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 Q: Define taxation.

 A: Taxes are imprescriptible as they are the lifeblood of the


 A: It is an inherent power by which the sovereign: government. However, tax statutes may provide for statute of
1. through its law-making body limitations.
2. raises income to defray the necessary expenses of government  Q: Define double taxation.
3. by apportioning the cost among those who, in some measure are  A: Otherwise described as “direct duplicate taxation”, the two taxes
privileged to enjoy its benefits and, therefore, must bear its burdens must be imposed on the same subject matter, for the same purpose,
 Q: What arethe basic principles of a sound tax system (Canons of by the same taxing authority, within the same jurisdiction, during the
Taxation)? same taxing period; and the taxes must be of the same kind or
 A: FAT character. (City of Manila v. Coca Cola Bottlers Philippines, G.R. No.
1. Fiscal adequacy 181845, Aug. 4, 2009)
a. Revenue raised must be sufficient to meet  Q: Is double taxation prohibited?
government/public expenditures and other public needs.  A: No, there is no Constitutional prohibition against double taxation.
(Chavez v. Ongpin, G.R. No. 76778, June 6, 1990) However, direct double taxation is unconstitutional as it results in
2. Administrative feasibility violation of substantive due process and equal protection clause.
a. Tax laws must be clear and concise.  Q: What is impact of taxation?
b. Capable of effective and efficient enforcement.  A: Otherwise known as the burden of taxation, it is the economic
c. Convenient as to time and manner of payment; must not cost of the tax. The impact of taxation may fall on another person
obstruct business growth and economic development. not statutorily liable to pay the tax.
3. Theoretical justice  Q: What is incidence of taxation?
a. Must take into consideration the taxpayer’s ability to pay  A: The incidence of taxation is upon the person statutorily liable to
(Ability to Pay Theory). pay the tax.
b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the  Q: What is tax evasion?
rule on taxation must be uniform and equitable and that the  A: It is the scheme where the taxpayer uses illegal or fraudulent
State must evolve a progressive system of taxation. means to defeat or lessen payment of a tax.
 Q: What are the theories in taxation?  Q: What is meant by tax exemption?
 A: The theories underlying the power of taxation are the following:  A: It is the grant of immunity, express or implied, to particular
1. Lifeblood theory (Necessity theory) persons or corporations, from a tax upon property or an excise tax
2. Benefits-protection theory (Doctrine of Symbiotic Relationship) which persons or corporations generally within the same taxing
districts are obliged to pay.
 Q: What is the Doctrine of Prospectivity of tax laws?  Q: What are the principles governing tax exemptions?
 A:  A:
GR: Taxes must only be imposed prospectively. 1. Tax exemptions are highly disfavored in law.
XPN: If the law expressly provides for retroactive imposition. 2. Tax exemptions are personal and nontransferable.
Retroactive application of revenue laws may be allowed if it will not 3. He who claims an exemption must justify that the legislature
amount to denial of due process. intended to exempt him by words too plain to be mistaken. He must
 Q: Discuss the Doctrine of Imprescriptibility. convincingly prove that he is exempted.
4. It must be strictly construed against the taxpayer.
5. Constitutional grants of tax exemptions are self-executing.
Note: Deductions for income tax purposes partake of the nature of 3. Where the language is clear and categorical, the words employed
tax exemptions, hence, they are also be strictly construed against are to be given their ordinary meaning.
the taxpayer. 4. When there is doubt, tax laws are strictly construed against the
6. Tax exemption is generally revocable. Government and liberally in favor of the taxpayer.
7. In order to be irrevocable, the tax exemption must be founded on Note: Taxes, being burdens, are not to be presumed beyond what
a contract or granted by the Constitution. the statute expressly and clearly provides.
8. The congressional power to grant an exemption necessarily 5. Provisions of the taxing act are not to be extended by implication.
carries with it the consequent power to revoke the same. 6. Tax laws are special laws and prevail over general laws.
9. Revocation are constitutional even though the corporate do not  Q: What is meant by situs of taxation?
have to perform a reciprocal duty for them to avail of tax exemptions  A: It is the place or authority that has the right to impose and collect
 Q: When does compensation or set-off take place? taxes.
 A: Compensation or set-off take place when two persons, in their  Q: What is meant by the doctrine of mobilia sequuntur personam?
own right, are creditors and debtors of each other (Article 1278, Civil  A: Literally, it means “Movable follows the person/owner”. However,
Code). a tangible property may acquire situs elsewhere provided it has a
 Q: What is the Doctrine of Equitable Recoupment? definite location there with some degree of permanency.
 A: It is a principle which allows a taxpayer, whose claim for refund  Q: What is international comity?
has been barred due to prescription, to recover said tax by setting  A: It refers to the respect accorded by nations to each other because
off the prescribed refund against a tax that may be due and they are sovereign equals. Thus, the property or income of a foreign
collectible from him. Under this doctrine, the taxpayer is allowed to state may not be the subject of taxation by another state.
credit such refund to his existing tax liability.  Q: Explain international comity as a limitation on the power to tax.
 A: It is an agreement between two or more persons who, to avoid  A: The Philippine Constitution expressly adopted the generally
lawsuit, amicably settle their differences on such terms and accepted principles of international law as part of the law of the
conditions as they may agree on. It implies the mutual agreement by land. (Sec. 2, Art. II, 1987 Constitution)
the parties in regard to the thing or subject matter which is to be  Thus, a State must recognize such generally accepted tenets of
compromised. International Law that limit the authority of the government to
 It is a contract whereby the parties, by reciprocal concessions avoid effectively impose taxes upon a sovereign State and its
litigation or put an end to one already commenced. instrumentalities.
 Q: When is compromise allowed?  Q: May the government tax itself?
 A: Compromises are generally allowed and enforceable when the  A: Yes. One of the inherent limitations on the power of taxation is
subject matter thereof is not prohibited from being compromised recognition of tax exemptions in favor of the government. This is
and the person entering such compromise is duly authorized to do premised on the concept that with respect to the government,
so. exemption is the rule and taxation is the exception in order to
 Q: How are tax laws construed? reduce administrative costs. But since sovereignty is absolute
 A: andtaxationis an act of high sovereignty, the state if so minded could
1. Generally, no person or property is subject to tax unless within tax itself, including its political subdivisions. (Maceda v. Macaraeg,
the terms or plain import of a taxing statute. G.R. No. 88291, June 8, 1993)
2. Tax laws are generally prospective in nature.  Q: What are the rules on tax exemptions of government agencies or
instrumentalities?
 A:  A: It is defined as possessed and enjoyed to the exclusion of others;
 1. If the taxing authority is the National Government: debarred from participation or enjoyment; and “exclusively” is
GR: The government is exempt from tax. defined, "in a manner to exclude; as enjoying a privilege
Reason: Otherwise, we would be “taking money from one pocket exclusively.”
and putting it in another.” (Board of Assessment Appeals of Laguna  Note: If real property is used for one or more commercial purposes,
v. CTA, G.R. No. L-18125, May 31, 1963) it is not exclusively used for the exempted purposes but is subject to
XPN: When it chooses to tax itself. Nothing prevents Congress from taxation.
decreeing that even instrumentalities or agencies of the government  Q: Is exclusivity synonymous with dominant use?
performing government functions may be subject to tax. Where it is  A: No. The words "dominant use" or "principal use" cannot be
done precisely to fulfill a constitutional mandate and national policy, substituted by the words "used exclusively" without doing violence to
no one can doubt its wisdom. (MCIAA v. Marcos, G.R. No. 120082, the Constitution and the law. Solely is synonymous with exclusively.
Sept. 11, 1996)  Q: What is meant by “actual, direct and exclusive use of the property
 Q: Are government educational institutions exempt from taxes? for religious, charitable and educational purposes”?
 A:  A: It is the direct and immediate and actual application of the
GR: They shall not be taxed with respect to their income. property itself to the purposes for which the charitable institution is
XPN: The income of whatever kind and character: organized. It is not the use of the income from the real property that
1. from any of their properties, real or personal, or is determinative of whether the property is used for tax-exempt
2. from any of their activities conducted for profit, regardless of the purposes.
disposition made of such income, shall be subject to tax imposed  Q: What is the “Flexible Tariff Clause”?
(Sec. 30 [1], NIRC)  A: This clause provides the authority given to the President to adjust
 Q: What about the constitutional tax exemption for non-stock non- tariff rates under Section 401 of the Tariff and Customs Code.
profit educational institutions? (Garcia v. Executive Secretary, G.R. No. 101273, July 3, 1992)
 A: All revenues and assets of non-stock, non-profit educational  Q: Is the real property tax exemption of religious organizations
institutions used actually, directly, and exclusively for educational violative of the non-establishment clause?
purposes shall be exempt from taxes and duties. Upon the  A: No. Neither the purpose nor the effect of the exemption is the
dissolution or cessation of the corporate existence of such advancement or the inhibition of religion; and it constitutes neither
institutions, their assets shall be disposed of in the manner provided personal sponsorship of, nor hostility to religion. (Walz v. Tax
by law. Commission, 397 US 664)
 The Constitution provides that as long as the revenue is used ADE  Q: Define taxes.
for educational purposes, the revenue remain tax exempt. It appears  A: These are enforced proportional contributions from persons and
that Section 30 of the NIRC is inconsistent with the Constitution. properties, levied by the State by virtue of its sovereignty for the
Constitution should still prevail. (See page 26 for the illustrative support of the government and for all its public needs. (1Cooley 62).
case)  Q: What are the basic features of the present income tax system?
 Note: Income derived from any public utility or from the exercise of  A: Our present income tax system has the following basic features:
any essential governmental function accruing to the government or 1. It has adopted a comprehensive tax situs by using the nationality,
to any political subdivision thereof is exempt from income tax. (Sec. residence, and source rules.
32[B][7][b], NIRC) 2. The individual income tax system is mainly progressive in nature
 Q: What is meant by the term “exclusive”? in that it provides graduated rates of income tax.
Note: Corporations in general are taxed at a flat rate of 30% of net 3. Source Principle – a non-resident alien is subject to Philippine
income. income tax because he derives income from such sources within the
3. It has retained a more schedular than global features with respect Philippines such as dividend, interest, rent or royalty
to individual taxpayers but has maintained a more global treatment  Q: What are the two periods that may be used by the taxpayer in
on corporations. the computation of taxable income?
4. Direct Tax – tax burden is borne by the income tax receipient  A:
upon whom the tax is imposed 1. Fiscal year period – accounting period of 12 months ending on the
 Q: Distinguish global system from schedular system of income last day of any month other than Dec.
taxation. 2. Calendar year period – accounting period from Jan. 1 to Dec. 31.
 A: Under a scheduler system, the various types or items of income  Q: What are the classifications of individual taxpayers
(compensation, business or professional income) are classified  A:
accordingly and are accorded different tax treatments, in accordance  1. Resident Citizen (RC) – Citizens of the Philippines who are residing
with schedules characterized by graduated tax rates. Since these therein.
types of income are treated separately, the allowable deductions 2. Non-resident Citizen (NRC) –
shall likewise vary for each type of income. a. A citizen of the Philippines who establishes to the satisfaction of
Under the global system, all income received by the taxpayer are the CIR the fact of his physical presence abroad with a definite
grouped together, without any distinction as to the type or nature of intention to reside therein;
the income, and after deducting therefrom expenses and other b. A citizen of the Philippines who leaves the Philippines during a
allowable deductions, are subjected to tax at a fixed rate. taxable year to reside abroad, either as an immigrant or for
 Q: What is a semi-schedular or semi-global tax system? employment on a permanent basis;
 A: A system where the compensation, business or professional c. A citizen of the Philippines who works and derives income from
income, capital gain and passive income not subject to final tax, and abroad and whose employment thereat requires him to be physically
other income are added together to arrive at the gross income, and present abroad most of the time during the taxable year;
after deducting the sum of allowable deductions from business or d. A citizen who has been previously considered as NRC and who
professional income, capital gain and passive income not subject to arrives in the Philippines at any time during the taxable year in which
final tax, and other income, in the case of corporations, as well as he arrives in the Philippines with respect to his income derived from
personal and additional exemptions, in the case of individual sources abroad until the date of his arrival in the Philippines;
taxpayers, the taxable income is subjected to one set of graduated e. The taxpayer shall submit proof to the CIR to show his intention
tax rates; method of taxation under the law. of leaving the Philippines to reside permanently abroad or to return
 Q: What are the criteria in imposing Philippine income tax? to and reside in the Philippines as the case may be for purposes of
1. Citizenship Principle – A citizen taxpayer is subject to income tax: this section. (Sec. 22 [E], NIRC)
a. On his worldwide income, if he resides in the Philippines. 3. Resident Alien (RA) – An individual whose residence is within the
b. Only on his income from sources within the Philippines, if he Philippines but who is not a citizen thereof. (Sec. 22 [F], NIRC)
qualifies as non-resident citizen. Note: He is one who is actually present in the Philippines and not a
2. Residence Principle – a resident alien is liable to pay income tax mere transient or sojourner. Residence does not mean mere physical
on his income from sources within the Philippines but exempt from presence, an alien is considered a resident or non-resident
tax on his income from sources outside the Philippines. depending on his intention with regard to the length and nature of
his stay.
 4. Non-resident Alien (NRA) – an individual whose residence is not  A: These are partnerships, other than GPP, whether registered or
within the Philippines and who is not a citizen thereof. (Sec. 22 [G], not. They are considered as corporations and therefore are taxed as
NIRC) corporation.
 Q: What are the kinds of corporation under the NIRC?  Q: What is a GPP?
 A:  A: A GPP is a partnership formed by persons for the sole purpose of
1. Domestic Corporation (DC) – a corporation created or organized in exercising their common profession. (Sec. 22 [B], NIRC)
the Philippines or under its laws and liable for income from sources  Q: Is GPP subject to income tax?
within and without the Phillipines (Sec 22[C], NIRC)  A: No, they are not subject to income tax but are required to file
2. Resident Foreign Corporation (RFC) – a corporation which is not information returns for its income for the purpose of furnishing
domestic and not engaged in trade or business in the Philippines is information as to the share in net income of the partnership which
liable for income from sources within. each partner should include in his individual return. Partners shall be
Note: In order that a foreign corporation may be regarded as doing liable for income tax in their separate and individual capacities. The
business within a State there must be continuity of conduct and share in thepartnership income is taxable to the individual partners,
intention to establish a continuous business, such as the whether or not the share has been distributed, because the GPP
appointment of a local agent and not one of a temporary character. itself is not taxable. Thus, there is a constructive receipt of income in
(CIR v. BOAC, GR L-65773-74, Apr. 30, 1987) case of GPPs.
3. Non-Resident Foreign Corporation (NRFC) – a corporation which is  Q: What is income tax?
not domestic and not engaged in trade or business in the Philippines  A: A tax on all yearly profits arising from property, profession, trade
is liable for income from sources within. (Sec.22 [I], NIRC) or business, or a tax on person’s income, emoluments, profits and
4. Special Types of Corporation – those corporations subject to the like. (Fisher v. Trinidad, GR L-19030. Oct. 20, 1922)
different tax rates.  Q: What is the basis of income tax?
a. Proprietary educational institutions and non-profit hospitals  A: Income tax is based on income, either gross or net, realized in
b. Domestic depositary bank (foreign currency deposit units) one taxable year.
c. International carriers  Q: What is the nature of income tax?
d. Offshore banking units  A: It is generally regarded as an excise tax. It is not levied upon
e. Regional or Area Headquarters and Regional operating persons, property, funds or profits but on the privilege of receiving
Headquarters of multinational companies said income or profit.
f. Non-resident cinematographic film owners, lessors or distributors  Q: What is income?
g. Non-resident owners or lessors of vessels chartered by Philippine  A: It refers to all wealth which flows into the taxpayer other than as
nationals mere return of capital. It includes the forms of income specifically
h. Non-resident lessors of aircraft, machinery and other equipment described as gains and profits, including gains derived from the sale
 Q: What are the classifications of partnerships in so far as tax is or other disposition of capital assets. (Sec. 36, RR No.2)
concerned?  Income is a flow of service rendered by capital by payment of money
A: from it or any benefit rendered by a fund of capital in relation to
1. General Professional Partnership (GPP); such fund through a period of time. (Madrigal v. Rafferty, GR 12287,
2. Business Partnership. Aug. 8, 1918)
 Q: What is a co-partnership or business partnership?  Q: What is gross income taxation?
 A: It is a system of taxation where the income is taxed at gross. The 1. Housing
taxpayer und 2. Expense account
 What is the definition of “gross income” under the NIRC? 3. Vehicle of any kind
 A: Except when otherwise provided, gross income means all income 4. Household personnel such as maid, driver and others
derived from whatever source, including (but not limited to) to the 5. Interest on loans at less than market rate to the extent of the
following items: [CG2I- R2DAP3] difference between the market rate and the actual rate granted
1. Compensation for services in whatever form paid, including, but 6. Membership fees, dues and other expenses borne by the
not limited to fees, salaries, wages, commissions and similar items; employer for the employee in social and athletic clubs or other
2. Gross income derived from the conduct of trade or business or the similar organizations
exercise of a profession; 7. Expenses for foreign travel
3. Gains derived from dealings in property; 8. Holiday and vacation expenses;
4. Interests; 9. Educational assistance to the employee or his dependents
5. Rents; 10. Life or health insurance and other non-life insurance premiums
6. Royalties; or similar amounts in excess of what the law allows (Sec. 33 [B],
7. Dividends; NIRC; Sec. 2.33 [B], RR 3-98)
8. Annuities  Q: What comprises business income?
9. Prizes and winnings;  A: It refers to income derived from merchandising, mining,
10. Pensions; and manufacturing and farming operations.
11. Partner’s distributive share from the net income of the general  Note: Business is any activity that entails time and effort of an
professional partnership. (Sec. 32 [A], NIRC) individual or group of individuals for purposes of livelihood or profit.
 Q:What is net income taxation?  Q: What is professional income?
 A: It is a system of taxation where the income subject to tax may be  A: It refers to the fees received by a professional from the practice
reduced by allowable deductions. of his profession, provided that there is no employer-employee
 Q: What is taxable income or net income? relationship between him and his clients.
 A: All pertinent items of gross income specified in the NIRC, less the  Q: Distinguish "capital asset" from "ordinary asset".
deductions and/or personal and additional exemptions, if any,  A: The term capital asset is defined by an exclusion of all ordinary
authorized for such types of income by the NIRC or other special assets. Thus, those properties not specifically excluded in the
laws. statutory definition constitutes capital assets, the profits or losses on
 Q: What is compensation income? the sale or the exchange of which are treated as capital gains or
 A: It includes all remuneration for services rendered by an employee capital losses. Conversely, all those properties specifically excluded
for his employer unless specifically excluded under the NIRC. (Sec. are considered as ordinary assets and the profits or losses realized
2.78.1, RR 2-98) must have to be treated as ordinary gains or ordinary losses.
 Q: Define fringe benefit.  Accordingly, "Capital assets" includes property held by the taxpayer
 A: Fringe benefit is any good, service or other benefit furnished or whether or not connected with his trade or business, but the term
granted by an employer in cash or in kind in addition to basic does not include any of the following, which are consequently
salaries, to an individual employee, except a rank and file employee, considered as "ordinary assets": [SOUR]
such as but not limited to: 1. Stock in trade of the taxpayer or other property of a kind which
HEV-HIM-HEEL would properly be included in the inventory of the taxpayer if on
hand at the close of the taxable year
2. Property held by the taxpayer primarily for sale to customers in  Q: What is dividend income?
the Ordinary course of trade or business  A: Dividend income is a corporate profit set aside, declared and
3. Property Used in the trade or business of a character which is distributed by the board of director of a corporation to be paid to
subject to the allowance for depreciation provided in the NIRC stockholders on demand or at a fixed time.
4. Real property used in trade or business of the taxpayer  Q: How is dividend income taxed?
 Q: Distinguish ordinary gain from capital gain.  A: Dividend income is considered as passive income subject to final
 A: Ordinary gain is a gain derived from the sale or exchange of tax.
ordinary assets such as SOUR while Capital gain is a gain derived  Q: What are royalties?
from the sale or exchange of capital assets or property not  A: Royalties are sums of money paid to a creator or a participant in
connected with the trade or business of the taxpayer other than an artistic work, based on individual sales of the work. In order to
SOUR. receive royalties, the work must generally have a copyright or
 Q: Differentiate capital gain from capital loss. patent.
 A: Capital Gain includes the gain derived from the sale or exchange  Q: What is rental income and what is its scope?
of an asset not connected with the trade or business. Capital Loss is  A: Rental income is a fixed sum, either in cash or in property
the loss that may be sustained from the sale or exchange of an asset equivalent, to be paid at a definite period for the use or enjoyment
not connected with the trade or business. Capital loss may not of a thing or right.
exceed capital gains when used as a deduction to income  All rentals derived from lease of real estate or personal property, of
 Q: Define “passive income.” copyrights, trademarks, patents and natural resources under lease.
 A: Passive income refers to income derived from any activity on  Q: When is prepaid rent taxable?
which the taxpayer has no active participation or involvement.  A: Prepaid or advance rental is taxable income to the lessor in the
 Q: What is meant by “income subject to final tax?” Give at least two year received, if received under a claim of right and without
examples of income of resident individuals that is subject to the final restriction as to its use, regardless of method of accounting
tax. employed.
 A: Income subject to final tax refers to an income wherein the tax  Q: What is an annuity?
due is fully collected through the withholding tax system. Under this  A: It refers to the periodic installment payments of income or
procedure, the payor of the income withholds the tax and remits it pension by insurance companies during the life of a person or for a
to the government as a final settlement of the income tax due on guaranteed fixed period of time, whichever is longer, in
said income. The recipient is no longer required to include the item consideration of capital paid by him.
of income subjected to "final tax" as part of his gross income in his  The portion representing return of premium is not taxable while that
income tax returns. portion that represents interest is taxable.
 Examples of income subject to final tax are dividend income, interest  Q: What is the meaning of prizes and winnings for the purposes of
from bank deposits, royalties. income taxation?
 Q: What is interest income?  A: It refers to amount of money in cash or in kind received by
 A: It is the amount of compensation paid for the use of money or chance or through luck and are generally taxable except if
forbearance from such use. specifically mentioned under the exclusion from computation of
 Q: How is interest income taxed? gross income under Sec. 32[B] of NIRC.
 A: Interest income is considered as passive income subject to final  Q: What is pension?
tax.
 A: It refers to amount of money received in lump sum or on  A: Necessary expense is one which is appropriate and helpful in the
staggered basis in consideration of services rendered given after an development of taxpayer’s business and is intended to minimize
individual reaches the age of retirement. losses or to increase profits. (Ibid.)
 Q: When is pension taxable?  Q: How is interest as a deduction from gross income defined?
 A: Pension being part of gross income is taxable to the extent of the  A: Interest shall refer to the payment for the use or forbearance or
amount received except if there is a BIR approved pension plan detention of money, regardless of the name it is called or
 Q: Is the income of GPP taxable? denominated. It includes the amount paid for the borrower’s use of
 A: GPP is not taxable as an entity but the partner’s share in the net money during the term of the loan, as well as for his detention of
income of GPP is included in his gross income. money after the due date for its repayment. (Sec. 2 [a], RR 13-
 Q: How do we compute the distributive share of each partner in the 2000)
net income of a GPP?  Q: What is Tax Benefit Rule?
 A: For purposes of computing the distributive share of each partner,  A: Taxes allowed as deductions, when refunded or credited shall be
the net income of the partnership shall be computed in the same included as part of gross income in the year of receipt to the extent
manner as a corporation. (Sec. 26, NIRC) of the income tax benefit of said deduction. (Sec. 34 C [1], NIRC).
 Each partner shall report as gross income in his return, his  Q: What are considered “losses” for purposes of deductions from
distributive share in the net income of the GPP, whether actually or gross income?
constructively received.  A: Losses actually sustained during the taxable year and not
 Q: Define deductions from gross income. compensated for by insurance or other forms of indemnity. (Sec. 34
 A: Deductions from gross income refer to items or amounts D [1], NIRC)
authorized by law to be subtracted from pertinent items of gross  Q: What is NOLCO?
income to arrive at the taxable income.  A: It is the excess of allowable deductions over gross income of
 Q: What are the requisites for deductibility of expenses (in general)? business for any taxable year which had not been previously offset
 A: D-STROWN as deduction from gross income.
1. Paid or incurred During the taxable year;  Q: What are bad debts?
2. The expense must be Substantiated by proof; (substantation rule)  A: Bad debts refer to debts resulting from the worthlessness or
3. The expense must be incurred in Trade or business carried on by uncollectibility, in whole or in part, of amount due to the taxpayer by
the taxpayer; others, arising from money lent or from uncollectible amounts of
4. The expense must be Reasonable; income from goods sold or services rendered. (Sec. 2, RR 5-99)
5. The expense must be Ordinary and necessary;  Q: What is optional standard deduction (OSD)?
6. If subject to Withholding taxes, proof of payment to BIR; and  A: The OSD is a scheme whereby a taxpayer is given the option to
7. Expenses must Not be against public policy, public moral or law deduct from his gross revenue or gross income a lump sum
such as bribes, kickbacks, for immoral purposes. equivalent to a percentage of such gross revenue or gross income
 Q: What is ordinary expense? for purposes of computing the net taxable income on which the
 A: It is any expense that is normal or usual in relation to the income tax rate will be applied.
taxpayer’s business and the surrounding circumstances. (General  Note: This is in lieu of the itemized deduction where the taxpayer
Electric [P.I.] Inc. v. Collector, CTA Case 1117, July 14, 1963) lists down all his expenses and the corresponding amounts incurred
 Q: What is necessary expense? to determine the amount of allowable deductions.
 Q: How much is allowed as OSD?
 A: The optional standard deduction is an amount not exceeding:  A: It is applicable to domestic and resident foreign corporations.
1. 40% of the gross sales or gross receipts of a qualified individual  Q: To what corporations is the minimum corporate income tax
taxpayer; or (MCIT) applicable?
2. 40% of the gross income of a qualified corporation. (Sec. 34 [L],  A: It is applicable to domestic and resident foreign corporations
NIRC) which are subject to regular income tax.
 Q: Differentiate itemized deduction from OSD.  Note: Under its charter, Philippine Airlines is exempt from the MCIT.
 A: Itemized Deduction must be substantiated by receipts while OSD (CIR v. Philippine Airlines, Inc., GR 180066, July 7, 2009)
requires no proof of expenses incurred because the allowable  Q: What is the treatment under the MCIT?
deduction is 40% of gross sales or receipts or gross income as the  A: Under the MCIT, tax is imposed on a corporation at the rate of
case may be. 2% based on gross income
 Q: What are personal exemptions?
 A: These are arbitrary amounts allowed as deductions from gross
income of an individualrepresenting personal, living and family
expenses of the taxpayer.
 Q: What are the kinds of personal exemptions?
 A:
1. Basic Personal Exemption – the amount subtracted from gross
income which is allowed for the theoretical personal, family, and
living expenses of an individual taxpayer regardless of status,
whether single or married individual judicially decreed as legally
separated with no qualified dependents or head of the family.
2. Additional Exemptions – these are exemptions in addition to the
basic personal exemptions that are granted to certain individual who
have dependents that qualify them for this exemption.
 Q: What is taxable income?
 A: The term taxable income means the pertinent items of gross
income specified in the NIRC, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of
income by the NIRC or other special laws.
 Q: How are corporations treated under normal corporate income tax
(NCIT)?
 A: Under the normal income tax, the taxable income of a corporation
during each taxable year is multiplied with the applicable rate of
30%.
 Note: The resulting amount should then be compared with the
income tax payable using the MCIT. Whichever is higher between
the two shall be the tax due.
 Q: To what corporations is the NCIT applicable?