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- Atty. Francis J. Sababan -


Basic Principles of Constitutional

a) Due process clause which
could be either substantive
due process and
procedural due process
b) Equal protection clause
Ormoc Sugar Central vs.
City Treasurer 22 SCRA
Tiu vs. CA 301 SCRA 178
c) Article III sec. 1 of the
1987 Constitution nonimpairment clause
d) Article III sec. 5 freedom
of religion
e) Article III sec. 20 nonpayment of poll tax
f) Article VI sec. 28 par. 2
flexible tariff clause
g) Article VI sec. 28 par. 3
exemption from real
property tax
Herrera vs. Quezon City 3
SCRA 186
Abra vs. Hernando 107 SCRA
Abra Valley vs. Aquino 52
SCRA 106
Philippine Lung Center vs.
Quezon City 433 SCRA 119
h) Article VI sec. 28 par. 4
qualified majority in tax
i) International
CIR vs. Johnson 309 SCRA
j) Doctrine of equitable recoupment
k) Doctrine of Set-off or compensation in
Republic vs. Mambulao 4 SCRA 622
Domingo vs. Garlitos 8 SCRA 443
Francia vs. IAC 162 SCRA 753
Caltex vs. COA 208 SCRA 726
Philex vs. CIR 294 SCRA 687
II. Income Tax Law
Section 22-26 of the National Internal
Revenue Code
a) Read in the commentaries or magic
notes the different kinds of:

1. Income Taxpayers
2. Income Taxes
3. Sources of Income sec. 42 of NIRC
- Income Taxpayers
a) Individuals
b) Corporation
c) Estates and Trusts
-Individuals are classified
Resident Citizens sec. 23 (A), sec
24 (A) (a)
Non-Resident Citizens sec 23 (B),
24 (A) (b) 22 (E)
Overseas Contract Workers Sec.
23 (C), 24 (A) (b)
Resident Aliens Rev. Reg. sec 5,
23 (D), 24 (A) (c)
Non-Resident Aliens Engaged in
trade or business sections 25 (A)
Non-Resident Aliens Not Engaged
in trade or business sec. 25 (B)
Aliens Employed in MultiNational Corporations sec. 25 (C)
and Rev. Reg. 12-2001
Aliens Employed in Offshore
Banking Units sec 25 (D)
Aliens Employed in petroleum
Service Contractors &
Subcontractors sec. 25 (E)
-Corporate Income Taxpayers
Domestic Corporations sec. 23 (E),
and sec 27 of NIRC
Resident Foreign Corporations sec. 22
(H) and (28)A
Non-Resident Foreign Corporations
sec. 22 (1) and 28 (B)
-Estates and Trusts sec. 60-66 of NIRC

Different Kinds of Income Tax

1. Net Income Tax secs. 24 (A), 25
(A) (1), 26, 27 (A) (B) (C), 28 (A) up
to 3rd par. 31 and 32 (A)
2. Gross Income Tax secs. 25 (B) first
part and 28 (B) (1)
3. Final Income Taxes sec. 57 (A)
4. Minimum Corporate Income Tax
of 2% of the Gross Income secs.
27 (E), 28 (A) (2)
5. Improperly Accumulated Earnings
Tax of 10% of its taxable income
sec. 29 NIRC Rev. Reg. 2-2001
Optional Corporate Income Tax of
15% of its gross income sections
27 (A) 4th to 10th par. And 28 A(1)
but only up to the 4th paragraph

- Atty. Francis J. Sababan -

-Proceed to section 42 and 23 of the

NDC vs. Comm 151 SCRA 472
Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A) (1),
28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
Comm. Vs. Manning 66 SCRA 14
Anscor vs. Comm. 301 SCRA 152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4);
28 (A) (7) (D); 32 B (7) (a)
Then you go to sec. 24 C, 25A (3); 25 B,
C, D, E, 27 D (2); 28 (A) (7) (C); 28 B (5)
(C) RA 7717 sec. 127 NIRC
Then you go to sec. 24 D (1); 25 (A) (3);
25 (B) last par. 27 (D) (5)
China Bank vs. Court of Appeals 336
SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 131999

-Upon reading sec. 27 (A) go to sec. 22 (B)

Batangas vs. Collector 102 Phil. 822
Evangelista vs. Collector 102 Phil 140
Reyes vs. Comm. 24 SCRA 198
Ona vs. Bautista 45 SCRA 74
Obillos vs. Comm 139 SCRA 436
Pascua vs. Comm. 166 SCRA 560
Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of NIRC,
sec. 133 par (o) of LGC, sec. 154 of the LGC.
Pagcor vs. Basco 197 SCRA 52
Mactan vs. Cebu 261 SCRA 667
LRT vs. City of Manila 342 SCRA 692
-Proceed to sections 27 (D) (1), 27 (D) (2),
27 (D) (5) read RA 9337, 28 (A) (7) (b), 28
(B) (5) (C), 27 (D) (4), (28) (A) (7) (d), 28 (B)
(5) (b)
Marubeni vs. CIR 177 SCRA 500
Proctor & Gamble vs. Comm 160 SCRA
Same case Proctor and Gamble on the
Motion for Reconsideration 204 SCRA
Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)

then sections 27 (E) and 28 (A) (2)

-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32 (B)
(7) (a)
Read Mitsubishi vs. Comm 181 SCRA
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read sec.
85 par (e), sec. 108A and sec. 123 of the
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see Aguinaldo
vs. Comm. 112 SCRA 136, RR 10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm. 316
SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing
donors tax returns sections 99 (A), 103
(A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
- Sections 105-115
-Read RA 9337
-Read ABAKADA vs Comm.
GR 168056, Sept. 1, 2005
VI. Remedies Under the Internal Revenue
-Sections 202-229
-RR 12-99
Phoenix vs Comm 14 SCRA 52
Basilan vs. Comm. 21 SCRA 17
Yabut vs. Flojo 115 SCRA 278
Union Shipping vs. Comm 185 SCRA
Comm. vs. TMX 205 SCRA 184

- Atty. Francis J. Sababan -

Comm. vs. Philamlife 244 SCRA

Comm. vs. CA & BPI 301 SCRA 435
BPI vs. Comm. 363 SCRA 840
-Prescription sections 203 and 222 of
NIRC, sec. 194 of the LGC, sec. 270 of
the LGC, sec. 1603 of Tariff and
Customs Code
-Protest sec. 228 of NIRC and RR 12-99
sec. 195 of LGC, 252 LGC, sec. 2313 of
Tariff & Customs Code and RA 7651

Regukar Customs Duty sec. 104 of TCC

RA 7631

X. Court of Tax Appeals

- RA 1125 as amended by RA 9282

VII. Local Taxation

- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read Bulacan
vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs. Petron
198 SCRA 82
-Under 133 (i) read First Holdings Co.
vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
Misamis vs. Cagayan de Oro 181
Reyes vs. San Pablo City 305
SCRA 353
Meralco vs. Laguna 306 SCRA
PLDT vs. Davao City 363 SCRA
- Co-relate sec. 139 and 147 of LGC
- Under sec. 140 of the LGC see sec.
125 of the Internal Revenue Code
- Under sec. 150 of the LGC read the
Phil. Match vs. Cebu 81 SCRA 99
Allied Thread vs. Manila 133
SCRA 338
Sipocat vs. Shell 105 Phil. 1263
Iloilo Bottles vs. Iloilo City 164
SCRA 607
VIII. Real Property Tax
Sections 197-294
Sec. 235
LRT vs. Manila 342 SCRA 692
Cebu City vs. Mactan 261 SCRA 667
IX. Tariff & Customs Code
Special Customs Duty sec. 301-304 of

- Atty. Francis J. Sababan -

Rules in the Classroom:

1. do not be absent
if you are absent, you have to
transcribe what happened in class when
you were out.
The next meeting you attend class,
consider yourself a resident of balic-balic,
babalikbalikan ka sa recit.
Exception: if you get married.
2. read the assignment. Wag zapote ang
3. holiday make up class probably on a
4. allowed to glance at your notes, wag lang
5. materials:
commentaries (any author will do)
magic notes (Sababan Lecture and
Book stand
Coverage of Taxation Law Review:
1. Basic Principles including Constitutional
2. Income Tax
3. Estate Tax
4. Donors Tax
5. Remedies
6. Local Tax
7. Real Property Tax
8. Tariff and Customs Code
9. Court of Tax Appeals
10. VAT (although not part of the coverage of
the Bar Exams, questions have been asked
since 1999)
Title 5,6 and 7 are always included in the
No computations in the bar
There are only 1 or 2 questions in the Bar
about Basic Principles
What are the favorite topics in the Bar?
! 12 questions on Income Tax
! 8-10 questions on remedies
! 8-10 questions allocated to the 7 topics
" Taxation is an inherent power of the
Q: What do you mean by INHERENT?
A: The power to tax is not provided for in
the law, statute or constitution; it depends on
the existence of the state. No law or

legislation for the exercise of the power to

tax by the national government.
Q: Do local governments exercise this
inherent power?
A: No. Only the National Government
exercises the inherent power to impose
Q: The taxing power of local governments is
a DELAGATED power. Delegated by whom?
A: Delegated by Congress through law in
case of autonomous regions, and delegated
by the constitution in case of LGUs not
considered an autonomous region.

" Cities, provinces and municipalities !

power granted under Art. X Sec. 5&6 of the
! Autonomous Regions ! power conferred
by Congress through law. Art. X Sec. 20 #2
of the Constitution is a non-self-executing
provision. Thus the power is granted by
Congress because said provision requires an
enabling law.
" Article X, Section 5 is self-executing thus
the power is granted by the constitution.

Due Process Clause

Q: why is it a limitation to the power to tax?
A: The due process clause as a limitation to
the power to tax refers both to substantive
and procedural due process. Substantive due
process requires that a tax statute must be
within the constitutional authority of
Congress to pass and that it be reasonable,
fair and just.
Procedural due process, on the other
hand, requires notice and hearing or at least
the opportunity to be heard.
Ex: On Substantive Due Process- when the
Congress passes a law exempting the 13th
month pay from tax but with the concurrence
only of the majority of the quorum law
would be invalid because the Constitution
provides that any grant of tax exemption
shall be passed with the concurrence of the
majority of all the members of the Congress.
Q: Does it follow that the adverse party must
always be notified?

- Atty. Francis J. Sababan -

A: No. As a rule, notice and hearing or the

opportunity to be heard is necessary only
when expressly required by law. Where there
is no such requirement, notice and the
opportunity to be heard are dispensable.
Ex. Before Oct. 1, 1995, you can secure a
TRO without notifying the adverse party. If
you are a suspect in a criminal case, you have
the right to have an opportunity to be heard
(if there is a law).
Before July 1, 1998, no notice need be
given to a party declared in default. After the
amendment, the party declared in default has
to be notified of subsequent proceedings
albeit without the right to participate therein.
In the case of a search warrant, the
person to be searched was not notified. The
person searched cannot claim that there was
a violation of due process because there is no
law requiring that the person to be searched
should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
No provision of law requires notice to the
adverse party. If the adverse party is notified,
he may abscond. Thus, in adversarial
proceedings, in connection with procedural
due process, the adverse party need not be
notified all the time.

Equal Protection Clause

" As a rule, taxpayers of the same footing
are treated alike, both as to privileges
conferred and liabilities imposed. Difference
in treatment is allowed only when based on
substantial distinction. Difference in
treatment not based on substantial
distinction is frowned upon as class
legislation. This is violated when taxpayers
belonging to the same classification are
treated differently form one another; and
taxpayers belonging different classifications
are treated alike.

Requirements of Reasonable Classification:

1) There must be substantial distinctions

that make a real difference.
2) It must be germane or relevant to the
purpose of the law.
3) The distinction or classification must
apply not only to the present but also
to future situations.

4) The distinction
must apply to
persons, things and transactions
belonging to the same class.

Ex: In one case, a tax ordinance was

assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid


Q: what happened in the city of Olonggapo?

A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
! The first led to the creation of the
Subic Special Economic Zone (SSEZ). The
latter set the limitations and boundaries
of the application of the incentives (no
taxes, local and national, shall be
imposed within SSEZ. In lieu thereof, 3%
of the Gross Income shall be remitted to
the national govt) to those operating
their businesses within the said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino businessmen
who are operating their business outside
the secured area. The
contended that the law in question was
violative of their right to equal protection
of laws since they are also Filipino
The Supreme Court ruled that there
was no violation since the classification
was based on a substantial distinction.
The element invoked here is element
#1 that there must be substantial
distinction in the classification of
taxpayers on whom the tax will be
The Court observed that those foreign
businessmen operating within the
secured area have to give a larger capital
to operate in the secured area (to spur
economic growth and guarantee


- Atty. Francis J. Sababan -

Q: What did the municipality of Ormoc do?

A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing upon
any and all centrifugal sugar milled at the
Ormoc Sugar Central a municipal tax on
the net sale of the same to the United
States and other foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under protest,
then filed a complaint against the City of
The Supreme Court said there was a
violation of the equal protection clause.
The element invoked here was element
#3, that it must be applicable to both
present and future circumstances. The
Supreme Court said that one must go to
the provision itself, in the case at bar,
there was a violation of element #3
because the law was worded in such a
way that it only applies to Ormoc Sugar
Central alone and to the exclusion of all
other sugar centrals to be established in
the future.
TAKE NOTE: People vs. Cayat

Freedom of Religion
It Involves 3 Things :
1. freedom to choose religion
2. freedom to exercise ones religion
3. prohibition upon the national
government to establish a national religion
Q: Which one limits the power to tax?
A: Prohibition upon the national government
to establish a national religion because this
will require a special appropriation of money
coming from the national treasury which is
funded by the taxes paid by the people.

Non-impairment Clause
Q: What are the sources of obligation in the
Civil Code?
A: Law, Contracts, Quasi-Contracts, Delict,
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from contracts.
General Rule: The power to tax is pursuant
to law, therefore, the obligation to pay taxes

is imposed by law, thus the non-impairment

clause does not apply.

" You have to determine first the source of

1. If the law merely provides for the
fulfillment of the obligation then the law is
not the source of the obligation.
2. When the law merely recognizes or
acknowledges the existence of an obligation
created by an act which may constitute a
contract, quasi-contract, delict, and quasidelict, and its only purpose is to regulate
such obligation, then the act itself is the
source of the obligation, not the law.
When the law establishes the obligation
and also provides for its fulfillment, then the
law itself is the source of the obligation
Q: So, in what instance does the nonimpairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the government.
In this instance, the obligation to pay the tax
is now based on the contract between the
taxpayer and the government pursuant to
their compromise agreement.
Take Note: the requirement for its
application: the parties are the government
and private individual.

Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on individuals
residing within a particular territory, whether
citizens or not, without regard to their
property or to the occupation in which they
may be engaged.
It is a tax imposed on persons without
any qualifications. persons may be allowed to
pay even if they are not qualified as to age or
property ownership.
Example of Poll Tax:
Community Tax
Certificate under Section 162 of the Local
Government Code.
Q: Why is it a limitation to the power to tax?
A: It is a limitation to the power to tax
because Congress is prohibited from passing
a law penalizing with imprisonment a person
who does not pay poll tax. (funds for sending
a person to jail is taken from the national

- Atty. Francis J. Sababan -

treasury which is funded by the taxes paid by

the people)

Exemption from payment of Real Estate

Q: What is the requirement for exemption
from payment of real property tax under the
1935, 1973 and 1987 Constitution?
A: Art. 6, Sec 22 (3), 1935 Constitution
Cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands,
buildings and improvements used
EDUCATIONAL purposes shall be exempt for
Art. 8, Sec. 17 (3), 1973 Constitution
charitable institutions, churches, parsonages
or convents appurtenant thereto, mosque,
and non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
RELIGIOUS and CHARITABLE purposes shall
be exempt from taxation.
Art. 6, Sec. 28 (3), 1987 Constitution
charitable institutions, churches, and
parsonages or convents appurtenant thereto,
mosque, non-profit cemeteries, and all lands,
buildings, and improvements ACTUALLY,
purposes shall be exempt from taxation.


(1935 Constitution)
Q: What is involved in this case?
A charitable institution, St.
Catherines Hospital. The hospital was
previously exempt from taxation until it
was reclassified and subsequently
assessed for the payment of real property
The contention of the respondent is
that the hospital was no longer a
charitable institution because it accepts
pay-patients, it also operates a school for
midwifery and nursing, and a dormitory.
Since it is not exclusively used for
charitable purposes it is not exempt from
The Court ruled that petitioner is not
liable for the payment of real estate
taxes. It is a charitable institution, thus
exempt from the payment of such tax.
The hospital, schools and dormitory
are all exempt fro taxation because they

are incidental to the primary purpose of

the hospital.
this arose during the 1935
Exempted by virtue of incidental
purpose was merely coined by the Supreme
Court. Thus, it does not apply to other taxes
except Real Estate Tax.


Q: What is involved in this case?

A religious institution was involved in
this case, the Roman Catholic Bishop of
Bangued, Inc. (bishop filed declaratory
relief after assessed for payment of tax).
The respondent judge granted the
exemption from taxes of said church
based only on the allegations of the
complaint without conducting a
hearing/trial. The assistant prosecutor
filed a complaint contending that
petitioner was deprived of its right to due
SC: the Court ordered that the case be
remanded to the lower court for further
proceedings. The Court observed that the
cause action arose under the 1973
not under the 1935
Constitution (note the difference). Tax
exemption is not presumed. It must be
strictly construed against the taxpayer and
liberally construed in favor of the


Q: What is involved in this case?

An educational institution is involved
in this case. The ground floor of the
school was leased to Northern Marketing
Corp., a domestic corporation. The 2nd
floor thereof was used as the residence of
the school director and his family.
The Province of Abra now contends
that since the school is not exclusively
used for educational purposes, the school
is now liable to pay real estate tax.
The Court held that the school is
PARTIALLY liable for real estate tax.
1. Residence exempt by virtue of
incidental purpose; justified because
it is necessary.
2. Commercial not exempt because it
is not pursuant to the primary
purpose; not for educational

- Atty. Francis J. Sababan -

Q: is the doctrine in the case of Herrera the

same with this case?
A: NO. in the Herrera case, the exemption
was granted to all the real property (hospital,
school and dorm). But in this case, the
Supreme Court made a qualification. The
Supreme Court said it depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided in
Q: At
present, do we still apply the
exemption from tax by virtue of the Doctrine
of Incidental Purpose?
A: Not anymore. The cause of action in said
case arose under the 1935 Constitution and
it does not apply to the provisions of the
1987 Constitution.


Q: What is involved in this case?

A charitable institution, a hospital. It
is provided in the charter of the Lung
Center of the Philippines is a charitable
institution. However, part of its building
was leased to private individuals and the
vacant portion of its lot was rented out to
Elliptical Orchids. Respondent contends
that since the hospital is not used
actually, directly, an d exclusively for
charitable purposes, it is liable to pay real
estate taxes.
The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of the
hospital used for charitable purposes
(whether for pay or non-pay patients),
petitioner is exempt from payment of real
estate tax.
NOTE: petitioner contended that the profits
derived from the lease of its premises were
used for the operation of the hospital. The
Court held that the use of the profits does
not determine exemption, rather it is the use
of the property that determines exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under the 1987 Constitution. The
requirements for exemption are different. In
the 1935 Constitution, the property must be
EXCLUSIVELY used for religious, educational
or charitable purposes. Under the 1987
Constitution, the property must be used


religious, educational and charitable
Q: Was the doctrine laid down in Abra Valley
affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court reiterated
the ruling in the Abra Valley case which arose
under the 1935 Constitution. The Supreme
Court made a qualification, it held that it
depends on whether or not the use is
incidental to the primary purpose of the
NOTE: at present, exemption from tax by
virtue of incidental purpose is not applicable
to all taxes including real estate tax.


Important :
1. international double taxation
2. importance of international tax treaty
3. implication of most favored nation
Q: What is the corporation involved in this
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered
into a license agreement with SC Johnson
and Sons U.S.A (Non-Resident Foreign
Corp, NRFC) whereby the former was
allowed to use the latters trademark and
facilities to manufacture its products. In
return, the DC will pay the NRFC royalties
as well as payment of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently, the
DC should have paid only 10% under the
most favored nation clause.
The Supreme Court coined the term
Double Taxation or
International Juridical Double Taxation.
What prompted the SC to coin such
Because a single income (tax royalties
paid by a DC) was subjected to tax by two
countries, the Philippines income tax and
the U.S. tax.
International Juridical Double
Taxation applies only to countries where
the tax liabilities of its nationals are
imposed on income derived from sources
coming from within and without.


- Atty. Francis J. Sababan -

there an instance where
international double taxation does not
Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
! The controversy in the case at bar
involves the income tax paid in the
After paying 25%, the US firm
discovered that they are entitled to 10%
under the most favored nation clause.
The question is: was the tax paid under
similar circumstances with that of the RPWest Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to the
royalties in payment of income tax. The
Supreme Court ruled that the lower
courts interpretation of the phrase was
erroneous. Rather, the phrase applies to
the application of matching credit.
Q: What is matching tax credit?
RP-Germany Treaty provides for that
20% of the tax paid in the Philippines
shall be credited to their tax due to be
paid in Germany.
The 10% does not apply because there
is no matching credit. Thus, there is no
similarity in the circumstances.

Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be allowed
to offset unsettled tax liabilities. This is not
allowed in this jurisdiction, because of
common law origin. If allowed, both the
collecting agency and the taxpayer might be
tempted to delay and neglect the pursuit of
their respective claims within the period
prescribed by law.
Q: What
is the doctrine of Equitable
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.

(Sir gives an illustration found in page 3 of

magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent in
the payment and collection of taxes.
(furthermore, you have to be honest for this
to work, hence, the government is preventing
There is no exception at all otherwise, the
BIR would be flooded with so many claims.

Presupposes mutual obligation between
the parties. In taxation, the concept of setoff arises where a taxpayer is liable to pay
tax but the government, for one reason or
another, is indebted to the said taxpayer.
Q: What do you mean by SET-OFF?
A: This
presupposes mutual obligations
between the parties, and that they are mutual
creditors and debtors of each other. In
taxation, the concept of taxation arises
where a taxpayer is liable to pay taxes but
the government, for one reason or another, is
INDEBTED to said taxpayer.


Q: What is the liability of Mambulao?

They are liable to pay forest charges
(under the old tax code).
NOTE: under our present tax code, the NIRC,
we do not have forest charges as the
same was abolished by President Aquino.
Q: What did the lumber company do?
The lumber company claimed that
since the government did not use the
reforestation charges
it paid for
reforestation of the denuded land
covered by its license, the amount paid
should be reimbursed to them or at least
compensated or applied to their liability
to pay forest charges.
The Court ruled that the reforestation
charges paid is in the nature of taxes.
The principle of compensation does
not apply in this case because the parties
are not mutually creditors and debtors of
each other. A claim for taxes is not a
debt, demand, contract or judgment as is
allowed to be set-off under the statute of
set-off which is construed uniformly, in
the light of public policy, to exclude the

- Atty. Francis J. Sababan -

remedy in connection or any

indebtedness of the State or any
municipality to one who is liable for
taxes. Neither are they a proper subject
for recoupment since they do not arise
out of contract or the same transaction
sued on.

General Rule: no set-off is admissible against

demands for taxes levied in general or local
governmental purposes.
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer and
the government, but arises out of a duty to,
and are positive acts of the government to
the making and enforcing of which, the
consent of the individual is not required.
Taxes cannot be the subject matter of


Q: What is being collected in this case?

A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was abolished
by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
The surviving spouse suggested that
the compensation to which the decedent
was entitled to as an employee of the
Bureau of Lands be set-off from the
estate and inheritance taxes imposed
upon the estate of the deceased.
Both the claim of the government for
estate and inheritance taxes and the
claim of the (intestate) for the services
rendered have already become overdue
hence demandable as well as fully
liquidated, compensation therefore takes
place by operation of law, in accordance
with Art. 1279 and 1290 of the Civil Code
and both debts are extinguished to the
concurrent amount.
Congress has
Compelling Reason:
enacted RA 2700, allocating a certain
sum of money to the estate of the


Q: This happened in what city?

A: Pasay City
Q: What is the tax being collected? Who is
collecting the same?


Payment for real estate taxes for the

property of Francia. It appears that
petitioner was delinquent in the payment
of his real estate tax liability. The same is
being collected by the Treasurer of Pasay.
Q: What is the suggestion of petitioner?
Suggested that the just compensation
for the payment of his expropriated
property be set-off from his unpaid real
estate taxes. (the other part of his
property was sold at a public auction)
The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled that
there can be no off-setting of taxes
against the claims that the taxpayer may
have against the government. A taxpayer
cannot refuse to pay a tax on the ground
that the government owes him an
Internal Revenue taxes cannot be the
subject of compensation because the
government and the taxpayer are not
mutually creditors and debtors of each
other, and a claim for taxes is not a debt,
demand, contract or judgment as is
allowed to be compensated or set-off.
Furthermore, the payment of just
compensation was already deposited with
PNB Pasay, and the taxes were collected
by a local government, the property was
expropriated by the national government.
(diff parties, not mutual creditors and
debtors of each other.)


Q: What is being collected?

Caltexs contribution to the Oil Price
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the
latter to settle its unremitted collection
stating that until the same is paid, its
claim for reimbursement from the OPSF
will be held in abeyance.
Q: Why is Caltex entitled to reimbursement?
Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore, RA
6952 expressly prohibits set-off from the
collection of contributions to the OPSF.
The Court likewise stated that Caltex
merely acted as agent of the government
in collecting contributions for the OPSF


- Atty. Francis J. Sababan -

because such is being shouldered by the

consumers when they purchase
petroleum products of oil companies,
such as Caltex.
Taxation is no longer envisioned as a
measure merely to raise revenues to
support the existence of the government.
Taxes may be levied for regulatory
purposes such as to provide means for
the rehabilitation and stabilization of a
threatened industry which is vested with
public interest, a concern which is within
the police power of the State to address.


The petitioner is liable for the payment of

excise taxes, which it wanted to be set-off
from its pending claim for a VAT Input
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government and
taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results of
a lawsuit against the government.
Double taxation is allowed because there
is no prohibition in the Constitution or
Obnoxious double
synonym of double taxation.



Elements of Double Taxation:

1) Levied by the same taxing authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the national
government. The two (2) are different taxing
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
(2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax Reform
Act of 1997, can levy tax upon GOCCs,

agencies and instrumentalities (Section 27

c)), although income received by the
Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.


Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
1. individual;
2. corporate;
3. estate and trust.


Q: How many kinds of individual taxpayers

are there?
A: There are seven (7). Namely:
1. Resident Citizen (23A and 24A);
2. Nonresident Citizen (23B and 24A);
3. OCW and Seaman (23C and 24A);
4. Resident Alien (22F, 23D and 24A);
5. Nonresident Alien Engaged in Trade
or Business (22G, 23D and 25A)
6. Nonresident Alien NOT Engaged in
Trade or Business (22G, 23D and
7. Aliens Engaged in Multinational
Companies, Offshore Banking Units,
Petroleum Service Contractors
(25C,D and E)

Resident Citizen (RC)

Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
Q: If you are abroad, and you have the
intention to permanently reside therein, can
you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your physical
presence therein, you may still be considered
a RC.

OCW and Seamen


- Atty. Francis J. Sababan -

OCW was used and not OFW in the CTRP,

because the classification shall cover only
those Filipino citizens working abroad with a
contract. TNTs are not covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he receives
compensation for services rendered abroad
as a member of the complement of a vessel
engaged exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said seaman
is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays
most of the time during the taxable year.
If he stays in the Philippines most of the
time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy, you
are not the one being referred to.

The importance of ascertaining whether

or not a seaman is a RC or a NRC, is that if he
is a RCm he is taxable on ALL income derived
from all sources within and without. If he is a
NRC, he is taxable only on income derived
form sources within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works abroad
with a contract. It does not cover TNTs.
Q: What is the status of a TNT?
A: Since
they are not covered by this
classification, they are considered RC
because they work abroad without a contract
and they have not manifested their intention
to permanently reside abroad. (distinguish
from an immigrant)
Requirements for a seaman to be considered
an OCW:
1. must be a member of the compliment of
a vessel;
2. the vessel must be exclusively engaged in
international trade or commerce.

Resident Alien (RA)

An individual whose residence is within
the Philippines and who is not a citizen

Intention to reside permanently in the

Philippines is not a requirement on the part
of the alien.
The requirement under RR#2 is that he is
actually present in the Philippines, neither a
sojourner, a traveler, not a tourist.
Whether hes a transient or not is
determined by his intent as to the nature and
length of his stay.

Q: Is the intention to permanently reside in

the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.

Non-Resident Alien Engaged in Trade or

Business (NRAETB)
A foreigner not residing in the Philippines
but who is engaged in trade or business
RR 2-98 has expanded the coverage of
the term, engaged in trade or business to
include the exercise of a profession.
Furthermore, by the express provision of the
law, a NRA who is neither a businessman nor
a professional but who come to and stays in
the Philippines for an aggregate period of
more than 180 days during any calendar year
is deemed to a NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in the
Philippines for an aggregate period of
MORE THAN 180 days during any
calendar year.
Q: What is the status of a Chinese who stays
here for 200 days in 2001?
Q: Suppose he stayed here for 100 days in
2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered as
such, he must stay for an aggregate period of
more than 180 days during a calendar year.
Q: What is the income tax applicable to said


- Atty. Francis J. Sababan -

A: Net Income Tax (NIT) on all its income

derived form sources within the Philippines.

Non-Resident Alien
Trade or Business



Q: How many kinds?

A: Only one.
The reason why the NRANETB are
included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.

Aliens Employed by Regional or Area

Headquarters & Regional Operating
Headquarters of Multinational
Companies/ Aliens Employed by
Offshore Banking Units (Aliens
Employed by MOP)
" Status: either a RA or NRA depending on
their stay here in the Philippines.
" Their status may either be RA or NRA
because Section 25 C and D does not
" Liable to pay 15% from Gross Income
received from their employer
" Income earned from all OTHER sources
shall be subject to the pertinent income tax,
as the case may be.

Aliens Employed in Multinational and

Offshore Banking Units
Q: How are they classified?
A: If they derived income from other sources
aside from their employer, you may classify
them either as RA, NRAETB, or NRANETB.

Aliens Employed in Petroleum Service

Contractors and Subcontractors
" Status: ALWAYS NRA. If they derive
income from other sources, such income
shall be subject to the pertinent income tax,
as the case may be.
" Income derived or coming from their
employer shall be subject to a tax of 15% of
the gross.




1. Domestic Corporation (DC) created

or organized under Philippine laws.
2. Resident Foreign Corporation (RFC)
corporation created under foreign
law, and engaged in trade or
3. Nonresident Foreign Corporation
(NRFC) created under foreign law,
and NOT engaged in trade or
Q: What are deemed corporations under the
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts, associations, or insurance
companies, but DOES NOT includes general
professional partnerships and a joint venture
or consortium formed of the purpose of
undertaking construction projects or
operations pursuant to or engaging in
petroleum, coal, geothermal or consortium
agreement under a service contract with the
1. Partnerships and others no matter how
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies


The phrase no matter how created or

organized was interpreted.
Even if the partnership was pursuant to
law or not, whether nonstick, nonprofit, it is
still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
Exception: General Professional Partnerships
Q: What is a GPP?
A: It is a partnership formed by persons for
the sole purpose of exercising their


- Atty. Francis J. Sababan -

profession, no part of the income of which in

derived from any trade or business. (what if a
partner has other businesses not related to
the GPP? > read section 26 quoted hereunder)
Two (2) Kinds of GPP formed for:
1) Exercise of a profession not a
corporation; exempt from Corporate
Income Tax (CIT)
2) Exercise of a profession and engaged
in trade or business a corporation;
subject to CIT


general rule:
a partnership is a
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to pay
corporate income tax.
1. if the income is derived from other
sources and such income is subject to NET
INCOME TAX, it is not exempt and it is
considered a corporation.
2. if the income is derived from other
sources and such income is subject to FINAL
INCOME TAX, it is still EXEMPT and it is not
deemed a corporation. ( separate return for
this. It will not reflect in the GPPs ITR)
This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the payment of
the FIT.
Q: What
is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of the
individual partners of the GPP.
" Section 26 (1st paragraph) provides: a
GPP as such shall not be subject to the Net
Income Tax however, persons engaging
in business as partners in a GPP shall be
liable for income tax only in their separate
and individual capacities.
In short, each partner will be paying NIT,
and the distributive shares they will be
receiving from the net income of the GPP will
be included in the gross income of the
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income tax?

A: No. as far as the share of the GPP is

concerned, it is considered a taxable
dividend which is subject to FIT.

Q: Is a joint venture a corporation?

A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
A: Three, namely Corporation X, Y, and X+Y.
the joint venture has a separate and distinct
personality from the two corporations.
Q: When is a joint venture not considered a
A: It is not deemed a corporation when it is
formed for the purpose of undertaking a
(construction?) project or engaging in
petroleum, gas, and other energy operations
pursuant to ? or consortium agreement
under a service contract with the

Domestic Corporation
Is one created or organized
Philippines or under its laws.



Taxable on all income derived from

sources within or without the Philippines.

Resident Foreign Corporation

Foreign corporations engaged in trade or
business in the Philippines.
Taxable for income derived within the

Non-Resident Foreign Corporation

Foreign corporations not engaged
trade or business in the Philippines.


Taxable for income derived within the

Both DC and RFC are liable for the
payment of the following:
1) NIT Net Income Tax
2) FIT Final Income Tax
3) 10% income tax on corporations with
properly accumulated earnings.
4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross Income


5) Optional Corporate Income Tax of

15% of the Gross Income

- Atty. Francis J. Sababan -

A NRFC is liable for payment of the ff:

1) GIT- Gross Income Tax
2) FIT Final Income Tax


Q: How many for each?

A: Seven (7) kinds for each because the trust
or estate will be determined by the status of
the trustor, grantor, or creator, or of the
The status of the estate is determined by
the status of the decedent at the time of his
death; so an estate, as an income taxpayer
can be a citizen or an alien.
When a person who owns property dies,
the following taxes are payable under the
provision of income tax law:
1) Income Tax for Individuals to cover
the period beginning January to
the time of death.
2) Estate Income Tax if the property is
transferred to the heirs.
3) If no partition is made, Individual or
Corporate Income Tax, depending
on whether there is or there is no
settlement of the estate. If there
is, depending on whether the
settlement is judicial or

Judicial Settlement
1) During the pendency of the
settlement, the estate through the
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the judicial
settlement, when the decision of the
court shall have become final and
executory, the heirs still do not divide
the property, the following
possibilities may arise:
a) If the heirs contribute to the
estate money, property or
industry with the intention to
divide the profits between and
created and the estate becomes
liable for payment of CIT

(Evangelista vs. Collector (102 Phil

b) If the heirs without contributing
money, property or industry to
improve the estate, simply divide
the fruits thereof between and
among themselves, a COOWNERSHIP is created and
Individual Income Tax (IIC) is
imposed on the income derived by
each of the heirs, payable in their
separate and individual capacity
(Pascual vs. COMM (165 scra 560)
and Obillos vs. COMM (139 SCRA

Extrajudicial Settlement and if NO Settlement

Some possibilities may arise. The income
tax liability depends on whether or not the
unregistered partnership or co-ownership is

Trusts can be created by will, by contract
or by agreement. The status of a trust
depends upon the status of the grantor or
trustor or creator of the trust. Hence, a trust
can also be a citizen or an alien.
Q: Where the trust earns income and such
income is not passive, who among the parties
mentioned is liable for payment of income
tax thereon?
A: The TRUST itself, through the trustee or
fiduciary but only if the trust is irrevocable.
If it is revocable, or for the benefit of the
grantor, the liability for the payment of
income tax devolves upon the trustor himself
in his capacity as individual taxpayer.
Q: How many kinds of income tax?
A: There are Six (6), namely:
1. Net Income Tax (NIT);
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT);
4. Minimum Corporate Income Tax of
2% of the Gross Income (MCIT)
5. Income Tax on Improperly
Accumulated Earnings subject to 10%
of the Taxable Income;
6. Optional Corporate Income Tax of
15% on the Gross Income




- Atty. Francis J. Sababan -

Q: what is the formula?

A: Gross Income Deductions and Personal
Exemptions = Taxable Income

Taxable Income x Tax Rate = Net

Taxable Net Income Tax Credit =

Taxable Net Income Due
Net Income means Gross Income less
deductions and
- deductions
Net Income
x Tax Rate
Income Tax Due
Q: What is the rate?
A: Individual: 32%
Corporation: 35%
NOTE: the formula allows for deduction,
personal exemptions and tax credit.
Q: What are the other terms for NIT?
a. taxable income
b. gross income (wlang kasunod)
only income tax from improperly
accumulated earnings does not use this term.
1. CFA: to be included in the gross
2. Revenue Regulations and Statutes:
a. ordinary way of paying income
b. normal way of paying income tax .

Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP, if
they derive income from other
Q: Is the taxable net income subject to
withholding tax?
A: It is subject to withholding tax if the law
says so.

Q: What if the law is silent?

A: If the law is silent, it is not subject to
withholding tax.
Q: What is another term for withholding tax?
A: It
is also known as the creditable
withholding tax system under the income tax
Q: Do we have to determine if there is an
actual gain or loss?
A: Yes because the formula for deductions,
Q: If you fail to pay, will you be held liable?
A: Yes, you will be held liable.



Q: What is the formula?

A: Gross Income x Rate
Q: How many taxpayers pay by way of the
A: There are two (2)
individual - NRANETB
corporation - NRFC
NOTE: the formula does not allow any
deduction, personal exemptions and tax

" NRANETB and NRFC, though not engaged
in trade or business, are liable to pay by way
of the gross for any income derived in the
Philippines. While not engaged in trade or
business, there is a possibility that they may
earn income in the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying taxes
depending on which side of the bench you


Q: What is the formula?

A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where you
add all the income from all the sources and
multiply the sum thereof by the rate of 25%


- Atty. Francis J. Sababan -

or 35%, as the case may be, in final income

tax, you cannot join all the income in one
group because each income has a particular
Q: What is the rate?
A: 35% as the case may be.
NOTE: like GIT, the formula does not allow
deductions, personal exemptions, and tax

Q: Who are liable to pay FIT?
A: All
taxpayers are liable to pay FIT
provided the requisites for its application are
Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to
pay NIT or else there will be double taxation.

1. for NIT, whether or not subject to

Creditable Withholding Tax (CWT), the
taxpayer is always liable if he fails to
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.

Q: Why is it that the rate of withholding is

always lower, and why is it that the rate of
GIT and FIT is always equal?
1. NIT allows deductions;
2. GIT and FIT do not allow deductions.
Q: Do you have to determine whether there
is an actual loss or gain?
A: No
need to determine because the
formula does not allow deductions. Gain is
presumed. No liability for final withholding
tax except for the sale of shares of stock. (?)

NOTE: as time passed by, the number of FIT


Q: What is the formula?

A: Gross Income x 2%

" before 1979 proceeds from the sale of

real property not exempt, it is subject to NIT
or GIT, as the case may be.
after 1979 capital gains tax. Proceeds
from the sale of real property is exempt.

Q: Who pays this tax?

A: DC and RFC only.

Q: If you fail to pay, will you be liable?

A: No. the withholding agent is liable to pay
" Case of Juday, Richard and Regine
" For one to be liable for the payment of
NIT, the income must be derived on the basis
of an employer employee relationship.
Employer Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
" However, in the case of celebrities, there
is no employer employee relationship, they
are merely receiving royalties. Royalties are
subject to final withholding tax, thus the
agent is liable to pay. (so, distinguish nature
of income, whether royalty or compensation)

Q: May it be applied simultaneous with NIT?

A: No. there must be a computation of the
NIT first then apply which ever is higher. The
MCIT is paid in lieu of the NIT.
Reason: to discourage corporations from
claiming too many deductions.
Q: Under what section is this found?
A: Section 27A 4th paragraph and Section 28
A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: To what kind of taxpayer does this apply?
A: To DC and RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st five individual
A: Only two (2) kinds are applicable out of
the six (6) kinds of income taxes.
1. NIT;
2. FIT;


Q: What kind of income tax will apply to

A: Generally, only one kind, 15% FIT with
respect to income derived from their

- Atty. Francis J. Sababan -

Income from other sources:

1. Determine the status of the AEMOP;
a. NIT
b. FIT
a. GIT
b. FIT
Q: What kind of income tax applies to DC?
A: Only four (4) kinds will apply out of the
six (6)
1. NIT
2. FIT
4. Improperly Accumulated Earnings
Q: May all of these be applied
A: No. only the NIT, FIT and Improperly
Accumulated Earnings be applied
simultaneously. NIT and MCIT cannot be
applied simultaneously. Only one will apply,
whichever is higher between the two.
Q: What kind of tax will apply to NRFC?
A: Out of the six (6) kinds, only two (2) will
1. GIT
2. FIT
Q: What is the significance of knowing the
classification of these taxpayers?
1. to determine the kind of income tax
applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for
income within and income without?
A: Only
1. RC
2. DC
" The rest of the taxpayers will be liable for
income coming from sources within.
" Income from sources without, no liability,
therefore exempt.

NOTE: The income taxpayer is not a RC or a

DC. Determine if the income came from
sources within or without to know the
taxpayers liability.
" If the facts are specific, do not qualify
your answer. Answers must be responsive to
the question.
Q: Is section 42 relevant to all the taxpayers?
ALL taxpayers, particularly the RC and DC
because these two are liable for both income
within and without.

" Section 42 is applicable only to taxpayers

who are liable for income within, the rest of
the taxpayers are otherwise exempt.
Q: Section 42(A)(1) provides for how many
kinds of interests?
A: It establishes two (2) kinds of interests,
1. interest derived from sources within
the Philippines.
2. interest on bonds, notes or other
interest bearing obligations of
residents, corporate or otherwise.
Q: What is the determining factor in order to
know if the income is from within?

1. location if the bank is from within the

Philippines (pursuant to a Revenue
2. residence of the obligor (whether an
individual or a corp.) contract of
loan with respect to the interest
earned thereon.

" For example the borrower is a NRAETB,

he borrowed money from a RA. The interest
earned by the loan will be considered as an
income without. RA is not liable to pay tax
since RA is liable only for income within,
therefore exempt from paying the tax.



The National Development Company

(NDC) entered into a contract with several
Japanese shipbuilding companies for the
construction of 12 ocean-going vessels.
The contract was made and executed in
The payments were initially in cash
and irrevocable letters of credit.


- Atty. Francis J. Sababan -


Subsequently, four promissory notes were

signed by NDC guaranteed by the
Later on, since no tax was withheld
from the interest on the amount due, the
BIR was collecting the amount from NDC.
The NDC contended that the income
was not derived from sources within the
Philippines, and thus they are not liable
to withhold anything. NDC said that since
the contract was entered into and was
executed in Japan, it is an income
The governments right to levy and
collect income tax on interest received by
a foreign corporation not engaged in
trade or business within the Philippines is
not planted upon the condition that the
activity or labor and the sale from which
the income flowed had its situs in the
Philippines. Nothing in the law (Section
42(1)) speaks of the act or activity of
nonresident corporations in the
Philippines, or place where the contract is
signed. The residence of the obligor who
pays the interest rather than the physical
location of the securities, bonds or notes
or the place of payment is the
determining factor of the source of the
income. Accordingly, if the obligor is a
resident of the Philippines, the interest
paid by him can have no other source
than within the Philippines.

Q: Suppose a NRFC, an Indonesian firm,

becomes a stockholder of two corporations, a
DC and a RFC, and both corporations
declared dividends, what is the liability of the
Indonesian firm if the same received the
1. Dividends received from DC:
Indonesian firm is liable to pay taxes.
NRFC, under the law, is liable if the
income is derived from sources
within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firms liability will depend
on amount of gross income from
sources within the Philippines.
The NRFC will be liable to pay income tax if
the following requisites are present:
1. at least 50% is income from sources

2. the 1st requisite is for the three (3)

preceding taxable years from the time
of declaration of the dividends.

In the absence of any
or both
requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income tax.
Q: Same scenario, but this time the shares of
stock of the two corporations were being
disposed off. What is the tax liability of the
Indonesian firm?
1. sale of shares of stock of DC: the
Indonesian firm will be liable for the
payment of taxes because the income
is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he liable
for both salaries?
A: No, he is not liable for the two incomes.
His status is an OCW (note facts: working in
HK under contract). The compensation he
received is not subject to tax pursuant to
Section 42(c). Compensation for labor or
in the
personal services
Philippines is considered an income within.
When it comes to services, it is the place
where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an income
derived from sources without, irrespective of
the place of payment.
Q: Suppose a DC hired a NRFC to advertise
its products abroad. What is the liability of
the NRFC? Will there be a withholding tax
A: The income is derived from sources
without since the services in this case were
performed abroad. As such, the NRFC is not
liable and therefore exempt from the
payment of tax. If the NRFC is not subject to
NIT, then it is not also subject to withholding
Q: What is the controlling factor?


- Atty. Francis J. Sababan -

A: The controlling factor is the place where

the services were performed and not where
the compensation therefore was received.
"income from sources within
Q: Granted by who?

Q: Suppose you are the franchise holder, how

much is the withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how
much is the withholding?
A: 10% (NIT) and in some cases 15%
a. right of, or the right to use
copyright, patents, etc
b. industrial,
scientific equipment
c. supply of knowledge
d. supply of services by
e. supply of technical assistance
f. supply of technical advice
g. right to use: motion picture
films, etc.
Q: What is the rule as regards the sale of
real property?
A: Gains, profits, and income from the sale
of real property located within the Philippines
considered income within.
Q: What about the sale of personal property,
what is the rule?
A: Determine
first if the property is
produced or merely purchased.
1. it the property is manufactured in the
Philippines and sold abroad, or viceversa, it is an income partly within
and partly without.
2. if the property is purchased,
considered derived entirely from the
sources within the country where it is
EXCEPTION: shares of stock of domestic
corporation, it is an income within wherever
it is sold.


Q: What is the issue here?

A: They cannot determine if the business
expense was incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not
sure, will you disallow the deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
= 10%
" Hence, 10% is the ratable share in the
deduction. If the deduction being asked is
100,000 not all of it will be allowed. Only
10,000 or 10% of 100,000 will be allowed
as deduction.
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a
taxpayer which is not an ordinary asset.
The following are ordinary assets:
1. stock in trade of the taxpayer or other
property of a kind which would
properly be included in the inventory
of the taxpayer if on hand at the close
of the taxable year;
2. property held by the taxpayer
primarily for sale to customers in the
ordinary course of trade or business;
3. property used in trade or business of
a character which is subject to the
allowance for depreciation provided in
subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a capital
A: Capital
gains are gains incurred or
received from transactions involving property
which are capital assets. Capital losses are
losses incurred from transactions involving
capital assets.
Q: What is ordinary gain? Ordinary loss?
A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.


- Atty. Francis J. Sababan -

Q: What
is the relevance of making a
A: It is relevant because Section 39B,C, and
D apply to capital assets only.
1. time when property was held (39B)
(holding period
applies only to
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)


Q: What is the holding period?

A: If capital asset is sold or exchanged by an
individual taxpayer, only a certain percentage
of the gain is subject to income tax.
It is the length of time or the duration of
the period by which the taxpayer held the
Q: What is the requirement?
1. the taxpayer must be an individual.
Section 39B states in case of a
taxpayer, other than a corporation..
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been held
for not more than 12 months; (short term)
50% if the capital asset has been held for
more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR.
1. gains in sales of shares of stock not
traded in stock exchange(section 24);
2. capital gains from sale of real
property(section 24).
Q: When will the holding period not apply?
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
"synonymous to 34D & loss capital rule
" this applies to individual and corporate

Q: What is the loss limitation rule?

A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may be
deducted only from capital gains, but losses
from the sale or exchange of ordinary assets
may be deducted from capital or ordinary
gains. (applies to individual and corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter with
the rule that the loss should always be
connected with the trade or business, capital
losses are losses not connected to the trade
or business, thus it is not deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing ordinary
loss to be deducted from either the
capital gains or ordinary gains?
A: It is already included in ITR, the gross
income less deductions hence it already
carries with it the deduction


Normally if the loss is an

ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
Q: What are the requirements?
1. taxpayer is an individual;
2. paid in the immediately succeeding
3. applies only to short term capital
4. capital loss should not exceed net
income in the year that it was
Q: How does net capital loss carry-over differ
from net operating loss carry-over under
Section 34 D (3)?
A: Under the net capital loss carry-over rule,
the capital loss can be carried over in the
immediate succeeding year. In net operating
loss carry-over rule, capital loss can be
carried over to the next three (3) succeeding
calendar year following the year when the
loss was incurred.


- Atty. Francis J. Sababan -

NOTE: only 15% of the loss will be carried

over, if the loss is greater than the gains.

" In net operating loss carry-over there is

an exception to the 3 year carry-over period.
In case of mines other than oil and gas wells,
the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares



The taxpayer inherited the property

fro her father and at the tie of the
inheritance it was considered a capital
asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale of
the lots.
the property converted to
ordinary asset?
The conversion from capital asset to
ordinary asset is allowed because Section
39 is silent.

Q: Are you allowed to convert ordinary asset

to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of the
issuance of said Revenue Regulation.
Q: What is the conversion prohibited in the
Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D final income tax of 6% if
the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and 35% if
the taxpayer is a corporation.
Q: What are the properties involve in the RR
A: 1. those property for sale by the realtors
2. real property use in trade or business
not necessary realtors
Q: That is the conversion allowed by the
Revenue Regulation? Is there an instance
when an ordinary asset may be converted to
capital asset?

A: Yes, provided that the property is an

asset other the real property, and it has been
idle for two (2) years.
Q: What is the tax mentioned in section 24?

Q: What is taxable income?

A: (memorize section 31) it is the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or other
laws. It refers to NIT because it allows
Q: What do you mean by the phrase other
than B, C, and D?
A: It means that if the elements of passive
income are present, the taxpayer has to pay
Q: Who are the taxpayers mentioned in
section 24?
1. RC
2. NRC
3. OCW
4. RA
" Additionally, under Section 25, NRAETB
Q: What is the tax liability of NRAETB?
A: Section
25(1) NRAETB is subject to
income tax in the same manner as those
individuals mentioned in Section 24.
Q: What about Domestic Corporations?
1. Sec. 27 A,B, and C
2. Sec. 26- GPP is not subject to income
Q: What about Resident Foreign
A: Sec 28(l) it is subject to 35% Net Income
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: Not Subject to Net Income Tax but they
are liable for Gross Income tax.


Q: Do legally married husband and wife

need to file separately or jointly?
A: It depends if:
1. Pure compensation income- separate
2. Not Pure compensation income- joint

- Atty. Francis J. Sababan -

c. Less than 3 yrs- 20%

Q: Does it apply to all individuals?

A: No! It does not apply to 10 NRFC and NRA
and NRAETB because they are liable to GIT.

Passive Income

NOTE: if the depositary is a Non resident it is



" Resident citizen is liable to pay tax for

bank interest earned abroad (NIT)

Interest, Royalties, prizes and Other winnings

Q: Bank Interest, what is the requirement?

A: The bank must be located in the Phils.
because the income must be derived from
sources w/in.
Q: Do you include this in your ITR?
A: No! because it is subject already to FIT.
The bank is the one liable for the payment of
NOTE: Liability for NIT, GIT, and MCIT will
depend on the elements present.
Q: Who are liable for bank interest?
1. RC }
2. NRC} Sec. 24 B1
3. RA }
5. NRANETB Sec. 25 (25%)
7. DC
8. RFC
Q: What is the rate of interest?
A: FIT of 20%
Q: Is there a lower rate?
A: 7 ! % if under EFCDS
Q: What if the depositor is non resident
-W/in FIT
- W/out- exempt
Q: What is the rule on pre- termination?
A: If it is pre terminated before 5th year a FIT
shall be imposed on the entire income and
shall be deducted and withheld by the
depositary bank from the proceeds of the
long term deposit based on the remaining
maturity thereof
a. 4 yrs to less than 5 yrs 5%
b. 3 yrs to less than 4 yrs- 12%

Q: If the money earns interest in abroad who

is liable?
A: RC and DC only by NIT, the rest are
exempt. No FIT abroad because we do not
have withholding agent abroad.
Q: MCIT applies to DC and RFC in relation to
bank interest?
A: If the bank interest is derived abroad, RFC
is exempt but DC is liable.
Impose NIT if it is higher than the MCIT,
otherwise apply MCIT if its higher than the

1. Prizes must be derived from sources
w/in the Phils.
2. it must be more than P 10,000
Q: Who are liable? (FIT)
1. RC
2. NRC
3. OCW
4. RA
Not Liable
1. NRANETB- liable for GIT at 25 %
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: When can we apply NIT in Prizes?
A: 1. When the taxpayer is RC, RFC and DC
2. For DC and RC it must be derived
from income abroad RFC it must be
derived from income w/in
3. amount is more than P10,000


- Atty. Francis J. Sababan -

NOTE: If the prize is derived from sources

w/in but it is below P 10,000 it is not subject
to tax. If derived from sources abroad, most
of them are exempt except for RC and DC
who are liable w/in and w/out.
Q; Is it possible for RC and DC to pay MCIT?
A: Yes if MCIT is higher than NIT.

Q: Do we apply the P10, 000 req.?
A: No, we do not apply it only applies to
prizes. It must not pertain to illegal
" Thus, the only requirement is it must be
derived from income w/in.

A: Liable for NIT if Income abroad like a

writer for Snoop. While FIT if for April Boy.
Q: Who are liable (FIT)?
1. RC
2. NRC
3. OCW
4. RA
Not Liable?
3. DC
4. RFC

Q: Who are liable? (FIT)

1. RC
2. NRC
3. OCW
4. RA

NOTE: Lower rate of 10% applies to all except


Not liable to FIT?

3 DC- law is silent NIT
4 RFC- law is silent

" If income is from sources abroad all are

exempt except RC and DC

Q: When does NIT apply to winnings?

1. If Taxpayer is DC or RC
2. Income is derived abroad
3. Taxpayer is RFC and income w/in.
NOTE: If income abroad, most TP are exempt
except DC and RC
Q: MCIT applies when?
A: It is higher than the NIT

" The income is from w/in

Q: When do we apply NIT to Royalties?

1. TP is RC or DC
2. Income is from w/out
3. TP is RF and income is w/in

" Confined





Q: What are dividends?

A: Any distribution made by Corporation to
its stockholders outside of its earnings or
profits and payable
to its stockholders
whether in money or in property (Sec. 73)


Q: Where did it come from?

A: shares come from another shareholder
Q: What are the dividends included?
A: Sec. 24 refers to cash
or property
H: For stock Dividends to be exempt it must
come from the profit of the corporation.

" Rate? 20%. Lower rate? 10% on books,

literary works and musical compositions.

Stock Dividends " it is the transfer of the

surplus profit from the authorized capital

Q: You are a writer for Snoop Dogg are you

liable for FIT? What if for April Boy?

Q: Assuming that there are 5 Incorporators,

the Corporation has a P5 M Authorized


- Atty. Francis J. Sababan -

Capital stock. It distributed 1 M stock

dividends, is it taxable?
A: NO, the dividends did not go to the Stock
holder but to the Auth Capital Stock. Only
cash and Prop Stock go to the Stock holder.


" Sec 24 B does not mention stock

dividends because it is not subject to FIT but
it is subject to NIT under Section 73.
Q: Is there an exception when
dividends are not taxable?
A: YES, if the shares of stocks are cancelled
and redeemed meaning it was reacquired by
the corp.


!the stockholders
payment of taxes



Gen Rule- the dividends must be distributed
by a DC.
Except- Regular operating- always a foreign
" What rate: 10% FIT
Q: Who are liable?
1. RC
2. NRC
3. OCW
4. RA
Not liable?
3. DC
4. RFC
" Shares of association and partnership is
Q: Determine the tax
liability of the
1. DC a Stockholder of DC= Exempt
2. RFC stockholder of DC= Exempt also
3. DC stockholder of RF= Liable for NIT.

Capital Gains From Sale of Shares of Stock

Not Traded (24C)



Subj to FIT
Determine whether there is a loss or a
gain because the tax is impose upon
the net capital gains realized from the
sale, barter, or exchange or other
disposition of the shares of stock in a
domestic corp.
It is uniformly
imposed on all
not subj to w/holding tax.

1. Shares of stock of a DC
2. It must be capital asset
3. must not be traded in the stock
" 25 R last part: Capital Gains realized by
NRANETB in the Phils. from the sale of shares
of stock in any DC and real prop shall be
subj. to the income tax prescribed under Sub
sec (c) and (d) of Sec. 24.
" SEC. 24 B 1&2: If the elements are
present NRANETB and NRFC are liable to pay
Except: under 24 C for NRANETB. What do
you mean by the phrase the provisions of
39 notwithstanding?
" It refers to the holding period. When it
comes to capital gains from sale of shares of
stock not traded and capital gains from the
sale of real prop. The holding period does
not apply because the basis will be those
provided in 24 C & D and not under 39B (GSP
or FMV)
ELEMENT #1 The share is a share in DC
Q: What if the share is from foreign corp?
A: Determine the income considered.
income w/in read Sec. 42 (E)


" If the shares sold are that of a foreign

corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in regardless where
it was sold.
Q: Shares of Foreign Corp sold in Phils.
Whos liable? What tax?


- Atty. Francis J. Sababan -

A: Not subj to FIT because one of the

elements is not present . Shares not being
that of a DC.
(RA, NRAETB) will pay NIT. DC and RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign
Corporation sold
A: It will be considered an income w/out.
most of them will be exempt
except RC and DC liable to pay NIT

" DC and RFC are subj to MCIT which may

be imposed if the NIT is lower than the
MCIT2% MCIT will be imposed if MCIT is
higher than NIT.

Capital Gains From Sale of Real Property

" In 39 B the holding period does not apply
because the basis of income tax is the gross
selling price (GSP) or the Fair market value
(FMV) whichever is higher- 6% FIT

" if sold in the stock market- it is not subj

to FIT

1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC

" if sold in the stock market, it will be subj

to percentage tax, in lieu of NIT.

" RFC not liable for FIT but liable to pay NIT
if all the elements are present.

ELEMENT # 3 It must be a capital asset.

" NRFC liable to pay GIT and not FIT

Q: When is it considered an ordinary asset?

A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset

" NRANETB liable to

elements are present.



NOTE: if all elements are present it will be

subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad: most
will be exempt except RC and DC
Q: When is a RFC subj to NIT?
1. Sale of shares of stock of a Foreign
corp in the Phil.
2. sale of shares of stock of DC which
are ordinary asset





ELEMENT # 3 The real prop must be a

capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are capital
Q: What if all the elements are not present?
most will be liable to pay NIT
Except NRANETB and NRFC liable for GIT
Q: May a RC be liable to pay NIT even if all
the elements are present?
A: YES, disposition made to the Govt. Thus,
the taxpayer has the option of paying 32%
NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if theres a loss
or a gain.
If theres a gain choose to be taxed at 6%
FIT. In this case the gain is always presumed.


- Atty. Francis J. Sababan -

If theres a loss choose to be taxed at

32% because losses may be considered an
allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition

NOTE: If the prop is under mortgage contract

and the mortgagee is a bank or financial inst,
the FIT does not apply because the property
is not yet transferred because theres a
period of redemption
If after a year the mortgagor failed to
redeem the property that is the only time that
the FIT will apply because theres now a
change of ownership. If redeemed w/in 1 yr
period FIT will not apply because theres no
change of ownership.
If the mortgagee is an individual the FIT
is imposed whether or not there is a transfer
of ownership.

Exceptions (24(D2))
Q: What if the prop being sold was a movie
house, can he claim for the exception?
A: the prop covered by the exemption is a
residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec. 24
1. The purpose of the seller is to acquire
new residential real prop
2. the privilege must be availed of w/in
18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
4. the adjusted basis or historical cost of
the residence sold shall be carried
over to the new residence.
5. the privilege must be availed only
once every 10 yrs
6. Certification of the brgy. Capt where
the taxpayer resides that indeed the
prop sold is the principal residence of
the tax payer (RR 13- 99)
Q: What if the property is worth 10 M and it
was sold only for 2M, what will happen to the
unused portion or profit?

A: If the proceeds are not fully utilized, the

portions of the gain is subj to FIT

Q: How many income taxes are paid by a

1. NIT
3. FIT
4. 10%Improperly
5. Optional corporate income tax of 15%
of the gross
" DC liable for five, but the optional is not
yet applicable so only 4.
Q: How many can be
simultaneously? A:
1. NIT, FIT and 10% IAE
2. MCIT, FIT, 10% IAE



Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non
profit only, is it exempt?
A: No, subject to 10% on their taxable
income except those covered by subsection
that gross income from
unrelated business, trade or activity must not
exceed 50% of its total gross income derived
by such educational inst or hospital from all
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross income
derived by such educational inst or
hospital from all sources
5. has permit to operate from DECS,
Q: What do you mean by unrelated trade
business or activity?


- Atty. Francis J. Sababan -

A: It means any trade, Business, or activity

which is not substantially related to the
exercise or performance by such entity of its
primary purpose or performance
Q: May a school or hospital be exempt from
paying tax? What are the req?
1. It must be non- stock and non- profit
2. the assets property and revenues
must be used actually, directly, and
exclusively fro the primary purpose
Q: Under what law? Is it the constitution or
the NIRC which provides fro the exemption?
It is under Sec. 30 of NIRC and not
under Sec.4 Art. 14 of the Constitution. The
provision of the NIRC is the specific law
which prevails over the Constitution which is
the general law.
! exempt from all taxes and custom

What about exemption from real
property tax?
Art. 6 Sec. 28 of the Constitution:
charitable institution churches, .and all
lands buildings, actually directly and
exclusively used for religious, charitable, and
educational purposes shall be exempt from
! Not Sec. 4 of Art. 14 of the
Q: You donated a property to a school will
you be liable for donors tax?
A: not liable if it falls under Sec. 101 (3) of
the NIRC
1. it must be non-stock,
educational inst.
2. not more than 30% of the prop donated
shall be used by such donee for admin
3. paying no dividends
4. governed by trustees who dont receive
any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov Code?

A: If its non-stock, non-profit educational

inst. It may be exempted from local taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the Consti.
GEN RULE : Subj to tax.
2. SSS
" PAGCOR no longer included.
Q: If the
GOCC is not one of those
enumerated does it follow all of its income is
automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived
from any public utility or from the exercise of
essential government function accruing to
the Govt of the Phils or to any political subd.
Are therefore exempt from income tax.
Therefore, even if the GOCC is one of
those enumerated under Sec. 27 it may still
be exempt under Sec. 32 b7b if its
performing governmental function
NOTE: Pagcor vs. Basco case
Q: What is the difference between Sec. 27 C
and 32 b7b?
1. Sec 27 C exempts those enumerated
without any qualification.
2. Sec. 32b7b qualification must concur
before it may be exempted.
Q: Can the government impose tax on itself?
A: It depends on who the taxing authority is.
If the taxing authority is the National Govt. as
a rule, YES.
1. those entities enumerated under 27 C
2. those GOCC falling under 32b7b
If the taxing authority is the local
government units, as a rule NO. LGUs are
expressly prohibited
from levying tax
against: (Sec 133(o)
1. National Govt.
2. Its agencies and instrumentalities


- Atty. Francis J. Sababan -

3. local government units

Sec 154 of LGC says that LGUs
may fix rate for the operation of public
utilities owned and maintained by the within
their jurisdiction.

A: Normally it is NIT because it is subj under

Sec 27 D3 and 28 A

PAL CASE July 20 2006

Q: Exempt from what kind of transaction?

A: From foreign currency transaction. If it
involves foreign currency transaction it is not
exempt but subject to 35 % NIT


The SC used 133 (o)an exception to

pay tax, real estate tax, imposed by City
of PAranaque on NAIA. The SC said that
the airport is not an agency or GOCC but
mere instrumentality of the Govt.
This is Gross ignorance of the law
Sec. 133 (o) is for local taxation not real
property taxation which is the one
involved in the present case.

NOTE: Mactan- Cebu Airport case

SEC. 27 D(1)
Q: How many possible incomes
A: Two (2): bank interest and royalties


1. Bank interest must be received by a
Domestic Corp
2. Royalties derived from sources within
Q: When it comes to bank interest, what is
the difference if the taxpayer is an individual
or corporation?
A: If individual, they may be exempt from
the payment of interest in case of long term
deposit except NRANETB
If DC, they are not exempt from long tem

Q: Who is the income earner?

A: Depositary banks

Q: Who are the other parties?

1. Off shore banking units
2. branches of foreign banks
3. local commercial bank
4. Other depositary banks under EFCDS
5. Non- residents
" if the above enumeration are the parties,
then depositary bank will be exempt from
paying the NIT

Foreign Currency Loan

Q: Who is the lender? Borrower?
A: Lender- EFCDS
Borrower- RC
Offshore banking units
Other depositary banks under EFCDS
" exemption of NR from EFCDS:
Q: Who is the income earner?
A: Non Residents whether individual


Q: What about royalties?

A: If individual, have a lower rate of 10%on
books, other literary and musical
compositions. DC have no lower preferential

Q: Derived from whom?

A: Depositary Bank under EFCDS



Q: What is the difference between 24 b1

from 27 D3
A: In 24 B1, NR is exempt only from bank
interst derived from EFCDS while 27D3
exempts NR from any income from
transactions with depositary bank under


Q: What is the expanded foreign currency?
A: It is a bank authorized by the BSP to
transact business in the Philippine Currency
as well as acceptable foreign currency or

NOTE: Sec. 24 B Nonresident exempt from

bank interest under EFCDS

SEC. 27


D(4)- Inter-corporate


Q: What is the tax to be paid?


27 D5 Capital Gains from sale of Real


- Atty. Francis J. Sababan -

Q: What is the tax?

A: 6% FIT
Q: What is the difference if the seller is an
individual and a DC?
A: Individual can sell all kinds of real
DC can only dispose land and/or


Q: Applicable to whom?
A: DC and RFC
Q: Can it be applied simultaneously with
A: NO, imposed in lieu of the NIT, whichever
is higher.

" An intl. carrier doing business in the

Phils. shall pay 2 ! % on its Gross Phil Billings
Q: Is 28 A3 the Gen. rule or the Exception?
A: It is the general rule because it is under
28 A3
" GPB is in the nature of FIT, applies only if
all the requirements are present.

" RFC will be liable for NIT, hence a RFC

engaged in common carriage does not pay
" Income without: EXEMPT

International Carrier:

Q: What is the Rationale?

A: to prevent corporations from claiming too
many deductions

" GPB refers to the amount of revenue

derived from: carriage of persons, excess
baggage, cargo and mail originating from the
Phils in a continuous and uninterrupted
flight, irrespective of the place of sale or
issue and the place of payment of the tickets
or passage document.

Q: When will it be imposed?

1. On the 4th year immediately ff the year
in which such corp commenced its
2. When the MCIT is higher than the NIT

1. Originating from the Phils.
2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or
issue and the place of the payment of
tickets or passage document.

Q: What is the carry over rule?

A: Sec 27 E2 states the carry over rule.

Q: Do you consider landing rights to

determine liability? (RR 15-2002)
1. If originates from the Phils and has
landing rights- ONLINE- RFC
2. No landing rights- OFFLINE- NRFC

" In order to avail: only in the year where

the MCIT is greater than the NIT.

Sec 28 A1
Q: What Kinds of taxes are paid by the RFC?

Sec. 28 B2 MCIT on RFC

! same with Sec. 27


1. Air carrier
2. ships

Q: If there are stopovers, is it still

A: YES, provided that the stopover does not
exceed 48 hrs.
Q: When will the place of sale of tickets
matter as to the taxpayers liability?
A: The place of tickets is material only if the
two other elements are not present to be able
to know if its subj to NIT or exempt.

Revalidated, exchanged or indorsed tickets

1. The passenger boards a plane in a
port or point in the Phils.


- Atty. Francis J. Sababan -

2. The tickets must be revalidated,

exchanged, or indorsed to another

Q: What if its the same airline but different

A: GPB does not apply, it must be to another
Q: What if it did not originate from the
A: Determine if its income within or without.
if ticket was purchased in the Phils. it is
income within hence apply NIT
if purchased outside, it is income without,
hence exempt

flight originates from the Phils
transshipment of passenger takes place
at any port outside the Phils.
the passenger transferred on another
Q: How do you apply GPB?
A: Only the aliquot portion of the cost of the
ticket corresponding to the leg flown from
the Phils to the point of transshipment shall
from part of the GPB.
Q: Is it liable for the whole flight?
From the Phils to the point of
transshipment, it is income w/in
From transshipment to final destination,
its income w/out- EXEMPT

International Shipping
" GPB means gross revenue whether from
passenger, cargo, mail
it must originate from the Phils.
up to final destination
- regardless of the place of sale or
payments of passenger or freight documents


1. only acceptable foreign currencies
2. always a foreign corporation (subj to
NIT) except #3

3. Exempt if income is derived by the

4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils.

Difference with EFCDS:

1. Acceptable
foreign currency, Phil.
Currency or both
2. Can be a domestic or foreign
3. Exempt if income derived by DC or
4. Parties:
a) local commercial banks
b) Foreign bank branch
c) Non Residents
d) OBU in the Phils
e) Other banks under EFCDS
" 10% FIT
If: Lender- OBU
Borrower- Resident Citizen
1. OBU
2. Local Commercial Banks
Transactions of Non Residents:
1. Income earner: Non- Residents
2. Lender: OBUs
Non resident exempt
transactions with OBUs and EFCDS



" profits based on the total profits applied
or earmarked fro remittance remitted by a
branch to its head office
" Subj to 15% tax
Except: those activities which are registered
with PEZA
NOTE: Interests, Dividends, Rents, Royalties
including remuneration for technical
sevices, salaries, wages, premiums,
annuities, emoluments, or casual gains,
profits, income and capital gains received
by a foreign corporation during each
taxable year from all sources within shall
not be treated as branch profits UNLESS


- Atty. Francis J. Sababan -

the same are effectively connected with

the conduct of its trade or business.

Branch Profit Remittance

Two ways to receive income (FC)
1. Branch
2. Subsidiaries
1. When a FC establishes branch, it is
always a FC
2. When a FC establishes DC, it is a RFC
Q; It is in addition to NIT- Why?
A: NIT because it is RFC
Q; What kind of tax is imposed under 28 A5?
A: 15% FIT
Q: How do you apply the rate?
A: multiplied to the total profit applied or
earmarked for remittance w/o deductions
It applies for branches that are:
1. the profit remitted is effectively
connected with the conduct of its
trade or business in the Phils.
2. One not registered with PEZA


F: A branch was established with AG&P,

there was investment with AG&P
Q: Did the petitioner participate with the
Q: What did the petitioner pay?
A: 15% Branch Profit Remittance Tax (BPRT)
10% Intercorporate Dividends
Q: Whats the issue?
A: Petitioner maintains that there was
overpayment of taxes, thus the same was
asking for a refund of tax erroneously
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
To be liable for BPRT
1. It is a RFC
2. Branch did not participate in negotiations

SEC. 28 A6a

" Regional or area headquarters (Sec. 22

DD) shall not be subject to tax exempt from
income tax if the requisites are present.
Q: What are the requisites?
1. the HQ do not earn or derive income
from the Phils.
2. Acts only as supervisory,
communications, coordinating centre
for their affiliates, subsidiary or
branches in the Asia- Pacific Region
and other foreign markets.
SEC. 28 A6b

" Regional Operating HQ are taxable and

liable to pay 10% taxable income.
" Regional Operating HQ is a branch
established in the Phils by a multinational
company engaged in any of the services:
1. Gen. Administration and Planning
2. Business Planning and Coordination
3. Sourcing and procurement of Raw
materials and components.
4. Corporate Finance and Advisory
5. Marketing Control and sales
6. Training and personal management
7. logistic services
8. research and development services
and product development
9. technical support and maintenance
10. data processing and communication
and business development
Rationale: Why liable? Because the claim for
exemption of resident airlines shall be
SEC. 28A7a Interests and Royalties:
" 20%FIT
" Interests under EFCDS= 7 ! %
Sec. 28A7b Income derived under EFCDS
1. Income derived from foreign currency
transactions with:
a) Non Residents
b) OBU
c) Local commercial bank
d) Foreign bank branches


e) Other depository


- Atty. Francis J. Sababan -



" As a Gen Rule: the above transaction is

Income from such transaction
as may be specified by the secretary of
Finance, upon recommendation by the
Monetary Board to be subject to regular
income tax payable by any banks.
2. Interest income from foreign currency
" granted by depository bank under said
EFCDS to others shall be subject to 10% FIT
Exempt if granted to:
1. Other OBU in the Phils, and
2. Other depository bank under the
SEC. 28 A7c: Capital Gains from
Shares of Stocks not Traded in the
Stock exchange
5% or 10% as the case maybe
" DC- RFC= EXEMPT, not subj to tax
SEC 28 B1
Q: What kind of tax?
A: 35% GIT on the ff income
1. Interest
2. Dividends
3. Rents
4. Royalties
5. Salaries
6. Premiums( except reinsurance
7. annuities
8. emoluments
9. Other fixed and determinable Gains,
profits and income.
SEC 28 B2 Non Resident Cinematographic
film owner, lessor or distributor
" liable for 25% GIT
SEC 28 B3 Non Resident owner or lessor of
Vessels chartered by Philippine Nationals.
" liable for 4 ! GIT

1. Chartered to Filipino
2. Approved by MARINA



SEC. B(4) Non Resident Owner or Lessor of

Machiniries, and other
" liable for 7 1/2 % GIT
SEC 28 b5a Interest on Foreign Loans
" Must be read with Sec. 32 B7a
Interest on Foreign Loans, if the lender is
1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an
exclusion (Sec 32 b7a: income derived
by a foreign govt from investments in
the Phils on loans, stocks, bond, and
other domestic securities or from
interest on deposits in banks by:
a) Foreign govt.
b) Financing inst owned controlled or
enjoying, refinancing from foreign
govt; and
c) Inter nation or Regional financial
inst established by foreign govt.



F: Atlas Mining entered into a Loan and Sales

Contract with Mitsubishi Metal Corp. ( A
Japanese Corp.) for the purposes of
projected expansion of the productivity
capacity of the formers mines in Cebu.
The contract provides that Mitsibushi will
extend a loan to Atlas in the amount 20
M dollar, so that Atlas will be able install
a new concentrator for copper
-Mitsubishi to comply with its
obligation, applied for a loan from
Export- Import Bank of Japan (Exim Bank)
and from consortium of Japanese banks.
Pursuant to the contract Atlas paid
interst to Mitsubishi where the
corresponding 15% tax thereon was
withheld and only remitted to the Govt.
Subsequently Mitsubishi filed a claim
for tax credit requesting that the same be
used as payment for its existing liabilities
despite having executed a waiver and
disclaimer of its interest in favor of Atlas
earlier on. It is the contention of
Mitsubishi that it was the mere agent of


- Atty. Francis J. Sababan -

Exim Bank which is a financing inst

owned and controlled by the Japanese
The status of Eximbank as a
government controlled inst became the
basis of the claim fro exemption by
Mitsubishi for the payment of interest on
I: WON Mitsubishi is a mere agent of
H: NO. The contract between the parties does
not contain any direct reference to Exim
Bank, it is strictly between Mitsubishi as
creditor and Atlas as the seller of copper.
The bank has nothing to do with the sale
of copper to Mitsubishi.
Atlas and
Mitsubishi had reciprocal obligationsMitsubishi in order to fulfill its obligations
had to obtain a loan, in its independent
capacity with Exim bank. Laws granting
exemption from tax are construed strictly
against the taxpayer and liberally in favor
of the taxing authority.
SEC. 28



" FIT 15% imposed on the amount of cash

and or prop dividends received from a
domestic corporation.

" You cannot refund right away ! 15%

BPRT and 10% Inter-corporate Dividends tax
has different basis

P&G who are involved

DC (P&G Phil) and NRFC (P&G US)
DC declares dividends to NRFC
35% was withheld and remitted to the BIR

What did they discover? (after paying)

they discovered that they are liable only
for 15% so they have a refund of 20%
Q: In the 1st case did the SC allowed the
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not the
proper party
2. There was a showing or proof as to
the existence of the tax deemed
paid rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding
agent is the proper party because he
is liable to pay said taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to 20%
of the tax deemed paid.

SUBJ TO THE CONDITION: the country where

the NRFC is domiciled allows a credit against
the tax due from the NRFC taxes deemed
paid or deemed to have been paid in the

Q: What is the rate if the law is silent?

A: 35% FIT

Gen rule: 35 % FIT

Exception: 15% under the tax deemed paid
rule/ reciprocity rule/ tax sparring rule

" The rate will only be 15% if theres a law

recognizing the same but this refers to the
case of those belonging to the first category.


2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
income within and income without
2nd : countries liable only for income within.

MARUBENI Case: 2 Issues

1. Is the payment of 10% FIT correct?

- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said liable
only to 25% because of the tax treaty


Q: Who are the parties?

DC(Wander) and FC (Glaxo)they
belong to different categories
The BIR tried to collect 35% because
the law is totally silent about the tax
H: The SC said that the tax should be 15%
which applies 2 instances:
1. Foreign law do not provide for tax
credit- 35%
2. law provides but the law is silent- 15%
3. law is silent because there is no law15%


- Atty. Francis J. Sababan -

4. law is silent because theres no law

because the subj matter is not
taxable- 15%




Q: What is the rate?

A: 10% of the gross income (taxable income)


" It is imposed upon the improperly

accumulated taxable income of the


Q: Applies to what Corp?

A: to DC only under RR 2- 2001( classified as
closely held corporations)
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel
corporation to declare dividends.


Q: Why?
A: because if profits are distributed to the
shareholders, they will be liable for the
payment of Dividends tax. Now, if the profits
are undistributed the shareholders will not
incur liability on taxes with respect to the
undistributed profits of the Corp.
- In a way it is in the form of deterrent to
the avoidance of tax upon shareholders who
are supposed to pay dividends tax on the
earnings distributed to them.
Q: What is taxable income?
A: SEC. 31 defines taxable income as the
pertinent items of gross income specified in
this Code, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income by this
Code or other special law
Q: When not liable to pay IAET?
A: There are 2 groups of DC exempt from
payment of IAET (RR2-2001)

A) Corporations failure to declare dividends

because of reasonable needs of business
" reasonable needs means are construed to
mean immediate needs of the business
including reasonable anticipated needs
Q: What constitutes reasonable accumulation
of the corporations earnings? Examples?
1. allowance for the increase in the
accumulation of earnings up to 100%


of the paidup capital of the

earnings reserved for the definite
corporate expansion projects or
programs approved by the Board
Earnings reserved fro buildings,
plants, or equipment, acquisition
approved by the Board
Earnings reserved for compliance with
any loan agreement or pre- existing
Earnings required by law or other
applicable statutes to be retained.
In case of subsidiaries of foreign
corporation, all undistributed
earnings or profits intended or
reserved for investments

NOTE: the corporations belonging in the 1st

group are normally liable but they can show
that the accumulation of earnings is justified
for reasonable needs of business, they incur
no liability and exempt from payments of the

B) Corporations which are exempt whether or

not it is for reasonable needs of the business:
1. Banks, and other non- bank financial
2. Insurance companies
3. Publicly- held corporations
4. Taxable partnerships
5. General Professional Partnerships
6. Non- taxable joint- ventures
7. Enterprises registered with
b) Bases Conversion Devt Act of 1992
(RA 9227)
c) Special Economic Zone declared by

Q: What is a closely- held corporations?

A: Those corporation at least 50% in value of
the outstanding capital stock or at least 50%
of the total combined voting power all
classes of stock entitled to vote is owned
directly, or indirectly by or for not more than
20 individuals
NOTE: Publicly held Corp. has more than 20
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.


- Atty. Francis J. Sababan -

2006 is the grace period. You will pay on

January 2007.


any of their properties, real

2. any activities conducted for profit

Q: If youre not mentioned to be exempted,

will you still be liable?
A: No, if you invoke adjustments




" regardless of the disposition of said

income, shall be subject to tax.

" Determine the Corporations exemptions

under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not be
taxed under this title (tax on income)
in respect to income receive by them
as such.
2. Sec 27, the corporations enumerated
are always exempt. Thus exemption is
3. Sec 22B GPP, as a general rule is not a
4. except if it earns income from other
" Joint Venture w/ service contract w/
government not a corporation, otherwise, it
is liable.
Assignment: Sec. 35
August 21, 2006 Midterms
August 14, 2006
Q: What is the reason for not including the
corporations exempt under section 27C and
Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under Section
27 C is absolute and without any conditions.
In addition, Section 22B provides that a joint
venture is generally taxable unless it has a
service contract with the government, a
generally taxable corporation
cannot be
joined with the group as generally not
taxable corporation. General Professional
Partnership is exempt but the exemption is
not the same as provided by Section 30.
TAKE NOTE : Las Paragraph of Section 30.
" exemption to the exemption: income of
whatever kind and character of the foregoing
organizations from:

Q: Enumerate the exempt

under Section 30; What is the requirement?
1. Labor, agricultural or horticultural
organization not organized principally
for profit;
2. Mutual savings bank not having a
capital stock represented by shares,
and cooperative bank without capital
stock organized and operated for
mutual purpose and without profit;
3. a beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as fraternal organization
operating under lodge system. (lodge
system: operating world wide) or a
mutual old association or a non-stock
a. organized by employees;
b. providing for the payment of life,
sickness, accident or other exclusive
benefits to its employees and their
4. Cemetery (a) company owned and (b)
operated exclusively for the benefit of
its members;
5. Non-stock corporation or association
organized and operated exclusively
for Religious, Charitable, Scientific,
Artistic or Cultural purposes, or for
the Rehabilitation of Veterans
(RCSACR), no part of its net income or
asset shall belong ot or inure to the
benefit of any member, organizer,
officer, or any specific person;
6. Business league, chamber of
commerce, or Board of trade, (a) not
organized for profit and (b) no part of
the net income of which inures to the
benefit of any stock holder or
7. Civil league or organization not
organized for profit but operated
exclusively for the promotion of social


Q: What is the basis of Manila BIR for the

imposition of the tax?


- Atty. Francis J. Sababan -

A: last paragraph of Section 30, because

YMCA was conducting an activity for
F: the CTA and the CA invoked the doctrine
laid down in Herrera and Abra Valley case
which involves an exemption from the
payment of Real property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the last
paragraph of Section 30.
YMCA Is exempt from the payment of
property tax, but not to income tax on
rentals from its property.
The tax code specifically mandates
that the income of exempt organizations
(under section 30) from any of their
properties, real or personal, shall be
subject to tax, including the rent income
of the YMCA from its real prop.

8. a non-stock and non profit educational

9. govt educational institution;
10. Farmers or other mutual typhoon or
fire insurance company, mutual ditch
or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members for
the sole purpose
of meeting its
11. Farmers, fruit growers or like
association organized and operated
as a sales agent for the purpose of
marketing the products of its
members and turning back to them
the proceeds of sales, less the
necessary selling expenses on the
basis of the quantity of produce
finished by them.
TAKE NOTE: income of sales agent is exempt.


Q: What is the tax treatment? Are these
taxable income? Are these included in the

gross income? Is it included in the ITR? Is it

subject to NIT?
A: Sec. 32 A answers the questions.

Q: What is the income tax referred to here?

A: NIT. The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically included
in the GIT?
A: No, Section 32 A states Except when
otherwise provided in this title
Q: What are the income that are not
included, not subject to NIT?
1. Income that are subject to FIT.
2. Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
they do not pay NIT, they pay by way of
Q: What are included in the Gross income?

1. Compensation for services in whatever

form paid including but nor limited to
fees, salaries, wages, commissions, and
similar items. [Sec. 32 A (1)]

Q: What is compensation?
A: all remuneration for services performed
by an employee for his employer under an
employer-employee relationship.
TAKE NOTE: compensation is included in the
ITR if the taxpayer is not liable for NIT. Thus,
if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries of
a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore banking, and petroleum companies.

Gross Income derived from the
conduct of trade or business or the
exercise of a profession; [Sec. 32 A (2)]
Q: What is the income tax here?
A: NIT, included in the ITR.


Gains derived from
property. [Sec. 32 A (3)]

- Atty. Francis J. Sababan -


Q: Did the law distinguished?

A: No, the law did not distinguished
between real and personal property.
1. Sale of real property
2. Sale of shares of stock (personal prop.)
" if the elements are present, subject to
FIT. Thus, it is not included in the ITR, the
withholding agent will be responsible for
Q: Income form the sale of property, do you
include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the forms
! subject to FIT if the following elements
are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR.
! Elements are not present, like when
the real prop. is an ordinary asset or when it
is capital asset if the taxpayer is RFC.
TAKE NOTE: R-R 17-2003
" Real property sale subject to FWT, the
buyer accomplishes the ITR.

4. interest; [Sec. 32 A (4)]

Q: What interest is being referred to here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest from
bank deposit which does not constitute
passive income.
Bank interest from sources, without or
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or considered
an income within, thus subject to FIT. Thus,
not included in the ITR.

5. Rents. [Sec. 32 A (5)]

" subject to NIT, included in the ITR.


6. Royalties; [Sec. 32 A (6)]

Q: What is being referred to here?

A: royalties which does not constitute
passive income. Royalties derived from
income without. subject to NIT. Thus not
included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and
the rest are exempt.
1. RC
2. DC

7. Dividends. [Sec. 32 A (7)]

Q: What kind of dividends?
A: one that does not constitute a passive
1. DC individual taxpayer = FIT
" only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included in
the computation of the gross income. Thus,
included in the ITR.

8. Annuities. [Sec. 32 A (8)]

Q: What kind of annuities?
A: annuities which are not exempt from tax
are included in the computation of the gross
income. (included in the ITR)

9. Prizes and Winnings [Sec. 32 A (9)]

Q: What kind of prizes and winnings?
a. those that does not constitute passive
income; and
b. those that are not considered as an
exclusion. Thus, exempt.

Passive Income
1. Prizes derived from sources within
and over 10,000.00
2. Winnings derived from sources
a. winnings: PCSO and Lotto winnings.


- Atty. Francis J. Sababan -

b. prizes:

" those primarily for recognition of

(1)religious, (2)charitable, (3)scientific,
(4)educational, (5)artistic, (6)literary, (7)civic
achievement are exempt PROVIDED:
1. the recipient was selected without any
action on his part to enter the contest
or proceedings; and
2. the recipient is not required to render
substantial future services as a
condition to receiving the prize or
" prizes and awards granted to athletes are
also exempted provided:
1. local or international sports
competition or tournament;
2. held in the Philippines or abroad; and
3. sanctioned by the national sports
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or

10. Pensions [Sec. 32 A (10)]

never subject to fit (?)

Q: What is being referred to?

A: GPP exempt from payment of corporate
income tax
" shares of partners subject to NIT Sec.


Q: What is the requirement?

A: only one requirement for exemption: that
the proceeds of the life insurance be payable
upon the death of the insured.
Q: Does it matter who the beneficiary is or
paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer under
an agreement to pay interest thereon, the
interest payment shall be included in the
gross income.

Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a certain
time, say 10 years and thereafter the insured
did not die, how much will be excluded?
A: only the amount received by the insured
as a return of the premiums.
Ex. 1 M 100 thousand = capital
It is exempt (100K)

Q: Why is it excluded?
A: because the amount received
represents a return of capital.

11. Partners distributive share from the

net income of the general professional
partnership (GPP).

1. Life insurance [Sec. 31 B (1)]

900K is taxable.

Q: What kind of pension?

A: Included in the gross income if not

SEC 32

Exemptions, exclusions,
deductions, have the same characteristics !
all tax do not apply.


Q: What do you mean by exclusions? Are

these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.


Q: is this subject to Estate Tax under Sec. 85

E? do we have the same requirement?
A: no, the requirement for exemption is not
the same under Section 85 E.

3. Proceeds of life insurance: decedent

insured himself, inclusion or exclusion
will depend on who the beneficiary is.
a. the beneficiary is the estate.
subject to Estate tax, included in the
gross estate regardless of whether or not
the designation of the beneficiary is
revocable or irrevocable.
b. the beneficiary is a third person other than
the estate.
b.1 Revocable Designation ! subject to
estate tax, included in the gross estate.


- Atty. Francis J. Sababan -

Reason: because of the insureds power

to modify or change the beneficiary.
b.2 Irrevocable Designation ! not subject
to Estate tax, not included in the gross
Reason: the insured loses the power to
control, modify and change the

Q: when will the damages recovered be

A: General Rule : all damages awarded are
tax exempt.
: damages representing loss of
Q: Why is it considered an exclusion?
A: because this is just an indemnification for
the injuries or damages suffered.

Q: Is it subject to VAT?
A: 1. Non-life insurance yes, subject to
VAT under 108 (A).
2. Life insurance
NO, subject to
percentage tax under Sec. 123 of the Tax

6. Income exempt under a treaty [Sec.

32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.

4. Gifts, Bequest and Devises [Sec. 32

B (3)]

7. Retirement benefits,
gratuities [Sec. 32 B (6)]

Q: Why is the donee exempt from income

A: Because
the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the value of
property acquired by gift, bequest or devise

Q: Why do we need to distinguish retirement

pay, separation pay and terminal leave pay?
A: because they have different requirements
for exemption.
Q: What is retirement pay?
A: the sum of money received upon reaching
the maximum age of employment.

A. GIFTS are excluded because they are
subject to donors tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE tax.
Q: what is included in the gross income?
A: income from such property.
" gift, bequest, devise or descent of income
from any property in case of transfers of
divided interest.

5. Compensation for
sickness [Sec. 32 B (4)]




a. Under RA4917 (with Retirement Plan)

1. the private benefit plan is approved
by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the time
of retirement; and
4. the official or employee
himself/herself of the benefit only

Q: is this the same as those provided under

the workmens compensation act (wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or those
under workmens compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and

b. Under RA7641 (without retirement plan )

1. the retiring official employee is at
least 60 years old but not more than
65 years old;
2. the employee or official must have
served the company for at least 5
entitled to 15 days salary and ! of the
13th month pay for every year of service.

Q: What does injury include?

A: The term injury includes death, even if
not injured, if the person dies this will be

TAKE NOTE: the retirement benefits under

RA4917 and RA7641 are exempt from
income tax provided the requirements are


SEC. 32 B(6)(c)

- Atty. Francis J. Sababan -

b. within employees control included.

" retirement benefits given by foreign

government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications automatic

1. registration CBA provides separation
pay, within the control = included.
2. installation of labor saving devises or
bankruptcy beyond the control =

SEC. 32 B(6)(d,e,f)

Q: What is terminal leave pay?

A: the accumulated vacation leave and sick
leave benefits converted to cash or money to
be given either every year or upon retirement
or separation.

" retirement benefits

given by the
Philippine Govt through the GSIS, SSS and
PVAO are exempt without further
qualifications = automatic exclusions.
August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.
August 28, 2006.
" Gross Income include both capital and
ordinary gains, Sec. 31 says gross incomedeductions, that which is ordinary loss.
- may be deducted from capital gains and
ordinary gains.
Q: What is separation pay?
A: on given when one is terminated from the
service because of (1) illness, (2)death, (3)
physical incapacity or injury, or (4) causes
beyond the control of the employee.
Q: Are there any requirement for separation
pay granted by foreign govt or corp?
A: None, the separation pay granted by the
aforementioned institutions are exempt
without further qualifications (other similar
Q: is separation pay an exclusion, therefore,
A: No.
Separation pay not
exempt (?)
1. Automatic exclusions, thus exempt if due
a. illness
b. death
c. physical incapacity or injury.
2. Conditional exclusion
a. causes beyond the control of the
employee- excluded

Terminal Leave Pay granted upon retirement

or separation:
uder PD220, TLP in the Govt or in the
Private Sector shall be exempt from
income tax if given or granted upon
retirement or separation.
TLP granted on a yearly basis:
1. employee in the private sector:
a. accumulated sick leave subject
to income tax.
b. Accumulated vacation leave: if
more than 10 days (meaning 11
pataas) subject to income tax;
If 10 days or less exempt.
2. Govt Employee:
governing law: EO 291 of Pres. Estrada,
RMC 16-2000.
Rule: Govt workers (both officers or nonofficers) granted TLP on a yearly basis !
exempt from income tax.
! there is no qualification as to vacation or
sick leave.
" Take Note of 3 cases.
be reminded of
EO 291, Sec. 2. 78.2
par. 97, RR2-98, RR16-200 (3).

Case of Zialcita

" retired from DOJ, contention: TLP should

be exempt from income tax pursuant to the
old law.
SC: on a different ground TLP is exempt
because it is similar to Retirement pay, thus
exempt but the rulings application is limited
only to DOJ employees.

Borromeo case:

" Same as the Zialcita case

Issues: WON the TLP is subject to income tax
and WON COLA and RATA are included?
SC: RULED TLP is Exempt!


- Atty. Francis J. Sababan -

Modified: the rule applies not only to DOJ

officers but also to CSC commissioners.

TAKE NOTE: if plain foreign corp., subject to

FIT 20%.


EXAMPLES of exclusions
a. Brunei Govt earns interest by depositing
money in Makati Bank Exclusion.
b. SMC- Stock dividends to 3. Brunei Govt.
c. Income derived by the Govt or its
political subdivisions (Sec. 32 B (7) (b)
a. exercise of public utility
b. exercise of any essential govt
accruing to the govt.
d prizes and awards (Sec. 32 B 7 c)

- Castaeda DFA officer in Phil. Embassy in

1. TLP is exempt.
2. Ruling applies to DFA officers.
Q: Does the rule or decision applies to Govt
officials only?
A: No. PD220: Exemption applies to both
private and public sectors(?)
it does not matter if TLP is vacation or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
JAN, 1998 the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
Officer in govt receiving TLP is always
exempt whether or not vacation or sick leave
is granted.
Modified RR2-98:
TLP will only apply to private sectors
if granted on a yearly basis may be
subject to tax: VACATION LEAVE

8. Miscellaneous items (Sec. 32 B (7)

(a) income derived by foreign Govt
[Sec. 32 B (7) (a)]
Q: What kind of income?
1. investments in:
a. loans
b. stocks
c. bonds
d. other domestic securities
2. interest from deposits in Banks in the
Q: Who are income earners?
1. foreign government
2. financing institutions owned,
controlled or enjoying re-financing
from foreign govts; and
3. intl or regional financial institutions
established by foreign govts
(established in the Philippines)

primarily for religious, charitable,

scientific, educational, artistic, literary or
civic achievements:
1. recipient was selected without any
action on his part to enter the contest
or proceedings;
2. the recipient was not required to
render substantial future services as a
condition to receive the prize or

D. prizes and awards in sports (Sec. 32B 7 d)

1. granted to athletes;
2. local or intl competitions;
3. held here or abroad;
4. sanctioned by the natl sports associations.
E. 13th month pay and other benefits (Sec.
32B 7 e)
Q: Do you include Christmas bonus in your
A: No, because the law says 13th month pay
and other benefits/similar benefits xmas
bonus is included in the category.
Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
Q: Applicable to whom?
1. govt; and
2. Private institutions.
F. GSIS, SSS, Medicare and other
contributions (Sec. 32 B 7 f)
" must be deducted from the GI not NIT
because it is an exclusion.
-creditable withholding tax is an exclusionmust be deducted first from the GI before
you compute the NIT. Otherwise, you are


including in the GI something

excluded from the same.

- Atty. Francis J. Sababan -



G. Gains from the Sale of bonds, debentures,

or other Certificate of indebtedness. (Sec. 32
B 7 g)
Q: Why 5 years?
A: certificate of indebtedness is similar to
Bank Interest in a long term deposit.
- Sec. 32 B 7 g is similar or the same as 24 B
in long term deposit.
H. Gains from redemption of shares in
mutual fund (Sec. 32 B 7 h)
1. Fiscal Year means an accounting period
of 12 months ending on the last day of any
month other than December.
2. Calendar year a period of 12 months
beginning on January and ending on
Q: Business expense incurred in February
2006, is it possible to include it for April
A: yes, it is possible or it is possible if fiscal
year is employed, if it falls under the fiscal
year and all the elements are present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
" for taxpayers liable for income within and
without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
" for taxpayers who are liable only for
income within, they can claim a deduction
for expenses incurred within the
1. For those business expenses
enumerated under A. You need to prove that
it is an ordinary and necessary expense.

Feb. 12, 2007 (Sec. 34 A, Expenses)

Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation, there
must be services actually rendered.

F: involves a corporation engaged in selling
fish nets, and the corporation have a land
sold through a broker.
"there was substantial profits gained from
the sale of a land which was sold by a broker.
The profit was in turn given to the workers as
special bonus.
"the corporation claimed the bonus as a
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually rendered.
"in this case, it was proven that the sale was
not made by the employees, no effort or
services actually rendered by them because
the sale was made through a broker.
Q: Reasonable Travel Expenses, What is the
1. Travel must be in pursuit of business,
trade or profession.
2. Travel expense while away from home.
Q: Is there a travel expense which was not in
pursuit of business?
A: yes, those which are considered as fringe
benefits (FB), expenses for foreign travel is
considered a FB only if it is not in pursuit of
the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)(ii)?
A: No, you can claim it under Sec. 34 A
(1)(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?

2. For those enumerated under A, all you

have to prove is that it is incurred during the
taxable year.


1. required as a condition for the

continued use or possession, for the


- Atty. Francis J. Sababan -

purpose of the trade, business or

possession of the property.
2. taxpayer has not taken any title or no
equity other than a lessor.

taxpayers allowable deduction for

interest expense shall be deducted by an
amount equal to 42% (RR 10-2000) of the
interest income subject to FIT.

Q: Reasonable allowance for entertainment,

amusement and recreation expenses, what is
the requirement?
1. connected with the development,
management, and operation of the trade
2. Does not exceed the limits or ceiling
set by the Secretary of Finance; and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks will
not pass the requirement of (i) ordinary and
(ii) necessary hence not deductible


Q: Why only private educational institution is

mentioned and no other taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ.
claim it under Sec. 34 A (2)




1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of the
expenses incurred.
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the expenses

Q: Who claims this deduction?

A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
"interest on debt - when one borrows money
to finance his business interest in connection
with the taxpayers profession trade or
"a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not the
principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid the entire amount
of interest can be claimed as itemized
2. if only ! of the obligation had been paid,
then the entire amount of ! of that interest
can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction on the
years that it was paid.




1. incurred within the taxable year.

2. individual taxpayer reporting income on a
cash basis.
No deduction shall be allowed in respect
to the following interest:
1. if within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest
is paid in advance or through discount or
2. if both taxpayer and the person to whom
the payments has been made or is to be
made are persons specified under Sec. 36 (B):


- Atty. Francis J. Sababan -

a. member of a family
b. bet. an individual and a corp., more than
50% in advance of the outstanding stock of
which is owned directly or indirectly by or for
such individual;
c. Bet. 2 corp., more than 50% in value of the
outstanding stock of each of which is owned,
directly or indirectly, by or for the same
d. bet. the grantor and a fiduciary of any
e. bet. the fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust; or
f. bet. a fiduciary of trust and a beneficiary of
such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related parties.
Q: What if half-brother?
A: not allowed to claim


TAKE NOTE: interest incurred from the

exploration of petroleum refers not just in
interest incurred on loan of money but also
interest incurred for installment payments.
Q: Who are related parties?
A: individuals and corporations.
1. interest incurred to acquire property used
in trade, business or exercise of profession
can be claimed a an itemize deduction
a. on interest; or
b. depreciation (as capital expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in a
bank so that it will warn interest. (RR132000)
1. loan of 1M from a bank with an interest of
2. 20% of 1M is Php200,000 but you cannot
claim this whole amount as a deduction.
3. when you deposited the 1M in the bank, it
earned a bank interest subject to FIT worth
4. 42% (RR) of 10,000 = 4,200 (RR 9337)


5. Php200K-4,200= Php195,800/ this is the

amount you can claim as a deduction.
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
1. if claimed as a deduction, it should be
deducted from the gross income;
2. if claimed as a tax credit, it should be
deducted from the Net Income Tax due
(bottom of the formula)


- Discount of senior citizens

SC: discount claimed by senior citizens shall
create a tax credit and must be deducted at
the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
"tax deduction is allowed if the taxes were
paid or incurred within the taxable year and
it must be connected to the trade, business
or profession of the tax payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only for
Q: What is a tax credit?
A: refers to the taxpayers right to deduct
from the income tax due the amount of
tax the taxpayer paid to foreign country,
subject to limitations.
Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
Q: What are the other tax credit under the
1. RA 6452 selling goods and commodities
to senior citizens, the discount claimed is
treated as a tax credit.
2. income tax paid to foreign country.