JD4201 | Taxation Law I | Finals Pointers | Dr.

Vicky Fernandez

1. MCIT: ​A minimum corporate income tax of 2% of gross income shall be imposed on a domestic
corporation and resident foreign corporation beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations when:
(a)​ ​the MCIT is greater than the RCIT for the taxable year.
(b)​ ​such operation has zero or negative taxable income

2. REGULAR CORPORATE INCOME TAX: ​The rate of RCIT imposed on corporations is 30%.
Domestic corporations Resident Foreign Corporations

(a) The rate is imposed on taxable income from sources The rate is imposed on taxable income from
within and without the Philippines. sources within the Philippines.
(b) Different rates of tax apply on certain passive incomes.

3. IMPROPERLY ACCUMULATED EARNINGS: ​This is the income tax imposed on a corporation if its
earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders.

An improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the
improperly accumulated taxable income of each corporation.

It is imposed on domestic corporations which are classified as closely-held corporations.

The term “improperly accumulated taxable income” means taxable income adjusted by:
1.​ ​Income exempt from tax
2.​ ​Income excluded from gross income
3.​ ​Income subject to final tax; and
4.​ ​The amount of net operating loss carry-over deducted; and
5.​ ​Reduced by the sum of:
a. dividends actually or constructively paid; and
b. income tax paid for the taxable year
c. amount reserved for the reasonable needs of the business

RMC 35-2011 [March 14, 2011]

The amount that may be retained, taking into consideration the reasonable needs of the business shall be 100% of
the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock.
Any excess capital over and above the par shall be excluded.

Purpose and nature of IAET

The imposition of IAET discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends received by
the shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed
(see CYNAMID PHILIPPINES INC VS. CA [JANUARY 20, 2000])

The IAET is being imposed in the nature of a penalty to the corporation for the improper accumulation of
its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay
dividends tax on the earnings distributed to them by the corporation (​see ​RR 2-01 [FEBRUARY 12, 2001]).

 
1
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

IAET for corporations

General rule Exception

The IAET shall apply to every corporation formed or availed for the The IAET shall not apply to
purpose of avoiding the income tax with respect to its shareholders 1. Publicly-held corporations
or the shareholders of any other corporation, by permitting earnings 2. Banks and other non-bank financial
and profits accumulate instead of being divided or distributed. intermediaries; and
3. Insurance companies
RR 2-01​: this refers to all domestic corporations which are classified 4. GPPs
as closely held corporations. A closely held corporation are those at 5. Non-taxable joint ventures
least 50% in value of the outstanding capital stock or at least 50% of 6. Enterprises registered under SEZs
the total combined voting power of all classes of stock is owned (see RR 2-01 [FEBRUARY 12, 2001]).
directly or indirectly by not more than 20 individuals.

Liability of corporation for IAET

The touchstone of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other causes, such as
the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would
not generally make the accumulated or undistributed earnings subject to the tax. However, if there is a
determination that a corporation has accumulated income beyond the reasonable needs of the business, the
10% improperly accumulated earnings tax shall be imposed. [​see ​RR 2-01 [FEBRUARY 12, 2001]​).

Circumstances indicative of a purpose to avoid the income tax with respect to shareholders
The fact that any corporation is a mere holding company or investment company shall be ​prima facie
evidence of a purpose to avoid the tax upon its shareholders or members. (​see ​Section 29(C)(1), Tax Code​)

Moreover, the fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs (including reasonably anticipated needs) of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear
preponderance of evidence shall prove the contrary (​see ​Section 29(C)(2)​, ​Tax Code​)

RR 2-01 adds three more instances, namely:

1. Investment of substantial earnings in unrelated business or in stock or securities of an unrelated
business
2. Investment in bonds and other long term securities
3. Accumulation of earnings in excess of 100% of paid up capital

CIR v. TUASON [MAY 15, 1989]

The CIR assessed Tuason, Inc. for IAET. The CIR presumed that when Tuason, Inc. accumulated profits, the
purpose was to avoid the income tax on its shareholders on the finding that it was a mere holding or investment
company. Tuason contended it was for the purpose of expanding their business as a real estate broker. The
Supreme Court ruled that Tuason was liable for IAET. Tuason was a mere holding company as it was not
involved itself in the development of the subdivisions but merely subdivided its own lots and sold them for
bigger profits. It derived its income from interest, dividends, and rental from the sale of realty. The touchstone
of liability is the purpose behind the accumulation of the income and not the consequences of the
accumulation. The company's failure to distribute dividends to its stockholders was clearly for reasons other
than the reasonable needs of the business.

 
2
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

4. ​IMMEDIACY TEST: ​The Immediacy Test is used to determine the “reasonable needs” of business” in order to
justify an accumulation of earnings. Under this test, the term "reasonable needs of the business" are hereby
construed to mean the immediate needs of the business, including reasonably anticipated needs. The corporation
should be able to prove an immediate need for the accumulation of the earnings and profits, or the direct
correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be
deemed to be not for the reasonable needs of the business, and the penalty tax would apply.

MANILA WINE Manila Wine Merchants (MWM) invested in several companies and bought shares in Wack
MERCHANTS V. Wack Golf and Country Club and likewise acquired US Treasury Bills. CIR found that
CIR [FEBRUARY MWM had unreasonably accumulated a surplus. On appeal, the CTA ruled that the
20, 1984] purchase of shares were harmless​. ​However, the CTA also ruled that the purchase of US
Treasury Bills was in no way related to the business of importing and selling wines and
ordered MWM to pay IAET on the said treasury bills. One of the contentions of MWM was
that it will be used to aid its importations The Supreme Court ruled against MWM. It noted
that the bonds were bought in 1951 and until 1961; it was never used to aid MWM’s
importations. To justify an accumulation of earnings and profits for the reasonably
anticipated future needs, such accumulation must be used within a reasonable time after the
close of the taxable year.

CYNAMID V. CA Cynamid argued that the increase of working capital by a corporation justifies accumulating
[JANUARY 20, income. It invoked the Bardahl Formula which allowed retention, as working capital
2000] reserve, sufficient amounts of liquid assets to carry the company though one operating
cycle and pay all of its current liabilities and any extraordinary expenses reasonably
anticipated. The Supreme Court ruled that, as stressed by American authorities, the formula
is used only for administrative convenience and not a precise rule. The Court found that in
companies where the formula was applied, they had operating cycles shorten than that of
Cynamid. The ratio of current assets to current liabilities should be used to determine the
sufficiency of working capital which ideally should be 2:1. Cyanamid’s ratio is 2.21:1 and,
thus, there was no need to infuse working capital.

5. ​CAPITALIZATION RULE: ​Where at least 50% of the outstanding capital stock or at least 50% of the total
combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by
at least 21 or more individuals, the corporation is considered as a publicly-held corporation, thus, exempt from
IAET.

6. ​CASUALTY LOSSES: ​These are the loss or physical damage suffered by property used in trade, business, or
the profession that results from unforeseen, identifiable events that are sudden, unexpected, and unusual in
character.

7. ​SENIOR CITIZEN DISCOUNT: ​RA No. 9994 (Expanded Senior Citizens Act) in relation to RR 7-2010 [July
20, 2010]

The law provides that discounts given to senior citizens on certain goods and services shall be deductible
from gross income. Also, private establishments employing senior citizens shall be entitled to additional
deductions from gross income equivalent to fifteen (15%) of the total amount paid as salaries and wages to
senior citizens.

8. ​NOLCO: Net Operating Loss Carryover ​refers to the excess of allowable deduction over gross income of a
business for any taxable year.[1]

Requisites for the deductibility of the NOLCO from the gross income
1.​ ​The net operating loss of the business or enterprise
2.​ ​for any taxable year immediately preceding the current taxable year

 
3
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

3.​ ​which had not been previously offset as deduction from gross income
4.​ ​shall be carried over as a deduction from gross income
5.​ ​for the next 3 consecutive taxable years immediately following the year of such loss
6. ​Provided, any net loss incurred in a taxable year during which the taxpayer was exempt from
income tax shall not be allowed as a deduction
7. ​Provided, further, a net operating loss carry-over shall be allowed only if there has been no
substantial change in the ownership of the business or enterprise.

Who are the taxpayers who are entitled to the deduct NOLCO from gross income?
1. Any individual engaged in trade or business or in the exercise of his profession
2. Domestic and resident foreign corporations subject to normal corporate income tax

NOLCO v. MCIT
Domestic and resident foreign corporations are liable to the 2% MCIT (computed based on gross income) whenever
the amount of MCIT is greater than the normal income tax due (which would be computed with the benefit of
NOLCO if any). Thus, such corporation cannot enjoy the benefit of NOLCO when it is subject to MCIT.

Will the three-year reglementary period on the carry-over of NOLCO continue to run ​notwithstanding that
the corporation is subject to MCIT (and hence, cannot avail of the benefit of NOLCO)?
Yes. ​RR 14-01 [AUGUST 27, 2001] ​provides that the three-year reglementary period on the carry-over of NOLCO
shall continue to run notwithstanding the fact that the corporation paid its income tax under the MCIT computation

9. ​EDUCATIONAL INSTITUTIONS (TAX RATE IF NON-STOCK NON-​PROFIT, EARNS RENTAL,

STOCK AND PROFIT)
Tax treatment of proprietary education institutions and hospital which are non-profit
Section 27(B) of the Tax Code provides that they shall pay a tax of 10% on their taxable income except:
1. Certain passive incomes subject to final tax
2. If the gross income from unrelated trade, business, or other activity94 exceeds 50% of the total gross income
derived by such proprietary educational institution95 and hospital which are non-profit from all sources, the tax shall
be imposed on the entire taxable income at 30%

“PROPRIETARY” and “NON-PROFIT”

Proprietary means private while non-profit means no net income or asset accrues to or benefits any member or
specific person, with all the net income or asset devoted to the institution’s purposes and all its activities.

As noted by the Supreme court in CIR v. St. Lukes Medical Center [September 26, 2012], “non-profit” does not
necessarily mean “charitable.”

Guidelines for the tax exemption of non-stock, non-profit educational institutions, non-stock, non-profit
corporations and private educational institutions
Non-stock, 1. Their exemption refers only to revenues derived from assets used ​actually, directly, and
non-profit exclusively for educational purposes.​
educational 2. Income from cafeterias, canteens and bookstores are also exempt if they are owned and
institutions operated by the educational institution and are located within the school premises.
3. 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 institution.
4. The interest income on bank deposits and yields from deposit substitutes may be exempt
from income tax if there is showing that said income will be used actually, directly, and
exclusively for educational purposes.

 
4
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

Non-stock, While generally exempt, they remain liable for

non-profit 1. Income derived from, any of their real properties
corporations 2. Any activity conducted from profit regardless of disposition thereof
3. Interest income from any bank deposits or yield on deposit substitutes, including foreign
currency deposits.
4. They shall be withholding agents for their employees’ compensation income subject to
withholding tax.

Private They shall be exempt from VAT but must be accredited with either the DepEd or CHED
educational 1. However, income derived from trade, business or other activity is still taxable.
institutions 2. Bank deposits and foreign currency deposits are exempt from withholding tax but they must
show proof that such income is used to fund proposed projects for their institution’s
improvement
3. They shall be withholding agents for their employees’ compensation income subject to
withholding tax.

10. ​FOREIGN CORPORATIONS NOT ENGAGED IN TRADE OR BUSINESS IN PH (DIVIDENDS,

STOCK)
Tax treatment on dividends from corporations: ​The income shall form part of the gross income of the
corporation but the situs of the income becomes material except for a resident citizen and domestic corporation
which is taxed on worldwide income.

Note​: In other words, only resident citizens and domestic corporations would be subject to tax on dividends received from
foreign corporations as they taxable on income without the Philippines.

Domestic corporation Tax-exempt (treated as inter-corporate on gross income)

Resident foreign Resident foreign corporation, however, are subject to the 15% branch profit
corporation remittance tax

Non-resident foreign 1. Tax treat rate, if applicable

corporation 2. 15% if not tac treaty but satisfies the tax-sparing
3. 30% if no tax treaty and does not comply with the tax-sparing provision

Dividends
General rule Exception

Generally, a dividend has its source in the country
where the corporation paying the dividend is
incorporated. (​residence of the corporation paying
the dividend​)
Thus, if the dividend is received from a domestic
corporation, it is income within the Philippines. If the
dividend is from the foreign corporation, it is income
without the Philippines.
The exception to the general rule that dividends paid
by a foreign corporation are from sources without
the Philippines is when a foreign corporation
derives 50 percent of its gross income from sources
within the Philippines for a three-year period ending
with the close of its taxable year preceding the
declaration of its dividends

 
5
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

11.​ ​INTEREST IN FOREIGN CURRENCY:

a.​ ​Citizens 7.5%
b.​ ​Resident aliens
c. Domestic corporation
d.​ ​Resident foreign corporation

​ on-resident alien
a.​ N Tax-exempt
b.​ N​ on-resident foreign corporations

Note: ​if the bank account id jointly in the name of a non-resident and a resident, 50% shall be treated as exempt and
the remaining 50% shall be subject to the final tax of 7.5%

12.​ ​RENTAL INCOME

Rental income ​refers to the amount or compensation paid for the use or enjoyment of a thing or a right and implies
a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of the property. It includes
all amount or property received from the lease contract, whether used in business or not.

Lease of personal property

Tax treatment of income received from lease of personal property: r​ ental income on the lease of personal property
located in the Philippines and paid to a non-resident taxpayer shall be taxed as follows:

Non-resident foreign Non-resident alien

corporation

Vessel 4.5% 25%

Aircraft, machineries and 7.5% 25%

other equipment

Other assets 32% 25%

Lease of real property

Tax treatment: ​The lease of real property shall be considered as conduct of trade or business on the part of the
lessor, hence, the rental income therefrom shall be considered as business income which shall be included in the
computation of the year-end gross income of the lessor, and not as a passive investment income subject to
withholding tax.

(a)​ ​Leasehold improvements by lessee

Improvements made by lessees taxable as income on the part of the lessor: ​provided that such
buildings or improvements are not subject to the removal by the lessee. The lessor may either: (1)
report the improvements as income at the time when such improvements are completed based on its
fair market value; or (2) spread over the life of the lease the estimated depreciate value of the
improvements at termination of the lease and report as income for each year of the lease an aliquot part
thereof (​Section 49, RR No. 2​)

Helvering v. Bruun [309 US 461]

it is not necessary to recognition of taxable gain that the lessor be able to sever the improvement begetting the
gain from his original capital.

 
6
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

(b)​ ​VAT added to rental/paid by the lessee

Any additional amount paid, directly or indirectly, by the lessee in consideration for the lease is
considered rental. Therefore, taxes paid by the lessee on leased property are part of rental income of
the landlord.

(c)​ ​Advance rental/long term lease

Prepaid or advance rental is taxable income to the lessor in the year received, if so received under a
claim of right and without restriction as to its use, and regardless of method of accounting employed.
Security deposit applied to the rental of the terminal month or period of contract must be recognized as
income at the time it is applied.

Note​: If the security deposit is merely to ensure compliance with the contract (security deposit with
acceleration clause), it is not income to the lessor until the lessee violates any provision of the
contract.

13.​ ​GPP (HOW TO TREAT INCOME GENERATED):

GENERAL PROFESSIONAL PARTNERSHIP[4]: may avail of the OSD only once, either by the GPP or the
partners comprising the partnership.

DETERMINATION OF THE OSD FOR GPP AND PARTNERS OF GPPs: ​GPP is not subject to Income Tax
imposed pursuant to Sec. 26 of the Tax Code, as amended.
§ ​HOWEVER, the partners shall be liable to pay Income Tax on their separate and individual capacities
for their respective distributive share in the net income of the GPP.

GPP AS A “PASS-THROUGH” ENTITY: ​The GPP is not a taxable entity for Income Tax purposes
since it is only acting as a “pass-through” entity where its income is ultimately taxed to the partners
comprising it. Section 26 of the Tax Code, as amended, likewise provides that “For purposes of computing
the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a
corporation.”
§ ​GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof,
it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not
exceeding Forty Percent (40 %) of its gross income.

COMPUTATION OF THE TAXABLE INCOME: ​In computing taxable income defined under Section
31 of the Tax Code, as amended, the following may be allowed as deductions:
(a)​ ​Itemized expenses which are ordinary and necessary, incurred or paid for the practice of profession; or
(b)​ ​OSD.

DISTRIBUTABLE NET INCOME OF THE PARTNERSHIP: ​determined by claiming either itemized

deductions or OSD.
§ ​The share in the net income of the partnership, actually or constructively received, shall be reported as
taxable income of each partner.
§ ​The partners comprising the GPP can no longer claim further deduction from their distributive share
in the net income of the GPP and are not allowed to avail of the 8% Income Tax rate option since their
distributive share from the GPP is already net of cost and expenses.

PARTNER DERIVING INCOME FROM TRADE, BUSINESS OR PRACTICE OF PROFESSION

APART AND DISTINCT FROM THE SHARE IN THE NET INCOME OF THE GPP​: the
deduction that can be claimed from the other income would either be the itemized deductions or OSD.

14.​ ​CASH DIVIDENDS

● A final withholding tax of 10% shall be imposed upon cash dividends actually or constructively received by
a resident citizen

 
7
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

● A final withholding tax of 20% shall be imposed upon cash dividends actually or constructively received by
a non-resident alien engaged in trade or business in the Philippines
● A final withholding tax equal to 25% of the entire income received from all sources within the Philippines,
including the cash dividends, shall be imposed on a non-resident alien not engaged in trade or business in
the Philippines
● Dividends received by a domestic corporation from another corporation shall not be subject to tax
● Dividends received by a non-resident foreign corporation from a domestic corporation are generally subject
to an income tax of 30% to be withheld at source. However, a final withholding tax of 15% is imposed on
the amount of cash dividends received from a domestic corporation if the tax sparing rules applies.

Note: ​Under the tax sparing rule, the lower rate of tax would apply if the country in which the non-resident foreign
corporation is domiciled would allow as a tax credit against the tax due from it, taxes deemed paid in the
Philippines 15% representing the difference between the regular income tax rate and the preferential rate. (NIRC,
Sec. 28(B)(5)(b))

15.​ I​ NCOME TAX ON INDIVIDUAL

a. ​COMPENSATION INCOME: ​Includes salaries, wages, emoluments, honoraria, bonuses, allowances

(transport, representation, entertainment, etc.) fringe benefits, taxable pensions and retirement pay and other
income of similar nature (COLA, PERA, housing allowance, overtime pay, emergency pay, hazarad pay, rice
and clothing allowance, medical)

b.​ B
​ ENEFITS:

Fringe Benefit – any good, service or other benefit furnished or granted in cash or in kind by an
employer to an individual employee such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social
and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
(NIRC, Sec. 33 (B))

Fringe Benefits Tax (FBT)

Final withholding tax imposed on the grossed-up monetary value (GMV) of fringe benefit furnished,
granted, or paid by the employer to the employee, except rank-and-file employees, whether such
employer is an individual, professional partnership, or corporation, regardless of whether the
corporation is taxable or not, or the government and its instrumentalities. (R.R. No. 03-98; Sec.
2.33(A))

Note: FBT is imposed on the employee and not on the employer, but to be paid by the em​ployer.

c. ​MORAL DAMAGES: ​Compensatory, actual, moral, exemplary damages, attorney's fees and other cost of the
suit are EXCLUDED from gross income. However, consequential damages representing loss of victims capacity
to earn are NOT EXCLUDED from Gross Income. Sec.32 B (4) - BIR Ruling 026-2018, January 18, 2018

 
8
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

or
Damages recovered are taxable if the amount represents loss or anticipated profits. not taxable if represents a return
of capital or investment (BIR Ruling, September 8, 1954)

d.​ ​ROYALTY FEES: ​Citizens and Resident Aliens = final tax rate of 20%
Except: royalties on books, literary works, and musical composition = 10%
Section 24 B (1)

e. ​LIQUIDATING DIVIDENDS: liquidating dividend resulting from the distribution by a corp of all its
property or assets in complete liquidation or dissolution. It is a return of capital, thus not an income. (2013
bar). However, it is taxable income with respect to excess of amount received over cost of the share
surrendered

f.​ ​PRIZE MONEY: ​Prizes of more than Php 10,000 = final tax rate of 20%
Except prizes of Php 10,000 or less = included in ITR (Section 24 a)
Basis: Sec. 24 (B) 1

16.​ ​ST. LUKE’S CASE

a.​ ​SEC 27 (B) VIS-A-VIS SEC 30 E, SEC 28[5]:
St. Luke’s Medical Center is a hospital organized as a non-stock and non-profit corporation. It admits
both paying and non-paying patients. The CIR claimed that St. Lukes was liable for income tax at 10% as
provided under Section 27(B)[6] ​of the NIRC. St. Lukes argues that it is a non-stock, non-profit institution
for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G)[7] of the
NIRC.​ D
​ ecide.

In ​CIR ​V​. S​T​. L​UKE’S ​M​EDICAL ​C​ENTER ​[S​EPTEMBER ​26, 2012]​, the Supreme Court ruled that St. Luke’s cannot
claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is
a non-profit hospital. For Section 27(B) to apply, the hospital must be non-profit which means that no net income or
asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. On the
other hand, Section 30(E) and (G), while providing for an exemption is qualified by the last paragraph which, in
turn, provides that activities conducted for profit shall be taxable. Section 30(E) and (G) requires that an institution
be operated exclusively for charitable purposes to be completely exempt from income tax. In this case, however, St.
Luke’s is not operated exclusively for charitable purposes insofar as its revenues from paying patients are
concerned. Such revenue is subject to income tax at 10% under Section 27(B).

Tax treatment of proprietary educational institutions and hospitals which are non-profit under Section 27(B)
and non-stock, non-profit charitable institutions under Section 30(E) and (G)
To be exempt from income taxes, Section 30(E) requires that the charitable institution must be organized and
operated exclusively for charitable purpose. It is nevertheless allowed to engage in “activities conducted for profit”
without losing its tax-exempt status for its not-for-profit activities. The consequence, however, is that such income
from activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.
For proprietary educational institutions and hospitals which are non-profit to avail of the preferential tax rate, no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution’s purposes and all its activities.

Thus, in CIR V. ST. LUKE’S MEDICAL CENTER [SEPTEMBER 26, 2012], while St. Luke’s did not qualify as a
non-profit, non-stock charitable institution under Section 30(E) as it was not operated exclusively for charitable
purposes, it remains to be a proprietary non-profit hospital under Section 27(E) as long as it does not distribute any
of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Lukes, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.

 
9
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

b. ​ARTICLE 6, PHILIPPINE CONSTITUTION: ​Charitable institutions, churches and parsonages or convents

appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxatio.
(Art. VI, sec 28(3))

c. ​HOW DO WE TREAT PAYMENT FROM PAYING PATIENT: ​As a general principle, a charitable
institution does not lose its character as such and its exemption from taxes simply because it derives income from
paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons managing or operating the institution.

17.​ ​CHURCHES EARNING RENTAL

RELIGIOUS CORPORATIONS.
Requisites for exemption:
1) organized and operated for one or more of the specified purposes
2) no part of its net income must inure to the benefit of private stockholders or individuals

Income from the conduct of strictly religious activities, such as fees received for administering baptismal,
solemnizing marriages, attending burials, holding masses, and other like income is EXEMPT

18.​ ​SALE OF CEMETERY LOTS

​Requisites for exemption:
1) owned and operated exclusively for the benefits of its owners
2) not operated for profit

any cemetery corporation chartered solely for burial purposes and not permitted by its charter to engage in any
business not necessarily incident to that purpose is exempt from income, provided that no part of its net
earnings inures to the benefit of any private shareholder or individual

19.​ D
​ ONATION SERVICES
Donations deductible in full
1. ​Donations to the ​Government​, its entities, political subdivisions or fully owned corporations exclusively for
undertaking priority activities in ​accordance with the national priority plan ​to be determined by NEDA
2. ​Donations to ​foreign institutions ​or international organizations pursuant to agreements, treaties entered into by
Government or special laws
3.​ ​Donations to ​accredited Non-Government Organizations ​(non-profit domestic corporation)

Donations subject to limitations

1.​ ​The government for public purposes
2.​ ​Accredited domestic corporations for religious, charitable, scientific, etc. purposes
3.​ ​Social welfare institutions
4.​ ​NGOs (not accredited)

The limitations are 10% of net income for individual taxpayers and 5% of net income for corporate
taxpayers.

Note:​ A ​non-government organization s​ hall refer to a n ​ on-stock, non-profit domestic corporation

organized and operated exclusively for ​scientific​, ​research​, e​ ducational​, ​character-building a​ nd y​ outh
and sports development​, ​health,​ s​ ocial welfare,​ c​ ultural or charitable purposes or a combination thereof,​
no part of the net income of which inures to the benefit of any private individual.

 
10
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

20.​ S
​ ALE OF RELIGIOUS ITEMS

21.​ E
​ DUCATIONAL INSTITUTION

a. ​SALE IN CANTEEN: In ​CIR V. CA [298 SCRA 83], ​the Supreme Court ruled that the income from the lease
and parking fees were not exempt. The last paragraph of Section 27 of the NIRC clearly provides that profits
realized by exempt organizations (non-profit clubs) from real property from whatever source and wherever used
are taxable. The Court noted that while YMCA is exempt from real property taxes, it is not exempt from income
tax on the rentals from its property. Further, YMCA failed to prove that it was a non-stock, non-profit
educational institution under Article XIV, Section 4(3) of the Constitution.

b.​ S​ ALE IN DORMS; ​and

c.​ ​SALE OF BOOKS

Income derived from dormitories, canteens and bookstores are not automatically exempt from taxation. There is still
a requirement for evidence to show actual, direct and exclusive use for educational purposes pursuant to Article
XIV, sec. 4(3) of the Constitution.

Q: Under Art. XIV, Sec. 4(3) of the 1987 Constitution, all revenues and assets of non-stock, non-profit
educational institutions, used actually, directly and exclusively for educational purposes, are exempt from
taxes and duties. Are incomes derived from dormitories, canteens and bookstores as well as interest income
on bank deposits and yields from deposit substitutes automatically exempt from taxation? (2000 Bar)

A: NO. ​The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from
taxation. There must be a showing that the incomes are used actually, directly, and exclusively for educational
purposes.

The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation.
There is still a requirement for evidence to show actual, direct and exclusive use for educational purposes.

NOTE: ​The 1987 Constitution does not distinguish with respect to the source or origin of the income. The
distinction is with respect to the use which should be actual, direct and exclusive for educational purposes. Where
the Constitution does not distinguish with respect to source or origin, the NIRC should not make distinctions
(Mamalateo, 2008).

22.​ ​EXCLUSIVE APPELLATE JURISDICTION OF CTA

a)​ ​Decisions of the CIR in cases involving:
§​ ​Disputed assessments
§​ ​Refunds of internal revenue taxes, fees, or other charges
§​ ​Penalties in relation thereto, or
§​ ​Other matters arising under the NIRC or other laws administered by the BIR

Note: ​RR 18-2013 n​ ow mandates the BIR to indicate in the final decision on a disputed assessment
that it is indeed the final decision of the BIR.

b)​ I​ naction by the CIR in cases involving:

§​ ​Disputed assessments
§​ ​Refunds of internal revenue taxes, fees or other charges
§​ ​Penalties in relations thereto, or
§ ​Other matters arising under the NIRC to other las administered by the BIR, where the NIRC
provides a specific period of action, in which the inaction shall be deemed a denial
§​ ​Provided that: in case of ​disputed assessments,

 
11
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

o t​ he inaction of the CIR within the 180-day period under Section 228 of the NIRC shall be
deemed a denial for purposes allowing the taxpayer to appeal his case to the Court and not
necessarily constitute a formal decision of the CIR on the tax cases;
o ​provided, further, that should the taxpayer opt to await the final decision of the CIR on the
disputed assessments beyond the 180-day period abovementioned, the taxpayer may
appeal such final decision to the Court under Section 3(a), Rule 8 of these rules; and
§ ​Provided, still further, that in the case of claims for ​refund of taxes erroneously or illegally
collected, ​the taxpayer must file a petition for review with the Court prior to the expiration of
the 2-year period under Section 229 of the NIRC.

c) ​Decisions, orders, or resolutions of the RTC in local tax cases originally decided or resolved by them in the
exercise of their original appellate jurisdiction

d)​ D
​ ecisions of the Commissioner of Customs in cases involving:
§​ ​Liability for customs duties, fees or other money charges,
§​ ​Seizure, detention or release of property affected
§​ ​Fines, forfeitures, or other penalties in relation thereto, or
§​ ​Other matters arising under the customs law or other laws administered by the BOC

e) ​Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally decided by the provincial or city board of
assessment appeals (Certiorari)

f) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions
of the Commissioner of Customs which are adverse to the Government under Section 2315 of the Tariff and
Customs Code.

g)​ D
​ ecisions of the:
§ ​Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article,
and the
§ ​Secretary of Agriculture in the case of agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and
Customs Code, and safeguard measures under RA 8800, where either party may appeal the
decision to impose or not to impose said duties.

23. ​IRREVOCABILITY RULE: ​Once a taxpayer chooses the option to carry over, such option shall be considered
irrevocable. It can no longer opt for a refund or issuance of a tax credit certificates;

If the taxpayer elected refund or issuance of a tax credit certificates, such option is revocable. The taxpayer is free to
change its choice and opt for carryover; and

If the taxpayer opts to carry over such excess creditable tax after electing refund or issuance of a tax credit
certificates, the carryover option is, likewise, irrevocable. The taxpayer cannot revert to its original choice of refund
or issuance of a tax credit certificates.

24. ​180 DAYS + 30 DAYS RULE: ​When a protest for reconsideration or reinvestigation is denied in whole or in
part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days
from receipt of said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the
decision shall become final, executory and demandable.

25. ​8% INCOME TAX RATE: Self-Employed individuals Earning Income purely from Self-Employment or
Practice​: i​ f gross sales/receipts and other non-operating income does not exceed the Value-Added Tax (VAT)
threshold as provided under Section 109 (BB) of the Tax Code, as amended, shall have the option to avail of:

 
12
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

a) ​The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended; or
b) 8% tax on gross sales or receipts and other non-operating income in excess of ₱ 250,000.00, in lieu of the
graduated income tax rates under Section 24(A) and the Percentage Tax under Section 116 all under the
Tax Code, as amended.

§ ​Unless the taxpayer signifies the intention to elect the 8% Income Tax rate in the 1​st Quarter Percentage and/or
Income Tax Return, or on the initial quarter return of the taxable year after the commencement of a new
business/practice of profession, the taxpayer shall be considered as having availed of the graduated rates under
Section 24(A)(2)(a) of the Tax Code, as amended.
o ​Such election shall be irrevocable and no amendment of option shall be made for the said
taxable year.

Who cannot avail the 8% tax rate

a) VAT-registered taxpayer
b) ​Taxpayer who is subject to other percentage taxes under Title V of the Tax Code, as amended, except
those under Section 116 of the same title.
c) ​Partners of a GPP by virtue of their distributive share from GPP, which is already net of cost and
expenses, cannot avail of the 8% Income Tax rate option.
§ ​A taxpayer who signifies the intention to avail of the 8% Income Tax rate option, and is conclusively qualified for
said option at the end of the taxable year (annual gross sales/receipts and other non-operating income did not
exceed the VAT threshold [₱ 3,000,000.00]) shall compute the final annual Income Tax due based on the ​actual
annual gross sales/receipts and other non-operating income​.
o ​The said Income Tax due shall be in lieu of the graduated rates of Income Tax and the
Percentage Tax under Sec. 116 of the Tax Code, as amended.
o ​The Financial Statements (FS) is not required to be attached in filing the final Income Tax
Return. However, existing rules and regulations on bookkeeping and invoicing/receipting shall
still apply.

When taxpayer’s gross sales/receipts and other non-operating income exceeded the vat threshold
during the taxable year: ​A taxpayer shall automatically be subject to the graduated rates under Section
24(A)(2)(a) of the Tax Code, as amended, even if the flat 8% Income Tax rate option is initially selected.
§ ​In such case, his/her Income Tax shall be computed under the graduated Income Tax rates and shall be
allowed a tax credit for the previous quarter/s Income Tax payment/s under the 8% Income Tax rate
option.

Taxpayer subject to graduated income tax rates[8]: ​also subject to the applicable business tax, if any.
§ ​Subject to the provisions of Section 8 of these Regulations, an financial statement (FS) shall be required
as an attachment to the annual Income Tax return even if the gross sales/receipts and other
non-operating income is less than the VAT threshold.
§ ​However, the annual Income Tax return of a taxpayer with gross sales/receipts and other non-operating
income of more than the said VAT threshold shall be accompanied by an audited FS.

Taxable income for individuals earning income from self-employment/practice of profession: ​shall be the net
income, if taxpayer opted to be taxed at graduated rates or has failed to signify chosen option.
§ ​However, if the option availed is the 8% income tax rate, the taxable base is the gross sales/receipts and other
non-operating income.

26.​ F
​ REE HOUSING

Instances when 1. Employer leases residential property and assigns the same for use by the employee
housing privilege is 2. Employer owns a residential property on installment basis and allows use by the employee
subject to fringe 3. Employer purchases a residential property and transfers ownership to the employee
benefit tax 4. Employees provides a monthly fixed amount for the employee to pay his landlord

 
13
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

Instances when 1. Housing privilege of military officials of the AFP

housing privilege is 2. Housing unit which is situated inside or adjacent to the premises of a business or factory
not subject to fringe (it is considered adjacent if its located within the maximum of 50 meters from the
benefit tax perimeter of the business premises)
3. Temporary housing for an employee who stays

27.​ ​PROCEEDS OF LIFE INSURANCE

Proceeds of life insurance payable upon the death of the insured to the heirs or beneficiaries, but not the interest
payments thereon if such amounts are held by the insurer under an agreement to pay interest.

Conditions for the exclusion from gross income of life insurance proceeds
1.​ ​Paid to the heirs or beneficiaries
2. Upon the death of the insured
3. Whether in a single sum or otherwise

Note: (1) Payment by reason other than death – Payment for reasons other than death are subject to tax up
to the extent of the excess of the premiums paid.

(2) Reason for the Exclusion – They partake more of indemnity or compensation rather than gain to the
recipient

Instances when life insurance proceeds are not excluded from gross income
1.​ ​Life insurance policy is used to secure a money obligation
2.​ ​Life insurance policy was transferred for a valuable consideration
3. ​The recipient of the insurance proceeds is a business partner of the deceased and the insurance was
taken to compensate the partner-beneficiary for any loss in income that may result as the death of the
insured partner
4. ​The recipient of the insurance proceeds is a partnership in which the insured is a partner and the
insurance was taken to compensate the partnership for any loss in come that may result from the
dissolution of the partnership caused by the death of the insured partner
5. ​The recipient of the life insurance proceeds is a corporation which the insured was an employee or
officer. (see ​RR No. 2-40​)

Tax treatment of the interests paid on life insurance proceeds

If the amounts of life insurance proceeds are held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in the gross income. (see ​Section 32(B)(1), Tax Code​)

Note:​ ​Rationale ​– The interests do not form part of the indemnity but are earnings or income from the use
of capital which are taxable.

28.​ C
​ ANCELLATION OF GAMBLING BETS:

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions (NIRC,
Sec. 34 D(6)

29.​ O
​ FFSHORE BANKING INTEREST

If the foreign currency transactions are with residents 10%

other than OBUs and local commercial banks

 
14
JD4201 | Taxation Law I | Finals Pointers | Dr. Vicky Fernandez

Income derived by OBUs from foreign currency Tax-exempt

transactions with nonresidents, other OBUs, and local
commercial banks

30.​ U
​ NUSED VACATION LEAVE CREDITS

Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year are
considered De Minimis benefits and are exempt from income tax as well as withholding tax on compensation
income of both managerial and rank and file employees.

31.​ ​COMMISSION
Commission of independent and/or exclusive sales representatives, and marketing agents of companies shall be
subject to Eight Percent (8%) tax rate.

BONUS: AMENDMENTS IN THE TRAIN LAW AFFECTING INCOME TAX

● For purely self-employed and/or professionals whose gross sales/receipts and other non-operating income
do not exceed the P3, 000,000.00 VAT threshold, the tax shall be, at the taxpayer’s option, either: (a) 8%
income tax on gross sales or gross receipts in excess of P250,000.00 in lieu of the graduated income tax
rates and the percentage tax; OR (b) Income tax based on the graduated income tax rates for individuals.
● PCSO and lotto winnings in excess of P10, 000.00 shall now be subject to the 20% final tax. Under the
NIRC, such winnings are exempt from the 20% final tax.
● The rate of final tax on interest income received by resident individual taxpayers under the expanded
foreign currency deposit system has been increased from 7.5% to 15% final tax.
● The final tax rate for net capital gains tax on the sale, barter, exchange or other disposition of shares of
stock in a domestic corporation not traded through the stock exchange is has been increased from 5%/10%
to a flat rate of 15% capital gains tax.
● The amount of tax exempt 13th month pay and other benefits has been increased from P82, 000.00 to P90,
000.00
● The allowable deduction for premium payments on health and/or hospitalization insurance of an individual
taxpayer has been removed. Under the NIRC, the allowable deduction is P2, 400.00 per year or P200.00 per
month, subject to a gross family income threshold of P250, 000.00
● The tax exemption for estates and trusts has been removed. Under the NIRC, there was an allowed personal
exemption of P50, 000.00 from the income of the estate and trust.

 
15