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JMCRUZ TAX 1 REVIEWER FOR COMPREHENSIVE FINAL EXAM

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TAXATION LAW I ATTY. ROMMEL GEOCANIGA 3. Benefits-Protection theory (Symbiotic relationship)


I. Introduction and General Principles Q: What is the benefits-protection theory?
DEFINITION AND CONCEPT OF TAXATION According to this principle, the basis of taxation is found
in the reciprocal duties of protection and support between
Q: Define taxation the State and its inhabitants. In return for his contribution,
Taxation is the inherent power of the sovereign exercised the taxpayer receives the general advantages and
through the legislature to impose burdens upon subjects protection which the government affords the taxpayer and
and objects within its jurisdiction for the purpose of his property.
raising revenues to carry out the legitimate objects of
In CIR VS. ALGUE [158 SCRA 9], the Supreme Court
government.
stated that taxes are what we pay for civilized society.
It is the mode of raising revenue for public purposes. Hence, despite the natural reluctance to surrender part of
ones hard-earned income, every person who is able must
It is the power by which the sovereign raises revenue to contribute his share in the running of the government and
defray the expenses of government. It is a way of the latter, for its part, is expected to respond in the form
apportioning the cost of government among those who in of tangible and intangible benefits intended to improve
some measure are privileged to enjoy its benefits and must the lives of the people and enhance their moral and
bear its burden. material values. This symbiotic relationship is the
Theory and Basis of Taxation rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those
1. Lifeblood Theory in the seat of power
Q: What is the lifeblood theory? 4. Jurisdiction over subjects and objects
As stated in the case of CIR vs. Algue [158 SCRA 9], the Q: Explain the jurisdiction of the State over persons and
existence of government is a necessity; it cannot exist nor property within its territory as a basis or rationale of
endure without the means to pay its expenses; and for taxation.
those means, the government has the right to compel all
its citizens and property within its limits to contribute in Jurisdiction is a reason why citizens must provide support
the form of taxes. to the state so the latter could continue to give protection.
It is the country, state or sovereign that gives protection
Taxes are the lifeblood of the government and so should that has the right to demand the payment of taxes with
be collected without unnecessary hindrance. On the other which to finance activities so it could continue to give
hand, such collection should be made in accordance with protection. The basis or rationale of taxation is also used
law as any arbitrariness will negate the very reason for to explain why taxation is basically territorial in character
government itself. It is therefore necessary to reconcile because it is only within the territorial boundaries of the
the apparently conflicting interests of the authorities and taxing authority where tax laws may be enforced. This is
the taxpayers so that the real purpose of taxation, which so because it is only within the confines of its territory that
is the promotion of the common good, may be achieved. a country, state or sovereign may give protection.
CIR vs. Algue [158 SCRA 9]
Principles of a sound tax system
2. Necessity Theory
Q: What the basic principles of a sound tax system?
Q: What is the necessity theory?
The basic principles are the following:
As stated in the case of PHILIPPINE GUARANTY V.
CIR [13 SCRA 775], taxation is a necessary burden to 1. Fiscal Adequacy The source of government revenue
preserve the States sovereignty and a means to give the must be sufficient to meet governmental expenditures and
citizenry an army to resist aggression, a navy to defend its other public needs
shores from invasion, a corps of civil servants to serve, 2. Theoretical Justice a good tax system must be based
public improvements for the enjoyment of the citizenry, on the taxpayers ability to pay
and those which come within the States territory and
facilities and protection which a government is supposed 3. Administrative feasibility taxes should be capable
to provide of being effectively enforced.

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Nature of Taxation POWER OF TAXATION COMPARED WITH


OTHER POWERS
1. An inherent power
TAXATION EMINENT POLICE
The power of taxation is inherent in the State, being
DOMAIN POWER
an attribute of sovereignty. The power to tax is an
incident of sovereignty and is unlimited in its range, Authority Only by the May be Only by
acknowledging in its very nature no limits, so that security who government exercised government
against abuse is to be found only in the responsibility of exercises or its by (1) or its
the legislature which imposes the tax on the constituency the power political government political
who are to pay it MACTAN CEBU INTERNATIONAL subdivision or political subdivision
AIRPORT AUTHORITY VS. MARCOS [261 SCRA s subdivision s
667]. This is so because the very existence of the State is s OR (2)
dependent on taxes. granted to
public
2. Legislative in character
utilities
The power of taxation is essentially a legislative
Purpose The The The use of
function. Taxation is an attribute of sovereignty. It is the
property is property is the property
strongest of all powers of the government. There is a
taken for taken for is regulated
presumption in favor of legislative determination. Public
the support public use for
policy decrees that since upon the prompt collection of
of the and must be promoting
revenue depends the very existence of government itself,
government compensate the general
whatever determination shall be arrived at by the
d welfare and
legislature should not be interfered with, unless there be a
is not
clear violation of some constitutional inhibition.
compensabl
[SARASOLA VS. TRINIDAD [40 PHIL. 252]
e
It is a legislative power because it involves the
Persons Operates on Operates on Operates on
promulgation of rules. The Constitution has allocated to
affected a an a
the legislative department the enactment of law.
community individual community
PURPOSES OF TAXATION or class of as owner of or class of
individuals a particular individuals
Q: What are the purposes of taxation? property
1. Revenue purposes: The basic purpose of taxation is to
Effect The money There is a There is no
raise revenues.
contributed transfer of transfer of
2. Sumptuary or regulatory purpose: The secondary becomes the right to title. At
purpose of taxation is to promote the general welfare and part of the property most, there
to protect the health, safety or morals of inhabitants public is restraint
funds on the
In TIO VS. VIDEOGRAM REGULATORY BOARD injurious
[151 SCRA 208], the Supreme Court held that the levy of use of
30% tax on videogram operators was imposed primarily property
to answer the need for regulating the video industry,
particularly rampant film piracy and flagrant violation of Benefits It is He receives The person
intellectual property rights. received assumed the market affected
that the value of the receives
In PHILIPPINE HEALTH CARE PROVIDERS VS. individual property indirect
CIR [554 SCRA 411], the Supreme Court, on the issue receives the taken from benefits as
of whether Health maintenance organizations (HMOs) equivalent him may arise
were exempt from Documentary Stamp Tax (DST), held of the tax in from the
that it is not the purpose of the government to throttle the form of maintenanc
private business. On the contrary, the government ought protection e of a
to encourage private enterprise. HMOs, just like any and benefits healthy
concern organized for a lawful economic activity have a he receives economic
right to maintain a legitimate business. Hence, HMOs from the standard of
should not be arbitrarily and unjustly included in the DST government society
coverage.

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SCOPE AND LIMITATION OF TAXATION Q: Define situs of taxation.


Inherent Limitations The situs of taxation is the place or authority that has the
right to impose and collect taxes.
1. Public purpose the revenues collected from taxation
should be devoted to a public purpose. Q: What are the basis or determinants of the situs of
taxation?
2. Inherently legislative or non-delegability of the
taxing power Only the legislature can exercise the 1. The symbiotic relationship
power of taxes unless the same is delegated by the
2. Jurisdiction, state or political unit that gives protection
constitution or through a law which does not violate the
has the right to demand support
constitution.
The power to tax is an incident of sovereignty and is Q: What is the effect of multiplicity of situs of taxation?
unlimited in its range, acknowledging in its very nature Due to the variance in the concept of domicile for tax
no limits, so that security against abuse is to be found only purposes and considering the multiple relationships that
in the responsibility of the legislature which imposes the may arise with respect to intangible property and the use
tax on the constituency who are to pay it MACTAN to which the property may have been devoted, all of which
CEBU INTERNATIONAL AIRPORT AUTHORITY may receive the protection of the laws of jurisdiction other
VS. MARCOS [261 SCRA 667]. than the domicile of the owner thereto, the same income
or intangible property may be subject to taxation in
Q: Do local governments have the power to tax?
several taxing jurisdictions.
Yes. The power to tax is no longer vested exclusively on
Congress. The local governments are now given direct Q: How do we address multiplicity of situs of taxation?
authority to levy taxes, fees and other charges pursuant to The taxing jurisdiction may:
Section 5, Article X, of the 1987 Constitution.
NAPOCOR V. CITY OF CABANATUAN [G.R. NO. 1. provide for exemptions or allowance of deduction or
149110, APRIL 9, 2003]. It must be noted, further, that tax credit for foreign taxes; and/or
the power is not inherent in the local government unlike 2. enter into tax treaties with other States.
in the national government. MANILA ELECTRIC
COMPANY VS. PROVINCE OF LAGUNA [306 4. Principle of Comity Comity is respect accorded by
SCRA 750]. A municipal corporation has no inherent nation to each others as co-equals. As taxation is an act of
right to impose taxes. Its power to tax must always yield sovereignty, such power should be imposed upon equals
to a legislative act which is superior having been passed out of respect.
by the state itself which has the inherent power to tax. (see
5. Tax exemption of the State
BASCO VS. PAGCOR [197 SCRA 52])
Q: Is the State subject to tax?
3. Territoriality or situs of taxation the taxing power
should be exercised only within the territorial jurisdiction Generally, the State may not be subject to taxation.
of the taxing authority. However, while this may be so, sovereignty being
absolute and taxation being an act of high sovereignty, the
Q: Explain the territoriality rule as a limitation on the
State may tax itself including its political subdivisions.
power of taxation.
Q: Are GOCCs subject to local government taxes?
However broad the power of taxation may be as to its
character and no matter how searching it is in its extent, Yes. Exemptions of GOCCs from local government taxes
such power is necessarily limited only to persons, have been withdrawn by the the Local Government Code
property or businesses within its jurisdiction.
Q: Can local governments tax the national government,
Q: What are the exceptions to the territoriality rule? its agencies, and instrumentalities?
1. Where tax laws operate outside territorial jurisdiction No. In MIAA v. CA [495 SCRA 591], the Supreme
(i.e. taxation of resident citizens on their incomes derived Court, in resolving the issue on whether the lands and
from abroad) buildings owned by the Manila International Airport
Authority were subject to real property tax, ruled in the
2. Where tax laws do not operate within the territorial
negative. The Supreme Court opined that since MIAA is
jurisdiction of the state (i.e. when exempted by treaty
not a GOCC but instead as government instrumentality
obligations and when exempted by international comity.)
vested with corporate powers or a government corporate
entity, it is exempt from real property tax. By express
provision of the Local Government Code, local
governments cannot levy taxes, fees or charges of any
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kind on the National Government, its agencies and Q: What are special entities that are granted tax
instrumentalities. exemptions by the Constitution?
Furthermore, the said lands and buildings are property of Under Article VI, Section 28, the following are exempt
the public dominion and therefore owned by the State. from real property taxes:
They are devoted to public use. Thus, they cannot be
1. Charitable institutions
auctioned as they are outside the commerce of man.
However, the portions of the property leased to private 2. Churches
entities are subject to real property tax.
3. Parsonages or convents appurtenant thereto
Constitutional Limitations
4. Mosques
Directly affecting taxation
5. Non-profit cemeteries; and
The direct constitutional provisions on taxation are:
6. All lands, buildings, and improvements, actually,
1. Non-imprisonment for non-payment of poll-tax directly and exclusively used for religious, charitable or
(Article III, Sec. 20) educational purposes.
2. Uniformity, equitability and progressivity of taxation The exemption provided for under Article VI, Section 28
(Article VI, Section 28, par. 1). pertains only to real property taxes (LLADOC V. CIR
[14 SCRA 292]).
Q: What is meant by uniformity?
Uniformity requires that all subjects or objects of Q: What is meant by actual, direct, and exclusive use?
taxation similarly situated are to be treated alike or put on What is meant by actual, direct, and exclusive use of the
equal footing both in privileges and liabilities (SISON V. property for charitable institutions is the direct and
ANCHETA [130 SCRA 654]; see also CIR V. immediate and actual application of the property itself to
LINGAYEN GULF [164 SCRA 27]) the purpose for which the charitable institution is
organized. LUNG CENTER OF THE PHILIPPINES
Q: What is meant by equitable?
V. QUEZON CITY [433 SCRA 119]
Equitable means fair, just, reasonable and proportionate
to ones ability to pay. Q: If a hospital also admits paying patients, does it lose
its character as a charitable institution?
In ABAKADA GURO PARTY-LIST V. ERMITA
No. In LUNG CENTER OF THE PHILIPPINES V.
[469 SCRA 1], the Supreme Court ruled that the 12%
QUEZON CITY [433 SCRA 119], the Supreme Court
VAT imposition was equitable as it imposes safeguards
stated that, as a general principle, a charitable institution
and limits in the form of VAT exemption granted to gross
does not lose its character as such and its exemption from
sales below P1.5 million.
taxes simply because it derives income from paying
Q: Should the system of taxation be always progressive? patients , whether out-patient or confined in the hospital
or receives subsidies from the government, as long as the
No. The Supreme Court in TOLENTINO VS.
money received is devoted or used altogether to the
SECRETARY OF FINANCE [249 SCRA 628] charitable object which it is intended to achieve, and no
explained that what Congress is required by the
money inures to the private benefit of the persons
Constitution to do is only to "evolve a progressive system
managing or operating the institution.
of taxation." This is a directive to Congress, just like the
directive to it to give priority to the enactment of laws for Q: YMCA is a non-stock, non-profit institution with
the enhancement of human dignity and the reduction of religious, charitable and educational objectives. YMCA
social, economic and political inequalities or for the leased part of its premises to small canteen owners and
promotion of the right to "quality education." These charged parking fees on the lots beside its building. Can
provisions are put in the Constitution as moral incentives the CIR tax YMCA for such income?
to legislation, not as judicially enforceable rights. Thus,
Yes. In CIR V. CA [298 SCRA 83], the Supreme Court
even if the VAT is regressive because it is an indirect tax,
ruled that the income from the lease and parking fees were
it is not prohibited by the Constitution.
not exempt. The last paragraph of Section 27 of the NIRC
3. Grant by Congress of authority to the President to fix clearly provides that profits realized by exempt
tariff rates, import and export quotas, etc (Article VI, organizations (non-profit clubs) from real property from
Section 28, par. 2) whatever source and wherever used are taxable. The
Court noted that while YMCA is exempt from real
4. Tax exemption of properties actually, directly, and
property taxes, it is not exempt from income tax on the
exclusively used for religious, charitable and educational
rentals from its property. Further, YMCA failed to prove
purposes (Article VI, Section 28, par. 3)
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that it was a non-stock, non-profit educational institution With regard to taxation of real property, the doctrine laid
under Article XIV, Section 4(3) of the Constitution. down in LUNG CENTER OF THE PHILIPPINES V.
QUEZON CITY [433 SCRA 119] still holds. The lands,
Q: The Philippine Lung Center leased portions of its buildings, and improvements actually, directly and
real property out for commercial purposes. Are these exclusively used for religious, charitable and educational
exempt from real property taxes? purposes shall remain exempt from real property taxes
No. In LUNG CENTER OF THE PHILIPPINES V. even if there is, in the case of a hospital, admission of
QUEZON CITY [433 SCRA 119], the Supreme Court paying patients. If the hospital were to lease to private
held that the hospital was not exempt from real property persons portions of its property for profit, the real
tax on the portions of its property not actually, directly, property will not be exempt from real property taxes.
and exclusively used for charitable purposes. Thus, those Thats for real property taxes. Income taxation is another
leased out for commercial purposes are subject to real thing.
property tax. Those used by the hospital even if used for
With regard to income taxation, the statement of the Court
paying patients remain exempt from real property taxes.
must be noted: Non-profit does not necessarily mean
CIR V. ST. LUKES MEDICAL CENTER charitable. This is affirmed in the constitutional
[SEPTEMBER 26, 2012] provision with regard to non-stock, non-profit educational
institutions. For their income to be exempt, their revenues
DOCTRINE: A proprietary non-profit hospital is subject and assets must be used actually, directly, and exclusively
to 10% tax under Section 27(B) of the Tax Code. FACTS: for educational purposes. The rule now can be laid down
St. Lukes Medical Center is a hospital organized as a non- as follows: For the income of a non-stock, non-profit
stock and non-profit corporation. It admits both paying corporation to be totally exempt, it must be organized and
and non-paying patients. The CIR claimed that St. Lukes operated exclusively for educational or charitable
was liable for income tax at 10% as provided under purposes. In such case, it will fall within the coverage of
Section 27(B)10 of the NIRC. St. Lukes argues that it is a Section 30(E) and (G) of the Tax Code. However, if it
non-stock, non-profit institution for charitable and social conducts for-profit activities, like the admission of paying
welfare purposes exempt from income tax under Section patients, it will not be exempt with regard to that
30(E) and (G) of the NIRC.11 particular income. Section 27(B) will apply and the
HELD: St. Lukes cannot claim full tax exemption under income will be taxed at the preferential rate of 10%.
Section 30 because it has paying patients and this is 5. Exemption from taxes of the revenues and assets of
notwithstanding the fact that it is a non-profit hospital. For educational institutions including grants, endowments,
Section 27(B) to apply, the hospital must be non-profit donations or contributions. (Article XVI, Section 4, par.
which means that no net income or asset accrues to or 3)
benefits any member or specific person and all the
activities of the hospital are non-profit. On the other hand, 6. Presidents veto power on appropriation, revenue, tariff
Section 30(E) and (G), while providing for an exemption bills (Article VI, Section 27, par. 2)
is qualified by the last paragraph which, in turn, provides
7. Non-impairment of the Supreme Courts jurisdiction in
that activities conducted for profit shall be taxable.
tax cases (Article VIII, Sec. 5, par. 2(b))
Section 30(E) and (G) requires that an institution be
operated exclusively for charitable purposes to be 8. Power of local governments to create its own sources
completely exempt from income tax. In this case, of revenue and to levy taxes subject to Congressional
however, St. Lukes is not operated exclusively for limitations (Article X, Section 6)
charitable purposes insofar as its revenues from paying
9. Voting requirement in connection with the legislative
patients are concerned. Such revenue is subject to income
grant of tax exemption (Article VI, Section 28, par. 4)
tax at 10% under Section 27(B).
10. The provision which mandates that money collected
Note: This case is very important because it reconciles the
on a tax levied for a public purpose shall be paid out for
following constitutional and statutory provisions: Section
such purpose only (Article VI, Section 29, par. 3)
28, Article VI (tax exemption of real property actually,
directly, and exclusively used for religious, charitable or Indirectly affecting taxation
educational purposes); Section 4(3) Article XIV (tax
exemption of income of non-stock, non-profit educational The general constitutional limitations are:
institutions used actually, directly, and exclusively for 1. Due process (Article III, Section 1)
educational purposes); Section 27(B), Tax Code (10%
preferential tax rate to income of proprietary educational Q: How is the due process clause applied to taxation?
institutions); Section 30(E) and (G) (tax exemption of the
In PEPSI-COLA BOTTLING COMPANY VS.
income of non-stock non-profit corporations organized
MUNICIPALITY OF TANAUAN, LEYTE [69 SCRA
and operated exclusively for charitable purposes.).
460], the Supreme Court held that taking of property
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without due process of law may not be passed over under 3. Religious Freedom (Article III, Section 5)
the guise of taxing power, except when the latter is 4. Non-Impairment of Contracts (Article (Article III,
exercised lawfully as when: Section 10)
1. the tax is for a public purpose;
DOCTRINES IN TAXATION
2. the rule on uniformity of taxation is observed;
1. Prospectivity of tax laws
3. either the person or property taxed is within the
Q: Are tax statutes prospective in its application?
jurisdiction of the government levying the tax; and
Yes. As held in CEBU PORTLAND V. COLLECTOR
4. in the assessment and collection of taxes notice and
[G.R. NO. 18649, FEBRUARY 27, 1965], the general
opportunity for hearing are provided
rule under the Civil Code that laws shall have prospective
2. Equal protection (Article III, Section 1) application applies to tax laws.

Q: How does the principle of uniformity relate to the Q: Can tax statutes be applied retroactively?
equal protection clause? Yes. While, as a general rule, taxes must only be imposed
The test of uniformity is based on the requisites for a valid prospectively, taxes, as an exception, may be imposed
classification under the equal protection clause. As held retroactively if the law expressly provides and if it will
in SISON V. ANCHETA [130 SCRA 654], uniformity not amount to a denial of due process.
of taxation is quite similar to the standard of equal
2. Imprescriptibility7
protection.
Q: Are taxes imprescriptible?
Under the equal protection clause, for a classification to
be valid, it must: As a general rule, taxes are imprescriptible. However,
as an exception, the tax law may provide otherwise. In
1. Rest on substantial distinctions;
particular, the NIRC and LGC provides for
2. Be germane to the purpose of the law; prescriptive periods for assessment and collection of
taxes.
3. Not be limited to existing conditions only; and
Q: What is the rationale behind providing for a statute
4. Apply equally to all members of the same class.
of limitations in the collection of taxes?
Q: Should tax incentives be uniform for all special
As held in the case of REPUBLIC VS. ABLAZA [108
economic zones?
PHIL 1105, the law prescribing a limitation of actions for
Not necessarily. In JOHN HAY V. LIM [414 SCRA the collection of the income tax is beneficial both to the
356], at issue was the extension of benefits given to the Government and to its citizens; to the Government
Subic SEZ under RA 7227 to the John Hay SEZ via a because tax officers would be obliged to act promptly in
proclamation, the Supreme Court ruled that tax the making of assessment, and to citizens because after
exemptions must be strictly and expressly provided for the lapse of the period of prescription citizens would have
and that the power to grant exemption is only within a feeling of security against unscrupulous tax agents who
Congress. The same rationale was used with respect to will always find an excuse to inspect the books of
locators in the Clark SEZ in the case of COCONUT OIL taxpayers, not to determine the latter's real liability, but to
REFINERS ASSOCIATION V. TORRES [465 SCRA take advantage of every opportunity to molest peaceful,
48]. law-abiding citizens.

Q: Does the classification freeze scheme12 under RA Q: How should said statute of limitations in taxation be
9334 violate the equal protection clause? construed?

No. In British American Tobacco v. Camacho [562 The law on prescription being a remedial measure should
SCRA 511], the Supreme Court held that the be liberally construed in order to afford protection. On the
classification freeze does not violate the equal protection other hand, the exceptions to the law on prescription
clause as it passes the rational basis test and is meant to should be strictly construed.
improve the efficiency and effectivity of the tax
3. Double Taxation
administration over sin products while trying to balance
the same with state interests. It addresses the concerns in Q: What is double taxation?
the simplification of tax administration of sin products,
elimination of potential areas for abuse and corruption in Double taxation is defined as taxing the same property
tax collection, buoyant and stable revenue generation, and twice when it should be taxed but once. It has also been
ease of projection of revenues. defined as taxing the same person twice by the same

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jurisdiction over the same thing. It is sometimes known as liquor in the exercise of police power while the other is
duplicate taxation. imposed for revenue purposes based on the sales made.
Q: What are the elements of (direct) double taxation? Q: A city ordinance imposed a license fee on any person,
firm, entity or corporation doing business in the City. A
There is direct double taxation if the two taxes are
contends that the ordinance constitutes double taxation
imposed:
as he already pays taxes imposed by the national
1. On the same subject matter government. Is A correct?

2. For the same purpose No. It has been expressly affirmed by the Supreme Court
that such an argument against double taxation may not be
3. By the same taxing authority invoked where one tax is imposed by the state and the
4. Within the same jurisdiction other is imposed by the city, it being widely recognized
that there is nothing inherently obnoxious in the
5. During the same taxing period requirement that license fees or taxes be exacted with
respect to the same occupation, calling or activity by both
6. The taxes must be of the same kind or character PEPSI-
the state and the political subdivisions thereof. (CITY OF
COLA BOTTLING COMPANY V. MUN. OF
BAGUIO VS. DE LEON [25 SCRA 938])
TANAUAN [69 SCRA 460]
4. Direct v Indirect Taxes
Q: Bank As gross receipts from passive income is
subject to 20% final withholding tax. At the same time, Q: How do you determine if a tax is direct or indirect?
the total gross receipt of Bank A is subject to 5% gross
receipts tax (GRT). Is the imposition of the FWT and Direct taxes are taxes wherein the impact or liability for
GRT a form of double taxation? the payment of the tax as well as the incidence or burden
of the tax falls on the same person. On the other hand,
No. First, the taxes herein are imposed on two different indirect tax are taxes wherein the impact or the tax
subject matters. The subject matter of the FWT is the liability for the payment of the tax falls on one person but
passive income generated in the form of interest on the incidence or burden thereof can be shifted or passed
deposits and yield on deposit substitutes, while the subject to another.
matter of the GRT is the privilege of engaging in the
business of banking. Second, although both taxes are Q: Distinguish indirect taxes from withholding taxes.
national in scope because they are imposed by the same ASIA INTERNATIONAL AUCTIONEERS V. CIR
taxing authority -- the national government under the Tax [G.R. 179115, SEPT. 26, 2012]
Code -- and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the FACTS: Asia International Auctioneers (AIA) received
taxing periods they affect are different. The FWT is an assessment from the BIR for deficiency VAT. AIA
deducted and withheld as soon as the income is earned, availed of the tax amnesty program under RA 9480. The
and is paid after every calendar quarter in which it is BIR contends that AIA is disqualified under RA 9480
earned. On the other hand, the GRT is neither deducted which, among others, enumerates withholding agents as
nor withheld, but is paid only after every taxable quarter persons to whom the tax amnesty shall not extend to. The
in which it is earned. Third, these two taxes are of BIR argues that AIA is a withholding agent.
different kinds or characters. The FWT is an income tax
HELD: AIA is not a withholding agent. Indirect taxes,
subject to withholding, while the GRT is a percentage tax
like VAT and excise tax, are different from withholding
not subject to withholding. Hence, there is no double
taxes. To distinguish, in indirect taxes, the incidence of
taxation. see CIR VS. SOLIDBANK CORP [416 SCRA
taxation falls on one person but the burden thereof can be
436] shifted or passed on to another person, such as when the
Q: A city passed two ordinances. The first ordinance tax is imposed upon goods before reaching the consumer
imposed a tax on the privilege of selling liquor while the who ultimately pays for it. On the other hand, in case of
second ordinance imposed a tax on the sales of liquor. withholding taxes, the incidence and burden of taxation
Is there double taxation? fall on the same entity, the statutory taxpayer. The burden
of taxation is not shifted to the withholding agent who
No. In COMPANIA GENERAL DE TABACOS V. merely collects, by withholding, the tax due from income
CITY OF MANILA [8 SCRA 367], the Supreme Court payments to entities arising from certain transactions and
held that both a license fee and a tax may be imposed on remits the same to the government. Due to this difference,
the same business and occupation and such as not a the deficiency VAT cannot be deemed as withholding
violation of the rule against double taxation. The taxes merely because they constitute indirect taxes.
impositions are of a different character. The first is a Moreover, records in this case support the conclusion that
license fee for the privilege of engaging in the sale of

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AIA was assessed not as a withholding agent but, as the exemption on the importations of cigars, cigarettes,
one directly liable for the said deficiency taxes. distilled spirits, fermented liquors and wines.
5. Exemption from Taxation 6. Compensation and Set-off
Q: What is a tax exemption? Q: Can taxes be the subject of compensation between the
government and the taxpayer?
A tax exemption is defined as a grant of immunity,
express or implied, to particular persons or corporations No. As held in CALTEX VS. COA [208 SCRA 727],
from the obligation to pay taxes. taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and
Q: Who has the power to grant tax exemptions? debtors of each other. A claim for taxes is not such a debt,
Both the power to tax and to exempt certain persons are demand, contract or judgment as is allowed to be set-off.
vested in the legislature. In particular, ARTICLE VI, (see FRANCIA V. IAC [162 SCRA 753])
SECTION 28 OF THE CONSTITUTION provides that
There can be no off-setting of taxes against the claims that
No law granting any tax exemption shall be passed
the taxpayer may have against the government. A person
without the concurrence of a majority of all the Members
cannot refuse to pay taxes on the ground that the
of the Congress.
government owes him an amount equal or greater than the
Q: Enumerate the instances where tax exemptions may tax being collected (PHILEX MINING V. CIR [294
be granted other than by act of Congress: SCRA 687]).

1. Where the President exercises his power under the Taxes cannot be the subject of set-off because they are not
flexible tariff clause to remove existing protective tariff in the nature of contracts between parties but grow out of
rates (see Section 28(2), Article VI, 1987 Constitution) a duty to, and, are positive acts, of the Government, to the
making and enforcing of which, the personal consent of
2. The local government may grant exemptions from the the taxpayer is not required (REPUBLIC V.
payment of local taxes without congressional approval MAMBULAO LUMBER [4 SCRA 622])
consequent to its power to levy taxes, fees and other
charges. (see Section 5, Article X, 1987 Constitution) The erroneous payment of final withholding tax cannot be
used to offset or be treated as advance tax payment, and
3. Where the President enters into and ratify a tax treaty cannot be used against the succeeding final withholding
granting certain exemptions subject only to Senate tax. COMMISSIONER OF INTERNAL REVENUE
occurrence. VS. GOULDS PUMPS (PHILS.) INCORPORATED,
Q: May tax exemptions exist by implication? AUGUST 22, 2012

No. In NDC v. CIR [151 SCRA 472], at issue was 7. Solutio Indebiti
whether the undertaking signed by the Secretary of Is the civil concept of solutio indebiti applicable to
Finance in the promissory note can be considered an taxation?
exemption on taxes on the interest remitted. The Supreme
Court ruled in the negative and opined that tax exemptions Yes. In the case of FILINVEST DEVELOPMENT
cannot be merely implied but must be categorically and CORPORATION VS. CIR [529 SCRA 605], the Court
unmistakably expressed. held that in the field of taxation where the State exacts
strict compliance upon its citizens, the State must likewise
Q: What is the rationale behind tax exemptions? deal with taxpayers with fairness and honesty. Hence,
Tax exemptions are given because: under the principle of solutio indebiti, the Government
has to restore to petitioner the sums representing
1. Public interest will be served by the exemption erroneous payments of taxes.
allowed; and
8. Tax Amnesty
2. Such public benefit or interest is sufficient to offset the
monetary loss entailed in the grant of the exemption Q: What is a tax amnesty?

Q: May a tax exemption be revoked? A tax amnesty is a general pardon or intentional


overlooking by the State of its authority to impose
In REPUBLIC V. CAGUIOA [536 SCRA 194] held penalties on persons otherwise guilty of evasion or
that there is no vested right in a tax exemption and more violation of a revenue or tax. REPUBLIC V. IAC [196
so when the latest expression of legislative intent renders SCRA 335]
it continuance doubtful. In the said case, RA 7227 granted
private domestic corporations doing business in the Subic Q: Distinguish a tax amnesty from a tax exemption.
SEZ tax exemptions on importations of general Tax Amnesty Tax Exemption
merchandise. However, RA 9334 withdrew the tax
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immunity from all immunity from civil instruction, ordinance, or regulation in the courts,
criminal, civil and liability only including the regional trial courts. This is within the scope
administrative liabilities of judicial power, which includes the authority of the
arising from courts to determine the validity of the acts of the political
nonpayment of taxes departments. Also, Section 1403 of the Tariff and customs
law mandates that the customs officer must first assess
applies only to past tax has prospective and determine the classification of the imported article
periods application. before tariff may be imposed. Unfortunately, CMO 23-
2007 has already classified the article even before the
customs officer had the chance to examine it. In effect,
9. Construction and Interpretation petitioner Commissioner of Customs diminished the
powers granted by the Tariff and Customs Code with
Q: State the rule on construction or interpretation of tax
regard to wheat importation when it no longer required
laws?
the customs officers prior examination and assessment of
As a general rule, there is no need for statutory the proper classification of the wheat. It is well-settled
construction if the tax law is clear. Where the law is clear that rules and regulations, which are the product of a
and unambiguous, the law must be taken as it is devoid of delegated power to create new and additional legal
judicial addition or subtraction. provisions that have the effect of law, should be within
the scope of the statutory authority granted by the
As an exception, if there is an ambiguity in the law, legislature to the administrative agency. It is required that
statutory construction is but proper and tax laws shall be the regulation be germane to the objects and purposes of
liberally interpreted in favor of the taxpayer and strictly the law; and that it be not in contradiction to, but in
against the taxing authority. conformity with, the standards prescribed by law.
Q: What is the rationale behind the liberal construction Q: How are tax exemptions construed and interpreted?
or interpretation of tax statutes?
Tax exemptions should be strictly construed against the
As held in the case of PHILIPPINE HEALTH CARE taxpayer.
PROVIDERS V. CIR [554 SCRA 411], tax statutes are
strictly construed against the taxing authority because In MERALCO V. VERA [67 SCRA 352], the issue to
taxation is a destructive power which interferes with the be resolved was whether MERALCO was exempt from
personal and property rights of the people and takes from excise tax on its poles, wires, and transformers. The
them a portion of their property for the support of the Supreme Court held that the in lieu of all taxes
government. provision is limited in scope to taxes upon the privileges,
earnings, income, franchise and poles, wires,
COMMISSIONER OF CUSTOMS V. HYPERMIX transformers, and insulators of the grantee. Construing
FEEDS [G.R. NO. 179579, FEBRUARY 1, 2012] this provision strictly against MERALCO, the Supreme
DOCTRINE: Rule and regulations, which are the product Court held that the provision covers only an exemption
of a delegated power to create new and additional legal from property taxes on the poles, wires, and transformers.
provisions that have effect of law, should be within the
scope of the statutory authority granted by the legislature As held in the case of QUEZON CITY V. ABS-CBN
to the administrative agency. FACTS: Petitioner issued [567 SCRA 495], statutes granting tax exemptions are
Customs Memorandum Order (CMO) No. 27-2003 construed stricissimi juris against the taxpayer and
prescribing guidelines, for tariff purposes, in the liberally in favor of the taxing authority. He who claims
applicable to importation of wheat. Respondent filed a an exemption from his share of common burden must
Petition for Declaratory Relief with the Regional Trial justify his claim that the legislature intended to exempt
Court (RTC) of Las Pinas City. Petitioner filed a Motion him by unmistakable terms. For exemptions from taxation
to Dismiss and alleged that the RTC did not have are not favored in law, nor are they presumed.
jurisdiction over the subject matter of the case because
A tax exemption must be strictly construed against the one
respondent was asking for a judicial determination of the
claiming the exemption because it is contrary to the
classification of wheat, thus, action for declaratory relief
lifeblood theory which is the underlying basis for taxes.
is improper.
10. Non-retroactive application
HELD: The Supreme Court held that the determination of
whether a specific rule or set of rules issued by an Q: Can BIR issuances be applied retroactively?
administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts. Yes. BIR issuances may be applied retroactively if its
Indeed, the Constitution vests the power of judicial review application will not be prejudicial to the taxpayer. (see
or the power to declare a law, treaty, international or Section 246, NIRC)
executive agreement, presidential decree, order,
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Q: When will BIR issuances be not given retroactive Corporation. Is the scheme designed to avoid taxes or
application? evade taxes?
As provided in SECTION 246 OF THE NIRC, rulings This is a case of tax evasion. In CIR VS. THE ESTATE
and circulars, rules and regulations promulgated by the OF BENIGNO TODA, JR. [483 SCRA 293], the
CIR would have no retroactive application if to so apply Supreme Court held that the three factors in tax evasion
them would be prejudicial to the taxpayers except in were present. The two transfers were tainted with fraud
the following cases: since the intermediary transfer (from the corporation to a
natural person) was prompted only by the desire to
(a) Where the taxpayer deliberately misstates or omits
mitigate tax liabilities and not for any business purpose.
material facts from his return or any document required of
him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
Jurisprudence also provides for another exception. In
PBCOM V. CIR [302 SCRA 241], The Supreme Court
opined that the non-retroactivity of rulings by the CIR is
inapplicable where the nullity of the issuance was
declared by the Courts and not by the CIR.
In BIR RULING NO. 370-2011 [OCTOBER 7, 2011]
the issue was whether RCBC is liable to pay the final
withholding tax on interest income realized from the
purchase of PEAce Bonds.5 Relying upon previous BIR
Rulings in 2001, RCBC paid no final tax upon the
issuance of the bonds. However, the rulings were all
reversed by a BIR Ruling in 2004. RCBC invoked the
non-retroactivity principle of BIR Rulings. The Supreme
Court in resolving this matter stated that the non-
retroactivity principle does not apply when the ruling
involved is null and void for being contrary to the law,
such as the previous rulings on the PEACe bonds. -
Poverty Eradication and Alleviation Certificate (PEAce)
Bond

Tax Avoidance v Tax Evasion


Q: What is the difference between tax avoidance and tax
evasion?
Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion,
on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal
liabilities.
Note: An example of tax avoidance is when a taxpayer
avails of deductions allowed by law.
Q: ABC corporation sold its building to A, who in turn,
sold during the same day the same property to XYZ

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II. Income Tax (G) The term 'nonresident alien' means an individual
whose residence is not within the Philippines and who is
SEC. 22. Definitions. - When used in this Title:
not a citizen thereof.
(A) The term 'person' means an individual, a trust, estate
(H) The term 'resident foreign corporation' applies to a
or corporation.
foreign corporation engaged in trade or business within
(B) The term 'corporation' shall include partnerships, no the Philippines.
matter how created or organized, joint-stock companies,
(I) The term 'nonresident foreign corporation' applies to
joint accounts (cuentas en participacion), association, or
a foreign corporation not engaged in trade or business
insurance companies, but does not include general
within the Philippines.
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking (Z) The term 'ordinary income' includes any gain from
construction projects or engaging in petroleum, coal, the sale or exchange of property which is not a capital
geothermal and other energy operations pursuant to an asset or property described in Section 39(A)(1). Any gain
operating consortium agreement under a service contract from the sale or exchange of property which is treated or
with the Government. 'General professional considered, under other provisions of this Title, as
partnerships' are partnerships formed by persons for the 'ordinary income' shall be treated as gain from the sale or
sole purpose of exercising their common profession, no exchange of property which is not a capital asset as
part of the income of which is derived from engaging in defined in Section 39(A)(1). The term 'ordinary loss'
any trade or business. includes any loss from the sale or exchange of property
which is not a capital asset. Any loss from the sale or
(C) The term 'domestic', when applied to a corporation,
exchange of property which is treated or considered,
means created or organized in the Philippines or under its
under other provisions of this Title, as 'ordinary loss' shall
laws.
be treated as loss from the sale or exchange of property
(D) The term 'foreign', when applied to a corporation, which is not a capital asset.
means a corporation which is not domestic
SEC. 31. Taxable Income Defined. -The term 'taxable
(E) The term 'nonresident citizen' means; income' means the pertinent items of gross income
specified in this Code, less the deductions and/or personal
(1) A citizen of the Philippines who establishes to the and additional exemptions, if any, authorized for such
satisfaction of the Commissioner the fact of his physical types of income by this Code or other special laws.
presence abroad with a definite intention to reside therein.
SEC. 39. Capital Gains and Losses. -
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an (A) Definitions. - As used in this Title -
immigrant or for employment on a permanent basis.
(1) Capital Assets. - The term 'capital assets' means
(3) A citizen of the Philippines who works and derives property held by the taxpayer (whether or not connected
income from abroad and whose employment thereat with his trade or business), but does not include stock in
requires him to be physically present abroad most of the trade of the taxpayer or other property of a kind which
time during the taxable year. would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year or
(4) A citizen who has been previously considered as property held by the taxpayer primarily for sale to
nonresident citizen and who arrives in the Philippines at customers in the ordinary course of his trade or business,
any time during the taxable year to reside permanently in or property used in the trade or business, of a character
the Philippines shall likewise be treated as a nonresident which is subject to the allowance for depreciation
citizen for the taxable year in which he arrives in the provided in Subsection (F) of Section 34; or real property
Philippines with respect to his income derived from used in trade or business of the taxpayer.
sources abroad until the date of his arrival in the
Philippines. (2) Net Capital Gain. - The term 'net capital gain'
means the excess of the gains from sales or exchanges of
(5) The taxpayer shall submit proof to the Commissioner capital assets over the losses from such sales or
to show his intention of leaving the Philippines to reside exchanges.
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section. (3) Net Capital Loss. - The term 'net capital loss' means
the excess of the losses from sales or exchanges of capital
(F) The term 'resident alien' means an individual whose assets over the gains from such sales or exchanges.
residence is within the Philippines and who is not a citizen
thereof.
TAXPAYERS
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Resident citizens One who comes to the Philippines for a definite purpose,
which in its nature may be promptly accomplished, is a
Q: Who is a resident citizen? transient.16 In other words, the stay is for a definite short
A resident citizen is a citizen of the Philippines without period of time.
the intention of transferring his physical presence abroad
But if his purpose is of such a nature that an extended stay
whether to stay permanently or temporarily as an overseas
may be necessary for its accomplishment, and to that end
contract worker.
the alien makes the Philippines his temporary home, he
Q: Who are citizens of the Philippines? becomes a resident, although he intends to return to his
domicile abroad.17 In other words, the stay is definite but
The following are considered citizens of the Philippines: extended.
1. Those who are citizens of the Philippines at the time of RR 2 provides that an alien who has acquired residence
the adoption of the Constitution in the Philippines retains his status as a resident until he
2. Those whose fathers or mothers are citizens of the abandons the same and actually departs from the
Philippines Philippines. An intention to change his residence does
not change his status as a resident alien to that of a
3. Those born before January 17, 1973 of Filipino nonresident alien.
mothers, who elect Philippine Citizenship upon reaching
the age of majority; and Non-resident Citizen

4. Those who are naturalized in accordance with law Q: Who is a non-resident citizen?

Resident Alien The term non-resident citizen means a citizen of the


Philippines:
Q: Who is a resident alien?
1. who establishes to the satisfaction of the Commissioner
A resident alien is an individual whose residence is within the fact of his physical presence abroad with intention
the Philippines and who is not a citizen to reside therein
Q: How is the residency of an alien determined? 2. who leaves the Philippines during the taxable year to
reside abroad either as an immigrant or for employment
An alien is considered a non-resident if he stays here for
on a permanent basis
a definite short period of time.
3. one who works and derives income from abroad and
An alien will be considered a resident if the stay here is
whose employment thereat requires him to be
either:
physically present abroad most of the time during the
1. definite and extended; taxable year.

2. indefinite 4. who has been previously considered a non-resident


citizen and who arrives in the Philippines at any time
An alien actually present in the Philippines who is not a during the taxable year to reside permanently in the
mere transient or sojourner is a resident of the Philippines Philippines with respect to his income derived from
for purposes of the income tax. sources abroad
In GARRISON V. CA [JULY 19, 1990], in resolving the Note that Section 2, RR No. 01-79 [January 8, 1979]
contention of US nationals that they cannot be considered enumerates who are deemed non-resident citizens:
resident aliens as they intend to go back to the US on
termination of their employment in the Philippines, the 1. Immigrant one who leaves the Philippines to reside
Supreme Court held that what the law requires is merely abroad as an immigrant for which a foreign visa has been
physical or bodily presence in a given place for a period secured
of time, not the intention to make it a permanent place of
2. Permanent employee one who leaves the Philippines
abode.
to reside abroad for employment on a more or less
The Supreme Court further held that, as laid clearly in RR permanent basis
No. 2, whether an alien is a transient or not is determined
3. Contract worker one who leaves the Philippines on
by his intentions with regard to the length and nature of
account of a contract of employment which is renew from
his stay. A mere floating intention indefinite as to time, to
time to time under such circumstance as to require him to
return to another country is not sufficient to constitute him
be physically present abroad most of the time (not less
as a transient. If he lives in the Philippines and has no
than 183 days)
definite intention as to his stay, he is a resident.15 In other
words, stay is indefinite.

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Under RR 05-01 [July 31, 2001], non-resident citizens domicile abroad when the purpose for which he came has
are no longer required to file the same on their income been consummated or abandoned.
derived from sources outside the Philippines.
SECTION 6. Loss of residence by alien. An alien who
In BIR Ruling 33-00 [September 5, 2000], the CIR held has acquired residence in the Philippines retains his status
that for overseas contract workers, the time spent abroad as a resident until he abandons the same and actually
is not material as all that is required is for the workers departs from the Philippines. An intention to change his
employment contract to pass through and be registered residence does not change his status as a resident alien to
with the POEA. that of a nonresident alien. Thus an alien who has acquired
a residence in the Philippines is taxable as a resident for
Q: If a natural-born Philippine citizen who became a the remainder of his stay in the Philippines.
citizen of the United States is later on granted Philippine
dual citizenship under RA 9225, is he required to pay Corporations
taxes for income earned in the United States?
Domestic one created or
No. In BIR Ruling DA-095-05 [March 29, 2005], the corporation organized in the
CIR held that such a person would be a non-resident Philippines or under its
citizen, and hence, will not be required to pay Philippine laws.
tax for income earned in the United States.
Foreign Corporation one created or
Non-resident Citizen organized under the
laws of a foreign
Q: Who is a non-resident alien?
country.
A non-resident alien is an individual:
Resident foreign a foreign corporation
1. whose residence is not within the Philippines; and Corporation engaged in trade or
business within the
2. who is not a citizen thereof Philippines or having
Note: Determination is by his intention with regard to the an office or place of
length and nature of his stay (see Section 5, RR 2). Again, business therein.
remember, that an alien is considered a non-resident if he
Non-resident foreign a foreign corporation
stays here for a definite short period of time. not engaged in trade or
corporation
Q: How do you determine if a non-resident alien is business within the
engaged in trade or business? Philippines and not
having any office or
Once a taxpayer is determined to be a non-resident alien, place of business
the test to determine whether the alien is a non-resident therein.
alien engaged in trade or business is whether his total
aggregate stay for a taxable year exceeds 180 days.
RR 2-40 SECTION 5. Definition. A "non-resident Partnership
alien individual" means an individual (a) Whose
Q: How do you determine if a partnership is taxable?
residence is not within the Philippines; and (b) Who is not
(elements of a taxable partnership)
a citizen of the Philippines.
1. An intent to form the same
An alien actually present in the Philippines who is not a
mere transient or sojourner is a resident of the Philippines 2. Generally participating in both profits and losses
for purposes of the income tax. Whether he is a transient
or not is determined by his intentions with regard to the 3. Such a community of interest, as far as third persons
length and nature of his stay. A mere floating intention are concerned as enables each party to make contract,
indefinite as to time, to return to another country is not manage he business and dispose of the whole property.
sufficient to constitute him a transient. If he lives in the Q: A group of insurance companies in the Philippines
Philippines and has no definite intention as to his stay, he decided to form a pool and entered into a reinsurance
is a resident. One who comes to the Philippines for a treaty with a non-resident reinsurance company. Is such
definite purpose which in its nature may be promptly a pool subject to corporate taxes and withholding taxes
accomplished is a transient. But if his purpose is of such on dividends paid to the non-resident reinsurance
a nature that an extended stay may be necessary for its company?
accomplishment, and to that end the alien makes his home
temporarily in the Philippines, he becomes a resident, Yes. Where several local insurance ceding companies
though it may be his intention at all times to return to his enter into a Pool Agreement or an association that would

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handle all the insurance businesses covered under their only as long as the inheritance or estate is not distributed,
quota-share reinsurance treaty and surplus reinsurance or, at least, partitioned. But the moment their respective
treaty with a non-resident foreign reinsurance company, known shares are used as part of the common assets of
the resulting pool having a common fund, and functions heirs to be used in making profits, it is but proper that the
through an executive board and its work is indispensable, income from such shares should be considered as part of
beneficial and economically useful to the business of the the taxable income of an unregistered partnership. (see
ceding companies and the foreign firm, such ONA V. CIR [MAY 25, 1972]).
circumstances indicate a partnership or an association
Note: Thus, we make a distinction. Before the partition of
taxable as a corporation (see AFISCO INSURANCE
property, the income of the co-ownership arising from the
CORPORATION VS. CIR [JANUARY 25, 1999])
death of a decedent is not subject to income tax, if the
Co-ownership activities of the co-owners are limited to the preservation
of the property and the collection of the income
Q: Is a co-ownership taxable as a corporation? therefrom. However, after partition, should the co-owners
No. The common ownership of property does not by itself invest the income of the co-ownership in any income-
create a partnership between the owners, though they may producing properties, they would be constituting
use it for purposes of making gains. Article 1769(3) of themselves into an unregistered partnership which is
the Civil Code provides that the sharing of gross returns consequently subject to income tax as a corporation.
does not by itself establish a partnership whether or not
Joint Venture
the persons sharing them have a joint or common right or
interest in any property from which the returns are The requisites of a joint venture are as follows:
derived.
1. Contribution by each party
Q: A and B, co-owners, bought 3 parcels of land in one
2. Profits are shared among the parties
transaction and bought 2 more parcels of land in
another. They decided to sell the 3 parcels to C and the 3. There is joint right of mutual control over the subject
2 parcels to D. They realized a net profit gain and paid matter
CGT. CIR assessed them for deficiency corporate
4. There is a single business transaction rather than a
income tax. Is the co-ownership taxable as a general or continuous transaction.
corporation?
Q: What are the requirements in order for a joint
No. A co-ownership who own properties which produce venture formed for construction purposes be not liable
income should not automatically be considered partners for income tax?
of an unregistered partnership, or a corporation, within the
purview of the income tax law. The essential elements of In RR No. 010-12 [JUNE 1, 2012], a joint venture or
a partnership are two, namely: (a) an agreement to consortium formed for the purpose of undertaking
contribute money, property or industry to a common fund; construction projects which is not considered as a taxable
and (b) intent to divide the profits among the contracting corporation should be:
parties. Here, there is no evidence that petitioners entered 1. For the undertaking of a construction project;
into an agreement to contribute money, property or
industry to a common fund, and that they intended to 2. Should involve joining or pooling of resources by
divide the profits among themselves. The sharing of licensed local contractors, licensed by the Philippine
returns does not in itself establish a partnership whether Contractors Accreditation Board (PCAB) of the DTI;
or not the persons sharing therein have a joint or common
3. The local contractors are engaged in construction
right or interest in the property. There must be a clear
business;
intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the 4. The joint venture itself must likewise be duly licensed
freedom of each party to transfer or assign the whole as such by the PCAB
property. (see OBILLOS v. CIR [OCTOBER 29, 1985]
and PASCUAL V. CIR [OCTOBER 18, 1988]). Absent one of the requirements, the joint venture formed
for construction purposes shall be considered a taxable
Q: A and B inherited properties. They did not partition corporation.
the same and instead invested them to a common fund
and divide the profits therefrom. Should they be Q: May joint ventures involving foreign contractors be
classified as an unregistered partnership subject to treated as a non-taxable corporation?
corporate income tax? Yes, provided that the member foreign contractor is:
Yes. The income from inherited properties may be 1. covered by a special license as contractor by the PCAB;
considered as individual income of the respective heirs and
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2. construction project is certified by the appropriate


government office as a foreign financed/internationally-
funded project and that international bidding is allowed
under the bilateral agreement between the Philippine
government; and foreign/international financing
institution.
Q: Two local contractors entered into a joint
development agreement to construct a residential
subdivision. One local contractor shall contribute the
parcel of land while the other shall contribute the
construction and development of the parcel of land into
a subdivision. Each shall receive an allocation of
saleable house and lot units from the project. Is the joint
venture liable for income tax?
No. In BIR Ruling No. 108-2010 [October 19, 2010],23
involving a joint venture between Avida and Aurora, the
CIR held that the joint development agreement between
the two is not subject to income tax because joint ventures
formed by local contractors for construction purposes are
deemed as not falling under the definition of a taxable
corporation.

INCOME CLASSIFICATIONS SOURCE OF INCOME TAX RATE TAX BASIS


TAXPAYERS
W/IN THE W/OUT
PHILS THE PHILS
INDIVIDUALS
RESIDENT CITIZEN 0-32% INCOME TAX NET INCOME
(183 days)
CITIZENS
NON-RESIDENT 0-32% INCOME TAX NET INCOME
CITIZEN
RESIDENT ALIEN 0-32% INCOME TAX NET INCOME
ALIENS NON-RESIDENT
ALIEN
ENGAGED IN T/B 0-32% INCOME TAX NET INCOME
(180 days)
NOT ENGAGED IN 25% FINAL GROSS
T/B WITHHOLDING INCOME
TAX
CORPORATIONS
DOMESTIC 30% INCOME TAX NET INCOME
CORPORATION
RESIDENT 30% INCOME TAX NET INCOME
FOREIGN
FOREIGN CORPORATION
CORPORATION NON-RESIDENT 30% INCOME TAX GROSS
FOREIGN INCOME
CORPORATION

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INCOME 1. If actually or physically received by the taxpayer


(actual receipt)
In General
2. If constructively received by the taxpayer (constructive
Q: What is the nature of income? receipt)
Income is that flow of services rendered by that capital by
Q: Distinguish actual receipt from constructive receipt.
the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund Actual receipt may be actual or physical receipt while
through a period of time. Income is the fruit of capital constructive receipt29 occurs when money
or labor severed from the tree. (see MADRIGAL VS. consideration or its equivalent is placed at the control of
RAFFERTY [AUGUST 7, 1918]). the person who rendered the service without restriction by
the payor (see Section 4.108-A, RR 16-2005).
Q: Define income for tax purposes.
Q: What is the constructive receipt doctrine?
Income means the gain derived from capital, from labor,
or from both combined, including profits gained from The constructive receipt doctrine provides than an item
dealings in property or as well as any asset clearly realized is treated as income when it is credited to the account of
whether earned or not. the taxpayer, or made unconditionally available to the
taxpayer; no physical possession is required. (see Section
Income may be defined as the amount of money coming
52, RR No. 2-40)
to a person or corporation within a specified time, whether
as payment for services, interest or profit from Income is received not only when it is actually handed to
investment. a taxpayer but also when it is merely constructively
received by him. In LIMPAN INVESTMENT V. CIR
It refers to all wealth which flows into the taxpayer other
[JULY 26, 1966], the lessees opted to deposit their
than as a mere return on capital. (RR No.2) Thus, as stated
payments when the lessor refused to accept the same in
in FISHER V. TRINIDAD [OCTOBER 30, 1922],
1957. The lessor did not report these payments in his 1957
mere advance in the value of property or a corporation in
income tax return. The Supreme Court held that the
no sense constitutes the income specified in the law. Such
failure to report the said rental income is unjustified as,
advance constitutes and can be treated merely as an
when the payments were deposited, the lessor was
increase in capital.
deemed to have constructive received such rentals.
When is income taxable? (elements of a taxable income)
Q: Define Income tax.
Income, gain or profit is subject to income tax when the
Income tax is a tax on all yearly profits arising from
following conditions are present:
property, professions, trades and offices.
1. There is income, gain or profit (existence of income)26
In CONWI V. CTA [AUGUST 31, 1992], the Supreme
2. The income, gain or profit is not exempt from income Court defined income tax as an amount of money coming
tax.27 to a person or corporation within a specified time, whether
as payment for services, interest, or profit from
3. The income, gain or profit is received or realized during investment.
the taxable year;28 (realization of income)
Q: Is money received as exemplary damages (punitive
Note: As to (1) for tax purposes, income does not only damages) income?
refer to the money a taxpayer receives but includes
anything of value. Yes. In COMMISSIONER V. GLENSHAW GLASS
CO. [348 U.S. 426], Glenshaw Co was engaged in a
As to (2) An income may have other elements but the protracted litigation with Hartford-Empire Co where the
law may specifically exclude the same from income for tax former demanded exemplary damages for fraud and treble
purposes i.e. certain passive incomes excluded from damages for injury to its business by reason of the latters
income as they are already subject to final taxes. violation of federal antitrust laws. The parties settled.
As to (3) Even if there is material gain, not excluded by Glenshaw did not report the money received as damages
law, if the material gain is not yet realized by the from the settlement in its income tax return. The
taxpayer, then there is no income to speak of. Commissioner assessed Glenshaw for the deficiency.
Glenshaw contended that punitive damages, as windfalls
flowing from culpable conduct of third parties are not
taxable income. The US Supreme Court held that money
received as damages must be reported as they constitute
Q: When is income considered received for income tax income. The mere fact that such payments were extracted
purposes? from wrongdoers cannot detract from their character as

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taxable income. The Court also stated that punitive Yes. Remuneration for services constitutes compensation
damages cannot be classified as gifts. even if the employer-employee relationship no longer
exists at the time when payment is made between the
Q: Is money received as compensatory damages person in whose employ the services had been performed
income? and the individual who performed them (see Section
Yes. In MURPHY V. IRS [493 F.3d 170], the US Court 2.78.1(A) RR No. 2-98]
of Appeals (District of Columbia), held that the amount
Q: Are living allowances treated as compensation
received as compensatory damages on for emotional
income?
distress and loss of reputation constitutes taxable income.
A: Generally, living allowances should be treated as
Note: It must be noted, however, that in the Murphy case,
income of the recipient. However, if any amount thereof
what was involved was physical injuries. Note under our
is paid directly by the employer and paid for the
Tax Code, amounts received as compensation for
convenience of the latter, the excess of what the recipient
personal injuries are excluded from gross income and
employee would have ordinarily incurred for his own
hence, not taxable. Thus, we must make a distinction. If
subsistence is not taxable income but a business expense
its non-physical injuries like mental anguish, the
of the employer. This exemplifies the employers
damages are included in gross income and hence taxable
convenience rule (see COLLECTOR VS.
but if its physical injuries, it is excluded from gross
HENDERSON [1 SCRA 649])
income.
2. Gross income derived from the conduct of trade or
Gross Income
business or the exercise of a profession;
Statutory Inclusions
3. Gains derived from dealings in property
Section 32(A), NIRC
4. Interests
Except when otherwise provided, all income derived from
5. Rents
whatever source, including, but not limited to, the
following items: Q: What is the tax treatment of income received from
lease of real property?
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages, The lease of real property shall be considered as conduct
commissions and similar items; of trade or business on the part of the lessor, hence, the
rental income therefrom shall be considered as business
Q: Define compensation for income tax purposes. income which shall be included in the computation of the
Compensation means all remuneration for services year-end gross income of the lessor, and not as a passive
performed by an employee for his employer under an investment income subject to withholding tax.
employer-employee relationship unless specifically
Q: Are improvements made by lessees taxable as income
excluded by the Tax Code. This includes the cash value
on the part of the lessor?
of all remuneration paid in any medium other than cash.
(see Section 78, NIRC, Section 2.78.3, RR No. 2-98). (Section 49, RR No. 2)
Compensation may be paid in money, or in some medium
Yes, provided that such buildings or improvements are
other than money as for example, stocks, bonds, or other
not subject to the removal by the lessee. The lessor may
forms of property.
either: (1) report the improvements as income at the time
Q: If an employer pays the income taxes assessable when such improvements are completed based on its fair
against an employee, is the payment by the employer market value; or (2) spread over the life of the lease the
taxable income on the part of the employee? estimated depreciate value of the improvements at
termination of the lease and report as income for each year
Yes. In OLD COLONY TRUST CO. V.
of the lease an aliquot part thereof
COMMISSIONER [279 U.S. 716], the US Supreme
Court held that the payment of the tax by the employer If for any other reason than a bona fide purchase from the
was in consideration of services rendered by the lessee by the lessor the lease is terminated, so that the
employee. The payment constituted income to the lessor comes into possession or control of the property
employee. The Court also added that it cannot be argued prior to the time originally fixed for the termination of the
that the payment was a gift. The payment for services, lease, the lessor receives additional income for the year in
even though voluntary, was nevertheless compensation which the lease is so terminated to the extent that the value
for services rendered. of such buildings or improvements when he became
entitled to such possession exceeds the amount already
Q: If the compensation is paid after separation, will it reported as income on account of the erection of such
still form part of compensation income? buildings or improvements. No appreciation in value due
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to causes other than the premature termination of the lease No. As discussed earlier, a stock dividend only represents
shall be included. Conversely, if the building or the transfer of surplus to capital account and, as such, is
improvements are destroyed prior to the expiration of the not subject to income tax.
lease, the lessor is entitled to deduct as a loss for the year
when such destruction takes place the amount previously Q: What are the exceptions to the rule that stock
reported as income because of the erection of such dividends are not subject to income tax?
buildings or improvements, less any salvage value subject 1. Change in the stockholders equity, right or interest in
to the lease to the extent that such loss was not the net assets of the corporation
compensated for by insurance. If the buildings or
improvements destroyed were acquired prior to March 1, 2. Recipient is other than the shareholder
1913, the deduction shall be based on the cost or the value 3. Cancellation or redemption of shares of sock
subject to the lease to the extent that such loss was not
compensated for by insurance. 4. Distribution of treasury stocks

Q: Should the improvement be capable of being 5. Dividends declared in the guise of treasury stock
separated from the land in order to be considered a dividend to avoid the effects of income taxation
taxable gain?
6. Different classes of stocks were issued.
No. The US Supreme Court in HELVERING V.
Stock dividends constitute as income if a corporation
BRUUN [309 US 461] stated that it is not necessary to
redeems stock issued so as to make a distribution.
recognition of taxable gain that the lessor be able to sever
the improvement begetting the gain from his original Q: Are liquidating dividends subject to income tax?
capital.
Yes. Where a corporation distributes all of its property or
6. Royalties assets in complete liquidation or dissolution,59 the gain
realized from the transaction by the stockholder, whether
7. Dividends
individual or corporate, is taxable income or a deductible
Q: What are dividends? loss,60 as the case may be.

The term dividends means any distribution made by a 59 There must be a bona fide plan of liquidation involving
corporation to its shareholders out of its earnings or the transfer of all assets.
profits and payable to its shareholders, whether in money
60 If the amount received by the stockholder in
or in other property.
liquidation is less than the cost or other basis of the stock,
Note: To simplify matters If the distribution is in money, the loss in the transaction is deductible.
it is called a cash dividend. If it is in property, it is called
Note: Previously, the CIR has ruled in BIR RULING
a property dividend. If it is in stock, it is called a stock
039-02 [NOVEMBER 11, 2002] and other previous
dividend. If it results from the distribution by a
rulings that the transfer by a liquidating corporation of
corporation of all its property or assets in complete
its remaining assets to its stockholders and the receipt of
liquidation or dissolution, it is called a liquidating
the shares surrendered by the shareholder are not subject
dividend.
to income tax. However, in BIR RULING 479-11
Q: When is dividend income subject to tax? [DECEMBER 5, 2011], the CIR reversed and set aside
the above-cited ruling and
It is taxable at the time of their declaration by the
corporation, and not at the time of actual payment of all previous rulings to that effect. The rule now is that they
dividends, since dividend income is taxable whether are subject to income tax.
actually or constructively received.
8. Annuities
Q: Are property dividends taxable?
9. Prizes and winnings
Yes. As provided in Section 251, RR No. 2, dividends
10. Pensions; and
paid in securities or other property (other than its own
stock), in which the earnings of a corporation have been 11. Partners distributive share from the net income of
invested, are income to the recipients to the amount of the the GPP
full market value of such property when receivable by
individual stockholders. 12. From whatever source

Q: Are stock dividends subject to income tax? Q: What is meant by the phrase all income derived
from whatever source"

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The phrase all income derived from whatever source prescribe as conforming as nearly as may be to the best
encompasses all accessions to wealth, clearly realized, accounting practice in the trade or business and as most
and over which the taxpayers have complete dominion. A clearly reflecting the income.
gain constitutes taxable income when its recipient has
If a taxpayer, after having complied with the terms and a
such control over it that as a practical matter, he derives
conditions prescribed by the Commissioner, uses a
readily realizable economic value from it.
particular method of valuing its inventory for any taxable
Q: Is an unlawful gain subject to income tax? year, then such method shall be used in all subsequent
taxable years unless:
Yes. In JAMES V. US [366 US 213], the Supreme Court
ruled that embezzled money constitutes gross income. It (i) With the approval of the Commissioner, a change to a
opined that unlawful, as well, as lawful gain are different method is authorized; or
comprehended within the term gross income. The Court
(ii) The Commissioner finds that the nature of the stock
has given a liberal construction to gross income in
on hand (e.g., its scarcity, liquidity, marketability and
recognition of the intent of Congress to tax all gains
price movements) is such that inventory gains should be
except those specifically exempted.
considered realized for tax purposes and, therefore, it is
RR 2, SECTION 50. Forgiveness of indebtedness. necessary to modify the valuation method for purposes of
The cancellation and forgiveness of indebtedness may ascertaining the income, profits, or loss in a more realistic
amount to a payment of income, to a gift, or to a capital manner: Provided, however, That the Commissioner shall
transaction, dependent upon the circumstances. If, for not exercise his authority to require a change in inventory
example, an individual performs services for a creditor, method more often than once every three (3) years:
who, in consideration thereof cancels the debt, income to Provided, further, That any change in an inventory
that amount is realized by the debtor as compensation for valuation method must be subject to approval by the
his services. If, however, a creditor merely desires to Secretary of Finance.
benefit a debtor and without any consideration therefor
cancels the debt, the amount of the debt is a gift from the 13. Condominium/ Homeowners Association
creditor to the debtor and need not be included in the Q: Are association dues, membership fees and other
latter's gross income. If a corporation to which a assessment charges collected by a condominium
stockholder is indebted forgives the debt, the transaction corporation from its members and tenants subject to
has the effect of the payment of a dividend. income tax?
Q: Should taxes previously claimed and allowed as Yes. Such amounts form part of the gross income of the
deductions but subsequently refunded or granted as tax corporation. This is because the condominium
credit be considered part of gross income? corporation furnishes its members and tenants with
benefits, advantages and privileges in return for such
Yes. RMC No. 13-80 [April 10, 1980] provides if a
payments. They constitute as income payments or
taxpayer receives a tax credit certificate or refund for
compensation for beneficial services provided to
erroneously paid tax which was claimed as a deduction
members and tenants. [RMC 65-2012]
from his gross income that resulted in a lower net taxable
income or a higher net operating loss that was carried over Note: Pursuant to Section 18 of RA 9904 (Magna Carta
to the succeeding taxable year, he realizes taxable income for Homeowners and Homeowners Association), the
that must be included in his income tax return in the year association dues and income derived from rentals of the
of the receipt. homeowners associations may be exempted from tax
subject to the following conditions: (a) The homeowners
Note: However, taxes which are not allowable as
association must be a duly constituted Association as
deductions, when refunded or credited, are not declarable
defined under Section 3(b) of RA 9904; (b) The LGU
for income tax purposes (income tax, estate tax, donors
having jurisdiction over the homeowners association
tax, and special assessments)
must issue a certification identifying the basic services
being rendered by the association and its lack of
resources to render such services; and (c) the association
must present proof that the income and dues are used for
13. Inventories the cleanliness, security and other basic services need by
members, including maintenance of the facilities in their
SEC. 41. Inventories. - whenever in the judgment of the respective subdivisions and villages. (RMC 9-2013
Commissioner, the use of inventories is necessary in order [January 29, 2013]
to determine clearly the income of any taxpayer,
inventories shall be taken by such taxpayer upon such Exclusions
basis as the Secretary of Finance, upon recommendation
of the Commissioner, may, by rules and regulations,
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Section 32, (B) Exclusions from Gross Income. - The the exclusive benefit of the said officials and
following items shall not be included in gross income employees.
and shall be exempt from taxation under this Title:
(b) Any amount received by an official or employee or
(1) Life Insurance. - The proceeds of life insurance by his heirs from the employer as a consequence of
policies paid to the heirs or beneficiaries upon the separation of such official or employee from the
death of the insured, whether in a single sum or service of the employer because of death sickness or
otherwise, but if such amounts are held by the insurer other physical disability or for any cause beyond the
under an agreement to pay interest thereon, the control of the said official or employee.
interest payments shall be included in gross income.
(c) The provisions of any existing law to the contrary
(2) Amount Received by Insured as Return of notwithstanding, social security benefits, retirement
Premium. - The amount received by the insured, as a gratuities, pensions and other similar benefits received
return of premiums paid by him under life insurance, by resident or nonresident citizens of the Philippines
endowment, or annuity contracts, either during the or aliens who come to reside permanently in the
term or at the maturity of the term mentioned in the Philippines from foreign government agencies and
contract or upon surrender of the contract. other institutions, private or public.
(3) Gifts, Bequests, and Devises. - The value of (d) Payments of benefits due or to become due to any
property acquired by gift, bequest, devise, or descent: person residing in the Philippines under the laws of the
Provided, however, That income from such property, United States administered by the United States
as well as gift, bequest, devise or descent of income Veterans Administration.
from any property, in cases of transfers of divided
(e) Benefits received from or enjoyed under the Social
interest, shall be included in gross income.
Security System in accordance with the provisions of
(4) Compensation for Injuries or Sickness. - amounts Republic Act No. 8282.
received, through Accident or Health Insurance or
(f) Benefits received from the GSIS under Republic
under Workmen's Compensation Acts, as
Act No. 8291, including retirement gratuity received
compensation for personal injuries or sickness, plus
by government officials and employees.
the amounts of any damages received, whether by suit
or agreement, on account of such injuries or sickness. Q: An employer maintains an employees trust to
provide retirement, pension, disability benefits to its
(5) Income Exempt under Treaty. - Income of any
employees. The trust made investments and earned
kind, to the extent required by any treaty obligation
therefrom interest income. Is it proper to subject the
binding upon the Government of the Philippines.
interest income to withholding tax?
(6) Retirement Benefits, Pensions, Gratuities, etc.-
No. As held by the Supreme Court in CIR V. CA & GCL
(a) Retirement benefits received under Republic Act RETIREMENT PLAN [MARCH 23, 1992], said
No. 7641 and those received by officials and employees retirement benefits received by officials and employees of
of private firms, whether individual or corporate, in private firms in accordance with a reasonable private
accordance with a reasonable private benefit plan benefit plan maintained by the employer shall be exempt
maintained by the employer: Provided, That the from all taxes
retiring official or employee has been in the service of
Q: A government employee, retired from service. Upon
the same employer for at least ten (10) years and is not
retirement, he received, among other benefits, terminal
less than fifty (50) years of age at the time of his
leave pay which the CIR withheld a portion allegedly
retirement: Provided, further, That the benefits
representing income tax thereon. Is terminal leave pay
granted under this subparagraph shall be availed of
considered part of gross income of the recipient?
by an official or employee only once. For purposes of
this Subsection, the term 'reasonable private benefit No. In COMMISSIONER OF INTERNAL
plan' means a pension, gratuity, stock bonus or profit- REVENUE VS. CA & EFREN CASTANEDA
sharing plan maintained by an employer for the [OCTOBER 17, 1991], the Supreme Court held that
benefit of some or all of his officials or employees, terminal leave pay received by a government official or
wherein contributions are made by such employer for employee is not subject to withholding (income) tax. The
the officials or employees, or both, for the purpose of rationale behind the employees entitlement to an
distributing to such officials and employees the exemption from withholding tax on his terminal leave is
earnings and principal of the fund thus accumulated, that commutation of leave credits, more commonly
and wherein its is provided in said plan that at no time known as terminal leave, is applied for by an officer or
shall any part of the corpus or income of the fund be employee who retires, resigns or is separated from the
used for, or be diverted to, any purpose other than for service through no fault of his own. In the exercise of

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sound personnel policy, the Government encourages from the machine to be purchased using the loaned
unused leaves to be accumulated. Terminal leave amount. The foreign corporation applied for the loan
payments are given not only at the same time but also for from one of its government financing institutions. Is the
the same policy considerations governing retirement interest income from the loans automatically exempt
benefits. In fine, not being part of the gross salary or from withholding tax?
income of a government official or employee but a
No. As held in CIR V. MITSUBISHI METAL
retirement benefit, terminal leave pay is not subject to
CORPORATION [JANUARY 22, 1990], the burden of
income tax. (see RE: REQUEST OF ATTY.
proof rests upon the party claiming an exemption to prove
BERNANDINO ZIALCITA [OCTOBER 18, 1990]).
that it is in fact covered by the exemption. In the said case,
Q: What are the conditions to exempt retirement benefits the Supreme Court found that the foreign government
paid from an employer maintained reasonable private financing institution had nothing to do with the sales and
retirement plan from income tax? loans agreement. It is the foreign corporation, not the
foreign government financing institution that is the sole
For the retirement benefits to be exempt from income tax,
creditor of the domestic corporation.
the taxpayer is burdened to prove the concurrence of the
following elements: (b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility
1. a reasonable private benefit plan is maintained by the
or from the exercise of any essential governmental
employer;
function accruing to the Government of the
2. the retiring official or employee has been in the service Philippines or to any political subdivision thereof.
of the same employer for at least ten (10) years;
(c) Prizes and Awards. - Prizes and awards made
3. the retiring official or employee is not less than fifty primarily in recognition of religious, charitable,
(50) years of age at the time of his retirement; and scientific, educational, artistic, literary, or civic
achievement but only if:
4. the benefit had been availed of only once
(i) The recipient was selected without any action on his
5. The retirement plan must be submitted to and approved part to enter the contest or proceeding; and
by the BIR (see INTERCONTINENTAL (ii) The recipient is not required to render substantial
BROADCASTING CORPORATION VS. future services as a condition to receiving the prize or
AMARILLA [OCTOBER 29, 2006]) award.
Q: Are contributions to SSS, GSIS, PHIC and Pag-Ibig (d) Prizes and Awards in sports Competition. - All
in excess of the mandatory contributions subject to prizes and awards granted to athletes in local and
income tax? international sports competitions and tournaments
Yes. Previously, SSS, GSIS, PHIC and Pag-Ibig whether held in the Philippines or abroad and
contributions in excess of the mandatory contributions sanctioned by their national sports associations.
were considered exempt from income tax. However, (e) 13th Month Pay and Other Benefits. -
because it was deemed to have been abused and the excess Gross benefits received by officials and employees of
contributions are being made as a form of investment, public and private entities: Provided, however, That
RMC No. 027-11 [JULY 1, 2011] now considers the the total exclusion under this subparagraph shall not
excess contributions as not excludible from gross income exceed eighty-two thousand pesos (P82,000) which
and not exempt from income and withholding tax. shall cover:
(7) Miscellaneous Items. - (i) Benefits received by officials and employees of the
(a) Income Derived by Foreign Government. - Income national and local government pursuant to Republic
derived from investments in the Philippines in loans, Act No. 6686;
stocks, bonds or other domestic securities, or from (ii) Benefits received by employees pursuant to
interest on deposits in banks in the Philippines by (i) Presidential Decree No. 851, as amended by
foreign governments, (ii) financing institutions owned, Memorandum Order No. 28, dated August 13, 1986;
controlled, or enjoying refinancing from foreign (iii) Benefits received by officials and employees not
governments, and (iii) international or regional covered by Presidential decree No. 851, as amended by
financial institutions established by foreign Memorandum Order No. 28, dated August 13, 1986;
governments. and
(iv) Other benefits such as productivity incentives and
Q: A domestic corporation entered into a loan and sales Christmas bonus: Provided, That every three (3) years
contract with a foreign corporation where the latter after the effectivity of this Act, the President of the
shall extend a loan to the former and the former shall Philippines shall adjust the amount herein stated to its
sell to the latter all copper concentrates to be produced
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present value using the Consumer Price Index (CPI), 8. Employees achievement awards, e.g. for length of
as published by the National Statistics Office. service or safety achievement, with an annual monetary
value not exceeding P10,000;47
(f) GSIS, SSS, Medicare and Other
Contributions. - GSIS, SSS, Medicare and Pag-Ibig 9. Gifts given during Christmas and major anniversary
contributions, and union dues of individuals. celebrations not exceeding P5,000 per employee per
annum;48
(g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the 10. Daily meal allowance for overtime work and
same or exchange or retirement of bonds, debentures night/graveyard shift not exceeding 25% of the basic
or other certificate of indebtedness with a maturity of minimum wage per region basis
more than five (5) years.
Q: Is the enumeration of de minimis benefits exclusive?
(h) Gains from Redemption of Shares in Mutual
Yes. As provided in RR No. 005-11 [March 16, 2011],
Fund. - Gains realized by the investor upon
all other benefits given by employers which are not
redemption of shares of stock in a mutual fund
included in the enumeration shall not be considered de
company as defined in Section 22 (BB) of this Code.
minimis benefits, and, hence, shall be subject to income
De minimis Benefit tax as well as withholding tax on compensation income.
Q: What are de minimis benefits? Is income earned by a contributor from the investments
and reinvestments of his Personal Equity and
As defined by RR 3-98 [MAY 21, 1998], de minimis
Retirement Act (PERA) assets subject to income tax?
benefits are benefits of relatively small value offered or
furnished by the employer to his/her employees as a No. As provided in RR No 017-11 [OCTOBER 27,
means of promoting the health, goodwill, contentment, 2011], implementing the tax provisions of RA 9505,
efficiency of his/her employees. These benefits are otherwise known as the Personal Equity and Retirement
exempt from the withholding tax on compensation Account (PERA) Act of 2008, investment income of a
income, and consequently from income tax, regardless of contributor consisting of all income earned from the
whether or not the recipients of the benefits are investments and reinvestments of his PERA assets in the
managerial or rank-and-file employees. maximum amount allowed shall be exempt from the
following taxes as may be applicable:
Q: What are deemed de minimis benefits?
1. Final withholding tax on interest from any currency
As provided in RR No. 005-11 [March 16, 2011], as
bank deposit, yield or any other monetary benefit from
amended recently by RR No. 008-12 [MAY 11, 2012],
deposit substitutes and from trust funds and similar
the following shall be considered de minimis benefits not
arrangements, including a depository bank under the
subject to income tax as well as withholding tax on
EFCDS;
compensation income of both managerial and rank and
2. Capital gains tax on the sale, exchange, retirement or
file employees:
maturity of bonds, debentures or other certificates of
1. Monetized unused vacation leave credits of private indebtedness;
employees not exceeding ten (10) days during the year;40 3. 10% tax on cash and/or property dividends actually or
constructively received from a domestic corporation,
2. Monetized value of vacation and sick leave credits paid including a mutual fund company;
to government officials and employees;41 4. Capital gains tax on the sale, barter, exchange, or other
3. Medical cash allowance to dependents of employees, disposition of shares of stock in a domestic corporation;
not exceeding P750 per employee per semester or P125 5. Regular income tax.
per month;
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice General Principles
per month amounting to not more than P1,500;43 SEC. 23. General Principles of Income Taxation in the
5. Uniform and clothing allowance not exceeding P5,000 Philippines. - Except when otherwise provided in this
per annum;44 Code:

6. Actual medical assistance, e.g. medical allowance to (A) A citizen of the Philippines residing therein is taxable
cover medical and healthcare needs, annual medical on all income derived from sources within and without the
check-up, maternity assistance, and routine consultations, Philippines;
not exceeding P10,000 per annum;45 (B) A nonresident citizen is taxable only on income
7. Laundry allowance not exceeding P300 per month;46 derived from sources within the Philippines;

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(C) An individual citizen of the Philippines who is contract actually involved two taxing jurisdictions. While
working and deriving income from abroad as an overseas the construction and installation work were completed in
contract worker is taxable only on income derived from the Philippines, some pieces of equipment and supplies
sources within the Philippines: Provided, That a seaman were completely designed and engineered in Japan. These
who is a citizen of the Philippines and who receives services made and completed in Japan are not subject to
compensation for services rendered abroad as a member contractors tax as they are rendered outside the taxing
of the complement of a vessel engaged exclusively in jurisdiction of the Philippines.
international trade shall be treated as an overseas contract
worker; Q: How are tax amnesties construed?
As held in the case of CIR V. MARUBENI
(D) An alien individual, whether a resident or not of the
CORPORATION [204 SCRA 377], a tax amnesty,
Philippines, is taxable only on income derived from
much like a tax exemption, is never favored nor presumed
sources within the Philippines;
in law. If granted, the terms of the amnesty, like that of a
(E) A domestic corporation is taxable on all income tax exemption, must be construed strictly against the
derived from sources within and without the Philippines; taxpayer and liberally in favor of the taxing authority.
and
Q: ABC Airways is a foreign airline.62 While it did not
(F) A foreign corporation, whether engaged or not in carry passengers and/or cargo to or from the
trade or business in the Philippines, is taxable only on Philippines, ABC maintains a general sales agent of its
income derived from sources within the Philippines. tickets in the Philippines. Is the sale of the tickets taxable
as income from sources within the Philippines?
Source of Income Rules
Yes. For the source of income to be considered as coming
SEC. 42. Income from Sources Within the from the Philippines, it is sufficient that the income is
Philippines. -
derived from activity within the Philippines. In ABCs
(A)Gross Income from Sources Within the case, the sale of tickets in the Philippines is the activity
Philippines. - The following items of gross income shall that produces the income. The tickets exchanged hands
be treated as gross income from sources within the here in the country and the payments for fares were also
Philippines: made with Philippine currency. The site of the source of
payments is the Philippines. The absence of flight
(1) Interests. - Interests derived from sources within the operations to and from the Philippines is not
Philippines, and interests on bonds, notes or other determinative of the source of income/site of income
interest-bearing obligation of residents, corporate or taxation for the test of taxability is the source. (see CIR
otherwise; VS. JAPAN AIRLINES [MARCH 6, 1991]; CIR VS.
(2) Dividends. - The amount received as dividends: BOAC [APRIL 30, 1987])

(a) From a domestic corporation; and Q: ABC, a multinational company, claimed as deduction
from gross income its share of the overhead expenses of
(b) From a foreign corporation, unless less than fifty its foreign head office. Can these overhead expenses of
percent (50%) of the gross income of such foreign the foreign head office be deducted from the gross
corporation for the three-year period ending with the close income of the Philippine branch?
of its taxable year preceding the declaration of such
dividends or for such part of such period as the It depends. Either it can be deducted in full or partly.
corporation has been in existence) was derived from Where an expense is clearly related to the production of
sources within the Philippines as determined under the Philippine-derived income or to Philippine operations
provisions of this Section; but only in an amount which (e.g. salaries of Philippine personnel, rental of office
bears the same ratio to such dividends as the gross income building in the Philippines), that expense can be deducted
of the corporation for such period derived from sources from the gross income acquired in the Philippines without
within the Philippines bears to its gross income from all resorting to apportionment. However, where there are
sources; items included in the overhead expenses incurred by the
parent company, all of which cannot be definitely
(3) Services.- Compensation for labor or personal allocated or identified with the operations of the
services performed in the Philippines; Philippine branch, the company may claim as its
deductible share a ratable part of such expenses based
In CIR V. MARUBENI [204 SCRA 377], what was
upon the ratio of the local branch's gross income to the
involved was a contract on a turn-key basis, in a turn key
total gross income, worldwide, of the multinational
contract, the contractor is entrusted to design, construct,
corporation. (see COMMISSIONER VS. CTA &
commission and handover the project to the employer in
SMITH KLINE [JANUARY 17, 1984]; see also
a completed state, which the CIR sought to tax as an
RAMO 4-86 [April 5, 1986])
indivisible contract. The Supreme Court held that the
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Q: XYZ entered into reinsurance contracts with foreign the services were done in Germany. However, she failed
insurance companies not doing business in the to prove hat such was the fact. Thus, the services were
Philippines. XYZ was to cede portions of premiums deemed performed in the Philippines, and, as such, is
underwritten in the Philippines to the foreign subject to income tax.
corporations in consideration for the assumption of risk.
(4) Rentals and Royalties. - Rentals and royalties from
Is the cession of the premiums taxable as income from
property located in the Philippines or from any interest in
sources within the Philippines?
such property, including rentals or royalties for -
Yes. Sources means the activity, property, or service
(a) The use of or the right or privilege to use in the
giving rise to the income. The original insurance
Philippines any copyright, patent, design or model, plan,
undertakings took place in the Philippines. It is not
secret formula or process, goodwill, trademark, trade
required that the foreign corporation be engaged in
brand or other like property or right;
business in the Philippines. What is controlling is no the
place of business, but the place of activity that created the (b) The use of, or the right to use in the Philippines any
income. Thus, the income is subject to income tax. (see industrial, commercial or scientific equipment;
PHILIPPINE GUARANTY V. CIR [APRIL 30, 1965]
and HOWDEN & CO. V. CIR [APRIL 14, 1965]). (c) The supply of scientific, technical, industrial or
commercial knowledge or information;
Q: ABC, a domestic corporation, entered into a
Management Service Agreement with XYZ, a non- (d) The supply of any assistance that is ancillary and
resident foreign corporation under which the latter shall subsidiary to, and is furnished as a means of enabling the
provide services for ABCs US branch and advice on application or enjoyment of, any such property or right as
ABCs corporate structure, all performed abroad. Is the is mentioned in paragraph (a), any such equipment as is
compensation for services taxable as income from mentioned in paragraph (b) or any such knowledge or
sources within the Philippines? information as is mentioned in paragraph (c);

Yes. The services covered by the management service (e) The supply of services by a nonresident person or his
agreement fall under the meaning of royalties. It is employee in connection with the use of property or rights
immaterial if the non-resident foreign corporation has no belonging to, or the installation or operation of any brand,
properties in the Philippines. The test of taxability is the machinery or other apparatus purchased from such
source and the source of an income is that activity which nonresident person;
produced the income. It is not the presence of any (f) Technical advice, assistance or services rendered in
property from which one derives rentals and royalties that connection with technical management or administration
is controlling,63 but rather as expressed under the of any scientific, industrial or commercial undertaking,
expanded meaning of royalties, it includes royalties for venture, project or scheme; and
the supply of scientific, technical, industrial, or
commercial, knowledge or information; and the technical (g) The use of or the right to use:
advice, assistance or services rendered in connection with
(i) Motion picture films;
the technical management and administration of any
(ii) Films or video tapes for use in connection with
scientific, industrial or commercial undertaking, venture,
television; and
project or scheme. (see PHILAMLIFE V. CTA [CA-
(iii) Tapes for use in connection with radio broadcasting.
GR SP. NO. 31283, APRIL 25, 1995]).
(5) Sale of Real Property. -Gains, profits and income
Q: A, a non-resident citizen, was engaged by a domestic
from the sale of real property located in the Philippines;
corporation as a commission agent. A will receive a sales
and
commission on all sales actually concluded. A argues
that the income is not taxable as A does not reside in the (6) Sale of Personal Property. - Gains; profits and
Philippines and that the place of payment of the income income from the sale of personal property, as determined
is outside the Philippines. Is As contention correct? in Subsection (E) of this Section.
No. The source of an income is the property, activity Q: Quill Corp is an office supply retailer with no
or service that produced the income. With respect of physical presence in North Dakota but it has a licensed
rendition of labor or personal service, as in the instant computer software program that its customers in North
case, it is the place where the labor or service is Dakota use for checking Quills current inventories and
performed that determines the source of income. There for placing orders directly. North Dakota attempted to
is therefore no merit in As interpretation which equates impose a use tax65 on Quill. Is Quill liable for the
source of income in labor or personal service with the tax?
residence of the payor or the place of payment of the
income. (see CIR VS. BAIER-NICKEL [AUGUST 29, Yes. In QUILL CORP V. NORTH DAKOTA [504 US
2006])64 Note that in this case, Baier-Nickel argued that 298, MAY 26, 1992], the US Supreme Court ruled that
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there must be physical presence in a state for the RAMO No. 01-95 [March 21, 1995] expanded RAMO
corporation to be liable for sales and use taxes. It applied No. 1-86 to cover taxation of Philippine branches of
its ruling in NATIONAL BELLAS HESS V. foreign corporations engaged in soliciting orders,
DEPARTMENT OF REVENUE OF ILLINOIS [386 purchases, service contracts, trading, construction and
US 753] where it held that a seller whose only connection other activities.
with customers in the State is by common carrier or the
mail lacked the requisite minimum contacts with the Deductions
State. Thus, such vendors are free from state-imposed Q: Distinguish a deduction from an exemption
duties to collect sales and use taxes. Nevertheless, the US
Supreme Court opined that if interstate commerce would Deduction Exemption
be subject to intolerable or undesirable burdens because
It is a subtraction It is an immunity or
of this, Congress has the power to legislate make such
privilege, a freedom
vendors liable for sales and use taxes.66
from a charge or burden
Q: Vodafone International Holdings (VIH), a to which others are
corporation in the Netherlands, acquired a controlling subjected to
interest of CGP holdings, a company in the Cayman
It is not a receipt but an It is generally a receipt
Islands. By virtue of this controlling interest, VIH
expenditure which is which is excluded from
acquired a 52% stake in Hutchinson Essar Limited
permitted to be taxable income
(HEL)67 in India from Hutchinson Telecom
subtracted from income
International Limited (HTIL). Simply stated, VIH
to determine the amount
acquired control over CGP and its subsidiaries,
subject to tax
including HEL. The Indian tax authorities contended
that the transfer of shares was subject to income tax. It is a reduction of A person exemption is
VIH argues that the transfer of shares took place outside wealth which helped the theoretical personal
the Indian taxing jurisdiction, and, hence, is not taxable. earn the income subject family and living
Which contention is correct? to tax, such as ordinary expense of an
and necessary expenses individual, such as the
The contention of VIH was held to be correct. In
personal
VODAFONE INTERNATIONAL HOLDINGS B.V.
V. UNION OF INDIA (SUPREME COURT OF
INDIA, CIVIL APPEAL NO. 733 OF 2012,
JANUARY 20, 2012),68 the Indian Supreme Court ruled
that VIH had no liability to withhold tax as the transaction
was between two non-residents with no taxable presence
in India. Under Section 9(1) of the Income Tax Act of
India, all income accruing or arising, whether directly or
indirectly through transfer of capital assets situated in
India shall be deemed to accrue or arise in India.69 The
Supreme Court stated that the section clearly applied to a
transfer of capital asset situated in India and could not be Itemized Deductions
expanded to cover indirect transfers of capital assets or Q: What are the general rules to be observed regarding
property situated in India. The words directly or deductions?
indirectly go with the income and not with the transfer
of a capital asset.7 1. Deductions must be paid or incurred in connection with
the taxpayers trade, business or profession
RMC 55-2013 Tax on Online Business Transactions
2. Deductions must be supported by adequate receipts or
Q: Is the gross income of branches of foreign invoices
corporations generated from solicitation of orders from
local importers where the branches merely relay to its 3. Additional requirement relating to withholding
head office abroad said purchase orders and where the SEC. 34. Deductions from Gross Income. - Except for
head office is the entity which actually consummates the taxpayers earning compensation income arising from
sale liable for income tax? personal services rendered under an employer-employee
Yes. By virtue of RAMO No. 1-86 [April 25, 1986], an relationship where no deductions shall be allowed under
income tax is imposed on the gross income generated this Section other than under subsection (M) hereof, in
from constructive trading and commission income computing taxable income subject to income tax under
derived from brokering activities of Philippine branches Sections 24(A); 25(A); 26; 27(A), (B) and (C); and
of foreign corporations engaged in trading activities.
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28(A)(1), there shall be allowed the following deductions The Supreme Court ruled in favor of the CIR. Advertising
from gross income; is generally of two kinds: (1) advertising to stimulate the
current sale of merchandise or use of services and (2)
(A) Expenses. -
advertising designed to stimulate the future sale of
(1) Ordinary and Necessary Trade, Business or merchandise or use of services. The second type involves
Professional Expenses. - expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayers trade
(a) In General. - There shall be allowed as deduction or business or for the industry or profession of which the
from gross income all the ordinary and necessary taxpayer is a member. If the expenditures are for the
expenses paid or incurred during the taxable year in advertising of the first kind, then, except as to the question
carrying on or which are directly attributable to, the of the reasonableness of amount, there is no doubt such
development, management, operation and/or conduct of expenditures are deductible as business expenses. If,
the trade, business or exercise of a profession, however, the expenditures are for advertising of the
Q: What are the requisites for deductibility of business second kind, then normally they should be spread out over
expenses? a reasonable period of time The protection of brand
franchise is analogous to the maintenance of goodwill or
The requisites are: title to ones property. This is a capital expenditure which
should be spread out over a reasonable period of time.
1. The expense must be ordinary and necessary
This was akin to the acquisition of capital assets and
2. Paid or incurred during the taxable year therefore expenses related thereto were not to be
considered as business expenses but as capital
3. In carrying on the trade or business of the taxpayer expenditures. The advertising expense incurred by
4. It must be supported by adequate invoices and receipts General Foods fall under the second type.

5. Must not be against law, morals, public policy, or Q: ABC Corporation paid a PR firm to campaign for the
public order sale of ABCs additional capital stock. Is the
compensation paid to the PR firm deductible as a
6. It must be reasonable business expense?
7. The tax required to be withheld on the expense paid or No. In ATLAS CONSOLIDATED MINING &
payable is shown to have been remitted to the BIR DEVELOPMENT CORPORATION VS.
COMMISSIONER OF INTERNAL REVENUE
Q: What is meant by ordinary and necessary expenses?
(JANUARY 27, 1981), the Supreme Court held that this
An expense is 'ordinary' when it connotes a payment is not deductible because it is a capital expenditure.
which is normal in relation to the business of the taxpayer Expenses relating to the recapitalization and
and the surrounding circumstances. reorganization of the corporation, promotion expenses
and commission or fees for the sale of stock
An expense will be considered 'necessary' where the reorganization are capital expenditures.
expenditure is appropriate and helpful in the development
of the taxpayer's business
Q: What is meant by paid or incurred during the Q: Are litigation expenses deductible as a business
taxable year? expense?
Paid or incurred during the taxable year means that the No. As held in ATLAS CONSOLIDATED MINING &
deduction shall be taken for the taxable year in which paid DEVELOPMENT CORPORATION VS.
or accrued or paid or incurred dependent on the COMMISSIONER OF INTERNAL REVENUE
accounting method in which net income is computed (JANUARY 27, 1981), litigation expenses incurred in
defense or protection of title are capital in nature and not
Q: Are advertising expenses deductible from gross deductible.
income?
Are police protection fees and gifts for an exhibition for
It depends on the nature of the advertising expense. In charitable purposes deductible as a business expense?
COMMISSIONER OF INTERNAL REVENUE VS.
GENERAL FOODS (PHILS.) INC. [APRIL 24, 2003], No. In CALANOC VS. COLLECTOR OF
General Foods claimed as deductions its advertising INTERNAL REVENUE [NOVEMBER 29, 1961], at
expenses for its product Tang. The CIR disallowed the issue in this case is the deductibility of the expenses
deduction arguing that the advertising expenses are not incurred for police protection and for gifts and parties in
business expenses but capital expenditures. connection with the boxing and wrestling exhibition that
Calanoc financed and promoted whose proceeds would be
given to the orphans and destitute children of the Child
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Welfare Workers Club of the Social Welfare 1. They are made in good faith
Commission. The Supreme Court held that the police
2. They are given for personal services actually rendered
protection fees were not deductible as they are illegal
since it was consideration for the performance of 3. The bonus when added to salaries is reasonable when
functions required of policemen by law. As to the gifts measured by the amount and quality of the services
and parties, they were deemed excessive considering that performed with relation to the business of the particular
the purpose of the exhibition was for a charitable cause. taxpayer.
INCLUDING: Q: A, an experienced realtor, was paid supervision fees
(i) A reasonable allowance for salaries, wages, and other in the amount of P100,000 annually by XYZ
forms of compensation for personal services actually Corporation for a three-year project, an amount when
rendered, including the grossed-up monetary value of combined with his salary and bonuses is double the
fringe benefit furnished or granted by the employer to the XYZs income. Are the supervision fees deductible?
employee: Provided, That the final tax imposed under No. In C.M. HOSKINS & CO., INC. VS.
Section 33 hereof has been paid; COMMISSIONER OF INTERNAL REVENUE
[NOVEMBER 28, 1969], Hoskins & Co. claimed as
Q: ABC Corp failed to claim expenses for professional
deductions the payment of P100,000 to its founder and
services that accrued in past years. May ABC Corp still
controlling stockholder, Hoskins representing 50% of the
claim these expenses as deductions?
8% supervision fees the company received as managing
No. In COMMISSIONER OF INTERNAL agent for Paradise Farms. In this case, the Supreme Court
REVENUE VS. ISABELA CULTURAL held that such was not deductible for failing to pass the
CORPORATION (FEBRUARY 12, 2007), Isabela reasonableness test. If allowed, Hoskin would be
Corp failed to claim the expenses for professional services receiving on his salary, bonus, and supervision fees at
that accrued in 1984 and 1985 during the said years. total of P185,000 which is double the companys reported
Instead, it sought to claim them as deductions during the net income. The Supreme Court stated that if it was a one-
taxable year of 1986. The Supreme Court held that one of time payment, it could have been deducted since Hoskin
the requisites for the deductibility of a business expenses was an experienced realtor. However, the P100,000
is that it must have been paid or incurred during the supervision fee was being paid every year (for three years)
taxable year. Hence, the professional fees should have for the entire duration of he companys project with
been claimed as deductions during the years where they Paradise Farms.
were paid or incurred.

Q: ABC Corporation claimed as deductions bonuses it


Q: Can a bonus given to corporate officers be deducted gave to its non-resident president and vice-president and
from gross income from the sale of one of its properties the bonuses it gave to its resident officers and employees.
on the representation that corporate officers, by virtue The company gave its resident officers and employees
of their positions, contributed to the consummation of much more. The deductions for bonuses given to
the sale? resident officers and employees were disallowed for
being excessive and for no special reason. Is the
No. In AGUINALDO INDUSTRIES
disallowance proper?
CORPORATION VS. COMMISSIONER OF
INTERNAL REVENUE [FEBRUARY 25, 1982], It would depend on the nature, extent, and quality of the
Aguinaldo Industries sought to claim as deductions the services actually rendered by the resident officers and
bonuses given to its corporate officers from the sale of one employees. In KUENZLE & STREIFF, INC. VS.
of its properties.The Supreme Court held that the said COLLECTOR OF INTERNAL REVENUE
bonuses cannot be deducted because there is no evidence [OCTOBER 20, 1959], the Supreme Court held that the
that the said officers did any work which would be the bonuses to its resident officers and employees were
basis of the grant of the bonuses. One of the requisites for reasonable taking into account the situation at the time
the deductibility of bonuses is that they are given for when the services were rendered: unsettling conditions
personal services actually rendered. after the war, the imposition of controls on exports and
imports, and he use of foreign exchange which resulted in
Q: Are bonuses to employees allowable deductions from diminution of the amount of business.
gross income?
Yes provided that:

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(ii) A reasonable allowance for travel expenses, here and Q: Is there a ceiling on entertainment, amusement and
abroad, while away from home in the pursuit of trade, recreational expenses?
business or profession;
Yes. RR 10-2002 [JULY 10, 2002] provides that:
Q: A, a hotel owner, claimed as deduction promotion
1. Sellers of goods or properties 0.5% of their net sales
expenses incurred by his wife for the promotion of the
as representation expenses
hotel. Half of the said expenses were disallowed as
deductions because on the finding that his wife went 2. Sellers of services 1% of their net revenues as
abroad on a combined business and medical trip. Is the representation expenses.
disallowance proper?
However, when supporting documents reflect a lower
Yes. In ZAMORA VS. COLLECTOR OF amount, then such lower amount shall be used.
INTERNAL REVENUE [MAY 31, 1963], Zamora, a
hotel owner, claimed as deduction promotion expenses RR No. 1-2009 Prescribes the rules and regulations to
incurred by his wife for the promotion of the hotel. On implement RA No. 9442 relative to the
appeal, the CTA only allowed 50% of the promotional tax privileges of persons with disability
expenses as deductions because it was found in the and tax incentives for establishments
Central Bank dollar allocation that his wife went abroad granting sales discount amounting to
on a combined business and medical trip. atleast 20%
The Supreme Court stated that promotional expenses are
deductible but must be substantiated. When some of the
representation expenses claimed by the taxpayer were
evidenced by vouchers or chits, but others were without
vouchers or chits, documents or supporting papers; that
there is no more than oral proof to the effect that payments
have been made for representation expenses allegedly
made by the taxpayer and about the general nature of such
alleged expenses; that accordingly, it is not possible to
determine the actual amount covered by supporting
papers and the amount without supporting papers, the
court should determine from all available data, the amount
properly deductible as representation expenses. In view of
this, the Supreme Court held CTA did not commit error
in allowing as promotion expenses in As income tax
returns at merely one-half.
RR No. 7-2010 Implements the tax privileges
(iii) A reasonable allowance for rentals and/or other provisions of RA No. 9994, otherwise
payments which are required as a condition for the known as the "Expanded Senior
continued use or possession, for purposes of the trade, Citizens Act of 2010", and prescribes
business or profession, of property to which the taxpayer the guidelines for the availment thereof
has not taken or is not taking title or in which he has no income tax deduction of 20%
equity other than that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment,
amusement and recreation expenses during the taxable
year, that are directly connected to the development,
management and operation of the trade, business or
profession of the taxpayer, or that are directly related to
or in furtherance of the conduct of his or its trade, business
or exercise of a profession not to exceed such ceilings as
the Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the Commissioner,
taking into account the needs as well as the special
circumstances, nature and character of the industry, trade,
business, or profession of the taxpayer: Provided, That
any expense incurred for entertainment, amusement or
recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.

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(2) Expenses Allowable to Private Educational


Institutions. - In addition to the expenses allowable as
deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code,
may at its option elect either: (a) to deduct expenditures
otherwise considered as capital outlays of depreciable
assets incurred during the taxable year for the expansion
of school facilities or (b) to deduct allowance for
depreciation thereof under Subsection (F) hereof.
(B) Interest. -
(1) In General. - The amount of interest paid or incurred
within a taxable year on indebtedness in connection with
the taxpayer's profession, trade or business shall be
allowed as deduction from gross income: Provided,
however, That the taxpayer's otherwise allowable
deduction for interest expense shall be reduced by forty-
two percent (42%) of the interest income subjected to
final tax: Provided, That effective January 1, 2009, the
percentage shall be thirty-three percent
[29]
(33%).
(2) Exceptions. - No deduction shall be allowed in
respect of interest under the succeeding subparagraphs:
(a) 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 through discount
or otherwise: Provided, That such interest shall be
allowed as a deduction in the year the indebtedness is
paid: Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount of interest
which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as
deduction in such taxable year;
(b) If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
(b) Substantiation Requirements. - No deduction from
specified under Section 36 (B); or
gross income shall be allowed under Subsection (A)
hereof unless the taxpayer shall substantiate with (c) If the indebtedness is incurred to finance petroleum
sufficient evidence, such as official receipts or other exploration.
adequate records: (i) the amount of the expense being
deducted, and (ii) the direct connection or relation of the (3) Optional Treatment of Interest Expense. - At the
expense being deducted to the development, option of the taxpayer, interest incurred to acquire
management, operation and/or conduct of the trade, property used in trade business or exercise of a profession
business or profession of the taxpayer. may be allowed as a deduction or treated as a capital
expenditure.
(c) Bribes, Kickbacks and Other Similar
Payments. - No deduction from gross income shall be
allowed under Subsection (A) hereof for any payment Q: May the taxpayer choose to treat interest expense as
made, directly or indirectly, to an official or employee of capital expenditure?
the national government, or to an official or employee of
any local government unit, or to an official or employee Yes. Section 34(B)(3) provides that at the option of the
of a government-owned or -controlled corporation, or to taxpayer, interest incurred to acquire property used in
an official or employee or representative of a foreign trade, business or exercise of a profession may be allowed
government, or to a private corporation, general as a deduction or treated as a capital expenditure.
professional partnership, or a similar entity, if the
However, should the taxpayer elect to deduct the interest
payment constitutes a bribe or kickback.
payments against its gross income, the taxpayer cannot at

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the same time capitalize the interest payments because Q: What are the requisites for the deductibility of
that would constitute double tax benefits which is not interest expenses from gross income?
authorized by law
The requisites are:
In PAPER INDUSTRIES CORPORATION OF THE
1. There must be indebtedness80
PHILIPPINES VS. COURT OF APPEALS
[DECEMBER 1, 1995], Paper Industries claimed as 2. There should be an interest expense paid or incurred
deductions against gross income interest payments on upon such indebtedness
loans for the purchase of machinery and equipment. The
CIR disallowed the deduction on the ground that because 3. The indebtedness must be that of the taxpayer
the loans had been incurred for the purchase of machinery 4. The indebtedness must be connected with the
and equipment, the interest payments on the said loans taxpayers trade, business or exercise of profession
should have been capitalized instead and claimed as a
depreciation deduction taking into account the adjusted 5. The interest expense must have been paid or incurred
basis of the machinery and equipment (original during the taxable year.
acquisition cost plus interest charges) over the useful life
6. The interest must be legally due
of such assets.
7. the interest payment arrangement must not be between
The Supreme Court ruled that Paper Industries is entitled
related taxpayers
to its claimed deduction for interest payments on loans
for, among other things, the purchase of machinery and 8. the interest must not be incurred to finance petroleum
equipment. The general rule is that interest expenses are operations
deductible against gross income and this certainly
includes interest paid under loans incurred in connection 9. in case of interest incurred to acquire property used in
with the carrying on of the business of the taxpayer. In trade, business, or exercise of profession, the same was
this case, the CIR does not dispute that the interest not treated as a capital expenditure
payments were made on loans incurred in connection with 10. The interest must have been stipulated in writing
the carrying on of the registered operations of Paper
Industries, i.e., the financing of the purchase of machinery 11. The allowable deduction have been reduced by an
and equipment actually used in the registered operations amount equal to 33% of the interest income subject to
of Paper Industries. Neither does the CIR deny that such final tax
interest payments were legally due and demandable under
(see RR 13-2000 [NOVEMBER 20, 2000])
the terms of such loans, and in fact paid by Paper
Indusries during the tax year. The CIR has been unable to Q: What is interest arbitrage?
point to any provision of the Tax Code or any other
Statute that requires the disallowance of the interest Interest arbitrage results in the reduction of the interest
payments made by Paper Industries. The general rule that expense by a percentage of the interest income subject to
interest payments on a legally demandable loan are final tax. It is also defined as a circumstance which is
deductible from gross income must be applied. presumed to exist because by putting excess funds in
deposits/securities subject to 20% withholding, taxpayers
Q: Do tax obligations constitute indebtedness? are able to avoid the 32% tax which will happen if the
same funds are invested in revenue-generating activities.
Yes. In COMMISSIONER OF INTERNAL
REVENUE VS. VDA. DE PRIETO [SEPTEMBER Another illustration of this is when a taxpayer borrows
30, 1960], Vda. de Prieto conveyed real property by way money from the bank (interest payments on which can
of gifts to her four children. She was assessed for donors then be claimed as expense and thus a 32% benefit) then
gift taxes including interests due thereon. She claimed as deposits it in a bank (and subsequently suffers only a 20%
deduction the total interest on account of the delinquency. final withholding tax) thus benefiting by 12%
She contends that the interests due from her tax representing the difference the 32% deduction and the
obligations are deductible from gross income. 20% withholding tax. It does not matter if the taxpayer
actually intended to save taxes.
The Supreme Court held that although interest payment
for delinquent taxes is not deductible as tax under Section In BIR RULING NO. 006-00 [JANUARY 5, 2000],
34(C) of the Tax Code, the taxpayer is not precluded PNB requested the BIR to exclude the interest income
thereby from claiming said interest payment as deduction derived by it from treasury bonds in the determination of
under Section 34(B) of the same Code. It is a well-settled the interest expense not allowable as deduction as gross
rule that tax obligations constitute indebtedness for income. PNB argues that the said bonds were given by the
purposes of deduction from gross income of the amount Government for payment for its liabilities to PNB and
of interest paid on indebtedness. hence, it has not engaged in a tax arbitrage scheme.

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Although as a general rule, the amount of interest expense Provided, That taxes allowed under this Subsection, when
paid or incurred by a taxpayer within a taxable year on refunded or credited, shall be included as part of gross
indebtedness in connection with his trade, business or income in the year of receipt to the extent of the income
exercise of profession shall be allowed as a deduction tax benefit of said deduction.
from his gross income, the said interest expense, however,
(2) Limitations on Deductions. - In the case of a
shall be reduced if the taxpayer has derived certain
nonresident alien individual engaged in trade or business
interest income which had been subject to final
in the Philippines and a resident foreign corporation, the
withholding tax. The CIR ruled that this limitation on the
deductions for taxes provided in paragraph (1) of this
deductibility of interest expenses applies whether or not a
Subsection (C) shall be allowed only if and to the extent
tax arbitrage scheme was entered into by the taxpayer.
that they are connected with income from sources within
(C) Taxes. - the Philippines.
(1) In General. - Taxes paid or incurred within the (3) Credit Against Tax for Taxes of Foreign
taxable year in connection with the taxpayer's profession, Countries. - If the taxpayer signifies in his return his
trade or business, shall be allowed as deduction, except: desire to have the benefits of this paragraph, the tax
imposed by this Title shall be credited with:
(a) The income tax provided for under this Title;
(a) Citizen and Domestic Corporation. - In the case of
(b) Income taxes imposed by authority of any foreign
a citizen of the Philippines and of a domestic corporation,
country; but this deduction shall be allowed in the case of
the amount of income taxes paid or incurred during the
a taxpayer who does not signify in his return his desire to
taxable year to any foreign country; and
have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign (b) Partnerships and Estates. - In the case of any such
countries); individual who is a member of a general professional
partnership or a beneficiary of an estate or trust, his
Q: May a resident alien deduct from their gross income proportionate share of such taxes of the general
income taxes they paid to their government? professional partnership or the estate or trust paid or
No. In COMMISSIONER OF INTERNAL incurred during the taxable year to a foreign country, if
REVENUE VS. LEDNICKY [JULY 31, 1964],81 US his distributive share of the income of such partnership or
citizens residing in the Philippines who derives income trust is reported for taxation under this Title.
wholly from sources within the Philippines, sought to
An alien individual and a foreign corporation shall not be
deduct from their gross income the income taxes they
allowed the credits against the tax for the taxes of foreign
have paid to the US government.
countries allowed under this paragraph.
The Supreme Court held that to allow an alien resident to
(4) Limitations on Credit. - The amount of the credit
deduct from his gross income whatever taxes he pays to
taken under this Section shall be subject to each of the
his own government is incompatible with the status of the
following limitations:
Philippines as a sovereign state. This is because the
foreign government will have the power to reduce the tax (a) The amount of the credit in respect to the tax paid or
income of the Philippine government simply by incurred to any country shall not exceed the same
increasing their tax rates. (Note that at the time this case proportion of the tax against which such credit is taken,
was decided, resident aliens were still allowed to claim a which the taxpayer's taxable income from sources within
tax credit. The present rule is that only resident citizens such country under this Title bears to his entire taxable
and domestic corporations can claim a tax credit. Also, in income for the same taxable year; and
this case, their net income for foreign sources was zero
(b) The total amount of the credit shall not exceed the
and, thus, there was no need to apply the tax credit.)
same proportion of the tax against which such credit is
Note: Also important is this case is the statement made taken, which the taxpayer's taxable income from sources
by the court on the exception: a taxpayer may only be without the Philippines taxable under this Title bears to
allowed to deduct from his gross income, taxes paid to a his entire taxable income for the same taxable year.
foreign country when such taxpayer is entitled to a foreign
(5) Adjustments on Payment of Incurred Taxes. - If
tax credit and he does not choose to exercise such right.
accrued taxes when paid differ from the amounts claimed
The right to deduct foreign tax paid is only an alternative
as credits by the taxpayer, or if any tax paid is refunded in
to the taxpayers right to the foreign tax credit.
whole or in part, the taxpayer shall notify the
(c) Estate and donor's taxes; and Commissioner; who shall re-determine the amount of the
tax for the year or years affected, and the amount of tax
(d) Taxes assessed against local benefits of a kind tending
due upon such re-determination, if any, shall be paid by
to increase the value of the property assessed.
the taxpayer upon notice and demand by the

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Commissioner, or the amount of tax overpaid, if any, shall robbery, theft or embezzlement during the taxable year:
be credited or refunded to the taxpayer. In the case of such Provided, however, That the time limit to be so prescribed
a tax incurred but not paid, the Commissioner as a in the rules and regulations shall not be less than thirty
condition precedent to the allowance of this credit may (30) days nor more than ninety (90) days from the date of
require the taxpayer to give a bond with sureties discovery of the casualty or robbery, theft or
satisfactory to and to be approved by the Commissioner embezzlement giving rise to the loss.
in such sum as he may require, conditioned upon the
(c) No loss shall be allowed as a deduction under this
payment by the taxpayer of any amount of tax found due
Subsection if at the time of the filing of the return, such
upon any such redetermination. The bond herein
loss has been claimed as a deduction for estate tax
prescribed shall contain such further conditions as the
purposes in the estate tax return.
Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided Q: Define casualty, theft, and embezzlement for
for in Subsection (C)(3) of this Section may, at the option purposes of tax deduction
of the taxpayer and irrespective of the method of Casualty means the complete or
accounting employed in keeping his books, be taken in the partial destruction of
year which the taxes of the foreign country were incurred, property resulting from
subject, however, to the conditions prescribed in an identifiable event of
Subsection (C)(5) of this Section. If the taxpayer elects to a sudden, unexpected or
take such credits in the year in which the taxes of the unusual nature.
foreign country accrued, the credits for all subsequent
years shall be taken upon the same basis and no portion Theft Criminal appropriation
of any such taxes shall be allowed as a deduction in the of anothers property to
same or any succeeding year. the use of the taker

(7) Proof of Credits. - The credits provided in Subsection Embezzlement Fraudulent


(C)(3) hereof shall be allowed only if the taxpayer appropriation of
establishes to the satisfaction of the Commissioner the anothers property by a
following: person to whom it has
been entrusted or into
(a) The total amount of income derived from sources whose hands it has
without the Philippines; lawfully come
(b) The amount of income derived from each country, the Q: What are the substantiation requirements for losses
tax paid or incurred to which is claimed as a credit under arising from casualty, robbery, theft, or embezzlement?
said paragraph, such amount to be determined under rules
and regulations prescribed by the Secretary of Finance; Generally, under RR 12-77 [OCTOBER 6, 1977], the
and substantiation requirements are: 1. A declaration of loss
filed with the CIR or his deputies within a certain period
(c) All other information necessary for the verification as prescribed in the RR after the occurrence of the
and computation of such credits. casualty, robbery, theft, or embezzlement
2. Proof of the elements of the loss claimed
(D) Losses. - RMO 31-2009 [OCTOBER 16, 2009] provides for
(1) In General. - Losses actually sustained during the policies and guidelines for the reporting of casualty
taxable year and not compensated for by insurance or losses.
other forms of indemnity shall be allowed as deductions: (2) Proof of Loss. - In the case of a nonresident alien
(a) If incurred in trade, profession or business; individual or foreign corporation, the losses deductible
shall be those actually sustained during the year incurred
(b) Of property connected with the trade, business or in business, trade or exercise of a profession conducted
profession, if the loss arises from fires, storms, shipwreck, within the Philippines, when such losses are not
or other casualties, or from robbery, theft or compensated for by insurance or other forms of
embezzlement. indemnity. The secretary of Finance, upon
recommendation of the Commissioner, is hereby
The Secretary of Finance, upon recommendation of the
authorized to promulgate rules and regulations
Commissioner, is hereby authorized to promulgate rules
prescribing, among other things, the time and manner by
and regulations prescribing, among other things, the time
which the taxpayer shall submit a declaration of loss
and manner by which the taxpayer shall submit a
sustained from casualty or from robbery, theft or
declaration of loss sustained from casualty or from
embezzlement during the taxable year: Provided, That the
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time to be so prescribed in the rules and regulations shall Yes. RR 14-01 [AUGUST 27, 2001] provides that the
not be less than thirty (30) days nor more than ninety (90) three-year reglementary period on the carry-over of
days from the date of discovery of the casualty or robbery, NOLCO shall continue to run notwithstanding the fact
theft or embezzlement giving rise to the loss; and that the corporation paid its income tax under the MCIT
computation.
(3) Net Operating Loss Carry-Over. - The net operating
loss of the business or enterprise for any taxable year Q: If several corporations enter an agreement to
immediately preceding the current taxable year, which integrate their respective businesses, can each of the
had not been previously offset as deduction from gross corporations continue to carry-over their respective net
income shall be carried over as a deduction from gross operating losses?
income for the next three (3) consecutive taxable years
It depends on the nature of the integration plan. In BIR
immediately following the year of such loss: Provided,
RULING 30-00 [AUGUST 10, 2000], three cement
however, That any net loss incurred in a taxable year
companies (Republic, Fortune and Blue Circle) sought the
during which the taxpayer was exempt from income tax
opinion of the CIR on the tax implications of their
shall not be allowed as a deduction under this Subsection:
integration plan. With regard to NOLCO, the CIR held
Provided, further, That a net operating loss carry-over
that since, under the plan, the corporation are not
shall be allowed only if there has been no substantial
dissolved but merely integrated for a specific bona fide
change in the ownership of the business or enterprise in
purpose, the net operation losses of each of the cement
that -
corporations are preserved after the proposed share swap
(i) Not less than seventy-five percent (75%) in nominal and may be carried over and claimed as a deduction from
value of outstanding issued shares., if the business is in their respective gross income because there is no
the name of a corporation, is held by or on behalf of the substantial change in the ownership of either of the three
same persons; or cement companies.
(ii) Not less than seventy-five percent (75%) of the paid Note: Provided, That for mines other than oil and gas
up capital of the corporation, if the business is in the name wells, a net operating loss without the benefit of
of a corporation, is held by or on behalf of the same incentives provided for under Executive Order No. 226,
persons. as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the first ten
For purposes of this subsection, the term 'net operating
(10) years of operation may be carried over as a deduction
loss' shall mean the excess of allowable deduction over
from taxable income for the next five (5) years
gross income of the business in a taxable year.
immediately following the year of such loss. The entire
Q: XYZ entered into a merger agreement with ABC. amount of the loss shall be carried over to the first of the
Under this agreement, the rights, properties, privileges, five (5) taxable years following the loss, and any portion
powers and franchises of the said ABC were to be of such loss which exceeds the taxable income of such
transferred, assigned and conveyed to XYZ as the first year shall be deducted in like manner form the
surviving corporation. Before merger, the company had taxable income of the next remaining four (4) years.
over preceding years accumulated losses. XYZ claimed
these losses as a deduction against its gross income.
Should the deduction be allowed? (4) Capital Losses. -
No. In PAPER INDUSTRIES CORPORATION OF (a) Limitations. - Loss from sales or Exchanges of
THE PHILIPPINES VS. COURT OF APPEALS capital assets shall be allowed only to the extent provided
[DECEMBER 1, 1995], the Supreme Court ruled that the in Section 39.
deduction was improper. NOLCO of the taxpayer shall
(b) Securities Becoming Worthless. - If securities as
not be transferred or assigned to another person, whether
defined in Section 22 (T) become worthless during the
directly or indirectly, such as, but not limited to, the
taxable year and are capital assets, the loss resulting
transfer or assignment thereof through merger,
therefrom shall, for purposes of this Title, be considered
consolidation or any form of business combination of
as a loss from the sale or exchange, on the last day of such
such taxpayer with another person. To allow the
taxable year, of capital assets.
deduction claimed by the surviving corporation would be
to permit one corporation or enterprise to benefit from the (5) Losses From Wash Sales of Stock or Securities. -
operating losses accumulated by another corporation or Losses from 'wash sales' of stock or securities as provided
enterprise. in Section 38.
Q: Will the three-year reglementary period on the carry- (6) Wagering Losses. - Losses from wagering
over of NOLCO continue to run notwithstanding that transactions shall be allowed only to the extent of the
the corporation is subject to MCIT (and hence, cannot gains from such transactions.
avail of the benefit of NOLCO)?
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(7) Abandonment Losses. - Q: Are foreign exchange losses deductible?


(a) In the event a contract area where petroleum No. In BIR RULING 206-90 [OCTOBER 30, 1990] and
operations are undertaken is partially or wholly BIR RULING NO. 144-85 [AUGUST 26, 1985], the
abandoned, all accumulated exploration and development CIR held that, with regard to foreign exchange losses, the
expenditures pertaining thereto shall be allowed as a annual increase in value of an asset is not taxable income
deduction: Provided, That accumulated expenditures because such increase has not yet been realized, The
incurred in that area prior to January 1, 1979 shall be increase in value could only be taxed when a disposition
allowed as a deduction only from any income derived of the property occurred which was of such a nature as to
from the same contract area. In all cases, notices of constitute a realization of such gain. The same conclusion
abandonment shall be filed with the Commissioner. obtains to losses. The annual decline in the value of
property is not normally allowable as a deduction. Hence,
(b) In case a producing well is subsequently abandoned,
to be allowable the loss must be realized.
the un-amortized costs thereof, as well as the un-
depreciated costs of equipment directly used therein , (E) Bad Debts. -
shall be allowed as a deduction in the year such well,
(1) In General. - Debts due to the taxpayer actually
equipment or facility is abandoned by the contractor:
ascertained to be worthless and charged off within the
Provided, That if such abandoned well is re-entered and
taxable year except those not connected with profession,
production is resumed, or if such equipment or facility is
trade or business and those sustained in a transaction
restored into service, the said costs shall be included as
entered into between parties mentioned under Section 36
part of gross income in the year of resumption or
(B) of this Code: Provided, That recovery of bad debts
restoration and shall be amortized or depreciated, as the
previously allowed as deduction in the preceding years
case may be.
shall be included as part of the gross income in the year
SEC. 38. Losses from Wash Sales of Stock or of recovery to the extent of the income tax benefit of said
Securities. - deduction. (2) Securities Becoming Worthless. - If
securities, as defined in Section 22 (T), are ascertained to
(A) In the case of any loss claimed to have been sustained
be worthless and charged off within the taxable year and
from any sale or other disposition of shares of stock or
are capital assets, the loss resulting therefrom shall, in the
securities where it appears that within a period beginning
case of a taxpayer other than a bank or trust company
thirty (30) days before the date of such sale or disposition
incorporated under the laws of the Philippines a
and ending thirty (30) days after such date, the taxpayer
substantial part of whose business is the receipt of
has acquired (by purchase or by exchange upon which the
deposits, for the purpose of this Title, be considered as a
entire amount of gain or loss was recognized by law), or
loss from the sale or exchange, on the last day of such
has entered into a contact or option so to acquire,
taxable year, of capital assets.
substantially identical stock or securities, then no
deduction for the loss shall be allowed under Section 34 Q: What are bad debts?
unless the claim is made by a dealer in stock or securities
Bad debts shall refer to those debts resulting from the
and with respect to a transaction made in the ordinary
worthlessness or uncollectibility, in whole or in part, of
course of the business of such dealer.
amounts due the taxpayer by others, arising from money
(B) If the amount of stock or securities acquired (or lent or form uncollectable amounts of income from goods
covered by the contract or option to acquire) is less than sold or services rendered.
the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or Q: How do you distinguish bad debts from loss?
securities, the loss from the sale or other disposition of Voluntary cancellation or forgiveness of a debt does not
which is not deductible, shall be determined under rules give rise to a deductible loss. However, if the debt is
and regulations prescribed by the Secretary of Finance, actually worthless, there may be a bad debt deduction.
upon recommendation of the Commissioner. That deduction would be allowed because the debt was
worthless, not because it was forgiven.
(C) If the amount of stock or securities acquired (or
covered by the contract or option to acquire which) is not Q: What are the conditions for bad debts to be
less than the amount of stock or securities sold or deductible?
otherwise disposed of, then the particular shares of stock
or securities, the acquisition of which (or the contract or As provided in RR 5-99 [March 10, 1999], the requisites
option to acquire which) resulted in the non-deductibility for deductibility of bad debts are:
of the loss shall be determined under rules and regulations 1. There must be an existing indebtedness due to the
prescribed by the Secretary of Finance, upon taxpayer which must be valid and legally demandable
recommendation of the Commissioner.
Foreign Losses
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2. The same must be connected with the taxpayers trade, No. In PHILEX MINING CORPORATION VS.
business or practice of profession COMMISSIONER OF INTERNAL REVENUE
[APRIL 16, 2008], the Supreme Court held that Philex
3. The same must not be sustained in a transaction entered
cannot deduct the amounts as bad debt. The agreement
into between related parties
provided for a distribution of assets of the mine upon
4. The same must actually be charged-off within the termination, a provision that is more consistent with a
taxable year partnership than a creditor-debtor relationship. In this
connection, there is no contractual basis for the execution
5. The same must be actually ascertained to be worthless of the two compromise agreements in which Baguio Gold
and uncollectible as of the end of the taxable year. recognized a debt in favor of Philex. Philexs advances
6. The debts are uncollectible despite diligent efforts should be treated as investments in a partnership. The
exerted by the taxpayer advances were not "debts" of Baguio Gold to Philex
inasmuch as the latter was under no unconditional
Note: RR 5-99 [March 10, 1999] provides for two obligation to return the same to the former.
exceptions to requisite no. 5, namely:
As for the amounts that Philex paid as guarantor to Baguio
1. The BSP, through the Monetary Board, shall ascertain Golds creditors, the debts were not yet due and
the worthlessness and uncollectibility of the bad debts and demandable at the time that Philex paid the same. Philex
it shall approve the writing off of the said indebtedness cannot claim the advances as a bad debt deduction from
from the banks; books of accounts at the end of the taxable its gross income. Deductions for income tax purposes
year. partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by
2. In no case may a receivable from an insurance or
convincing evidence that he is entitled to the deduction
surety company be written-off from the taxpayer's books
claimed. In this case, Philex failed to substantiate its
and claimed as bad debts deduction unless such company
assertion that the advances were subsisting debts of
has been declared closed due to insolvency or for any
Baguio Gold that could be deducted from its gross
such similar reason by the Insurance Commissioner
income. Consequently, it could not claim the advances as
In both cases, requisites nos. 1-4 should still be complied a valid bad debt deduction.
with.
Is the declaration by the taxpayer that a debt is worthless
Q: What is meant by actually ascertained to be sufficient for it to claim a bad debt deduction?
worthless?
No. In PHILIPPINE REFINING COMPANY VS.
The phrase means that a debt is not worthless simply COURT OF APPEALS [MAY 8, 1996], at issue was
because it is of doubtful value or difficult to collect. PRCs (now Unilever) claimed of bad debt deduction. On
Conclusive evidence must be presented to show that the appeal, the CTA disallowed the same as there was no iota
taxpayers receivable from a debtor has definitely become of documentary evidence to prove the worthlessness of
worthless. the debts sought to be deducted. The Supreme Court
stated that before a debt can be considered worthless, the
Q: What is meant by actually charged off? taxpayer must also show that it is indeed uncollectible
The phrase means that the amount of money lent by the even in the future. PRC here failed to prove the
taxpayer to his debtor has been recorded in his books of worthlessness of the amounts receivable.
account as a receivable that has actually become Q: ABC, an investment company made advances to XYZ
worthless of as of the end of the taxable year, that the said under an agreement that a portion of its net profits
receivable has been cancelled and written-off from the would go to ABC. XYZ suffered substantial losses but
said taxpayers books of account. continued to operate. ABC made a partial write-off of
Q: ABC mining entered into a management contract the losses and deducted the amount in its return. Is the
with XYZ mining. ABC made advances of cash and deduction proper?
property. However, XYZs mine suffered continuing No. In FERNANDEZ HERMANOS, INC. VS.
losses which led to ABC;s withdrawal as manager and COMMISSIONER OF INTERNAL REVENUE
cessation of mine operations. ABC and XYZ entered into [SEPTEMBER 30, 1969], the Supreme Court held that
two compromises: the first involved alleged indebtedness the deduction was improper. The Court opined that
by XYZ from the advances of ABC and the second assuming that in this case there was a valid and subsisting
involved long-term loans guaranteed by ABC. ABC debt and that the debtor was incapable of paying the debt,
deducted the amounts as bad debt. Is the deduction the debt is still not deductible as a worthless debt because
proper? the debtor was still in operation. It has been held that if
the debtor corporation, although losing money or
insolvent, was still operating at the end of the taxable
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year, the debt is not considered worthless and therefore However, as to the supplier of the goods or services, he
not deductible. may avail of a deduction. RR 8-2009 subjects the
following to a 5% creditable withholding tax: (a)
Q: What is the effect of recovery of bad debts? payments made by the political parties and candidates of
The recovery of bad debts previously allowed as local and national elections for their campaign
deduction in the preceding year or years shall be included expenditures; and (b) payments made by individuals or
as part of the taxpayers gross income in the year of such juridical persons for their purchases of goods and services
recovery to the extent of the income tax benefit of said intended to be given as campaign contributions to
deduction (equitable doctrine of tax benefit or tax benefit political parties and candidates. RMC 63-2009 provides
rule) that such 5% creditable withholding tax shall be allowed
as a tax credit or deduction against the total income tax
Additional Info: Political campaign expenses liability of the supplier of goods or services.
Note: The import of RR 8-2009 in relation to RMC 63-
09 and RR 7-2011 in relation to RMC 15-2013 which are
recent BIR issuances on the matter of political campaign
expenses. We know (or should know) that contributions
given to candidates or political parties are not subject to
donors tax (see Section 13, RA 7166). It may, however,
be subject to income tax. In order for the campaign
expenditure to be tax-exempt, it must be fully utilized. If it
is not fully utilized, it is subject to income tax (see Section
2, RR 7-2011). These contributions are intended to
finance the operation expenditures of a candidate. Any
unexpended balance from any contribution to a candidate
or party shall be subject to income tax. Further, if the
candidate fails to include certain campaign expenditures
in the Statement of Expenditures to be filed with the
COMELEC, such amounts will be automatically
subjected to income tax.
RMC 15-2013 requires every candidate, treasurer of the
party and person acting under authority of that candidate
or treasurer a) to keep detailed, full and accurate records
of all contributions received and expenditures incurred;
b) to be responsible for the preservation of the records of
contributions and expenditures together with all pertinent
documents, for at least three years after the holding of the
election to which they pertain and for the productions for
inspection by the COMELEC or its duly authorized
representative, or upon presentation of a subpoena duces
tecum duly issued by the COMELEC.
Now, with that said, we now answer whether political
campaign expenses are deductible.
Q: Are political campaign expenses deductible?
We must distinguish between (1) the candidate, political
party, or contributor and (2) the supplier of the goods and
services pertaining to the campaign expenditures.
As to the candidate, political party, or contributor, the
political campaign expenses are not deductible. If they are
fully utilized, they are tax exempt and thus theres no need
for any deduction at all. If they are not fully utilized and
hence subject to income tax, it is submitted that they
cannot still be deducted either as a business expense or as
a contribution. (MONTENEGRO V.
COMMISSIONER, CTA CASE 695, APRIL 30, 1965)

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(F) Depreciation. - Q: What are the requisites for the deductibility of a


depreciation expense?
(1) General Rule. - There shall be allowed as a
depreciation deduction a reasonable allowance for the 1. The allowance for depreciation must be reasonable
exhaustion, wear and tear (including reasonable
2. It must be for property used in the trade, business, or
allowance for obsolescence) of property used in the trade
profession
or business. In the case of property held by one person for
life with remainder to another person, the deduction shall 3. It must be charged off during the taxable year; and
be computed as if the life tenant were the absolute owner
of the property and shall be allowed to the life tenant. In 4. A statement on the allowance must be attached to the
the case of property held in trust, the allowable deduction return
shall be apportioned between the income beneficiaries Q: Can an asset be depreciated beyond its acquisition
and the trustees in accordance with the pertinent cost?
provisions of the instrument creating the trust, or in the
absence of such provisions, on the basis of the trust No. In BASILAN ESTATES, INC. VS.
income allowable to each. COMMISSIONER OF INTERNAL REVENUE
[SEPTEMBER 5, 1967], Basilan Estates claimed
(2) Use of Certain Methods and Rates. - The term deductions for the depreciation of its assets up to 1949 on
'reasonable allowance' as used in the preceding the basis of their acquisition cost. In 1950, however, it
paragraph shall include, but not limited to, an allowance changed the depreciable value of the assets by increasing
computed in accordance with rules and regulations it to conform with the increase in cost of their
prescribed by the Secretary of Finance, upon replacement. Accordingly, in 1950 to 1953, the company
recommendation of the Commissioner, under any of the deducted from gross income the value of the depreciation
following methods: based on this reappraised value.
(a) The straight-line method; The Supreme Court held that such value cannot be
(b) Declining-balance method, using a rate not exceeding deducted from gross income as it was beyond the
twice the rate which would have been used had the annual acquisition cost. Depreciation as a deduction is allowed
allowance been computed under the method described in so that the owner of the assets can set aside some money
Subsection (F) (1); to buy a replacement or, in other words, to gradually
recover the acquisition cost. The income tax law does not
(c) The sum-of-the-years-digit method; and authorize the depreciation of an asset beyond its
acquisition cost. The reason is that deductions from gross
(d) Any other method which may be prescribed by the
income are privileges, not matters of right. More
Secretary of Finance upon recommendation of the
importantly, the recovery, free of income tax, of an
Commissioner.
amount more than the invested capital in an asset will run
Q: What is depreciation? counter to the purpose of a depreciation allowance. For
then, the taxpayer can not only recover the acquisition
Depreciation is the gradual diminution in the useful value
cost, but also make some profit. Recovery in due time
of tangible property resulting from wear and tear and
through depreciation of investment made is the
normal obsolescence. (except LAND)
philosophy behind depreciation allowance; the idea of
The term is also applied to amortization of the value of profit on the investment made has never been the
intangible assets, the use of which in the trade or business underlying reason for the allowance of a deduction for
is definitely limited in duration. depreciation.

Q: What is the rationale behind depreciation? The BIR found that ABC claimed excessive depreciation
of its buildings. In its defense, ABC Limpan argued that
Depreciation commences with the acquisition of the that some of its buildings are old and out of style; hence,
property and its owner is not bound to see his property they are entitled to higher rates of depreciation than
gradually waste, without making provision out of those adopted by the BIR in its assessment. On appeal,
earnings for its replacement. It is entitled to see to it that the CTA found that the depreciation was excessive.
from earnings the value of the property invested is kept Should the findings of the CTA be affirmed?
unimpaired so that at the end of any given term of years,
the original investment remains as it was in the beginning Yes provided there no arbitrariness and abuse of
discretion on the part of the CTA. In LIMPAN
INVESTMENT CORPORATION VS.
COMMISSIONER OF INTERNAL REVENUE
[JULY 26, 1966], the Supreme Court opined that
depreciation is a question of fact and is not measured by

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theoretical yardstick, but should be determined by a in full in the year paid or incurred or at the election of the
consideration of actual facts. The findings of the tax court taxpayer, may be capitalized and amortized if such
in this respect should not be disturbed when not shown to expenditures incurred are for producing wells and/or
be arbitrary or in abuse of discretion. Limpan has not mines in the same contract area.
shown any arbitrariness or abuse of discretion on the part
'Intangible costs in petroleum operations' refers to any
of the CTA. In fact, the CTA applied rates of depreciation
cost incurred in petroleum operations which in itself has
in accordance with Bulletin F of the US Federal Internal
no salvage value and which is incidental to and necessary
Revenue Service, which the Supreme Court, has
for the drilling of wells and preparation of wells for the
pronounced as having strong persuasive effect.
production of petroleum: Provided, That said costs shall
RR 12-2012 [OCTOBER 12, 2012] Deductibility not pertain to the acquisition or improvement of property
of Depreciation Expense as it relates to purchase of a character subject to the allowance for depreciation
of vehicles except that the allowances for depreciation on such
property shall be deductible under this Subsection.
Guidelines to claim depreciation as a deduction in
gross income: Any intangible exploration, drilling and development
expenses allowed as a deduction in computing taxable
1. Only one vehicle for land transport is allowed for the
income during the year shall not be taken into
use of an official or employee
consideration in computing the adjusted cost basis for the
2. The value of which should not exceed P2,400,000 purpose of computing allowable cost depletion.

3. It must be substantiated with sufficient evidence, such


as official receipts or other adequate records; and
CONSOLIDATED MINES (factual proof is necessary)
4. There is a direct connection or relation of the vehicle to
(H) Charitable and Other Contributions. -
the development, management, operation, and/or conduct
of the trade or business or profession of the taxpayer (1) In General. - Contributions or gifts actually paid or
made within the taxable year to, or for the use of the
Generally, no deduction in the gross income shall be
Government of the Philippines or any of its agencies or
allowed for depreciation of the following:
any political subdivision thereof exclusively for public
1. Yachts, helicopters, airplanes, and/or aircrafts; and purposes, or to accredited domestic corporation or
associations organized and operated exclusively for
2. Land vehicles with a value of more than P2,400,000 religious, charitable, scientific, youth and sports
Exception: the taxpayer is in the business of transport development, cultural or educational purposes or for the
operations or lease of transportation equipment and the rehabilitation of veterans, or to social welfare institutions,
vehicles purchased are used in such operations. or to non-government organizations, in accordance with
In addition, the following shall be disallowed as rules and regulations promulgated by the Secretary of
deductions in the gross income: finance, upon recommendation of the Commissioner, no
part of the net [30] income of which inures to the benefit of
1. All maintenance expenses on account of non- any private stockholder or individual in an amount not in
depreciable vehicles; excess of ten percent (10%) in the case of an individual,
and five percent (%) in the case of a corporation, of the
2. Input taxes on the purchase of non-depreciable vehicles
taxpayer's taxable income derived from trade, business or
and all input taxes on maintenance expenses.
profession as computed without the benefit of this and the
(G) Depletion of Oil and Gas Wells and Mines. - following subparagraphs.

(1) In General. - In the case of oil and gas wells or mines, Q: What are the conditions for deductibility of
a reasonable allowance for depletion or amortization charitable contributions?
computed in accordance with the cost-depletion method
The requisites are:
shall be granted under rules and regulations to be
prescribed by the Secretary of finance, upon 1. Actually paid or made to the Philippine Government or
recommendation of the Commissioner. Provided, That any political subdivision thereof, or any of the domestic
when the allowance for depletion shall equal the capital corporation or association specified in the Tax Code
invested no further allowance shall be granted: Provided,
further, That after production in commercial quantities 2. Made within the taxable year
has commenced, certain intangible exploration and 3. Not exceeding 10% (individuals) or 5% (corporations)
development drilling costs: (a) shall be deductible in the of the taxpayers taxable income before charitable
year incurred if such expenditures are incurred for non- contributions
producing wells and/or mines, or (b) shall be deductible
4. Evidenced by adequate receipts or records
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Q: What contributions are deductible in full? (2) Amortization of Certain Research and
Development Expenditures. - At the election of the
Donations to the following institutions are deductible in
taxpayer and in accordance with the rules and regulations
full:
to be prescribed by the Secretary of Finance, upon
1. Donations to the Government, its entities, political recommendation of the Commissioner, the following
subdivisions or fully owned corporations exclusively for research and development expenditures may be treated as
undertaking priority activities in accordance with the deferred expenses:
national priority plan to be determined by NEDA
(a) Paid or incurred by the taxpayer in connection with
2. Donations to foreign institutions or international his trade, business or profession;
organizations pursuant to agreements, treaties entered (b) Not treated as expenses under paragraph (1) hereof;
into by Government or special laws and
(c) Chargeable to capital account but not chargeable to
3. Donations to accredited Non-Government property of a character which is subject to depreciation
Organizations (non-profit domestic corporation)85 or depletion.
Q: When are donations subject to limitations? 3M PHILIPPINES V CIR - Although the Tax Code
When the donation is made to: allows payments of royalty to be deducted from gross
income as business expenses, it is CB Circular No. 393
1. The government for public purposes that defines what royalty payments are proper. Hence,
improper payments of royalty are not deductible as
2. Accredited domestic corporations for religious,
legitimate business expenses.
charitable, scientific, etc. purposes
Additional Requirements for deductibility
3. Social welfare institutions
(K) Additional Requirements for Deductibility of
4. NGOs (not accredited)
Certain Payments. - Any amount paid or payable which
The limitations are 10% of net income for individual is otherwise deductible from, or taken into account in
taxpayers and 5% of net income for corporate taxpayers. computing gross income or for which depreciation or
amortization may be allowed under this Section, shall be
Note: A non-government organization shall refer to a allowed as a deduction only if it is shown that the tax
non-stock, non-profit domestic corporation organized required to be deducted and withheld therefrom has been
and operated exclusively for scientific, research, paid to the Bureau of Internal Revenue in accordance with
educational, character-building and youth and sports this Section 58 and 81 of this Code.
development, health, social welfare, cultural or
charitable purposes or a combination thereof, no part of RMO 38-63
the net income of which inures to the benefit of any private
In order to minimize the onerous effect of literal
individual.
application of Section 30(1), allowance or disallowance
Q: Is an international NGO qualified to be granted of a deduction falling under the said paragraph of Section
accreditation? 30 shall be determined in accordance with the following
guidelines.
No. In BIR RULING 19-01 [MAY 10, 2001], at issue Guidelines For Applying Section 30(1):
was whether or not international organizations with home An amount claimed as deduction on which a tax is
offices based abroad are qualified to be granted donee supposed to have been withheld under Sections 54 and 93
institution status (accreditations as NGO), the CIR ruled shall be allowed if in the course of his audit and/or
that a non-stock, non-profit corporation or organization investigation, the examiner discovers that:
must be created or organized under Philippine laws and 1. No withholding of creditable or final tax was made but
that an NGO must be a non-profit domestic corporation, a the payee reported the income and the withholding
foreign corporation whether resident or non-resident agent/taxpayer pays during the original audit and
cannot be accredited as a done institution. investigation the surcharges, interest and penalties
(I) Research and Development. - incident to the failure to withhold the tax.

(1) In General. - A taxpayer may treat research or


development expenditures which are paid or incurred by 2. No withholding of creditable or final tax was made and
him during the taxable year in connection with his trade, the recipient-payee failed to report the income on due date
business or profession as ordinary and necessary expenses thereof, but the withholding agent pays during the original
which are not chargeable to capital account. The audit and investigation the amount supposed to have been
expenditures so treated shall be allowed as deduction withheld, inclusive of surcharges, interest and penalties
during the taxable year when paid or incurred. incident to his failure to withhold.

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3. The withholding agent erroneously under withheld the Q: What are the rules in the determination of the
tax but pays during the original audit and investigation the amount of OSD of GPPs?
difference in the amount supposed to have been withheld,
RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6
inclusive of surcharges, interest and penalties incident to
to 7 of RR 16-2008 with respect to the determination of
such error.
the OSD of GPPs.
(L) Optional Standard Deduction (OSD).
A GPP is not subject to income tax but the partners shall
Q: What is meant by Optional Standard deduction? be liable to pay income tax on their separate and
individual capabilities for their respective distributive
Section 34(L) provides that in lieu of the itemized
share in the net income of the GPP.
deductions, an individual subject to tax excluding a
nonresident alien may elect a standard deduction of For purposes of computing the distributive share of the
not exceeding 40% of his gross sales or gross receipts, as partners, the net income of the GPP shall be computed in
the case may be. In the case of a domestic corporation the same manner as a corporation. The GPP may claim
and a resident foreign corporation, it may elect a itemized deductions or in lieu thereof may opt to avail of
standard deduction in an amount not exceeding 40% of the OSD allowed to corporations. The net income
its gross income. determined by either claiming the itemized deductions or
OSD from the GPPs gross income is the distributable net
A non-resident alien (whether engaged or not) and a non-
income from which the share of each partner is
resident foreign corporation cannot claim OSD.
determined.
The election to use OSD when made in the return shall be
If the GPP availed of the itemized deductions in
irrevocable for the taxable year for which the return is
computing its net income, a partner may still claim
made.
itemized deductions from his share in the net income of
Q: Who may avail of the OSD? the partnership.

1. A citizen, whether resident or non-resident However, if the GPP availed of the OSD in computing its
net income, the partner can no longer claim further
2. Resident alien deduction from his share in the said net income.
3. Taxable estate or trust (M) Premium Payments on Health and/or
Note: A non-resident alien and a non-resident foreign Hospitalization Insurance of an Individual
corporation cannot claim OSD. Taxpayer. - the amount of premiums not to exceed Two
thousand four hundred pesos (P2,400) per family or Two
Q: What are the rules in the determination of the hundred pesos (P200) a month paid during the taxable
amount of OSD? year for health and/or hospitalization insurance taken by
the taxpayer for himself, including his family, shall be
RR 16-2008 [NOVEMBER 26, 2008] provides for the
allowed as a deduction from his gross income: Provided,
following rules:
That said family has a gross income of not more than Two
1. For individuals hundred fifty thousand pesos (P250,000) for the taxable
year: Provided, finally, That in the case of married
a. If on accrual basis of accounting, the OSD shall be taxpayers, only the spouse claiming the additional
based on gross sales exemption for dependents shall be entitled to this
b. If on cash basis of accounting, the OSD shall be based deduction.
on gross receipts Notwithstanding the provision of the preceding
c. Cost of sales and cost of services are not allowed to be Subsections, The Secretary of Finance, upon
deducted for purposes of determining the basis of the recommendation of the Commissioner, after a public
OSD hearing shall have been held for this purpose, may
prescribe by rules and regulations, limitations or ceilings
2. For corporations for any of the itemized deductions under Subsections (A)
to (J) of this Section: Provided, That for purposes of
a. It shall be based on gross income
determining such ceilings or limitations, the Secretary of
Note: The basis of the 40% OSD for individual taxpayers Finance shall consider the following factors: (1) adequacy
shall be gross sales or gross receipts, not gross income, of the prescribed limits on the actual expenditure
because the cost of sales and the cost of services are requirements of each particular industry; and (2)effects of
not allowed to be deducted for purposes of determining inflation on expenditure levels: Provided, further, That no
the basis of OSD. ceilings shall further be imposed on items of expense
already subject to ceilings under present law.

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Q: May a taxpayer deduct from his gross income either one of such corporations, with respect to the taxable
premium payments for health and hospitalization year of the corporation preceding the date of the sale of
insurance? exchange was under the law applicable to such taxable
year, a personal holding company or a foreign personal
Yes. An individual taxpayer can claim as deduction from
holding company;
his gross income the premium payment for health and/or
hospitalization insurance for an amount not exceeding (4) Between the grantor and a fiduciary of any trust; or
P2,400 per family during the taxable year provided the
(5) Between the fiduciary of and the fiduciary of a trust
gross family income does not exceed P250,000 for the
and the fiduciary of another trust if the same person is a
taxable year. Only one spouse claiming the additional
grantor with respect to each trust; or
exemption for dependents shall be entitled to this
deduction. (6) Between a fiduciary of a trust and beneficiary of such
trust.
Note: Only a non-resident alien not engaged in trade or
business in the Philippines cannot claim this deduction. Q: Are margin fees deductible business expenses?
SEC. 36. Items not Deductible. - No. In ESSO STANDARD EASTERN, INC. VS.
(A) General Rule. - In computing net income, no COMMISSIONER OF INTERNAL REVENUE
[JULY 7, 1989], Esso made profit remittances to its New
deduction shall in any case be allowed in respect to -
York Head Office. Esso claims that the margin fees it paid
(1) Personal, living or family expenses; to the Central Bank on the remittances are ordinary and
necessary expenses and should be deducted from its gross
(2) Any amount paid out for new buildings or for
income.
permanent improvements, or betterments made to
increase the value of any property or estate; The Supreme Court held that margin fees are not
necessary and ordinary expenses. The margin fees are not
This Subsection shall not apply to intangible drilling and
expenses in connection with the production or earning of
development costs incurred in petroleum operations
petitioner's incomes in the Philippines.. Since the margin
which are deductible under Subsection (G) (1) of Section
fees in question were incurred for the remittance of funds
34 of this Code.
to petitioner's Head Office in New York, which is a
(3) Any amount expended in restoring property or in separate and distinct income taxpayer from the branch in
making good the exhaustion thereof for which an the Philippines, for its disposal abroad, it can never be
allowance is or has been made; or said therefore that the margin fees were appropriate and
helpful in the development of petitioner's business in the
(4) Premiums paid on any life insurance policy covering Philippines exclusively or were incurred for purposes
the life of any officer or employee, or of any person proper to the conduct of the affairs of petitioner's branch
financially interested in any trade or business carried on in the Philippines exclusively or for the purpose of
by the taxpayer, individual or corporate, when the realizing a profit or of minimizing a loss in the Philippines
taxpayer is directly or indirectly a beneficiary under such exclusively.
policy.
(B) Losses from Sales or Exchanges of Property. - In
computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of
property directly or indirectly -
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only
his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation,
between an individual and corporation more than fifty
percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for such individual;
or
(3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent (50%)
in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if
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Individuals
Q: Differentiate ordinary income from passive income.
Ordinary income is income other than capital gain and
those incomes which fall under the category of passive
income.
On the other hand, if the income is generated in the active
pursuit and performance of the corporations primary
purposes, the same is not passive income. Generally,
passive income is income generated by the taxpayers
assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation
that earn dividends or interest income received from
savings.
Q: What is the income tax rate imposed on ordinary
income? It shall be subject to the graduated income tax
with rates from 5% to 32%.

SEC. 24. Income Tax Rates. -


(A) Rates of Income Tax on Individual Citizen and
Individual Resident Alien of the Philippines.-
(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this


Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable
year from all sources within and without the Philippines
be every individual citizen of the Philippines residing
therein;
(b) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable
year from all sources within the Philippines by an
individual citizen of the Philippines who is residing
outside of the Philippines including overseas contract
workers referred to in Subsection(C) of Section 23 hereof;
and
(c) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable
year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.

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(2) Rates of Tax on Taxable Income of Individuals. - accounts and other investments evidenced by certificates
The tax shall be computed in accordance with and at the in such form prescribed by the Bangko Sentral ng
rates established in the following schedule: Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the
5% holder of the certificate pre-terminate the deposit or
Not over P10,000
P500+10% of the excess over investment before the fifth (5th) year, a final tax shall be
Over P10,000 but not
P10,000 imposed on the entire income and shall be deducted and
over P30,000
P2,500+15% of the excess over withheld by the depository bank from the proceeds of the
Over P30,000 but not
P30,000 long-term deposit or investment certificate based on the
over P70,000
P8,500+20% of the excess over remaining maturity thereof:
Over P70,000 but not
P70,000
over P140,000
P22,500+25% of the excess over
Over P140,000 but not Four (4) years to less than five (5) years - 5%;
P140,000
over P250,00 Three (3) years to less than (4) years - 12%; and
P50,000+30% of the excess over
Over P250,000 but not Less than three (3) years - 20%
P250,000
over P500,000
P125,000+32% of the excess
Over P500,000 (2) Cash and/or Property Dividends. - A final tax at the
over P500,000.[12]
following rates shall be imposed upon the cash and/or
For married individuals, the husband and wife, subject to property dividends actually or constructively received by
the provision of Section 51 (D) hereof, shall compute an individual from a domestic corporation or from a joint
separately their individual income tax based on their stock company, insurance or mutual fund companies and
respective total taxable income: Provided, That if any regional operating headquarters of multinational
income cannot be definitely attributed to or identified as companies, or on the share of an individual in the
income exclusively earned or realized by either of the distributable net income after tax of a partnership (except
spouses, the same shall be divided equally between the a general professional partnership) of which he is a
spouses for the purpose of determining their respective partner, or on the share of an individual in the net income
taxable income. after tax of an association, a joint account, or a joint
venture or consortium taxable as a corporation of which
Provided, That minimum wage earners as defined in he is a member or co-venturer:
Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: provided, Six percent (6%) beginning January 1, 1998;
further, That the holiday pay, overtime pay, night shift Eight percent (8%) beginning January 1, 1999;
differential pay and hazard pay received by such Ten percent (10%) beginning January 1, 2000.
minimum wage earners shall likewise be exempt from Provided, however, That the tax on dividends shall apply
income tax. [13] only on income earned on or after January 1, 1998.
(B) Rate of Tax on Certain Passive Income: - Income forming part of retained earnings as of December
31, 1997 shall not, even if declared or distributed on or
(1) Interests, Royalties, Prizes, and Other Winnings. - after January 1, 1998, be subject to this tax.
A final tax at the rate of twenty percent (20%) is hereby (C) Capital Gains from Sale of Shares of Stock not
imposed upon the amount of interest from any currency Traded in the Stock Exchange. - The provisions of
bank deposit and yield or any other monetary benefit from Section 39(B) notwithstanding, a final tax at the rates
deposit substitutes and from trust funds and similar prescribed below is hereby imposed upon the net capital
arrangements; royalties, except on books, as well as other gains realized during the taxable year from the sale,
literary works and musical compositions, which shall be barter, exchange or other disposition of shares of stock in
imposed a final tax of ten percent (10%); prizes (except a domestic corporation, except shares sold, or disposed of
prizes amounting to Ten thousand pesos (P10,000) or less through the stock exchange.
which shall be subject to tax under Subsection (A) of
Section 24; and other winnings (except Philippine Charity Not over P 100,000 5%
Sweepstakes and Lotto winnings), derived from sources On any amount in excess of P 100,000 10%
within the Philippines: Provided, however, That interest
income received by an individual taxpayer (except a Q: What are stocks classified as capital assets?
nonresident individual) from a depository bank under the Stocks classified as capital assets mean all stocks and
expanded foreign currency deposit system shall be subject securities held by taxpayers other than dealers in
to a final income tax at the rate of seven and one-half securities.
percent (7 1/2%) of such interest income: Provided,
further, That interest income from long-term deposit or
investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management
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RMC 37-2012 [AUGUST 3, 2012] clarified RR 06-2008


in stating that a Certificate Authorizing Registration
[CAR] is still necessary before any transfer of shares of
stock not traded in the Stock Exchange may be transferred
in the books of a corporation.
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange,
or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de
retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That
the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of
its political subdivisions or agencies or to government-
owned or controlled corporations shall be determined
either under Section 24 (A) or under this Subsection, at
the option of the taxpayer;
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or
disposition of their principal residence by natural persons,
the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition,
shall be exempt from the capital gains tax imposed under
this Subsection: Provided, That the historical cost or
adjusted basis of the real property sold or disposed shall
be carried over to the new principal residence built or
acquired: Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty (30)
Q: What are exempted from capital gains tax on stock days from the date of sale or disposition through a
transactions? prescribed return of his intention to avail of the tax
1. Gains derived by dealers in securities exemption herein mentioned: Provided, still further, That
the said tax exemption can only be availed of once every
2. Gains from sales of stock to the extent invested in new ten (10) years: Provided, finally, That if there is no full
shares of stocks in banks, financial intermediaries, and utilization of the proceeds of sale or disposition, the
corporations organized primarily to hold equities in banks portion of the gain presumed to have been realized from
the sale or disposition shall be subject to capital gains tax.
3. All other gains which hare specifically exempt from
For this purpose, the gross selling price or fair market
income tax under existing investment incentives and other
value at the time of sale, whichever is higher, shall be
special laws.
multiplied by a fraction which the unutilized amount
Q: What is the effect of non-payment of capital gains bears to the gross selling price in order to determine the
tax on stock transactions? taxable portion and the tax prescribed under paragraph (1)
of this Subsection shall be imposed thereon.
As provided in Section 11 of RR 06-2008, no sale,
exchange, transfer or similar transaction intended to
convey ownership of, or title to any share of stock shall
be registered in the books of the corporation unless the
receipts of payment of the tax herein imposed is filed with
and recorded by the stock transfer agent or secretary of
the corporation.

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Q: ABC Company took out a loan from XYZ bank and Agreement. It can only be released upon showing that the
mortgaged one of its properties as collateral. ABC was proceeds have been fully utilized within 18 months.
unable to pay so XYZ extrajudicially foreclosed the
2. The proceeds from the sale, exchange or disposition
property and bought it. Before the expiration of the one-
must be fully utilized in acquiring or constructing his new
year redemption period, the mortgagor notified the bank
principal residence within 18 calendar months from date
of its intention to redeem the property. Is XYZ liable to
of its sale. Proof must be submitted.53
pay the capital gains tax as a result of the foreclosure
sale? 3. The tax exemption may be availed of only once every
10 years
No. In foreclosure sale, there is no actual transfer of the
mortgaged real property until after the expiration of the 4. The historical cost or adjusted basis of his old principal
one-year period and title is consolidated in the name of residence sold, exchanged disposed shall be carried over
the mortgagee in case of non-redemption. This is because to the cost basis of his new principal residence
before the period expires there is yet no transfer of title
and no profit or gain is realized by the mortgagor. 5. If there is no full utilization of the proceeds of sale,
SUPREME TRANSLINER V. BPI FAMILY exchange or disposition of his old principal residence, he
SAVINGS BANK [FEBRUARY 23, 2011] shall be liable for deficiency capital gains tax of the
utilized portion.54
Q: What is the special rule for disposition of real
property made by an individual to the government? Note: The exemption applies to resident citizens and
aliens. This is logical because if they are not residents,
As provided in RR 8-98, in case of disposition of real then there is no principal place of residence.
property made by an individual to the government or to
any of its political subdivisions or agencies or to Q: Define principal residence
government-owned or controlled corporations, the seller It is the dwelling house, where the husband or wife or
may elect to: unmarried individual residence; actual occupancy is not
1. compute the tax on the gain derived from such sale interrupted or abandoned by temporary absence
under the normal income tax rates; or 2. under a final Q: Who is liable to pay the capital gains tax?
capital gains tax of 6%.
The seller is liable to pay the capital gains tax. As
Extrajudicial Foreclosure provided in RR NO. 8-98 [AUGUST 25, 1998], the
RMC 55-2011 provides that the 1-year period on the capital gains tax return will be filed by the seller within
foreclosed asset of natural persons and the period within 30 days following each sale or disposition of real
which to pay CGT or CWT and DST on the foreclosure property.
of Real Estate Mortgage shall be reckoned from the date Note: To ensure compliance, he must within 30 days from
of registration of the sale in the Office of the Register of the lapse of the said period the required documents to
Deeds prove full utilization. If he fails to submit the required
For juridical persons in an extrajudicial foreclosure, documents within 30 days after the lapse of the 18-month
Section 47 of the General Banking Law provides that its period, it shall be presumed that he did not fully utilize
right of redemption shall be until, but not after the the proceeds of the sale, exchange or disposition of his old
registration of the certificate of sale with the Register of principal residence, and shall be assessed deficiency
Deeds, which in no case shall be more than 3 months after capital gains tax.
foreclosure, whichever is earlier. (RMC No. 55-2011 Q: If title to property is transferred to one spouse as a
[November 10, 2011]). The right of redemption shall be result of a court decision in an annulment case, is the
reckoned from the approval of the executive judge [CIR transfer subject to capital gains tax?
v. UPCB [October 23, 2009])
No. In BIR Ruling DA-029-08 [JANUARY 23, 2008],
Principal Residence title to a house and lot was transferred to the husband by
Q: What are the conditions for the exemption of capital virtue of a decision of the court declaring his marriage
gains tax on the sale by a natural person of his principal with his wife null and void. In BIR Ruling DA 287-07
residence? [MAY 8, 2007], title to a condominium unit was
transferred to the wife as a result of an agreement to
As provided in RR 13-99 [JULY 26, 1999], as amended distribute communal property executed in the course of
by RR 14-2000 [NOVEMBER 20, 2000]: annulment proceedings. In both BIR Rulings, the CIR
held that the transfer of the title of the subject properties
1. The 6% capital gains tax due shall be deposited in an
are not subject to capital gains tax, as such transfers are
account with an authorized agent bank under an Escrow

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equivalent to a conveyance but without monetary Exemptions


consideration, made in accordance with the Court's
Decision granting parties agreement for the distribution of RR 1-2009 - pwds
communal property. In view of the amendment brought about by RA No. 9504
under Section 35(A) and (B) of the Tax Code of 1997, a
Q: Is the assignment and delivery of the developed units
benefactor of a person with disability whose civil status is
to joint owners in a Build-To-Own (BTO) scheme
single shall be entitled to the new personal exemption
subject to capital gains tax?
of P 50,000 just like any other individual taxpayer,
In a BTO, the developer makes it appear that it merely whether single or married, with or without qualified
manages the construction of the condominium project, dependent, subject to the Transitory Provisions of
and that the funds as contributed by the individual Revenue Regulations No. 10-2008.
investors are pooled in a bank with the developer, as
On the other hand, the benefactor of a person with
project manager, receiving a project management fee, In
disability may only be entitled to claim the new additional
that scheme, it is claimed that the assignment and delivery
exemption of P 25,000 per qualified dependent child (not
to the individual investors of the developed units is not
exceeding four) if the person with disability is his/her
taxable as it is merely a transfer of property held in trust
legitimate, illegitimate or legally-adopted child, whether
by the Trustee for the individual trustors. Previous BIR
minor or of legal age. In other words, for purposes of
rulings have exempted the assignment from capital gains
additional exemption, the benefactor will not be entitled
tax. In In BIR RULING DA-455-07 [AUGUST 17,
to the additional exemption unless that benefactor is a
2007], the conveyance of the condominium units by the
parent of the person with disability.
trustee to the individual trustors pursuant to the terms of
the BTO contract and without consideration was held not RR 7-2010 sc
subject to capital gains tax. However, in RMC NO. 055-
10 [JUNE 28, 2010], the CIR nullified all BIR Rulings A benefactor of a Senior Citizen shall be entitled to claim
exempting the scheme from capital gains tax. Thus, the the basic personal exemption of P 50,000.00, which is the
present rule is that the assignment and delivery in BTO amount of basic personal exemption allowed under RA
schemes are subject to capital gains tax. No. 9504 for all taxpayers required to file ITRs. A Senior
Citizen who is not gainfully employed, living with and
dependent upon his benefactor for chief support, although
treated as dependent under the Act, will not entitle the
OCWs/Senior Citizens/ PWDs
benefactor to claim the additional personal exemption of
Q: Is the 20% sales discount granted by establishments P 25,000.00. The entitlement to claim the additional
to qualified senior citizens considered a tax credit or a personal exemption per dependent (not exceeding four) is
tax deduction? allowable only to individual taxpayers with a qualified
dependent child or children, subject to the conditions set
In M.E. HOLDING CORPORATION V. COURT OF
forth under Section 35(B) of the Tax Code, as amended.
APPEALS [MARCH 3, 2008], the Supreme Court noted
If required to file an ITR, the benefactor shall state therein
that under RA 9257 or the Expanded Senior Citizens Act
the name, birthday and OSCA ID number of the
of 2003, starting taxable year 2004, the 20% sales
dependent Senior Citizen.
discount shall be treated as a tax deduction and no longer
as a tax credit. RR 1-2011 ocw
Q: Can a benefactor of a PWD whose civil status is An OCW or OFW's income arising out of his overseas
single avail of the head of family status to be entitled employment is exempt from Income Tax. However, if an
to personal exemption? OCW or OFW has income earnings from business
activities or properties within the Philippines, such
It is no longer necessary. RA 9442, which amends RA
income earnings are subject to Philippine Income Tax.
7277 or the Magna Carta for Persons with Disability,
provides that a benefactor of a PWD whose civil status is
single shall be considered as head of family and, as
such, shall be entitled to personal exemption. However,
the terms head of family and his/her dependents for
purposes of availing personal exemption have been
eliminated in view of an amendment brought about by RA
9504. The rule is that individual taxpayers regardless of
status are entitled to the personal exemption. [see RR NO.
001-09 [DECEMBER 9, 2008].

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Personal and Additional Exemptions/ PERA exemption in the amount equal to the exemptions allowed
in the income tax law in the country of which he is a
SEC. 35. Allowance of Personal Exemption for subject - or citizen, to citizens of the Philippines not
Individual Taxpayer. -
residing in such country, not to exceed the amount fixed
(A) In General. - For purposes of determining the tax in this Section as exemption for citizens or resident of the
provided in Section 24 (A) of this Title, there shall be Philippines: Provided, That said nonresident alien should
allowed a basic personal exemption amounting to Fifty file a true and accurate return of the total income received
Thousand Pesos (P50,000) for each individual by him from all sources in the Philippines, as required by
taxpayer. [33] this Title.

In the case of married individuals where only one of the Q: Which kinds of individual taxpayers can avail of
spouses is deriving gross income, only such spouse shall personal and additional exemptions?
be allowed the personal exemption.
Citizens and resident aliens are allowed personal and
(B) Additional Exemption for Dependents. - There additional exemptions; nonresident aliens engaged in
shall be allowed an additional exemption of Twenty-five trade or business in the Philippines are entitled to
thousand pesos (P25,000) for each dependent not personal exemptions only by way of reciprocity but not to
exceeding four (4). [34] additional exemptions.86

The additional exemption for dependent shall be claimed Q: How should these exemptions be credited?
by only one of the spouses in the case of married
These exemptions must first be credited against gross
individuals.
compensation income; the excess, if any, can be used to
In the case of legally separated spouses, additional offset taxable net income.
exemptions may be claimed only by the spouse who has
Q: Is a foster child considered a dependent?
custody of the child or children: Provided, That the total
amount of additional exemptions that may be claimed by Yes. RA 10165 or The Foster Care Act of 2012
both shall not exceed the maximum additional amended the NIRC to include a foster child in the term
exemptions herein allowed. dependent. Thus, foster parents may claim an addition
exemption of P25,000 for each dependent (which includes
For purposes of this Subsection, a 'dependent' means a
the foster child) not exceeding 4.
legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such Q: What is the rule for spouses and legally separated
dependent is not more than twenty-one (21) years of age, spouses?
unmarried and not gainfully employed or if such
The additional exemption for dependents can be claimed
dependent, regardless of age, is incapable of self-support
by only one of the spouses. In the case of legally separated
because of mental or physical defect.
spouses, additional exemptions may be claimed only by
(C) Change of Status. - If the taxpayer marries or should the spouse who has custody of the child or children.
have additional dependent(s) as defined above during the
taxable year, the taxpayer may claim the corresponding Q: What is the status-at-the-end-of-the-year rule or
additional exemption, as the case may be, in full for such the change-of-status rule with respect to personal and
year. additional exemptions?
This means that whatever is the status of the taxpayer at
If the taxpayer dies during the taxable year, his estate may
the end of the calendar year shall be used for purposes of
still claim the personal and additional exemptions for
determining his personal and additional exemptions.
himself and his dependent(s) as if he died at the close of
such year. Q: What is the rationale behind personal and additional
If the spouse or any of the dependents dies or if any of exemptions under the Tax Code?
such dependents marries, becomes twenty-one (21) years Exemptions are fixed at arbitrary amounts intended to
old or becomes gainfully employed during the taxable substitute for the disallowance of personal or living
year, the taxpayer may still claim the same exemptions as expenses as deductible items from the taxable income of
if the spouse or any of the dependents died, or as if such certain individual taxpayers. The amounts represent
dependents married, became twenty-one (21) years old or roughly the equivalent of the taxpayers minimum
became gainfully employed at the close of such year. subsistence and those of his dependents.(see
PANSACOLA V. CIR [NOVEMBER 16, 2006])
(D) Personal Exemption Allowable to Nonresident
Alien Individual. - A nonresident alien individual As held in PANSACOLA V. CIR [NOVEMBER 16,
engaged in trade, business or in the exercise of a 2006], what the law should consider for the purpose of
profession in the Philippines shall be entitled to a personal determining the tax due from an individual taxpayer is his
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status and qualified dependents at the close of the taxable Partnerships


year and not at the time the return is filed and the tax due
thereon is paid. SEC. 26. Tax Liability of Members of General
Professional Partnerships. - A general professional
A change of status of the taxpayer during the taxable year partnership as such shall not be subject to the income tax
generally benefits, but does not prejudice him. imposed under this Chapter. Persons engaging in business
as partners in a general professional partnership shall be
In the following cases, the rule is applied as follows:
liable for income tax only in their separate and individual
1. If the taxpayer marries or should have additional capacities.
dependents during the taxable year, he may claim the
For purposes of computing the distributive share of the
corresponding additional exemption in full for such year.
partners, the net income of the partnership shall be
2. If the taxpayer dies during the taxable year, his estate computed in the same manner as a corporation.
may still claim the personal and additional exemptions for
Each partner shall report as gross income his distributive
himself and his dependents as if he died at the close of
share, actually or constructively received, in the net
such year.
income of the partnership.
3. If the spouse or any of the dependents dies or if any
SEC. 73 (D) Net Income of a Partnership Deemed
such dependent marries, becomes 21 years old or becomes
Constructively Received by Partners. - The taxable
gainfully employed during the taxable year, the taxpayer
income declared by a partnership for a taxable year which
may still claim the same exemptions as if the spouse or
is subject to tax under Section 27 (A) of this Code, after
any of the dependents died, or if such dependents married,
deducting the corporate income tax imposed therein, shall
became 21 years old or became gainfully employed at the
be deemed to have been actually or constructively
close of such year.
received by the partners in the same taxable year and shall
Benefits of PERA be taxed to them in their individual capacity, whether
actually distributed or not.
Q: Is income earned by a contributor from the
investments and reinvestments of his Personal Equity Q: What are the rules in the determination of the
and Retirement Act (PERA) assets subject to income amount of OSD of GPPs?
tax? RR 2-2010 [FEBRUARY 18, 2010] amended Sections 6
No. As provided in RR No 017-11 [OCTOBER 27, to 7 of RR 16-2008 with respect to the determination of
2011], implementing the tax provisions of RA 9505, the OSD of GPPs.
otherwise known as the Personal Equity and Retirement
A GPP is not subject to income tax but the partners shall
Account (PERA) Act of 2008, investment income of a
be liable to pay income tax on their separate and
contributor consisting of all income earned from the
individual capabilities for their respective distributive
investments and reinvestments of his PERA assets in the
share in the net income of the GPP.
maximum amount allowed shall be exempt from the
following taxes as may be applicable: For purposes of computing the distributive share of the
partners, the net income of the GPP shall be computed in
1. Final withholding tax on interest from any currency
the same manner as a corporation. The GPP may claim
bank deposit, yield or any other monetary benefit from
itemized deductions or in lieu thereof may opt to avail of
deposit substitutes and from trust funds and similar
the OSD allowed to corporations. The net income
arrangements, including a depository bank under the
determined by either claiming the itemized deductions or
EFCDS;
OSD from the GPPs gross income is the distributable net
2. Capital gains tax on the sale, exchange, retirement or income from which the share of each partner is
maturity of bonds, debentures or other certificates of determined.
indebtedness;
If the GPP availed of the itemized deductions in
3. 10% tax on cash and/or property dividends actually or computing its net income, a partner may still claim
constructively received from a domestic corporation, itemized deductions from his share in the net income of
including a mutual fund company; the partnership.

4. Capital gains tax on the sale, barter, exchange, or other However, if the GPP availed of the OSD in computing its
disposition of shares of stock in a domestic corporation; net income, the partner can no longer claim further
deduction from his share in the said net income.
5. Regular income tax.

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Corporations other depository banks under the expanded system, shall


be subject to a final tax at the rate of ten percent (10%). [20]
Domestic Corporations
Any income of nonresidents, whether individuals or
SEC. 27. Rates of Income tax on Domestic corporations, from transactions with depository banks
Corporations. -
under the expanded system shall be exempt from income
(A) In General. - Except as otherwise provided in this tax.
Code, an income tax of thirty-five percent (35%) is hereby
(4) Intercorporate Dividends. - Dividends received by a
imposed upon the taxable income derived during each
domestic corporation from another domestic corporation
taxable year from all sources within and without the
shall not be subject to tax.
Philippines by every corporation, as defined in Section
22(B) of this Code and taxable under this Title as a (5) Capital Gains Realized from the Sale, Exchange or
corporation, organized in, or existing under the laws of Disposition of Lands and/or Buildings. - Afinal tax of
the Philippines: Provided, That effective January 1, 2009, six percent (6%) is hereby imposed on the gain presumed
the rate of income tax shall be thirty percent (30%). to have been realized on the sale, exchange or disposition
of lands and/or buildings which are not actually used in
(D) Rates of Tax on Certain Passive Incomes. -
the business of a corporation and are treated as capital
(1) Interest from Deposits and Yield or any other assets, based on the gross selling price of fair market value
Monetary Benefit from Deposit Substitutes and from as determined in accordance with Section 6(E) of this
Trust Funds and Similar Arrangements, and Code, whichever is higher, of such lands and/or buildings.
Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations,
and royalties, derived from sources within the
Philippines: Provided, however, That interest income
derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at the rates
prescribed below shall be imposed on net capital gains
realized during the taxable year from the sale, exchange
or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the
stock exchange:

Not over P 100,000 5%


Amount in excess of P 100,000 10%

(3) Tax on Income Derived under the Expanded


Foreign Currency Deposit System. - Income derived by
a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with
nonresidents, offshore banking units in the Philippines,
local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency
deposit system shall be exempt from all taxes, except net
income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest
income from foreign currency loans granted by such
depository banks under said expanded system to residents
other than offshore banking units in the Philippines or
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Resident Foreign Corporation to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine
SEC. 28. Rates of Income Tax on Foreign Billings.
Corporations. - [21]
(b) International Shipping. - 'Gross Philippine
(A) Tax on Resident Foreign Corporations. -
Billings' means gross revenue whether for passenger,
(1) In General. - Except as otherwise provided in this cargo or mail originating from the Philippines up to final
Code, a corporation organized, authorized, or existing destination, regardless of the place of sale or payments of
under the laws of any foreign country, engaged in trade or the passage or freight documents.
business within the Philippines, shall be subject to an
Provided, That international carriers doing business in the
income tax equivalent to thirty-five percent (35%) of the
Philippines may avail of a preferential rate or exemption
taxable income derived in the preceding taxable year from
from the tax herein imposed on their gross revenue
all sources within the Philippines: Provided, That
derived from the carriage of persons and their excess
effective January 1, 2009, the rate of income tax shall be
baggage on the basis of an applicable tax treaty or
thirty percent (30%). [22]
international agreement to which the Philippines is a
In the case of corporations adopting the fiscal-year signatory or on the basis of reciprocity such that an
accounting period, the taxable income shall be computed international carrier, whose home country grants income
without regard to the specific date when sales, purchases tax exemption to Philippine carriers, shall likewise be
and other transactions occur. Their income and expenses exempt from the tax imposed under this provision.
for the fiscal year shall be deemed to have been earned
RR 15-2002
and spent equally for each month of the period.
(a) International air carrier shall refer to a foreign
The corporate income tax rate shall be applied on the
airline corporation doing business in the Philippines
amount computed by multiplying the number of months
having been granted landing rights in any Philippine port
covered by the new rate within the fiscal year by the
to perform international air transportation
taxable income of the corporation for the period, divided
services/activities or flight operations anywhere in the
by twelve. [23]
world.
Provided, however, That a resident foreign corporation
(b) Off-line carrier shall refer to an international air
shall be granted the option to be taxed at fifteen percent
carrier having no flight operations to and from the
(15%) on gross income under the same conditions, as
Philippines.
provided in Section 27 (A).
(c) On-line carrier shall refer to an international air
(2) Minimum Corporate Income Tax on Resident carrier having or maintaining flight operations to and
Foreign Corporations. - A minimum corporate income
from the Philippines.
tax of two percent (2%) of gross income, as prescribed
under Section 27 (E) of this Code, shall be imposed, under AIR NEW ZEALAND V CIR
the same conditions, on a resident foreign corporation
ANZ is a foreign corporation and is an off-line
taxable under paragraph (1) of this Subsection.
international carrier having no landing rights in the
(3) International Carrier. - An international carrier Philippines. It is not registered in the SEC and have no
doing business in the Philippines shall pay a tax of two license to do business in the Phils. However, it has a
and one-half percent (2 1/2 %) on its 'Gross Philippine general sales agent in the Phils which sells passage
Billings' as defined hereunder: documents for compensation or commission covering off-
line flights of ANZ.
(a) International Air Carrier. - 'Gross Philippine
Billings' refers to the amount of gross revenue derived BIR taxed ANZ at the rate of 32%.
from carriage of persons, excess baggage, cargo, and mail
It claimed refund on the ground that pursuant to RP-NZ
originating from the Philippines in a continuous and
Tax Trady on profits derived from sources within the
uninterrupted flight, irrespective of the place of sale or
Phils. It shall only be liable at the rate of 1 %
issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged CTA: We affirm the Court in Division's ruling that since
and/or indorsed to another international airline form part petitioner admitted that it sells passage documents .in the
of the Gross Philippine Billings if the passenger boards a Philippines through its sales agent, Aerotel, and that it
plane in a port or point in the Philippines: Provided, derives revenues from the conduct of its business activity
further, That for a flight which originates from the regularly pursued within the Philippines, petitioner is a
Philippines, but transshipment of passenger takes place at resident foreign corporation engaged in trade or business
any part outside the Philippines on another airline, only in the Philippines and must be subject to income tax.
the aliquot portion of the cost of the ticket corresponding

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Considering, therefore, that petitioner is a resident foreign (4) Offshore Banking Units. - The provisions of any law
corporation doing business in the Philippines, and to the contrary notwithstanding, income derived by
applying Article 8(2) of the RP-New Zealand Tax Treaty, offshore banking units authorized by the Bangko Sentral
it shall be subject to an income tax equivalent to 1 1/2 ng Pilipinas (BSP), from foreign currency transactions
%on the profits derived from sources within the with nonresidents, other offshore banking units, local
Philippines. commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas
To reiterate, the absence of flight operations to and from
(BSP) to transact business with offshore banking units
the Philippines is not determinative of the source of
shall be exempt from all taxes except net income from
income for purposes of ascertaining income tax liability.
such transactions as may be specified by the Secretary of
It is sufficient that the income is derived from activity
Finance, upon recommendation of the Monetary Board
within the Philippine territory. Therefore, petitioner is a
which shall be subject to the regular income tax payable
resident foreign corporation doing business in the
by banks: Provided, however, That any interest income
Philippines within the purview of our tax law and the
derived from foreign currency loans granted to residents
income earned from its flight operations outside the
other than offshore banking units or local commercial
Philippines is subject to income tax.
banks, including local, branches of foreign banks that may
CIR V BOAC be authorized by the BSP to transact business with
offshore banking units, shall be subject only to a final tax
Q: ABC Airways is a foreign airline.62 While it did not at the rate of ten percent (10%). [24]
carry passengers and/or cargo to or from the
Philippines, ABC maintains a general sales agent of its Any income of nonresidents, whether individuals or
tickets in the Philippines. Is the sale of the tickets taxable corporations, from transactions with said offshore
as income from sources within the Philippines? banking units shall be exempt from income tax.

Yes. For the source of income to be considered as coming RR 14-2012


from the Philippines, it is sufficient that the income is
SECTION 5. Tax Treatment of Interest Income
derived from activity within the Philippines. In ABCs
Derived from a Depository Bank under the Expanded
case, the sale of tickets in the Philippines is the activity
Foreign Currency Deposit System.
that produces the income. The tickets exchanged hands
here in the country and the payments for fares were also Consistent with the provisions of Sections 24(B)(1),
made with Philippine currency. The site of the source of 27(D)(1), 27(D)(3), 28(A)(7)(a), and 28(A)(7)(b) of the
payments is the Philippines. The absence of flight NIRC of 1997, as amended, the tax treatment of interest
operations to and from the Philippines is not income derived from a depository bank under the
determinative of the source of income/site of income Expanded Foreign Currency Deposit System, is as
taxation for the test of taxability is the source. follows:
It is our considered opinion that BOAC is a resident 1. Subject to a Final Withholding Tax (FWT) of seven and
foreign corporation. There is no specific criterion as to one-half percent(7.5%) if the interest income is received
what constitutes "doing" or "engaging in" or "transacting" by:
business. Each case must be judged in the light of its
a. citizens;
peculiar environmental circumstances. The term implies
b. resident aliens;
a continuity of commercial dealings and arrangements,
c. domestic corporations; and
and contemplates, to that extent, the performance of acts d. resident foreign corporation
or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial
gain or for the purpose and object of the business 2. Any income of nonresidents, whether individuals or
organization. "In order that a foreign corporation may be corporations, from transactions with depository banks
regarded as doing business within a State, there must be under the expanded system shall be exempt from income
continuity of conduct and intention to establish a tax;
continuous business, such as the appointment of a local
3. If a bank account is jointly in the name of a non-resident
agent, and not one of a temporary character.
citizen such as an overseas contract worker, or a Filipino
UNITED AIRLINES V CIR seaman, and his/her spouse or dependent who is a resident
in the Philippines, fifty percent (50%) of the interest
A taxpayer may not offset taxes due from the claims that income from such bank deposit shall be treated as exempt
he may have against the government. Taxes cannot be the while the other fifty percent (50%) shall be subject to a
subject of compensation because the government and Final Withholding Tax (FWT) of seven and one-half
taxpayer are not mutually creditors and debtors of each percent (7.5%);
other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
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4. Income derived by a depository bank under the paid in the same manner as provided in Sections 57 and
expanded foreign currency deposit system from foreign 58 of this Code: Provided, that interests, dividends, rents,
currency transactions with nonresidents, offshore banking royalties, including remuneration for technical services,
units in the Philippines, local commercial banks including salaries, wages premiums, annuities, emoluments or other
branches of foreign banks that may be authorized by the fixed or determinable annual, periodic or casual gains,
Bangko Sentral ng Pilipinas profits, income and capital gains received by a foreign
corporation during each taxable year from all sources
(BSP) to transact business with foreign currency deposit
within the Philippines shall not be treated as branch
system units and other depository banks under the
profits unless the same are effectively connected with the
expanded foreign currency deposit system shall be
conduct of its trade or business in the Philippines.
exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of BANK OF AMERICA V CA
Finance, upon recommendation by the Monetary Board to
Petitioner Bank of America NT & SA argues that the 15%
be subject to the regular income tax payable by banks;
branch profit remittance tax on the basis of the above
5. Interest income from foreign currency loans granted by provision should be assessed on the amount actually
such depository banks under said expanded system to remitted abroad, which is to say that the 15% profit
residents other than offshore banking units in the remittance tax itself should not form part of the tax base.
Philippines or other depository banks under the expanded Respondent Commissioner of Internal Revenue,
system shall be subject to a final tax at the rate of ten contending otherwise, holds the position that, in
percent (10%). computing the 15% remittance tax, the tax should be
inclusive of the sum deemed remitted.
SECTION 6. Tax Treatment of Interest Income
Derived from Offshore Banking Units. COURT: The statute employs "Any profit remitted
abroad by a branch to its head office shall be subject to a
Consistent with the provision of Section 28(A)(4) of the
tax of fifteen per cent (15%)" without more. Nowhere
NIRC of 1997, as amended, the tax treatment of interest
is there said of "base on the total amount actually applied
income derived from offshore banking units are as
for by the branch with the Central Bank of the Philippines
follows:
as profit to be remitted abroad, which shall be collected
1. Income derived by offshore banking units authorized and paid as provided in Sections 53 and 54 of this Code."
by the Bangko Sentral ng Pilipinas (BSP), from foreign Where the law does not qualify that the tax is imposed and
currency transactions with nonresidents, other offshore collected at source based on profit to be remitted abroad,
banking units, local commercial banks, including that qualification should not be read into the law.
branches of foreign banks that may be authorized by the
COMPANIA GEN. DE TOBACCOS DE FILIPINAS
Bangko Sentral ng Pilipinas(BSP) to transact business
V CIR
with offshore banking units shall be exempt from all taxes
except net income from such transactions as may be Petitioner, a foreign cor poration duly licensed by
specified by the Secretary of Finance, upon Philippine laws to engage in business through its branch
recommendation of the Monetary Board which shall be office, seeking a refund representing the alleged o verpaid
subject to the regular income tax payable by banks; branch profit remittance taxes during the years 1980 to
1985.
2. Interest income derived from foreign currency loans
granted to residents other than offshore banking units or COURT: RMC 8-82: Having found that the questioned
local commercial banks, including local branches of taxes were paid the applicable ruling is revenue
foreign banks that may be authorized by the BSP to Memorandum Circular No. 8 - 82, "then what should
transact business with offshore banking units, shall be apply as taxable base in computing the 15X branch profit
subject only to a Final Withholding Tax (FWT) at the rate remittance tax is the amount applied for with the Central
of ten percent (10%); Bank as profit to be remitted abroad.
3. Any income of nonresidents, whether individuals or With regard to the passive income already subjected to the
corporations, from transactions with said offshore final tax, That interests, dividends, rents, royalties,
banking units shall be exempt from income tax. including remunerations for technical services, salaries,
wages, premiums, annuities, emoluments or other fixed or
(5) Tax on Branch Profits Remittances. - Any profit
determinable annual, periodical or casual gains, profits,
remitted by a branch to its head office shall be subject to
income and capital gains received by a foreign
a tax of fifteen (15%) which shall be based on the total
corporation during each taxable year from all sources
profits applied or earmarked for remittance without any
within the Philippines shall not be considered as branch
deduction for the tax component thereof (except those
profits unless the same are effectively connected with the
activities which are registered with the Philippine
conduct of the trade or business in the Philippines.
Economic Zone Authority). The tax shall be collected and
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ITAD BIR RULING 18-09 (b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their
Requesting confirmation that branch profits remitted by
taxable income.
Det Norske Veritas AS Philippine Branch (Det Norske
Philippine Branch) to Det Norske Veritas AS (Det Section 22: (DD) The term 'regional or area
Norske) 2 are exempt from the 15 percent branch profits headquarters' shall mean a branch established in the
remittance tax (BPRT) pursuant to paragraphs 1 and 2, Philippines by multinational companies and which
Article 25 of the Convention between the Republic of the headquarters do not earn or derive income from the
Philippines and the Kingdom of Norway for the Philippines and which act as supervisory,
Avoidance of Double Taxation and the Prevention of communications and coordinating center for their
Fiscal Evasion with Respect to Taxes on Income and on affiliates, subsidiaries, or branches in the Asia-Pacific
Capital (Philippines-Norway tax treaty). Region and other foreign markets.
In fine, ITAD is of the opinion and so holds that: (EE) The term 'regional operating headquarters' shall
mean a branch established in the Philippines by
1. The Philippines-Norway tax treaty recognizes the
multinational companies which are engaged in any of the
BPRT and gives way to its imposition as paragraph 7,
following services: general administration and planning;
Article 10 of the tax treaty provides that branch profits
business planning and coordination; sourcing and
remitted by a branch office of a Norwegian corporation in
procurement of raw materials and components; corporate
the Philippines to its head office in Norway may be
finance advisory services; marketing control and sales
subject to an additional tax like the BPRT at a rate not to
promotion; training and personnel management; logistic
exceed 15 percent.
services; research and development services and product
2. Paragraph 1, Article 25 of the Philippines-Norway tax development; technical support and maintenance; data
treaty does not provide a legal basis for the non- processing and communications; and business
imposition of the BPRT. The principle of equal treatment development.
intended by this paragraph is limited to nationals of the
RR 11-2010
Philippines and of Norway who are both residents of the
Philippines. While Det Norske is a national of Norway, it Filipinos employed by ROHQs or RHQs in a managerial
is not, however, a resident of the Philippines under or technical position shall have the option to be taxed at
paragraph 1, Article 4 of the tax treaty. either 15% of their gross income or at the regular Income
Tax rate on taxable compensation income in accordance
3. Paragraph 2, Article 25 of the Philippines-Norway tax
with Section 24 of the Tax Code, if the employer is
treaty lays down a principle of equal treatment between a
governed by Book III of Executive Order (EO) No. 226,
permanent establishment of a Norwegian enterprise in the
as amended by Republic Act (RA) No. 8756. All other
Philippines and a domestic enterprise. Similar with the
employees are considered as regular employees who are
United States, the Philippines is of the view that as long
subject to the regular Income Tax rate on their taxable
as the aggregate taxes imposed by the Philippines on a
compensation income.
permanent establishment are not greater than the taxes
imposed by the Philippines on a domestic enterprise, it Filipinos exercising the option to be taxed at 15%
cannot be considered that the permanent establishment is preferential rate for occupying the same managerial or
treated less favorably in the Philippines than the domestic technical position as that of an alien employed in an
enterprise. In this connection, while the BPRT is imposed ROHQ or RHQ must meet all the following requirements:
only on permanent establishments and not on domestic
a. Position and Function Test - The employee must
enterprises, the burden of this tax upon a permanent
occupy a managerial position or technical position and
establishment is, however, mitigated by the current tax
must actually be exercising such managerial or technical
regimes which greatly favor the permanent establishment
functions pertaining to said position;
over the domestic enterprise.
b. Compensation Threshold Test - In order to be
In view of the foregoing, your request for confirmation
considered a managerial or technical employee for
that the branch profits remitted by Det Norske Philippine
Income Tax purposes, the employee must have received,
Branch (the branch office of Det Norske in the
or is due to receive under a contract of employment a
Philippines) to Det Norske (the Norwegian corporation)
gross annual taxable compensation of at least PhP
is NOT exempt from the 15 percent BPRT.
975,000.00 (whether or not this is actually received);
(6) Regional or Area Headquarters and Regional Provided that, a change in compensation as a consequence
Operating Headquarters of Multinational of which, such employee subsequently receiving less than
Companies. - the compensation threshold stated in this section shall, for
the calendar year when the change becomes effective,
(a) Regional or area headquarters as defined in Section
result in the employee being subject to the regular Income
22(DD) shall not be subject to income tax.
Tax rate.
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Beginning December 31, 2013 and on December 31 every under the expanded system shall be subject to a final tax
three years thereafter, the compensation threshold shall be at the rate of ten percent (10%). [25]
adjusted to its present value using the Philippine
Any income of nonresidents, whether individuals or
Consumer Price Index (CPI), as published by the National
corporations, from transactions with depository banks
Statistics Office. The adjusted compensation shall take
under the expanded system shall be exempt from income
effect not earlier than the first day of the calendar month
tax.
immediately following the issuance of a corresponding
RMC on the matter. (c) Capital Gains from Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at the rates
c. Exclusivity Test The Filipino managerial or technical
prescribed below is hereby imposed upon the net capital
employee must be exclusively working for the RHQ or
gains realized during the taxable year from the sale,
ROHQ as a regular employee and not just a consultant or
barter, exchange or other disposition of shares of stock in
contractual personnel. Exclusivity means having just one
a domestic corporation except shares sold or disposed of
employer at a time.
through the stock exchange:
For purposes of determining the compensation threshold
under these Regulations, gross compensation shall not Not over P 100,000 5%
include retirement and/or separation pay/benefits On any amount in excess of 10%
(whether or not taxable), as well as items considered as de P 100,000
minimis benefits. Provided, that the foregoing shall be
(d) Intercorporate Dividends. - Dividends received by a
considered in determining the Income Tax due at the time
resident foreign corporation from a domestic corporation
of the employee's retirement or separation.
liable to tax under this Code shall not be subject to tax
(7) Tax on Certain Incomes Received by a Resident under this Title.
Foreign Corporation. -
(a) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and
Royalties. - Interest from any currency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements
and royalties derived from sources within the Philippines
shall be subject to a final income tax at the rate of twenty
percent (20%) of such interest: Provided, however, That
interest income derived by a resident foreign corporation
from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.
(b) Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency
deposit system from foreign currency transactions with
nonresidents, offshore banking units in the Philippines,
local commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency
deposit system units, and other depository banks under the
expanded foreign currency deposit system shall be
exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to
be subject to the regular income tax payable by banks:
Provided, however, That interest income from foreign
currency loans granted by such depository banks under
said expanded system to residents other than offshore
banking units in the Philippines or other depository banks

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Non-resident Foreign Corporation from sources within the Philippines as those allowed to
their German counterparts. Further, the RP-Germany Tax
SECTION 28 (B) Tax on Nonresident Foreign Treaty allows for crediting against German income and
Corporation. -
corporate tax of 20% of the gross amount of royalties paid
(1) In General. - Except as otherwise provided in this under the law of the Philippines. On the other hand, the
Code, a foreign corporation not engaged in trade or RP-US Tax Treaty does not provide for the similar
business in the Philippines shall pay a tax equal to thirty- crediting of 20% of the gross amount of royalties paid.
five percent (35%) of the gross income received during The similarity in the circumstances of payment of taxes is
each taxable year from all sources within the Philippines, a condition for the enjoyment of most favored nation
such as interests, dividends, rents, royalties, salaries, treatment precisely to underscore the need for equality of
premiums (except reinsurance premiums), annuities, treatment. since the RP-US Tax Treaty does not give a
emoluments or other fixed or determinable annual, matching tax credit of 20 percent for the taxes paid to the
periodic or casual gains, profits and income, and capital Philippines on royalties as allowed under the RP-West
gains, except capital gains subject to tax under Germany Tax Treaty, XYZ cannot be deemed entitled to
subparagraph 5 ( c ): Provided, That effective January 1, the 10 percent rate granted under the latter treaty for the
2009, the rate of income tax shall be thirty percent (30%). reason that there is no payment of taxes on royalties under
similar circumstances.
(2) Nonresident Cinematographic Film Owner, Lessor
or Distributor. - A cinematographic film owner, lessor, Q: ABC Corporation, a foreign corporation in Japan
or distributor shall pay a tax of twenty-five percent (25%) and licensed to do engage in business in the Philippines
of its gross income from all sources within the (hence, a resident foreign corporation) has equity
Philippines. investments in XYZ Company, a domestic corporation.
XYZ declared and paid cash dividends to ABC. XYZ
(3) Nonresident Owner or Lessor of Vessels Chartered directly remitted the cash dividends to ABCs head office
by Philippine Nationals. - A nonresident owner or lessor in Japan (hence, a non-resident foreign corporation) net
of vessels shall be subject to a tax of four and one-half not only of the 10% final dividend tax but also of the
percent (4 1/2%) of gross rentals, lease or charter fees from withheld 15% profit remittance tax based on the
leases or charters to Filipino citizens or corporations, as remittable amount after deducting the final withholding
approved by the Maritime Industry Authority.
tax of 10%. ABC argues that following the principal-
(4) Nonresident Owner or Lessor of Aircraft, agent relationship theory, ABC is a resident foreign
Machineries and Other Equipment. - Rentals, charters corporation subject only to the 10 % intercorporate final
and other fees derived by a nonresident lessor of aircraft, tax on dividends received from a domestic corporation.
machineries and other equipment shall be subject to a tax Is ABC correct?
of seven and one-half percent (7 1/2%) of gross rentals or
fees. No. The general rule that a foreign corporation is the same
juridical entity as its branch office in the Philippines
Q: XYZ Corporation is a domestic corporation which cannot apply here. This rule is based on the premise that
entered into a license agreement with ABC Corporation, the business of the foreign corporation is conducted
a non-resident foreign corporation based in the US through its branch office, following the principal agent
pursuant to which the former was granted the right to relationship theory. It is understood that the branch
use trademark, patents and technology owned by the becomes its agent here. So that when the foreign
latter. For such use, XYZ paid royalties to ABC and corporation transacts business in the Philippines
subjected the same to the 25% withholding tax on royalty independently of its branch, the principal-agent
payments. XYZ claimed for a refund and argues that the relationship is set aside. The transaction becomes one of
withholding tax should only be 10% pursuant to the the foreign corporation, not of the branch. Consequently,
most-favoured nation clause of the RP-US Tax Treaty the taxpayer is the foreign corporation, not the branch or
in relation to the RP-West Germany Tax Treaty. Is the resident foreign corporation. Corollarily, if the
XYZs contention correct? business transaction is conducted through the branch
No. In CIR V. S.C. JOHNSON AND SONS, INC. office, the latter becomes the taxpayer, and not the foreign
[JUNE 25, 1999], the Supreme Court held that the corporation. (see MARUBENI CORPORATION VS.
concessional tax rate of 10% provided for in the RP- CIR [SEPTEMBER 14, 1989]).
Germany Tax Treaty could not apply to taxes imposed Q: XYZ is a foreign shipping company. It does not have
upon royalties in the RP-US Tax Treaty since the two a branch office in the Philippines and it made only two
taxes imposed under the two tax treaties are not paid calls in Philippine ports. What kind of foreign
under similar circumstances and do not contain similar corporation is XYZ?
provisions on tax crediting. It is not proved that the RP-
US Tax Treaty grants similar tax reliefs to residents of the XYZ is a foreign corporation not authorized or licensed
US in respect of the taxes imposable upon royalties earned to do business in the Philippines. In order that a foreign
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corporation may be considered engaged in trade or been paid in the Philippines equivalent to 15%, which
business, its business transactions must be continuous. represents the different between the regular income tax of
A casual business activity in the Philippines by a 30% and the 15% tax on dividends.
foreign corporation does not amount to engaging in
Q: Is it required that the foreign country must give a
trade or business in the Philippines for income tax
purposes. Accordingly, its taxable income for purposes deemed paid tax credit for the dividend tax waived by
of our income tax law consists of its gross income from the Philippines making applicable the preferred
all sources within the Philippines. (see N.V. REEDERIJ dividend tax rate of 15%?
AMSTERDAM VS. CIR [JUNE 23, 1988]) As ruled in CIR V. PROCTER & GAMBLE
PHILIPPINES [DECEMBER 2, 1999], the Tax Code
does not require that the foreign countrys tax laws
(5) Tax on Certain Incomes Received by a Nonresident deemed the parent-corporation to have paid the dividend
Foreign Corporation. - tax waived by the Philippines. The Code only requires
that the foreign country shall allow the corporation a
(a) Interest on Foreign Loans. - A final withholding tax
deemed paid tax credit in an amount equivalent to the
at the rate of twenty percent (20%) is hereby imposed on
percentage points waived by the Philippines.
the amount of interest on foreign loans contracted on or
after August 1, 1986; IN SHORT:
(b) Intercorporate Dividends. - A final withholding tax In CIR V. PROCTER & GAMBLE PHILIPPINES
at the rate of fifteen percent (15%) is hereby imposed on [DECEMBER 2, 1999], concluded that if the country of
the amount of cash and/or property dividends received domicile of the recipient corporation allows a credit
from a domestic corporation, which shall be collected and against the tax imposable by it an amount equivalent to
paid as provided in Section 57 (A) of this Code, subject to 20%113 of the dividends remitted from a Philippine
the condition that the country in which the nonresident domestic corporation to corporations domiciled therein,
foreign corporation is domiciled, shall allow a credit the dividends remitted are subject to FWT at the
against the tax due from the nonresident foreign preferential rate of 15% in accordance with Section 28
corporation taxes deemed to have been paid in the (b)(5)(b) of the Tax Code of 1997, as amended.
Philippines equivalent to twenty percent (20%), which
represents the difference between the regular income tax Q: When does a non-resident foreign corporation
of thirty-five percent (35%) and the fifteen percent (15%) become entitled to the 15% FWT?
tax on dividends as provided in this subparagraph: In INTERPUBLIC GROUP OF COMPANIES, INC.
Provided, that effective January 1, 2009, the credit against VS. COMMISSIONER OF INTERNAL REVENUE
the tax due shall be equivalent to fifteen percent (15%), [CTA CASE NO. 7796 DATED FEBRUARY 21,
which represents the difference between the regular 2011], a US Corporation, who owns 30% of the total and
income tax of thirty percent (30%) and the fifteen percent outstanding voting capital stock of a Philippine
(15%) tax on dividends; advertising company filed a claim for the refund or
issuance of a TCC for overpaid FWT on dividends
Q: What is a tax-sparing provision?
withheld and remitted by the Philippine company. In the
As explained in the case of CIR V. PROCTER & administrative claim, the US corporation alleged that, as
GAMBLE PHILIPPINES [DECEMBER 2, 1999]: A a non-resident foreign corporation, it may avail of the
more general way of mitigating the impact of double preferential FWT rate of 15% on cash dividends received
taxation is to recognize the foreign tax as a tax credit. from a domestic corporation during the taxable year 2006.
However, the principal defect of the tax credit system is The CIR, in response, raised the question of whether the
when low tax rates or special tax concessions are granted US corporation is entitled to the FWT at the rate of 15%
in a country for the obvious reason of encouraging foreign or the rate of 20% in accordance with the RP-US Tax
investments. For instance, if the usual tax rate is 35 Treaty. The CTA, applied the ruling in CIR V.
percent but a concession rate accrues to the country of the PROCTER & GAMBLE PHILIPPINES
investor rather than to the investor himself.106 To obviate [DECEMBER 2, 1999].
this, a tax sparing provision may be stipulated. With tax
sparing, taxes exempted or reduced are considered as Q: If the foreign country does not impose a tax on the
having been fully paid. dividend, is the dividend received by the non-resident
foreign corporation subject to the 15% FWT?
In the Philippines, the 15% tax on dividends received by
Yes. In BIR RULING DA-145-07 [MARCH 8, 2007],
a non-resident foreign corporation from a domestic
SM Investments asked for the BIRs opinion on whether
corporation is imposed subject to the condition that the
the cash dividends declared by them to Asia Opportunities
country in which the nonresident foreign corporation is
Limited, a corporation organized and existing under the
domiciled shall allow a credit against the tax due from the
laws of the British Virgin Islands are subject to 15%
nonresident foreign corporation taxes deemed to have
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FWT. The CIR noted that the International Business shall only be submitted to and received by the
Companies Ordinance of the Territory of the British International Tax Affairs Division (ITAD). All rulings
Virgin Islands does not impose any tax on dividends from relative to the application, implementation and
foreign sources, which logically would include those interpretation of the provisions of Philippine tax treaties
received from Philippine corporations. As such, the shall emanate from ITAD.
dividend is subject only to the FWT of 15%.
DEUSTCHE BANK V CIR (pacta sunt servanda)
(c) Capital Gains from Sale of Shares of Stock not
In accordance with Section 28(A)(5)4 of the National
Traded in the Stock Exchange. - A final tax at the rates
Internal Revenue Code (NIRC) of 1997, petitioner
prescribed below is hereby imposed upon the net capital
withheld and remitted to respondent on 21 October 2003
gains realized during the taxable year from the sale,
the amount of PHP 67,688,553.51, which represented the
barter, exchange or other disposition of shares of stock in
fifteen percent (15%) branch profit remittance tax
a domestic corporation, except shares sold, or disposed of
(BPRT) on its regular banking unit (RBU) net income
through the stock exchange:
remitted to Deutsche Bank Germany (DB Germany) for
Not over P 100,000 5% 2002 and prior taxable years.5
On any amount in excess of P 10%
Believing that it made an overpayment of the BPRT,
100,000
petitioner filed with the BIR Large Taxpayers Assessment
Income covered by Tax Treaties and Investigation Division on 4 October 2005 an
administrative claim for refund or issuance of its tax credit
Q: Is there a need for an application for a tax treaty certificate in the total amount of PHP 22,562,851.17. On
relief with the International Tax Affairs Division the same date, petitioner requested from the International
(ITAD)114 in order to avail of the benefit? Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the
FIRST VIEW: Yes. In MIRANT V. CIR [CTA CASE
RP-Germany Tax Treaty.
NO. 7796, FEBRUARY 21, 2011], Mirant made income
payments to VHL enterprises, a US nonresident foreign CTA EN BANC: A ruling from the ITAD of the BIR must
corporation and to WES World, a UK nonresident foreign be secured prior to the availment of a preferential tax rate
corporation. It accordingly withheld the tax due on these under a tax treaty. The court likewise ruled that the 15-
interest payments. Thereafter, Mirant filed for a refund day rule for tax treaty relief application under RMO No.
contending that the two foreign corporations have created 1-2000 must be complied.
permanent establishments in the Philippines and thus
making applicable the lower withholding tax rate under SUPREME COURT:
the RP-UK and RP-US tax treaties. The CTA noted that Under Section 28(A)(5) of the NIRC, any profit remitted
under those treaties, VHL and WES World, while not to its head office shall be subject to a tax of 15% based on
having a fixed place of business have established the total profits applied for or earmarked for remittance
permanent establishments in the Philippines because without any deduction of the tax component. However, by
they have furnished services through their employees or virtue of the RP-Germany Tax Treaty, we are bound to
other personnel for a period or periods the aggregate of extend to a branch in the Philippines, remitting to its head
which is more than 183 days in a twelve-month period." office in Germany, the benefit of a preferential rate
However, under RMO 01-2000, it is provided that the equivalent to 10% BPRT.
availment of a tax treaty provision must be preceded by On the other hand, the BIR issued RMO No. 1-2000,
an application for a tax treaty relief with its International which requires that any availment of the tax treaty relief
Tax Affairs Division (ITAD). A foreign corporation must be preceded by an application with ITAD at least 15
wishing to avail of the benefits of the tax treaty should days before the transaction. The Order was issued to
invoke the provisions of the tax treaty and prove that streamline the processing of the application of tax treaty
indeed the provisions of the tax treaty applies to it, before relief in order to improve efficiency and service to the
the benefits may be extended to such corporation.The taxpayers. Further, it also aims to prevent the
CTA noted that Mirant did not make such application. consequences of an erroneous interpretation and/or
Thus, the CTA finally held that the income payments of application of the treaty provisions (i.e., filing a claim for
Mirant to VHL and WES, which are both non-resident a tax refund/credit for the overpayment of taxes or for
foreign corporations, are subject to the final tax of 32%. deficiency tax liabilities for underpayment).
Note: As provided in RMO 072-10 [AUGUST 25, 2010], Bearing in mind the rationale of tax treaties, the period of
the ITAD is the sole office charged with the receiving of application for the availment of tax treaty relief as
tax treaty relief applications (TTRA). All tax treaty relief required by RMO No. 1-2000 should not operate to divest
applications relative to the implementation and entitlement to the relief as it would constitute a violation
interpretation of the provisions of Philippine tax treaties of the duty required by good faith in complying with a tax
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treaty. The denial of the availment of tax relief for the Final Withholding Tax at Source
failure of a taxpayer to apply within the prescribed period
SEC. 57. Withholding of Tax at Source. -
under the administrative issuance would impair the value
of the tax treaty. At most, the application for a tax treaty (A) Withholding of Final Tax on Certain Incomes. -
relief from the BIR should merely operate to confirm the Subject to rules and regulations the Secretary of Finance
entitlement of the taxpayer to the relief. may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return
The obligation to comply with a tax treaty must take
by certain income payees, the tax imposed or prescribed
precedence over the objective of RMO No. 1-2000.
by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
Simply put, tax treaties are entered into to minimize, if not 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(1),
eliminate the harshness of international juridical double 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5),
taxation, which is why they are also known as double tax 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
treaty or double tax agreements. 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items
"A state that has contracted valid international obligations
of income shall be withheld by payor-corporation and/or
is bound to make in its legislations those modifications
person and paid in the same manner and subject to the
that may be necessary to ensure the fulfillment of the
same conditions as provided in Section 58 of this Code.
obligations undertaken."20 Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are Q: May a withholding agent file a claim for tax refund?
accorded to the parties entitled thereto. The BIR must not
Yes. Generally, the person entitled to claim a tax refund
impose additional requirements that would negate the
is the taxpayer. However, if the taxpayer does not file the
availment of the reliefs provided for under international
claim, the withholding agent may file the same.
agreements. More so, when the RP-Germany Tax Treaty
does not provide for any pre-requisite for the availment of In CIR V. SMART COMMUNICATIONS [AUGUST
the benefits under said agreement. 25, 2010], it was submitted that rule allowing the
withholding agent to file the claim is applicable only
when the withholding agent and the taxpayer are related
Withholding Tax parties. The Supreme Court disagreed and stated that such
relationship is not required. A withholding agent has a
Q: Who are required by law to withhold on income legal right to file a claim for refund. First, he is considered
payments? a taxpayer under the Tax Code as he is personally liable
1. Agents or employees of withholding agents for the withholding tax as well as for deficiency
assessments, surcharges, and penalties, should the amount
2. Persons having control of the payment and claiming the withheld be finally found to be less than the amount that
expense should have been withheld. Second, as an agent of the
3. Payor having control of the payment where payment is taxpayer, his authority to file the income tax return and
made through brokers remit the tax withheld to the government includes the
authority to file a claim for refund and to bring an action
Q: Who is the withholding agent? for recovery of such claim.
The withholding agent is the one who has control, Q: Is the withholding agent who filed the claim for tax
custody, or receipt of the funds that is subject to income refund obliged to remit the same to the taxpayer?
tax and to be withheld and remitted to the BIR. The
withholding agent holds the amount withheld from the Yes. The right of the withholding agent to claim a refund
income of another person in trust for the government until of erroneously or illegally withheld taxes comes with the
paid. responsibility to return the same to the taxpayer. In CIR
V. SMART COMMUNICATIONS [AUGUST 25,
The duty to withhold is different from the duty to pay 2010], the Supreme Court ruled that while the
income tax. The obligation to withhold is imposed upon withholding agent has the right to recover the taxes
the buyer-payor of income but the burden of tax is really erroneously or illegally collected, he nevertheless has the
upon the seller-income earner. obligation to remit the same; otherwise, he would be
unjustly enriching himself at the expense of the principal
The obligation to withhold is compulsory as it makes such
taxpayer from whom the taxes were withheld, and from
withholding agent personally liable for payment of the
whom he derives his legal right to file a claim for refund.
tax. Such liability of the withholding agent is direct and
independent from the liability of the income recipient.

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Creditable Withholding Tax tax withheld is more


than the tax due
(B) Withholding of Creditable Tax at Source. - The
Secretary of Finance may, upon the recommendation of
the Commissioner, require the withholding of a tax on the The payee is not The income recipient is
items of income payable to natural or juridical persons, required to file an still required to file an
residing in the Philippines, by payor-corporation/persons income tax return for income tax return, as
as provided for by law, at the rate of not less than one the particular income. prescribed in Sec. 51
percent (1%) but not more than thirty-two percent (32%) and Sec. 52 of the
thereof, which shall be credited against the income tax NIRC.
liability of the taxpayer for the taxable year.
Q: When does the obligation to withhold arise? Q: Are backwages, allowances and benefits awarded in
a labor dispute subject to withholding tax?
Either when:
Yes. Backwages, allowances, and benefits awarded in a
1. It is paid labor dispute constitute remunerations for services that
2. It becomes payable (i.e. it is legally due, demandable, would have been performed by the employee in the year
or enforceable) when actually received, or during the period of his
dismissal from the service which was subsequently ruled
3. It is accrued as an asset or expense to be illegal. The said back wages, allowances and
benefits are subject to withholding tax on wages. (see
In FILIPINAS SYNTHETIC FIBER
RMC 39-2012 [August 3, 2012])
CORPORATION V. CA [OCTOBER 12, 1999], the
Supreme Court stated that the Tax Code is silent as to Q: Who should withhold the tax due thereon?
when the duty to withhold taxes arises. In this case, to
determine when the duty to withhold the taxes arose, the The employers are mandated to withhold taxes on wages
Court inquired into the nature of accrual method of and this includes those backwages, allowances, and
accounting, the procedure used by the taxpayer, and to the benefits awarded in a labor dispute.
modus vivendi of withholding tax at source come. It noted Q: If the backwages, allowances, disputes are received
that under the accrual basis method of accounting, income by virtue of a labor dispute award through garnishment
is reportable when all the events have occurred that fix the of debts due to the employer and other credits to which
taxpayers right to receive the income and the amount can the employer is entitled to subject to withholding tax?
be determined with reasonable accuracy. Such method is
allowed by law in reporting incomes. In RMC 39-2012 [August 3, 2012], the CIR answered
this question in the affirmative. Persons having control of
the payment of wages or salaries are authorized to deduct
Q: Differentiate final withholding tax (FWT) from and withhold upon such wages or salaries the withholding
creditable withholding tax (CWT). tax due thereon. In this case, the garnishees are the
persons owning debts due to the employer or in
FWT CWT possession or control of credits to which the employer are
entitled. Accordingly, they are in control of the payment
The amount of income Taxes withheld on of backwages, allowances and benefits. Thus, in order to
tax withheld by the certain income ensure the collection of the appropriate withholding taxes
withholding agent is payments are intended on wages, garnishees of a judgment award in a labor
constituted as a full and to equal or at least dispute are constituted as withholding agents with the
final payment of the approximate the tax due duty of deducting the corresponding withholding tax on
income tax due from the of the payee on said wages due thereon in an amount equivalent to five percent
payee on the said income. (5%) of the portion of the judgment award representing
income. the taxable backwages, allowances and benefits.
The liability for Payee of income is
payment of the tax rests required to report the
primarily on the payor income and/or pay the
as a withholding agent. difference between the
tax withheld and the tax
due on the income. The
payee also has the right
to ask for a refund if the

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Special Rules In the case of taxpayers engaged in the sale of service,


'gross income' means gross receipts less sales returns,
Minimum Corporate Income Tax
allowances, discounts and cost of services. 'Cost of
SEC. 27. Rates of Income tax on Domestic services' shall mean all direct costs and expenses
Corporations. - (E) Minimum Corporate Income Tax on necessarily incurred to provide the services required by
Domestic Corporations. - the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
(1) Imposition of Tax. - A minimum corporate income specialists directly rendering the service and (B) cost of
tax of two percent (2%) of the gross income as of the end facilities directly utilized in providing the service such as
of the taxable year, as defined herein, is hereby imposed depreciation or rental of equipment used and cost of
on a corporation taxable under this Title, beginning on the supplies: Provided, however, That in the case of banks,
fourth taxable year immediately following the year in 'cost of services' shall include interest expense.
which such corporation commenced its business
operations, when the minimum income tax is greater than As noted by the Supreme Court in COMMISSIONER
the tax computed under Subsection (A) of this Section for VS. PAL [JULY 7, 2009], inclusions and
the taxable year. exclusions/deductions from gross income for MCIT
purposes are limited to those directly arising from the
(2) Carry Forward of Excess Minimum Tax. - Any conduct of the taxpayers business. It is thus more limited
excess of the minimum corporate income tax over the than the gross income used in the computation of basic
normal income tax as computed under Subsection (A) of corporate income tax.
this Section shall be carried forward and credited against
the normal income tax for the three (3) immediately SEC. 28. Rates of Income Tax on Foreign
succeeding taxable years. Corporations.

(3) Relief from the Minimum Corporate Income Tax (2) Minimum Corporate Income Tax on Resident
Under Certain Conditions. - The Secretary of Finance is Foreign Corporations. - A minimum corporate income
hereby authorized to suspend the imposition of the tax of two percent (2%) of gross income, as prescribed
minimum corporate income tax on any corporation which under Section 27 (E) of this Code, shall be imposed, under
suffers losses on account of prolonged labor dispute, or the same conditions, on a resident foreign corporation
because of force majeure, or because of legitimate taxable under paragraph (1) of this Subsection.
business reverses. Q: What is the purpose of MCIT?
The Secretary of Finance is hereby authorized to As held in the case of CHAMBER OF REAL ESTATE
promulgate, upon recommendation of the Commissioner, AND BUILDERS ASSOCIATION, INC. V.
the necessary rules and regulation that shall define the ROMULO [MARCH 9, 2010]), the primary purpose of
terms and conditions under which he may suspend the any legitimate business is to earn a profit. Continued and
imposition of the minimum corporate income tax in a repeated losses after operations of a corporation or
meritorious case. consistent reports of minimal net income render its
(4) Gross Income Defined. - For purposes of applying financial statements and its tax payments suspect. For
the minimum corporate income tax provided under sure, certain tax avoidance schemes resorted to by
Subsection (E) hereof, the term 'gross income' shall mean corporations are allowed in our jurisdiction. The MCIT
gross sales less sales returns, discounts and allowances serves to put a cap on such tax shelters. As a tax on gross
and cost of goods sold. 'Cost of goods sold' shall include income, it prevents tax evasion and minimizes tax
all business expenses directly incurred to produce the avoidance schemes achieved through sophisticated and
merchandise to bring them to their present location and artful manipulations of deductions and other stratagems.
use. Since the tax base was broader, the tax rate was lowered.

For a trading or merchandising concern, 'cost of goods Q: Is MCIT a tax on capital and an additional tax
sold' shall include the invoice cost of the goods sold, plus imposition?
import duties, freight in transporting the goods to the The Supreme Court in CHAMBER OF REAL ESTATE
place where the goods are actually sold including AND BUILDERS ASSOCIATION, INC. V.
insurance while the goods are in transit. ROMULO [MARCH 9, 2010] answered this in the
For a manufacturing concern, 'cost of goods negative. The MCIT is imposed on gross income which is
manufactured and sold' shall include all costs of arrived at by deducting the capital spent by the
production of finished goods, such as raw materials used, corporation in the sale of its goods, i.e. the cost of goods
direct labor and manufacturing overhead, freight cost, and other direct expenses from gross sales. Thus, the
insurance premiums and other costs incurred to bring the capital is not being taxed. Furthermore, the MCIT is not
raw materials to the factory or warehouse. an additional tax imposition. It is imposed in lieu of the
RCIT.
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Q: What is the difference between RCIT and MCIT? accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon
The tax base of RCIT is taxable income while the tax base
its shareholders or members unless the corporation, by the
of MCIT is gross income.
clear preponderance of evidence, shall prove to the
In COMMISSIONER VS. PAL [JULY 7, 2009], PAL contrary.
under PD 1590 (its franchise) was liable only for basic
(D) Improperly Accumulated Taxable Income. - For
corporate income tax or franchise tax, whichever is lower
purposes of this Section, the term 'improperly
and this is in lieu of all other taxes, except real property.
accumulated taxable income' means taxable income
The CIR contends that PAL is subject to MCIT while it
adjusted by:
was the contention of PAL that the MCIT was included in
the in lieu of all other taxes provision. The Supreme
Court noted there is a distinction between taxable income,
which is the basis for basic corporate income tax; and
gross income, which is the basis for the MCIT under
Section 27(E). The two terms have their respective
technical meanings, and cannot be used interchangeably.
Hence, the basic corporate income tax cannot cover MCIT
since the basis for the first is the annual net taxable
income; while the basis for the second is gross. Thus,
MCIT is included in all other taxes from which PAL is
exempted.
Improperly Accumulated Earnings Tax
SEC. 29. Imposition of Improperly Accumulated Provided, however, That for corporations using the
Earnings Tax. - calendar year basis, the accumulated earnings tax shall not
(A) In General. - In addition to other taxes imposed by apply on improperly accumulated income as of December
this Title, there is hereby imposed for each taxable year 31, 1997. In the case of corporations adopting the fiscal
on the improperly accumulated taxable income of each year accounting period, the improperly accumulated
corporation described in Subsection B hereof, an income not subject to this tax, shall be reckoned, as of the
improperly accumulated earnings tax equal to ten percent end of the month comprising the twelve (12)-month
(10%) of the improperly accumulated taxable income. period of fiscal year 1997-1998.

(B) Tax on Corporations Subject to Improperly (E) Reasonable Needs of the Business. - For purposes of
Accumulated Earnings Tax. - this Section, the term 'reasonable needs of the business'
includes the reasonably anticipated needs of the business.
(1) In General. - The improperly accumulated earnings
tax imposed in the preceding Section shall apply to every Q: What is the purpose and nature of IAET?
corporation formed or availed for the purpose of avoiding The imposition of IAET discouraged tax avoidance
the income tax with respect to its shareholders or the through corporate surplus accumulation. When
shareholders of any other corporation, by permitting corporations do not declare dividends, income taxes are
earnings and profits to accumulate instead of being not paid on the undeclared dividends received by the
divided or distributed. shareholders. The tax on improper accumulation of
(2) Exceptions. - The improperly accumulated earnings surplus is essentially a penalty tax designed to compel
tax as provided for under this Section shall not apply to: corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed (see
(a) Publicly-held corporations; CYNAMID PHILIPPINES INC VS. CA [JANUARY
(b) Banks and other nonbank financial intermediaries; 20, 2000])
and
(c) Insurance companies. The IAET is being imposed in the nature of a penalty to
the corporation for the improper accumulation of its
(C) Evidence of Purpose to Avoid Income Tax. - earnings, and as a form of deterrent to the avoidance of
tax upon shareholders who are supposed to pay dividends
(1) Prima Facie Evidence. - the fact that any corporation
tax on the earnings distributed to them by the corporation
is a mere holding company or investment company shall
(see RR 2-01 [FEBRUARY 12, 2001]).
be prima facie evidence of a purpose to avoid the tax upon
its shareholders or members. Q: What is the Immediacy Test?
(2) Evidence Determinative of Purpose. - The fact that The Immediacy Test is used to determine the reasonable
the earnings or profits of a corporation are permitted to needs of business in order to justify an accumulation of
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earnings. Under this test, the term "reasonable needs of accumulation and not later ones. The second reason given
the business" are hereby construed to mean the immediate by MWM was too indefinite and was a mere afterthought.
needs of the business, including reasonably anticipated
needs. The corporation should be able to prove an Q: What circumstances are indicative of a purpose to
immediate need for the accumulation of the earnings and avoid the income tax with respect to shareholders?
profits, or the direct correlation of anticipated needs to The fact that any corporation is a mere holding company
such accumulation of profits. Otherwise, such or investment company shall be prima facie evidence of
accumulation would be deemed to be not for the a purpose to avoid the tax upon its shareholders or
reasonable needs of the business, and the penalty tax members. (see Section 29(C)(1), Tax Code)
would apply.
Moreover, the fact that the earnings or profits of a
corporation are permitted to accumulate beyond the
reasonable needs (including reasonably anticipated
In MANILA WINE MERCHANTS V. CIR
needs) of the business shall be determinative of the
[FEBRUARY 20, 1984], Manila Wine Merchants
purpose to avoid the tax upon its shareholders or members
(MWM) invested in several companies and bought shares
unless the corporation, by the clear preponderance of
in Wack Wack Golf and Country Club and likewise
evidence shall prove the contrary (see Section 29(C)(2),
acquired US Treasury Bills. CIR found that MWM had
Tax Code)
unreasonably accumulated a surplus. On appeal, the CTA
ruled that the purchase of shares were harmless. However, RR 2-01 adds three more instances, namely:
the CTA also ruled that the purchase of US Treasury Bills
was in no way related to the business of importing and 1. Investment of substantial earnings in unrelated business
selling wines and ordered MWM to pay IAET on the said or in stock or securities of an unrelated business
treasury bills. One of the contentions of MWM was that it 2. Investment in bonds and other long term securities
will be used to aid its importations The Supreme Court
ruled against MWM. It noted that the bonds were bought 3. Accumulation of earnings in excess of 100% of paid up
in 1951 and until 1961; it was never used to aid MWMs capital
importations. To justify an accumulation of earnings and
In CIR v. TUASON [MAY 15, 1989], the CIR assessed
profits for the reasonably anticipated future needs, such
Tuason, Inc. for IAET. The CIR presumed that when
accumulation must be used within a reasonable time after
Tuason, Inc. accumulated profits, the purpose was to
the close of the taxable year.
avoid the income tax on its shareholders on the finding
Q: In determining if profits are reasonably accumulated that it was a mere holding or investment company. Tuason
for business needs, the intention of the taxpayer is contended it was for the purpose of expanding their
reckoned at what time? business as a real estate broker. The Supreme Court ruled
that Tuason was liable for IAET. Tuason was a mere
It is reckoned at the time of accumulation. In MANILA holding company as it was not involved itself in the
WINE MERCHANTS V. CIR [FEBRUARY 20, development of the subdivisions but merely subdivided
1984], one of the contentions of MWM was that it held on its own lots and sold them for bigger profits. It derived its
to said bonds for several years to wait for 60% of its stock income from interest, dividends, and rental from the sale
to be owned by Filipinos so it can purchase its own lot and of realty. The touchstone of liability is the purpose behind
building. The Supreme Court stated that to determine if the accumulation of the income and not the consequences
profits are reasonably accumulated for business needs, the of the accumulation. The company's failure to distribute
controlling intention is that manifested at the time of dividends to its stockholders was clearly for reasons other
accumulation and not later ones. The second reason given than the reasonable needs of the business.
by MWM was too indefinite and was a mere afterthought.
Q: Abbot-Phils, a domestic corporation, is a wholly
Q: In determining if profits are reasonably accumulated owned subsidiary of Abbot-US, a non-resident foreign
for business needs, the intention of the taxpayer is corporation. Abbot-Phils claims that by virtue of this, it
reckoned at what time? is exempt from the IAET. Is this contention correct?
It is reckoned at the time of accumulation. In MANILA Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR
WINE MERCHANTS V. CIR [FEBRUARY 20, ruled that Abbot-Phils was exempt from IAET. Since
1984], one of the contentions of MWM was that it held on Abbott-Phils. is a wholly-owned subsidiary of Abbott-
to said bonds for several years to wait for 60% of its stock US, such shares will be considered as being owned
to be owned by Filipinos so it can purchase its own lot and proportionately by the Abbott-US shareholders. The
building. The Supreme Court stated that to determine if ownership of a domestic corporation for purposes of
profits are reasonably accumulated for business needs, the determining whether it is a closely held corporation or a
controlling intention is that manifested at the time of publicly held corporation is ultimately traced to the
individual shareholders of the parent company. Thus,
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where at least 50% of the outstanding capital stock or at (A fringe benefit tax is levied upon the employer.)
least 50% of the total combined voting power of all
A rank-and-file employee means all employees who are
classes of stock entitled to vote in a corporation is owned
holding neither managerial or supervisory position. (the
directly or indirectly by at least 21 or more individuals,
value of such fringe benefit shall form part of
the corporation is considered publicly-held corporation.
compensation income)
As of the year-end 2000, Abbott-US had 101,272
shareholders holding a combined 1,545,934,133 shares of Q: What is meant by grossed-up monetary value of the
common stock and the twenty largest shareholders of fringe benefit?
Abbott-US as of September 30, 2001 own an aggregate of
30.1 percent of Abbott-US' issued and outstanding shares. As defined in RR 3-98 [JANUARY 1, 1998], the grossed-
Thus, Abbot-Phils is a publicly-held corporation exempt up monetary value of the fringe benefit represents the
from IAET. whole amount of income received by the employee which
includes the net amount of money or net monetary value
of property which has been received plus the amount of
the fringe benefit tax thereon otherwise due from the
BIR RULING 94-2013
employee, but paid by the employer for and in behalf of
Cebu Air (domestic corporation) 66.15% owned by his employee.
CPAir Holding which in turn wholly owned by JG
In essence, the purpose of getting the grossed-up
Summit.
monetary value is to preserve the benefit to the employer
JG Summit is owned by 6 individuals. as a whole.
W/N Cebu Air is deemed a publicly held corporation and Q: How is the grossed-up monetary value of the fringe
thus exempted from IAET. benefit determined?
NO. IAET is not a publicly held corporation. It is determined by dividing the actual monetary value of
the fringe benefit by 68% (effective January 1, 2000.)
IAET is imposed upon domestic corporations which are
classified as closely-held corporations. Exceptions: In the case of non-resident aliens not engaged
in trade or business and alien and Filipino individuals
Closely-held corporations are those corporations at least
employed in RHQs, ROHQs of MNCs, OBUs and
fifty percent (50%) in value of the outstanding capital
petroleum subcontractors, the grossed-up value of the
stock or at least fifty percent (50%) of the total combined
fringe benefit shall be determined by dividing the actual
voting power of all classes of stock entitled to vote is
monetary value of the fringe benefit by the difference
owned directly or indirectly by or for not more than
between one hundred percent (100%) and under their
twenty (20) individuals. Domestic corporations not
respective rates of income tax.
falling under the aforesaid definition are, therefore,
publicly-held corporations. (B) Fringe Benefit Defined. - For purposes of this
Section, the term 'fringe benefit' means any good, service
or other benefit furnished or granted in cash or in kind by
Fringe Benefits Tax an employer to an individual employee (except rank and
file employees as defined herein) such as, but not limited
What is a fringe benefit tax? to, the following:
A fringe benefit tax is a final withholding tax (at 32%) (1) HOUSING;
imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee except rank Q: In what instances is the housing privilege subject to
and file employees by the employer. fringe benefit tax?

(see Section 33, Tax Code and RR 3-98 [JANUARY 1. Employer leases residential property and assigns the
1, 1998]) same for use by the employee

A managerial employee refers to one who is vested with 2. Employer owns a residential property on installment
powers or prerogatives to lay down and execute basis and allows use by the employee
management policies and/or to hire, transfer, suspend,
3. Employer purchases a residential property and transfers
lay-off, recall, discharge, assign or discipline employees
ownership to the employee
A supervisory employee is one who, in the interest of the
4. Employees provides a monthly fixed amount for the
employer, effectively recommends such managerial
employee to pay his landlord
actions if the exercise of such authority is not merely
routinary or clerical in nature but requires the use of
independent judgment.
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The value of the benefit shall be measured based on the


depreciation of a yacht at an estimated useful life of 20
Q: What housing privileges are not subject to fringe years.
benefit tax?
(4) HOUSEHOLD PERSONNEL, SUCH AS MAID,
1. Housing privilege of military officials of the AFP38
DRIVER AND OTHERS;
2. Housing unit which is situated inside or adjacent to the
Q: Are household expenses of employees subject to
premises of a business or factory (it is considered adjacent
fringe benefits tax?
if its located within the maximum of 50 meters from the
perimeter of the business premises) Yes. Expenses of the employee which are borne by the
employer for household personnel such as salaries of
3. Temporary housing for an employee who stays in a
household help, personal driver of the employee, or other
housing unit for three months or less
similar personnel expenses shall be taxable as fringe
(2) EXPENSE ACCOUNT; benefits.

Q: Are expense accounts taxable fringe benefits? (5) INTEREST ON LOAN AT LESS THAN
MARKET RATE TO THE EXTENT OF THE
General Rule: Expenses incurred by the employee but DIFFERENCE BETWEEN THE MARKET RATE
which are paid by his employer shall be treated as taxable AND ACTUAL RATE GRANTED;
fringe benefits
Q: Are interest on loans obtained by the employee from
Exception: They are not taxable fringe benefits if incurred the employer subject to fringe benefit tax?
or reasonably expected to be incurred by the employee in
the performance of his duties subject to the following Yes. If the employer lends money to his employee free of
conditions interest or a rate lower than 12%, such interest foregone
by the employer or the difference of the interest assumed
1. Expenditures are duly receipted for and in the name of by the employee and the rate of 12% shall be treated as a
the employer taxable fringe benefit
2. Expenditures do not partake of the nature of a personal (6) MEMBERSHIP FEES, DUES AND OTHER
expense attributable to the employee. EXPENSES BORNE BY THE EMPLOYER FOR
Note: Personal expenses of the employee paid or THE EMPLOYEE IN SOCIAL AND ATHLETIC
reimbursed by the employer to the employee shall be CLUBS OR OTHER SIMILAR ORGANIZATIONS;
treated as a taxable fringe benefit whether or not the same Q: Are membership fees, dues and other expenses in
are duly receipted for in the name of the employer. social and athletic clubs subject to fringe benefit tax?
(3) VEHICLE OF ANY KIND; Yes. Membership fees, dues, and other expenses borne by
Q: When is a motor vehicle privilege considered a the employer for his employee in social and athletic clubs
taxable fringe benefit? or other smiliar organizations shall be treated as taxable
fringe benefits of the employee in full
1. Employer purchases vehicle in employees name
(7) EXPENSES FOR FOREIGN TRAVEL;
2. Employer provides employee cash for vehicle purchase
General Rule: Reasonable business expenses which are
3. Employer purchases car on installment in name of paid for by the employer for the foreign travel of his
employee employee for the purpose of attending business meetings
or conventions shall not be treated as taxable fringe
4. Employer shoulders a portion of purchase price
benefits.
5. Employer owns and maintains a fleet of motor vehicles
Exception: In the absence of documentary evidence
for use of business and employees
showing that the travel abroad was in connection with
6. Employer leases and maintains a fleet of motor vehicles business meetings or conventions, the expense shall be
for the use of the business and employees. treated as a taxable fringe benefit.

The use of aircraft (including helicopters) owned and Note: Travelling expenses of family members of the
maintained by the employer shall be treated as business employee borne by the employer shall be subject to fringe
use and not be subject to the fringe benefits tax. benefits tax (see Section 2.33(D)(7)(c), RR No. 3-98)

The use of yacht whether owned and maintained or leased


by the employer shall be treated as taxable fringe benefit.

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(8) HOLIDAY AND VACATION EXPENSES; regulations to be promulgated by the Secretary


of Finance, upon recommendation of the Commissioner.
Holiday and vacation expenses treated of the employee
borne by the employer shall be treated as taxable fringe The Secretary of Finance is hereby authorized to
benefits. (see Section 2.33(D)(8), RR No. 3-98) promulgate, upon recommendation of the Commissioner,
such rules and regulations as are necessary to carry out
efficiently and fairly the provisions of this Section, taking
(9) EDUCATIONAL ASSISTANCE TO THE into account the peculiar nature and special need of the
EMPLOYEE OR HIS DEPENDENTS; trade, business or profession of the employer.

Q: Is the cost of educational assistance to the employee Section 2.23(C), RR No. 3-98 provides that fringe
or his dependents subject to fringe benefit tax? benefits exempted from the payment of the fringe benefits
tax may however still form part of the employees basic
General rule: Yes. The cost of educational assistance to compensation income which is subject to income tax.
the employee and his dependents borne by the employer
shall be subject to fringe benefits tax (see Section DE MINIMIS BENEFIT
2.33(D)(9)(a) and (b), RR No. 3-98)
As provided in RR No. 005-11 [March 16, 2011], as
Exceptions: amended recently by RR No. 008-12 [MAY 11, 2012],
the following shall be considered de minimis benefits not
1. Education of the employee is directly connected with subject to income tax as well as withholding tax on
employers trade or business compensation income of both managerial and rank and
2. With a written contract that employee shall remain file employees:
employed with the employer for a period of time mutually 1. Monetized unused vacation leave credits of private
agreed upon by the parties employees not exceeding ten (10) days during the year;40
3. In case of dependents, the assistance was provided 2. Monetized value of vacation and sick leave credits paid
through a competitive scheme under the scholarship to government officials and employees;41
program of the company employer.
3. Medical cash allowance to dependents of employees,
(10) LIFE OR HEALTH INSURANCE AND OTHER not exceeding P750 per employee per semester or P125
NON-LIFE INSURANCE PREMIUMS OR per month;
SIMILAR AMOUNTS IN EXCESS OF WHAT THE
LAW ALLOWS. 4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice
per month amounting to not more than P1,500;43
Q: Is the cost of life or health insurance paid for by the
employer subject to fringe benefit tax? 5. Uniform and clothing allowance not exceeding P5,000
per annum;44
The cost of life or health insurance and other non-life
insurance premiums borne by the employer for his 6. Actual medical assistance, e.g. medical allowance to
employees shall be treated as taxable fringe benefits cover medical and healthcare needs, annual medical
except: check-up, maternity assistance, and routine consultations,
not exceeding P10,000 per annum;45
1. Contributions of the employer for the benefit of the
employee to the SSS, GSIS and other similar 7. Laundry allowance not exceeding P300 per month;46
contributions
8. Employees achievement awards, e.g. for length of
2. The cost of premiums borne by the employer for the service or safety achievement, with an annual monetary
group insurance of his employees value not exceeding P10,000;47

(C) Fringe Benefits Not Taxable. - The following fringe 9. Gifts given during Christmas and major anniversary
benefits are not taxable under this Section: celebrations not exceeding P5,000 per employee per
annum;48
(1) Fringe benefits which are authorized and exempted
from tax under special laws; 10. Daily meal allowance for overtime work and
(2) Contributions of the employer for the benefit of the night/graveyard shift not exceeding 25% of the basic
employee to retirement, insurance and hospitalization minimum wage per region basis
benefit plans;
Transfer Pricing
(3) Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not; SEC. 50. Allocation of Income and Deductions. - In the
and case of two or more organizations, trades or businesses
(4) De minimis benefits as defined in the rules and (whether or not incorporated and whether or not

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organized in the Philippines) owned or controlled directly


or indirectly by the same interests, the Commissioner is
authorized to distribute, apportion or allocate gross Q: GSK purchased a pharmaceutical ingredient from
income or deductions between or among such Adechsa, a related non-residency company for between
organization, trade or business, if he determined that such $1,512 and $1,651 per kg. During the same period, two
distribution, apportionment or allocation is necessary in Canadian pharmaceutical companies purchase the
order to prevent evasion of taxes or clearly to reflect the same ingredient for between $194 and $304 per kg from
income of any such organization, trade or business. arms length suppliers. Canadas minister for internal
revenue reassessed GSK because the prices it paid for
Q: What is transfer pricing? the ingredient were greater than an amount that would
have been reasonable in the circumstances had they
Transfer pricing is generally defined as the pricing of
been dealing at arms length. GSK argues the License
cross-border, intra-firm transactions between related
and Supply Agreement it entered with Adechsa should
parties or associated enterprises. Typically, a transfer
be considered in determining if it is an arms length
price occurs between a taxpayer of a country with high
transaction. Is GSKs contention correct?
income taxes and a related or associated enterprise of a
country with low income taxes. Yes. As held by the Supreme Court of Canada in HM V.
GLAXOSMITHKLINE [2012 SCC 52, OCTOBER
While transfer pricing issue typically occurs in cross-
18, 2012], a proper application of the arms length
border transactions, it can also occur in domestic
principle requires that regard be had for the
transactions. One context where transfer pricing issue
economically relevant characteristics of the arms
occurs domestically is where one associated enterprise,
length and non-arms length circumstances to ensure they
entitled to income tax exemptions, is being used to
are sufficiently comparable. The economically
allocate income away from a company subject to regular
relevant characteristics of the situations being compared
income taxes. is a domestic transfer pricing issue when
may make it necessary to consider other transactions that
income are shifted in favor of a related company with
impact the transfer price under consideration. Such
special tax privileges such as Board of Investments (BOI)
circumstances will include agreements that may confer
Incentives and Philippine Economic Zone Authority
rights and benefits in addition to the purchase of property
(PEZA) fiscal incentives or when expenses of a related
where those agreements are linked to the purchasing
company with special tax privileges are shifted to a
agreement. The objective is to determine what an arms
related company subject to regular income taxes or in
length purchaser would pay for the property and the rights
other circumstances, when income and/or expenses are
and benefits together where the rights and benefits are
shifted to a related party in order to minimize tax
linked to the price paid for the property. In this case, GSK
liabilities (see RR 2-2013 [January 23, 2013])
was paying for at least some of the rights and benefits
Q: Filinvest Development Corporation (FDC) extended under the Licence Agreement as part of the purchase
advances in favour of its affiliate. The BIR assesses prices for ranitidine from Adechsa. As such, the Licence
FDC for deficiency income by unilaterally imputing an Agreement could not be ignored in determining the
arms length interest rate on its advances. FDC reasonable amount paid to Adechsa which applies not
disputes this by saying the CIR lacks authority to impute only to payment for goods but also to payment for
theoretical interest and the rule is that interests cannot services.
be demanded in the absence of a stipulation to that
Q: What is the arms length bargaining standard with
effect. Is FDCs contention correct?
respect to the determination of the taxable income on
Yes. According to the case of CIR V. FILINVEST inter-company loans or advances in relation to transfer
DEVELOPMENT CORPORATION [JULY 19, pricing?
2011], Despite the seemingly broad power of the CIR to
RMC 026-08 [MARCH 24, 2008] adopts the arms
distribute, apportion and allocate gross income under
length standard as the ultimate test for determining the
Section 50, the same does not include the power to impute
fairness of related party transactions. The standard to be
theoretical interest even with regard to controlled
applied in every case is that of an uncontrolled taxpayer
taxpayers transactions. This is true even if the CIR is able
dealing at arms length with another uncontrolled
to prove that the interest expense was in fact claimed by
taxpayer.
FDC. The term in the definition of gross income that even
those income from whatever source derived is covered Thus, where a member of a group of controlled entities
still requires that there must be actual or at least probable makes a loan or advances directly or indirectly or
receipt or realization of the time of gross income sought becomes a creditor of another member of such group and
to be apportioned, distributed or reallocated. Finally, charges no interest, or chargest interest at a rate which is
under the Civil Code, no interest shall be due unless not equal to an arms-length rate, the CIR may make
expressly stipulated in writing. appropriate allocations to reflect an arms length interest
rate for use of such loan or advance.
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Special Entities
Proprietary Educational Institution 3. Interest income from any bank deposits or yield on
deposit substitutes, including foreign currency deposits.
Q: What is the tax treatment of proprietary education
institutions and hospitals which are non-profit? 4. They shall be withholding agents for their employees
compensation income subject to withholding tax.
Section 27(B) of the Tax Code provides that they shall
pay a tax of 10% on their taxable income except: Private educational institutions
1. Certain passive incomes subject to final tax They shall be exempt from VAT but must be accredited
with either the DepEd or CHED.
2. If the gross income from unrelated trade, business, or
other activity94 exceeds 50% of the total gross income 1. However, income derived from trade, business or other
derived by such proprietary educational institution95 and activity is still taxable
hospital which are non-profit from all sources, the tax
2. Bank deposits and foreign currency deposits are exempt
shall be imposed on the entire taxable income at 30%
from withholding tax but they must show proof that such
Q: What is meant by the terms proprietary and non- income is used to fund proposed projects for their
profit? institutions improvement
Proprietary means private while non-profit means no net 3. They shall be withholding agents for their employees
income or asset accrues to or benefits any member or compensation income subject to withholding tax.
specific person, with all the net income or asset devoted
to the institutions purposes and all its activities.
As noted by the Supreme Court IN CIR V. ST. LUKES Q: St. Lukes Medical Center is a hospital organized as a
MEDICAL CENTER [SEPTEMBER 26, 2012], non- non-stock and non-profit corporation. It admits both
profit does not necessarily mean charitable. paying and non-paying patients. The CIR claimed that
St. Lukes was liable for income tax at 10% as provided
Q: What are the guidelines for the tax exemption of non- under Section 27(B)96 of the NIRC. St. Lukes argues
stock, non-profit educational institutions, non-stock, that it is a non-stock, non-profit institution for
non-profit corporations and private educational charitable and social welfare purposes exempt from
institutions as provided in RMC 76-03? income tax under Section 30(E) and (G) of the NIRC.97
Decide.
Non-stock, non-profit educational institutions
Section 27(B) provides that proprietary educational
1. Their exemption refers only to revenues derived from
institutions and hospitals which are non-profit shal pay a
assets used actually, directly, and exclusively for
tax of ten percent (10%) on their taxable income
educational purposes
Section 30(E), NIRC provides that a non-stock
2. Income from cafeterias, canteens and bookstores are
corporation or association organized and operated
also exempt if they are owned and operated by the
exclusively for charitable purposes is exempt from
educational institution and are located within the school
income tax while Section 30(G) provides that a civic
premises
league or organization not organized for profit but
3. However, they shall be subject to internal revenue taxes operated exclusively for the promotion of social welfare
on income from trade, business or other activity, the is likewise exempt.
conduct of which is not related to the exercise or
In CIR V. ST. LUKES MEDICAL CENTER
performance by such educational institution of their
[SEPTEMBER 26, 2012], the Supreme Court ruled that
educational purposes or functions
St. Lukes cannot claim full tax exemption under Section
4. The interest income on bank deposits and yields from 30 because it has paying patients and this is
deposit substitutes may be exempt from income tax if notwithstanding the fact that it is a non-profit hospital. For
there is showing that said income will be used actually, Section 27(B) to apply, the hospital must be non-profit
directly, and exclusively for educational purposes. which means that no net income or asset accrues to or
benefits any member or specific person and all the
Non-stock, non-profit corporations activities of the hospital are non-profit. On the other hand,
While generally exempt, they remain liable for Section 30(E) and (G), while providing for an exemption
is qualified by the last paragraph which, in turn, provides
1. Income derived from any of their real properties that activities conducted for profit shall be taxable.
Section 30(E) and (G) requires that an institution be
2. Any activity conducted from profit regardless of
operated exclusively for charitable purposes to be
disposition thereof
completely exempt from income tax. In this case,
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however, St. Lukes is not operated exclusively for exempt from the payment of corporate income tax. Is
charitable purposes insofar as its revenues from paying PAGCOR subject to income tax?
patients are concerned. Such revenue is subject to income
No. The Supreme Court held that the original exemption
tax at 10% under Section 27(B).
of PAGCOR from corporate income tax was not made
Q: Reconcile the tax treatment of proprietary pursuant to a valid classification based on substantial
educational institutions and hospitals which are non- distinction so that the law may operate only on some and
profit under Section 27(B) and non-stock, non-profit not on all. Instead, the same was merely granted to the
charitable institutions under Section 30(E) and (G). acquiescence of the House Committee on Ways and
Means to the request of PAGCOR. The argument that the
To be exempt from income taxes, Section 30(E) requires
withdrawal of the exemption violates the non-impairment
that the charitable institution must be organized and
clause will not hold since any franchise is subject to
operated exclusively for charitable purpose. It is
amendment, alteration or repeal by Congress. The Court,
nevertheless allowed to engage in activities conducted
however, made clear that PAGCOR remains to be exempt
for profit without losing its tax-exempt status for its not-
from VAT. Nowhere in RA 9337 is it provided that
for-profit activities. The consequence, however, is that
PAGCOR can be subjected to VAT. Thus, the provision
such income from activities conducted for profit,
of RR 16- 2005 which the BIR issued to implement the
regardless of the disposition made of such income, shall
VAT law subjecting PAGCOR to VAT is invalid for
be subject to tax.
being contrary to RA 9337. PAGCOR V. BIR [MARCH
For proprietary educational institutions and hospitals 15, 2011]
which are non-profit to avail of the preferential tax rate,
PAGCOR V BIR (2014)
no net income or asset accrues to or benefits any member
or specific person, with all the net income or asset devoted Petitioner filed a Motion for Clarification alleging that
to the institutions purposes and all its activities. RMC No. 33-2013 is an erroneous interpretation and
application of the aforesaid Decision, and seeking
Thus, in CIR V. ST. LUKES MEDICAL CENTER
clarification with respect to:
[SEPTEMBER 26, 2012], while the St. Lukes did not
qualify as a non-profit, non-stock charitable institution Tax imposition upon income from gaming operations and
under Section 30(E) as it was not operated exclusively for income from other related transactions
charitable purposes, it remains to be a proprietary non-
In fine, the Court upheld earlier ruling that Section 1 of
profit hospital under Section 27(E) as long as it does not
R.A. No. 9337, amending Section 27(c) of R.A. No. 8424,
distribute any of its profits to its members and such profits
by excluding petitioner from the enumeration of GOCCs
are reinvested pursuant to its corporate purposes. St.
exempted from corporate income tax, is valid and
Lukes, as a proprietary non-profit hospital, is entitled to
constitutional. In addition, Court held that:
the preferential tax rate of 10% on its net income from its
for-profit activities.
1. Petitioners tax privilege of paying five percent
GOCCs
(5%) franchise tax in lieu of all other taxes with
Q: Are GOCCs, agencies and instrumentalities owned respect to its income from gaming operations,
and control by the government liable to pay income tax? pursuant to P.D. 1869, as amended, is not
repealed or amended by Section 1(c) of R.A. No.
All corporations, agencies, or instrumentalities owned or
9337;
controlled by the government shall pay such rate of tax
upon their taxable income except: 2. Petitioners income from gaming operations is
subject to the five percent (5%) franchise tax
1. GSIS
only; and
2. SSS
3. Petitioners income from other related services is
3. Phil Health subject to corporate income tax (10%) only.

4. Local Water Districts BLOOMBERRY V BIR

5. PCSO W/N PAGCORs tax privileges are applicable to its


licensees and contractees.
(see Section 27(C), Tax Code)
As the PAGCOR Charter states in unequivocal terms that
Note: That is the general rule. The provisions of special exemptions granted for earnings derived from the
laws or general laws may provide otherwise. operations conducted under the franchise specifically
Q: RA 9337 amended Section 27(C) of the Tax Code and from the payment of any tax, income or otherwise, as well
excluded PAGCOR from the enumeration of GOCCs as any form of charges, fees or levies, shall inure to the

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benefit of and extend to corporation(s), association(s), (I) Government educational institution;


agency(ies), or individual(s) with whom the PAGCOR or
(J) Farmers' or other mutual typhoon or fire insurance
operator has any contractual relationship in connection
company, mutual ditch or irrigation company, mutual or
with the operations of the casino(s) authorized to be
cooperative telephone company, or like organization of a
conducted under this Franchise, so it must be that
purely local character, the income of which consists solely
all contractees and licensees of PAGCOR, upon payment
of assessments, dues, and fees collected from members
of the 5% franchise tax, shall likewise be exempted from
for the sole purpose of meeting its expenses; and
all other taxes, including corporate income tax realized
from the operation of casinos. (K) Farmers', fruit growers', or like association organized
and operated as a sales agent for the purpose of marketing
For the same reasons that made us conclude in the 10 the products of its members and turning back to them the
December 2014 Decision of the Court sitting En Banc in proceeds of sales, less the necessary selling expenses on
G.R. No. 215427 that PAGCOR is subject to corporate the basis of the quantity of produce finished by them;
income tax for "other related services", we find it logical
that its contractees and licensees shall likewise pay Notwithstanding the provisions in the preceding
corporate income tax for income derived from such paragraphs, the income of whatever kind and character of
"related services." the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
Exempt Corporations (Memorize at least 5) for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title Q: Are recreational clubs exempt from income tax?
in respect to income received by them as such:
No. As clarified by RMC 35-2012 [AUGUST 3, 2012],
(A) Labor, agricultural or horticultural organization not clubs which are organized and operated exclusively for
organized principally for profit; pleasure, recreation, and other non-profit purposes
(hereinafter referred to as "recreational clubs") are not
(B) Mutual savings bank not having a capital stock
exempt from income tax. The provision in the National
represented by shares, and cooperative bank without
Internal Revenue Code of 1977 which granted income tax
capital stock organized and operated for mutual purposes
exemption to such recreational clubs was omitted in the
and without profit;
current list of tax exempt corporations under National
(C) A beneficiary society, order or association, operating Internal Revenue Code of 1997, as amended.
for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, Q: A credit cooperative was assessed deficiency
or mutual aid association or a nonstock corporation withholding tax on interest from savings and time
organized by employees providing for the payment of life, deposits of its members. The CTA ruled against the
sickness, accident, or other benefits exclusively to the credit cooperative stating that withholding tax on
members of such society, order, or association, or income payments subject to FWT includes said interests
nonstock corporation or their dependents; as interests from similar arrangements. Is CTAs ratio
correct?
(D) Cemetery company owned and operated exclusively
No. Since interest from any Philippine currency bank
for the benefit of its members;
deposit yield or any other monetary benefit from deposit
(E) Nonstock corporation or association organized and substitutes are paid by banks, other entities such as
operated exclusively for religious, charitable, scientific, cooperative are not required to withhold the
athletic, or cultural purposes, or for the rehabilitation of corresponding tax on the interest from savings and time
veterans, no part of its net income or asset shall belong to deposits of its members. The fact that similar
or inure to the benefit of any member, organizer, officer arrangements is preceded by banking terms means that
or any specific person; those subject to withholding must have deposit
peculiarities. This is also consistent with the preferential
(F) Business league chamber of commerce, or board of
treatment accorded to members of cooperatives who are
trade, not organized for profit and no part of the net
exempt in the same way as the cooperative themselves.
income of which inures to the benefit of any private stock-
(see DUMAGUETE CREDIT COOPERATIVE V.
holder, or individual;
CIR [JANUARY 22, 2010]).
(G) Civic league or organization not organized for profit
Q: Are all the activities of the enumerated exempt
but operated exclusively for the promotion of social
corporations exempt from tax?
welfare;
No. Notwithstanding that they are exempt corporations,
(H) A nonstock and nonprofit educational institution;
the income of whatever kind and character of the

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organizations mentioned above from any of their Each case must rest upon its own peculiar facts and
properties, real or personal, or form any of their activities circumstances (see CALASANZ V. CIR [144 SCRA 664]
conducted for profit regardless of the disposition made of
Capital Assests/ Income
such income shall be subject to tax imposed under the
Code. Q: A inherited from his father an agricultural land. He
had the land surveyed and subdivided into lots.
Q: If a non-stock, non-profit educational institution
Improvements, such as good roads, concrete gutters,
charges tuition and other fees for the different services
drainage and lighting system, were introduced to make
it renders, does the institution lose its tax-exempt status?
the lots saleable. Soon after, the lots were sold to the
No. In CIR V. G. SINCO EDUCATIONAL CORP public at a profit. The Revenue examiner adjudged A as
[OCTOBER 23, 1956], the Supreme Court held that the engaged in business as real estate dealers and required
amount of fees charged by the school depends upon the him to pay the real estate dealers tax and assessed a
policy and a given administration at a given time and is deficiency income tax on profits derived from the sale of
not conclusive of the purposes of the institution. It does the lots based on the rates for ordinary income and not
not in itself make a school a profit-making enterprise. as capital gains at capital gain rates. Is the Revenue
Examiner correct?
Insurance Companies
Yes. The statutory definition of capital assets is negative
Q: What is an annuity for purposes of income taxation? in nature. If the asset is not among the exceptions, it is a
An annuity refers to the periodic installment payments of capital asset; conversely, assets falling within the
income or pension by insurance companies during the life exceptions are ordinary assets. And necessarily, any gain
of a person or for a guaranteed fixed period of time, resulting from the sale or exchange of an asset is a capital
whichever is longer, in consideration of capital paid by gain or an ordinary gain depending on the kind of asset
him. The portion of proceeds from insurance that involved in the transaction. In this case, the activities of
represent a mere return of the premiums is not taxable A are indistinguishable from those invariably employed
while the portion that represents the interests is taxable. by one engaged in the business of selling real estate. One
strong factor is the business element of development
Capital Gains and Losses which is very much in evidence. A did not sell the land in
SEC. 39. Capital Gains and Losses. - the condition in which he acquired it. In the course of
selling the subdivided lots, A engaged in the real estate
(A) Definitions. - As used in this Title - business and accordingly, the gains from the sale of the
lots are ordinary income taxable in full (see CALASANZ
Q: What are ordinary assets?
VS. COMMISSIONER [OCTOBER 9, 1986])
1. Stock in trade of the taxpayer or other property of a
Q: What is the tax consequence if the property is sold by
kind which would properly be included in the inventory
a seller-corporation engaged in real estate business?
of the taxpayer if on hand at the close of the taxable year
It depends. In BIR RULING 27-02 [JULY 15, 2002],50
2. Property held by the taxpayer primarily for sale to
the CIR was asked to rule on the tax consequences of
customers in the ordinary course of his trade or business
certain transactions involving a seller that is engaged n
3. Property used in trade or business of a character that is real estate business but without any specification as to
subject to allowance for depreciation whether the property is capital or ordinary. The CIR stated
that it is necessary to first determine the character of the
4. Real property used in trade or business of the taxpayer real property being sold.
(see Section 39 Tax Code, and Section 132, RR 2) If the real property is a land or building which is not
Q: What are capital assets? actually used in the business of the seller-corporation and
is treated as a capital asset, , then a final tax of six percent
The term capital assets means property held by the (6%) shall be imposed on the gain presumed to have been
taxpayer whether or not connected with his trade or realized on its sale, exchange or disposition of such land
business, except those enumerated as ordinary assets in or building based on the gross selling price or fair market
Section 39. value, whichever is higher of such land and/or building.
This rule applies, whether or not the seller-corporation is
Note: (1) The statutory definition of capital assets is
engaged in real estate business.
negative in nature. If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling If the real property being sold is an ordinary asset,
within the exceptions are ordinary assets. withholding tax rates shall apply. The rate of withholding
tax will depend on whether, first, the seller is exempt or
(2) There is no rigid or fixed formula to determine with
taxable; second, whether the seller is habitually engaged
finality whether property is a capital or ordinary asset.
in real estate business or not; and third, if the seller is
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habitually engaged in real estate business, the gross different characterization for tax purposes. The following
selling price. circumstances in combination show unequivocally that
the petitioner was, at the time material to this case,
This ruling also stated that registration with the HLURB
engaged in the real estate business (see TUASON VS.
or HUDCC shall be sufficient for a seller/transferor to be
LINGAD [JULY 31, 1974]
considered as habitually engaged in the real estate
business. If the seller/transferor is not registered with (2) Net Capital Gain. - The term 'net capital gain' means
HLURB or HUDCC, he/it may prove that he/it is engaged the excess of the gains from sales or exchanges of capital
in the real estate business by offering other satisfactory assets over the losses from such sales or exchanges.
evidence.
(3) Net Capital Loss. - The term 'net capital loss' means
Q: Can an ordinary asset be converted to a capital asset? the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.
General Rule: No, the property is still an ordinary asset
(see Section 3(e), RR No. 7-2003) (B) Percentage Taken into Account - In the case of a
taxpayer, other than a corporation, only the following
Exceptions: Properties classified as ordinary assets for
percentages of the gain or loss recognized upon the sale
being used in business by a taxpayer engaged in business
or exchange of a capital asset shall be taken into account
other than real estate business are automatically converted
in computing net capital gain, net capital loss, and net
into capital assets upon showing of proof that the same
income.
have not been used in business for more than 2 years prior
to the consummation of the taxable transactions involving (1) One hundred percent (100%) if the capital asset has
the properties. (BIR RULING NO. 142-2011; Sec. 3(e), been held for not more than twelve (12) months; and
RR No. 7-2003)
(2) Fifty percent (50%) if the capital asset has been held
Note: The conversion from ordinary assets to capital for more than twelve (12) months;
assets is only allowed if the taxpayer is not engaged in the
(C) Limitation on Capital losses. - Losses from sales or
real estate business.
exchange capital assets shall be allowed only to the extent
Q: Can a capital asset be converted to an ordinary asset? of the gains from such sales or exchanges. If a bank or
trust company incorporated under the laws of the
Yes. While RR No. 7-2003 provides a rule that once an
Philippines, a substantial part of whose business is the
asset is ordinary, it cannot be converted to a capital asset
receipt of deposits, sells any bond, debenture, note, or
(subject to the two year waiting period), jurisprudence has
certificate or other evidence of indebtedness issued by any
consistently held that a capital asset may become an
corporation (including one issued by a government or
ordinary asset. CALASANZ V. CIR [144 SCRA 664]
political subdivision thereof), with interest coupons or in
Ordinary Assets/ Income registered form, any loss resulting from such sale shall not
be subject to the foregoing limitation and shall not be
Q: Y inherited from his mother several tracts of land. included in determining the applicability of such
When his mother was still alive, these lands were limitation to other losses.
subdivided into lots and leased. Y sold the leased lots to
the occupants except for one lot which needed filling Q: Is an equity investment a capital asset?
because of low elevation. Said lot was filled and Yes. As ruled by the Supreme Court in CHINABANK V.
subdivided into smaller lots and sold to the public. Y CA [JULY 19, 2000], an equity investment is a capital,
reported his income from the sales as long-term capital not ordinary, asset of the investor the sale or exchange of
gains. The CIR denied this and ruled that Y was engaged which results in either a capital gain or a capital loss.
in the business of leasing the lots and the subsequent
sale are sales of real property used in trade or business Q: What is the allowable extent of losses from sales or
of the taxpayer. Is the CIR correct? exchanges of capitals assets? (capital loss limitation
rule)
Yes. In this case, the properties should be regarded as
ordinary assets. When Y obtained by inheritance the Losses from sales of exchanges of capital assets shall be
parcels in question, transferred to him was not merely the allowed to be deducted only to the extent of the gains from
duty to respect the terms of any contract thereon, but as such sales or exchanges.
well the correlative right to receive and enjoy the fruits of
In CHINABANK V. CA [JULY 19, 2000], Chinabank
the business and property which the decedent had
made a 53% equity investment in the First CBC Capital
established and maintained. Under the circumstances, Ys
(Asia) Ltd, a Hong Kong subsidiary. First CBC became
sales of the several lots forming part of his rental business
insolvent. With BSP approval, Chinabank wrote-off the
cannot be characterized as other than sales of ordinary
investment in its ITR as a bad debt or as an ordinary loss
assets. The sales concluded on installment basis of the
deductible from its gross income. The BIR disallowed the
subdivided lots comprising the last lot do not deserve a
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Q: Distinguish Net Loss Carry-over (NELCO)
deduction on the basis that the debt was not worthless. from Net Operating Loss Carry-Over
The Supreme Court ruled that the equity investment is not
indebtedness in the first place but rather capital, not an NELCO NOLCO
ordinary, asset. Shares of stock would be ordinary assets NELCO is a concept in NOLCO is a concept in
only to a dealer in securities or a person engaged in the capital gains taxation ordinary income
purchase and sale of, or an active trader (for his own taxation
account) in, securities. In the hands, however, of another NELCO is enjoyed only NOLCO is enjoyed by
who holds the shares of stock by way of an investment, by individuals, not corporations, not
the shares to him would be capital assets. When the shares corporations individuals
held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital May be availed of only May be availed over a
assets. during the succeeding period three years
year
The Court further stated that assuming that the equity
investment of CBC has indeed become "worthless," the Determination of Gains or Loss from Sale or Transfer of
loss sustained is a capital, not an ordinary, loss. The rule Property
thus is that capital loss can be deducted only from capital
gains. The capital loss sustained by CBC can only be SEC. 40. Determination of Amount and Recognition
deducted from capital gains if any derived by it during the of Gain or Loss. -
same taxable year that the securities have become (A) Computation of Gain or Loss. - The gain from the
"worthless. sale or other disposition of property shall be the excess of
Note: The exception (where the capital loss limitation the amount realized therefrom over the basis or adjusted
rule will not apply) If a bank or trust company basis for determining gain, and the loss shall be the excess
incorporated under the laws of the Philippines, a of the basis or adjusted basis for determining loss over the
substantial part of whose business is the receipt of amount realized. The amount realized from the sale or
deposits sells any bond, debenture, note or certificate or other disposition of property shall be the sum of money
other evidence of indebtedness issued by an corporation received plus the fair market value of the property (other
with interest coupons or in registered form, any losss than money) received;
resulting from such sale shall not be subject to the above (B) Basis for Determining Gain or Loss from Sale or
limitations and shall not be included in determining the Disposition of Property. - The basis of property shall be:
applicability of such limitation to other losses.
(1) The cost thereof in the case of property acquired on or
(D) Net Capital Loss Carry-Over. - If any taxpayer, after March 1, 1913, if such property was acquired by
other than a corporation, sustains in any taxable year a net purchase; or
capital loss, such loss (in an amount not in excess of the
net income for such year) shall be treated in the (2) The fair market price or value as of the date of
succeeding taxable year as a loss from the sale or acquisition, if the same was acquired by inheritance; or
exchange of a capital asset held for not more than twelve (3) If the property was acquired by gift, the basis shall be
(12) months. the same as if it would be in the hands of the donor or the
(E) Retirement of Bonds, Etc. - For purposes of this last preceding owner by whom it was not acquired by gift,
Title, amounts received by the holder upon the retirement except that if such basis is greater than the fair market
of bonds, debentures, notes or certificates or other value of the property at the time of the gift then, for the
evidences of indebtedness issued by any corporation purpose of determining loss, the basis shall be such fair
(including those issued by a government or political market value; or
subdivision thereof) with interest coupons or in registered (4) If the property was acquired for less than an adequate
form, shall be considered as amounts received in consideration in money or money's worth, the basis of
exchange therefor. such property is the amount paid by the transferee for the
(F) Gains or losses from Short Sales, Etc. - For property; or
purposes of this Title - (5) The basis as defined in paragraph (C)(5) of this
(1) Gains or losses from short sales of property shall be Section, if the property was acquired in a transaction
considered as gains or losses from sales or exchanges of where gain or loss is not recognized under paragraph
capital assets; and (C)(2) of this Section.

(2) Gains or losses attributable to the failure to exercise


privileges or options to buy or sell property shall be
considered as capital gains or losses.

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(C) Exchange of Property. - parcels of land in exchange for shares of stock of FLI.
The CIR argues that the taxable gain should be
(1) General Rule. - Except as herein provided, upon the
recognized for the exchange as FDCs controlling
sale or exchange or property, the entire amount of the gain
interest in FLI was decreased as a result of the
or loss, as the case may be, shall be recognized.
exchange. Is the CIRs contention correct?
(2) Exception. - No gain or loss shall be recognized if in
No. The Supreme Court in CIR V. FILINVEST
pursuance of a plan of merger or consolidation -
DEVELOPMENT CORPORATION (JULY 19, 2011]
(a) A corporation, which is a party to a merger or stated that the requisites for the non-recognition of gain or
consolidation, exchanges property solely for stock in a loss of a transfer of property for shares of stock are as
corporation, which is a party to the merger or follows: (a) the transferee is a corporation; (b) the
consolidation; transferee exchanges its shares of stock for property/ies of
the transferor; (c) the transfer is made by a person, acting
Q: A, B, C were majority stockholders of ABC Theatrical alone or together with others, not exceeding four persons;
Co. They were also majority stockholders of XYZ and, (d) as a result of the exchange the transferor, alone or
Theatrical Co which was engaged in the same business. together with others, not exceeding four, gains control of
ABC and XYZ agreed to merge. Under the agreement, the transferee. Rather than isolating FDC, the shares
all business, property, assets and goodwill of ABC will issued to FDC should be appreciated in combination with
be transferred to XYZ in exchange for XYZ stocks for the new shares issued to FAI. Together, FDC and FAIs
each stock held in ABC. Is the exchange subject to shares add to 70.99% of FLIs shares. Since the term
capital gains tax? "control" is clearly defined as "ownership of stocks in a
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], corporation possessing at least fifty-one percent of the
It is well established that where stocks for stocks were total voting power of classes of stocks entitled to one vote,
exchanged, and distributed to the stockholders of the the exchange of property for stocks between FDC-FAI
corporations, parties to the merger or consolidation, and FLI clearly qualify as a tax-free transaction.
pursuant to a plan of reorganization, such exchange is Q: ABC is a domestic corporation. Shareholders
exempt from capital gains tax. The basic consideration, of transferred their real property in exchange for more
course, is the purpose of the merger, as this would shares in the corporation. In effect, they gained control
determine whether the exchange of properties involved of more than 51% of the shares of the corporation
therein shall be subject or not to the capital gains tax. The entitled to vote. Is the exchange tax-exempt?
criterion laid down by the law is that the merger" must be
undertaken for a bona fide business purpose and not solely It depends. In BIR Ruling 274-87,58 the CIR ruled that
for the purpose of escaping the burden of taxation." It is no gain or loss would be recognized if property is
clear, in fact, that the purpose of the merger was to transferred to a corporation by a person in exchange for
continue the business of the Old Corporation, whose stock in such a corporation of which as a result of such
corporate life was about to expire, through the New exchange, said person alone or together with others, not
Corporation to which all the assets and obligations of the exceeding four persons, gains control of said corporation.
former had been transferred. The exemption from the tax The term "control" shall mean ownership of stocks in a
of the gain derived from exchanges of stock solely for corporation possessing at least 51% of the total voting
stock of another corporation was intended to encourage power of all classes of stocks entitled to vote. In
corporations in pooling, combining or expanding their determining the 51% stock ownership, only those persons
resources conducive to the economic development of the who transferred property for stock in the same transaction
country. The merger in question involved a pooling of may be counted up to a maximum of five.
resources aimed at the continuation and expansion of
(c) A security holder of a corporation, which is a party to
business and so came under the letter and intendment of
the merger or consolidation, exchanges his securities in
the NIRC exempting from the capital gains tax exchanges
such corporation, solely for stock or securities in such
of property.
corporation, a party to the merger or consolidation.
(b) A shareholder exchanges stock in a corporation, which
No gain or loss shall also be recognized if property is
is a party to the merger or consolidation, solely for the
transferred to a corporation by a person in exchange for
stock of another corporation also a party to the merger or
stock or unit of participation in such a corporation of
consolidation; or
which as a result of such exchange said person, alone or
Q: Filinvest Development Corporation (FDC), a holding together with others, not exceeding four (4) persons, gains
company, is the owner of 80% of the outstanding shares control of said corporation: Provided, That stocks issued
of Filinvest Alabang, Inc. (FAI) and 67.42% of the for services shall not be considered as issued in return for
outstanding shares of Filinvest Land, Inc. (FLI). FDC property.
and FAI entered into a Deed of Exchange with FLI
whereby the former both transfer in favor of the latter
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(3) Exchange Not Solely in Kind. - stock or securities exchanged, decreased by (1) the money
received, and (2) the fair market value of the other
(a) If, in connection with an exchange described in the
property received, and increased by (a) the amount treated
above exceptions, an individual, a shareholder, a security
as dividend of the shareholder and (b) the amount of any
holder or a corporation receives not only stock or
gain that was recognized on the exchange: Provided, That
securities permitted to be received without the recognition
the property received as 'boot' shall have as basis its fair
of gain or loss, but also money and/or property, the gain,
market value: Provided, further, That if as part of the
if any, but not the loss, shall be recognized but in an
consideration to the transferor, the transferee of property
amount not in excess of the sum of the money and fair
assumes a liability of the transferor or acquires form the
market value of such other property received: Provided,
latter property subject to a liability, such assumption or
That as to the shareholder, if the money and/or other
acquisition (in the amount of the liability) shall, for
property received has the effect of a distribution of a
purposes of this paragraph, be treated as money received
taxable dividend, there shall be taxed as dividend to the
by the transferor on the exchange: Provided, finally, That
shareholder an amount of the gain recognized not in
if the transferor receives several kinds of stock or
excess of his proportionate share of the undistributed
securities, the Commissioner is hereby authorized to
earnings and profits of the corporation; the remainder, if
allocate the basis among the several classes of stocks or
any, of the gain recognized shall be treated as a capital
securities.
gain.
(b) The basis of the property transferred in the hands of
(b) If, in connection with the exchange described in the
the transferee shall be the same as it would be in the hands
above exceptions, the transferor corporation receives not
of the transferor increased by the amount of the gain
only stock permitted to be received without the
recognized to the transferor on the transfer.
recognition of gain or loss but also money and/or other
property, then (i) if the corporation receiving such money (6) Definitions. -
and/or other property distributes it in pursuance of the
(a) The term "securities" means bonds and debentures but
plan of merger or consolidation, no gain to the corporation
not 'notes' of whatever class or duration.
shall be recognized from the exchange, but (ii) if the
corporation receiving such other property and/or money (b) The term "merger" or "consolidation", when used in
does not distribute it in pursuance of the plan of merger this Section, shall be understood to mean: (i) the ordinary
or consolidation, the gain, if any, but not the loss to the merger or consolidation, or (ii) the acquisition by one
corporation shall be recognized but in an amount not in corporation of all or substantially all the properties of
excess of the sum of such money and the fair market value another corporation solely for stock: Provided, That for a
of such other property so received, which is not transaction to be regarded as a merger or consolidation
distributed. within the purview of this Section, it must be undertaken
for a bona fide business purpose and not solely for the
(4) Assumption of Liability. -
purpose of escaping the burden of taxation: Provided,
(a) If the taxpayer, in connection with the exchanges further, That in determining whether a bona fide business
described in the foregoing exceptions, receives stock or purpose exists, each and every step of the transaction shall
securities which would be permitted to be received be considered and the whole transaction or series of
without the recognition of the gain if it were the sole transaction shall be treated as a single unit: Provided,
consideration, and as part of the consideration, another finally , That in determining whether the property
party to the exchange assumes a liability of the taxpayer, transferred constitutes a substantial portion of the
or acquires from the taxpayer property, subject to a property of the transferor, the term "property" shall be
liability, then such assumption or acquisition shall not be taken to include the cash assets of the transferor.
treated as money and/or other property, and shall not
(c) The term "control", when used in this Section, shall
prevent the exchange from being within the exceptions.
mean ownership of stocks in a corporation possessing at
(b) If the amount of the liabilities assumed plus the least fifty-one percent (51%) of the total voting power of
amount of the liabilities to which the property is subject all classes of stocks entitled to vote.
exceed the total of the adjusted basis of the property
(d) The Secretary of Finance, upon recommendation of
transferred pursuant to such exchange, then such excess
the Commissioner, is hereby authorized to issue rules and
shall be considered as a gain from the sale or exchange of
regulations for the purpose "substantially all" and for the
a capital asset or of property which is not a capital asset,
proper implementation of this Section.
as the case may be.
(5) Basis - Q: A owns all the stock of ABC Corp. ABC Corp. had
1,000 shares of XYZ Corp. A formed a new corporation
(a) The basis of the stock or securities received by the called DEF Corp. A had ABC transfer all 1,000 XYZ
transferor upon the exchange specified in the above shares to DEF. She then dissolved DEF and liquidated
exception shall be the same as the basis of the property, the assets (the XYZ shares). A then sold the XYZ shares
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and paid the corresponding CGT based on a lower cost stocks of the Transferee entitled to vote) of the Transferee
basis. Is the transfer valid? as a prerequisite to enjoying the benefit of non-
recognition of gain or loss. What is essential in a de facto
No. As held in GREGORY V. HELVERING [293 US
merger is that the Transferee acquires all or substantially
465, JANUARY 7, 1935], a transfer of assets by one
all of the properties of the Transferor. (see RMC 1-02
corporation to another must have a business purpose.
[April 25, 2002])
Here, it was a mere device which followed the form of a
corporate reorganization to conceal its real character Q: Is there a prescriptive period for rulings issued in
which was a transfer of stock of XYZ shares to A connection to tax-free exchanges?
Yes. RMC 40-2012 [August 3, 2012] provides that
rulings issued under Section 40 (C) (2) of the NIRC, as
amended, shall be valid only for ninety (90) days counted
from the date of receipt of the ruling by any of the parties
to the exchange transaction. The properties and shares of
Q: What is a de facto merger? stocks involved in the transfer should be conveyed to the
To constitute a de facto merger, the following elements transferee/s and transferor/s, respectively, within this
must concur: period.

1. There must be a transfer of all or substantially all of the Q: A Corp, a domestic corporation, entered into a
properties of the transferor corporation solely for stock, merger with its wholly-owned domestic subsidiaries B
and Corp and C Corp. A Corp is the surviving corporation.
Pursuant to the merger, B Corp and C Corp will transfer
2. It must be undertaken for a bona fide business purpose all their assets and liabilities to A Corp. However, since
and not solely for the purpose of escaping the burden of B Corp and C Corp are wholly-owned by A Corp prior
taxation. (see RMC 1-02 [April 25, 2002]) to the merger, A Corp will not longer issue any shares of
stock in consideration of the assets and liabilities
Q: What is meant by substantially all?
transferred. Is the merger between A Corp, B Corp, and
As provided by RR 2, "substantially all" means the C Corp considered a tax free merger under Section
acquisition by one corporation of at least 80% of the 40(C)(2)?
assets, including cash, of another corporation, which has
No. The intended re-organization is an upstream merger
the element of permanence and not merely momentary
between a parent company and its subsidiaries where the
holding
parent company will not be issuing any shares ot the
Q: What are the differences between a de facto merger subsidiaries in exchange for he assets to be transferred. In
and a statutory (ordinary) merger? effect, the transfer takes the nature of a donation made by
the subsidiaries to their parent company contrary to what
In a de facto merger, the Transferor is not automatically is contemplated in Section 40(C)(2) of the NIRC. Also,
dissolved unlike in the case of a statutory merger. the intended merger has the effect of dissolving and
Likewise, there is no automatic transfer to the Transferee liquidating the subsidiaries without payment of
of all the rights, privileges, and liabilities of the Transferor corresponding taxes. BIR RULING NO. 614-12
in the case of de facto merger. [NOVEMBER 9, 2012]
Q: What are the similarities and differences between a NORTHERN TOBACCO V CIR (CTA #8866)
de facto merger and a transfer of property for shares
under Section 40(C)(2) of the Tax Code? W/N a tax ruling is a condition precedent for the
application of section 40(c)(2) of the 1997 NIRC.
De facto merger is in procedure similar to a transfer to a
controlled corporation under the same Section 40(C)(2) of The Revenue Regulations that respondent relied upon
the Tax Code of 1997, except that at least 80% of the merely provide the guidelines in monitoring tax-free
Transferor's assets, including cash, are transferred to the exchanges of property, and in order that, in cases of
Transferee, with the element of permanence and not subsequent sales of said property, they shall be taxed
merely momentary holding. accordingly. Therefore, the BIR Ruling or Certification
required under RR No. 18-01 is for determining gain or
However, a de facto merger and a transfer to a controlled loss on a subsequent sale or disposition of property
corporation are different in that, (1) the Transferor in a de subject of the tax-free exchange, and not a precondition
facto merger is a corporation, while in a transfer to a for a taxpayer to be entitled to an exemption. There is
controlled corporation, the Transferors may either be a nothing therein explicitly requiring a party, in exchanging
corporation or an individual, and (2) in a de facto merger, property for shares of stocks, to first secure a BIR
there is no requirement that the transferor gains control confirmatory certification or tax ruling before it can avail
(that is, 51% of the total voting powers of all classes of itself of tax exemption.
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CO V. CIR (CTA #8831) payment and exclusively in exchange for the said shares,
petitioners and Anthony Sy assigned, transferred and
This resolves the Petition for Review filed by Lucio L.
conveyed unto Puregold the Kareila shares equivalent to
Co, Susan P. Co, Ferdinand Vincent P. Co, and Pamela
450 Puregold common shares for every 1 Kareila share.
Justine P. Co for the refund of the amount of
(P1,647,615,290.07),allegedly representing their Considering that the combined ownership by petitioners
erroneous payment of capital gains tax (CGT) including of Puregold's outstanding capital stock amounted to
interests and/or compromise penalty arising from an 75.83/o of the total Puregold shares, petitioners gained
exchange of shares of stock. further control of Puregold, the transferee, after the
exchange.
Under the Deed of Exchange, petitioners and Anthony Sy
would receive four hundred fifty (450) Puregold shares Accordingly, petitioners, as the transferors, should not
for every one (1) Kareila share that they would transfer to have recognized any gain from the said transaction and
Puregold. In accordance with the agreement, Puregold should not have paid CGT thereon.
issued to petitioners and Anthony Sy a total of
766,406,250 Puregold shares from its unissued but
existing authorized capital stock in exchange for
1,703,125 Kareila shares.
On June 26 and 28, 2012, petitioners collectively paid
capital gains tax (CGT) including interests and/or
compromise penalty on the said transfer.
Petitioners however claim that their payment of CGT was
erroneous since per Section 40(C)(2) of the NIRC, their
transfer of shares under the Deed of Exchange was a tax
exempt transaction.
On the other hand, respondent alleges that Revenue
Regulations No. 18-2001, Revenue Memorandum Order
Nos. 32-2001 and 17-2002 provide that there are certain
conditions/requirements which should be complied with
by the parties to an exchange transaction in order to avail
of the non-recognition of gain under Section 40(C)(2) of
the NIRC. Thus, for the subject transaction to qualify as a
tax free exchange, a prior application for a certification or
ruling from the BIR must be secured. In the present case
however, no such prior request for a certification/ruling
from the BIR was made. And since the claims for refund
are construed strictly against the taxpayer-claimant, the
refund sought by petitioners should be denied.
COURT:
The requisites for the nonrecognition of gain or loss are
as follows:
(1) the transferee is a corporation;
(2) the transferee exchanges its shares of stock for
property/ies of the transferor;
(3) the transfer is made by a person, acting alone or
together with others, not exceeding four persons; and,
(4) as a result of the exchange the transferor, alone or
together with others, not exceeding four, gains control of
the transferee.
Based on the Deed of Exchange executed by petitioners
with Anthony Sy and Puregold Price Club, Inc.,
petitioners and Anthony Sy subscribed to a total of
766,406,250 common shares of stock of Puregold. In
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Administrative Provisions received or not. Expenses are accounted for in the period
they are incurred and not in the period they are paid.
Accounting Period and Methods
Q: Distinguish cash method from accrual method of
SEC. 43. General Rule. - The taxable income shall be
accounting.
computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case In cash method, income is reported in the year payments
may be) in accordance with the method of accounting are received while expenses are deducted in the year paid.
regularly employed in keeping the books of such On the other hand, in accrual method, income is reported
taxpayer, but if no such method of accounting has been so in the year it is earned while expenses are deducted in the
employed, or if the method employed does not clearly year it is incurred, regardless of receipt or disbursement
reflect the income, the computation shall be made in of cash.
accordance with such method as in the opinion of the
Commissioner clearly reflects the income. If the Q: Can a taxpayer use a combination of two or more
taxpayer's annual accounting period is other than a fiscal methods of accounting?
year, as defined in Section 22(Q), or if the taxpayer has No. The rule is that a taxpayer may use any one method
no annual accounting period, or does not keep books, or of accounting but not a combination of two or more
if the taxpayer is an individual, the taxable income shall methods of accounting for each type of business during
be computed on the basis of the calendar year. the taxable year. The use of a hybrid method of
accounting is not allowed (see CONSOLIDATED
SEC. 44. Period in which Items of Gross Income
MINES VS. CTA [AUGUST 29, 1974])
Included.- The amount of all items of gross income shall
be included in the gross income for the taxable year in SEC. 46. Change of Accounting Period. - If a taxpayer,
which received by the taxpayer, unless, under methods of other than an individual, changes his accounting period
accounting permitted under Section 43, any such amounts from fiscal year to calendar year, from calendar year to
are to be properly accounted for as of a different period. fiscal year, or from one fiscal year to another, the net
In the case of the death of a taxpayer, there shall be income shall, with the approval of the Commissioner, be
included in computing taxable income for the taxable computed on the basis of such new accounting period,
period in which falls the date of his death, amounts subject to the provisions of Section 47.
accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior SEC. 47. Final or Adjustment Returns for a Period of
period. Less than Twelve (12) Months. -

SEC. 45. Period for which Deductions and Credits (A) Returns for Short Period Resulting from Change
Taken. - The deductions provided for in this Title shall of Accounting Period. - If a taxpayer, other than an
be taken for the taxable year in which 'paid or accrued' or individual, with the approval of the Commissioner,
'paid or incurred', dependent upon the method of changes the basis of computing net income from fiscal
accounting upon the basis of which the net income is year to calendar year, a separate final or adjustment return
computed, unless in order to clearly reflect the income, shall be made for the period between the close of the last
the deductions should be taken as of a different period. In fiscal year for which return was made and the following
the case of the death of a taxpayer, there shall be allowed December 31. If the change is from calendar year to fiscal
as deductions for the taxable period in which falls the date year, a separate final or adjustment return shall be made
of his death, amounts accrued up to the date of his death for the period between the close of the last calendar year
if not otherwise properly allowable in respect of such for which return was made and the date designated as the
period or a prior period. close of the fiscal year. If the change is from one fiscal
year to another fiscal year, a separate final or adjustment
Accounting Method return shall be made for the period between the close of
the former fiscal year and the date designated as the close
Q: What are two main accounting methods that may be
of the new fiscal year.
used by taxpayers?
(B) Income Computed on Basis of Short Period. -
The methods are:
Where a separate final or adjustment return is made under
1. Cash Method a method of accounting whereby all Subsection (A) on account of a change in the accounting
items of gross income received during the year shall be period, and in all other cases where a separate final or
accounted for in such taxable year and that only expenses adjustment return is required or permitted by rules and
actually paid shall be claimed as deductions during the regulations prescribed by the Secretary of Finance, upon
year recommendation of the Commissioner, to be made for a
fractional part of a year, then the income shall be
2. Accrual Method method of accounting for income
computed on the basis of the period for which separate
in the period it is earned, regardless of whether it has been
final or adjustment return is made.
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SEC. 48. Accounting for Long-term Contracts. - of the purchaser during the taxable period in which the
Income from long-term contracts shall be reported for tax sale or other disposition is made.
purposes in the manner as provided in this Section. As
used herein, the term 'long-term contracts' means (C) Sales of Real Property Considered as Capital Asset
by Individuals. - An individual who sells or disposes of
building, installation or construction contracts covering a
real property, considered as capital asset, and is otherwise
period in excess of one (1) year. Persons whose gross
qualified to report the gain therefrom under Subsection
income is derived in whole or in part from such contracts
(B) may pay the capital gains tax in installments under
shall report such income upon the basis of percentage of
rules and regulations to be promulgated by the Secretary
completion. The return should be accompanied by a return
of Finance, upon recommendation of the Commissioner.
certificate of architects or engineers showing the
percentage of completion during the taxable year of the (D) Change from Accrual to Installment Basis. - If a
entire work performed under contract. There should be taxpayer entitled to the benefits of Subsection (A) elects
deducted from such gross income all expenditures made for any taxable year to report his taxable income on the
during the taxable year on account of the contract, account installment basis, then in computing his income for the
being taken of the material and supplies on hand at the year of change or any subsequent year, amounts actually
beginning and end of the taxable period for use in received during any such year on account of sales or other
connection with the work under the contract but not yet dispositions of property made in any prior year shall not
so applied. If upon completion of a contract, it is found be excluded.
that the taxable [net] income arising thereunder has not
been clearly reflected for any year or years, the Q: A sold lots to ABC Corp and was paid less than 25%,
Commissioner may permit or require an amended return. the balance was covered by 4 checks. On the same day,
the checks were discounted (exchange for cash at an
SEC. 49. Installment Basis. - amount lower than face value) also ABC Corp. A
(A) Sales of Dealers in Personal Property. - Under rules reported as income for the year of the sale for the year
and regulations prescribed by the Secretary of Finance, of the sale only the cash amount received from sale and
upon recommendation of the Commissioner, a person excluded the amount received from the discounted
who regularly sells or otherwise disposes of personal checks. The balance was reported as income only in the
property on the installment plan may return as income next four years. A argues that initial payment excludes
therefrom in any taxable year that proportion of the evidence of indebtedness. Is As contention correct?
installment payments actually received in that year, which Yes. As held in BIBIANO V BANAS [FEBRUARY 10,
the gross profit realized or to be realized when payment is 2000], The transaction remains to be an instalment (not
completed, bears to the total contract price. cash) sale as the law expressly excludes evidence of
indebtedness in the determination of how much was paid
Q: Explain the installment method
for the year. However, even if the proceeds of discounted
Installment Method is a method of accounting note is not considered as part of the initial payment, the
considered appropriate when collections of the proceeds income realized from the discounting itself is still a
of sales and incomes extend over relatively long periods separate taxable income in the year it was converted into
of time and there is strong possibility that full collection cash because it was at this year that there was actual gain
will not be paid. As customers make installment on the discounted notes.
payments, the seller recognizes the gross profit on sale in
proportion to the cash collected during the year. (see Q: Explain the percentage of completion method.
Section 49, Tax Code) Percentage of Completion Method is a method of
accounting applicable in the case of a building,
(B) Sales of Realty and Casual Sales of
installation or construction contract covering a period in
Personality. - In the case (1) of a casual sale or other
excess of one year, whereby gross income derived from
casual disposition of personal property (other than
such contract may be reported upon the basis of
property of a kind which would properly be included in
percentage of completion. (see Section 48, Tax Code)
the inventory of the taxpayer if on hand at the close of the
taxable year), for a price exceeding One thousand pesos SEC. 50. Allocation of Income and Deductions. - In the
(P1,000), or (2) of a sale or other disposition of real case of two or more organizations, trades or businesses
property, if in either case the initial payments do not (whether or not incorporated and whether or not
exceed twenty-five percent (25%) of the selling price, the organized in the Philippines) owned or controlled directly
income may, under the rules and regulations prescribed or indirectly by the same interests, the Commissioner is
by the Secretary of Finance, upon recommendation of the authorized to distribute, apportion or allocate gross
Commissioner, be returned on the basis and in the manner income or deductions between or among such
above prescribed in this Section. As used in this Section, organization, trade or business, if he determined that such
the term 'initial payments' means the payments received distribution, apportionment or allocation is necessary in
in cash or property other than evidences of indebtedness
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order to prevent evasion of taxes or clearly to reflect the employers at any time during the taxable year shall file an
income of any such organization, trade or business. income tax return. [36]
Q: Distinguish gross income from net income and (c) An individual whose sole income has been subjected
taxable income to final withholding tax pursuant to Section 57(A) of this
Code; and
Gross Income All income minus
exclusions. (In other (d) A minimum wage earner as defined in section 22 (HH)
words, all income of this Code or an individual who is exempt from income
subject to income tax) tax pursuant to the provisions of this Code and other laws,
Taxable Income All pertinent items of general or special. [37]
gross income less
deductions and/or (3) The foregoing notwithstanding, any individual not
personal and additional required to file an income tax return may nevertheless be
exemptions, if any, required to file an information return pursuant to rules and
authorized for such regulations prescribed by the Secretary of Finance, upon
types of income by this recommendation of the Commissioner.
Code or other special
laws (see Section 31, (4) The income tax return shall be filed in duplicate by the
NIRC) following persons:
Net income This is gross income
less the allowable (a) A resident citizen - on his income from all sources;
deductions. (b) A nonresident citizen - on his income derived from
sources within the Philippines;
Returns and Payment of Taxes
(c) A resident alien - on his income derived from sources
Individual Return within the Philippines; and

SEC. 51. Individual Return. - (d) A nonresident alien engaged in trade or business in the
Philippines - on his income derived from sources within
(A) Requirements. - the Philippines.
(1) Except as provided in paragraph (2) of this Subsection, (B) Where to File. - Except in cases where the
the following individuals are required to file an income Commissioner otherwise permits, the return shall be filed
tax return: with an authorized agent bank, Revenue District Officer,
(a) Every Filipino citizen residing in the Philippines; Collection Agent or duly authorized Treasurer of the city
or municipality in which such person has his legal
(b) Every Filipino citizen residing outside the Philippines, residence or principal place of business in the Philippines,
on his income from sources within the Philippines; or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner.
(c) Every alien residing in the Philippines, on income
derived from sources within the Philippines; and (C) When to File. -
(d) Every nonresident alien engaged in trade or business (1) The return of any individual specified above shall be
or in the exercise of profession in the Philippines. filed on or before the fifteenth (15th) day of April of each
year covering income for the preceding taxable year.
(2) The following individuals shall not be required to file
an income tax return: (2) Individuals subject to tax on capital gains;
(a) An individual whose gross income does not exceed his (a) From the sale or exchange of shares of stock not traded
total personal and additional exemptions for dependents thru a local stock exchange as prescribed under Section
under Section 35: Provided, That a citizen of the 24(C)shall file a return within thirty (30) days after each
Philippines and any alien individual engaged in business transaction and a final consolidated return on or before
or practice of profession within the Philippine shall file an April 15 of each year covering all stock transactions of the
income tax return, regardless of the amount of gross preceding taxable year; and
income;
(b) From the sale or disposition of real property under
(b) An individual with respect to pure compensation Section 24(D) shall file a return within thirty (30) days
income, [35] as defined in Section 32 (A)(1), derived from following each sale or other disposition.
sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of (D) Husband and Wife. - Married individuals, whether
Section 79 of this Code: Provided, That an individual citizens, resident or nonresident aliens, who do not derive
deriving compensation concurrently from two or more income purely from compensation, shall file a return for
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the taxable year to include the income of both spouses, shall be paid on August 15 and November 15 of the
but where it is impracticable for the spouses to file one current year, respectively. The fourth installment shall be
return, each spouse may file a separate return of income paid on or before April 15 of the following calendar year
but the returns so filed shall be consolidated by the Bureau when the final adjusted income tax return is due to be
for purposes of verification for the taxable year. filed.
(E) Return of Parent to Include Income of (C) Definition of Estimated Tax. - In the case of an
Children. - The income of unmarried minors derived individual, the term 'estimated tax' means the amount
from properly received from a living parent shall be which the individual declared as income tax in his final
included in the return of the parent, except (1) when the adjusted and annual income tax return for the preceding
donor's tax has been paid on such property, or (2) when taxable year minus the sum of the credits allowed under
the transfer of such property is exempt from donor's tax. this Title against the said tax. If, during the current taxable
year, the taxpayer reasonable expects to pay a bigger
(F) Persons Under Disability. - If the taxpayer is unable
income tax, he shall file an amended declaration during
to make his own return, the return may be made by his
any interval of installment payment dates.
duly authorized agent or representative or by the guardian
or other person charged with the care of his person or Corporation Returns
property, the principal and his representative or guardian
Quarterly Income Tax
assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or SEC. 75. - Declaration of Quarterly Corporate Income
fraudulent returns. Tax. - Every corporation shall file in duplicate a quarterly
summary declaration of its gross income and deductions
(G) Signature Presumed Correct. - The fact that an
on a cumulative basis for the preceding quarter or quarters
individual's name is signed to a filed return shall be prima
upon which the income tax, as provided in Title II of this
facie evidence for all purposes that the return was actually
Code, shall be levied, collected and paid. The tax so
signed by him.
computed shall be decreased by the amount of tax
SEC. 74. Declaration of Income Tax for Individuals. - previously paid or assessed during the preceding quarters
and shall be paid not later than sixty (60) days from the
(A) In General. - Except as otherwise provided in this
close of each of the first three (3) quarters of the taxable
Section, every individual subject to income tax under
year, whether calendar or fiscal year.
Sections 24 and 25(A) of this Title, who is receiving self-
employment income, whether it constitutes the sole Final Adjustment Return
source of his income or in combination with salaries,
SEC. 76. - Final Adjustment Return. - Every
wages and other fixed or determinable income, shall make
corporation liable to tax under Section 27 shall file a final
and file a declaration of his estimated income for the
adjustment return covering the total taxable income for
current taxable year on or before April 15 of the same
the preceding calendar or fiscal year. If the sum of the
taxable year. In general, 'self-employment income'
quarterly tax payments made during the said taxable year
consists of the earnings derived by the individual from the
is not equal to the total tax due on the entire taxable
practice of profession or conduct of trade or business
income of that year, the corporation shall either:
carried on by him as a sole proprietor or by a partnership
of which he is a member. Nonresident Filipino citizens, (A) Pay the balance of tax still due; or
with respect to income from without the Philippines, and
nonresident aliens not engaged in trade or business in the (B) Carry-over the excess credit; or
Philippines, are not required to render a declaration of (C) Be credited or refunded with the excess amount paid,
estimated income tax. The declaration shall contain such as the case may be.
pertinent information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and In case the corporation is entitled to a tax credit or refund
regulations prescribe. An individual may make of the excess estimated quarterly income taxes paid, the
amendments of a declaration filed during the taxable year excess amount shown on its final adjustment return may
under the rules and regulations prescribed by the be carried over and credited against the estimated
Secretary of Finance, upon recommendation of the quarterly income tax liabilities for the taxable quarters of
Commissioner. the suceeding taxable years. Once the option to carry-over
and apply the excess quarterly income tax against income
(B) Return and Payment of Estimated Income Tax by tax due for the taxable quarters of the succeeding taxable
Individuals. - The amount of estimated income as years has been made, such option shall be considered
defined in Subsection (C) with respect to which a irrevocable for that taxable period and no application for
declaration is required under Subsection (A) shall be paid cash refund or issuance of a tax credit certificate shall be
in four (4) installments. The first installment shall be paid allowed therefor.
at the time of the declaration and the second and third
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SYSTRA PHILS. V CIR Failure to indicate a choice, however, will not bar a
valid request for a refund, should this option be chosen
Petitioner opted to carry over the said excess tax credit to
by the taxpayer later on.
the succeeding taxable year 2001.
In GR No. 162004, however, the subsequent acts of
Petitioner indicated in the 2001 ITR the option "To be
petitioner demonstrated its option to carry over its tax
issued a Tax Credit Certificate" relative to its tax
credit for 1998, even if it again failed to tick the
overpayments.
appropriate box for that option in its 1998 ITR.
On August 9, 2002, petitioner instituted a claim for refund
The fact that it filled out the portion Prior Years Excess
or issuance of a tax credit certificate with the BIR of its
Credits in its 1999 FAR means that it categorically availed
unutilized creditable withholding taxes in the amount
itself of the carry-over option. In fact, the line that
of P5,342,246.00 as of December 31, 2001.
precedes that phrase in the BIR form clearly states Less:
CTA: It ruled that petitioner was precluded from claiming Tax Credits/Payments. The contention that it merely filled
a refund thereof or requesting a tax credit certificate out that portion because it was a requirement -- and that
therefor. Once it was made for a particular taxable period, to have done otherwise would have been tantamount to
the option to carry over became irrevocable. falsifying the FAR -- is a long shot.

SC: A corporation entitled to a tax credit or refund of the The FAR is the most reliable firsthand evidence of
excess estimated quarterly income taxes paid has two corporate acts pertaining to income taxes. In it are found
options: (1) to carry over the excess credit or (2) to apply the itemization and summary of additions to and
for the issuance of a tax credit certificate or to claim a cash deductions from income taxes due. These entries are not
refund. If the option to carry over the excess credit is without rhyme or reason. They are required, because they
exercised, the same shall be irrevocable for that taxable facilitate the tax administration process.
period.
Failure to indicate the amount of prior years excess credits
In exercising its option, the corporation must signify in its does not mean falsification by a taxpayer of its current
annual corporate adjustment return (by marking the years FAR. On the contrary, if an application for a tax
option box provided in the BIR form) its intention either refund has been -- or will be -- filed, then that portion of
to carry over the excess credit or to claim a refund. To the BIR form should necessarily be blank, even if the FAR
facilitate tax collection, these remedies are in the of the previous taxable year already shows an
alternative and the choice of one precludes the other.20 overpayment in taxes.

This is known as the irrevocability rule and is embodied BPI V CIR


in the last sentence of Section 76 of the Tax Code. The
Upon the SECs approval of the Articles of Merger in July
phrase "such option shall be considered irrevocable for
1, 1985, BPI became the successor-in-interestof Family
that taxable period" means that the option to carry over
Bank and Trust Company (FBTC). Prior to the approval
the excess tax credits of a particular taxable year can no
of the merger, FBTC earned rental fees and interest from
longer be revoked.
treasury notes. FBTCs lessees withheld 5% on the rentals
The rule prevents a taxpayer from claiming twice the pursuant to the
excess quarterly taxes paid: (1) as automatic credit against
Expanding Withholding Tax Regulations while the
taxes for the taxable quarters of the succeeding years for
Central Bank withheld 15% on the treasury notes.The
which no tax credit certificate has been issued and (2) as
withheld taxes totaling to 174k were remitted to FBTC.
a tax credit either for which a tax credit certificate will be
FBTCs excess credit amounted to 2.14M.
issued or which will be claimed for cash refund.
In 1986, FBTC filed its return showing (a 65.5M net loss
In this case, it was in the year 2000 that petitioner derived
and) a refundable amount of the withheld tax. BPI, as
excess tax credits and exercised the irrevocable option to
successor0in-interest, asked the BIR for refund of the
carry them over as tax credits for the next taxable year.
excess credit and the withheld taxes. The BIR refused.In
Under Section 76 of the Tax Code, a claim for refund of
1987 BPI brought a petition for review before the CTA.
such excess credits can no longer be made. The excess
The CTA dismissed it on the ground that the claim for tax
credits will only be applied "against income tax due for
refund had prescribed. MR denied, hence this petition for
the taxable quarters of the succeeding taxable years."
review.
PHILAM ASSET MANAGEMENT V CIR CTA: Since FBTC is a dissolving corporation, it
Under Section 76 of the National Internal Revenue Code, is required to file its income tax return within 30 day after
a taxable corporation with excess quarterly income tax the cessation of business or 30 days after the approval of
payments may apply for either a tax refund or a tax credit, the merger. For BPI to claim the refund, it should have
but not both. The choice of one precludes the other. filed the action within to years from the day in which

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FBTC as corporate taxpayer is required to file its final itself and without unquestionable evidence, cannot be
income tax return. BPI filed it on Dec 1987, when it had the basis for the grant of the refund.
until July 1987 to file it. Petitioner misled the CTA by
In the case at bar, the CTA explained that it merely
claiming that what is required is only an information
determined whether petitioner is entitled to a refund based
return. An ongoing corporation files a quarterly corporate
on the facts. On the assumption that petitioner filed a
return and the final adjustment return refers to final
correct return, it had the right to file a claim for refund of
adjustment income tax return. All references by BPI relate
GPB tax on passenger revenues it paid in 1999 when it
to the filing of an accurate income tax return.
was not operating passenger flights to and from the
The correct return for the case of FBTC is the Final Philippines. However, upon examination by the CTA,
Adjustment Income Tax Return. petitioners return was found erroneous as it understated
its gross cargo revenue for the same taxable year due to
RATIO: Reckoning period of the 2-year prescriptive
deductions of two (2) items consisting of commission and
period in claiming a refund is from the time claimant is
other incentives of its agent. Having underpaid the GPB
required to file his return.
tax due on its cargo revenues for 1999, petitioner is not
Other income tax requirements entitled to a refund of its GPB tax on its passenger
revenue, the amount of the former being even much
UNITED AIRLINES V CIR higher (P31.43 million) than the tax refund sought (P5.2
On April 12, 2002, petitioner filed with respondent million). The CTA therefore correctly denied the claim
Commissioner a claim for income tax refund, pursuant to for tax refund after determining the proper assessment and
Section 28(A)(3)(a) of the National Internal Revenue the tax due.
Code of 1997 (NIRC) in relation to Article 4(7) of the RATIO:
Convention between the Government of the Republic of
the Philippines and the Government of the United States Offsetting of tax refund with tax due (valid return): NO
of America with respect to Income Taxes (RP-US Tax
Offsetting of tax refund with tax deficiency
Treaty). Since the Bureau of Internal Revenue (BIR)
(invalid/understated return): YES
erroneously imposed and collected income tax in 1999
based on petitioners gross passenger revenue, as
beginning 1998 petitioner no longer flew passenger
flights to and from the Philippines, petitioner is entitled to
a refund of such erroneously collected income tax in the
amount of P5,028,813.23
W/N the petitioner is entitled to a refund of the amount
of P5,028,813.23 it paid as income tax on its passenger
revenues in 1999.
SC: Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or
Fraudulent Returns. - When an assessment is made in
case of any list, statement or return, which in the opinion
of the Commissioner was false or fraudulent or contained
any understatement or undervaluation, no tax collected
under such assessment shall be recovered by any suit,
unless it is proved that the said list, statement or return
was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall
not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas
wells and mines.
The grant of a refund is founded on the assumption
that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as
to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by

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