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- Atty. Francis J. Sababan -
COVERAGE OF TAXATION LAW REVIEW 1. Income Taxpayers
2. Income Taxes
I. Basic Principles of Constitutional 3. Sources of Income sec. 42 of NIRC
Limitations - Income Taxpayers
a) Due process clause which a) Individuals
could be either substantive b) Corporation
due process and c) Estates and Trusts –
procedural due process -Individuals are classified
clause • Resident Citizens sec. 23 (A), sec
b) Equal protection clause 24 (A) (a)
Read: • Non-Resident Citizens sec 23 (B),
• Ormoc Sugar Central vs. 24 (A) (b) 22 (E)
City Treasurer 22 SCRA • Overseas Contract Workers Sec.
603 23 (C), 24 (A) (b)
• Tiu vs. CA 301 SCRA 178 • Resident Aliens Rev. Reg. sec 5,
c) Article III sec. 1 of the 23 (D), 24 (A) (c)
1987 Constitution – non- • Non-Resident Aliens Engaged in
impairment clause trade or business sections 25 (A)
d) Article III sec. 5 – freedom (1)
of religion • Non-Resident Aliens Not Engaged
e) Article III sec. 20 – non- in trade or business sec. 25 (B)
payment of poll tax • Aliens Employed in Multi-
f) Article VI sec. 28 par. 2 – National Corporations sec. 25 (C)
flexible tariff clause and Rev. Reg. 12-2001
g) Article VI sec. 28 par. 3 – • Aliens Employed in Offshore
exemption from real Banking Units sec 25 (D)
property tax • Aliens Employed in petroleum
Read: Service Contractors &
• Herrera vs. Quezon City 3 Subcontractors sec. 25 (E)
SCRA 186 -Corporate Income Taxpayers
• Abra vs. Hernando 107 SCRA • Domestic Corporations sec. 23 (E),
104 and sec 27 of NIRC
• Abra Valley vs. Aquino 52 • Resident Foreign Corporations sec. 22
SCRA 106 (H) and (28)A
• Philippine Lung Center vs. • Non-Resident Foreign Corporations
Quezon City 433 SCRA 119 sec. 22 (1) and 28 (B)
h) Article VI sec. 28 par. 4 – -Estates and Trusts sec. 60-66 of NIRC
qualified majority in tax
exemption Different Kinds of Income Tax
i) International double 1. Net Income Tax secs. 24 (A), 25
taxation (A) (1), 26, 27 (A) (B) (C), 28 (A) up
• CIR vs. Johnson 309 SCRA to 3rd par. 31 and 32 (A)
87 2. Gross Income Tax secs. 25 (B) first
j) Doctrine of equitable recoupment part and 28 (B) (1)
k) Doctrine of Set-off or compensation in 3. Final Income Taxes sec. 57 (A)
taxation 4. Minimum Corporate Income Tax
• Republic vs. Mambulao 4 SCRA 622 of 2% of the Gross Income secs.
• Domingo vs. Garlitos 8 SCRA 443 27 (E), 28 (A) (2)
• Francia vs. IAC 162 SCRA 753 5. Improperly Accumulated Earnings
• Caltex vs. COA 208 SCRA 726 Tax of 10% of its taxable income
• Philex vs. CIR 294 SCRA 687 sec. 29 NIRC Rev. Reg. 2-2001
• Optional Corporate Income Tax of
II. Income Tax Law 15% of its gross income sections
Section 22-26 of the National Internal 27 (A) 4th to 10th par. And 28 A(1)
Revenue Code but only up to the 4th paragraph
a) Read in the commentaries or magic
notes the different kinds of:

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- Atty. Francis J. Sababan -
-Proceed to section 42 and 23 of the then sections 27 (E) and 28 (A) (2)
NIRC -Go to sec. 28 (A) (3) read RR 15-2002
• NDC vs. Comm 151 SCRA 472 -Go to sec. 28 (A) (4) see RA 9337
• Comm. Vs. IAC 127 SCRA 9 -Then see sec 28 (A) (5) see Marubeni vs.
-Then go to sec. 39 of NIRC Comm 177 SCRA 500
• Calazans vs. Comm. 144 SCRA -Proceed to sec. 28(B) (5) (a) and sec 32 (B)
664 RR 7-2003 (7) (a)
-Then proceed to sec. 24 (A), 25 (A) • Read Mitsubishi vs. Comm 181 SCRA
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1), 214
28 (A) (6) and sec 51 (D) -Then go to sec. 29 and Rev. Reg. 2-2001
-Then continue to sec 24 B 1, 25 -Upon reading sec. 32 (B) 1 and 2, read sec.
B,C,D,E; 27 (D) (1) 85 par (e), sec. 108A and sec. 123 of the
-Then go to se. 24 (B) (2) sec. 73 NIRC
• Comm. Vs. Manning 66 SCRA 14 -Proceed to sec. 33 read Rev. Reg. 3-98
• Anscor vs. Comm. 301 SCRA 152 -then go to sec. 34 (A) (1) (a) see Aguinaldo
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); vs. Comm. 112 SCRA 136, RR 10-2002
28 (A) (7) (D); 32 B (7) (a) -Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
- Then you go to sec. 24 C, 25A (3); 25 B, 325 SCRA 259 and Filipina vs. Comm. 316
C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5) SCRA 480
(C) RA 7717 sec. 127 NIRC -Upon reading sec. 60-66, read Ona vs.
- Then you go to sec. 24 D (1); 25 (A) (3); Bautista 45 SCRA 74
25 (B) last par. 27 (D) (5)
• China Bank vs. Court of Appeals 336 III. Estate Tax
SCRA ___; RR 7-2003 -Sections 84-97 see sec. 104
-Upon reading sec. 24 (D) (2) read RR 13- -Upon reading sec. 85 (B) read Vidal
1999 de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Upon reading sec. 27 (A) go to sec. 22 (B) -Sec. 85 (G) compare with sec. 100
• Batangas vs. Collector 102 Phil. 822 -sec. 85 (H) compare with sec. 86 (C)
• Evangelista vs. Collector 102 Phil 140 -Upon reading sec. 86 see RR 2-2003
• Reyes vs. Comm. 24 SCRA 198 -Upon reading sec. 94 see Marcos vs.
• Ona vs. Bautista 45 SCRA 74 Sandiganbayan 273 SCRA 47
• Obillos vs. Comm 139 SCRA 436
• Pascua vs. Comm. 166 SCRA 560 IV. Donors Tax Law
• Afisco vs. Comm. 302 SCRA 1 - Sections 98-104
- G and Cumulative methods of filing
-Upon reading sec. 27 (C) of NIRC see RA donor’s tax returns sections 99 (A), 103
9337 then go to sec. 32 (B) (7) (b) of NIRC, (A) (1) and RR 2-2003
sec. 133 par (o) of LGC, sec. 154 of the LGC. - Sections 100 and 85 (9)
• Pagcor vs. Basco 197 SCRA 52
• Mactan vs. Cebu 261 SCRA 667 V. Value Added Tax
• LRT vs. City of Manila 342 SCRA 692 - Sections 105-115
-Read RA 9337
-Proceed to sections 27 (D) (1), 27 (D) (2), -Read ABAKADA vs Comm.
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28 GR 168056, Sept. 1, 2005
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B)
(5) (b) VI. Remedies Under the Internal Revenue
• Marubeni vs. CIR 177 SCRA 500 Code
• Proctor & Gamble vs. Comm 160 SCRA -Sections 202-229
560 -RR 12-99
• Same case Proctor and Gamble on the • Phoenix vs Comm 14 SCRA 52
Motion for Reconsideration 204 SCRA • Basilan vs. Comm. 21 SCRA 17
377 • Yabut vs. Flojo 115 SCRA 278
• Wonder vs. Comm 160 SCRA 573 • Union Shipping vs. Comm 185 SCRA
547
-Proceed to sec. 27(D) (5) • Comm. vs. TMX 205 SCRA 184

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- Atty. Francis J. Sababan -
• Comm. vs. Philamlife 244 SCRA - Regukar Customs Duty sec. 104 of TCC
• Comm. vs. CA & BPI 301 SCRA 435 - RA 7631
• BPI vs. Comm. 363 SCRA 840
-Prescription sections 203 and 222 of
NIRC, sec. 194 of the LGC, sec. 270 of X. Court of Tax Appeals
the LGC, sec. 1603 of Tariff and - RA 1125 as amended by RA 9282
Customs Code
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651

VII. Local Taxation


- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
• Misamis vs. Cagayan de Oro 181
SCRA 38
• Reyes vs. San Pablo City 305
SCRA 353
• Meralco vs. Laguna 306 SCRA
750
• PLDT vs. Davao City 363 SCRA
522

- Co-relate sec. 139 and 147 of LGC


- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code
- Under sec. 150 of the LGC read the
following:
• Phil. Match vs. Cebu 81 SCRA 99
• Allied Thread vs. Manila 133
SCRA 338
• Sipocat vs. Shell 105 Phil. 1263
• Iloilo Bottles vs. Iloilo City 164
SCRA 607

VIII. Real Property Tax


- Sections 197-294
- Sec. 235
• LRT vs. Manila 342 SCRA 692
• Cebu City vs. Mactan 261 SCRA 667

IX. Tariff & Customs Code


- Special Customs Duty sec. 301-304 of
TCC

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- Atty. Francis J. Sababan -
Rules in the Classroom: legislation for the exercise of the power to
1. do not be absent tax by the national government.
! if you are absent, you have to
transcribe what happened in class when Q: Do local governments exercise this
you were out. inherent power?
! The next meeting you attend class, A: No. Only the National Government
consider yourself a resident of balic-balic, exercises the inherent power to impose
babalikbalikan ka sa recit. taxes.
! Exception: if you get married.
2. read the assignment. Wag zapote ang Q: The taxing power of local governments is
aral. a DELAGATED power. Delegated by whom?
3. holiday – make up class probably on a A: Delegated by Congress through law in
Sunday case of autonomous regions, and delegated
4. allowed to glance at your notes, wag lang by the constitution in case of LGUs not
pahalata/garapal considered an autonomous region.
5. materials:
! codal " Cities, provinces and municipalities !
! commentaries (any author will do) power granted under Art. X Sec. 5&6 of the
! magic notes (Sababan Lecture and Constitution
Q&A)
! Book stand ! Autonomous Regions ! power conferred
by Congress through law. Art. X Sec. 20 #2
Coverage of Taxation Law Review: of the Constitution is a non-self-executing
1. Basic Principles including Constitutional provision. Thus the power is granted by
Provisions Congress because said provision requires an
2. Income Tax enabling law.
3. Estate Tax
4. Donor’s Tax " Article X, Section 5 is self-executing thus
5. Remedies the power is granted by the constitution.
6. Local Tax
7. Real Property Tax CONSTITUTIONAL LIMITATIONS
8. Tariff and Customs Code
9. Court of Tax Appeals Due Process Clause
10. VAT (although not part of the coverage of
the Bar Exams, questions have been asked Q: why is it a limitation to the power to tax?
since 1999) A: The due process clause as a limitation to
the power to tax refers both to substantive
! Title 5,6 and 7 are always included in the and procedural due process. Substantive due
coverage process requires that a tax statute must be
! No computations in the bar within the constitutional authority of
! There are only 1 or 2 questions in the Bar Congress to pass and that it be reasonable,
about Basic Principles fair and just.
! What are the favorite topics in the Bar? Procedural due process, on the other
! 12 questions on Income Tax hand, requires notice and hearing or at least
! 8-10 questions on remedies the opportunity to be heard.
! 8-10 questions allocated to the 7 topics Ex: On Substantive Due Process- when the
Congress passes a law exempting the 13th
BASIC PRINCIPLES: month pay from tax but with the concurrence
only of the majority of the quorum – law
" Taxation is an inherent power of the would be invalid because the Constitution
State. provides that any grant of tax exemption
shall be passed with the concurrence of the
Q: What do you mean by INHERENT? majority of all the members of the Congress.
A: The power to tax is not provided for in
the law, statute or constitution; it depends on Q: Does it follow that the adverse party must
the existence of the state. No law or always be notified?

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- Atty. Francis J. Sababan -
A: No. As a rule, notice and hearing or the 4) The distinction must apply to
opportunity to be heard is necessary only persons, things and transactions
when expressly required by law. Where there belonging to the same class.
is no such requirement, notice and the
opportunity to be heard are dispensable. Ex: In one case, a tax ordinance was
Ex. Before Oct. 1, 1995, you can secure a assailed on the ground that the ordinance
TRO without notifying the adverse party. If failed to distinguish a worker form casual,
you are a suspect in a criminal case, you have permanent or temporary. The SC said that
the right to have an opportunity to be heard the ordinance was invalid because of the
(if there is a law). failure to state the said classification.
Before July 1, 1998, no notice need be
given to a party declared in default. After the In PEOPLE v. CAYAT the Supreme Court
amendment, the party declared in default has mandated the requisites for a valid
to be notified of subsequent proceedings classification.
albeit without the right to participate therein.
In the case of a search warrant, the TIU v. COURT OF APPEALS (301 SCRA 278)
person to be searched was not notified. The Q: what happened in the city of Olonggapo?
person searched cannot claim that there was A: The Congress, with the approval of the
a violation of due process because there is no President, passed RA 7227, an act
law requiring that the person to be searched creating the conversion of the military
should be notified. bases into other productive uses.
Regarding delinquent tax payers, Q: Who was the President at that time?
before levy, there must be notice. A: President Ramos
Q: What were signed?
REASON: A: RA 7227, EO 97 and EO 97-A
No provision of law requires notice to the ! The first led to the creation of the
adverse party. If the adverse party is notified, Subic Special Economic Zone (SSEZ). The
he may abscond. Thus, in adversarial latter set the limitations and boundaries
proceedings, in connection with procedural of the application of the incentives (no
due process, the adverse party need not be taxes, local and national, shall be
notified all the time. imposed within SSEZ. In lieu thereof, 3%
of the Gross Income shall be remitted to
Equal Protection Clause the national gov’t) to those operating
their businesses within the said area.
" As a rule, taxpayers of the same footing Q: Who are the petitioners and what was
are treated alike, both as to privileges their contention?
conferred and liabilities imposed. Difference A: The petitioners are Filipino businessmen
in treatment is allowed only when based on who are operating their business outside
substantial distinction. Difference in the secured area. The petitioners
treatment not based on substantial contended that the law in question was
distinction is frowned upon as “class violative of their right to equal protection
legislation.” This is violated when taxpayers of laws since they are also Filipino
belonging to the same classification are businessmen.
treated differently form one another; and H: The Supreme Court ruled that there
taxpayers belonging different classifications was no violation since the classification
are treated alike. was based on a substantial distinction.
The element invoked here is element
Requirements of Reasonable Classification: #1 that there must be substantial
1) There must be substantial distinctions distinction in the classification of
that make a real difference. taxpayers on whom the tax will be
2) It must be germane or relevant to the imposed.
purpose of the law. The Court observed that those foreign
3) The distinction or classification must businessmen operating within the
apply not only to the present but also secured area have to give a larger capital
to future situations. to operate in the secured area (to spur
economic growth and guarantee
employment).

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- Atty. Francis J. Sababan -
is imposed by law, thus the non-impairment
ORMOC SUGAR CENTRAL vs. CIR clause does not apply.
Q: What did the municipality of Ormoc do?
A: The City Council of Ormoc passed a " You have to determine first the source of
Municipal Ordinance No.4 imposing upon obligation:
any and all centrifugal sugar milled at the 1. If the law merely provides for the
Ormoc Sugar Central a municipal tax on fulfillment of the obligation then the law is
the net sale of the same to the United not the source of the obligation.
States and other foreign countries. 2. When the law merely recognizes or
Q: Did the owner accept this imposition? acknowledges the existence of an obligation
A: No. the tax due was paid under protest, created by an act which may constitute a
then filed a complaint against the City of contract, quasi-contract, delict, and quasi-
Ormoc. delict, and its only purpose is to regulate
H: The Supreme Court said there was a such obligation, then the act itself is the
violation of the equal protection clause. source of the obligation, not the law.
The element invoked here was element When the law establishes the obligation
#3, that it must be applicable to both and also provides for its fulfillment, then the
present and future circumstances. The law itself is the source of the obligation
Supreme Court said that one must go to
the provision itself, in the case at bar, Q: So, in what instance does the non-
there was a violation of element #3 impairment of contracts clause becomes a
because the law was worded in such a limitation to the power to tax?
way that it only applies to Ormoc Sugar A: it is when the taxpayer enters into a
Central alone and to the exclusion of all compromise agreement with the government.
other sugar centrals to be established in In this instance, the obligation to pay the tax
the future. is now based on the contract between the
TAKE NOTE: People vs. Cayat taxpayer and the government pursuant to
their compromise agreement.
Freedom of Religion
Take Note: the requirement for its
It Involves 3 Things: application: the parties are the government
1. freedom to choose religion and private individual.
2. freedom to exercise one’s religion
3. prohibition upon the national Poll Tax
government to establish a national religion
Q: What is a poll tax?
Q: Which one limits the power to tax? A: It is a tax of a fixed amount on individuals
A: Prohibition upon the national government residing within a particular territory, whether
to establish a national religion because this citizens or not, without regard to their
will require a special appropriation of money property or to the occupation in which they
coming from the national treasury which is may be engaged.
funded by the taxes paid by the people. It is a tax imposed on persons without
any qualifications. persons may be allowed to
Non-impairment Clause pay even if they are not qualified as to age or
property ownership.
Q: What are the sources of obligation in the
Civil Code? Example of Poll Tax: Community Tax
A: Law, Contracts, Quasi-Contracts, Delict, Certificate under Section 162 of the Local
Quasi-Delict. Government Code.

Q: What is the obligation contemplated in Q: Why is it a limitation to the power to tax?


this limitation? A: It is a limitation to the power to tax
A: Those obligations arising from contracts. because Congress is prohibited from passing
a law penalizing with imprisonment a person
General Rule: The power to tax is pursuant who does not pay poll tax. (funds for sending
to law, therefore, the obligation to pay taxes a person to jail is taken from the national

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- Atty. Francis J. Sababan -
treasury which is funded by the taxes paid by are incidental to the primary purpose of
the people) the hospital.
NOTE: this arose during the 1935
Exemption from payment of Real Estate Constitution.
Tax “Exempted by virtue of incidental
purpose” was merely coined by the Supreme
Q: What is the requirement for exemption Court. Thus, it does not apply to other taxes
from payment of real property tax under the except Real Estate Tax.
1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution – PROVINCE OF ABRA v. HERNANDO
Cemeteries, churches and parsonages or Q: What is involved in this case?
convents appurtenant thereto, and all lands, A A religious institution was involved in
buildings and improvements used this case, the Roman Catholic Bishop of
EXCLUSIVELY for RELIGIOUS, CHARITABLE or Bangued, Inc. (bishop filed declaratory
EDUCATIONAL purposes shall be exempt for relief after assessed for payment of tax).
taxation. The respondent judge granted the
Art. 8, Sec. 17 (3), 1973 Constitution – exemption from taxes of said church
charitable institutions, churches, parsonages based only on the allegations of the
or convents appurtenant thereto, mosque, complaint without conducting a
and non-profit cemeteries, and all lands, hearing/trial. The assistant prosecutor
buildings, and improvements ACTUALLY, filed a complaint contending that
DIRECTLY, and EXCLUSIVELY used for petitioner was deprived of its right to due
RELIGIOUS and CHARITABLE purposes shall process.
be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution – SC: the Court ordered that the case be
charitable institutions, churches, and remanded to the lower court for further
parsonages or convents appurtenant thereto, proceedings. The Court observed that the
mosque, non-profit cemeteries, and all lands, cause action arose under the 1973
buildings, and improvements ACTUALLY, Constitution, not under the 1935
DIRECTLY and EXCLUSIVELY used for Constitution (note the difference). Tax
RELIGIOUS, EDUCATIONAL and CHARITABLE exemption is not presumed. It must be
purposes shall be exempt from taxation. strictly construed against the taxpayer and
liberally construed in favor of the
HERRERA v. QC-BOARD OF ASSESSMENT government.
(1935 Constitution)
Q: What is involved in this case? ABRA VALLEY COLLEGE INC. v. AQUINO
A: A charitable institution, St. Q: What is involved in this case?
Catherine’s Hospital. The hospital was A: An educational institution is involved
previously exempt from taxation until it in this case. The ground floor of the
was reclassified and subsequently school was leased to Northern Marketing
assessed for the payment of real property Corp., a domestic corporation. The 2nd
tax. floor thereof was used as the residence of
The contention of the respondent is the school director and his family.
that the hospital was no longer a The Province of Abra now contends
charitable institution because it accepts that since the school is not exclusively
pay-patients, it also operates a school for used for educational purposes, the school
midwifery and nursing, and a dormitory. is now liable to pay real estate tax.
Since it is not exclusively used for H: The Court held that the school is
charitable purposes it is not exempt from PARTIALLY liable for real estate tax.
taxation. 1. Residence – exempt by virtue of
H: The Court ruled that petitioner is not incidental purpose; justified because
liable for the payment of real estate it is necessary.
taxes. It is a charitable institution, thus 2. Commercial – not exempt because it
exempt from the payment of such tax. is not pursuant to the primary
The hospital, schools and dormitory purpose; not for educational
are all exempt fro taxation because they purposes.

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- Atty. Francis J. Sababan -
Q: is the doctrine in the case of Herrera the ACTUALLY, DIRECTLY, and EXCLUSIVELY for
same with this case? religious, educational and charitable
A: NO. in the Herrera case, the exemption purposes.
was granted to all the real property (hospital,
school and dorm). But in this case, the Q: Was the doctrine laid down in Abra Valley
Supreme Court made a qualification. The affirmed in the Lung Center case?
Supreme Court said it depends. A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
NOTE: both cases arose under the 1935 Constitution. The Supreme Court reiterated
Constitution despite having been decided in the ruling in the Abra Valley case which arose
1988. under the 1935 Constitution. The Supreme
Court made a qualification, it held that it
Q: At present, do we still apply the depends on whether or not the use is
exemption from tax by virtue of the Doctrine incidental to the primary purpose of the
of Incidental Purpose? institution.
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and NOTE: at present, “exemption from tax by
it does not apply to the provisions of the virtue of incidental purpose” is not applicable
1987 Constitution. to all taxes including real estate tax.

PHILIPPINE LUNG CENTER v. QUEZON CITY COMM v. SC JOHNSON and SONS, INC.
Q: What is involved in this case? Important :
A: A charitable institution, a hospital. It 1. international double taxation
is provided in the charter of the Lung 2. importance of international tax treaty
Center of the Philippines is a charitable 3. implication of most favored nation
institution. However, part of its building clause
was leased to private individuals and the Q: What is the corporation involved in this
vacant portion of its lot was rented out to case?
Elliptical Orchids. Respondent contends A: A domestic corporation (DC).
that since the hospital is not used SC Johnson and Sons, Inc. entered
actually, directly, an d exclusively for into a license agreement with SC Johnson
charitable purposes, it is liable to pay real and Sons U.S.A (Non-Resident Foreign
estate taxes. Corp, NRFC) whereby the former was
H: The Supreme Court held that the allowed to use the latter’s trademark and
petitioner is liable to pay tax for those facilities to manufacture its products. In
parts leased to private individuals for return, the DC will pay the NRFC royalties
commercial purposes. For the part of the as well as payment of withholding tax.
hospital used for charitable purposes A case for refund of overpaid
(whether for pay or non-pay patients), withholding tax was filed. Apparently, the
petitioner is exempt from payment of real DC should have paid only 10% under the
estate tax. most favored nation clause.
H: The Supreme Court coined the term
NOTE: petitioner contended that the profits International Double Taxation or
derived from the lease of its premises were International Juridical Double Taxation.
used for the operation of the hospital. The Q: What prompted the SC to coin such
Court held that the use of the profits does term?
not determine exemption, rather it is the use A: Because a single income (tax royalties
of the property that determines exemption. paid by a DC) was subjected to tax by two
The case of Herrera does not apply countries, the Philippines income tax and
because said case arose under the 1935 the U.S. tax.
Constitution and the present case arose International Juridical Double
under the 1987 Constitution. The Taxation applies only to countries where
requirements for exemption are different. In the tax liabilities of its nationals are
the 1935 Constitution, the property must be imposed on income derived from sources
EXCLUSIVELY used for religious, educational coming from within and without.
or charitable purposes. Under the 1987
Constitution, the property must be used

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- Atty. Francis J. Sababan -
Q: Is there an instance where (Sir gives an illustration found in page 3 of
international double taxation does not magic notes)
apply?
A: Yes. If it involves nationals of Q: Is the rule absolute? Reason
countries wherein the tax liability is A: Yes, the rule is absolute. The rationale
imposed only from income derive from behind this is to prevent the taxpayer and
sources within and not including those government official from being negligent in
derived from sources without. the payment and collection of taxes.
(Ex: Switzerland) (furthermore, you have to be honest for this
! The controversy in the case at bar to work, hence, the government is preventing
involves the income tax paid in the corruption)
Philippines. There is no exception at all otherwise, the
After paying 25%, the US firm BIR would be flooded with so many claims.
discovered that they are entitled to 10%
under the most favored nation clause. Set-off
The question is: was the tax paid under
similar circumstances with that of the RP- Presupposes mutual obligation between
West Germany Treaty? the parties. In taxation, the concept of set-
The CTA and Court of Appeals ruled off arises where a taxpayer is liable to pay
that it was paid under similar tax but the government, for one reason or
circumstances. The phrase referred to the another, is indebted to the said taxpayer.
royalties in payment of income tax. The
Supreme Court ruled that the lower Q: What do you mean by SET-OFF?
courts’ interpretation of the phrase was A: This presupposes mutual obligations
erroneous. Rather, the phrase applies to between the parties, and that they are mutual
the application of matching credit. creditors and debtors of each other. In
Q: What is matching tax credit? taxation, the concept of taxation arises
A: RP-Germany Treaty provides for that where a taxpayer is liable to pay taxes but
20% of the tax paid in the Philippines the government, for one reason or another, is
shall be credited to their tax due to be INDEBTED to said taxpayer.
paid in Germany.
The 10% does not apply because there REPUBLIC v. MAMBULAO LUMBER CO.
is no matching credit. Thus, there is no Q: What is the liability of Mambulao?
similarity in the circumstances. A: They are liable to pay forest charges
(under the old tax code).
EQUITABLE RECOUPMENT AND DOCTRINE NOTE: under our present tax code, the NIRC,
OF SET-OFF we do not have forest charges as the
same was abolished by President Aquino.
Equitable Recoupment Q: What did the lumber company do?
A: The lumber company claimed that
This doctrine provides that a claim for since the government did not use the
refund barred by prescription may be allowed reforestation charges it paid for
to offset unsettled tax liabilities. This is not reforestation of the denuded land
allowed in this jurisdiction, because of covered by its license, the amount paid
common law origin. If allowed, both the should be reimbursed to them or at least
collecting agency and the taxpayer might be compensated or applied to their liability
tempted to delay and neglect the pursuit of to pay forest charges.
their respective claims within the period H: The Court ruled that the reforestation
prescribed by law. charges paid is in the nature of taxes.
The principle of compensation does
Q: What is the doctrine of Equitable not apply in this case because the parties
Recoupment? are not mutually creditors and debtors of
A: When the claim for refund is barred by each other. A claim for taxes is not a
prescription, the same is allowed to be debt, demand, contract or judgment as is
credited to unsettled tax liabilities. allowed to be set-off under the statute of
set-off which is construed uniformly, in
the light of public policy, to exclude the

9
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- Atty. Francis J. Sababan -
remedy in connection or any A: Payment for real estate taxes for the
indebtedness of the State or any property of Francia. It appears that
municipality to one who is liable for petitioner was delinquent in the payment
taxes. Neither are they a proper subject of his real estate tax liability. The same is
for recoupment since they do not arise being collected by the Treasurer of Pasay.
out of contract or the same transaction Q: What is the suggestion of petitioner?
sued on. A: Suggested that the just compensation
for the payment of his expropriated
General Rule: no set-off is admissible against property be set-off from his unpaid real
demands for taxes levied in general or local estate taxes. (the other part of his
governmental purposes. property was sold at a public auction)
H: The factual milieu of the case does
Reason: Taxes are not in the nature of not justify legal compensation.
contracts or debts between the taxpayer and The Court has consistently ruled that
the government, but arises out of a duty to, there can be no off-setting of taxes
and are positive acts of the government to against the claims that the taxpayer may
the making and enforcing of which, the have against the government. A taxpayer
consent of the individual is not required. cannot refuse to pay a tax on the ground
Taxes cannot be the subject matter of that the government owes him an
compensation. amount.
Internal Revenue taxes cannot be the
DOMINGO v. GARLITOS subject of compensation because the
Q: What is being collected in this case? government and the taxpayer are not
A: Estate and inheritance taxes. mutually creditors and debtors of each
NOTE: we do not have inheritance taxes other, and a claim for taxes is not a debt,
anymore because the same was abolished demand, contract or judgment as is
by Lolo Macoy. allowed to be compensated or set-off.
Q: Who is the administratrix? Furthermore, the payment of just
A: The surviving spouse. compensation was already deposited with
Q: What did the surviving spouse do? PNB Pasay, and the taxes were collected
A: The surviving spouse suggested that by a local government, the property was
the compensation to which the decedent expropriated by the national government.
was entitled to as an employee of the (diff parties, not mutual creditors and
Bureau of Lands be set-off from the debtors of each other.)
estate and inheritance taxes imposed
upon the estate of the deceased. CALTEX PHIL v. COA
H: Both the claim of the government for Q: What is being collected?
estate and inheritance taxes and the A: Caltex’s contribution to the Oil Price
claim of the (intestate) for the services Stabilization Fund (OPSF).
rendered have already become overdue COA sent a letter to Caltex asking the
hence demandable as well as fully latter to settle its unremitted collection
liquidated, compensation therefore takes stating that until the same is paid, its
place by operation of law, in accordance claim for reimbursement from the OPSF
with Art. 1279 and 1290 of the Civil Code will be held in abeyance.
and both debts are extinguished to the Q: Why is Caltex entitled to reimbursement?
concurrent amount. A: Because of the fluctuation of the oil
Compelling Reason: Congress has prices in the Middle East and Europe.
enacted RA 2700, allocating a certain Caltex wanted to off-set its unremitted
sum of money to the estate of the collection from its reimbursements.
deceased. H: The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
FRANCIA v. IAC 6952 expressly prohibits set-off from the
Q: This happened in what city? collection of contributions to the OPSF.
A: Pasay City The Court likewise stated that Caltex
Q: What is the tax being collected? Who is merely acted as agent of the government
collecting the same? in collecting contributions for the OPSF

10
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- Atty. Francis J. Sababan -
because such is being shouldered by the agencies and instrumentalities (Section 27
consumers when they purchase c)), although income received by the
petroleum products of oil companies, Government form:
such as Caltex. 1) any public utility or
Taxation is no longer envisioned as a 2) the exercise of any essential
measure merely to raise revenues to governmental function
support the existence of the government. is exempt from tax.
Taxes may be levied for regulatory
purposes such as to provide means for KINDS OF INCOME TAXPAYERS
the rehabilitation and stabilization of a
threatened industry which is vested with Q: Generally, how many kinds of income
public interest, a concern which is within taxpayers are there?
the police power of the State to address. A: Under section 22A of NIRC, there are
three (3), namely:
PHILEX MINING CORP v. COMM 1. individual;
The petitioner is liable for the payment of 2. corporate;
excise taxes, which it wanted to be set-off 3. estate and trust.
from its pending claim for a VAT Input
credit/refund. I. INDIVIDUAL TAXPAYER
The Court did not allow set-off. Taxes
cannot be the subject of compensation for Q: How many kinds of individual taxpayers
the simple reason that the government and are there?
taxpayer are not mutual creditors and A: There are seven (7). Namely:
debtors of each other. Taxes are not debts. 1. Resident Citizen (§23A and 24A);
Furthermore, in the instant case, the 2. Nonresident Citizen (§23B and 24A);
claim for VAT refund is still pending. The 3. OCW and Seaman (§23C and 24A);
collection of a tax cannot await the results of 4. Resident Alien (§22F, 23D and 24A);
a lawsuit against the government. 5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A)
DOUBLE TAXATION 6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and
Double taxation is allowed because there 25B)
is no prohibition in the Constitution or 7. Aliens Engaged in Multinational
statute. Companies, Offshore Banking Units,
Petroleum Service Contractors
Obnoxious double taxation is the (§25C,D and E)
synonym of double taxation.
Resident Citizen (RC)
Elements of Double Taxation:
1) Levied by the same taxing authority Q: How many types of RC?
2) For the same subject matter A: There are two (2), namely:
3) For the same taxing period and 1. RC residing in the Philippines; and
4) For the same purpose 2. Filipino living abroad with no
intention to reside permanently
There is no double taxation if the tax is therein.
levied by the LGU and another by the national
government. The two (2) are different taxing Q: If you are abroad, and you have the
authorities. intention to permanently reside therein, can
you still be considered a RC?
LGUs are expressly prohibited by the A: Yes. If such intention to permanently
provisions of RA 7160 or the LGC of 1991 reside therein was not manifested to the
from levying tax upon: (1) the National Commissioner and the fact of your physical
Government; (2) its agencies and presence therein, you may still be considered
instrumentalities; (3) LGUs (sec.113(o)). a RC.
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform OCW and Seamen
Act of 1997, can levy tax upon GOCCs,

11
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- Atty. Francis J. Sababan -
OCW was used and not OFW in the CTRP, Intention to reside permanently in the
because the classification shall cover only Philippines is not a requirement on the part
those Filipino citizens working abroad with a of the alien.
contract. TNTs are not covered.
The requirement under RR#2 is that he is
A Filipino seaman is deemed to be an actually present in the Philippines, neither a
OCW for purposes of taxation if he receives sojourner, a traveler, not a tourist.
compensation for services rendered abroad Whether he’s a transient or not is
as a member of the complement of a vessel determined by his intent as to the nature and
engaged exclusively in international trade. length of his stay.
Consequently, if he is not a member of
the complement or even if he is but the Q: Is the intention to permanently reside in
vessel where he works is not exclusively the Philippines necessary?
engaged in international trade, said seaman A: No, so long as he is not a sojourner,
is not deemed to be an OCW. He is either a tourist or a traveler.
RC or a NRC depending on where he stays
most of the time during the taxable year. Non-Resident Alien Engaged in Trade or
If he stays in the Philippines most of the Business (NRAETB)
time during the taxable year, he is
considered a RC, otherwise, a NCR. A foreigner not residing in the Philippines
but who is engaged in trade or business
If you are a seaman in the US Navy, you here.
are not the one being referred to.
RR 2-98 has expanded the coverage of
The importance of ascertaining whether the term, “engaged in trade or business” to
or not a seaman is a RC or a NRC, is that if he include the exercise of a profession.
is a RCm he is taxable on ALL income derived Furthermore, by the express provision of the
from all sources within and without. If he is a law, a NRA who is neither a businessman nor
NRC, he is taxable only on income derived a professional but who come to and stays in
form sources within the Philippines. the Philippines for an aggregate period of
more than 180 days during any calendar year
Q: What is the significance of using OCW? is deemed to a NRAETB in the Philippines.
A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs. Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
Q: What is the status of a TNT? (25a1);
A: Since they are not covered by this 2. NRA who practices a profession
classification, they are considered RC (Revenue Regulation 2-98);
because they work abroad without a contract 3. foreigner who comes and stays in the
and they have not manifested their intention Philippines for an aggregate period of
to permanently reside abroad. (distinguish MORE THAN 180 days during any
from an immigrant) calendar year.

Requirements for a seaman to be considered Q: What is the status of a Chinese who stays
an OCW: here for 200 days in 2001?
1. must be a member of the compliment of A: NRAETB
a vessel;
2. the vessel must be exclusively engaged in Q: Suppose he stayed here for 100 days in
international trade or commerce. 2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
Resident Alien (RA) such, he must stay for an aggregate period of
more than 180 days during a calendar year.
An individual whose residence is within
the Philippines and who is not a citizen Q: What is the income tax applicable to said
thereof. taxpayer?

12
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- Atty. Francis J. Sababan -
A: Net Income Tax (NIT) on all its income
derived form sources within the Philippines. II. CORPORATE TAXPAYER

Non-Resident Alien Not Engaged in 1. Domestic Corporation (DC) – created


Trade or Business or organized under Philippine laws.
2. Resident Foreign Corporation (RFC) –
Q: How many kinds? corporation created under foreign
A: Only one. law, and engaged in trade or
business.
The reason why the NRANETB are 3. Nonresident Foreign Corporation
included in any income tax law is because (NRFC) – created under foreign law,
they may be deriving income form sources and NOT engaged in trade or
within the Philippines. business.
They are subject to tax based on their
GROSS INCOME received form all sources Q: What are deemed corporations under the
within the Philippines. NIRC?
A: The term corporation shall include
Aliens Employed by Regional or Area partnerships, no matter how created or
Headquarters & Regional Operating organized, joint stock companies, joint
Headquarters of Multinational accounts, associations, or insurance
Companies/ Aliens Employed by companies, but DOES NOT includes general
Offshore Banking Units (Aliens professional partnerships and a joint venture
Employed by MOP) or consortium formed of the purpose of
undertaking construction projects or
" Status: either a RA or NRA depending on operations pursuant to or engaging in
their stay here in the Philippines. petroleum, coal, geothermal or consortium
agreement under a service contract with the
" Their status may either be RA or NRA Government.
because Section 25 C and D does not 1. Partnerships and others no matter how
distinguish. created
2. Joint Stock Companies
" Liable to pay 15% from Gross Income 3. Joint Accounts
received from their employer 4. Associations
5. Insurance Companies
" Income earned from all OTHER sources
shall be subject to the pertinent income tax,
as the case may be. CIR v. COURT OF APPEALS
The phrase no “matter how created or
Aliens Employed in Multinational and organized” was interpreted.
Offshore Banking Units Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
Q: How are they classified? still deemed a corporation.
A: If they derived income from other sources Reason: because of the possibility of
aside from their employer, you may classify earning profits form sources within the
them either as RA, NRAETB, or NRANETB. Philippines.

Aliens Employed in Petroleum Service Q: Are partnerships always considered


Contractors and Subcontractors corporations? Is there no exception?
A: General Rule: a partnership is a
" Status: ALWAYS NRA. If they derive corporation.
income from other sources, such income
shall be subject to the pertinent income tax, Exception: General Professional Partnerships
as the case may be. (GPP)

" Income derived or coming from their Q: What is a GPP?


employer shall be subject to a tax of 15% of A: It is a partnership formed by persons for
the gross. the sole purpose of exercising their

13
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- Atty. Francis J. Sababan -
profession, no part of the income of which in A: No. as far as the share of the GPP is
derived from any trade or business. (what if a concerned, it is considered a taxable
partner has other businesses not related to dividend which is subject to FIT.
the GPP? > read section 26 quoted hereunder)
Q: Is a joint venture a corporation?
Two (2) Kinds of GPP formed for: A: Generally, yes, it is a corporation.
1) Exercise of a profession – not a
corporation; exempt from Corporate Q: Corporation X and Corporation Y joined
Income Tax (CIT) together. How many corporations do we
2) Exercise of a profession and engaged have?
in trade or business – a corporation; A: Three, namely Corporation X, Y, and X+Y.
subject to CIT the joint venture has a separate and distinct
personality from the two corporations.
TAN v. DEL ROSARIO
general rule: a partnership is a Q: When is a joint venture not considered a
corporation corporation?
exception: GPP A: It is not deemed a corporation when it is
exception to the exception: if the GPP formed for the purpose of undertaking a
derives income from other sources, it is (“construction?) project or engaging in
considered a corporation, thus liable to pay petroleum, gas, and other energy operations
corporate income tax. pursuant to “?” or consortium agreement
under a service contract with the
Rule: government.
1. if the income is derived from other
sources and such income is subject to NET Domestic Corporation
INCOME TAX, it is not exempt and it is
considered a corporation. Is one created or organized in the
2. if the income is derived from other Philippines or under its laws.
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not Taxable on all income derived from
deemed a corporation. ( separate return for sources within or without the Philippines.
this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will Resident Foreign Corporation
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment of Foreign corporations engaged in trade or
the FIT. business in the Philippines.

Q: What is the importance of knowing Taxable for income derived within the
whether the corporation is exempt or not? Philippines.
A: To determine their tax liability. This is
important to determine the tax liability of the Non-Resident Foreign Corporation
individual partners of the GPP.
Foreign corporations not engaged in
" Section 26 (1st paragraph) provides: “a trade or business in the Philippines.
GPP as such shall not be subject to the Net
Income Tax…” however, “…persons engaging Taxable for income derived within the
in business as partners in a GPP shall be Philippines.
liable for income tax only in their separate
and individual capacities.” Both DC and RFC are liable for the
In short, each partner will be paying NIT, payment of the following:
and the distributive shares they will be 1) NIT – Net Income Tax
receiving from the net income of the GPP will 2) FIT – Final Income Tax
be included in the gross income of the 3) 10% income tax on corporations with
partner. properly accumulated earnings.
4) MCIT (Minimum Corporate Income
Q: If the GPP is deemed a corporation, will Tax) of 2% of the Gross Income
the partners have to pay for the income tax?

14
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- Atty. Francis J. Sababan -
5) Optional Corporate Income Tax of (Evangelista vs. Collector (102 Phil
15% of the Gross Income 140))
b) If the heirs without contributing
A NRFC is liable for payment of the ff: money, property or industry to
1) GIT- Gross Income Tax improve the estate, simply divide
2) FIT – Final Income Tax the fruits thereof between and
among themselves, a CO-
III. TRUST AND ESTATE OWNERSHIP is created and
Individual Income Tax (IIC) is
Q: How many for each? imposed on the income derived by
A: Seven (7) kinds for each because the trust each of the heirs, payable in their
or estate will be determined by the status of separate and individual capacity
the trustor, grantor, or creator, or of the (Pascual vs. COMM (165 scra 560)
decedent. and Obillos vs. COMM (139 SCRA
436))
The status of the estate is determined by
the status of the decedent at the time of his Extrajudicial Settlement and if NO Settlement
death; so an estate, as an income taxpayer
can be a citizen or an alien. Some possibilities may arise. The income
tax liability depends on whether or not the
When a person who owns property dies, unregistered partnership or co-ownership is
the following taxes are payable under the created.
provision of income tax law:
1) Income Tax for Individuals – to cover Trust
the period beginning January to
the time of death. Trusts can be created by will, by contract
2) Estate Income Tax – if the property is or by agreement. The status of a trust
transferred to the heirs. depends upon the status of the grantor or
3) If no partition is made, Individual or trustor or creator of the trust. Hence, a trust
Corporate Income Tax, depending can also be a citizen or an alien.
on whether there is or there is no
settlement of the estate. If there Q: Where the trust earns income and such
is, depending on whether the income is not passive, who among the parties
settlement is judicial or mentioned is liable for payment of income
extrajudicial. tax thereon?
A: The TRUST itself, through the trustee or
Judicial Settlement fiduciary but only if the trust is irrevocable.
If it is revocable, or for the benefit of the
1) During the pendency of the grantor, the liability for the payment of
settlement, the estate through the income tax devolves upon the trustor himself
executor, administrator, or heirs is in his capacity as individual taxpayer.
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial KINDS OF INCOME TAX
settlement, when the decision of the
court shall have become final and Q: How many kinds of income tax?
executory, the heirs still do not divide A: There are Six (6), namely:
the property, the following 1. Net Income Tax (NIT);
possibilities may arise: 2. Gross Income Tax (GIT);
a) If the heirs contribute to the 3. Final Income Tax (FIT);
estate money, property or 4. Minimum Corporate Income Tax of
industry with the intention to 2% of the Gross Income (MCIT)
divide the profits between and 5. Income Tax on Improperly
among themselves, an Accumulated Earnings subject to 10%
UNREGISTERED PARTNERSHIP is of the Taxable Income;
created and the estate becomes 6. Optional Corporate Income Tax of
liable for payment of CIT 15% on the Gross Income

15
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- Atty. Francis J. Sababan -
Q: What if the law is silent?
I. NET INCOME TAX A: If the law is silent, it is not subject to
withholding tax.
Q: what is the formula?
A: Gross Income – Deductions and Personal Q: What is another term for withholding tax?
Exemptions = Taxable Income A: It is also known as the creditable
withholding tax system under the income tax
Taxable Income x Tax Rate = Net law.
Income
Q: Do we have to determine if there is an
Taxable Net Income – Tax Credit = actual gain or loss?
Taxable Net Income Due A: Yes because the formula for deductions,
etc.
Net Income means Gross Income less
deductions and Q: If you fail to pay, will you be held liable?
Formula: A: Yes, you will be held liable.
GI
- deductions II. GROSS INCOME TAX (GIT)
Net Income
x Tax Rate Q: What is the formula?
Income Tax Due A: Gross Income x Rate

Q: What is the rate? Q: How many taxpayers pay by way of the


A: Individual: 32% gross?
Corporation: 35% A: There are two (2)
individual - NRANETB
NOTE: the formula allows for deduction, corporation - NRFC
personal exemptions and tax credit.
NOTE: the formula does not allow any
Q: What are the other terms for NIT? deduction, personal exemptions and tax
A: NIRC: credit.
a. taxable income
b. gross income (wlang kasunod) Characteristics:
! only income tax from improperly
accumulated earnings does not use this term. " NRANETB and NRFC, though not engaged
in trade or business, are liable to pay by way
1. CFA: “to be included in the gross of the gross for any income derived in the
income” Philippines. While not engaged in trade or
2. Revenue Regulations and Statutes: business, there is a possibility that they may
a. ordinary way of paying income earn income in the Philippines.
tax;
b. normal way of paying income tax . Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
Characteristics: because the persons liable are foreigners.
This rule is ABSOLUTE
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT); NOTE: there are two (2) ways of paying taxes
2. NRFC (GIT also); depending on which side of the bench you
3. With certain modifications, AEMOP, if are.
they derive income from other
sources; III. FINAL INCOME TAX (FIT)

Q: Is the taxable net income subject to Q: What is the formula?


withholding tax? A: (Each Income) x (Particular Rate)
A: It is subject to withholding tax if the law Unlike in the gross income tax where you
says so. add all the income from all the sources and
multiply the sum thereof by the rate of 25%

16
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
or 35%, as the case may be, in final income 1. for NIT, whether or not subject to
tax, you cannot join all the income in one Creditable Withholding Tax (CWT), the
group because each income has a particular taxpayer is always liable if he fails to
rate. pay.
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.
Q: What is the rate?
A: 35% as the case may be. Q: Why is it that the rate of withholding is
always lower, and why is it that the rate of
NOTE: like GIT, the formula does not allow GIT and FIT is always equal?
deductions, personal exemptions, and tax A:
credit. 1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Characteristics:
Q: Do you have to determine whether there
Q: Who are liable to pay FIT? is an actual loss or gain?
A: All taxpayers are liable to pay FIT A: No need to determine because the
provided the requisites for its application are formula does not allow deductions. Gain is
present. presumed. No liability for final withholding
tax except for the sale of shares of stock. (?)
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to IV. MINIMUM CORPORATE INCOME TAX
pay NIT or else there will be double taxation. (MCIT)

NOTE: as time passed by, the number of FIT Q: What is the formula?
increased. A: Gross Income x 2%

" before 1979 – proceeds from the sale of Q: Who pays this tax?
real property not exempt, it is subject to NIT A: DC and RFC only.
or GIT, as the case may be.
after 1979 – capital gains tax. Proceeds Q: May it be applied simultaneous with NIT?
from the sale of real property is exempt. A: No. there must be a computation of the
NIT first then apply which ever is higher. The
Q: If you fail to pay, will you be liable? MCIT is paid in lieu of the NIT.
A: No. the withholding agent is liable to pay
FIT. Reason: to discourage corporations from
claiming too many deductions.
" Case of Juday, Richard and Regine
V. OPTIONAL CORPORATE INCOME TAX
" For one to be liable for the payment of
NIT, the income must be derived on the basis Q: Under what section is this found?
of an employer – employee relationship. A: Section 27A 4th paragraph and Section 28
A(1) 4th paragraph.
Employer – Employee Relationship
(3 Cs): Q: Is this applicable now?
1. contract; A: No. this is not yet implemented.
2. control;
3. compensation; Q: To what kind of taxpayer does this apply?
A: To DC and RFC.
" However, in the case of celebrities, there
is no employer – employee relationship, they Q: What kind of taxes are applicable or
are merely receiving royalties. Royalties are imposed upon the 1st five individual
subject to final withholding tax, thus the taxpayers?
agent is liable to pay. (so, distinguish nature A: Only two (2) kinds are applicable out of
of income, whether royalty or compensation) the six (6) kinds of income taxes.
1. NIT;
RULE: 2. FIT;

17
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- Atty. Francis J. Sababan -
NOTE: The income taxpayer is not a RC or a
Q: What kind of income tax will apply to DC. Determine if the income came from
AEMOP? sources within or without to know the
A: Generally, only one kind, 15% FIT with taxpayer’s liability.
respect to income derived from their
employer. " If the facts are specific, do not qualify
your answer. Answers must be responsive to
Income from other sources: the question.
1. Determine the status of the AEMOP;
a. NIT Q: Is section 42 relevant to all the taxpayers?
b. FIT A: NO. SECTION 42 IS NOT MATERIAL TO
2. NRANETB ALL taxpayers, particularly the RC and DC
a. GIT because these two are liable for both income
b. FIT within and without.

Q: What kind of income tax applies to DC? " Section 42 is applicable only to taxpayers
A: Only four (4) kinds will apply out of the who are liable for income within, the rest of
six (6) the taxpayers are otherwise exempt.
1. NIT
2. FIT Q: Section 42(A)(1) provides for how many
3. MCIT kinds of interests?
4. Improperly Accumulated Earnings A: It establishes two (2) kinds of interests,
namely:
Q: May all of these be applied 1. interest derived from sources within
simultaneously? the Philippines.
A: No. only the NIT, FIT and Improperly 2. interest on bonds, notes or other
Accumulated Earnings be applied interest bearing obligations of
simultaneously. NIT and MCIT cannot be residents, corporate or otherwise.
applied simultaneously. Only one will apply,
whichever is higher between the two. Q: What is the determining factor in order to
know if the income is from within?
Q: What kind of tax will apply to NRFC?
A:
A: Out of the six (6) kinds, only two (2) will 1. location if the bank is from within the
apply: Philippines (pursuant to a Revenue
1. GIT Reg.)
2. FIT 2. residence of the obligor (whether an
individual or a corp.) – contract of
Q: What is the significance of knowing the loan with respect to the interest
classification of these taxpayers? earned thereon.
A:
1. to determine the kind of income tax " For example the borrower is a NRAETB,
applicable to them; he borrowed money from a RA. The interest
2. to determine their tax liability. earned by the loan will be considered as an
income without. RA is not liable to pay tax
Q: Under Section 23, who are liable for since RA is liable only for income within,
income within and income without? therefore exempt from paying the tax.
A: Only
1. RC NATIONAL DEVELOPMENT CO. v. CIR
2. DC F: The National Development Company
(NDC) entered into a contract with several
" The rest of the taxpayers will be liable for Japanese shipbuilding companies for the
income coming from sources within. construction of 12 ocean-going vessels.
The contract was made and executed in
" Income from sources without, no liability, Tokyo.
therefore exempt. The payments were initially in cash
and irrevocable letters of credit.

18
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- Atty. Francis J. Sababan -
Subsequently, four promissory notes were 2. the 1st requisite is for the three (3)
signed by NDC guaranteed by the preceding taxable years from the time
Government. of declaration of the dividends.
Later on, since no tax was withheld
from the interest on the amount due, the " In the absence of any or both
BIR was collecting the amount from NDC. requisites, the income will be considered
The NDC contended that the income from sources without, thus exempting the
was not derived from sources within the Indonesian firm from payment of income tax.
Philippines, and thus they are not liable
to withhold anything. NDC said that since Q: Same scenario, but this time the shares of
the contract was entered into and was stock of the two corporations were being
executed in Japan, it is an income disposed off. What is the tax liability of the
without. Indonesian firm?
H: The government’s right to levy and A:
collect income tax on interest received by 1. sale of shares of stock of DC: the
a foreign corporation not engaged in Indonesian firm will be liable for the
trade or business within the Philippines is payment of taxes because the income
not planted upon the condition that the is from sources within.
activity or labor and the sale from which 2. sale of shares of stock of RFC: the
the income flowed had its situs in the liability will depend on where the
Philippines. Nothing in the law (Section shares of stock were sold. (mejo
42(1)) speaks of the act or activity of Malabo sa notes, please be guided
nonresident corporations in the accordingly)
Philippines, or place where the contract is
signed. The residence of the obligor who Q: Filipino Executive, assigned to Hong
pays the interest rather than the physical Kong, receiving two salaries, one from the
location of the securities, bonds or notes Philippines, the other from HK. The
or the place of payment is the performance of the job was in HK. Is he liable
determining factor of the source of the for both salaries?
income. Accordingly, if the obligor is a A: No, he is not liable for the two incomes.
resident of the Philippines, the interest His status is an OCW (note facts: working in
paid by him can have no other source HK under contract). The compensation he
than within the Philippines. received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
Q: Suppose a NRFC, an Indonesian firm, personal services performed in the
becomes a stockholder of two corporations, a Philippines is considered an income within.
DC and a RFC, and both corporations When it comes to services, it is the place
declared dividends, what is the liability of the where the same is rendered which is
Indonesian firm if the same received the controlling. In the case at bar, the services
dividends? were rendered abroad, thus it is an income
A: derived from sources without, irrespective of
1. Dividends received from DC: the the place of payment.
Indonesian firm is liable to pay taxes.
NRFC, under the law, is liable if the Q: Suppose a DC hired a NRFC to advertise
income is derived from sources its products abroad. What is the liability of
within. (Sec 42a) the NRFC? Will there be a withholding tax
2. Dividends received from RFC: the imposed?
Indonesian firm’s liability will depend A: The income is derived from sources
on amount of gross income from without since the services in this case were
sources within the Philippines. performed abroad. As such, the NRFC is not
liable and therefore exempt from the
The NRFC will be liable to pay income tax if payment of tax. If the NRFC is not subject to
the following requisites are present: NIT, then it is not also subject to withholding
1. at least 50% is income from sources tax.
within;
Q: What is the controlling factor?

19
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- Atty. Francis J. Sababan -
A: The controlling factor is the place where Q: What is the issue here?
the services were performed and not where A: They cannot determine if the business
the compensation therefore was received. expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not
RENTALS AND ROYALTIES sure, will you disallow the deduction?
"income from sources within A: No. determine it pro rata.
Q: Granted by who? Formula: GI from within
A: NRFC GI from without

Q: Suppose you are the franchise holder, how Example: 100,000


much is the withholding? 1,000,000
A: 35% (GIT) = 10%
" Hence, 10% is the ratable share in the
Q: if the franchise is granted by RFC, how deduction. If the deduction being asked is
much is the withholding? 100,000 not all of it will be allowed. Only
A: 10% (NIT) and in some cases 15% 10,000 or 10% of 100,000 will be allowed
as deduction.
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM) CAPITAL GAINS AND LOSSES
Section 39
a. right of, or the right to use
copyright, patents, etc Q: What is capital asset?
b. industrial, commercial, A: Capital asset is an asset held by a
scientific equipment taxpayer which is not an ordinary asset.
c. supply of knowledge
d. supply of services by The following are ordinary assets:
nonresident 1. stock in trade of the taxpayer or other
e. supply of technical assistance property of a kind which would
f. supply of technical advice properly be included in the inventory
g. right to use: motion picture of the taxpayer if on hand at the close
films, etc. of the taxable year;
2. property held by the taxpayer
Q: What is the rule as regards the sale of primarily for sale to customers in the
real property? ordinary course of trade or business;
A: Gains, profits, and income from the sale 3. property used in trade or business of
of real property located within the Philippines a character which is subject to the
considered income within. allowance for depreciation provided in
subsection 1.
Q: What about the sale of personal property, 4. real property used in trade or
what is the rule? business of the taxpayer.
A: Determine first if the property is
produced or merely purchased. All other property not mentioned in the
foregoing are considered capital assets.
1. it the property is manufactured in the
Philippines and sold abroad, or vice- Q: What is a capital gain? What is a capital
versa, it is an income partly within loss?
and partly without. A: Capital gains are gains incurred or
2. if the property is purchased, received from transactions involving property
considered derived entirely from the which are capital assets. Capital losses are
sources within the country where it is losses incurred from transactions involving
sold. capital assets.

EXCEPTION: shares of stock of domestic Q: What is ordinary gain? Ordinary loss?


corporation, it is an income within wherever A: Ordinary gains are those received from
it is sold. transactions involving ordinary assets.
Capital losses are losses incurred in
COMMISSIONER v. IAC transactions involving ordinary assets.

20
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- Atty. Francis J. Sababan -
Q: What is the loss limitation rule?
Q: What is the relevance of making a A: Pursuant to Section 39 C, losses from
distinction? sales or exchange of capital assets may be
A: It is relevant because Section 39B,C, and deducted only from capital gains, but losses
D apply to capital assets only. from the sale or exchange of ordinary assets
1. time when property was held (39B) may be deducted from capital or ordinary
(holding period applies only to gains. (applies to individual and corporation)
individuals);
2. limitations on capital losses (39C); Q: In connection with 34 D, Losses in
3. Net Capital Carry-Over (39D) Allowable Deduction, what is the rationale
behind this rule?
I. CAPITAL ASSETS A: If it is otherwise, it will run counter with
the rule that the loss should always be
Q: What is the holding period? connected with the trade or business, capital
A: If capital asset is sold or exchanged by an losses are losses not connected to the trade
individual taxpayer, only a certain percentage or business, thus it is not deductible
of the gain is subject to income tax.
It is the length of time or the duration of Q: what is your remedy?
the period by which the taxpayer held the A: 39 D, net capital loss carry-over
asset.
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
Q: What is the requirement? capital gains or ordinary gains?
A: A: It is already included in ITR, the gross
1. the taxpayer must be an individual. income less deductions hence it already
Section 39B states “in case of a carries with it the deduction
taxpayer, other than a corporation..”
2. property is capital in nature. TAKE NOTE: Normally if the loss is an
Q: What is the term? ordinary loss there is no carry over.
A: 100% if the capital asset has been held Except: a. 34D3
for not more than 12 months; (short term) b. if the loss is more than GI
50% if the capital asset has been held for
more than 12 months. (long term) III. NET CAPITAL LOSS CARRY-OVER

NOTE: the holding period applies to both Q: What are the requirements?
gains and losses. A:
1. taxpayer is an individual;
Q: Do you include capital gains in your ITR? 2. paid in the immediately succeeding
A: General rule: yes, include in ITR. year;
3. applies only to short term capital
EXCEPT: gain;
1. gains in sales of shares of stock not 4. capital loss should not exceed net
traded in stock exchange(section 24); income in the year that it was
2. capital gains from sale of real incurred.
property(section 24).
Q: How does net capital loss carry-over differ
Q: When will the holding period not apply? from net operating loss carry-over under
A: Section 34 D (3)?
1. property is an ordinary asset A: Under the net capital loss carry-over rule,
2. taxpayer is a corporation the capital loss can be carried over in the
3. sale of real property considered as immediate succeeding year. In net operating
ordinary asset loss carry-over rule, capital loss can be
carried over to the next three (3) succeeding
II. LIMITATION ON CAPITAL LOSSES calendar year following the year when the
"synonymous to 34D & loss capital rule loss was incurred.
" this applies to individual and corporate
taxpayer

21
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- Atty. Francis J. Sababan -
NOTE: only 15% of the loss will be carried A: Yes, provided that the property is an
over, if the loss is greater than the gains. asset other the real property, and it has been
idle for two (2) years.
" In net operating loss carry-over there is
an exception to the 3 year carry-over period. SECTION 24
In case of mines other than oil and gas wells, TAX ON INDIVIDUALS
the period is up to 5 years.
Q: What is the tax mentioned in section 24?
Q: What is a short sale? A: NIT
A: Sale of property by which the taxpayer
cannot come into the possession of the Q: What is taxable income?
property. EX: shares A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
CALAZANS v. CIR less the deductions and/or personal and
F: The taxpayer inherited the property additional exemptions, if any, authorized for
fro her father and at the tie of the such types of income by the NIRC or other
inheritance it was considered a capital laws. It refers to NIT because it allows
asset. In order to liquidate the deductions.
inheritance, the taxpayer decided to
develop the land to facilitate the sale of Q: What do you mean by the phrase “other
the lots. than B, C, and D”?
I: Was the property converted to A: It means that if the elements of passive
ordinary asset? income are present, the taxpayer has to pay
H: The conversion from capital asset to FIT.
ordinary asset is allowed because Section
39 is silent. Q: Who are the taxpayers mentioned in
section 24?
Q: Are you allowed to convert ordinary asset A:
to capital asset? 1. RC
A: General rule: it is not allowed. Read 2. NRC
Revenue Regulation 7-2003 3. OCW
The case at bar still applies despite of the 4. RA
issuance of said Revenue Regulation.
" Additionally, under Section 25, NRAETB
Q: What is the conversion prohibited in the
Revenue Regulation? Q: What is the tax liability of NRAETB?
A: Conversion of real estate property. A: Section 25(1) NRAETB is subject to
income tax in the same manner as those
Q: What is the rationale? individuals mentioned in Section 24.
A: Section 24 D – final income tax of 6% if
the real estate is capital asset. If it is an Q: What about Domestic Corporations?
ordinary asset, it will be subject to income A:
tax of 32% for individual taxpayer, and 35% if 1. Sec. 27 A,B, and C
the taxpayer is a corporation. 2. Sec. 26- GPP is not subject to income
tax.
Q: What are the properties involve in the RR
7-2003? Q: What about Resident Foreign
A: 1. those property for sale by the realtors Corporations?
2. real property use in trade or business A: Sec 28(l) it is subject to 35% Net Income
not necessary realtors Tax

Q: That is the conversion allowed by the Q: What about Non Resident foreign
Revenue Regulation? Is there an instance Corporation and Non Resident Alien not
when an ordinary asset may be converted to engaged in Trade or Business?
capital asset? A: Not Subject to Net Income Tax but they
are liable for Gross Income tax.

22
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- Atty. Francis J. Sababan -
Q: Do legally married husband and wife c. Less than 3 yrs- 20%
need to file separately or jointly?
A: It depends if: Q: Does it apply to all individuals?
1. Pure compensation income- separate A: No! It does not apply to 10 NRFC and NRA
2. Not Pure compensation income- joint and NRAETB because they are liable to GIT.

Passive Income NOTE: if the depositary is a Non resident it is


Interest, Royalties, prizes and Other winnings exempt

Interest " Resident citizen is liable to pay tax for


bank interest earned abroad (NIT)
Q: Bank Interest, what is the requirement?
A: The bank must be located in the Phils. Q: If the money earns interest in abroad who
because the income must be derived from is liable?
sources w/in. A: RC and DC only by NIT, the rest are
exempt. No FIT abroad because we do not
Q: Do you include this in your ITR? have withholding agent abroad.
A: No! because it is subject already to FIT.
The bank is the one liable for the payment of Q: MCIT applies to DC and RFC in relation to
this. bank interest?
A: If the bank interest is derived abroad, RFC
NOTE: Liability for NIT, GIT, and MCIT will is exempt but DC is liable.
depend on the elements present. Impose NIT if it is higher than the MCIT,
otherwise apply MCIT if it’s higher than the
Q: Who are liable for bank interest? NIT
A:
1. RC } Prizes
2. NRC} Sec. 24 B1
3. RA } Requirements:
4. NRAETB 1. Prizes must be derived from sources
5. NRANETB Sec. 25 (25%) w/in the Phils.
6. AEMOP 2. it must be more than P 10,000
7. DC
8. RFC Q: Who are liable? (FIT)
9. NRFC A:
1. RC
Q: What is the rate of interest? 2. NRC
A: FIT of 20% 3. OCW
4. RA
Q: Is there a lower rate? 5. NRAETB
A: 7 ! % if under EFCDS 6. AEMOP (RC, NRAETB)

Q: What if the depositor is non resident Not Liable


alien? 1. NRANETB- liable for GIT at 25 %
A: 2. AEMPOP (NRANETB- GIT)
-W/in – FIT 3. DC- NIT 27 D is silent
- W/out- exempt 4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: What is the rule on pre- termination?
A: If it is pre terminated before 5th year a FIT Q: When can we apply NIT in Prizes?
shall be imposed on the entire income and A: 1. When the taxpayer is RC, RFC and DC
shall be deducted and withheld by the 2. For DC and RC it must be derived
depositary bank from the proceeds of the from income abroad RFC it must be
long term deposit based on the remaining derived from income w/in
maturity thereof 3. amount is more than P10,000
a. 4 yrs to less than 5 yrs – 5%
b. 3 yrs to less than 4 yrs- 12%

23
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
NOTE: If the prize is derived from sources A: Liable for NIT if Income abroad like a
w/in but it is below P 10,000 it is not subject writer for Snoop. While FIT if for April Boy.
to tax. If derived from sources abroad, most
of them are exempt except for RC and DC Q: Who are liable (FIT)?
who are liable w/in and w/out. A:
1. RC
Q; Is it possible for RC and DC to pay MCIT? 2. NRC
A: Yes if MCIT is higher than NIT. 3. OCW
4. RA
Winnings 5. NRAETB
6. AEMOP (RC, NRAETB)
Q: Do we apply the P10, 000 req.?
A: No, we do not apply it only applies to Not Liable?
prizes. It must not pertain to illegal 1. NRANETB
gambling. 2. AEMOP
3. DC
" Thus, the only requirement is it must be 4. RFC
derived from income w/in. 5. NRFC

Q: Who are liable? (FIT) NOTE: Lower rate of 10% applies to all except
A: NRANETB
1. RC
2. NRC Q: When do we apply NIT to Royalties?
3. OCW A:
4. RA 1. TP is RC or DC
5. NRAETB 2. Income is from w/out
6. AEMOP (RA, NRAETB) 3. TP is RF and income is w/in

Not liable to FIT? " If income is from sources abroad all are
1 NRANETB- GIT exempt except RC and DC
2 AEMOP (NRANETB- GIT)
3 DC- law is silent NIT Dividends
4 RFC- law is silent
5 NRFC- GIT " Confined with cash and/or property
dividends.
Q: When does NIT apply to winnings?
A: Q: What are dividends?
1. If Taxpayer is DC or RC A: Any distribution made by Corporation to
2. Income is derived abroad its stockholders outside of its earnings or
3. Taxpayer is RFC and income w/in. profits and payable to its stockholders
whether in money or in property (Sec. 73)
NOTE: If income abroad, most TP are exempt
except DC and RC COMM. vs. MANNING
Q: Where did it come from?
Q: MCIT applies when? A: shares come from another shareholder
A: It is higher than the NIT Q: What are the dividends included?
A: Sec. 24 refers to cash or property
Royalties dividend
H: For stock Dividends to be exempt it must
Requirement: come from the profit of the corporation.
" The income is from w/in
Stock Dividends " it is the transfer of the
" Rate? 20%. Lower rate? 10% on books, surplus profit from the authorized capital
literary works and musical compositions. stocks.

Q: You are a writer for Snoop Dogg are you Q: Assuming that there are 5 Incorporators,
liable for FIT? What if for April Boy? the Corporation has a P5 M Authorized

24
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Capital stock. It distributed 1 M stock 1. Subj to FIT
dividends, is it taxable? 2. Determine whether there is a loss or a
A: NO, the dividends did not go to the Stock gain because the tax is impose upon
holder but to the Auth Capital Stock. Only the net capital gains realized from the
cash and Prop Stock go to the Stock holder. sale, barter, or exchange or other
disposition of the shares of stock in a
" Sec 24 B does not mention stock domestic corp.
dividends because it is not subject to FIT but 3. It is uniformly imposed on all
it is subject to NIT under Section 73. taxpayer
4. not subj to w/holding tax.
Q: Is there an exception when stock
dividends are not taxable? Requirements:
A: YES, if the shares of stocks are cancelled 1. Shares of stock of a DC
and redeemed meaning it was reacquired by 2. It must be capital asset
the corp. 3. must not be traded in the stock
market
ANSCOR CASE
!the stockholders cannot escape the " 25 R last part: Capital Gains realized by
payment of taxes NRANETB in the Phils. from the sale of shares
of stock in any DC and real prop shall be
Requirement: subj. to the income tax prescribed under Sub
Gen Rule- the dividends must be distributed sec (c) and (d) of Sec. 24.
by a DC.
Except- Regular operating- always a foreign " SEC. 24 B 1&2: If the elements are
corp. present NRANETB and NRFC are liable to pay
GIT.
" What rate: 10% FIT
Except: under 24 C for NRANETB. What do
Q: Who are liable? you mean by the phrase “ the provisions of
A: 39 notwithstanding”?
1. RC
2. NRC " It refers to the holding period. When it
3. OCW comes to capital gains from sale of shares of
4. RA stock not traded and capital gains from the
5. NRAETB sale of real prop. The holding period does
6. AEMOP (RC, NRAETB) not apply because the basis will be those
provided in 24 C & D and not under 39B (GSP
Not liable? or FMV)
1. NRANETB
2. AEMOP ELEMENT #1 The share is a share in DC
3. DC
4. RFC Q: What if the share is from foreign corp?
5. NRFC A: Determine the income considered. If
income w/in read Sec. 42 (E)
" Shares of association and partnership is
taxable " If the shares sold are that of a foreign
corp it is subj to the ff rules:
Q: Determine the tax liability of the a. sold in the Phils= its income w/in
following? b. sold in abroad= w/out
A: c. Shares of stock in a Dc is always
1. DC a Stockholder of DC= Exempt considered an income w/in regardless where
2. RFC stockholder of DC= Exempt also it was sold.
3. DC stockholder of RF= Liable for NIT.
Q: Shares of Foreign Corp sold in Phils.
Capital Gains From Sale of Shares of Stock Who’s liable? What tax?
Not Traded (§24C)

25
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
A: Not subj to FIT because one of the " DC and RFC are subj to MCIT which may
elements is not present . Shares not being be imposed if the NIT is lower than the
that of a DC. MCIT2% MCIT will be imposed if MCIT is
Hence: a) RC, NRC, OCW, NRAETB, AEMOP higher than NIT.
(RA, NRAETB) will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT Capital Gains From Sale of Real Property
(§24D)
Q: Shares of Foreign Corporation sold
abroad? " In 39 B the holding period does not apply
A: It will be considered an income w/out. because the basis of income tax is the gross
Thus: selling price (GSP) or the Fair market value
most of them will be exempt (FMV) whichever is higher- 6% FIT
except RC and DC liable to pay NIT
Requirements:
ELEMENT # 2 NOT TRADED OR SOLD IN 1. The real prop must be sold w/in the
THE STOCK MARKET Phils and located in the Phils.
2. It must be a capital asset
" if sold in the stock market- it is not subj 3. The seller must be an individual,
to FIT estate or trust or a DC

" if sold in the stock market, it will be subj " RFC not liable for FIT but liable to pay NIT
to percentage tax, in lieu of NIT. if all the elements are present.

ELEMENT # 3 It must be a capital asset. " NRFC liable to pay GIT and not FIT

Q: When is it considered an ordinary asset? " NRANETB liable to pay FIT are all
A: 1. When the broker or dealer elements are present.
a. used it in trade or business
b. held for sale in the ordinary ELEMENT # 3 The real prop must be a
course of trade or business capital asset
2. to all other assets, it will be
considered a capital asset Q: When considered a capital asset?
A: Read R.R. 7- 2003
NOTE: if all elements are present it will be
subj to FIT Q: Ordinary asset- shall refer to all real
property specifically excluded from the
If the shares are ordinary asset definition of capital asset under Sec. 39
A: Other property not mentioned are capital
1. Ordinary shares in DC- income w/in asset.
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB Q: What if all the elements are not present?
2. Ordinary assets of foreign corporations A:
a. Income within if sold in the Phils: most will be liable to pay NIT
most will pay except NRANETB Except NRANETB and NRFC liable for GIT
and NRFC
b. Income w/out if sold abroad: most Q: May a RC be liable to pay NIT even if all
will be exempt except RC and DC the elements are present?
A: YES, disposition made to the Govt. Thus,
MCIT the taxpayer has the option of paying 32%
Q: When is a RFC subj to NIT? NIT or 6% FIT
A:
1. Sale of shares of stock of a Foreign Q: Which is more advantageous?
corp in the Phil. A: It depends determine first if there’s a loss
2. sale of shares of stock of DC which or a gain.
are ordinary asset If there’s a gain choose to be taxed at 6%
FIT. In this case the gain is always presumed.

26
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- Atty. Francis J. Sababan -
If there’s a loss choose to be taxed at A: If the proceeds are not fully utilized, the
32% because losses may be considered an portions of the gain is subj to FIT
allowable deduction .
SEC. 27A RATES OF INCOME TAX
Other transactions are covered:
1. sale Q: How many income taxes are paid by a
2. barter DC?
3. exchange A:
4. other disposition 1. NIT
2. MCIT
NOTE: If the prop is under mortgage contract 3. FIT
and the mortgagee is a bank or financial inst, 4. 10%Improperly Accumulated
the FIT does not apply because the property Earnings
is not yet transferred because there’s a 5. Optional corporate income tax of 15%
period of redemption of the gross
If after a year the mortgagor failed to
redeem the property that is the only time that " DC liable for five, but the optional is not
the FIT will apply because there’s now a yet applicable so only 4.
change of ownership. If redeemed w/in 1 yr
period FIT will not apply because there’s no Q: How many can be applied
change of ownership. simultaneously? A: ONLY 3
If the mortgagee is an individual the FIT 1. NIT, FIT and 10% IAE
is imposed whether or not there is a transfer 2. MCIT, FIT, 10% IAE
of ownership.
SEC. 27 (B) PROPRIETARY EDUCATIONAL
Exceptions (§24(D2)) INST. & HOSP.

Q: What if the prop being sold was a movie Who are the taxpayers?
house, can he claim for the exception? 1. Non- Profit Proprietary Educl. Inst and
A: the prop covered by the exemption is a 2. Non Profit Proprietary Hospital
residential lot
Q: What if the school or hospital is non
Q: Who can claim the exemption? profit only, is it exempt?
A: Only the taxpayer mentioned in Sec. 24 A: No, subject to 10% on their taxable
income except those covered by subsection
Requirements: (D)
1. The purpose of the seller is to acquire PROVIDED that gross income from
new residential real prop unrelated business, trade or activity must not
2. the privilege must be availed of w/in exceed 50% of its total gross income derived
18 mos. From the sale by such educational inst or hospital from all
3. Comm. must be informed w/in 30 sources
days from the date of sale with the
intention to avail of the exemption Requirements:
4. the adjusted basis or historical cost of 1. It is a private school or hospital
the residence sold shall be carried 2. it is stock corp
over to the new residence. 3. it is non profit
5. the privilege must be availed only 4. that gross income from unrelated
once every 10 yrs business, trade or activity must not
6. Certification of the brgy. Capt where exceed50% of its total gross income
the taxpayer resides that indeed the derived by such educational inst or
prop sold is the principal residence of hospital from all sources
the tax payer (RR 13- 99) 5. has permit to operate from DECS,
TESDA, or CHED
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to the Q: What do you mean by unrelated trade
unused portion or profit? business or activity?

27
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
A: It means any trade, Business, or activity A: If its non-stock, non-profit educational
which is not substantially related to the inst. It may be exempted from local taxation.
exercise or performance by such entity of its
primary purpose or performance Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
Q: May a school or hospital be exempt from
paying tax? What are the req?
A: SEC. 23: GOCC, AGENCIES, INST of the
1. It must be non- stock and non- profit GOVT.
2. the assets property and revenues
must be used actually, directly, and GEN RULE: Subj to tax.
exclusively fro the primary purpose
EXCEPTIONS:
Q: Under what law? Is it the constitution or 1. GSIS
the NIRC which provides fro the exemption? 2. SSS
A: It is under Sec. 30 of NIRC and not 3. PHIC
under Sec.4 Art. 14 of the Constitution. The 4. PCSO
provision of the NIRC is the specific law
which prevails over the Constitution which is " PAGCOR no longer included.
the general law.
! exempt from all taxes and custom Q: If the GOCC is not one of those
duties enumerated does it follow all of its income is
automatically subject to tax?
Q: What about exemption from real A: NO. Under Sec 32. B (7) income derived
property tax? from any public utility or from the exercise of
A: Art. 6 Sec. 28 of the Constitution: essential government function accruing to
charitable institution churches, ….and all the Govt of the Phils or to any political subd.
lands buildings, actually directly and Are therefore exempt from income tax.
exclusively used for religious, charitable, and Therefore, even if the GOCC is one of
educational purposes shall be exempt from those enumerated under Sec. 27 it may still
taxation. be exempt under Sec. 32 b7b if its
! Not Sec. 4 of Art. 14 of the performing governmental function
Constitution.
NOTE: Pagcor vs. Basco case
Q: You donated a property to a school will
you be liable for donor’s tax? Q: What is the difference between Sec. 27 C
A: not liable if it falls under Sec. 101 (3) of and 32 b7b?
the NIRC A:
1. Sec 27 C exempts those enumerated
REQ. FOR EXEMPTION TO DONORS TAX: without any qualification.
1. it must be non-stock, non-profit 2. Sec. 32b7b qualification must concur
educational inst. before it may be exempted.
2. not more than 30% of the prop donated
shall be used by such donee for admin Q: Can the government impose tax on itself?
purposes. A: It depends on who the taxing authority is.
3. paying no dividends If the taxing authority is the National Govt. as
4. governed by trustees who don’t receive a rule, YES.
any compensation Exceptions
5. devoting all its income to the 1. those entities enumerated under §27 C
accomplishment and promotion of the 2. those GOCC falling under §32b7b
purposes stated in its Articles of
Incorporation If the taxing authority is the local
government units, as a rule NO. LGU’s are
Q: What about exemption from VAT? expressly prohibited from levying tax
A: Sec. 109 (m) of R-VAT against: (Sec 133(o)
1. National Govt.
Q: What about exemption fro Loc Gov Code? 2. Its agencies and instrumentalities

28
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- Atty. Francis J. Sababan -
3. local government units A: Normally it is NIT because it is subj under
Exception: Sec 154 of LGC says that LGU’s Sec 27 D3 and 28 A
may fix rate for the operation of public
utilities owned and maintained by the within Q: Who is the income earner?
their jurisdiction. A: Depositary banks

PAL CASE July 20 2006 Q: Exempt from what kind of transaction?


H: The SC used 133 (o)an exception to A: From foreign currency transaction. If it
pay tax, real estate tax, imposed by City involves foreign currency transaction it is not
of PAranaque on NAIA. The SC said that exempt but subject to 35 % NIT
the airport is not an agency or GOCC but
mere instrumentality of the Govt. Q: Who are the other parties?
This is Gross ignorance of the law A:
Sec. 133 (o) is for local taxation not real 1. Off shore banking units
property taxation which is the one 2. branches of foreign banks
involved in the present case. 3. local commercial bank
4. Other depositary banks under EFCDS
NOTE: Mactan- Cebu Airport case 5. Non- residents

SEC. 27 D(1) " if the above enumeration are the parties,


then depositary bank will be exempt from
Q: How many possible incomes were paying the NIT
mentioned?
A: Two (2): bank interest and royalties Foreign Currency Loan

REQ: Q: Who is the lender? Borrower?


1. Bank interest must be received by a A: Lender- EFCDS
Domestic Corp Borrower- RC
2. Royalties derived from sources within
EXEMPT
Q: When it comes to bank interest, what is Offshore banking units
the difference if the taxpayer is an individual Other depositary banks under EFCDS
or corporation?
A: If individual, they may be exempt from " exemption of NR from EFCDS:
the payment of interest in case of long term
deposit except NRANETB Q: Who is the income earner?
If DC, they are not exempt from long tem A: Non Residents whether individual or
deposit. Corporations

Q: What about royalties? Q: Derived from whom?


A: If individual, have a lower rate of 10%on A: Depositary Bank under EFCDS
books, other literary and musical
compositions. DC have no lower preferential NOTE: Sec. 24 B Nonresident exempt from
rate. bank interest under EFCDS

SEC 27 D2: CAPITAL GAINS FROM SALE OF Q: What is the difference between 24 b1
SHARES NOT TRADED from 27 D3
A: In 24 B1, NR is exempt only from bank
SEC 27 D3: EFCDS interst derived from EFCDS while 27D3
exempts NR from any income from
Q: What is the expanded foreign currency? transactions with depositary bank under
A: It is a bank authorized by the BSP to EFCDS
transact business in the Philippine Currency
as well as acceptable foreign currency or SEC. 27 D(4)- Inter-corporate dividends-
both. exempt

Q: What is the tax to be paid?

29
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- Atty. Francis J. Sababan -
27 D5 Capital Gains from sale of Real " An intl. carrier doing business in the
Prop. Phils. shall pay 2 ! % on its Gross Phil Billings
(GPB)
Q: What is the tax?
A: 6% FIT Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
Q: What is the difference if the seller is an 28 A3
individual and a DC?
A: Individual can sell all kinds of real " GPB is in the nature of FIT, applies only if
property all the requirements are present.
DC can only dispose land and/or
buildings. " RFC will be liable for NIT, hence a RFC
engaged in common carriage does not pay
SEC 27 (E) MCIT GPB but NIT

Q: Applicable to whom? " Income without: EXEMPT


A: DC and RFC
International Carrier:
Q: Can it be applied simultaneously with
NIT? " GPB refers to the amount of revenue
A: NO, imposed in lieu of the NIT, whichever derived from: carriage of persons, excess
is higher. baggage, cargo and mail originating from the
Phils in a continuous and uninterrupted
Q: What is the Rationale? flight, irrespective of the place of sale or
A: to prevent corporations from claiming too issue and the place of payment of the tickets
many deductions or passage document.

Q: When will it be imposed? REQ:


A: 1. Originating from the Phils.
1. On the 4th year immediately ff the year 2. Continuous and uninterrupted flight;
in which such corp commenced its 3. Irrespective of the place of sale or
business. issue and the place of the payment of
2. When the MCIT is higher than the NIT tickets or passage document.

Q: What is the carry over rule? Q: Do you consider landing rights to


A: Sec 27 E2 states the carry over rule. determine liability? (RR 15-2002)
A:
" In order to avail: only in the year where 1. If originates from the Phils and has
the MCIT is greater than the NIT. landing rights- ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
Sec 28 A1
Q: If there are stopovers, is it still
Q: What Kinds of taxes are paid by the RFC? uninterrupted?
A: NIT A: YES, provided that the stopover does not
MCIT exceed 48 hrs.

Q: When will the place of sale of tickets


Sec. 28 B2 MCIT on RFC matter as to the taxpayers liability?
A: The place of tickets is material only if the
! same with Sec. 27 two other elements are not present to be able
to know if its subj to NIT or exempt.
Sec. 28 A3- INTL CARRIER
Revalidated, exchanged or indorsed tickets
Kind:
1. Air carrier REQ:
2. ships 1. The passenger boards a plane in a
port or point in the Phils.

30
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- Atty. Francis J. Sababan -
2. The tickets must be revalidated, 3. Exempt if income is derived by the
exchanged, or indorsed to another OBU from EFCDS
airline. 4. Parties:
a) local commercial banks
Q: What if it’s the same airline but different b) Foreign bank branch
plane? c) Non Residents
A: GPB does not apply, it must be to another d) OBU in the Phils.
airline
Difference with EFCDS:
Q: What if it did not originate from the EFCDS
Phils.? 1. Acceptable foreign currency, Phil.
A: Determine if its income within or without. Currency or both
if ticket was purchased in the Phils. it is 2. Can be a domestic or foreign
income within hence apply NIT corporation
if purchased outside, it is income without, 3. Exempt if income derived by DC or
hence exempt RFC from EFCDS
4. Parties:
Transshipment a) local commercial banks
b) Foreign bank branch
REQ: c) Non Residents
flight originates from the Phils d) OBU in the Phils
transshipment of passenger takes place e) Other banks under EFCDS
at any port outside the Phils.
the passenger transferred on another FOREIGN CURRENCY LOAN
airline
" 10% FIT
Q: How do you apply GPB? If: Lender- OBU
A: Only the aliquot portion of the cost of the Borrower- Resident Citizen
ticket corresponding to the leg flown from EXCEPT:
the Phils to the point of transshipment shall 1. OBU
from part of the GPB. 2. Local Commercial Banks

Q: Is it liable for the whole flight? Transactions of Non Residents:


A: 1. Income earner: Non- Residents
From the Phils to the point of 2. Lender: OBU’s
transshipment, it is income w/in
From transshipment to final destination, NOTE: Non resident exempt from
its income w/out- EXEMPT transactions with OBU’s and EFCDS

International Shipping SEC. 28 A5 TAX ON BRANCH PROFITS,


REMITTANCES
" GPB means gross revenue whether from " profits based on the total profits applied
passenger, cargo, mail or earmarked fro remittance remitted by a
branch to its head office
" Subj to 15% tax
REQ:
it must originate from the Phils. Except: those activities which are registered
up to final destination with PEZA
- regardless of the place of sale or
payments of passenger or freight documents NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
Sec28 A(4) OFF SHORE BANKING UNITS sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
OBU’s profits, income and capital gains received
1. only acceptable foreign currencies by a foreign corporation during each
2. always a foreign corporation (subj to taxable year from all sources within shall
NIT) except #3 not be treated as branch profits UNLESS

31
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- Atty. Francis J. Sababan -
the same are effectively connected with " Regional or area headquarters (Sec. 22
the conduct of its trade or business. DD) shall not be subject to tax exempt from
income tax if the requisites are present.
Branch Profit Remittance
Q: What are the requisites?
Two ways to receive income (FC) A:
1. Branch 1. the HQ do not earn or derive income
2. Subsidiaries from the Phils.
2. Acts only as supervisory,
NOTE: communications, coordinating centre
1. When a FC establishes branch, it is for their affiliates, subsidiary or
always a FC branches in the Asia- Pacific Region
2. When a FC establishes DC, it is a RFC and other foreign markets.

Q; It is in addition to NIT- Why? SEC. 28 A6b


A: NIT because it is RFC
" Regional Operating HQ are taxable and
Q; What kind of tax is imposed under 28 A5? liable to pay 10% taxable income.
A: 15% FIT
" Regional Operating HQ is a branch
Q: How do you apply the rate? established in the Phils by a multinational
A: multiplied to the total profit applied or company engaged in any of the services:
earmarked for remittance w/o deductions 1. Gen. Administration and Planning
2. Business Planning and Coordination
It applies for branches that are: 3. Sourcing and procurement of Raw
1. the profit remitted is effectively materials and components.
connected with the conduct of its 4. Corporate Finance and Advisory
trade or business in the Phils. Services
2. One not registered with PEZA 5. Marketing Control and sales
promotion
MARUBENI CASE 6. Training and personal management
F: A branch was established with AG&P, 7. logistic services
there was investment with AG&P 8. research and development services
Q: Did the petitioner participate with the and product development
negotiation? 9. technical support and maintenance
A: NO 10. data processing and communication
Q: What did the petitioner pay? and business development
A: 15% Branch Profit Remittance Tax (BPRT)
10% Intercorporate Dividends Rationale: Why liable? Because the claim for
Q: What’s the issue? exemption of resident airlines shall be
A: Petitioner maintains that there was minimized
overpayment of taxes, thus the same was
asking for a refund of tax erroneously SEC. 28A7a Interests and Royalties:
paid.
" 20%FIT
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC " Interests under EFCDS= 7 ! %
H: -not correct to pay 15%
Sec. 28A7b Income derived under EFCDS
To be liable for BPRT
1. It is a RFC 1. Income derived from foreign currency
2. Branch did not participate in negotiations transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches
SEC. 28 A6a

32
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- Atty. Francis J. Sababan -
e) Other depository bank under the Elements:
EFCDS 1. Chartered to Filipino Citizens or
Corporations
" As a Gen Rule: the above transaction is 2. Approved by MARINA
Exempt
SEC. B(4) Non Resident Owner or Lessor of
EXCEPTION: Income from such transaction Aircraft, Machiniries, and other
as may be specified by the secretary of Equipments.
Finance, upon recommendation by the
Monetary Board to be subject to regular " liable for 7 1/2 % GIT
income tax payable by any banks.
SEC 28 b5a Interest on Foreign Loans
2. Interest income from foreign currency
loans " Must be read with Sec. 32 B7a

" granted by depository bank under said Interest on Foreign Loans, if the lender is
EFCDS to others shall be subject to 10% FIT 1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an
Exempt if granted to: exclusion (Sec 32 b7a: income derived
1. Other OBU in the Phils, and by a foreign gov’t from investments in
2. Other depository bank under the the Phils on loans, stocks, bond, and
EFCDS other domestic securities or from
» SEC. 28 A7c: Capital Gains from interest on deposits in banks by:
Shares of Stocks not Traded in the a) Foreign govt.
Stock exchange b) Financing inst owned controlled or
» 5% or 10% as the case maybe enjoying, refinancing from foreign
govt; and
SEC 28A7d: INTERCORPORATE DIVIDENDS c) Inter nation or Regional financial
inst established by foreign govt.
" DC- RFC= EXEMPT, not subj to tax
COMMISIONER OF INTERNAL REV. vs.
SEC 28 B1 MITSUBISHI METAL CORP. (180 SCRA 214)
F: Atlas Mining entered into a Loan and Sales
Q: What kind of tax? Contract with Mitsubishi Metal Corp. ( A
A: 35% GIT on the ff income Japanese Corp.) for the purposes of
1. Interest projected expansion of the productivity
2. Dividends capacity of the former’s mines in Cebu.
3. Rents The contract provides that Mitsibushi will
4. Royalties extend a loan to Atlas in the amount 20
5. Salaries M dollar, so that Atlas will be able install
6. Premiums( except reinsurance a new concentrator for copper
premiums) production.
7. annuities -Mitsubishi to comply with its
8. emoluments obligation, applied for a loan from
9. Other fixed and determinable Gains, Export- Import Bank of Japan (Exim Bank)
profits and income. and from consortium of Japanese banks.
Pursuant to the contract Atlas paid
SEC 28 B2 Non Resident Cinematographic interst to Mitsubishi where the
film owner, lessor or distributor corresponding 15% tax thereon was
withheld and only remitted to the Govt.
" liable for 25% GIT Subsequently Mitsubishi filed a claim
for tax credit requesting that the same be
SEC 28 B3 Non Resident owner or lessor of used as payment for its existing liabilities
Vessels chartered by Philippine Nationals. despite having executed a waiver and
disclaimer of its interest in favor of Atlas
" liable for 4 ! GIT earlier on. It is the contention of
Mitsubishi that it was the mere agent of

33
!"#"$%&'()"*(+,-%,*('&$,.(
- Atty. Francis J. Sababan -
Exim Bank which is a financing inst " You cannot refund right away ! 15%
owned and controlled by the Japanese BPRT and 10% Inter-corporate Dividends tax
Govt. has different basis
The status of Eximbank as a
government controlled inst became the In P&G who are involved
basis of the claim fro exemption by - DC (P&G Phil) and NRFC (P&G US)
Mitsubishi for the payment of interest on - DC declares dividends to NRFC
loans. - 35% was withheld and remitted to the BIR
I: WON Mitsubishi is a mere agent of
Eximbank What did they discover? (after paying)
H: NO. The contract between the parties does - they discovered that they are liable only
not contain any direct reference to Exim for 15% so they have a refund of 20%
Bank, it is strictly between Mitsubishi as
creditor and Atlas as the seller of copper. Q: In the 1st case did the SC allowed the
The bank has nothing to do with the sale refund?
of copper to Mitsubishi. Atlas and A: NO, denial anchored on 2 grounds:
Mitsubishi had reciprocal obligations- 1. One claiming for refund was not the
Mitsubishi in order to fulfill its obligations proper party
had to obtain a loan, in its independent 2. There was a showing or proof as to
capacity with Exim bank. Laws granting the existence of the “tax deemed
exemption from tax are construed strictly paid” rule
against the taxpayer and liberally in favor
of the taxing authority. Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS: 1. Income tax is FIT: the withholding
agent is the proper party because he
" FIT 15% imposed on the amount of cash is liable to pay said taxes
and or prop dividends received from a 2. actual proof of payment not
domestic corporation. necessary, what is necessary is the
law of the domicile of the country
SUBJ TO THE CONDITION: the country where providing fro tax credit equal to 20%
the NRFC is domiciled allows a credit against of the tax deemed paid.
the tax due from the NRFC taxes deemed
paid or deemed to have been paid in the Q: What is the rate if the law is silent?
Phils. A: 35% FIT

Gen rule: 35 % FIT " The rate will only be 15% if there’s a law
Exception: 15% under the “tax deemed paid recognizing the same but this refers to the
rule/ reciprocity rule/ tax sparring rule” case of those belonging to the first category.

JHONSONS CASE
2 Kinds of Categories: WANDER CASE
1st : Japan, US, Germany, Phils liable for Q: Who are the parties?
income within and income without A: DC(Wander) and FC (Glaxo)- they
belong to different categories
2nd : countries liable only for income within. The BIR tried to collect 35% because
the law is totally silent about the tax
MARUBENI Case: 2 Issues credit
1. Is the payment of 10% FIT correct? H: The SC said that the tax should be 15%
- No because it was a branch and RFC but which applies 2 instances:
still Marubeni was NRFC under the old law 1. Foreign law do not provide for tax
which is liable to pay 35%, but SC said liable credit- 35%
only to 25% because of the tax treaty 2. law provides but the law is silent- 15%
3. law is silent because there is no law-
15%

34
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- Atty. Francis J. Sababan -
4. law is silent because there’s no law of the paid- up capital of the
because the subj matter is not corporation.
taxable- 15% 2. earnings reserved for the definite
corporate expansion projects or
SEC. 29 IAET programs approved by the Board
3. Earnings reserved fro buildings,
Q: What is the rate? plants, or equipment, acquisition
A: 10% of the gross income (taxable income) approved by the Board
4. Earnings reserved for compliance with
" It is imposed upon the improperly any loan agreement or pre- existing
accumulated taxable income of the obligations
corporation 5. Earnings required by law or other
applicable statutes to be retained.
Q: Applies to what Corp? 6. In case of subsidiaries of foreign
A: to DC only under RR 2- 2001( classified as corporation, all undistributed
closely held corporations) earnings or profits intended or
reserved for investments
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the NOTE: the corporations belonging in the 1st
corporation to declare dividends. group are normally liable but they can show
that the accumulation of earnings is justified
Q: Why? for reasonable needs of business, they incur
A: because if profits are distributed to the no liability and exempt from payments of the
shareholders, they will be liable for the same.
payment of Dividends tax. Now, if the profits
are undistributed the shareholders will not B) Corporations which are exempt whether or
incur liability on taxes with respect to the not it is for reasonable needs of the business:
undistributed profits of the Corp. 1. Banks, and other non- bank financial
- In a way it is in the form of deterrent to intermediaries.
the avoidance of tax upon shareholders who 2. Insurance companies
are supposed to pay dividends tax on the 3. Publicly- held corporations
earnings distributed to them. 4. Taxable partnerships
5. General Professional Partnerships
Q: What is taxable income? 6. Non- taxable joint- ventures
A: SEC. 31 defines taxable income as the 7. Enterprises registered with
pertinent items of gross income specified in a) PEZA
this Code, less the deductions and/or b) Bases Conversion Devt Act of 1992
personal and additional exemptions, if any, (RA 9227)
authorized for such types of income by this c) Special Economic Zone declared by
Code or other special law law

Q: When not liable to pay IAET? Q: What is a closely- held corporations?


A: There are 2 groups of DC exempt from A: Those corporation at least 50% in value of
payment of IAET (RR2-2001) the outstanding capital stock or at least 50%
of the total combined voting power all
A) Corporations failure to declare dividends classes of stock entitled to vote is owned
because of reasonable needs of business directly, or indirectly by or for not more than
20 individuals
" reasonable needs means are construed to
mean immediate needs of the business NOTE: Publicly held Corp. has more than 20
including reasonable anticipated needs shareholders

Q: What constitutes reasonable accumulation Q: What is the time for paying this tax?
of the corporation’s earnings? Examples? A: Calendar Year: Jan 25, 2005- Dec 31,
A: 2005. Today is 2006. You have 1 year to
1. allowance for the increase in the declare after the close of the taxable year.
accumulation of earnings up to 100%

35
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- Atty. Francis J. Sababan -
2006 is the grace period. You will pay on 1. any of their properties, real or
January 2007. personal;
2. any activities conducted for profit
Q: If you’re not mentioned to be exempted,
will you still be liable? " regardless of the disposition of said
A: No, if you invoke adjustments income, shall be subject to tax.

SEC 30. EXEEMPTIONS FROM TAX ON Q: Enumerate the exempt corporations


CORPORATIONS under Section 30; What is the requirement?
A:
" Determine the Corporations’ exemptions 1. Labor, agricultural or horticultural
under Sec. 30 27 C and 22B. organization not organized principally
1. Sec 30, the corporations shall not be for profit;
taxed under this title (tax on income) 2. Mutual savings bank not having a
in respect to income receive by them capital stock represented by shares,
as such. and cooperative bank without capital
2. Sec 27, the corporations enumerated stock organized and operated for
are always exempt. Thus exemption is mutual purpose and without profit;
unconditional 3. a beneficiary society, order or
3. Sec 22B GPP, as a general rule is not a association, operating for the
corporation exclusive benefit of the members
4. except if it earns income from other such as fraternal organization
business operating under lodge system. (lodge
system: operating world wide) or a
" Joint Venture w/ service contract w/ mutual old association or a non-stock
government not a corporation, otherwise, it corporation:
is liable. a. organized by employees;
b. providing for the payment of life,
Assignment: Sec. 35 sickness, accident or other exclusive
benefits to its employees and their
August 21, 2006 – Midterms dependents;
4. Cemetery (a) company owned and (b)
August 14, 2006 operated exclusively for the benefit of
its members;
Q: What is the reason for not including the 5. Non-stock corporation or association
corporations exempt under section 27C and organized and operated exclusively
Section 22B under Section 30? for Religious, Charitable, Scientific,
A: Because there is an exemption which Artistic or Cultural purposes, or for
does not apply to all exempt corporation. the Rehabilitation of Veterans
The exemption under Section 30 is not (RCSACR), no part of its net income or
absolute while the exemption under Section asset shall belong ot or inure to the
27 C is absolute and without any conditions. benefit of any member, organizer,
In addition, Section 22B provides that a joint officer, or any specific person;
venture is generally taxable unless it has a 6. Business league, chamber of
service contract with the government, a commerce, or Board of trade, (a) not
generally taxable corporation cannot be organized for profit and (b) no part of
joined with the group as generally not the net income of which inures to the
taxable corporation. General Professional benefit of any stock holder or
Partnership is exempt but the exemption is individual;
not the same as provided by Section 30. 7. Civil league or organization not
organized for profit but operated
TAKE NOTE: Las Paragraph of Section 30. exclusively for the promotion of social
welfare.
" exemption to the exemption: income of
whatever kind and character of the foregoing CIR vs. YMCA
organizations from: Q: What is the basis of Manila BIR for the
imposition of the tax?

36
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- Atty. Francis J. Sababan -
A: last paragraph of Section 30, because gross income? Is it included in the ITR? Is it
YMCA was conducting an activity for subject to NIT?
profit. A: Sec. 32 A answers the questions.
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley case Q: What is the income tax referred to here?
which involves an exemption from the A: NIT. The section refers only to the
payment of Real property Tax. payment of NIT. It speaks of the NIT.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the last Q: If the is mentioned under Section 32 A,
paragraph of Section 30. does it follow that it is automatically included
YMCA Is exempt from the payment of in the GIT?
property tax, but not to income tax on A: No, Section 32 A states “Except when
rentals from its property. otherwise provided in this title”
The tax code specifically mandates
that the income of exempt organizations Q: What are the income that are not
(under section 30) from any of their included, not subject to NIT?
properties, real or personal, shall be A:
subject to tax, including the rent income 1. Income that are subject to FIT.
of the YMCA from its real prop. 2. Income that are considered an
exclusion; and
8. a non-stock and non profit educational 3. Income that are exempt.
institution;
9. gov’t educational institution; Q: When do you not apply Sec. 32 A?
10. Farmer’s or other mutual typhoon or A: it applies to all except:
fire insurance company, mutual ditch 1. NRANETB
or irrigation company, or like 2. NRFC
organization of a purely local » they do not pay NIT, they pay by way of
character, the income of which GIT.
consists solely of assessment, dues
and fees, collected from members for Q: What are included in the Gross income?
the sole purpose of meeting its A:
expenses; 1. Compensation for services in whatever
11. Farmer’s, fruit grower’s or like form paid including but nor limited to
association organized and operated fees, salaries, wages, commissions, and
as a sales agent for the purpose of similar items. [Sec. 32 A (1)]
marketing the products of its
members and turning back to them Q: What is compensation?
the proceeds of sales, less the A: all remuneration for services performed
necessary selling expenses on the by an employee for his employer under an
basis of the quantity of produce employer-employee relationship.
finished by them.
TAKE NOTE: compensation is included in the
TAKE NOTE: income of sales agent is exempt. ITR if the taxpayer is not liable for NIT. Thus,
if subject to NIT, included in the ITR.
Section 31: TAXABLE INCOME
Q: Is there an instance where the salaries of
a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
CHAPTER VI: COMPUTATION OF GROSS offshore banking, and petroleum companies.
INCOME
2. Gross Income derived from the
SECTION 32: GROSS INCOME conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the tax treatment? Are these
taxable income? Are these included in the Q: What is the income tax here?
A: NIT, included in the ITR.

37
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- Atty. Francis J. Sababan -

3. Gains derived from dealings in 6. Royalties; [Sec. 32 A (6)]


property. [Sec. 32 A (3)]
Q: What is being referred to here?
Q: Did the law distinguished? A: royalties which does not constitute
A: No, the law did not distinguished passive income. Royalties derived from
between real and personal property. income without. – subject to NIT. Thus not
included in the ITR.
TAKE NOTE:
1. Sale of real property Q: Who are the taxpayers?
2. Sale of shares of stock (personal prop.) A: Liable from income w/in and w/out and
the rest are exempt.
" if the elements are present, subject to 1. RC
FIT. Thus, it is not included in the ITR, the 2. DC
withholding agent will be responsible for
this. 7. Dividends. [Sec. 32 A (7)]

Q: Income form the sale of property, do you Q: What kind of dividends?


include this in the ITR? A: one that does not constitute a passive
A: it depends income.
a. if subject to FIT, not included.
Withholding agent accomplish the forms TAKE NOTE:
! subject to FIT if the following elements 1. DC individual taxpayer = FIT
are present: 2. DC – DC & RFC = EXEMPT
1. it is a capital asset; 3. DC – NRFC = FWT
2. located in the Phil.: and
3. sold by individual, trust, estate, DC. " only dividends issued by a FC to an
b. if subject to NIT, included in the ITR. individual taxpayer (RC OR RA) is included in
! Elements are not present, like when the computation of the gross income. Thus,
the real prop. is an ordinary asset or when it included in the ITR.
is capital asset if the taxpayer is RFC.
8. Annuities. [Sec. 32 A (8)]
TAKE NOTE: R-R 17-2003
Q: What kind of annuities?
" Real property sale subject to FWT, the A: annuities which are not exempt from tax
buyer accomplishes the ITR. are included in the computation of the gross
income. (included in the ITR)
4. interest; [Sec. 32 A (4)]

Q: What interest is being referred to here? 9. Prizes and Winnings [Sec. 32 A (9)]
A: interest which is included in the
computation of gross income is interest Q: What kind of prizes and winnings?
earned from lending money and interest from A:
bank deposit which does not constitute a. those that does not constitute passive
passive income. income; and
Bank interest from sources, without or b. those that are not considered as an
abroad. exclusion. Thus, exempt.

Q: Bank interest from Solid Bank, is it Passive Income


included in the ITR?
A: No, because it is included or considered 1. Prizes – derived from sources within
an income within, thus subject to FIT. Thus, and over 10,000.00
not included in the ITR. 2. Winnings – derived from sources
within.
5. Rents. [Sec. 32 A (5)]
Exempt:
" subject to NIT, included in the ITR. a. winnings: PCSO and Lotto winnings.

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- Atty. Francis J. Sababan -
b. prizes: TAKE NOTE: Exemptions, exclusions,
deductions, have the same characteristics !
" those primarily for recognition of all tax do not apply.
(1)religious, (2)charitable, (3)scientific,
(4)educational, (5)artistic, (6)literary, (7)civic 1. Life insurance [Sec. 31 B (1)]
achievement are exempt PROVIDED:
1. the recipient was selected without any Q: What is the requirement?
action on his part to enter the contest A: only one requirement for exemption: that
or proceedings; and the proceeds of the life insurance be payable
2. the recipient is not required to render upon the death of the insured.
substantial future services as a
condition to receiving the prize or Q: Does it matter who the beneficiary is or
award. paid in a lump sun or single sum?
A: No. it does not matter.
" prizes and awards granted to athletes are
also exempted provided: Exception: amounts held by the insurer under
1. local or international sports an agreement to pay interest thereon, the
competition or tournament; interest payment shall be included in the
2. held in the Philippines or abroad; and gross income.
3. sanctioned by the national sports
association. 2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: When is a prize subject to NIT?
A: 1. when derived from income without; Q: if the insurance is payable within a certain
2. when less than 10,000.00; time, say 10 years and thereafter the insured
3. when the income earner is a DC or RC. did not die, how much will be excluded?
A: only the amount received by the insured
Q: When is winning subject to NIT? as a return of the premiums.
A: 1. When derived from income without;
2. when the income earner is a DC or Ex. 1 M – 100 thousand = capital
RC. It is exempt (100K)

10. Pensions [Sec. 32 A (10)] 900K is taxable.

Q: What kind of pension? Q: Why is it excluded?


A: Included in the gross income if not A: because the amount received merely
exempt represents a return of capital.
» never subject to fit (?)
11. Partner’s distributive share from the Q: is this subject to Estate Tax under Sec. 85
net income of the general professional E? do we have the same requirement?
partnership (GPP). A: no, the requirement for exemption is not
the same under Section 85 E.
Q: What is being referred to?
A: GPP exempt from payment of corporate 3. Proceeds of life insurance: decedent
income tax insured himself, inclusion or exclusion
will depend on who the beneficiary is.
" shares of partners subject to NIT – Sec.
26 a. the beneficiary is the estate.
» subject to Estate tax, included in the
SEC 32 B EXCLUSIONS FROM GROSS gross estate regardless of whether or not
INCOME the designation of the beneficiary is
revocable or irrevocable.
Q: What do you mean by exclusions? Are b. the beneficiary is a third person other than
these exempt from income tax? the estate.
A: these are not included in the gross b.1 Revocable Designation ! subject to
income, THUS, exempt. estate tax, included in the gross estate.

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- Atty. Francis J. Sababan -
Reason: because of the insured’s power Q: when will the damages recovered be
to modify or change the beneficiary. exempt?
b.2 Irrevocable Designation ! not subject A: General Rule: all damages awarded are
to Estate tax, not included in the gross tax exempt.
estate. Exception: damages representing loss of
Reason: the insured loses the power to income.
control, modify and change the
beneficiary. Q: Why is it considered an exclusion?
A: because this is just an indemnification for
Q: Is it subject to VAT? the injuries or damages suffered.
A: 1. Non-life insurance – yes, subject to
VAT under 108 (A). 6. Income exempt under a treaty [Sec.
2. Life insurance – NO, subject to 32 B (5)]
percentage tax under Sec. 123 of the Tax
Code. Q: What is excluded?
A: income of any kind required by treaty
4. Gifts, Bequest and Devises [Sec. 32 binding upon the Phil. Government.
B (3)]
7. Retirement benefits, pensions,
Q: Why is the donee exempt from income gratuities [Sec. 32 B (6)]
tax?
A: Because the law classify it as an Q: Why do we need to distinguish retirement
exclusion, not important to know whether pay, separation pay and terminal leave pay?
property is real or personal. A: because they have different requirements
What is exempted is the “value of for exemption.
property acquired by gift, bequest or devise”
Q: What is retirement pay?
TAKE NOTE: A: the sum of money received upon reaching
A. GIFTS are excluded because they are the maximum age of employment.
subject to donor’s tax.
B. BEQUEST and DEVISE are excluded a. Under RA4917 (with Retirement Plan)
because they are subject to ESTATE tax. 1. the private benefit plan is approved
by the BIR (RR2-98);
Q: what is included in the gross income? 2. the retiring official or employee has
A: income from such property. been in the service of the same
employer for the last 10 years;
" gift, bequest, devise or descent of income 3. he is at least 50 years old at the time
from any property in case of transfers of of retirement; and
divided interest. 4. the official or employee avails
himself/herself of the benefit only
5. Compensation for injuries or once.
sickness [Sec. 32 B (4)]
b. Under RA7641 (without retirement plan)
Q: is this the same as those provided under 1. the retiring official employee is at
the workmen’s compensation act (wca)? least 60 years old but not more than
A: YES. There are 3 groups: 65 years old;
a. Health or accident insurance or those 2. the employee or official must have
under workmen’s compensation. served the company for at least 5
b. personal injuries and sickness; and years;
c. Damages to prevent injuries and » entitled to 15 days salary and ! of the
sickness. 13th month pay for every year of service.

Q: What does injury include? TAKE NOTE: the retirement benefits under
A: The term injury includes death, even if RA4917 and RA7641 are exempt from
not injured, if the person dies this will be income tax provided the requirements are
available. present.

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- Atty. Francis J. Sababan -
SEC. 32 B(6)(c) b. within employee’s control – included.

" retirement benefits given by foreign Examples:


government, foreign corporation, public as 1. registration – CBA provides separation
well as private to RC, NRC, RA residing pay, within the control = included.
permanently in the Philippines - exempt 2. installation of labor saving devises or
without further qualifications – automatic bankruptcy – beyond the control =
exclusions. excluded.

SEC. 32 B(6)(d,e,f) Q: What is terminal leave pay?


A: the accumulated vacation leave and sick
" retirement benefits given by the leave benefits converted to cash or money to
Philippine Gov’t through the GSIS, SSS and be given either every year or upon retirement
PVAO are exempt without further or separation.
qualifications = automatic exclusions.
Terminal Leave Pay granted upon retirement
August 21, 2006. or separation:
- midterms 6-8 pm until sec 32 B(6) NIRC. » uder PD220, TLP in the Gov’t or in the
Private Sector shall be exempt from
August 28, 2006. income tax if given or granted upon
retirement or separation.
ANSWERS = MIDTERMS TLP granted on a yearly basis:
1. employee in the private sector:
" Gross Income include both capital and a. accumulated sick leave – subject
ordinary gains, Sec. 31 says gross income- to income tax.
deductions, that which is ordinary loss. b. Accumulated vacation leave: if
- may be deducted from capital gains and more than 10 days (meaning 11
ordinary gains. pataas) – subject to income tax;
»If 10 days or less – exempt.
Q: What is separation pay? 2. Gov’t Employee:
A: on given when one is terminated from the » governing law: EO 291 of Pres. Estrada,
service because of (1) illness, (2)death, (3) RMC 16-2000.
physical incapacity or injury, or (4) causes
beyond the control of the employee. Rule: Gov’t workers (both officers or non-
officers) granted TLP on a yearly basis !
Q: Are there any requirement for separation exempt from income tax.
pay granted by foreign gov’t or corp? ! there is no qualification as to vacation or
A: None, the separation pay granted by the sick leave.
aforementioned institutions are exempt
without further qualifications (“other similar " Take Note of 3 cases.
benefits”). » be reminded of EO 291, Sec. 2. 78.2
par. 97, RR2-98, RR16-200 (3).
Q: is separation pay an exclusion, therefore,
exempt? Case of Zialcita
A: No. " retired from DOJ, contention: TLP should
GENERAL RULE: Separation pay not be exempt from income tax pursuant to the
exempt (?) old law.
Exception: SC: on a different ground – TLP is exempt
1. Automatic exclusions, thus exempt if due because it is similar to Retirement pay, thus
to: exempt but the ruling’s application is limited
a. illness only to DOJ employees.
b. death
c. physical incapacity or injury. Borromeo case:
" Same as the Zialcita case
2. Conditional exclusion Issues: WON the TLP is subject to income tax
a. causes beyond the control of the and WON COLA and RATA are included?
employee- excluded SC: RULED TLP is Exempt!

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- Atty. Francis J. Sababan -
Modified: the rule applies not only to DOJ TAKE NOTE: if plain foreign corp., subject to
officers but also to CSC commissioners. FIT 20%.

COMMISSIONER v. CASTAÑEDA EXAMPLES of exclusions:


- Castañeda –DFA officer in Phil. Embassy in a. Brunei Gov’t earns interest by depositing
England. money in Makati Bank – Exclusion.
1. TLP is exempt. b. SMC- Stock dividends to 3. Brunei Gov’t.
2. Ruling applies to DFA officers. exclusion
c. Income derived by the Gov’t or its
Q: Does the rule or decision applies to Gov’t political subdivisions (Sec. 32 B (7) (b)
officials only? a. exercise of public utility
A: No. PD220: Exemption applies to both b. exercise of any essential gov’t
private and public sectors(?) function.
it does not matter if TLP is vacation or » accruing to the gov’t.
sick leave. d prizes and awards (Sec. 32 B 7 c)
» primarily for religious, charitable,
RR2-98, Sec. 2.78.1 par. (a)(7) scientific, educational, artistic, literary or
» JAN, 1998 – the rule applies to both civic achievements:
private and public sectors. 1. recipient was selected without any
action on his part to enter the contest
EO291 (SEPT., 2000) or proceedings;
» Officer in gov’t receiving TLP is always 2. the recipient was not required to
exempt whether or not vacation or sick leave render substantial future services as a
is granted. condition to receive the prize or
award.
Modified RR2-98:
» TLP will only apply to private sectors D. prizes and awards in sports (Sec. 32B 7 d)
» if granted on a yearly basis – may be 1. granted to athletes;
subject to tax: VACATION LEAVE 2. local or int’l competitions;
1. MORE THAN 10 DAYS = TAXABLE 3. held here or abroad;
2. LESS THAN 10 DAYS = EXEMPT 4. sanctioned by the nat’l sports associations.

8. Miscellaneous items (Sec. 32 B (7) E. 13th month pay and other benefits (Sec.
(a) income derived by foreign Gov’t 32B 7 e)
[Sec. 32 B (7) (a)]
Q: Do you include Christmas bonus in your
Q: What kind of income? ITR?
A: A: No, because the law says 13th month pay
1. investments in: and “other benefits”/”similar benefits” – xmas
a. loans bonus is included in the category.
b. stocks
c. bonds Q: Who can increase the 30,000 limit?
d. other domestic securities A: The Sec. of Finance.
2. interest from deposits in Banks in the
Philippines. Q: Applicable to whom?
A:
Q: Who are income earners? 1. gov’t; and
A: 2. Private institutions.
1. foreign government
2. financing institutions owned, F. GSIS, SSS, Medicare and other
controlled or enjoying re-financing contributions (Sec. 32 B 7 f)
from foreign gov’ts; and " must be deducted from the GI not NIT
3. int’l or regional financial institutions because it is an exclusion.
established by foreign gov’ts -creditable withholding tax is an exclusion-
(established in the Philippines) must be deducted first from the GI before
you compute the NIT. Otherwise, you are

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- Atty. Francis J. Sababan -
including in the GI something that is Feb. 12, 2007 (Sec. 34 A, Expenses)
excluded from the same.
Q: Did the law define what is reasonable?
G. Gains from the Sale of bonds, debentures, A: No. for salaries and wages all that is
or other Certificate of indebtedness. (Sec. 32 required by law is for it to be reasonable.
B 7 g)
- for other forms of compensation, there
Q: Why 5 years? must be services actually rendered.
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit. AGUINLDO Case

- Sec. 32 B 7 g is similar or the same as 24 B F: involves a corporation engaged in selling


in long term deposit. fish nets, and the corporation have a land
sold through a broker.
H. Gains from redemption of shares in "there was substantial profits gained from
mutual fund (Sec. 32 B 7 h) the sale of a land which was sold by a broker.
The profit was in turn given to the workers as
1. Fiscal Year – means an accounting period special bonus.
of 12 months ending on the last day of any "the corporation claimed the bonus as a
month other than December. deduction.

2. Calendar year – a period of 12 months ISSUE: Should the deduction be allowed?


beginning on January and ending on
December. H: The SC did not allow the deduction, for
other forms of compensation, it must be
Q: Business expense incurred in February made or given for services actually rendered.
2006, is it possible to include it for April
2006? "in this case, it was proven that the sale was
A: yes, it is possible or it is possible if fiscal not made by the employees, no effort or
year is employed, if it falls under the fiscal services actually rendered by them because
year and all the elements are present. the sale was made through a broker.
"
- related to trade or business.
REASON: Capital loss has no connection to Q: Reasonable Travel Expenses, What is the
the trade or business. requirement?
A:
1. Travel must be in pursuit of business,
TAKE NOTE: trade or profession.
" for taxpayers liable for income within and 2. Travel expense while away from home.
without (RC & DC)), they can claim
deduction for expenses incurred within Q: Is there a travel expense which was not in
and without. pursuit of business?
" for taxpayers who are liable only for A: yes, those which are considered as fringe
income within, they can claim a deduction benefits (FB), expenses for foreign travel is
for expenses incurred within the considered a FB only if it is not in pursuit of
Philippines. the trade or business.

Sec. 34 A EXPENSES Q: can you claim it under Sec. 34 A (1)(a)(ii)?


A: No, you can claim it under Sec. 34 A
1. For those business expenses not (1)(a)(i) last paragraph.
enumerated under A. You need to prove that
it is an ordinary and necessary expense. Q: Reasonable Allowances for rentals for
meralco bills, requirements?
2. For those enumerated under A, all you A:
have to prove is that it is incurred during the 1. required as a condition for the
taxable year. continued use or possession, for the

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- Atty. Francis J. Sababan -
purpose of the trade, business or • taxpayer’s allowable deduction for
possession of the property. interest expense shall be deducted by an
2. taxpayer has not taken any title or no amount equal to 42% (RR 10-2000) of the
equity other than a lessor. interest income subject to FIT.

Q: Reasonable allowance for entertainment, Q: Who claims this deduction?


amusement and recreation expenses, what is A: the debtor claims this deduction.
the requirement?
A: Q: What kind of interest is this?
1. connected with the development, A: interest on loan.
management, and operation of the trade
(DOM); "interest on debt - when one borrows money
2. Does not exceed the limits or ceiling to finance his business interest in connection
set by the Secretary of Finance; and with the taxpayer’s profession trade or
3. Not contrary to law, morals, good business.
customs, public policy or public order.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a)
Q: How about bribe, kickbacks, and other
similar payments "a borrower or taxpayer can claim the
A: even without this provisions, kickbacks will interest paid in advance as itemized
not pass the requirement of (i) ordinary and deduction when he filed his income tax
(ii) necessary hence not deductible return (ITR) depending on whether or not the
principal obligation has been paid.
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION 1. if the entire amount or entire principal
obligation has been paid – the entire amount
Q: Why only private educational institution is of interest can be claimed as itemized
mentioned and no other taxpayers? deduction.
A: it refers to section 27 for Private
Educational Institution given to the 2. if only ! of the obligation had been paid,
educational institution. then the entire amount of ! of that interest
can be claimed as a deduction.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not 3. if no payment had been paid on the
deductible as business expense principal obligation, the advance interest
paid cannot be claimed as a deduction on the
EXCEPTION: Private Educ. Institution can years that it was paid.
claim it under Sec. 34 A (2)
REQUIREMENTS FOR REDISCOUNTING OF
BUSINESS EXPENSE vs. ALLOWANCE FOR PAPERS:
DEPRECIATION
1. incurred within the taxable year.
BUSINESS EXPENSE 2. individual taxpayer reporting income on a
1. No carry-over cash basis.
2. can be claimed for one year only.
3. if the amount of capital outlay is • No deduction shall be allowed in respect
substantial, it cannot accommodate all of the to the following interest:
expenses incurred.
1. if within the taxable year an individual
ALLOWANCE FOR DEPRECIATION taxpayer reporting income on the cash basis
1. There is carry over incurs an indebtedness on which an interest
2. you can claim it for a longer period is paid in advance or through discount or
depending on the life span of the property. otherwise.
3. it can accommodate all of the expenses
incurred. 2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36 (B):

44
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- Atty. Francis J. Sababan -
a. member of a family 5. Php200K-4,200= Php195,800/ this is the
b. bet. an individual and a corp., more than amount you can claim as a deduction.
50% in advance of the outstanding stock of
which is owned directly or indirectly by or for 34 C TAXES:
such individual;
c. Bet. 2 corp., more than 50% in value of the REQUISITES:
outstanding stock of each of which is owned, 1. taxes must paid or incurred within the
directly or indirectly, by or for the same taxable year
individual. 2. it must be incurred in connection with
d. bet. the grantor and a fiduciary of any trade or business.
trust; 3. can be claimed as:
e. bet. the fiduciary of a trust and the a. a deduction; or 34 C 1&2
fiduciary of another trust if the same person b. tax credit 34 C 3&7
is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary of Q: Where should it be deducted?
such trust. A:
1. if claimed as a deduction, it should be
Q: Who are not allowed to claim interest deducted from the gross income;
under sec 36 B? 2. if claimed as a tax credit, it should be
A: interest incurred between related parties. deducted from the Net Income Tax due
(bottom of the formula)
Q: What if half-brother?
A: not allowed to claim deduction for MERCURY DRUG CASE
interest. - Discount of senior citizens
SC: discount claimed by senior citizens shall
TAKE NOTE: interest incurred from the create a tax credit and must be deducted at
exploration of petroleum refers not just in the bottom of the formula.
interest incurred on loan of money but also
interest incurred for installment payments. Q: What is a tax deduction? Example?
A: example is business tax.
Q: Who are related parties? "tax deduction is allowed if the taxes were
A: individuals and corporations. paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
OPTIONAL TREATMENT OF INTEREST
EXPENSE: Q: Who are entitled to claim it?
1. interest incurred to acquire property used A: those liable to pay NIT. (Tax credit only for
in trade, business or exercise of profession NIT)
can be claimed a an itemize deduction…
a. on interest; or Q: What is a tax credit?
b. depreciation (as capital expenditure?) A: refers to the taxpayer’s right to deduct
from the income tax due the amount of
Q: What is this interest income? tax the taxpayer paid to foreign country,
A: the money borrowed was deposited in a subject to limitations.
bank so that it will warn interest. (RR13-
2000) Q: What is the tax credit being referred to
under 34 C (3)?
ILLUSTRATION: A: credit against taxes for taxes of foreign
1. loan of 1M from a bank with an interest of country.
20%
2. 20% of 1M is Php200,000 but you cannot Q: What are the other tax credit under the
claim this whole amount as a deduction. code?
3. when you deposited the 1M in the bank, it A:
earned a bank interest subject to FIT worth 1. RA 6452 – selling goods and commodities
Php10,000.00. to senior citizens, the discount claimed is
4. 42% (RR) of 10,000 = 4,200 (RR 9337) treated as a tax credit.
2. income tax paid to foreign country.

45