted or made
available to its officers and employees.
Therefore, ING Bank’s obligation to withhold the related withholding tax due from the
deductions for accrued bonuses arose at the time of accrual and not at the time of
actual payment.

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F.

Exclusions from Gross Income

1|INCOME TAXATION REVIEWER II

(7) Miscellaneous Items. -

2. Are Damages Taxable?

3|INCOME TAXATION REVIEWER II

The following allowances, bonuses or benefits, excluded by the NIRC of 1997, as

b. Art. 287 of the Labor Code, as amended

"Retail, service and agricultural establishments or operations employing not more

5|INCOME TAXATION REVIEWER II

6|INCOME TAXATION REVIEWER II

Sec. 28. Gross Income. –

d. BIR Ruling No. DA-151-04 dated March 31, 2004

"We request a confirmation of the following opinion, because of the growing

8|INCOME TAXATION REVIEWER II

9|INCOME TAXATION REVIEWER II

2. An employer enters into a collective bargaining agreement providing retirement

3. It is needless to add that the tax treatment of retirement benefits received by

Finally, retirement benefits received by employees not from a BIR approved

a. CIR vs. CA, GR No. 96016 dated October 17, 1991

. . . commutation of leave credits, more commonly known as terminal leave, is

b. In Re: Zialcita, AM No. 90-6-015-SC dated October 18, 1990

c. BIR Ruling No. 496-14 dated December 12, 2014

Withholding tax on effectively connected income

In case of dividends paid to a resident of Japan by a domestic corporation that has a

5. Income of the government

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is

Generally, a corporation may obtain funds for capital expenditures by floating

On the other hand, secondary markets refer to the trading of outstanding or

An investor in bonds may derive two (2) types of income:

It must be stressed that interest income, derived by individuals from long-term

Sec. 32. Gross Income. –

(7) Miscellaneous Items. -

a. Must submit at least one competitive bid in each scheduled auction.

c. Must be active in the trading of GS [government securities] in the secondary market.

In effecting a sale or distribution of government securities, a GSED acts in a certain

Section 57 prescribes the withholding tax on interest or yield on deposit substitutes,

Section 57. Withholding of Tax at Source. -

Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -

As explained by respondents, "the discount is the imputed interest earned on the

In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-

Giving unwarranted benefits, advantage, or preference to a party and causing undue

7. Rule on Excess De Minimis Benefits

a. Q5/A5 of RMC No. 50-2018 dated May 11, 2018

G. Fringe Benefits Tax

Sec. 33. Special Treatment of Fringe Benefit. -

The Secretary of Finance is hereby authorized to promulgate, upon

Employee is a citizen/resident alien/nonresident alien engaged in trade or business

(2) Income and other Taxes - (a) Franchise Holder:

In reply to both letters-protest, the BIR requested PAGCOR to submit additional

Hence, this special civil action for certiorari.

Ruling: PAGCOR is liable for the payment of withholding taxes

We now resolve the validity of the foregoing assessments.

Final Withholding Tax on Fringe Benefits

Under Section 33 of the NIRC, FBT is imposed as:

57. x x x expenses borne by [respondent] to cover various memberships in social, athletic

On housing privileges Monetary value

If the employer purchases a residential (Acquisition x 5%) x 50%

If the employer purchases a residential Acquisition cost of FMV,

Housing of military officials Exempt

Housing which is situated inside or adjacent Exempt

Premiums for Insurance Monetary

If the contribution is pursuant to existing law such as to the GSIS Exempt

Life or health insurance and other non-life insurance 100%