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FEATURES OF PHILIPPINE INCOME TAXATION

TAX SITUS- It is the place or authority that has the right to impose and collect taxes.
GR: The taxing power of a country is limited to persons and property within and subject to
its jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which could only be exercised within a country’s
territorial limits.
2. This is based on the theory that taxes are paid for the protection and services
provided by the taxing authority which could not be provided outside the territorial boundaries
of the taxing State.

XPNs:
1. Where tax laws operate outside territorial jurisdiction.( i.e. Taxation of resident
citizens on their incomes derived abroad)
2. Where tax laws do not operate within the territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.

Factors that determine the situs of taxation (ReCiNS2)


1.) Residence of the taxpayer
2.) Citizenship of the taxpayer
3.) Nature of the tax
4.) Subject matter of the tax
5.) Source of income
Rules in Fixing the Tax Situs

OBJECT SITUS
INCOME TAX
Nationality – applied to RC, DC Upon sources of income derived within and without the
Philippines

Place – applied to NRC, NRA, NRFC Upon sources of income derived within the Philippines

Upon sources of income derived within the Philippines


Residence – applied to RA, RFC
PROPERTY TAX

Real Property Location of the property (lex rei sitae / lex situs)
Rationale:
1. The taxing authority has control because of the
stationary and fixed character of the property.
2. The place where the real property is situated gives
protection to the real property; hence the property or its
owner should support the government of that place.

Personal Property Domicile of the owner (mobilia sequuntur personam)

Rationale: The place where the tangible personal


property is found gives its protection.
Tangible personal property Where the property is physically located although the
owner resides in another jurisdiction (51 Am Jur. 467)

Intangible personal property GR: Situs of intangible personal property is the domicile
of the owner pursuant to the principle of the mobilia
sequntur personam.

XPN:
1. When the property has acquired a business situs in
another jurisdiction;
2. When an express provision of the statute provide for
another rule.

EXCISE TAX / DONOR’S TAX / ESTATE TAX

Nationality– applied to RC, NRC Taxed upon their properties wherever situated

Place – applied to NRA Taxed on properties situated within the Philippines

Residence – applied to RA Taxed upon their properties wherever situated

BUSINESS TAX Place where the act/ business is performed or


occupation is engaged in

VAT Where the goods, property or services are destined,


used or consumed

Q: What is meant by the doctrine of mobilia sequuntur personam?


A: Literally, it means “Movable follows the person/owner”. However, a tangible property may
acquire situs elsewhere provided it has a definite location there with some degree of
permanency.

Q: For purposes of estate and donor’s taxes, what are the intangible properties with situs in
the Philippines?
A: Fran-Sha4 (Organized-Established-85-Foreign Situs)
1. Franchise which must be exercised in the Philippines;
2. Shares, obligations or bonds issued by any corporation or sociedad anonima
Organized or constituted in the Philippines in accordance with its laws;
3. Shares, obligations or bonds by any foreign corporation 85% of its business is located
in the Philippines;
4. Shares, obligations or bonds issued by any Foreign corporation if such shares,
obligations or bonds have acquired a business Situs in the Philippines;
5. Shares or rights in any partnership, business or industry Established in the Philippines
(Sec. 104, NIRC)
Note: These are considered located in the Philippines, regardless of the residence of the owner.

Q: What are the remedies available against multiplicity of situs?


A: Tax laws and treaties with other States may:
1. Exempt foreign nationals from local taxation and local nationals from foreign taxation
under the principle of reciprocity;
2. Credit foreign taxes paid from local taxes due;
3. Allow foreign taxes as deduction from gross income; or
4. Reduce the Philippine income tax rate.
PROGRESSIVE SYSTEM OF TAXATION- this refers to or covers the entire tax structure of the
country in all its stages and aspects. It require that revenue laws place emphasis on direct rather
than indirect taxes, the ability to pay principle as the principal criterion. Thus, this system is
primarily based on taxpayer’s ability to pay; it implies that as the income, gain or proceeds of a
taxpayer increase, he pays more taxes. As applied to income taxation, he who earns more shall
pay more and he who earn less, pay less.
It means that the stress on a set of revenue laws is on ability to pay, which is really to say
that those in a better financial position to pay are tax more than those who are not.

REGRESSIVE SYSTEM OF TAXATION- it is a system where there are more indirect taxes imposed
than direct taxes. The lower income group in the society shoulders the burden of the indirect
taxes; they bear the bulk of the burden of providing government revenue. Under this system,
the tax rate decreases as the tax base or bracket increases. The rate and the rate base move in
opposite directions.

Q: Distinguish global system from schedular system of income taxation.


A: Under a scheduler system, the various types or items of income (compensation, business or
professional income) are classified accordingly and are accorded different tax treatments, in
accordance with schedules characterized by graduated tax rates. Since these types of income
are treated separately, the allowable deductions shall likewise vary for each type of income.

Under the global system, all income received by the taxpayer are grouped together, without
any distinction as to the type or nature of the income, and after deducting therefrom expenses
and other allowable deductions, are subjected to tax at a fixed rate.

Q: What is a semi-schedular or semi-global tax system?


A: A system where the compensation, business or professional income, capital gain and passive
income not subject to final tax, and other income are added together to arrive at the gross
income, and after deducting the sum of allowable deductions from business or professional
income, capital gain and passive income not subject to final tax, and other income, in the case
of corporations, as well as personal and additional exemptions, in the case of individual
taxpayers, the taxable income is subjected to one set of graduated tax rates; method of taxation
under the law.

Q: What system is employed in case of individual income taxation?


A: The schedular system is followed. Under Sec. 24 to 26 of the NIRC, the income of an
individual taxpayer that is subject to tax may be classified into compensation income, business
income, professional income, passive income, capital income derived from the sale of shares of
stock, or capital gain derived from the sale of real property. Therefore, different income
classification would subject it to different tax treatment with different tax rates.

Q: What system is adopted in corporate income taxation?


A: Global system of taxation. Under Sec. 27 and 28 of the NIRC, the rules are uniform as far as
domestic corporations are concerned subject to certain exceptions. In case of resident and non-
resident foreign corporations the rules applied are also uniform.
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.

Who are taxable on income derived from all sources, whether within or outside the Philippines?
Taxed worldwide!

1. Resident citizens.
2. Domestic corporations.
 The other kinds of taxpayers are subject to tax only on income derived from
Philippine sources.

Taxable Income Taxable Income

Citizenship & Residency Inside RP Outside RP

Resident Citizen Yes Yes

Non-resident Citizen Yes No

Overseas Contract Worker Yes No

Resident Alien Yes No

Non-resident Alien Yes No

Domestic Corp Yes Yes

Foreign Corp Yes No


Section 22. Definitions - When used in this Title:

(A) The term 'person' means an individual, a trust, estate or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), association,
or insurance companies, but does not include general professional partnerships and a
joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the Government.
'General professional partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.

(C) The term 'domestic,' when applied to a corporation, means created or organized in
the Philippines or under its laws.

(D) The term 'foreign,' when applied to a corporation, means a corporation which is not
domestic.

(E) The term 'nonresident citizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the


Commissioner the fact of his physical presence abroad with a definite intention
to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year
to reside abroad, either as an immigrant or for employment on a permanent
basis.

(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most of
the time during the taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be for purpose of this Section.

(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.

(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in
trade or business within the Philippines.

(I) The term 'nonresident foreign corporation' applies to a foreign corporation not
engaged in trade or business within the Philippines.

(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver,
conservator or any person acting in any fiduciary capacity for any person.

(K) The term 'withholding agent' means any person required to deduct and withhold any
tax under the provisions of Section 57.

(L) The term 'shares of stock' shall include shares of stock of a corporation, warrants
and/or options to purchase shares of stock, as well as units of participation in a
partnership (except general professional partnerships), joint stock companies, joint
accounts, joint ventures taxable as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.

(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or
option/s to purchase shares of stock of a corporation, as well as a holder of a unit of
participation in a partnership (except general professional partnerships) in a joint stock
company, a joint account, a taxable joint venture, a member of an association,
recreation or amusement club (such as golf, polo or similar clubs) and a holder of a
mutual fund certificate, a member in an association, joint-stock company, or insurance
company.

(N) The term 'taxpayer' means any person subject to tax imposed by this Title.

(O) The terms 'including' and 'includes', when used in a definition contained in this Title,
shall not be deemed to exclude other things otherwise within the meaning of the term
defined.

(P) The term 'taxable year' means the calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed under this Title.
'Taxable year' includes, in the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the commissioner, the period for which such return is
made.

(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on
the last day of any month other than December.

(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the
method of accounting upon the basis of which the net income is computed under this
Title.

(S) The term 'trade or business' includes the performance of the functions of a public
office.

(T) The term 'securities' means shares of stock in a corporation and rights to subscribe
for or to receive such shares. The term includes bonds, debentures, notes or certificates,
or other evidence or indebtedness, issued by any corporation, including those issued by
a government or political subdivision thereof, with interest coupons or in registered
form.

(U) The term 'dealer in securities' means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers; that is, one
who, as a merchant, buys securities and re-sells them to customers with a view to the
gains and profits that may be derived therefrom.

(V) The term 'bank' means every banking institution, as defined in Section 2 of Republic
Act No. 337, as amended, otherwise known as the General banking Act. A bank may
either be a commercial bank, a thrift bank, a development bank, a rural bank or
specialized government bank.

(W) The term 'non-bank financial intermediary' means a financial intermediary, as


defined in Section 2(D)(C) of Republic Act No. 337, as amended, otherwise known as the
General Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform
quasi-banking activities.

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower's own
account, or through the issuance of certificates of assignment or similar instruments,
with recourse, or of repurchase agreements for purposes of relending or purchasing
receivables and other similar obligations: Provided, however, That commercial, industrial
and other non-financial companies, which borrow funds through any of these means for
the limited purpose of financing their own needs or the needs of their agents or dealers,
shall not be considered as performing quasi-banking functions.

(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from
the public (the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowers own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These instruments may include,
but need not be limited to bankers' acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements entered into by and between the
Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with recourse: Provided, however,
That debt instruments issued for interbank call loans with maturity of not more than five
(5) days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit substitute
debt instruments.

(Z) The term 'ordinary income' includes any gain from the sale or exchange of property
which is not a capital asset or property described in Section 39(A)(1). Any gain from the
sale or exchange of property which is treated or considered, under other provisions of
this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of
property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary
loss' includes any loss from the sale or exchange of property which is not a capital asset.
Any loss from the sale or exchange of property which is treated or considered, under
other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or
exchange of property which is not a capital asset.

(AA) The term 'rank and file employees' shall mean all employees who are holding
neither managerial nor supervisory position as defined under existing provisions of the
Labor Code of the Philippines, as amended.

(BB) The term 'mutual fund company' shall mean an open-end and close-end investment
company as defined under the Investment Company Act.

(CC) The term 'trade, business or profession' shall not include performance of services by
the taxpayer as an employee.

(DD) The term 'regional or area headquarters' shall mean a branch established in the
Philippines by multinational companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets.

(EE) The term 'regional operating headquarters' shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and coordination;
sourcing and procurement of raw materials and components; corporate finance advisory
services; marketing control and sales promotion; training and personnel management;
logistic services; research and development services and product development; technical
support and maintenance; data processing and communications; and business
development.

(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of
time deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments with a
maturity period of not less than five (5) years, the form of which shall be prescribed by
the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial
intermediaries and finance companies) to individuals in denominations of Ten thousand
pesos (P10,000) and other denominations as may be prescribed by the BSP.

INCOME- it is an amount of money coming to a person or corporation within a specified time


whether as payment of services, interest or profit from investment. It is a gain derived from
capital, from labor, or from both combined, provided it be understood to include profit or gain,
resulting from the sale or conversion of real/personal property, ordinary or capital assets.
It refers to all wealth which flows into the taxpayer other than as mere return of capital.
It includes the forms of income specifically described as gains and profits, including gains
derived from the sale or other disposition of capital assets. (Sec. 36, RR No.2)
Income is a flow of service rendered by capital by payment of money from it or any
benefit rendered by a fund of capital in relation to such fund through a period of time.
(Madrigal v. Rafferty, GR 12287, Aug. 8, 1918)
An income is an amount of money coming to a person or corporation within a specified
time, whether as payment for services, interest or profit from investment. Unless otherwise
specified, income means cash or its equivalent.

An income tax is a tax on all yearly profits arising from property, profession, trade or business,
or a tax on person’s income, emoluments, profits and the like.

DIFFERENCE BETWEEN INCOME AND CAPITAL


 The essential difference between capital and income is that capital is a fund; and income
is a flow. Capital is wealth, while income is the service of wealth.
 Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree,
income the fruit.
 Income means profits or gains. (Madrigal v Rafferty)
 Income may be defined as the amount of money coming to a person or corporation
within a specified time, whether as payment for services, interest or profit from
investment.
o A mere advance in the value of property of a person or a corporation in no sense
constitutes the ‘income’ specified in the law. Such advance constitutes and can
be treated merely as an increase in capital. (Fisher v Trinidad)
 Cash dividends is taxed as income because it has been realized/received, while stock
dividends is not taxed as income because it is merely inchoate as it is a mere anticipation
of income (it becomes income once you sell it).
o One is an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of a corporation. (Fisher v Trinidad)
 When dealing with money or property, the questions you should ask are:
o Is this capital or is this income?
o Has it been realized/received or is it merely inchoate?

CAPITAL INCOME
Constitutes the investment which is the source Any wealth which flows into the taxpayer
of income other than a mere return of capital

Is the wealth Is the service of wealth

Madrigal vs. Rafferty, August 7, 1918, 38 Phil 414


Facts: Vicente Madrigal is married to Susana Paterno. He filed a tax return with the Collector of Internal Revenue, herein appellee, for his
income tax for the year 1914. Thereafter, he claims that the amount reflected in the return does not represent his income alone but that of
the conjugal partnership of the spouses. He proposes that the aforementioned net income be divided equally into two parts for the payment
of the proper tax. His claim having been denied, appellant pays the tax under protest.

Issue: Should the income tax be divided between the spouses?

Held
The essential difference between capital and income is that capital is a fun income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth,
while income is the service of wealth. A tax on income is not a tax on property. Income can be defined as profits or gains.
Susana, has an inchoate right in the property of her husband during the life of the conjugal partnership. Her interest in the
ultimate property rights and in the ultimate ownership of property acquired as income lies after such income has become
capital. She has no absolute right to ½ of the income of the conjugal partnership. Not being seized of a separate estate,
Susana cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the
additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband’s
property, the income cannot properly be considered the separate income of the wife for purposes of the additional tax.

Receipts- it has reference to all wealth that flows into the taxpayer which includes return of
capital.

Requisites for income to be taxable


1. Citizenship Principle – A citizen taxpayer is subject to income tax:
a. On his worldwide income, if he resides in the Philippines.
b. Only on his income from sources within the Philippines, if he qualifies as non-resident
citizen.

2. Residence Principle – a resident alien is liable to pay income tax on his income from sources
within the Philippines but exempt from tax on his income from sources outside the Philippines.

3. Source Principle – a non-resident alien is subject to Philippine income tax because he derives
income from such sources within the Philippines such as dividend, interest, rent or royalty.

Test in determining income/ Doctrine in determination of taxable income

Realization Test – Unless income is deemed realized, then there is no taxable income. Revenue
is generally recognized when both conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place.
Severance Test – Income is recognized when there is separation of something which is of
exchangeable value.

Eisner v Macomber (Realization Test)


Facts: There is no taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the
realization or transmutation which would result in the receipt of income. The taxpayer owned 2,200 shares of stock in a company. The
company declared a 50% stock dividend in 1916, so the taxpayer received an additional 1,100 shares of which 198.77shares represented the
surplus of the company earned between 1913 and 1916. The shares that represented the surplus had a par value of $19,877 and the
Commissioner treated the par value of these shares as included in the taxpayer’s taxable income. The taxpayer asserted that the stock
dividend was not income under the 16th amendment. The District court found for the taxpayer.

Issue: WON the payment of a stock dividend to a stockholder of a company is includable as taxable income?

Held: No. The Court understood a stock dividend to be a method of recapitalizing surplus, and spreading that capital among the stockholders
in proportion to the shares that they held. Thus, the shareholder's capital investment had grown and was worth more if it were to be sold,
but he still owned the same proportion of the company as he did previously. A stock dividend takes nothing from the property of the
company and adds nothing to that of the shareholder. The sixteenth amendment gave Congress the power to tax 'income’ and in the
common meaning of the word, 'income' did not include unrealized gains that were still the property of the company. Using Towne v. Esiner's
definition of income being a 'gain derived from capital' under the Revenue act of 1913, the Court analogized 'capital' as being separate from
'income' in the way that a tree is separate from its fruit. The Government argued that it was nevertheless a 'gain' to the stockholder because
it could be sold for more. However, the Court stated that the taxpayer had not sold yet, and that his investment was still exposed to the
business risks that could wipe it out. The taxpayer does not realize increased worth in property unless he receives 'something of
exchangeable value proceeding from the property.' A stock dividend is different from a cash dividend which is subsequently reinvested
because cash dividends actually transfer the company’s property to the stockholder. A stock dividend does not.

Raytheon production corp. vs CIR


FACTS: Raytheon (original company) was a pioneer manufacturer of rectifier tubes which are used in radio receiving sets (using alternating
current instead of batteries). The Radio Corporation of America developed a competitive tube, with the same effect as the Raytheon tube.
RCA owned many patents covering radio circuits. Beginning 1927, RCA’s license agreements with radio set manufacturers included a clause
which required the manufacturers to buy their tubes only from RCA. Soon, Raytheon’s sales gradually declined. Raytheon (new company that
bought original company) brought an action against RCA for violating anti-trust laws, as well as for destruction of Raytheon’s profitable
business and goodwill. Both parties finally agreed on a $410,000 settlement of the anti-trust case, with RCA acquiring patent license rights
and sublicensing rights. Raytheon counted the $60,000 from the amount as income from patent licenses, while the remaining $350,000 were
counted as damages, and therefore not subject to income tax. The income from patents was determined from the cost of the development of
such patents, and the fact that few of them were being used and none were earning royalties. Thus, the value of patents and the goodwill
was backed by evidence during trial.

ISSUE: Whether or not damages for loss of business good will are a nontaxable return of capital or income.
HELD: No. They are not taxable in general. Damages for violation of the anti-trust acts are treated as ordinary income where they represent
compensation for loss of profits. The test is not whether the action was one in tort or contract but rather the question to be asked is "In lieu
of what were the damages awarded?" Where the suit is not to recover lost profits but is for recovery in injury to good will, the recovery
represents a return of capital and, with certain limitations (necessity of proof/evidence), is not taxable.
The suit by Raytheon was not one of recovering lost profits. From its allegations, Raytheon’s suit was for the destruction of its goodwill. The
presentation of evidence of profits was merely used to establish the value of good will and the business, since such value is derived by a
capitalization of profits. Therefore, a recovery on goodwill and business represents return of capital.

The fact that the case ended in settlement is of no moment. The determining factor is the NATURE of the basic claim from which the
compromised amount was realized.

However, compensation for the loss of goodwill in excess of its cost is gross income. The law does not exempt compensatory damages just
because they are a return of capital. The tax exemption applies only to the portion that recovers the cost basis of that capital; any excess
damages serve to realize prior appreciation, and should be taxed as income. In addition, evidence must be produced to establish the value of
the goodwill and business. In this case, Raytheon was not able to establish the value of its goodwill and business. It did not produce enough
evidence to such effect. The amount of nontaxable capital cannot be ascertained. Since Raytheon could not establish the cost basis of its
good will, its basis will be treated as zero. The Court concludes that the $350,000 of the $410,000 attributable to the suit is thus taxable
income.

BIR Ruling 091-99


CAPITAL GAINS TAX; Pacto de retro - The terms of the agreement between CB-BOL and TMBC calling for the transfer of its assets, although
denominated as Deed of Assignment with Right to Repurchase, is in reality an equitable mortgage created over the said properties.
Instruments covering a sale with right to repurchase may be captioned or labeled as such. However, when any or more of the circumstances
enumerated under Article 1602, Civil Code, obtain in the agreement, the contract shall be presumed as an equitable mortgage. (BIR Ruling
No. 217-81 dated November 6, 1981). This is relevant in determining whether or not the transaction had is subject to the corresponding
taxes, i.e. capital gains tax documentary stamp tax.

Insofar as corporations are concerned, its liability to the capital gains tax imposed on the presumed gains realized from the sale, exchange or
disposition of lands and/or buildings is governed by Section 27(D)(5) of the Tax Code of 1997. Thus, for a corporation to be liable to the tax, a
true sale, exchange or disposition of capital assets must have transpired. Unlike in transactions made by individuals under Section 24(D)(1) of
the Code, where all sales of real property classified as capital assets, including pacto de retro or other forms of conditional sales are subject
to the capital gains tax, no similar qualifications exist for capital asset transaction of a corporation. Hence, the latter is subject to such tax
only upon a close and completed transaction in which income is realized.

Accordingly, this Office holds that only upon the executing of the final or absolute deed of sale covering the properties of the bank subject of
the pacto de retro, will the payment of the 6% capital gains tax apply. By the same token, since no actual conveyance of real property is to be
made, the stamp tax on deeds of sale and conveyances of real property imposed under Section 196 shall not apply. However, since the
transaction is in the nature of an equitable mortgage and made primarily as a security for the payment of a pre-existing loan, the same is
subject instead to the rate of documentary stamp tax imposed under Section 195. (BIR Ruling No. 091-99 dated July 8, 1999)

Claim of Right Doctrine – A taxable gain is conditioned upon the presence of a claim of right to
the alleged gain and the absence of a definite unconditional obligation to return or repay.

FACTS:

• 1977: Victoria Javier, wife of Javier-respondent, received $999k from Prudential Bank remitted by her sister Dolores through Mellon Bank in
US.
• Around 3 weeks after, Mellon Bank filed a complaint with CFI Rizal against Javier claiming that its remittance of $1M was a clerical error
and should have been $1k only and praying that the excess be returned on the ground that the Javiers are just trustees of an implied trust for
the benefit of Mellon Bank.
• CFI charged Javier with estafa alleging that they misappropriated and converted it to their own personal use.
• A year after, Javier filed his Income Tax Return for 1977 and stating in the footnote that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation”
• The Commissioner of Internal Revenue wrote a letter to Javier demanding him to pay taxes for the deficiency, due to the remittance.
• Javier replied to the Commissioner and said that he will pay the deficiency but denied that he had any undeclared income for 1977 and
requested that the assessment of 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent
return.

• Commissioner replied that “the amount of Mellon Bank’s erroneous remittance which you were able to dispose is definitely taxable” and
the Commissioner imposed a 50% fraud penalty on Javier.

ISSUE: Whether or not Javier is liable for the 50% penalty.

HELD: No.

• The court held that there was no actual and intentional fraud through willful and deliberate misleading of the BIR in the case. Javier even
noted that “the taxpayer was recipient of some money received abroad which he presumed to be a gift but turned out to be an error and is
now subject of litigation”
• (the ff are not expressly written in the case, in fact the doctrine I just found it elsewhere but this is relevant to the topic rather than the
issue in the case)
o Claim of right doctrine- a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite
and unconditional obligation to return or repay.
o In this case, the remittance was not a taxable gain, since it is still under litigation and there is a chance that Javier might have the obligation
to return it. It will only become taxable once the case has been settled because by then whatever amount that will be rewarded, Javier has a
claim of right over it.

Income derived from whatever purpose- the words used in the law disclose a legislative policy
to include all income not expressly exempted within the class of taxable income under our laws,
irrespective voluntary or involuntary action of the taxpayer in producing the gains, whether
derived from legal or illegal sources.

Gutierrez v Court of Tax Appeals


Facts:
Maria Morales (Gutierrez is her husband) was the registered owner of an agricultural land in Mabalacat Pampanga. The Republic, pursuant to
the Military Bases Agreement, instituted expropriation proceedings for the expansion of the Clark Field Air Base. The land was expropriated;
Morales compensated its fair market value. CIR included the amount paid by the Republic in assessing taxes on Morales’ gross income.
Morales protested, arguing that due compensation from property expropriated was not "income derived from sale, dealing or disposition
of property" referred to by section 29 of the Tax Code and therefore not taxable. CIR denied Morales’ protest, contending that section 29 is
intended to be broad enough inits construction to subsume “income from any source” as taxable.

Issue:
WON compensation from expropriation is taxable as part of gross income

Held: Yes.
The acquisition by government of private property through expropriation proceedings, said property being justly compensated is embraced
within the meaning of the term “sale” or “disposition of property,” and the proceeds of the transaction clearly fall within the definition of
gross income. These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under
our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains.

Economic-benefit Principle – Taking into consideration the pertinent provisions of law, income
realized is taxable only to the extent that the taxpayer is economically benefited.
BIR Ruling No. 029-98 dated March 19, 1998

INCOME TAX; Income tax paid or accrued (now incurred) by a company within a taxable year not allowed as deduction - (a) BIR is
prohibited from issuing further comments on Questions Nos. 1, 2, 3, 7 and 8 issued by the Energy Regulatory Board in relation to
ERB Case No. 93-118 entitled "Meralco vs. Energy Regulatory Board, et. al." in so far as the rate fixing issue is concerned
considering that the issues are all sub judice pending before the Court of Appeals. With regard to the question of whether the
appraisal increase of property, plant and equipment of electric utilities is taxable, the general rule is that, mere increase in the
value of property without actual realization, either through sale or other disposition, is not taxable. However, if by reason of
appraisal, the cost basis of property is increased and the resulting basis is used as the new tax base for purposes of computing the
allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable under
the economic benefit principle.

(b) BIR is not following American Laws on taxation because we have our tax laws, including rules and regulations implementing
our tax laws. However, under the doctrine of precedent, a court may apply American Laws or Court Decisions.

(c) The amendments introduced by EO No. 37 to then Section 21(c)(2) of the Tax Code of 1997 provides that dividend received by a
citizen or resident alien from a domestic corporation is subject to income tax at the rate of 15% in 1986, 10% effective January 1,
1987, 5% effective January 1, 1988 and 0% effective January 1, 1989. However, Sec. 22 (a) and (b) of the same Code provides that
dividends received by a non-resident alien individual, whether engaged or not in trade or business in the Philippines, from a
domestic corporation is subject to final withholding tax of 30% of such dividend income.

(d) For purposes of computing the taxable income of domestic corporation derived form within and without the Philippines, the
allowable deductions are limited to those provided under Section 29 of the Tax Code of 1997 for taxable year 1997 and prior years
but for taxable year 1998, Section 34 of the Tax Code of 1997 governs.

(e) Pursuant to then Section 117 of the Tax Code of 1997, as amended by RA 8241, the 2% franchise tax of electric, gas and water
utilities is based on gross receipts derived from the business covered by the law granting the franchise.

CLASSIFICATION OF INCOME TAXPAYER

ARTICLE IV 1987 CONSTITUTION


CITIZENSHIP

Section 1. The following are citizens of the Philippines:

1. Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine Citizenship
upon reaching the age of majority; and
4. Those who are naturalized in the accordance with law.

Section 2. Natural-born citizens are those who are citizens of the Philippines from birth without
having to perform any act to acquire or perfect their Philippine citizenship. Those who elect
Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be deemed
natural-born citizens.

Resident Citizen (RC) – Citizens of the Philippines who are residing therein.
Non-resident Citizen (NRC) –
a. A citizen of the Philippines who establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside therein;
b. A citizen of the Philippines who leaves the Philippines during a taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
c. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year;
d. A citizen who has been previously considered as NRC and who arrives in the
Philippines at any time during the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date of his arrival in the
Philippines;
e. The taxpayer shall submit proof to the CIR to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as
the case may be for purposes of this section. (Sec. 22 [E], NIRC)

 Who are non-resident citizens? (RR 1-79)


1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa has been secured
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renewed from time to time under such circumstance as to
require him to be physically present abroad most of the time (not less than 183 days)
 Non-resident citizens who are exempt from tax with respect to income derived from sources
outside the Philippines shall no longer be required to file information returns from sources
outside the Philippines beginning 2001. (RR 5-2001)
 The phrase “most of the time” shall mean that the said citizen shall have stayed abroad for
at least 183 days in a taxable year.
 The same exemption applies to an OCW but as such worker, the time spent abroad is not
material for tax exemption purposes all that is required is for the worker’s employement
contract to pass through and be registered with the POEA. (BIR Ruling 33-2000).

Resident Alien (RA) – An individual whose residence is within the Philippines but who is not a
citizen thereof. (Sec. 22 [F], NIRC)

Note: He is one who is actually present in the Philippines and not a mere transient or sojourner. Residence does not mean mere physical
presence; an alien is considered a resident or non-resident depending on his intention with regard to the length and nature of his stay.

 Resident alien is an individual:


1. Whose residence is within the Philippines
2. Who is not a citizen
 Mere physical or body presence is enough. Not intention to make the country one’s abode.
(Garrison v CA)
 An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or not
is determined by his intentions with regard to the length and nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose which in its nature
may be promptly accomplished is a transient.
 But if his purpose is of such a nature that an extended stay may be necessary
for its accomplishment, and to that end the alien makes his home temporarily
in the Philippines, he becomes a resident, though it may be his intention at all
times to return to his domicile abroad when the purpose for which he came
has been consummated or abandoned. (RR 2)

Non-resident Alien (NRA) – an individual whose residence is not within the Philippines and who
is not a citizen thereof.

1. Non-resident alien engaged in trade or business (NRA – ETB) – An alien who stays in
the Philippines for more than 180 days. (Sec. 25 [A], NIRC)

2. Non-resident alien not engaged in trade or business (NRA-NETB) – An alien who stays
in the Philippines for 180 days or less. (Sec. 25 [B], NIRC)

 Who are non-resident aliens?


1. An individual whose residence is not within the Philippines
2. Not a citizen of the Philippines
o Determination is by his intention with regard to the length and nature of his stay. (Sec 5,
RR 2)
 Loss of residence by alien
o An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status. An alien who has
acquired a residence is taxable as a resident for the remainder of his stay in the
Philippines. (Sec. 6, RR 2)

General Professional partnership- are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in
any trade or business.

ESTATE AND TRUST

Estate

Q: Define estate.

A: Estate refers to the mass of properties left by a deceased person.

Q: When a person who owns property dies, what are the taxes payables under the income tax
law
A:
1. Income tax for individuals from Jan. to the time of death. (Sec. 24 and 25, NIRC)
2. Income tax of the estate, if the estate is under administration or judicial settlement. (Sec. 60,
NIRC)

Trusts
Q: What is a trust?
A: It is a right to the property, whether real or personal, held by one person for the benefit of
another.

Q: What are the classifications of trust for tax purposes?


A: TIP
1. Taxable and tax-exempt trust
2. Irrevocable trust and revocable trust (pass through entity)
3. Trust administered in the Philippines and trust administered in a foreign country.

Q: Define revocable and irrevocable trust.


A:
1. Revocable Trust – a kind of trust where the power to revert (return) to grantor title to any
part of the corpus (body) of the trust is vested:
a. In the grantor, either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of the corpus or the income therefrom; or
b. In any person not having a substantial adverse interest in the disposition of the corpus or the
income therefrom.

2. Irrevocable Trust – a kind of trust which cannot be altered without the consent of the
beneficiary.

Q: What is the significance of determining whether the trust is revocable or irrevocable?


A: The income of a revocable trust is included in computing the taxable income of the grantor
without any of the deductions allowed for estates while the income of an irrevocable trust is a
separate taxable entity subject to tax as income of the trust after deducting the allowable
deductions

Q: What is trust administered in the Philippines and trust administered in a foreign country?
A:
1. Trust Administered in the Philippines – a kind of trust where the administrator of the trust is
located in the Philippines.
2. Trust administered in a Foreign Country – a kind of trust where the administrator is located
outside of the Philippines.

Q: What is the significance in determining whether the trust is a trust administered in the
Philippines or in a foreign country?
A: Only trusts administered in the Philippines are subject to Philippine taxes. Thus, there are
deductions allowed for trusts administered in the Philippines which are not allowed for those
administered in a foreign country.
CORPORATIONS
Corporation-
Q: What is a corporation for tax purposes?
A:
1. The term “corporation” shall include:
a. Partnerships, no matter how created
b. Joint stock companies
c. Joint accounts (cuentas en participacion)
d. Associations
e. Insurance companies
2. It does not include:
a. General professional partnerships and
b. A joint venture or consortium formed for purposes of undertaking construction projects
engaging in:
i. Petroleum
ii. Coal
iii. Geothermal
iv. Other energy operations pursuant to an operating or consortium agreement under a service
contract with the Government

Domestic Corporation (DC) – a corporation created or organized in the Philippines or under its
laws and liable for income from sources within and without the Philippines (Sec 22[C], NIRC)

Article 484. ( civil code) There is co-ownership whenever the ownership of an


undivided thing or right belongs to different persons.

In default of contracts, or of special provisions, co-ownership shall be governed by the


provisions of this Title. (392)

What are examples of co-ownership?


1. When two or more heirs inherit an undivided property from a decedent.
2. When a donor makes a gift of undivided property in favor of two or more donees.

Q: Is co-ownership subject to income tax?


A:
GR: It shall not be subject to income tax if the activities of the co-owners are limited to the
preservation of the property and the collection of income therefrom. In such case, the co-
owners shall be taxed individually on their distributive share in the income of the co-ownership.
XPN: If the co-owners invest the income in a business for profit they would constitute
themselves into a partnership and such shall be taxable as a corporation.

Q: Brothers A, B and C borrowed a sum of money from their father which amount together
with their personal monies was used by them for the purpose of buying real properties. The
real properties they bought were leased to various tenants. The BIR demanded the payment
of income tax on corporations, real estate dealer’s tax, and corporation residence tax.
However, A, B and C seek to reverse the letter of demand and be absolved from the payment
of the taxes in question. Are they subject to tax on corporations?

A: Yes, "Corporations" strictly speaking are distinct and different from "partnerships". When the
NIRC includes "partnerships" among the entities subject to the tax on "corporations", it must
allude to organizations which are not necessarily "partnerships" in the technical sense of the
term. As defined in the NIRC "the term corporation includes partnership, no matter how created
or organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standards form, or conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted for the purposes of the tax on
corporations. (Evangelista v. CIR, GR L-9996, Oct. 15, 1957)

Foreign Corporation
Resident Foreign Corporation (RFC) – a corporation which is not domestic and not engaged in
trade or business in the Philippines is liable for income from sources within.

Note: In order that a foreign corporation may be regarded as doing business within a State
there must be continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent and not one of a temporary character. (CIR v. BOAC, GR L-
65773-74, Apr. 30, 1987)

Non-Resident Foreign Corporation (NRFC) – a corporation which is not domestic and not
engaged in trade or business in the Philippines is liable for income from sources within. (Sec.22
[I], NIRC)

4. Special Types of Corporation – those corporations subject to different tax rates.


a. Proprietary educational institutions and non-profit hospitals
b. Domestic depositary bank (foreign currency deposit units)
c. International carriers
d. Offshore banking units
e. Regional or Area Headquarters and Regional operating Headquarters of multinational
companies
f. Non-resident cinematographic film owners, lessors or distributors
g. Non-resident owners or lessors of vessels chartered by Philippine nationals
h. Non-resident lessors of aircraft, machinery and other equipments
Q: What is the test in determining the status of corporations?
A: Under the “law of incorporation test”, a corporation is considered:
1. Domestic Corporation – If organized or created in accordance with or under the laws of the
Philippines;
2. Foreign Corporation – Organized or created in accordance with or under the laws other than
the Philippines.

Q: What are the modes by which a foreign corporation seeking to do business in the
Philippines may adopt?
A:
1. Setting up a Domestic Subsidiary – This involves incorporation under Philippine laws.

Note: For tax purposes, the subsidiary becomes a domestic corporation while the parent
company remains a non-resident foreign corporation.
2. Doing Business Through a Branch or Representative Office – This mode requires acquisition by
the foreign corporation of a license to do business in the Philippines. The branch office does not
obtain a separate juridical personality but becomes merely an extension of its parent company
unlike a domestic subsidiary. The foreign company upon acquiring a license to do business
through a branch or representative office becomes a resident foreign corporation with respect to
the transactions that are effectively connected with its business in the Philippines. Otherwise, it
shall be considered a non-resident foreign corporation with respect to transactions that are not
effectively connected with its business here.

Q: What is the test to determine whether a FC is a resident or non-resident?


A: To be a resident foreign corporation, a FC should obtain first a license from the Philippine
Government to operate business in the Philippines through establishment of a branch or a
representative office, otherwise they are considered as non-resident foreign corporation.

Q: What are the special RFC?

A:
1. International carriers
2. Offshore banking unit
3. Foreign currency deposit unit
4. Regional or area headquarters of multinational corporations
5. Regional operating headquarters of multinational corporations

Q: What are the special NRFC?


A:
1. NR owner, lessor, distributor of cinematographic film
2. NR owner or lessor of vessels chartered by Philippines nationals
3. NR owner or lessor of aircraft, machinery and equipment

Note: They are only considered special because different tax rates are applicable to them.

Evangelista vs. Collector of Internal Revenue, October 15, 1957,102 Phil 140
Facts: Petitioners borrowed a sum of money from their father which amount together with their personal monies was used by them for the
purpose of buying real properties. The real properties they bought were rented or leased to various tenants. The respondent demanded the
payment of income tax on corporations, real estate dealer’s tax, and corporation residence tax. However, petitioners seek to reversed the
letter of demand and be absolved from the payment of the taxes in question.

Q. Are petitioners subject to tax on corporations?

A. Yes, "Corporations" strictly speaking are distinct and different from "partnership". When our Internal Revenue Code includes
"partnership" among the entities subject to the tax on "corporations", it must be allude to organizations which are not necessarily
"partnership" in the technical sense of the term. Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations
"duly registered general partnership", which constitute precisely one of the most typical forms of partnership in this jurisdiction. As defined
in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standards form, or conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.

Pascual and Dragon vs. Commissioner, 166 SCRA 560


Facts: Pascual and Dragon bought 2 parcels of land from Bernardino and 3 from Roque. Thereafter, the first two were sold to Meirenir
Development Corporation and 3 to Reyes and Samson. They divided the profits between the two (2) of them. The Commissioner contended
that the petitioners formed an unregistered partnership or joint venture taxable as a corporation under the Code and its income is subject to
the NIRC.

Q. Is there an unregistered partnership formed?

A. There was no partnership formed. The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. (see Article 1769, NCC). In the present case, there is clear evidence of co-
ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain
was not present.
TAX BASE AND TAX RATE

A.) Taxable income


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.

(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the
rates established in the following schedule: (just see chart below, it’s the same thing)

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute
separately their individual income tax based on their respective total taxable income: Provided, that if any
income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of determining their respective
taxable income.

"Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night
shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from
income tax.

Rates of Tax on Taxable Income of Individuals


Not over P10,000 5%

Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000

Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000

Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000

Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000

Over P500,000 P125,000 + 32% of the excess over P500,000


Gross Income

Less: Deductions

Taxable Income

Tax Rate

Tax Due

Know the tax base and the tax rate!

 Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide taxable!
 The tax is imposed upon taxable compensation or employment income, business income, and income derived from the
practice of professions derived by citizens and resident aliens.
 Married individuals shall compute separately their individual income tax based on their respective total taxable
income.
o If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between them for the purpose of determining their
respective taxable income.
 Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay, overtime
pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax.
 A non-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in the same
manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines.
 For non-resident aliens not so engaged, the tax is
o 25% of the entire or gross income received from sources within the Philippines and
o 15% of the gross income received as compensation, salaries, and other emoluments by reason of his
employment by:
 regional or area headquarters and regional operating headquarters of multinational corporations;
 offshore banking units established by a foreign corporation in the Philippines; or
 by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec 25 (A-E))

B.) Passive Income

Sec 24. (B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final
tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources
within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) 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: 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 accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under
this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of
the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%


Sec.22 (FF) The term 'long-term deposit or investment certificates' shall refer to certificate of time
deposit or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments with a maturity period of not less than five
(5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by
banks only (not by nonbank financial intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by
the BSP.

Revenue Regulation No. 10-98


Issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to the
imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore
Banking Systems. Specifically, interest income which is actually or constructively received by a resident
citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be
subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a
bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such
bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of
7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the
provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of
interest which was actually or constructively received by a depositor starting January 1, 1998 is
taxable.

Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98)

1. Interest income actually received by a resident citizen or resident alien 7.5% final
from FCD withholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and his spouse 50% exempt/
(who is a resident) 50% final
withholding tax
of 7.5%

4. Interest income actually received by a domestic corporation or resident 7.5% final


foreign corporation from FCD withholding tax

Interest income which is actually or constructively received by a resident citizen of the Philippines or
by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding
tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the
name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as
exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will
apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of
RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually
or constructively received by a depositor starting January 1, 1998 is taxable. (RR 10-98)
Tax Rate on Certain Passive Income on Citizens and Resident Aliens Final Tax

1. Interest under the expanded foreign currency deposit system (see RR 10- 7.5% (vs exempt
98 below) Nonresident citizens: exempt for nonresident
aliens engaged in
trade/biz)

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits 20%
from deposit substitute, trust fund & similar arrangement

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company, insurance


or mutual fund company, & regional operating headquarters of
10% (vs 20% for
multinational company or share in the distributive net income after tax o a
non-resident
partnership (except a general professional partnership), joint stock or joint
aliens engaged in
venture or consortium taxable as a corporation
trade/biz)
 But what about dividends from foreign corporations for citizens (not
resident aliens)? Well, the income here enters into the computation
for Sec 24 (a) tax calendar. For resident aliens, they are not taxed
since it’s income derived from abroad.
8. Interest on long-term deposit or investment in banks (with maturity of 5 exempt
years or more)

Prize – the result of an effort (like a prize in a beauty contest)

Winning – the result of a transaction where the outcome depends upon


chance (like betting)

Deposit substitute – a means of borrowing money from the public (20 or


more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments (like banker’s acceptances,
promissory notes, repurchase agreements, certificates of assignment or
participation)
Dividends
Sec.24 (B) (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon
the cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies and regional
operating headquarters of multinational companies, or on the share of an individual in the
distributable net income after tax of a partnership (except a general professional partnership) of which
he is a partner, or on the share of an individual in the net income after tax of an association, a joint
account, or a joint venture or consortium taxable as a corporation of which he is a member or co-
venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and

Ten percent (10% beginning January 1, 2000.

Provided, however, that the tax on dividends shall apply only on income earned on or after January 1,
1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or
distributed on or after January 1, 1998, be subject to this tax.

Capital Gains
(C) Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange.

Not over P100,000……………………………........ 5%

On any amount in excess of P100,000………… 10%


Tax Rate on Income from Sale, Barter, Exchange or other
Disposition of Shares of Stock (RR 6-2008)

If shares of stock are listed and traded through the local stock ½ of 1% (or .005%) of the
exchange gross selling price or gross
value in money of the shares
of stock

If shares not traded through the local stock exchange

o Capital gains not over P100,000 5% of the net capital gains


o Capital gains in excess of P100,000
10% of the net capital gains

 Who are liable?


1. Individual taxpayer, whether citizen or alien;
2. Corporate taxpayer, whether domestic or foreign;
3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust funds and
pension funds, among others.

 Who are exempt?


1. Dealers in securities
2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB), and Section
2(s) of these Regulations, in connection with the gains realized by said investor upon
redemption of said shares of stock in a mutual fund company and
All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws.

How to determine the tax base of disposition of Fair Market Value


stock (RR 6-2008)

Sales of stock listed and traded through the LSE FMV is the actual selling price

Sales of stock listed but not traded through the LSE FMV is the closing price on the day when
the shares were sold, transferred, etc (if
no sale was made on that day in the LSE,
then the closing price on the day nearest
to the date of sale, transfer, or exchange
of the said shares)

Sales of stock not listed and not traded through the FMV is the book value of the shares of
LSE stock as shown in the financial
statements duly certified by an
independent CPA nearest to the date of
sale
Capital Gains on Real Property
(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) days from the
date of sale or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can only be
availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have been realized from
the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling
price or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to determine the
taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed
thereon.
Article 415. Civil Code
The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot
be separated therefrom without breaking the material or deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it reveals
the intention to attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a piece of
land, and which tend directly to meet the needs of the said industry or works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar
nature, in case their owner has placed them or preserves them with the intention to
have them permanently attached to the land, and forming a permanent part of it; the
animals in these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and
waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and object
to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over immovable
property. (334a)

Revenue Regulation No. 9-98


Issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to the
imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and
resident foreign corporations. Specifically, an MCIT of 2% of the gross income as of the end of
the taxable year is imposed upon any domestic corporations beginning the 4th taxable year
immediately following the taxable year in which such corporation commenced its business
operations. The MCIT will be imposed whenever such operation has zero or negative taxable
income or whenever the amount of MCIT is greater than the normal income tax due from such
operation. In the case of a domestic corporation whose operations or activities are partly
covered by the regular income tax system and partly covered under a special income tax
system, the MCIT will apply on operations covered by the regular income tax system.

The Regulations will apply to domestic and resident foreign corporations on their
aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent
provisions of RA 8424, provided, however, that corporations using the fiscal year accounting
period and which are subject to MCIT on income derived pertaining to any month or months of
the year 1998 will not be imposed with penalties for late payment of the tax.
Final Tax Rate on Sales, Exchanges, or Transfers or Real
Properties Classified as Capital Assets (RR 8-98)

Sale of real property in the Philippines 6% of the gross selling


price, or the current
market value at the time
of sale, whichever is
higher

If sale was made to the government or to GOCCs Either 6% of the gross


selling price/current
market value or under the
normal income tax rate,
taxpayer’s option

Revenue Regulation No. 13-99


Issued September 14, 1999 prescribes the regulations for the exemption of a citizen or a
resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange or
disposition of his principal residence. In order for a person to be exempted from the payment
of the tax, he should submit, together with the required documents, a Sworn Declaration of his
intent to avail of the tax exemption to the Revenue District Office having jurisdiction over the
location of his principal residence within (30) days from the date of the sale, exchange or
disposition of the principal residence. The proceeds from the sale, exchange or disposition of
the principal residence must be fully utilized in acquiring or constructing the new principal
residence within eighteen (18) calendar months from the date of the sale, exchange or
disposition. In case the entire proceeds of the sale is not utilized for the purchase or
construction of a new principal residence, the Capital Gains Tax will be computed based on the
formula specified in the Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-
month reglementary period, his right of exemption from the Capital Gains Tax did not arise on
the extent of the unutilized amount, in which event, the tax due thereon will immediately
become due and demandable on the 31st day after the date of the sale, exchange or
disposition of the principal residence.

If the individual taxpayer's principal residence is disposed in exchange for a condominium unit,
the disposition of the taxpayer's principal residence will not be subjected to the Capital Gains
Tax herein prescribed, provided that the said condominium unit received in the exchange will
be used by the taxpayer-transferor as his new principal residence.
 Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or disposition
of a principal residence (RR 13-99)
1. The proceeds from the sale, exchange, or disposition of his principal residence must be
fully utilized in acquiring or construing a new principal residence within 18 months.
There must be proof.
2. This can only be availed of ONLY ONCE every 10 years
3. The historical cost of his old principal residence shall be carried over to the cost basis of
his new residence
4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of the
utilized portion
5. If the principal residence is disposed in exchange for a condo, and if it is used as his new
residence, then he is exempt
6. The 6% capital gains tax otherwise due must be deposited in escrow with an authorized
agent bank, and can only be released when sufficient proof is shown that the proceeds
have been fully utilized within 18 months.

Revenue Regulation No. 14-2000


Issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No. 13-99 relative to the sale,
exchange or disposition by a natural person of his "principal residence".

The residential address shown in the latest income tax return filed by the vendor/transferor
immediately preceding the date of sale of said real property shall be treated, for purposes of
these Regulations, as a conclusive presumption about his true residential address, the
certification of the Barangay Chairman, or Building Administrator (in case of condominium
unit), to the contrary notwithstanding, in accordance with the doctrine of admission against
interest or the principle of estoppel.

The seller/transferor's compliance with the preliminary conditions for exemption from the 6%
capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to
approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate
(TCC) of the principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said
CAR or TCC shall state that the said sale, exchange or disposition of the taxpayer's principal
residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Tax Code, but
subject to compliance with the post-reporting requirements imposed under Sec. 3(3) of the
Regulations.

 What is the principal residence anyway? (RR 14-2000)


o It is the dwelling house, where the husband or wife or unmarried individual resides;
actual occupancy is not interrupted or abandoned by temporary absence due to
travel, studies, or work abroad
o If the ownership of the land and the dwelling house belong to different persons, only
the dwelling house shall be treated as principal residence
Non-Resident Aliens

Taxable Income

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the


Philippines shall be subject to an income tax in the same manner as an individual citizen
and a resident alien individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing business in the Philippines'.
Section 22 (G) of this Code notwithstanding.

 A nonresident alien engaged in trade or business in the Philippines is subject to the same
income tax rate as citizens and resident aliens, on taxable income received from all sources
within the Philippines.
 A nonresident alien who stays in the Philippines for an aggregate period of more than 180
days shall be deemed as nonresident alien doing business in the Philippines.

Passive Income

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or
Multinational Company, or Share in the Distributable Net Income of a Partnership
(Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash
and/or property dividends from a domestic corporation, or from a joint stock company,
or from an insurance or mutual fund company or from a regional operating headquarter
of multinational company, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of a nonresident alien individual in
the net income after tax of an association, a joint account, or a joint venture taxable as a
corporation of which he is a member or a co-venturer; interests; royalties (in any form);
and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall
be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of
twenty percent (20%) on the total amount thereof: Provided, however, that royalties on
books as well as other literary works, and royalties on musical compositions shall be
subject to a final tax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographic films and similar works shall be subject to the tax
provided under Section 28 of this Code: Provided, furthermore, That interest income
from long-term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted
and withheld by the depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%

Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Trade, Final Tax
Business or Exercising a Profession

1. Interest under the expanded foreign currency deposit system exempt

2. Royalty from books, literary works, & musical compositions 10%

3. Royalty other than above 20%

4. Interest on any current bank deposit, yield or other monetary benefits from 20%
deposit substitute, trust fund & similar arrangement

5. Prize exceeding P10,000 20%

6. Other winnings, except Phil Charity Sweepstakes & Lotto 20%

7. Dividend from a domestic corp, or from a joint stock company, insurance or


mutual fund company, & regional operating headquarters of multinational
company or share in the distributive net income after tax o a partnership (except a 20% (compare
general professional partnership), joint stock or joint venture or consortium with citizens and
taxable as a corporation resident aliens)

 What about dividends from foreign corps? Exempt. Nonresident aliens are
not taxed worldwide.
8. Gross income from cinematographic films & similar works 25%
9. Interest on long-term deposit or investment in banks (with maturity of 5 years or exempt
more)

Capital Gains
Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in
domestic corporations not traded through the local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections (C) and (D) of Section 24.

Tax Rate on Capital Gains (same with residents, and


nonresident aliens not engaged in business)

1. On sale of shares of stock of a domestic corporation NOT


listed and NOT traded thru a local stock exchange held as a
capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000
5% of the net capital gains

10% of the net capital gains

2. On sale of real property in the Philippines held as a capital


asset
6% of the gross selling price,
or the current market value
at the time of sale,
whichever is higher

 Nonresident aliens not engaged in business are taxed 25% of their entire income within the
Philippines.
 That means they have no deductions!
 Their capital gains are the same with nonresident aliens engaged in business (see table
above!)

Not engage in the trade or business

Section 25(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon the entire
income received from all sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and
income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall
be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

Special aliens (Section 25 (C,D,E) )

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - There shall be levied, collected and paid for
each taxable year upon the gross income received by every alien individual employed by
regional or area headquarters and regional operating headquarters established in the
Philippines by multinational companies as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, from such
regional or area headquarters and regional operating headquarters, a tax equal to
fifteen percent (15%) of such gross income: Provided, however, That the same tax
treatment shall apply to Filipinos employed and occupying the same position as those of
aliens employed by these multinational companies. For purposes of this Chapter, the
term 'multinational company' means a foreign firm or entity engaged in international
trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other
foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien
individual employed by offshore banking units established in the Philippines as salaries,
wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances, from such off-shore banking units, a tax equal to fifteen
percent (15%) of such gross income: Provided, however, That the same tax treatment
shall apply to Filipinos employed and occupying the same positions as those of aliens
employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An


Alien individual who is a permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor or by a foreign service
subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax
of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, received from such
contractor or subcontractor: Provided, however, That the same tax treatment shall
apply to a Filipino employed and occupying the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income
tax, as the case may be, imposed under this Code.

Special Aliens

1. Employed by regional or area headquarters & regional operating 15% on gross income
headquarters established in the Philippines by multinational;

2. Employed by offshore banking units 15% on gross income

3. Permanent resident of a foreign country but who is employed 15%


and assigned in the Philippines by a foreign service contractor or by
a foreign service subcontractor engaged in petroleum operations in
the Philippines

 Provided the same tax shall apply to Filipinos employed and occupying the same position as
these aliens.
 These apply only to positions of a highly technical or highly managerial nature. (Atty.
Montero)
 All income earned from all other sources within the Philippines by the special alien
employees shall be subject to the pertinent income tax imposed by the Code.

Tips on answering

Thought process in answering problems:

1. Is this income? If not, then it’s not really a income tax problem.
2. Who’s the taxpayer? And what’s the source? Refer to Sec 23!
3. What’s the specific rate? See sec 24-25!

For example, what is the tax rate of on income derived from dividends from foreign
corporations for 1. Citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or
business?

1. Citizens
a. Yes, it’s income.
b. The source is outside the Philippines. Are they liable for sources from outside the
Philippines? Yes! Citizens are taxed worldwide!
c. What’s the specific tax rate? Hmm… since it’s not in any of the charts, but they
still have to be taxed, then the income they derive from dividends from foreign
corporations will be considered in computing the tax rate based on the tax
calendar of Sec 24(a)
2. Resident aliens
a. Yes, it’s income.
b. The source is outside the Philippines. Are they liable for sources from outside the
Philippines? No! They aren’t taxed worldwide.
3. Nonresident aliens engaged in trade or business
a. Yes, my dear, it’s income.
b. The source is outside the Philippines. Are they liable for source from outside the
Philippines? No! They aren’t taxed worldwide either.

Members of the General Professional Partnership (Sec. 26)

Section 26. Tax Liability of Members of General Professional Partnerships. - A general


professional partnership as such shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a general professional partnership shall be
liable for income tax only in their separate and individual capacities.1avvphil.ñet

For purposes of computing the distributive share of the partners, the net income of the
partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively
received, in the net income of the partnership.

CORPORATIONS
Domestic Corporation
In General (Sec. 27 A)

(A) In General. - Except as otherwise provided in this Code, an income tax of


thirty-five percent (35%) is hereby imposed upon the taxable income derived during
each taxable year from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal year
shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by
multiplying the number of months covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of
Finance, may effective January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after the following conditions
have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
(CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five
percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the corporation is qualified under the
scheme.

For purposes of this Section, the term 'gross income' derived from business shall be
equivalent to gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold' shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods' sold shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.

Tax rate of Domestic Corporations 30% of taxable income from all sources within and outside the
Philippines, or

2% of gross income if MCIT applies, or

15% of gross income if the following conditions are met:

1. tax effort ratio of 20% of GNP


2. ratio of 40% of income tax collection to total tax
revenues
3. VAT tax effort of 4% of GNP; and
4. .9% ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP (this last one has yet to be
implemented)

 Option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed 55%
 Election of the gross income tax option by the corporation shall be irrevocable for 3
consecutive taxable years
 Domestic corporations are subject to any or some of the following:
 Capital gains tax
 Final tax on passive income
 Normal tax
 Minimum corporate income tax (MCIT)
 Gross income tax (GIT)
 Improperly accumulated earnings tax (IAET)

Special Corporation (sec 27par. B, C)

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational


institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: Provided, that if
the gross income from unrelated trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such educational institutions or hospitals
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A 'Proprietary educational
institution' is any private school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the Technical
Education and Skills Development Authority (TESDA), as the case may be, in accordance
with existing laws and regulations.

 Proprietary educational institution is:


o Any private school maintained & administered by private individuals or groups
o With an issued permit to operate from the DECS or CHED or TESDA

Tax rate of proprietary educational 10% on their taxable income (except for passive
institutions and hospitals income), or

30% on their entire taxable income if the gross


income from unrelated trade, business or other
activity exceeds 50% of the total gross income of
the institution

 Unrelated trade, business or other activity means


o Any trade, business or other activity
o The conduct of which is not substantially related to the exercise or performance by
such its institution of its primary purpose or function.
 For non-stock, non-profit educational institutions, all revenues use actually, directly and
exclusively for educational purposes are exempt.
o Their exemption refers only to revenues derived from assets used actually, directly
and exclusively for educational purposes.
o Income from cafeterias, canteens & bookstores are also exempt if they are owned &
operated by the educational institution and are located within the school premises.
o However, they shall be subject to internal revenue taxes on income from trade,
business or other activity, the conduct of which is not related to the exercise or
performance by such educational institutions of their educational purposes or
functions, i. e. rental payment from their building/premises. (RR 76-2003)
 For non-stock, non-profit corporations who are exempt, they are still liable for taxes on:
o Income derived from any of their real properties (rental payment form their building
premises)
o Any activity conducted from profit regardless of disposition thereof
o Interest income from any bank deposits or yield on deposit substitutes (final tax of
20%)
o If its foreign currency deposit, final tax of 7.5% (Dep Order 149-95, 1995)
o They shall also be withholding agents for their employee’s compensation income
subject to withholding tax (RR 76-2003)
 For private educational institutions, they are exempt from VAT, but they must be accredited
with either DECS or CHED.
o However, income derived from trade, business or other activity is still taxable.
o Their bank deposits and foreign currency deposits are exempt from withholding
taxes but they must show proof that such income is used to fund proposed projects
for their institution’s improvement.
o They shall also be the withholding agents for their employee’s compensation income
subject to withholding tax.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The


provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in s similar business, industry, or
activity.

G. GOCCs
Sec. 27 (C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. -
The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except
the Government Service Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office
(PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section
upon corporations or associations engaged in s similar business, industry, or activity.

 GOCCs are taxed on the same rate upon their taxable income upon corporations or
associations engaged in similar business, industry, or activity.
o Exempt GOCCs:
 GSIS
 SSS
 PHIC
 PCSO
 As per RA 9337, PAGCOR was deleted from the list of exempt GOCCs.
Passive Income

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and 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.

(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 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 depository system units and other
depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under
said expanded foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with


depository banks under the expanded system shall be exempt from income tax.

Tax Rate on Passive Income of Domestic Corporations Final Tax

1. Interest under the expanded foreign currency deposit system 7.5%

2. Royalty of all types within the Philippines 20%

o Royalty from abroad? Enters the taxable income 30% tax rate
3. Interest on any current bank deposit, yield or other monetary benefits 20%
from deposit substitute, trust fund & similar arrangement

4. Dividend from domestic corporations (inter-corporate dividend) exempt


Tax Rate of BANKS on Income Derived under the Expanded FCD System Final Tax

1. Income derived by a depository BANK from foreign currency transactions exempt


with non-residents, OBUs, etc

2. Interest income from foreign currency loans granted by a bank to 10%


residents other than OBUs

Capital Gains (Sec. 27 D, par 2&5)

(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 P100,000………………… 5%


Amount in excess of P100,000…… 10%

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.

Tax Rate on Capital Gains (same as individuals)

2. On sale of shares of stock of a domestic corporation NOT


listed and NOT traded thru a local stock exchange held as a
capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000
5% of the net capital gains

10% of the net capital gains

2. On sale of real property in the Philippines held as a capital


asset
6% of the gross selling price,
or the current market value
at the time of sale,
whichever is higher

Resident Foreign Corporation


In General (Sec. 28 A)

Section 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation


organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an income
tax equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%).

In the case of corporations adopting the fiscal-year accounting period, the


taxable income shall be computed without regard to the specific date when
sales, purchases and other transactions occur. Their income and expenses for
the fiscal year shall be deemed to have been earned and spent equally for each
month of the period.

The reduced corporate income tax rates shall be applied on the amount
computed by multiplying the number of months covered by the new rates within
the fiscal year by the taxable income of the corporation for the period, divided
by twelve.

Provided, however, That a resident foreign corporation shall be granted the


option to be taxed at fifteen percent (15%) on gross income under the same
conditions, as provided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A


minimum corporate income tax of two percent (2%) of gross income, as
prescribed under Section 27 (E) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under paragraph (1) of this
Subsection.
(3) International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross
Philippine Billings' as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the


amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a
flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

(b) International Shipping. - 'Gross Philippine Billings' means gross


revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.

(4) Offshore Banking Units. - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking
units, including any interest income derived from foreign currency loans granted
to residents, shall be subject to a final income tax at the rate of ten percent
(10%) of such income.

Any income of nonresidents, whether individuals or corporations, from


transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its
head office shall be subject to a tax of fifteen (15%) which shall be based on the
total profits applied or earmarked for remittance without any deduction for the
tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code: provided, that
interests, dividends, rents, royalties, including remuneration for technical
services, salaries, wages premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and capital gains
received by a foreign corporation during each taxable year from all sources
within the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.

(6) Regional or Area Headquarters and Regional Operating Headquarters of


Multinational Companies. -

(a) Regional or area headquarters as defined in Section 22(DD) shall not


be subject to income tax.

(b) Regional operating headquarters as defined in Section 22(EE) shall pay


a tax of ten percent (10%) of their taxable income.

(7) Tax on Certain Incomes Received by a Resident 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
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, including interest income
from foreign currency loans granted by such depository banks under said
expanded foreign currency deposit system to residents, shall be subject
to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from


transactions with depository banks under the expanded system shall be
exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock
exchange:

Not over P100,000………………… 5%


On any amount in excess of P100,000…… 10%

(d) Intercorporate Dividends. - Dividends received by a resident foreign


corporation from a domestic corporation liable to tax under this Code
shall not be subject to tax under this Title.

 A foreign corporation is one which is not domestic (ie organized/incorporated here). It may
be a resident or non-resident corporation.
 A resident corporation is a foreign corporation engaged in business in the Philippines.
o A foreign corporation can engage in business in the Philippines only after it had
registered with, and had been allowed by, the regulatory agencies of the Philippine
government to engage in business in the Philippines.

Tax rate of Foreign Resident 30% of taxable income from all sources within the
Corporations Philippines, or

2% of gross income if MCIT applies, or

15% of gross income (again, the GIT has yet to be


implemented)

N.V. Reederij “Amsterdam” vs. Commissioner, June 23,1988, 162 SCRA 487
Facts: Petitioner is a foreign corporation not authorized or licensed to do business in the Phil. It does not have a branch office in the Phil. and
it made only two calls in Phil. ports to unload cargoes for foreign destination. In these two instances, Royal International Ocean Lines acted
as husbanding agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner on the freight receipts.
Defendant made an assessment as a non-resident foreign corporation not engaged in trade or business. Petitioner filed a petition praying for
the cancellation of the subject assessment.

Q. Is petitioner a non-resident foreign corporation not engaged in trade or business?

A. Yes, the corporation is considered as a non-resident foreign corporation. In order that a foreign corporation may be considered engaged
in trade or business, its business transactions must be continuous. Casual activity as in this case, does not amount to engaging in trade or
business in the Philippines.
Special Foreign Corporation
International Carrier

Sec 28 (A)

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a
tax of two and one-half percent (2 1/2%) on its "Gross Philippine Billings" as defined hereunder:

(a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion of the cost
of the ticket corresponding to the leg flown from the Philippines to the point of transshipment
shall form part of Gross Philippine Billings.

(b) International Shipping. - "Gross Philippine Billings" means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination, regardless of
the place of sale or payments of the passage or freight documents.

 Tax rate for international carriers is 2.5% of Gross Philippine Billings


 Gross Philippine Billings refers to
o Gross revenue derived from carriage of persons, excess baggage, cargo and mail
o Originating from the Philippines in a continuous and uninterrupted flight
o Irrespective of the place of sale or issue and the place of payment of the ticket or
passage document
 In CIR v BOAC, British Overseas Airways did not have any landing rights here nor did they
have license to operate here. They also did not carry passengers or cargo to or from the
Philippines. They did, however, have a general sales agent which sold BOAC tickets. They
were taxed for the sale of the tickets (because of the situs of taxation principle), even if the
service to be rendered was outside the Philippines. They weren’t liable for carrier’s tax
though.
o Doing business has no specific criterion. As long as there was a continuity of conduct
and intention to establish a continuous business and not one of a temporary
character, then you are doing business in the Philippines. (Remember your corp!)
 An offline airline which has a branch/agent in the Philippines and sells passage documents
to cover offline flights of its principal or other airlines is NOT considered engaged in
business as an international air carrier in the country and is NOT subject to the GPB nor to
the 3% common carrier’s tax.
 If the airline has flights which originate from any point in the Philippines, it is subject to the
2.5% GPB tax unless it is subject to a different tax rate under a tax treaty to which the
Philippines is a signatory.
 In a nutshell, if an international air carrier maintains flights to and from the Philippines, it
shall be taxed at the rate of 2.5% GPB while international air carriers that do not have flights
to and from the Philippines but nonetheless earn income from other activities in the
country will be taxed at the rate of 32% (now 30%) of such income. (South African Airways,
Feb 16, 2010)
 What is included in computing the GPB?
o Gross revenue from passage of persons (actual amount as reflected in the tax
coupon part of the plane ticket)
o Excess baggage
o Cargo and mail originating from the Philippines in a continuous and uninterrupted
flight
 To compute the GPB: (monthly average net fare of all the tax coupons of plane tickets per
point of final destination, per class of passage, per classification of passenger) MULTIPLIED
by the (total number of passengers flown for the month as declared in the flight manifest)
 In case of passengers’ flights from any point in the Philippines and back, that portion of
revenue pertaining to the return trip to the Philippines is NOT included as part of the GPB.
(RR 15-2002)

Offshore Banking Units

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income
derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking units, including any interest income derived from
foreign currency loans granted to residents, shall be subject to a final income tax at the rate of
ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with said
offshore banking units shall be exempt from income tax.

 Tax rate of offshore banking units authorized by the BSP (including any interest income
foreign currency loans granted to residents) is 10% final tax.
 Income of nonresidents from transactions with OBUs shall be exempt from income tax.
 An offshore banking unit is a branch of a foreign bank which is authorized by the BSP to
transact offshore banking business in the Philippines.
 A foreign currency deposit unit is a department of a local bank or an inexistent local branch
of a foreign bank which is authorized by the BSP to operate under the expanded foreign
currency deposit system.
 Gross onshore income covers all income arising from transactions allowed by the BSP
conducted by and between an offshore bank with another offshore bank or with an FCDU or
with a non-resident. (RR 10-76)
 The following are included in computing the gross onshore income of OBUs and FCDUs?
o Gross interest income arising from foreign currency loans and advances and
investments with residents
o Fees, commissions and other charges which are integral parts of the income from
foreign currency loan transactions is EXEMPT. They are not to be included in
computing the final tax. (RR 14-77)

Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98)

1. Interest income actually received by a resident citizen or resident alien 7.5% final
from FCD withholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen Exempt

3. If it was in a bank account in the joint names of an OCW and his spouse 50% exempt/
(who is a resident) 50% final
withholding tax
of 7.5%

4. Interest income actually received by a domestic corporation or resident 7.5% final


foreign corporation from FCD withholding tax

Regional or Area Headquarters and ROHQs

Sec 22(DD) The term "regional or area headquarters" shall mean a branch established in the
Philippines by multinational companies and which headquarters do not earn or derive income
from the Philippines and which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

(EE) The term "regional operating headquarters" shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following services:
general administration and planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance advisory services; marketing
control and sales promotion; training and personnel management; logistic services; research
and development services and product development; technical support and maintenance; data
processing and communications; and business development.

Sec 28. (6) Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. –

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income
tax.

(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent
(10%) of their taxable income.

 Regional or Area Headquarters is a branch established in the Philippines by multi-nationals


and which headquarters:
o Do NOT earn or derive income from the Philippines, and
o Which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries or branches in the Asia-Pacific Regions.
 They are EXEMPT from income tax.
 Regional Operating Headquarters is a branch established in the Philippines by multi-
nationals which are engaged in any of the following services:
o General admin and planning
o Business planning and coordination;
o Sourcing and procurement of raw materials and components;
o Corporate finance advisory services;
o Marketing control and sales promotion;
o Training and personnel management;
o Logistic services;
o Research and development services and product development;
o Technical support and maintenance;
o Data processing and communications; and
o Business development.
 They are taxed 10% on taxable income.

Branch Profit Remittance Tax

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall
be subject to a tax of fifteen (15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections 57 and 58 of this Code:
provided, that interests, dividends, rents, royalties, including remuneration for technical
services, salaries, wages premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall not be treated
as branch profits unless the same are effectively connected with the conduct of its trade or
business in the Philippines.

 Any profit remitted by a branch to its head office shall be subject to a tax of 15%, except
those registered with PEZA (they have their own tax rules as incentives)
 What’s the base for the BPRT?
o It’s the total profits applied for remittance or earmarked for remittance without any
deduction for the tax component, not the profit actually remitted abroad.
o If it is a foreign corporation, the following are not included:
 Interests
 Dividends
 Rents
 Royalties
 Payment for technical services
 Salaries and wage premiums
 Annuities, emoluments, or other fixed or determinable casual gains
 Profits, income & capital gains
 Except if the above are connected with the conduct of its business in the
Philippines.
 Passive income is not included in computing for the BPRT. It is subject to a final tax.
(Compania General de Tabacos v CIR)
o Except when it arises from business activity in which the corporation is engaged or
connected with the conduct of its business in the Philippines.
 Dividends from a local corporation to a non-resident foreign corporation is not subject to
BPT but to final withholding tax. (Marubeni v CIR, 1990)

Commissioner vs. Marubeni, 177 SCRA 500


Facts: Marubeni Corporation, is a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in
business under Philippine laws. Atlantic Gulf and Pacific Co. of Manila (AG&P) declared and paid cash dividends to petitioner and withheld
the corresponding final dividend tax thereon. Subsequently, Marubeni claimed for the refund or issuance of a tax credit representing profit
tax remittance erroneously paid on the dividends remitted by AG&P. Marubeni contends that it is a resident foreign corporation subject
only to the 10% intercorporate final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of the Tax
Code of 1977.

Q. Is the contention of Marubeni correct?


A. No, the dividend income remitted to Marubeni Corporation of Japan arising from its equity investments in Atlantic, Gulf and Pacific
Company of Manila is considered separate and distinct income from the branch office in the Philippines. There can be no other logical
conclusion that the investment was made for purposes peculiarly germane to the conduct of the corporate affairs to Marubeni, Japan, but
certainly not of the branch in the Philippines.

Passive Income

(7) Tax on Certain Incomes Received by a Resident 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 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, including interest income from
foreign currency loans granted by such depository banks under said expanded foreign
currency deposit system to residents, shall be subject to a final income tax at the rate of
ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from


transactions with depository banks under the expanded system shall be
exempt from income tax.

Tax Rate on Passive Income of Foreign Resident Corporations Final Tax

1. Interest under the expanded foreign currency deposit system 7.5%

2. Royalty of all types within the Philippines 20%

o Royalty from abroad? Exempt. (remember, only taxed from sources within
the Philippines)
3. Interest on any current bank deposit, yield or other monetary benefits from deposit 20%
substitute, trust fund & similar arrangement

4. Dividend from domestic corporations (inter-corporate dividend) exempt


Dividends (Sec 28, par 7, subpar C)

(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a


domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

Capital Gains ( Sec 28, par A,7,(c) )

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final
tax at the rates prescribed below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock
in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000………………… 5%


On any amount in excess of P100,000…… 10%

Tax Rate on Capital Gains

3. On sale of shares of stock of a domestic corporation NOT


listed and NOT traded thru a local stock exchange held as a
capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000
5% of the net capital gains

10% of the net capital gains

2. On sale of real property in the Philippines No provision for capital gains


for sale of realty.

Atty. Montero says that you


apply it to the normal
corporate tax of 30%
Non-Resident Foreign Corporation
In General ( Sec. 28 B (1) )
(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in
trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross
income received during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under subparagraph 5(c)
Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)

 Non-resident foreign corporations are subject to 30% income tax on the gross income
derived during each taxable year from all sources within the Philippines only
o Special corporations (seen below) are subject to a different tax rate
 When the foreign corporation transacts business in the Philippines independently of its
branch in the country, the principal agent relationship is set aside. The transaction becomes
that of the foreign corporation, not of the branch, hence, the corporation is considered a
foreign non-resident corporation for that isolated and independent transaction. (Marubeni
v CIR)
 A casual activity in the Philippines by a foreign corporation does not amount to engaging in
trade or business in the Philippines for income tax purposes. In order that a foreign
corporation may be considered engaged in trade or business, its business transactions must
be continuous. (NV Reederij v CIR)

Special non-resident foreign corporations

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film


owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income
from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident


owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of
gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as
approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals,
charters and other fees derived by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or
fees.

SPECIAL CORPORATIONS

Tax Rate Tax Base

Non-resident owner of lessor of vessel 4.5% Gross rentals, lease and


charter fees from the Phil

Non-resident cinematographic film 25% Gross income from the Phil


owner, lessor, or distributor

Non-resident lessor of aircraft, 7.5% Gross rentals, charges and


machinery and other equipment other fees from Phil sources

Proprietary educational institution and 10% Taxable income from all


non-profit hospital sources

Resident international carrier 2.5% Gross Philippine billings

Regional operating headquarters of 10% Philippine Taxable income


multinational corporation

 There’s no MCIT for special corporations

Passive income
Interest (Sec. 28 (B) (5) (a))
(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is
hereby imposed on the amount of interest on foreign loans contracted on or after August
1, 1986;

Dividends (Sec. 28 (B) (5) (b))

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is
hereby imposed on the amount of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in Section 57 (A) of this Code,
subject to the condition that the country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for
1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen
percent (17%) thereafter, which represents the difference between the regular income tax of
thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent
(33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in this subparagraph;

CIR vs. Wander Philippines Inc., 160 SCRA 573


Facts: Wander Inc. is a domestic corporation owned by Glaro S.A. Ltd., - a service corporation not engaged in trade or business in
the Philippines. Wander remits dividends to its parent company out of which Wander withholds 35% and pays the same to the BIR. Wander
filed a claim for refund, contending that it is liable only for 15% withholding tax and not 35% as provided in the Tax Code.

Q. Is Wander entitled to the preferential rate of 15% withholding tax on the dividends it remitted to Glaro?

A. Yes, under the Tax Code, dividends received from a domestic corporation liable to tax, the tax rate shall be 15% of the dividends
remitted, subject to the condition that the country in which the non-resident corporation shall allow a credit against the tax due from the
non-resident corporation taxes deemed to be paid in the Philippines equivalent to 20% which represents the difference between the regular
tax of 35% on corporations and 15% tax on dividends. In the instant case, Switzerland did not impose any tax on dividends received by Glaro.
Such fact, however, should be considered as a full satisfaction of the given conditions. To deny Wander to withhold the 15% tax would run
counter to the very spirit and intent of said law.

Commissioner vs. Procter, 204 SCRA 377


Facts: Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&GUSA"). P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for
refund or tax credit.

Q. May a subsidiary corporation (withholding agent) file an action for refund?

A. Yes, P& G(USA) is properly regarded as a “taxpayer” within the meaning of Section 309, NIRC [now Section 22 (N)] and therefore,
authorized to file refund. Withholding agent is technically considered as taxpayer. It is also an agent of the taxpayer in reporting such
income. If the withholding agent is also an agent of the beneficial owner, such authority may reasonably be held to include the authority to
file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where the withholding
agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-
stockholder. It seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such
refund.

Dividends (Sec. 28 (B) (5) (c))

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final
tax at the rates prescribed below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock
in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000………………… 5%


On any amount in excess of P100,000…… 10%

Tax Rate on Capital Gains (same as foreign resident


corporations)

4. On sale of shares of stock of a domestic corporation NOT


listed and NOT traded thru a local stock exchange held as a
capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000

5% of the net capital gains

10% of the net capital gains

2. On sale of real property in the Philippines No provision for capital gains


for sale of realty.

Atty. Montero says that you


apply it to the normal
corporate tax of 30%

On inter-corporate dividends (CIR v Procter and Gamble Philippine Manufacturing, 1991)

 The ordinary 35% (now 30%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to 15% if the country of
domicile of the foreign stockholder corporation “shall allow” such foreign corporation a
tax credit for “taxes deemed paid in the Philippines”, applicable against the tax payable
to the domiciliary country by the foreign stockholder corporation.
 In CIR v PG (PMC) (1991), Procter and Gamble Philippines declared dividends to its
parent company, P&G-USA. It deducted 35% withholding tax, but now claimed for a
refund, stating that the reduced 15% dividend tax rate should apply.
o The SC said that the reduced 15% dividend tax rate is applicable if the USA “shall
allow” to P&G-USA a tax credit for “taxes deemed paid in the Philippines”
applicable against the US taxes of P&G-USA.
o The NIRC specifies that such tax credit for “taxes deemed paid in the Philippines”
must, as a minimum, reach an amount equivalent to 20% (now 15%) which
represents the difference between the regular 35% (now 30%) dividend tax rate
and the preferred 15% dividend tax rate. It is important to note that Sec. 24(b)1
(now Sec. 28 (B) (5) (b) of the NIRC does not require that the US must give a
“deemed paid” tax credit for the dividend tax (20% points) waived by the
Philippines in making applicable the preferred dividend tax rate of 15%.
o In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the 20% points of dividend tax waived by the
Philippines. The NIRC only requires that the US “shall allow” P&G-USA a
“deemed paid” tax credit in an amount equivalent to the 20% points waived by
the Philippines.
 CIR v Wander Philippines had the same facts as CIR v P&GPMC. But in Wander, the
country at issue was Switzerland and it did not even impose any income tax on the
dividends received by Swiss corporations from foreign corporations.
o THE SC said that the condition of “taxes deemed paid” was already complied
with since no income tax was imposed on the dividends in the first place.
 In both cases, the taxpayers were entitled to a refund.

Income covered by tax treaties

 In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country. There would be some incentives on
the part of the foreigners to invest in the Philippines because the rates of tax are lowered
and at the same time, they are credited against the domestic tax abroad a figure higher
than what was collected in the Philippines.
o Thus, if the rates of tax are lowered here, there should be a concomitant
commitment on the part of the state of residence (of the foreign corp) to grant
some form of tax relief, whether this be in the form of a tax credit or exemption.
Otherwise, the tax which would have been collected here will simply be collected by
another state, defeating the object of the tax treaty since the tax burden imposed
would remain unrelieved.
o The purpose of the most favored nation clause is to establish the principle of
equality of international treatment by providing that citizens of the contracting
nations may enjoy the privileges accorded by either party to those of the most
favored nation. This allows the taxpayer in one state to avail of more liberal
provisions granted to another tax treaty to which his country or residence is also a
party. However, the use of the most favored nation clause is subject to the rationale
of tax treaties.
o If the state of residence does not grant some form of tax relief to the investor (the
foreign non-resident corp), no benefit would redound to the Philippines. (CIR v SC
Johnson and Son, wherein the issue was with the payment of taxes on royalties. SC
Johnson wanted tax credit based on the US-RP tax treaty which had a “most favored
nation clause.” The Germany-RP treaty was more beneficial because it allowed a
10% rate on royalties. However, the Germany-RP treaty also allowed for 20%
matching credit for royalties. The US-RP tax treaty did NOT have this 20% matching
credit. So the SC said that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed
under the RP- Germany Tax Treaty, SC Johnson cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is no payment
of taxes on royalties under similar circumstances.)
 Based on RMC 46-2002 (affirmed by Golden Arches v CIR, CTA Case 6862, 2007), the 10%
rate of withholding tax on royalties remitted to residents of the US may now be availed of
because of the RP-China tax treaty which has the basically the same provisions of the RP-US
tax treaty. So, the MFN of the RP-US tax treaty can refer to the RP-China tax treaty (as
compared to the RP-Germany treaty which were essentially not the same).1