Taxation Review - Midterms 2015 PDF

TAXATION
REVIEW – MIDTERMS (A.Y. 2015 – 2016)

From the Discussions of Atty. Amago

GENERAL PRINCIPLES OF TAXATION

A. DEFINITION AND CONCEPT OF TAXATION

Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues in order to carry out the legitimate objects of the government.

B. NATURE OF TAXATION

Two fold nature of taxation:
1) Inherent Attribute of Sovereignty
• Taxation is inherent in nature being an attribute of sovereignty.
• There is no need for a constitutional grant for the state to exercise this power (there is no need for it to be stated in any law
–it exists with existence of the state).
• It is unlimited; the security against its abuse is to be found only on the responsibility of the legislature which imposes the tax
upon the constituency who is to pay it.

2) Legislative in Character
• Taxation is a legislative power because it involves the promulgation of rules.
• It can only be exercised by the immediate representative of the people.

Scope of legislative power of tax (Aspects which can be determined by the legislature)
• What can be determined by the legislature:
1) Purpose of the tax àrevenue raising
2) Coverage à refers to subjects and objects of taxations
3) Amount and rate of tax
4) Kinds of tax to be collected which refers to the nature
5) Apportionment of the tax
6) Manner and mode of enforcement and collection of tax
7) Where the situs (place) of taxation primarily lies

C. CHARACTERISTICS OF TAXATION
1) Inherent
2) Legislative
3) Generally imprescriptible
4) Applies prospectively
5) Subservient to the non-‐impairment clause
6) May be exercised jointly with police power or eminent domain
7) Power is unlimited

D. POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain
Purpose
To raise revenue To promote public welfare Taking of private property for
public use

Amount
Generally unlimited Limited to the cost of the regulation No amount imposed but rather the
owner is paid the market value of
the property taken
-‐limited only to the market value of
the property taken

Compensation
Enjoyment of public services Altruistic feeling of contributing

Properly taken
money Could be any property property
1
Tax is (repeat wanmilyon times J )
TAXATION REVIEW – MIDTERMS (A.Y. 2015 – 2016)

Benefits Received
No special or direct benefit is No direct benefit is received, but a healthy A direct benefit results in the form
received by the taxpayer; general economic standard of society is attained of just compensation to the owner
benefit -‐received solely by the owner of
the property
Non-‐Impairment of Contracts
Contracts may not be impaired Contracts may be impaired Contracts may be impaired
-‐subservient or inferior to the non -‐superior to non impairment clause
impairment clause
Transfer of Property Rights
Taxes paid become part of public No Transfer but only restraint in use Transfer is effected in favour of
funds State
Scope
All persons, property and excises All persons, property, liberty rights and Only upon a particular property
privileges
Who Exercises
Govt Govt May be granted to Public utilities
Surrender
The can be bargaining (subject to Can’t be bargained
compromise)

E. PURPOSE OF TAXATION

1. Primary
o To raise revenue
2. Secondary or sumptuary purpose (Non-‐revenue or regulatory purpose)
o For regulation (e.g. sin tax – primarily imposed to raise revenue but incidentally to curtail the consumption of alcohol and
cigarettes.)
o For the rehabilitation and stabilization of a threatened industry
o To reduce social inequality
o Implemented through eminent domain
o Compensatory

F. PRINCIPLES OF SOUND TAX SYSTEM

1. Fiscal adequacy

2. Administrative feasibility

3. Theoretical justice

G. THEORY AND BASIS OF TAXATION (taken from TIU Notes)

1. Lifeblood theory/Necessity Theory – underlying theory of taxation
-‐ The power of taxation proceeds upon the theory that the existence of government is a necessity; that it cannot continue without
means to pay its expenses; and that for these means it has a right to compel all its citizens and property within its limits to
contribute. (71 Am. Jur. 2d 346)

2. Benefits-‐protection theory/Symbiotic relationship Theory/Compensation Theory – basis of taxation
-‐ According to this theory, the State demands and receive taxes from the subjects of taxation within its jurisdiction so that it may be
enabled to carry its mandate into effect and perform the functions of the government, and the citizen pays from his property the
portion demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of organized society. (51
Am Jur. 42-‐43)
-‐ Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender part of their hard earned income to the government,
every person who is able to must contribute his share in the running of the government. The government, for its part, is expected
to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power. (CIR v. Algue)
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-‐ The legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are paid and collected without
delay. For taxes are the lifeblood of government. Also such measures tend to prevent collusion between the taxpayer and the tax
collector. By questioning a tax’s legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue officials,
can unduly delay, if not totally evade, the payment of such tax. (Phil Guaranty Co. v. CIR)
-‐ The power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. (FELS Energy, Inc. v. Province of Batangas)

3. Jurisdiction over subject and objects

H. DOCTRINES IN TAXATION

1. Prospectivity of tax laws
GR: tax laws are applicable only to present and future circumstances. It should not be applied to past transaction. Otherwise, it is
a violation of the due process clause

Exc: tax laws may be applied retroactively provided it is expressly declared clearly by legislative intent

2. Imprescriptibility
GR: power to tax is imprescriptible as it is inherent in character, being inherent it therefore exists with the existence of the State
and will only cease upon the death of the State (power to tax itself can never prescribe)
Exc: but the administrative aspect will prescribe (collection, assessment, right to refund will prescribe)

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.
-‐ Sir: So there are two tax laws imposing dual burden on the same subject.

Strict Sense (Direct Double Taxation)
1) the same property must be taxed twice when it should be taxed once;
2) both taxes must be imposed on the same property or subject matter;
3) for the same purpose;
4) by the same State, Government, or taxing authority;
5) within the same territory, jurisdiction or taxing district;
6) during the same taxing period; and
7) of the same kind or character of tax.

Broad Sense (Indirect Double Taxation)
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.

Q: What should always exist, for there to be double taxation?
A: That there should be the same subject or object which was taxed twice for there to be broad sense, it is just that all the other aspects are
not present.
Q: Is double taxation a ground for invalidating a tax law?
A: no

Q: What then can you use as basis when you would like to declare a tax law as void?
A: Violation of the equal protection clause. It violates the constitutional limitations of the power to tax

Modes of Eliminating Double Taxation
• Mostly applicable in eliminating international double taxation
• One nation taxing one party who is a resident of another country which also imposes a tax on all income of the resident
o In Phils, all RC are taxed on income within and without.

1) Allowing reciprocal exemption either by law or by treaty;
-‐ By entering into treaties
-‐ RP-‐US, RP-‐GERMANY, RP-‐SINGAPORE
-‐ This is not automatic
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Deutsche Bank case:
o
§ When you avail of tax credit, it is not necessary that there be an application of tax treaty relief, before you can
avail of tax treaty incentives
§ Principle in PIL: pacta sunt servanda, there must be good faith in entering into treaties and in the
implementation thereof, then once it has been executed, it is automatic that all incentives stated therein will
be applicable, regardless of whether there is application of tax treaty relief or not.

§ But that does not mean that we don’t get tax treaty relief because of the Deutsche case. It just means that it
cannot be used by the BIR as a way of disallowing tax incentives.

§ In practice, you will realize that you should follow what the BIR says, so long as it is provided in the law; but if
not provided in the law, you can always question.

• Example: when they request that you present tax treaty relief application, and you cannot, it does not
mean that you are not entitled to the incentives. It’s just that you may be penalized for not getting a
tax treaty relief. But you still have to apply.

§ The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under
the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. "A state that
has contracted valid international obligations is bound to make in its legislations those modifications that may
be necessary to ensure the fulfilment of the obligations undertaken." Thus, laws and issuances must ensure
that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The obligation to
comply with a tax treaty must take precedence over the objective of RMO No. 1-‐2000.|||It is significant to
emphasize that petitioner applied — though belatedly — for a tax treaty relief, in substantial compliance with
RMO No. 1-‐2000. Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10%
BPRT in accordance with the RP-‐Germany Tax Treaty.

-‐ Most favoured nation clause
§ Should be provided in bilateral tax treaties
§ If there is a particular rate which is favourable and that rate is provided in the treaty, a party who is not a party to
such treaty which includes the most favourable rate, can still make use of that treaty as basis for applying the most
favourable rate
§ If in RP-‐US provides for 15%, but RP-‐Singapore is 20%, the more favourable is 15%, if you are a Singaporean, you do
not invoke the RP-‐Singapore treaty, what you invoke instead is the RP-‐US, because the Philippines continues to be a
party in such a treaty. And the tax that you are talking about must be applicable here in the Philippines.
§ But sometimes the most favoured nation clause provides for some other conditions.
• SC JOHNSON CASE
§ There is a Philippine entity, SC Johnson Incorporated, a Philippine corporation, for it to continue its operation here
in the Philippines, so it can have a competitive edge, it would have to make use of the brand in the US Corporation
of SC Johnson. So it has to enter into a license agreement to use the trademark for a consideration because of this, it
was imposed of 25% royalty withholding tax on royalties. Because of this, they were able to look at another treaty.
There is RP-‐US TREATY which says 25% for royalty income. But there is this RP-‐Germany treaty, which provides that
the rate is only 10%, based on this most favoured nation clause, they want to apply the 10%. However, the Supreme
Court said that it is not applicable. While it is correct that a particular taxpayer can make use of the most favoured
nation clause, it will have to comply with the conditions of the most favoured nation clause. Under the RP-‐
GERMANY tax treaty, it says there that the payment of taxes must be in similar circumstances for it to be applied to
another treaty. Meaning, if the royalty income is used in the Philippines, it will not be subject to tax; also, if the
Philippine taxpayer will earn royalty income there in Germany, it will not be liable to pay tax also. So murag nay
concession.
§ 20% to be imposed by the German government on the royalty income of a Philippine entity there.
§ Sa US TREATY kay not the same man, they did not have that similar tax crediting provision nga naa sa RP-‐GERMANY.
So the Supreme Court said that since it is not in similar circumstances, you cannot apply the most favoured nation
clause
§ Essence: There may be other conditions that are provided in a particular treaty which contains the most favoured
nation clause, which must first be complied with before you can apply the most favourable rate of taxes. You can
apply for the most favourable rate, provided you are similarly situated as that provided in the treaty that contains
the most favoured nation clause
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Really: The lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United
§
States from sources within the Philippines only if the circumstances of the resident of the United States are similar
to those of the resident of West Germany. Since the RP-‐US Tax Treaty contains no “matching credit” provision as
that provided under Article 24 of the RP-‐WEST GERMANY Tax Treaty, the tax on royalties under the RP-‐US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-‐WEST GERMANY Tax Treaty.

2) Allowance of tax credit for foreign taxes paid
-‐ That taxes you paid abroad are allowed as deductions from the local taxes that are due to be paid
Example:
Philippines taxes
Total taxes paid on all income – 100,000
You paid a total tax in the US – 10,000

100,000
(10,000)
90,000
àIn effect the taxes that you actually pay here are reduced

3) Allowance of deduction for foreign taxes paid
-‐ Instead of looking at the taxes due and payable, you go back first to the taxable income. From the taxable income, you can
deduct there the taxes that you paid.
Example:
Total income – 300,000
Amount of tax paid in the US -‐10,000

300,000
(10,000)
290,000

290,000 x 30% =87,000
à Is the amount of tax that you will have to pay

Q: Which is usually better, tax credit or tax deduction?
A: Tax credit, because the deduction is from the tax due and payable itself. It could be that if you use tax credit, which is a
deduction of the taxable income, in effect the amount that you can actually just use as deduction only amounts to 70%,
because g subject paman siya sa tax rate na 30%. In almost all cases, it is always better to make use of tax credit than tax
deduction.

4) Reduction of Philippine tax rate
-‐ It is already imbedded in the tax law
-‐ Example: Tax sparring rule:
o That instead of paying 30%, you will only have to pay 15% for dividend income.
o It is 15% so that it will be equal with the branch remittance. Otherwise, it would be more favourable for one to just
set up a branch, if 15% is not used as basis for the tax sparring rule.
o Why 15%?
o Kay if you are a subsidiary of a corporation in the Philippines, meaning your parent company owns shares of the
corporation here in the Philippines, so if you would like give out money to your parent company, you will not do
branch remittance, because when you say branch, it refers to one entity. There are no shares to mention here, you
don’t base it on shares. So what you do is you declare dividends so you can transfer income to the parent company.
If the parent company is a non resident foreign corporation, it will be subject to final tax on dividends, which
supposedly is 30%, but because of this sparring rule, it is now subject only to 15%. If you are a branch, since you
don’t have a separate entity from your home office, the home office continues to own you in total, there will only
be one reporting entity there. So how do you transfer income from the branch to the home office, you don’t declare
dividends because there are no shares to mention there, so what you do is to give remittance, as it is termed as
branch remittance. When you give money to your home office, the tax rate would be same, at 15%, para similar ang
treatment if there is parent-‐subsidiary relation or there is home office-‐branch relationship

4. Escape from taxation
a) Tax avoidance
-‐ It has to be legally permissible alternative or methods.
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-‐ It is 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.

b) Tax evasion
-‐ This connotes fraud, by using pretences or forbidden devises to lessen or defeat taxes
-‐ 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.
-‐ Estate of Benigno Toda:
Elements:
(1) ends to be achieved – which it to pay lesser than that which you should know should be paid, or not paying taxes
when you know that you should pay taxes.
(2) accompanying state of mind which is evil – which is deliberate or evil or with bad faith or malice.
(3) course of action/failure of action which is unlawful – filling up of tax returns with higher amounts of expenses or
deductions or when you don’t file a return at all.
-‐ Example of evasion: substantial understatement of income, overstatement of deductions. If you claim that you actually giving
birth to twins instead of just one child.
-‐ To prove state of mind which is evil, there are presumptions:
o If you under declare your sales by more than 30%, there is said to be fraud.

c) Tax 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; direct taxes
cannot be shifted.
-‐ It is the passing of the burden by the person statutorily liable to pay the taxes to someone else. Only the incidence is
transferred. The best example is the VAT. Who is statutorily liable? Seller. But they may shift the burden to the consumers
such that the end user is the one who pays. Added to the cost/price of the goods. It is still the seller who is still required to
remit. Take note that it is only the burden which is shifted.

Tax incidence
-‐ 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.
-‐ one who has the burden to pay the tax (Seller)

Tax impact
-‐ is the point on which a tax is originally imposed.
-‐ In so far as the law is concerned, the statutory taxpayer, the subject of tax, is the person who must pay the tax to the
government.
-‐ one liable to pay

Kinds of Tax Shifting
1. Forward – from seller to buyer
Example: VAT, from the manufacturer to the retailer, then to the consumer
From the manufacturer, let’s say 100, because it is subjected to VAT, and since it does not want to pay tax, so it will add
12% to the 100, ang bill to the retailer 112 na. The impact of taxation is on the manufacturer. And the retailer does not
want to pay VAT; it will add again VAT to the consumer, so the consumer will have to pay it.
2. Backward – from buyer to seller
The buyer will buy lesser units of the products if you will shift all your taxes to me. Meaning, the one who will bear the
burden of the tax, the retailer, but if si retailer mo ingon pud nga d ko mo palit nimo if imo ko pabayron og tax, so g balik
nasad nimo sa manufacturer
3. Inward – combination of forward and backward
4. Transformation

Examples of Tax that can be shifted:
Documentary stamp taxes, percentage taxes, and VAT

5. Exemption from taxation
a) Meaning of exemption from taxation
Broad Sense – tax does not apply to all persons in the jurisdiction of the taxing authority

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Ex. Exemption of minors from taxation, exemption from real property taxes: churches, parsonages and mosques and all
appurtenances thereto
-‐-‐While all are other subject to real property tax, there is one which exempt from real property tax

Narrow Sense
– the grant of immunity, express or implied, to a particular person or entity, from a tax on property or excise tax which
persons/entity are generally obliged to pay
-‐-‐This refers to a particular class or persons or entity, which is exempted from tax.

Ex. Charitable institutions which are exempted from real property taxes when used actually, directly, and exclusively
used for charitable purposes. Non stock, non profit organization is exempted from all taxes like income tax, real property
tax, customs tax

b) Nature of tax exemption
• Exemption is an act of the state in divesting itself of its prerogative to collect taxes upon certain subjects or objects.
• It is granted to particular persons so it becomes personal to him, it only attaches to him, and so he cannot transfer it to
someone else even by mere agreement.
• Therefore, it should be construed strictly against the taxpayer if talking about exemption because it is a necessity of the
government to collect taxes.

Q: How do you interpret tax laws?
A: liberally in favour of the tax payer and against the government

Q: tax exemption interpretation
A: strictly construed against the tax payer and in favour of the government

c) Kinds of tax exemption

(i) Express – specific identification of subject and objection not taxed
§ Examples: SSS, GSIS, PHILHEALTH

(ii) Implied – there is failure of the law to specify that such persons/objects are exempt.
Ø Student allowance is an income but is not subject to tax because it is not provided by the tax code.
Ø Clothes worn is property but not subject to tax because it is not provided by the tax code
-‐ Construed liberally in favor of the taxpayer and strictly against the taxing authority

(iii) Contractual – there must be a contract
Ø Government bonds, provided in the tax code
Ø PEZA entities, they enter into registration agreements. Though there is a general exemption in the PEZA law,
there is always a specific agreement entered into between PEZA and the PEZA-‐registered entity and it is
provided there, the conditions for the exemptions of a particular PEZA enterprise called locators.
• Example: tax holiday can either 3 years or 4 years depending on their agreement. 3 years if it is an
expansion or additional project.
v Let’s say you’re a call center entity. You’re exempted for your operations with clients from
US or Europe. Now, you are able to find clients in Australia. Instead of including it in your
business, you created another entity and registered it with PEZA. PEZA locators are ordinarily
enjoying tax holiday for 4 years but because this new entity is still owned by you and still
holding shares. This can be considered as an expansion or additional project. It will only be
exempted good for 3 years.

Q: Isn’t contractual considered express as well?
A: that’s correct. It is an express exemption because it is specific and provided in writing.

d) Rationale/grounds for exemption
-‐ Similar to the sumptuary purposes of taxation. Non-‐revenue raising or special purposes is the reason for exemption

e) Revocation of tax exemption
GR: it can be revoked
EXCEPTIONS
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1. When it violates the non-‐impairment clause of the Constitution àtax exemption is covered by a material
consideration
Ø Example: Big investments in the economic zone (PEZA). You cannot immediately revoke the exemption of
PEZA locators because they invested money in the Philippines and one of the incentives given is the tax
exemption covered by the Registration agreement.
Ø Another: airline companies are exempted from paying certain taxes in return for them to carry mails for
the government. This is a US scenario.

2. Exemption granted by the Constitution
Ø Cannot revoke exemptions unless they change the Constitution i.e. charitable institutions, etc.

6. Compensation and set-‐off
v Compensation by operation of law: they must be principal creditors and debtors of each other. this is the primary consideration
for there to be compensation
v In taxation, the taxpayer and the government are NOT principal creditors and debtors of each other because taxes are DIFFERENT
from debts.
o Thus, GR: NO compensation
o EX: that your claim from the government and the taxes that are due to the government are both DUE AND DEMANDABLE
and that it must be FULLY LIQUIDATED

Q: Do we adhere to the DOCTRINE OF EQUITABLE RECOUPMENT?
A: NO except in one case (School case, not UST à please find this case)

Doctrine of Equitable Recoupment: a refund of a tax illegally or erroneously collected or overpaid by the taxpayer is barred by prescription.
A tax presently being assessed against a taxpayer may be set-‐off against such tax refund.

7. Compromise
Ø a contract, whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one that was already
commenced
Ø In tax, instead of pursuing tax evasion cases, you pay the taxes by way of compromise.

8. Tax amnesty

a) Definition: is a general pardon to tax payers or an intentional overlooking by the State of its authority to impose penalties to
persons otherwise guilty of evasion or violation of a revenue or tax law.
- In other words, it is merely the waiver of the government to collect the tax already imposed
- WHO CAN GRANT? Only CONGRESS can grant tax amnesties

b) Distinguished from tax exemption: Tax amnesty is NOT similar to tax exemptions
- In tax exemption, there is NO TAX imposed at all. In tax amnesty, there is tax imposed but the government will not collect it
- Tax exemptions waives CIVIL liability. In tax amnesty, you are immune from CIVIL, CRIMINAL and ADMINISTRATIVE liabilities.
- Tax exemption is PROSPECTIVE in application. Whereas, tax amnesty applies only to past tax periods, hence, RETROACTIVE in
application.

9. Construction and interpretation of:
a) Tax laws: strictly against the STATE, and liberally in favor of the tax payer
(i) General rule
-‐ Philippine-‐American Accident Insurance Company Case: taxes as burdens which must be endured by the
taxpayer must not be presumed to go beyond what the law expressly and clearly declares.

(ii) Exception
-‐ Principle of Separability and Presumption of Validity of Tax Laws
o Principle of Separability: that a tax law is not rendered invalid by one provision when there are other
provisions which can be imposed (Domondon)

b) Tax exemption and exclusion
(i) General rule
-‐ strictissimi juris against the tax payer and liberally in favour of the taxing authority
o must be able to point out a specific provision of the law exempting a taxpayer from the common burden

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(ii) Exception
-‐ When the statute provides for a liberal construction
-‐ When special taxes relating to special cases and/or taxpayers
-‐ Exemption of public properties
-‐ Exemption to charitable and education institution or their property
-‐ Exemption in favour of government political subdivisions or instrumentality
-‐ A tax refund based on solutio indebiti

c) Tax rules and regulations: a reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption
in his favour for afterall, the government is never estopped from collecting taxes because of the mistakes or errors on the part of
its agents.
o a commissioner is not bound by the decisions of the previous commissioners
§ examples: disposal of idle lands are now subject to VAT being incidental to corporate operations; exemptions of
exchange of properties without consideration i.e encroaching properties – changing boundaries, not anymore
exempted

d) Penal provisions of tax laws: strictly against the government
o Always in favor of the accused

e) Non-‐retroactive application to taxpayers
(i) General Rule: CANNOT be applied retroactively
(ii) Exceptions: provided it is expressly declared or is clearly the legislative intent

Rules and regulations should be applied prospectively unless legislative intention provides otherwise
GROUNDS FOR THE RETROACTIVE APPLICATION OF A REVENUE RULING: Sec. 246 NIRC
ü Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by
the BIR
ü Where the facts subsequently gathered by the BIR are materially different from the facts in which the rulings is based or
ü Where the taxpayer acted in bad faith

I. SCOPE AND LIMITATION OF TAXATION

1. Inherent limitations (P-‐E-‐N-‐I-‐T)

a) Public purpose
Ø If it is for the promotion of a public welfare, although incidentally may result in that of a private interest, the expenditure
is essentially considered public à used as basis for the exemption for the Sugar Industry
Ø Now, public purpose is synonymous with public interest, public benefit, public welfare and public convenience. It has
become an elastic concept that can be hammered to fit modern standards and norms and includes those purposes
designed to promote social justice.
Ø WHEN are you supposed to DETERMINE PUBLIC PURPOSE?
ü At the time of the ENACTMENT of the tax law

b) Inherently legislative – LEGISLATIVE IN CHARACTER
Ø GR: the legislative authority to tax CANNOT be delegated
ü Congress CANNOT delegate the determination of the:
Purpose
Extent/amount of tax
Situs
Kind of tax to be imposed
Subject/ coverage of the tax imposition
Ø REVIEW: SOURCES OF TAX LAWS
ü Constitution
ü NIRC/Tax Code
ü Local government code
ü Local tax laws
ü Miscellaneous laws and regulation
Ø Nature of the legislative power is NOT political in character. It is civil in nature, not subject to ex post facto law
prohibition
ü EX POST FACTO LAW à imposing a penalty against a previous act
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Ø It is not penal in character, cannot be retroactively applied
Ø EXCEPTIONS:
ü DELEGATION TO THE PRESIDENT
in terms of the FLEXIBLE TARIFF CLAUSE
• In the interest of national economy, general welfare and/or national security, and subject to
the limitations herein prescribed, the President, upon recommendation of the National
Economic and Development Authority (hereinafter referred to as NEDA), is hereby
empowered: (1) to increase, reduce or remove existing protective rates of import duty
(including any necessary change in classification). The existing rates may be increased or
decreased to any level, in one or several stages but in no case shall the increased rate of
import duty be higher than a maximum of one hundred (100) per cent ad valorem; (2) to
establish import quota or to ban imports of any commodity, as may be necessary; and (3) to
impose an additional duty on all imports not exceeding ten (10) per cent ad valorem
whenever necessary ENTERING into TAX TREATIES subject to CONCURRENCE by the SENATE
in the ratification made by the President (TCCP Sec. 401)
Emergency powers of the President
• In case there is an emergency or to secure national interest, it can impose quotas and import
duties
ü DELEGATION TO LOCAL GOVERNMENT
It is considered a direct grant subject to limitations to be imposed by Congress
• i.e. Local and real property taxes: one limitation provided by Congress is that taxes must not
be excessive, oppressive or confiscatory.
ü DELEGATION TO ADMINISTRATIVE AGENCIES or otherwise known as the POWER OF SUBORDINATE
LEGISLATION
Two Tests:
• Completeness Test
o The policy to be executed has already been set forth in the law so that the only
thing left for the delegate to do is to implement the law
• Sufficient Standard Test/Sufficiently Determinate Standard Test
o There is a standard set by Congress and then all that the delegate should do is to
conform to such standards
o Issue on VAT increase from 10% to 12%à SC: there is sufficient standard provided
by law

c) Territorial
Ø This is where the situs of taxation becomes very important because of the territoriality limitation
Ø SITUS OF TAXATIONà place/authority that has the right to impose/collect the taxes
Ø FACTORS CONSIDERED IN THE SITUS under Philippine Taxation:
ü Domiciliary theory à refers to the residence of the income earner
ü Nationality theory à citizenship of the income earner
ü Source as basis for the situs of taxation
CIR vs. Baier-‐Nickel (nexus) à read case
Ø SITUS OF INCOME TAX:
ü Interest income à residence of the DEBTOR
ü Dividends à depends whether Domestic or Foreign
Domestic à within the Philippines
Foreign àlook at the 3-‐year income of the said foreign Corporation and if 50% of the income is
derived from the Philippines, it is considered within the Philippines (Tax Code)
• Expanded version is more than 85% à within the Philippines
• More than 50% to 85% àpartly within, partly without
• 50% below à without the Philippines
ü Income from services à taxable where the Services is rendered
ü Rentals à where the property being rented is used
ü Royalties à where the royalty is used
ü Property taxes
Real property à lex rei sitae
Personal property à mobilia sequitor personam
ü Excise tax à where the privilege is exercised
ü Domestic products or minerals à where they are mined or extracted
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ü Imported article à place of importation or place of release or where the customs house is
ü Franchise à where the privilege is exercised
ü Estate tax à nationality of the decedent, residence of the decedent and location of the estate left by the
decedent
Resident citizen àwithin and without
Non-‐resident citizen à within and without
• Opposite of Income tax, everything is within and without except non-‐resident alien
Non-‐resident alien à without
ü Donor’s tax à nationality of the donor, residence of the donor and location of the property donated where the
donation was made
ü Business tax
Sale of real property à where the real property is located
Sale Personal property à where the place of purchase or sale is
ü VAT àwhere the services are rendered or where the goods are destined (Destination Principle)

d) International comity
Ø It’s based on respect accorded by nations to each other because they are sovereign equals

e) Exemption of government entities, agencies, and instrumentalities

2. Constitutional limitations

a) Provisions directly affecting taxation

(1) Prohibition against imprisonment for non-‐payment of poll tax
-‐ Poll tax = cedula
-‐ Can be imprisoned in relation to cedula WHEN you falsify the information in your cedula
(2) Uniformity and equality of taxation
-‐ Uniformity àtaxed uniformly
-‐ Equality à capacity to pay
(3) Origin of Tax Laws àshould come from the House of Representatives but Senate can amend or modify appropriation,
revenue or tariff bills (A.R.T.)
(4) Prohibition against taxation of religious, charitable entities, and educational entities with respect to their properties
-‐ Only on REAL PROPERTY TAX
-‐ Two cases: Lung Center of the Philippines Case and St. Luke’s Medical Center Case
(5) Prohibition against taxation of non-‐stock, non-‐profit institutions
-‐ Exempted from taxes and duties on all assets and revenues of such entity
(6) Majority vote of Congress for grant of tax exemption
(7) Prohibition on use of tax levied for special purpose
-‐ Shall be treated as a special fund and shall be used for such purpose only
-‐ Should there be excess of such special fund, it will be transferred to the general funds of the government
-‐ Example of special funds: Sugar Tax Act, Fertilizer
(8) President’s veto power on appropriation, revenue, tariff bills
-‐ Any particular item or items referring to the subject of the tax and the tax rate
(9) Non-‐impairment of jurisdiction of the Supreme Court
(10) Grant of power to the local government units to create its own sources of revenue
-‐ Local Government Code à to impose local taxes and real property taxes
(11) Flexible tariff clause
(12) Exemption from real property taxes
(13) No appropriation or use of public money for religious purposes
(14) Progressive system of Taxation
-‐ To evolve à not mandatory
-‐ Minimal indirect taxes

b) Provisions indirectly affecting taxation

(i) Due process
-‐ No person shall be deprived of life, liberty or property without due process
-‐ Example: you cannot impose excessive taxes
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(ii) Equal protection
-‐ No person shall be denied the equal protection of the laws
-‐ Basis: there should be VALID CLASSIFICATION: REQUISITES
o Substantial distinction
o Germane to the purpose (of taxation) à relevant to the issue
o Must be applicable to the members of the same class
o Must be applicable not only to existing conditions but to future conditions as well
§ SITUATION: Municipality decides to tax all Astronauts in their jurisdiction but there is only ONE
astronaut in such locality. Astronaut cannot question because there may be other astronauts in
the future. Sa pagkakaron, ikaw lang usa.
§ SITUATION: Imposing taxes on Ugly People. Not a substantial distinction, thus, no valid
classification. Beauty is in the eye of the beholder. J
-‐ Several TESTS to determine VALID CLASSIFICATION:
o Compelling Interest Test
§ Best example is the Sugar Act. There is a valid classification because the sugar industry is essential
to the economic interest of the county.
§ There must be a presence of COMPELLING, rather than substantial, governmental interest.
o Rational Basis Test
§ The classification is valid if it is rationally related to a constitutionally permissible state interest.
§ Example: taxing Mining companies more than all other industry because the Constitution adheres
to environmental and sustainable development.
§ Example: Lumber Industry à using the environment more than other people
(iii) Religious freedom
-‐ There shall be no law made respecting an establishment of religion or prohibiting the free exercise thereof. The free
exercise and enjoyment on religious profession or worship without discrimination or preference shall forever be
allowed. No religious test shall be required for the exercise of civil or political rights.

(iv) Non-‐impairment of obligations of contracts

(v) Non-‐establishment Clause
-‐ There shall be no law prohibiting the establishment of religion
-‐ Papal Visit: NO violation because:
o Pope is a head of state
o There is a secular purpose which is to encourage tourism. One reason why spending for Sinulog is justified
-‐ So long as the principal or primary effect is that it will not advance or inhibit religion and that it does not foster
excessive government entanglement with religion
-‐ Cases: American Bible Society vs. City of Manila and Tolentino vs. Secretary of Finance
o American Bible Society: Distribution of bibles à cannot be prohibited and cannot be subject to tax

J. STAGES OF TAXATION

1. Levy
-‐ the imposition of the tax which involves the determination by Congress of the subject, object and rate of taxation in the form of a
law.
2. Assessment and collection
-‐ Assessment: the determination of the amount of tax due.
o Ordinarily done by the BIR or self-‐assessment/self-‐help
-‐ Collection: the means, process and method of implementing the tax law for the purpose satisfying the tax oblgation
3. Payment
-‐ Compliance with the tax laws including the exercise of remedies
4. Refund
-‐ The return to the taxpayer of the previously erroneous, excessive or illegally collected taxes

K. DEFINITION, NATURE, AND CHARACTERISTICS OF TAXES

Definition of Tax – enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of
its sovereignty for the support of the State and for all public needs

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Nature and Characteristic of a Tax
a) Enforced contribution
b) Generally payable in money
c) Proportionate in character
d) Levied on person, property or the exercise of a right or privilege
e) Levied by the state which has jurisdiction over the subject or object of taxation
f) Levied by the lawmaking body of the state
g) Levied for public purpose/s

L. REQUISITES OF A VALID TAX

a) It must be for public purpose
b) The rule on taxation should be uniform
c) Either the person the property being taxed must be within the jurisdiction of the taxing authority
d) That the assessment and collection be in consonance with the due process clause
e) The tax must not infringed the inherent and constitutional limitations of the power of taxation

M. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS

1. Tariff

Tax Tariff
Nature General Specific
Taxing Authority National and Local Government National Government
Property Involved Domestic and imported properties Imported and exported properties
Agency BIR or LGU Bureau of Customs

2. Toll

Tax Toll
Definition Enforced proportional contributions A sum of money for the use of something, a
from persons and property consideration which is paid for the use of a
property which is of a public nature; e.g., road,
bridge
Basis A demand of sovereignty A demand of proprietorship
Amount No limit as to the amount Amount of toll depends upon the cost of
construction or maintenance of the public
improvement used
Authority May imposed only by the government May be imposed by the government or private
individuals or entities

3. License fee

Tax License Fee
Definition Enforced proportional contributions it is an exaction of the right:
from persons and property -‐ to use or dispose property, or
-‐ to pursue business, occupation or
calling, or
-‐ to exercise a privilege
Purpose Imposed for revenue purposes Imposed for regulatory purposes
Basis Imposed under the power of taxation Imposed under the police power of the State
Amount No limit as to the amount of tax Amount of license fee that can be collected is
limited to the cost of the license and the
expenses of police surveillance and regulation
Time of payment Normally paid after the start of business Normally paid before the commencement of
the business
Effect of non-‐payment Failure to pay the tax does not make the Failure to pay a license fee makes the business
business illegal illegal
Surrender Taxes, being the lifeblood of the State, License fee may with or without consideration
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cannot be surrendered excepts for lawful
considerations
Exemption LGU can grant exemption on taxes Generally, LGU cannot grant

4. Special assessment

Tax Special Assessment
Definition Enforced proportional contributions An enforced proportional contribution from
from persons and property owners of lands especially benefited by public
improvements
Basis Based on necessity Based wholly on benefits
Subject Levied on: Levied only on land
(a) Persons;
(b) Property; or
(c) Acts.
Scope Has general application It is exceptional both to the time and place of
imposition
Person Liable It is a personal liability of the Not a personal liability of the person assessed;
taxpayer his liability is limited only to the land involved
Surrender Cannot be surrendered without Can be surrendered
compensation

5. Debt

Tax Debt
Basis Based on law Based on contract or judgement
Effect of non-‐ Taxpayer may be imprisoned for his No imprisonment for failure to pay a debt
payment failure to pay the tax (except poll tax)
Mode of payment Generally payable in money May be payable in money, property or services
Assignability Not assignable Can be assigned (you can let the other person
pay the debt on your behalf)
Interest Does not draw interest unless delinquent Draws interest if stipulated or delayed
Authority Imposed by public authority Can be imposed by private individuals
Prescription Prescriptive periods for tax are Civil code governs the prescriptive period of
determined under the NIRC debts

N. KINDS OF TAXES

1. As to object
a) Personal, capitation, or poll tax
-‐ Example: Poll tax; Community Tax
b) Property tax
-‐ Example: real property tax
c) Privilege tax
-‐ Example: income tax

2. As to burden or incidence
a) Direct
-‐ The burden and incidence is on one person
-‐ Example: income tax
b) Indirect
-‐ The burden is on one person while the impact and incidence is shifted to another person
-‐ Example: VAT

3. As to tax rates
a) Specific
-‐ tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement
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-‐so long as the item falls within the classification being taxed then it is subject to that particular tax; no need for an
appraisal
b) Ad valorem
-‐ tax of a fixed proportion of the value of the property with respect to which the tax is assessed
-‐ since this involves the value of the property, it needs an appraisal by appraisers
c) Mixed
-‐ partly specific and/or party ad valorem
-‐ applicable to custom duties

4. As to purposes
a) General or fiscal
b) Special, regulatory, or sumptuary

5. As to scope or authority to impose
a) National – internal revenue taxes
b) Local – real property tax, municipal tax

6. As to graduation
a) Progressive
-‐ the tax rate increases as the tax base increases
b) Regressive
-‐ the tax rate increases as the tax base decreases
c) Proportionate
-‐ it has a fixed percentage

GENERAL PRINCIPLES (CASE DOCTRINES) as mentioned by Atty. A

MCIAA vs Marcos
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so
that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through their Constitutions. Our Constitution, for
instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a progressive system of taxation.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes
granted to natural or juridical persons, including government-‐owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-‐owned corporation, it necessarily follows that its exemption from such tax granted it in
Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is
qualified by Section 232 and 234.

CREBA vs Romulo
MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only
considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which
are equally necessary to produce gross income, were not taken into account.31 Thus, pegging the tax base of the MCIT to a corporation’s
gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."32
SC disagrees.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power
derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the
common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. [SCOPE OF THE POWER OF CONGRESS]

15

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal
check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay
it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a
presumption of constitutionality.

PKSMMN, et al. vs Executive Secretary
The Court has also recently declared that the coco-‐levy funds are in the nature of taxes and can only be used for public purpose.46 Taxes are
enforced proportional contributions from persons and property, levied by the State by virtue of its sovereignty for the support of the
government and for all its public needs.47 Here, the coco-‐levy funds were imposed pursuant to law, namely, R.A. 6260 and P.D. 276. The
funds were collected and managed by the PCA, an independent government corporation directly under the President.48 And, as the
respondent public officials pointed out, the pertinent laws used the term levy,49 which means to tax,50 in describing the exaction.

Southern Cross Cement Corporation vs CMAP
Respondents also make the astounding argument that the imposition of general safeguard measures should not be seen as a taxation
measure, but instead as an exercise of police power. The vain hope of respondents in divorcing the safeguard measures from the concept of
taxation is to exclude from consideration Section 28(2), Article VI of the Constitution.

POWER TO TAX MAY BE USED TO IMPLEMENT POLICE POWER

The motivation behind many taxation measures is the implementation of police power goals. Progressive income taxes alleviate the margin
between rich and poor; the so-‐called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of
these potentially harmful products. Taxation is distinguishable from police power as to the means employed to implement these public
good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects of
taxation, and the belief that taxes are the lifeblood of the state. These considerations necessitated the evolution of taxation as a distinct
legal concept from police power. Yet at the same time, it has been recognized that taxation may be made the implement of the states
police power.

X x X x X x X

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.49
The Court acknowledges the basic postulates ingrained in the provision, and, hence, governing in this case. They are:

(1) It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts. Thus, the authority cannot come from the Finance Department, the National Economic Development
Authority, or the World Trade Organization, no matter how insistent or persistent these bodies may be.

(2) The authorization granted to the President must be embodied in a law. Hence, the justification cannot be supplied simply by
inherent executive powers. It cannot arise from administrative or executive orders promulgated by the executive branch or from the
wisdom or whim of the President.

(3) The authorization to the President can be exercised only within the specified limits set in the law and is further subject to
limitations and restrictions which Congress may impose. Consequently, if Congress specifies that the tariff rates should not exceed a
given amount, the President cannot impose a tariff rate that exceeds such amount. If Congress stipulates that no duties may be
imposed on the importation of corn, the President cannot impose duties on corn, no matter how actively the local corn producers lobby
the President. Even the most picayune of limits or restrictions imposed by Congress must be observed by the President.

There is one fundamental principle that animates these constitutional postulates. These impositions under Section 28(2), Article VI fall
within the realm of the power of taxation, a power which is within the sole province of the legislature under the Constitution.
Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and other similar tax levies involving the
importation of foreign goods. Assuming that Section 28(2) Article VI did not exist, the enactment of the SMA by Congress would be voided
on the ground that it would constitute an undue delegation of the legislative power to tax. The constitutional provision shields such
delegation from constitutional infirmity, and should be recognized as an exceptional grant of legislative power to the President, rather than
the affirmation of an inherent executive power.

CIR vs Central Luzon Drug Corporation
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only
to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release.
Equivalent to the payment of property taken by the State, such issuance -‐-‐ when not done within a reasonable time from the grant of the
16

discounts -‐-‐ cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately
deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction
in its revenues.79

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.80Tax measures are but
"enforced contributions exacted on pain of penal sanctions"81 and "clearly imposed for a public purpose."82 In recent years, the power to tax
has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.83

While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not
intended to take away rights from a person and give them to another who is not entitled thereto."84 For this reason, a just compensation
for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even85 -‐-‐ without the discounts yet -‐-‐ will surely start to incur losses
because of such discounts. The same effect is expected if its mark-‐up is less than 20 percent, and if all its sales come from retail purchases
by senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its gross sales. Operating at a loss through no fault of its own,
it will realize that the tax credit limitation under RR 2-‐94 is inutile, if not improper. Worse, profit-‐generating businesses will be put in a
better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.

CIR vs Acosta
After a thorough consideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have to
stress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise.

Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. As well said in a prior
case, revenue laws are not intended to be liberally construed.22 Considering that taxes are the lifeblood of the government and in Holmes’s
memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.

CIR vs Solidbank Corporation
Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x taxing the same person twice by
the same jurisdiction for the same thing."117 It is obnoxious when the taxpayer is taxed twice, when it should be but once.118 Otherwise
described as "direct duplicate taxation,"119 the two taxes must be imposed on the same subject matter, for the same purpose, by the same
taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.120

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in
the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.

Second, although both taxes are national in scope because they are imposed by the same taxing authority -‐-‐ the national government
under the Tax Code -‐-‐ and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they
affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it
is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage
tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within the same jurisdiction, for the
same purpose, in different taxing periods, some of the property in the territory.125Subjecting interest income to a 20% FWT and including it
in the computation of the 5% GRT is clearly not double taxation.

CIR VS S.C. Johnson and Son, Inc.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or
may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded
by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the
RP-‐US Tax Treaty and Article 12 (2) (b) of the RP-‐West Germany Tax Treaty, above-‐quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for
17

royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the
income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.

We accordingly agree with petitioner that since the RP-‐US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to
the Philippines on royalties as allowed under the RP-‐West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to
be construed strictissimi juris against the person or entity claiming the exemption. 27The burden of proof is upon him who claims the
exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is
claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on
royalties under the RP-‐US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-‐West Germany Tax Treaty.

CIR vs Estate od Benigno Toda
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving
device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on
the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.23

[elements of] Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-‐payment of tax
when it is shown that a tax is due;
(2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental";
and
(3) a course of action or failure of action which is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the
Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was
debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited
and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not
the intermediary Altonaga.

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

CIR vs The Philpiine American Accident Insurance Company, Inc.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is clearly subject to the tax
being levied against him. Unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-‐settled rule
that the imposition of a tax cannot be presumed.17Where there is doubt, tax laws must be construed strictly against the government and in
favor of the taxpayer.18This is because taxes are burdens on the taxpayer, and should not be unduly imposed or presumed beyond what the
statutes expressly and clearly import

PAGCOR vs BIR
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed.24 As a rule, tax exemptions are construed strongly against the claimant.25 Exemptions must be
shown to exist clearly and categorically, and supported by clear legal provision.

CIR vs St. Luke’s Medical Center
There is no dispute that St. Luke's is organized as a non-‐stock and non-‐profit charitable institution. However, this does not automatically
exempt St. Luke's from paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a
charitable institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated exclusively" for charitable
purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.

SEC. 30. Exemptions from Tax on Corporations. -‐ The following organizations shall not be taxed under this Title in respect to income
received by them as such:
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
18

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to
engage in "activities conducted for profit" without losing its tax exempt status for its not-‐for-‐profit activities. The only consequence is that
the "income of whatever kind and character" of a charitable institution "from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from for-‐
profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

CIR vs Mitsubishi Metal Corp.
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.

KEPCO vs CIR
Well-‐settled in this jurisdiction is the fact that actions for tax refund, as in this case, are in the nature of a claim for exemption and the law is
construed in strictissimi juris against the taxpayer. The pieces of evidence presented entitling a taxpayer to an exemption are
also strictissimi scrutinized and must be duly proven

Asia International Auctioneers, Inc.
A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean slate.23
A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of the taxing authority

Planters Product, Inc. vs Fertiphil Corporation
The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that
public purpose should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to
promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-‐cost housing and urban or agrarian
reform.

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI. We cannot agree with PPI
that the levy was imposed to ensure the stability of the fertilizer industry in the country. The letter of understanding and the plain text of
the LOI clearly indicate that the levy was exacted for the benefit of a private corporation.

NPC vs City of Cabanatuan
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the local
government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-‐owned or controlled corporations and all other units of government were that such privilege
resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises."78 With the added burden of
devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying
taxes or other charges due from them.

Abakada Guro Party List vs Ermita
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that
Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall ‘evolve a progressive system of taxation.’ The constitutional provision has been interpreted to mean simply that
‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ (E. FERNANDO, THE CONSTITUTION
OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax
19

system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation
of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing
such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, §4 amending §103 of the NIRC)

CIR vs Baier-‐Nickel
The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.

CIR vs American Express International
Services Subject to Zero VAT
As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax.51Goods and services are
taxed only in the country where they are consumed. Thus, exports are zero-‐rated, while imports are taxed.

Confusion in zero rating arises because petitioner equates the performance of a particular type of service with theconsumption of its output
abroad. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the outcome of
such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its foreign clients -‐-‐
the ROCs outside the country -‐-‐ by receiving the bills of service establishments located here in the country and forwarding them to the
ROCs abroad. The consumption contemplated by law, contrary to petitioner’s administrative interpretation,52 does not imply that the
service be done abroad in order to be zero-‐rated.

Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer’s release from any past or future liability x x x."54 The services rendered
by respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from
service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can
only be a "predetermined end of a course"55 when determining the service "location or position x x x for legal purposes."56 Respondent’s
facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under the
destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent.

Respondent’s Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the [BSP]."57 Thus, for the supply of service to be zero-‐rated as an exception, the law merely requires that first, the service be performed in
the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable
foreign currency accounted for in accordance with BSP rules and regulations.

Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed
in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than "processing,
manufacturing or repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition
that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-‐rated.

Tax Situs of a Zero-‐Rated Service
The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-‐rated service. Under this criterion, the
place where the service is rendered determines the jurisdiction60 to impose the VAT.61Performed in the Philippines, such service is
necessarily subject to its jurisdiction,62 for the State necessarily has to have "a substantial connection"63 to it, in order to enforce a zero
rate.64 The place of payment is immaterial;65much less is the place where the output of the service will be further or ultimately used.

Lung Center vs Quezon City
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner shall enjoy the tax
exemptions and privileges:

20

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-‐profit, non-‐stock corporation organized primarily to help combat the high
incidence of lung and pulmonary diseases in the Philippines, all donations, contributions, endowments and equipment and supplies to
be imported by authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual
use and benefit of the Lung Center, shall be exempt from income and gift taxes, the same further deductible in full for the purpose of
determining the maximum deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the Government or any
political subdivision or instrumentality thereof with respect to equipment purchases made by, or for the Lung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as well as
the building constructed thereon. If the intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2.

CIR vs CTA, Manila Golf
An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but rather to the subject of the tax and
the tax rate. In the portion of a revenue bill which actually imposes a tax, a section identifies the tax and enumerates the persons liable
therefor with the corresponding tax rate. To construe the word "item" as referring to the whole section would tie the President's hand in
choosing either to approve the whole section at the expense of also approving a provision therein which he deems unacceptable or veto
the entire section at the expense of foregoing the collection of the kind of tax altogether. The evil which was sought to be prevented in
giving the President the power to disapprove items in a revenue bill would be perpetrated rendering that power inutile

American Bible Society vs City of Manila
The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate
religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that
there is a clear and present danger of any substantive evil which the State has the right to prevent". (Tañada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee herein involved is imposed upon appellant for its
distribution and sale of bibles and other religious literature which is constitutionally prohibited.

Smart Communication vs City of Davao
VI. Non-‐impairment Clause of the Constitution
Another argument of Smart is that the imposition of the local franchise tax by the City of Davao would violate the constitutional prohibition
against impairment of contracts. The franchise, according to petitioner, is in the nature of a contract between the government and Smart.47

However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution. As previously discussed, the
franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the
franchise, we are constrained to rule against it. The "in lieu of all taxes" clause in Section 9 of R.A. No. 7294 leaves much room for
interpretation. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption.

Moreover, Smart’s franchise was granted with the express condition that it is subject to amendment, alteration, or repeal.48 As held in
Tolentino v. Secretary of Finance: 49

It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing
power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation
of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting
contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and
good order of society.

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax
exemption has been granted for a valid consideration.

21

A. INCOME TAXATION

INCOME TAX SYSTEMS
a) Global tax system – which collates all forms of income and then make one deductions which are applicable and subject the same to one
tax rate. There’s only one tax base; there’s also one tax rate. So regardless of the form of income, they are aggregated into one and then all
deductions are also aggregated into one. You make the deductions one time subject the same to one tax rate

b) Schedular tax system – Different types of types or forms of income are subjected to different taxes. Different tax rate for every form of
income.
-‐ If this is compensation income, this is subject to (let’s say) 5%.
-‐ If this is interest income, this is subject to (let’s say) 10%.

c) Semi-‐schedular or semi-‐global tax system – The Philippines follows this. Both of the above systems, Global and Schedular are being
followed depending on the type of tax payers.
-‐ So you have passive income subject to final tax. Global System, one tax one income.
-‐ Semi-‐schedular, this is clearly presented by our income tax table for individuals. It follows a particular schedule.
-‐ Different income subject to different tax rate.
-‐ So business income, compensation income, they are subject to different tax rates.

FEATURES OF THE PHILIPPINE INCOME TAX LAW

a) It is a direct tax, it means that the burden cannot be shifted to another taxpayer.
b) It is progressive, which means that as the tax base increases, the tax rate also increases, specifically if your income increases, you will
be subject to higher taxes. This is clearly manifested by the schedule of tax rates for the individual taxpayer.
c) It is comprehensive, meaning it covers all forms of income. Tax as a general is unlimited. It is able to impose taxes on all forms of
income.
d) It is semi-‐schedular or semi global.

CRITERIA IN IMPOSING PHILIPPINE INCOME TAX

a) Citizenship Principle – a citizen of the Philippines is subject to Philippine Income Tax whether the income is obtained within or without
the Philippines.
-‐ Whereas, for a non-‐resident citizen, only for the income within.
-‐ So long as you are a citizen, you are subject to income tax.

b) Residency Principle -‐ If you’re an alien, following the citizenship principle, supposedly not subject to tax, but because we also follow
the residency principle, we also impose taxes on the resident alien.
-‐ Resident aliens are subject to income tax for income earned within the Philippines.

c) Source Principle – So even if you’re a non-‐resident alien, you may still be subject to income tax here in the Philippines if you have an
income derived here.
-‐ Case of Bayer Nickel discusses the Source Principle.

TYPES OF PHILIPPINE INCOME TAX

a) Individual Taxes – individual taxpayers
b) Corporate Taxes – corporations, partnerships and joint ventures

TAXABLE PERIOD

a) Calendar Period – Any 12-‐month period ending on December 31.
b) Fiscal Period – Any 12-‐month period ending other than on December 31.
c) Short Period – This is applicable to entities or persons whose taxable period has been terminated. A taxpayer changes its taxable
period and it will be required to file a so called short period return, meaning, it’s less than its usual 12-‐month period.
§ Example: One client, last July 2014, changes its calendar year from Dec 31 to March 30 of every year. When their by-‐laws of
corporation has to be amended, you have to put there that the fiscal year has already been changed. You also have to apply a
change of calendar year with the BIR. The BIR would require a filing of a short period return, the latter should cover the
difference in the period of change.
22

§ Dec 31 to March 30; I applied for it somewhere in June 2014. Ni-‐agi naman ang December 31, right? So they are supposed to
file an income tax return April 15 of that year. So na-‐cover na ang period. So if they will be changing their period from
December to March 30, when will be the deadline of their filing of their ITR? It would be on 15th day of the fourth month. So,
July 15.
§ So for that period, nay period na di ma-‐cover, let’s just assume that the by-‐laws were approved by the SEC somewhere in
August na. So supposedly ako 12-‐month kay nagsugod na pag-‐April, unya na-‐approve naman pagka-‐August. Supposedly naa
koy period (month) na wala na-‐report kay wala man to siya na-‐cover sa ako 12 month. Kung August ko nagsugod, unsa
naman lang na months ako ma-‐report? Wala man na siya kaabot og 12 months. What the BIR would require in addition to
your application, is a short period return from, January 1 to March 30. Kay mao man na siya ang wala na-‐recover sa previous
na report.
§ Ayaw nalang ninyo sobraa og sabot. Basta mao nana. J -‐ Sir
§ The BIR requires the filing of a short period return between the months of the difference of your previous Calendar year to
your current Fiscal year.
§ Another Example: Fiscal year to another fiscal year. January 31 to February 28; one month lang ang imung himoong short
period return.
§ This type of period applies either because you will change from Fiscal period to Calendar period or from Fiscal period to
another Fiscal period; or when the taxpayer will have to dissolve its business.
§ Example: Calendar Period and you decide to dissolve your business on June 30, you will have to file an ITR along with your
financial statements good for January to June 30. That’s less than 12 months. That is a short period.

KINDS OF TAXPAYERS

Taxpayer Within Without
RC T T
NRC and OCW T X
RA T X
NRA (ETB and NETB) T X
DC T T
FC T X

INDIVIDUALS:

v Citizens of the Philippines – you base it on the definition given by the Constitution.
o Resident Citizen – he establishes his dwelling here in the Philippines; stayed in the Philippines for most of the time
during the year.
o Non-‐Resident Citizens – refer to NIRC; Title II, Section 22 (E): The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
§ Changed your residence from the Philippines to abroad.
§ This is usually applicable to persons who have stayed abroad for a long period already. That it
becomes incontrovertible that they are residents of the foreign countries.

(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.
§ It does not require a period. If you leave the Philippines during the year and then the reason for which
you have already been granted an immigrant visa by some other country. Automatically you will
become an NRC regardless of the period.
§ Bisan pa’g nag-‐stay kas Philippines until November. And on that month, you receive your immigration
visa and you left the Philippines right away, you are already considered as NRC because the reason for
your leaving the Philippines is because you are already considered as an immigrant.
§ When you go abroad for the reason of permanent employment, you will become an NRC
automatically. Example, you are a nurse, you applied in the USA and on August of 2015, you received a
definite invitation and acceptance of an employment in a hospital in USA and then right away, on
September you left the Philippines.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable year.
23

§ Still refers to employment but requires a period; which is most of the time during the year. His
employment requires him to be present abroad for most of the time during the year.
§ This refers only to temporary arrangement.
§ As in the case when the employee is seconded abroad by a Domestic Corporation to a Foreign
Corporation which is also a sister company or a principal office of some entity here in the Philippines.
For example, you are an employee of Dash Engineering, a Japanese entity here in the Philippines. You
will be sent to Japan for some project that they have; you will stay there for a year during 2016. Here
you are staying most of the time of the year abroad and not on a permanent basis.
§ Most of the Time during the Year – defined as 183 days. If you stay abroad for at least 183 days,
automatically, you are considered as an NRC.
ü But the reason of your stay abroad has to be for employment.
§ In the succeeding provision, it provides an exception for OFWs or OCWs who are also considered as
NRCs.
ü If you’re an OFW or OCW, do you have account your number of days that you will stay
abroad for you to be considered as NRC?
ü No. But it is required that the employment contract must pass through or be registered by
the Philippine Overseas Employment Authority or POEA.
ü The same goes for the seamen but the requirement is that you must be employed as a
member of a complement of a vessel which is exclusively engaged in international trade.
§ The OFWs and OCWs are automatically considered as NRCs because they contribute to the foreign
currency reserves of the Philippines.

(4) A citizen who has been previously considered as nonresident 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 a nonresident
citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.
§ Here, it will require a timeline. This is only applicable to a person who has been previously classified as
NRC.
§ If from January to August, last year, you were considered as an NRC, then you decided to return to the
Philippines. The purpose of returning must be to permanently reside here in the Philippines. You
returned here sometime in August, you derived income from January to August, abroad. You received
income worth 1m, now while you are here in the Philippines, you continue to earn income abroad,
500k.
ü From January to August: NRC, as such you are only taxable for income within the Philippines.
This 1m from abroad, will not be subject to tax.
ü For 500k, from the moment you return here in the Philippines up to December of this year,
you will be already considered RC. This is an income derived abroad. This is now subject to
tax because RCs’ income are taxable within and without the Philippines.
ü Hybrid NRC. You are considered a Hybrid on the year that you arrive here in the Philippines
for purposes of permanent residency.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.
§ This paragraph applies to all NRCs. Not a type of NRC.

v Alien is someone who did not comply with the requirements of the Constitution. A foreigner, not a citizen of the Philippines.
o Resident Alien – A foreigner residing the Philippines. As a rule if a foreigner stays in the Philippines for at least a year, he
is considered as a resident alien but that is not a hard and fast rule. It will depend on your intention of staying here in the
Philippines.
§ If your intention of staying here in the Philippines is definite and you have already accomplished that purpose
and then you just went back abroad, as a rule, you are not considered as a resident alien.
§ If your purpose is indefinite, you are considered as a resident.
§ As an alien, you present your clear intention of your stay here in the Philippines.
§ Exception: Even if your intention is definite but your definite purpose would require you to stay here in the
Philippines for an extended period; so that you will make the Philippines your temporary residence, you would
still be considered as a resident here in the Philippines.
• As in the case of a project which extends, like the one in Mactan Airport, you have Indians working in
the airport, the airport project would be probably be done in three years, their intention of staying is
definite, just to finish the project; because of the period of their stay.
24

• There is really no hard and fast rule on the period of stay in the Philippines.
§ Taxable within the Philippines only.

o Non-‐Resident Alien – Their purpose here in the Philippines to be a transient or a sojourner, like for purposes of vacation.
§ NRA-‐ETB – If you stay here in the Philippines as a transient or sojourner but stays is up to 181 days. At least 181
days here in the Philippines.
• *Memory Aid:
o NRA – at least 181 days
o NRC – at least 183 days
o Whichever is favorable to the Philippines
• Taxable for income within the Philippines.
§ NRA-‐NETB -‐ If you stay here in the Philippines as a transient or sojourner but stays is did not reach 181 days.
• Taxable only for income within the Philippines

v Estates and Trust – Special Form of Individual Taxpayers for purposes for taxation.
o No residency required so long as they are established here in the Philippines. It has to be a Philippines estate or trust.
o It could also happen that there is an estate owned by a Resident Alien. In other words, estates of RAs are also included.

v The Supreme Court believes that there is a special class of individual taxpayer, a minimum wage earner but this minimum wage
earner could be classified as a resident citizen or a resident alien; refers to a person who is employed in the PH

CORPORATIONS:

Section 22. Definitions -‐ When used in this Title:

(B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-‐stock companies, joint accounts
(cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General
professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.

-‐ Different definition from that in the Corporation Code
-‐ A corporation is not limited to that entity which registered with the SEC and granted a separate entity under the Corporation
Code, it includes partnerships, joint ventures, insurance companies
-‐ How is a corporation taxed in the PH?
1. It depends if Domestic Corporation (DC) or Foreign Corporation (FC)
2. Classification of corporate taxpayers based on their citizenship and residency
-‐ How do we classify corporations?
• DOMESTIC CORPORATION
1. Created or organized and registered in the PH under PH laws
2. Taxed 30% from sources within and without the PH

• FOREIGN CORPORATION
o Could be registered in the PH or not but under a foreign law
o The law which creates it has to be foreign
o Taxed 30% from sources within the PH
o May be Resident Foreign Corporation or Non Resident Foreign Corporation

• RESIDENT FOREIGN CORPORATION
§ When it is doing business in the Philippines
• The term “doing business” is defined in Section 3(d) of Republic act No. 7042 or the Foreign
Investments Act of 1991. In the said law, “doing business” includes:
x x x soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totalling one hundred eighty (180) days
or more; participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the performance of acts or
25

works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase “doing business” shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having a nominee director or officer
to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account.
• There is actually a case discussing the two tests to apply:
o Continuity Test – it is more than a mere isolated transaction
o Substantive Test – corporation is normally engaged in activities incident to or in
progressive prosecution of earning commercial gain or pursuing the objects of such FC
§ Ex: FC engaged in manufacturing optical parts of a camera; if that FC has a branch
office in the PH and that branch office continues to manufacture the optical parts
then you can say that this is a RFC based on the Continuity and Substantive test
• FC can do business in the PH either thru domestic subsidiary or branch or representative office
• SUBSIDIARY – considered a domestic taxpayer
• BRANCH OFFICE – classified as a RFC because it is licensed to do business in the PH
• REPRESENTATIVE OFFICE – RFC because it is granted a license to do business in the PH

Representative Office Branch
-‐ Does not earn income in the PH -‐ Does business just like any FC doing
-‐ Does not engage in any sales business in the PH
transaction or activity which allows -‐ Mere extension of the personality of
it to earn profit the FC
-‐ Exempt entities for tax purposes

§ Representative Office
o Does not earn income in the PH
o It is set up merely to lialise to set up customers here but its never gonna engage in any
sales transaction or any activities which allows it to earn profit
o Thats why they are exempt entites for tax purposes
§ Branch Office
o Does business just like any foreign corporation doing business in their own country
o It is a mere extension of the personalty of the FC

• NON RESIDENT FOREIGN CORPORATION

PARTNERSHIP:

-‐ Under the Civil Code: By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
-‐ For tax purposes, it is included in the definition of a corporation EXCEPT General Professional Partnership
-‐ TAXABLE PARTNERSHIP v GPP
-‐
TAXABLE PARTNERSHIP GPP
-‐ Purpose is to derive profit -‐ Objective is to pursue a profession
-‐ Taxed as a corporation -‐ Not taxed as a corporation; partners
-‐ Considered passive income, are individually taxed
specifically called DIVIDEND -‐ Personal and additional exemptions
are granted to the partners
-‐ Active income subject to 5-‐32%

-‐ PARTNERSHIP v JOINT VENTURE
- A JV ordinarily has one objective which is to finish a project
-‐ The SC always ruled on cases based on the definition of a partnership under the Civil Code. However, there are certain cases which
do not follow such definition yet the SC decided that it is still a partnership
-‐ Cases involving unregistered partnerships:
1. Evangelista Case (?)
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§ Involves four siblings who inherited the property. They did not make any improvements they simply sold it. BIR
taxed them as an unregistered partnership.
§ SC said no because there was really no intention to do business. The earning of the profit was merely incidental
to the sale transaction

2. LORENZO ONA v CIR (case digest from the internet)
§ Facts:
• Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children. A civil case
was instituted for the settlement of her state, in which Oña was appointed administrator and later on
the guardian of the three heirs who were still minors when the project for partition was approved.
Although the project of partition was approved by the Court, no attempt was made to divide the
properties and they remained under the management of Oña who used said properties in business by
leasing or selling them and investing the income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result, petitioners’ properties and investments gradually
increased. Petitioners returned for income tax purposes their shares in the net income but they did
not actually receive their shares because this left with Oña who invested them.
§ Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax.
§ Issue:
• W/N there was a co-‐ownership or an unregistered partnership
• W/N the petitioners are liable for the deficiency corporate income tax
§ Held:
• Yes. For tax purposes, the co-‐ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce profits for the heirs in proportion to
their respective shares in the inheritance as determined in a project partition either duly executed in
an extrajudicial settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason is simple. From the moment of such partition, the heirs are entitled already to
their respective definite shares of the estate and the incomes thereof, for each of them to manage
and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly, he
becomes liable individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-‐heirs under a single management to be used with the intent of
making profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership is
formed.

3. AFISCO INSURANCE v CA
§ petitioners-‐insurance companies formed a Pool Agreement, or an association that would handle all the
insurance businesses covered under their quota-‐share reinsurance treaty and surplus reinsurance treaty with
Munich is considered a partnership or association which may be taxed as a corporation.
§ Pool Agreement or an association that would handle all the insurance businesses covered under their quota-‐
share reinsurance treaty and surplus reinsurance treaty with Munich may be considered a partnership because
it contains the following elements: (1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. This common fund pays for the administration and
operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of the ceding companies. (3) While, the
pool itself is not a reinsurer and does not issue any policies; its work is indispensable, beneficial and
economically useful to the business of the ceding companies and Munich, because without it they would not
have received their premiums pursuant to the agreement with Munich. Profit motive or business is, therefore,
the primordial reason for the pool’s formation.

JOINT VENTURE:

-‐ GR: Taxable as a corporate taxpayer
-‐ XPN: Joint Venture or consortium formed for the purpose of
• Undertaking construction projects or
• Engaging in petroleum, coal, geothermal and other energy operations
• Pursuant to an operating or consortium agreement under a service contract with the govt.

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-‐ To be taxable, what is necessary?
1. Each party to the JV must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, etc.
2. Profits must be shared among the parties
3. There must be a joint proprietary interest
4. Right of mutual control over the subject matter of the enterprise
5. Usually, there is a single business transaction

-‐ Two instances when a JV becomes a taxable entity:
1. DC jointly owned by individuals and by two or more existing DC and/or FC that is INCORPORATED under the laws of the
Philippines
§ Taxable even if engaged in the business of construction or energy related activity
2. UNINCORPORATED JV or consortium engaged in any other line of business than construction or energy-‐related activity
with operating contract with the govt.

-‐ JV and consortiums engaged in construction are exempted to encourage domestic contractors who cannot compete with foreign
contractors so that they will pool their resources together and be competitive
-‐ Those engaged in energy related activities are exempt to promote the energy program of the govt and to encourage public
utilities

ESTATE AND TRUST:

ESTATE
-‐ An estate is created by operation of law, when an individual dies, leaving properties to his compulsory or other heirs
-‐ Only estates under judicial settlement can be treated as taxable entity
• Does this mean that it if it is not settled judicially it is not subject to tax? No because if settlement is extrajudicial, income will
not be taxed on the estate but on the heirs who will receive the income
-‐ What is the advantage if settled judicially and considered as a taxable entity? It can avail of the basic personal exemption of
50,000 ( though that is still contentious at the moment, 20k or 50k? the agreement of most authors is 50k because after all estates
are to be treated as an individual taxpayer)
• Why the distinction? Because judicial settlement it will take a long time and the govt does not want to be deprived of the
taxes it should have earned.
• so that the government has a continuous source of revenue or income they treat it as taxable entity. It seemed that it back
fired because most of the estates are not yet settled and yet they continue not to earn the profit they supposed to earn. I
noticed it on practice that there isn’t much settlement o the estate. They would wait for like 30 years before they settle the
estate. Make it a habit in your family to make a prompt settlement of the estate so that you will not have to pay interests and
penalties for estate tax.

TRUST
These are called fiduciary tax payers –Estate and Trust.

Q: When is trust taxable?
A: When it is irrevocable as to corpus (the Principal) and income. A trust is said to be irrevocable when the person who grants the
estate (trust) cannot make use of the principal and income for its own purpose. It can only be used for the benefit of the beneficiary.
Irrevocable also as to the beneficiary. If it is revocable such that the grantor of the trust can make use of the principal and/or income
then it shall not be considered as a taxable trust entity.

Q: But does that mean that it is no longer subject to tax?
A: It is still subject to tax but NOT on the level of trust but on the level of the grantor.

Q: Is Employee’s Trust a Taxable Trust?
A: Generally exempted provided it is under or set as reasonable private benefit plan. And not merely voluntary. For purposes of the
bar, take note of this.

INCOME TAXATION

Definition
- Income tax is defined as a tax on all yearly profits arising from property, professions, trades or offices. It’s a tax on person’s
income, emoluments, profits and the like
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- SIR: If you notice, it’s on yearly profits. It’s actually referring to a 12-‐month period which can either be Fiscal or Calendar and in
fact it can also be shortened.

Nature
- An excise tax. It’s a tax on the privilege to earn income.

General principles
- resident citizen-‐ taxable for income from within and without while the rest are taxable only for income within.
- Corporate Taxpayer-‐ Domestic is taxable for income within and without and the rest are only taxable for income within.

INCOME

Q: How is income defined?
A: all wealth which flows into the taxpayer. Income is the fruit, Capital is the tree. Jurisprudence defined it as the flow of wealth other than
the mere return of capital.

SIR: Capital is the wealth, Income is the service of wealth. Any amount which is received by the taxpayer from his profession, from the
conduct of trade or business or for any services rendered.

Q; Income is taxable when?
A: Elements:
a. there must be an income, gain or profit;
b. must be received (actual or constructive) during the taxable year, and
c. must not be exempt from income tax.

TESTS IN DETERMINING WHETHER INCOME IS TAXABLE OR NOT

1. REALIZATION TEST

Elements:
a. that the earning process must be complete or virtually complete
b. that there was an exchange or transaction

SIR: an income is realized when it is borne out of a transaction. So if there is no transaction then there is no realization of income. This is
the basis of this test. There has to be an earning process and such process must be complete.

To illustrate: In the case of share of stocks. In the stock market, PLDT shares fluctuate every day. You originally bought it at P1 and now P25.
Can u say as a holder of the shares you earn income by the fact that the shares you are holding now is P25? NO. Although there was an
earning process because in fact you already bought the share but it is not complete. It will only be completed when you sell the shares and
be able to earn the P25. Then you can say that an income is said to be realized. So for purposes of this test, you must determine if there is a
transaction, if none, then no realized income.

In the case of your piece of land. Mere increase in the value of your land is not a realized income. It will only be realized when you sell your
land because then there will be a transaction. But you may say na di ba sir if nipurchase ka dib a transaction na. Yes but that income you
looked at it at the point of view of the seller. Now what you look at is on your point of view. That you as a holder of the land enters into
transaction and from such transaction you were able to generate income, then you can say that such income is realized. Basta class, in
general even in accounting, if there is sale there is realized income.

There is no taxable income until there is a separation from capital of something of exchangeable value thereby supplying the realization or
transmutation which would result in the receipt of income. If there is a transaction there can be a realized income. But of course, you have
to compare the cost and the amount you received because even if there is a transaction if the amount you received is less than the amount
you paid for, is there income? NO, there is loss. So no taxable income then. Again, it doesn’t stop from the fact that there is a transaction; it
must be that the amount you received is higher than your cost.

2. CLAIM OF RIGHT DOCTRINE

SIR: This doctrine holds that there is taxable income or gain then there is already a claim of right to the alleged income or gain and there is
an absence of a definite unconditional obligation to return or repay that which would otherwise constitute a gain. If you already received
profit or income and yet there is still an obligation for you to return, still you considered it as taxable income because you already received
it, you already have a claim. Meaning there is an obligation on your part to return it but there is no prohibition for you not to use it. That
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the Philippines does not adhere to this doctrine is a CTA decision. The doctrine is from U.S. They have a provision in their tax code which
allows you to deduct from your succeeding income the amount which you returned. So example in 2015, you received an amount but there
is a condition that you have to return it, but no prohibition not to use it. If condition realized in 2016, so you will have to return. The US you
are allowed to deduct it from your 2016 income. In the Philippines we cannot do that because we are limited to what can be included in the
itemized deduction. Return of income previously earned is not an allowable deduction. So CTA believes that we shouldn’t adhere to this
doctrine. So even if you have the obligation to return it, you cannot deduct it from your succeeding income. That is not the position of SC.
So under the Philippine Income Taxation, we still adhere to the Doctrine of Claim of Right or Doctrine of Ownership, Command or Control.
So if you already have a claim of right over the income, then it is considered as taxable income. You are able to establish your right over
that particular amount it’s considered as taxable income.

3. DOCTRINE OF PROPRIETARY TEST OR ECONOMIC BENEFIT TEST

SIR: If there is an increase in your wealth, that is already considered as a taxable income.

Example: Stock Option granted to an employee. It is a compensation income therefore it is taxable. You are supposed to tax it if it is already
granted and you get the difference between the exercise price and the value of the shares at the time it was granted. Take note that there
is already an increase in the wealth on the part of the taxpayer. It is a benefit because if the taxpayer (employee) was not granted a stock
option the consequence would be that the latter would purchase the stock at its market value, but because of the stock option the
employee was granted a privilege.

Example: Payment of compensation every 15th day of the month. Here there is a benefit because the employee receives his/her
compensation every 15th day of the month and by virtue of that the latter is able to pay his/her debts. So, there is a benefit.

4. SEVERANCE TEST – more or less the same with the realization test. There is separation of capital from something of exchangeable value
and that the transaction must be complete. One of the tests in determining income. From the word itself “severance” something must have
been let go by the taxpayer. When something has been let go by one taxpayer and it is being received by other taxpayer the latter is said to
have been earned a taxable income, provided that the transaction is complete.

5. ALL EVENTS TEST – it is more applicable in determining allowable deductions rather than income. For those entities using accrual
accounting even if those entities did not receive the income for as long as the transaction has already been completed, meaning all events
leading to the realization of that income or all events leading to you receiving that amount, there is said to be income already even if the
entities did not actually receive the said amount.

It is not necessary to determine the amount with accuracy, what is needed is information sufficient for the taxpayer to compute how much
can be earned there is said to be taxable income (Sir: more applicable to deductions). However, but looking at it at the income is that there
is a period within which you’re supposed to earn income and during that period everything necessary has already been done then there is
said to be a taxable income. Look at it on a periodic basis.
Example: A taxpayer (buyer) which has transaction dated Dec. 29, 2014. There is a sale of a parcel of land however the contract requires
that the title of the land must be actually transferred to his name before he gives full payment of the entire amount, but the sale
transaction was closed on Dec. 29, 2014. When will the taxpayer consider earning his income? 2014 or 2015? It is 2014 because all events
necessary for him to earn that income has already been completed. We look at if he already has a right to the sale; the sale has already
been closed because you cannot transfer title if the transfer is not completed. It is already completed only that the full amount of purchase
price has been withheld.

METHODS OF ACCOUNTING

Income is taxable provided there is income and the income has been realized and recognized but that would depend on the method of
accounting used by the taxpayer.

1. Accrual
- Income is recognized when earned regardless of when cash is received
- Expenses are recognized when incurred regardless of when paid

2. Cash basis
- Income is recognized when cash is received
- Expenses are recognized when cash is dispensed

3. Installment Payment
- There is said to be installment method when what is recognized as income is only that which pertains to the installments actually
received.
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Installment payment/method is allowed when the initial payment does not exceed 25% of the selling price (in any sale
transaction). In other words you have a contract which states that there will several payments to be made in relation to the
transaction.

Example:
> Transaction worth 1,000,000 (June 17, 2015)
> 20% down payment
> 10 installments or 80,000 monthly installments (will start in July 2015)

Query: How will you determine if the initial payment constitutes less than 25%? You compute the entire payment for one
taxable year. Take note that initial payment refers to the total payment made during the year (taxable year of the taxpayer). If
it is an individual we refer to the taxable year of January to December, but if it is a corporation there are two – they are fiscal
or calendar.

200,000 down payment
+ 480,000 (installments starting from July to Dec. 2015)

680,000 -‐ Clearly it exceeds 25% of the gross selling price of 1,000,000 thus it cannot avail of the installment method. The
method that can be availed of is Deferred method, it will be considered as a deferred sale not installment method/payment on
the ground that it is more than 25% of the selling price. The entire amount of 1,000,000 will be considered as income for the
taxable year 2015, unlike in installment method as shown below.

Example:
>Transaction worth 1,000,000 (June 17, 2015)
>10% down payment
>90 monthly installments or 10,000 monthly installments (will start in Sept.
2015).

• TN: 1,000,000 x 10% = 100,000 -‐> should be deducted from 1,000,000.
• Therefore: 1,000,000 – 100,000 = 900,000 -‐> i.divide sa 90 to get the monthly installment.
• 900,000/90 = 100,000 -‐>monthly installment

How to get the initial payment within the taxable year of 2015?

100,000 (Down Payment)
+ 40,000 (10,000 x 4) Sept. to December 2015 only 4 months

140,000 – Can avail of the installment method because it is less than 25% of the gross selling price of 1,000,000. In installment
method only 140,000 will be considered as income for the taxable year of 2015. The advantage is you will pay less tax. Had it
been deferred method, the entire amount of 1,000,000 would have been considered as income and thus you will pay higher
amount of tax.

4. Percentage of Completion Method
- It is applicable for a long term contract (exceeding 1 year), ordinarily this will apply to a construction contract where you will have
to make completion reports from time to time and the project is not completed in just few months. Just like installment you get to
avail of recognition of taxes on staggered basis. Instead of the amount actually paid or received on the basis of installment
payment, it will be based on the completion of the project. A completion of a project ranges from 0% to 100%.

Example: Completion for this year based on progress billings is only 20%. Under the percentage of completion method what could
be considered as income is only equivalent to 20%

Example:
1,000,000 (percentage of completion is 40%)
Total Income = 10% of GSP
Income Earned = 100,000 x 40% (percentage of completion) = 40,000 -‐> Taxable income for the year. The income that will be
reported to the BIR as taxable income.

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GROSS INCOME

SEC. 32. Gross Income. –
(A) General Definition. -‐ Except when otherwise provided in this Title, gross income means all income derived from whatever source,
including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.

TN: The phrase “from whatever source” means that any income derived legally or illegally should still form part of the gross income. Also,
even if the income does not fall on any of the enumerated items it can still be considered as gross income because of the phrase “including
but not limited to”.

Gross Income does not account for the deduction, unlike net income where something has already been deducted.

SEC. 31. Taxable Income Defined. -‐ The term taxable income means the pertinent items of gross income specified in this Code, less the
deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws.

TN: Comparing taxable income from Gross income simply means that your gross income is not subject to any deductions yet; whereas in
taxable income is less any deductions allowed under the law.

Taxable income is different from net income in the sense that in taxable income it says there that gross income less any deductions allowed
under the law; whereas in net income it may be any deductions for as long as it is an amount spent for the operations of the business – it
may be allowed or not allowed under the law. There are deductions not allowed under the law but it are allowed under accounting
standards, like for example impairment losses and EAR expenses (the entire amount is deductible under accounting standard, but not
under our tax code).

INDIVIDUAL SITUS DEPENDING ON THE TYPES OF INCOME

INTEREST
• Source within the Philippines if the debtor is residing in the Philippines then interest income is sourced within the Philippines.
If the residence of the debtor is in a country other than the Philippines it is considered as income sourced outside the
Philippines.

DIVIDENDS
• If the issuing corporation is a domestic corporation any dividends issued by such corporation is considered as income within,
or is sourced in, the Philippines.
• If the issuing corporation is a foreign corporation and more than 50% of its operation is within the Philippines then it is
sourced within the Philippines, if its 50% or less it is sourced outside the Philippines (under the tax code).

SERVICES
• Income is sourced within the Philippines if the service, under which the income is derived, is rendered here in the Philippines.

ROYALTIES
• If royalties is exercised here in the Philippines then the income is considered within the Philippines. The basis of situs is the
place of exercise or utilization; where the royalty is being used.

INCOME PARTLY WITHIN AND PARTLY WITHOUT
• When it is manufactured here in the Philippines and sold outside the Philippines or the other way around.

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SPECIFIC ITEMS OF GROSS INCOME

1. COMPENSATION INCOME
- remuneration paid by the employer to the employee for the services rendered under an employer-‐employee relationship. If it is paid in
cash, the compensation income subject to tax is the cash value.
- If it is paid in the form of a property (e.g. rice cooker, other appliances or sacks of rice) then it will be the fair market value.
- If it is paid in the form of a promissory note, we have to distinguish if it is interest bearing or non-‐interest bearing. If it is interest
bearing it is the face value of the note; whereas if it is non-‐interest bearing it will be the discounted value.

Example:
Interest bearing
Promissory Note = 1,000,000 (income to be recognized in 2015)
10% per annum = treated as Interest Income in 2015 because it is already earned in 2015. Take note of the words “per annum”.

Non-‐interest bearing
Promissory Note = 1,000,000
10% per annum = 100,000 (recognized if it is earned)
Discounted value = 900,000 (income to be recognized in 2015)

Caveat: Don’t dwell too much on this topic because under the Labor Code payment of compensation in the form of a PN is not allowed. It is
prohibited.

2. FRINGE BENEFITS
Any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual
employee (except rank and file employee as defined in these regulations) 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.

- "Managerial employee" is one who is vested with the powers or prerogatives to lay down and execute management policies and/or to
hire, transfer, suspend, lay-‐off, recall, discharge, assign or discipline employees.
- Supervisory employees are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise
of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
- All employees not falling within any of the above definitions are considered rank-‐and-‐file employees.
o If they receive benefits similar to those given to managerial employee and supervisory employees, they are taxed at the rate of 5-‐
32% (Dumping ground computation). It is considered as an ordinary compensation income.

Tax Rate
RC/NRC/RA/NRA-‐ETB NRA-‐NETB Filipino Special Employees*
32% 25% 15%

*Revenue Regulation (No. 11-‐2010) only mentions Filipinos working in an ROHQ or RHQ. The presumption is, this regulation does not
apply to Filipinos employed in Offshore Banking Units or Petroleum Service Contractors. [Aranas notes]

General guideline in determining the monetary value:
1. If money is granted as a form of fringe benefit, then the amount that was given by the employer will be the Monetary Value.
2. If real property is given, determine if the ownership is vested to the EE:
a. If ownership vested to the EE, the MV is the value of the property.
b. If ownership is NOT vested to the EE, depreciation serves as the MV.

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To compute for the Grossed Up Monetary Value:
GMV = Monetary Value of the Fringe Benefit + Fringe Benefit Tax

To compute for the Fringe Benefit Tax:
1) determine the GMV:
GMV = Value of the Fringe Benefit ÷ (1 – Tax Rate) [the goal here is to determine the 100% value of the benefit]
2) multiply the GMV with the FBT rate:
FBT = GMV x 32%

Example: If the taxpayer receives a fringe benefit amounting to 100,000 (represents 68% of the entire amount) – that amount means
that it is already net of tax. For it to be grossed-‐up we add back the tax. The rate for FBT is 32%

100,000 divided by 68% = Grossed-‐up Monetary Value

QUERY: Is it possible if the rate is not 32%? Yes. If the taxpayer is not a resident citizen, not a non-‐resident citizen, or not a resident
alien the rate could not be 32%. The 32% if you notice is highest rate applicable to a taxpayer, only APPLICABLE to resident citizen, non-‐
resident citizen and resident alien). If it is a NRA-‐NETB the rate applicable is 25% not 32%.

- EMPLOYEES (occupying managerial or technical position) employed in RAHQ, ROHQ of the Multinational Companies, Offshore Banking
Units and Foreign Service Contractors and Sub-‐contractors engaged in petroleum and geothermal operations – 15% FBT rate.
Therefore if the latter received fringe benefit the monetary value would be 85% of the entire amount of the fringe benefit. Provided
that the employees subject to the 15% preferential rate must comply with the TESTS:

• THREE TEST FOR ELIGIBILITY TO THE 15% PREFERENTIAL TAX RATE

I. Position and Function Test. -‐ The employee must occupy a managerial position or technical position AND must actually be
exercising such managerial or technical functions pertaining to said position;
II. Compensation Threshold Test -‐ In order to be considered a managerial or technical employee for income tax purposes, the
employee must have received, or is due to receive under a contract of employment, a gross annual taxable compensation of
at least PhP 975,000.00 (whether or not this is actually received);
III. Exclusivity Test – The Filipino managerial or technical employee must be exclusively working for the RHQ or ROHQ as a
regular employee and not just a consultant or contractual personnel. Exclusivity means having just one employer at a time.

• KINDS OF FRINGE BENEFITS (HEVHIMEHEL)

(a) Housing Privilege

CASE ANNUAL VALUE of BENEFIT Monetary Value of Benefit (Monthly)
Employer leases residential 50% X Monthly rental paid by the employer
property for use of the (Henderson vs Collecter case)
employee -‐ The 50% is given under the regulation as a
sign that there is no transfer of ownership
from the ER to EE
-‐ If there is transfer of ownership, then the
entire amount is taxable as fringe benefit
Employer owns residential 5% of FMV of land improvements. 50% x Monthly Value of the benefit
property which was assigned to (5% represents the depreciation of
an officer for his use as the property) *Monthly Value =
residence (no transfer of *Only the depreciation value is Annual Value /12 mos.
ownership) considered the FB.
Employer purchases residential 5% of acquisition cost excluding 50% x Monthly Value of Benefit
property on installment basis interest.
and allows the employee to use Acquisition cost is the basis for the
the same as his residence depreciation.
Purchases residential property Acquisition cost or FMV* whichever is higher
and transfers the ownership to *determined by the BIR or Assessor whichever is
the employee higher
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Purchases residential property FMV of CIR and FMV of Assessor, whichever is
and transfers ownership higher minus the cost of the employee
thereof to his employee for the
latter’s residential use at a price
less than the employer’s
acquisition cost

*Exceptions:
I. Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force;
-‐ Take note wala’I Philippine National Police ha..
II. A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the business
premises or factory. (deemed to be for the convenience of the ER)
-‐ Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ER’s factory is hazardous.
III. Temporary housing for an employee who stays in a housing unit for three (3) months or less.
-‐ Applies to transient EE, like he is in Manila for training etc.

(b) Expense account

Monetary Value = equivalent of the value that was paid for by the Employer.
Examples: transportation expenses, parking expenses, communication expenses., etc. for as long as they are related to the trade or
business of the employer.

When can an expense account not considered as a fringe benefit
When the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a
personal expense attributable to the employee. In short, when it is required to be liquidated by the employee. It will then be
considered as ordinary expense of the employer.
1) Business expenses
1. Related to the business of the employer.
2. Common in law firms or auditing firms: Having a lunch meeting with clients.
3. GR: Not subject to the Fringe Benefits Tax, provided:
1. It is duly receipted.
2. The receipt is under the name of the employer.
EXC: Not duly receipted.
2) Personal expenses
§ Purchases of groceries for the personal consumption of the employee and his family members paid for or reimbursed by the
employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted
for in the name of the employer.

(c) Vehicle of any kind

Guidelines in valuation of Motor Vehicles:

CASE TRANSACTION MONETARY VALUE of Benefit
1 Purchase the motor vehicle in the name Acquisition Cost

of the employee
2 Provides the employee with cash for the Amount of cash received by the employee
purchase of a motor vehicle in the name
of the employee
3 Shoulders a portion of the amount of Amount shouldered by the employee
the purchase price of a motor vehicle in
the name of the employee
4 Purchase the car on install in the name Acquisition cost (exclusive of interest) divided by 5
of the employees years.
*5 years represents the lifespan of the vehicle.
5 Owns and maintains a fleet of motor Acquisition cost of all motor vehicles not normally
vehicles for the use of the business of used in business divided by 5 years x 50% amount
the employees of rental payment for motor vehicles not normally
used in business x 50%
35

6 Leases and maintains a fleet of motor Amount of rental payment for motor vehicles not
vehicles for the use of the business and normally used in business x 50%
the employees
7 The use of yacht whether owned and Depreciation of yacht at an estimated useful life of
maintained or leased by the employer 20 years.

Take note: every time ownership is not vested, and the EE is benefited, it always 50%.

(d) Household expenses
Monetary Value = the amount shouldered by the employer.
Examples: cost of utilities, homeowners association dues, garbage dues, salaries of household help, personal driver of the employee, or
other similar personal expenses, etc.

(e) Interest on loan at less than market rate
Monetary Value = difference between the market value less the interest imposed. (No revenue regulation coming from BIR adopting the
6% per annum as the legal interest.)

(f) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations.
Monetary Value = the cost of membership.

(g) Expenses for foreign travel
General rule: subject to fringe benefit tax
Except: 1) reasonable business expense
2) inland travel expenses, excluding lodging cost in a hotel, amounting to $300 or less
3) the cost of economy and business class airplane ticket; 30% of the cost of first class airplane ticket.

Requisites in order to be exempted from the fringe benefit tax:

1. Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of
attending business meetings or conventions which are necessary to the trade or business of the employer shall NOT be treated as
taxable fringe benefits because here you are most likely required to liquidate you expenses. However, if in the same scenario you
will NOT be required to liquidate, then fringe benefit may apply.
o The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.
ü official invitation/communication letters from business associates abroad indicating its purpose.

2. Inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less per day, shall NOT be subject to a fringe benefit tax.

Not subject to fringe benefit tax Subject to fringe benefit tax
1) Inland travel expenses such as: 1) Lodging cost in a hotel amounting to an
1) Food average of US$300.00 or less per day.
2) Beverages
3) Local transportation
2) Lodging cost in a hotel higher than $300
per day. (this will be considered as income of
the EE.)

3. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the
cost of first class airplane ticket shall be subject to a fringe benefit tax. Travelling expenses which are paid by the employer for the
travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.

Not subject to fringe benefit tax Subject to fringe benefit tax
1) Cost of airplane ticket which are: 1) 70% of the cost of first class airplane ticket
i. economy class 2) Travelling expenses which are paid by the
ii. business class employer for the travel of the family
2) 30% of the cost of first class airplane members of the employee
ticket

36

(e) Holiday and vacation expenses
Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits equivalent to the cost
of the holiday vacation.

(i) Educational assistance to the employee or his dependents —

As to the employee:
General rule: subject to fringe benefit
Except: 1) if the education or study involved is
i. directly connected with the employer's trade, business or profession, and
ii. there is a written contract between them that the employee is under obligation to remain in the employ of the
employer for period of time that they have mutually agreed upon. (return of service contract; lock-‐in service
contract)

As to the dependents of the employee:
Except: when the assistance was provided through a competitive scheme under the scholarship program of the company.
§ there must be a qualification exam to identify who will be admitted to such scholarship program.
§ dependent must be able maintain a certain grade.

(j) Cost of life or health insurance and other non-‐life insurance premiums or similar amounts in excess of what the law allows [applies
only to managerial or supervisory employees]

Except: 1) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law:
§ SSS, GSIS or similar contributions arising from the provisions of any other existing law
2) the cost of premiums borne by the employer for the group insurance of his employees.

The following fringe benefits are NOT taxable:
(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.

Take note: just because they are not subjected to FB tax does not mean they are not subjected to other taxes.

• EXEMPTION FROM FRINGE BENEFIT TAX (Revenue Regulation No. 5-‐ 2011)

a. De Minimis Benefits – These are facilities and privileges of relatively small value and are offered or furnished by the employer to his
employees merely as means of promoting their, health, contentment or efficiency.
• This falls under the “Taxable 13th month pay and other benefits”
o If it does not fall under the regular compensation, it now falls under ‘other benefits’
o Benefits always make the life of the employee easier.
§ Cellphone allowance
§ Rice subsidy
• Take note: The amount in excess of the limit stated below forms part of the P82k threshold. Any amount in excess of the
P82k threshold is now subject to ordinary tax [5%-‐32%].)

The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation
income of both managerial and rank and file employees as long as it will not exceed the minimum amount set under this
enumeration (the list is exclusive):

a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;
§ does not include sick leave credits
§ If you are a private rank and file employee and you avail of your monetized amount of your unused sick leave credits,
are you exempted from fringe benefit tax? Yes, because you a rank and file employee, not a managerial or supervisory
employee. However, you will be subject to ordinary income tax.
b) Monetized value of vacation and sick leave credits paid to government officials and employees;
37

c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month;
§ This pertains to dependents of employees.
d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;
§ Example: Employee E is given a sack of Jasmin rice worth P3,000 by Employer R. The excess of P1,500 will be added to the
P82k ‘other benefits’ threshold.
e) Uniform and Clothing allowance not exceeding P5,000 per annum;
§ P2,500 per semester.
§ P416.67 per month.
f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-‐up,
maternity assistance, and routine consultations, not exceeding P10,000.00 per annum;
§ This pertains to the employee himself.
§ Sample question: Medical cash allowance for employees in order to be considered ‘de minimis’ benefit, and therefore
exempt from fringe benefit tax is limited P750 per semester: False.
g) Laundry allowance not exceeding P300 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 received by the
employee under an established written plan which does not discriminate in favor of highly paid employees;
§ If you were given cash or gift certificate, it is merely considered as a supplemental income and not a de minimis benefit.
§ If you were given a gold ring worth P15,000, the excess of P5000 falls to the P82k threshold.
i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 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;
§ To benefit the call center agents, nurses and other employees working on a graveyard shift.

TAKE NOTE: 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 on compensation income.

Atty A: The old revenue regulation used to include Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc as ‘de minimis’ benefit.
§ These do not form part of the P82k.
§ What forms part of the P82k are the excesses of the items enumerated above.
§ Now taxable as ordinary compensation.

3. PROFESSIONAL INCOME
Income derived from the exercise of one’s profession either on his own or by joining a General Professional Partnership. In both instances,
they are allowed to make deductions for their expenses.

1) On his own:
• Tax rate: 5%-‐32%
§ Example: A doctor’s consultation fee.

2) General Professional Partnerships – formed by persons for:
i. The sole purpose of exercising a common profession and
ii. No part of the income of which is derived from engaging in any trade or business.
Ø The partnership is not taxable because it is the partners themselves who are liable to pay tax for the shares they received.
o The income received by the partnership is deemed constructively received by the partners so that it will be considered
income of the partners subject to tax.
§ Shares in the GPP is another item in the GROSS INCOME enumeration.
o Example: law firms, accounting firms, clinics, etc.
o The partners will file their income tax return and their income is classified as business/professional income.
§ Being a professional income, there is still a withholding tax equivalent to 10%, but it is a creditable
withholding tax which means you will have to deduct it to your taxable income in order to get your net income
tax still due or payable.
iii. Needs registration with the BIR.
o GPP will be required to file an income tax return even if you are tax exempt or not subject to tax.
§ Its purpose is to countercheck if the partners are correctly declaring the shares that they received in the GPP
regardless of whether or not the shares have been distributed.
38

§ Example: Partnership X is composed of 3 partners. If the GPP declared a net income of P300k but one of the
partners only declared P50k as the share he received, then the BIR will question such partner.
§ In a GPP, once the partnership declares a net income, it’s already deemed to be received constructively by the
partners. BIR will simply divide the net income with the number of members in a partnership.
§ In order to avoid any inconvenience, some GPPs prefer to submit the ITR of the GPP together with the
individual ITRs of the partners.

4. INCOME ROM BUSINESS
Income derived from engaging in trade or business. It can either be sole proprietorship, partnership or corporation. Take note for tax
purposes, corporations include partnership however organized (except GPP).

1) Business selling services: income comes in the form of gross receipts.
§ Gross income means gross receipts less returns, discounts, and allowances.
§ For income taxation purposes, gross receipt is not limited to amounts actually received. You can use accrual accounting for
purposes of income tax. Unlike in VAT where we only consider gross receipt if actually received.
2) Business selling goods:
§ Gross income derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and 'cost of
goods sold.' Cost of good sold' shall include all business expenses directly incurred to produce the merchandise to bring them to
their present location and use.
o For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the
goods are in transit.
o For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.
GROSS INCOME
Less
ALLOWABLE DEDUCTION
TAXABLE INCOME
X 30%

5. INCOME FROM DEALINGS IN PROPERTY

Two types of properties:
1. Ordinary asset – includes Stocks in trade – must be part of your inventory; Property primarily held for sale – (building house for the
purpose of selling it); Property used in trade or business, subject to allowance for depreciation -‐ (depreciable assets: machineries,
equipments); Real property used in trade or business – (building used as display area for your merchandise or inventory; real estate
dealers)
2. Capital asset -‐ 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.

ORDINARY ASSET CAPITAL ASSET
Individual: 5-‐32% Real Property: 6% of the GSP or FMV, whichever is higher
Shares of Stocks:
Listed & Traded in the Local Stock Exchange: (Stock Transaction Tax)
- ½ of 1% based on GSP.
Not listed or not traded in the Stock Exchange:
- 1st 100K = 5%
- Excess of 100K = 10%
Other Capital Asset:
Short term (12mos or less): 100% of the net capital gain
Long term: 50% of the net capital gain

Net capital gains/loss = GSP – cost of acquiring the asset
39

Corporation: 30% based on the Taxable Real property: Same as above
Income Shares of stocks -‐ Same as above
Other Capital Asset: 100% Net capital gains/loss (no short/long term)

RULES ON NET CAPITAL GAINS/LOSS
1) Can you add your capital gains from you ordinary income? Yes it will be subjected to the same rate
2) Can you deduct your ordinary loss from your capital gains? Yes
3) Can your capital loss be deducted from your ordinary gain? No
4) Can your capital loss be deducted from your capital gain? Yes

Capital gains and capital loss can go together. However, only capital gain can go together with ordinary gain and ordinary loss. Capital
loss can only be deducted from you capital gains.

NOLCO is only applicable to individuals.

How to compute for NOLCO
Gross Income
less Allowable Deductions

Example:
GI P1,000,000
-‐AD P800,000
TI P200,000 ß This is your ordinary gain in relation to your business

During 2015, you happen to sell a jewelry
GSP P1,000,000
Cost P1,200,000
CL P200,000 ß Capital loss; This cannot be deducted from your ordinary gain.

In 2016
GSP P1,000,000
Cost P800,000
OG P200,000 ßOrdinary gain: you cannot deduct the capital loss from 2015; Capital loss from 2015 will be forfeited;

Let’s say on 2016, you entered into a capital transaction, you sold your ref for P1M.
GSP P1,000,000
Cost P700,000
CG P300,000 ßCapital gain: you can deduct the P200,000 Capital loss from 2015. That will be your Net Capital Loss
NOLCO (P200,000) Carry Over
NCG P100,000 ß This can be added to your 2016 Ordinary Gain of P200,000 because capital gains can be added to
Ordinary gains.
You will now have a Net Taxable Income of P300,000 which be subjected to 5%-‐32%

Example 2:
Ordinary gain P100,000
Capital loss P200,000

Is the P200,000 allowed to be carried over next year? YES
How much are you allowed to carry over next year? The Net Capital Loss that you can Carry Over should not exceed the income before tax
on the year it was incurred. In this case only P100,000 (OG) can be carried over.

GSP P1,000,000
Cost P700,000
CG P300,000
NOLCO (P100,000)
NCG P200,000
OG P200,000
NTI P400,000
If this were a corporation the Net Taxable Income for 2016 would have been P500,000 because NOLCO does not apply to corporations.
40

Example 3:
2015
GI P1,000,000
AD P900,000
TI 100,000
Taxpayer is an individual. Since birth he is an owner of a Rolex watch. He is now 25 yrs old just like Kyle. He sold his Rolex watch
forP500,000. It only cost him P100,000.

GSP P500,000
Cost P100,000
CG P400,000

How much is the Net Taxable Income of Kyle in 2015? Since Kyle had this watch since birth, we multiply our Capital Gains with 50% because
it is long term. That would be P200,000

NTI is P300,000

Example 4:
What if the cost is P700,000

GSP P500,000
Cost P700,000
CL (P200,000)

How much is the Net Taxable Income of Kyle for 2015? P100,000

GI P1,000,000
AD P800,000
TI P200,000

Again in 2016 Kyle sold his other Rolex watch.

GSP P500,000
Cost P300,000
CG P200,000 x 50%
P100,000

How much is the Net Taxable Income of Kyle for 2016?
Take note: Just because the loss on the year it was incurred is considered a long-‐term loss it does not mean that it cannot be carried over. It
can still be carried over but it will be treated as a short term loss.

CONDITIONALLY EXEMPT FROM PAYMENT OF CGT INSOFAR AS THE SALE OF YOUR PRINCIPAL RESIDENCE:

1. The proceeds of the sale of the Principal Residence have been fully utilized in acquiring or constructing new principal residence within
18 calendar months from the date of sale or disposition. [includes transferring to a condo unit.]
• To prove such property is your principal residence, you may need to obtain a certification from your barangay chairwoman.
• Take note: CGT of 6% FMV or selling price, whichever is higher. Cost is not deducted from the FMV or selling price when
multiplied by the rate of 6% to get the CGT of the capital asset; cost is only deducted if it is classified as ordinary asset.
2. The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or
acquired;
3. The Commissioner has been duly notified, through prescribed return, within 30 days from the date of sale or disposition of the
person’s intention to avail of the tax exemption
4. Exemption was availed only once every ten years; and
5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale
or disposition will be subject to CGT.
• The portion not utilized will not subject to CGT.
• Determine total proceeds of the sale and the cost of the new principal residence.
41

6. In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from the agreed
selling price/consideration the 6% capital gains tax which shall be deposited in cash or manager’s check in interest-‐bearing account
with an Authorized Agent Bank AAB under an Escrow’s Agreement between the concerned Revenue District Officer, the Seller and the
Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall only be released to such
Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in fact, been utilized in the
acquisition or construction of the Seller/Transferor’s new principal residence within 18 calendar months from the date of sale or
disposition. The date of sale or disposition of a property refers to the date of notarization of the document evidencing the transfer of
said property.

CG x 6% = CGT x unutilized proceeds = CGT payable
Gross selling price

GSP/FMV x 6% = CGT x UP/GSP = CGT Payable

You will still be subject to surcharge and interest.

6. INTEREST INCOME

§ RULE: look at the source
o It comes from interest in bank deposit à 20% FWT; 20% passive income
o It comes from deposit substitute à 20% FWT à must be registered and traded security
§ Deposit Substitutes à
• alternative form of obtaining funds from the public, other than deposit,
• through the issuance, endorsement or acceptance of debt instrument for the borrower’s own account,
• for the purpose of relending or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer.
• Securitized and registered; you can buy and sell in the market
o Public means borrowing from 20 or more individual or corporate lenders at any one time
o Not a deposit substitute à 20% CWT
o Not a deposit substitute + 20,000 corporations BORROWERà 2% CWT (BDO vs RP 2015)
o From ordinary lending/personal transaction à 5-‐32%; 30%

• TABLE:

Interest Income from:
Bank Deposit & Deposit Ordinary Lending or Do not constitute Not Deposit
Substitutes Personal Loan as a Deposit Substitute BUT
Transaction Substitute BORROWER
COPORATION is
considered as Large
taxpayer
(Top 20,000)
20% Final Withholding Tax 5-‐32%; 30% Dumping 20% Creditable 2% CWT
Ground Computation Withholding Tax

§ IMPOSITITON OF THEORETICAL INTEREST
o No income from theoretical interest à must be actual and constructive receipt of income
o CIR VS FILINVEST CASE:
§ ISSUE: CIR argues that the CA erred in reversing the CTA’s finding that theoretical interests can be imputed on the
advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to interest-‐
bearing fund borrowings from commercial banks
§ SC: CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former
provided its affiliates. While admitting that FDC obtained interest-‐bearing loans from commercial banks,45 Susan
Macabelda -‐ FDC's Funds Management Department Manager who was the sole witness presented before the CTA -‐
clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of
its investment in Bonifacio Land in 1997.46 More significantly, said witness testified that said advances: (a) were
extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b)
42

were all temporarily in nature since they were repaid within the duration of one week to three months and were
evidenced by mere journal entries, cash vouchers and instructional letters."47
§ More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall
be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares,48 the rule is likewise settled that tax
statutes must be construed strictly against the government and liberally in favor of the taxpayer.49 Accordingly, the
general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws
and the provisions of a taxing act are not to be extended by implication.50 While it is true that taxes are the lifeblood
of the government, it has been held that their assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself.51

o Note: Only instruction letters and journal and ledgers à subject to DST but not subject to interest income.

7. DIVIDEND INCOME (Kinds of dividends)

A. CASH DIVIDENDS

RULE:
§ INDIVIDUAL:

RC/NRC/RA NRA-‐ETB NRA-‐NETB

CASH DIVIDEND 10% FT 20% FT 25% FT

§ CORPORATION:

RECEPIENT

DC RFC NRFC

DC Exempt Exempt 15% or 30%

-‐ deferred because -‐ TAX SPARING

it will be later on

taxed to its

ISSUING individual SH.

RFC 30% 30% GR: NA

EXC: if more than

50% INCOME

WITHIN THE PHIL.

NRFC 30% NA – situs is not NA – situs is not
within within

§ TAX SPARING:
o based on reciprocity rule; it is when part of the tax is spared in favor of the NRFC
o the rule on reciprocity DOES NOT APPLY when:
§ no tax treaty between the Philippines and the domicile country of the NRFC or
§ domicile country of the NRFC does not give the same benefits to Filipino corporation who earns the same
income who is domiciled in the same country of the NRFC

§ DC cash or property dividends to DC or RFC:
o Exempt. This is a deferred transaction
o This is exempt because the corporation here upon receipt of the dividend will not yet distribute it to the shareholder SH
it is only within the entity, no one is benefited yet. It will later on be declared as a dividend again to its SH. This is when
you tax the SH for the dividend income.
o If you tax it ahead upon dividend to the corporation and tax it again upon dividend to the SH it will be taxed twice. So to
avoid this kind of arrangement and to make it beneficial and encourage stockholdings the tax code deems it necessary to
tax it once. It will only be taxed upon distribution to natural persons.

§ RFC cash or property dividends to NRFC:
o As rule it is not applicable because the situs of the income is outside the jurisdiction of the Philippines
43

§ EXCEPTION: is the RFC issues dividend and does business here in the Philippines to the extent of MORE THAN
50% of its income it is considered situs inside the Philippines based on the 3 year period from when the
dividend was declared.
• Example: dividend income 2014, basis therefore is 2014, 2013 and 2012 income. Count the
percentage of the income derived here in the Philippines. If it exceeds 50% then it is earned here in
the Philippines.

B. PROPERTY DIVIDENDS

§ rule: same BUT the value of the property should be FMV of the property whichever is higher of the assessment by BIR or Local
assessor (for tax purposes)
§ Q: How do you record dividend?
A: Normally, the basis is book value but for tax purposes it should be Fair Market Value (FMV) because in effect there is an
exchange/conveyance of property.
§ Treasury shares à considered as property dividends.

C. SCRIP DIVIDEND – in a form of promissory note

§ rule: same

D. STOCK DIVIDEND

§ General Rule: not taxable
§ Exception:
(1) Redemption/Cancellation:.
o When the corporation cancels or redeems stocks issued as dividends at such time and in such manner to make
cancellation or redemption equivalent to the distribution of the taxable dividends
o GR: real intention to transfer cash dividends and circumvent of the law. Not on every intention.
o If there is no intention then no income tax.
o Illustration: Corporation X with A, B, C as Stockholders. X declared dividends 100 shares per SH. For such
declaration, there will be no tax since there is no change in the interest of the SH in the corporation. But if X decides
to buy back the shares of A, the Corp X will pay 10 per share. A will be receiving the monetary value.
o (Mr. Honculada cited the case of CIR vs CA CTA & Anscor):

CIR vs CA CTA & Anscor
Ruling:
GR: Stock dividends, strictly speaking, represent capital and do not constitute income to its recipient. So that the mere
issuance thereof is not yet subject to income tax as they are nothing but an enrichment through increase in value of
capital investment. As capital, the stock dividends postpone the realization of profits because the fund represented by
the new stock has been transferred from surplus to capital and no longer available for actual distribution.

EXCEPT: if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to
the extent it represents a distribution of earnings or profits accumulated…

“the exempting clause above quoted was added because corporations found a loophole in the original provision. They
resorted to devious means to circumvent the law and evade the tax. Corporate earnings would be distributed under the
guise of its initial capitalization by declaring the stock dividends previously issued and later redeem said dividends by
paying cash to the stockholder. This process of issuance-‐redemption amounts to a distribution of taxable cash dividends
which was just delayed so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of
taxation. Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation of
stock dividends, depending on the time and manner it was made is essentially equivalent to a distribution of taxable
dividends, making the proceeds thereof taxable income to the extent it represents profits. The exception was designed
to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from
being made use of as a device for the actual distribution of cash dividends, which is taxable.”

Elements for the Exception to Apply (When it is taxable):
(a) there is redemption or cancellation;
44

(b) the transaction involves stock dividends and
(c) the time and manner of the transaction makes it essentially equivalent to a distribution of taxable dividends.

Of these, the most important is the third.

o Q: Does every time the corporation buys back or pays for the shares relating to stock dividends, it is subject to
income tax then?
A: As long as redemption reveals the intention was to circumvent the issuance of cash dividends, it is subject to tax.
In Anscor, SC said no justification to make it not taxable. So the rule is as long as you can prove by its nature that you
did not intend it as cash dividends, taking into account entire circumstances-‐the time, manner and scheme and as
long as you can prove to the BIR that your redemption of the dividends is not intended to circumvent the taxability
of the distribution of income then you are not subject to income tax.

Anscor Case: “As qualified by the phrase such time and in such manner, the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock dividends. So
that, whether the amount distributed in the redemption should be treated as the equivalent of a taxable dividend is
a question of fact which is determinable on the basis of the particular facts of the transaction in question. No
decisive test can be used to determine the application of the exemption under Section 83(b) The use of the words
such manner and essentially equivalent negative any idea that a weighted formula can resolve a crucial issue Should
the distribution be treated as taxable dividend.

SIR: So it’s not on every redemption. You based it on the intention of the issuing corporation for redeeming the
shares of stocks. So going back to the example of X Corp redeeming the shares of A, the fact that you cannot explain
why only the stocks owned by A are being redeemed, this may be an indication that the redemption is to circumvent
the payment of income tax. So such redemption is subject to income tax. Because it is as if others opted to get stock
dividends while A opted for cash dividends. So him having opted that, he must be subject to income tax. This is
actually in your tax code Sec. 73 (B).

Sec. 73 (B) NIRC:
Stock Dividends –A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent that it represents a distribution of earnings or profits.

(2) Substantial Alteration of the Proportional Interest or ownership of the Corporation:
o Illustration: an option given to stockholders whether they will receive a stock or cash dividends.
o Q: Some received cash dividends while others received stock dividends, how will the stock dividends be treated?
A: it will be treated as an income on the part of the SH opting to get stock dividends.
o SIR: For instance:

Option: Cash P10,000 or 100 shares of stocks worth P10,000

SH Dividends After Dividends
Before

Shares Fraction Shares Fraction

A = 100 1/3 100 1/5
B = 100 1/3 200 2/5
C = 100 1/3 200 2/5

o A opted to receive cash, then he gets P10,000 cash while B and C received 100 stocks each. Currently, they are
All is 1/3. If all of them opted to get stock dividends, each shall receive additional 100 shares. But if A opted to
equal.
get cash and after the option taken by B and C to receive stock dividends, what will happen is A will remain with 100
shares, but B and C will get 200 shares each. So from 1/3, A will now have 1/5, whereas B now has 2/5 and C has
2/5.
So from this it can be said that there is change in the equity structure of the corporation issuing the stock
dividends. Then B and C shall be subject to income tax. Why is that so?

o Reason: It’s as if B and C actually received cash and then paid for the shares of stocks. It’s as if the SH were offered
shares but because one opted for cash then it means that everyone is supposed to get cash and then just purchased
45

the shares so they can have more shares. If the corporation gave an option to receive cash or stocks, there is really
an intention to give out profits to the SH. This is clearly presented by the fact that one opted to receive cash. It’s as if
the corporation issued cash and others opted to buy the shares with the money that they were supposed to receive.
This is the reason why the law deems it to be taxable on the part of the SH who are paying for the additional shares
–those who opted for stock dividends. All SH (those who opted for cash and those who opted for stocks) will be
taxed the same way.

(3) Where the recipient is other than the SH:
o If there is a usufruct on the shares. If there is a stock dividend issued, then the increase is an income on the part of
the usufructuary. So such shall be subject to income tax. Only the usufructuary shall be subject to tax because as to
him it shall be considered as additional income.

E. LIQUIDATING DIVIDENDS

§ Rule : Taxable as to the difference between the amount received from the corporation and the cost of shares surrendered by the
SH

SH Shares Valued at Upon Liquidation:

A= 100 10, 000 Net Asset= 30,000,000
B= 100 10, 000
C= 100 10, 000

o Q: Is it possible that the corporation has a capital stocks of only 30,000 yet the Net Asset is 30M?
A: Yes. If there is retained earnings of 29,970,000. But by then you will be subject to improperly accumulated earnings.

Net Asset= 30,000,000
Liquidating Dividends Shares Invested Taxable Income
A= 10M 10k 9, 990,000

B= 10M 10k 9, 990,000

C= 10M 10k 9, 9 90,000

o Q: Will the liquidating dividends be subject to tax? If so, how much?
A: Individually on the part of SH. To determine, compare the value of the assets he actually received and the value of the
assets he invested. In this case, each only invested 10,000 but at the end of the corporate life, they received 30M each. So the
SH actually earned 9,990,000 each.

Reason: if you do not declare dividends ever year and at the end of the corporate life you will not be subject to tax, you can
o
get away with the tax on dividends. So the law deems it that they will be taxed upon liquidation. The corporation could have
declared 30M dividends, having not done so it is said that the government has been deprived of the revenue it supposed to
get. So the law will tax on the distribution of the assets which includes the dividends which had not been declared. The
difference in the amount invested and the amount received, clearly that portion that is in excess is the profits of the
corporation and should have been declared as dividends.

F. DISGUISED DIVIDENDS
§ Also known as Indirect Dividends
§ Examples:
o Those paid by the corporation to a SH in a form of honorarium or any cash payment not reflected as cash dividends but
in reality they are.
o Use of company vehicle of corporation by the SH. This may be considered as property dividends on the part of SH.
Though this is difficult to prove because the car is registered in the name of the corporation. But when you can see that
the car is being used for the personal activities of the SH then it can be considered as disguised dividends. Common
practice in family corporations.
o Forgiveness of debt of SH by the Corporation. No consideration given other than the reason that he is a SH. You were not
required to do anything. By that benefit you said to have earned income. As a SH, you supposed to be given benefit only
when such corporation declares dividends.

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8. ROYALTY INCOME

§ Rule:
o if Passive source à on time creation of the royalty and no subsequent or continuous service of the royalty.
o GR: 20% on royalty
§ EXC: books, literary works, and musical composition à 10%
o if active source à 5-‐32% or 30%;
§ This is when the royalties, as part of the ordinary business, the person who earns the royalties due to the nature of
the operation of my royalty, there is continuous rendition of service for the use of the royalty.

o Example: author of a Book, this yr the book was written and printed by rex bookstore. How will the income received from rex
be taxed?
§ This year: passive because the writing of the book was done just once.
§ Next year when it was sold again: still passive income because the book was written only once. There was no
continued rendition of service on the part of the author.
§ The service here to be rendered is not continuous in relation to the royalty income.
§ Even is there is a subsequent edition, the mere editing of the book entitles the author to another royalty, separate
and distinct to that of the previous thus it is still a passive income. Each book is covered by a different copyright.
§ As opposed to a publishing house or a music label, here they earn an active income because the income they earn
this is the source of their ordinary business. Lending out of the copyright here becomes the business of the income
earner therefore it is active not passive.

o Example: Jollibee, someone acquired from it a franchise. There is income on the franchise. How is it taxed?
§ Here this is an active income because unlike an author, part of the earning of my franchise income is the continued
rendering of service of Jollibee for the continuance of the franchise as part of its operation.
§ Again in a franchise, the franchise is a source of income and that you continue to service the person using the
franchise in relation to the nature of the royalty income earned.
§ Goodwill is created because there is continuous rendition of service to the other party.

ROYALTY INCOME RC/NRC/RA NRA-‐ETB NRA-‐NETB DC/RFC NRFC
Intangible Properties 20% FT 20% FT 25% FT 20% FT 30% FT
(PASSIVE)
Books, Literary 10% FT 10%FT 25% FT 20% FT 30% FT
works, and musical
composition
(PASSIVE)
ALL (ACTIVE 5-‐32% 5-‐32% 25% 30% 30% GI
INCOME)

SUMMARY:
-‐ Determine if it is from active source or passive source
-‐ Royalty is a valuable property that can be developed and sold on a regular basis for a consideration; in which case, any gain
derived therefrom is considered an ACTIVE income subject to the normal income tax (5-‐32% -‐ individual; 30% -‐ corporation)
-‐ When a person pays royalty to another for the use of its intellectual property, such is PASSIVE income of the owner thus subject to
final withholding tax
o Royalty as passive income:
§ Recipient is Citizen/RA/NRA ETB/DC/RFC -‐ 20% FWT except royalty on books, other literary works and musical
compositions received by individuals which is subject to 10% final tax
§ Recipient is NRA NETB – 25% FWT unless lower tax rate is allowed under existing tax treaty
§ Recipient is a NRFC -‐ 30% FWT unless lower tax rate is allowed under existing tax treaty

9. RENTAL INCOME

§ RULE: 5% withholding; but still subject to 5-‐32% income tax or 30% dumping ground computation
§ Two types of Lease:
o Operating Lease
§ RULE: Taxed as and rent income subject to 5% WT; 5-‐32%
47

§ Cost of the property is not wholly amortized during the primary period of the lease. The lessor does not rely solely
on the rentals during the primary period for his profits but looks for the recovery of the balance of his cost and the
rest of his profit from the sale or release of the leased property.
§ Earn income by letting others use the property but rent is not the way to recover the property cost. You can recover
the cost by selling it at the end of the lease.

LEGAL Finance Lease
o
§ RULE: Taxed as and ordinary income not subject to 5% withholding
§ Entire cost of the property is amortized for at least 70% of said amount, which must be amortized for not less than
2yrs.
• PARTIES:
o Investor-‐ who will buy the property;
o seller of the property;
o person interested but cannot afford
• 1st transaction: is the sale of the property from the seller to the investor
• 2nd transaction: lease contract between the investor and the person interested but who cannot afford.
• In the lease contract the transaction is between the investor and the person buying. The investor is the
first owner.
• Investor will then amortize the ENTIRE cost of his transaction over the lease to RECOVER such through the
lease contract.
• at least 70% of the cost must be amortized IN A PERIOD OF NOT LESS THAN 2YRS.
§ Finance Lease is different from sale in installment:
• because here at the end of the lease contract the LESSEE HAS NO OBLIGATION NOR OPTION TO PURCHASE
THE PROPERTY TO THE LEASE AT THE END OF THE LEASE.
§ TN: COMPARISON OF TAX RATE:
• OPERATING LEASE: Taxed as and rent income subject to 5% WT; 5-‐32%
• LEGAL FINANCE LEASE: Taxed as and ordinary income not subject to 5% withholding
• INSTALLMENT SALE: considered as an ordinary sale income; depends whether a capital asset then taxed as
capital gain or ordinary asset then taxed as an ordinary gain.

§ LEASE HOLD IMPROVEMENT (will come out)
§ Rule: title must be vested to lessor; income on the part of the lessor
§ Two ways to recognize:
o Outright
§
o Spread out
§ SPREAD OUT the value of the rent. How?
• get the value of the property at the end of the lease period:
o Depreciation = Value of the LI divide by Useful Life
o Value of LI at the end = Value of LI less (depreciation times remaining period of the lease)
§ VAT if shouldered by the lessee which forms part of the rental IS NOT INCOME.
• Example: if the rental i
§ 2M divide by 15yrs = 133,333.33

§ Example 1: NOTHING ANYMORE TO TRANSFER AT THE END OF LEASE TERM
o Lessor A & Lessee B
o Lease Term: 30 yrs
o Annual Rent: 100,000.00
o Leasehold Improvement: 2,000,000.00
o Useful Life: 15 yrs
o Title vests at the end of the lease
o Leasehold Completed 5th yr
o What should be recognized?
§ YEAR 1 to YEAR 4
• Lessor A: Rent Income 100k
• Lessee B: Rent Expense 100k

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YEAR 5
§
• Lessor A: Rent Income 100k
• No additional Income. The LI was completed on the 5th yr then it has a life of 15 yrs. So on the 20th
year the LI will be fully depreciated. At the end of the lease contract nothing would have been left to
the lessor. Nothing can be transferred therefore no income.

§ Example: OUTRIGHT & SPREAD OUT
o Lessor A & Lessee B
o Lease Term: 30 yrs
o Annual Rent: 100K
o Leasehold Improvement: 2M
o Useful Life 15 yrs
o Leasehold Completed 29th yr
o What should be recognized:
§ YR 1 to 28
• Lessor: Rent Income of lessor: 100k
• Lessee: Rent Expense lessee: 100k
§ COMPUTATIONS:
• Yearly Depreciation:
o Yearly Depreciation of the Leasehold Improvement = COST/Useful Life
o Yearly Depreciation of the Leasehold Improvement = 2M/15yrs = 133,333.34
§ Who will recognize this depreciation expense?
• The lessee for the remaining 2 yrs of the contract
• Value of the LI to be recognized by the Lessor
o Value = Cost less yearly Depreciation of the remaining lease term
o Value = 2M less (133,333.34 x two years left) = 1,733,333.34

OUTRIGHT METHOD:
o YR 29
§ Lessor
• Rent Income of 100K
• Leasehold Improvement: additional Rent Income 1,733,334
o Asset here is recognized on the year the building is completed.
o Cannot recognize depreciation because the use is still with the lessee
§ Lessee
• Rent Expense of 100k
• Depreciation Expense 133,333.34
• Leasehold Improvement to be recognized by lessee is 266,667
(Balance 2M less 1,733,334)

SPREADOUT METHOD:
o YR 29 & 30
§ Lessor
• Leasehold Improvement additional Rent Income of 866,667 (1,733,334/2)
• Asset of Lessor of 866,667

§ Lessee
• Asset of Lessee of 1,133,333

49

o YR 29 & 30
§ Lessor
• Leasehold Improvement additional Rent Income of 866,667 (1,733,334/2)

§ Lessee

§ Asset of Lessor of 1,733,333
§ Asset of Lessee of 0
§ Depreciation expense of 133,333 recognized by lessee
§ BV= 1,733,334 of improvement

(Additional points/discussion in RENTAL INCOME)
-‐ If the VAT is shouldered by the lessee it should NOT be considered as part of the income to the lessor
o VAT is a tax and not an income. To tax a tax would result in tax pyramiding which is not allowed in our jurisdiction
o You never hold on to VAT, it has to be remitted to the govt. The statutory taxpayer is required to remit it every 20th day
of the month following
-‐ EX: Rent is P11,200 inclusive of VAT. How much is to be recognized as income?
o Only 10k is considered as income; the P1,200 represents VAT and should not be treated as part of the income
-‐ What is then contemplated by the law when it says, “when taxes are shouldered by the lessee it will be considered as income of
the lessor?”
o Whenever there is a direct tax to be shouldered by the lessee such is considered as an income by the lessor. That which
the law does not allow to be passed on.
o When there are taxes, which under the law are not supposed to be passed on to your lessee and yet it is paid by the
lessee, that is considered as additional income on the part of the lessor
o EX:
§ Withholding tax. If the 5% WT is to be shouldered by the lessee such should be considered as additional income
of the lessor because you are ordinarily not supposed to pass it on. You are supposed to pay it.
§ Real Property Tax when covered by the lessee is considered additional income by lessor. It is ordinarily the
owner of the property should pay the RPT
-‐ ADVANCE RENTAL
o Considered income if these advanced amounts are within the control of the lessor to dispose
-‐ SECURITY DEPOSIT
o Not recognized as income because you ordinarily have no control or a right to the disposition of such amount.
o You are not supposed to be benefited from it. It does not comply with the claim of right doctrine. Not considered as
income just yet.
o This has become a gray area lately because of the BIR regulation with regard to VAT. If there is a security deposit, it is
supposed to be subject to VAT.

10. ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR OTHER TYPES OF INSURANCE
- Any periodic payment resulting from your investments.
o Example: You invest during the period of your service, and upon resignation, you will receive periodic payments as annuity.
- It is an income to the extent of the difference between the amount that you paid and the amount that you received.

- Illustration:
1. You paid a premium of 1M. In a span of ten years, you will receive 100K annually.
• There is no income but mere return of investment.

2. You paid a premium of 1M. In a span of ten years, you will receive 200K annually.
• -‐There is an income of 1M which is the difference between the amount of your investment and the total amount received.
- Rates:
A. Sources within the Philippines:
a. Individual Taxpayer: 5%-‐32%
b. Non Resident Alien Not Engaged in Trade or Business: 25%
c. Corporation: 30%

50

B. Sources outside the Philippines:
a. Resident Citizen: 5-‐32%
b. Domestic Corporation: 30%

11. PRIZES AND AWARDS

PRIZE WINNINGS
1. There is effort (but not in the submission) 1. Game of chance
2. Less than 10K: 5%-‐32% 2. Regardless of amount: 20%
Excess: 20%
3. Ex. Literary Award 3. Ex. Bingo

1. The prize received by a corporation from PBA is subject to 20% final tax.
• If the corporation will give bonus to the players, it will be subject to the ordinary income tax of 5%-‐32% as compensation to
its employees.
• It does not matter if the amount distributed to the players is the prize from the basketball tournament.

2. Manny Pacquiao’s prize from boxing abroad is subject to the rate of 5%-‐32%
• He is a resident citizen.
• The Philippine Tax Authority does not have jurisdiction abroad.
• There is also no withholding agent abroad.

o Exemption of prizes and award:
1. Sports sanctioned by the Philippines Sport Organization
2. Primarily in recognition of charitable, artistic, literary, religious, educational and civic
a) Without exerting effort in joining the contest and
b) No condition to render future service

Sample Case: Parent company in Japan wanted to give 100k to a managerial employee of the Subsidiary Company for having
been chosen in its annual contest for good service. Is it subject to tax? No.
1. There is no employer-‐employee relationship, so it cannot be considered as compensation subject to 5%-‐32%.
2. No effort on the part of the employee. The recipient did not apply for it.
3. It is considered as a prize for civic, scientific or artistic contribution to the local or global community.

• On the other hand, if it is subject to tax, the rate would be 5-‐32%, not 20% because the source is a foreign country.

12. PENSIONS RETIREMENT BENEFITS, OR SEPARATION PAY
• It pertains to payment in the future in consideration of past service.
• Generally, subject to income tax.
Except:
1. New retirement law
a. Rendered at least 5 years of service
b. Under the same employer
c. At least 60 years of age for voluntary and65 for compulsory
d. Applicable if there is no private benefit place

2. Reasonable Private Retirement Plan
a. There must be a profit sharing plan
b. It must be registered with the BIR
c. Employee must be at least 50 years of age
d. Service of at least 10 years under the same employer (not necessarily continuous)
e. Must be availed of only once

• You can start working as a private employee and later on apply in the government. There is a different retirement plan for the
government. Government’s retirement plan may also be tax-‐free.
• You may voluntarily resign and still avail of the tax exemption if you fall within the qualifications of your retirement plan policy.

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13. INCOME FROM ANY SOURCE WHATEVER

SUMMARY OF INCOME FROM WHATEVER SOURCE
- Compensation
- Gross income gains from dealings with properties
- Interest
- Royalties
- Rent dividends
- Annuities
- Pension
- Partner’s income
- Prizes and awards

OTHERS:
A. Forgiveness of indebtedness
- Given out of generosity
o Except: In consideration of service

B. Bad Debts Recovered
- Recovery of accounts previously written off
- It is taxable applying the tax benefit rule
- To determine the tax benefit from bad debts previously written off, you compare the Would-‐be Income from the Actual Income

Thus:
Would be Income – Actual Income = Amount of Debt Taxable
Where:
Actual Income = Gross Income – Bad Debt
Would be Income = Gross Income – Would be Bad Debt.

The “Would be Bad Debt” is the bad debt you would have recognized had you known it would have been recovered on a future date. Such
that if the entire bad debts would be subsequent recovered, the Would be Bad Debt would be 0.

Example 1:

2014
Gross Income: 100K Computation:
Bad Debt: (50K) 100 [Would be Income 100-‐0 ]
Taxable Income: 50K (50) [Actual Income 100-‐50 ]
50 [Taxable Bad Debt]
2015
Gross Income: 200K *Because the difference between the Would Be and Actual is 50,
Recovered Bad Debt: 50K therefore the entire amount of 50 as Recovered Bad Debts is
considered as Taxable Income
Taxable Income: 250K

Example 2:

2014

Gross Income: (100K) Computation:
Bad Debt: (50) 0 [Would be Income (100k) – 0 ]
Taxable Income: (150K) (0) [Actual Income: (100k) – 50 ]
0 [Taxable Bad Debt]
2015
*even if you recovered the whole amount, none of it is taxable
Gross Income: 200K because you derived 0 benefit. Take note that for tax purposes, a
Recovered Bad Debt: 50K loss or negative profit is considered as 0.

52

Example 3:
2014
Computation:
Gross Income 50K 50 [Would be Income 50K – 0 ]
Bad Debt: (100K) (0) [Actual Income 50K – 100K ]
Taxable Income: (50K) 50K [Taxable Bad debt]

2015 *you only recognize 50k even if 100k was recovered because you
were only benefited up to the extent of 50k
Gross Income: 200K
Recovered Bad Debt: 100K

Example 4:
2014 Computation:
0 [Would be Income 50k – 60K]
Gross Income 50K 0 [Actual Income 50k – 100k]
Bad Debt: (100K) 0 [Taxable Bad Debt]
Taxable income: (50k)
*You would deduct 60k from your gross income to get a Would be
2015 income of -‐10 because 60k would be the bad debts you would have
recognized in 2014 had you known that 40 out of the 100k would be
Gross Income: 200K recovered on a future date.
Recovered Bad Debt: 40K There being no taxable benefit in this situation, you don’t recognize any
Taxable Income: 200K as part of taxable income for 2015.

• If given the same facts, but the recovered bad debt for 2015 is 60k, you will recognize a Taxable Income of 210K. Gross Income of
50K, less Would be bad debts of 40K, would equal to 10K.

• If what is recovered would be 80, the Taxable Income for 2015 would 230K.
50K – 20K– actual income of 0 = 30k taxable benefit.

C. Taxes
- Not all taxes are deductible, such as the following:
1. Income tax
2. Donor’stax
3. Estate Tax
4. Stock Transaction Tax
5. Special assesment
6. Income tax paid for in foreign country recognized as tax credit
7. Value added tax

- Tax Benefit Rule applies.

D. Campaign contributions
- Generally, campaign contribution should not be subject to tax as long as it is utilized in the election.
- Excpetions:
1. Excess or unutilized portion
2. Failure to file in the COMELEC the statement of expenditure

E. Corporate Bonds
- Liability of the corporation which is securitized. There is a paper representing it

• If corporation sell it in its FACE VALUE, it is NOT TAXABLE because there is no gain.
• If issued at a PREMIUM, the GAIN IS TAXABLE. If the bond is worth 1M and the corporation sells it’s a 1.5M, the EXCESS
OF 500K IS TAXABLE. However, it is not taxed outright. It must be AMMORTIZED. If the lifetime of the bond is 5 years, it
is taxable for 100K every year.
53

• If issued AT A DISCOUNT, the LOSS IS TO BE RECOGNIZED. If the bond is worth 1M and it was sold at 900k, there is a loss
of 100K which is deductible. It has to be amortized over the life of the bond. If the lifetime of the bond is 5 years, there
is a deduction of 20K every year.
• If you start with a discount, you add. If you start with a premium, you deduct. Both must reach the face value
• If you REDEEM the bond equivalent to its value, it is not subject to tax as there is no gain.
• Redemption of the Bond: REDEMPTION PRICE VS CARRYING VALUE

Example: Face value: 1.5
Redeemed at 1M on the third year
Life span of 5 years

a. Amortize the premium which is 500K (1.5M-‐ 1M) over a period of 5 years. Every year you deduct 100k, so on the
3rd year you were able to deduct 300K. The CARRYING VALUE is 1.2M, which is 1.5M minus 300K. You were able
to earn 200k which is the CARRYING VALUE MINUS THE REDEMTION PRICE (1.2M 1M). It is income on your part
which is taxable.

b. If it is a discounted amount of 900K, you amortize 100K in a span of 5 years. Every year you deduct 20K. On the
third year of redemption, the CARRYING VALUE is 960k which is 900 plus 60K (20K x 3years). You may deduct 40K
which is the REDEMPTION PRICE MINUS THE CARRYING VALUE (1M-‐ 960 K).

F. Compensation for Damages
- Generally, compensation for damages is not subject to tax because it is a mere reversion to where you were prior to its award.
- Except:
1. Loss of expected profit
o Illegal dismissal and compensation for back wages
2. Damages for defending a patent

G. Tax Informer’s Reward
- Generally subject to tax at the rate of 10% final tax.
- It must not exceed 1M, but in reality it is only 900K because 105 goes to the government.
- There must be proper collection of tax, as well as the imposition of penalties and surcharges. It may include smuggled goods

EXCLUSIONS

• Immunities or privilege of not paying taxes despite the fact that you actually have income.
• There’s no question that if it’s a return of capital, then it should NOT be subject to tax.
• In general, majority of these exclusions are items of gross income. But because the law specifically provides that they are excluded in
gross income, then they are NOT subject to tax.

EXCLUSIONS DEDUCTIONS
Items of gross income Items of allowable deductions
Something you receive Something you gave up or spent
Specific; provided for in the Tax Code While enumerated in the tax code, these are not
exclusive (there could be additional deductions
allowed even if it’s not provided under the NIRC)

• Exclusions come in the form of an exemption and so must be strictly construed against the taxpayer (similar to deductions which must
be construed strictly against the taxpayer)

1. PROCEEDS OF LIFE INSURANCE

Section 32. Gross Income. -‐
xxx
B) 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.
54

Ø General rule → excluded
Exception → if such amounts are held by the insurer under an agreement to pay
interest thereon, the interest payments shall be incuded in gross
income
Ø It doesn’t matter whether the life insurance is secured by the insured or a third party
Ø Regardless also of the beneficiary it could be your estate, administrator, or employer, or heirs. It doesn’t matter for as long as it is
proceeds for life insurance. This is a very good medium for estate planning because it’s not subject to tax.
Ø The proceeds contemplated here is AFTER the death of the insured so that if ever, it is a proceed without any death involved, it will
NOT be covered here
§ Example: Mr X secured an insurance policy with himself with proceeds equivalent to 1 million. However, one of the provisions
of his life insurance policy states that “if he continues to live for a period of 50 years from the time he secured the life
insurance, he can already recover the proceeds worth 1 million pesos”. This 1 million pesos will still be considered proceeds
for life insurance.
But is it excluded under this item [Sec.32 B(1)] ?
ü NO. Because the contemplation under this section is that THERE MUST BE DEATH.
Will the entire 1 million be subject to tax?
ü NO. Because of [Sec.32 B(2)] which states that amounts received as return of premium are also excluded from gross
income. If you are able to determine how much of the 1 million is the return of premium, the amount of premium
will not be considered taxable since only the excess is taxable.
Ø It could also happen that the life insurance policy provides for payments of interest income, as in the case where it usually takes a
while before you are able to get the proceeds of your life insurance. If ever during the period while you are still waiting for the
proceeds, from the time it has accrued up to the time you are able to get it, during that period there is an obligation to pay an interest,
will that interest be included in the exclusion? NO. It’s very specific in the tax code because then, the interest will no longer be
considered part of the proceeds of the life insurance. It will now be an income for the forbearance of money. So, during the period
where you’re not given the amount, the insurer continues to make use of the money.
Ø It could also happen that when you secure a life insurance for yourself, it can be allowed to be assumed or assigned to someone else.
Life insurance can be used as a collateral. You can go to banks and if the banks will ask if you have any property or assets that can be
used to secure payments of an obligation-‐ like a loan, then life insurance can be used as a collateral for the reason that there is an
expectation of money from the life insurance. The problem here though in contemplation of the assignment and the transfer for a
valuable consideration is that the person transferee of the life insurance really becomes the person insured-‐ in replacement of the
person originally insured. Ay sayop diay class, he will NOT become the person insured, he will just become the BENEFICIARY of the life
insurance.
§ Example1: X whose life is insured for the amount of 1 million pesos, and has already paid 300k. Supposedly, he becomes the
beneficiary of the life insurance. However, he decided to transfer his life insurance in the person of Y, his son and so the latter
will now become the beneficiary of the life insurance. So X’s life continues to be the one insured. Now, why will Y be
interested of the life insurance? Because he will still get the proceeds of the life insurance if ever X dies because it’s already
certain that X will really die.

If total premium required → 600k. X will transfer his life insurance NOT in the amount of 600k but based on the value of
proceeds which Y can get. Even if the payment required is 600k, because he is able to get 1 million, there is still income to it.
But of course, X will not sell it at an amount of 1million because Y will not pay for it since he will most likely but for it at an
amount less than the proceeds which he may be able to get. If he sold it to Y for 700k, then Y will continue to make payment
of the 600k, how much is the amount continued by Y to be paid? He will pay the difference of 300k. All in all, Y is required to
pay 1million. If there is a life insurance proceeds of 1million pesos, how much is excluded from income tax on the part of Y?
Still 1 million. But the basis will ONLY be the actual value of the consideration and the amount of the premium and other sum
subsequently paid by the transferee shall be tax exempt.

Actual consideration → 700k
plus Amount subsequently paid →300k
1million = excluded

§ Example2: If it was only sold by X at the amount of 400k, and Y continued to pay life insurance at 300k.

Actual consideration → 400k
plus Amount subsequently paid →300k
700k = excluded.

- In example2, only the 300k is taxable, 1M minus 700k(excluded) = 300k.
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- Isn’t it a violation of the exclusion principle under the tax code that states that proceeds of life insurance is excluded from income
tax? It ought to be a violation but it is the law. In fact, even before the tax laws have been codified, it’s also stated in Revenue
Reg.2 that if there’s an assignment, exclusion should just be the consideration paid plus subsequent payments. Atty: My opinion is
that you don’t want to have people transferring their life insurance, you’re putting premium on the life of a person.

2. AMOUNTS RECEIVED BY INSURED AS RETURN OF PREMIUM

(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.

- If ever there’s a policy which allows you to recover proceeds even if you did NOT DIE
- What is contemplated here is a type of insurance called ENDOWMENT
- In the first place, this is NOT income, it is only a return of CAPITAL.

3. GIFTS, BEQUESTS AND DEVISES

(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.
- Gifts-‐one given gratuitously covered under the law on Donation
- Bequests –aka Legacy; personal property given by way of will
- Devises – real property given through a will
- It is excluded since it is already subject to Estate and Donor’s Tax

4. COMPENSATION FOR INJURIES AND SICKNESS

(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.

- In relation to the physical aspect, you must be affected personally
- Injured personally
- Example: Car1 bumped into Car2. The owner of Car2 demanded damages for his car amounting to 200k. The car insurance of Car1,
paid only 100k to Car2 while the other 100k was shouldered by the owner of Car1.
§ How much is excluded?
o NOTHING is excluded.
§ How would you treat the entire 200k?
o Sadly, the ENTIRE amount is taxable. Because it is NOT exempted under the law.
- But isn’t this just a return of capital? After all, you have incurred a loss, so isn’t it just a return? Yes, that’s right. But you present it in
your income tax return. First, there’s gross income so include it in gross income, then after that you claim it as a deduction. Whether
it is taxable, then yes it is taxable but it may happen that you may be able to deduct it.

5. INCOME EXEMPT UNDER TREATY

(5) Income Exempt under Treaty. -‐ Income of any kind, to the extent required by any treaty obligation binding upon the Government of the
Philippines.

-‐ Because we treat other states as superior in their own jurisdiction, we cannot tax them for we do not hold jurisdiction over them.
Sometimes, what we do is we enter into agreements as to how we tax certain items which may belong to other states.
-‐ Our tax law is very specific that if it is already provided in the Tax Treaty that this particular item is exempted then it should be
considered exclusions already from gross income.
-‐ Employees in IRRI, Embassies are exempted from income tax. But this presupposes that they are foreign nationals.

Deutsche Bank-‐AG Manila Branch vs CIR Gr no. 188550, 8-‐19-‐2013 (based from the Case Summaries Compiled last year)
Facts: In accordance with Section 28 (A) (5) of the National Internal Revenue Code (NIRC) of 1997, petitioner withheld and remitted to
respondent on 21 October 2003 the amount of PHP67,688,553.51, representing fifteen percent (15%) branch profit remittance tax (BPRT)
on its regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. Believing
that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers Assessment and Investigation Division on 4 October
2005 an administrative claim for refund or issuance of its tax credit certificate in the total amount of PHP22,562,851.17. On the same date,
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petitioner requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of 10%
under the RP-‐Germany Tax Treaty. Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review with the
CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit certificate for the amount of
PHP22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB Germany.

Issue: Whether or not the failure to strictly comply with RMO No. 1-‐2000 will deprive persons or corporations of the benefit of a tax treaty.

Ruling: No. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief. "A state that has contracted valid international obligations is bound to
make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken." Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The obligation to comply
with a tax treaty must take precedence over the objective of RMO No. 1-‐2000. It is significant to emphasize that petitioner applied —
though belatedly — for a tax treaty relief, in substantial compliance with RMO No. 1-‐2000. Clearly, there is no reason to deprive petitioner
of the benefit of a preferential tax rate of 10% BPRT in accordance with the RP-‐Germany Tax Treaty

Atty’s Discussion:
-‐ This involves a branch profit remittance tax. While they filed an administrative claim for tax refund, they also filed for a
confirmation from the BIR ITAD (International Tax Affairs Division of the BIR). This is where you file for a tax treaty relief the so-‐
called ITAD, and that’s your ITAD ruling. If you’ve seen a lex libris software in the library, you’ll see tax rulings of the BIR which has
a separate icon called ITAD ruling. This ruling is a ruling issued by BIR in relation to tax treaties of the Philippines. You file it to the
International Tax Affairs Division of the BIR (or I.T.A.D.)
-‐ They asked for confirmation if they can avail of the 10% tax rate. BIR denied it on the basis that there must be an application for
ITAD ruling at least 15 days before you can avail of the tax treaty relief. The reason for this is that it will prevent the consequences
of an erroneous interpretation and application of the treaty provisions.
-‐ But the SC ruled that the tax code clearly provides that if there are items excluded under a treaty then we ought to comply with it.
In the case, there is a provision in the RP Germany that it will be subject to 10%. SC said we are to comply with our agreements
with the international community in accordance with the principle pacta sunt servanda.
-‐ So every treaty in force is binding upon parties and obligations under the treaty must be performed by them in good faith. A state
that has contradicted valid international obligations is bound to make it in its legislations those modifications that may deem
necessary to ensure the fulfilment of the obligations undertaken.
-‐ We ought to make legislations compliant with our international agreements rather than preventing them.
-‐ So does that mean then that we don’t need to apply anymore for a tax treaty relief? NO, we are still required. If you do not apply,
you may be subject to penalties.

6. RETIREMENT BENEFITS, PENSIONS AND GRATUITIES
(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.

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(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.

- General rule →Pensions are generally subject to income tax.
- Exception →Special laws, i.e. retirement
- New Retirement Law:
1) Complulsory-‐ 65 yrs old
Voluntary -‐60 yrs old
2) Rendered service for the same employer for at least 5 years
- Reasonable Private Benefit Plan
1) Registered in the BIR
2) At least 50 years old
3) Rendered service for at least 10yrs (not necessarily continuous, but just TOTAL)
4) Availed of once
- If you have your own retirement benefit plan, can you still avail of the retirement law?
o Yes. Whichever is more favourable to the taxpayer, he/ she can avail of it.
- For example, under the retirement plan of a company, he cannot avail of the benefits under the Retirement Plan, and so he may
be subject to income tax. If he failed to render 10 years of service, he can still avail of the New Retirement Law.
- Take note that when you already availed of the exemption under the New Retirement Law, you can no longer avail of it under the
reasonable private benefit plan. You can only avail of it once.
- Retirement vs Separation

Retirement Separation
Any separation from employment in Through law, even OUTSIDE the law (leave without
compliance with the retirement law absence or committed a crime-‐ in violation of law,
that’s why it is outside the law) or agreement of the
parties
It is the law which provides the policies for
retirement, by agreement, or by CBA

- Separation excluded by gross income:
1) Involuntary (beyond the control of the employee)
a. Retrenchment – cost saving device where employees will be let go for economic purposes
b. Cessation of business
c. Redundancy
2) Death
3) Sickness
4) Physical disability
- Terminal leave benefits are sick or vacation leave benefits which you availed of just before you leave the company. It could
happen that within the year you are entitled to let’s say 20 leave benefits, if you leave some time in March, and you have not
availed of any of your vacation leave, if there’s a rule in your company that it will be commuted to cash, then that benefit is
considered income on your part and it will be subject to tax but only to the extent of the excess of 10 days vacation leave. Because
the 10days is considered a de minimis benefit and not subject to income tax. So first 10 days is exempt; the excess is the one
subject to income tax.
- So if ever your employer will give you separation benefits and a terminal leave pay, just tell your employer to NOT consider it as a
terminal leave benefit, just consider it as part of separation pay so that it will also be exempted since there’s no limit on the
amount of separation pay.

7. MISCELLANEOUS BENEFITS

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.

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CIR vs Mitsubishi G.R. No. L-‐54908

• For Atlas to continue its operations, it will have to get a loan from any financial institution supposedly. Because Atlas is the main
supplier of Mitsubishi, they entered into an agreement where Mitsubishi will loan Atlas the amount necessary to continue supplying
Mitsubishi
• But Mitsubishi to be able to comply with the loan agreement also has to loan the amount, and it loaned from Eximbank which happens
to be owned by the Japanese government
• Issue: the loan agreement of Atlas and Mitsubishi had a stipulation for the payment of interest. So there is interest income here. The
question is whether the interest income of Mitsubishi should be subject to income tax
• Mitsubushi’s contention: under the tax code, part of the exclusions are interests on deposits in banks in the Philippines by foreign
governments, financing institutions owned or controlled or enjoying refinancing from foreign governments, and international or
regional financial institutions established by foreign governments.
• This is just a loan agreement, and supposedly only interests from deposits are subject to the exclusions, but Mitsubishi would want to
extend the exclusions to include interest income owned by the foreign government
• This is not an investment here. This is a loan agreement. Supposedly, that alone should have told Mitsubishi this is not covered by the
exemption
• According to SC: This interest income is provision is not between Eximbank and Atlas, it is between Mitsubishi and Atlas. The interest
income has nothing to do with the foreign government. If that is the case, if we allow this type of arrangement, then all foreign
corporations will just loan from their foreign banks then extend the loan to entities here in the Philippines so they can get away with
the payment of taxes. SC said the exclusion provision under the tax code does not apply. This is not an investment income. This is an
interest income from a loan. (This is a landmark case, read it!)

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.
- Already discussed, in relation to prizes and awards

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
- The national sports commission is the Philippine Olympics Committee

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 Thirty thousand pesos (P30,000) 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, further, That the ceiling of Thirty thousand pesos
(P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.
• The latest now is Php82,000.00
• How do you compute for the 82K?
Example: You are a purely compensation earner
Monthly Compensation 60,000
Rice Subsidy 2,000
59

Laundry Allowance 500
Productivity Incentive 5,000 at the end of the year
X-‐mas bonus 20,000

COMPUTE: How much is subject to tax?
Item Amount subject to tax
Compensation Income 60,000 x 12 =720,000
Other Benefits
Rice Subsidy 500 X 12 = 6,000 (1500 is exempted since it is de minimis benefit)
Laundry Allowance 200 X 12 = 2,400
Productivity Incentive 5,000 (not a de minimis benefit)
X-‐mas bonus 20,000
13th month pay 60,000
Total: 93,400
-‐ 82,000 (the limit for other benefits)

Total other benefits subject to tax: 11,400

• The purpose of the 82,000 limit is to get the ceiling for 13th month pay and other benefits. Do not deduct 82,000 from the
compensation income. So do not commit the mistake of saying that 13th month pay is exempted from tax. Only 82,00 is exempted
from tax in relation to 13th month pay
• Question: Can the X-‐mas bonus be considered x-‐mas gift under de minimis benefits?
Sir: Here in the miscellaneous, it is X-‐mas BONUS, not GIFT. If what is provided in the problem is gifts, apply the 5,000 in de
minimis. If not mentioned, consider it as not part of de minimis benefits, so don’t deduct. Mamalateo says x-‐mas bonus can be
xmas gift, but for purposes of computation, there’s a distinction between bonus and gift. The tax code mentions in exclusions that
it’s x-‐mas BONUS specifically. For my exam, distinguish bonus from gift
• Based on RR 1-‐2015 (latest amendment to de minimis benefits) the following is considered a de minimis benefit:
o “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 (Php 10,000.00) per
employee per taxable year.”
• Therefore: CBA AND productivity incentive benefit COMBINED should NOT exceed Php 10,000 per year per employee.
• TN: Not necessary that both should be present to be considered de minimis. What is required only is that when both are
combined they should not exceed Php 10,000 to be considered de minimis.
**** The computation of last meeting wherein there was a productivity incentive received of Php 5,000 should not have
been included. But if don’t want to change your notes too much just make the productivity incentive received to Php 15,000
so that the solution of last meeting would still be correct.
• So in addition to your Php 82,000 you have Php 10,000 productivity incentive that goes with your CBA.

F. GSIS, SSS, Medicare and Other Contributions. -‐ GSIS, SSS, Medicare and Pag-‐ibig contributions, and union dues of individuals
• Example
Paid by ER Actual Amount to be paid Excess
SSS 700 600 100
Philhealth 700 500 200
PAG-‐IBIG 500 100 400
• To illustrate that: If you have a total compensation of 60,000 per month, you can reflect the exemption by taking it away from the
amount subject to withholding tax
• Every month you are subject to withholding tax. To do this, the payroll master will deduct the contributions made to SSS,
philhealth, pag ibig. They will deduct 600, 500, 100 so that you will now end up with a taxable income of 58,800. Only this 58,800
will be subject to tax. The contributions you made, even if you really earned 60,000, will not be subject to tax. It’s as if you only
earned 58,800.
• They are excluded by them being deducted from compensation income
• The excess were never deducted, they are included in the 58,800.
• The contributions are made deductions from your income
• Answer to a question:
ü Those voluntarily registering themselves as SSS, philhealth members ought to be subject to tax as to the excess. But if I am
that person, I will not pay tax. I will just say this is not in excess as provided by law. I am only to contribute this much under
the law. The pension also will not be subject to tax because that is now the benefit from SSS and Philhealth. The exclusion is
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in relation to contribution, not benefit. There is no exemption as to the benefits, only as to the contribution that there is a
limit.
ü The contributions have a limit, but the benefits from SSS, Philhealth, PAGIBIG, GSIS are specifically exempted by law from
taxes regardless of how much the benefit is.
ü This was started by Henares that the excess in voluntary contributions is subject to tax. The reason given by her was that the
excess is now an investment. It is not a mandatory contribution anymore, and therefore outside the contemplation of the law

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.
• If you sell or exchange bonds, debentures or other certificates of indebtedness on premium, on discount, or sale on face value,
you are subject to tax. However, if it provides that the maturity date of the bond or debenture is already more than 5 years, it
could be excluded from income tax as provided under Sec 32
• In addition to your analysis, if it relates to sale of bonds, debentures or other securities, you also look at the period of maturity. If
it is more than 5 years, it is exempted from income tax

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.
• There has to be a company engaged in mutual fund investment.
• Examples: Philam Life and other insurance companies
• Supposedly, on your own, you cannot invest in share of stocks because you cannot afford or you do not trust yourself to be good
on investments, so what you do is you invest in a mutual fund company. This company will take care of the money you invested
and it will do the buying and trading of the share on your behalf. It’s not only you who invested, there are several individuals. In
return, they will give you shares equivalent to the amount you invested. You will receive a certificate of ownership as to your
investment. That ownership under the law is already considered as shares in mutual fund
• If you will redeem it, since this is short-‐term investment, you will return the certificate and get back the amount that you received,
that is exempted from income tax. In the ordinary situation, if you give the shares back to the company who owns them, that
would have been subject to capital gains tax. But in this case, it is excluded under the tax code when you sell your shares or giving
it back to the mutual fund company
• The reason is because the government would like to encourage investments in capital markets so they exclude these from income
tax

ALLOWABLE DEDUCTIONS

• Allowable Deductions are amounts that you can deduct from your gross income in order to arrive at the taxable income of the
taxpayer

• Deductions vs Exclusions
1. Deductions are outflows of wealth, exclusions are actually inflows.
2. Deductions are pertinent to determine taxable income, exclusions are pertinent in computing your gross income
3. Deductions are amounts you spent, exclusions are amounts you may receive

• Deductions vs Exemptions
1. Deductions are items of cost and expenses related to your business, exemptions are amounts arbitrarily determined by law
2. Deductions are to recover the cost of doing business

EXEMPTIONS
• Individuals have a basic personal exemption of Php50,000 and additional exemption of Php25,000
• These exemptions are allowed only to individuals
RC NRC RA NRA-‐ETB NRA-‐NETB
Basic Personal ü ü ü ü Subject to X
Exemptions reciprocity
(BPE)
Additional ü ü ü X X
Exemptions (AE)

• It doesn’t matter whether you’re married or single to avail of BPE, it only matters on whether you have a dependent or not
• Who are DEPENDENTS? Legitimate, illegitimate, legally adopted CHILD
ü No senior citizens, parents, brothers or sisters; these are only to determine if you are head of family or not. In claiming AE, it
should only be a CHILD
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CONDITIONS for a child to be dependent
1. Not more than 21 years old
2. Unmarried
3. Not gainfully employed
4. Chiefly supported by the taxpayer
5. Living with the taxpayer
Example. As a general rule, the husband will claim the exemption except if he is not gainfully employed or there is an express
waiver in writing by the husband, or he cannot claim it for non-‐compliance of the conditions under the law. Example you are
legally separated from your wife and your child is living with your wife. So the wife will claim the exemption.

• STATUS-‐AT-‐THE-‐END-‐OF-‐THE-‐YEAR RULE
ü If there is a change in the status of the taxpayer, it is always construed in favor of the taxpayer
ü If your child is born in the middle of the year, it is as if the child is born at the beginning of the year
ü If your child will celebrate his birthday in the middle of the year, it’s as if he celebrated at the end of the year. This
matters because there is age limit for a dependent. If he celebrates his 22nd birthday at the middle of the year, it’s as if
he celebrated at the end of the year so you can still claim the exemption
ü A muslim can only claim AE equivalent to 4 children still, same applies as to whether the child is living with them or not.
It becomes confusing because Muslims are allowed 4 wives and what if the wives have children. What if he specifically
waives in writing, who among the wives can claim the exemption? This is not yet answered. Even Henares has not
spoken about this

• ESTATES AND TRUSTS
ü Allowed BPE equivalent to 20,000 or 50,000, still a gray area, but it should be 50,000

INDIVIDUALS CORPORATIONS
RC NRC RA NRA-‐ETB NRA-‐NETB DC RFC NRFC
Deductions ü ü ü ü X ü ü X
in general
OSD ü ü ü X X ü ü X
Itemized ü ü ü ü X ü ü X
Deductions
BPE ü ü ü ü X
reciprocity
AE ü ü ü X X

• For individuals to be allowed deductions, they must be earning income from trade or business or exercise of a profession.
Individuals earning compensation income are not allowed deductions
• Make a distinction for OSD for individuals and corporations
ü For individuals, they cannot claim deductions for cost of sales and cost of services for purposes of computing OSD (2010 Bar
Exam)
ü The 40% is based on gross sales / gross receipts for individual, and on gross income for corporation
ü Example: You’re an individual and you have:
Total sales 1M
Cost of sales _500K _
Gross profit 500K
ü Since you’re an individual, you base the 40% on 1M. If you’re a corporation, you base it on 500K
ü So CORRECTION (as to the discussion way back): If you are engaged in sale of services, you can deduct cost of services

62

ITEMIZED DEDUCTIONS (Ex In Ta Lo Ba Cha Re Pen Pre Dep Dep) Sec. 34

EXPENSES

A. Business Expenses

It must be ORDINARY or NECESSARY to the trade or business of the taxpayer or professional activities of the tax payer.
a) ORDINARY
-‐ Usual or normal in the conduct of business
-‐ How to know if the activity is normal or usual? Make reference to entities or industries that are the same or related to your
business.
b) NECESSARY
-‐ Beneficial, usual and appropriate to the business
-‐ Will uplift the business and/or contribute to the operations of the business

REQUISITES FOR DEDUCTIBILITY OF EXPENSES:
1. Must be ORDINARY or NECESSARY
2. Incurred within the taxable year
3. Must be related to the business of the taxpayer
4. Substantiated by evidence including but not limited to official receipts, contracts, agreements, acknowledge receipt. BUT
BEST EVIDENCE would be official receipts
5. Reasonable in amount
6. Must not be against LAW, MORALS, PUBLIC POLICY or PUBLIC ORDER
7. If there is a requirement of WITHHOLDING, it must be complied with otherwise you cannot deduct the expense

• Can employer deduct 13th month pay as an expense?
o YES, because it is part of the compensation given to the employee
• Can de minimis benefits paid by employer be deducted as expense?
o YES also.
• Anything that the employer pays by reason of EE-‐ER relationship can be deducted as an expense
• To what extent will you recognize FRINGE BENEFITS as an expense?
o Grossed up monetary value
• TN however if there is DEPRECIATION on the fringe benefit.
o If title is not given to employee, thus you recognize only 50% of the value. It is already accounted for under fringe benefit
tax of employer thus you do not need to account for depreciation because to allow such it would result in a 150%
deduction by the employer. It is already covered by fringe benefit tax of the employer.

EXAMPLE:
Value of motorcycle is 1M and depreciable for a period of 10 yrs. So depreciation of 100k per year.
If given to employee as fringe benefit, only account 500k. So get GMV which is 1,470,588. So FBT is 470,588. Multiply by 50% = 235,294.
Further divide by useful life = 23,529 per year.

Do not anymore account for the fringe benefit because it is already covered by the depreciation so that only the depreciation and the fringe
benefit tax is allowed to be deducted.

B. Advertising and Promotional Expense
• GR: Can be allowed as a deduction IF it is a period cost (good for 1 year)
o Exception: Not deductible outright IF it will boost goodwill or create a name which covers a period of more than 1 year. It
considered a CAPITAL EXPENDITURE thus it must be SPREAD OUT.

C. Rental Expense
• IMPORTANT: In relation to the property the taxpayer must not have title or must not assert any ownership on the part of the
property being rented/leased
• REQUIREMENT FOR DEDUCTIBILITY: Must have been subjected to a withholding tax of 5%; no withholding = cannot be allowed to
deduct and penalize him double the amount to be withheld

D. Traveling Expense
• Requisites:
a) Relates to business of taxpayer and that the person given the allowance must liquidate
63

b) Paid while AWAY FROM HOME (must indicate office as final destination should not be your house otherwise it will not be
deductible)

E. Entertainment, Amusement and Recreation Expenses (EAR)
• Requisites:
1. Reasonable in amount
2. Incurred during the taxable period
3. Connected to the trade and business
4. Not contrary law or public morals and public policy
TN: If clients are brought to KTV Bar and GROs are hired, for purposes of answering the Bar, it should not be allowed for
it is against public morals. But you may try to argue that they are legitimate businesses as they are given permits thus the
hiring of GROs for your client should be deductible.
5. Does not exceed the limit:
Ø Sale of goods – 0.5% of Net Sales
Ø Sale of services – 1% of Net Receipts
Ø If both: Proportional
• Nets sales/Net Revenue x ACTUAL EXPENSE
Total Net sales & revenue
• Ex: Actual EAR = 3000; Net sales =200K; Net Receipt = 300K
o (200K ÷ 500K) x 3000 = 1200
o (300K ÷ 500K) x 3000 = 1800
• Get the limit:
o NS= 200K x 0.5% =1k
o NR= 300k x 1% = 3K
• Compare; Use whichever is lower:
o NS: Limit 1000 vs Actual 1200 = for Net sales 1000
o NR: Limit 3000 vs Actual 1800 = for Net revenue 1800
o TOTAL ALLOWED DEDUCTION: 2800

F. Repairs and Maintenance Expense
• Only ORDINARY repairs are allowed. Ordinary if it extends the life of the asset by not more than 1 year.
• EXTRAORDINARY repairs extend the life or value of the asset repaired thus it is a capital expenditure which should be subject to
depreciation/amortization

G. Supplies and Materials
• Goods used in the ordinary course of the Business or incidental thereto
• Different from INVENTORY which are the goods subject of your business, these are the goods to be actually sold
• Must be actually consumed during the year

H. Litigation Expenses
• GR: Allowable deduction for the year incurred; Period Cost
o Exception: litigation incurred in the defense or protection of title are capital in nature such as INTELLECTUAL PROPERTIES (
patent, copyright or trademark)
o Cost of the litigation will usually form part of the cost of intellectual property
o Cost of land litigation is an ordinary litigation expense; litigation expense will not form part of the value of the land as the
land will always have a concrete valuation

I. Expenses of Regular Business Unit of the Bank
• Only regular business units expense can be deductible.
• FCDU and offshore transactions are not allowed as deduction because they are outside our jurisdiction and not subject to tax

J. Option to Private Educational Institution
• Option:
1. Deduct the capital outlay outright or as a period cost or
2. Consider it as a capital asset and subject it to depreciation over the period of its useful life

K. Under the Expanded Senior Citizens Law
• The 20% discount given to senior citizens can be allowed as a deduction
• If ever you employ senior citizens, you can make an additional 15% deduction of the wages you pay
64

L. Magna Carta of Persons with Disability
• 20% discount can be deducted as well

INTEREST

• Requisites:
a. Incurred within the taxable year
b. Must relate to an indebtedness
c. In connection to trade and business
d. Stipulated in writing
e. Not used to finance petroleum operations nor should it be between related parties

• Deductible in full when taxpayer DOES NOT EARN interest income subject to final tax.
• Not Deductible in full when they earn such interest income. This is to prevent Tax Arbitrage
• Theoretical Interest Expense is NOT DEDUCTIBLE; it is just made up interest; speculation, no bearing
• Imputed Interest Expense is NOT DEDUCTIBLE; It is not recognized under the law, because the interest must be in writing.
• Interest on Penalties on Unpaid tax à YES, 20%. NOT SUBJECT TO LIMITATION
- May be allowed when:
• Legally due
• Out of forbearance of money
• Only on unpaid business related tax
o Income tax à yes related to business
o Surcharge à NO
o Compromise à NO
• TAX ARBITRAGE RULE: the interest expense is reduced by 33% of the interest income subject to final tax.
-‐ Interest Income: 1M
-‐ Interest Expense: 500K
-‐ 500K less (1M x 33%) = 170,000 may only be deducted

TAXES

• basic taxes only
• interest and penalties on unpaid taxes are not included in the item taxes for purposes of deduction. They would be computed with the
item interest for deduction.
• Taxes not allowed as deduction:
a. Philippine Income Tax
b. Estate and Donor’s Tax
c. Special Assessment
d. Stock transaction tax
e. Value Added Tax
f. Foreign Income Tax if claimed as tax credit

LOSSES
• Losses sustained in the course or in relation to the trade, business or profession of the taxpayer.
• All deductions, except charitable contributions, are in relation to the trade, business or profession of the taxpayer.
• Loss must arise from fire, storms, shipwrecked, other casualties, robbery, theft or embezzlement and other losses. And not
compensated for by insurance or other forms of indemnity.
• The requirement is that it must be reported in a period not less than thirty (30) days nor more than ninety (90) days from the date of
discovery of the casualty (sec 34 D)
• What you recognize as loss:
o If total destruction, the book value of the property.
o If partial destruction, cost of restoration or the book value whichever is lower.

• Net Operation Loss Carry-‐over
o shall be carried over as a deduction from the gross income for the next 3 consecutive taxable years immediately following the
year of loss.
o However, any net loss incurred in a taxable during which the taxpayer was exempt from income tax shall not be allowed as a
deduction.
65

Example:
Year 1 2 3 4 5
Net Income (100k) 0 40K 50k 10K
Deduction (40k) (50K) -‐

(cannot deduct (deduction is Same reason as The remaining
as the taxpayer limited to the year 3 10k cannot be
is exempt as it extent of income) deducted as it is
is not subject beyond the 3
to tax) consecutive years
stated in the tax
code
Rationale: so that
you cannot deduct
the remaining 60K
for another 3 years
as a loss

-‐ What is allowed to be deducted in NOLCO is up to the extent of the income for that particular year.
-‐ This is because, if you allow 100k to be deducted in year2, the remaining 60k could be considered as a loss in that year that
would be carried over for another 3 years. Thus, the taxpayer would be allowed to perpetrate the loss for more than 3 years.
-‐ In year 5, no net loss carry-‐over is allowed as it is more than 3 consecutive years following the year of such loss. Thus, even if
there was taxable year that is exempt from taxes or had income tax holiday or 0 taxable income it still included in the
counting for purposes of NOLCO.
-‐ Question: Are you allowed to deduct NOLCO if you are in OSD?
o No, because NOLCO is part of itemized deduction involving losses. So if you opted OSD meaning you forego any
itemized deduction.
-‐ But if during the year that you availed the OSD would you include it in counting the 3 years for NOLCO? Example, in year 2
you opted OSD, would it be counted for purposes of NOLCO?
o Yes, regardless of the circumstance that happened within the 3 year period, the counting still continues.

• Another requirement is that there should be no substantial change in the ownership of the business of the taxpayer.
(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.
o This will only result in case of merger/ consolidation or business combination.

• Loss from shrinkage of stocks is NOT ALLOWED as a deduction. It is only a theoretical loss, not yet realized.
o Allowed as a deduction when the stock is sold and its value has lessen. Here, there is an actual loss.

• Loss of useful value is allowed as a deduction because this is already realized. There is no more value for the property that you just
purchased. The asset has been obsolete or you are legally prohibited to use it. (Example: inkjet which is now not commonly use or
firecrackers that is now legally prohibited)

• Loss from wash sale is NOT ALLOWED as a deduction because it is example of a stock manipulation activity. EXCEPT if you are a dealer
in security because you sell securities from time to time.
o Wash Sale: 61 day period sale → bought 30 days before and sold after 30 days; involving substantially the same shares.
o Sec. 38 “any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty
(30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact
or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under
Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary
course of the business of such dealer.”
o Basis of the loss, is the time you incurred the loss.

• WAGERING LOSSES only deductible to the extent of wagering gains. How come there would be a gambling loss that is related to your
trade or business. Thus, if it not related to trade or business it is not deductible.
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BAD DEBTS

• Requisites:
a. There must be an existing debt of the taxpayer which must be validly and legally demandable.
b. It is incurred in connection with the trade, business or profession of the taxpayer.
c. It must not be sustained in a transaction entered into by related parties (Sec. 36B).
d. It must be actually charged off in the books of accounts of the taxpayer as of the end of the taxable year.
e. It must be actually ascertained to be worthless and uncollectable as of the end of the taxable year.

• Is it required that there be a court decision or ruling for you to be able to charge off your collectibles?
o There need not be a court ruling as long as you can provide pertinent supporting documents showing that there is
impossibility for its collection. As for a person who is really insolvent based on the financial statement of the corporation as it
has incurred losses for a period of three years. This could be taken as an evidence or reasonable proof that the receivables
can be collected.
o Of course the best evidence is a court decision that a person is indeed insolvent.
o Tax Benefit Rule (no more discussion as it was already covered last time)

DEPRECIATION

• Allowable Methods:
a. Straight-‐line Method
o Formula: Depreciable Value ÷ useful life
o Example:
Property= 1M Useful life= 10 years
1M ÷ 10 = P100,000 (Recognized Depreciation)

b. Declining Balance Method
o It can be single or double DBM.
o For Single DBM the Formula: 1 ÷ useful life = rate
o Multiply the rate to the balance every year after each depreciation
o Example: (same figures)
1÷10= 1/10 or 10%
Thus,
1st year 1M x 10% = P100,000 (Recognized Depreciation)
2nd year 900,000 x 10% = P90,000 (Recognized Depreciation)
3rd year 810,000 x 10% = P81,000 (Recognized Depreciation)

o If double DBM just multiply the rate by two. Thus, (1÷ useful life) x 2
In our example, 1/10 = .10 or 10% x 2 = 20%

c. Sum-‐of-‐the-‐years-‐digit Method
o Formula: Life Remaining/ D multiply value of the property
o Use the Sequence Formula to come up with your denominator: D = life[ (life+1) /2]
o So if the useful life is 5 years. 5[(5+1)/2]= 5(6/2)= 5(3) = 15
o Thus,
5/15 x 1M = 333,333
4/15 x 1M = 266,667
3/15 x 1M = 200,000
2/15 x 1M = 133,333
1/15 x 1M = 66,667

d. Any other method prescribed by the Secretary of Finance

• You can enter into an agreement with the BIR that another method would be the best method in dealing with your particular asset.
This is subject to the agreement of the BIR.
• There could be Units of Production as when you are engaged in the business of manufacturing.
o Example if you want to know the depreciation value of an equipment used in manufacturing bottle. You expect it to produce
200M bottles. And the equipment is worth 1M.
o Formula:
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Depreciable value ÷ Total units expected to be produced = Rate of Depreciation
Then, Multiply the rate to the actual production during the year = Depreciation value of that particular year
Thus,
1M ÷ 200M =0.005 (Depreciation value per unit)
10M x 0.005= 50,000
So, in a year you produced 10M bottles then the depreciation value is P50,000.

DEPLETION

• It is applicable to wasting assets or natural resources which are physically consumable and irreplaceable. As in the case of oil and gas
wells or mines.
• For oil and gas wells or mines the method allowed by law is Cost Depletion Method.
• Cost Depletion Method is more or less the same as the unit of production method.
Depletion rate = Total Cost divided by units that can be extracted
Depletion (Amortization) Expense = Units produced during the year x depletion rate
• You get the cost not from the value of the land as it does not depreciate but to the value of the equipment or machine.
• For depletion purposes you don’t call it depletion expense, you call it Amortization Expense.

CHARITABLE AND OTHER CONTRIBUTIONS

• Distinguish deductible in full and deductible subject to limitation.

A. Deductible in Full B. Deductible, subject to limitation

1) Recipients is: 1) Recipient is:
Government of the Philippines; Government of the Philippines;
Or to any of its agencies or political subdivisions, Any of its agencies or political subdivisions
including fully-‐owned government corporations,
exclusively to finance, to provide for, or to be used in
undertaking priority activities For a non-‐priority activity in any of the areas mentioned
in A, and exclusively for a public purpose
For priority activities in:
1. Science; 5. Economic Development
2. Education; 6. Human Settlement
3. Culture; 7. Youth and Sports Development
4. Health;
• There is a National Priority Plan issued by NEDA
under the Office of the President.
2) Recipient is 2) Recipients is
an accredited non-‐government organization, an accredited non-‐government organization,
organized / operated for (purposes) organize/operated for (purposes)

• Scientific; • Scientific;
• Education; • Education;
• Cultural; • Cultural;
• Character building/youth and sports development • Character building/youth and sports development
• Charitable; • Charitable;
• Social welfare; • Social welfare;
• Health; • Religious
• Research • Rehabilitation of Veterans
• Social welfare institution

And satisfying the following conditions: If the conditions in Table A is not complied with.
1. Organized and operated exclusively for the Or the conditions of FULL DEDUCTIBILITY not complied
aforementioned purposes or a combination with.
thereof, no part of the net income of which
inures to the benefit of any private individual;
Subject to limitation:
68

2. The donation must be utilized not later than the a) Individual -‐ 10% of taxable income from trade,
15th day of the 3rd month following the close of business or profession before contribution or
its taxable year. before the deduction of the charitable
(taxable year of the NGO concern not the contribution
taxpayer) b) Corporation – 5% of taxable income from trade
business or profession before contribution or
3. The administrative expense must not exceed 30% before the deduction of the charitable
of total expenses. contribution

4. Upon dissolution, assets would be distributed to
another nonprofit domestic corporation
organized for similar purpose or purposes, or to
the state for public purpose, or would be
distributed by a court to another organization to
be used in such manner as in the judgment of
said court shall best accomplish the general
purpose for which the dissolved organization was
organized.

3) Recipient is
foreign institutions or international organizations
which are fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered into
by the Government of the Philippines and the foreign
institutions or international organizations or in pursuance
of special laws

• Deductible in Full under Special Laws

i. Integrated Bar of the Philippines (PD 81)
ii. Developments Academy of the Philippines (PD 205)
iii. Aquaculture Department of the Southeast Asian Fisheries and Development Center[SEAFDEC] PD 292
iv. National Social Action Council (PD 294)
v. National Museum, Library and Archives (PD 373)
vi. University of the Philippines and other state colleges and universities
vii. Philippines Rural Reconstruction Movement
viii. Cultural Center of the Philippines
ix. Trustees of the Press Foundation of Asia
x. Humanitarian Science Foundation
xi. Artesian Well Fund (RA 1977)
xii. International Rice Research Institute
xiii. Department of Science and Technology (DOST) and its agencies and to public or recognize non-‐profit, non-‐stock educational
institutions (RA 3589)
xiv. Donations of prizes and awards to athletes (RA 7549)

• Example:
Given: INDIVIUAL
10K donation to Accredited NGO not complying with all condition
Gross Income for the year is 10M
Itemized deduction excluding Charitable Contribution: 5M
Thus,
Net income before Charitable Contribution: 5M
Charitable Contribution to be deducted is 5M x 10% = 500,000 limitation; compared to actual of 10K use whichever is lower.
Therefore deduct 10K.

• Example:
Given: CORPO
Gross Income for the YR 10M
69

Itemized deduction excluding Charitable Contribution: 5M
Thus,
Net income before CC: 5M
CC to be deducted is 5M x 5% = 250,000 limitation; compared to actual of 10K use whichever is lower.
Therefore deduct 10K.

• Example:
INDIVIUAL
GI for the YR 10M
Itemized deduction excluding Charitable contribution: 5M
Net income before CC: 5M
CC to be deducted is 5M x 10% = 500,000 limitation; compared to actual of 600K use whichever is lower.
Therefore, deduct 500K.

• If you avail for OSD, you cannot deduct as Charitable Contribution is part of the Itemized Deduction.
• Accrediting Body for NGO (EO 671) → DSWD, DOST, PHIL. SPORTS COM, NCCA, CHED
o Certificate of Donation in the form prescribed by the BIR and notice to the RDO if donation is more than 1M
o The certificate of donation is given by the receiving entity (NGO)

RESEARCH AND DEVELOPMENT

• Research and development as an item of deduction refers to cost of materials, equipment, facilities, personnel, purchased intangibles,
contract services and a reasonable allocation of indirect cost that is specifically related to research and development activities and
that have no alternative future use.
• Considered research activities are those undertaken to discover new knowledge that will be useful in developing new products,
services or process.
• Considered development activities involve the application of research findings to develop a product, service or process.
• There is an option of the taxpayer to treated it as a deferred expenditure or as an expense.

• Deferred expenditure:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or
depletion.

In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not
less than sixty (60) months as may be elected by the taxpayer.

• Limitation to the Deduction: shall not apply,
(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with
research and development of a character which is subject to depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of
ore or other mineral, including oil or gas.

PENSION TRUSTS

• This would refer to any reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions,
but only if such amount
(1) has not theretofore been allowed as a deduction, and
(2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is
made.
• Given for past or current service as when you set up pension trust, the trustee will count from the start of his/her service and not from
the date the pension trust was established.
• Since the taxpayer (employer) is paying and nothing will be returned to the taxpayer then it is deductible but subject to:
o Current Year → fully deductible
o Past years →apportioned to the next 10 years; 1/10 deductible per year
• Example:
1-‐10 year = no pension;
70

but on the 11th to 15th year decided to make a pension trust and asked to make a contribution of: Current Year = 100K; Past Year=
200K;
15th to 20th contribution is Current Year 200K; Past Year 300K
• on the 20th yr:
CY = 200K
PY: 11 to 15→ 200k divided by 10 = 20K
15 to 16→ 300k divided by 10 = 30K
TOTAL DEDUCTIBLE EXPENSE: 250K pension trust expense

PREMIUMS ON HEALTH AND HOSPITALIZATION

• Allowed to individual taxpayers RC, NRC and RA only
• The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month
paid during the taxable
• Conditions:
a) That said nuclear family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the
taxable year
b) The taxpayer must be the person who availed of health or hospitalization benefit

ITEMS NOT ALLOWED AS A DEDUCTION

(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
o These are capital expenditures. They are allowed as a deduction in the form of depreciation.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made
o Also a capital expenditure.

(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.
o Payments may or may be deductible depending on the beneficiary
o Ex. insurance on an employee for the benefit of the employer
- Insurance proceed subject to tax → NO
- Insurance payments deductible →NO

(5) Losses from Sales or Exchanges of Property Between Related Taxpayers
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.

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WITHHOLDING TAX

Withholding tax is not a type of tax. It is a system of collection of taxes.

KINDS OF WITHHOLDING TAX

1. Creditable withholding
a.) Expanded withholding tax on certain income payments made by private persons to resident taxpayers
b.) Withholding tax on compensation income for services done in the Philippines
c.) Withholding tax on money payments of the government

2. Final withholding tax

Final withholding tax-‐ is a kind of withholding tax which is prescribed on certain income payments and is not creditable against the income
tax due of the payee on other income subject to regular rates of tax for the taxable year. Income Tax withheld constitutes the full and final
payment of the Income Tax due from the payee on the particular income subjected to final withholding tax.

SIR: not included for the computation of income tax for the year.

Creditable withholding tax-‐ taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the
payee on the said income. It is creditable because it is supposed to be deducted on the tax due. It is an advance payment.

SIR: included for the computation of income tax for the year. Example: rent income, compensation income. You receive 30 k
monthly. Also there is a corresponding taxes withheld from you, monthly. That’s why you received less than 30k monthly. At the
end of the year, the employer will add all of the withholding taxes and must equal to the tax to be paid for that specific year. If it is
less, then the employee is liable for the additional tax.

Example on professional income: You rendered service as a lawyer. You have a retainer 10k every month. 120k is the year.

Withholding tax:
If it exceeds 720k for the year = 15 % monthly.
If it is 720k or less = 10 % monthly
Answer: Since it is 120k, then the withholding tax is 10% monthly (12k).

FOREIGN TAX CREDIT
- applicable only to RC and DC (tax within and without)
2 Limitations:
1) Per Country Limitation
Per Country Income x Phil. Taxable Income = Per Country Limitation
Total Income

2) Global Limitation
All Foreign Income x Phil. Taxable Income = Global Limitation
Global Income

EXAMPLE 1:
Phil taxable income: 1, 000,000
Phil tax due: 300, 000
US taxable income: 500, 000
US tax due: 200, 000 *Actual tax paid
500, 000 x 300, 000 = 100, 000 *Per Country Limit lower tax
1,500, 000

ANSWER: The foreign tax credit will be the per country limitation or the actual tax paid whichever is lower. In this case, the per
country limit (100K) will be the basis of the deduction.

72

EXAMPLE 2:
Phil taxable income: 1,000,000
Phil tax due: 300, 000
US taxable income: 500, 000
US tax due: 200,000 *Actual tax paid
Japan taxable income: 300, 000
Japan tax due: 40, 000 * Actual tax paid the lower tax

PER COUNTRY LIMITATION: Note: Remember the whichever is lower rule

US: 500,000 x 300, 000 = 83, 333 * Per Country 1 the lower tax
1, 800,000

Japan: 300, 000 x 300, 000 = 50, 000 *Per Country 2
1,800,000

TOTAL TAXES: 40, 000 ( actual tax paid Japan) + 83, 333 (per country limit US) = 123,333 BASIS (LIMIT 1)

GLOBAL LIMITATION:
800, 000 x 300, 00= 133, 333 * Global Limit (LIMIT 2)
1, 800, 000

ANSWER: LIMIT 1: 123, 333 (Foreign tax credit the lower tax)

Tax Due
Less: Tax Credit
Tax Payable

TAXABLE INCOME

TAXABLE INCOME-‐ the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws. (Sec . 31, NIRC)

GROSS INCOME (CG2IR2DAP3)
Less Allowable Deductions/Exemptions (ExInTaLoBaChaRePrePreDepDep)
TAXABLE INCOME
X Tax Rate (5-‐32% or 30%)
TAX DUE AND PAYABLE

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TAX RATE
- depends on what kind of income (passive or active)

PASSIVE INCOME

NRA NRA
Passive Income RC NRC RA DC RFC NRFC
ETB NETB
This should be
included in its gross
income subject to
30% *tax. BUT in
1. Interest from currency the case of interest
deposits, trust funds and 20% 20% 20% 20% 25% 20% 20% on loans which have
deposit substitutes been made on or
after August 1,
1986, the same is
subject to 20% final
tax.
2. Royalties (on books as well
as literary and musical 10% 10% 10% 10% 25% 10% 10% 30%
composition)
- In general 20% 20% 20% 20% 25% 20% 20% 30%
5-‐32% 5-‐32% 5-‐32% 30% 30%
30%
(regardless (regardless
3. Prizes (P10,000 or less) 5-‐32% 25% (regardless of the
of the of the
amount)
amount) amount)
- In excess of P10,000 20% 20% 20% 20% 25% -‐ -‐
4. Winnings (except from
20% 20% 20% 20% 25% 30% 30% 30%
PCSO and lotto)
5. Interest Income from
7.5% -‐ 7.5% -‐ -‐ 7.5% 7.5% -‐
Foreign Currency Deposit
These dividends
received from DC by
NRFC is subject to
15% Final Tax IF: the
6. Cash and Property
10% 10% 10% 20% 25% Exempt Exempt foreign corp allows
Dividends (from DC)
a tax credit atleast
15% of the taxes
deemed paid in the
Philippines by NRFC.
7. On capital gains presumed
to have been realized from
sale, exchange or other 6% 6% 6% 6% 6% 6% 30% 30%
disposition of real
property (capital asset)
8. On capital gains for shares
of stock not traded in the
stock exchange
- Not over P100,000 5% 5% 5% 5% 5% 5% 5% 5%
- Any amount in excess of 10% 10% 10% 10% 10% 10% 10% 10%
P100,000
9. Interest Income from long-‐
term deposit or
investment in the form of Exempt Exempt Exempt Exempt
savings, common or
25% -‐ -‐ -‐
individual trust funds,
deposit substitutes,
investment management
accounts and other
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investments evidenced by
certificates

Upon pre-‐termination before
the fifth year, there should be
imposed on the entire income
from the proceeds of the
long-‐term deposit based on
the remaining maturity
thereof:

Holding Period:
- Four (4) years to less than 5% 5% 5% 5%
five (5) years
- Three (3) years to less than 12% 12% 12% 12%
four (4) years
- Less than three (3) years 20% 20% 20% 20%

INDIVIDUALS

Amount of Net
Rate
Taxable Income
But Not
Over
Over
10,000 5%
P500 + 10% of the Excess over
10,000 30,000
10,000
P2,500 + 15% of the Excess over
30,000 70,000
30,000
70,000 140,000
70,000
140,000 250,000
140,000
250,000 500,000
250,000
500,000
500,000

CORPORATIONS

CORPORATIONS TAX RATE TAX BASE
DC 30% Net income
RFC 30% Net income
NRFC 30% Gross Income

PROBLEM 1:
Mr. X is an RA, earning business and compensation income, as follows:
Gross Business Income – 600,000
Gross Compensation Income – 240,000
Itemized deductions-‐ 300,000

Compute for his tax due and payable.

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Gross Business Income 600,000
Gross Compensation Income 240,000
Total Gross Income 840,000
Less: Allowable Deductions & Exemptions Itemized Deductions 300,000
Personal Exemption 50,000 350,000
Taxable Income 490,000

Tax Rate
For the first 250,000 50,000
In excess of 250,000 (30% x 240,000) 72,000
Tax Due and Payable: 122,000

PROBLEM 2:
Mr. Y is an RC, earning business and compensation income, as follows:
Gross Business Income – 1,000,000
Gross Compensation Income – 300,000
He has two dependents: his parent and his child.
He opted for the OSD

Compute for his tax due and payable.

Gross Business Income 1,000,000 Gross Compensation
Income 300,000
Total Gross Income 1,300,000
Less: Allowable Deductions & Exemptions OSD (40% of 1,000,000) 400,000
Personal Exemption 50,000
Additional Exemption 25,000 475,000
Taxable Income 825,000

Tax Rate
For the first 500,000 125,000
In excess of 500,000 (32% x 325,000) 104,000
Tax Due and Payable: 229,000

ESTATE AND TRUSTS

ESTATE

• Example:
o A died; lot leased @ 20k every month
o Decedent died on June 30 2015
• Solution:
o July to December: 20K times 6 months = 120K
o less PE: 20K
o TAXABLE INCOME: 100k;
o TN: withholding tax of 5% every month of the 20K =1000 x 6=6000
o TAX DUE: 14500 less withholding of 6000K = 8500

TRUSTS

• Only when the trust is irrevocable is it considered as a separate taxpayer
• any distribution during the year to the beneficiary shall be deducted from the income
• Example:
o B made a trust; only half shall be distributed
o 2014 income for the trust 500K
o solution:
§ 500k less distribution 250K = 250K
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§ 250K less PE of 20K = 230K
§ tax due: 45K
• Rule on CONSLIDATION:
o Requirement:
§ Several trust
§ same grantor and
§ same beneficiary
o Example: ….
o Solution:
§ GI: trust1 450K; trust2 600K
§ AD: T1 150K; T2 200K
§ Consolidation: 700K before exemption
§ BPE 20K
§ Conso TI: 680K
§ Tax Due: 182,600K
o TAX DUE OF TRUST 1: TTI before PE divided by the CI before PE
§ 300K divided by 700K times 182600 = 78257
o TAX DUE OF TRUST 2:
§ 400K/700K times 182600 = 104343

TAX ON CORPORATIONS

Corporations are subject to 3 TYPES OF TAX REGIMES:

1) Normal income tax
2) Minimum Corporate income tax
3) Gross income tax

NORMAL INCOME TAX :

Follows the same computation like in the dumping ground computation so you have

Gross computation
Less: Allowable deductions (no exemption)
__________________________________
Taxable income
x tax rate of 30%
__________________________________
Income Tax Due and Payable

Sample problem:

Gross sales-‐ 1M
Sales Return and Allowances-‐ 50,000
Sales Discount-‐ 10,000
Cost of sales-‐ 400,000
Itemized deductions-‐ 100,000

Data of Corp X, determine the tax due and payable:

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Gross sales-‐ 1M
-‐
Sales R&A (50,000)
Sales Disc. (10,000)
Net sales 940,000
-‐
COS 400,000
Gross Income 540,000
-‐
Itemized deductions 100,000
Taxable income 440,000
Tax rate x 30%__
Tax due & payable =132,000.00

Atty. A : Now what if it’s a manufacturing concern: instead of seeing a Cost of sales there you will see cost of goods manufactured and sold
or cost of goods sold. If it’s a service entity then its cost of services.

This matters in computing the gross income because it is important when we will compute the MCIT for the basis is the gross income. So
don’t commit a mistake!

SPECIAL REGIMES
• PEZA
- there are entities that does not follow this computation for they are subject to special rates like in the case of those
registered under PEZA for there is in lieu of all taxes for 5% based on gross income, in fact they can avail of the tax holiday for
the first 4 or 5 or 6 yrs. depending if its pioneer or non-‐pioneer.

• PROPRIETARY NON-‐PROFIT HOSPITAL and PROPRIETARY NON-‐PROFIT EDUCATIONAL INSTITUTION
- rate of 10% and that is the subject matter of the case of ST. LUKES
- So for proprietary educational institutions they are required to subject themselves to the predominance test.
- If the income from unrelated activities:
→ more than 50% = then subject to 30% tax rate
→ Is 50% or less = then subject to the special rate of 10% based on its net taxable income (meaning they can avail
deductions.)

Example: ABC University a proprietary non-‐profit educational institution has a gross income for taxable year 2015 of 15M, and of
the total gross income 5M was derived from unrelated trade or business, total deductions amount to 3M. Compute the tax due
and payable?

Ans. so apply the predominance test. = 5M
÷ 15M
33%

So does not exceed the 50% so the rate applicable is 10% of the net taxable income of ABC corp.
15M
-‐ 3M
12M
X 10%
Tax due and payable = 1.2M

EXEMPTION FROM TAX ON CORPORATIONS

SEC. 30. Exemptions from Tax on Corporations -‐ The following organizations shall not be taxed under this Title in respect to income received
by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the
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payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any
member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures
to the benefit of any private stock-‐holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and
fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of
its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.

- so in this we distinguish two types of income as read( one in bold letters):
1) income from use of property
2) any other activities conducted for profit, and its regardless of disposition.
- So it can be taxable. So in the case of St. Lukes like those used for clinics it will be subject to tax notwithstanding sec. 30 because
sec. 30 also provides that as to those properties it will be subject to income tax.

Q: if a cemetery is used for a halloween concert, so if used for the maintenance, will it be subject to tax?
A: yes because still its used for profit nganong pa concert2 man ka! Kai nag pa concert ka sa falling under used for profit bisag piso pana.

Q: what if nay coffee shop sa cemetery?dibah pede mukita? Or sample starbucks.
A; STILL YES it will be subject to tax for it is a profit for use of property regardless of the disposition.

SPECIAL RULES:

When can a resident foreign corporation be subject to a different tax rate?

1. In case of an INTERNATIONAL CARRIER (air or shipping) -‐ 2.5%
• For as long as there is a flight/voyage:
- Which is from the point/port in the Philippines, any income earned there can be subject to the rate of 2.5% based on gross
Philippine billings. The gross Philippine billings will have to account for that portion of the travel which is from the Philippines
to another country. (phil-‐abroad)
- If there is transshipment, Ex. Philippines-‐ Hongkong-‐ US. If you paid your ticket for the entire voyage, only the portion from
the philippines to hongkong will be taxed here.

2. OFFSHORE BANKING UNITS (10%)
• Foreign currency transactions only.
• If there is a bank here in the phil. which engages in offshore banking and regular banking only the offshore banking portion will be
subject to the preferential rate.

3. BRANCH PROFIT REMITTANCE (15%)
• Total profits applied or earmarked for remittance without deductions for the tax component.

4. REGIONAL OPERATING HEADQUARTERS OF MULTINATIONAL COMPANIES
• 10% of the taxable income

5. REGIONAL AREA HEADQUARTERS
• Exempt
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MINIMUM CORPORATE INCOME TAX (2%)

• It is to address the non-‐declaration or under declaration of corporate income and revenues
• Based on gross income and applies only to corporations
• The three year carry over must be continuous
• Imposable on the 5th year from the commencement of business.
• Commencement of business is upon registration with the BIR.
• It is constitutional “SC held that it is not a tax on the capital because it is based on gross income and not on sales.”

What are the safeguards provided for in MCIT which makes it reasonable? SC cited:
1. It recognizes the imposition of the MCIT on the 5th year of operations.
2. It has (3)three year carry forward in excess of the normal income tax.
3. There is Suspension of imposition of MCIT for reasonable business reverses

When is the MCIT imposed?
1. If you have negative or zero NIT.
2. NCIT is greater than the NIT.

Example: X, a resident foreign corporation is on its fifth year of operation in 2015 it has the following financial data:

*Gross sales –-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐30M
*SalesRetAll-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 900K
*Sales Discount-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 1M ,500K
*COGS-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 10M,500K
*Deductions-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 15M
*Interest income from Int’l Bank
under FCDU-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 3M (7.5%)
*Interest on notes recvbl -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐50K
*Dividends from B corp.(RFC)-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 200K
*Capital gains on direct sale to buyers of
C corp. shares (DC)-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 90K (5%)

Compute the MCIT and NIT.
Ans. NIT Due: 705K
In MCIT it does not include other gross income. It should only be based on gross income from operations.

Ans. MCIT = 17,100,000 x2%= 342,000

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Solution:

Normal Tax Minimum Corporate Income Tax

Gross Sales P30,000,000 Gross Sales P30,000,000
Less: Less:
Sales returns and Sales Returns &
allowances P900,000 Allowances P900,000
Sales Discounts 1,500,000 2,400,000 Sales Discounts 1,500,000 2,400,000
Net Sales P27,600,000 Net Sales P27,600,00
Less: Less:
Cost of goods Cost of goods
manufactured and manufactured
sold 10,500,000 and sold 10,500,000
Gross Profit P17,100,000

from sales
Add: Other 250,000
gross income
Gross income P17,350,000 Gross Income P17,100,000
LESS: 15,000,000
Deductions
Net Income P2,350,000
Multiply by 30% Multiply by 2%
Tax Rate
Normal Tax P705,000 MCIT P342,000

Income Tax Due P 705,000

Other Gross Income:
Interest on Notes Receivable P 50,000
Dividends from Ceramics Corporation 200,000
TOTAL P 250,000

Final Tax on Passive Income:
Interest Income from International Bank (P 3M x 7.5%) P 225,000
Capital gain on sale of beauty corporation (P90,000 x 5%) P 4,500
TOTAL P 229,500

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Normal Tax Minimum Corporate Income Tax

Gross Receipts P18,000,000 Gross Receipts P18,000,000
Less: Less:
Sales returns and Sales Returns &
allowances P360,000 Allowances P360,,000
Sales Discounts 900,000 1,260,000 Sales Discounts 900,000 1,260,000
Net Receipts P16,740,000 Net P16,740,00
Receipts
Add: Less:
Other Gross Income 100,000 Cost of services 5,000,000
Gross income P16,840,000 Gross P11,740,000
Income
LESS: 16,190,000
Deductions
Net Income P 650,000
Multiply by 30% Multiply 2%
Tax Rate by
Normal Tax P 195,000 MCIT P234,800

Income Tax Due P 234,800

Other Gross Income:
Interest on Notes Receivable P 100,000

Dividends from aerobics corporation is exempt.

Final tax on Passive Income:
Capital gain from sale of land and building (P6M x 6%) P 360,000

RECAP:
- Please be guided on the dumping ground computation, always begin with the determination of what composes gross income; and
then from there, you will then determine what are the allowable deductions so that we can end up with the taxable income. And
then you can apply the applicable rate to such taxable income so you can get the tax due and payable.

- A corporation may be subject to three (3) types of tax regime. This could be simultaneous but one is mutually exclusive.
1. Regular or the normal income tax (NIT),
2. Minimum Corporate Income Tax (MCIT); and
3. Gross Income Tax (GIT).

- Gross income tax can not go together with MCIT and normal income tax; but a corporation may be subject to NIT and MCIT. The
determination is simultaneous for the particular year but only one type of regime may be applied for such year. So it’s always
whichever is higher, between the MCIT and NIT.

- But then again, if there is excess MCIT, the excess can be carried for three (3) successive years. So that after the 3 year period, any
excess which remains unused can no longer be applied to succeeding NIT.

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

This other type of tax used as a penalty for not declaring dividends to stockholders. Before this is termed as “SurTax” but it has been
nominated as improperly accumulated earnings Tax (IAET) under the NIRC of 1997.

• Who can be subject to IAET: only be applied to one type of corporation which is CLOSELY HELD CORPORATIONS.
o the corporation here is the same corporation referred to in the corporation code.

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• PARNTERSHIPS can not be subject to IAET
o First, (primary reason) they are not subject to IAET because of the constructive principle for partnership (or sometimes called,
CONSTRUCTIVE RECEIVED DOCTRINE). It is as if the partners already received their income WON it is declared.
o Second, the determination of what could be considered reasonable needs for business will be based on the paid-‐in capital (PIC) of
a corporation and partnerships does not have PIC. The determination of IAET is based on the RE of a corporation vis-‐à-‐vis it’s PIC.
Here in the partnership there is no Retained Earnings (RE). You can never really tell if the partnership would have RE more than it
needs because there is no RE to base it from.

• “Touch stone” of the liability of the IAET: the accumulation of income and not the consequence of accumulation.
o Meaning, why does it continue to accumulate income? That the reason why they can be subject to IAET.
o If ever the corporation can assert any reasonable business needs then the accumulation is not considered improper.

• How do we determine what is reasonable business needs?
o “immediacy test”: For as long as the corporation has an immediate need of the earnings and that’s the reason why they continue
to accumulate it, then they can’t be subject to IAET. They are sort of “excused”.

• REASONABLE BUSINESS NEEDS
o Under the corporation code, there is a penalty for accumulating earnings more than 100% of the PIC of the corporation subject to
exceptions which is clearly provided in the provisions of the corporation code.

• GROUNDS FOR EXEMPTION from penalties for accumulating earnings more than the PIC:
1. Expansion projects
o First, the corporation code specified the instances when there is a need to accumulated earnings for reason of possible
expansion of operations. As well as the corporation needs to spend for capital expenditures. As they try to build buildings and
other branches

2. A loan agreement where consent of the creditor is needed before a dividend may be declared.
o Second, based on a loan contract, where the contractual obligations of the corporation requires them to seek consent before
any distribution of earnings to stockholders maybe done

3. there is a need to accumulate in order to meet probable contingencies
o Third, in anticipation of business needs which actually for possible contingencies as wherein there is an expectation of strong
typhoons. Especially for the Philippines where may typhoons could visit the country. That could be used as grounds for
accumulating earnings. They are said to be within the legal bounds for purposes of accumulating and getting away with
penalty imposed under the corporation code. Note: They are also the same grounds for basis of getting away IAET sanctioned
by the NIRC.

TN: there is an allowed adjustments for amounts reserved for reasonable business needs only if it emanates from the income for the
current taxable year.

• How do you determine the PIC used for basis for determining 100%?
o The shares at PAR VALUE only. Exclude the additional paid-‐in capital.
- Legal Basis: RMC 35-‐2011 that the “100% of the paid-‐up capital or the amount contributed to the corporation representing
the par value of the shares of stock, hence, any excess capital over and above the par shall be excluded”.
o Based on the interpretation of the BIR and SEC (though no explanation from their part), paid-‐up capital should not include the
premiums/APIC paid by the stockholders. In other words only the par value will be considered as PAID-‐UP CAPITAL for purposes of
determining WON there is an EXCESS.

For example:
1000 shares;
Par value of each share = P100;
Paid for by the stockholder at P200 each share.
- How much is the Paid Up Capital? P100,000 (at par value only)
- Do you include the Additional Paid In Capital? No.
- Basis of the BIR, the PIC should not include APIC. In other words, only refer to the par value of the shares.

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o How about Revaluation Surplus?
- This pertains to the excess of the Fair Market Value of an asset (property) over its carrying amount or amount recorded in the
financial statements. Because when an asset is revalued, any increase in carrying amount should be credited (added) to a
revaluation reserve in stockholders equity (effect is INCREASE IN CAPITAL/EQUITY BALANCE).

Ex. Table recorded in the books at 1, 000 but its true value in the market is 5,000, thus Revaluation Surplus is 4, 000.

- REVALUATION SURPLUS even if included as part of EQUITY/CAPITAL will NOT BE INCLUDED as part of the 100% paid-‐up
capital for purposes of determining WON there is EXCESS over UNAPPROPRIATED Retained Earnings (ACCUMULATED
EARNINGS).

Atty. A: Actually, when you consider the amount that you really paid for the shares it’s the TOTAL value you actually paid for, that
includes the premium or the APIC. However, on the part of the Government (BIR), they would want it to be beneficial to them (to
collect more taxes), thus they really want that dividends be declared and paid AND that the PAID-‐UP Capital is only the PAR VALUE. If I
were to take a position, I would have included the premium/APIC in computing for the PAID-‐UP CAPITAL as it is part of the amount that
a stockholder actually paid, but I AM NOT BIR. Thus, as of now, PAID-‐UP capital(PUC) is limited to the PAR VALUE of the shares.

• After having considered the “reasonable needs of the business” as determined by the immediacy test and after having determined that
there is Excess, WHAT happens if it turned out that there is no BASIS for the accumulation of the earnings as there is no reasonable
immediate business needs, and that you were able to accumulate in EXCESS of the 100% PUC ? So it will now be subjected to
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET).

• EVIDENCE OF PURPOSE TO AVOID INCOME TAX

(1) Prima Facie Evidence. -‐ the fact that any corporation is a mere holding company or investment company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members.

(2) Evidence Determinative of Purpose. -‐ The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence, shall prove to the contrary.

(3) Circumstances indicative of improper accumulation of profits
1. Withdrawals by stockholders disguised as loans.
2. Expenditures by the corp. for the personal benefit of the stockholders.
3. Investments in unrelated business.
4. Radical change of business when large profits have been accumulated.
5. Yearly substantial advances made to stockholders-‐officers.

• Covered Corporations
Only domestic corporations classified as closely-‐held corporations are liable for IAET.

• What is a Closely Held Corporations?
Closely-‐held corporations are those:
(1) at least 50% in value of the outstanding capital stock is owned directly or indirectly by or for not more than 20 individuals; or
(2) at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for
not more than 20 individuals.

TN: Domestic corporations not falling under the aforesaid definition are, therefore, publicly-‐held corporations.

• (From UP Notes)
To determine whether the corporation is closely held corporation, insofar as such determination is based on stock ownership, the
following rules shall be applied:

(1) Stock Not Owned by Individuals. -‐ Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall
be considered as being owned proportionately by its shareholders, partners or beneficiaries.

(2) Family and Partnership Ownership. -‐ An individual shall be considered as owning the stock owned, directly or indirectly, by or
for his family, or by or for his partner.

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For purposes of this paragraph, the ‘family of an individual’ includes his brothers or sisters (whether by whole or half-‐blood),
spouse, ancestors and lineal descendants.
(3) Option to Acquire Stocks. -‐ If any person has an option to acquire stock, such stock shall be considered as owned by such
person.

For purposes of this paragraph, an option to acquire such an option and each one of a series of option shall be considered as an
option to acquire such stock.
(3) Constructive Ownership as Actual Ownership. -‐ Stock constructively owned by reason of the application of (a) or (c) shall, for
purposes of applying (1) or (2), be treated as actually owned by such person.

But stock constructively owned by the individual by reason of the application of (b) shall NOT be treated as owned by him for purposes
of again applying such paragraph in order to make another the constructive owner of such stock.

• BIR RULING 025-‐02
The ownership of a domestic corporation for purposes of determining whether it is a closely held corporation or a publicly held
corporation is ultimately traced to the individual shareholders of the parent company.

Where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled
to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered as a publicly-‐
held corporation, thus, exempt from IAET.

• So HOW do we determine the IAET (THIS IS HIS FAVORITE)?
This is his FAVORITE because it sort of summarizes everything discussed as regards INCOME TAXATION.

Pro forma computation of improperly accumulated taxable income

Taxable income xxx
Add: Income exempt from tax xxx
Income excluded from gross income xxx
Income subject to final tax xxx
The amount of net operating loss
carry-‐over deducted xxx xxx
Total xxx
Less: Dividends actually or constructively paid xxx
Income tax paid for the whole year*** xxx
Amount reserved for the reasonable needs
of the business xxx xxx
Improperly accumulated taxable income xxx
X IAET Rate 10%
IAE Tax XX

(You may refer also to RMC 35-‐2011 for a more detailed computation as used in Tax Practitioners.)
***You have to take note WON the company may be subjected to Normal Income Tax or MCIT. Consider also all other taxes paid,
e.g. Final Tax.

Illustration: Assume that in taxable year 2010, Peace Corporation, a domestic trading corporation, is subject to improperly accumulated
earnings tax after having been assessed as retaining earnings beyond the reasonable needs of the business. Following are related data:

Gross Sales P
7,500,000
Sales returns and allowances 225,000
Sales discounts 375,000
Cost of goods sold 2,625,000
Deductions 3,275,000
Interest income from USA Bank under the Foreign currency deposit 750,000
system
Interest on notes receivable 50,000
Dividend from Landscaping Corporation, a resident foreign corporation 100,000
Dividend from Crafts Corporation, a domestic corporation 65,000
85

Capital gain on sale of Gem & Diamond Corp. shares, a Domestic
Corporation, to a direct buyer 75,000
Dividend paid 800,000

The income tax to be paid is the higher amount between the normal tax and minimum corporate income tax.

COMPUTATION:

Income Tax Due P345,000

Other gross income:
Interest on notes receivable P 50,000
Dividend from Landscaping Corporation 100,000
Total P150,000

Divident from Crafts Corporate is exempt.

Final Tax on Passive income:
Interest income from BSA Bank (P750,000 x 7.5%) P 56.250
Capital gain on sale of Gem and Diamond Corporation
Shares (P75,000 x 5%) 3,750

Total P 60,000

The computation of tax on improperly accumulated earnings follows:

Taxable Income P 1,150,000
Add:
Income exempt from tax:
Dividend from Crafts P 65,000
Income subject to final tax:
Interest from BSA Bank P 750,000
Capital gain on sale of Gem &
Diamond shares 75,000 890,000
Total P 2,040,000
Less:
Dividend paid P 800,000
Income tax 2007 345,000
Final Tax on passive income 60,000 1,205,000
Improperly accumulated earnings P 835,000
Multiply by 10%
Improperly accumulated earnings tax P 83,500

For corporation using the calendar year basis, the accumulated earnings tax shall not apply on improperly accumulated income as of Dec.
31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax
shall be reckoned, as of the end of the month comprising the twelve-‐month period of fiscal year 1997-‐1998.

• Steps in Determining the IAET:
1. Determine the Taxable Income
2. Determine the income subject to final tax
3. Determine the income exempted from income tax
4. Determine the income excluded from income tax
5. Determine the rates applicable to each:
§ Taxable Income – NIT or MCIT
§ Income subject to final tax and the rate applicable

ü What you consider as Improperly Accumulated Earnings is not as simple as getting the difference between the RE and the
Paid Up capital because there is a different formula provided in the tax Code.
86

ü To Determine whether the Corporation has Improperly Accumulated Earnings is one thing and the determination of the IAET
is another. To determine whether a Corporation should be subject to IAET or not :

There is no improper or
RE is less than or equal to unreasonable accumulation
100% of the Paid-‐In Capital
Compare the RE
Paid Up
with the
Capital in the Determine whether the
books of the accumulation is justified by:

Corporation RE is more than 100% of 1. Business Expansion
Paid Up Capital 2. Loan Obligations
3. Possible Business
Contingencies

If Justified, there is If not justified,
no Improperly proceed with the
Accumulated Computation of the
Earnings IAET provided in

Section29(D)

IAET is applicable to both Domestic and Resident Foreign Corporations. It does not apply to Non-‐Resident Foreign
ü
Corporations.
ü It is applicable only to closely-‐held corporations. Because closely-‐held corporations are not being regulated by a specific
Government Agency. So it is very easy to manipulate. The stockholders may just agree with each other not to declare
dividends and thus not subjected to 10% Dividends Tax. The IAET is imposed in order to curtail the practice of Corporations in
not declaring dividends so that they can get away with the imposition of the 10% Final Tax on Dividends.
ü For public corporations they are exempted from IAET because they are regulated by the:
§ PSE when their stocks are listed
§ If not listed, the corporation is regulated not by a specific agency but by the stockholders themselves. The
control there will be difficult considering the number of the stockholders.
§ For banks – BSP
§ Insurance Companies – Insurance Commission
§ Public Utilities – Ex. ERC

• PRIMA FACIE EVIDENCE OF ACCUMULATION OR PROFITS BEYOND THE REASONABLE NEEDS OF THE BUSINESS

Section 29 (C). Evidence of Purpose to Avoid Income Tax.
1. Prima Facie Evidence. – The fact that any corporation is a mere holding company or investment company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members.

2. Evidence Determinative of Purpose. – The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence shall prove the contrary.

o Prima Facie evidence of Accumulation of profits beyond the reasonable needs of business :

1) Being a mere holding company – because the purpose of a holding company is to earn profits through investment.
2) Investment of a substantial earning of a corporation in unrelated business, or in stocks and securities of an unrelated business
– earnings are supposedly given out to the stockholders; Investing in another business is not a “reasonable need of the
business”.
3) Investment in bonds and other long term securities.
4) Accumulation of earnings in excess of 100%.

87

• Will the Income Previously subjected to IAET be subjected to IAET in the succeeding Taxable Year?

Year 5 Year 6 Year 7
Retained Earnings 200,000 400,000 600,000
Paid-‐Up Capital 100,000 100,000 100,000
Subject to IAET? Yes Yes* Yes**

* Will the same income subjected to IAET in year 5 be subject again to IAET for Year 6?
No, the fact that that earnings have already been subjected to IAET, it will no longer be subjected to IAET even if the Corporation
did not declare dividends for the succeeding years. It will no longer be included.

*Moreover, for the determination of whether or not there is an improper accumulation of earnings, is it based on the difference
between the RE and the Paid In Capital?
No. It is actually based on the Taxable income every year. So you consider the current year’s operation.

** For year 6 and year 7 you only consider the income added to the RE for the current year. Hence only 200,000 vs. 100,000. Retained
earnings is the account used wherein you accumulated all your profits from the start of the operations. Hence, every year, if you
continuously earn profits, your RE will continue to increase if the Corporation will not declare dividends.

That’s why in the illustration above, in year 5 you have RE amounting to 200,000, in year 6 your profit is another 200,000 so your RE is
already 400,000 and in year 7 you earned another 200,000 so you have 600,000 RE by the end of year 7.

For purposes of determining if there is Improper accumulation of earnings you only look at the profit added to the RE for the taxable
year. Hence for year 6, compare only 200,000 vs. 100,000 since the first 200,000 has already been determined the year before. Same
goes in Year 7, because you will only account for earnings for that particular year. It’s on a yearly basis.

• APPLICABILITY OF THE PRESCRIPTIVE PERIODS SET OUT UNDER REMEDIES
ü The prescriptive periods apply.
ü IAET is an example of a tax where no return is filed. Hence the prescriptive period shall be 10 years from discovery. Other
authors may say that it is imprescriptible because the BIR can always say that they discovered it just recently. Hence the
period did not even begin to run.

GROSS INCOME TAX (GIT)
An incentive given by Pres. Joseph Estrada

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the
new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve Provided, further, That the
President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed
at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all
sources does not exceed fifty-‐five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the
corporation is qualified under the scheme.

• CONDITIONS for the applicability of the GIT

o If a corporation has a cost to sales ratio of 55%
- Determine the gross sales and the cost of sales
- Cost ratio= Cost of goods sold/gross sales or gross receipts
§ But sir’s position is that it should be cost of goods sold/ NET SALES or NET RECEIPTS.
88

§ If there is no return and allowances, you use GROSS SALES or GROSS RECEIPTS but if there are returns and allowances,
you use NET SALES or NET RECEIPTS nalang.

o GIT is available only to firms whose ration of cost of sales to gross sales or receipts from all sources do not exceed fifty-‐five per
cent (55%).
- Take note of the other conditions. See Sec.27A of NIRC. You don’t need to memorize them.

o Remember that this is only an OPTION, but once you chose this, it will be irrevocable for 3 consecutive years. GIT is 15% of Gross
Income. You base your gross income sa definition sa tax code:
- Service concern: Gross income x 15% (you do not deduct cost of services, it is automatic)
- Manufacturing or merchandising concern: gross sales less cost of sales or goods sold x 15%

PARTNERSHIP

General co-‐partnership or trade partnership is one intended for profit -‐ tax rate is the same sa corporations it’s just that there is a
constructive distribution of income to each of the partners. If there is no profit and loss ratio, determined based on their capital
contribution, if there is an agreement as to their share of profits and losses then the same should be followed. If one contributes services,
then he will not share in the losses. Thus if trade partnership earns income and the partners received constructively, the partnership will be
taxed at the rate of 30%. The partners will be subject to 10%, the same rate as dividends because this is considered as dividends income
which is a passive income for TRADE partnership but this will not apply to GPPs.

For GPP, it is not subject to tax, considered as a mere conduit of the partners, tax will only be imposed on the person of the partners.
Income of partners will be subject to 5-‐32%.
TN: Determine first if the partnership is a GPP or a trade partnership because the partners are subject to different tax rates.

Rules on GPPS
- If the GPP availed of ID, the partners may still claim ID except those already claimed by the GPP.

Example: You have a law firm, you are so hardworking you always bring in income to the partnership. Of course the partnership will
record it as part of the income and at the end of the year you will receive your own income. But while you’re doing this, you’re using
your own car, you go to meetings using your personal car and you never charge the partnership for the value of your car, in your
income from the partnership, can you deduct the depreciation if your car?
o Yes, provided the car was never registered as part of the assets of the partnership and the car was actually used in the
practice of prof. This is not considered as purely compensation income, there is no prohibition to deduct ID.
o The rule then is: for as long as expenses have not been claimed by the partnership, you can claim it as part of the deduction
but provided such expenses can be related to the practice of a profession. OW you cannot deduct it. For example, expenses
for lunch meals everyday-‐ cannot claim as deduction for your won expenses. That’s a personal expense.

§ TN in this instance, the GPP availed of the ID, and the partners claim ID. Can they claim OSD? No.
o If the GPP availed of the ID, the partners can only avail of the OSD.
o If the GPP avails of OSD, the partners cannot avail of OSD, except when there’s other gross income, but only in relation to his
other income. For ex: partner in the law firm also has manpower business, it’s possible to claim OSD. Partner, however,
cannot claim ID. This is the problem because if your professional partnership claims OSD, you can claim OSD regardless of
where the income is from.
ü TN that that will only happen if you’re other business is a sole prop. Because if the other business is a corporation also or
another partnership which is not a GPP, there’s no question that you can deduct OSD or ID because in the first place that
income will never be recorded as your income. You’re other income is either subjected already to final tax already of
10% because it will be dividend when it comes to you, not part of the dumping ground.
ü For ex: you have a law firm, that manpower services is a corporation, do you record the income of the manpower
services as part of your income from the GPP? No, because you will receive only dividend from the manpower services
corporation. There is no issue of whether you can claim OSD or not.
ü It is different if the manpower services is a sole proprietorship, because if it is, whatever the income of the manpower
service, you would have to add it up to your income from the GPP. The problem is that you cannot claim ID if the GPP
claims OSD. What you can just claim is still OSD.
(Refer to: REV REG 2-‐ 2010)

§ If the partner also derives other gross income from trade, business or practice of profession apart and distinct from his share in the
net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of
from his partnership income. Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its
89

gross income (Book author’s note: RA 9504 specifically states that for individuals, the basis of the 40% OSD shall be gross sales or
gross receipts) from trade, business or practice of profession but not to include his share from the net income of the GPP.

Illustration:

For the taxable year 2014, Part and Ner, partners of a General Professional Partnership agreed to divide profits and losses 50:50,
respectively. Both are married and without qualified dependents. The following are the details of the accounts:

Sale of Services, GPP 2,500,000
Cost of Services, GPP 875,000
Itemized Deductions, GPP 825,000

PART NER
Travelling Expenses (not liquidated by the GPP) 34,500 16,500
Representation Expenses (personal Credit card of Partner used) 14,250 23,500
Cost of Car, to be depreciated over 5 yrs. (used in the practice, 750,000 580,000
Registered under the Partner)
Salaries from the GPP 360,000 300,000
Lotto Winnings 900,000
Interest on Bank Deposit 25,000 20,000
Book Royalties 250,000

The distributable net income of the GPP, share of each partner and taxable income are computed as follows:

GPP GPP
If OSD If Itemized

Sale of Services 2,500,000 2,500,000
Less: Cost of Services 875,000 875,000
Gross Income 1,625,000 1,625,000
Less: Deductions
40% OSD 650,000
Itemized Deductions 825,000
Distributable Net Income 975,000 800,000

Share of Each Partner (50:50) 487,500 400,000

GPP GPP
If OSD, then… If Itemized, then…
PART NER PART NER
OSD OSD Itemized Itemized

Share of Each Partner in the GPP 487,500 487,500 400,000 400,000
Less: Additional Itemized Deductions
Travelling Expenses -‐ -‐ 34,500 16,500
Representation Expenses -‐ -‐ 14,250 23,500
Depreciation of Car -‐ -‐ 150,000 116,000
Net Share of Each Partner in the GPP 487,500 487,500 201,250 244,000
Add: Salaries from the GPP 360,000 300,000 360,000 300,000
Total 847,500 787,500 561,250 544,000
Less: Personal Exemptions 50,000 50,000 50,000 50,000
Taxable Income 797,500 737,500 511,250 494,000

Tax Due and Payable
(125,000 + 32% of the excess over 500,000) 220,200 201,000 128,600
(50,000 + 30% of the excess over 250,000) 123,200

90

Atty. Amago’s Discussion:

• The share of each partner in the GPP (487,500 for OSD/400,000 for itemized) is income from the practice of profession, so you have to
check if there are any expenses that they can deduct. You have to determine the deductions first because there could be expenses
related to the income of the partners on the General Professional Partnership.

• Among the items listed, the following are the deductions to their share from the GPP’s income:

TN: These are applied only for itemized deduction for the partners and not for OSD

1. Travelling Expenses:
- (Though unliquidated, refer to Letter G on the Clarifications below)

2. Representation Expenses:
- This is deductible because this is used for the partnership’s business. But the partners are just using their credit
cards and this expense has not been charged by the partners yet to the GPP.
- Since it is intended for the clients of the partnership, it is an expense incurred by the partner in relation to the
practice of profession. So of course, you can always deduct it.

3. Depreciation Expense of the Car:
PART: 750,000/5 years=150,000 per year
NER: 580,000/5 years = 116,000 per year

• After deducting the expenses related to the practice of profession, you will then know the net share of each partner from the GPP.
- This is considered net share because while they received 400,000 each (for itemized) from the partners’ income, the expenses of
the partnership does not stop on what had been recorded by the GPP because they continue to incur expenses which they haven’t
charged yet to the GPP.
- So to determine their net share, you deduct first the expenses which the partners incurred for the practice of their profession.

• For OSD: the net share is the same, because the partners can no longer deduct expenses in relation to the GPP if the GPP itself 0claims
OSD.
- Take note that OSD is in lieu of itemized deduction and that means that whatever was recorded or not recorded by the
partnership does not matter anymore. It seems to have accounted for everything already. So that is why the partners can no
longer deduct expenses.
- Lotto Winnings is exempt from income tax, interest on bank deposits is subject to a 20% final tax while book royalties to a 10%
final tax.
- But it does not end there. You have to check if there is any income that has to be added to the partners’ net share from the GPP.
In this case, they are the salaries of each partner.
- If the GPP claimed OSD, the salaries of each partner will also be added to their net share because it does not change the fact that
the partners did receive salary.
- Whether the partnership claimed OSD or itemized deduction is not anymore relevant because you already determined the net
share of each of the partners from the GPP. This is already a separate item.
- In fact, this salary is already deducted as part of the itemized deduction of the GPP and this continues to be an income on the
part of the partner. Thus, it will not matter whether the GPP used itemized deduction or OSD. It will still be added.

• After adding the net share and the salaries, you will then deduct the basic personal exemption of 50,000 each then apply the tax table.

*Sir holds us responsible for the use of the tax table.

91

Clarifications:

A. A GPP is not taxed the same as a corporation or trade partnerships, but it can still claim OSD. It is not actually that it is not subject
to tax but it is just exempted from the corporate income tax. So OSD is still applicable to a GPP.

B. When it comes to the salaries of the partners, the GPP also considered as a withholding agent. Even if the GPP is a withholding
agent, the salaries paid to its partners will still be included in the total income of the individual partners at the end of the taxable
year upon filing of the annual ITR.

Remember: taxes withheld from salary or compensation by an employer-‐ is a Creditable Withholding Tax, not a final withholding
tax. Thus, you still have to account for the whole income even those from which CWT had been withheld from.

It will just reduce the tax due and payable at the end of the year because you can deduct from it whatever was withheld by the
GPP. It will remain 360,000/300,000 as the total income from salary to be added to the net share (refer to example above).

For example, what were withheld were 200,000, which refer to the tax itself already and not to theincome. So you will deduct that
as a credit from the tax due and payable and not from the income.

What will happen is that at the end of the year when you file your annual tax return, this will include both your income from GPP
and your Business income. So all income will be added altogether with deduction from the total tax due and payable for what
was withheld.

In the example (above), we did not account for creditable withholding tax but in practice, there is tax withheld on the salary that is
deductible from the total tax due for the year. Whatever taxes that were paid in advance will be deducted from the tax due itself.

Thus, it will affect the actual taxes that will be due and payable at the end of the year but it will not affect the salary you received.
So it will still be computed in the same way but the effect of the Creditable withholding Tax will be after the tax due computation
for the reason that there was already payment of part of the whole tax due as withheld by the employer.

C. In case the GPP failed to remit the amount as withholding agent, the partner will still be liable for the tax that should have been
withheld and paid but not actually remitted to the BIR.

If you have an employer, you have to be vigilant because if it so happens that your employer did not withhold and remit the right
amount of taxes and you will suppose to file your total income tax for the whole year because you have other income aside from
compensation, and there was no withholding tax paid by your employer, you cannot deduct the amount that was supposedly
withheld. It is as if you have never paid. So you will have to pay the entire tax due and payable.

But it doesn’t prejudice your right to go against your employer who failed to remit the tax and in addition to that, the latter will be
subject to penalties, twice the amount of the tax not remitted.

D. The limits as to the percentage of allowable deductions applied to corporation and trade partnerships are also applicable to GPPs,
e.i. EAR of 1% or 2%-‐ Entertainment, Amusement, Recreation. (The example given above refers to Representation Expense)

E. Winnings of the corporation are subject to 30% since they are not part of passive income if received by DC and RFC. They are
considered as other income on the part of the DC and RFC. But if received by NRFC, it is 30% but on gross.

F. On how to determine whether dividend income from RFC are considered within or without:
- Make qualification on the 3 yr period from the declaration of income
- It is Atty. Amago’s position to follow the Tax Code since the 50%-‐85% partly within partly without provision in the regulation
is not actually sanctioned by the Tax Code.
- Thus, if within the preceding 3-‐year period the dividend income from a Resident Foreign Corporation (RFC) is:
a. 50% or less: as to income of corporation from its domestic operation, all dividend income will be considered
outside the Philippines
b. more than 50%: as to income of corporation from its domestic operation all income is considered within the
Philippines

G. As to the Unliquidated Travelling Expense in the above given example, the GPP did not deduct it. Thus, it is still deductible on the
part of each partner.

92

It is as if the GPP does not know about it yet but each partner knows about it since they were the ones who actually incurred the
expense. So they can deduct it. Unliquidated simply means the partners have not informed the GPP about such expense.

H. As a rule, one of the requisites for deductions to be allowed is that proper withholding taxes have been paid. Thus, if an employer
failed to withhold and remit CWT on salaries of its employees, it cannot deduct the salaries paid as one of the allowable
deductions.

However, remember the Cohan Rule. The BIR cannot completely disallow an entity from deducting expenses which are allowable
under the law. It can only disallow to the extent of 50% under the Cohan Rule.

-‐ end -‐

Abejo|Bandoy|Bonghanoy|Burdeos|Corominas|Cuñado|Deveraturda|Entera|Erojo|Garcia, E.|
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