PART I - GENERAL PRINCIPLES ON TAXATION

Q: What is Taxation?

It is a mode by which government makes exactions for revenue in order to

support their existence and carry out their legitimate objectives. 
It is a
process or means by which sovereign, through its lawmaking body, raises
income to defray the necessary expenses of the Government

Q: What is Tax?

Enforced proportional contributions from persons and property levied

by the law-making body of the State by virtue of its sovereignty for the
support of the government and all public needs.

Note: Taxing power of the President

Q: Explain the theory and basis of taxation

1. Lifeblood Theory/ Necessity Theory

Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need.

The power of taxation proceeds upon the theory that (1) the
existence of government is a necessity; that it cannot continue
without means to pay its expenses;

2. Benefits-protection principle
Taxation is described as (2) symbiotic relationship whereby taxes
are paid in exchange of the benefits and protection that the citizens
get from the government. This is the so-called Benefit-protection
theory.

3. Jurisdiction over subjects and objects

The limited powers of sovereignty are confined to objects within the
respective spheres of governmental control. These objects are the
proper subjects or objects of taxation and none else.

Q: Nature of Taxation

1. Inherent - it can be exercised by the government even if the

Constitution is entirely silent on the subject. Constitutional

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 provisions relating to the power of taxation do not operate as grants
of the power to the government.

2. The power to tax is peculiarly and exclusively legislative and

cannot be exercised by the executive or judicial branch of the
government (1 Cooley 160-161). Hence, only Congress, our
national legislative body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative body subject to
such limitations as may be provided by law.

Exceptions:
a. Delegated legislative power to LGU
b. Delagated legistative power to the President
c. Delagated legislative power to Admin Agencies

3. Subject to constitutional and inherent limitations Power to tax

is regarded as supreme, unlimited and comprehensive. The
principal check on its abuse rests only on the responsibility of the
members of the legislature to their constituents.

Q: Characteristics of a sound tax system / Principles of sound tax

system

1. Fiscal Adequacy
It means that sources of revenues must be adequate to support and
meet the government expenditure and their variations.

2. Administrative Feasibility
The tax imposed be proportionate to taxpayer’s ability to pay.

3. Theoretical Justice
Tax Law must be capable of convenient, just and effective
administration.

Q: What are doctrines in taxation?

1. Prospectivity of tax laws

General rule: Tax laws are prospective in operation.

Reason: Nature and amount of the tax could not be foreseen and understood
by the taxpayer at the time the transaction.

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 Exception: Tax laws may be applied retroactively provided it is
expressly declared or clearly the legislative intent.

Exception to the exception:when retroactive application would be

so harsh and oppressive (Republic v. Fernandez).

2. Imprescriptibility

Unless otherwise provided by the tax itself, taxes are

imprescriptible. (CIR v. Ayala Securities Corporation)

Prescriptions found in statutes

(1) National Internal Revenue Code- statute of limitations (see

Section 203 and 222) in the assessment and collection of taxes
therein imposed.

(2) Tariff and Customs Code- does not express any general statute of
limitation; it provides, however, that “when articles have been
entered and passed free of duty or final adjustments of duties made,
with subsequent delivery, such entry and passage free of duty or
settlements of duties will, after the expiration of one (1) year, from
the date of the final payment of duties, in the absence of fraud or
protest or compliance audit pursuant to the provisions of this Code,
be final and conclusive upon all parties, unless the liquidation of the
import entry was merely tentative.” (Sec. 1603)

(3) Local Government Code- prescribes prescriptive periods for the

assessment (5 years) and collection (5 years) of taxes. (seeSections
194 and 270, Rep. Act No. 7160).

3. Double Taxation

Means taxing twice for the same tax period the same thing or
activity, when it should be taxed but once, for the same purpose and
with the same kind of character of tax. ( CIR Vs. Bank of Commerce)

Strict Sense Vs. Broad Sense

Strict sense (Direct duplicate Taxation)

It is a principle where in a tax is imposed in same property or

activity when it should be tax once, for the same purpose, by the
same state, government or taxing authority, of the same kind or

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 character of tax.

There is double taxation in the broad sense or there is indirect

duplicate taxation if any of the elements for direct duplicate taxation
is absent.

Constitutionality of double taxation

There is no constitutional prohibition against double taxation in the

Philippines. It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated.
[Villanueva v. City of Iloilo (1968)].

Double taxation in its narrow sense is undoubtedly unconstitutional

but that in the broader sense is not necessarily so. (De Leon, citing
26 R.C.L 264- 265).Where double taxation (in its narrow sense)
occurs, the taxpayer may seek relief under the uniformity rule or the
equal protection guarantee. (De Leon, citing 84 C.J.S.138).

Q: What are the modes of eliminating double taxation

(1) Allowing reciprocal exemption either by law or by treaty;

(2) Allowance of tax credit for foreign taxes paid

(3) Allowance of deduction for foreign taxes paid (

(4) Reduction of Philippine tax rate.

Q: Explain the following terms:

A. SHIFTING
The transfer of the burden of a tax by the original payer or the one
on whom the tax was assessed or imposed to someone else. What is
transferred is not the payment of the tax but the burden of the tax.

All indirect taxes may be shifted – VAT ; direct taxes cannot be

shifted – Income Tax

B. IMPACT OF TAXATION
It is the point on which a tax is originally imposed. In so far as the
law is concerned, the taxpayer, the subject of tax, is the person who
must pay the tax to the government.

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 C. INCIDENCE OF TAXATION
It is that point on which the tax burden finally rests or settles down.
It takes place when shifting has been effected from the statutory
taxpayer to another.

Relationship between Impact, Shifting, and Incidence of a Tax


The impact is the initial phenomenon, the shifting is the intermediate

process, and the incidence is the result. Impact is the imposition of the tax;
shifting is the transfer of the tax; while incidence is the setting or coming
to rest of the tax. (e.g impact in a sales tax is on the seller who shifts the
burden to the customer who finally bears the incidence of the tax)

Q: What is Tax Avoidance?

The exploitation by the taxpayer of legally permissible alternative tax rates

or methods of assessing taxable property or income in order to avoid or
reduce tax liability. It is politely called “tax minimization” and is not
punishable by law.

Q: What is Tax Transformation?

The taxpayer escapes in taxation by a transformation of the tax into a gain

through the medium of production. Producer upon whom the tax has been
imposed pays the tax and endeavors to recoup himself by improving his
process of production thereby turning out his units of products at a lower
cost.

Q: What is Tax Evasion?

It is the use by the taxpayer of illegal or fraudulent means to defeat or

lessen the payment of a tax. It is also known as “tax dodging.” It is
punishable by law.

Example: Deliberate failure to report a taxable income or property;

deliberate reduction of income that has been received.

Q: Discuss the exemption from taxation

It is express grant of freedom from a financial charge; It implies a waiver

on the part of the government to collect taxes. It is strictly construed
against the taxpayer. This cannot be deligated since it is a mere personal
privilege, unless there’s legislative intent. This can be revoked by the
government except if founded on the contract which is protected from
impairment. (Non-impairment clause of the Constitution)

Tax exemptions must be shown to exist clearly and categorically, and

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supported by clear legal provisions. ( NPC Vs. Albay)

Q: Tax Amnesty Vs. Tax Exemption

Tax amnesty is an immunity from all criminal and civil obligations arising
from non-payment of taxes. It is a general pardon given to all taxpayers. It
applies to past tax periods, hence of retroactive application. (People v.
Castañeda, 1988).

Tax exemption is an immunity from all civil liability only. It is an immunity

or privilege, a freedom from a charge or burden of which others are
subjected. (Greenfield v. Meer, 77 Phil. 394 [1946]). It is generally
prospective in application.(Dimaampao, 2005, p. 111)

Q: How should tax laws be interpreted?

In case of doubt, such are to be construed strictly against the government

and liberally in favor of the taxpayer.(Manila Railroad Co. v. Coll. of
Customs, 52 Phil. 950 [1929]).

Q: Scope and Limitation of Taxation

(1) PUBLIC PURPOSE

The proceeds of the tax must be used (a) for the support of the State
or (b) for some recognized objects of government or directly to
promote the welfare of the community.

(2) TERRITORIALITY- A state may not tax property lying outside its
borders or lay an excise or privilege tax upon the exercise or
enjoyment of a right or privilege derived from the laws of another
state and therein exercise and enjoyed. (51 Am.Jur. 87-88).

Reason:

(1) Tax laws (and this is true of all laws) do not operate beyond a
country’s territorial limits.

(2) Property which is wholly and exclusively within the

jurisdiction of another state receives none of the protection for
which a tax is supposed to be a compensation.

(3) INHERENTLY LEGISLATIVE - Please refer to the prior discussion

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Q: Distinguish Tax from License Fees

TAX LICENSE FEES

Levied for revenue Levied for regulation

Involves an exercise of taxing Involves and exercise of police

power power

Imposed on right to exercise a Imposed on right to exercise a

privilege, as to persons and privilege,
property.

It is enforced contribution to Legal compensation of an officer

defray public expenses for specific services

Failure to pay does not make the Failure to pay makes the act or
business illegal business illegal

Q: What is meant by progressive taxation and what is the basis?

It is built on the principle of the taxpayer’s ability to pay. Taxation is

progressive when its rate goes up depending on the resources of the
persons affected. Simply put, tax rate increases if the tax base increases.

PART II –BASIC CONCEPT ON INCOME TAXATION

Q: What is Income?

Income means all the wealth which flows into the taxpayer other than
mere return on capital. It is gain derived severed from capital.

Q: What is Income Tax?

Income Tax is defined as a tax on all yearly profits arising from property,
professions, trades, or offices, or as a tax on the person’s income,
emoluments, profits and the like (Fisher v. Trinidad).

Income tax is generally classified as an excise tax. It is not levied upon

persons, property, funds or profits but upon the right of a person to receive
income or profits.

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Q: What are requisites that income may be taxable?

1. There must be gain

2. The gain must be realized and received ( actual or constructive)
3. The gain must not be excluded by law or treaty from taxation

Basis: CIR Vs. CA GR. 108576

Note:

A mere increase in the value of property is not income, but merely

unrealized increase in capital.(1 Mertens, Sec. 5.06)The increase in the
value of property is also known as appraisal surplus or revaluation
increment.

Q: When is income considered realized?

With regard to income tax, income is realized when it is earned from a

close and complete or virtually completed transaction.
Example: Sale of car ( transfer of ownership); Declaration of dividends

Q: What are the sources of income? (PAS)

1. Property
2. Activity
3. Service

Q: Sources of income as test of taxability of income

Under Section 23 of NIRC, All persons are taxable only on income from
sources within the Philippines. However, resident citizens and domestic
corporations are taxable also on income sources outside the Philippines.

Q: When is the source of income considered from within the

Philippines?

Section 42(A) of NIRC

Generally, for the sources of income to be considered as coming from the

Philippines, it is sufficient that the income derived from property, activity,
or services within the Philippines.

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Check the situs of taxation: Activity/Service – performed within the
Philippines; Property – where the property is located.

Q: Income sourced within the Philippines and situs of taxation

Section 42(A) of NIRC

This should be paid by residents of

INTEREST the Philippines, corporate or
otherwise
This should be paid by a domestic
corporation or foreign corporation,
DIVIDENDS provided, atleast 50% of their
income in the last 3 taxable years
coming from the sources within the
Philippines.
COMPENSATION FOR SERVICES Services should be performed here
in the Philippines
RENTALS AND ROYALTIES Rentals – property should be
located in the Philippines
Royalties – Services, right to use and
activity must be performed here in
the Philippines.
GAINS FROM THE SALE OF REAL Property is located in the
PROPERTY Philippines

GAINS FROM THE SALE OF Where the sale took place; except
PERSONAL PROPERTY for gain on sale of shares in
domestic corporation where
regardless of the place of sale, the
income is always as income sourced
within the Philippines.

PART III – INDIVIDUAL INCOME TAXATION

Q: Who are the individual income taxpayers?

1. Resident Citizen
2. Non-Resident Citizen
3. Overseas Contractual workers and seamen
4. Resident Alien

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 5. Non-Resident Alien engaged in trade/business or exercise of
profession in the Philippines

Q: Features of Philippine Income Tax Law

DIRECT TAX


The tax burden is borne by the income recipient upon whom the tax is
imposed.

PROGRESSIVE

The tax rate increases as the tax base increases. It is founded on the ability
to pay principle and is consistent with Sec. 28, Art. VI, 1987 Constitution.

COMPREHENSIVE

The Philippines has adopted the most comprehensive system of imposing

income tax by adopting the citizenship principle, the residence principle,
and the source principle. Any of the three principles is enough to justify
the imposition of income tax on the income of a resident citizen and
domestic corporation that are taxed on a worldwide income.

SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM

The Philippines follows the semi-schedular or semi- global system of

income taxation, although certain passive investment incomes and capital
gains from sale of capital assets, namely: (a) shares of stock of domestic
corporations and (b) real property are subject to final taxes at preferential
tax rates.

NATIONAL TAX

It is imposed and collected by the National Government throughout the

country.

EXCISE TAX

It is imposed on the right or privilege of a person to receive or earn

income. It is not a personal tax or a property tax.

Q: How are income/gains of the individuals taxed?

Individuals are taxed on the basis of their taxable income, that is gross
income less deduction and personal and additional exemption. This tax is
referred to as ordinary income tax or regular income tax.

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Legal Basis: Section 31 of NIRC, in relation to Section 24 A ( On individual
citizens and individual resident alien of the Philippines

Q: What is a non-resident Citizen?

Section 22 of NIRC defines such as :

1. A citizen of the Philippines who establishes to the satisfaction

of the Commissioner the fact his physical presence abroad with
a definite intention to reside there in.
2. A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis
3. A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
physically present most of the time during the year.

4. A citizen who has been previously considered as non-resident

citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall likewise
be treated as non-resident citizen for the taxable year in which he
arrives in the Philippines with respect to its income derived from
sources abroad until the date of his arrival in the Philippines.

For income tax purpose within the taxable year - Period stay abroad
– Only taxable on income sourced within the Philippines. From the
date of arrival – he shall be subject to tax on income sourced in and
out of the Philippines.

Q: What is the taxable period?

It is either calendar year or fiscal year ending during such calendar

year, upon which the net income is computed.

The accounting periods used in determining the taxable income of

taxpayers are:


(a) Calendar Year - Accounting period of 12 months ending on the

last day of December


Example : Jan 1, 2016 to December 31, 2016

(b) Fiscal Year - Accounting period of 12 months ending on the last

day of any month other than December (Sec. 22(Q), NIRC).


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 Example : April 1, 2015 – March 31,2016

c) Short Period- Accounting period which starts after the first month
of the tax year or ends before the last month of the taxable year (less
than 12 months). ( Jan 2016- June 2016)

Example : Jan 1, 2016 to June 30, 2016

INSTANCES WHEREBY SHORT ACCOUNTING PERIOD ARISES

(a)When a corporation is newly organized.
(b) When a corporation

is dissolved.
(c) When a corporation changes accounting period. (d)
When the taxpayer dies.

Q: What is final tax?

Final tax is imposed on certain kinds of passive income earned by

individual ( Section 24B, 24C and 24D)

1. Certain Passive income

a. Interest from currency bank deposit, yield or any other
monetary benefit from deposit substitutes and trust funds
and other similar arrangements - 20% Final Tax ( PESO
CURRENCY DEPOSIT)

Ex. During the year, Pedro had saving deposits amounting to

100,000. It earned 10,000 interest during the year.

1. How much is the tax imposed on 100,000?

None, since it is merely a capital.

2. How much is the tax imposed on interest?

10,000 x 20% = 2,000 final tax

3. What is the liability of the withholding agent ( bank)?

 Remit and pay the corresponding tax to the BIR pursuant
to Section 57.

4. Amount to be received/collected by the end of the year in

case Pedro decided to withdraw deposit from the bank.
P 108,000

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b. Pedro (debtor) entered into a contract of loan between Juan
during the year for the amount of 100,000 with the interest
amounting 20,000 by the end of the year , as stipulated in the
contract.

1. Is the interest income arising from loan subject to taxable?

Yes, the interest income earned shall be subjected to ordinary
tax and not to final tax. Enumerations under Section 24B are
exclusive.

2. What if Pedro is a resident citizen while Juan a resident alien?

What is the tax consequence?

Interest income is an income sourced within the Philippines

coming from an interest bearing obligation pursuant to Sec
42(A)(1) – Interests. Such interest earned by Juan which is
earned by resident individual shall be subject to ordinary
income tax.

3. What if Pedro is an non-resident alien while Juan a resident

alien? What is the tax consequence?

Settled is the rule that interest is construed as income

sourced within the Philippines if such income is paid by a
resident individual by virtue of an interest bearing obligation.
Here, Pedro is a non-resident individual. Hence, interest
income earned by Juan is an income sourced outside the
Philippine and exempt from tax. (Note that a resident alien
individual shall be subject to tax on it income derived only
within the Philippines)

c. Royalties -20% final tax

d. Royalties on books, literary works, musical -10% final tax
e. Prizes – 20%

Note: For prizes amounting to 10,000 or less, this shall be

subject to ordinary tax.

Example: Pedro during the year received prize amount to

P20,000 from Eat Bulaga.

What is the tax liability? P20,000 x 20% = P4,000

Amount to be received by the winner = P16,000

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Instances when the final tax on prize is not applicable:
a. When earned from sources abroad, that is when the
contest is held abroad. Such income received by a resident
citizen shall be subject to ordinary income taxation.

b. When the prize or award is received primarily in

recognition of religious, charitable, educational, artistic,
literary or civic achievement provided further: (a) the
recipient was selected without any action on his part to
enter the contest (b) he is not required to render substantial
future services. Hence, exempt from tax.

c. When the prize is won by an athlete in a local or

international sports competition sanctioned by a
recognized national sports competition.

d. Interest income received by individual taxpayer ( except

a non-resident individual) from a depositary bank under
expanded foreign currency deposit – 71/2 % final tax (
FOREIGN CURRENCY DEPOSIT)

e. Interest income from long term deposit or investment in

the form of savings, common or trust funds, deposit
substitutes, evidenced by certificate from BSP – exempt,
subject to pre-termination

4 to less than 5 years – 5% final tax

3 to less than 4 years – 12% final tax
less than 3 years – 20% final tax

Note: Final tax is imposed on the entire income and shall be

deducted and withheld by the depository bank from the proceeds
of the long term deposit.

f. Cash and property dividends from Domestic Corporation

-10% final tax

Tax imposed on dividends actually or constructively received.

If the cash dividends and property dividends were declared and

distributed to a resident citizen or resident alien individual –
subjected to 10% final tax.

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 If the cash dividends and property dividends were declared and
distributed to a non-resident individual doing business here
in the Philippines– subjected to 20%

If the cash dividends and property dividends were declared and

distributed to a non-resident individual not doing business
here in the Philippines– subjected to 25%.

Stock dividends and Liquidating dividends are not subject to

final tax.

Dividends in the form of distributive share of partners in GPP

are subject to 10% CWT ( Creditable withholding tax). Note
that distributive share is an ordinary income of the partner in
GPP.

2. Capital Gains from Sale of Shares of Stocks in a Domestic

Corporation not traded in the stocks exchange.

Capital gain is computed as difference between Selling price –

book value at the time it is acquired.

If the net book value (fair value) at the time of disposition is

higher than the selling price. Such excess shall be subject to
donor’s tax. (Revenue Regulation 6-2008)

In 2010, Luis purchased 100 shares from a domestic corp for P10
each. In 2011, he decided to dispose all of his shares to Karen for 15
pesos. The net book value/ fair value at the time of disposition is
P20.

What is the tax consequence?

Karen (withholding agent, buyer, payor) will withhold the final tax
on gains derived from the sale of shares
(P15-10) = 5X100 shares X 5% final tax= P25

Excess of P20 over 15 shall be subject to donor’s tax. = P5 X 100

shares

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 Sale of stocks acquired from

Foreign Corporation Domestic Corporation

( Taxable under ordinary tax)
For: resident citizen only since Traded in
he is taxable on its worldwide Traded in PSE?
Income. PSE?

Final Tax
Stock
transaction tax
( Percentage
Tax) ; Exempt
from income tax

3. Capital Gains from Sale of Real Property located in the

Philippines

(A) If such real property is deemed principal residence of the

seller – exempt from final tax

Provided:
1. The (all) proceeds are to be used in acquiring or establish
a new principal residence within 18 calendar months from
the date of sale
2. The seller must notify the Commissioner of internal
revenue with his intention to avail the exemption within
30 days from the date of sale ( Sec 24D(2), NIRC)

What if only half of the proceeds was used to acquire new

principal residence?

Portion of proceeds not utilized is subject to final tax

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 How to compute CGT on unutilized portion?

Gross selling Unutilized

Price or FMV portion/
Capital = of the assets X Total X 6%
Gains sold proceeds
Tax whichever is
higher
(Presumed
gain)

*Capital gains tax is a form of final tax

What if the said asset is sold to the government?

The taxpayer shall have option whether it will be subject to
capital gains tax or ordinary income tax. Section 24D1 of NIRC

What if the said asset is located outside the Philippines?

It is exempt from capital gains tax. Taxable under ordinary tax
for resident citizen only since he is taxable on its worldwide
income.

What if the said real property is an ordinary asset?

6% CGT will not apply. Capital gains shall be subject to
ordinary tax (See: holding period on capital gains)

4. Other forms of income subject to final tax

(a) Fringe Benefit
(b) Informer’s award ( Section 282 of NIRC)

Q: Distinquish ordinary tax from final tax

ORDINARY TAX FINAL TAX

Tax base is taxable income Tax Base is gross income
No deductions, personal and No deductions, personal and
additional exemptions are allowed. additional exemptions are allowed.

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It is computed on the basis of one
taxable year
Liability for the payment rests on
the payee
Payee required to file an income tax
return
CWT is imposed on income subject
to ordinary tax
It is computed on a per transaction
basis
Liability rests on the payor (
withholding agent)
Payee is no longer required to file
an the return since it is to be made
by payor.
FWT is imposed income subject to
final withholding tax

Q: Distinquish final withholding tax from creditable withholding tax

Final Withholding Tax Creditable Withholding Tax

The amount of income tax withheld
by the payor is constituted as full
and final payment of the income tax
due from the payee on the said
income.
The amount of tax withheld are
intended to eaual or at least
approximate the tax due of the
payee on the said income

The liability for the payment of the
tax rests primarily on the payor as a
withholding agent.
The payee is not required to file
income tax return
Payee of income tax is required to
report the income and pay the
difference between the tax withheld
and the tax due thereon. The
taxpayer has the right to ask for the
refund if the tax withheld is more
than the tax due.
The income earner is still required
to file an income tax return as
prescribed in Section 51 and 52 of
NIRC., as amended.

Q: What is passive income?

Income actually or constructively earned not in active pursuit of

business and trade

Q: Are all passive income subject to final tax?

No. Only passive income enumerated in Section 57A of NIRC shall be

subject to final tax. All others shall be subject to ordinary tax.

Q: What are ordinary income subject to CWT? ( RR 2-98)

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 a. Compensation/Wages – Withholding tax on compensation
b. Professional fees – 15% CWT if the gross income of the payee
exceeds 720,000; Otherwise, 10%
c. Rentals from realty – 5% CWT
d. Income payments to partners of GPPs – 15% CWT if the gross
income of the payee exceeds 720,000, Otherwise 10%.
e. Brokers – 10% CWT

Example: During the year, Roberto, a broker, earned 70,000 for the
services he rendered on behalf of ABC Corp. What is the tax consequence?

1. Roberto is still required to file its income to report the business

income ( ordinary income) P70,000 derived from that transaction
2. He is allowed to claim deductions, personal and additional
exemptions, if applicable.
3. ABC should withhold tax on income payment Roberto
70,000 x 10% CWT = 7,000
4. ABC should provide BIR Form No. 2307 to Roberto so Roberto can
claim the tax withheld on its income as tax credit.
5. Tax liability is computed as Tax due – Tax Credit.
6. Any excess, can be claimed as refund or can be carried forward to
the next taxable period.

Q: What is a capital asset?

Capital asset is an asset not falling under the enumeration provided in Sec
39A of NIRC( referred to as ordinary assets)

a. Stock in trade or inventoriable assets

b. Property primarily held for sale to customers in the ordinary course
of trade or business
c. Depreciable asset
d. Real property used in trade or business

What is a capital gain?

Capital gain is a gain derived from the sale and disposition of capital asset.
This gain is included in gross income subject to ordinary income tax (
Section 32A, NIRC). By way of exception, capital gains derived from the
sale of stocks issued by domestic corporation and sale of real property
located in the Philippines are subject to final tax.

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Q: State the rules on the holding period, limitation and carry over of
net capital loss

Holding period
1. This rule is applicable to individuals only
2. This is applicable to capital assets only
3. Only 50% of capital gain is taxable or 50% of capital loss is
deductible if the assets sold has been held for more than 12 months
4. 100% if the assets sold has been held for less than 12 months

Loss limitation rule

1. Capital loss is only deductible to the extent of the its capital gains

Net capital loss carry over

1. Net capital loss cannot be deducted from any ordinary gain
2. Net capital loss shall be carried forward to the next taxable year and
shall be deducted from net capital gain , if any.

Example:

In 2015, Pedro had the following transactions:

1. Capital Asset A ( Long-term) acquired last 2013 for P500,000 was

sold to Anne for 250,000
2. Capital Asset B was purchased from Micky for 750,000
3. Ordinary Asset C was purchased from Juan for 600,000
4. Pedro generated income as an actor in Star Cinema to- P80,000

In 2016, Pedro had the following transactions:

1. Capital Asset B was sold to Jaja for 1,000,000 ( long-term)

2. Ordinary Asset C was sold to Gina for 800,000
3. Pedro generated income as an actor in Star Cinema to- P100,000

For 2015
1. Pedro should report on its annual income return 2015 the
Professional Income – P80,000

 Note that there is long-term capital loss amounting to 250,000.

Applying the loss-limitation rule, such loss can be deductible to
the extent of capital gain during the year. Since capital gain is
zero, such loss will be carried over to the next taxable year.

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For 2016
 Pedro should report on its annual income return 2015 the
Professional Income – P100,000
Business Income from sale of Asset C – P200,000
Other Income from sale of Asset B – 250,000

Pedro is entitled to deduct the net capital loss from the net
capital gain arising from the sale of Asset B Hence, net capital
gain for the year 2016 is ZERO.

PART III – COPORATE INCOME TAXATION

Q: What is a corporation?

Ans: Under the Law, the term “ Corporation” shall include partnerships, no
matter how it is organized, joint stock acconts, associations, or insurance
companies but does not include:

a. General professional partnership

b. Joint venture formed for the purpose of undertaking construction
projects
c. Joint venture formed for the purpose of engaging petroleum, coal,
geothermal, and other energy operations pursuant to operating
consortium agreement under a service contract with the
Government

Legal Reference: Section 22B, NIRC

Q: Types of Corporate taxpayers

a. Domestic Corporation
b. Resident Foreign Corporation ( Branch)
c. Non-resident foreign corporation

Q: How Corporation shall be taxed?

Ans: Domestic Corporation and Resident Foreign Corporation shall be

taxed on their taxable income ( Regular Corporate Income
Tax/preferential tax rate, whichever is applicable) or in lieu thereof, the
Minimum Corporate income tax (2% on Gross Income), whichever is
higher.

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Domestic Corporation shall be taxed on their world-wide income ( income
sourced inside and outside the Philippines) and Resident Foreign
Corporation shall be taxed on income all sourced within the Philippines
only.

Furthermore, by way of exemptions, final tax shall be imposed on certain

kinds of passive income such as:
 Interest on bank deposits
 Royalties derived from services rendered here in the Philippines
and from the use of property and other rights located here in the
Philippines
 Capital Gains from sale of shares of stocks ( not listed and traded in
PSE)
 Capital Gains from sale or disposition of land or building located in
the Philippines

Note: Capital gains from sale or disposition of real property considered as

principal residence is not applicable to Corporation.

For Non-residents Foreign Corporation, their income from all sources

within the Philippines are taxed via final withholding tax at 30%.

In addition, interest on foreign loan shall be taxed at 20% final

withholding tax. Dividends from domestic corporation shall be taxed at
15% subject to condition Tax Treaty relief application) and capital gains
from share of stocks in a domestic corporation ( 5% on first 100,000 and
10% on excess of 100,000)

Sample problem:

ABC Corporation engaged in manufacturing services earned and incurred

the following revenues and expenses respectively:

In the Philippines Abroad

Sales from 100,000 200,000
Manufacturing
Cost of Services 30,000 10,000
Allowed Deductions 10,000 20,000
Interest Income from 10,000 20,000
bank deposits
Dividend income 15,000
distributed by

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 Domestic
Corporation

1. Compute for the Corporate Income Tax liability

2. Other Tax Consequences

A. If ABC is a domestic corporation

Sales 100,000 + 200,000

Cost of services 30,000 + 10,000
Gross Income from operations 260,000
Other income 20,000
Total Gross Income 280,000
Allowed Deductions 10,000+20,000
Taxable Income 250,000

RCIT =250,000 x 30% = P75,000

MCIT = 315,000 X 2% = 6,300

Rule: Corporate income tax liability is equal to RCIT or MCIT

whichever is higher. Since RCIT is higher than MCIT, Corporate income
liability of ABC is 75,000.

Note: Only interest income sourced within the Philippines will be

subject to final withholding tax.
Other tax consequences:
Interest income from bank deposits sourced within the Philippines and
dividends income coming from domestic corporation shall be subject to
final withholding tax rates of 20% and 10% respectively.

B. If ABC is a resident foreign corporation

Sales 100,000
Cost of services 30,000
Gross Income from operations 70,000
Other income 0
Total Gross Income 70,000
Allowed Deductions 10,000
Taxable Income 60,000

RCIT =60,000 x 30% = P18,000

MCIT = 70,000 X 2% = 1,400

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 Rule: Corporate income tax liability is equal to RCIT or MCIT
whichever is higher. Since RCIT is higher than MCIT, Corporate income
liability of ABC is 18,000.

Other tax consequences:

Interest income from bank deposits sourced within the Philippines and
dividends income coming from domestic corporation shall be subject to
final withholding tax rates of 20% and 10% respectively.

C. If ABC is a non-resident foreign corporation

The Corporation shall be taxed based on its total incomes sourced within
the Philippines at rate of 30% final withholding tax rate.

Corporate Income Tax Liability =: 100,000 X 30% FT = 30,000

Q: Compute for the tax liability of the following corporations :

Entity A: Non-resident cinematographic film owner, lessor or
distributor
Entity B: Non-resident owner of vessels chartered by
Philippines nationals
Entity C: Non-resident owner or lessor of aircraft machineries
and other equipment

Ans:
Entity A – Shall be taxed on its gross revenue or sales at 25% final
withholding tax rate

Example: Bloomberg-Hongkong on which owns satellite equipment. The

Company leased the equipment to PLDT. Revenues earned by Bloomberg-
Hongkong is equivalent to 600,000. Cost incurred by Bloomberg for the
delivery of equipment from Hongkong to the Philippines is 40,000.

Since Bloomberg- Hongkong is non-resident lessor of the equipment and

earned revenues within the Philippines. The entity shall be taxed at rate of
25% final withholding tax rate on its gross revenue sourced within the
Philippines.

Final tax = 600,000 X 25%

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Legal Reference: Section 28B(2)

Entity B = 4 ½ % final withholding tax rate of gross rentals and charter

fees
Entity C = 7 ½ % final withholding tax rate of gross rentals and fees

Q: Who are the exempt corporations?

Ans : SSS , GSIS, PHIC and PCSO and Local Water Districts under Section 27
(C) of NIRC

Q: Discuss the rule on taxation on income derived by non-stock

corporation and NPOs.

Ans: Under Section 30 of NIRC, these entities are exempt from income tax
in respect to income derived from their registered activity. However, their
income from property, real or personal, or from any other activities
conducted for profit shall be taxable at regular rate.

Example: Manila Golf Club, non-stock corporation, generated membership

and association dues amounting to 1Million during 2015. During the year,
the Company sold one of its assets which was used in its business to Pedro
and derived an income amounting to 50,000.

1M coming from membership and association dues is exempt from tax

since these are fees collected in relation to its registered activity. Only the
income coming from the sale of assets shall be subject to tax.

Q: Discuss the rule on taxation on income derived by proprietary

educational institution/ hospital

Ans: Income derived by these entities are not exempt but enjoys a
preferential rate of 10% on its taxable income PROVIDED that not more
than 50% of its income from unrelared trade or business exceeds its total
gross income.

Legal reference: Section 27B of NIRC

Example: During the year, UST, a proprietary institution, earned the

following the income:

Income from tuition fees – P 500,000

Income from rental – P 60,000
Income from catering services ( canteen) – P 700,000

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The entity shall be taxed at 30% on its taxable income since the total
income derived from unrelated/ unregistered activity is more than 50% of
the total gross income derived during the year.

( 760,000/ 1,260,000) =60.31%

Corporate Tax Liability = 1,260,000 X 30% = 378,000

Q: What is MCIT and rationale behind the imposition?

Ans: MCIT is computed as 2% of the total gross income derived by a

Corporation during the year. It was devised as a relatively simple and
effective revenue raising instrument compared to the normal income tax
which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the
public sector ( CREBA Vs. Romulo)

Q: What are the perceived advantages of pegging the tax base of MCIT
to a corporation’s gross income?

Ans: MCIT prevents tax evasiuon and minimizes tax avoidance schemes. It
is also simple and effective in addressing liquifity problems of the
government. ( CREBA Vs. Romulo)

Q: What are the instances the MCIT will not apply?

Ans:
(A) During the infant state of the corporation, MCIT shall apply only
beginning of the fourth taxable year immediately following the
taxable year in which such corporation commenced its business
operations.

Example: ABC started during 2012. MCIT shall be applicable starting

2016.

(B) Imposition of MCIT shall be suspended upon submission of proof

by the applicant corporation that the corporation sustained
substantial losses coming from (1) prolonged labor disputes (2)
force majeaure and (3) legitimate business revereses.

(c) When the Corporation is not subject to normal income tax

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 1. A proprietary educational instition or hospital enjoying
10% on their taxable income
2. An FCDU – Foreign Currency Depository Unity
3. OBU - Offshore banking Unit
4. Regional operating headquarter of multinational Company
5. PEZA-registered enterprises

Q: What is IAET ( Improperly Accumulated Earnings Tax)

Legal Reference: Revenue Regulation No. 2-2001

Ans:
IAET is equal to 10% of the improperly accumulated taxable income is
imposed on corporations formed and acailed of for the purpose of
avoiding the income tax with respect to its shareholders of any
corporations, by permitting the earnings and profit of the corporation to
accumulate instead distributing them to shareholders.

This is devised to force domestic corporations to declare and

distribute dividends to its shareholders. Note that dividends distributed by
a domestic corporations to individuals shall be subject to 10% final
withholding tax rate.

Q: How to compute tax base for IAET?

Ans:

Sum of the following:

a. Income exempt from tax
b. Income excluded from gross income
c. Income subject to final tax
d. The amount of net operating loss-carry over (NOLCO) deducted

Less:

a. Income tax payable/paid during the year

b. Dividends actually or constructively paid from applicable year’s
taxable income
c. Amounts reserved for the reasonable needs of the business

Q: What is period for payment of dividends/ IAET?

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Ans: The dividends must be declared and paid or issued not later than 1
year following the close of the taxable year, otherwise, the IAET should be
paid within 15 days there after.

Q: Who are exempt from IAET?

Ans: IAET shall not apply to the following corporations:

1. Bank and other non-bank financial institutions

2. Insurance companies
3. Publicly-held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non-taxable joint ventures
7. PEZA-registered enterprises

Q: What is the meaning of reasonable needs of business?

Ans: It means the immediate needs of the business including reasonable

anticipated needs ( Sec. 3 of RR No. 2-2001)

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