Tax Reviewer

B.
General Principles
Citizenship & Residency
Resident Citizen
Non-resident Citizen
Overseas Contract Worker
Resident Alien
Non-resident Alien
Domestic Corp
Foreign Corp
Taxable Income
Inside RP
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Outside RP
Yes
No
No
No
No
Yes
No
C. Income Tax on Individuals

Resident Citizens & Resident Aliens
Section 22 (F), Tax Code
Facts
Garrison v CA - 1990
1. Petitoners are all US Citizens who were born here,
got repatriated to USA, but later came back under
the Philippine Immigration Act of 1940 and were
employed at the Subic Naval Base.
2. They were charged with violating the law because

they all did not file their income taxes for 1969. They
claim that they are NOT RESIDENT ALIENS but only
SPECIAL TEMPORARY VISITORS and therefore are
exempt from income tax under the US-RP Military
Bases Agreement.
3. And that since they are exempt from income tax,

then its a waste of time to file income tax return
Resident Alien - an individual:

1) whose residence is within the Phils
2) who is NOT a citizen
Issues
Held
Principles
1. Are they considered ALIENS?
YES, they are considered resident aliens

and NOT A MERE TRANSIENT or
SOJOURNER
Whether he is a transient or not is

determined by his intentions with regards to
the length and nature of his stay
2. Are they exempt from income taxes?
YES, the Bases Agreement was explicit in

saying that 1) US nationals serving in the
Phils 2) in connection with construction,
maintenance, operation, or defense of the
bases, 3) who are residing in Phils by
reason only of such employment and 4)
whose income is derived exclusively from
US sources are NOT LIABLE to pay
income taxes
A mere floating intention indefinite as to time,

to return to another country, is NOT
SUFFICIENT to constitute him as a transient.
If he lives in the Phils and has NO
DEFINITE intention as to his stay, he is a
resident. One who come to the Phils for a
definite purpose which in its nature may be
promptly accomplished is a transient.
3. Are they exempt from filing income tax

return?
NO, the exemption is NOT absolute. It is

only for income derived exclusively from
US sources. But the BIR cannot know
this if petitioners don't file income tax
returns. It cannot be presumed that they
earned no income from any other source.
But if his purpose is of such a nature that an

extended stay may be necessary to its
accomplishment, he becomes a resident,
EVEN if his intention is to return to his
domicile abroad
Terminology
Non-resident Citizens
Section 22 (E), Tax Code
Meaning of Non-resident Citizen:

1) a citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside there
2) a citizen who leaves the Phils during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis
3) a citizen who works & derives income from abroad & whose employment there requires him to be physically present abroad most of the time
4) a citizen who was previously considered a non-resident citizen, who arrives in Phils at any time during the taxable year to reside permanently in the
Phils is treated as a non-resident citizen for the taxable year in which he arrives with respect to his income derived abroad until the date of his arrival
RR 1-79 (1979)
Who are Non-resident Citizens?

1) Immigrant - one who leaves the Phils to reside abroad as an immigrant for which a foreign visa has been secured
2) Permanent Employee - one who leaves the Phils to reside abroad for employment on a more or less permanent basis
3) Contract Worker - one who leaves the Phils on account of a contract of employment which is renewed from time to time under such circumstance
as to require him to be physically present abroad most of the time (not less than 183 days)
RR 5-01 (2001)
Non-resident citizens who are exempt from income tax derived from sources OUTSIDE Phils are no longer required to file income tax return
BIR Ruling 33-00 (2000)

1. Technoserve is a domestic foreign corp
engaged in rendering services for overseas or
domestic projects in the areas of engineering,
procurement, and construction management
1. Were the workers correctly classifed

as non-resident citizens so that their
income when they worked in Japan is
not taxable here?
YES, since they are all assigned

overseas for more than 183 days,
their income while in Japan are
exempt
2. Most of their work comes from their parent

company, JGC, a japanese firm. The design
works are done in Phils but sometimes they
send their workers to Japan. These workers
are stationed at JGC offices but still considered
working for Technoserve
Tax Code - An individual citizen of the

Phils who is working & deriving income
from abroad as an overseas contract
worker is TAXABLE ONLY on income
from sources within the Phils
A non-resident citizen - is a citizen who
works & derives income from abroad &
whose employment requires him to be
physically present abroad most of the
time during the taxable year
3. These workers are paid in US dollars but

converted to Peso and are paid here in Phils.
The client (JGC) is the one paying these
workers
4. All workers who were assigned overseas for
more than 183 days were claissified as nonresident citizens
Non-resident aliens engaged in business in the Phil

Section 22 (G), Tax Code
Non-Resident Alien - an individual

1) whose residence is NOT within the Phils
2) who is NOT a citizen of the Phils
RR 2 (1940)
Sec 5 Who are Non-resident Aliens?

1) an individual whose residence is NOT within the Phils
2) an individual who is NOT a citizen of the Phils
Determination is by his intention with regard to the length & nature of

his stay.
Sec 6. Loss of residence by alien

An alien who has acquired resident in the Phils RETAINS his status until he abandons the same and ACTUALLY DEPARTS from the Phils
An mere INTENTION to change his residence DOES NOT change his status. An alien who has acquired a residence is taxable as a resident
for the remainder of his stay in the Phils
Head of Family
Section 35 (A), Tax Code
Head of Family - an unmarried or legally separated man or woman:

1) with one or both parents (regardless of age), OR
2) with one or more brothers or sisters, OR
3) with one or more legitimate, recognized natural, or legally adopted children
living with and dependent upon him for their chief support, where such brothers or sisters or children are:
1) not more than 21 years of age
2) unmarried and not gainfully employed
3) where such children, brothers or sisters, regardless of age, are incapable of self-support because of mental or physical defect
Dependent
Section 35 (B), Tax Code
Senior Citizens
RA 7432
Dependent - a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is:
1) not more than 21 years of age
2) unmarried and not gainfully employed
3) if such dependent, regardless of age, are incapable of self-support because of mental or physical defect
Senior Citizens Act
Who are Senior Citizens?
1) Resident Citizens of the Phils
2) At least 60 years of age
3) have a yearly income of NOT MORE than P 60,000

Tax Exemption
A qualified senior citizen will be entitled to an exemption from payment for individual income tax provided that his annual taxable income does NOT
exceed the poverty level of P60,000 or such amount as may be determined by NEDA for a certain taxable year.
Kind of Income & Income tax on Individuals

Tax Formula
Income
Not over P 10,000
Over P 10,000 - P 30,000
Over P 30,000 - P 70,000
Over P 70,000 - P 140,000
Over P 140,000 - P 250,000
Over P 250,000 - P 500,000
over P 500,000
Tax (5 to 32%)
5%
P 500 + 10% of excess
P 2,500 + 15% of excess
P 8,500 + 20% of excess
P 22,500 + 25% of excess
P 50,000 + 30% of excess
P 125,000 + 34% of excess
Jan 1, 1999 - 33%, Jan 1, 2000 onwards - 32%
* if married, husband & wife shall compute separately their individual income; if any income cannot be definitely attributed to one, it shall be divided
equally for the purposes of determining their taxable income
Final Income tax - interests, royalties, awards, dividends, capital gains on sale of shares, realty
Section 24 (B), (C), (D) Tax Code
Tax Rate on Certain Passive Income on Citizens & Resident Aliens

Income
1) interest under the expanded foreign currency deposit system
2) royalty from books, literary works, & musical compositions
3) royalty other than the above
4) interest on any currenty bank deposit, yield or other monetary benefits from
deposit substitute, trust fund & similar arrangement
5) prize exceeding P 10,000
6) other winnings, except Phil Charity Sweepstakes & Lotto
7) dividend from a domestic corp, or from a joint stock company, insurance or
mutual fund company, & regional operating headquarters of multinational
company or share in the distributive net income after tax of a partnership
(except a general professional partnership), joint stock or joint venture
or consortium taxable as a corporation
8) interest on LONG-TERM deposit or investment in banks (with maturity of 5
years or more)
Final Tax
7.5%
10%
20%
20%
20%
20%
10%
exempt
* Prize - the result of an effort (ex. Prize in a beauty contest)

* Winning - the result of a transaction where the outcome depends upon chance (ex. Betting)
Tax Rate on Capital Gains
Income
1) on sale of shares of stock of a domestic corp NOT listed & traded thru a local
stock exchange held as capital asset, on the net capital gain:
not over P 100,000
on any amount in excess of P 100,0000
2) on sale of real property in the Phils held as capital asset
on the gross selling price, or the current fair market value at the time of sale
whichever is higher
Section 22 (Y), Tax Code
Final Tax
5%
10%
6%
Deposit Substitute - a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments
Examples are:
1) banker's acceptances
2) promissory notes
3) repurchase agreements
4) certificates of assignment or participation
RR 10-98
Tax rate on INTEREST INCOME from Foreign Currency Deposit (FCD)

1) interest income actually received by a resident citizen or resident alien from FCD - final withholding tax of 7.5%
2) if it was deposited by an OCW (overseas contract worker) or seaman - exempt
3) if it was in a bank account in the joint names of an OCW and his spouse (who is a resident) - 50% exempt, 50% final withholding tax of 7.5%
4) interest income actually received by a domestic corp or resident foreign corp from FCD - final withholding tax of 7.5%
Tax rate on INCOME of an Foreign Currency Deposit Unit (FCDU) from foreign currency transactions
1) transactions with residents of the Phils - final withholding tax of 10% based on gross income
2) transactions with non-residents of the Phils - exempt
RR 2-82
Who are Liable to pay tax on sale of shares of stock classifed as capital assets?
1) individual taxpayer, whether citizen or alien
2) corporate taxpayer, whether domestic or foreign
Who are NOT Liable?
1) gains derived by dealers in securities
2) gains on sale of shares of stock to the extent invested in new shares of stock in BANKS, NON-BANK FINANCIAL INTERMEDIARIES, and
CORPORATIONS organized primarily to hold equities in banks
How much is the tax?
1) for sales of stock listed & traded through the stock exchange - 1/4 of 1% on the GROSS SELLING PRICE
2) for sales of stock NOT traded through stock exchange
not over 100,000 - 10%
over 100,000
- 20%
How to determine the tax base? - it is based on the FAIR MARKET VALUE (FMV)
1) for sales of stock listed & traded through the stock exchange - FMV is actual selling price
2) for sales of stock NOT traded through stock exchange but listed in exchange - FMV is the highest closing price on the day of sale
2) for sales of stock NOT traded through stock exchange AND NOT listed in exchange - FMV is the book value nearest the valuation date
RR 8-98
Final Tax rate on Sales, Exchanges, or Transfers of Real Properties classified as CAPITAL Assets
1) Imposed on Capital Gains PRESUMED to have been realized by the SELLER - 6%
2) if sale was made to the government or to GOCCs - either 6% or under the normal income tax rate, taxpayer's option
Creditable Withholding Tax on Sales, Exchanges, or Transfers of Real Properties classified as ORDINARY Assets
1) if the seller is habitually engaged in the real estate business
if selling price is less than P 500,000
- 1.5%
if selling price is P 500,000 to P 2 million - 3%
if selling price is above P 2 million
- 5%
2) if the seller is NOT habitually engaged in the real estate business - 7.5%
3) if the seller is exempt from creditable withholding tax as per RR 2-98 - exempt
RR 13-99
Exemption of Certain Individuals from the Capital Gains Tax of 6% on the sale, exchange, or disposition of a principal residence
1) the proceeds from the sale, exchange, or disposition of his PRINCIPAL residence must be FULLY UTILIZED within 18 months. Must show PROOF
2) this can be availed of ONLY ONCE in every 10 years
3) the historical cost of his old principal residence shall be carried over to the cost basis of his NEW residence
4) if there is no FULL UTILIZATION, he shall be liable for the deficiency capital gains tax of the unutilized portion
5) if the principal residence is disposed in exchange for CONDO, and if it is used as his NEW residence, EXEMPT!
6) the 6% capital gains tax otherwide due MUST BE DEPOSITED in ESCROW wth an Authorized Agent Bank, can can only be released when sufficient
proof is shown that the proceeds have been FULLY UTILIZED within 18 months
RR 14-2000
Clarification of Principal Residence?

1) principal residence - the dwelling house, where the husband or wife or unmarried individual reside; actual occupancy is not interrupted or abandoned
by temporary absence due to travel, studies, or work abroad

2) if the ownership of the land & the dwelling house belong to different persons - only the dweling house shall be treated as principal residence
RR 4-99
Payment of Capital Gains Tax on Forclosure of Mortgaged Property

1) if the mortgagor exercises his right of redemption within 1 year - NO CAPITAL GAINS tax because no capital gains has been derived & no transfer
of property was realized
2) in case of non-redemption - the CAPITAL GAINS will be due based on the bid price of the highest bidder
Personal & Additional Exemptions

Section 35 (A) & (B), Tax Code
Basic Personal Exemption

Single, or married but judicially declared as legally separated, w/ NO dependents
Head of Family
For each married individual
Additional Exemption
For each dependent child (not exceeding 4) to be claimed by a married person
or head of family
* if married, only 1 of the spouses can claim the additional exemption
* if legally separated, the spouse who has custody of the children can claim
Exemption
P 20,000
P 25,000
P 32,000
P 8,000
Change of Status
Section 35 (C), Tax Code
Change of Status
1) if taxpayer should marry or should have additional dependents during the taxable year, he may claim the corresponding exemptions in full for the year
2) if taxpayer should die during the taxable year, his estate may claim the personal exemptions as if he died at the close of the year
3) if spouse or any dependent should die or any dependent should marry or become 21 years old, or become gainfully employed during the year,
the taxpayer may claim the personal exemption as if it happened at the close of such year
Personal Exemption allowable to Non-resident Alien individuals engaged in trade, business, or in the exercise of a profession in the Phils
Section 35 (D), Tax Code
- in the amount equal to the exemptions allowed in the income tax law in the country to which he is a citizen, to citizens of the Phils, not to exceed
the exemption of our own citizens here
Requirements: (based on reciprocity)
1) that the country of which he is subject or citizen has an income tax law
2) the income tax law of his country allows personal exemption to citizens of the Phils not residing there, but deriving income from there
3) the personal exemptions shall be equal to that allowed by the income tax law of his country to a citizen of the Phils as above, or the amount provided
in the Tax Code whichever is lower
Example
for Single
for Head of Family
for Married
Foreign country allows to the nonresident Filipino

P 30,000
P 18,000
P 40,000
Personal exemptions in the Local Tax

Code
P 20,000
P 25,000
P 32,000
Personal Exemption
Allowed
P 20,000
P 18,000
P 32,000
Optional Standard Deduction

Section 34 (L), Tax Code
- an individual (other than a non-resident alien) may opt to get a standard deduction in an amount not exceeding 10% of his gross income, instead of
following the personal exemptions
Premium payments on health and/or hospitalization insurance

Section 34 (M), Tax Code
- the taxpayer is allowed a deduction of P 2,400 per family or P 200 a month for health and/or hospitalization insurance premiums
- said family must have a gross income of NOT MORE than P 250,000 for the taxable year
- if married, only the spouse claiming the additional exemption for dependents can avail of this
Tax on Non-resident Aliens

Section 25, Tax Code
- a non-resident alien engaged in trade or business in the Phils is subject to the same tax rate as citizens
- a non-resident alien who stays in Phils for an aggregate period of more than 180 days shall be deemed as non-resident alien doing business in Phils
Tax Rate on Certain Passive Income of Non-Resident Aliens doing business in Phils
Income
2) royalty from books, literary works, & musical compositions
3) royalty other than the above
5) prize exceeding P 10,000
6) other winnings, except Phil Charity Sweepstakes & Lotto
7) dividend from a domestic corp, or from a joint stock company, insurance or
mutual fund company, & regional operating headquarters of multinational
company or share in the distributive net income after tax of a partnership
(except a general professional partnership), joint stock or joint venture
or consortium taxable as a corporation
8) gross income from cinematographic flims & similar works
9) interest on LONG-TERM deposit or investment in banks (with maturity of 5
years or more)
Tax Rate on Capital Gains
Income
not over P 100,000
Final Tax
7.5%
10%
20%
20%
20%
20%
20%
25%
exempt
Final Tax
2) on sale of real property in the Phils held as capital asset

on the gross selling price, or the current fair market value at the time of sale
whichever is higher
Section 25 (C), (D), (E), Tax Code
5%
10%
6%
Tax Rate on Certain Passive Income of Non-Resident Aliens NOT doing business in the Phils
- tax rate on capital gains are same as above
- on all other sources, tax rate is 25%
Tax Rate on Aliens employed by regional or area headquarters & regional operating headquarters established in the Phils by
multinational corporations; on income received from such corporations and on Filipinos employed & occupying the same positions - 15%
Tax Rate on Aliens employed by offshore banking units; on income received from such offshore banking units; and on Filipinos
employed & occupying the same posiitons - 15%
Tax Rate on Aliens who are permanent residents of foreign countries employed & assigned in the Phils by foreign service contractors
or subcontractors engaged in petroleum operations in the Phils; on income received from such contractors or subcontractors; and on
Filipinos employed & occupying the same positions - 15%
D. Definitions
Corporation - includes:
1) partnerships - no matter how created or organized
2) joint stock companies
3) joint accounts
4) associations
5) insurance companies
6) mutual fund companies
7) regional operating headquarters of multinational corporations
8) joint accounts
Does NOT include:
1) general PROFESSIONAL partnerships - partnerships formed by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business
2) a joint venture or consortium formed for the purpose of undertaking construction projects
3) a joint venture or consortium formed for engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating
or consortium agreement under a service contract with the Government
Domestic Corporation - one created or organized in the Phils under its laws
Foreign Corporation - one which is NOT domestic, and may be a resident or non-resident corporation
Resident Corporation - a foreign corporation engaged in business in the Phils
Non-resident Corporation - a foreign corporation NOT engaged in business in the Phils BUT deriving INCOME from the Phils
Facts
AFISCO Insurance v CA - 1999
1. Petitioners are 41 Non-life Insurance companies
who formed themselves into a "POOL" (called the
Clearing House) in order to facilitate the handling of
re-insurance business contracted with a non-resident
foreign insurance company
Issues
1. Was the POOL a partnership or

association subject to tax as a corporation?
(Since it merely acted as an agent and
performed only administrative functions)
2. The CIR assessed them deficiency income tax on

the POOL's remittances to member companies and
on to the foreign firm. It deemed the POOL as a
corporation and the remittances as DIVIDENDS
Held
Principles
YES, the Tax Code specified it "from all

sources by every corporation NO
MATTER how created or organized . . ."
"The term corporation shall INCLUDE

partnerships, NO MATTER how created or
organized, joint-stock companies, joint
accounts, ASSOCIATIONS, or insurance
companies . . . "
1) the POOL has a common fund which

pays for the expenses of the POOL; 2)
the POOL functions thru an executive
board which resembles the board of
directors of a corporation; 3) even if the
POOL is not a reinsurer, its work is
indispensable, beneficial, and
economically useful to the business of the
members
Civil Code, Contract of partnship when two or

more persons bind themselves to contribute
money, property, or industry to a common
fund, with the intention of dividing the profits
among themselves
2. Were the remittances to member

companies of their respective shares of
reinsurance premiums properly deemed as
DIVIDENDS and subject to tax? (Since the
pool did not earn income as a reinsurer and
that the reinsurance policies of individual
members are limited to the extent of their
allocated share in the original risk). Was
there double taxation?
YES they are taxable as dividends and

NO there is NO double taxation because
the POOL is a separate entity
3. Has the CIR's right to assess the POOL

already prescribed?
NO, becoz the POOL had changed its

address without notifying the CIR so that
it had difficulty in serving notice
1. Was there really a PARTNERSHIP?
NO, there is NO evidence in this case that

the petitioners entered into a partnership
as compared to Evangelista where there
was a series of transactions so that the
character of a business engaged in the
purpose of gain was present
in Evangelista v CIR - the sons borrowed

money from the dad, and they used it to buy
land. They leased out the land and collected
rent. They were held as a corporation and
assessed corporate income tax
In THIS case, the transactions were

isolated. Petitioners did not make any
ADDITIONAL purchase when they sold
the land in 1968 nor did they earn any
income from said lands as compared to
Evangelista where they leased out the
properties for several years
Elements of a partnership: 1) an agreement

to contribute money, property, or industry to a
common fund; 2) intent to divide the profits
among the contracting parties
Pascual & Dragon v CIR - 1988

1. Petitioners jointly bought 2 parcels of land in 1965.
They bought another 3 parcels in 1966. Without
making any improvements, they sold the 2 parcels in
1968 and the 3 parcels in 1970. They availed of tax
amnesty in 1974 & 74 and paid the capital gains tax.
2. But the CIR still assessed them tax deficiency

claiming that the tax amnesty is only good for their
INDIVIDUAL income tax but NOT for the corporate
income tax of their unregistered partnership. The
CIR based its decision on Evangelista v CIR
Terminology
There is clear evidence only of COOWNERSHIP. They shared in the gross

profits as co-owners & paid their capital
gains taxes thereby
The sharing of returns does NOT in itself

establish a partnership whether or not the
persons sharing have a joint or common right
in the property. There must be 1) a CLEAR
INTENT to form a partnership, 2) the
existence of a judicial personality different
from the individual partners, 3) the freedom
of each party to transfer or assign the whole
property
NO, they were simply CO-OWNERS. The

original purpose was to divide the lots for
residential purposes. But later, they found
it unfeasible to build their residences
there and had no choice but to resell the
lots to dissolve the co-ownership.
The sharing of gross returns does NOT in

itself establish a partnership. There MUST
be an unmistakable intention to form a
partnership or joint venture
The division of profit was merely

incidental to the dissolution of the coownership
All co-ownerships are NOT deemed

unregistered partnerships.
Obillos v CIR - 1985

1. In 1973, Mr. Obillos transferred to his 4 children
his rights to two lots in Greenhills. The total sale
amount was P 178,000 and the children became coowners of the two lots.
1. Did the children form a partnership

because they contributed P 178,000 to buy
the two lots and later resold them at a profit
and divided the profits among themselves?
2. In 1974, the children sold the lots to another

company and earned profit of P 135,000 for which
they paid capital gains tax of P16,700.
3. The CIR said that the children had formed an
unregistered partnership or joint venture and thus
required to pay corporate income tax, fraud
surcharges, 42% accumulated interest, etc to a total
of P 70,000. This is ON TOP of the tax they had
already paid.
For ex. If heirs inherited a hacienda from

their parents. Then, they did not invest any
additional capital but rather just continued
dedicating the property to the use which it
had been put to by their parents. It is not a
partnership.
4. Thus, the total deficiency income taxes and

penalties total to almost 100% of their profit. They
now protest.
Ona v CIR - 1972
1. In 1944, Ms. Ona died with heirs Mr. Ona & 5

children. Mr. Ona became the administrator of her
estate because the children were minors (each heir
had equal share in 10 parcels of land, several
houses, and others)
2. Mr. Ona, as the administrator, used the properties

in business by leasing or selling them & investing the
income and proceeds from the sales in real
properties & securities. This resulted in the increase
in the estate value.
3. Although every year, the children declared their

respective shares and their income derived from the
properties, they did NOT actually receive their shares
in the yearly income since it was in the hands of Mr.
Ona.
1. Did the heirs form an unregistered

partnership?
YES, they did NOT merely hold the

properties, instead they chose to let Mr.
Ona manage their interest, actually sell
some of the properties and invested them
in real properties & securities for the
purpose of dividing the profits in future. In
effect, they contributed their interest in the
property to a common fund.
2. If it WAS an unregistered partnership,

shouldn't the taxable income be LIMITED to
the income derived from the acquisiiton &
sale of real properties & securities and NOT
include the income derived from the inherited
properties?
NO, the income derived from inherited

properties may be considered as
individual income ONLY so long as the
inheritance is NOT distributed or
partitioned. But the moment their
respective known shares are used as part
of the common assets to be used in
making profits, it is considered part of the
taxable income of an unregistered
partnership
In cases of inheritance, there is a period

when the heirs can be considered as coowners, but it does NOT necessarily follow
that such status as co-owners continues until
the inheritance is actually & physically
distributed among the heirs. If they decide to
continue holding said shares under the
common management of the administrator
and engage in business on that basis, it
becomes an unregistred partnership
4. The CIR said that they had formed an unregistered

partnership and assessed them deficiency corporate
income tax for the years 1955 and 1956. They then
protested.
BIR Ruling 317-92
1. Ayala Land & API entered into agreement to jointly

construct 6750 bldg in Makati. Their proportionate
share was 60 / 40% of all leasable area, common
area, and parking spaces.
1. Did the FIRST AGREEMENT to jointly

construct the bldg constitute a taxable JOINT
VENTURE?
2. Due to softness in the market, they decided to do

a joint venture for 3 years, where ALI will be the
manager and both will contribute money to a
common fund for the purpose of leasing out the bldg
floors irrespective of who owns the floors. Then, the
net income shall be divided 60/40.
2. Is the SECOND AGREEMENT

connsidered as a corporation separately
taxable from ALI & API?
YES, a JV is created when two

corporations, while operating separately,
were placed under one sole management
which opearted the business affairs of
said companies as though a single entity
3. Are the rentals received to be considered

income of the JV?
YES, these are income to the JV
4. Are the net income to be distributed as

dividends to ALI & API taxable?
NO, these are considered INTRACORPORATE dividends, and are exempt
NO, they haven't derived income /

profits from it yet
Requisites of a JV: 1) each party makes a

contribution (either capital, service, skill,
knowledge, or material) 2) profits are shared
among the parties 3) there is joint right of
mutual control over the subject matter 4)
there is a single business transaction rather
than a general or continuous transaction
E. Income Tax Rates

on Domestic Corporations
- income tax of 35% (used to be 32%) (except if on the 4th year, MCIT applies - 2% of gross income)
- on the gross income derived during each taxable year
- from ALL sources within and without the Phils
- BUT starting Jan 1, 2009, the rate shall become 30%
Domestic Corporations are subject to any or some of the following:
1) capital gains tax
2) final tax on passive income
3) normal tax
4) minimum corporate income tax (MCIT)
5) gross income tax (GIT)
6) improperly accumulated earnings tax (IAET)
Gross Income computation
Gross Sales
Less) Sales Returns
Discounts
Allowances
Cost of Goods Sold - all business expenses directly incurred to produce the merchandise and bring them to their present location or use
Total Gross Income
Cost of Goods Sold for a Trading or Merchandising Concern:
1) the invoice cost of goods sold
2) import duties
3) freight in transporting the goods to the place where the goods are actually sold
4) insurance while goods are in transit
Cost of Goods Sold for a Manufacturing Concern:
1) all costs of production of finished goods such as raw materials, direct labor, & manufacturing overhead
2) freight cost
3) insurance premiums
4) other costs incurred to bring the raw materials to the factory or warehouse
Gross Income computation for a SERVICE concern
Gross Sales
Less) Sales Returns
Discounts
Allowances
Cost of Services - all direct costs & expenses necessarily incurred to provide the services required by the customers & clients including
a) salaries & employee benefits of personnel, consultants, & specialists directly rendering the service
b) cost of facilities directly utilized in proviidng the service such as depreciation or rental of equipment used & cost of supplies
* if it is a BANK - interest expense is included
Total Gross Income of a SERVICE concern
F. Proprietary Educational Institutions & Hospitals

Proprietary Educational Institution - any private school maintained & administered by private individuals or groups with an issued permit to operate
from the DECS or the CHED or the TESDA
on Proprietary Educational Institutions & Hospitals
- income tax rate of 10%
- on their taxable income (except for passive income)
- if the gross income from UNRELATED trade, business, or other acitivity exceeds 50% of the total gross income of the institution, it shall be 35% on
the ENTIRE taxable income
Constitutional Exemption
- ALL revenues of non-stock, non-profit educational institutions used ACTUALLY, DIRECTLY, & EXCLUSIVELY for educational purposes are EXEMPT
RR 76-2003
Exempted NON-STOCK & NON-PROFIT Corporations are still liable for taxes on:
1) income derived from any of their real properties (ex. Rental payment from their building premises)
2) any activity conducted for profit regardless of disposition thereof
3) interest income from any bank deposits or yield on deposit substitutes (final tax of 20%)
4) if its foreign currency deposit - final tax of 7.5%
5) they shall also be withholding agents for their employee's compensation income subject to withholding tax
Exempted NON-STOCK & NON-PROFIT Educational Institutions:
1) their exemption refers ONLY to revenues derived from assets used ACTUALLY, DIRECTLY, & EXCLUSIVELY for educational purposes
2) but income from cafeterias / canteens & bookstores area also exempt if they are owned & operated by the educational institution & are located
within the school premises
PRIVATE Educational Institutions
1) they are exempt from the VAT - but they must be accredited with either DECS or CHED
2) but income derived from trade, business or other activity is STILL TAXABLE
3) however, their bank deposits & foreign currency deposits are EXEMPT from withholding taxes but they must show proof that such income is used
to fund proposed projects for their institution's improvement
4) they shall also be withholding agents for their employee's compensation income subject to withholding tax
G. GOCCs
on ALL GOCCs
- income tax of 35%
EXCEPT:
1) GSIS
2) SSS
3) PHIC (Philippine Health Insurance Corp)
4) PCSO
5) PAGCOR (no longer exempt becoz of RA9337)
H. Passive Income
as amended by RA 9294
Tax Rate on Certain Passive Income of Domestic Corporations

Income
2) interest on any currency bank deposit, yield or other monetary benefits from
3) royalty - all types
4) dividend from domestic corporations (inter-corporate dividend)
Tax Rate on Capital Gains of Domestic Corporations (same as with individuals)
Income
not over P 100,000
2) on sale of real property in the Phils held as capital asset on the gross selling
price, or the current fair market value at the time of sale, whichever is higher
FCDU of BANKS
Tax Rate on Income Derived Under the Expanded FCD system

1) Income derived by a depository BANK from foreign currency transactions
2) INTEREST income from foreign currency LOANS granted by a BANK
3) Income of non-residents (individuals or corporations) from transactions with
depository BANK
Final Tax
7.5%
20%
20%
exempt
Final Tax
5%
10%
6%
exempt
10%
exempt
Section 22 (Y), Tax Code
Deposit Substitute - a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments
Examples are:
1) banker's acceptances
2) promissory notes
3) repurchase agreements
4) certificates of assignment or participation
RR 2-82 (Sale of Shares)
Who are Liable to pay tax on sale of shares of stock classifed as capital assets?
1) individual taxpayer, whether citizen or alien
2) corporate taxpayer, whether domestic or foreign
Who are NOT Liable?
1) gains derived by dealers in securities
2) gains on sale of shares of stock to the extent invested in new shares of stock in BANKS, NON-BANK FINANCIAL INTERMEDIARIES, and
CORPORATIONS organized primarily to hold equities in banks
How much is the tax?
1) for sales of stock listed & traded through the stock exchange - 1/4 of 1% on the GROSS SELLING PRICE
2) for sales of stock NOT traded through stock exchange
not over 100,000 - 5%
over 100,000
- 10%
How to determine the tax base? - it is based on the FAIR MARKET VALUE (FMV)
1) for sales of stock listed & traded through the stock exchange - FMV is actual selling price
2) for sales of stock NOT traded through stock exchange but listed in exchange - FMV is the highest closing price on the day of sale
2) for sales of stock NOT traded through stock exchange AND NOT listed in exchange - FMV is the book value nearest the valuation date
Intercorporate Dividends
CIR v Manning - 1975
1. In 1952, a corp called MANTRASCO was 99.9%
owned by Mr. Reese, the rest owned by 3 other
persons. Because of Mr. Reese's desire to make
sure that the company will be managed by his costockowners, they executed an agreement that said
upon his death, all the stockholders will endorse their
shares to a TRUST held by a law firm.
1. Were the stock dividends in reality a

scheme to distribute the CASH assets of the
company and is considered an INCOME?
(seeing that they were treasury shares)
2. Further, that the Company (MANTRASCO) will buy

back all the shares held by the TRUST (as treasury
shares). After this is done, they will be distributed to
existing shareholders (which are the 3 persons) as
stock dividends.
YES, they were not actually treasury

shares since they lack the essential
features of a treasury share. What they
had done was to USE the company's
periodic earnings to directly subsidize the
purchase of Mr. Reese's shares in
MANTRASCO and to make themselves
the full owners
A treasury share does NOT participate in

DIVIDENDS (becoz a corporation cannot
declare dividends upon itself) AND it is NOT
a VOTING STOCK (becoz an equal
distribution of voting powers among
stockholders will be lost)
They had used a technicality to bestow

upon themselves the ownership of the
company using the company's own
earnings
A stock dividend CANNOT be declared out of

outstanding corporate stock, but ONLY from
retained earnings
treasury shares - stocks issued

& paid for & reacquired by the
corporation by purchase,
donation, forfeiture or other
means
3. Mr. Reese died two years later and by 1963 all the
shares of Mr. Reese had been purchased by
MANTRASCO and distributed to the 3 shareholders
as stock dividends.
4. The CIR assessed them for deficiency income tax
claiming that the stock dividends was ACTUALLY
distribution of the assets or cash of the corporation
and is therefore considered INCOME. They
protested
Sale of Realty
RR 8-98
Final Tax rate on Sales, Exchanges, or Transfers of Real Properties classified as CAPITAL Assets
1) Imposed on Capital Gains PRESUMED to have been realized by the SELLER - 6%
2) if sale was made to the government or to GOCCs - either 6% or under the normal income tax rate, taxpayer's option
Creditable Withholding Tax on Sales, Exchanges, or Transfers of Real Properties classified as ORDINARY Assets
1) if the seller is habitually engaged in the real estate business
if selling price is less than P 500,000
- 1.5%
if selling price is P 500,000 to P 2 million - 3%
if selling price is above P 2 million
- 5%
2) if the seller is NOT habitually engaged in the real estate business - 7.5%
3) if the seller is exempt from creditable withholding tax as per RR 2-98 - exempt
RR 4-99
Payment of Capital Gains Tax on Forclosure of Mortgaged Property

1) if the mortgagor exercises his right of redemption within 1 year - NO CAPITAL GAINS tax because no capital gains has been derived & no transfer
of property was realized
2) in case of non-redemption - the CAPITAL GAINS will be due based on the bid price of the highest bidder
I. Minimum Corporate Income Tax (MCIT)

Section 27 (E), Tax Code
MCIT on Domestic Corporations & on Resident Foreign Corporations

- income tax of 2% of the gross income
- beginning on the 4TH taxable year of operations
- when the MCIT is GREATER than the 35% tax computed above
RR 9-98
Instructions to Revenue Officers

1) to implement the MCIT on domestic & resident foreign corporations, whenever they have zero or negative taxable income or when the MCIT is
greater than the normal income tax due
2) any excess of the MCIT over the normal income tax shall be carried forward on an annual basis and CREDITED against the normal income tax for
the 3 immediately succeeding taxable years
3) EXEMPTED corporations from the MCIT are:
- resident foreign corporations engaged in business as INTERNATIONAL CARRIER - 2.5% of Phil Gross Billings
- resident foreign corporations engaged in business as OFFSHORE BANKING UNITS on their income from foreign currency transactions with local
banks
- also, on the interest income of the above from foreign currency LOANS granted to residents of the Phils - final tax of 10%
- resident foreign corporations engaged in business as REGIONAL OPERATING HEADQUARTERS - 10% tax on taxable income
- firms that are taxed under a special income tax regime (ex. Those under PEZA)
J. Income Tax on Resident Foreign Corporations

Foreign Corporation - one which is NOT domestic, and may be a resident or non-resident corporation
Resident Corporation - a foreign corporation engaged in business in the Phils
on Resident Foreign Corporations
- income tax of 35% (except on the 4th year, if MCIT applies - 2% of gross income)
- on the TAXABLE income derived during each taxable year
- from ALL sources within the Phils only
Tax Rate on Certain Passive Income of Resident Foreign Corporations
Income
3) royalty - all types
4) dividend from domestic corporations (inter-corporate dividend)
Tax Rate on Capital Gains of Resident Foreign Corporations

Income
not over P 100,000
International Carrier
Final Tax
7.5%
20%
20%
exempt
Final Tax
5%
10%
Tax rate of an International Carrier doing business in the Phils is 2.5% of its Gross Phils Billings
CIR v BOAC - 1987
1. British Overseas Airways Corporation (BOAC) is a

100% British government-owned corporation
engaged in the international airline business. It has
no landing rights in Philis and was not granted a
certificate of public convenience and license to
operate here
1. Are the revenues derived by BOAC from

sales of tickets in Phils considered INCOME?
YES, the sale of tickets here was the

activity that produced the income. The
SITUS of the source of payments is the
Phils. Although the Tax Code did not
specify income from sale of tickets for
international transporation as part of the
gross income from sources in the Phils, it
does not render it less an income form
sources within the Phils
2. Although it did not carry passengers or cargo to or

from Phils, it maintained a general sales agent which
sold BOAC tickets covering passengers and cargoes
over international routes
2. Was the Income derived from sources

OUTSIDE the Phils? Since the service is to
be rendered outside the Phils
NO, the income was derived from within

the Phils. The test of taxability is the
SOURCE
3. Is BOAC considered a resident foreign

corporation doing business in the Phils?
YES, becoz there is not specific criterion

as to what constitutes "doing business in
Phils". There was a continuity of conduct
& intention to establish a continuous
business and not one of a temporary
character.
3. The CIR assessed it deficiency income taxes

claiming that the ticket sales were sold here and
were therefore income from services.
The source of an income is the property,

activity or service that produced the income.
It is sufficient that the income is derived from
ACTIVITY WITHIN the Phils.
4. BOAC protested claiming that the income is for

services and the place where the service is rendered
determines the source
4. Can BOAC apply the principle of res

judicata on JAL V CIR in this case?
NO, in THAT case, the ruling was that the

mere sale of tickets, unaccompanied by
the physical act of carriage of
transportation does NOT render the
taxpayer subject to the common carrier's
tax.
The common carrier's tax is an excise tax,

what we are dealing with here is an INCOME
tax, so . .. Different subject matter
1. Was the revenue derived by an

international air carrier from sales of tickets in
the Phils considered to be income from Phils
sources?
YES, as per CIR v BOAC, also Tax Code

defines Gross income as . "income
from transactions of any business
carried on for gain or profit and income
derived from any source whatever"
An international airline which has a sales

agent here & which allocates fares received
to various airlines on the basis of their
participation in the services rendered,
although it does not operate any airplane in
the Phils, is considered a RESIDENT
FOREIGN CORP doing business in the Phils
2. Is Air Canada a resident foreign corp doing

business in the Phils?
YES, there is a continuity of conduct and

intention to establish a continuous
business by the appointment of a local
agent
The source of income is the property, action,

or service that produced the income.
Air Canada v CIR - 2005

1. Air Canada is a Canadian corp which was granted
an authority to operate as an off-line carrier by the
Civil Aeronautics Board. AC appointed Aerotel Ltd s
its general sales agent in the Phils. Aeortel paid
income taxes but then asked for refund claiming that
it is NOT a resident foreign corp and therefore not
subject to income tax.
RR 15-2002
Income Tax on Gross Phil Billings (GPB) of International Air Carriers

1. An OFF-LINE airline which has a branch / agent in Phils and sells PASSAGE DOCUMENTS to cover OFF-LINE flights of its principal or for other
airlines is NOT CONSIDERED engaged in business as international air carrier in Phils & is NOT subject to GPB nor to the 3% common carrier's tax
2. If the airline has flights which originate from any point in the Phils, it is subject to the GPB of 2.5% UNLESS it is subject to a different tax rate under
a tax treaty to which the Phils is a signatory
3. What is included in computing the GPB?
a) gross revenue from passage of persons (actual amount as reflected in the tax coupon part of the plane ticket)
b) excess baggage
c) cargo and mail originating from the Phils in a continuous & uninterrupted flight
4. How to compute the GPB?
monthly average NET fare of all the tax coupons of plane tickets per point of final destination, per class of passage, per classification of passenger
X
total number of passengers flown for the month as declared in the flight manifest
* in the case of PASSENGERS' flights from any point in the Phils and BACK, that portion of revenue pertaining to the RETURN TRIP to the
Phils is NOT INCLUDED as part of GPB
OBUs / FCDUs
Tax rate of Offshore Banking Units authorized by the Bangko Sentral, (including any interest income from foreign currency loans granted
to residents) is FINAL TAX of 20%
RR 10-76
Offshore Banking Unit - a branch of a foreign bank which is authorized by the BSP to transact offshore banking business in the Phils
Foreign Currency Deposit Unit - a department of a local bank or in an existing local branch of foreign banks, which is authorized by the BSP
to operarate under the expanded foreign currency deposit system
Gross Onshore Income - all income arising from transactions allowed by the BSP conducted by & between an offshore bank with another offshore
bank or with an FCDU or with a non-resident
RR 14-77
What is included in computing the GROSS ONSHORE INCOME of OBUs & FCDUs?
a) gross interest income arising from foreign currency loans & advances & investments with residents
b) fees, commissions, & other charges which are integral parts of the income from foreign currency loan transactions are EXEMPT! Don't include
this in computing the final tax
RR 10-98
Tax rate on INTEREST INCOME from Foreign Currency Deposit (FCD)

1) interest income actually received by a resident citizen or resident alien from FCD - final withholding tax of 7.5%
2) if it was deposited by an OCW (overseas contract worker) or seaman - exempt

3) if it was in a bank account in the joint names of an OCW and his spouse (who is a resident) - 50% exempt, 50% final withholding tax of 7.5%
4) interest income actually received by a domestic corp or resident foreign corp from FCD - final withholding tax of 7.5%
Tax rate on INCOME of an Foreign Currency Deposit Unit (FCDU) from foreign currency transactions
1) transactions with residents of the Phils - final withholding tax of 10% based on gross income
2) transactions with non-residents of the Phils - exempt
Branch Profit Remittance Tax
Any profit remitted by a branch to its head office shall be subject to a tax of 15% - (EXCEPT those registered with PEZA)
How is this computed?
a) it is based on the TOTAL profits applied for remittance withouth any deduction for the tax component
If it was a FOREIGN CORPORATION, What are NOT included?
a) interests
b) dividends
c) rents
d) royalties
e) payment for technical services
d) salaries & wages premiums
f) annuities, emoluments or other fixed or determinable casual gains
g) profits, income, & capital gains
except if the above are connected with the conduct of its business in the Phils
Bank of America v CA - 1994

1. BA is a foreign corp licensed to engage in
business here. It paid 15% branch profit remittance
tax on profit from its regular banking operations &
from its foreign currency deposit unit operations
What is the correct tax base for the branch

profit remittance tax?
It should be based on the PROFIT

remitted abroad (the amount sent
abroad)

profit remittance tax?

abroad)

profit remittance tax? On the profit that is
REMITTABLE or the profit that it ACTUALLY
REMITTED?

abroad)
Is passive income still included in computing

for the BPRT?
No, it is subject to a final tax
2. Later, it claimed that the branch profit tax was

computed incorrectly. Should have been computed
on the basis of profits ACTUALLY remitted and not
on the amount BEFORE the branch profit tax applied
3. It is asking for recovery of the overpaid amount
CIR v Burroughs - 1986

1. Burroughs is a foreign corp doing business in the
Phils and had a branch in Makati. It applied for
authority to remit profits to its parent company and
paid the 15% branch profit remittance tax
2. Later, it claimed overpayment because the tax
should have been computed on the basis of the
amount ACTUALLY remitted and not on the amount
BEFORE profit remittance tax applied
3. Now asking for a refund
Compania General de Tabacos v CIR - 1993

1. Compania is a foreign corp doing business in the
Phils through a branch office. It paid 15% BPRT and
later claimed a refund for overpayment
Remitted - refers to the total branch profits

which would be send abroad and not to the
total profits of the branch (not all of which
need be sent abroad)
Section 22 (DD) & (EE), Tax Code
Regional or Area Headquarters & ROHQs

Regional or Area Headquarters - a branch established in the Phils by MNCs and which headquarters do NOT earn or derive income from the Phils
and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific regions
and other foreign markets
- EXEMPT from INCOME TAX
Regional Operating Headquarters - a branch established in the Phils by MNCs which are engaged in any of the following services:
1) general administration & planning
2) business planning & coordination
3) sourcing & procurement of raw materials & components
4) corporate finance advisory services
5) marketing control & sales promotion
6) training & personnel management
7) logistic services
8) research & development services
9) product development
10) technical support & maintenance
11) data processing & communications
12) business development
- INCOME TAX OF 10% on gross income
Tax on Certain Incomes of Resident Foreign Corporations

INCOME of a resident foreign corp
1. Interest from any currency bank deposits & yield or from deposit substitutes
& trust funds
2. royalties
3. interest under the expanded foreign currency deposit system
Final Tax
20%
20%
7.5%
INCOME of a BANK (resident foreign corp)

Final Tax
income under the expanded foreign currency deposit system from foreign currency transactions with local banks &
interest income from foreign currency loans to residents
10%
Sale of Shares on sale of shares of stock of a domestic corp NOT listed & traded thru a local
not over P 100,000
Final Tax
5%
10%
K. Income Tax on Non-Resident Foreign Corporations

on NON- Resident Foreign Corporations

- income tax of 35%
- on the GROSS income derived during each taxable year
- from ALL sources WITHIN the Phils only
CIR v SC Johnson & Son - 1999
1. SC Johnson is a domestic corp licensee of SC

Johnson USA. It was required to pay royalties and it
subjected the royalties to a 25% withtholding tax.
Was it entitled to the lower tax rate due to the

tax treaty? Since in the RP-US tax treaty, the
"most favored nation clause" provided that
the lowest rate of Phil tax at 10% may be
imposed on royalties derived by a US
resident from sources within the Phils ONLY if
the circumstances of the US resident are
similar to those of West German residents
NO, because in the RP-West German

treaty, there was a provision for a tax
credit of 20% of the gross amount of
royalties against German income &
corporation tax for the taxes payable in
the Phils. There is no such provision in
the RP-US treaty so that they are not "in
the same circumstances"
The purpose of tax treaties is to avoid double

taxation in two different jurisdictions thereby
encouraging the free flow of goods &
services between the signatories
2. Later, it filed for refund claiming overpayment

because the royalties paid should have been subject
to only 10% withholding tax pursuant to the MOSTFAVORED NATION CLAUSE of the RP-US Tax
Treaty in relation to the RP-West Germany Tax
Treaty
Tax refunds are in the nature of tax

exemptions and will be construed stricly
against the person claiming exemption
The purpose of the most-favored nation

clause is to establish the principle of equality
of international treatment by providing that
the citizens of the contracting nations may
enjoy the privileges accorded by either party
to those of the most favored nation. This
allows the taxpayer in one state to avail of
more liberal provisions granted in another tax
treaty to which his country of residence is
also a party
Marubeni v CIR - 1989

1. Marubeni of Japan had equity investments in
AG&P of the Phils. AGP paid cash dividends to
Marubeni but withheld 10% as final dividend tax and
another 15% as profit remittance tax.
1. Is Marubeni Japan to be considered a

resident foreign corporation due to its
principal-agent relationship with Marubeni
Phils? And therefore subject to only 10%
intercorporate final tax on dividends?
NO, when the foreign corp transacts

business in the Phils INDEPENDENTLY
of its branch, the principal-agent
relationship is set aside. The transaction
becomes one of the foreign corp, not of
the branch
2. Later, AGP asked the BIR for a ruling. The BIR

said that since the dividends received by Marubeni
are NOT income arising from the business activity in
which Marubeni is engaged, it is not considered
branch profits for the purpose of the 15% BPRT
The taxes were incurred on dividend

income to the head office in Japan which
is a separate & distinct income taxpayer
from the branch in the Phils.
3. Marubeni then asked for a refund. But the BIR

denied it saying that since Marubeni is a non-resident
foreign corporation, its income is subject to 25% tax.
And since AGP already withheld 10 + 15%, there is
nothing to be refunded. (it should've been 35% but
there was a tax treaty so it was reduced to 25%)
But there is an error in computing. The

10% tax on dividends should be levied
directly on the dividends received while
the 15% BRPT should be levied on the
profit actually remitted abroad
4. Marubeni claimed that the income was earned

NOT by the Japanese company but by its Phils
branch, Marubeni Corp Phils. The BIR thinks
otherwise
NV Reederij & Royal Interocean Lines v CIR - 1988

1. NB Reederij is a foreign shipping corp. In 1964 &
64, on two occasions only, its two ships called on
Phils ports and loaded cargoes for foreign
destination. Royal Interocean acted as its agent.
They did not pay income tax.
1. Should NB Reederij be considered a

foreign corp not engaged in business in the
Phils?
YES, it does not have any branch or office

here and it made only two calls in Phils
ports. In order that it be considered
engaged in business here, its business
transactions must be continuous.
2. The CIR assessed them deficiency income tax as

non-resident foreign corp not doing business in the
Phils. But Royal Interocean protested saying that it
is a foreign corp engaged in business in Phils. It filed
an income tax of a very low amount only.
3. The CIR rejected this, hence this petition
Special Corporations
Summary on Special Corporations

Taxpayer
1) Proprietary educational insitution &
non-profit hospital
2) Resident international carrier
Tax Base
Rate
Taxable income from ALL sources
10%
Gross Philippine billings
2.5%
3) Non-resident owner or lessor of vessel

4) Non-resident cinematographic film
owner, lessor or distributor
5) Non-resident lessor of aircraft,
machinery, and other equipment
6) Regional operating headquarters of
MNCs
Gross rentals, lease, and charter fees

from the Phils
4.5%
Gross income from the Phils
25%
Gross rentals, charges, and other

fees from Phils sources
7.5%
Phil taxable income
10%
Tax Rate on Certain Passive Income of NON-Resident Foreign Corporations

Income
Final Tax
1) interest on foreign loans
20%
2) dividend from domestic corporations (intercorporate dividends)
15%
- this is subject to the condition that the country in which the non-resident foreign corp is domiciled allows a credit against the tax due from the
non-resident foreign corp taxes deemed to have been paid in the Phils equivalent to 20% difference
Tax Rate on Capital Gains of Resident Foreign Corporations
Income
Final Tax
on sale of shares of stock of a domestic corp NOT listed & traded thru a local
not over P 100,000
5%
10%
BIR Ruling 8-00
1. SGS Phils paid dividend to its parent company in
Switzerland. It withheld 33% tax. (based on
previous provision not yet amended by RA 9337) It
asked the BIR whether it should have paid 15% only
and was it entitled to a refund
Was it entitled to a refund?
YES, because the final withholding tax on

dividends paid to non-resident foreign
corps is only 15% PROVIDED the 20%
portion to be exempted in the Phils will
likewise be exempted by the country
where the non-resident foreign corp
resides
Since Switzerland imposed NO TAX on all

dividends received by Swiss companies from
foreign companies, the requirement is more
than satisfied
Was it 20%? Or 15% because of the "mostfavored nation clause"?
It was 15%, because the "MFN clause"

states that the applicable rate will be the
LOWEST rate of Phils tax that may be
imposed on royalties of the SAME KIND
paid UNDER SIMILAR
CIRCUMSTANCES to a resident of a third
state
The third state is the Netherlands. The RPNetherlands Tax Treaty provides that the tax
on such royalties is 15% of the gross amount
Income covered by Tax Treaties

ITAD Ruling 102-02
1. What tax rate should Energizer Phils pay when

sending royalties to Everready USA? Since under
the RP-US Tax Treaty, the applicable rate is 20%
L. Improperly Accumulated Earnings Tax (IAET)

on ALL corporations
- income tax of 10% on the improperly accumulated taxable income
- the IAET is on corps which permit earnings & profits to accumulate instead of being divided or distributed
NOT Applicable to
1) publicly-held corps
2) banks & other financial institutions
3) insurance companies
Evidence of Purpose to Avoid Income Tax
1. Prima Facie Evidence - the fact that any corp is a mere holding company or investment company
2. Evidence determinative of purpose - the fact that the earnings or profits of a corp are permitted to accumulate BEYOND the REASONABLE NEEDS
of the business
Computing for the IAET
Taxable Income adjusted by:

1. income exempt from tax
2. income excluded from gross income
3. income subject to final tax
4. the amount of Net Operating Loss Carry-Over
Deducted by:
1. dividends actualy or constructively paid
2. income tax paid for the taxable year
Manila Wine Merchants v CIR - 1984
1. Manila Wine is a domestic corp engaged in the

importation & sale of whisky, wines, liquors, and
distilled spirits. During the course of business, it
invested in several companies, bought shares at
Wack Wack, and also bought US Treasury Bills worth
around P 350,000
1. Was the investment of US Treasury Bills to

be considered an investment in unrelated
business? Even that Manila Wine said that
US Treasury bills should be considered as
good as cash and that it wanted to earn some
interest from its cash and that 1) it will be
used to finance their importation, 2) a dollar
reserve would be useful in meeting urgent
orders of its customers, 3) the money will be
used for future expansion by buying its own
lot & office bldg. But its was still waiting for it
to become 60% filipino owned
YES, "reasonable needs" means the

immediate needs of the business; if the
corp can't prove this, then its not an
immediate need. Also, american cases
have held that investment of the earnings
of a corp in stock or securities of an
UNRELATED business usually indicates
an accumulation BEYOND THE
REASONABLE NEED of the business
The controlling INTENTION of the taxpayer

is that which is manifested at the time of
accumulation and NOT subsequently
declared intentions which are merely the
product of afterthought. A speculative and
indefinite purpose will not suffice.
1. Was Tuason considered to be a holding /

investment company?
YES, because it did not involve itself in

the development of subdivisions but
merely subdivided its own lots and sold
them for bigger profits. It derived its
income from interest, dividends, and
rental realized from the sale of realty
The touchstone of liability is the PURPOSE

behind the accumulation and not the
CONSEQUENCE of the accumulation.
2. Was Tuason liable for the 25% surtax?
YES, because 99.9% in value of the

outstanding stock of Tuason Inc. is owned
by Antonio Tuason himself. This gives
conclusive presumption that the purpose
of accumulated earnings was to avoid the
income tax on its shareholder
2. The CIR assessed it IAET of 25% which it

protested. Later, the CTA determined that its
investment in several companies were reasonable
EXCEPT its purchase of US Treasury Bills
CIR v Tuason Inc - 1989

1. Tuason is a domestic corp. The CIR assessed it
deficiency income taxes and 25% surtax on
improperly acccumulated earnings. Tuason paid the
deficiency income taxes but protested the 25%
surtax on the grounds that accumulated earnings
was kept solely for the purpose of expanding its
business operations as a real estate broker
2. Tuason claimed that the surplus was set aside to

build up capital for its expansion program which
included the construction of an apartment bldg and
the purchase of a condo intended for resale or lease
Also, that the amount spend for

construction of the bldg and the amount
for purchase of the condo has a big
discrepancy from the amount actually
accumulated (about 2 million). So it is not
under the reasonable needs requirement
Cyanamid Phils Inc v CA - 2000
1. Cyanamid Phils is a wholly owned subsidiary of

American Cyanamid Co. It is engaged in the
manufacture of pharmaceutical products &
chemicals, importer & wholesaler of finished goods
2. The CIR assessed it deficiency income taxes &

25% surtax on IAET. Later, it settled with the CIR for
the income taxes but NOT the IAET which it is still
protesting. It claims that 1) it was reasonable to
meet working capital needs and the retirement of
debts 2) that since it is a wholly owned subsidiary of
a publicly-held corp in USA, no individual
shareholder could have evaded income taxes by
reason of its accumulation of earnings
RR 2-01
1. Was Cyanamid liable for the IAET? Or was

its accumulation considered reasonable?
YES, because the BARDAHL formula is

not a precise rule, it is used only for
administative convenience. Using the
formula in THIS case merely creates a
false illusion of exactitude
Since Cyanamid claims that by using the

BARDAHL formula, its working capital needs
were actually inadequate.
As per CIR's computation (ratio between

current assets to current liabilities) ,
Cyanamid's working capital was more
than TWICE its currentl liabilities. Plus,
the working capital was projected to
increase further from the year's sales.
There is no reason to expect a working
capital deficit which could have
necessitated an increase in working
capital.
2. Was Cyanamid exempted since it is a

subsidiary of a publicly-held corp?
NO, because at that time, the TAX CODE

exempted only banks, financial
institutions, and insurance companies
The burden of proving the determination of

the CIR is wrong is on the taxpayer.
How to Determine the Reasonable Needs?

- use the IMMEDIACY-TEST
- reasonable needs means the immediate needs of the business including reasonably anticipated needs
- burden of proof is on the corp
The following are considered Reasonable:
1. allowance for the increase of accumulated earnings up to 100% of the paid-up capital
2. earnings reserved for bldg, plant, or equipment acquisition as approved by the Board of Directors
3. earnings reserved for compliance with any loan or obligation established under a legitimate business agreement
4. earings required by law to be retained
5. in case of subsidiaries of foreign corps in the Phils, ALL undistributed earnings intended or reserved for investments in the Phils
Who are covered?
- all domestic corps which are classified as closely-held corporations
- starting on Jan 1, 1998
Closely-held corp - those at least 50 % in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of
stock is owned directly or indirectly by NOT MORE than 20 individuals
Who are NOT covered?
1. banks & other financial intermediaries
2. insurance companies
3. publicly-held corporations
4. taxable partnerships
5. general professional partnerships
6. non-taxable joint ventures
7. enterprises registered with PEZA or with BCDA or with other special economic zones
Prima Facie Evidence of IAE
1. investment of substantial earnings in UNRELATED business or in stock or securities of an unrelated business
2. investment in bonds & other long-term securities
3. accumulation of earnings in excess of 100% of paid-up capital
* the CONTROLLING INTENTION of the taxpayer is that which is manifested at the TIME of accumulation, and not the declared intentions which
are merely the product of after thought
BIR Ruling 25-02
1. Abbot Labs is a wholly owned subsidiary of Abbot

USA, engaged in the business of manufacturing,
buying, selling, importing, & exporting drugs. It
presented evidence that it had 100,000 shareholders
and that the 20 largest shareholders of Abbot USA
own 30% of the company and that Abbot USA is a
publicly-listed company in USA.
1. Is Abbot Lab considered a publicly-held

corp so that the IAET do not apply to it?
YES, the ownership of a domestic corp is

ultimately traced to the individual
shareholders of the parent company. And
where 50% of the outstanding capital
stock or at least 50% of the total
combined voting power of all classes of
stock is owned by more than 20
individulas, the corp is considered a
publicly-held corp
2. Now Abbot Labs is asking BIR for a ruling as to

whether its considered a publicly-held corp
How to determine if a corp is a closely-held one? Look at stock-ownership:

1. stock not owned by individuals - will be considered to be owned proportionately by its shareholders
2. family & partnership ownership - an individual shall be considered to own the stock for his family members or partner
3. option to acquire stocks - if a person has an option to acquire stocks, it shall be considered as being owned by him
M. Tax-exempt Corporations
The Following organizations are tax-exempt: (as long as they aren't organized for profit)
1. Labor, agricultural, or horicultural org
2. Mutual savings bank without capital stock represented by shares &
Cooperative bank without capital stock
3. A beneficiary society, order, or association - operating for the exclusive benefit of the members
ex. A frat operating under the lodge system (Masonic lodge)
A mutual aid association
A non-stock corp organized by employees providing for the payment of life, sickness, accident, or other benefits exclusive to its members
4. Cemetery company - owned & operated exclusively for the benefit of its members
5. Non-stock corp or association - organized & operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehab
of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member or specific person
6. Business league chamber of commerce, or board of trade - no part of its income inures to any individual
7. Civic league or organization operated exclusively for the promotion of social welfare
8. A non-stock & non-profit educational institution
9. Governmen educational institution
10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or
like orgs of a purely local character - the income which consists solely of dues, assessments, & fees collected from members for the sole
purpose of meeting its expenses
11. Farmers', fruit growers', or like associations organized & operated as sales agent for the purpose of marketing the products of its members &
turning back to them the proceeds less expenses
* But the any income of the above orgs from any of their properties (real or personal), or from any activity conducted for profit regardless
of disposition made of such income, shall be taxable
CIR v V.G. Sinco Educational Corp - 1956

1. Mr. Sinco established & operated a school known
as Foundation College of Dumaguete. As per DECS
requirement, he incorporated it as the VG Sinco
Educational Corp. As a non-profit educational
institution, it has never distributed any dividend or
profit to its stockholders. But it paid salary to its
founder & president when he served as teacher and
it paid Community Publishers for products
purchased. Mr. Sinco is a stockholder of Community
Publisher
1. Was the payment of salaries to be

considered as "distribution of profit"?
NO, merely paying moderate salares is

NOT considered distributing profits. It is
natural that a school pay salary to its
teachers and to pay for publications it
purchases.
In American jurisprudence, it was held that

the payment of the school to the school
principal of a salary, even if he was the
former owner, does not render the school as
being "conducted for profit"
Even if the it is provided that the assets of

the corporation will be distributed to its
stockholders upon its dissolution, it does not
remove the right of the school's tax
exemption. It is only a speculative
contingency since no one knows what state
the school will be in upon its dissolution
2. The CIR assessed it deficiency income tax

claiming that since it paid salaries to teachers, it has
distributed its profits and therefore the school was
conducted for profit
Art 39, EO 226
The Omnibus Investment Code of 1987

Art 39 - Incentives to Registered Enterprises (under the Investment Priorities Plan)
1. Income Tax Holiday:
for Pioneer firms
- 6 years from commercial operation
for Non-pioneer firms - 4 years from commercial operation
for newly registered firms - fully exempt from income taxes
Extention of tax exemption for 1 more year
- if the project meets the prescribed ratio of capital equipment to number of workers set by the Board
- if the utilization of indigenous raw materials are at rates set by the Board
- if the net foreign exchange savings or earnings amount to at least US$ 500,000 annually during the first 3 years of operation
* But NO REGISTERED FIRM may avail of this incentive for a period exceeding 8 years
Exemption for Registered Expanding Firms
- For a period of 3 years from commercial operation, registered expanding firms are entitled to tax-exemption proportionate to their expansion, BUT
if it availed of this incentive during this period, it is NOT entitled to ADDITIONAL deduction for incremental labor expense
*This incentive cannot be extended beyond 3 years
2. Additional Deduction for Labor Expense
- For the first 5 years from registration, a regsitered enterprise is allowed an ADDITIONAL deduction of 50% of the wages corresponding to the
increment in the number of DIRECT labor for skilled & unskilled workers if the project meets the prescribed ratio of capital equipment to number
of workers set by the Board
- This exemption shall be doubled if the activity is located in less developed areas
3. Tax & Duty Exemption on Imported Captial Equipment
- With 5 years from the effectivity of this Code, (so until 1992), importations of machinery & equipment & spare parts of registerd enterprises
shall be 100% exempt of customs duties & revenue tax, but the importation must comply with the following conditions:
a) they are NOT manufactured domestically in sufficient quantity, of comparable quality, & at reasonable prices
b) they are reasonably needed & will be used exclusively by the registered enterprise in the manufacture of its products
c) the approval of the Board was obtained for such importation
4. Tax Credit on Domestic Capital Equipment
- A tax credit of 100% of the value of the revenue tax & customs duties that would have been waived on the machinery & equipment had these
been imported is given to registered enterprises which purchase them from a domestic manufacturer
5. Exemption from Contractor's Tax
- The registered enterprise is exempt from contractor's tax
Sec 23-25, RA 7915
Special Economic Zone Act of 1995

Sec 23 - Fiscal Incentives
- Businesses operating within the ECOZONES shall be entitled to fiscal incentives as per PD 66 (Export Processing Zone Authority) or w/ EO 226
- exporters using local materials as inputs shall get tax credits same as those provided in the Export Development Act of 1994
Sec 24 - Exemption from Taxes under the NIRC
- NO taxes, lcoal & national, shall be imposed on businesses operating within the ECONOZONE
- in lieu of taxes, 5% of the gross income shall be remitted to the national government
Sec 25 - Applicable National Taxes

- ALL income derived by persons & all service establishments in the ECOZONE are subject to taxes under the Tax Code
N. Taxable Income
O. Gross Income
Taxable Income - means the pertinent items of:

Gross Income
less) deductions
less) personal exemptions
=
Taxable income
Gross Income - means ALL income derived from WHATEVER SOURCE, including:
1) compensation for services in whatever form paid (ex. Fees, salaries, wages, commissions, & similar items)
2) gross income derived from the conduct of trade or business or the exercise of a profession
3) gains derived from dealings in property
4) interests
5) rents
6) royalties
7) dividends
8) annuities
9) prizes & winnings
10) pensions
11) partner's distributive share from the net income of a general professional partnership
COMPENSATION
Compensation - for services in whatever form paid are taxable

- Compensation earners are NOT ALLOWED to deduct any other deduction from their salary, but MAY have deductions applied to income
earned from OTHER sources
BUSINESS INCOME
Business Income - in the case of manufacturing, merchandising, or mining business, GROSS income means:
Total sales
less) cost of goods sold
add) all income from incidental & outside sources
=
Gross Income
GAINS
Gains - gain or loss on sale or exchange of property is recognized when:

- the property received in exchange is essentiall different from the property disposed
- the property received has market value
In sale or exchange of REAL or PERSONAL property, distinguish between ORDINARY vs CAPITAL assets (capital assets have special rules on their
gains or losses)
Rules on Capital Gains & Losses
1) the transaction should be a sale or exchange
2) in the case of a taxpayer, OTHER than a corporation, ONLY the following % of the gain or loss shall be taken into acccount in computing the net
capital gain, net capital loss, and net income
- 100% if the asset has been held for LESS than 12 months
- 50% if the asset has been held for MORE than 12 months
3) losses from sales or exchanges of capital assets is allowed ONLY to the extent of the gains from such sales or exchanges
4) if a taxpayer, OTHER than a corporation, sustains a net capital loss in the taxable year, this loss, in amount NOT MORE than the net income of such
year, shall be treated in the SUCCEEDING YEAR as a loss from a sale or exchange of a capital asset held for LESS than 12 months. This is called
the NET CAPITAL LOSS CARRY-OVER
Sale & Exchange
Sale - a delivery of goods for money
Exchange - a delivery of goods for goods received
The following are considered as sale or exchange:

1) retirement of bonds
2) short selling
3) failure to exercise a privilege or option to buy or sell property
4) securities becoming worthless
5) receipt of a liquidating dividend - when a corporation is dissolved and fully liquidated
INTERESTS
Interests
In the case of 2 or more orgs, trades, or businneses (whether or not organized & incorporated in the Phils), owned or controlled DIRECTLY or
INDIRECTLY by the SAME INTERESTS, the CIR is authorized to distributore, apportion, or allocate gross income or deductions between or among
such orgs, trades, or businesses, if he determines that such is necessary in order to prevent tax evasion
- the CIR shall use standards that are fair, reasonable, or at ARMS's LENGTH
CIR v Filinvest Corp & Filinvest Alabang - 2005

1. Filinvest Development Corp (FDC) is a holding
company while Filinvest Alabang (FAI) and Filinvest
Land (FLI) are real estate developers. The 3
companies entered into a Deed of Exchange where
FDC & FAI transferred parcels of land to FLI in
exchange for shares of stock in FLI.
1. Did the swap qualify as a tax-free

exchange? Or did the subsequent afreement
between FDC & Reco result in a dilution of
FDC's control over FLI thereby giving rise to a
taxable gain?
YES, prior to the exchange, FDC held

67% of stocks in FLI while FAI didn't hold
any stock. After the exchange, FDC held
61% of FLI, while FAI held 10%. So, the
exchange resulted in further control of FLI
by FDC & FAI.
2. FLI requested a BIR ruling so that no gain or loss

would be recognized in the transfer of real properties.
The BIR ruled that since the transfer resulted in the
control of FLI by FDC & FAI, there was no gain or
loss to be recognized.
Also, FDC had requested for a BIR ruling

and it complied with the ruling. To change
it now would violate the non-retroactivity
of BIR rulings to the prejudice of FDC.
3. Later, FDC entered into an agreement with a

Singaporean company called Reco Herrera to form a
JV (called FILINVEST ASIA) to develop & manage
the 50% ownership interest of FDC in PBCOM Tower.
The equity participation of FDC & Reco was 60-40.
FDC then reported a NET LOSS on its annual
income tax return for that year.
NO, said gains are yet to be realized by

FDC. The prospective gain is only an
alleged increase in the value of the
shareholdings of FDC in FAC resulting
from the assignment of a % of its rights in
the project to FAC. This gain is taxable
only if & when FDC actually realizes the
incremental value of its investment when
it finally disposes of its share in FAC.
2. Did the JV (FAC) result in a gain on dilution

by FDC thereby subject to income tax?
4. The CIR assessed FDC deficiency income taxes

of P 150M. It also assessed FAI of deficiency
income taxes of P 1.4 B. The companies protested.
RMO 63-99
Application of Section 50, Tax Code

What is the ultimate test to determine the fairness of related party transactions?
Arm's Length - the standard of an UNCONTROLLED taxpayer dealing at arm's length with ANOTHER UNCONTROLLED TAXPAYER
How to determine Taxable Income on Inter-company Loans or Advances
- if a member of a group of CONTROLLED entities makes a loan or advances directly or indirectly to another member of such group, AND CHARGES
NO INTEREST, or charges interest not equal to an arm's length, the CIR may make appropriate allocations to reflect arm's length interest rate
What is the Arm's length interest rate?
- it shall be the rate of interest which would have been charged at the time the indebtedness arose in INDEPENDENT transaction between UNRELATED
parties under SIMILAR circumstances
- use THE Bank Reference Rate by THE BSP
RENTS
Section 49, RR 2
Improvements by Lessees
- When a lessee erects a building or makes improvements per agreement with the lessor, the lessor may report the
income therefrom upon either of the following: (at his option)
1) at the time when such building or improvements are completed, the fair market value of such building or improvement
2) the lessor may spread over the life of the lease, the estimated depreciated value of such building or improvement at the termination of the lease,
and report the income for each of the adequate part
- If the lease is terminated, and it is NOT through purchase by the lessor, so that the lessor comes into possession of the property prior to the time
originally fixed, the lessor is considered to receive ADDITIONAL income for that year. (if the value of the building exceeds the amount already
reported as income). No appreciation in value due to causes OTHER than the premature termination of the lease shall be included.
- If the building is destroyed BEFORE the expiration of the lease, the lessor is entitled to deduct as LOSS for the year when such destruction occurred,
the amount previously reported as income, less the any salvage value to the extent that such loss was not compensated for by insurance
ROYALTIES
DIVIDENDS
Section 250, RR 2
Meaning of Royalties
- any payment of any kind received as consideration for the use of or right to use:
1) any patent, trademark, design, or model
2) secret formula or process
3) of industrial, commercial, or scientific equipment
4) for information concerning industrial, commercial, or scientific experience
Meaning of Dividends
- any distribution whether in cash or other property, in the ordinary course of business even if extraordinary in amount, made by:
1) a domestic or resident foreign corp
2) a joint-stock company
3) a partnership
4) a joint account
5) an association
6) an insurance company
to the shareholders or members out of its EARNINGS or PROFITS
Regarding Dividends
* when the corporation receives interest which are tax-free; it becomes TAXABLE AS DIVIDENDS when it distributes the same to its shareholders
* when the dividend is received by a corp, it is taxable only up to 25% in accordance with Sec 24, Tax Code
* when the dividend is received by a DOMESTIC corp from a FOREIGN CORP, it is taxable only to the extend that it constitutes income from sources
in the Phils as provided in Sec 37(a), Tax Code
* when the dividend is paid by a DOMESTIC corp to a NON-RESIDENT FOREIGN CORP, it is taxable in FULL.
Section 251, RR 2
Dividends paid in Property (or in Securities other than its own stock
* these are considered income too, in the amount of the full market value as when received by stockholder
* the rates are as follows:
- if received BEFORE Jan 1, 1998
Tax - Exempt
- if received bet Jan 1 - Dec 31, 1998
6%
- if received bet Jan 1 - Dec 31, 1999
8%
- if received AFTER Jan 1, 2000
10%
Regarding Dividends paid in Property
* if it was paid in stock of ANOTHER CORP, it is NOT considered A STOCK DIVIDEND
* same valuation is the market value at the time the dividend becomes payable
* scrip dividends are subject to tax in the year in which the warrants are issued
Section 252, RR 2
Stock Dividends
* stock dividends are NOT TAXABLE
Exception:
1) when the stock dividend causes CHANGE in the corporate identity or a change in the nature of the shares issued whereby the proportional interest
of the stockholders after the distribution is ESSENTIALLY DIFFERENT from his former interest
Section 253, RR 2
Sale of Stock Received as Dividends

* once the recepient SELLS the stock dividend, he may realize GAIN or LOSS. This GAIN or LOSS is treated as arising from the SALE OR
EXCHANGE of a CAPITAL ASSET
Computation of GAIN or LOSS:

1) when stock dividend is the same character as the stock upon which it is paid
2) when stock dividend materially differs from stock upon which it is paid
3) when stock was purchased at diff times & at diff prices so that the identity
cannot be determined
cost = old shares / total shares of old & new

cost = cost of shares of 1 class / number of shares in that class
cost = presumed to be from stock issued with respect to earliest
purchased stock
Section 254, RR 2
Stock Declartion and SUBSEQUENT REDEMPTION

* if AFTER the stock dividend declaration, a corp cancels or redeems the same in such time & manner as to make the distribution / redemption
essentially equivalent to a DISTRIBUTION OF A TAXABLE DIVIDEND, the amount received shall be considered as TAXABLE DIVIDEND
Section 255, RR 2
Sources of Distribution
* every distribution is made out of earnings or profits
* just determine them to be coming from the earnings or profits of the taxable year, if NOT, then to the past taxable years
Section 256, RR 2
Distribution in Liquidation
* when a corp distributes ALL its properties or assets in complete liquidation, the GAIN realized from this is TAXABLE
* computation is based on Sec 34 (b) or (c ) of the Tax Code
CIR v CA & ANSCOR - 1999
1. Don Andres Soriano, a foreigner, formed a

domestic corp called ANSCOR in 1930 of which he
owns 99% of the shares. In 1947 and in 1949 to
1963, ANSCOR declared stock dividends. By 1964,
when Don Soriano died, his holdings had
accumulated to 185,000 shares. Half of this went to
his wife and the other half formed his estate.
2. In 1967, Mrs. Soriano thought of a tax avoidance

scheme. She had ANSCOR reclassify its existing
common shares into preferred shares. She then
changed almost all of her own shares and the
estate's shares into preferred shares. The company
then bought back the remaining common shares as
treasury stock.
1. Was ANSCOR covered by the Tax

Amnesty?
NO, because it was only a withholding

agent (a tax collector on behalf of the
government), and it is not protected by
the Amnesty. The agent is not liable for
the tax and therefore cannot claim
amnesty from tax.
Although stock dividends are considered

unrealized gain and therefore not taxable as
income, there is a loophole that corporations
use to circumvent the law. They declare
stock dividends and THEN redeem the stock
dividends by paying cash. This is a technical
way of avoiding taxation. So, an
EXCEPTION CLAUSE was inserted in the
Tax Code.
2. Was ANSCOR's redemption of stocks

declared as stock dividends considered as
"essentially equivalent to the distribution of
taxable dividend"? Since ANSCOR claims
that: 1) it wanted to reduce foreign exhange
remittances in case cash dividends are
declared and 2) it wanted to "filipinize" the
company
YES, the "filipinize" plan was a mere

afterthought not supported by any Board
Resolution & the records show despite
the existence of enormous profits, no
cash dividend was ever declared by
ANSCOR from 1945 until the BIR started
making its assessments in the 1970's.
The EXCEPTION CLAUSE provides that the

redemption of stock dividends, DEPENDING
on the TIME & MANNER, is essentially
equivalent to a distribution of taxable
dividends, and therefore taxable to the extent
that it represents profits. But this is a caseto-case basis that will be considered.
Also, 1) it was shown that the proceeds of

the redemption are deemed taxable
dividend since it was shown that income
was generated therefrom 2) even if the
declared purpose was valid, it cannot
serve as an excuse not to pay tax
Criteria to determine the above: 1) presence

or absence of a real business purpose 2)
amount of earnings available for declaration
of regular dividend and the corporation's past
record 3) effect of the distribution as
compared to the declaration of a regular
dividend 4) the lapse of time between
issuance & redemption 5) the presence of a
substantial surplus
3. In 1973, the CIR assessed ANSCOR for deficiency

withholding tax-at-source for its transactions of
exchange & redemption of stocks. ANSCOR
protested claiming that it had availed of Tax Amnesty
under PD 23. The BIR denied it.
3. Was ANSCOR's reclassification of

common to preferred shares considered
taxable?
Wise & Co v Meer - 1947
NO, becoz no income was realized from

this, no flow of wealth. Under the doctrine
of "equality of shares", all stocks issued
by the corp are presumed equal with the
same privileges & liabilities. There was
only a modification of shareholder's rights
in this case.
redemption - a reacquisition
of stock by a corp in
exchange for property,
whether or not the acquired
stock is cancelled, retired, or
held in the treasury
1. Manila Wine Merchants, Ltd is a Hongkong corp.

In 1937, it recommended to its stockholders to sell its
business & assets to Manila Wine Merchants, Inc, a
Phil domestic corp which was formed on the same
day as the recommendation.
1. Were the dividends considered "ordinary"

or liquidating"?
Liquidating, becoz it was very clear that

when the recommendation was passed in
May, it already specified the Manila
company as the buyer and it was clear
that the Manila company was formed
specifically to absorb the business of the
HK company.
2. While the resolution was not yet finalized, the HK

firm declared cash dividends on which it duly paid
income taxes. It also sold the company to the Manila
co. and received P 400,000 in payment. After the
resolution was signed 3 months later, the HK firm
liquidated its assets and distributed it to all the
shareholders and paid income tax on it. One of the
shareholders was Wise & Co.
Even if the HK company continued to run

the business till its final and actual
liquidation, it did so, only "IN TRUST" for
the Manila company. Based on the facts,
the court said that since the sale was
effectively made on the day of the
recommendation (in May), the business
ceased to be a "GOING CONCERN" and
therefore can't distribute "ORDINARY
DIVIDENDS"
3. The CIR assessed Wise deficiency income taxes

claiming that the dividends were considered as
"liquidating dividends" and NOT "ordinary dividends".
Wise & Meer protested
2. If these were "liquidating dividends", were

they taxable?
YES, the law at that time specifically

provided that "amounts distributed in the
liquidation of a corp shall be treated as
PAYMENTS in exchange for stock of
shares, and any gain or profit realized
shall be taxed to the distributee as
OTHER GAINS OR PROFITS"
3. Would these not be considered as "double

taxation"?
NO, becoz they had received the

distributions IN EXCHANGE for the
surrender of their stock in the HK
company. Its similar if they sold the
stocks to a 3rd party. Its still taxable.
4. Didn't the HK company already pay the

income tax on these dividends?
NO, since these are not ordinary

dividends but distributions in payment for
stock surrendered, these were taxable on
all the shareholders. (its a separate
transaction) These are considered taxable
as OTHER GAINS OR PROFITS
5. Were the shareholders who were NONRESIDENT ALIENS not taxable? Since even
if the dividends were to be considered as a
sale of their stock to the HK company, the
profit did not come from Phil sources and is
not subject to Phil taxes.
NO, the HK company was doing business

in the Phils and it SOLD the company to a
domestic corp in the Phils. Therefore all
income came from Phil sources.
A "distribution" does NOT necessarily

become a "dividend" merely because it was
called a dividend by the distributing company
dividend - any distribution

made by a corp to its
shareholders whether in
case or in property out of its
earnings or profits
accumulated since March 1,
1913
BIR RULING 322-87
Regarding a trading company that is in the process of liquidation, and whose stockholders are to received liquidating dividends IN EXCESS
of their investment
- since the shareholders will realized capital gain or loss, the gain is taxable
- such gain to be computed as the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders
of their respective shareholdings
* But because of Section 34 (b) of the Tax Code:
- if the shareholder held his shares for more than 12 months, only 50% of the capital gains is taxable
-if less than 12 months - 100% of the capital gains is taxable
ANNUITIES
Annuity - a sum of money payable yearly or at regular intervals

Annuities are TAX-EXEMPT
PRIZES & WINNINGS
Prizes & Winnings - generally taxable (they are similar to gains derived from labor)
exceptions:
1) if the recipient was selected without any action on his part to enter the contest & he was not required to render substantial future services as a
condition for receiving the prize or award
2) those granted to athlethes are exempt
3) those that are in the nature of GIFTS
PENSIONS
Pension - a gratuity granted as a favor or reward, or one paid under given conditions to a person following retirement from service or to surviving
dependents
Pensions are TAX-EXEMPT
SHARE IN GPP's INCOME

The General Professional Partnership (GPP) is TAX-EXEMPT

but, the income of the individual partners are subject to tax
Computing the net income of the partnership shall be the done in the same manner as a corporation. Each partner shall report as GROSS INCOME
his distributive share in the net income of the partnership
FROM WHATEVER SOURCE

Section 50, RR 2
Cancellation or Forgiveness of Debt MAY amount to:

1) a payment of income - taxable (ex. A person performs service for a creditor who cancels his debt)
2) a capital transaction - taxable (ex. A corp forgives the debt of a stockholder, it is in the nature of paying a dividend)
3) a gift - exempt (ex. A creditor merely wants to benefit a debtor by canceling his debt without any consideration)
RMC 13-80
Refunds & Tax Credits

- taxes which were previously claimed & allowed as deductions,but SUBSEQUENTLY was refunded or granted as tax credit should be declared
as part of the gross income of that year
Exceptions (the ff, when refunded or credit, are NOT declarable as gross income because they are NOT allowable as deductions):
1) estate & donor's taxes
2) income, war-profit & excess profit taxes imposed by A FOREIGN COUNTRY
3) estate & gift taxes
4) taxes assessed against local benefits of a kind tending to increase the value of the property assessed
5) stock transaction tax
6) energy tax
7) taxes which are not allowable as deductions under the law
Special Tax Credits
1) sales, compensating, & specific taxes paid on supplies & raw materials imported by A REGISTERED EXPORT PRODUCER - given as tax credits
2) when a registered BOI & TOURISM ENTEREPRISE assumes payment of taxes withheld due from the FOREIGN LENDER on interest payments
on FOREIGN LOANS - given a tax credit
EXCLUSIONS
The following are tax-exempt & are NOT included in gross income:
1) Life Insurance - except if the proceeds are held by the insurer under an agreement to pay interest thereon, the INTEREST PAYMENTS only, are
included in gross income
2) Amount received by insured as RETURN OF PREMIUM
3) Gifts, Bequests, & Devises - except the income from such property acquired by gifts, bequests, & devises which shall be included in gross income
4) Compensation for Injuries or Sickness - including amount of damages received on account of such injury or sickness
5) Income exempt under Treaty
6) Retirement Benefits, Pensions, Gratuities, etc - but this applies only if the retiring person has been in the service of the same employer for at
least 10 years and is NOT LESS THAN 50 years of age at the time of his retirement; and this benefit can be availed of only once
7) Separation pay caused by death, sickness, or other disability
8) Social Security benefits, retirement gratuities, pensions, & similar benefits
9) Benefits received from the US Veterans Administration
10) Benefits received from the SSS
11) Benefits received from the GSIS

Miscellaneous Tax Exempt items:
1) Income earned by FOREIGN GOVERNMENTS in Phils
2) Income earned by the Phil government or its political subdivisions (ex. Public utility)
3) prizes & awards - made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement - ONLY IF
he was selected without any action on his part to enter the contest & he is not required to render substantial future services as a condition to
receiving the prize or award
4) prizes & awards - in sports competitions - must be sanctioned by national sports associations
5) 13th month pay & other benefits like christmas bonus - but cannot exceed P 30,000
6) GSIS, SSS, Medicare, Pag-ibig, union dues, & other contributions
7) gains from sale of BONDS, DEBENTURES, or other Certificate of Indebtedness - must have maturity of more than 5 years
8) gains from redemption of shares in mutual fund
CIR v CA & GCL Retirement Plan - 1992
1. GCL Retirement Plan is an employee's trust
maintained by the employer, GCL Inc. to provide
retirement, pension, disability, & death benefits to its
employees. The Plan was submitted & qualified as
tax-exempt by the CIR.
1. Was the tax-exempt status of GCL

applicable to ALL kinds of taxes, including
final withholding tax on interest income?
2. In 1984, GCL made investments & earned interest

income from which it paid withholding taxes. In
1985, it claimed for refund the amount withheld as
taxes on interest income claiming to be fully taxexempt. But the CIR denied this claiming that PD
1959 abolished the exemption of interest income
earned by employees' trusts
YES, the Tax Code specifically exempted

employees' trusts from ALL TAXES. If this
is not the case, it would result in a
diminution of accumulated income &
reduce whatever the trust beneficiaries
would receive out of the trust fund.
Employee's trust provide economic

assistance to employees upon the
occurrence of certain contingencies, such as
old age retirement, death, sickness or
disability. It is established for their exclusive
benefit and for no other purpose
Also, the reason behind giving this tax

exemption is to encourage the
establishment of such private plans for
the benefit of workers outside of the
Social Security Act.
CIR v CA & Castaneda - 1991

1. Mr. Castaneda retired from government service in
the Phil embassy in London. Upon forced
retirement, he received TERMINAL LEAVE PAY from
which the CIR withheld P 12,000 as income tax.
1. Is TERMINAL LEAVE PAY received by a

government employee taxable?
NO, terminal leave pay is NOT part of his

gross salary or income. It is a retirement
benefit and is tax-exempt.
1. Is TERMINAL LEAVE PAY received by a

government employee taxable?
NO, terminal leave pay is NOT part of his

gross salary or income. It is a retirement
benefit and is tax-exempt.
2. He then filed claim for refund claiming that the

terminal leave pay is tax-exempt. The CTA
grantedhis request, hence this appeal by the CIR.
Request of Atty. Zialcita - 1990

1. Atty Zialcita rendered government service for 28
years. When he reached the age of 65, he was
forced to retire. But the CIR withheld income taxes
on his TERMINAL LEAVE PAY. He is now requesting
the court to grant a refund.
"We fail to see the logic in viewing with

EAGER EYES for purposes of tax revenues,
the fruits of a working lifetime of labor simply
because fixed salaries & retirement benefits
are so visible and convenient to levey upon"
RA 4917
RETIREMENT BENEFITS - received by employees of private firms are TAX-EXEMPT

Provided that:
1) the retiring employee has been in service for at least 10 years
2) he is not less than 50 years of age
3) that he can avail of this exemption only once
4) in case his separation from service was due to death, sickness, or other physical disability or for any cause beyond his control, any amount
received by him or his heirs shall also be exempt
RA 7833
This Act inserted some clauses to the Tax Code to specifically exempt the ff:
1) 13th month pay & other benefits

2) extra P 5,000 Christmas bonus to government employees (RA 6886)
3) benefits received by employees NOT covered by the 13th month pay law (PD 851)
4) other benefits such as productivity incentives, Christmas bonus not exeeding P 12,000
* But the above exemptions applies only to the first P 30,000
RR 2-95 & RMC 36-94
Refund / Credit of Taxes Withheld from Employees who were separated from employment
- if the employee is separated from previous employer but is not employed by another employer, he shall be refunded or credited the taxes withheld
on his exempt 13th month pay & other benefits by his present employer
- if the employee is separated but has no present job, he shall claim his refund with the BIR
Income derived by Foreign Government - in loans, stocks, bonds, or other domestic securities or from interests on deposits in Phil banks
Requirements from Exemption: the income was received by
1) by foreign governments
2) by financing institutions owned, controlled, or enjoying re-financing from foreign governments
3) by international or regional financial institutions established by foreign governments
CIR v Mitsubishi Metal - 1990
Atlas Mining got a loan from Mitsubishi for expansion

of its mines. Mitsubishi in turn, got a loan from
Japan Eximbank for this amount. The government
withheld 15% of the interest payments as taxes.
Mitsubishi and Atlas now seeking tax credit claiming
that the loan actually came from a bank owned by
the Japanese government and is therefore exempt
Was Mitsubishi a mere agent of Japan

Eximbank so that the loan is considered an
investment by a foreign country and is
excluded from gross income computation as
per the National Internal Revenue Code?
NO, the contract was clearly between

Atlas & Mitsubishi only. It was separate
and distinct from loan agreement between
Mitsubishi & Eximbank
Taxation is the rule. Scrupulous care must

be taken to avoid opening the floodgates to
the violation of our tax laws. Otherwise, a
mere expedient of having a Phil corporation
enter into a contract for loans with private
foreign entities which in turn will negotiate
independently with their government could be
availed of to take advantage of the tax
exemption.
P. Fringe Benefits Tax (FBT)

Fringe Benefit - any good, service, or other benefit granted in cash or in kind by an employer to an employee (except rank & file) such as:
1) membership fees, dues, & other expenses in social & athletic clubs or similar orgs
2) life or health insurance & other non-life premiums
3) interest on loan at LESS than market rate to the extent of the difference between the market rate & the actual rate granted
4) motor vehicle of any kind
5) housing
6) household personnel such as maid or driver
7) holiday & vacation expenses
8) expense account
9) expenses for foreign travel
10) educational assistance to the employee or his dependents
Fringe Benefit Tax - final tax of 32% on the GROSSED-UP monetary value of fringe benefits
* FBT is also an EXPENSE which is deductible from the employer's GROSS INCOME
* if the employee is an alien employed by a ROHQ, offshore banking unit, or petroleum service contractor, whose income is subject to a 15% tax,
the FBT is also 15%
Grossed-Up Monetary Value - amount paid by the employer which is subject to tax
Computation:
Actual Monetary Value
/ (divided by)
68%
= FBT
Special Cases
- if it is received by non-resident alien not engaged in trade or business
FBT
25%
- if it is received by alien or Filipino employed by a ROHQ or RAHQ

-if it is received by employees in special economiz zones
15%
25% or 15%
Exceptions on the FBT:

1) necessary / convenient - those that are necessary for the trade & business of the employer or for the convenience of the employer
2) exempt under special laws
3) rank & file - if the employee is a rank & file, whether granted by the CBA or not
4) de minimus benefits - of relatively small value & are furnished merely as a means of promoting the health, goodwill, etc of the employees
- ex. Rice subsidy, laundry allowance, uniforms, medical cash allowance, etc
5) contributions to plans - to retirement, insurance, and hospitalization benefit plans
* rank & file - employees who are holding neither managerial nor supervisory position
RR 3-98
Further Clarifications:
1) Housing Privilege
- if employee LEASES a residential property for the use of the employee & the property is the usual place of residence
of the employee
- if the employee PURCHASES a residential property on installment basis & allows the employee to use it as his usual
place of residence
- if the employee PURCHASES a residential property & TRANSFERS OWNERSHIP to the employee
- housing of military officials
- housing which is situated inside or adjacent to the premises of a business or factory (within 50 meters)
- temporary housing for employee who stays for not more than 3 months
2) Expense Account
- if the expense was duly receipted for and in the name of the employer, and the expense is not in the nature of a
personal expense attributable to the employee
- if these are personal expenses such as groceries for the personal consumption of the employee, paid for or reimbursed
by the employer, even if these are duly receipted for in the name of the employer
- representation & transportation allowances which are fixed in amount & regularly given as part of monthly compensation
3) Motor Vehicle
- if employer PURCHASES vehicle in the name of the employee, regardless of usage of the vehicle
- if employer shoulders a portion of the amount of the purchase price of a vehicle owned by the employee
- if employer owns & maintains a fleet of vehicles for the use of the business & the employees
- use of aircraft owned & maintained by the employer
- use of yacht
4) Household Expenses
- ex. Salaries of maids, drivers, payment for homeowners association dues, garbage dues, etc
5) Interest on loan at less than Market rate
- if it is less than 12% interest rate
FBT
50% of the value of benefit
100% of the value
exempt
exempt
exempt
not considered FB
considered to be FB
not considered FB
but as taxable income
100% of the value
value is amount shouldered
exempt
value is based on depreciation
100% of the value
the diff is FB
6) Membership Fees & other expenses in social and athletic clubs
100% of the value
7) Expenses for foreign travel

- if it is reasonable for the purpose of attending business meetings or conventions
- if it is for local travel, expenses not more than US$ 300 per day (not including lodging)
- cost of plane ticket if economy or business class
- cost of plance ticket if first class
- travel expenses of family members of the employee
exempt
exempt
exempt
30% of value
100% of the value
8) Holiday & Vacation Expenses

9) Educational assistance to the employee or his dependents
- if the employee was granted a scholarship by the employer and if the education or study is directly connected to
100% of the value
the trade or business of the employer, and there is written contract that the employee must remain in employ for
a period of time
- if the assistance was extened to the employee's dependents and was provided through a scholarship program of the
company
10) Life or Health Insurance & other Non-life insurance premiums in excess of what the law allows
- if the contribution is pursuant to existing law such as to the SSS or GSIS
- if it is for the GROUP insurance of the employees
exempt
exempt
exempt
exempt
RR 8-00
The ff are considered "DE MINIMIS" benefits of ALL TYPES of employees - exempt from TAX
1) monetized unused vacation leave no exceeding 10 days per year
2) medical cash allowance to dependents of employees not exceeding P 750 / employee per sem or P 125 / month
3) rice subsidy of P 1,000 or 1 sack of 50-kg rice per month
4) uniforms & clothing allowance not exceeding P 3,000 / year
5) actual yearly medical benefits not exceeding P 10,000 / year
6) laundry allowance not exceeding P 300 / month
7) employee achievement awards for length of service or safety achievement in the form of tangible property with value not exceeding P 10,000
8) gifts given during christmas & major anniversaries not exceeding P 5,000 / year
9) flowers, fruits, books, etc given under special circumstances such as illness, marriage, birth of a baby, etc
10) daily meal allwance for overtime work not exceeding 25% of the basic minimum wage
RR 10-00
Others
- the amount of "De Minimis" benefits is not computed in determining the P 30,000 ceiling of "OTHER BENEFITS" provided in Sec 32(b) of Tax Code
- but if the employer pays MORE than the ceilings prescribed above, the EXCESS is taxable to the employee ONLY if it is beyond the P 30,000 ceiling
- any amount given by employer as benefits, whether "de minimis" or others, shall be deductible as business expense
O. Deductions
In General
The ff: are allowed deductions from gross income (except for taxpayers who earn compensation income)
all ordinary & necessary expenses in carrying on the development, management, and operation of a trade, business, or profession including:
A reasonable allowance for:
a) salaries, wages, and other forms of compensation including fringe benefits
b) travel expenses, here & abroad, in pursuit of trade, business, or profession
c) rentals & others which are required for the continued use of property
d) entertainment, amusement, & recreation expenses that are directly connected to the trade, business, or profession (but not those that are contrary
to law, morals, public policy, or public order)
Aguinaldo Industries v CIR - 1982

1. Aguinaldo is a domestic corp with two businesses:
a) manufacturing of fishing nets (tax exempt) and b)
manufacturing of furniture, each with its own Division
and separate books. It bought land in Rizal for its
FISH NETS division. Later, it sold this land and
booked the profit as MISCELLANEOUS income
under FISH NETS division.
2. The BIR examiner said that it had deducted

P60,000 as additional compensation paid to its
officers but that it took this amount from the abovementioned PROFIT and claimed it as expenses of
selling the land. It disallowed the deduction.
3. Petitioner claimed that these were legitimate
business expenses and was paid as allowance or
bonus to its officers
Atlas Consolidated Mining v CIR - 1981
1. Was the bonus given to its officers

considered as ordinary & necessary business
expense and therefore deductible?
NO, the records show that the sale was

effected through a broker who got a
commission and there is no evidence of
any service rendered by the officers.
The taxpayer must show that 1) personal

services have actually been rendered and 2)
that is a reasonable amount
1. Atlas is a mining company. The CIR assessed it

deficiency income taxes of P 500,000 in 1957 and
P200,000 in 1958. This was based on its
understanding that only gold mines were tax-exempt.
Later, becoz of the ruling of the Sec of Finance, the
BIR eliminated the assessment in 1957 and reduced
the P 200,000 to only 39,000.
1. Were the expenses paid for the services

rendered by a PR firm to be considered
allowable deduction as business expense?
NO, it is considered a capital expenditure.

This is based on US jurisprudence where
it was held that expenses incurred to
create a favorable image does NOT make
it a business expense.
test of deductibility: 1) expense must be

ordinary & necessary 2) it must be paid or
incurred in carrying on a trade or business
3) it must be proven by evidence
2. The P 39,000 was for disallowance of certain

items claimed by Atlas as deductible from gross
income. Atlas still protested. The contested
deductions were for: transfer agent's fee,
stockholders relation service fee, US stock listing
expenses, suit expenses, & provision for
contingencies.
2. Was the US stock listing fee to be

considered allowable deduction?
YES, because it is made annually to the

stock exchange for the privilege of having
its stock listed. It is therefore ordinary &
necessary.
An expense is necessary - when it is

appropriate & helpful in the development of
the taxpayer's business. It is ordinary when it is normal in relation to the business
of the taxpayer. But there is no hard & fast
rule on this. INTENTION is also important
3. Later, the CTA allowed all the expenses to be

deducted EXCEPT stockholders relation service
fee and suit expenses. Atlas still protested saying it
was paid to a PR firm, a reputable firm in New York,
and that its shares were sold in USA because of this
and should be considered as ordinary & necessary
business expense
3. Were suit expenses to be considered

allowable deduction?
NO,litigation expenses incurred in

defense or protection of title are CAPITAL
in nature and not deductible. It is
considered a part of the cost of the
property.
1. Don Pedro Roxas and wife, both Spanish,

transferred to their grandchildren some agricultural
lands in Batangas, a house & lot in Manila, & shares
of stocks in diff corps. The grandchildren formed a
partnership called ROXAS CIA to manage the
properties.
1. Was Roxas Cia liable for payment of fixed

tax on real estate dealers? Since the CIR
claimed that it subdivided the farm lands and
sold them to the farmers on installment.
NO, it was an isolated transaction and

was done only to obey the request of
government. It was done only because
the government couldn't come up with
enough funds to pay and the Municipal
Council of Batangas even passed a
resolution expressing the people's
gratitude.
2. After the war, the government convinced them to

sell the agricultural lands to farmer-tenants for P 2
million. They agreed but the government didn't have
enough money to pay. So, it set up a Rehabilitation
Finance Corp which will advance P 1.5 million to
ROXAS CIA and the farmers can buy the lands on
installment basis.
2. Is the profit derived from the sale of its

Batangas lands considered an ordinary gain
and thereby 100% taxable?
NO, since Roxas is not considered in the

business of selling real estate, the lands
sold are CAPITAL assets and the gain is
taxable only up to 50%
3. Meantime, after 2 of the brothers had married and

resided somewhere else, Jose (the remaining
brother) continued to stay at the Manila house and
paid rent on it of P 8,000 / year to ROXAS CIA
3. Were representation expenses allowed as

deductions? (tickets for a banquet given in
honor of Sergio Osmena & gifts given to
various persons)
NO, they could not show any

connection between their business
the representation expense.
Deductions must be proved by the taxpayer

to be reasonable, ordinary and necessary,
and incurred in connection with his business.
4. The CIR assessed it deficiency REAL ESTATE

DEALER'S TAX on the house rentals from Jose;
deficiency SECURITIES DEALER'S TAX on its
profits from the purchase & sale of securities; &
deficiency INCOME TAXES on is unreported NET
PROFITS from the sale of the Batangas lands. It
also disallowed various deductions claimed.
4. Were contributions to the Christmas funds

of the Pasay city Police, Pasay City Firemen,
& Baguio City Police allowed as deductions?
NO, becoz these were not spent for

PUBLIC purposes but as Christmas gifts
to the families of these public officials.
a contribution to a government entity is

deductible when used EXCLUSIVELY for
public purposes
Roxas v CTA - 1968
5. ROXAS protested and the CTA sustained the

assessment EXCEPT the SECURITIES DEALER'S
tax and the deductions for contributions to the Phil.
Air Force chapel and Hijas de Jesus's Retiro de
Manresa. ROXAS protested again.
5. Were contributions to the Manila Police

trust fund allowed as deductions?
YES, because these are intended to be

used exclusively for public purposes
6. Were contributions to a group of civicminded citizens organized by the Philippines

Herald for Manila's neediest families allowed
as deductions?
NO, becoz the Philippines Herald is not a

corp but an association organized
exclusively for charitable purposes.
7. Were contributions to Our Lady of Fatima

Chapel at the FEU allowed as deductions?
NO, becoz FEU gives dividends to its

stockholders and becoz the chapel has
not been shown to belong to the Catholic
Church or to any religious org
8. Was ROXAS liable for real estate dealer's

tax on its income from Jose's rentals?
YES, even if the rentals came from a

partner, the law did not specify a
difference from where the rentals came
from. As long as you receive rentals, you
are liable for the real estate dealer's tax
1. Mr. Zamora owned the Bay View Hotel & Farmacia

Zamora. In 1944, he bought 2 parcels of land & sold
them in 1951. The CIR found that in his income tax
return, he failed to include his capital gains from the
sale of real properties and that he claimed
deductions which were not allowable. He was
assessed deficiency income taxes.
1. Were the expenses of his wife who went to

Japan & USA to puchase machinery & to
observe hotel management in modern hotels
to be considered as PROMOTION
EXPENSES and thus allowable as
deductions? Even if she could not produce
enough supporting receipts?
NO, only 50% was allowed because: 1)

she had obtained only P 5,000 from the
Central Bank in her application for dollar
allocation 2) she stated that she went
abroad for a combined medical &
business trip 3) she could not even
remember how much money she had
spent or how she had spent P 20,000
2. Mr. Zamora protested
2. Should the rate of depreciation on his hotel

be 3.5% and not 2.5% as claimed by the
CTA? Since the location is now becoming a
commercial district, and the hotel has no
room for improvement & it is old-fashioned
already
NO, the CTA had already taken those

factors in account.
3. Was the valuation of the CTA on this 2

parcels of land incorrect? Since it was
purchased by using 1/2 Phil currency and 1/2
Japanese War notes?
NO, the CTA used the Ballantyne Scale of

values which was a fair valuation of the
currencies of that time.
Zamora v CIR - 1963
Expenses
Claims for deductions of promotion expenses

must be substantiated by records showing in
detail the amount & the nature of the
expenses incurred.
Requirements for Deductible Claims

1) sufficient evidence - such as OR
2) a direct connection of the expense to the development, management, operation, and / or conduct of the trade, business or profession
* payments of bribes & kickbacks are not deductible
Special Deductibles for Private Educational Institutions
1) they are allowed to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred for the expansion of school facilities
2) they are allowed to deduct allowance for depreciation of the above
CM Hoskins & Co v CIR - 1969
1. CM Hoskins is a domestic corp engaged in the

real estate business as brokers, managing agents, &
administrators. Mr. C.M. Hoskins owns 99.6% of the
corp and was the company President. He was also
Chairman of the Board and received salary and
bonuses and got 50% share of the sales
commissions earned by the company. He also got
50% of the supervision fees received by the
company as managing agents of Paradise Farms
subdivision.
2. On its income tax return, the CIR disallowed 4

items of deduction & assessed it deficiency income
taxes. CM Hoskins protested
1. Was the 50% share of Mr. Hoskins in the

supervision fees received by the company
allowable as deductions? Since the CIR
claime this amount to be inordinately large
NO, becoz while a ONE-time fee could be

considered fair & deductible as an
expense, in this case, Mr.Hoskins was
receiving these supervisory fees EVERY
YEAR regardless of whether services
were actually rendered by him. Also if it
was allowed, his total compensation
would be DOUBLE the company's own
net income.
Test of Reasonableness for Bonuses: 1) the

payment of bonuses is in fact compensation
2) it must be for personal services actually
rendered 3) the bonuses, when added to the
salaries, are reasonable when measured by
the amount & quality of the services
performed with relation to the business of the
taxpayer
2. What if the company had a policy of

equally sharing its sales commissions with its
salesmen?
NO, becoz this is not about sharing

commissions, this is about sharing
supervision fees
The Employer has the RIGHT to fix the

compensation of its employees but for
income tax purposes, the employer cannot
legally claim such bonuses as deductible
expenses unless they are shown to be
reasonable
1. Mr. Calano got a permit to solict & receive

contributions for the orphans & destitute children of
the Child Welfare Workers Club . He then financed
& promoted a boxing & wrestling event at Rizal
Memorial station. Before the event, he applied with
the CIR for exemption of payment of amusement
taxes.
1. Was the payment for police protection

allowable as deductions?
NO, this is illegal because it is a

consideration given to the police for the
performance of their functions as required
of them by law.
2. After the event, the CIR found that the net profit
was only P 1,375. It found several questionable
items deducted as business expenses. The CIR
then denied the exemption and demanded payment
of amusement taxes.
2. Were the expenditures for parties, gifts,

and other items of representation allowable?
NO, they were excessive, considering that

the purpose was for a charitable cause
1. Should the resident & non-resident officers

of the company have been treated equally in
terms of bonuses?
YES, becoz according to the company,

both non-resident officers and resident
employees had given the SAME amount
of efficient personal service to deserve
equal treatment in compensation. Even if
their yearly salaries had been much
smaller.
General rule: Bonuses to employees made

in GOOD FAITH and as ADDITIONAL
compensation for the services actually
rendered are deductible provided that such
payments, when ADDED to the salaries, do
NOT exceed a reasonable compensation
So, there is NO SPECIAL REASON to

grant GREATER bonuses to lower
ranking officers than those given to their
non-resident higher officials.
There is no fixed text for determining

REASONABLENESS.
Calanoc v CIR - 1961
Kuenzle & Streiff, Inc v CIR - 1959

1. Kuenzle is a domestic corp engaged in the
business of importing textiles, hardware, sundries,
chemicals, pharmaceuticals, lumbers, groceries,
wines, & liquor. On its income tax return, it deducted
items for salaries, directors' fees, bonuses for its
officials and employees, & interest on earned but
unpaid salaies & bonues of this employees.
2. The CIR disallowed these deductions and

assessed it deficiency income taxes. Later, upon reexamination, it allowed all items to be deducted
EXCEPT the bonues insofar as they EXCEED the
salaries of the recipients and the INTERESTS on
earned but unpaid salaries & bonuses.
2. Can the bonuses given IN EXCESS of the

yearly salaries of the employees be allowable
as deductions?
YES, becoz of the determination of

reasonableness factors: 1) the post-war
policy of the company in giving low
salaries becoz of the unsettled conditions
2) the imposition of government controls
on the use of foreign exchange 3) the
payment of bonuses amounts to only a
little more than the yearly salaries
3. Were the interests on earned but unpaid /

unclaimed salaries & bonuses allowable as
deductions?
RR 10-02
NO, becoz these were not incurred from

debt. It is not the company's fault if the
employees did not claim their salaries &
bonuses.
Representation Expense - expenses incurred in connection with the conduct of his trade, business, or profession in:
a) entertaining, providing amusement & recreation to, or meeting with guests
b) at a dining place, place of amusement, country club, theater, concert, play, sporting event, & similar places
- if the taxpayer is the registered member of a country, golf, or sports club, the presumption is that the expenses are FRINGE BENEFITS subject to
the FRINGE BENEFIT TAX unless the taxpayer can prove that these are actually representation expenses
Entertainment Facilities - refers to a yacht, vacation home or condominium & similar item of real or personal property used by the taxpayer
primarily for entertainment, amusement, or recreation of guests or employees
- it must be owned or form part of the taxpayer's trade, business, or profession or for which he claims a rental expense
- a yacht is considered an entertainment facility if its use is NOT RESTRICTED to specified officers or employees as to make it a fringe benefit
The ff are NOT considered entertainment, amusement, & recreation expenses
1) those that are treated as compensation for fringe benefits
2) expenses for charitable & fund-raising events
3) expenses for bonafide business meeting of stockholders, partners, or directors
4) expenses for attending or sponsoring an employee to a business league or professional org meeting
5) expenses for events organized for promotion, marketing, & advertising including concerts, conferences, seminars, workshops, conventions, etc
6) other expenses of a similar nature
* but these may STILL be qualified as deductible if they pass the requisites below
Requisites of Deductibility for Entertainment, Amusement, & Recreation Expense
1) it must be paid or incurred during the taxable year
2) it must be directly connected to the development, management, & operation of the trade, business or profession of the taxpayer
3) it must NOT be contrary to law, morals, good customs, public policy, or public order
4) it must not have been paid to an official of the government as a bribe or kickback
5) it must be substantiated by adequate proof
6) it must have been withheld and paid to the BIR
The Ceiling for the above is:
1) for taxpayers engaged in sale of goods or properties
2) for taxpayers engaged in sale of services, including exercise of profession
and use or lease of properties
Interests
Ceiling
0.5% of NET SALES
1 % of NET REVENUE
Interests paid on debts are allowed as deduction but:

1) these must be in incurred in connection with the taxpayer's profession, trade, or business
2) that the allowable deduction is only 42% of the interest income subject to final tax (reduced to 33% starting 2009)
Exceptions
1) if the taxpayer incurred an indebtedness on which an interest is paid IN ADVANCE or through discount, and the CASH-BASIS accounting
method is used, the interest expense is allowed as deduction in the year when he has fully paid his liability.
2) if the indebtedness is payable in amortizations, the amount of interest corresponding to the amount of principal amortized is allowed as deduction
3) if the indebtedness is incurred to finance petroleum exploration
4) if the taxpayer & the person to whom the payment as been made are the following persons: (Sec 36-b)
- members of a family
- between an individual & a corp where more than 50% of the outstanding stock of the corp is owned by the individual
- between two corps where more than 50% of the outstanding stock of each is owned by the other, or by same individual
- between the grantor & a fiduciary of any trust
- between the fiduciary of a trust & the fiduciary of another trust if the same person is a grantor with respect to each trust
- between the fiduciary of a trust & the beneficiary
Picop v CA - 1995
1. Was Picop liable for the 35% transaction

tax?
YES, the Investment Incentives Act did

NOT include exemption from the
transaction tax becoz this is an INCOME
tax and supposed to be paid by the
lenders. The borrower should have
withhold the tax on the interest earnings
of the lender. Since it did not withhold it, it
is now liable for it.
2. Was Picop liable for the interest &

surcharge on the upaid transaction tax?
NO, becoz the transaction tax was not

included in the section of the 1977 Tax
Code where penalties may be imposed.
But the new Tax Code already said that
penalties may be imposed on FAILURE
TO PAY ALL TAXES. Lucky for Picop
that this was not given retroactive effect.
3. In 1977, Picop also issued long-term debenture

bonds with a face value of P 100 million. The
proceeds were used to finance its operations. The
CIR assessed it deficiency documentary & stamp
taxes for P 300K. Picop claims tax-exemption under
the Investments Incentives Act.
3. Was Picop liable for documentary &

science stamp taxes?
NO, becoz it was proved that Picop is

NOT in the business of issuing bonds on
a regular basis and that it dedicated the
proceeds of the bonds to carrying out its
registered operations. So, even if the
issuance of bonds are not synonymous
with the manufacturing operations of an
integrated pulp & paper mill, it constitutes
a sufficient connection so as to be taxexempt. The BIR in later years also
adopted the same position.
4. Picop had also obtained loans from foreign

creditors to finance the purchase of machinery &
equipment. In 1977, it claimed deductions on the
interest payments made on these loans. The CIR
disallowed it as it said that the interest payments
should have been CAPITALIZED and claimed as
depreciation expense.
4. Was Picop entitled to deductions for

interest payments on loans for the purchase
of machinery & equipment?
YES, the general rule is that interest

expenses are deductible against gross
income.
5. In 1977, Picop entered into a merger agreement

with Ristan Pulp & Paper Mills & Rustan
Manfucturing Corp (both also BOI-registered). But
before the merge, Rustan had accumulated losses
of P 81 million while Picop had a profit of P 9 million.
Picop claimed P 44 million of Rustan's accumulated
losses as deduction against its 1977 gross income.
It used the NOLCO as basis. The CIR disallowed it
saying that previous losses were incurred by
ANOTHER TAXPAYER, not Picop.
5. Was Picop entitled to deductions for net

operating losses incurred by Rustan Pulp &
Paper Mills?
NO, RA 5186 was given as a very special

incentive ONLY to registered pioneer
firms and ONLY with respect to their
registered operations. The pupose is to
allow these firms to accumulate its losses
in the early years of its business and
offset the losses in the later years when
they are already earning. This privelege
is given only to the SAME ENTERPRISE
engaged in the SAME REGISTERED
OPERATIONS.
5. Picop also claimed deduction for expenses related

to chattel & real estate mortagages required by PNB
from Picop as guarantee on loans. But it dit not
prove this by evidence
6. Was Picop entitled to deductions on certain

claimed financial guarantee expenses?
NO, a taxpayer has the burden of proof

for claimed deductions. Since Picop did
not provide sufficient proof, it is not
allowed to deduct
1. Picop is a domestic corp registered with the BOI

as a preferred pioneer enterprise with respect to its
integrated pulp & paper mill and as a preferred nonpioneer enterprise with respect to its integrated
plywood & veneer mills.
2. In 1977, Picop issued promissory notes of about P

230 million on which it paid P 45 million in interest.
The CIR assessed it deficiency transaction tax. Picop
claims tax-exemption under the Investment
Incentives Act
Long-term bonds are not considered

commercial papers and are NOT subject to
the transaction tax.
General rule: Net Operating Losses

CANNOT be carried over for those corps that
are NOT registered with the BOI as a
preferred pioneer enterprise. Losses may be
deducted from gross income ONLY IF such
lossess were actually sustained in the SAME
YEAR that they are deducted.
6. The CIR assessed Picop for deficiency income

taxes in its 1977 income tax return claiming that it
understated its sales & overstated its costs. Picop
claimed that this was due to difference in
EXPECTED exchange rate versus ACTUAL
exchange rate for its dollar exports & dollar
expenses.
7. Did Picop understate its sales & overstated

its cost of sales in 1977?
YES, it could provide no proof that it did

otherwise. The explanation was weak.
6. The CIR also assessed Picop for deficiency

corporate development tax. Picop protested claiming
tax-exemption.
8. Was Picop liable for the corp. development

tax of 5% of net income in 1977?
YES, this is an income tax so Picop is not

exempted.
1. Can the interest on the LATE PAYMENT of

donor's tax be claimed as deduction in
income tax return?
YES, a tax is considered a "debt".

Interest on taxes is interest on
indebtedness and is thus deductible.
CIR v de Prieto - 1960

1. Ms. Prieto gave her four children gifts of real
property with a value of P 890K. But the CIR valued
the property at P 1.2 Million and assessed donor's
tax of P 110,000. Mrs. Prieto paid it, but since P
50,000 of that were for interest on the total
delinquency, she later claimed P 50,000 as deduction
on her income tax return.
a tax is a DEBT for which a creditor's bill may

be brough in a proper case.
2. The CIR disallowed the deduction claim becoz in

order for interest to be deductible, there must be
shown to be an indebtedness.
RR 13-00
Requisites for Deductibility of Interest Expense

1) there must be an indebtedness
2) there should be an interest expense paid or incurred upon the indebtedness
3) the indebtedness must be that of the taxpayer
4) the indebtedness must be connected with the taxpayer's trade, business, or exercise of profession
5) the interest expense must have been paid or incurred during the taxable year
6) the interest must have been stipulated in writing
7) the interest must be legally due
8) the interest payment arrangement must not be between related taxpayers as specifiec in Sec 34 (B)
9) the interest must not be incurred to finance petroleum operations
10) in case the interest was incurred to acquire property used in trade, business, or exercise of profession, it was not
treated as capitabl expenditure
Beginning Jan 1, 2000, the amount of interest expense that can be deducted shall be reduced by 38% of the interest income earned on the year
ex.
Net Income before Interest Expense
P 1,000,000
Less: Interest Expense
P 150,000
Less: 38% of interest income from deposit of
P 200,000 =
76,000
Deductible Interest Expense
74,000
Taxable Income
P 926,000
* Interest incurred or paid on ALL UNPAID BUSINESS-RELATED TAXES are FULLY DEDUCTIBLE and are not subject to the above limitation
* if the interest expense was incurred to acquire property used in trade, business, or exercise of a profession it is taxpayer's option to:
1) either deduct it in full in the year it is incurred
2) or to treat it as a capital expenditure and claim as deduciton only the periodic amortization
Interest Arbitrage
BIR Ruling 006-00
1. PNB received income from treasury bonds. It is

seeking BIR approval to allow it to deduct interest
expense WITHOUT considering its interest income.
Taxes (Sec 34)
1. Can it deduct interest expense 100%
NO, becoz to allow it to do so would give

it undue benefit of a TAX SPREAD. If it
can deduct interest expense 100% and
pay only 20% withholding tax on its
interest income, then it would be earning
from this tax loophole. So, it can only
deduct interest expense but MUST BE IN
CONSIDERATION of its interest income.
See above computation.
Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade, or business are deductible
Exceptions
1) the income tax provided for under this Title
2) income taxes imposed by a foreign country (but it shall be allowed if the taxpayer does not signify his desire to enjoy any benefits of tax credits
for taxes paid to foreign countries as specificied in paragraph 3). - only for those income sourced OUTSIDE the Phils.
3) estate & donor's taxes
4) taxes assessed against local benefits of a kind tending to increase the value of the property assessed
* if the above taxes are refunded or credited, they shall form part of the gross income
CIR v Lednicky - 1964
1. Mr. & Mrs. Lenicky are American citizens residing

in the Phils who have derived all their income from
Phil sources. In 1957 they filed their income tax
return and duly paid income tax of about P 320,000.
2. In 1959, they filed an amended income tax return

for 1956 and claimed a deduction of P 200,000 for
income taxes paid to the US government. They then
requested a refund of P 112,000.
1. Can a US citizen, residing in the Phils who

derived all his income from the Phils, deduct
from his income tax the amount of income
taxes paid to the US government? Since they
did NOT signify their desire to avail of any
benefits of tax credits for taxes paid to foreign
countries
NO, the right to deduct income taxes paid

to foreign governments is given ONLY as
an ALTERNATIVE to the right to claim a
tax credit for such foreign income taxes.
But since ALL their income is derived from
Phil sources, then they don't have the
right of any tax credit. So, they also don't
have the right to deduct.
If this were allowed, any increase in taxes of

foreign governments would result in
decrease in our own tax collection. It doesn't
make sense
If there was any double taxation, it should

be the USA who gives relief since the
income was earned in the Phils so the
Phils should benefit from the income tax.
3. Basically, they did similar thing of paying income

tax and then later amending it by claiming deductions
for taxes paid to the US government. They did this
for many years.
Losses
Losses actually sustained and NOT compensated for by insurance or other forms of indemnity are DEDUCTIBLE:
1) if it was incurred in trade, profesion, or business
2) for property connected with the trade, business, or profession if it arises from fires, storms, shipwreck, or other casualties, or from robbery, theft
or embezzlement
* Exception - if the loss has already been claimed as deduction for estate tax purposes, it is no longer deductible from gross income
RR 12-77
Casualty - the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature
- the taxpayer bears the BURDEN OF PROOF
NOLCO
Net Operating Loss - the excess of allowable deduction over gross income of the business in a taxable year
Net Operating Loss Carry-over (NOLCO) - only beginning Jan 1, 1998
- the net operating loss of the business which has not been previously offset as deduction shall be carried over as deduction from gross income
for the NEXT 3 consecutive years immediately following the year of such loss
- this is allowed only if there has been NO SUBSTANTIAL change in ownership of the business:
1) where not less than 75% of outstanding shares in the business is in the name of a corp of held by the same persons
2) where not less than 75% of the paid-up capital of the corp is held by the same persons
- for mines OTHER than oil & gas wells, a NET OPERATING LOSS without the benefit of incentives provided for by the Ominubs Investments Code of
1987, may be carried over as deduction for the next 5 YEARS immediately following the year of loss
RR 14-01
Various Provisions
1) NOLCO is allowed regardless of the change in ownership of a company, in case of a merger where the taxpayer who accumulated the NOLCO
is the surviving entity
2) If the NOLCO arises from a merger, consolidation, or combination, the transferee / assignee is NOT entitled to claim the same NOLCO as deduction
UNLESS the transferor GAINS CONTROL of at least 75% of the outstanding issues or paid-up capital of the transferee
3) NOLCO is NOT transferrable or assignable to another person - EXCEPT if there has been NO SUBSTANTIAL CHANGE in the ownership of the
business in that NOT LESS than 75% of the paid-up capital of the business is held by the same persons
4) an individual who claims the 10% OPTIONAL STANDARD DEDUCTION cannot claim deduction of NOLCO simultaneously. Even if the NOLCO was
not claimed, the 3 year period shall continue to run
5) if the taxpayer paid its income tax under the MCIT computation, the 3 year period still runs
Those NOT Qualified for NOLCO:
1) Offshore Banking Units of a foreign banking corp and FCDU of a domestic banking corp
2) an enterprise registered with the BOI enjoying the Income Tax Holiday incentive
3) an enterprise registered with the PEZA
4) an enterprise registered with SBMA
5) foreign corp. engaged in international shipping or air carriage business in the Phils
6) any person, natural or juridical, enjoying exemption from income tax
BIR Ruling 30-00

1. Republic Cement & Fortune Cement are domestic
corps, listed in the stock market, engaged in the
manufacture & sale of cement. BCPI has
ownership in several companies including several
cement corporations which are all in a NET LOSS
position.
2. BCPI extended a loan to Alsons Cement for US$
41 million, payable either in cash or in shares of
Alson's holdings in Iligan Cement. In 1999, Republic,
Fortune, & Iligan propsed to integrate their cement
businesses under a single management structure.
This entailed a lot of transfer of shares in many
corporations which are too complicated to explain.
3. BCPI is now asking the BIR to confirm that NO

GAIN or LOSS is recognized on the transfers
because after the transfers, BCPI & other companies
hold more than 51% of the total voting stock of
Republic. Also that the NET OPERATING LOSS of
Republic, Fortune, & Iligan are preserved after the
share swaps because there was no substantial
change in ownerships of the companies.
Forex Losses
BIR Ruling 206-90
1. Can the NOLCO be preserved?
YES, becoz the corps were not dissolved

but were merely integrated for a specific
bona fide business purpose so that there
is no substantial change in ownership of
each company.
1. Mariwasa is a domestic corp which has existing

US$ loans from Noritake & Toyota Tshusho Corp. In
1989, they agreed to convert the loans to peso which
was approved by the Central Bank
1. Can forex losses be deducted? But the

payment of the loan is not yet due.
NO, when foreign currency is acquired in

connection with the regular course of
business, ordinary gain or loss results
from the fluctuations. Such loss is
deductible ONLY in the year it is
actually sustained. But since the loans
have not actually been paid YET,
therefore the losses have not yet been
realized and are not deductible YET.
2. They are asking the BIR to approve that the LOSS

on conversion of US$ loans to pesos be allowed as
deductible from their gross income. They claimed
that since the Central Bank has already approved the
conversion, then the rate has been fixed and they
already incurred a loss.
BIR Ruling 144-85
1. Can forex losses which have accrued by

reason of devaluation be deductible? These
losses arose from matured but unremitted
principay payments on loans.
NO, since the principial has not yet been

remitted, no loss has been incurred YET.
Annual increase in value of an asset is NOT

taxable income because such increase has
not yet been realized. The increase in value
can only be taxed when such is disposed and
there was a gain. The same is true of
decrease in value. It is only when the
decrease is realized, before it is allowed to
be deducted.
1. Are media advertising expenses

considered ordinary & necessary
expenses?
NO, it was only necessary, but it wasn't

ordinary. It failed the "reasonableness"
test. Also, it was a capital outlay to create
goodwill for the product so it's considered
a capital expense to be spread out over a
reasonable time.
efforts to establish reputation are similar to

the acquisition of capital assets and therefore
expenses related to these are not business
expenses but CAPITAL expenses
Also, the amount was almost 1/2 of its

total claim for marketing expenses. There
were also claims for other marketing
expenses so that it was unreasonably
large.
There is NO hard & fast rule to test the

reasonbleness. Many factors must be taken
into account.
Finally, Gen Foods also admitted that the

expense was incurred "in order to protect
its brand franchise" This is analogous to
maintenance of goodwill or title to one's
property.
Two kinds of advertising: 1) to stimulate

CURRENT sales 2) to stimulate FUTURE
sales. The first can be considered business
expense, the 2nd must be spread out over a
reasonable period of time
CIR v General Foods - 2003

1. Gen Foods is a domestic manufacturing corp of
beverages such as Tang, Calumet, & Kool-aid. In its
1985 tax return, it claimed as deductions P 9 million
for media advertising expense. It also claimed 2.6
million for other adveritising & promotions expense,
and P 1.5 million for consumer promotion.
2. The CIR disallowed 50% of the P9 million claiming
the amount to be unreasonably large and assessed
it deficiency income taxes. Gen Foods protested
saying that business conditions were poor after the
Aquino assasination.
Bad Debts
Bad Debts - are deductible, provided that:

1) there is an existing indebtedness due to the taxpayer which is valid & legally demandable
2) they are connected with the trade, business, or profession of the taxpayer
3) they are actually ascertained to be worthless & charged off within the taxable year
4) they were not sustained between those parties specifically mentioned in Sec 36(B)
5) if they are recovered, they should be included as part of gorss income in the year of recovery - TAX BENEFIT RULE
Securites becoming Worthless - this is considered to be a LOSS FROM SALE of CAPITAL ASSETS on the last day of the taxable year
except for a bank or trust company (becoz their business is the receipt of deposits)
RR 5-99
Bad Debts - are debts resulting from worthlessness or uncollecability of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered
How to ascertain if its worthless?
- can't be just because it is of doubtful value or difficult to collect
- it must depend on the particular facts & circumstances of each case
- ex. If the amount is too small and the collection through court action may be more costly to the taxpayer, this can be considered bad debts
Other Considerations to Demonstrate the Uncollectibility of a Debt
1) the value of the collateral
2) the financial condition of the debtor
3) the assignment of the case for collection to an independent collection lawyer & his sworn testimony
Exceptions
* if it is a bank, the BSP is the one that will ascertain the worthlessness & uncollectibility of bad debts
* if the receivable is from an insurance company, it cannot be claimed as bad debt unless the insurance company has been declared closed or
insolvent by the Insurance Commissioner
Phil Refining Company v CTA - 1996
1. PRC, now UNILEVER, deducted P 395,000 as

bad debts from its income tax return. This was
disallowed by the CIR which resulted in its deficiency
income taxes. PRC protested
1. Can these specific debts be considered

bad debts & worthless? Since PRC claims
that it is the one who should decide whether a
debt is bad or not.
NO, becoz PRC failed to submit enough

evidence to support their claim. They only
presented an explanation by their
accountant and NO documentary
evidence of all their allegations.
2. PRC claims that: 1) one customer's store was

burnt down with nothing left that can be garnished 2)
one customer was murdered & left no assets 3) one
customer's goods were hi-jacked 4) a former
employee who owes them money can't be found 5)
one customer lost his stocks through robbery and
became bankrupt 6) one customer is a foreign corp
and it would be more costly to sue them in their own
country 7) one customer is a government agency so
that PRC did not file suit against it
The ff steps must also be proved to be

undertaken by taxpayer: 1) sending of
statement of accounts 2) sending of
collection letters 3) giving the account to a
lawyer for collection 4) filing a collection
case in court
Fenandez Hermanos Inc v CIR - 1969

1. Fernandez is a domestic corp engaged in
business as an investment company. They were
assessed deficiency income taxes due to some
discrepancies on their deductible claims.
2. They claimed losses on worthlessness of shares
of stock in Mati Lumber since it was no longer in
operation.
Requisites to determine worthlessness: 1)

there is a valid & subsisting debt 2) the debt
must be actually ascertained to be worthless
& uncollectible during the taxable year 3) the
debt must be charged off during the taxable
year 4) the debt must arise from the
business or trade of the taxpayer 5) the
taxpayer must show that it its uncollectible
EVEN in the future
1. Can the losses in Mati Lumber be

deducted? Since the owner of Mati had been
proven to have left for Spain and died there
and had left no assets.
YES, there was sufficient evidence.
3. They claimed bad debts on Palawan Mines which

had requested financial help to enable it to resume
its mining operation. The company lent it money on
the condition that Palawan will pay it 15% of its net
profits. But after 5 years of cash advances, Palawan
still suffered losses so that finally, the company
became convinced that it could no longer recover the
cash advances and wrote them off as bad debts
even if Palawan was STILL IN OPERATION.
2. Can the cash advances to Palawan be

considered bad debts? Since the company
gave advances to Palawan WITHOUT
expectation of repayment.
NO, becoz these advances are

considered INVESTMENTS, not LOANS.
The record showed that the two
companies had the SAME BOARD OF
DIRECTORS. Also, the agreement
clearly shows that it did not expect to be
repaid. And finally, there cannot be a
PARTIAL deduction of bad debts.
4. They claimed losses in its operation of Balamban

Coal Mines. The mine was actually abandoned in
1952. However, Fernandez had claimed the losses
in 1950 & 51 saying that since the road to the mine
was not constructed, it could not and did not sell any
coal during these years.
3. Can the claims for losses be deductible in

1950 & 51? Or should it be in 1952 when the
mine was abandoned?
NO, it can only be claimed in 1952

because some definite event must fix the
time when the loss is sustained. The
event is the abandonment of the mine.
5. They claimed a depreciation allowance for its

buildings at an annual rate of 10%. But the CIR said
the reasonable rate should have been 3%
4. Was the 10% per annum depreciation rate

excessive?
YES, there was no evidence to justify that

the buildings had a useful life of only 10
years.
6. They had an increase in net worth coming from an

error in its insurance company's books so that it
appeared that its liability to creditors was actually
LOWER. The CIR claimed this to be taxable.
5. Was the apparent increase in net worth

taxable? Since it arose from the insurance
company's bookkeeping error?
NO, the increase was not the result of

receipt by the company of unreported or
unexplained taxable income. It was
merely the result of the correction of erro
relating to its indebtedness to its creditors.
It cannot be considered income and
therefore is not taxable.
7. Since Palawan Mines could not repay its debt, it

transferred its CONTRACTUAL RIGHTS to
Fernandez as partial payment. The company then
deducted 1/5th of the amount as DEPLETION
CHARGE claiming as basis their engineer's estimate
that the mine would be exhausted in 5 years. The
CIR disallowed this.
6. Can it deduct 1/5th of the value of the

contractual rights EVEN IF it had not actually
used the mine nor sold the products?
NO, the exhaustion must be BY

PRODUCTION. The Tax Code provides
allowance for depletion of mines ONLY for
that which has been mined and and the
products actually sold during the year.
Depreciation
Depreciation - the gradual dimunition in the useful value of tangible property resulting from wear & tear & normal obsolescense
A reasonable allowance for Depreciation due to wear & tear or exhaustion of property is deductible.
Some Methods to determine Reasonable Allowance
1) straight-line
2) declining balance
3) sum-of-the-years-digit
- if the taxpayer & the CIR had come to an agreement on the useful life on which depreciation will be based, this agreement will be considered binding
Some cases of Depreciation
1) for properties used directly in production of Petroleum
2) for properties used indirectly in production of Petroleum
3) for properties used in Mining Operations
4) for non-resident aliens engaged in trade or business here, or resident
foreign corps
Basilan Estates v CIR - 1967
Alllowed Depreciation
10 years based on either straight-line or declining balance method
5 years using straight-line
if expected life is 10 years or less - normal rate of depreciation
if expected life is more than 10 years - notification to the CIR
a reasonable rate is allowed ONLY on properties located in the Phils
1. Basilan is a domestic corp engaged in the coconut

industry. It had been assessed deficiency income
taxes for certain disallowed depreciation, travelling
expenses, miscellaneous expenses, & unreasonably
accumulated profits.
2. Up to 1949 it had claimed deductions for

depreciation of its assets on the basis of acquisition
cost. But in 1950 it changed the depreciable value of
said assets by increasing it to conform with the
increase in cost for their replacement. The CIR
allowed it depreciation based on the SAME OLD
ASSETS only, not at the reappraised value.
1. Should the depreciation be based on ONLY

on the acquisition cost and cannot be on the
reappraised value of assets?
YES, becoz anything BEYOND the

acquisition cost is already considered
PROFIT.
3. They had claimed travelling & miscellaneous

expenses for when its company President travelled
to Manila. The CIR said it did not prove this by
receipts. But Basilan claimed that the receipts had
been lost to a fire and that its already beyond 5 years
so they had no obligation to keep the receipts.
2. Can the CIR still demand for receipts

beyond the 5 year period?
NO, the requirement is to keep them only

for 5 years.
3. Was the amount unreasonably high so as

to be considered unreasonably accumulated?
YES, becoz 1) its assets to liabilities

ratio was 6:1 2) the P 200,000 it had
previously reserved for drier & machinery
and malaria control had already reverted
back to it 3) it allowed shareholders to
withdraw large sums of money as
personal loans 4) it invested in unrelated
businesses 5) it increased its capital
stock without any need for doing so
1. Petitoner is a corporation engaged in the business

of leasing real properties. In 1956, the BIR assessed
it deficiency income tax for underdeclaring its rentail
incomes and claiming excessive depreciation of its
buildings
1. Was the excuse that the previous owners

retained ownership of the land and only later
transferred the ownership to the corporation
valid?
NO, there is no corroborating document

to prove this; only verbal
2. Petitoner claims that 1) previous owners collected

part of the rental income; 2) that their President was
late to turn over the rental collected; 3) that one of
their tenants deposited his rental payment in court
instead of giving it to the corporation; 4) a subtenant's rental should be reported in the next year,
not this year
2. Was the excuse that their President was

late to turn over the rental he personally
collected valid?
NO, also no corrobotation to this
3. Petitioner also claims that the their buildings are

old and out of style so that they are entitled to higher
depreciation
3. Was the excuse that one of their tenants

deposited his rental in court valid?
NO, the reason he did so is because of

the refusal of petitoner to accept the
rental payment; so the petitoner is
deemed to have constructively received
the rental
4. Was the excuse that the sub-tenant's rental

should be reported next year, not in 1956
valid?
NO, rental income is income regardless of

its source
5. Was the excuse that they were entitled to

higher depreciation becoz their buildings were
old & out of style valid?
NO, depreciation is a question of fact and

is not measured by theoretical yardstick
4. The CIR charged it for unreasonably accumulated

profits and it protested claiming these were for
expenses for cultivation, labor, fertilization, drainage,
irrigation, etc. Plus that it had plans to use these
funds for expansion. It also had high expenses in
previous years
An owner is entitled to see that the value of

the property invested is kept unimpaired so
that at the end of any given year, the original
investment remains as it was in the
beginning. Company has the right to claim
depreciation. But the law does not allow
depreciation BEYOND its acquisition cost
Limpan Investment Corp v CIR - 1966
Depletion
Oil & Gas wells or Mines - are allowed a reasonable allowance for depletion or amortization computed using the COST-DEPLETION METHOD
Requisites:
1) when the allowance for depletion equals the capital invested, no further allowance shall be granted
2) after production in commercial quantities has started, certain intangible exploration & drilling costs will be deducted in the year incurred if such
were incurred for non-prodcuing wells or mines OR these may be capitalized & amortized if such were incurred for producing wells or mines in
same contract area
3) if it was a non-resident aliean or a resident foreign corp, the allowance for depletion is limited to oil wells & mines in the Phils
Consolidated Mines v CTA - 1974
1.Consolidated is a domestic corp engaged in
mining. In filed for refund for claimed overpayment
of taxes for the year 1951. But the BIR found several
questionable items:
1. Did the company overstate its depletion?

While Consolidated claimed P 1.7 million, the
CIR said it was only P 131,000.
YES, because it could not give substantial

evidence as to how it arrived at the P 1.7
million figure. Burden of proof is on the
taxpayer
Formula for rate of depletion = cost of mine

property / estimated ore deposit
2. Depletion & depreciation expenses were

overcharged. The CIR & Consolidated both agree on
the MINE COST, but they widely disagree on the
EXPENSES OF DEVELOPMENT BEFORE
PRODUCTION.
2. Did the company correctly deduct its

depreciation expenses? Since these were
allegedly sustained from a deterioration of its
incomplete constructions, the CIR said that
this is not proper depreciation.
NO, since these constructions were

incomplete, they had NOT BEEN USED
and cannot be depreciated yet.
A balance sheet is NOT considered an entry

made in the ordinary course of business. It
only shows a summation of the accounts.
3. The claims for audit & legal fees & other expenses
were not properly substantiated
3. Were the miscellaneous expenses properly

deducted? Since the company was able to
show vouchers & cancelled checks proving
that it did incur these expenses
NO, the vouchers & cancelled checks

only proved that the amounts had been
spent but they DONT prove that the
expenses are deductible. The evidence
should have been receipts
Charitable & other Contributions
Donations to the following are PARTIALLY DEDUCTIBLE:

1) to the Government - exclusively for public purposes
2) to accredited domestic corps or associations - organized & operated exclusively for religious, charitable, scientific, youth & sports development,
cultural or educational purposes, or for the rehabilitation of veterans
3) to social welfare institutions
4) to non-accredited NGOs
* individual - 10% DEDUCTIBLE
* corp - 5% DEDUCTIBLE
Donations to the following are FULLY DEDUCTIBLE:
1) to the Government - exclusively to finance activities in education, health, youth & sports development, human settlements, science & culture, and in
economic development according to NEDA plan
2) to certain foreign institutions or international orgs
3) to accredited NGOs (non-government orgs)
NGO - a non-profit domestic corp organized & operated EXCLUSIVELY for scientific, research, educational, character-building and youth & sports
development, health, social welfare, cultural or charitable purposes, or a combination thereof - NO PART OF THE NET INCOME inures to the
benefit of any priviate individual
* the level of admin expenses cannot exceed 30% of the total expenses
BIR Ruling 19-01

1. Can international orgs with home offices
based abroad be qualified as DONEE
INSTITUTIONS?
Reseach & Development
NO, the requirement of the Tax Code is

that the NGO must be a DOMESTIC
CORP
Expenses for R & D - can be treated as ordinay & necessary expenses provide that:
1) it is incurred during the taxable year
2) it is incurred in connection with his trade or business
Limitations
* taxpayer can either fully deduct it or amortize the deductions
* this is not applicable to the expenses for the acquisition or improvement of land or property to be used in connection with R & D (these are subject to
depreciation or depletion)
* this is not applicable to expenses incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of minerals & oil
3M Phils v CIR - 1988
1. 3M Phils is a subsidiary of 3M USA. It imports,
manufactures, wholesales, & distributes all products
of 3M USA. It agreed to pay a technical service fee
& a royalty on its net sales to 3M USA.
2. It claimed these as deductions on its net income.

The CIR allowed a lowered amount as deduction for
TECHNICAL SERVICE FEE and allowed the royalty
amount to be deducted ONLY ON LOCALLY
MANUFACTURED PRODUCTS. It disallowed
deductions on those items which were WHOLLY
IMPORTED FINISHED PRODUCTS.
Pension Trusts
1. Are the technical service fees & royalties

on imported finished products deductible?
NO, becoz the CB issued a circular on

royalties and it was clear that NO
ROYALTY is payable on the
WHOLESALE PRICE of FINISHED
products impored by the licensee from the
licensor.
Also, the CB Circular has the force &

effect of law.
The employer who establised the pension trust for his employee's benefit can DEDUCT it but:
1) the amount paid to the trust is reasonable
2) the amount must not have been previously allowed for deduction (double deduction)
3) the amount is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the payment is made
Additional Requirements for Deductibility

If the item to be deducted is from gross income is depreciated or amortized, it must be proven to have been WITHHELD & PAID to the BIR, otherwise
it won't be allowed to be deducted
RMO 38-83
Taxes which were not originally withheld & paid but were only paid during audit are DEDUCTIBLE in these conditions:
1) no withholding tax was made but the payee reported the income, and the withholding agent pays during the audit including the penalties
2) no withholding tax was made, and the payeee did not report the income, but the withholding agent pays during the audit including the penalties
3) the withholding agent erroneously under-withheld the tax but pays the difference during the audit
Optional Standard Deduction
Taxpayer, except a non-resident alien, can choose to just have a STANDARD DEDUCTION of 10% of his gross income IN LIEU of all of the above
Non-deductible Expenses
The following are NOT DEDUCTIBLE:

1) personal, living, or family expenses
2) any amount paid for new buildings or for permanent improvements made to increase the value of any property or estate
3) any amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made
4) premiums paid on life insurance covering the life of any officer or employee or if the taxpayer is directly or indirectly a beneficiary under the policy
The following LOSSES FROM SALES or EXCHANGE OF PROPERTY are NOT DEDUCTIBLE if they were incurred:
1) members of a family
2) between an individual & a corp where more than 50% of the outstanding stock of the corp is owned by the individual - EXCEPT IN DISTRIBUTIONS
IN LIQUIDATION
3) between two corps if more than 50% of the outstanding stock of each is owned by the other, or by same individual - EXCEPT IN DISTRIBUTIONS
IN LIQUIDATION
4) between the grantor & a fiduciary of any trust
5) between the fiduciary of a trust & the fiduciary of another trust if the same person is a grantor with respect to each trust
6) between the fiduciary of a trust & the beneficiary
Section 119 - 122, RR 2
The following PERSONAL EXPENSES are NOT DEDUCTIBLE:

1) insurance paid on a dwelling owned & occupied by the taxpayer
2) premiums paid for life insurance
3) when a professional man rents a property for residential purposes but receiveds clients in connection with his work (his place of business being
elsewhere), NO part of the rent is allowable as business expense. But if he uses part of his house as an office, that portion is considered business
expense
4) allowance given by father to children
5) alimony or allowance paid under a separation agreement

The following CAPITAL EXPENSES are NOT DEDUCTIBLE:
1) new buildings, permanent improvements, or any amount spent in restoring property
2) cost of defending or perfecting title to property
3) architect's services
4) expenses for administration of estate, court costs, attorney's fees & executor's commissions
5) amount assessed & paid under an agreement between bondholders & shareholders of a corp, to be used in the reorganization of the corp
5. Esso Standard v CIR - 1989
1. Esso claiming refund from CIR for advance

payment for expenses which should have been
deductible as business expenses
2. Esso claiming that margin fees paid to the Central

Bank should be allowable business expenses
Is the Central Bank authority to establish a

Margin over bank's selling rates of foreign
exhange a POLICE measure or a REVENUE
measure?
It was a POLICE power because the

purpose is to stabilize the currency
When a taxpayer claims a deduction, he

must point to some specific provision of the
statute in which that deduction is authorized
& must be able to prove that he is entitled to
it, BURDEN is on the TAXPAYER
Were the margin fees deductible as business

expense?
NO, they are NOT expenses incurred in

connection with the production or earning
of Esso's income in the Phils; rather, they
were incurred in the disposition of said
income; expenses for the remittance of
funds AFTER they have already been
earned
Test of deductibility: if it is to be a business

expense:
1. the expense must be
ordinary & necessary
2. it
must be paid or incurred within the taxable
year
3. it must be paid or incurred in
carrying on a trade or business
Necessary - when the expense is
his business
Ordinary - when it connotes a payment
which is normal in relation to the business
margin levy - a form of

exchange control designed to
discourage imports &
encourage exports; to curtail
excessive demand upon the
international reserve in order to
stabilize the currency
R. Capital Gains & Losses

Capital Assets
Section 132, RR-2
Section 132, RR-2
Capital Assets - property held by the taxpayer (whether or not connected with his trade or business), but does NOT include:
1) stock in trade
2) other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the year
3) property held by taxpayer PRIMARILY for sale to customers in the ordinary course of his trade or business
4) property USED in the trade or business, of a character which is subject to depreciation allowance
5) real property USED in trade or business - (I AM NOT SURE IF THIS IS STILL VALID. IT MAY HAVE BEEN REVOKED ALREADY, pls check)
As to number 4, there is a limitation. This is limited to the property used in trade or business AT THE TIME OF SALE OR EXCHANGE only
It won't apply to the real property gains or losses to the extent that such gain or loss is ALLOCABLE to the land (which means normal loss / gain) and
not those that were IMPROVEMENTS made by the taxpayer which are subject to depreciation
Percentage taken into account - if the taxpayer is an individual, the following percentage is followed in computing for NET gain or NET loss
1) 100% if the capital asset was held for NOT MORE than 12 months
2) 50% if it was held for MORE than 12 months
Ex. A Merchandising company had ORDINARY net income of P 10,000 and a net capital gain of P 5,000 (held for 1.5 years)
What is the Taxable Income?
It will be P 10,000 + P 2,500 (50% of P 5,000) = P 12,500
Limitation on Capital Losses
Losses are allowed ONLY TO THE EXTENT of gains from such sales or exchanges. Except for a bank where its losses from bonds, notes, etc are
not subject to this limitation. If the taxpayer incurs NET CAPITAL LOSS, such loss CANNOT be deducted from his ordinary income because the
LOSS can be deducted ONLY TO THE EXTENT OF CAPITAL GAINS.
Ex. A taxpayer in buy & sell business, had ordinary income of P 20,000, capital gains of P 5,000 & capital losses of P 3,000
Ordinary Net Income
Gains from sale of capital assets (as from sale of stocks)
50% of such gain
Losses from sale of capital assets
50% of such loss
Net Taxable Capital Gain
P 20,000
P 5,000
x 50 %
P 2,500
P 3,000
x 50%
1,500
Taxable Income
P 1,000
P 21,000
Ex. A taxpayer in buy & sell business, had ordinary income of P 20,000, capital gains of P 2,000 & capital losses of P 7,000
Ordinary Net Income
Losses from sale of capital assets (as from sale of stocks)
50% of such gain
x 50 %
Losses from sale of capital assets
50% of such loss
x 50%
Net Capital Loss
P 20,000
P 7,000
P 3,500
P 2,000
1,000
P 2,500
Taxable Income
* can't deduct capital loss of P 2,500 because you can only deduct to the extent of your capital gains
P 20,000
Net Capital Loss Carry-over - if the taxpayer is an individual, and he sustains a NET CAPITAL LOSS, the loss is treated in the succeeding year as
a loss for a capital asset held for NOT MORE than 12 months (100% credited), but the amount WILL NOT EXCEED the net income for the year the
capital loss was incurred
BIR Ruling 27-02
Steps to Determine the Tax in Real Estate transactions:

1) FIRST - determine the character of property being sold.
IF the property is NOT used in business of seller, it is treated as a CAPITAL ASSET & the gain of the seller is subject to 6% capital gains tax based
on gross selling price or fair market value

IF the property is USED in business of seller, it is treated as ORDINARY ASSET, so that withholding tax rates shall apply
The withholding rates will depend on:
a) whether the seller is EXEMPT or TAXABLE
b) whether the seller is ENGAGED IN REAL ESTATE BUSINESS or not
c) if he is ENGAGED in real estate business, what is the GROSS SELLING PRICE?
Different Scenarios of Sale of Real Property: (assuming the seller is NOT exempt & the property is AN ORDINARY ASSET)
Seller
Buyer
Tax Treatment
1) corp engaged in real estate
Creditable withholding tax based on gross selling price or fair market
business
business
value is deducted by the BUYER (to be credited to the seller)
if selling price if P 500,000 or less
1.5%
if it is P 500,000 to P 2 million
3%
if it is above P 2 million
5%
business
2) corp NOT engaged in real estate

business
same as above
3) corp NOT engaged in real estate

business

business
if property is considered ORDINARY asset -6% creditable withholding

if property is considered CAPITAL asset - final tax of 6%

business
4) individual buyer NOT engaged in

trade or business
if it was on installment (payments in the year of sale does NOT

exceed 25% of the selling price), NO WITHHOLDING TAX on
periodic installments, it will be withheld on the LAST payment
if it was on cash basis or deferred payment (payments in the year
of sale EXCEED 25% of selling price), buyer withholds the tax
on the first installment

business
5) individual buyer engaged in

trade or business
if it was on installment - tax withheld by buyer on EVERY installment

if it was on cash or deferred payment - buyer withholds the tax
on the first installment
installment plan - where the total payment in the year of sale DOES NOT exceed 25% of the total selling price
deferred payment plan - where the total payment in the year of sale EXCEEDS 25% of the total selling price
Ordinary Income
Section 22 (Z) , Tax Code
Ordinay Income - any gain from sale or exchange of property which is NOT A CAPITAL ASSET
Net Capital Gain - the excess of the gains from such sales or exchanges of capital assets over the losses from such sales or exchanges
Net Capital Loss - the opposite of the above
Percentage taken into Account
If the taxpayer is NOT a corp, the ff percentages of the GAIN or LOSS in sale or exchange of a CAPITAL ASSET shall be taken into account to
compute for the NET CAPITAL GAIN or NET CAPITAL LOSS & NET INCOME
1) if asset was held for NOT MORE more than 12 months
100%
2) if asset was held for MORE than 12 months
50%
Limitation on Capital Loss
Losses from sales or exchanges of CAPITAL ASSETS are allowed ONLY TO THE EXTENT of the GAINS from such sales or exchanges
* except for a bank who incurs losses from sale of bonds, notes, etc. - where it shall be allowed consideration for the entire amount
* so IF you incur capital losses, and you're not a bank, the most that you can claim as losses is the amount of capital gains. If your losses are more
than your gains, at the end of the year, you will claim NO LOSSES and NO GAINS
S. Determination of Gain or Loss from Sale or Transfer of Property

Computation of Gain or Loss
Section 136, RR-2
Gain - the excess amount realized over the basis for determining gain
Loss - the opposite of the above
Amount Realized - the sum of money received PLUS the fair market value of the property (other than money) received
Basis for Determining Gain or Loss from Sale or Disposition of Property (also called Original basis)
Mode of Acqusition
Cost Basis
1) If it was acquired by purchase
the actual cost
2) If by inheritance
the fair market value
3) If by gift
the same as if it would be in the hands of the donor or the last preceding owner, but if the basis is GREATER
than the fair market value, then the basis shall be the fair market value
4) if acquired for less than an adequate
consideration in money or its worth
the amount paid by the transferee for the property
Exchange of Property (Tax-FREE exchange)
General Rule - In a sale or exchange of property, the ENTIRE AMOUNT of GAIN or LOSS is recognized
Exceptions: (no gain or loss is recognized)
1) In a MERGER or CONSOLIDATION, where a corp exchanges property SOLELY for stock in another corp, which is also a party to the MERGER
2) In a MERGER or CONSOLIDATION,where a shareholder exchanges stock in a corp for the stock of another corp also a party to the merger
3) In a MERGER or CONSOLIDATION, where a security holder of a corp exchanges his securities for STOCK or SECURITIES in another corp
also a party to the Merger
4) where property is transferred to a corp by a person in exchange for STOCK in the corp, and the result of such exchange is that the person
(and up to 4 other persons), GAINS CONTROL of the corp. BUT, the stocks issued for services ARE NOT CONSIDERED as issued in return
for property
Securities - means BONDS & DEBENTURES, but NOT NOTES of whatever class or duration
Merger or Consolidation means:
1) the ordinary merger or consolidation
2) the acquisition by one corp of all or almost all the properties of another corp solely for stock
* BUT, there MUST BE A BONA-FIDE BUSINESS PURPOSE, can't be for tax purposes only
Control - means ownership of stocks in a corp of at least 51% of the total voting power of all classes of stocks entitled to vote
Merger or Consolidation
CIR v Rufino - 1987
1. The Rufinos were majority stockholders of Eastern
Theatrical Co and Eastern Theatrical Inc both in the
business of operating theaters. In 1958, the owners
passed a resolution to merge both corps by
transferring the assets, goodwill, & liabilities of the
first to the 2nd in exchange for shares of stock. This
was done because the 1st corp's life was about to
expire
2. The BIR declared that the merger was not

undertaken for a BONAFIDE business purpose but to
avoid liability for the capital gains tax on the
exchange of the old for the new shares of stock. It
imposed deficiency assessments on the Rufinos
1. Was it a VALID merger thereby exempt

from Capital Gains tax?
YES, even if the ACTUAL transfer of the

properties was NOT made on the date of
the merger. Becoz the old corp still had to
surrender its assets to the new corp
before the new corp could issue stock to
the shareholders of the old corp.
These actions need time to complete, but

it was still part & parcel of, and
indispensable to the validity &
enforceability of the Deed of Assignment.
The shares of stock were only evidence of
the ownership of such stocks. Even if
they were issued later, the ownership was
transferred to them on the date the
merger took effect.
3. BIR claims that the new corp did not actually issue
stocks in exchange for the properties of the old corp
at the time of the supposed merger in 1959. It was
done only on paper. The increase in capitalization of
the new corp was registered with the SEC 37 days
AFTER the old corp expired. Since there was NO
merger, the old corp was liquidated and therefore the
Rufinos are liable for their capital gains
Also, there was a VALID purpose for the

merger, which was to continue the
business of the OLD corp whose
corporate life was about to expire. The
NEW Corp was NOT dissolved after the
merger, in fact, it continued the business
of the old corp.
Transfer of Substantially "ALL" the assets - means a transfer of at least 80% of the assets, including cash, with SOME degree of permanence
Transfer of Property for Shares of Stock - NO GAIN or LOSS is recognized when a person transfers property (not services) to a corp in exchange
for shares of stock, (alone or up to 4 others), where such person GAINS CONTROL of the corp
BIR Ruling 274-87
1. Maray Farms is a domestic corp. In 1987, some
of the shareholders transferred their PERSONAL
PROPERTY to the corp in exchange for MORE
SHARES of stock in the corp so that the effect is
they gained control of more than 51% of the total
voting power of all classes of stock entitled to vote
1. Was this a valid transaction making it taxexempt?
YES, No gain or loss is recognized.

Maximum of 5 persons may perform the
said transaction
But if they LATER sell their shares of stock,

they shall be subject to income tax on gains
derived from such sale or exchange. The
COST BASIS of the stock shall be the same
as the original acquisition cost or adjusted
cost basis.
RR 18-01
Administrative Requirements in case of Tax-FREE exchanges - submit to BIR the ff:

1) Sworn certificate on the basis of property to be transferred
2) Certified true copies of the Transfer Certificates of Title
3) Certified true copies of the corresponding Tax Declaration of the real properties to be transferred
4) Certified true copies of the certificates of stock evidencing shares of stock to be transferred
5) Certified true copy of the inventory of the property to be transferred
RMR 1-02
Elements of a DE FACTO Merger (a valid merger):

1) there must be a transfer of all or substantially all of the properties of the transferor corp SOLELY FOR STOCK
2) it must be undertaken for a BONA FIDE BUSINESS PURPOSE, not solely for the purpose of escaping taxes
Difference between a DE FACTO merger vs a STATUTORY merger
1) In a De Facto merger, the transferor is NOT AUTOMATICALLY DISSOLVED
2) In a De Facto merger, there is NO AUTOMATIC TRANSFER to the transferee of all the rights, privileges, & liabilities of the Transferor
Difference between a DE FACTO merger vs a TRANSFER TO A CONTROLLED CORP
1) In a De Facto merger, the transferor is a corp, in the other, the transferor may be an individual
2) In a De Facto merger, the requirement is that the transferee acquires ALL or SUBSTANTIALLY ALL of the properties of the Transferor
In the other, the requirement is that the transferor GAINS CONTROL of the transferee (own 51% of the total voting powers)
Sample case: A domestic corp called X owns the ff properties:
1) land encumbered by a a real estate mortgage
2) buildings
3) 100 shares of stock in G Corp with a par value of P 10 per share
4) 50 shares of stock in D Corp without par value
5) unsecured receivables
6) Loans to Q, secured by a real estate mortgage
7) Cash
Facts: the property transferred by X constitutes 80% of X's assets, including cash
X transfers the property to Y. In exchange, Y issues shares of stock in Y corp, but does not give any cash
Also, Y Corp assumes the liabilities of X. But the sum total of the liabilities PLUS the encumbrance of the real estate mortgage DO NOT
exceed the basis of the property transferred
Tax Consequences:
1) X will not recognize any gain or loss on the transfer of property to Y. So, X is not subject to Captial Gains tax, Income tax, or even Creditable
withholding tax on the transfer

2) X is not subject to Donor's tax, regardless of whether the value of the property transferred exceeds the value of the shares issued to X
3) X is not subject to the VAT on the transfer of property if it was not engaged in a business that is subject to VAT
Assumption of Liability in Tax-FREE Exchanges: (PLEASE VERIFY THIS INFO, I AM NOT SURE ABOUT THIS)
1) If the Transferor receives stock or securities in a transfer of property, and as part of the consideration, the OTHER party also assumes the liability
of the transferor or that the property he assumes has a liability, then the property / liability acquired WILL NOT be treated as MONEY or OTHER
PROPERTY so that it still falls under the exception of Sec 40-C and NO GAIN or LOSS is recognized.
2) BUT if the amount of liability assumed EXCEEDS the total of the adjusted basis of the property transferred , the the EXCESS is considered as a
GAIN FROM SALE of either a Capital Asset or an Ordinary Asset, as the case may be
Example: X transfers property to Y with an adjusted basis of P 15 million in exchange for Y's stock plus that Y assumes X's liability of P 10 million
This exchange is considered TAX-FREE
But if the liability of X is P 20 million, then this will EXCEED the adjusted basis of P 15 million. So, the P 5 million will be considered GAIN
and it will be taxable
Cost or Basis in tax-FREE exchanges:
When the transferor later on SELLS or EXCHANGES the stock he got TAX-FREE, in exchange for his property, the basis for determining his gain
or loss is the SUBSTITUTED BASIS. This will also be the cost basis when the transferee later on sells the property acquired.
How to compute the Substituted Basis:
1) Take the ORIGINAL basis of the property (usually the cost or book value)
2) Subtract any money or the fair market value of any property that may have been received ASIDE from the shares of stock
3) Add the amount treated as DIVIDEND by the shareholder & any gain that was recognized on the exchange (if any)
Example: X transfers property to Y for shares of stock. The property's book value was P 5 million and X received an extra P 1 million aside from stock
If X later sells his shares of stock to W, the substituted basis will be computed as (P 5 million - P 1 million =) P 4 million.
If X sells the shares to W for P 6 million, his gain will be (P 6 million - P 4 million = ) 2 million and it will be subject to capital gains tax
Business Purpose
Gregory v Helvering - 1935
1. Ms. Gregory owns all the stock of United Mortgage
Corp. UMC had 1,000 shares of Monitor Securites
corp. Ms. Gregory formed a new corp called Averill.
Then, she had UMC transfer all 1,000 shares of
Monitor to Averill. Then she dissolved Averill and
liquidated its assets (which were the Monitor shares)
Averill never transacted any business at all
2. Ms. Gregory then sold the Monitor shares and paid
a tax on her capital gain but based on a lower cost
basis. Without this round-about way of acquiring the
Monitor shares, she would have paid a much higher
tax.
1. Was it a VALID transfer?
NO, a transfer of assets by one corp to

another MUST HAVE A BUSINESS
PURPOSE. It was a mere device which
followed the form of a corporate
reorganization to conceal its real
character which was to transfer the stock
of Monitor to Ms. Gregory.
Even if the whole undertaking was done
according to law, it was done OUTSIDE
the intent of the statute allowing for
transfer of property from 1 corp to another
3. The CIR said that it was without business purpose

and that she should be liable for tax as though UMC
had paid her a dividend from its sale of the Monitor
shares.
Losses from Wash Sales of Stocks or Securities

Losses are not allowed to be claimed in sales of stock or securities when:
1) within a period of 30 days BEFORE the sale and 30 days AFTER the sale (total of 61 days)
2) the taxpayer acquires or enters into an option to purchase
3) substantially the same / identical stocks or securities
* except if the taxpayer is a STOCKBROKER, and the sale / purchase was made in the regular course of business
Sec 131, RR-2
The important thing to remember is the 61 day period. Ex. A person buys shares of stock in a corp, and WITHIN 30 days buys MORE shares. Then,
within ANOTHER 30 days, he sells those shares AT A LOSS, he cannot claim this loss.
T. Situs of Taxation
The following are treated as Gross Income From Sources within the Phils
1) Interests - including interests on bonds, notes, & other interest bearing obligations
2) Dividends - from a domestic corp and foreign corp
unless less than 50% of the gross income of the foreign corp was derived from the Phils (the amount will be based on the same ratio
to dividends as the gross income for such period derived from sources within Phils bears to its gross income from all sources
3) Services - compensation for labor or personal services performed in the Phils
4) Rentals & Royalties - from property located in the Phils or from any interest in such property for:
- the use of any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other similar
- the use of any industrial, commercial, or scientific equipment
- the supply of scientific, technical, industrial, or commercial knowledge or info
- the supply of services by a non-resident person in connection with the use of property or rights; or the installation or operation of any brand,
machinery, or other apparatus purchased from such non-resident person
- technical advise, assistance or services rendered in connection with technical management of any scientific, industrial or commercial undertaking
- the use of motion picture films, films for TV, tapes for radio broadcast
5) Sale of Real Property - gains, profits, & income from sale of real property located in the Phils
6) Sale of Personal Property - gains, profits, & income from sale of personal property
CIR v Marubeni - 2001

Marubeni, a Japanese company was assessed to
pay deficiency income on some undeclared income
they got from local construction projects. They
contest it. Later, EO 41 was issued giving a one-time
amnesty to companies for unpaid income taxes.
Marubeni took advantage of this and paid to get the
amnesty. The CIR feels that they shouldn't be given
amnesty since there was already a pending case
BEFORE the tax amnesty was passed.
Were Marubeni's tax deficiency liabilities

extinguished by their availment of the tax
amnesty?
NO, because by the time Marubeni filed

for tax amnesty, there was already a
pending case with the Court of Tax
Appeals, thereby excluding it from
availing of the amnesty as provided
clearly in the EO.
A tax amnesty, similar to tax exemption, is

NEVER favored nor presumed in law. If
granted, it must be construed strictly
against the taxpayer and liberally in favor of
the taxing authority.
tax amnesty - a general pardon

by the state of its authority to
impose penalties on persons
otherwise guilty of evasion or
violation of a revenue or tax law
Is Marubeni liable to pay the income, branch,

profit remittance, and contractor's taxes
assessed by CIR? Since Marubeni claims
that these were incurred in Japan, not in Phils
NO, records clearly shows that Marubeni

had their equipment fabricated,
designed , engineered, & manufactured in
Japan and outside the taxing jurisdiction
of the Phils and so are not subject to
contractor's tax
Where a statute amending a tax law is silent

as to whether it operates retroactively, the
amendment wil NOT be given a retroactive
effect
contractor - refers to a person

who undertakes to do a specific
job or piece of work for other
persons, using his own means
& methods without submitting
himself to control as to the petty
details
A contractor's tax is generally in the nature of

an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on
products. It can be levied by the taxing
authority ONLY when the acts, privileges, or
business are done WITHIN the jurisdiction of
said authority
CIR v BOAC - 1987
1. British Overseas Airways Corporation (BOAC) is a

100% British government-owned corporation
engaged in the international airline business. It has
no landing rights in Philis and was not granted a
certificate of public convenience and license to
operate here
1. Are the revenues derived by BOAC from

sales of tickets in Phils considered INCOME?
YES, the sale of tickets here was the

activity that produced the income. The
SITUS of the source of payments is the
Phils. Although the Tax Code did not
specify income from sale of tickets for
international transporation as part of the
gross income from sources in the Phils, it
does not render it less an income form
sources within the Phils
2. Although it did not carry passengers or cargo to or

from Phils, it maintained a general sales agent which
sold BOAC tickets covering passengers and cargoes
over international routes
2. Was the Income derived from sources

OUTSIDE the Phils? Since the service is to
be rendered outside the Phils
NO, the income was derived from within

the Phils. The test of taxability is the
SOURCE
3. Is BOAC considered a resident foreign

corporation doing business in the Phils?
YES, becoz there is not specific criterion

as to what constitutes "doing business in
Phils". There was a continuity of conduct
& intention to establish a continuous
business and not one of a temporary
character.
4. Can BOAC apply the principle of res

judicata on JAL V CIR in this case?
NO, in THAT case, the ruling was that the

mere sale of tickets, unaccompanied by
the physical act of carriage of
transportation does NOT render the
taxpayer subject to the common carrier's
tax.
1. Can SKF deduct as expenses MORE than

the amount stated in its own service
agreement with its home office?
YES, becoz SKF presented ample

evidence to show the audited financial
statements of both Phils office & home
office and that indeed the expenses were
PRO-RATED correctly
3. The CIR assessed it deficiency income taxes

claiming that the ticket sales were sold here and
were therefore income from services.
4. BOAC protested claiming that the income is for

services and the place where the service is rendered
determines the source
CIR v Smith Kline & French Overseas - 1984

1. SK & F is an MNC domiciled in USA and licensed
to do business in Phils. It is engaged in importation,
manufacture, & sale of drugs. In its 1971 income tax
return, it claimed a deduction of P 500,000 for its
share in head office overhead expenses.
2. In 1973, it filed for refund for "UNDERDEDUCTION" because the actual share should have
been P 1.4 million. This was based on the
percentage of its Phil gross income versus the gross
income of the entire corp. Due to this, it had
overpaid its income tax.
3. The CTA granted its request but the CIR protested,
claiming that although SKF has the right to avail of
deductions, it is not an absolute right and that the
amount is limited to the SERVICE AGREEMENT that
SKF Phils had entered into with its home office.
Under that agreement, the amount of Phil's share in
expenses is limited to $ 77,000 so that it can't claim
MORE than this amount
4. SK&F claims that the contract is subordinate to

Phil tax laws and the matter of allocated expenses
which are deductible CANNOT be the subject of an
agreement between private parties.
Phil Guaranty Co v CIR - 1965
The source of an income is the property,

activity or service that produced the income.
It is sufficient that the income is derived from
ACTIVITY WITHIN the Phils.
The common carrier's tax is an excise tax,

what we are dealing with here is an INCOME
tax, so . .. Different subject matter
1. Philguaranty is a domesic insurance company. It

entered into reinsurance contracts with foreign
insurance companies not doing business in the Phils.
These reinsurance contracts were signed in Manila
& in abroad by the foreign companies.
1. Were the premiums subject to tax since

these were given to foreign companies who
are not engaged in business in the Phils?
YES, the contracts show that the activities

that constituted the reinsurance of
Philguaranty were against losses arising
from its original insurances in the Phils.
2. The reinsurance contact tied-up the liability of the

foreign companies simultaneous with that of
Philguaranty and that the foreign companies agreed
to pay a proportionate amount of taxes incurred.
Finally, all conflicts are to be arbitrated in Manila and
the contracts are subject to Phil laws.
Further, the liability of the foreign

reinsurers were to commence
SIMULTANEOUS with Philguaranty's own
liability. The contracts were subject to
Phil laws and any arbitration was to be
done here.
3. Philguaranty sent part of the premiums to the

foreign companies in the amount of P 1.5 millioni but
did NOT withhold any tax. So, the CIR assessed the
WITHHOLDING TAX on Philguaranty on the
premiums sent abroad.
Clearly, the SOURCE of income is within

the Phils.
The place of business of foreign insurers is

NOT to be confused with their PLACE OF
ACTIVITY. An activity may occur outside the
place of business. The ACTIVITY that
created the income is the controlling factor in
determining the SOURCE of income
4. Philguaranty protested claiming that the premiums

were not subject to withholding tax becoz these were
not income sourced within the Phil, since the foreign
companies are not engaged in business here.
Howden & Co v CIR - 1965
1. Commonwealth Insurance is a domestic insurance

company. It entered into reinsurance contracts with
some British insurance companies and agreed to
cede a portion of its premiums to them. These
British companies were represented in the Phils by
Howden & Co. The contracts were prepared &
signed by the foreigners in England & were sent to
Manila to be signed by Commonwealth.
1. Are the portions of premiums ceded to

foreign reinsurance companies through a
foreign insurance broker taxable? (Are these
reinsurance premiums SOURCED WITHIN
the Phils?)
YES, the source of income as the

ACTIVITY that produced the income.
Since the liability insured & the risks
underwritten by Commonwealth were for
those situated in the Phils, therefore the
ACTIVITY was in the Phils. Also, the last
signatory was Commonwealth, which
signed the contract in Manila. Finally, the
laws of the Phils governs the contracts
and it even provided for the use of Phil
currency as medium of exchange &
payment of taxes
An income may be earned by a corporation

even though all its business are conducted
abroad. The source of income is NOT THE
PLACE OF BUSINESS.
2. Commonwealth filed & paid income tax on behalf

of Howden & Co. Later, Howden & Co filed for claim
of refund invoking a ruling by the CIR which stated
that it was exempting from withholding tax
reinsurance premiums received by foreign
companies from domestic insurance companies. But
the CTA denied the claim.
3. Howden protested claiming as follows: a) that the
contracts for reinsurance were prepared & signed
abroad so that the SITUS is outside the Phils b) that
the foreign reinsurers are not engaged in business in
Phils so that their income came from business
conducted in England c) that the Tax Code does not
include reinsurance premiums as part of the
enumerated sources of income
RAMO - 1-95
The Order applies to the INCOME TAX ONLY of : (does not cover withholding, branch profit remittance tax & busines tax)
1) Phil branches & liason offices of Japanese trading firms
2) all other foreign trading companies
Tax Rates
1) for solicitation & trading activities
Worldwide Operating Income
Sales to the Phils

Worldwide Sales
Attribution Rate (75%)
Net Income fro construction

& other activities
Tax Rate (35%)
Tax Rate (35%)
2) for construction & other activities

+) Plus
RAMO - 1-86
This Order was implemented because the Phil liason offices of some multinational companies are soliciting orders from local importers. But then, these
liason offices are NOT reporting as income the sales made to local importers because they claim that the sale was actually consummated by their head
office abroad. The other way is that the Phil liason office solicits orders from local importers. It then relays the information to its foreign head office,
which looks for exporters of the product and earns a commision. But since the commission is earned by the head office, the Phil liason office does
NOT pay tax on these broker's commissions here.
So, now these transactions will be considered as CONSTRUCTIVELY consummated by the Phil liason / branch office as TRADING ACTIVITIES or
as BROKERING ACTIVITIES.
RAMO - 4-86
The problem here is that deductions being made by the Phil branch offices of foreign corp are hard to check because the supporting documents &
books of accounts are not accessible to the BIR. So, the Phil branch offices only submit an audit certification to back-up their claim for deductions.
This Order provides several procedures for BIR personnel to determine the correct deductions such as functional analysis (analyzing the functions
of the Phil branch office, etc), relevance tests, reasonableness tests, & other measures
The following are treated as Gross Income From Sources OUTSIDE (WITHOUT) the Phils
1) interests OTHER than those derived from sources WITHIN the Phils
2) Dividends OTHER than those derived from sources WITHIN the Phils
3) Compsation for labor - or personal services performed OUTSIDE the Phils
4) Rentals or Royalties - from property located OUTSIDE the Phils or from any interest in such propertyetc
5) Gains, Profits, Income - from sale of real property located OUTSIDE the Phils
Income From sources PARTLY WITHIN & PARTLY WITHOUT the Phils
These shall be allocated under rules prescribed by the Sec of Finance
1) For the gross income items allocated to sources parly within & partly without the Phils:
- there shall be deducted the expenses, losses, & other deductions properly apportioned
- and a RATABLE part of other expenses, losses, & deductions which cannot properly be allocated to some some item of gross income
2) If there is any remainder, it shall be included IN FULL as taxable income from SOURCES WITHIN THE PHILS
Situs of sale of PERSONAL PROPERTY
Gains, profits, & income derived from purchase of personal property WITHIN & sold WITHOUT, or from purchase WITHOUT and sale WITHIN
are treated as DERIVED ENTIRELY FROM SOURCES WITHIN the COUNTRY IN WHICH IT IS SOLD
Situs of Sale of stocks in a DOMESTIC CORP
Gains from sale of shares of stock in a domestic corp ARE TREATED AS DERIVED ENTIRELY FROM SOURCES WITHIN THE PHILS
regardless of where the said shares are sold
U. Accounting Periods & Methods

Sec 43, Tax Code
General Rule
1) Taxable income is computed on the basis of the taxpayer's annual accounting period, in accordance with the method of accounting regularly
employed in keeping his books
2) If there is no method employed or does not keep books, the taxable income shall be computed on the basis of the calendar year
3) If the taxpayer is an individual, it shall be the calendar year
Sec 167, RR-2
Although the taxpayer is allowed to do his own accounting method, some guidelines should be followed:
1) When the production, purchase, or sale of merchandise of any kind is an income producing factor, inventories should be taken at the beginning
and at the end of the year
2) Expenses should be properly classified between capital and income. Capital expenses are those for plant, equipment, etc which have a long useful
life extending substantially beyond the year
3) When the cost of capital assets is being recovered thru deductions for wear & tear, depletion, or obsolescence, any expenses made to restore
the property or prolong its useful life should be added to the property account and not to current expenses
Sec 44, Tax Code
Period in which Gross income is included

These items of gross income are included in the taxable year that they are received by the taxpayer, unless they are properly accounted for as of a
different period.
Sec 45, Tax Code
Period for which Deductions & Credits taken

The deductions shall be taken for the taxable year in which it is incurred
Sec 46, Tax Code
Change of Accounting Period

If the taxpayer, OTHER than an individual, changes his accounting period (fiscal to calendar, vice versa, or fiscal to fiscal), the net income will be
computed on the basis of his new accounting period (subject to the approval of the CIR)
Sec 47, Tax Code
Returns for short term periods

If taxpayer changes his accounting period, a separate return is made for the GAP. And income will be apportioned properly.
Sec 48, Tax Code
Accounting for Long-term Contracts

Long term - means building, installation or construction contracts covering a period IN EXCESS of 1 year
Persons reporting long-term contracts must report it on BASIS OF PERCENTAGE OF COMPLETION.
Sec 49, Tax Code
Installment Basis
1) Sales of Dealers in Personal Property
A person who regularly sells personal property on the installment plan MAY return as income in ANY taxable year that proportion of the installment
payment which the GROSS PROFIT realized bears to the total contract price
2) Sales of Real Property & Casual sales of Personal Property
If the price exceeds P 1,000 OR where the INITIAL payment (payment received during the taxable period) DOES NOT EXCEED 25% of the selling
price, the same basis as above may be followed
3) Sales of Real Property considered as Capital Asset by Individuals
An individual who sells real property considered as capital asset MAY pay the capital gains tax in installments under rules of the BIR
4) Changes from Accrual to Installment Basis
When a taxpayer decides to report his taxable income on the installment basis, the amounts actually received in PRIOR YEARS are not excluded
Sec 50, Tax Code
V. Returns & Payment of Taxes

Individual Return
Section 51 & 56, Tax Code
Allocation of Income & Deductions

When two or more orgs, trades, or businesses are owned or controlled directly or indirectly by the SAME INTERESTS, the CIR can distribute,
apportion, or allocate gross income or deductions between or among such orgs, trades, or businesses IN ORDER TO PREVENT TAX EVASION
Tax Return - a sworn statement executed in accordance with law on a required FORM wherein the taxpayer states the facts as to the nature & extent
of his tax liability for a taxable year including the computation of the tax due
Who are required to file?

1) Resident Citizen
2) Non-resident Citizen
3) Resident Alien
4) Non-resident Alien (engaged in business here)
on income WITHIN & WITHOUT the Phils

on income WITHIN only
Who are NOT required to file?

1) Those whose GROSS INCOME does NOT exceed his TOTAL PERSONAL & ADDITIONAL EXEMPTIONS
- but those who are engaged in business or practices a profession MUST file, regardless of the amount of gross income
2) those who earn PURE compensation income, NOT exceeding P 60,000, from ONE employer, & the income tax on which has already been
CORRECTLY WITHHELD
3) the following are NOT required to file, regardless of income amount (final withholding taxed already)
- those whose income consists SOLELY of royalties, interests, prizes, winnings, dividends, etc. and the share in a partnership or association,
joint venture, or consortium taxable as a corp
- aliens employed by ROHQ of MNCs with respect to their compensation income
- aliens employed by OFFSHORE banking units with respect to their compensation income
- aliens employed by FOREIGN SERVICE CONTRACTORS & SUBCONTRACTORS engaged in petroleum exploration, with respect to their
compensation income
4) those exempted by the Tax Code & other special laws
Where to File?
1) an authorized agent bank
2) Revenue District Officer
3) collection agent
4) duly authorized city treasurer where he is legally residing
5) office of the Commissioner
When to File?
- on or before April 15 of each year
Husband & Wife
- those married individuals who DO NOT derive income PURELY from compensation, shall file a return TO INCLUDE INCOME FROM BOTH SPOUSES
- but if it is impractical, then they may file separate returns
Parents & Children
- parents MUST include the INCOME of UNMARRIED MINORS derived from property received from A LIVING PARENT
Except:
- when the donor's tax has already been paid on such property
- when the transfer of such propery is exempt from donor's tax
When to Pay?
- it is "PAY-AS-YOU-FILE" and "PAY-WHERE-YOU-FILE"
- a person may pay in INSTALLMENTS if the tax due exceeds P 2,000
Filing of Return covering CAPITAL GAINS
for sale or exchange of stock NOT traded thru local stock exchange
for sale or disposition of REAL PROPERTY
for gains received by installment
within 30 days afer each transaction & a final consolidated return

on or before April 15
within 30 days following each sale or other disposition
within 30 days from receipt of each installment
Annual Declaration of Income Tax

- individuals who receive SELF-EMPLOYMENT income must make & file a DECLARATION OF HIS ESTIMATED INCOME for the current year on
or before April 15
Self-employment income - consists of earnings from the practice of a profession or conduct of trade or business carried on as the sole proprietor
or a partnership of which he is a member
Quartely payment of Income Tax - in 4 installments
First Installment
at the time of declaration
Second
Third
Fourth
Corporate Returns
Section 52, 53, & 56, Tax Code
15-Aug
15-Nov
on or before April 15
Corporations Required to File Tax Return

- ALL corps, except foreign corp not engaged in trade or business in Phils, must file:
1) quarterly income tax return - on a cumulative basis for the preceding quarter/s
2) a final or adjustment return - on or before April 15
- a corp may use either CALENDER YEAR or FISCAL YEAR basis for filing.
- calendar year - from Jan 1 to Dec 31
- fiscal year - period ends on the last day of any month other than Dec
Quarterly Income Tax Return

- corp must file tax return for preceding quarter within 60 days following the close of each quarter
Final Adjustment Return

- corp will file final return at the end of either fiscal or calendar year
- If sum of the quarterly returns is NOT EQUAL to TOTAL TAX DUE, the corp shall either:
1) pay the balance
2) carry-over the excess credit
3) be credited or refuned with the excess amount
* but the corp can choose ONLY 1 option and it is irrevocable
Philam Asset Mgmt v CIR - 2005

1. Philam is a domestic corp acting as investment
manager for some local fund companies. It provides
management & technical services and received a
monthly management fee on which its customers
withhold 5% creditable tax.
2. In 1998, it incurred a net loss of 2.6 million, but it

failed to utilize the creditable withholding tax withheld
by its customers amounting to P 500,000. So, it filed
for a refund of said amount.
3. But the CA denied this request saying that Philam

did NOT specify its intention to request for a rerund
or credit because it did not MARK this OPTION in its
corporate adjustment return. (it failed to "tick" the box
for that option)
2. Was the failure to "tick" the option to refund

its creditable withholding tax FATAL to its
claim for refund?
NO, this requirement is ONLY for the

purpose of facilitating tax collection.
Failure to signify one's intention does
NOT mean outright barring of a valid
request for a refund. Even if they failed to
indicate, they had filed for an
administrative claim for refund
Section 76 of Tax Code gives 2 options when

a corp's total income tax payments exceeds
its income tax due. 1) file for a tax refund or
2) avail of a tax credit
3. Must it show as evidence its annual income

tax return for the succeeding calendar years
as a REQUISITE for its claim of refund?
NO, the Tax Code does not specify it as

required. It only requires the filing of the
FAR (final adjustment return) for the
PRECEDING year, not the SUCCEEDING
year. Any refundable amount may already
be credited against the estimated tax
liabilities of the succeeding year.
There is NO automatic grant of a tax refund.

The BIR will still investigate it Even if you
"tick" the option, it doesn't mean that you will
get a refund without BIR's approval.
1. Was it entitled to a refund?
NO, becoz it had already filed for the

CARRY-OVER option by filling out the
portion "Prior Year's excess credits" in its
FAR. It cannot have a refund AND a tax
credit at the same time for the same
excess income taxes paid.
Section 77A, Tax Code
Where to File? - same as for individuals
Section 77B, Tax Code
When to File?
for quarterly declarations
for final declaration
within 60 days following the close of the quarter

on or before April 15, or the 15th day of the 4th month following the close of fiscal year
Section 77C, Tax Code
When to pay? - same as for individuals
Filing of Return covering CAPITAL GAINS from SHARES OF STOCK
for sale or exchange of stock NOT traded thru local stock exchange
within 30 days after each transaction &

a final consolidated return of ALL transactions during the year
For Corps contemplating DISSOLUTION / REORGANIZATION

- after the corp adopts a plan or resolution for its dissolution, it must submit to the BIR, within 30 days, a RETURN specifying the terms of the
resolution & other information. It must secure a tax clearance certificate from BIR which it will submit to the SEC before its dissolution
Section 244, RR-2
Requirements to submit to BIR:

1) copy of resolution authorizing such dissolution
2) balance sheet at the date of dissolution & Profit & Loss Statement covering the beginning of the year to the date of dissolution
3) names & addresses of the shareholders, their number of shares
4) value & a description of the assets received in liquidation by each shareholder
BPI v CIR - 2000

1. BPI & Family Bank merged on July 1, 1985. But
Family Bank had paid excess taxes from those
withheld by the Central Bank and it had excess tax
credits of P 2 million. It filed for a refund on Oct 7,
1986, but the BIR denied it saying that it was too late.
Was Oct 7, 1986 too late?
YES, Sec 46 of Tax Code specified the

filing of FINAL Income tax return. Also,
Sec 244 of RR-2 stated the filing of
income tax return. Rules promulgated by
the Sec of Finance are considered valid
unless proven to be contrary to law
2. Family Bank insists that it had until the 15th day of

the 4th month following the close of its taxable year.
The BIR insists that it should have filed within 30
days from the SEC's approval of its Articles of
Merger on July 1, 2985
Filing of Return by General Professional Partneships

- exempt corps such as general prof partnerships & joint ventures for construction, etc are STILL required to file tax return specifying:
1) the items of gross income
2) the deductions allowed
3) the names, TIN, addresses, & shares of each partner
W. Withholding Tax
Final Withholding Tax at Source
The Sec of Finance will promulgate rules regarding withholding & payment of tax withheld
CIR v Wander Phils - 1988

1. Wander is a domestic corp, and is a wholly-owned
subsidiary of Glaro (a Swiss company). It filed its
income tax return on dividends it remitted to Glaro on
which it withheld 35%. Later, it filed for tax refund
claiming that it was liable to withhold only 15%.
2. The CTA granted its refund, but the CIR protested

claiming that it is Glaro, and not Wander which is
entitled to receive the refund, if any.
CIR v P&G Phils - 1988
1. Is Wander entitled to a refund since it was

only the withholding agent?
YES, it is the wholly-owned subsidiary of

Glaro. It became a withholding agent
ONLY becoz of the Tax Code so that it
STILL has its obligations to the mother
company. It is the proper entity who can
claim for the refund or tax credit
2. Was Wander entitlted to the preferential

rate of 15% withholding tax since Switzerland
allows as tax credit 20% on dividends
received from abroad.
YES, becoz Switzerland does NOT

impose any income tax on dividends
received by Swiss corps from abroad.
Since the Tax Code provides an exception
on the 35% withtholding rate if the foreign
counterpart country ALSO gives a tax
credit, then Wander is entitled to the
preferential rate of 15%
1. P&G is a domestic corp and is a wholly-owned

subsidiary of P&G USA. In 1974 & 75 it declared a
dividend in favor of its USA corp and withheld 35%
on said dividend.
2. In 1977, it filed a claim for refund stating the taxsparing credit provision in the Tax Code where 20%
of the withheld tax on dividend may be refunded if
the counterpart country also gives a tax credit. The
CTA granted its request, but the CIR protested.
1. Was P&G Phils entitled to the refund since

it was only the wihtholding agent?
NO, the real party in interest is the mother

corp in USA, so that it should be the
claimant of the refund
2. Was P&G entitled to the preferential rate of

15% tax on dividends remitted to its parent
corp?
NO, the US Tax Code was not SPECIFIC

in providing a tax credit that can be
"deemed as paid" as required by our Tax
Code. Also, P&G failed to show the
actual amount credited by US government
on dividends received by P&G USA. It
also failed to submit the income tax return
of the mother company as proof.
Section 2.57 A, RR 2-98
Principles of Final Withholding Tax

1) the amount of tax withheld is full & final
2) the liability for payment of the tax rests primarily on the withholding agent as payor. In case he fails to withhold, he will be liable for the deficiency
3) the PAYEE is NOT required to file an income tax return for the particular income
4) the finality of the withheld tax is limited on that particular income and will NOT extend to the payee's OTHER tax liability on said income. Ex. If a bank
received income subject to final withholding tax, the SAME INCOME can still be subject to a percentage tax
Section 2.57.1, RR 2-98
Income subject to FINAL withholding tax

A) Citizen or a Resident Alien
1) interest from any peso bank deposit, yield, monetary benefit, deposit substitutes, trust funds, etc
2) prizes & other winnings
3) royalties on books & other literary works, & musical compositions
4) royalties - from other sources
5) interest received under the FCDS
6) interest income from a long-term deposit or investment PRE-TERMINATED before the 5th year
7) cash / property dividends actually or CONSTRUCTIVELY received from a domestic corp, joint stock company,
insurance or mutual fund, from the share in a partnership (EXCEPT GENERAL PROFESSIONAL PARTNERSHIP)
or on the share in the net income of an association, a joint account, or a joint venture or consortium
8) capital gains from sale, exchange, or other disposition of real property LOCATED IN THE PHILS, classified as
CAPITAL ASSETS
B) Non-resident alien engaged in trade or business
everything the same except:
5) interest received under the FCDS - this doesn't apply
7) cash / property dividends the rate is 20%
20%
20%
10%
20%
7.5%
10.0%
6%
0%
20%
C) Non-resident alien NOT engaged in trade or business

1) on income FROM ALL SOURCES WITHIN THE PHILS
CAPITAL ASSETS
25%
6%
D) Alien employed by a REGIONAL or AREA HEADQUARTERS & ROH of an MNC

1) on income from salaries, wages, annuities, compensation, renumeration, etc
(EXCEPT INCOME subject to FRINGE BENEFIT TAX)
15%
E) Alien employed by a OFFSHORE BANKING UNIT

1) on ALL income
15%
F) Alien employed by a FOREIGN PETROLEUM SERVICE CONTRACTORS & SUBCONTRACTORS

1) on ALL income
15%
G) Domestic Corp
1) interest from any peso bank deposit, yield, monetary benefit, deposit substitutes, trust funds, etc
20%
2) royalties - from other sources

3) interest received under the FCDU
4) income BY A DEPOSITORY BANK under the FCDU
CAPITAL ASSETS
H) Resident Foreign Corp
1) offshore banking unit
2) branch profit remittances
3) interest on bank deposits
4) income BY A DEPOSITORY BANK under the FCDU
10%
15%
7.5%
10%
I) NON-Resident Foreign Corp

1) on income FROM ALL SOURCES WITHIN THE PHILS
2) on income FROM ALL SOURCES WITHIN THE PHILS by a NON-Resident Cinematographic film owner or distributor
3) on gross rentals, lease, & charter fees by a NON-Resident owner or lessor of vessels from leases or charters
to FILPINO citizens or corps
4) interest on foreign loans
5) dividends from a domestic FOREIGN corp (THIS IS SUBJECT to a condition of mutual tax credit given by the
counterpart foreign country)
6) Fringe Benefits granted to an employee (except rank & file)
7) informer's reward given to persons instrumental in the discovery of violations of the Tax Code & seizure of
smuggled goods
Creditable Withholing Tax
20%
7.5%
10%
6%
32%
25%
4.5%
20%
15%
32%
10%
The Sec of Finance will promulgate rules regarding withholding of a tax WHICH WILL BE CREDITABLE (not less than 1% not more than 32%)
The Creditable Tax must be withheld AT SOURCE, but should still be included in the TAX RETURN of the recipient. Any excess shall be refunded
and any deficiency shall be paid by the taxpayer
Filipinas Synthetic Fiber Corp v CA - 1999
1.Filpinas is a domestic corp. In 1979 the CIR

assessed it deficiency withholding tax for 1974 & 75
on its remittances to foreign corps. The bulk of the
amount of deficiency consisted of interest &
penalties.
2. Filipinas protested claiming that its liability to

withhold taxes & to pay the tax withheld attaches
ONLY at the time of ACTUAL PAYMENT or
remittance and NOT AT THE time when the liability
ACCRUED.
Section 2.57B & 2.57.2, RR 2-98
1. When does the liability to withhold tax

arise? Upon the ACTUAL REMITTANCE of
the amounts due or upon the ACCRUAL of
the amounts?
Upon the ACCRUAL, becoz the law is

silent on WHEN the duty to withhold tax
arises. Since the purpose of the
withholding tax is to compel the agent to
withhold under all circumstances, then it
is when the RIGHT to receive income
arises that determines WHEN to include
that income as gross income and WHEN
to apply withholding tax.
Requirements of reporting income under the

accrual method of accounting: 1) that the
right to receive the amount must be valid,
unconditional, & enforceable 2) the amount
must be reasonably susceptible of accurate
estimate 3) there must be a reasonable
expectation that the amount will be paid in
due course
Also, that Filipinas had already claimed

as deductible business expense the
interests on the amount due to the foreign
corps on THAT year, even when the loan
wasn't due yet. It cannot now claim that it
had no duty to withhold YET since the
loan contract was not yet due and
demandable.
Income Subject to CREDITABLE Withholding Tax

1) professional fees, talent fees, etc rendered by INDIVIDUALS
2) professional fees, talent fees, etc rendered by JURIDICAL PERSONS
3) rentals for the continued use or possession of real properties USED IN BUSINESS, which the payor has not taken title
4) cinematographic film rentals & other payments
5) income payments to certain contractors: general engineering, general building, specialty, & other contractors
6) income distributed to the beneficiaries of estates & trusts (except if already subjected to final withholding or tax-exempt)
10%
5%
5%
5%
1%
15%
7) income payment to certain brokers & agents: customs, insurance, real estate & commercial brokers & fees of agents
of professional entertainers
8) income payment made periodically or at the end of the year by a general professional partnership to the partners:
such as drawings, advances, sharings, allowances, stipends, etc.
9) professional fees paid to medical practitioners by hospitals or clinics or by patients (see RR 12-98)
10) real property which are NOT capital assets sold by a person engaged in the real estate business:
selling price is P 500,000 or LESS
selling price is more than P 500,000 but not more than P 2 million
selling price is more than P 2 million
- if the real property was sold by a person NOT engaged in the real estate business
- if the payment was on installment, the applicable tax will be withheld on:
every installment IF the seller was engaged in real estate business
LAST installment IF the seller was NOT engaged in real estate business
11) on additional payments by importers, shipping, & airline companies to government personnel for overtime services
12) on the amount paid by any credit card company to any business entity representing the sale of goods/services
made by them to cardholders
13) payments made by any of the TOP 5,000 CORPS to their local supplier of goods
14) payments by the government to local supplie of goods (except if the purchase is below P 10,000)
5%
10%
10%
1.5%
3%
5%
7.5%
15%
0.5%
1%
1%
RR 12-98
If the service by a medical practitioner was thru a professional partnership for the practice of the medical profession
The hospital / clinic has the responsibility to withhold the tax
No withholding tax applies if there is PROOF that NO professional fee has been charged by the medical practitioner
Return & Payment of Tax
5%
Withholding Agents MUST file a RETURN & pay to:

1) an authorized agent bank
2) revenue district officer
3) collection agent
4) duly authorized treasurer of the city or municipality where he resides or has his place of business
- these taxes must be maintained in a separate account & not co-mingled with any other funds of the withholding agent
When to file & pay:
1) for FINAL withholding tax
2) for CREDITABLE withholding tax
within 25 days from the close of each calendar quarter

not later than the LAST DAY of the MONTH following the close of the quarter which withholding was made
* if there is any excess, it shall be either credited or refunded; if deficiency, then it shall be paid by the taxpayer
Withholding on Wages
This applies to ALL EMPLOYED individuals, whether citizens or aliens, deriving income from compensation for services rendered in the Phils.
Wages - all renumeration, other than fees paid to a public official, for services performed by an employee for his employer (cash or kind)
Exceptions:
1) agricultural labor paid entirely in products of the farm where the labor is performed
2) domestic service in a private home (maids)
3) casual labor not in the course of the employer's trade or business
4) services by a citizen or resident of the Phils for a foreign government or international org
General Rule: Every employer making payment of wages shall deduct from & withhold tax
Exception: No withholding tax is required if the total compensation income of the individual does NOT exceed the minimum wage or P 5,000 a month
whichever is higher
Refunds or Credits
1) to the employer - when there was an overpayment but only to the extent that the amount of overpayment was not withheld by the employer
2) to the employee - any excess of taxes withheld shall be returned or credited within 3 months from April 15, these refunds WILL EARN INTEREST
at 6% PER ANNUM after the lapse of the 3 month period
Personal Exemptions
Before the start of employment, the employee should furnish the employer with a signed withholding exemption certificate and additional exemptions
to which he is entitlted. This is to be used by employer in determination of the amount to be withheld. If he doesn't furnish, then the employer shall
withhold tax under ZERO EXEMPTION
Husband & Wife
When both husband & wife are recipients of wages, whether from the same or from different employers, taxes to be withheld are determined as:
1) The husband is deemed HEAD OF FAMILY and the proper claimant of the additional exemptions with respect to dependent children, unless he
waives his right in favor of the wife
2) Taxes are withheld from the wife in under ZERO exemption
Non-resident Aliens engaged in trade or business - wages paid to them are also subject to withholding tax
Year-end Adjustment
On or before Dec 31, but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each
employee on their income for the entire year. The difference between the tax due for the entire year and the sum of taxes withheld from Jan to Nov
shall either be withheld from his salary in December or refunded to him NOT LATER than Jan 25 of the next year
Liability for Tax

1) by the employer - if he fails to withhold & remit, it shall be collected from him with penalties
2) by the employee - if he fails to file the withholding tax certificate, the tax withheld by employer shall be collected from HIM (the employee) including
penalties; excess taxes withheld becoz of his refusal to file certificate or giving false information shall be FORFEITED to the government
Filing of Return & Payment of Taxes Withheld

It shall be filed & paid within 25 days from the close of each calender quarter
Return & Payment in Case of government employee - same as normal employees, the taxes to be withheld by the officer in charge of wages
Withholding Tax by Government Agencies
Income payments, except any single purchase of P 10,000 & below, made by a government office, national or local, including GOCCs, on their
purchase of goods from local suppliers: withholding tax of 1%
Statements & Returns

Employers must submit annual return on or before Jan 31 of the succeeding year containing all relevant employee information
Course Outline - as of 12/10/06

Facts
Issues
Held
Principles
Terminology
A. In General
Taxable Income
1. Madrigal v Rafferty - 1918

1. Mr. Madrigal & wife got married before 1914. They
filed net income of P 290,000 in 1914 and said that it
was income of CONJUGAL PARTNERSHIP and that
the additional income tax (proved by an Act of
Congress in 1913) should be computed by dividing
the income in two equal parts
- income vs capital
1. Should the additional income tax be
computed based on two equal parts? Or does
the marriage have NO BEARING on
computing income tax?
NO, since the wife does not have an

ABSOLUTE RIGHT on the property of the
conjugal partnership, she cannot make a
separate return in order to receive the
benefit of income tax exemption
2. They are now asking for refund for overpayment of

income tax. What they want is to add the income of
BOTH partners and divide it equally so that BOTH
partners get the benefit of income tax exemptions
and pay less additional income tax
"property is a tree; income is the fruit; labor

is a tree, income the fruit; capital is a tree,
income the fruit"
capital - a fund of property

existing at an instant of time;
capital is wealth
a tax on income is NOT a tax on property
income - a flow of services

rendered by that capital through
a period of time; income is the
service of wealth
2. Fisher v Trinidad - 1922
- income vs stock dividends (capital) and cash dividend (income)
1. Mr. Fisher owns stocks in a company. In 1919, the

company declared stock dividends. The CIR
assessed income tax on stock dividend and Mr.
Fisher paid under protest claiming that stock
dividends are CAPITAL, not income
NO, they are NOT CASH DIVIDENDS

wherein it is considered accumulated
earnings. In Stock Dividends, the
corporation retains ownership of the
increased amount of capital and parts
with nothing to the stockholder except an
interest on it
a statute providing for an income tax

cannot be construed to cover property
which is in fact, not income; EVEN if the
statute contains a provision that "stock
dividends shall be considered income"
stock dividends - represent

undistributed increase in the
CAPITAL of corporations
Cash dividends are regarded as INCOME

and stock dividends are regarded as
CAPITAL
when a company issues stock dividends, it

means that the accumulated profits have
been capitalized instead of distributed to
stockholders; so that the stockholder has
received NOTHING that answers the
definition of income; he only gets a
representation of his increased interest in
the capital of the company
income - the return IN MONEY

from one's business, labor, or
capital invested; gains, profit, or
private revenue
1. Are the stock dividends to be considered

"income" and thus taxable? Or are they to be
considered as CAPITAL?
3. Limpan Investment v CIR - 1966

1. Petitoner is a corporation engaged in the business
of leasing real properties. In 1956, the BIR assessed
it deficiency income tax for underdeclaring its rentail
incomes and claiming excessive depreciation of its
buildings
1. Was the excuse that the previous owners

retained ownership of the land and only later
transferred the ownership to the corporation
valid?
NO, there is no corroborating document

to prove this; only verbal
2. Petitoner claims that 1) previous owners collected

part of the rental income; 2) that their President was
late to turn over the rental collected; 3) that one of
their tenants deposited his rental payment in court
instead of giving it to the corporation; 4) a subtenant's rental should be reported in the next year,
not this year
2. Was the excuse that their President was

late to turn over the rental he personally
collected valid?
NO, also no corrobotation to this
3. Petitioner also claims that the their buildings are

old and out of style so that they are entitled to higher
depreciation
3. Was the excuse that one of their tenants

deposited his rental in court valid?
NO, the reason he did so is because of

the refusal of petitoner to accept the
rental payment; so the petitoner is
deemed to have constructively received
the rental
Facts
Issues
Held
4. Was the excuse that the sub-tenant's rental

should be reported next year, not in 1956
valid?
NO, rental income is income regardless of

its source
5. Was the excuse that they were entitled to

higher depreciation valid?
NO, depreciation is a question of fact and

is not measured by theoretical yardstick
Principles
Terminology
4. Conwi v CTA - 1992

1. Petitoners are employees of P&G who were
assigned to P&G affiliates in other countries and
earned income in dollars. They paid income taxes
based on the conversion rates following the FREE
MARKET RATE as per BIR Memo and Rulings
1. Are these considered dollar earnings or

foreign exchange transactions?
Dollar earnings; because the petitioners

got paid in dollars, and their expenses
were also in dollars
The impelementation of the NIRC

empowers the Sec of Finance to
promulgate rules & regulations; and the
Memo was issued to prescribe a uniform
rate of exchange from US dollars to Phil
peso for INTERNAL REVENUE TAX
PURPOSES
2. Later, they filed amended income tax returns using

the PAR VALUE of the peso as per a Central Bank
Circular as the basis for converting their dollar
income to peso. They then asked for a refund for
overpayment
1. Which was the proper rate to be used in

computing the dollar earnings for tax
purposes? The Par Value or the Free Market
rate?
The FREE MARKET RATE as per BIR

Memorandum Circular and BIR Rulings.
The CB Circular refers only to export
products, receipts of foreign exchange,
foreign exchange payments, and foreign
borrowings, nothing about income
Since petitioners are citizens of the Phils,

their income, within or without, are subject
to income tax EVEN if there were NO
remittances of US dollars into the Phils
income - an amount of money

coming to a person within a
specified time, whether as
payment for services, interest or
profit from investment
Taxation Digests - as of 12/03/06

Facts
Issues
Held
Principles
Terminology
A. GENERAL PRINCIPLES
Concept, Nature, & Characteristics of Taxation
1. CIR v Cebu Portland - 1987

1. CP asking for refund from CIR for taxes paid on
cement; claims its a mineral and exempt from AD
VALOREM tax
Is cement a mineral?
NO, its a manufactured product, subject

to Ad Valorem tax
2. CP also claims that sales tax cannot be enforced

while case still pending
Can tax assesment NOT be enforced while its

still being contested?
NO, Taxes are the lifeblood of

government and cannot be postponed by
questioning their validity
3. CP claims that 5-year reglementary period for

assessment of tax liability should have started when
it filed its gross sales returns
Was the filing of gross sales returns

considered same as filing the AD VALOREM
tax return?
NO, Filing of income tax cannot be

considered as substantial compliance w/
filing sales tax
Was the CIR correct in disallowing deductions

by Algue for legitimate business expense?
CIR claims that its just a tax dodge because
the payees are members of the same family
in control of Algue
NO, the deductions were NOT excessive;

also most of the payees were not in the
regular employ of Algue nor were they its
controlling stockholders
The burden is on the taxpayer to prove the

validity of the claimed deduction
tax dodge - an attempt to

evade a legitimate assement by
involving an imaginary
deduction
YES, the appeal was made on time
As a rule, the warrant of distraint & levy is

proof of the finality of the assessment and
renders hopeless a request for consideration,
BUT, in this case, the warrant was premature
because there is PROTEST after receipt of
notice of assessment
warrant of distraint & levy -
ad valorem -
Injunctions are not available to restrain

collection of taxes
2. CIR v Algue - 1988

1. Algue claims deductions were legitimate because
these were promotional fees for services in creation
of a new company and subsequent purchase of
property
2. CIR issued a warrant of distraint & levy on Algue

while its petition was pending
Was the appeal by Algue made on time?
Taxes should be collected without

unnecessary hindrance, BUT such collection
must be in accordance with the law or it
becomes arbitrary and will negate the very
reason for government itself
3. Hodges v Municipal Board of Iliolo - 1963

1. MB of Iloilo issued Ordinance for sales tax for
motor vehicles & prohibit registration of this vehicles
without payment of sales tax
Does MB of Iloilo have authority to impose

sales tax and CAN it make sales tax payment
a PRE-CONDITION of vehicle registration?
YES, MB of Iloilo has authority to make

ordinance because it merely imposes a
sales tax; and YES the condition is NOT a
tax but only a coervice measure to
enforce payment
It is imperative that the power to impose

taxes be clothed with the authority to devise
ways and means to accomplish their
collection in the most effective manner
YES, the Ordinance merely imposes a

license fee under the cloak of an AD
VALOREM tax to circumvent the
prohibition under the Motor Vehicle Law
As a rule, an AD VALOREM tax is a property

tax, BUT if the NATURE & PURPOSE is that
of an EXCISE, then it is considered an
EXCISE
Classifications & Distinctions
4. Asstn Custom Brokers v Municipal Board - 1953

1. Association challenges Ordinance issued by MB of
Manila imposing a property tax on ALL motor
vehicles operating within the city
Was it in reality a LICENSE TAX even as it

was called an AD VALOREM TAX?
property tax excise tax -
license tax -
Facts
2. It provided a 1 % per annum AD VALOREM tax
for use of repair & maintenance of streets & bridges
Issues
Held
Principles
Terminology
Did the Ordinance offend against the rule of

uniformity of taxation?
YES, becoz it did NOT distinguish

between motor vehicle for hire and those
for private use; nor did it distinguish
between vehicles registered in the city
and those merely passing through
uniformity of taxation -
Did the Ordinance constitute double

taxation?
YES, the Motor Vehicle Law specifically

prevents such duplication and merely
calling it a PROPERTY TAX does not
make it a property tax, the INTENT is the
key
double taxation -
5. Esso Standard v CIR - 1989
1. Esso claiming refund from CIR for advance

payment for expenses which should have been
deductible as business expenses
2. Esso claiming that margin fees paid to the Central

Bank should be allowable business expenses
Is the Central Bank authority to establish a

Margin over bank's selling rates of foreign
exhange a POLICE measure or a REVENUE
measure?
It was a POLICE power because the

purpose is to stabilize the currency
When a taxpayer claims a deduction, he

must point to some specific provision of the
statute in which that deduction is authorized
& must be able to prove that he is entitled to
it, BURDEN is on the TAXPAYER
Were the margin fees deductible as business

expense?
NO, they are NOT expenses incurred in

connection with the production or earning
of Esso's income in the Phils; rather, they
were incurred in the disposition of said
income; expenses for the remittance of
funds AFTER they have already been
earned
Test of deductibility: if it is to be a business

expense:
1. the expense must be
ordinary & necessary
2. it
must be paid or incurred within the taxable
year
3. it must be paid or incurred in
carrying on a trade or business
margin levy - a form of

exchange control designed to
discourage imports &
encourage exports; to curtail
excessive demand upon the
international reserve in order to
stabilize the currency
Necessary - when the expense is

his business
Ordinary - when it connotes a payment
which is normal in relation to the business
6. Progressive Development Corp v QC - 1989

1. the Municipal Board of QC issued ordinance
imposing 5% tax on gross receipts on rentals or
lease of space in markets in QC; Progressive
questions this
Was the license tax in reality a tax on income

& therefore prohibited by RA 2264?
It was only a license fee; Progressive has

not shown that the tax is so unreasonably
large & so grossly disproportionate to the
costs of the regulatory service
To be a license fee - it must relate to an

activity that so engages the public interest in
health, morals, safety, & development as to
require regulation for the protection &
promotion of such public interest; it must
bear a reasonable relation to the probable
expenses or regulation including incidental
costs
Are motor vehicle registration fees TAXES or

REGULATORY FEES?
Since these are actually intended for

additional revenues of government; then
the motor vehicle registratoin fee is
actually a TAX
General rule is that TAXES are for revenue

and FEES are for purposes of regulation &
inspection and is limited in amount to what is
necessary to cover the costs of this service
7. PAL v Edu - 1988

1. PAL wasn't paying any motor registration fees
because of its legislative franchise to operate which
exempts it from payment of taxes. But the LTO chief
issued a regulation requiring all tax-exempt entities
to pay motor vehicle registration fees. PAL paid
under protest
license fee - imposed in the

exercise of police power for
purpose of regulation
tax - imposed under
the taxing power for the purpose
of raising revenues
Facts
Issues
Held
Principles
But if the purpose of the FEE is primarily
revenue, or if revenues is at least one of the
real and substantial purposes, then it is
properly called a TAX
8. Villegas v Hiu Chiong - 1978

1. Mayor Villegas imposes Ordinance requiring all
aliens to register first & pay a registration fee
BEFORE being allowed to work; Hiu Chiong contests
this
1. Was the Ordinance a revenue measure,

discriminatory, and violative of the rule of
uniformity in taxation?
YES, it was a revenue measure obviously

to raise money under the guise of
regulation
2. Did the Ordinance violate the principle of

illegal delegation of legislative power?
3. Was it arbitrary, oppressive, and

unreasonable?
YES, it is not only because it is excessive

but also because it failed to consider valid
substantial differences in situation among
aliens
where an Ordinance fails to state any policy

or to set up any standard to guide or limit the
action, expresses no purpose to be attained
by requiring a permit, enumerats no
conditions for its grant or refusal, it thus
grants the Mayor arbitary and unrestricted
powers - such Ordinance is invalid
NO, license fees is clearly to regulate

sale of liquor since it is potentially harmful
to public health & morals while the sales
tax are a revenue measure
a FEE is imposed in the exercise of police

power while a TAX is imposed under the
taxing power for purpose of raising revenue
9. Compania General v City of Manila - 1963

1. Tabacalera claiming from the City refund because
it paid BOTH the fixed LICENSE fees and SALES
TAXES required by various Ordinances; claims that it
should be exempt from the sales tax since it already
paid the license fees
Was Tabacalera being subjected to double

taxation?
both a license fee & a tax may be imposed

on the same business and its not a violation
of the rule against double taxation
10. American Mail Line v City of Basilan - 1961

1. City of Basilan passed an Ordinance requiring all
ships to pay anchorage fees, American Mail contests
this
Does the City of Basilan have the authority to

enact the Ordinance & collect the anchorage
fees?
City does not have blanket authority to

enact Ordinances. It was clearly shown
that the Ordinance was for revenue
purposes and therefore invalid
1. Was the OPSF in the nature of a special

tax? And therefore to be expended only for a
special purpose?
NO, even if they are referred to as taxes,

they are exacted under the police power
of the State
11. Osmena v Orbos - 1993

1. The Oil Price Stabilization Fund (OPSF) was
created by PD to reimburse oil companies for cost
increases from exchange rate and increase in world
price of oil.
2. In 1991, the deficit to be paid by the OPSF was
about P 12 billion already. The petitioner challenges
this saying that the PD did not authorize such
payments; that the money should be treated as a
SPECIAL FUND and not as TRUST FUND.
3. Special fund would mean that it should be used
only for a specific purpose and not channeled to
another government project
The EO gave special treatment to the

OPSF, segregating it from the general
fund and placing it in a "trust liability
account". But the fund is still subject to
review by the COA. It thus complies with
the Constitutional requirements of a
"Special Fund"
the power to regulate as an exercise of police

power does NOT include the power to
impose fees for revenue purposes
Terminology
Facts
Issues
12. Republic v Bacolod-Murcia Milling - 1966
1. Some Sugar millers are claiming that the Phil
Sugar Institute misused the funds which were
received by LEVY from them. Since they no longer
benefit from Phil Sugar, they wanted a refund from
the funds already paid
Held
Principles
Terminology
Was the levy considered a SPECIAL

ASSESSMENT & therefore should have been
devoted ONLY to the specific purpose for
which it was authorized?
NO, it was an exercise of police power for

the general welfare of the entire country
(sugar is a vital industry)
a SPECIAL ASSESSMENT is to finance the

improvement of particular properties with the
benefits accruing to the owners who paid the
assessment; an ORDINARY TAX is to
provide government with revenues it needs
for state affairs
special assessment - a levy

upon property predicated on the
doctrine that the property
against which it is levied derives
some special benefit from the
improvement
Did the Phil Sugar have any power or

authority to acquire a refinery?
YES, acquisition is part of research
13. Victorias Milling v Municipality of Victorias - 1968

1. Victorias Milling questions the validity of an
Ordinance passed by the municipality of Victorias
imposing license taxes on operators of sugar
centrals & sugar refineries
1. Was the Ordinance a regulatory or a

revenue measure?
It was a revenue measure. Even if it was

called a municipal license tax, it runs
counter to the declared purpose of
making money
2. Is the Ordinance discriminatory since it

singles out Victorias Milling which is the only
operator of a sugar central & a sugar refinery
in the area
NO, the ordinance applies to any sugar

central or sugar refinery which may
happen to operate in the municipality.
the determining factors are the purpose &

effect of the imposition as may be apparent
from the provisions of the Ordinance. When
no police inspection, supervision, or
regulation is provided, nor any standard set
for the applicant to establish . . . presumption
is strong that the power of taxation, not police
power, is being exercised
An Ordinance carries with it the presumption

of validity. Courts will go slow in writing off an
ordinance as unreasonable unless the
amount is so excessive as to be prohibitive,
arbitrary, unreasonable, oppressive, or
confiscatory
3. Was the Ordinance excessive?
NO, presumption of validity. Petioner

failed to prove that it is excessive
4. Did the Ordinance constitute double

taxation?
NO, the two taxes cover two different

objects. One taxes a person operating
sugar centrals or manufactures
centrifugal sugar and the other taxes
operators of sugar refineries. Both taxes
are NOT on sugar, rather, it is imposed on
occupation or business
5. Did the national government already preempted the municipality from enacting the
Ordinance since the NIRC subjects operators
of sugar centrals to percentage tax?
NO, this is not a percentage tax. It is a

specific tax for operators of sugar centrals
& sugar refineries. It is not a tax based
on the amount of proceeds realized out of
the sale of sugar. Rather, it is imposed on
the minimum annual output capacity, and
is not a percentage
Was the tax unconstitutional since it was

levied for the aid and support of the sugar
industry exclusively and is not a public
purpose?
NO, it was not purely an exercise of

taxing power, but also had regulatory
purpose (for rehabilitation & stabilization
of the sugar industry)
When the welfare of the public is at stake;

legislature has police power to stabilize a
threatened industry
it was an exercise in police power
Taxation may be made the implement of the

state's police power
Double taxation - taxing the

same person twice by the same
jurisdiction for the same thing
14. Lutz v Araneta - 1955

1. the Sugar Adjustment Act was enacted as an
emergency measure due to the imminent threat of
losing preferential trade status with USA; it imposed
higher tax on sugar producers; Lutz contests this
Facts
Issues
Held
Principles
Terminology
It is inherent in the power to tax that a state is

free to select the subjects of taxation
15. PCGG v Cojuangco - 2001
1. After EDSA, Pres Aquino established the PCGG to

go after ill-gotten wealth. The PCGG sequestered
shares of stock in UCPB which were registered
under the name of "one million coconut farmers" and
Danding Cojuangco
1. Did the Sandiganbayan commit grave

abuse of discretion when it disallowed PCGG
to vote UCPB shares in the name of the one
million coconut farmers?
YES, because the Sandiganbayan

contravened jurisprudence in Baseco v
Conjuangco. It deprived the government
of its right to vote sequestered shares
purchased with coconut levy funds which
are public funds
2. Later, Danding made a motion with the Anti-Graft

court to hold elections for the Board of Directors of
UCPB. PCGG objected and got a Restraining Order
from the SC
2. Who may vote on the sequestered shares

while the case is still pending in the
Sandiganbayan?
The PCGG, representing the government,

because these shares were bought using
coconut levy funds. These funds are
public in character and is clearly affected
with public interest
The general rule is that sequestered shares

are voted by the registered holder. But
PCGG may vote on these shares if it satisfies
the two-tiered test. (applies when shares
are registered in the names of private
persons or were acquired with ill-gotten
wealth) 1) is there prima facie evidence that
the shares were ill-gotten? 2) is there
imminent danger of dissipation?
The exception to the rule is if the

sequestered share were acquired with public
funds. This is the public character test.
Coconut levy funds are prima facie public

funds because: 1) they are raised with the
use of the police & taxing power of the state;
2) they are levies imposed for the benefit of
the coconut industry & its farmers
3. The Coconut Federation (COCOFED) and

Danding got a resolution from the Sandiganbayan to
stop PCGG from voting on the shares.
Elements of a tax: 1) it is an enforced

proportional contribution from persons &
properties; 2) it is imposed by the state by
virtue of its sovereignty; 3) it is levied for the
support of the government
Limitations on the Power of Taxation
16. Pascual v Secretary of Public Works - 1960

1. Governor Pascual prays to void RA 920 that seeks
to appropriate funds to construct roads since the
property was a private property belonging to Senator
Zulueta; Even that the senator donated the property
to the government 5 months AFTER the RA was
passed?
Was it legal to appropriate public funds for a

private purpose?
NO, public funds may be used only for a

public purpose. At the time when the RA
was passed, the property was private.
As a rule, the taxing power must be

exercised for PUBLIC PURPOSE only and
not for the advantage of private individuals.
The test is whether the statute is designed to
promote the public interests.
Taxpayers have the right to question the
constitutionality of a legislation appropriating
local or state public funds
18. Pepsi v Municipality of Tanuan, Leyte - 1976

1. Pepsi questioning a provision in the Local
Autonomy Act as giving municipalities an undue
delegation of taxing authority. Further Pepsi contests
some Ordinances requiring it to pay municipal
product tax on its softdrinks
Was the Local Autonomy Act an undue

delegation of power, confiscatory &
oppressive?
NO, it was due delegation. Municipalities

are permitted to tax subjects which for
reasons of public policy, the state has not
deemed wise to tax for more general
purposes
the power of taxation is and essential and

inherent attribute of sovereignty. It is purely
legislative and cannot be delegated either to
the executive or judicial. But it may be
delegated to LOCAL governments
(municipal)
public funds - money

belonging to the state raised by
operation of law for the support
of the government or for the
discharge of its functions
Facts
Issues
Do the Ordinances constitute double taxation

and impose percentage or specific taxes?
Held
NO, it wasn't double taxation nor was it a

percentage or specific tax
Principles
Terminology
Double taxation is not forbidden by the

Constitution. It only becomes obnoxious
when the taxpayer is taxed TWICE for te
benefit of the SAME GOVERNMENT ENTITY
or by the SAME JURISDICTION for the
SAME PURPOSE. But it is allowed when
one tax is imposed by the state and other by
the city or municipality
specific tax - those imposed on

specified articles
Municipalities are empowerd to impose, not

only municipal license taxes, but also to levy
for public purposes, just and uniform taxes
19. SSS v City of Bacolod - 1982

1. SSS was assessed to pay local realty tax by the
City of Bacolod. When it didn't pay, the city declared
the land & building of SSS in that city to be forfeited
to the city. SSS claims to be exempt since its a
government owned & controlled corporation
Are government owned & controlled

corporations exempt from realty taxes?
YES, they are exempt
According to the city charter - lands &

buildings owned by the government are
exempt from taxation
Even if SSS is devoted to private or

proprietary purpose, since it is OWNED &
CONTROLED by the government, it is
exempt
20. Sea-Land v CA - 2001

Sea-land got a contract to transport US government
military household goods and effects of US military
personnel to Subic. It paid an income tax on that
year. But later, it asked for refund of the income tax
saying it paid by mistake and should have been
exempt
Was the income derived from transporing US

goods exempt as per RP-US Military Bases
Agreement?
NO, it wasn't specified as so in the

Agreement
Laws granting exemption from tax are

construed STRICTISSIMI JURIS against the
taxpayer and liberally in favor of the taxing
power. Taxation is the rule, and exemption is
the exception


exemption.
NO, because these goods are not sold

DIRECTLY to the US Army for their actual
use, instead they are sold for the benefit
of these postal exchanges and shops.
The money used to pay for these are not
even supplied by the US Army itself
Whenever a state engages in a business

which is of a private nature, that business is
not withdrawn from the taxing power of the
Nation. Whenever the government permits
an organization under its control to engage in
a business which is of a private nature, that
business is not withdrawn from the taxing
power of the state
21. CIR v Mitsubishi Metal - 1990


22. Thirty-first Infantry Post v Posadas - 1930

US Army Post buys goods which are sold to army
personnel for their private use. Revenue
Commissioner Posadas taxes them for goods
bought. US Army Post wants to be exempt
Are goods which are normally subject to tax,

exempt from tax when they are sold to the US
Army for resale to its personnel?
Facts
23. CIR v Marubeni - 2001
Marubeni, a Japanese company was assessed to
pay deficiency income on some undeclared income
they got from local construction projects. They
contest it. Later, EO 41 was issued giving a one-time
amnesty to companies for unpaid income taxes.
Marubeni took advantage of this and paid to get the
amnesty. The CIR feels that they shouldn't be given
amnesty since there was already a pending case
BEFORE the tax amnesty was passed.
Issues
Held
Principles
Terminology
Were Marubeni's tax deficiency liabilities

extinguished by their availment of the tax
amnesty?
NO, because by the time Marubeni filed

for tax amnesty, there was already a
pending case with the Court of Tax
Appeals, thereby excluding it from
availing of the amnesty as provided
clearly in the EO.
A tax amnesty, similar to tax exemption, is

NEVER favored nor presumed in law. If
granted, it must be construed strictly
against the taxpayer and liberally in favor of
the taxing authority.
tax amnesty - a general pardon

by the state of its authority to
impose penalties on persons
otherwise guilty of evasion or
violation of a revenue or tax law
Is Marubeni liable to pay the income, branch,

profit remittance, and contractor's taxes
assessed by CIR? Since Marubeni claims
that these were incurred in Japan, not in Phils
NO, records clearly shows that Marubeni

had their equipment fabricated,
designed , engineered, & manufactured in
Japan and outside the taxing jurisdiction
of the Phils and so are not subject to
contractor's tax
Where a statute amending a tax law is silent

as to whether it operates retroactively, the
amendment wil NOT be given a retroactive
effect
contractor - refers to a person

who undertakes to do a specific
job or piece of work for other
persons, using his own means
& methods without submitting
himself to control as to the petty
details
A contractor's tax is generally in the nature of

an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on
products. It can be levied by the taxing
authority ONLY when the acts, privileges, or
business are done WITHIN the jurisdiction of
said authority
24. Reagan v CIR - 1969

1. Reagan was a civilian employee of a US company
who sold his car to a US Marine inside Clark Air
Base. He claims exemption from income tax
because the sale took place inside Clark, which was
outside Phil territory
Was he exempt? Was the sale made outside

Phil jurisdiction?
25. Tiu v CA - 1999

1. In 1992, RA 7227 was passed creating the Subic
Special Economic Zone. Pres Ramos issued EO
giving tax & duty incentives and specifying an area
inside Subic which was tax & duty free.
2. Petioners challenge this
NO, Clark Air Base is undisputably inside

Philippine territory. He is not exempt
- equal protection
1. Was the EO in violation of the equal
protection clause?
NO, there is real & substantive distinction

between the circumstances inside &
outside the Subic Naval Base
Equal protection is not absolute, it is subject

to reasonable classifications
Also, the purpose of the law was to

accelerate the conversion of military
reservations into productive uses. And
to develop the zone into a self-sustaining,
industrial, commerical, financial, and
investment center
It is aimed to attract BIG INVESTORS which

are very different from the current business
operators outside the area. Also, easier to
manage & monitor activities within the secure
area
Finally, the law applies to ALL the resident

individuals & businesses within the
secured area equally
26. John Hay v BCDA - 2003
A state may, by its consent, submit to a

restriction of its sovereign rights. Sovereignty
as AUTO-LIMITATION. Even then, the areas
remain native soil and still subject to its
authority.
Facts
1. The Bases Conversion & Development Authority
(BCDA) hired private contractors to develop portions
of Camp John Hay in Baguio to become Special
Economic Zones. The local authorities sent a lot of
suggestions on how to go about it, but when the
President issued his proclamation, they contested
portions of it which granted tax exemptions.
Issues
Did the President have power to grant tax

exemptions since the taxing power is purely
legislative?
Held
Principles
NO, because under RA 7227, only the

SUBIC Special Economic Zone was
granted by Congress with tax exemption.
There was NO express extension of this
benefit to OTHER SEZs still to be created
It is the legislature that has the FULL

POWER to exempt any person or corporation
or class of property from taxation. Its power
to exempt is as broad as its power to tax.
Other than Congress, the Constitution itself
may provide for specific tax exemptions or
local governments may pass ordinances on
exemption ONLY from local taxes
Tax exemption CANNOT be implied. It must

be categorically and unmistakably expressed
27. Coconut Oil Refiners v BCDA - 2005

1. Several associations filed petition against
government to nullify certain Executive Orders on its
provisions giving special tax and duty free
exemptions to duty-free shops inside Clark & Subic
Was the Executive Order void because it was

an exercise in executive lawmaking?
NO, the true legislative intent was to

create a free port where the FREE FLOW
OF GOODS or capital within is insured
Did the EO violate the provisions of RA7227

when it allowed the setting up of tax and dutyfree shops inside Clark & Subic?
NO, setting up of tax & duty-free shops

within certain limits is well within the
provisions of RA7227
Did the EO violate the prohibition against

unfair competition & practicies in restraint of
trade?
NO, the legislature can use tax incentives

as a tool to pursue its policies.
The mere fact that incentives & privileges are

granted to certain enterprises to the
exclusion of others does NOT render the
issuance unconstitutional for espousing
unfair competition
28. Prov. of Abra v Hernando - 1981
- due process & religious exemption
1. The property of the Catholic Bishop of Bangued

was assessed real property taxes by the province of
Abra. Bishop challenges this
YES, if the properties were actually,

directly, & exclusively used for religious or
charitable purposes. In this case, it was
not clearly proven
1. Was the property exempt? For religious

purposes?
29. Tolentino v Sec of Finance - 1995

1. Petioners challenge the constitutionality of the EVAT law (RA 7716). The House proposed a bill. After
3 readings it was passed to the Senate. But after 1
reading, the Senate Ways & Means committee
passed its own version of the bill.
Does the Senate have the power to propose

amendments to revenue bills? (argument
being that RA 7716 did not originate
EXCLUSIVELY from the House of
Representatives)
YES, the Senate make/propose an

amendment to a revenue bill EVEN BY
enacting its OWN VERSION (there have
been many precedents)
The Senate has limitless power to propose or

concur with amendments on any bill and can
even rewrite a bill and leave only a trace of
the original bill
2. Members of the Press claim that the EVAT law is

unconstitutional because it removes the exemption of
the press from the VAT and therefore is
discriminatory against the Press
Is the press exempt from the taxing power of

the State? Is the VAT discriminatory against
the Press?
NO, the Press is not exempt. Freedom of

the press only prohibits laws which single
out the press and discriminate against the
press based on the content of the
publication
Since the law granted the press a privilege

before, the law can also take back that
privilege anytime without offense to the
Constitution.
By granting exemptions, the state does NOT
forever waive the exercise of its sovereign
prerogative
Terminology
Facts
3. Real Estate groups say the EVAT law violates DUE

PROCESS, EQUAL PROTECTION and the RULE
ON TAXATION
4. Cooperatives claim that the EVAT goes against the

Constitution granting exemptions to it. Since there
was a PD before that granted exemption to
cooperatives from income & sales taxes. Now the
EVAT took that exemption away.
Issues
Principles
the VAT is NOT a license tax. It is NOT a

tax on the exercise of a privilege. It is
similar to income tax and does not violate
any freedoms under the Constitution
An imposition of a license tax (whose

purpose is regulatory) on the press OR to
religious groups is UNCONSTITUTIONAL
because it lays a PRIOR RESTRAINT on the
exercise of its right
Terminology
prior restraint -
Does the EVAT impair obligations of

contracts?
NO, contracts must be understood as

having been made in reference to the
possible exercise of rightful authority of
the government
Does it classify transactions without

reasonable basis? Because it exempts food,
petroleum, and medicine but NOT real
estate?
NO, the state has the power to tax

anything.
Inequalities which result from singling out

one particular class for taxation is NOT
unconstitutional
Does it violate the rule of uniformity of taxes?
NO, it does not
The taxing power has the authority to make

reasonable & natural classifications for
purposes of taxation. It is enough that the
statute equally applies to all persons, forms,
and corporations placed in similar situation
equality & uniformity of

taxation - all taxable articles or
kinds of property of the SAME
CLASS must be taxed at the
SAME RATE
Is it going against the provision in the

Constitution that Congress shall "evolve a
progressive system of taxation"? Is it a
regressive tax?
NO, even Sales Tax are regressive.
The Constitution says "EVOLVE", it did NOT

PROHIBIT regressive or indirect taxes. It
just means DIRECT TAXES are preferred.
regressive - progressive -
Did the EVAT violate the Constitutional

provision that "the Congress shall create an
agency to promote the viability & growth of
cooperatives"?
NO, the Constitution only grants tax

exemptions to charitable institutions,
churches, and non-profit educational
institutions, NOT COOPERATIVES
30. Abakada Guro v Ermita - 2005
1. Several groups petiton to declare RA 9337

(increasing the EVAT law) to be unconstitutional
Held
- due process, equal protection, uniformity

1. Is the Section giving the President a standby authority to raise the VAT rate from 10% to
12% an undue delegation of the legislative
power to tax?
NO, the legislature may delegate to the

executive the power to determine certain
facts or conditions on which the operation
of a statue is made to depend, subject to
sufficient standards. The President
MUST impose the 12% VAT when certain
conditions are met
2. Does the EVAT impose an unfair &

unnecessary additional tax burden?
NO, the SC will not pass upon questions

of wisdom, justice, or expediency of
legislation
3. Does the EVAT infringe upon due process

clause? Since the maximum input tax carried
over that can be credited is only 70% of
output tax?
NO, because the law allows the excess to

be carried over to the succeeding quarter.
Also, it allows a VAT-registered person to
apply for a tax credit certificate or refund
for any unused input taxes
4. Is the input tax a PROPERTY that may not

be confiscated, appropriated, or limited
without due process?
NO, it is not a property right, it is a mere

statutory privilege. The right to credit
input tax as against output tax is a
privilege that the law can remove or limit
Purely legislative power which can never be

delegated - the authority to make a complete
law and to determine the expediency of its
enactment
VAT - a tax on spending or

consumption; levied on the sale,
barter, exchange or lease of
goods or properties & services;
the burden of VAT falls on the
end-consumers
Valid delegation is : 1) if the law is complete

in itself 2) it fixes a standard
Direct Tax - a tax for which a

taxpayer is directly liable on the
transaction or business it
engages in, without transferring
the burden to someone else (ex.
Income tax)
The state may change or take away rights,

which were created by law, but it may not
take away property
Facts
Issues
Held
Principles
5. Does the EVAT infringe upon equal

protection?
NO, the state can make reasonable &

natural classifications for the purpose of
taxation. Equality among equals
The law did not make any classification on

the subject of taxation, the kind of property,
the rates to be levied or the amounts to be
raised, the methods of assessment,
valuations, and collection
6. Was the law uniform?
YES, it provides a standard rate of 0% or

10% or 12% on all goods & services. It
also did not make any distinction as to the
type of industry or trade that will bear the
70% limitation on the creditable input tax
Rule of uniformity ONLY demands uniformity

within the particular class
7. Was the law equitable?
YES, it provided a threshold margin

where the VAT does not apply to sales of
goods or services with gross annual sales
not exceeding P 1.5 million. Also, it
imposes a 3% percentage tax on VATexempt persons and those below P 1.5
million. So that bigger businesses that
qualify for VAT coverage & VAT-exempt
taxpayers stand on equal-footing
Additionally, the law provides mitigating

measures to cushion the impact of the tax on
those previously exempt. (ex. Excise taxes
on petroleoum products were reduced).
Finally, the law also increased the income tax
on corporations (from 32 to 35%), removed
PAGCOR's exemption from income taxes,
and even taxed artists.
8. Was the law regressive?
YES, but the Constitution does not

prohibit the imposiiton of indirect taxes
like VAT; it only says "evolve a
progressive system of taxation"
By its very nature, the VAT is regressive. The

VAT paid eats the same portion of an income,
whether big or small
Who has the competency to classify copra as

food or non-food? The Bureau of Food &
Drug or the BIR?
In the interpretation of tax laws, the BIR

has great respect
The opinion of the Commissioner of Internal

Revenue, in the absence of any showing that
it is plainly wrong, is entitled to great weight.
Was the Memo discriminatory & a violation of

equal protection because coconut farmers &
copra producers are exempt while traders are
not? Both sell copra in the original state
anyway
NO, there is a material & substantial

difference between them. The former
produce & sell copra, the latter ONLY sell
copra
Is the Memo discriminatory against FT?
Yes, considering the circumstances and

the words of the Memo, it was obviously
not just a corrective measure, but was
made to place FT's brands within the
classification of foreign brands so that it
will fall under the 55% tax rule of the new
RA. Also, the Memo applies only to FT's
brands, did not include the brands of
other companies.
31. Misamis Oriental v Dept of Finance - 1994

1. Petioners represent companies who buy & sell
copra in Misamis Oriental. Before the VAT, copra
was classified as an agricultural FOOD product and
was exempt at ALL STAGES OF PRODUCTION &
DISTRIBUTION. But the BIR issued a Memo
reclassifying copra as agricultural NON-FOOD
product and granted exemption ONLY if the sale is
made by the primary producer or owner of the land.
Sale by traders are not exempt
32. CIR v CA - 1996

1. Fortune Tabacco manufactures cigarettes under
HOPE, CHAMPION, and MORE brands. At first,
they were to be classified as foreign brands as listed
in the World Tobacco Directory. But FT changed the
names to HOPE LUXURY, PREMIUM MORE, and
CHAMPION (is a local brand) so that it became
classified as local brands subject to AD VALOREM
TAX of 45%
The BIR has only interpretative powers, no

quasi-legislative powers
Terminology
Facts
Issues
Held
Principles
Was the 5% franchise tax collectible since it

was realized before the effectivity of RA
3843?
NO, because the RA specifically stated

that the effectivity was upon the DATE the
ORIGINAL franchise was granted,
The Legislature has the inherent power to not

only to select the subjects of taxation but to
grant exemptions.
Did the RA violate the rule of uniformity and

equality?
NO, tax exeptions have never been

deemed violative of the equal protection
clause
A tax is uniform when it operates with the

same force & effect in every place where the
subject of it is found.
If it was valid, can the RA be given

RETROACTIVE effect so that the deficiency
would become uncollectible?
YES, because of the above
Legislative intent is the key to answer

whether a statute can apply retroactively
Is the VAT oppressive, discriminatory,

regressive, & violative of the due process &
equal protection clause?
NO, the tax is uniform (applies similarly to

all goods & services sold to the public
which are not exempt)
Terminology
2. Later, RA 7654 was passed changing the tax rate

for foreign brands. Two days before its effectivity,
the BIR issued a Memo saying that since HOPE,
MORE, & CHAMPION were listed in the World
Tobacco Directory as being manufactured by many
foreign companies, it should be classified as locally
manufactured cigarettes bearing a FOREIGN brand
and is subject to 55% tax. BIR assessed tax
deficiency on FT at about P 9 million
3. FT appealed this and the CTA declared the BIR
Memo to be invalid.
33. CIR v Lingayen Gulf Electric Power - 1988

1. Lingayen Gulf operates an electric power plant
and was paying 1% tax on gross receipts as per the
municipal franchise granted to it. The BIR assessed
it tax defiency and said they should pay 5% (as per
the NIRC), which they contested. While the case
was pending, a RA was passed granting them a
franchise and specifying that they pay 2% tax.
34. Kapatiran v Tan - 1988

1. Petitioners challenge the EO 273 which adopted
the VAT for being unconstitutional.
NO, the tax is equitable (imposed only on

sales of goods & services by persons
engaged in business with gross sales of
more than P 200K)
35. Sison v Ancheta - 1984

1. Petitioner challenges the Constitutionality of Batas
Pambansa 135 amending the NIRC of certain tax
rates on citizens. Higher tax rate on those who
exercise a profession or run a business versus those
on a fixed income
Is the amendment arbitrary, class legislation,

oppressive, and capricious?
NO, taxpayers may be classified into

different categories as long as the
classification rests upon substantial
distinctions that make real differences
The powe to tax is NOT the power to destroy.

The Constitution has set some limits such as
the due process & equal protection clause
The Due Process clause may be invoked
where a taxing statute is so arbitrary that it
finds no support in the Constitution. Example,
it it can be shown to amount to a confiscation
of property.
Where the tax measure is BEYOND the
jurisdiction of the state OR it is NOT for a
public purpose, OR in case of retroactive
statute is SO HARSH & UNREASONABLE,
it is subject to attack on due process
grounds
uniformity - all property

belonging to the same class
shall be taxed alike
Facts
Issues
Held
Principles
Terminology
Equal protection means that the law

operates equally & uniformly on ALL persons
under SIMILAR circumstances or that ALL
persons be treated in the same manner, the
conditions not being different
Uniformity is when the tax operates with the
same force & effect in every place where
the subject may be found
36. Villegas v Hiu Chiong - 1978

1. Mayor Villegas imposes Ordinance requiring all
aliens to register first & pay a registration fee
BEFORE being allowed to work; Hiu Chiong contests
this
1. Was the Ordinance a revenue measure,

discriminatory, and violative of the rule of
uniformity in taxation?
YES, it was a revenue measure obviously

to raise money under the guise of
regulation
2. Did the Ordinance violate the principle of

illegal delegation of legislative power?
3. Was it arbitrary, oppressive, and

unreasonable?
YES, it is not only because it is excessive

but also because it failed to consider valid
substantial differences in situation among
aliens
where an Ordinance fails to state any policy

or to set up any standard to guide or limit the
action, expresses no purpose to be attained
by requiring a permit, enumerats no
conditions for its grant or refusal, it thus
grants the Mayor arbitary and unrestricted
powers - such Ordinance is invalid
37. Villanueva v City of Iloilo - 1968
1. Petioner owns several tenement (apartment)

houses. The City of Iloilo issued an Ordinance
imposing license tax on persons engaged in the
business of operating tenement houses. The SC
declared it void since at that time, the city did not
have the power to tax as according to its charter.
2. Later, the Local Autonomy Act was passed. The

City again issued same Ordinance. Petioner
challenges this.
1. Did the Ordinance impose double taxation?
NO, because it is NOT a real estate tax

as according to definition. The intention is
to impose a license tax on the
OPERATION of tenement houses, which
is a form of business
2. Is the City of Iloilo empowered to impose

tenement taxes?
YES, the Local Autonomy Act gave local

governments broad taxing power as long
as it is for public purposes, just & uniform
3. Is the Ordinance oppressive &

unreasonable because it carries a PENAL
clause?
NO, the tax is NOT a debt nor is it a poll

tax. The Charter of Iloilo empowers the
city to FIX penalties for violations of
Ordinances
The spirit, rather than the letter of an

Ordinance determines the construction. The
character of a tax is deduced from its nature
& essence, not to be fixed by isolated words
real estate tax - a direct tax on

the ownership of lands &
buildings not specially
exempted. It is a fixed
proportion of the assessed
value of the property taxed &
requires the intervention of
assessors. It constitutes a
superior lien on & is enforceable
against the property and NOT
by imprisonment of the owner
The same tax may be imposed by the

national government as well as the local
government. No Constitutional prohibition
against double taxation in the Philippines
double taxation - when the

same property is taxed twice
when it should be taxed once;
both taxes being imposed on
the same property for the
same purpose by the same
taxing authority within the
same jurisdiction during the
same taxing period and the tax
is the same kind of tax
Facts
Issues
Held
4. Does the ordinance violate the rule of

uniformity? Since other owners of tenement
houses in other cities don't have to pay
license tax
NO, it is NOT required that taxes for the

same purpose MUST be imposed in
different territorial jurisdictions at the
same time
1. Is the Ordinance imposing double taxation?
Even if it is, it is not illegal
2. Is it excessive, oppressive, & confiscatory?
NO, the amount is too small
3. Did the City have legislative powers?
YES, it may be delegated
Principles
As long as the burden of tax falls equally &
impartially on all owners of tenement houses
similarly classified or situation, uniformity is
accomplished
38. Pepsi v City of Butuan - 1968

1. Pepsi owns a warehouse in Butuan to store its
softdrinks while its factory is in QC. The City issued
an Ordinance imposing a tax per case of softdrinks
received outside but sold within the city. Pepsi
contests this
4. Is it highly unjust & discriminatory?
YES, because only sales by agents of

OUTSIDE dealers are subject to tax.
Sales by local dealers regardless of
volume of sales are exempted.
5. Is the Ordinance in reality an import tax?
YES, because it was based on number of

cases RECEIVED, not SOLD by the
agent. And also because merchants who
sell softdrinks are not taxed, ONLY the
agents of another dealer
Uniformity must be based on: 1) substantial

distinction which make real differences 2)
these are germane to the purpose of the
legislation 3) the classification applies not
only to the present but also to future
conditions substantially identical to the
present ones 4) the classification applies
equally to all those who belong to the same
class
39. Ormoc Sugar v Treasurer of Ormoc City - 1968

1. The City of Ormoc issued an Ordinance specifying
Ormoc Sugar Company by name and imposing a tax
on sugar milled by said company. Ormoc Sugar paid
under protest but challenged the constitutionality of
the Ordinance
1. Did the Ordinance violate equal protection

clause and rule on uniformity?
YES, because it specifically names

Ormoc Sugar Company and none other.
Even if the company was the ONLY sugar
miller in that city, the classification should
be in terms applicable to future conditions
as well.
3. Is the company entitled to interest on

refund should it win the case?
NO, because at the time of collection, the

Ordinance provided a sufficient basis, it
being presumed constitutional until
proven otherwise
Was the tax unconstitutional since it was

levied for the aid and support of the sugar
industry exclusively and is not a public
purpose?
NO, it was not purely an exercise of

taxing power, but also had regulatory
purpose (for rehabilitation & stabilization
of the sugar industry)
When the welfare of the public is at stake;

legislature has police power to stabilize a
threatened industry
it was an exercise in police power
Taxation may be made the implement of the

state's police power
The taxing ordinance should NOT be

singular & exclusive as to exclude any
subsequently established company in the
same class
40. Lutz v Araneta - 1955

1. the Sugar Adjustment Act was enacted as an
emergency measure due to the imminent threat of
losing preferential trade status with USA; it imposed
higher tax on sugar producers; Lutz contests this
It is inherent in the power to tax that a state is

free to select the subjects of taxation
Terminology
Facts
Issues
41. Asstn Custom Brokers v Municipal Board - 1953
Held
Principles
As a rule, an AD VALOREM tax is a property
tax, BUT if the NATURE & PURPOSE is that
of an EXCISE, then it is considered an
EXCISE
Terminology
1. Association challenges Ordinance issued by MB of

Manila imposing a property tax on ALL motor
vehicles operating within the city
Was it in reality a LICENSE TAX even as it

was called an AD VALOREM TAX?
YES, the Ordinance merely imposes a

license fee under the cloak of an AD
VALOREM tax to circumvent the
prohibition under the Motor Vehicle Law
2. It provided a 1 % per annum AD VALOREM tax

for use of repair & maintenance of streets & bridges
Did the Ordinance offend against the rule of

uniformity of taxation?
YES, becoz it did NOT distinguish

between motor vehicle for hire and those
for private use; nor did it distinguish
between vehicles registered in the city
and those merely passing through
uniformity of taxation -
Did the Ordinance constitute double

taxation?
YES, the Motor Vehicle Law specifically

prevents such duplication and merely
calling it a PROPERTY TAX does not
make it a property tax, the INTENT is the
key
double taxation -
42. Eastern Theatrical v Alfonso - 1949

1. Petioners are owners & operators of theaters &
distributors of local & imported films. City of Manila
issued Ordinance imposing a fee on the price of
every ticket sold in Manila. Petioners challenge this
1. Is the Ordinance violative of uniformity &

equality rule? Since other places of
amusement were not included?
NO, the taxing power has the authority to

make reasonable & natural classifications
for purposes of taxation
2. Did the Ordinance violate existing national

revenue & tax laws? Since the NIRC that
was later enacted included provisions on
amusement tax
NO, because the Revised Administrative

Code expressly included taxing of
theaters as within the power granted to
the city
43. Philtrust v Yatco - 1940

1. Petioners are banks which have been paying
capital & deposit taxes for some years. Now, they
are challenging the section of the Revised
Administrative Code.
- uniformity & equal protection

1. Was the tax in violation of the rule of
uniformity? Since it exempts the National
City Bank of New York
NO, the rule of uniformity does not call for

perfect uniformity or perfect equality. The
law applies uniformly to all banks in the
Phils.
2. Was it discriminatory & violative of the

equal protection clause?
NO, a state may impose a different rate of

taxation upon a foreign corporation for the
privilege of doing business within the
state than it applies to its own
corporations
44. Churchill v Concepcion - 1916

1. Petioner owns a billboard in Manila. An Act was
passed taxing "billboards..and all signs displayed on
premises not occupied by buildings". The BIR taxed
them. They paid under protest & is now contesting it
Both provisions of law may stand together &

be enforced at the same time without any
incompatibility. No rule against double
taxation
- uniformity
1. Was the Act confiscatory & unjustly
discriminatory? Thereby resulting in
deprivation of property?
NO, the petitioners can raise their

charges to cover for the tax and yet they
never tried it. Besides, other people paid
the tax without protest
unless the tax equals or exceeds the gross

income, it would not be considered
confiscatory
2. Did it lack uniformity? Because it wasn't

graded according to value?
NO, the rule of uniformity doesn't mean

that it has to be graded according to value
a tax is uniform when it operates with the

subject is found
45. Meralco v Province of Laguna - 1999
property tax excise tax -
license tax -
Facts
1. Meralco was granted a franchise to provide
electricity by several provinces in Laguna. Later, the
Local Government Code was passed in 1991. Then,
the province passed an Ordinance imposing a
franchise tax of 50% of 1% of gross receipts on all
businesses enjoying a franchise. Meralco paid under
protest and challenges the Ordinance
Issues
Held
Principles
1. Was the Ordinance violative of the nonimpairment clause in the Constitution?

Since the tax exemption granted by PD 551
was in the nature of a contract.
NO, this is not a contractual tax

exemption, it is a tax exemption granted
under a franchise to operate. The
Constitution is explicit that NO franchise
shall be granted except under the
condition that such privilege shall be
subject to amendment, alteration, or
repeal by Congress when the common
good so requires
Contractual tax exemptions may NOT be

revoked without impairing the obligations
of contracts. A franchise is a grant which is
beyond the scope of the non-impairment
clause of the Constitution
2. Did the Ordinance repeal PD 551? PD 551

specified that the franchise tax payable by all
franchisees is 2% of gross receipts
YES, because the Local Government

Code (basing on the legislative intent) has
vested broad taxing powers to local
government units. And Section 193 of the
Code specifically mentions that tax
exemption privileges are withdrawn upon
effectivity of the Code. There is also a
general repealing clause which states that
all PREVIOUS laws which are
inconsistent with the Code are repealed
Local governments do not have the

INHERENT power to tax except when such
power is DELEGATED to them by the
Constitution or the legislature
46. Province of Misamis Oriental v Cagayan Electric - 1990

1. Cagayan Electric was granted a franchise to
operate an electric company in Cagayan de Oro.
Later, the Local Tax Code was promulgated. The
province of Misamis enacted an Ordinance imposing
a franchise tax on all businesses enjoying a
franchise. Cagayan paid under protest and
challenges the Ordinance
1. Is a corporation whose franchise expressly

provides that payment of the franchise tax in
lieu of all taxes & assessment by whatever
authority, exempt from paying a provincial
franchise tax?
YES, the magic words are "IN LIEU OF

ALL TAXES". These were specified in the
RA granting the franchise
2. Was the RA that granted the franchise to

Cagayan repealed by the PD (Local Tax
Code)?
NO, the RA is a special law applicable

only to Cagayan Electric while the PD is a
general tax law
48. Lealda Electric v CIR - 1963

1. Lealda was an electric company operating in Albay
under a franchise which granted 2% tax. Later, the
NIRC was amended by a RA increasing the tax to
5%. Lealda paid the higher rate but asked for
refund.
A special and local statue applicable to a

particular case is NOT repealed by a later
statute which is general in terms, even if the
terms of the general act is broad enough to
include the cases in the special law
- non-impairment of contracts
1. Was the original franchise a PRIVATE
CONTRACT between the government and
Lealda? So that it is protected by the nonimpairment clause?
NO, the original franchise did not fix the

rate at 2%, it only said the rate shall be
the same as other franchise holders. But
RA fixed the rate of the franchise tax of
"ALL EXISTING & FUTURE
FRANCHISES"
A franchise has a provision that it can be

altered or repealed by Congress. If there is
no magic words "IN LIEU OF ALL TAXES .
NOW OR IN THE FUTURE". Old law will be
repealed by newer law
Tax exemptions are never presumed
49. Casanovas v Hord - 1907

1. Casanovas owned a mining concession granted
by the Spanish government. Later, when the Internal
Revenue Act was passed, the CIR imposed higher
tax on his mines. He paid under protest and now
asking for refund
- non-impairment of contracts
1. Was the royal decree granting the mining
concession a PRIVATE CONTRACT between
the government and Casanovas? So that it is
protected by the non-impairment clause?
YES, it was a contract and was impaired

by the Internal Revenue Act. It said in the
contract that it can be canceled only for
failure to comply with the conditions
stated, and nothing that said it can be
cancelled by future legislation
A state may BY CONTRACT exempt the

property of an individual or corporation from
taxation, either for a specified period or
permanently
Terminology
contractual tax exemptions those agreed to by the taxing
authority in contracts, such as
those contained in government
bonds or debentures, lawfully
entered into by them under
enabling laws in which the
government sheds its cloak of
authority & waives its
governmental immunity
Facts
Issues
Held
Principles
The legislature may, in the absence of a
special restriciton in the Constitution, make a
valid contract with a corporation with respect
to taxation, and such contract can be
enforced against the state
50. American Bible v Manila - 1957
- exemption of religious, charitable, & educational entities
1. American Bible is a foreign non-stock, non-profit

corp. with a local agency in Manila which distributes
& sells bibles. The City of Manila said that it was
conducting a business of general merchandise and
required it to secure permit & pay license fees. They
paid under protest and is now asking for refund
1. Was the Ordinance requiring all

businesses to obtain Mayor's permit before it
can operate valid?
YES, it doesn't specifically tax the

exercise of religious practices. It applies
generally to all businesses
2. American Bible claims that it has been in Phils

since 1899. The City never required it to pay real
estate taxes on its properties, it was never required
to pay any municipal license fee or tax before the
war; and that it sells bibles at a loss. It even has to
get remittances from New York to support its
operating costs and accepts donations for its cause
2. If Valid, was the Ordinance applicable to

American Bible since it claims to be exempt
due to religious purpose?
NO, even if they sell the bibles sometimes

at a little bit higher than cost, it doesn't
mean that they were engaged in the
business of selling merchandise for profit.
Applying the Ordinance would impair the
freedom of religion
51. Abra Valley v. Aquino - 1988

1. Abra Valley College is a school offering primary,
high school, & college courses. The students are
housed in the main building while the Director and
his family lives on the 2nd floor. The ground floor
was used & rented by a commercial establishment

1. Was the lot & building used EXCLUSIVELY
for educational purposes and therefore
exempt from real estate tax?
NO, the 2nd floor lodging for the Director

& his family is INCIDENTAL to
educational purpose, but the ground floor
commercial establishment is NOT
The exemption in favor of property used

exclusively for charitable & educational
purposes extends to facilities which are
incidental to & reasonably necessary to
accomplish said purpose.
2. The school's lot & building were sold at public

auction by the Provincial Treasurer of the province of
Abra for non-payment of real estate taxes. Now the
Director is seeking its return
52. CIR v Bishop Missionary - 1965
1. Bishop represents the Episcopalian Church of

USA. He is the administrator of St. Luke's Hospital,
Brent Hospital, & St. Stephen High School - all
owned by the Episcopalian Church. He received
shipments of supplies & equipment to be used for the
construction & operation of the new St. Luke's
Hospital in QC, etc. The CIR levied taxes on these.
The Bishop paid but is now claiming refund
1. Is the Phils office is merely the branch of

the USA office?
NO, they are both separately & duly

registered in each country. The Phils is a
branch ONLY in matters of faith. Same
as the Catholic Church in the Phils
2. Is St. Luke's Hospital is a charitable

institution or not? Considering that it admits
pay patients
YES, the admission of pay patients does

NOT detract from the charitable character
of a hospital. The funds of the hospital
are devoted exclusively to its
maintenance
53. Lladoc v CIR - 1965
requisites for a valid tax exemption: 1) the

imported articles must have been donated 2)
the donee must be a duly incorporated or
established international civic, religious, or
charitable organization 3) the aricles must
have been donated for the use of the
organization and NOT for barter, sale, or hire
Terminology
Facts
1. Somebody donated money to a priest for the
construction of a new Catholic church in Bacolod city.
The church was constructed and Reverend Lladoc
became the parish priest. The CIR assessed him a
donee's gift tax which he protested
Issues
1. Is the Reverend liable for the assessed
donee's gift tax which was donated for the
construction of his church?
54. Herrera v QC Board - 1961
Held
YES, because it was not a property tax, it
was an excise tax (on the exercise of a
privilege of receiving & using the property)
Principles
The exemption of churches, parsonages,
convents, & all lands & buildings used
EXCLUSIVELY for religious purposes
COVERS only PROPERTY TAXES. Gift
taxes are not within this exemption
1. The Director of the Bureau of Hospitals authorized

the petitioners to establish & operate the St.
Catherine's Hospital in QC. The latter then
requested from the QC assessor real estate tax
exemption which was granted. But later, the QC
Board sent notice that the hospital was re-classified
and was now liable to pay taxes. Petitioners
challenge this.
1. Was the hospital use exclusively for

charitable purposes and therefore exempt?
Considering that it has a pay ward and
accepts pay patients?
YES, because the income realized from

pay patients is spent for maintenance &
improvement of the charity wards
When rendering charity is the PRIMARY

OBJECTIVE, and the funds received from
pay patients are devoted to the purpose of
the institution, the mere fact that a profit has
been made will not deprive the hospital of its
benevolent objective
2. They claim that they also have a school for midwifery which uses hospital property too. Other
portions of the property are used as residence of the
petitioners, garage, dormitory and school
2. Also that the portion dedicated to

educational & charitable purposes cannot be
identified or separated from those of other
uses since its only 1 building
This is another ground for exemption.

The exemption is regardless of whether or
not profits are derived from the operation
of the institution
The exemption extends to facilities which are

incidental to & reasonably necessary for the
accomplishment of the hospital's purposes
Congress may tax the PROFITS, but the
land, buildings, & improvements are
BEYOND its taxing power
55. Bishop of Nueva v Ilocos - 1927
1. Bishop represents the Catholic Church where they

own land in Ilocos Norte. The provincial board taxed
them on the part of the property which was formerly a
cemetery and an adjacent lot used for a vegetable
garden. The rest of the property which has a church
& a convent were not taxed. Bishop is protesting
YES, the priest has to take care of himself

so that a vegetable garden is considered
part of the house. And since the former
cemetery is not used for commercial
purposes but rather for religious
festivities, it is also considered an
incidental use in religious functions
1. Was the part which was formerly a

cemetery & the part which was being used as
a vegetable garden exempt?
56. CIR v CA & YMCA - 1998

1. YMCA got income from leasing out a portion of its
premises to shop owners & from parking fees. The
CIR assessed deficiency income tax on it. YMCA
protested it claiming that such income is for nonprofit purpose

1. Is the income derived from rentals of real
property owned by YMCA subject to income
tax? Considering that YMCA was established
as a welfare, educational & charitable nonprofit organization?
YES, the NIRC specifically states that

income from exempt organizations from
any of their properties are subject to tax.
(It means whether the income is for profit
or for non-profit purpose)
Consti, Article 14, Section 4, "all revenues &

assets of non-stock, non-profit educational
institutions used actually, directly, &
exclusively for educational purposes shall be
exempt from taxes & duties"
The YMCA is exempt only from property

taxes
2. Is the YMCA considered an educational
institution to exempt it from income tax?
57. Lung Center v QC - 2004
NO, under the Education Act, educational

institution refers to a school seminary,
college, or educational establishment
Terminology
Facts
1. Lung Center was established by PD. Its in QC
with a lot area of 120,000 sq. meters. Aside from the
hospital, it has a big space at the ground floor leased
to private stores & canteens and to doctors for their
clinics. There is a big area of land that is vacant and
another area leased for commercial purpose called
Elliptical Orchids & Gardens. Lung Center accepts
both paying & non-paying patients and receives
government subsidies
Issues
Held
Principles
Terminology
1. Is it a charitable institution since 60% of its

hospital beds are exclusively for charity
patients & the major thrust of the hospital is to
serve charity patients?
YES, it fulfills the elements, looking at its

PURPOSE (articles of incorporation)
which is for the welfare & benefit of the
Filipino people to help combat high
incidences of lung & pulmonary diseases
in the Phils. The medical services to be
rendered to the public in general including
those who are poor and the needy without
discrimination
Elements to be considered are: statute

creating the enterprise, its corporate
purpose; its constitution and by-laws; the
methods of administration; the nature of
actual work performed; character of services
rendered; the indefiniteness of the
beneficiaries; & the use & occupation of the
properties
charity - a gift for the benefit of

an indefinite number of persons,
either by bringing their minds &
hearts under the influence of
education or religion, by
assisting them to establish
themselves in life or otherwise
lessening the burden of
government
It does NOT lose its character as a

charitable institution simply because
money is donated to it through
government subsidies
Any person, the rich as well as the poor, may

fall sick or be injured or wounded and
become the subject of charity
BUT, those portions of its real property

that are leased to private entities are NOT
exempt from real property taxes, because
these are not actually, directly, &
exclusively used for charitable
purposes
As a general rule, a charitable institution

does NOT lose its character as such simply
because it derives income from paying
patients as long as the money received is
devoted to the charitable object and NO
money inures to the private benefit of the
persons managing it
ALSO, the PD specifically gives it

exemption ONLY to taxes, charges, &
fees imposed by the government or any
political subdivision; NOT property taxes
The 1987 Constitution added the words,

"ACTUALLY, DIRECTLY, & EXCLUSIVELY
used for charitable purposes". So now, the
dominant use or principal use reason cannot
be applied anymore.
2. Later, the city of QC assessed it for real property

taxes for which it is claiming exemption
Situs of Taxation & Double Taxation
58. Republic Bank v CTA - 1992

1. Republic Bank was assessed bank reserve
deficiency taxes due based on Sec 249 of the Tax
Code. The Bank contends that Section 249 no
longer applies because of the enactment of the
General Banking Act which repealed that provision of
the Tax Code.
- double taxation
1. Was Section 249 of the Tax Code repealed
by Sec 90 of the General Banking Act?
NO, the Tax Code is imposing a TAX on

banks while the General Banking Act is
imposing a PENALTY on banks for
reserve deficiency
the Tax was for revenue, while the Penalty

was for regulation
2. Was there double taxation? Because if

they have reserve deficiency, the bank would
then have to be liable for a tax of 1% a month
to the BIR, as well as a penalty of 1/10 of 1%
a day to the Central Bank
59. P&G v Municipality of Jagna - 1979
- double taxation
1. P&G has a warehouse in Jagna, Bohol where it

stores copra purchased in the municipality for
shipping to its factory. The municipal council issued
an Ordinance imposing storage fees of all exportable
copra deposited in the "bodega" within its jurisdiction.
P&G paid under protest for 6 years, but is now
challenging the validity of the Ordinance
YES, because the prevailing law when the

Ordinance was passed was the
Commonwealth Act 472 which gave them
authority to impose 3 kinds of licenses. 1)
for regulation of useful occupation 2) for
regulation of non-useful 3) license for
REVENUE
1. Was the Ordinance valid? Considering

that the cost is HIGH, it is really a license fee
not for regulation but for REVENUE
At that time, license fee has not acquired a

fixed definition yet. It could be used for
regulation of various privileges as for
example, the privilege of storing copra in a
bodega
Facts
Issues
Held
ALSO, it can be considered to fall under
the General Welfare Clause of the
Revised Administrative Code
2. Was it double taxation? Since it is P&G is

not engaged in buying or selling copra, but is
only storing copra for use in its business of
manufacturing
NO, a tax on products is different from a

tax on the PRIVILEGE of storing the
product
3. Was the tax in reality an EXPORT TAX?

Which is prohibited under the Revised
Administrative Code?
NO, it wasn't imposed for export to any

foreign country. The words "exportable
copra" was meant as "shipment out of the
municipality"
3. Has P&G's right to action already

prescribed? Since the Civil code provides
only a 5-year period for this
NO, under the Civil Code, the period for

prescription of actions is 6 years, P&G
was just in time
Principles
A warehouse used to store copra is likely to
endanger the public safety because the oil
content of copra when ignited, is difficult to
put out by wate and chemicals must be used
Double Taxation - taxing the

The Export Tax prohibition will only come into
play when there is a clear showing that what
is being taxes is an export to a foreign
country
60. Pepsi v Municipality of Tanuan, Leyte - 1976
- double taxation
1. Pepsi questioning a provision in the Local

Autonomy Act as giving municipalities an undue
delegation of taxing authority. Further Pepsi contests
some Ordinances requiring it to pay municipal
product tax on its softdrinks
NO, it was due delegation. Municipalities

are permitted to tax subjects which for
reasons of public policy, the state has not
deemed wise to tax for more general
purposes
the power of taxation is and essential and

inherent attribute of sovereignty. It is purely
legislative and cannot be delegated either to
the executive or judicial. But it may be
delegated to LOCAL governments
(municipal)
NO, it wasn't double taxation nor was it a

percentage or specific tax
Double taxation is not forbidden by the

Constitution. It only becomes obnoxious
when the taxpayer is taxed TWICE for te
benefit of the SAME GOVERNMENT ENTITY
or by the SAME JURISDICTION for the
SAME PURPOSE. But it is allowed when
one tax is imposed by the state and other by
the city or municipality
Was the Local Autonomy Act an undue

delegation of power, confiscatory &
oppressive?
Do the Ordinances constitute double taxation

and impose percentage or specific taxes?
Terminology
specific tax - those imposed on

specified articles
Municipalities are empowerd to impose, not

only municipal license taxes, but also to levy
for public purposes, just and uniform taxes
61. Villanueva v City of Iloilo - 1968
1. Petioner owns several tenement (apartment)

houses. The City of Iloilo issued an Ordinance
imposing license tax on persons engaged in the
business of operating tenement houses. The SC
declared it void since at that time, the city did not
have the power to tax as according to its charter.
1. Did the Ordinance impose double taxation?
- double taxation
NO, because it is NOT a real estate tax

as according to definition. The intention is
to impose a license tax on the
OPERATION of tenement houses, which
is a form of business
The spirit, rather than the letter of an

Ordinance determines the construction. The
character of a tax is deduced from its nature
& essence, not to be fixed by isolated words
real estate tax - a direct tax on

the ownership of lands &
buildings not specially
exempted. It is a fixed
proportion of the assessed
value of the property taxed &
requires the intervention of
assessors. It constitutes a
superior lien on & is enforceable
against the property and NOT
by imprisonment of the owner
Facts
2. Later, the Local Autonomy Act was passed. The

City again issued same Ordinance. Petioner
challenges this.
Issues
2. Is the City of Iloilo empowered to impose

tenement taxes?
YES, the Local Autonomy Act gave local

governments broad taxing power as long
as it is for public purposes, just & uniform
3. Is the Ordinance oppressive &

unreasonable because it carries a PENAL
clause?
NO, the tax is NOT a debt nor is it a poll

tax. The Charter of Iloilo empowers the
city to FIX penalties for violations of
Ordinances
4. Does the ordinance violate the rule of

uniformity? Since other owners of tenement
houses in other cities don't have to pay
license tax
NO, it is NOT required that taxes for the

same purpose MUST be imposed in
different territorial jurisdictions at the
same time
62. Victorias Milling v Municipality of Victorias - 1968

1. Victorias Milling questions the validity of an
Ordinance passed by the municipality of Victorias
imposing license taxes on operators of sugar
centrals & sugar refineries
Held
Principles
The same tax may be imposed by the

national government as well as the local
government. No Constitutional prohibition
against double taxation in the Philippines
Terminology
double taxation - when the
same property is taxed twice
when it should be taxed once;
both taxes being imposed on
the same property for the
same purpose by the same
taxing authority within the
same jurisdiction during the
same taxing period and the tax
is the same kind of tax
As long as the burden of tax falls equally &

impartially on all owners of tenement houses
similarly classified or situation, uniformity is
accomplished
- double taxation
1. Was the Ordinance a regulatory or a

revenue measure?
It was a revenue measure. Even if it was

called a municipal license tax, it runs
counter to the declared purpose of
making money
2. Is the Ordinance discriminatory since it

singles out Victorias Milling which is the only
operator of a sugar central & a sugar refinery
in the area
NO, the ordinance applies to any sugar

central or sugar refinery which may
happen to operate in the municipality.
3. Was the Ordinance excessive?
NO, presumption of validity. Petioner

failed to prove that it is excessive
4. Did the Ordinance constitute double

taxation?
NO, the two taxes cover two different

objects. One taxes a person operating
sugar centrals or manufactures
centrifugal sugar and the other taxes
operators of sugar refineries. Both taxes
are NOT on sugar, rather, it is imposed on
occupation or business
5. Did the national government already preempted the municipality from enacting the
Ordinance since the NIRC subjects operators
of sugar centrals to percentage tax?
NO, this is not a percentage tax. It is a

specific tax for operators of sugar centrals
& sugar refineries. It is not a tax based
on the amount of proceeds realized out of
the sale of sugar. Rather, it is imposed on
the minimum annual output capacity, and
is not a percentage
the determining factors are the purpose &

effect of the imposition as may be apparent
from the provisions of the Ordinance. When
no police inspection, supervision, or
regulation is provided, nor any standard set
for the applicant to establish . . . presumption
is strong that the power of taxation, not police
power, is being exercised
An Ordinance carries with it the presumption

of validity. Courts will go slow in writing off an
ordinance as unreasonable unless the
amount is so excessive as to be prohibitive,
arbitrary, unreasonable, oppressive, or
confiscatory
Double taxation - taxing the

Facts
Issues
63. Compania General v City of Manila - 1963
1. Tabacalera claiming from the City refund because
it paid BOTH the fixed LICENSE fees and SALES
TAXES required by various Ordinances; claims that it
should be exempt from the sales tax since it already
paid the license fees
Was Tabacalera being subjected to double

taxation?
Held
Principles
- double taxation
NO, license fees is clearly to regulate
sale of liquor since it is potentially harmful
to public health & morals while the sales
tax are a revenue measure
a FEE is imposed in the exercise of police

power while a TAX is imposed under the
taxing power for purpose of raising revenue
both a license fee & a tax may be imposed

on the same business and its not a violation
of the rule against double taxation
64. Bulacan v CA - 1998

1. Republic Cement was assessed a tax for
extracting limestone, shale, & silica from its private
lands in Bulacan by virtue of an Ordinance. They
paid under protest and is now contesting
- double taxation
1. Did the City have authority to tax Republic
Cement's extraction of materials from its
PRIVATE land? Since the Local Government
code specifically gives authority to tax sand,
gravel & other quarry resources extracted
from PUBLIC LANDS only
YES, because the Local Government

Code gives authority to impose taxes
OTHER than those specified, under
certain circumstances
2. Was it double taxation?
YES, the Local Government Code

prohibits provinces from levying EXCISE
taxes on articles already taxed by the
NIRC
The NIRC already levies a tax on ALL quarry

resources, regardless of origin. While, the
Local Government Code gives authority to
tax ONLY those from public lands. Ergo, the
province may not tax those from private
Forms of Escape from Taxation
65. Delpher Trades v Intermediate Appellate Court - 1988
- tax avoidance
1. Mr. Pacheco & his sister owns land in Bulacan

which he leased out to CCI company with the
condition that after the term of lease, if Mr. Pacheco
wishes to sell the property, he must first offer it to
CCI under similar conditions.
NO, because the facts prove that the real

owners of Delpher Trades were the
children of Mr. Pacheco & his sister.
There was no transfer of ownership.
Important points: 1) the Pachecos took NO

PAR VALUE shares in exchange for their
property 2) there was no attempt to state the
current market value of the land
Delpher Trades was just a business

conduit of the Pachecos. What they
really did was to invest their properties &
change the nature of their ownership from
unincorporated to incorporated and to
save on inheritance taxes (estate
planning)
The legal right of a taxpayer to decrease the

amount of what otherwise could be his taxes
by means which the law permits, cannot be
doubted
1. Was the Deed of Exchange meant to be a

Contract of Sale thereby prejudicing Hydro
Pipe's right of first refusal?
2. CCI assigned its rights & obligations to Hydro

Pipes Int'l with consent of Mr. Pacheco.
3. Later, Mr. Pacheco executed a deed of exchange

with Delpher Trades where Mr. Pacheco gave the
property to Delpher Trades and received 2,500
shares of stock in Delpher Trades
4. Now, Hydro Pipes claims that the exchange was
actually a deed of sale and violated its right of first
refusal to purchase the property
66. Heng Tong Textiles v CIR - 1968
- tax avoidance
Terminology
Facts
1. Heng Tong imported a shipment of textile. The
goods were withdrawn from customs by Pan-Asiatic
Commercial which paid the sales taxes. The BIR
made an assessment of tax deficiency PENALTY on
Heng Tong, which it is contesting
Facts: 1) Heng Tong & Pan-Asiatic were sister

companies 2) the commercial & shipping documents
were in the name of Heng Tong 3) Pan-Asiatic
acted merely as indentor
Issues
Held
Principles
1. Was Heng Tong liable for tax deficiency

PENALTY since it was the real importer?
NO, it was merely an arrangment so that

sales taxes could be minimized. PanAsiatic, as indorsee, withdraws the goods
from Customs and sells it to Heng Tong at
cost (no sales tax paid by Heng Tong
since it was at cost)
An attempt to minimize one's tax does NOT

necessarily constitute fraud. A taxpayer may
diminish his liability by any means which the
law permits
2. Was Heng Tong guilty of fraud?
NO, it was in good faith that they wanted

Pan-Asiatic to be, in law, considered the
importer. Their reason COULD BE
TRUE, that they wanted Pan-Asiatic to
have good reputation with suppliers
abroad
Fraud is never lightly presumed. It must be

proved to exist by clear & convincing
evidence & cannot be justified by mere
speculation
Terminology
67. CIR v Toda - 2004
- tax evasion (fraud)
1. The CIC Company authorized its president, Mr.

Toda to sell its building & land. Mr. Toda sold it to Mr.
Altonaga (for P 100 million), who in turn RE-SOLD it
to Royal Match Inc (RMI) on the same day (for P 200
million)
1. Was Toda guilty of tax evasion by fraud?

Or was it simply tax avoidance?
YES, TAX EVASION, because: 1) even

before selling the property to Mr.
Altonaga, CIC had received P 40 million
from RMI; such was reflected in the
balance sheet of RMI as "other
investment CIC Bldg"
2. Mr. Altonaga paid capital gains tax of P 10 million.

CIC paid capital gains of P 75 million
2. If he was, has the period for assessment of

deficiency already prescribed? NO, the NIRC
specifically provides that in cases of
fraudulent returns, the period is 10 years from
the discovery of the fraud
2) Mr. Altonaga was a close business

associate & a trusted corporate executive
of Mr. Toda
tax evasion - a scheme used

outside of those lawful means &
usually subjects taxpayer to civil
or criminal liabilities
3. Mr. Toda sold his entire shares of stock in CIC

(almost 100%) to Mr. Choa for P 12.5 million. Three
years later, he died
3) the two sales were made

simultaneously on the same date
fraud - anything calculated to

deceive resulting in the damage
of another or by which an undue
advantage is taken of another
4. After he died, the BIR assessed deficiency income

taxes on the new CIC for P 79 million.
4) the Deed of Absolute Sale between

Altonaga & RMI was even notarized
EARLIER than the one between CIC &
Altonaga
5. The new CIC is protesting, claims that it should be

the old CIC that is liable and that Toda had
undertaken to hold the buyer of his stocks FREE
from all tax liabilities
5) Obviously, it was done so that Altonaga

would be subject to only 5% individual
capital gains tax and CIC would not have
to pay the 35% corporate income tax.
Altonaga was a tax shelter
Tax evasion has 3 factors: 1) the end to be

achieved (payment of less or none of the
taxes due) 2) bad faith or willful state of mind
3) unlawful action
Exemption from Taxation
68. Davao Gulf Lumber v CIR - 1998
- tax refund (computation)
1. Petitioner is a licensed forest concessionaire who

purchased oils, fuels, etc for use in cutting down
trees. The oil companies paid the specific taxes but
passed them on to the petitioner.
RA 1435, because it was passed to get

funds for constructing new highways. But
since forest concessionaires do not
directly benefit from these new highways,
(they use their own roads), the tax refund
was given as a measure of relief to them
1. Which law should be the basis of the rates

to be refunded? RA 1435 or the NIRC?
Once a tax is unquestionably imposed, a

claim of exemption must be clearly shown &
based on language in th law too plain to be
mistaken
tax avoidance - tax saving

device within the means
sanctioned by law
Facts
2. Petioner is now claiming or refund from CIR based
on jurisprudence (Insular Lumber v CTA) and RA
1435 or Phil Highway Act of 1953 (which provides
that 25% of the specific tax paid shall be refunded
upon submission of proof of actual use in by forest
concessionaire)
Issues
2. Should the refund be based on NIRC on
the grounds of equity and justice?
Held
When the Phil Highway Act was abolished
in 1985, the reason for the refund ceased
to exist. Since petitioner purchased &
used the oils before 1985, then, the
refund falls under the RA
3. But the CIR refunded only a small part and based

on lower rates under RA 1435, not the higher rates
actually paid by petitoner.
Further, the RA does NOT EXPLICITLY

provide that the refund MAY be based on
higher rates which were non-existent at
the time of its enactment.
69. Phil Acetylene v CIR - 1967
- shifting
1. Petitioner maufactures & sells oxygen & acetylene

glass. They sold to Napocor and Voice of America
(an agency of USA). The CIR assessed them
deficiency sales tax for which it is protesting
1. Was petitioner liable for payment of taxes?

Since Napocor is exempt from taxation?
YES, the SC looked at US jurisprudence

and proved that EVEN in those cases
where tax exemption was sought on the
ground of state immunity, it failed
2. Is the sales tax imposed on the producer or

the purchaser? Since it is paid by the
manufacturer but is later SHIFTED to the
buyer
ON THE PRODUCER, Even if the

economic burden of the tax finally falls on
the purchaser, it just becomes PART of
the price. The purchaser still does not
pay the tax
3. How about VOA? Was the sale to it exempt

from sales tax?
NO, because according to the Bases

Agreement, ONLY sales made for
EXCLUSIVE use in the construction,
maintenance, operation or defense of the
bases are exempt. Even its an agency of
the USA, if the purpose is NOT the above,
it is not exempt
70. CIR v CA & Ateneo - 1997

1. Ateneo, being a non-stock, non-profit educational
institution, had an auxiliary unit called the Institute of
Philippine Culture (IPC), which has NO legal
personality separate & distinct from thaf of Ateneo.
Principles
There is NO TAX EXEMPTION solely on the
ground of EQUITY
- independent contractor or academic institution?

1. Is IPC considered an independent
contractor? So that it is subject to the 3%
contractor tax?
NO, the IPC never sold its services for a

fee to anyone nor was it engaged in a
business apart from the academic
purpose of the university
When determining exemptions, the CIR

should first determine if the subject is
covered under the Tax Code. THEN, it can
ask the subject to PROVE its exemption
2. Was the research done by IPC considered

a taxable activity? Since it is done under a
contract and the IPC received compensation
NO, because there is no evidence that

IPC conducted the research FOR A FEE.
The funds can be considered as gifts or
donations WITH NO STRINGS
ATTACHED. IPC's main function is to
undertake research projects UNDER THE
ACADEMIC AGENDA of Ateneo
A Statute will NOT be construed as imposing

a tax UNLESS it does so clearly, expressly,
and unambiguously.
3. The CIR assessed it deficiency income &

contractor's taxes. (under the Tax Code which says
"an independent contractor encompassess all kinds
of servies rendered for a fee") Later, it dropped the
deficiency income, but retained the deficiency
contractor's taxes. Ateneo is protesting
When IPC accepts sponsorship for a

research project, it is on condition that: a)
the research is confined to topics
consistent with its academic purpose b)
that no commercial purpose research is
done c) that IPC retains the rights &
ownership of the results, (no transfer of
ownership)
In case of doubt, tax statutes are construed

STRONGLY AGAINST the government and
in favor of the subject. ONLY AFTER it is
found that the subject is CLEARLY covered
in the Tax Code shall the rule become to be
strictly construed AGAINST the taxpayer
71. Caltex v CoA - 1992
- only NPC was granted full exemption
2. The IPC is engaged in social sciences studies and

sometimes gets sponsorships for its research
activities from international orgs, private foundations,
and government agencies
Terminology
contract of sale - one of the

parties obligates himself to
transfer the ownership of & to
deliver a determinate thing &
the other to pay the price
Facts
Issues
Held
1. Oil companies are required to remit to the OPSF a

certain portion of its tax collected.
1. Does the CoA have the power to determine

which expenditures are recoverable from the
OPSF and which are not? (Isn't this
supposed to be the function of the Dept of
Finance?)
YES, the Constitution grants them

authority to disallow illegal expenditures
of funds or uses of funds and property. It
is also responsible for the enforcement of
the rules & regulations
2. In 1989, the CoA directed Caltex to remit to the

OPSF its collections for additional tax on petroleum
which amounted to P 330 million. Later that year, the
CoA revised the amount to P 1.2 billion.
2. Was the Department of Finance Circular

correct when it said that "financing charges"
is considered part of "cost underrecovery"?
NO, although it was the government's

request that Caltex refinance its oil import
payments from 30 days to 360 days
credit, the CoA claimed that Caltex in fact
earned more from this by investing in the
money market. Since Caltex could not
prove that it suffered a loss from this, it
cannot "have its cake and it eat too" by
asking for reimbursement
3. Caltex requested an early release of its pending

tax credit certificates which were due from the OPSF.
The CoA denied the early release.
3. Were the sales to Napocor tax exempt and

therefore applicable for reimbursement from
the OPSF?
YES, NPC was granted FULL

EXEMPTION, Caltex can recover from
OPSF
4. Caltex proposed a simultaneous exchange, it will

pay P 1.2 billion while the Coa will give the same
amount in cash disbursement from OPSF. The CoA
agreed but said that sales to mining companies and
to NAPOCOR were not covered for tax credit. Also
that "financing charges" were not part of the underrecovery which Caltex was claiming. (Since Caltex
could use those funds to invest in money market and
earn more)
4. Were the sales to mining companies tax

exempt and applicable for reimbursement as
well?
NO, the OPSF was not created to aid

distressed mining companies but rather to
help the domestic oil industry by
stabilizing oil prices. The suspension of
tax payment by mining companies did not
give Caltex the same privilege.
5. But the Department of Finance disagreed with this

and Caltex is using this as a basis for its petition
5. Can the amounts due to the OPSF be offset against Caltex's claims against it?
NO, taxes cannot be the subject of

compensation. The oil companies merely
act as agents for the government in their
collection of taxes
72. Luzon Stevedoring v CTA - 1988

1. Petitioner imported engine parts for the repair &
maintenance of its tugboats. It was assessed
compensating tax for which it paid under protest.
The CTA denied its protest.
1. Is "TUGBOATS" included in the term

"CARGO VESSELS" and therefore tax
exempt under the NIRC? (Since tugboats
tows the barge loaded with cargo and they
constitute a single vessel)
Principles
- tax exemption (strictly construed against taxpayer)

NO, tugboats are for towing & pulling only,
not for use in carrying persons or goods
by themselves
Any claim of exemption is strictly construed

against the taxpayer
Besides, the INTENT of the exemption is

to provide incentives to bolster the
shipping industry, NOT the business of
stevedoring
73. National Development Corp v CIR - 1987
- situs of taxation, tax exemption, withholding tax
1. NDC contracted Japanease companies for

construction of 12 ships. NDC paid in cash & L/C
(guaranteed by the Central Bank) and did NOT
withold any tax on interest paid. The CIR assessed
NDC liable for P 5 million taxes on the INTEREST it
paid to Japanese companies. Since NDC did not
pay, the BIR issued a warrant of distraint & levy.
NDC goes to CTA
YES, NDC was liable. Sec 37 of the Tax

Code provides "income FROM
SOURCES within the Phils". The law
does NOT speak of the activity, but of
"SOURCE". The RESIDENCE of the
obligor who pays the interest is the
determining factor of the SOURCE of
interest income
1. Was NDC liable for the tax on INTEREST?

Or was it the Japanese companies who
earned income from sources within the Phils?
(All the related activities like construction of
vessel were done in Tokyo)
Tax exemptions cannot be merely implied,

but must be categorically & unmistakably
expressed
Terminology
Facts
Issues
2. Were the interest payments obligations of
the Phil government & that the promissory
notes were government securites exempt
from taxation?
74. Meralco v CIR - 1975
1. Meralco holds a franchise to construct, maintain, &

operate an electric light, heat, & power system in
Manila. It imported wires, transformers, & insulators
for its use in the operations. The CIR assessed it
compensating tax for which it paid under protest
Held
Principles
NO, there is nothing written that clearly

gives NDC an exemption from interest
taxes. The government merely
guaranteed the obligations of NDC
without diminishing its taxing power. The
tax was due on the interest EARNED by
the Japanese companies, not the NDC.
Its NDC's fault for not withholding it
In case of doubt, a withholding agent may

always protect himself by withholding the tax
due, and promptly querying with the CIR for
determination of whether or not the income is
subject to tax
Terminology
- tax exemption under a franchise, compensating tax versus property tax

1. Is Meralco exempt from compensating tax?
Since its franchise says "that the percentage
tax payable shall be in lieu of all taxes &
assessments of whatsoever nature, and by
whatsoever authority upon the privileges,
earnings, income, franchise, & poles, wires,
transformers, & insulators of the grantee,
from which taxes & assessments the grantee
is hereby expressly exempted"
NO, because 1) the franchise is a

MUNICIPAL franchise, not a legislative
franchise 2) there is NO EXPRESS
PROVISION in the franchise that
MERALCO is exempt from paying a
COMPENSATING tax on its imports of
poles, wires, transformers, & insulators.
A compensating tax is an excise tax, NOT a

property tax. A tax levied upon property
because of its ownership is a direct tax. A tax
levied upon property BECAUSE OF ITS USE
is an excise tax
excise tax - one imposed on

the performance of an act, the
engaging in an occupation, or
the enjoyment of a privilege
The provision merely exempts it from

PROPERTY TAX. The succeeding
phrase "from which." limits the scope of
exemption, and only reaffirms that the
exemption is from payment of property
tax
75. Maceda v Macaraig - 1991 (part ONE)
- tax exemption of government entities, exemption is the rule
1. In 1946, Napocor was created by a CA to

undertake the development of power sources and
exempted it from all taxes. In 1974, a PD specified
that other charges imposed "directly or indirectly"
on all petroleum products used by NPC are included
in the tax exemption. In 1976, a PD amened the
previous PD by integrating the tax exemption in
GENERAL TERMS under 1 paragraph.
1. Did the NPC ceased to enjoy INDIRECT

tax exemption when PD 938 was enacted in
1976? Since the phrase "directly or indirectly"
was deleted
NO, the original Charter and the various

amendments to it by PD show that the
INTENT was to exempt it from ALL
FORMS of taxes. Besides, the taxes paid
by oil companies on oil products sold to
NPC NEVER entered into the rates
charged by NPC to its customers
In case of property owned by the state,

exemption is the rule and taxation is the
exception. Repeal by implication is not
favored unless it is manifest that the
legislature so intended
direct tax - a tax for which a

taxpayer is directly liable on the
transaction, ex. Custom duties
& ad valorem taxes
2. In 1984, a PD was proclaimed withdrawing all tax

exemption privileges but authorized the Fiscal Board
to recommend restoration of exemption for some.
NPC's exemption got restored.
2. Did the Fiscal Board resolutions restore

ONLY tax and duty exemptions and NOT
indirect tax exemption?
NO, the restoration INCLUDED all forms

of taxes. There is NO TAX EVASION in
this case by oil companies, rather, it is a
case of TAX RELIEF for NPC
Process: 1) oil company pays for taxes &

duties 2) it bills NPC for oil INCLUDING
taxes & duties 3) NPC applies for tax credit
from BIR 4) NPC assigns tax credit to oil
companies as payment of the tax component
indirect tax - taxes primarily

paid by persons who can shift
the burden upon someone else,
ex. Custom duties are SHIFTED
to the buyer by adding them to
the selling price
3. In 1987, an EO again withdrew all tax exemptions

and also authorized the Fiscal Board to do the same.
Three months later, the FB restored NPC's tax
exemptions RETROACTIVELY to when it was taken
away. During these 3 months, the oil companies had
been charging specific & ad valorem taxes on NPC.
NPC asked for a refund on taxes paid
Doctrine in Phil Acetylene v CIR is no

longer applicable because it was decided in
1967 where the court held that the seller
cannot get tax exemption just because its
customer, NPC was tax exempt. But in 1971,
the NPC's charter was revised and its tax
exemption was expanded to include indirect
tax
Facts
Issues
Held
Principles
4. The BIR said that indirect taxes or those only

shifted to NPC are not covered by refund. The
amount became as big as P 1.5 billion and Senator
Maceda got into the picture calling for a Blue Ribbon
inquiry. The Blue Ribbon found that NPC was never
granted exemption from indirect taxes and should
pay specific & ad valorem taxes from 1976 up to
present
Maceda v Macaraig - 1993 (part TWO)
1. Senator Maceda asked the court to RECONSIDER
1. What kind of tax exemption privileges did

NPC have?
It was exempted from ALL FORMS of

taxes (both direct & indirect). Besides,
what possible benefit would it get when it
increased its capitalization by P 200
million from taxpayer money if it would
just use it to pay taxes?
2. For what periods in time were these

privileges enjoyed?
These were restored from 1984 to the

present
3. If there are taxes to be paid, who shall pay

for these taxes?
The oil companies. They add the tax to

the price of oil. If NPC is tax exempt, it
asks the government for a refund
76. CIR v Gotamco & Sons - 1987

1. Gotamco & Sons was contracted to build a
building by the WHO. All prospective bidders were
told that the building belonged to an international org
with diplomatic status and thus exempt from payment
of all fees, licenses, & taxes. The winning bidder
was Gotamco & Sons who constructed the building
for around P 450,000
2. Later, the CIR said that the petitioner is liable for

contractor's tax of 3% because it is not a direct nor
an indirect tax on the WHO. Even that the WHO
issued a certification that the contractors were told
NOT to include the taxes in their bids and that they
acted in good faith, the CIR still demanded payment
of deficiency tax
- tax exemption, express provision for indirect taxes
1. Is the tax actually an INDIRECT tax on the

WHO and thus exempted?
YES, because it will be shifted by the

contractor to the owner as a matter of
self-preservaation so that in the last
analysis, it is the owner of the building
that shoulders the burden of the tax
2. Is Gotamco liable for the 3% contractor's

tax? (Since it is in the nature of an excise tax
which is a charge upon the engaging in an
occupation)
NO, in Phil Acetylene v CIR, it was a tax

on sale of goods to be paid by the
manufacturer. But the HOST
AGREEMENT specifically exempted
WHO from "indirect taxes". It even
provided that should the Org make
important purchases for official use, the
government will arrange for the return of
the amount of tax paid. It was very clear
that the intent was to exempt WHO from
indirect taxation
77. CIR v CA & YMCA - 1998

1. YMCA got income from leasing out a portion of its
premises to shop owners & from parking fees. The
CIR assessed deficiency income tax on it. YMCA
protested it claiming that such income is for nonprofit purpose
In 1987, the issue became MOOT &

ACADEMIC because ad valorem taxes for
fuel oil was reduced to ZERO

1. Is the income derived from rentals of real
property owned by YMCA subject to income
tax? Considering that YMCA was established
as a welfare, educational & charitable nonprofit organization?
YES, the NIRC specifically states that

income from exempt organizations from
any of their properties are subject to tax.
(It means whether the income is for profit
or for non-profit purpose)
The YMCA is exempt only from property
taxes
Consti, Article 14, Section 4, "all revenues &

assets of non-stock, non-profit educational
institutions used actually, directly, &
exclusively for educational purposes shall be
exempt from taxes & duties"
Terminology
Facts
Issues
2. Is the YMCA considered an educational
institution to exempt it from income tax?
78. Nitafan v CIR - 1987

1. Petitoners are judges who wish to enjoin the CIR
from making any deductions of withholding taxes
from their salaries
Held
Principles
NO, under the Education Act, educational

institution refers to a school seminary,
college, or educational establishment
- tax exemption, judicial officers not exempted anymore

1. Is withholding tax on judicial officers
unconstitutional? Since the constitution
mandates that "during their continuance in
office, their salary shall not be decreased"
NO, the salaries of judicial officers are

properly subject to a general income tax
law and it does not fall within the
constitutional mandate mentioned
Comparing the 1973 & 1987 Constitution. In

the 1973 version, there was a provision
which stated that "no salary of any public
officer including constitutional officers shall
be exempt from payment of income tax".
This statement is missing in the 1987 version
Looking at the deliberations of the 1987

Constitution, it was clear that the intent
was to take away the exemption from
income tax. They specifically discussed
and agreed that jurisprudence (Perfecto v
Meer) would not apply anymore
79. Prov. of Abra v Hernando - 1981
- due process & religious exemption
1. The property of the Catholic Bishop of Bangued

was assessed real property taxes by the province of
Abra. Bishop challenges this
YES, if the properties were actually,

directly, & exclusively used for religious or
charitable purposes. In this case, it was
not clearly proven
1. Was the property exempt? For religious

purposes?
80. CIR v Mitsubishi Metal - 1990




exemption.
NO, because these goods are not sold

DIRECTLY to the US Army for their actual
use, instead they are sold for the benefit
of these postal exchanges and shops.
The money used to pay for these are not
even supplied by the US Army itself
Whenever a state engages in a business

which is of a private nature, that business is
not withdrawn from the taxing power of the
Nation. Whenever the government permits
an organization under its control to engage in
a business which is of a private nature, that
business is not withdrawn from the taxing
power of the state
82. Thirty-first Infantry Post v Posadas - 1930

US Army Post buys goods which are sold to army
personnel for their private use. Revenue
Commissioner Posadas taxes them for goods
bought. US Army Post wants to be exempt
83. PLDT v Davao - 2001
Are goods which are normally subject to tax,

exempt from tax when they are sold to the US
Army for resale to its personnel?
- tax exemption, can be re-granted after the LGC withdrew it
Terminology
Facts
Issues
Held
1. In 1999, PLDT applied for Mayor's Permit to

operate its Davao Metro Exchange. The City
demanded it to pay local franchise tax for the rest of
the year first. PLDT protested and even asked for
refund of tax paid from 1997 to 1998.
1. Can the tax exemption, which was

expressly withdrawn by the LGC, be granted
again by Congress?
YES, the grant of taxing powers to local

government units does NOT affect the
power of Congress to grant exemptions
pursuant to a declared national policy
2. The City denied it citing that the Local Government

Code (effective 1992) already withdrew all tax
exemptions previously enjoyed and authorized local
governments to impose a tax on businesses enjoying
a franchise, notwithstanding any grant of tax
exemption
2. Was PLDT then given exemption under RA

7925 (Public Telecom Policy Act)? (where
Globe & Smart were given tax exemption
from local franchise taxes)
NO, the intent of the RA is to promote

gradually the deregulation of the entry,
pricing, & operations of all public
telecoms and thus promote a level playing
field in the industry.
3. PLDT claims that since Smart & Globe were given

tax exemptions in their new legislative franchises, it
must also be given tax exemption under RA 7925
(Public Telecom Policy Act) which states that "any
advantage, favor, privilege, exemption, or immunity
granted under existing franchises shall IPSO FACTO
become part of previously granted telecom
franchises"
Principles
There is nothing in the language of the

RA nor in the deliberations of Congress
which shows that it contemplates the
grant of tax exemptions to all telecom
entities, including those whose
exemptions have been withdrawn by the
LGC
84. Sea-Land v CA - 2001

Sea-land got a contract to transport US government
military household goods and effects of US military
personnel to Subic. It paid an income tax on that
year. But later, it asked for refund of the income tax
saying it paid by mistake and should have been
exempt
Was the income derived from transporing US

goods exempt as per RP-US Military Bases
Agreement?
NO, it wasn't specified as so in the

Agreement
Laws granting exemption from tax are

construed STRICTISSIMI JURIS against the
taxpayer and liberally in favor of the taxing
power. Taxation is the rule, and exemption is
the exception
85. Meralco v Province of Laguna - 1999
- tax exemption under franchise repealed
1. Meralco was granted franchise in the province of

Laguna and also by the National Electrification
Administration to operate an electric & power service.
1. Did the Ordinance violated the nonimpairment clause?
NO, the LGC has expressly withdrawn tax

exemptions previously enjoyed by certain
entities. A franchise partakes the nature
of a grant which is beyond the purview of
the non-impairment clause
Art 12 of Consti, "no franchise for the

operation of a public utility shall be granted
except under the condition that such privilege
shall be subject to amendment, alteration, or
repeal by Congress when the common good
so requires"
2. Has the LGC repealed PD 551 (granting its

franchise). Since the PD had the magic
words "IN LIEU OF ALL TAXES"
YES, there is a Repealing Clause which

states that "all general & special laws,
acts, city charters, decrees, executive
orders, proclamations, and administrative
regulationswhich are inconsistent with
any of the provisions of this Code are
hereby REPEALED or MODIFIED"
The magic phrase will have to give way to the

peremptory language of the LGC. The
legislative intent is very clear
2. After the LGC of 1991 was passed, province of

Laguna enacted an Ordinance taxing Meralco for
franchise tax. Meralco paid under protest
86. Tiu v CA - 1999

1. In 1992, RA 7227 was passed creating the Subic
Special Economic Zone. Pres Ramos issued EO
giving tax & duty incentives and specifying an area
inside Subic which was tax & duty free.
- equal protection
1. Was the EO in violation of the equal
protection clause?
NO, there is real & substantive distinction

between the circumstances inside &
outside the Subic Naval Base
Equal protection is not absolute, it is subject

to reasonable classifications
Terminology
Facts
Issues
2. Petioners challenge this
Held
Principles
Also, the purpose of the law was to

accelerate the conversion of military
reservations into productive uses. And
to develop the zone into a self-sustaining,
industrial, commerical, financial, and
investment center
It is aimed to attract BIG INVESTORS which

are very different from the current business
operators outside the area. Also, easier to
manage & monitor activities within the secure
area
Terminology
Finally, the law applies to ALL the resident

individuals & businesses within the
secured area equally
87. Mactan Cebu Int'l Airport v Marcos - 1996
- tax exemption, repealed by the LGC
1. Mactan Cebu, which was created under a RA, was

assessed realty taxes by the city of Cebu ON
SEVERAL PARCELS OF LANDS BELONGING TO
IT. Petioner claimed it was exempt being an
instrumentality of the government performing
governmental functions. The City rejected, saying
that it is a government-controlled corp whose tax
exemptions had been withdrawn under the LGC
NO, the general rule laid down by the

LGC is that the taxing powers of local
governments cannot extend to the
National government, its agencies, &
instrumentalities. BUT it can impose
REAL PROPERTY TAX on property
owned by the Republic of the Phils or any
of its political subdivisions EXCEPT when
the beneficial use has been granted to
a taxable person
2. Petitioner was forced to pay under protest.

Claiming that the LGC specifically provided that "the
taxing powers of local government units shall NOT
extend to the levy of taxes or fees or charges of any
kind on the national government, its agencies, &
instrumentalities"
1. Is Mactan Cebu considered an

instrumentality or agency of the government?
Since its task is not merely to efficiently
operate & manage the airport but also to
promote & develop Central Visayas &
Mindanao as centers of int'l trade & tourism
2. Is it liable to pay realty taxes? Or was the

exemption withdrawn by the LGC?
YES, the LGC expressly withdrew

exemptions from payment of realty taxes
granted to natural or juridical persons
INCLUDING government-owned or
controlled corporations
3. Were the parcels of land in question

belonging to the Republic of the Phils whose
beneficial use has been granted to the
petitioner?
NO, the Charter of Mactan Cebu says that

the the transfer of land to it was an
absolute conveyance of ownership so that
it is now the owner of said lands, so that
they are not exempted
Republic of the Phils - the corporate

governmental entity through which the
functions of government are exercised
throughout the Phils, including the various
arms, whether pertaining to the autonomous
regions, the provincial, city, municipal, or
barangay subdivisions
agency of government - any of

the various units of the
government, including a
department, bureau, office,
instrumentality, or governmentowned or controlled corp
National government - the entire machinery

of the CENTRAL government, as
distinguished from the diff forms of local
government; composed of the 3 great
departmetns: executive, legislative, & judicial
instrumentality of
government - any agency of
the national government , not
integrated within the department
framework, vested with special
functions, endowed with some
corporate powers, administering
special funds, and enjoying
operational autonomy
88. CIR v Robertson - 1986
- tax exemption, international comity
1. Several American citizens (who were born here

but later became American Citizens) were hired as
civilian employees in the US military bases. They
were assessed deficiency income taxes on their
income derived from salaries . The CIR claims that
these people have already established their
residence in the Phils. (some owned residential
properties here; some are already retired Federal
Civil Service employees)
YES, tax exemption under the Agreement

requires that a person must be a US
Citizen employed in connection with the
construction, maintenance, operation, or
defense of the bases and that the income
derived is from the US government. They
all fulfill the requirements
89. Basco v Pagcor - 1991
1. Are these Americans tax exempt under the

RP-US Military Bases Agreement?
case of Reagan V CIR does not apply here;

totally different becoz Reagan was claimint
tax exemption on the sale of his automobile
INSIDE the US bases; he was claiming
territorial jurisdiciton exemption
- tax exemption, supremacy of National government over local government
Facts
1. Petitoners are lawyers who question the
constitutionality of Pagcor's Charter on the basis of it
being contrary to morals, public policy, and order;
and that it waived the right of the City of Manila to
impose taxes & license fees
Issues
Held
Principles
1. Was the establishment of Pagcor contrary

to morals, public policy, and order?
NO, the prohibition of gambling does not

mean that the government cannot
regulate it in the exercise of its police
power. The creation of Pagcor was for
public welfare and it has proven to be
beneficial to society
2. Does Pagcor violate the principle of local

autonomy since it constitutes a waiver of the
right of the City of Manila to impose taxes and
legal fees?
NO, the city of Manila is a mere municipal

corporation which has no inherent right to
impose taxes. Its power to tax must
always yield to a legislative act which is
superior, having been passed by the state
which has the inherent power to tax
this doctrine of supremacy of the National

government over local governments is no
longer ruling when the LGC was enacted
(Mactan Cebu v Marcos)
Also, local governments have NO power

to tax instrumentalities of the National
Government. Since Pagcor is a
government owned or controlled
corporation with an original charter, it
should be exempt from local taxes
the matter of regulating, taxing, or dealing

with gambling is a state concern and so, it is
the sole prerogative of the State to retain it or
delegate it to local governments
3. Is this violative of the Local Autonomy

Clause in the Constitution? Which provides
that "each local government unit shall have
the power to create its own source of revenue
and to levy taxes, fees, and other charges
subject to such guidelines and limitations as
the Congress may provide
NO, the power of local government to

impose taxes & fees is ALWAYS
SUBJECT to limitations which Congress
may provide
90. RP v Intermediate Appellate Court & Pastor - 1991
- tax amnesty, in case of doubt - strictly against government
1. The Spouses Pastor was assessed deficiency

income taxes. They countered that they had already
availed of the tax amnesty and should be no liable
anymore. The BIR insists that they aren't covered by
the tax amnesty because there was an existing
assessment already at the time they paid the
amnesty tax
YES, the government is ESTOPPED from

collecting the difference.
1. Was the payment under the tax amnesty

enough to divest the government from the
right to further recover from the taxpayer?
Considering that the Revenue Regulations
provide that only persons who had no
pending assessment can avail of the tax
amnesty
a tax amnesty - partakes of an absolute

forgiveness or waiver by the government of
its right to collect what otherwise would be
due it
IN CASE OF DOUBT - tax statutes are to be

construed strictly against the GOVERNMENT
and liberally in favor of the taxpayer
91. CIR v CA & ROH Auto Products Phils - 1995
- tax amnesty, coverage
1. An EQ was issued in 1986 giving a one-time tax

amnesty on unpaid income taxes for the taxable
years 1981 - 1985. ROH availed of this. Later, the
CIR assessed it deficiency income taxes. ROH
claimed to have paid already under the tax amnesty
plan. But the CIR said that the Revenue Memo
Order to implement the EO included only
assessments issued by the BIR AFTER the
promulgation of the EO and not BEFORE.
YES, if the EO had NOT intended to

include tax liabilities already assessed
before it was promulgated, it could have
just provided it in the exclusionary
clauses. But it did not. Besides, it was
the time of Martial law and there were
calls for civil disobedience. So, its natural
that after the EDSA revolution, the new
government would provide for a broad,
not a confined, tax amnesty
1. Was ROH's deficiency income taxes

extinguished by its availment of the tax
amnesty?
93. Misamis Oriental v Dept of Finance - 1994
Terminology
Facts
1. Petioners represent companies who buy & sell
copra in Misamis Oriental. Before the VAT, copra
was classified as an agricultural FOOD product and
was exempt at ALL STAGES OF PRODUCTION &
DISTRIBUTION. But the BIR issued a Memo
reclassifying copra as agricultural NON-FOOD
product and granted exemption ONLY if the sale is
made by the primary producer or owner of the land.
Sale by traders are not exempt
Issues
Held
Who has the competency to classify copra as

food or non-food? The Bureau of Food &
Drug or the BIR?
In the interpretation of tax laws, the BIR

has great respect
Was the Memo discriminatory & a violation of

equal protection because coconut farmers &
copra producers are exempt while traders are
not? Both sell copra in the original state
anyway
NO, there is a material & substantial

difference between them. The former
produce & sell copra, the latter ONLY sell
copra
Principles
Terminology
The opinion of the Commissioner of Internal

Revenue, in the absence of any showing that
it is plainly wrong, is entitled to great weight.
95. CIR v Lingayen Gulf Electric Power - 1988

1. Lingayen Gulf operates an electric power plant
and was paying 1% tax on gross receipts as per the
municipal franchise granted to it. The BIR assessed
it tax defiency and said they should pay 5% (as per
the NIRC), which they contested. While the case
was pending, a RA was passed granting them a
franchise and specifying that they pay 2% tax.
Was the 5% franchise tax collectible since it

was realized before the effectivity of RA
3843?
NO, because the RA specifically stated

that the effectivity was upon the DATE the
ORIGINAL franchise was granted,
The Legislature has the inherent power to not

only to select the subjects of taxation but to
grant exemptions.
Did the RA violate the rule of uniformity and

equality?
NO, tax exeptions have never been

deemed violative of the equal protection
clause
A tax is uniform when it operates with the

subject of it is found.
If it was valid, can the RA be given

RETROACTIVE effect so that the deficiency
would become uncollectible?
YES, because of the above
Legislative intent is the key to answer

whether a statute can apply retroactively
uniformity - all property

belonging to the same class
shall be taxed alike
Nature, Construction, Applicationi, and Sources of Tax Laws
96. ABS-CBN v CTA - 1981
- state is not estopped, but no retroactivity in the interest of justice
1. ABS-CBN withheld income tax of 30% of 1/2 of the

amount of film rentals from foreign companies not
engaged in trade or business within the Phils. This is
pursuant to the NIRC and follwing the Circular of the
CIR dated 1961 and approved by the Secretary of
Finance.
NO, the Tax Code provides that "circulars

promulgated by the Commissioner shall
NOT be given retroactive application if it
will be prejudicial to the taxpayer".
Besides, ABS-CBN had already remitted
all film rentals and no longer had any
control of over them when the new
Circular was issued
2. But in 1971, a new CIR issued a new Circular

claiming that the previous one was erroneous, it
should be 30% of the ENTIRE amount. It assessed
deficiency withholding taxes on ABS-CBN, which it is
now protesting
97. PBCOM v CIR - 1999
1. Can the CIR apply the new Circular

RETROACTIVELY so as to assess a
deficiency withholding tax on ABS-CBN?
principle of legislative approval of

administrative interpretation by re-enactment
- the re-enactment of a statute, substantially
unchanged is persuasive indication of the
adoption by Congress of a prior executive
construction
the government is NEVER estopped from

collecting taxes because of mistakes or
errors on the part of its agents, except in the
interest of justice and fair play
- state is not estopped by mistakes of its agents
Facts
1. In the 1st 2 quarters of 1985, PBCOM paid P 5
million in income taxes. But at the end of the year, it
reported a net loss and asked the BIR for a tax credit
of P 5 million. It also asked for refund for withholding
taxes already paid on rentail income from its leased
properties
Issues
Held
1. Was PBCOM prejudiced because the BIR

gave it assurance that the prescriptive period
for refund/tax credit is not 2 years but 10
years (under a Revenue Memo Circular), and
afterwards, the BIR rejected their request?
NO, the NIRC provided that the

prescriptive period for filing a court
proceeding for recovery of tax
erroneously collected is two years. The
BIR Circular created a clear inconsistency
with the NIRC. By doing so, the BIR did
not simply interpret the law, it legislated
guidelines contrary to the statute passed
by Congress
Claims for refund or tax credit should be

exercised within the time fixed by law
because the BIR's functions should not be
unduly delayed or hampered by incidental
matters
Also, the NON-RETROACTIVITY rule

cannot be applied because the nullity of
the erroneous circular was declared by
the COURTS, not by the BIR
Interpretations by executive officers are given

great respect, but it is NOT conclusive and
will be ignored if judicially found to be
erroneous
Claims for refunds are construed

STRICTLY AGAINST TAXPAYER
The State cannot be put in estoppel by the

mistakes or errors of its officials or agents
2. The CTA denied its plea saying that it was filed

beyond the 2-year reglementary period
Principles
Power to Tax involves Power to Destroy
98. CIR v Tokyo Shipping - 1999
- power to tax / power to destroy
1. Tokyo Shipping owns a tramper vessel. In 1980, a

sugar company chartered it to load sugar. Tokyo prepaid income & common carrier's taxes but when the
ship arrived in Guimaras, there was NO sugar. So, it
went back to Japan without any cargo
1. Who has the burden of proof to support a

claim for refund?
The taxpayer, since a claim for refund is

in the nature of a claim for exemption, it is
strictly construed against the taxpayer.
So, taxpayer has burden of proof
2. It claimed tax refund with the CIR in 1981 and

subsequently filed petition with the CTA.
2. Did Tokyo Shipping sufficiently prove that it

did not realize any receipt from its charter
agreement? And thus entitled to a refund?
YES, the evidence is clear. The

government was able to delay the refund
for 15 long years so that the money finally
refunded is just worth a damaged nickel
99. Reyes v Almanzor - 1991

1. Petitioners owned parcels of land which were
leased and occupied as dwelling sites in Manila. In
1971, an RA was passed prohibiting for 1 year an
increase in monthly rentals of dwelling sites where
the rent does not exceed P 300. A PD was passed
prohibiting landowners from ejecting tenants upon
the expiration of the lease
2. In 1973, the City of Manila re-assessed the

property basing it on market value which
corresponded to a tax increase for the landowner.
Petitioners are claiming that it is unconstitutional
since the taxes imposed greatly exceeded the annual
income derived from their properties
100. CIR v Algue - 1988
The power of taxation is also called the

power to destroy. It should be exercised with
caution to minimize injury to the proprietary
rights of a taxayer. It must be exercised
fairly, equally, and uniformly, lest the tax
collector "kills the hen that lays the golden
egg"
- power to tax / power to destroy
1. Which method should have been used for

valuing the land? The Comparable Sales
Approach or the Income Approach method?
The Income Approach, it is more realistic

and fairer because the landowners were
burdend by the Rent Freeze Laws so it
would be an injustice to penalize them by
imposing excessive taxes which will result
in the forfeiture of their properties
Justice Holmes wrote, "The power to tax is

NOT the power to destroywhile THIS
COURT sits" and so it is in the Philippines
The due process clause may be invoked

where a taxing statute is so arbitrary that it
finds no support in the Constitution. An
obvious example is where it can be shown to
amount to confiscation of property. That
would be a clear abuse of power. (Sison v
Ancheta)
Terminology
Facts
1. Algue claims deductions were legitimate because
these were promotional fees for services in creation
of a new company and subsequent purchase of
property
2. CIR issued a warrant of distraint & levy on Algue

while its petition was pending
Issues
Held
Was the CIR correct in disallowing deductions

by Algue for legitimate business expense?
CIR claims that its just a tax dodge because
the payees are members of the same family
in control of Algue
NO, the deductions were NOT excessive;

also most of the payees were not in the
regular employ of Algue nor were they its
controlling stockholders
The burden is on the taxpayer to prove the

validity of the claimed deduction
tax dodge - an attempt to

evade a legitimate assement by
involving an imaginary
deduction
YES, the appeal was made on time
As a rule, the warrant of distraint & levy is

proof of the finality of the assessment and
renders hopeless a request for consideration,
BUT, in this case, the warrant was premature
because there is PROTEST after receipt of
notice of assessment
warrant of distraint & levy -
Was the appeal by Algue made on time?
Principles
Terminology
Taxes should be collected without

unnecessary hindrance, BUT such collection
must be in accordance with the law or it
becomes arbitrary and will negate the very
reason for government itself
Set-off of Taxes
100. Philex Mining v CIR - 1998

1. In 1992, the BIR sent letter to Philex asking it to
settle tax liabilites of P 123 million. Philex said it has
pending claims for VAT INPUT CREDIT / REFUND of
P 120 million and it should be off-set.
- taxes cannot be offset, power to tax is power to destroy

1. Can Philex off-set its liabilities with the
refund since both had already become "due &
demandable as well as fully liquidated"?
NO, taxes cannot be the subject of

compensation because the government
and the taxpayer are not creditors &
debtors of each other
Debts - are due to the government it its

corporate capacity; taxes - are due to the
government in its sovereign capacity
2. BIR said these pending cases have not yet been

established or determined so legal compensation
can take place. Philex petitioned with CTA, while the
case was pending, BIR issued tax credit of P 13
million. The CTA ruled that Philex should pay the
balance of P 110 million
2. Is Philex liable for surcharges & interests

for the non-payment of its excise taxes?
YES, a tax is compulsory, not a matter of

bargain. If Philex was allowed to
automatically off-set, it will deprive the
government of authority over the manner
by which taxpayers credit and offset their
tax liabilities. The payment of surcharges
is mandatory
A person cannot refuse to pay a tax on the

ground that the government owes him an
amount equal to or greater than the tax being
collected
3. Then, Philex got another refund from BIR of P 36

million which it wanted to off-set in its liabilities.
3. Did the BIR violate the NIRC because it

took them 5 years to grant its tax claim while
the provision requires "within 60 days"?
YES, the BIR was negligent, but EVEN

SO, the State is not bound by the neglect
of its agents & officers. Its still NOT a
valid reason for non-payment of taxes.
The proper recourse is to file a Civil Case
against the BIR employees
doctrine in CIR v Itogon-Suyoc Mines no

longer applies because the provision in the
NIRC of 1939 had been deleted
101. Francia v Intermediate Appellate Court - 1988
- taxes cannot be offset, requisites of legal compensation
1. Mr. Francia owns a lot in Pasay City. In Oct, 1977

a portion of his property was expropriated by the
National Government for P 4,100. Later, in Dec of
1977, while he was in Iligan helping his uncle ship
bananas, the City auctioned off his entire property for
failing to pay real estate taxes for the past 14 years.
NO, taxpayer cannot refuse to pay

because he has a claim against the
government. Besides, the tax was due to
the city while the expropriation was done
by the national government.
2. He's now petitioning to annul the sale. He claims

that his deliquency of P 2,400 was already
extinguished by legal compensation because the
government owed him P 4,100 when they
expropriated his property.
1. Should Francia's tax delinquency have

been off-set against what the government
owed him?
Also, notice of the deposit by the National

government of the payment in PNB was
given to him long before the auction.
requisites of legal compensation: 1) that

each of the obligors be bound principally and
that he be at the same time a principal
creditor of the other 2) that the two debts are
due
legal compensation obligations of persons who in

their own right are reciprocal
debtors & creditors of each
other are extinguished
Facts
Issues
Held
2. Was due process followed?
YES, he had one year within which to

redeem his property. He received the
notice of auction sale without doing
anything about it
3. Was the price paid for the property

shockingly inadequate amounting to fraud
and deprivation?
NO, alleged gross inadequacy of price is

not material when the law gives the owner
the right to redeem, as when a sale is
made at public auction, upon the theory
that the lesser the price, the easier it is for
the owner to effect redemption
Principles
102. CIR v Itogon-Suyoc Mines - 1969
- taxes can be offset; but this is old doctrine, no longer controlling
1. In Jan 1961, Itogon paid income tax of P 13,000.

But in May 1961, it filed an amended income tax
return reporting a net loss and asking for refund of P
13,000.
NO, the NIRC at that time provided that

"if the taxpayer was entitled to a refund of
any amount due as tax, such amount, if
not yet refunded, may be deducted from
the tax to be paid
1. Was it fair and just for the CIR to charge

interest on the P 13,000 when it was already
paid to the government even BEFORE the
new income tax liability occurred?
2. In 1962, It had income tax liability of P 97,000 but

it deducted the P 13,000 it was claiming as refund.
The CIR assessed it INTEREST charges on the
unpaid amount claiming absence of legal right to
deduct the said amount before the refund was
approved.
this doctrine is NO LONGER

CONTROLLING
Even that the CIR had not yet approved

the refund, Itogon was clearly entitled to
it. The taxpayer was not guilty of any
delay in payment
3. Later, the refund was approved, but CIR still

demanded the interest charge.
103. Domingo v Garlitos - 1963
- taxes can be offset; inheritance taxes v debt of government
1. Mr. Scott, before he died signed a contract with the

Bureau of Lands wherein the Bureau was supposed
to pay him P 260,000 as payment for services
rendered.
YES, because an RA had already been

enacted appropriating the funds to pay
Mr. Scott. Both claims had already
become due and demandable as well as
fully liquidated. Legal compensation will
take place
1. Can the inheritance taxes be off-set

against the debt of the Bureau?
2. When he died, the CIR assessed inheritance taxes

on his estate of P 40,000.
3. His wife is now contesting it saying that the
government still owes the estate P 260,000 and must
pay first
104. Republic v Mambulao Lumber - 1962
- taxes cannot be offest; not mutually creditors & debtors
1. Mambulao Lumber owes the government P 4,800

for forest charges. But it is claiming that it had paid
the government P 9,000 already for
REFORESTATION charges over the years and that
the government did not use these payments to
ACTUALLY DO REFORESTATION. Therefore the
government should either refund the amount or offset the amount to its current liability of P 4,800
NO, the amount collected as reforestation

charges are to be used for reforestation of
denuded areas. But it is not expressly
stated that these funds should be used
EXCLUSIVELY for reforestation in the
areas covered by Mambulao Lumber's
lumber license.
1. Can the P 9,000 already paid for

reforestation charges be off-set against the P
4,800 that Mambulao Lumber owes as forest
charges?
Also, they are not mutually creditors and

debtors of each other. The reforestation
charge is a tax payable irrespective of
whether the area covered by his license is
reforested or not
Terminology
Facts
Issues
Held
Principles
Taxpayer Suit
105. Anti-Graft League v San Juan - 1996
- legal standing & requisites for taxpayer suit
1. In 1975, Pres Marcos issued PD establishing the

Technological Colleges of Rizal. The Province of
Rizal negotiated with Ortigas Co. for the acqusition of
4 parcels of land in Pasig. Ortigas then sold these
lands to the Province for P110 / sq.
NO, 1) petitioner alleged that the intial

puchase was an illegal disbursement of
public funds. 2) there has been no
unlawful spending shown so the taxpayer
cannot be adversely affected
1. Does the petitioner have legal standing to

question the compromise agreement? Is it a
taxpayer's suit?
requisites of taxpayer suit: 1) that public

funds are disbursed by a political subdivision
and in doing so, a law is violated or some
irregularity is committed 2) that the petitioner
is directly affected by the act
2. In 1976, the Metro Manila Commission was

created and the resources of the Province was
decimated so that the colleges were never built.
3. In 1987, the Province passed a resolution
authorizing the governor to sell the lands to raise
funds. It sold the land to Valley View Realty for
P700 / sq. Ortigas protested because the term of its
contract of sale was that the lands were to be utilized
solely for the Rizal Technological College and the
Rizal Provincial Hospital.
4. A compromise was agreed upon, the Province
returned the P 30 million to Valley View and the sales
was rescinded. The Province agreed to reconvey the
lands to Ortigas for P 2,250 / sq
5. Petitioners filed suit claiming graft
106. Joya v PCGG - 1993
- taxpayer suit is only on disbursement of public funds
1. In 1990, the PCGG asked Pres Aquino for

authority to sell 82 Old Master's Paintings &
silverware which it seized from Marcos as part of illgotten wealth. Pres Aquino gave authority.
1. Do the petitioners have legal standing?
NO, the items were donated by private

persons from different parts of the world
to the Metropolitan Museum; so the
ownership belongs to the org, not to the
public; the other items were gifts to the
Marcoses
legal standing - a personal & substantive

interest in the case such that the party has
sustained or will sustain direct injury ; the
interest must be personal
2. The PCGG contracted Christie's of New York to do

the auction sale. But the CoA opposed it citing
illegality of the transaction, disadvantageous to the
government and the these were historical & cultural
relics, the disposal of which were prohibited
2. Can this be considered a taxpayer suit?
NO, a taxpayer suit can prosper only if

governmental acts involve disbursement
of public funds. There is no disbursement
here
requisites for the court to settle the

constitutionality of a law or government act:
1) the question must be raised by the proper
party 2) there must be an actual case or
controversy
3. The Director of National Museum certified that the

items were NOT protected cultural properties.
2. Were the items considered "cultural

treasure of the nation" and is protected by the
Constitution?
NO, as per the Director of National

Museum
4. Now petitioners are seeking to enjoin the PCGG

from proceeding with the auction.
107. Lozada v Comelec - 1983

1. Petitioners wish to compel the Comelec to call a
special election to fill-up existing vacancies in the
Batasang Pambansa. Comelec says they lack legal
standing
- taxpayer suit is only on disbursement of public funds

1. Do the petitioners have legal standing?
NO, there is no allegation that tax money

is being illegally spent. In fact, this suit
calls for expenditure of public funds (for
the election) which may even be illegal
It is only when an act involves the illegal

expenditure of public money can a tax-payer
suit be allowed
Terminology
Facts
Issues
Held
Also, they have no personal and
substantial interest in the case such that
they have sustained or will sustain direct
injury; the interest here is a common
interest
Principles
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B.

C. Income Tax on Individuals

2. They were charged with violating the law because

3. And that since they are exempt from income tax,

Resident Alien - an individual:

1. Are they considered ALIENS?

YES, they are considered resident aliens

Whether he is a transient or not is

2. Are they exempt from income taxes?

YES, the Bases Agreement was explicit in

A mere floating intention indefinite as to time,

3. Are they exempt from filing income tax

NO, the exemption is NOT absolute. It is

But if his purpose is of such a nature that an

Meaning of Non-resident Citizen:

Who are Non-resident Citizens?

BIR Ruling 33-00 (2000)

1. Were the workers correctly classifed

YES, since they are all assigned

2. Most of their work comes from their parent

Tax Code - An individual citizen of the

3. These workers are paid in US dollars but

Non-resident aliens engaged in business in the Phil

Non-Resident Alien - an individual

Sec 5 Who are Non-resident Aliens?

Determination is by his intention with regard to the length & nature of

Sec 6. Loss of residence by alien

Head of Family - an unmarried or legally separated man or woman:

3) have a yearly income of NOT MORE than P 60,000

Kind of Income & Income tax on Individuals

Jan 1, 1999 - 33%, Jan 1, 2000 onwards - 32%

Tax Rate on Certain Passive Income on Citizens & Resident Aliens

* Prize - the result of an effort (ex. Prize in a beauty contest)

Tax rate on INTEREST INCOME from Foreign Currency Deposit (FCD)

Clarification of Principal Residence?

by temporary absence due to travel, studies, or work abroad

Payment of Capital Gains Tax on Forclosure of Mortgaged Property

Personal & Additional Exemptions

Basic Personal Exemption

Foreign country allows to the nonresident Filipino

Personal exemptions in the Local Tax

Optional Standard Deduction

Premium payments on health and/or hospitalization insurance

Tax on Non-resident Aliens

Section 25 (A), Tax Code

2) on sale of real property in the Phils held as capital asset

Section 25 (C), (D), (E), Tax Code

1. Was the POOL a partnership or

2. The CIR assessed them deficiency income tax on

YES, the Tax Code specified it "from all

"The term corporation shall INCLUDE

1) the POOL has a common fund which

Civil Code, Contract of partnship when two or

2. Were the remittances to member

YES they are taxable as dividends and

3. Has the CIR's right to assess the POOL

NO, becoz the POOL had changed its

1. Was there really a PARTNERSHIP?

NO, there is NO evidence in this case that

in Evangelista v CIR - the sons borrowed

In THIS case, the transactions were

Elements of a partnership: 1) an agreement

Pascual & Dragon v CIR - 1988

2. But the CIR still assessed them tax deficiency