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Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
the videoke club were receipted and submitted Bar Question (2009)
to support the deduction for representation and Masarap Food Corporation (MFC) incurred
entertainment expenses. Decide if all the substantial advertising expenses in order to
representation and entertainment expenses protect its brand franchise for one of its line
claimed by Golden Dragon are deductible. products. In its income tax return, MFC included
Explain. the advertising expense as deduction from gross
The expenses incurred were to entertain the income, claiming it as an ordinary business
investors of Golden Dragon; thus, the amount expense. Is MFC correct?
deductible for entertainment, amusement, and In 1995, respondent paid P9.4 million for
recreation expenses is limited to the actual advertising a product. This was disallowed by
amount paid or incurred but in no case shall the the BIR as ordinary and necessary expense and
deduction exceed 0.50% of net sales for considered the same as capital expenditure,
taxpayers engaged in the sale of goods or since the amount was staggering, which was
properties (Sec. 34[A][1][a][iv], NIRC as incurred to create or maintain some form of
implemented by R.R. No. 10-2002). goodwill for the taxpayer’s trade or business for
[NOTE: Reasonableness and liberality are the industry or profession of which the taxpayer
recommended in considering an examinee’s is a member. The court held that “goodwill”
answer to this question.] generally denotes the benefit arising from
connection and reputation, and efforts to
Bar Question (2014) establish reputation are akin to acquisition of
A, B, and C, all lawyers, formed a partnership capital assets. Therefore, expenses related
called ABC Law Firm so that they can practice thereto are not (ordinary and necessary)
their profession as lawyers. For the year 2012, business expenses but are capital expenditures
ABC Law Firm received earnings and paid (that are not deductible pursuant to the
expenses, among which are as follows: provisions of Section 36 of the Tax Code) (CIR v.
Earnings: General Foods (Phils.), Inc., 2003)
(1) Professional/legal fees from various
clients Bar Question (2014)
(2) Cash prize received from a religious Which of the following should not be claimed
society in recognition of the exemplary as deductions from gross income?
service of ABC Law Firm (A) Discounts given to senior citizens on
(3) Gains derived from sale of excess certain goods and services
computers and laptops (B) Advertising expenses to maintain
Payments: some form of goodwill for the
(1) Salaries of office staff taxpayer’s business.
(2) Rentals for office space (C) Salaries and bonuses paid to employees
(3) Representation expenses incurred in (D) Interest payment on loans for the
meetings with clients purchase of machinery and equipment
(B) What are the items in the above- used in business
mentioned payments which may be Legal Basis: General Foods Corp v. CIR, 2003
considered as deductions from the gross
income of ABC Law Firm? Explain. Professional expenses are deductible in the
The law firm being formed as a general year the professional services are rendered,
professional partnership is entitled to the same not in the year they are billed.
deductions as allowed to corporations (Sec. 26, In 1984 and 1985, legal services were rendered
NIRC). Hence, the three items of deductions by the lawyers, but they were billed by the
mentioned in the problem are all deductible, lawyer and paid by the respondent in 1986. In
they being in the nature of ordinary and the audit of the books for 1986, the BIR
necessary expenses incurred in the practice of disallowed the expenses for 1986 pursuant to
profession (Sec. 34[A], NIRC). the “all events test.” The CTA and CA ruled in
favor of the respondent. However, the Supreme
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
The transportation and representation citizenship under R.A. 9225. His mother left him
allowances are actually reimbursements for a lot and building in Makati City and he wants to
expenses incurred by the employee for the make use of it in his trading business.
employer. Said allowances spent by the Considering that he needs money for the
employee for the employer are designed to business, he wants to sell his lot and building
enhance the quality of the service that the and make use of the consideration. However, the
employer is supposed to perform for its clientele lot has sentimental value and he wants to
like the people of the municipality. reacquire it in the future. A friend of Henry told
[NOTE: The 13th month pay and other gross him of the “sale-leaseback transaction”
benefits received by officials and employees of commonly used in the U.S., which is also used
public and private entities, are exempt to the for tax reduction. Under said transaction, the lot
extent of P90,000 (formerly P82,000) pursuant owner sells his property to a buyer on the
to Section 32(B)(7)(e), NIRC, as amended by condition that he leases it back from the buyer.
R.A. 10963 (TRAIN).] At the same time, the property owner is granted
Bar Question (2006) an option to repurchase the lot on or before an
Gold and Silver Corporation gave extra 14th agreed date. Henry approaches you as a tax
month bonus to all its officials and employees in lawyer for advice.
the total amount of P75 million. When it filed its Explain what tax benefits, if any, can be
corporate income tax return the following year, obtained by Henry and the buyer from the
the corporation declared a net operating loss. sale-leaseback transaction?
When the income tax return of the corporation Henry will be entitled to claim rental expense as
was reviewed by the BIR the following year, it a deduction from his gross income in the trading
disallowed as item of deduction the P75 million business. His lease payments plus interest
bonus the corporation gave its officials and would be substantially higher than the
employees on the ground of unreasonableness. depreciation expense he may claim in
The corporation claimed that the bonus is an computing his taxable income; hence, the lease
ordinary and necessary expense that should be would result in the additional benefit of
allowed. Decide the case. increasing his additional tax deductions. The
I will rule against the deductibility of the bonus. buyer will be deriving rental income from the
The extra bonus is both not normal to the property and be able to claim business
business and unreasonable. Admittedly, there is deductions such as real property taxes, repairs
no fixed test for determining the reasonableness and maintenance, depreciation, and other
of a bonus as an additional compensation. This expenses necessary for the renting out of the
depends upon many factors, such as the property.
payment must be made in good faith; the
character of the taxpayer’s business; the volume Bar Question (1993)
and amount of its net earnings; the locality; the X is the Advertising Manager of Mang Douglas
type and extent of the services rendered; the Ham, Inc. X had dinner with Y, owner of a chain
salary policy of the corporation; the size of the or burger restaurants, to convince the latter to
particular business; the employees’ qualification carry Mang Doublas’ hamburger. After Y agreed,
and contributions to the business venture; and both X and Y went their separate ways. X
general economic conditions (CM Hoskins & celebrated by going to a single’s bar. He picked
Co., Inc. v. CIR, 1969). Giving an extra bonus at a up a partner and consumed a bottle of beer. He
time that the company suffers operating losses drove home at 3:00 a.m. On his way, he
is not a payment in good faith and is not normal sideswiped a pedestrian who died as a result of
to the business; hence, unreasonable and would the accident. X settled the case extrajudicially by
not qualify as ordinary and necessary expense. paying the heirs of the pedestrian P50,000. The
money, however, came from Mang Douglas
Bar Question (2016) Hamburger, Inc. Discuss whether the P50,000
Henry, a U.S. naturalized citizen, went home to can be claimed by Mang Douglas Hamburger,
the Philippines to reacquire Philippine Inc. as an ordinary and necessary expense.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
No. As the expenditure had not been incurred in must be supported by receipts, records, or other
carrying on his trade or business, the same pertinent papers (CIR v. General Foods (Phils.)
cannot be considered an ordinary and necessary Inc., 2003). Section 34(A)(1)(b) of the 1997
expense for which deduction may be claimed. NIRC, as amended, does not require that the
Such expense is a personal expense which is not substantiation be in the form of official receipts
deductible from the gross income pursuant to or invoices issued in the name of the taxpayer
Section 36 of the 1997 Tax Code. claiming the expense. It must only be proven
that there is a “direct connection or relation of
Bar Question (2017) the expense being deducted to the development,
Calvin Dela Pisa was a Permits and Licensing management, operation and/or conduct of the
Officer (rank-and-file) of Sta. Portia Realty trade, business, or profession of the taxpayer.”
Corporation (SPRC). He invited the Regional
Director of the Housing and Land Use (b) Is the reimbursement received by
Regulatory Board (HLURB) to lunch at the Sulo Calvin from SPRC subject to tax?
Hotel in Quezon City to discuss the approval of Explain your answer.
SPRC’s application for a development permit in No. Any amount paid as reimbursements for
connection with its subdivision development representation incurred by the employee in the
project in Pasig City. At breakfast the following performance of his duties is not compensation
day, Calvin met a prospective client interested to subject to withholding, if the following
enter into a joint venture with SPRC for the conditions are satisfied: (i) it is for ordinary and
construction of a residential condominium unit necessary representation expense paid or
in Cainta, Rizal. incurred by the employee in the pursuit of the
Calvin incurred expenses for the lunch trade, business, or profession, and (ii) the
and breakfast meetings he had with the Regional employee is required to account/liquidate for
Director of HLURB and the prospective client, such expense in accordance with the specific
respectively. The expenses were duly supported requirements of substantiation pursuant to
by official receipts issued in his name. At Section 34 of the 1997 NIRC, as amended. The
month’s end, he requested reimbursement of his amounts are actually spent by the employee for
expenses, and SPRC granted his request. the benefit of his employer, so no income is
(a) Can SPRC claim an allowable considered to have flowed to the employee.
deduction for the expenses incurred
by Calvin? Explain your answer. Bar Question (2014)
SPRC cannot claim as a deduction, the amount Freezy Corporation, a domestic corporation
spent for lunch in the meeting with the Regional engaged in the manufacture and sale of ice
Director of HLURB. While the expense is cream, made payments to an officer of Frosty
business connected, the same is not allowed as Corporation, a competitor in the ice cream
deduction because it was incurred as an indirect business, in exchange for said officer’s
payment to a government official which, not revelation of Frosty Corporation’s trade secrets.
only amounts to a violation of the Anti-Graft and May Freezy Corporation claim the payment
Corrupt Practices Act, but also constitutes to the officer as deduction from its gross
bribes, kickbacks, and similar payments (See income? Explain.
Sec. 34[a][c], NIRC). No. The payments made in exchange for the
With respect, however, to the amount revelation of a competitor’s trade secrets is
spent for breakfast with a prospective client, the considered as an expense which is against the
same is deductible from gross income of SPRC. law, morals, good customs or public policy,
the expense complies with the requirements for which is not deductible (3M Philippines, Inc. v.
deductibility, namely: (a) the expense must be CIR, 1988). Also, the law will not allow the
ordinary and necessary; (b) it must have been deduction of bribes, kickbacks, and other similar
paid or incurred during the taxable year; (c) it payments. Applying the principle of ejusdem
must have been paid or incurred in carrying on generis, payments made by Freezy Corporation
the trade or business of the taxpayer; and (d) it would fall under “other similar payments” which
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
are not allowed as deduction from gross income month P100,000 per guard hired. May X deduct
(Section 34[A][1][c], NIRC). from his income the money he paid to the
director? Reasons.
Bar Question (1998) The money paid to please the director is not
MC Garcia, a contractor who won the bid for the deductible. This is a form of bribery. Deductions
construction of a public highway, claims as shall not be allowed if the expense is contrary to
expenses, facilitation fees which according to law, public policy or for immoral purposes
him are standard operating procedure in (Zamora v. Collector, 1963; Roxas v. CTA and CIR,
transactions with the government. Are these 1968).
expenses allowable as deduction from gross
income? Bar Question (1998)
No. The alleged facilitation fees which he claims a) Are contributions to a candidate in
as standard operating procedure in transactions an election subject to donor’s tax?
with the government comes in the form of No, provided the recipient candidate had
bribes or “kickback” which are not allowed as complied with the requirement for filing of
deductions from gross income (Sec. 34[A][l][c], returns of contributions with the COMELEC as
NIRC). required under the Omnibus Election Code.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
BSP’s claimed interest expense equivalent to While taxes and debts are distinguishable legal
38%/42% of its interest income subjected to concepts, in certain cases as in the suit at bar, on
final withholding tax; that BSP submits that it is account of their nature, the distinction becomes
not engaged in an interest arbitrage scheme inconsequential. This qualification is recognized
because its investment in government even in the United States. In our jurisdiction, the
securities, treasury bonds and notes and other rule is settled that although taxes already due
securities, as well as other transactions from have not, strictly speaking, the same concept as
which it earns interest income and which was debts, they are however, obligations that may be
subjected to the final tax, are being undertaken considered as such (Sambrano vs. CTA, 1957). In
in accordance with its legally mandated a more recent case, CIR vs. Prieto, 1960, we
responsibilities to achieve its primary objective explicitly announced that while the distinction
of maintaining price stability; that BSP does not between "taxes" and "debts" was recognized in
borrow money from different financial this jurisdiction, the variance in their legal
institutions for reinvestment purposes but as a conception does not extend to the interests paid
monetary tool in its open market operations to on them, at least insofar as section 30(b) (1) of
mop up or siphon off excess liquidity in the the NIRC is concerned.
banking system; that BSP should be entitled to
claim the full amount of interest expense Paper Industries Corp. v. CA, G.R. Nos. 106949-
incurred in the course of its operations; and that 50
such interest should not be reduced by a portion At the option of the taxpayer, interest incurred
of the interest income subjected to final tax. to acquire property used in trade, business or
HOWEVER, based on the provisions of the New exercise of a profession may be (a) allowed as a
Central Bank Act, if a taxpayer incurred deduction or (b) treated as a capital
indebtedness plus interest expense connected expenditure. (Sec. 34[B][3], NIRC). However,
with his trade during the taxable year and also should the taxpayer elect to deduct the interest
earned interest income which had been payments against its gross income, the taxpayer
subjected to final withholding tax, the amount of cannot at the same time capitalize the interest
interest shall be subject to the limitations as payments because that would constitute double
provided for by law. Also, the law did not tax benefits which is not authorized by law.
provide that there is a need for a tax arbitrage in
order that the limitation on the deduction of the Collector v. Prieto, G.R. No. L-13912
interest expense can be applied. Besides, the "Although taxes already due have not, strictly
implementing rules itself says that the speaking, the same concept as debts, they are,
limitation shall apply regardless of whether or however, obligations that may be considered as
not a tax arbitrage scheme was entered into by such. "'The term "debt" is properly used in a
the taxpayer or regardless of the date when the comprehensive sense as embracing not merely
interest bearing loan and the date when the money due by contract but whatever one is
investment was made for as long as, during the bound to render to another, either for contract,
taxable year, there is an interest expense or the requirement of the law. (Camben vs. Fink
incurred on one side and an interest income Coule & Coke Co. 61 LRA 584). "Where statute
earned on the other side, which interest income imposes a personal liability for a tax, the tax
had been subjected to final withholding tax and becomes, at least in a broad sense, a debt.
that the rule shall be observed irrespective of (Idem). "'A tax is a debt for which a creditor's
the currency of the loan contracted and/or in bill may be brought in a proper case.' (State vs.
whatever currency the investments or deposits Georgia Co., 19 LEA 485)." It follows that the
were made. interest paid by herein respondent for the late
payment of her donor's tax is deductible from
E. CASES her gross income under section 30 (b) of the Tax
Code above quoted.
CIR v. Palanca, G.R. No. L-16626
Bar Question (1992)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
The dividends are not deductible from gross 3. Taxes must be paid or accrued during
income. Preferred shares shall be considered the taxable year in connection with the
capital, regardless of the conditions under which taxpayer’s trade, business, or
such shares are issued and, therefore, dividends profession; and
paid thereon are not considered “interest” 4. Taxes are not specifically excluded by
which are allowed to be deducted from the gross law from being deducted from the
income of the corporation (RMC No. 17-71, taxpayer’s gross income.
1971).
In case of an nonresident alien individual
engaged in trade or business in the
3 - TAXES Philippines and a resident foreign
corporation: the deductions for taxes shall be
A. SEC. 34(C), NIRC allowed ONLY IF and TO THE EXTENT that they
are connected with income from sources within
General rule: all taxes paid or accrued within the the Philippines
taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as C. ALLOWABLE TAX CREDIT
deduction from gross income
If the taxpayer signifies in his return his desire
Exceptions: to have the benefits of deduction for taxes, the
1. Philippine income tax (Sec. 81, Rev. tax imposed by this Title shall be credited with:
Regs. No. 2); (a) In the case of a citizen of the Philippines
2. Foreign income tax (Sec. 82, Rev. Regs. and of a domestic corporation, the
No. 2) Provided, this deduction shall be amount of income taxes paid or
allowed in the case of a taxpayer who incurred during the taxable year to any
does not signify in his return his desire foreign country; and
to have to any extent the benefits of (b) In the case of any such individual who is
paragraph (3) of this Subsection a member of a general professional
(relating to credits for taxes of foreign partnership or a beneficiary of an
countries); estate or trust, his proportionate share
3. Estate and donor’s taxes (Sec. 83, Rev. of such taxes of the general professional
Regs. No. 2); partnership or the estate or trust paid
4. Special assessments on real property or incurred during the taxable year to a
(Sec. 84, Rev. Regs. No. 2); [taxes foreign country, if his distributive share
assessed against local benefits of a kind of the income of such partnership or
tending to increase the value of the trust is reported for taxation under this
property assessed] Title.
5. Electric energy consumption tax under An alien individual and a foreign corporation
B.P. 36 shall NOT BE ALLOWED the credits against the
Provided, That taxes allowed, when tax for the taxes of foreign countries allowed
refunded or credited, shall be included as part under this paragraph.
of gross income in the year of receipt to the
extent of the income tax benefit of said Limitations on Credit
deduction. The amount of the credit taken shall be subject
to the following limitations:
B. ALLOWABLE DEDUCTION (a) The amount of the credit in respect to
the tax paid or incurred to any country
Conditions for deductibility of taxes: shall not exceed the same proportion
1. Payments must be for taxes; of the tax against which such credit is
2. Taxes are imposed by law upon the taken, which the taxpayer’s taxable
taxpayer; income from sources within such
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
country under this Title bears to his taxes, by deduction from gross income and by
entire taxable income for the same tax credit. This danger of double credit certainly
taxable year; and can not exist if the taxpayer can not claim
(b) The total amount of the credit shall not benefit under either of these headings at his
exceed the same proportion of the tax option, so that he must be entitled to a tax credit
against which such credit is taken, (respondent taxpayers admittedly are not so
which the taxpayer’s taxable income entitled because all their income is derived from
from sources without the Philippines Philippine sources), or the option to deduct
taxable under this Title bears to his from gross income disappears altogether. In the
entire taxable income for the same present case, while the taxpayers would have to
taxable year. pay two taxes on the same income, the
Philippine government only receives the
Year in which Credit Taken: at the option of proceeds of one tax. No double taxation from the
the taxpayer and irrespective of his method of same governmental entity.
accounting, credit is taken in the year in which
the taxes of the foreign country were incurred, Gutierrez v. Collector, G.R. No. L-19537
subject to conditions prescribed in Subsection CAPITAL EXPENDITURES NOT DEDUCTIBLE. —
(C)(5). The following are not deductible business
expenses but should be integrated into the cost
If the taxpayer elects to take such credits in the of the capital assets for which they were
year in which the taxes of the foreign country incurred and depreciated yearly:
accrued, the credits for all subsequent years (1) Expenses in watching over laborers in
shall be taken upon the same basis, and no construction work. Watching over
portion of any such taxes shall be allowed as a laborers is an activity more akin to the
deduction in the same or any succeeding year. construction work than to running the
taxpayer's business.
Proof of Credits Required (2) Real estate tax which remained unpaid
1. The total amount of income derived by the former owner of the taxpayer's
from sources within the Philippines; rental property but which the latter
2. The amount of income derived from paid, is an additional cost to acquire
each country, the tax paid or incurred to such property and ought therefore to be
which is claimed as a credit; treated as part of the property's
3. All other information necessary for the purchase price.
verification and computation of such (3) The iron bars, venetian blind and water
credits. pump augmented the value of the
apartments where they were installed.
CIR v. Lednicky, G.R. No. L-18169 Their cost is not a maintenance charge,
An alien resident who derives income wholly hence, not deductible.
from sources within the Philippines may not (4) Expenses for the relocation, survey and
deduct from gross income the income taxes he registration of property tend to
paid to his home country for the taxable year. strengthen title over the property,
An alien resident's right to deduct from hence, they should be considered as
gross income the income taxes he paid to a addition to the cost of such property.
foreign government is given only as an (5) The set of "Comments on the Rules of
alternative to his right to claim a tax credit for Court" having a life span of more than
such foreign income taxes; so that unless he has one year should be depreciated ratably
a right to claim such tax credit if he chooses, he during its whole life span instead of its
is precluded from said deduction. total cost being deducted in one year.
Petitioners admit that the purpose of
the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign 4 - LOSSES
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
bond, debenture, note or certificate or other stock or securities, then NO DEDUCTION for
evidence of indebtedness issued by any the loss shall be allowed
corporation, with interest coupons or in
registered form, any loss resulting from such Exception: Claim is made by a dealer in stock or
sale shall not be subject to the foregoing securities and with respect to a transaction
limitation and shall not be included in made in the ordinary course of business of such
determining the applicability of such dealer
limitation to other losses.
If the amount of stock or securities acquired (or
Net Capital Loss Carry-Over covered by the contract or option to acquire) is
If any taxpayer, other than a corporation, less than the amount of stock or securities sold
sustains any taxable year a capital loss, such loss or otherwise disposed of, then the particular
(in an amount not in excess of the net income for shares of stock or securities, the loss from the
such year) shall be treated in the succeeding sale or other disposition of which is not
taxable year as a loss from the sale or deductible, shall be determined under rules and
exchange of a capital asset held for not more regulations prescribed by the Sec. of Finance
than twelve (12) months.
If the amount of stock or securities acquired (or
*Amounts received upon retirement bonds, covered by the contract or option to acquire) is
debentures, notes or certificates or other not less than the amount of stock or securities
evidences of indebtedness, with interest sold or otherwise disposed of, then the
coupons or in registered form, shall be particular shares of stock or securities, the
considered as amounts received in exchange acquisition of which is resulted in the non-
therefor deductibility of the loss, shall be determined
under the rules and regulations prescribed by
Gains and Losses from Short Sales, Etc. the Secretary of Fiance.
- Considered as gains or losses from sales
or exchanges of capital assets; iii. Wagering Losses (Sec. 34(D)
- If such gains or losses are attributable (6), 38, NIRC)
to the failure to exercise privileges or
options to buy or sell property, it is - Losses from wagering transactions
considered as capital gains or losses. - Allowed only to the extent of the gains
from such transactions
ii. Losses from Wash Sales (Sec.
34(D)(5), 38, NIRC) iv. Abandonment Losses (Sec.
34(D)(7), NIRC)
“Wash sales” - sale of a security (stocks, bonds,
options) at a loss and repurchase of the same or In case a contract area where petroleum
substantially identical security shortly before or operations are undertaken is partially or
after wholly abandoned: all accumulated
exploration and development expenditures
“Losses from Wash Sales” - any loss claimed to pertaining thereto shall be allowed as deduction
have been sustained from any sale or other If incurred prior to January 1, 1979; allowed
disposition of shares of stock or securities as deduction only from any income derived from
the same contract area.
General Rule: Where it appears that within a
period beginning thirty (30) days before the In case a producing well is subsequently
date of such sale or disposition and ending abandoned: the unamortized costs thereof, as
thirty (30) days after such date, the taxpayer has well as the undepreciated costs of equipment
acquired, or has entered into a contract or directly used therein, shall be allowed as a
option so to acquire, substantially identical
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
deduction in the year such well, equipment or such investor become worthless, the loss is
facility is abandoned by the contractor. deemed to be a loss from the sale or exchange of
If such abandoned well is reentered and capital assets under Section 29(d)(4)(B) of the
production is resumed or if such equipment National Internal Revenue Code. In the case at
or facility is restored into service: the said bar, First CBC Capital (Asia), Ltd., the investee
costs shall be included as part of gross income in corporation, is a subsidiary corporation of
the year of resumption or restoration and shall petitioner bank whose shares in said investee
be amortized or depreciated corporation are not intended for purchase or
sale but as an investment. Unquestionably then,
D. CASES any loss therefrom would be a capital loss, not
an ordinary loss to the investor. The Court also
Plaridel Surety & Insurance Co. v. CIR, G.R. No. ruled that equity holdings cannot come close to
L-21520 being, within the purview of "evidence of
The rule is that the loss deduction will be denied indebtedness" under Section 33 of the NIRC. The
if there is a measurable right to compensation loss of petitioner bank in its equity investment
for the oss, with ultimate collection reasonably in the Hongkong subsidiary cannot also be
clear. So where there is reasonable ground for deductible as a bad debt. The shares of stock in
reimbursement, the taxpayer must seek his question did not constitute a loan extended by it
redress and may not secure a loss deduction to its subsidiary (First CBC Capital) or a debt
until he establishes that no recovery may be subject to obligatory repayment by the latter,
had. In other words, the taxpayer must first essential elements to constitute a bad debt, but a
exhaust his remedies to recover or reduce his long term investment made by CBC.
loss.
Bar Question (2016)
Fernandez Hermanos, Inc. v. CIR, G.R. No. L- Rakham operates the lending company that
21551, L-21557, L-21557, L-24978, made a loan to Alfonso in the amount of
The Court sustains the Tax Court's disallowance P120,000 subject to a promissory note which is
of the sums of P8,989.76 and P27,732.66 spent due within one year from the note’s issuance.
by the taxpayer for the operation of its Three years after the loan became due and upon
Balamban coal mine in Cebu in 1950 and 1951, information that Alfonso is nowhere to be found,
respectively, and claimed as losses in the Rakham asks you for advice on how to treat the
taxpayer's returns for said years. The Tax Court obligation as “bad debt.” Discuss the requisites
correctly held that the losses "are deductible in for deductibility of a “bad debt.”
1952, when the mines were abandoned, and not I will advise Rakham that the obligation of
in 1950 and 1951, when they were still in Alfonso may now be considered as bad debts for
operation." The taxpayer's claim that these having met the yardstick of a debt which had
expenditures should be allowed as losses for the become worthless. In order to be considered
corresponding years that they were incurred, worthless, the taxpayer should establish that
because it made no sales of coal during said during the year from which a deduction is
years, since the promised road or outlet through sought, a situation developed as a result of
which the coal could be transported from the which it became evident in the exercise of
mines to the provincial road was not sound, objective business judgment that there
constructed, cannot be sustained. Some definite remained no practical, but only vaguely
event must fix the time when the loss is theoretical, prospect that the debt would ever be
sustained, and there it was the event of actual paid (Collector v. Goodrich International
abandonment of the mines in 1952. Rubber Co., G.R. No. L-22265). A bad debt is
deductible if it complies with the following
China Bank Corp. v. CA, G.R. No. 125508 requisites:
The Court ruled that shares of stock held by way a. There must be a valid and subsisting
of an investment are considered as capital assets debt.
under the law and when said shares held by
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
b. The obligation is connected with the the use of X’s car. All the members of the band
taxpayer’s trade or business and is not died and X’s car was a total wreck. Can X deduct
between related parties. the value of his car from his income as
c. There is an actual ascertainment that casualty loss? Reasons.
the debt is worthless. Section 29(1)(c) of the NIRC provides that in
d. The debt is charged-off during the cases of individual taxpayers, losses to be
taxable year. A partial write-off is not deductible must:
allowed (PRC v. CA, 1996) a) Actually be sustained and charged off
within the taxable year;
Bar Question (2010) b) Have been incurred in trade, profession
“A” is a travelling salesman working full time for or business or in any transaction
Nu Skin Products. He receives a monthly salary entered into for profit, though not
plus 3% commission on his sales in a Southern connected with trade, profession or
province where he is based. He regularly uses business;
his own car to maximize his visits even to far- c) Be evidenced by a closed and completed
flung areas. One fine day, a group of militants transaction.
seized his car. He was notified the following day Moreover, Section 1 of Rev. Regs. No.
by the police that the marines and the militants 12-77 defined “casualty loss” as a complete or
had a bloody encounter and his car was partial destruction of property resulting from an
completely destroyed after a grenade hit it. “A” identifiable event of sudden, unexpected, or
wants to file a claim for casualty loss. Explain unusual nature. It denotes accidents, some
the legal basis of your tax advice. sudden invasion by hostile agency and excludes
I would advise “A” not to file a claim for casualty progressive deterioration.
loss deduction from gross income, because he Based on the abovementioned laws and
derives purely compensation income, which the circumstances of the case at bar, the value of
includes the 3% commission on his sales, from the wrecked car is deductible as casualty loss,
his employer. An individual who receives provided the regulations governing
compensation income under an employer- substantiation requirements for losses are
employee relationship is not entitled to any kind complied with.
of deduction (whether itemized or the standard
deduction) from gross income (Sec. 34, NIRC).
Indeed, he is allowed to deduct from his gross 5 - BAD DEBTS
compensation income only the personal and
additional exemptions authorized in Section 35 “Bad debts” - debt resulting from the
of the Tax Code [NOTE: The allowance for worthlessness or uncollectibility, in whole or in
personal and additional exemptions as an part, of amount due the taxpayer by others,
allowable deduction of individuals was repealed arising from money lent or from uncollectible
by R.A. 10963 (TRAIN)]. Besides, to be amounts of income from goods sold or services
deductible from gross income, casualty loss rendered.
must relate to a property connected with the - Arises when a loan or debt for services
trade, business or profession of the taxpayer or sale or rental of property becomes
(Sec. 34[D][2], NIRC). worthless or uncollectible
- Debt must have had a value when
Bar Question (1993) acquired or created
X is a traveling salesman in Joso, Sulu. In the
course of his travel, a band of MNLF seized his If a worthless debt arises from unpaid wages,
car by force and used it to kidnap a foreign rents, etc.: there is no deduction, UNLESS the
missionary. The next day, X learned that the unpaid amount has been included in income.
military and the MNLF band had a chance
encounter. Using heavy weapons, the military A. SEC. 34(E), NIRC
fired at the MNLF band that tried to escape with
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
Bad Debts in General: debts due to the taxpayer extent of the income tax benefit of said
actually ascertained to be worthless and deduction.
charged off within the taxable year except those
not connected with profession, trade or C. REV. REG. 25-2002
business and those sustained in a transaction - Amends RR No. 5-99 relative to the
entered into between parties mentioned under requirements for deductibility of bad
debts from the gross income of a
Recovery of bad debts previously allowed as corporation, including banks, insurance
deduction in the preceding years: included as companies, or an individual, estate and
part of the gross income in the year of trust that is engaged in trade or
recovery to the extent of the income tax benefit business or a professional engaged in
of said deduction. the practice of his profession.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
entail expenses exceeding the amounts sought A. What is meant by the “tax benefit
to be collected. rule”?
Tax Benefit Rule states that the taxpayer is
Tax Benefit Rule obliged to declare as taxable income subsequent
The recovery of bad debts previously allowed as recovery of bad debts in the year they were
deduction in the preceding year or years shall be collected to the extent of the tax benefit enjoyed
included as part of the taxpayer’s gross income by the taxpayer when the bad debts were
in the year of such recovery to the extent of the written-off and claimed as deduction from gross
income tax benefit of said deduction. income. It also applies to taxes previously
deducted from gross income but which were
Example: if in the year the taxpayer claimed subsequently refunded or credited. The
deduction of bad debts written-off, he realized a taxpayer is also required to report as taxable
reduction of the income tax due from him on income the subsequent tax refund or tax credit
account of the said deduction, his subsequent granted to the extent of the tax benefit of the
recovery thereof from his debtor shall be taxpayer enjoyed when such taxes were
treated as a receipt of realized taxable income. previously claimed as deduction from income
Conversely, if the said taxpayer did not benefit
from the deduction of the said bad debt written-
off because it did not result to any reduction of
his income tax in the year of such deduction (i.e., B. Give an illustration of the application
where the result of his business operation was a of the tax benefit rule.
net loss even without deduction of the bad debts X Company has a business connected receivable
written-off), then his subsequent recovery amounting to P100,000 from Y who was
thereof shall be treated as a mere recovery or a declared bankrupt by a competent court.
return of capital, hence, not treated as receipt of Despite earnest efforts to collect the same, Y was
realized taxable income. not able to pay, prompting X Company to write-
off the entire liability. During the year of write-
Under this rule, the recovery of amounts off, the entire amount was claimed as a
deducted in previous years from gross deduction for income tax purposes reducing the
income become taxable income UNLESS to the taxable net income of X Company to only
extent thereof, the deduction did not result in P1,000,000. Three years later, Y voluntarily paid
any tax benefit to the taxpayer. his obligation previously written-off to X
Company. In the year of recovery, the entire
Rev. Regs. No. 2 amount constitutes part of gross income of X
Any amount subsequently received on account Company because it was able to get full tax
of a bad debt previously charged off and allowed benefit three years earlier.
as deduction for prior years must be included in
the gross income for the taxable year in which it Bar Question (2014)
was received. Doñ a Evelina, a rich widow engaged in the
business of currency exchange, was assessed a
Vis-a-vis Federal Income Tax Regulations considerable amount of local business taxes by
Recoveries of bad debts previously deducted do the City Govt of Bagnet by virtue of Tax
not constitute taxable income, UNLESS the Ordinance No. 24. Despite her objections
deductions of bad debts in prior years resulted thereto, Doñ a Evelina paid the taxes.
in a reduction of income tax liability. This Nevertheless, unsatisfied with said Tax
doctrine can only be availed of by a creditor but Ordinance, Doñ a Evelina, through her counsel
never a debtor (Phil. Fiber Processing Co. v. CIR, Atty. ELP, filed a written claim for recovery of
1966) said local business taxes and contested the
assessment. Her claim was denied, and so Atty.
Bar Question (2003) ELP elevated her case to the RTC.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
The RTC declared Tax Ordinance No 24 1. The allowance for depreciation must be
null and void without legal effect for having reasonable;
been enacted in violation of the publication 2. It must be for property arising out of its
requirement of tax ordinances and revenue use in the trade or business, or out of its
measures under the LGC and on the ground of not being used temporarily during the
double taxation. On appeal, the CTA affirmed the year; and
decision of the RTC. No motion for 3. It must be charged off during the
reconsideration was filed and the decision taxable year from the taxpayer’s books
became final and executory. of accounts.
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
rate which would have deduction from his gross income, without any
been used had the written objection on the part of the
annual allowance been Commissioner or his duly authorized
computed under the representative, the aforesaid useful life and
method described in depreciation rate so adopted shall be
Subsection (F)(1) considered binding
iii. Sum of the Years Digit
Method B. SPECIAL RULES ON DEPRECIATION
- a form of accelerated i. Private Educational
depreciation that is Institutions (Sec. 34(A)(2),
based on the NIRC)
assumption that the
productivity of the In addition to other allowable deductions, a
asset decreases with private educational institution may, at its option,
the passage of time. elect either:
Under this method, a a) To deduct expenditures otherwise
fraction is computed considered as capital outlays of
by dividing the depreciable assets incurred during the
remaining useful life of taxable year for the expansion of school
the asset on a facilities, or
particular date by the b) To deduct allowance for depreciation
sum of the year's digits thereof
Where the taxpayer has adopted such useful life iii. Mining Operations (Sec.
and depreciation rate for any depreciable asset 34(F)(5))
and claimed the depreciation expenses as
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
Depreciation in respect of all properties used should have been first proved as a law, to be
in mining operations other than petroleum subject to judicial notice. Bulletin F, is a
operations shall be computed as follows: publication of the US Federal Internal Revenue
(a) At the normal rate of depreciation if Service, which was made after a study of the
the expected life is ten (10) years or lives of the properties. In the words of the lower
less; or court: "It contains the list of depreciable assets,
(b) Depreciated over any number of years the estimated average useful lives thereof and
between five (5) years and the the rates of depreciation allowable for each kind
expected life if the latter is more than of property. (See 1955 PH Federal Taxes, Par.
ten (10) years, and the depreciation 14, 160 to Par. 14, 163-0). It is true that Bulletin
thereon allowed as deduction from F has no binding force, but it has a strong
taxable income persuasive effect considering that the same has
been the result of scientific studies and
*contractor must notify the Commissioner observation for a long period in the United State
which of the depreciation rates it will use after whose Income Tax Law ours is patterned."
Verily, courts are permitted to look into and
iv. For Nonresident Aliens investigate the antecedents or the legislative
Engaged in Trade or Business history of the statutes involved (Director of
or Resident Foreign Lands v. Abaya, et al., 63 Phil. 559). Zamora also
Corporation (Sec. 34(F)(6)) contends that his basis for applying the 3-1/2%
rate is the testimony of its witness Mariano
- A reasonable allowance for the Katipunan, who cited a book entitled "Hotel
deterioration of property arising out of Management — Principles and Practice" by
its use or employment or its non-use Lucius Boomer, President, Hotel Waldorf Astoria
in the business, trade or profession Corporation. As well commented by the Solicitor
shall be permitted only when such General, "while the petitioner would deny us the
property is located in the Philippines right to use Bulletin F, he would insist on using
as authority, a book in Hotel management
Basilan Estate, Inc. v. Commissioner, G.R. No. written by a man who knew more about hotels
L-22492 than about taxation. All that the witness did
The income tax law does not authorize the (Katipunan) . . . is to read excerpts from the said
depreciation of an asset beyond its acquisition book (t.s.n. pp. 99-101), which admittedly were
cost. Reason:: deductions from gross income based on the decision of the U.S. Tax Courts,
are privileges, not matters of right. They are not made in 1928 (t.s.n. p. 106)". In view hereof, We
created by implication but upon clear hold that the 2-1/2% rate of depreciation of
expression in the law. Moreover, the recovery, the Bay View Hotel building, is approximately
free of income tax, of an amount more than the correct.
invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. Fernandez Hermanos Inc. v. CIR, CIR, G.R. No.
For then what the taxpayer would recover will L-21551
be, not only the acquisition cost, but also some During the year 1950 to 1954, the taxpayer
profit. Recovery in due time through claimed a depreciation allowance for its
depreciation of investment made is the buildings at the annual rate of 10%. The
philosophy behind depreciation allowance; the Commissioner claimed that the reasonable
idea of profit has never been the underlying depreciation rate is only 3% annually. We
reason for the allowance. Hence, depreciation on sustain the Tax Court's finding that the taxpayer
appraisal value is not allowed. did not submit adequate proof of the
correctness of the taxpayer's claim that the
Zamora v. Collector, No. L-15290 depreciable assets or buildings in question had a
As the lower court based its findings on Bulletin useful life only of 10 years so as to justify its
F, petitioner Zamora, argues that the same 10% depreciation per annum claim, such finding
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
being supported by the record. The taxpayer's Election to Deduct Exploration and
contention that it has many zero or one-peso Development Expenditures in Mining
assets, support the Commissioner's position that Operations
a 10% annual depreciation rate was excessive. Taxpayer may, at his option, deduct exploration
and development expenditures accumulated as
cost or adjusted basis for cost depletion as of
7 - DEPLETION (SEC. 34(G), NIRC) date of prospecting, as well as exploration and
development expenditures paid or incurred
In case of oil and gas wells or mines, a during the taxable year.
reasonable allowance for depletion or
amortization computed in accordance with the Total amount deductible for exploration and
cost-depletion method shall be granted development expenditures: shall not exceed
twenty-five percent (25%) of the net income
When the allowance for depletion shall equal from mining operations computed without the
the capital invested: no further allowance shall benefit of any tax incentives under existing laws.
be granted
Actual exploration and development
After production in commercial quantities has expenditures MINUS 25% of the net income
commenced, certain intangible exploration from mining: shall be carried forward to the
and development drilling costs: succeeding years until fully deducted.
(a) Shall be deductible in the year
incurred if such expenditures are *election of the taxpayers shall be irrevocable
incurred for non-producing wells and shall be binding in succeeding taxable
and/or mines; or years
(b) Shall be deductible in full in the year
paid or incurred or, at the election of “Net income from mining operations” - gross
the taxpayer, may be capitalized and income from operations LESS “allowable
amortized if such expenditures deductions” necessary or related to mining
incurred are for producing wells and/or operations
mines in the same contract area “Allowable deductions” - mining, milling and
marketing expenses, and depreciation of
“Intangible costs in petroleum operations” - properties directly used in the mining
any cost incurred in petroleum operations in operations.
which in itself has no salvage value and which is
incidental to and necessary for the drilling of “Exploration expenditures” - expenditures
wells and preparation of wells for the paid or incurred during the development stage
production of petroleum of the mine or other natural deposits.
- Shall not pertain to the acquisition or
improvement of property of a character “Development stage of the mine or other
subject to the allowance for natural deposits” - at the time when deposits of
depreciation except that the allowance ore or other minerals are shown to exist in
for depreciation on such property shall sufficient commercial quantity and quality
be deductible
“End stage” - upon commencement of actual
*Any intangible exploration, drilling and commercial extraction
development expenses allowed as a deduction
in computing taxable income during the year Depletion of Oil and Gas Wells and Mines
shall not be taken into consideration in Deductible by a Nonresident Alien Individual
computing the adjusted cost basis for the engaged in trade or business in PH or
purpose of computing allowable cost depletion. Foreign Corporation
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
Hence, the P5,000 contribution to the crippled deduction in the form of premium payments on
girl cannot be claimed as a deduction. health and/or hospitalization insurance in an
amount not exceeding P2,400 per annum (Sec.
Bar Question (1993) 34[M], NIRC). This deduction is allowed if the
X’s favorite charity organization is the aggregate family income does not exceed
Philippine National Red Cross (PNRC). To raise P250,000 and by the spouse, in case of married
money, PNRC sponsored a concert featuring the individual, who claims additional personal
Austria Boys Choir. X advanced P100,000 to the exemption for dependents. [NOTE: The
PNRC for which he was issued a promissory allowance for personal and additional
note. Before its maturity, X cancelled and exemptions and premium payments on health
returned the note to PNRC. an advertising man, and/or hospitalization insurance as an
X also undertook the promotions of the Austria allowable deduction of individuals were
Boys Choir. Part of the promotions campaign repealed by R.A. 10963 (TRAIN).]
was to ask prominent personalities to publicly
donate blood to the PNRC a day before the B. DEDUCTIBLE IN FULL (SEC. 34(H)(2))
concert. X himself donated 100 cc. Of blood. X
intends to claim as deductions the value of the 1. Donations to the Government
note, the cash value of the promotions campaign - Exclusively to finance, to
and the cash value of the blood he donated. Give provide for, or to be used in
your legal advice. undertaking priority activities
The value of the note can be claimed as in education, health, youth and
deduction as charitable contribution. While the sports development, human
amount was originally a loan, it can be settlements, science and
considered to have become a gift or contribution culture, and in economic
when X cancelled and returned the note to development, according to
PNRC, a charitable organization. National Priority Plan by NEDA
On the other hand, the cash value of the - Donation which is not in
promotions campaign cannot be claimed as a accordance with annual
deduction. Advertising expenses can only be priority plan subject to
deducted from revenues where the expenses limitations in paragraph (1) of
were incurred. In the case at hand, PNRC is the this Subsection
revenue-producing entity not X. X did not derive
any revenue. Thus, the cash value of his 2. Donations to Certain Foreign
promotions campaign cannot be claimed as Institutions or International
deduction. Organizations
Finally, the cash value of the blood - In pursuance of or in
donated by X cannot be claimed as deduction. compliance with agreements,
Blood has no monetary value in this case as it is treaties, or commitments
not disbursed in the form of expense. entered into by the
Government of PH and the
Bar Question (2001) foreign institutions or
international organizations or
Taxpayers, whose only income consist of
in pursuance of special laws
salaries and wages from their employers, have
long been complaining that they are not allowed
3. Donations to Accredited
to deduct any item from their gross income for
Nongovernment Organizations
purposes of computing their net taxable income.
(nonprofit domestic corporations:
With the passage of the Comprehensive Tax
(1) Organized and operated
Reform Act of 1997, is this complaint still
exclusively for scientific,
valid? Explain your answer.
research, educational,
No more. Gross compensation income
character-building and youth
earners are now allowed at least an item of
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
When election may be made: any taxable year 11 - OPTIONAL STANDARD DEDUCTION (SEC.
beginning after the effectivity of this Code, but 34(L), NIRC) - See TRAIN
only if made not later than the time prescribed
by law for filing the return for such taxable year. The optional standard deduction (OSD), which is
in lieu of the itemized deductions, is merely a
Method and period selected shall be adhered privilege that may be enjoyed by certain
to for the taxable year for which the election is individual taxpayers. The requisites for its
made and for all subsequent taxable years exercise are as follows:
UNLESS, with approval of the Commissioner, a a. OSD is available only to citizens or
change to a different method is authorized resident aliens and to domestic
corporations and resident foreign
Limitations on Deduction corporations; thus, non-resident aliens
This Subsection shall not apply to: and non-resident foreign corporations
(a) Any expenditure for the acquisition or are not entitled to claim the optional
improvement of land, or for the standard deduction;
improvement of property to be used b. The standard deduction is optional; i.e.,
in connection with research and unless taxpayer signifies in his return
development of a character which is his intention to elect this deduction, he
subject to depreciation and depletion; is considered as having availed of the
and itemized deductions;
(b) Any expenditure paid or incurred for c. Such election, when made by the
the purpose of ascertaining the qualified taxpayer, is irrevocable for the
existence, location, extent, or quality year in which made; however, he can
of any deposit of ore or other mineral, change to or select the itemized
including oil or gas. deductions in succeeding year(s);
d. The amount of standard deductions is
limited to 40% of taxpayer’s gross sales
10 - PENSION TRUST (SEC. 34(L), NIRC) or gross receipts (in the case of
individuals selling goods or services, as
- Established and maintained to provide the case may be) and on gross income
for the payment of reasonable pensions (in the case of a corporation); and
to an employer’s employees e. Proof of actual deductions is not
- A reasonable amount transferred or required.
paid into such trust during the taxable
year shall be allowed as deduction (in OSD for General Professional Partnerships
addition to the contributions to such and Partners of GPPs
trust during the taxable year to cover The distributable net income of the GPP may be
the pension liability accruing during the determined by claiming either the itemized
year, allowed as deduction under deductions allowed under Section 34 of the
Subsection [A][1] of this Section) NIRC or in lieu thereof, it can opt to avail of the
- Such deduction is allowed ONLY IF such OSD allowed to corporations in claiming the
amount: deductions in an amount not exceeding 40% of
(1) Has not theretofore been its gross income.
allowed as a deduction, and
(2) Is apportioned in equal parts Share in the net income of GPP, actually or
over a period of ten (10) constructively received, shall be reported as
consecutive years beginning taxable income of each partner.
with the year in which the
transfer or payment is made Partners comprising the GPP can no longer
further deduct from their distributive share in
the net income of the GPP and are not allowed
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
Madrigal v. Rafferty, G.R. No. 12287 b. Their employment in 1991 by the same
Exemptions are fixed at arbitrary amounts company will make them liable to the
intended to substitute for personal and living income imposed on gross compensation
expenses. They are roughly the equivalent of the income;
taxpayer’s minimum subsistence and those of c. Birth of the first child in December
his dependents. 1992 would give rise to an additional
exemption of P5,000 (now P25,000) for
Bar Question (2001) the taxable year 1992;
Distinguish allowable deductions from d. Birth of their second child in November
personal exemptions. Give an example of an 1993 would likewise entitle them to
allowable deduction and another example claim additional exemption of P5,000
for personal exemption. (now P25,000) raising their additional
The distinction are as follows: personal exemptions to P10,000 for
1. As to amount - allowable deductions taxable year 1993.
generally refer to actual expenses e. Sale of their condominium unit in 1994
incurred in the pursuit of trade, shall make the spouses liable to the five
business, or practice of profession while percent (now 6%) capital gains tax on
personal exemptions are arbitrary the gain presumed to have been
amounts allowed by law realized from the sale.
2. As to nature - allowable deductions
constitute business expenses while “Status-at-the-end-of-the-year Rule” -
personal exemptions pertain to whatever is the status of the taxpayer at the end
personal expenses of the calendar year shall be used for purposes
3. As to purpose - deductions are allowed of determining his personal and additional
to enable the taxpayer to recoup his exemptions generally applies
cost of doing business while personal Under TRAIN: regardless of the status of the
exemptions are allowed to cover taxpayer, the first P250,000 income of an
personal, family, and living expenses. individual shall enjoy tax exemption
4. As to claimants - allowable deductions
can be claimed by all taxpayers, Bar Question (2004)
corporate, or otherwise, while personal Ram got married to Lisa last January 2003. On
exemptions can be claimed only by November 30, 2003, Lisa gave birth to twins.
individual taxpayers. Unfortunately, however, Lisa died in the course
of her delivery. Due to complications, one of the
Bar Question (1997) twins also died on December 15, 2003.
Mar and Joy got married in 1990. A week before In preparing his income tax return
their marriage, Joy received, by way of donation, for the year 2003, what should Ram indicate
a condominium unit worth P750,000 from her in the return as his civil status: (a) single; (b)
parents. After marriage, some renovations were married; (c) head of the family; (d) widower;
made at a cost of P150,000. The spouses were (e) none of the above? Why? Reason.
both employed in 1991 by the same company. Ram should indicate “(b) married” as
On December 30, 1992, their first child was his civil status in preparing his income tax
born,a dn a second child was born on November return for the year 2003. The death of his wife
7, 1993. In 1994, they sold the condominium during the year will not change his status
unit and bought a new unit. because should the spouse die during the
Under the foregoing facts, what were the taxable year, the taxpayer may still claim the
events in the life of the spouses that had same exemptions (that of being married) as if
income tax incidence? the spouse died at the close of such year (Sec.
a. Their marriage in 1990 qualifies them 35[c], NIRC).
to claim personal exemption for
married individuals;
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
Section 30(a)(1) of the Tax Code partly reads: grounds, OXY objected to the insurance
“All the ordinary and necessary expenses paid purchase but ADD purchased the policy anyway.
or incurred during the taxable year in carrying Its annual premium amounted to P100,000. Is
on any trade or business, including … rentals or said premium deductible by ADD
other payments required to be made as a Computers? Reason.
condition to the continued use or possession, for NO. The premium is not deductible
the purpose of trade or business, of property to because it is not an ordinary business expense.
which the taxpayer has not taken or is not The term “ordinary” is used in the income tax
taking title or in which he has no equity.” law in its common significance and it has the
In this case the Supreme Court connotation of being normal, usual or customary
concurred in the decision of the CTA that, "No (Deputy v. Du Pont, 1940). Paying the premium
evidence has been presented as to the nature of for the insurance of a person not connected to
the said 'farming expenses' other than the bare the company is not normal, usual or customary.
statement of petitioner that they were spent for Another reason for its non-deductibility
the 'development and cultivation of (his) is the fact that it can be considered as an illegal
property'. No specification has been made as to compensation made to a government employee.
the actual amount spent for purchase of tools, This is so because if the insured, his estate, or
equipment or materials, or the amount spent for his heirs were made as the beneficiary (because
improvement. Respondent claims that the entire of the requirement of insurable interest), the
amount was spent exclusively for clearing and payment of premium will constitute bribes
developing the farm which were necessary to which are not allowed as deduction from gross
place it in a productive state. It is not, income (Sec. 34[A][1][c], NIRC).
therefore, an ordinary expense but a capital On the other hand, if the company was
expenditure. Accordingly, it is not deductible made the beneficiary, whether directly or
but it may be amortized, in accordance with indirectly, the premium is not allowed as a
Section 75 of Revenue Regulations No. 2, cited deduction from gross income (Sec. 36[A][4],
above. See also, Section 31 of the Revenue Code NIRC).
which provides that in computing net income,
no deduction shall in any case be allowed in
respect of any amount paid out for new
buildings or for permanent improvements or
betterments made to increase the value of any
property or estate."
As to the representation expenses:
Gancayco’s claim was partly allowed and partly
disallowed. The disallowance is justified by the
record, for, apart from the absence of receipts,
invoices or vouchers of the expenditures in
question, petitioner could not specify the items
constituting the same, or when or on whom or
on what they were incurred.
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General Categories of Tax Base - the annual taxable income not over
1. Compensation income, business and 250,000 of individual citizens,
professional income, capital gains, individual resident aliens, and non-
passive income, and other income not resident alien individuals engaged in
subject to final tax; trade or business in the Philippines is
2. Capital gains subject to final now exempt from income tax
withholding income tax at preferential - Allowance for personal and additional
tax rates; and exemptions for individual taxpayers
3. Passive investment income subject to were repealed
final withholding income tax at
preferential tax rates. Tax Schedule effective January 1, 2018 until
December 31, 2022
“Global Tax System”
We follow the global tax system insofar as Not over P250,000 0%
compensation income, business and Over P250,000 but 20% of the excess
professional income, capital gains, passive not over P400,000 over P250,000
incomes, and other income not subject to final
tax. Over P400,000 but P30,000 + 25% of the
- The allowable deductions under not over P800,000 excess over P400,000
Sections 34, 37, and 38 of the Tax Code
Over P800,000 but P130,000 + 30% of
as well as personal and additional
not over P2,000,000 the excess over
exemptions under Section 35 of the Tax P800,000
Code, with respect to individuals, are
deducted from the taxable gross Over P2,000,000 but P490,000 + 32% of
income (except capital gains from sale not over P8,000,000 the excess over
or exchange of shares of stock of a P2,000,000
domestic corporation and real property,
Over P8,000,000 P2,410,000 + 35% of
and passive incomes that are subject to the excess over
final withholding taxes). P8,000,000
- Gross income less allowable deductions
= Net “taxable income”
Tax Schedule effective January 1, 2023
- No deductions (whether itemized or
onwards
optional standard) are allowed by law
Not over P250,000 0%
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g. Joint account
Amount of Capital Gain Tax Rate
h. Joint venture or consortium taxable as a
corporation Not over P100,000 5%
Final tax of 15% shall be imposed upon the net Final tax of 6% (based on the gross selling
capital gains realized from the sale, barter, price or current fair market value, whichever is
exchange or other disposition of shares of stock higher (Sec. 24(D)(1))
in a domestic corporation (except those made
through stock exchange): Exception: capital gains presumed to have been
Not over P100,000: 5% realized from the sale or disposition of their
On any amount in excess of P100,000: principal residence utilized in acquiring or
10% (Sec. 24(C), NIRC) constructing a new principal residence (within
18 months) shall be exempt from CGT
Rev. Reg. 6-2008
Stock transaction tax at the rate of ½ of 1% *Real property defined in Art. 415 of CC
- Shall be levied, assessed and collected
on every sale, barter, exchange or other Rev. Reg. 8-98
disposition of shares of stock listed and - Capital Gains Tax (CGT) Return will
traded through the LSE be filed by the seller within 30 days
- Shall be based on the gross selling price following each sale or disposition of
or gross value in money of the shares of real property
stock sold, bartered, exchanged or - Payment of the CGT will be made to an
otherwise disposed Authorized Agent Bank (AAB) located
- Shall be assumed and paid by the seller within the Revenue District Office
or transferor through the remittance of (RDO) having jurisdiction
the stock transaction tax by the seller or - Creditable withholding taxes
transferor’s broker deducted and withheld by the
withholding agent/buyer on the sale,
Stock transaction tax for sale, barter, transfer or exchange or real property
exchange or other disposition through IPO: classified as ordinary asset will be paid
by the withholding agent/buyer upon
filing of the return with the AAB located
Proportion of Disposed Shares Tax Rate
within the RDO having jurisdiction
to Outstanding Shares
- Payment of CWT will have to be done
Up to 25% 4% within 10 days following the end of the
month in which the transaction
Over 25% but not over 33 ⅓% 2% occurred, provided, however, that
taxes withheld in December will be filed
Over 33 ⅓% 1%
on or before January 25 of the following
year.
Final tax imposed on the sale, barter or
exchange of shares of stock not traded Rev. Reg. 13-99
through the LSE: Capital gains presumed to have been realized
from the sale, exchange or disposition by a
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
natural person of his principal residence shall principal residence sold, exchanged or
not be imposed with income tax, including disposed by the aforesaid taxpayer
the six percent (6%) capital gains tax, subject
to the following conditions: B - NON-RESIDENT ALIENS (SEC. 25, NIRC)
1) Sworn Declaration Requirement; i. Engaged in trade or business
2) Post Reporting Requirement; 1. Taxable Income (Sec. 25(A)
3) The tax exemption herein granted may (1), NIRC)
be availed of only once every ten (10) - Subject to an income
years; tax in the same
4) The historical cost or adjusted basis of manner as an
his old principal residence sold, individual citizen and a
exchanged or disposed shall be carried resident alien
over to the cost basis of his new individual, on taxable
principal residence; and income received from
5) If there is no full utilization of the all sources within the
proceeds of sale, exchange or Philippines
disposition of his old principal - Those who come to the
residence for the acquisition or PH and stay therein for
construction of his new principal an aggregate period of
residence, he shall be liable for more than 180 days:
deficiency capital gains tax which deemed nonresident
shall be computed in accordance with alien doing business
Sec. (4) hereof. Accordingly, only a in the PH
fractional part (which the utilized
amount bears to the gross selling price) 2. Passive Income (Sec. 25(A)
of the historical cost of the old principal (2), NIRC)
residence sold shall be carried over to
the cost basis of the new principal Income tax of 20% shall be imposed on:
residence 1. Cash and/or property dividends from
a. Domestic corporation
Rev. Reg. 14-2000 b. Joint stock company
- amends Sections 3(2), 3 and 6 of RR No. c. Insurance or mutual fund
13-99 relative to the sale, exchange or company
disposition by a natural person of his d. Regional operating
"principal residence" headquarters of multinational
- Residential address shown in the company
latest income tax return filed by the e. Share of a nonresident alien
vendor/transferor immediately individual in the distributable
preceding the date of sale of said real net income after tax of a
property shall be treated, for purposes partnership (except GPP)
of these Regulations, as a conclusive f. Share of a nonresident alien
presumption about his true individual in the net income
residential address after tax of an association
- Seller/transferor's compliance with the g. Joint account
preliminary conditions for exemption h. Joint venture
from the 6% capital gains tax under 2. Interests
Sec. 3(1) and (2) of the Regulations 3. Royalties (in any form) [except royalties
will be sufficient basis for the RDO to on books, literary works and musical
approve and issue the Certificate compositions which shall be subject to a
Authorizing Registration (CAR) or Tax final tax of 10%; and cinematographic
Clearance Certificate (TCC) of the films and similar works which shall be
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Cajustin)
- GPP shall not be subject to the income taxable income from sources within and
tax imposed under this Chapter without the Philippines
- Partners in GPP shall be liable for - Subject to the corporate income tax for
income tax only in their separate and the year, equal to the higher amount
individual capacities between the regular corporate income
tax (RCIT), computed at 30%on its net
Soriano, et al. v. Secretary of Finance, et al., taxable income, and the minimum
GR Nos. 184450, 184508, 184538, 185234, corporate income tax (MCIT) computed
January 24, 2017 at two percent of its gross income
In sum, R.A. 9504, like R.A. 7167 in Umali, was a during the year.
piece of social legislation clearly intended to - Therefore, there will be two yearly
afford immediate tax relief to individual computations of corporate income
taxpayers, particularly low-income taxes for every corporation subject to
compensation earners. Indeed, if R.A. 9504 was either the RCIT or MCIT, whichever is
to take effect beginning taxable year 2009 or higher
half of the year 2008 only, then the intent of
Congress to address the increase in the cost of EXCEPT: in case of a proprietary educational
living in 2008 would have been negated. institution and hospital which is non-profit,
Therefore, following Umali, the test is whether which shall be subject to income tax at 10% of
the new set of personal and additional its taxable income, UNLESS its gross income
exemptions was available at the time of the from unrelated trade, business, or other activity
filing of the income tax return. In other words, exceeds 50% of the total gross income derived
while the status of the individual taxpayers is from all sources (Sec. 27[B], NIRC)
determined at the close of the taxable year, their
personal and additional exemptions - and John Hay Peoples Alternative Coalition v. Lim
consequently the computation of their taxable A domestic corporation that is registered with
income - are reckoned when the tax becomes the Camp John Hay Development Authority is
due, and not while the income is being earned or not entitled to the five percent preferential
received. The NIRC is clear on these matters. income tax rate on its gross income earned and
The taxable income of an individual taxpayer thus subject to the normal corporate income tax
shall be computed on the basis of the calendar rate on its net taxable income from worldwide
year. The taxpayer is required to file an income sources.
tax return on the 15th of April of each year Proclamation No. 420, which was issued
covering income of the preceding taxable year. by the President and which extended the same
The tax due thereon shall be paid at the time the privileges enjoyed by enterprises registered
return is filed. It stands to reason that the new with the Subic Bay Metropolitan Authority
set of personal and additional exemptions, (SBMA) under R.A. 7227 (a.k.a. Bases
adjusted as a form of social legislation to Development and Conversion Law) to
address the prevailing poverty threshold, should enterprises registered with the other Freeport
be given effect at the most opportune time as zones like the Camp John Hay, violated the 1987
the Court ruled in Umali Constitution, which provides that now law
granting tax exemption shall be passed without
the concurrence of a majority of all the members
2 - CORPORATIONS of Congress.
A - DOMESTIC CORPORATIONS (SEC. 27, ii. Special Corporations (Sec. 27(B), (C),
NIRC) NIRC)
i. In General (Sec. 27(A), NIRC) 1. Proprietary Educational
- Subject to Philippine income tax at 30% Institutions and Hospitals
(effective January 1, 2009) of its net which are non-profit
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point in the Philippines and back, that income tax by express provision of the
portion of revenue pertaining to the law.
return trip to the Philippines shall not - The person making the income payment
be included as part of GPB shall withhold and remit the tax
- Refunded tickets shall likewise not be
included in computation of GPB Rev. Reg. 10-76
- In the case of a flight that originates - Enumerates the taxes that are covered
from the Philippines but by the in-lieu-of nature of the 5%
transshipment of passenger, excess income tax which include but are not
baggage, cargo and/or mail takes places limited to:
elsewhere in another aircraft belonging 1. Privilege tax
to a different airline company, the GPB 2. Gross receipts tax
shall be that portion of the revenue 3. Documentary and science
corresponding to the leg flown from any stamp tax
point in the Philippines to the point of 4. Profit remittance tax
transshipment - Re-enforced the exemption of FCDUs
from gross receipts tax
(2) Offshore Banking Units
- Income derived by offshore Rev. Reg. 14-77
banking units authorized by - Amended Rev. Reg. 10-76
the BSP from foreign currency - “Gross onshore income” - gross
transactions with local interest income arising from foreign
commercial banks, including currency loans and advances to and/or
branches of foreign banks that investments with residents made by
may be authorized by the BSP offshore banking units or expanded
to transact business with foreign currency deposit units
offshore banking units, - In case of foreign currency loan
including any interest derived transactions: such gross
from foreign currency loans interest income shall refer only
granted to residents, shall be to the stipulated interest and
subject to a final income tax at shall not include any and all
the rate of 10% of such income fees, commissions and other
(Sec. 28(4), as amended, NIRC) charges which are integral
parts of the income form the
Rev. Reg. 10-98 above transactions
- Income derived by an FCDU or an OBU - Such gross onshore income shall be
from foreign currency transactions with taxed with ten percent (10%) thereof
residents of the Philippines, including and be a final tax. Any and all fees,
local commercial banks, local branches commissions and other charges which
of foreign banks, and other depository are integral parts of the charges
banks under the foreign currency imposed on foreign currency loan
deposit system, shall be subject to a transactions are exempt from the tax
final withholding tax of 10%. herein imposed
- These income include: interest from - In the case of onshore income realized
lending operations, including bank by an OBU or by an expanded FCDU: the
charges, commissions, service fees, and income need not be included in the
net foreign exchange transactions gains quarterly income tax return to be filed
- Income from foreign currency - The payor-borrower under Section 53,
transactions with non-residents of the in relation to Section 54, of NIRC, is
Philippines shall not be subject to constituted as the withholding agent
charged with the obligation of
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In the 15% remittance tax, the law specifies its Final tax of 10% shall be imposed on
own tax base to be on the “profit remitted interest income from foreign currency loans
abroad.” There is absolutely nothing equivocal granted by the abovementioned depository
or uncertain about the language of the banks to residents other than depository banks
provision. The tax is imposed on the amount under the expanded system
sent abroad, and the law calls for nothing
further. 2. Dividends (Sec. 28(A)(7)(d),
The branch profit remittance tax should NIRC)
be based on the amount actually remitted, NOT
what was applied for. There is nothing in Dividends received by a resident foreign
Section 24 which indicates that the 15% corporation from a domestic corporation liable
tax/branch profit remittance is on the total to tax shall not be subject to tax under this
amount of profit; where the law does NOT Title
qualify that the tax is imposed and collected at
source, the qualification should not be read into 3. Capital gains (Sec. 28(A)(7)
law. Rationale of 15%: To equalize/ share the (c), NIRC)
burden of income taxation with foreign
corporations Final tax prescribed below is imposed upon
the net capital gains from the sale, barter,
RMC 55-80 exchange or other disposition of shares of stock
- Any profit remitted by a branch office to in a domestic corporation (except those through
its mother company authorized to stock exchange):
engage in petroleum operations in
Not over P100,000 5%
the Philippines shall be subject to a tax
t seven and one-half percent (7.5%) On any amount in excess of P100,000 10%
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country by the foreign stockholder corporation. "deemed paid" by P&G-USA, are tax credits
In other words, in the instant case, the reduced available or applicable against the US corporate
fifteen percent (15%) dividend tax rate is income tax of P&G-USA. These tax credits are
applicable if the USA "shall allow" to P&G-USA a allowed because of the US congressional desire
tax credit for "taxes deemed paid in the to avoid or reduce double taxation of the same
Philippines" applicable against the US taxes of income stream.
P&G-USA. The NIRC specifies that such tax credit
for "taxes deemed paid in the Philippines" must,
as a minimum, reach an amount equivalent to Commissioner v. Wander Phils. 160 SCRA 573
twenty (20) percentage points which represents ISSUE: Whether or not private respondent
the difference between the regular thirty-five Wander is entitled to the preferential rate of
percent (35%) dividend tax rate and the 15% withholding tax on dividends declared
and remitted to its parent corporation,
preferred fifteen percent (15%) dividend tax
Glaro.
rate. It is important to note that Section 24 (b) Yes. Pursuant to Section 24 (b) (1) of the Tax
(1), NIRC, does not require that the US must give Code, as amended by P.D. 369 and 778, the
a "deemed paid" tax credit for the dividend tax dividends received from a domestic corporation
(20 percentage points) waived by the liable to tax, the tax shall be 15% of the
Philippines in making applicable the preferred dividends received, subject to the condition that
dividend tax rate of fifteen percent (15%). In the country in which the non-resident foreign
corporation is domiciled shall allow a credit
other words, our NIRC does not require that the
against the tax due from the non-resident
US tax law deem the parent-corporation to have foreign corporation taxes deemed to have been
paid the twenty (20) percentage points of paid in the Philippines equivalent to 20% which
dividend tax waived by the Philippines. The represents the difference between the regular
NIRC only requires that the US "shall allow" tax (35%) on corporations and the tax (15%)
P&G-USA a "deemed paid" tax credit in an dividends.
amount equivalent to the twenty (20) While it may be true that claims for
refund are construed strictly against the
percentage points waived by the Philippines.
claimant, nevertheless, the fact that Switzerland
The parent-corporation P&G-USA is did not impose any tax or the dividends received
"deemed to have paid" a portion of the by Glaro from the Philippines should be
Philippine corporate income tax although that considered as a full satisfaction of the given
tax was actually paid by its Philippine condition. For, as aptly stated by respondent
subsidiary, P&G-Phil., not by P&G-USA. This Court, to deny private respondent the privilege
to withhold only 15% tax provided for under
"deemed paid" concept merely reflects
Presidential Decree No. 369, amending Section
economic reality, since the Philippine corporate 24 (b) (1) of the Tax Code, would run counter to
income tax was in fact paid and deducted from the very spirit and intent of said law and
revenues earned in the Philippines, thus definitely will adversely affect foreign
reducing the amount remittable as dividends to corporations' interest here and discourage them
P&G-USA. In other words, US tax law treats the from investing capital in our country.
Philippine corporate income tax as if it came out
of the pocket, as it were, of P&G-USA as a part of Marubeni Corp. v. Commissioner, 177 SCRA
the economic cost of carrying on business 500
operations in the Philippines through the 1. Whether or not the dividends Marubeni
medium of P&G-Phil. and here earning profits. Corporation received from Atlantic Gulf and
What is, under US law, deemed paid by P&G-USA Pacific Co. are effectively connected with its
are not "phantom taxes" but instead Philippine conduct or business in the Philippines as to
corporate income taxes actually paid here by be considered branch profits subject to 15%
P&G-Phil., which are very real indeed. It is also profit remittance tax imposed under Section
useful to note that both (i) tax credit for the 24(b)(2) of the National Internal Revenue
Philippine dividend tax actually withheld, and Code.
(ii) the tax credit for the Philippine corporate NO. Pursuant to Section 24(b)(2) of the Tax
income tax actually paid by P&G-Phil. but Code, as amended, only profits remitted abroad
by a branch office to its head office which are
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effectively connected with its trade or business - Subject to the final tax at the
in the Philippines are subject to the 15% profit following rates: (a) five
remittance tax. The dividends received by percent on net capital gains
Marubeni Corporation from Atlantic Gulf and not over P100,000; and (b)
Pacific Co. are not income arising from the 10% on net capital gains in
business activity in which Marubeni Corporation excess of P100,000
is engaged. Accordingly, said dividends if
remitted abroad are not considered branch
profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of D - MINIMUM CORPORATE INCOME TAX
the Tax Code, as amended. (“MCIT”)
2. Whether Marubeni Corporation is a
resident or non-resident foreign i. On Domestic Corporation (Sec. 27(E),
corporation. Marubeni Corporation is a non- NIRC)
resident foreign corporation, with respect to Tax of 2% of the gross income as of the end of
the transaction. the taxable year is imposed on a corporation
Marubeni Corporation’s head office in Japan is a taxable beginning on the fourth taxable year
separate and distinct income taxpayer from the immediately following the year in which such
branch in the Philippines. The investment on corporation commenced its business operations,
Atlantic Gulf and Pacific Co. was made for when the minimum income tax is greater than
purposes peculiarly germane to the conduct of the tax computed under Subsection (A) of this
the corporate affairs of Marubeni Corporation in Section for the taxable year.
Japan, but certainly not of the branch in the Primarily aims to forestall tax evasion
Philippines. by corporations that declare losses despite their
3. At what rate should Marubeni be taxed? business operations
15%. The applicable provision of the Tax Code is Thus, even if a corporation incurs net
Section 24(b)(1)(iii) in conjunction with the loss in its business operations, it is still subject
Philippine-Japan Tax Treaty of 1980. As a to an MCIT of 2% of its gross income
general rule, it is taxed 35% of its gross income
from all sources within the Philippines. ii. On Resident Foreign Corporation
However, a discounted rate of 15% is given to (Sec. 28(A)(2), NIRC)
Marubeni Corporation on dividends received Tax of 2% of gross income, as prescribed under
from Atlantic Gulf and Pacific Co. on the Section 27(E) of this Code, shall be imposed,
condition that Japan, its domicile state, extends under the same conditions, on a resident foreign
in favor of Marubeni Corporation a tax credit of corporation
not less than 20% of the dividends received.
This 15% tax rate imposed on the dividends iii. Rev. Reg. 9-98
received under Section 24(b)(1)(iii) is easily issued September 2, 1998 prescribes the
within the maximum ceiling of 25% of the gross regulations to implement RA No. 8424 relative
amount of the dividends as decreed in Article to the imposition of the Minimum Corporate
10(2)(b) of the Tax Treaty. Note: Each tax has a Income Tax (MCIT) on domestic corporations
different tax basis. Under the Philippine-Japan and resident foreign corporations. Specifically,
Tax Convention, the 25% rate fixed is the an MCIT of 2% of the gross income as of the end
maximum rate, as reflected in the phrase “shall of the taxable year is imposed upon any
not exceed.” This means that any tax imposable domestic corporations beginning the 4th taxable
by the contracting state concerned should not year immediately following the taxable year in
exceed the 25% limitation and said rate would which such corporation commenced its business
apply only if the tax imposed by our laws operations. The MCIT will be imposed whenever
exceeds the same. such operation has zero or negative taxable
income or whenever the amount of MCIT is
iv. Capital gains (Sec. 28(B)(5)(c), NIRC) greater than the normal income tax due from
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Moreover, in addition to the quarterly MCIT services/direct cost, in case of sale of services.
paid and quarterly normal Income Tax This rule, notwithstanding, if apart from
payments in the taxable quarters of the same deriving income from these core business
taxable year, excess MCIT in the prior year/s activities there are other 2 items of gross
(subject to the prescriptive period allowed for income realized or earned by the taxpayer
its creditability), expanded withholding taxes in during the taxable period which are subject to
the current year and excess expanded the normal corporate Income Tax, the same
withholding taxes in the prior year shall be items must be included as part of the taxpayer’s
allowed to be credited against the annual gross income for computing MCIT. This means
Income Tax computed under the normal Income that the term “gross income” will also include all
Tax rules. items of gross income enumerated under
However, if in the computation of the Section 32(A) of the Tax Code, as amended,
annual Income Tax due, the computed annual except income exempt from Income Tax and
MCIT due appears to be higher than the annual income subject to final withholding tax
normal Income Tax due, what may be credited The MCIT shall be paid in the same
against the annual MCIT due shall only be the manner prescribed for the payment of the
quarterly MCIT payments of the current taxable normal corporate Income Tax which is on a
quarters, the quarterly normal Income Tax quarterly and on a yearly basis. It shall be
payments in the quarters of the current taxable covered by a tax return designed for the
year, the expanded withholding taxes in the purpose, which will be submitted together with
current year and excess expanded withholding the corporation's annual final adjustment ITR.
taxes in the prior year. Excess MCIT from the Domestic corporations shall be required to pay
previous taxable year/s shall not be allowed to the MCIT on a quarterly basis, pursuant to the
be credited therefrom as the same can only be provisions of Sections 75 and 77 of the Tax Code
applied against normal Income Tax. in relation to Section 245 of the same Code, as
For purposes of these Regulations, the amended
term, “normal Income Tax” means the income In the filing of the quarterly ITR for the
tax rates prescribed under Sections 27(A) and taxable quarter which is due for filing after the
28(A)(1) of the Code at 34% on January 1, 1998; effectivity of these Regulations, the computation
33% effective January 1, 1999; at 32% effective of the MCIT shall be done on cumulative basis
January 1, 2000 and 35% effective November 1, covering not only the current taxable quarter
2005 and thereafter. Provided, however, that but also the previous taxable quarters of the
effective January 1, 2009 the rate of Income Tax same taxable year. Such computed MCIT shall be
shall be 30% pursuant to RA No. 9337. compared with the cumulative normal Income
The taxpayer shall pay the MCIT Tax, whereupon the higher amount between the
whenever it is greater than the regular or two shall be the basis of the quarterly Income
normal corporate Income Tax which is imposed Tax payment to be made for said taxable
under Sections 27(A) and 28(A)(1) of the Tax quarter.
Code. The final comparison between the normal Thus, for those using calendar year
Income Tax payable by the corporation and the basis accounting period, in the filing of the
MCIT shall be made at the end of the taxable quarterly ITR for the third quarter ended
year and the payable or excess payment in the September 2007, which is due for filing on or
annual ITR shall be computed taking into before November 29, 2007, the gross income for
consideration corporate Income Tax payment the 1st and 2nd quarters shall be added to the
made at the time of filing of quarterly corporate gross income for the quarter ended September
ITR whether this be MCIT or normal Income Tax 2007, the total of which shall be the basis of the
The term “gross income” means gross 2% MCIT which shall then be compared with the
sales less sales returns, discounts and computed cumulative normal Income Tax. The
allowances and cost of goods sold, in case of sale cumulative MCIT for the three (3) said quarters
of goods, or gross revenue less sales returns, shall be paid in case the same appears to be
discounts, allowances and cost of higher than the normal Income Tax computed
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for the same period. Excess normal Income Tax - Domestic corporations not falling under
carried over from previous taxable year and the aforesaid definition are, therefore,
payments made for the previous quarters of the publicly-held corporations.
same taxable year, including withholding tax - The IAET shall not apply to:
credits claimed for said previous quarters of (1) Publicly-held corporations;
same taxable year shall be credited against the (2) Banks and other non-bank
computed tax due in the cumulative quarterly financial intermediaries; and
tax return. (3) Insurance companies (Sec.
29[B][2], NIRC)
E - IMPROPERLY ACCUMULATED EARNINGS - Rev. Regs. No. 2-2001 further added the
TAX following entities as outside the
- An improperly accumulated earnings coverage of the IAET:
tax equal to 10% is imposed on the (1) Taxable partnerships;
improperly accumulated taxable (2) General professional
income of every corporation formed or partnerships;
availed of for the purpose of avoiding (3) Non-taxable joint ventures; and
the income tax with respect to its (4) Enterprises duly registered
shareholders or the shareholders of any with PEZA
other corporation by permitting its (5) Enterprises registered
earnings and profits to accumulate pursuant to the Bases
instead of being divided or distributed Conversion and Development
(Sec. 29, NIRC) Act of 1992
The rationale is that if the earnings and (6) Other enterprises duly
profits were distributed, the shareholders registered under special
would then be liable to income tax thereon, economic zones declared by
whereas if the distribution were not made to law which enjoy payment of
them, they would incur no tax in respect to the special tax rate on their
undistributed earnings and profits of the registered operations or
corporations. activities in lieu of other taxes,
THUS, a tax is being imposed in the national or local
nature of a penalty to the corporation for (7) Branch of a foreign corporation
improper accumulation of its earnings, and
as a form of deterrent to the avoidance of tax Those covered by IAET are required to pay or
upon shareholders who are supposed to pay issue dividends not later than one year
dividends tax on the earnings distributed to following the close of the taxable year,
them by the corporation. otherwise, the IAET, if any, should be paid
within 15 days thereafter.
Rev. Reg. 2-2001
- Provides that the IAET shall be imposed HOWEVER, said corporations are allowed to
on improperly accumulated taxable accumulate earnings up to 100% of their paid-
income earned starting January 1, 1998 up capital as of Balance Sheet date, inclusive of
by domestic corporations as defined accumulations taken from other years. [“paid-
under the Tax Code and which are up capital” - capital refers to the value of the
classified as closely-held corporations property or assets of a corporations; the total
defines as those corporations at least amount of the capital that persons have agreed
50% in value of the outstanding capital to take and pay for, which need not necessarily
stock or at least 50% of the total be, adn can be more than, the par value of the
combined voting power of all classes of shares]
stock entitled to vote is owned directly
or indirectly by or for not more than 20 In excess thereof, the accumulation of surplus or
individuals. undistributed earnings or profits shall be
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
subject to the IAET, unless used for the undistributed earnings and profits for the
reasonable needs of the business (used either reasonable needs of the business, such purpose
for the immediate needs of the business or does not fall within the interdiction of the
reasonably anticipated needs of the business) statute (Ibid., p. 45).
In order to determine whether profits are CIR v. Tuason 173 SCRA 397
accumulated for the reasonable needs of the The Court of Tax Appeals conceded that the
business: the controlling intention of the Revenue Commissioner's determination that
taxpayer is that which is manifested at the time Antonio Tuason, Inc. was a mere holding or
of accumulation, not subsequently declared investment company, was "presumptively
intentions; definiteness of plan/s coupled with correct" (p. 7, Annex A), for the corporation did
action/s taken towards its consummation is not involve itself in the development of
essential subdivisions but merely subdivided its own lots
and sold them for bigger profits. It derived its
Bar Question (2010) income mostly from interest, dividends and
What is the “immediacy test”? Explain rental realized from the sale of realty. Another
briefly. circumstance supporting that presumption is
To determine the reasonable needs of the that 99.99% in value of the outstanding stock of
business in order to justify an accumulation of Antonio Tuason, Inc., is owned by Antonio
earnings (and not impose the 10% tax on Tuason himself. The Commissioner
improperly accumulated earnings of "conclusively presumed" that when the
corporations), the “immediacy” test under corporation accumulated (instead of
American jurisprudence has been adopted in the distributing to the shareholders) a surplus of
Philippines. Thus, the term ”reasonable needs over P3 million from its earnings in 1975 to
of the business” is construed to mean the 1978, the purpose was to avoid the imposition
immediate needs of the business to accumulate of the progressive income tax on its
earnings and profits (instead of declaring shareholders. Since the company as of the time
dividends to shareholders), including of the assessment in 1981, had invested in its
reasonably anticipated needs. business operations only P773,720 out of its
accumulated surplus profits of P3,263,305.88
Manila Wine Merchants, Inc. v. CIR, 127 SCRA for 1975-1978, its remaining accumulated
483 surplus profits of P2,489,585.88 are subject to
To determine the "reasonable needs" of the the 25% surtax.
business in order to justify an accumulation of It is plain to see that the company's
earnings, the Courts of the United States have failure to distribute dividends to its
invented the so-called "Immediacy Test" which stockholders in 1975-1978 was for reasons
construed the words "reasonable needs of the other than the reasonable needs of the business,
business" to mean the immediate needs of the thereby falling within the interdiction of Section
business, and it was generally held that if the 25 of the Tax Code of 1977.
corporation did not prove an immediate need
for the accumulation of the earnings and profits, Cyanamid v. CA, 322 SCRA 639
the accumulation was not for the reasonable A review of American taxation history on
needs of the business, and the penalty tax would accumulated earnings tax will show that the
apply. American cases likewise hold that application of the accumulated earnings tax to
investment of the earnings and profits of the publicly held corporations has been
corporation in stock or securities of an problematic. Initially, the Tax Court and the
unrelated business usually indicates an Court of Claims held that the accumulated
accumulation beyond the reasonable needs of earnings tax applies to publicly held
the business. corporations. Then, the Ninth Circuit Court of
Thus, if the failure to pay dividends is Appeals ruled in Golconda that the accumulated
due to some other cause, such as the use of earnings tax could only apply to closely held
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
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TAX 2 FINALS EXAM REVIEWER (Atty. Deborah S. Acosta-
Cajustin)
RMC 9-2006, January 25, 2006 PAGCOR v. BIR, G.R. No. 172087, March 15,
2011
RMC No. 39-2007, January 22, 2007
CIR v. Aichi Forging Company of Asia, G.R. No.
184823, October 6, 2010
RR 13-97
Fort Bonifacio Devt Corp. v. CIR, G.R. Nos.
158885 and 170680, April 2, 2009
RR 7-99
CIR v. Benguet Corporation, G.R. Nos. 134587
and 134588, July 8, 2005
RMC 74-99
CIR v. SM Prime Holdings, Inc. et al, G.R. No.
183505, February 26, 2010
American Express v. Commissioner, SC G.R.
152609, June 28, 2005 CIR v. The Philippine American Accident
Insurance Company, et al., G.R. No. 141658,
CIR v. Burmeister and Wain, G.R. No. 153205, March 18, 2005
January 22, 2007
RR No. 18-2011
CIR v. Magsaysay Lines, G.R. No. 146984, July
28, 2006
RR No. 16-2011
RA No. 9361, December 31, 2006
(as implemented by RR No. 2-2007 (December 29, 2006))
RR No. 13-2012
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Cajustin)
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