Tax Transcription Complete Lumbera PDF

TAXATION LAWS I
ATTY. RIZALINA LUMBERA
OUTLINE
I. NATIONAL INTERNAL REVENUE CODE (NIRC)
Last Amendment: 1997 = 1997 NIR TAX REFORM ACT (under Cory Administration)
NIRC is supplemented by various BIR issuances in the form of:
1. Revenue Regulations
2. Revenue Memorandum orders
3. Revenue Memorandum circulars
These are only specific to the BIR.
NIRC is supplemented by revenue regulations issued by BIR pursuant to the power of

the BIR to promulgate rules and regulations, revenue memorandum orders, and
revenue memorandum circulars.
II. LOCAL GOVERNMENT CODE OF 1991 (LGC)
- We use this in Administration Law and Public Corporation

- There is a tax portion in that.
- Under the LGC of 1991, we have ordinary local property taxes and real property tax.
III. TARIFF AND CUSTOMS CODE (TCC)
- Supplemented by the Bureau of Customs together with the issuances made by the BOC
AGENCIES IMPLEMETING TAX LAWS
1. BUREAU OF INTERNAL REVENUE (Under the Department of Finance)

2. DOF and DENR
For the LGC:
1. Local Sanggunian, from barangay, to municipality, to city, to province

2. Legislature of a LGU
3. Office of the Treasurer in each LGU - pinagbabayaran
4. Assessor’s office of each LGU – levies
For the TCC:
1. Bureau of Customs
In such agencies, we have additional government units involved in tax:
1. DOF (under BIR and BOC)

2. DOJ (as far as ordinary local taxes are concerned)
3. For Tariffs and Customs Duties:
a. DTI (importation of goods which are non-agricultural products) and
b. DOA (importation of goods of agricultural products)
1
TAXATION LAWS I
TAXATION
- One of the 3 inherent powers of the state, together with police power and eminent domain.
- Through the power of taxation, the government raises funds, government levies taxes for
the purpose of raising funds to support the needs of the government.
- It is exercised by the state through the legislature (Senate and HOR).
- It is always legislative in character.
- Because it is an inherent power of the state, there are constitutional and inherent
limitations.
What is the most important purpose of levying of tax?
- To raise revenues
- All the taxes that are paid by taxpayers are used by the government to finance its
requirements.
TAXES
- These are enforced contributions on taxpayers and once they are paid by the taxpayers,
they go to the national treasury because these are becoming public funds.
- That is why the most important concept in taxation:
o Taxes must be utilized by the government for public purpose and it requires
appropriation of the funds collected by the state by way of taxes
- Appropriation should be for public purpose.
o If not for a public purpose, any taxpayer may file a taxpayer’s suit if the funds of the
government for any purpose other than for public purposes.
Taxes are enforced proportional contributions.
1. Enforced – you cannot refuse to pay tax. Enforced contributions on every citizen of the state.
Enforced and levied by the legislature
2. Proportional – in proportion to your capacity to pay. In determining the proportion, we say
that the basic principle in taxes are:
It must be a sound tax system (FAT)
a. Fiscal Adequacy – the tax system is capable of raising sufficient funds for the needs of the
government
b. Administrative Feasibility – the tax system is capable of being administered and
implemented
c. Theoretical Justice – the tax system is based on the capacity to pay; the higher the income,
the higher the rate of tax base
o Theoretical justice is the best example of proportional, according on your capacity
to pay
o All taxes (except VAT and Excise taxes) are progressive.
Progressive System of Tax
- Depends on the capacity of taxpayer to pay

- Best Example: Sec. 24 of the NIRC
2
TAXATION LAWS I
o Income tax for individuals range from 5%-32% and the tax base also
differs.
o This is the best example of a scheduler tax system or progressive.
- The higher the income. The higher the rate of tax is.
- Perfect example of provision in the Bill of Rights that: Congress shall evolve
a progressive tax system, and the due process clause which states that “No
person shall be deprived of life liberty and property without due process of
law, nor shall a person be deprived of the equal protection of the law.”
- Excise tax in (Secs. 85, 86, and 87)
o It is schedular and progressive; depending on the amount of the
estate ranging from 5%-15%
- Donor’s Tax (Sec. 99)
o It is schedular din ang ating donor’s tax ranging from 2%-15%
- VAT
o Fixed at 12% or 0%.
- Percentage tax
o Fixed at 3% of the gross sales.
- Basically, internal revenue taxes are scheduler and progressive according to
the Constitution.
CONSTITUTIONAL AND INHERENT LIMITATIONS
1. Constitutional Limitations –Provisions in the Constitution which restrict the power of the
state to levy taxes.
2. Inherent Limitations – By the very nature of the power of taxation, nagllilimit na agad siya.
CONSTITUTIONAL LIMITATIONS
1. Due Process Clause (Art. III, Sec. 1)
No person shall be deprived of life, liberty, and property without due process of law, nor
shall any person be denied of equal protection of the laws.
- Taxes are properties of taxpayers; these are our money.

- Lahat ng binabayad na taxes, should both comply with substantive and procedural due
process.
1. Substantive – it must be for public purpose
o If taxes are obtained or levied not for a public purpose = denial of substantive due
process.
2. Procedural – it must follow the required procedure
o If taxes are levied and paid, and the procedures under the NIRC or the LGC or under
the TCC are not followed (eg: Kung paano magbabayad? Paano maniningil?) =
violation of constitutional provision on procedural due process
2. Equal Protection Clause (Art. III, Sec. 1)
No person shall be deprived of life, liberty, and property without due process of law, nor shall
any person be denied of equal protection of the laws.
- Does it allow classification among taxpayers?
3
TAXATION LAWS I
- Those taxpayers who belong to the same classification must be subjected to the same rate of
tax.
- Kung ano ang grupo mo, among the group, the tax should be applied equally. Kung wala ka
sa group na ‘yun, hindi ka pwede i-tax ng rate na ‘yun. ‘Yan ‘yung schedular.
- You will notice in Sec. 24, dyan sa equal protection clause, it allows classification.
When is there a valid classification?
1. Classification is germane to the purpose of the law

2. Must not be temporary, apply all the way forever
3. There must be substantial distinction in the classification
These are the requirements of the Equal Protection Clause.
When is there a valid classification among taxpayers?
1. It must be germane to the purpose of the law – the act of classifying must be related to the
purpose of the law, why the law was passed (“it”)
2. It must be based on substantial distinctions (eg: ang gatas, hindi mo pwede i-treat similarly
sa asukal; ang alak hindi mo pwede i-treat similarly sa sofdrinks)
3. Application of the law must be equal and all the way (forever) – basta ito ay classified na
ganito, ang tax ay applied forever in that manner in this specific classification
If you violate the equal protection clause, the tax law is invalid and unconstitutional. Dapat, it
should comply with equal protection clause under the Constitution.
3. Non-Impairment Clause (Art. III, Sec. 10)
No law impairing the obligation of contracts shall be passed.
- Once a right is vested, it cannot be changed, you cannot amend it, cannot diminish any right
you have.
- Application in Tax: Normally applied in exemptions. Whan an exemption is granted to a
taxpayer, and we apply the non-impairment clause, pwede ba nating baguhin, palitan, o
amendahan ang tax exemption? Basically kasi hindi ito nag-apply sa tax because taxes are
enforced, taxes are required to be paid. (eg: Hindi mo pwedeng sabihin na kapag granted ka
ng tax exemption, forever na ‘yung tax exemption) You cannot use this constitutional
provision, na kapag ikaw ay binigyan ng tax exemption, ito ay forever, hindi na pwedeng
bawiin.
- Tax exemptions are mere privileges. Tax exemptions or tax incentives (whether in full or
partial), those are mere privileges; privileges which are extended and you do not have any
vested right in a tax exemption because it can be removed and taken away from you.
o When will this non-impairment clause apply in tax exemption?
 If the tax exemption is unilaterally granted by the legislature through a law,
it can be removed without violating this constitutional provision because it
is a unilateral grant.
 But if the tax exemption or tax incentive is contractual in character
(bilateral) – between the state and the taxpayer), any impairment or change
in the provisions of the contract pertaining to tax exemption, cannot be
changed. If changed, the taxpayer, can use this basis.
4
TAXATION LAWS I
1. Unilateral – non-impairment clause can never be applied because tax

exemptions and tax incentives are mere privileges granted by the legislature.
2. Bilateral (in the nature of a contractual obligation; mutually agreed upon by the
taxpayer and the state) – any change in the vested right will be a violation of this
constitutional provision on non-impairment of obligations in a contract.
- Application in Tax: Nowadays, personal exemption of an individual earning income,
regardless of status, personal exemption ay P50,000.00, and for children we have and
additional exemption of P25,000.00/child maximum of 4.
o This is a unilateral grant.
o If the state, later on, removes that exemption, we cannot do anything.
- Current events: Removal of tax exemptions of senior citizens
o VAT is a unilateral grant.
o If the state decides, pursuant to a tax reform bill, the exemption from VAT of senior
citizen is removed, senior citizens cannot complain because it is a unilateral grant of
tax incentive.
- Application in Tax: If there are foreign investments coming into the Philippines for
construction of new industries. Ang mga typical tax incentives sa kanila ng BOI ay ‘yung
importation of materials used in construction. Binibigyan sila ng tax exemption from
importation of construction materials kasi we are trying to encourage them to invest. May
nakalagay sa tax incentive nila na “Lahat ng importation of construction materials will be
exempt from VAT.” Or kung hindi man fully exempt, binababaan ‘yung rate.
o This is a bilateral agreement.
o We cannot withdraw this ‘dun sa construction. Habang kino-construct ‘yan at
habang ginagawa ng foreign investor ‘yung investment niya dito sa Pilipinas, hindi
natin pwedeng baguhin because the taxpayer-foreign investor can use this non-
impairment clause of obligation in a contract.
4. Voting Requirements for Grant Of Tax Exemptions (Art. VI, Sec. 28, no. 4)
x x x (4) No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of the Congress.
How many votes do you need? Sa kongreso, not necessarily a tax exemption, how many votes do we
need to pass a tax bill? When a law in general is passed in the Congress, ilang boto ang kailangan?
- Majority of all the members of the Congress (there is nothing in the Constitution na
nakasulat kung voting jointly or separately)
No tax bill shall be passed granting tax exemption without the concurrence of the majority of all the
members of the Congress.
- ALL = absolute majority (even those absent are included in the counting) because tax
exemptions are construed against the taxpayers that is why it requires the strictest of the
requirements. Even if there is quorum, ang quorum ay 50% ng lahat. ‘Pag sinabing absolute
majority, hindi 50% ng quorum kung hindi 50% ng over-all population ng Kongreso (lower
and upper house).
- SEPARATELY - otherwise, walang silbi. Senate becomes powerless because if we are going
to interpret it “jointly,” they are going to be eaten up by mere numbers, which is not the
intention of the law insofar as tax exemptions are concerned.
5
TAXATION LAWS I
= ABSOLUTE MAJORITY (50% +1 OF BOTH HOUSES) VOTING SEPARATELY
This is a tax bill which goes through the same procedure in passing an ordinary bill. It goes
through the same process. It is an ordinary bill which is a tax bill which provides for tax
exemption.
Kung tax bill, hindi mag-aapply ito dahil ‘yun ay hindi tax exemption bill.
5. Each LGU Shall have the Power to create its own sources of revenues (Art. X, Sec. 5)
Each local government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local governments.
- Product: LGC of 1991

- Issue: Are local taxes (taxes imposed by LGU) are the national taxes or the local taxes?
- Dati: lahat ng taxes na iniimpose ng LGU are considered as local taxes.
- There was a particular case which says that our local taxes specifically real property tax, are
no longer considered as local tax but already a national tax.
 GR: All taxes levied by the LGU are considered as local taxes.
 XPN: In case of real property tax, nag-evolve ang nature niya from local tax classification
into a national tax classification.
6. Jurisdiction of the Supreme Court as the Highest Court of the Land (Art. VIII, Sec. 5)
The Supreme Court shall have the following powers:
xxx
(2) Review, revise, modify , or affirm on appeal on certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
xxx
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty
imposed in relation thereto.
- Application in Tax: Applied in the sense that the SC, being the highest court of the land, has
the power to decide with finality all tax cases. SC cannot be deprived of that jurisdiction.
- We cannot deprive SC of its jurisdiction to decide with finality of all tax cases. Lahat ng tax
cases decided with finality by SC.
7. Non-Imprisonment for Non-Payment of Debt or Poll Tax (Art. III, Sec. 20)
No person shall be imprisoned for non-payment of debt or poll tax.
 Poll Tax – residence tax (cedula)

- Non-payment of income tax, estate tax, donor’s tax, VAT, percentage tax, documentary
stamp tax, may cause imprisonment because it is tax evasion (criminal offense).
- We are not exempting from payment of poll tax. Kapag hindi ka nagbayad, hindi ka
makukulong.
6
TAXATION LAWS I
- Why?
o Because you will be violating another constitutional provision: The Right to
Travel
o If you will be imprisoned for non-payment of poll tax, it is a restriction or
curtailment of one’s right to travel. Therefore, you cannot be imprisoned for
non-payment of poll tax.
- If you did not pay your income tax, regardless of how small the value is, it constitutes Tax
Evasion which is a violation under the NIRC.
8. Tax Bills shall originate exclusively from House of Representatives (Art. VI, Sec. 24)
All appropriation, revenue or tariff bills, bills authorizing increase of public debt, bills of
local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
Can the Senate completely change the tax bill originating from the HOR?
- Yes. In any bill passed by HOR, the Senate may change, completely adapt, or baguhin talaga
‘yung bill na prinopose ng lower house.
9. Institutions not subject to tax (Art. VI, Sec. 28, no. 3)
x x x (3) Charitable institutions, churches and parsonages or covenants 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
taxation.
Institutions covered by the Constitution:
a. Charitable Institutions, includes charitable hospitals (CI)

b. Religious Institutions (RI)
c. Non-Stock, Non-Profit Educational Institutions (NSNPEI)
Charitable Institutions vs. Proprietary Hospitals and Proprietary Educational Institutions
There is a need for Tax Exemption Certificate (TEC) issued.
General Note: New BIR issuance on NSNPEI under the administration of Commissioner Kim.
(November 2013)
 These institutions were already issued TEC and according to the issuances made by
Commissioner Kim, the tax exemption certificate should be revalidated. There is a
requirement for the revalidation of the TEC issued to these institutions.
 Commissioner Dulay (July 2016): Nag-exception to the rule si Commissioner Dulay. In case of
NSNPEI, all NSNPEI with TEC issued prior to November 30, 2012, there is no need to
revalidate. What they should do is to apply for new TEC, which TEC if granted to them
would never require revalidation.
Constitution limitations on various institutions (Art VI, Sec. 28, no. 3) should always be studied in
relation to Sec. 30 of the NIRC.
7
TAXATION LAWS I
These are some of the institutions provided in the Constitution but there are other organizations
which are considered as non-stock, non-profit domestic corporations (NSNPDC) listed under Sec.
30 as exempt from payment of income tax.
Charitable Institutions
Charitable institutions, churches and parsonages or covenants 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
taxation. (Art. 6, Sec. 28, no. 3)
CI
Churches
Parsonages Charitable
Convents ADE Religious Exempt from RPT
Mosques Educational
Non-Profit Cemeteries
LBI
Ano ang meron sa CI/RI para maexempt sila?
- Must be incorporated as a NSNPI.

o Articles of Incorporation and By-Laws provide that the primary purpose of the
institutions is for charitable and religious activities; profession of faith and
charitable activities.
o Must be incorporated in the Philippines.
What are the usual characteristics of NSNPI?
1. It is governed or managed by Board of Trustees (BOT), no Board of Directors.

2. No part of its income is distributed to the members in the form of dividends. In particular,
funds or assets should not inure to the benefit of a particular member or the BOT.
Is the exemption automatic?
- No.
o While it is true that the Constitution provides for an exemption, it does not provide
for an automatic exemption. You need to prove that you qualify as a CI and you
apply for the exemption where the BIR shall issue a TEC, a BIR ruling particular to
you.
Charitable Institution A. May BIR ruling nakalagay na si CI A shall be exempt from tax. That is the TEC.
Hindi ito generic, particular ito sa inyo. TEC or ruling stating that your CI A is exempt from payment of
income tax.
St. Luke’s Hospital case set the trend on CI and other exempt institutions. There are 2 tests adapted
by the BIR in its issuance to determine whether the institution is an exempt institution:
1. Operational Test – institution is actually operating pursuant to the primary purpose in

which it was incorporated.
8
TAXATION LAWS I
2. Organizational Test – institution must actually be organized as a NSNPI.
If you are just starting as a CI, ang requirement bago ka maissue-han ng TEC is 3 years of operation
in the minimum. Hindi ka automatic na mabibigyan ng TEC. Kailangan mo munang mag-operate ng
minimum of 3 taon bago ka makapag-apply ng TEC.
Ang sinasabi dyan ng batas, exempt from tax. ‘pag brineakdown mo ‘yung provision na ito: CI for all
its lands, buildings, or improvements (LBI), actually, directly, and exclusively (ADE) used for
charitable purpose shall be exempt from tax.
CI ADE Charitable Exempt from

LBI Purpose Tax
Anong klaseng tax exempt?

- CI according to this constitutional provision is exempt only from RPT.
Kaya ang sinasabi dyan, CI, sa lahat ng kanilang LBI (as described under Art. 415 of the NCC), lahat
ng LBI ni CI, na ginagamit sa charitable purpose ADE, shall be exempt from RPT.
“Actually, directly, and exclusively used”
Here is a home for the aged:
B1 B2
Kitchen Recreational Area
Office Parking Lot Garden
1. B1 = exempt
2. B2 = exempt
3. Kitchen = exempt
4. Recreational area = exempt
5. Parking lot = exempt; ancillary use
o Ancillary use - hindi siya ginagamit technically ancillary to the charitable purpose,
ginagamit siya.
6. Office = exempt; ancillary use
7. Garden = exempt; ancillary use
All portions of CI are exempt from payment of RPT
Basis:
1. Constitution: Art. VI, Sec. 28, no. 3

2. LGC of 1991: Sec. 234
‘Yung NIRC ba inaapply natin ‘pag RPT
- Hindi, kasi National Internal Revenue Code.

- Dito sa Constitution, ang pinag-uusapan lang natin ay ang RP, hindi natin pinag-uusapan ang
ibang taxes ng CI.
9
TAXATION LAWS I
‘Yung portion sa garden, hinati, nagparenta sa Jollibee. Home for the Aged is an ordinary domestic
corporation, NSNP. Pinarentahan nila ito sa Jollibee, KFC, at McDo. Bawat isa, nagbabayad ng
P100,00.00 na renta. Kumikita ‘yung home for the aged, rental income. Tumatanggap ng renta.
B1 B2
Kitchen Recreational Area
Jollibee
Office Parking Lot Garden McDo
KFC
Can you use the Constitutional provision in determining WON the P100,00.00 rentals is subject to
income tax?
- No. Because Constitution speaks of RPT only.
What is the concept of the Constitutional limitation on CI?
- It is limited only to exemption from RPT. If we talk about other kinds of taxes due for the
home of the aged, you will never use Constitutional Provision because this only pertains to
RPT.
‘Yan ba ay income? ‘Yan ba ay subject to income tax?
- Hindi makikita sa Constitutional Provision ang sagot. Makikita ito sa NIRC
Exempt lang sila sa RPT. All other kinds of taxes are not covered by the Constitution.
Religious Institutions
Churches, convents, mosques, public cemeteries, parsonages
We apply the same rule: All of the LBI of RI, ADE used for religious purpose, shall be exempt from
RPT.
RI ADE Religious Exempt from

LBI Purpose Tax
‘Pag inapply natin ito, RI, we have what we refer to in the Corporation Code as Religious
Corporation (Dominicans, Jesuits, Franciscans, etc.). Hindi ‘yung relihiyon. We are not talking here
about our faith. We are talking about the organization, the religious organization, incorporated as a
NSNPRO. ‘Yung korporasyon ng religious order. (eg: Dominican Order, INC, etc)
Incorporated as a DC registered in SEC and the purpose is for religious purpose, to propagate faith.
10
TAXATION LAWS I
Roman Catholic
Simbahan Parsonage Contemplation Area
KFC
Parking Lot Kitchen Jollibee
McDo
The corporation owns the land where these are located. ‘Yun bang pag-aari ng religious corporation
ay subject sa RPT o hindi? Alin dito ang subject sa RPT at alin ang exempt according to the
Constitution?
Constitution: lahat ng LBI na ADE used for religious purpose by the RC shall be exempt from
RPT
1. Simabahan = exempt
2. Parsonage = exempt
3. Contemplation Area = exempt
4. Parking Lot = exempt
5. Kitchen = exempt
6. KFC, Jollibee, McDo = not exempt because no ADE used for religious purpose
Kapag nagpamisa tayo sa simbahan, nagbabayad tayo P50.00 para sa special intention. Kapag
nagpabinyag tayo ng anak. Kapag nagpakumpil. Kapag kinasal.
- Lahat ito registered sa BIR. They also have their official receipts. This is a business
operation and what we refer to as the business operation side of the church.
- Registration plate is issued to them. Registered as a NSNPDC primary purpose is for
religious purpose.
- Kapag nagbabayad ka ng ganyan, covered ba ‘yan ng constitutional provision?
o Hindi. Kasi ang Constitution, sinasabi lang, ay RPT. Ang income ng simbahan ay
hindi kino-cover ng Constitution.
o Ano ang applicable provisions kapag ang pinag-uusapan ay ‘yung income ng
simbahan?
 NIRC, National Internal Revenu Code, and one of the taxes included therein
is income tax.
Non-Stock Non-Profit Educational Institution
Constitutional Provision: Art. XIV, Sec. 4, no. 3:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties.
All revenues and assets of NSNPEI including all LBI ADE used for education purpose shall be
exempt from taxes and duties.
RA ADE Education Exempt from

LBI Purpose Taxes and Duties
11
TAXATION LAWS I
Art. VI, Sec. 28, no. 3
- Lahat lang ng assets na ginagamit sa charitable, religious, or education purpose, shall be

exempt from RPT.
Art. XIV, Sec. 4, no. 3
- Dito, hindi lang assets, pati ang revenue (kita), and if ADE for education purpose, shall be
exempt from taxes and duties. Mas malawak ang coverage nito: RPT, Internal revenue taxes,
tariff and customs duties. Exemption is a lot broader pagdating sa NSNPEI.
Art. VI, Sec. 28, no. 3 Art. XIV, Sec. 4, no. 3.

CI/RI NSNPEI
Assets Income revenues and assets
Exemption: RPT Exemption/s:
1. All RPT (LGC of 1991);
2. all internal revenue taxes (NIRC);
3. tariff and customs duties (TCC of 1991)
Requirements:
1. Should have a certificate obtained from CHED and DepEd.
2. School must be incorporated as a NSNPEI (incorporated with the SEC)
3. Articles of incorporation and by-laws provide that it is a NSNPEI
4. Purpose: Provide education to the public in general
5. NSNPEI is governed by BOT
6. No part of its income inures to the benefit of his members or to the BOT
UST is a NSNPEI
Graduate School Library

B2 B3
High School QuadriPark
Health
Chapel Main Building Hospital
Service
Parking
Field Benavides Park Restaurants
Lot
B1 Dorm Arch of the Centuries Gym B4
Alin ang subject to RPT at alin ang hindi?

1. Carpark = not exempt
2. Restaurants = not exempt
3. All school buildings = exempt
4. Library = exempt
5. Gym = exempt
o Paano kung pinarentahan ang gym sa GInebra, nagbabayad ng P10,000.00 per day.
Exempt pa rin ba ang gym from RPT?
12
TAXATION LAWS I
 Exempt pa rin.
 Hindi naman natanggal ang pagka-ADE niya sa UST students. Tha nature of
the use of the gym by UST in furtherance of its educational purpose is not
removed just because it is used by others who are paying rentals
6. Dorm inside the campus = exempt
7. Chapel = exempt
o Which of the constitutional provisions will you use as basis for the exemption of the
chapel from RPT? Is it as a RI or as an EI?
13
TAXATION LAWS I
CONSTITUTIONAL LIMITATIONS
Charitable Institutions (CI)
Art. VI, Sec. 28 (3) 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 taxation.
- Only the assets and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from real
property tax
Non-stock, Non-profit Educational Institutions (NSNPEI)
Art. XIV, Sec. 4 (3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.
- Refers to “all revenues and assets” used actually, directly, and exclusively for educational
purposes shall be exempt from tax
- Ancillary or incidental use is covered and still considered as actually, directly, and
exclusively (ADE) used for educational purpose
Examples: (Assuming that UST is a NSNPEI)
a. UST buildings – exempt from tax as they are actually, directly, and exclusively for
educational purpose
b. Dorm, gym or hospital in UST – exempt from real property tax because ancillary use is
covered, and ancillary/incidental use is considered as ADE
c. Income of UST
 RPT – Use sense of sight if ADE; only it covers ancillary or incidental use
o Basis: Constitution and LGC of 1991
 Tuition fees – apply the Constitution, which states that all revenues ADE used for
educational purpose shall be exempt from internal revenue taxes
o NOTE: There is a seeming conflict between the Constitution and Sec. 30 of the
NIRC
o Sec. 30(h) of NIRC – among the 11 exempt corporations, NSNPEI shall be exempt
from income tax for income realized by them “as such”
 This means that the source of income determines the exemption under
Sec. 30, such that if the income derived by the NSNPEI from the primary
purpose for which it was created, that income will be exempt from tax.
 The tuition fee income per se, because it is income derived “as
such” by the school is exempt. The mere fact of earning it, in
other words, from the primary purpose for which the school was
created, exempts it automatically.
o But when you look the Constitution, it says the other way around. It says that
“revenues used,” so it is the use of the income that determines exemption.
 As long as the tuition fee income is used for educational purpose, it will
be exempt from tax.
 Regardless of source, when you use it, that is the time that it will be
exempt.
o Thus, there is a conflict.
14
TAXATION LAWS I
d. Rental Income of UST

 In applying the Constitution, it will be exempt as long as it is used for educational
purpose
 In applying Sec. 30, last paragraph, of NIRC, that is not exempt, because the provision
says that, “income of whatever kind and character from real or personal property or
from any activity conducted for profit regardless of disposition, will not be exempt.”
 See, there is a conflict.
e. Income deposited in a bank and earned interests
 In applying the Constitution, it will be exempt as long as it is used for educational
purpose
 In applying Sec. 30, last paragraph, this will not be exempt
 In fact, Sec. 30 says, even if used, for example, to buy books, which is for educational
purpose, this will not be exempt, because “regardless of disposition.”
Resolving this conflict
This conflict was existing for the longest time. Experts then say that we follow Sec. 30 of the
NIRC. But, it was only lately that the BIR came out with a revenue issuance, specifically providing
for NSNPEI.
RMO 44-2016, issued by Commissioner Dulay, requires that all income will not be subject to
income tax as long as these properties are maintained an operated by the institution.
Examples:
a. Rental income from Jollibee, KFC, etc. inside the campus - subject to income tax
b. The portion of the property occupied by Jollibee, etc. – subject to RPT
c. Income from canteen operated and maintained by the school located within the
premises of the campus – any income derived therefrom will be exempt.
d. Interests in bank –
RMO 44-2016 settles anything about this conflict
Commissioner Kim issued an RMO regarding the revalidation requirements. All the 11
exempt corporations under Sec. 30 must revalidate their tax exemption certificates in the BIR.
When Commissioner Dulay took over, he suspended all the issuances issued by Commissioner Kim,
including RMO 64-2016. So it is suspended. But, while suspended, all the concepts therein are still
applicable, because the same concepts are applied in previous BIR Issuance. Last July,
Commissioner Dulay made an exception. Among the suspended, he lifted the suspension except on
RMO 64-2016. Instead of lifting the suspension, he issued RMO 44-2016. This specifically pertains
to NSNPEI.
RMO 44-2016 states that the nature of tax exemption of NSNPEI is directly conferred by the
Constitution. It further states that from the constitutional provision, NSNPEI are constitutionally
exempt from tax on all revenues derived in pursuance of its purpose as an educational institution
and used actually, directly, and exclusively for educational purposes. For the constitutional
exemption to be enjoyed, the following the requisites: (1) the school must be non-stock and non-
profit; and (2) the income is actually, directly, and exclusively used for educational purposes. So it
goes back to the concept of “use.” In this light, the constitutional conferral of tax exemption upon
15
TAXATION LAWS I
NSNPEI should not be implemented or interpreted in such a manner that will defeat the intent and
language of the Constitution.
THE RULES NOW (refers only to NSNPEI):

1. Tuition fee – exempt from income tax
2. Rental income – not exempt; but if used for educational purpose, exempt
3. Interests on bank deposits – even if “an activity conducted for profit” under Sec. 30, will be
exempt from income tax if ADE used for educational purpose
4. There is an exception to Sec. 30 for the requirement of revalidation of tax exemption
certificate. There is no need to revalidate. So if you are already existing as NSPEI, which was
previously issued a tax exemption certificate, and applied for revalidation, you no longer
need revalidate.
- But, must apply for tax exemption ruling if in existence on or before June 30, 2012
(Commissioner Kim)
- For NSNPEI existing after June 2012, apply for tax exemption ruling but must first
operate for 3 years.
Example:
If the school is accredited by CHED/DepEd after June 30, 2012, the school must wait
for 3 years before it can apply for exemption. Thus, in the meantime, it is not exempt.
Application:
A dorm or gym of UST was constructed across Espana. It was leased by lessees.
a. Is the gym or dorm across Espana subject to RPT?
- No, it is exempt because the property is ADE used for educational purpose.
b. Dorm and gym being rented. Is the rental income subject to income tax?
- No, if the rental income is used for educational purpose.
Proprietary Educational Institution (PEI)
It is neither covered by the issuance of Commissioner Dulay nor that of Commissioner Kim.
Art. XIV, Sec. 4(3). Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by law including restrictions
on dividends and provisions for reinvestment.
- Subject to the limitations provided for by law, PEI may likewise be exempt from similar
taxes and duties
- This means they are not exempt; they can only be exempt if there is a law providing for
exemption.
Examples: (Assuming UST is a PEI)

a. Properties used – exempt from RPT
o Basis: Sec. 234 of LGC of 1991 – all real properties ADE used for religious,
charitable or educational purpose shall be exempt, regardless if it is NSNPEI or
PEI
b. Tuition fee (income from educational functions) – apply Sec. 27(B) of the NIRC
c. Rental income – apply Sec. 27(B) of the NIRC
16
TAXATION LAWS I
Art. VI, Sec. 28 (3) 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 taxation.
What situation does “educational purposes” refer to?

- “Educational purposes” is merely incidental to religious or charitable purposes, it is
not the main.
Example:
If the school is incorporated separately from the religious corporation, the educational
purpose is merely incidental to religious or charitable purpose of the institution.
Charitable Hospitals
- The hospital is incorporated as a domestic corporation, non-stock, non-profit institution.

- Art. VI, Sec. 28(3) will apply
 If UST is incorporated as separate domestic corporation, then we have to determine

whether or not it is charitable institution.
 Charitable institutions including charitable hospitals, as well as all lands, buildings and
improvements ADE used for charitable purpose shall be exempt from RPT.
Example:
St. Luke’s Hospital was incorporated as NSNPCI. It was issued a tax exemption
certificate.
a. RPT – exempt
b. Rental income from:
i. Lodging house – exempt
ii. X-ray building – exempt
iii. Operating room – exempt
 Basis: Sec. 30 of NIRC – “exempt as such”
iv. Rental from doctors – not exempt
v. Rental income from KFC, Jollibee, etc. – not exempt
 Basis: Sec. 30, last paragraph
St. Luke’s Hospital v. Commissioner of Internal Revenue

- A NSNPCI according to its articles of incorporation
- A large portion of its income came from non-paying clients/non-paying patients which is
65%, and only 35% came from charity
- St. Luke’s contended that: (1) if they are receiving payment from paying clients/patients, it
does not make a stock domestic corporation subject to tax and (2) it has tax exemption
certificate issued by BIR
- BIR maintained that: St. Luke’s is operating for profit because only 30% of its revenues
came charitable purposes, thus it can no longer contend that it is a NSNPCI.
o Ruling of Supreme Court:
 Instead of applying Sec. 30 of the NIRC, in relation to the Constitution, Sec.
27(B) of the NIRC shall apply, which states that for proprietary educational
institutions and hospitals, if the income from unrelated trade or activity does
not exceed 50%, the preferential tax of 10% will apply.
17
TAXATION LAWS I
 Conversely, applying the other way, since St. Luke’s Hospital’s income from
unrelated trade or activity exceeds 50% of your total income, then its
income will be taxed to the regular rate of 30%, which is the corporate
income tax rate.
 The Supreme Court did not say that St. Luke’s Hospital, because of the
nature of its income, ceases to be a NSNPCI. But by the very nature of its
operations, it is considered as a proprietary hospital under Sec. 27(B).
 The revalidation of tax exemption certificates also started in this case.
 2 tests, which are applied to all NSNP organizations under Sec. 30:
1. Operational Test
2. Organizational Test
INHERENT LIMITATIONS
1. Public Purpose – must be for the benefit of the welfare of the public in general
2. Non-delegability of the taxing power – only the Legislature can exercise taxing power, and it
cannot be delegated.
EXCEPTIONS:
a. Administrative acts
b. Power of the president to fix tariff rates and customs tax, insofar as the Tariffs and
Customs Code is concerned
NOTE: LCG of 1991 – that is not an exercise of power of delegation of the Legislature; what
is delegated by the Legislature is the act of imposing tax, because the law itself is the
example of exercise of the Legislature of the power of taxation.
3. Territoriality – you look at the territory of the Republic of the Philippines
- If this is the subject matter of tax, the subject matter is inside the country and the
subject matter inside the country is definitely inside a city or municipality. And the subject
matter inside the barangay, which is inside a city or municipality, is inside a province. And
all of them are inside the Philippines. This concept of tax is an international concept.
- It is territorial, meaning, the coverage of all the barangays, cities, municipalities,
provinces is local tax.
- For the national territory, the coverage is national tax.
- For the countries, the coverage is international tax.
 Can the subject matter be taxed by the barangay, city/municipality, the province and
the country?
 No. Because of what we refer to as situs of taxation (location of tax).
 It is territorial, meaning, it is confined within a specified territory of the
State. It may be local or national tax.
 Situs of taxation – we are talking here about the location. The question is
that: Who has the power to levy tax among the local government units and
the national government?
 We need to know here double taxation. Using the territorial doctrine, all subject
matter within one territory can only be taxed in that particular taxing jurisdiction.
Within the taxing jurisdiction of a country, it further subdivided into local and
national. Between the two, there is no possibility at all that the subject matter will be
taxed by both or all the LGUs and the national government. That cannot be done.
 There are 2 doctrines that you must understand why this cannot be done:
1. Residual Theory – all subject matter not taxed by the LGU, may be taxed by the
national government
18
TAXATION LAWS I
2. Rule of Pre-emption – any subject matter which is not subjected to tax by the
national government (not provided for under the NIRC), may be taxed by the
LGUs (eg. Professional tax or business tax). And among the LGUs, whichever LGU
levies tax first in one particular subject matter will be to the exclusion of the
other LGUs.
Example:
The business tax or professional tax of an individual paid to the LGU, that is
paid to the city or municipality because under the LGC of 1991, it is the city or
municipality which levies tax first. That is why the province is already excluded.
 Territoriality is always adjunct to the concept of double taxation.
 2 kinds of Double Taxation:
1. Double taxation in the strict sense (Direct Duplicate Taxation)
Elements:
a. One subject matter is taxed twice
b. By the same taxing jurisdiction
c. During the same taxable period
d. For the same tax
e. For the same purpose
 If these elements are present, it is then prohibited and
unconstitutional.
 What is violated in the Constitution in double taxation in the strict
sense?
o Due process clause is violated when there is double taxation
in the strict sense.
2. Double taxation in the broad sense (Indirect Duplicate Taxation) – not
prohibited; not unconstitutional but as much as possible, it is discouraged
because it creates more impact on the taxpayer
Examples:
a. Inheritance Tax – the subject matter here is different (eg. Inheritance from
mother; inheritance from daughter, if the daughter died)
b. Value Added Tax – you pay additional 12% tax for whatever you consume
from a store or a restaurant
 In these cases, there are separate transactions, but the law
recognizes that they have impact on consumers
 But for trade or business, there is a remedy provided for by law,
allowing crediting.
4. International Comity – it is an unwritten rule among nations not to tax each other. It is a form
of respect among countries which are doing this way also in their territory.
- This one is applied in international taxation
- This pertains to government to government
Examples:
a. If Lumbera were a resident citizen in the Philippines, earning income from UST,
took a vacation in the USA. She conducted lectures there and earned US $2,000.
This $2, 000 is taxable in the USA. Here in the Philippines, Lumbera will also pay
tax for she is a resident citizen. That creates double taxation in the broad sense.
b. Manny Pacquiao’s winnings in the USA, taxable there and taxable here.
c. Pia Wurtzbach’s winnings in the USA, taxable there and taxable here.
19
TAXATION LAWS I
- This international tax results again into double taxation.

- When we talk about private transactions of citizens of each nation, this is what we apply,
double taxation in the broad sense.
- When we talk about tax by one government against another government/State, then we are
now referring to international comity.
5. Tax Exemption of the Government – this is only a general rule that the government is not
subject to tax.
Reason: Because it would be foolish for the government to impose tax and collect
from itself and spend it.
Specific rules on the taxability and exemption of the government:

a. Agencies of the government (eg. DOH, DSWD)
i. RPT – exempt
Basis: Sec. 234(a) of LGC of 1991 – Real property owned by the Republic
of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to
a taxable person, shall be exempt from real property tax.
o Refers to ownership of the government
o If the beneficial use no longer pertains to the government,
but pertains instead to a non-exempt person or entity, it will
not be exempt.
ii. Income tax
1) Proprietary functions (eg. DSWD’s interest on bank deposits)
– not exempt from tax
2) Governmental functions – exempt from tax
b. Government-owned and/or –controlled corporations (GOCCs)
i. RPT – as a general rule, they are not exempt as they not covered by Sec.
234 of LGC of 1991 (based on decided cases).
Exception: Exempt from RPT provided that they are directly
performing governmental functions.
ii. Income tax
1) Proprietary functions – not exempt from tax
2) Governmental functions – exempt from tax
c. Government Educational Institutions (GEI) (eg. PUP)
i. RPT – exempt
Bases:
Sec. 234(a) of LGC of 1991
ADE used for educational purpose
ii. Income tax
1) Tuition fees – exempt
Basis: Sec. 30(I) of NIRC
2) Rental income from Jollibee, etc. – not exempt
Basis: Sec. 30, last paragraph (activity conducted for profit)
3) Interest on bank deposits – not exempt
Basis: Sec. 30, last paragraph (activity conducted for profit)
4) Bank deposits used to buy computers – not exempt
20
TAXATION LAWS I
Basis: Sec. 30, last paragraph (activity conducted for profit,

regardless of disposition)
NATIONAL INTERNAL REVENUE CODE
1. Organization of the BIR

a. 1 Commissioner – chief
b. 4 Deputy Commissioners – assistant chiefs
c. Head Office of BIR – under the Department of Finance
i. Regional Offices – Regional Directors
1) Revenue District Offices – Revenue District Officers
2. Powers of the BIR and the Commissioner
a. BIR – an administrative agency in charge of tax collection of national internal
revenue taxes (main function)
b. Commissioner
i. Power to interpret tax laws – that is why the BIR Commissioner issues
Revenue Regulations, Revenue Memorandum Circulars, and Revenue
Memorandum Orders
- Power to promulgate administrative rules on tax collection (BIR
Opinions and BIR Rulings)
- These administrative rules are governed by the Administrative Code
as they are mean to explain and to supply or supplement the NIRC
- The BIR Commissioner cannot issue RRs, RMCs, RMOs which will be
contrary to the provisions of the Tax Code
- These rulings, opinions, RMOs shall be applied prospectively, they
cannot be applied retroactively (of course, there are exceptions to
the rule of non-retroactivity)
ii. Power to decide tax cases – pertains only to validity of assessments, which
we refer to as protest cases; it is only administrative, not judicial
proceedings
- BIR is not a quasi-judicial agency/adjudicatory body
iii. Power to obtain information from government offices/agencies – this is the
most powerful (eg. Ask for SALN, ask from Registry of Deeds a list of assets
of a taxpayer)
- It must not be a fishing expedition
- The purpose o obtain information is in relation to tax assessment, it
can never be used for any other purpose
Examples:
a. Can the BIR Commissioner ask for a list of your cars registered in
the LTO?
- Yes.
b. Can the BIR Commissioner ask for a list of all your savings
account? (Existence of bank account)
- Yes.
c. Can the BIR Commissioner ask for a statement of how much your
savings account contain?
- No. It will be a violation of the Bank Secrecy Law
Exceptions:
1) If the taxpayer is offering for a compromise for tax deficiency
21
TAXATION LAWS I
2) If the executor is offering for a compromise for estate tax

iv. Power to issue assessments of all internal revenue taxes
v. Power to summon witnesses for the purpose of investigation of taxes or for
making a true and valid assessment
vi. Power to examine books and records and all the financial documents of the
taxpayer
vii. Power to issue subpoena
1) Subpoena duces tecum
2) Subpoena ad testificandum
- If the taxpayer refuses to obey any subpoena issued, that is a
criminal offense under the Tax Code
viii. Power to prescribe gross sales and gross receipts – if a taxpayer failed to pay
taxes or failed to file a return, the BIR Commissioner can prescribe a gross
sales and gross receipts based on the best evidence obtainable, by
comparing your business with similar businesses.
INCOME TAX (Sec. 22-30 of the NIRC)
Income – anything that flows into the wealth of the taxpayer or increases the net worth of taxpayer
other than the return capital, regardless if the income is derived from legal or illegal sources, or that
the income is in kind or in cash.
 You might have received something but that might not be considered as income, either
because it does not flow into your wealth or does not increase your net worth.
 Assuming what you receive is income, the next question is: Is it taxable? Because not all
income is subject to tax
For the income to be taxable:

1. When it is actually or constructively received
2. It must be realized.
3. It must not be exempted by law.
Examples:
a. Bunga ng puno ng mangga ng kapitabhay mo, nalaglag sa property mo, that is
income for purposes of tax.
b. Bunga ng puno ng mangga ng kapitbahay mo, hindi mo na hinintay mahulog,
kinuha mo, that is theft. But that is considered as income for purposes of tax.
c. Nakapulot ka ng sampung piso dyan, that is income.
d. Kung isinauli lang sa’yo ang iyong capital, assuming na meron kang puhunan, that
is not income (this is just a return of capital)
e. Kung may nagbayad ng utang sa’yo (payment of indebtedness), that is not income
(this is just a return of capital)
f. Appreciation in the value of assets is not income.
Income Tax – direct tax on the right to receive income

- Always based on one’s capacity
- In accordance with the tax base under the NIRC
- It depends on the source of income
22
TAXATION LAWS I
2 kinds of Taxpayers
1. Individual Taxpayers
a. Resident Citizens (RC)
b. Non-resident Citizens (NRC)
c. Resident Aliens (RA)
d. Non-resident Aliens Engaged in Trade or Business (NRA-ETB)
e. Non-resident Aliens Not Engaged in Trade or Business (NRA-NETB)
 Estate of a deceased person not yet settled or not yet distributed among the heirs is
considered an individual income taxpayer.
 Trust (eg. Trust funds) created by the grantor and held for the meantime in favor of a
trustee for the benefit of a beneficiary. In the meantime that the trust, from the time of
creation until distribution to a trustee, that is considered an individual income taxpayer.
2. Corporate Taxpayers
a. Domestic Corporations (DC)
b. Resident Foreign Corporations (RFC)
c. Non-resident Foreign Corporations (NRFC)
 Partnerships –treated as corporate taxpayers

2 kinds of Partnerships under the Tax Code:
i. General Professional Partnership – established solely and exclusively for the
exercise of the common profession of the partners and no part of its income is
derived from trade or business.
- Not subject to tax
Example: Law firm
ii. General Co-partnership – a partnership other than a general professional
partnership
- Subject to tax just like an ordinary domestic corporation
Example: Law firm leased a portion of its property to Jollibee, etc.
 Joint Venture Agreements – treated as domestic corporate taxpayers, except for

construction and oil exploration projects, which are not subject to tax
23
TAXATION LAWS I
TRUST
What is a trust? From what time and until when it is constituted?
- From the trust is constituted by a trustor in favor of a trustee who is under obligation to
pay the property and transmit it to a beneficiary.
- From the time it is constituted until distribution or transfer in favor of a beneficiary, trust is
considered an income taxpayer. For whatever income realized by the trust or the estate,
during these periods described, then we will impose income tax. They are then called
individual taxpayer.
INDIVIDUAL TAXPAYERS
Who are the individual taxpayers?
Resident Citizen (RC)
- For purposes of taxation, a resident citizen is a citizen of the Philippines and who is residing
therein.
Who are the Filipino citizens?
- Those citizens who are defined as such under the Philippine Constitution.
Who are residing Filipino citizens? When you say “resident,” what does it mean?
- Those who are physically staying or present in the Philippines or has an intention to reside
here permanently, or those who are absent but has an intention to return thereto,
In taxation, residence and domicile are used interchangeably, unlike in Election Law.
Non-Resident Citizens (NRC)
Who are non-resident citizens?
- Those who are defined under Sec. 22 of the NIRC.

1. Those leave the Philippines and prove to the satisfaction of the Commissioner the
intention to be physically present abroad and with intention to reside therein
permanently
2. Those who stay abroad as immigrants
3. Those who earn income from abroad and their work requires them to be physically
present there most of the time
4. Seamen
5. Those who return to the Philippines during the taxable year and has intention to reside
here permanently
 Does not return yet to the Philippines – non-resident citizen
 Upon return here in the Philippines – resident citizen
 This is in fact the only time under the entire Tax Code that the taxpayer is classified
differently in one taxable period
When we say “intention to reside outside of the Philippines,” what does it mean? How do you
signify your intention to reside permanently outside of the Philippines? What are the indicators?
24
TAXATION LAWS I
 You are employed somewhere else

- An indication that you have the intention to reside permanently outside of the
Philippines.
- But not necessarily, because an OFW, for one, has a income/employment outside but
considered as a non-resident citizen differently
Why a seaman is considered a non-resident citizen?
- Because he is not residing in the Philippines but he is also not residing somewhere else. He
is not earning income from the Philippines.
Resident Alien (RA)
Who is a resident alien?
- One who is not a citizen of the Philippines but is residing therein, but his domicile is
somewhere else.
Non-Resident Alien engaged in Trade or Business (NRAETB)
Who is a non-resident alien engaged in trade or business?
- A citizen of another country, not residing in the Philippines, but engaging in economic or
commercial activities here in the Philippines.
What do you mean by “trade or business?”
- Refers to economic or commercial activities or exercising your profession.
Non-Resident Alien not engaged in Trade or Business (NRA-NETB)
Who is a non-resident alien not engaged in trade or business?
- A citizen of another country, not residing in the Philippines and who is not entering into
economic or commercial transactions here in the Philippines.
How do we distinguish a non-resident alien who is engaged in trade or business from one who is
not engaged in trade or business?
- A NRA-ETB is a citizen of another country, not residing in the Philippines, but engaging in
economic or commercial activities or exercising profession here in the Philippines. On the
other hand, a NRA-NETB is citizen of another country, not residing in the Philippines and
who is not entering into economic or commercial transactions or exercising profession here
in the Philippines.
What are the indicators to determine a non-resident alien is engaged in trade or business here in
the Philippines or not?
1. If an alien stays here in the Philippines for an aggregate period of 180 days or more for the
entire year
25
TAXATION LAWS I
Examples:
a. Eto ako si Lumbera, white, blond a buhok, matangkad. Dumating ako ng airport ng
Pilipinas. Tumuntong ako today. Dala ko luggage ko. For purposes of tax, ano ako?
o Non-resident alien not engaged in trade or business
b. Dumating ako ngayon, sabi ko sa’yo give me a contract of lease in your house, I will rent
out your house? What am I?
o Resident alien because I already have the intention of residing here and
there is a presence of contract of lease.
o Regardless of the days of period of stay in the Philippines, if I have the
intention of residing here permanently, from day 1, I am a resident alien.
c. Eto ako si Lumbera, blond, maputi. Dunating ako sa Pilipinas today. Pumunta ako ng
hotel. Gusto ko lang na nasa hotel room, nanonood ng TV, kumakain, nagpapamasahe,
nagsshopping. 7 buwan, nakahilata ako sa hotel room. What am I?
o Non-resident alien engaged in trade or business, because when you
stayed in the Philippines, it is already more than 180 days and there is
no need to prove that I am engaged in trade or business or not because
that is already an indicator.
d. Eto ako si Lumbera. January, dumating ng Pilipinas, nagpunta ng hotel, 20 days. Umalis
ulit ng February, 20 days. March, umalis ulit. Basta every month, bumabalik ako ng
Pilipinas. Every month, sa loob ng 10 buwan, 20 araw akong nasa Pilipinas. Balik-alis.
What am I for purposes of tax?
o Non-resident alien engaged in trade or business because my stay in the
Philippines aggregate is more than 180 days, regardless of whether ako
ay kumakain lang sa Pilipinas o nagsshopping. For purposes of taxation,
ako ay NRA-ETB in the Philippines.
2. Principle of Habituality – when an alien enters into contracts or commercial transactions in

the Philippines, on a more or less regular basis
- The concept is repetitive; continuing
- It does not mean, however, that in a one single contract, you are not engaging in
a trade or business
Examples:
a. Si Lumbera. Nandon sa USA. Kinontrata kita. Sabi ko sa’yo by phone and internet, pwede
bang ikaw ang gumawa ng lahat ng produkto ko. 1 contract lang. P10 Billion.
o Not because it is only a one single transaction, it does not mean na hindi
na ako NRA-ETB, kasi case-to-case basis ito.
b. Dumating ako ng Pilipinas, binenta ko sa’yo relo ko. Or wala ako sa Pilipinas, pinadala
ko sa’yo, binenta ko sa’yo.
o Hindi ‘yan engaging in commercial activity kasi isolated transaction. Iisa
‘yan.
c. Binenta ko sa’yo, 50 pirasong ganito. 1 kontrata lang.
o That’s a different thing. Engaging in commercial activity na ako.
3. Putting up a branch of your business here in the Philippines

4. Hiring of agents here in the Philippines
5. Hiring of employees here in the Philippines
26
TAXATION LAWS I
Domestic Corporation (DC)
What is a domestic corporation?
- Domestic corporation is an entity created or organized in the Philippines or under its laws.
Foreign Corporation (FC)
What is a foreign corporation?
- Foreign corporation is an entity incorporated in accordance with any law other than the
Philippines or a foreign law.
Resident Foreign Corporation (RFC) and Non-Resident Foreign Corporation (NRFC)
How do you distinguish a resident foreign corporation from a non-resident foreign corporation?
- A resident foreign corporation is a corporation incorporated in accordance with the

foreign laws and is engaged in trade or business in the Philippines. While, a non-resident
foreign corporation is a corporation incorporated in accordance with the foreign laws and
is not engaged in trade or business in the Philippines.
How do you determine if a foreign corporation is a resident or a non-resident?
- The following are the indicators that it is a resident foreign corporation:

1. If it has a branch here in the Philippines
- The branch here is a resident foreign corporation
2. There is agent assigned here in the Philippines
3. There is hiring of employees here in the Philippines
4. Principle of Habituality
Partnerships
When we speak of partnerships, what kind of taxpayer are they?
- They are corporate taxpayers.
What kinds of partnerships do we have for purposes of tax?
1. General Professional Partnership – is one which is established exclusively or solely for the
exercise of the common profession of the partners and no part of its income is derived from
trade or business.
Examples:
1. Lahat tayo abogado. Nagtayo tayo ng partnership. Etong building na ito, we
occupy. Tig-iisa tayo ng kwarto. We render services to the clients. How does the
law classify us for purposes of tax?
- General professional partnership
2. Etong building inoccupy natin. Sabi natin parentahan natin sa canteen.
Pinarentahan natin sa canteen ang portion ng ating building. Nagbabayad siya ng
renta sa atin. Are we still a general professional partnership?
27
TAXATION LAWS I
- No more, because part of our income is derived for trade or business. So we

are stopped from being classified as a general professional partnership. And
what are we? We are then a general co-partnership.
2. General Co-partnership – any partnership other than a general professional partnership.
Sec. 25 (C) (D) (E) of the NIRC
(C) Alien individual employed by regional or area headquarters and regional operating
headquarters of multinational companies
(D) Alien individual employed by offshore banking units
(E) Alien individual employed by petroleum service contractor and subcontractor
- These three are working in the Philippines, but they are NRA-NETB. Their physical
situation is that they are aliens, they working in these companies and these companies are
in the Philippines. Their work requires them to be physically present here. But the law
classifies them as NRA-NETB.
Taxability, for purposes of income tax, is dependent on the source of income – within or without the
Philippines. And when we compute income tax, we talk about taxable periods.
Taxable Periods
What are the taxable periods that we are talking about?
1. Calendar year – any 12-month period beginning from January and ending in December.
2. Fiscal year – any 12-month period beginning anytime (beginning in the first day of the month,
except in January) but ending after the 12-month period.
For an individual, whether engaged in trade or business or not, what is the taxable period?
- Calendar year only. Not fiscal year.
For corporations, it may be fiscal year or calendar year.
Let us assume that you are a corporate taxpayer, can you shift from calendar to fiscal, and fiscal to
calendar?
SOURCES OF INCOME
1. Within the Philippines

2. Without the Philippines
Taxpayer Within Without

Individual
1. RC √ √
2. NRC √ X
3. RA √ X
4. NRA-ETB √ X
5. NRA-NETB √ X
28
TAXATION LAWS I
Corporate
1. DC √ √
2. RFC √ X
3. NRFC √ X
A resident citizen is taxable on all income derived from sources within and without the Philippines.
[Sec. 23 (A)]
When do you say that an income is derived from Philippine sources (income from sources within
the Philippines)?
Sec. 42 (A) of the NIRC
1. Interests on bank deposits – the bank which issued interest is in the Philippines
2. Other interest-bearing obligations (like debts, promissory notes, debentures) – if the debtor
is a “resident, corporation or otherwise”; if the debtor is a resident of the Philippines
Examples:
a. Tayong dalawa, nag-utangan. Creditor and debtor. Ikaw nasa Hong Kong, ako nasa
USA. Sabi mo sa akin, “Lumbera, pautangin mo ako.” “O sige, pautangin kita. $1, 000,
interest is $100. Papadala ko sa iyo ah, money transfer. “Anong bank account mo?”
“Pwede bang yung bank account ko na lang na nasa Singapore? Doon mo ipadala.” So
pinadala ko sa Singapore. $1,000. Sabi mo, “Paano kita babayaran?” Sabi ko, “Ah sige
ideposito mo yung $1, 100 (principal + interest) sa account ko na nasa Paris. I-money
transfer mo don. Wala tayo sa Pilipinas. Ang mga bangko ay wala sa Pilipinas. Pero
ikaw, a resident citizen, na nagbakasyon sa Hong Kong, at ako ay immigrant sa USA.
Nagbayaran tayo ngayon. Within or without?
o Within
b. Nag-utangan kami, parehong Pilipino, nasa Pilipinas. “Bayaran mo ako P1, 100.
Friends tayo eh”. “O sige bayaran ko”, P1, 100. Bakasyon tayo sa Singapore, sabay. “Uy
may pera na ako, gamitin mo pang-shopping.” Binayaran kita sa Singapore, P1, 100.
Within or without?
o Within
o Physically palabas ng Pilipinas and yet, the law says, within ‘yan, kasi
ang nagbayad, resident.
Debtor is:
a. Resident citizen – within

b. Non-resident citizen – without
c. Resident alien – within
d. Non-resident alien, of whatever kind – without
e. Domestic corporation – within
f. Resident foreign corporation – within
g. Non-resident foreign corporation – without
3. Services – the place where the service was performed/rendered, regardless of where the
payment was made
29
TAXATION LAWS I
Examples:
a. Here you are working in a BPO. Ang kausap mo, nasa India. And the service is rendered
here and paid by the foreign company from India papunta ng Pilipinas. Within or
without?
o Within, because the service was rendered and performed here in the
Philippines, regardless of where the payment was made.
b. In the case of seaman, na natatrabaho sa labas ng bansa at ang sweldo ay pinapadala
sa pamilya dito sa Pilipinas. Within or without?
o Without, because the service was performed outside of the Philippines,
despite the fact that the salary is paid in the Philippines
4. Income on real property – the location of the real property
Examples:
a. Buyer-seller. You own a property in the Philippines. I am the buyer, ikaw ay nasa
France, ako ay nasa South Africa. We called up each other. Sabi ko, “Can I buy your
property in the Philippines?” You are working in Paris; I am working in South Africa.
We agreed over the phone. “How do you pay?” “I’ll send you thru money transfer in
your account in Paris. Within or without?
o Within, because the real property is located in the Philippines
5. Tangible personal property – same rule; lex rae sitae, meaning where the tangible personal
property is located
6. Intangible personal property –
Examples:
a. Nagbenta ako ng shares of stocks. Eto ka, si X, US citizen domiciled in the USA. The
shares of stocks nasa ABC Corporation, na nasa Paris. Pag ibinenta ko si shares of
stocks, lahat ng kinita, within or without?
o Without, will follow the domicile of the owner.
b. Si X may shares of stocks sa San Mig Corporation (Philippines). Ibinenta. Within or
without?
o Within, the law says that it’s within.
GR: When shares or stocks are sold, they follow domicile of owner (but this is just a mere
general rule)
- The more specific rule is this: If we are talking about shares of stocks in a
domestic corporation, because the law specifically says so, then the shares of
stocks in SMC will not follow the domicile of the owner, and therefore, this will
be treated as income within.
- Etong shares of stock in a domestic corporation, pag may binenta, kahit sino ang
nagbenta nyan, yan ay lahat within.
7. Dividends –
Examples:
a. SMC Corporation, nag-issue ng dividends in favor of X. Within or without?
30
TAXATION LAWS I
o Within, because the one which issued the dividends is a domestic

corporation, all dividends are from within. It is from the point of view of
the stockholders, as they are the recipients of dividends.
b. XYZ is a domestic corporation. It issued dividends of 100,000 in favor of
stockholder X. Within or without?
o Within, because Sec. 42 says that all dividends issue by a domestic
corporation are income from within.
c. What if XYZ is a foreign corporation? Within or without?
o Within, because, under Sec. 42 (A)(2)(a), dividends from foreign
corporations are considered income from within the Philippines.
When do we consider dividends as income without? Sec. 42 (A)(2)(b)
Tagalog version:
o Subalit kung tatlong taon bago binigay ang dibidendo, ang kinita sa
Pilipinas ng foreign corporations ay mas mababa sa 50% ng suma-tutal
na kita, hindi lahat ay within, kaunti lamang.
Math version:
o XYZ is a foreign corporation (may branch sa Pilipinas or walang branch,

pero kumita sa Pilipinas). Nagbigay siya ng P100,000-dividends
(meaning kumita siya). Yang lahat ng 100, 000 ay within, sabi ng batas.
Yung kita niya sa Pilipinas, whether thru a branch or not thru branch,
pag yan ay ibinabalik sa USA na kumpanya, at yung USA ang magsasabi
na may kinita kami sa Pilipinas. At yung kita ay ididistribute mo as
dividends. Sa dividends, may element ng kinita sa Pilipinas. Kaya within.
The possibility of earning income from the Philippines, which forms part
of the profits, at yung profits ay binigay mong dividends, because of this
element of source of income within the Philippines, ‘yun ang rason kung
bakit yan ay within.
o Pero sabi rin ng batas, kung tatlong taon bago binigay ang dibidendo, ang
kinita sa Pilipinas ni XYZ ay mas mababa sa 50% ng suma-tutal na kita,
hindi dapat lahat ng 100,00 ay within, kaunti lamang.
2016 nagbigay ng 100, 000
Kinita sa USA Kinita sa Pilipinas

2015 5M 2M
2014 3M 1M
2013 4M 1M
Sub-total 12M 4M
Total 16M
16M /2 = 8M
Ang kinita sa Pilipinas (4M) ay mas mababa sa 50% ng suma-tutal na kita (16M),
hindi lahat ng 100, 000 ay within. Kaunti lamang.
31
TAXATION LAWS I
4M x 100,000 = 25, 000

16M
 25, 000 lang ang within, at ang 75, 000 ay without
Paano kung isang taon lang?
Then everything is within.
English version:
Unless 3 years prior to the declaration of dividends, the income in the Philippines is
less than 50% of its total income, in which case you apply ratio and proportion. Only a
portion thereof pertaining to the income derived from the Philippine sources shall be
treated as income within.
Within Without
Resident citizen √ √
Basis: Sec. 23(A) and Sec. 24 (A)(1)(a)
Non-resident citizen √ X
Basis: Sec. 23(B) and Sec. 24 (A)(1)(b)
Resident alien √ X
Basis: Sec. 24 (A)(1)(c)
Non-resident alien – ETB √ X
Basis: Sec. 25 (A)(1)
Non-resident alien – NETB √ X
Basis: Sec. 25 (B)
Domestic corporation √ √
Basis: Sec. 23 (E) and Sec. 27 (A)
Resident foreign corporation √ X
Basis: Sec. 23 (F) and Sec. 28 (A)(1)
Non-resident foreign √ X
corporation
Basis: Sec. 23 (F) and Sec. 28 (B)(1)
Application:
Si Lumbera naggupit sa Pilipinas. Binayaran mo ako, P50. Within or without?
- Within, because the service is rendered in the Philippines.

- Regardless of who Lumbera is, the income taxable.
Si Lumbera naggupit sa USA. Binayaran ako $10. Within or without?
- Without, because the service is rendered outside the Philippines.

a. Resident citizen – taxable
b. NRC – not taxable
c. RA – not taxable
d. NRA-ETB – not taxable
32
TAXATION LAWS I
e. NRA-NETB – not taxable

f. DC – taxable
g. RFC – not taxable
h. NRFC – not taxable
Lumbera has a real property in the Philippines. I sold it. I realized an income of P100, 000. Tell me if it
is taxable.
- For all kinds of taxpayer, whoever Lumbera is, the income from the sale is taxable, because
the real property is located in the Philippines.
If the property is in the USA. I received an income of $100,000. Tell if it is taxable or not.
- Only if the taxpayer is a RC or DC that the income realized from the real property sold would
be taxable. For the rest, it is not taxable, because the income is derived from sources outside
of the Philippines.
Here is BPI (Taft Avenue), nag-issue ng interests sa bank deposits. P100,000 ang interest. Within or
without? Taxable or not?
- Within, because the bank imposing interests is in the Philippines.

- All of them are subject to tax
If the bank is in the USA, which issue interests on bank deposits. Within or without? Taxable or not?
- Without
a. RC – taxable
b. NRC – not taxable
c. RA – not taxable
d. NRA-ETB – not taxable
e. NRA-NETB - not taxable
f. DC – taxable
g. RFC - not taxable
h. NRFC – not taxable
Here is Lumbera, the creditor, who is paid by the debtor, P100,000 interest on loan. Within or without?
- Within, because the debtor is a resident of the Philippines.

- Regardless of who Lumbera is, the income is taxable.
If the debtor is outside the Philippines, within or without?
- Without, because the debtor is a not a resident of the Philippines.
Here is Lumbera the creditor who was paid by the debtor P100,000.00, interest on loans. Ang creditor
nasa Pililpinas, ang debtor nasa labas.
Within or without? What is that factor that we consider to say that it is within or without? Is it
the creditor side or the debtor side?
- Debtor side.
1. Debtor is a resident of the Philippines = all interest paid by him is within.
33
TAXATION LAWS I
2. Debtor is not a resident of the Philippines = all interest paid by him is without.
As long as debtor is a resident of the Philippines, it is within.
Kung si debtor ay RC na nagbakasyon sa US at binayaran ako.
- Within
Pero kung ang nagbayad sa akin ay foreign alien not a resident of the Philippines
- Without
It is always the creditor who will realize the income because I am the recipient of the interest
income. Ako ang binayaran.
Whether the debtor is a citizen or an alien
- Taxable
1. RC - within, taxable
2. NRC - without, taxable
3. RA - within, taxable
4. NRAETB/NRANETB - without, not taxable
5. DC - within, taxable
6. RFC - within, taxable
7. NRFC – without; not taxable
Always consider the debtor’s side. Hindi nagmmatter dito kung nasaan physically ang creditor
o debtor. Ang pinag-uusapan dito ay ‘yun bang debtor ay resident o hindi. Kung ang nag-issue
ay resident, within. Kung ang nag-issue ay non-resident, without.
1. Kung RC ang tumanggap at ang nag-issue ay RC - within, taxable

2. Kung ang nag-issue NRC – without, no tax
3. Kung RA ako, nag-issue RA din - within
Dividends
Si X ay stockholder sa SanMig Corporation, tumanggap si Lumbera (stockholder) ng P100,00.00 mula

sa DC. Within or Without?
- Within
1. If Lumbera were a RC - dividend is taxable within PH

2. If Lumbera were a NRC – dividend is taxable within PH
3. If Lumbera were RA or NRA - dividend is taxable within the PH
4. If Lumbera were a DC, RFC, or NRFC - dividend is taxable in PH
Regardless of who Lumbera is, regardless of whatever kind of taxpayer Lumbera is, if the
dividends were issued by a DC, the dividends are income within. All taxpayers, Lumbera will be
subject to tax.
What if the exception to the rule applies. Kung 3 taon bago binigay ang dibidendo, ang kinita sa
Pilipinas ay mas mababa sa 50% ng suma total na kita. (P100,000.00)
34
TAXATION LAWS I
GR: 100,000.00 is within, entirely.
XYZ is a FC which issued a P100,000.00 dividend.
GR: P100,000.00 is income within. It is subject to tax for all kinds of taxpayers.
XPN: If exception to the rule applies:
1. If Lumbera were a RC, P25,000.00 is within, and P75,000.00 is without. Both are subject
to tax.
2. If Lumbera were a NRC, P25,000.00 is subject to tax while P75,000.00 is not subject to
tax.
3. If Lumbera were a RA, P25,000.00 is subject to tax while P75,000.00 is not subject to
tax.
4. If Lumbera were a NRAETB/NRANETB, P25,000.00 is subject to tax while P75,000.00 is
not subject to tax.
5. If Lumbera were a DC, P25,000.00 is subject to tax while P75,000.00 without is not
subject to tax.
6. If Lumbera were a RFC/NRFC, only P25,000.00 is subject to tax within the Philippines,
while P75,000.00 is not subject to tax.
Intercorporate Dividends (Sec. 27. of NIRC)
If Lumbera were an individual taxpayer and the dividends were issued by a DC
- Lumbera regardless of who I am will be subject to tax because P100,000.00 shall be income
from within.
If Lumbera were an individual and the one that issued the dividends is a RFC
GR: P100,000.00 is within, and therefore, subject to tax.
XPN to the rule applies: Lumbera were an indivudal, P25,000.00 subject to tax, P75,000.00 will
not be subject to tax.
Rules are different in the means of a corporation
If Lumbera were a DC which received dividends from another DC in the amount of P100,000.00
- Within.
- But it is not subject tax because the law says it will be exempt from tax. This is what we
refer to as intercorporate dividends.
If the stockholder were likewise a DC, and the issuing corporation is a DC which issued the
dividends in favor of another domestic corporation, we call it intercorporate dividends. And the
same is P100,000.00 is income within but not subject to tax.
DC issued, DC recipient = exempt, intercorporate dividends according to Sec. 27 (D)(no. 4)
FC issued, DC recipient.
- Income within or without? Within.

- Subject to tax? Yes. Hindi ‘yan intercorporate dividends na exempt under Sec. 27 (D)(no.4)
35
TAXATION LAWS I
Ang ineexempt ay ang nag-issue ay DC at ang recipient ay DC.
If the exception to the rule applies, P25,000.00 is within, Subject to tax. P75,000.00 is within,
subject to tax.
Issuing is DC, nag-issue ng P100,000.00 dividends
- Within or without? Within.

- Subject to tax? No.
Issuing DC P100K, tumanggap DC.

- Subject to tax? Law says exempt.
Ang nag-issue FC, ang tumanggap ay DC,

- Subject to tax? Yes. (Hindi siya covered ng Intercorporate dividends)
- If the exception to the rule applies:
o P25K is within, subject to tax.
o P75K is without, subject to tax.
Nag-issue ang DC P100K, ang tumanggap RFC.

- Subject to tax? No. Exempt. Intercorporate dividends.
- Basis: Sec. 28 (A)(no.7)(b)
Ang nag-issue ay FC at ang tumanggap ay RFC, 100K.
Ito ako stockholder, nag-issue ay DC, P100K tinaggap ko.

- Subject to tax? No. Exempt.
Nag-issue si FC tumanggap ay si RFC,

- Subject to tax? Yes.
Ang ineexempt ay kapag ang nag-issue ay DC.
XYZ DC nag-issue P100K,

- Taxable? No, exempt, no tax. (Sec. 27, D, no. 4)
Ang nag-issue ay FC ang tumanggap ay ito
36
TAXATION LAWS I
- Taxaxble? Yes.
o P25K taxable,
o P75K, taxable.
Ang nag-issue DC ang tumanggap RFC.
- Within or Without? Within.

- Basis? Sec. 28 (A)(no.7)(b)
Nag-issue si FC in favor of RFC

- If the Exception to the rule applies:
o P25K is within, subject to tax.
o P75,000.00, without, no tax.
DC nag-issue P100K, ang tumanggap NRFC. Palabas ng bansa.
- Within or without? Within, dahil ang nag-issue ay DC.

- Basis: Sec. 28, (B)(no.5)(b)
- What rate? FWT, 15%.
Nag-issue ay FC P100K.

- Magkano? 30%, balik sa regular rate
- Basis? Sec. 28 (B)(no. 1)
o In general, except as otherwise provided in this code a FC NETB in the PH shall pay a
tax equal to 35% (hindi na ‘to 35% reduced na ‘to to 30%) of the gross income
received during each taxable year from all sources within the PH such as interests,
dividends, rents, royalties, salaries, premium, blah blah blah, except capital gains
subject to tax under subparagraph 5(c) and (d).
Ang 15% lang ay kapag ang nag-issue ay DC. Eh kapag ang nag-issue ay FC, taxable raw eh.
Anong tax? 30%.
RFC to a NRFC, ang gamit ay FC,

- Rate? 30%.
- Kailan ka nag-15%? Kapag ang nag-issue ay DC.
o P25K is within.
 Subject to tax? Yes.
 Rate? 30%.
37
TAXATION LAWS I
o P75K is without.
 Subject to tax? No.
Resident Citizen
So ang sabi natin sa RC under Sec. 23 and Sec. 24 (A)(1)(a), sa loob ng 12 months, ang RC, sa lahat
ng kinita niya sa loob at labas ng bansa, shall be subject to tax.
Sabi dyan, Sec. 23 and 24, sa lahat ng kinita nila sa loob at labas ng bansa, anong klaseng tax ang
babayaran?
- Net Income Tax

o When we speak of NIT, sa loob ng 12 months, January to December, lahat ng gross
income (GI) pagsasama-samahin lahat. Lahat ng kinita niya na pinagsama-sama sa
loob ng 12 buwan babawasan ng deductions, allowable deductions, sa loob din ng
12 buwan. And that will be taxable net income and we multiply it by the rates.
- What rates do we apply?
o The schedular ranging from 5-32%. This is the schedular type of tax.
 Meaning, depending on your capacity to pay, the higher the income, the
higher the capacity to pay, the higher the tax base, the higher the tax rate.
And the maximum rate is 32%.
We are referring here, the net income tax table and this is found in Sec. 24. That is the net
income tax table. And when we speak of the net income tax table, it ranges from 5%-32%.
The procedure is sa loob ng 12 buwan, isasama-sama mo ang gross income mo and then the
law provides for the allowable deductions, authorized ito. You just cannot claim anything.
Ito ang revenue side, ito ang expense side. So sa loob ng 12 buwan, January to December,
lahat ng revenue side pagsama-samahin, lahat ng expense side pagsama-samahin, i-minus si
expenses ‘dun sa gross income pero only the allowed expenses provided for by law, you will
come up with the taxable net income. And you multiply the rates provided under the net
income tax table and you will come up with the net income tax; less tax credit if any.
This is the procedure when we speak of NIT, lahat ng kinita niya sa loob at labas ng bansa,
shall be subject to NIT. And we compute it this way. That’s the rule.
Si Lumbera is employed and I realized income, P2M in a year.

- What kind of tax? NIT.
Si Lumbera has a sari-sari store on the side. Kumita ang sari-sari store ko P200K a year.

- Basis? Sec. 23 (A) says that all income derived from sources within and without the PH shall
be subject to tax.
On the side, nagbenta ako ng shabu, kumita ako, pusher ako, o nagjjueteng ako, kumita ako, o
nagnakaw ako.
38
TAXATION LAWS I
- Income? Yes.
Si Lumbera nagbakasyon sa US, naglecture ako doon without EER.
- Income? Yes.
- Within or without? Without.
- Subject to tax? Yes. Sec. 23(A) and Sec 24(A)(no.1)(a) state that as a RC, I am subject to NIT
from all income derived from within and without PH sources.
Nagbenta ako ng cocaine sa US.
- Income? Yes.
- Basis? Sec. 23(A) and Sec 24(A)(no.1)(a)
Sa US naggupit ako, again without EER. Gumupit ako USD10 each, discounted habang nagbabakasyon
ako doon. I am still a RC because I am not among the 5 listed. I am a RC, kumita ako sa paggugupit.
- Income? Yes.
- What king of tax? NIT.
Sa loob at labas ng Pilipinas, ang sabi ng Secs. 23 and 24 I am subject to NIT. Anong grades ang
iaapply sa lahat ng income ko na ‘yan?
- 5%-32%, depende kung magkano ang aking taxable net income.
The law also provides, this is column A paragraph A, all income from within and without from
whatever source derived under Sec. 24 (A)(1)(a), may nakasulat dyan na ang tax due ay NIT.
Passive Income (Sec. 24, B)
Lumbera, may bank deposit, peso account, in BPI Espana. Kumita ako P100.
- Income? Yes.
- What kind of tax? FWT.
- What rate? 20%.
- Basis? Sec. 24 (B)(no. 1)
Si Lumbera has a dollar account in BPI Espana. Kumita ng interest sa dollar account, USD10.
- Income? Yes.
o Why?
39
TAXATION LAWS I
 Because a local bank issued the interest income.

- What rate? 7.5%.
Lumbera has a peso account long term deposit, time deposit 10 years. Hindi ko prine-terminate. On the
10th year the period terminated, I received interest income, P200K.
- Income? Yes.
o Why?
 Interest is from a local bank.
What if the time deposit was pre-terminated on the 4th year.

- What rate? FWT 5%.
What if I pre-terminated on the 3rd year?

- What rate? FWT 12%
What if I pre-terminated on the 2nd year.

- What rate? FWT 20%. (Balik sa dati.)
10 taon ang term hindi ako nagpreterminate. Kumita P200K.
- Exempt or not? Exempt.
Hindi ko mahintay si 10 taon, kailangan ko si salapi, nagpre-terminate ako ng 4 na taon.
- May tax? Yes.

- Anong rate? FWT 5%.
Nagpre-terminate ako sa 3 taon pa lang.

Nagpre-terminate ako on the 2nd year.

Nagpre-terminate ako 1st year.

40
TAXATION LAWS I
Wala pang isang taon, 3 buwan pa lang nagpreterminate na ako.

- Anong rate? FWT 20%. (Bumabalik, kasi ang regular rate ng tax on the interest is 20%)
Paano kung ang aking time deposit ay 1 year, nag-expire, may interes.

Nirenew ko for another year, nag-expire ulit.

1 year ang term, nag-expire, may interest income.

Nirenew ko ng isa pa.

Nirenew ko pangatlong taon.

Nirenew ko pang-4 na taon.

Nirenew ko sa 5th year.

‘Pag isang taon nirerenew mo ang term ‘nun 1 year so ang laging rate ‘nun 20%. Kahit 10 taon
mo irenew ‘yan. Pero ito ang usapan kapag 10 taon ang original na term, hindi ako nagpre-
terminate. Or nagpre-terminate ako ng prior to 5 years, nag-iiba ang rate.
Si Lumbera may time deposit/bank deposit sa USA pero peso account in a NY Bank. Kumita ng interest
P100.

o Why?
 From whatever source derived, I shall be subject to tax. Therefore I am
taxable.
41
TAXATION LAWS I
o Why?
 Because PH government cannot require a bank in a foreign country to remit
to us the FWT. It cannot be subject to FWT. The interest on the bank
deposits issued by a foreign bank will be subject to NIT and not FWT and the
reason de etre is because we cannot ask foreign countries to be our
withholding agents.
- Basis? Sec. 24 (A)(1)(a). On the taxable income defined in Section 31 of this Code, other than
the income subject to tax under Subsection (B), (C), and (D) of this section derived for each
taxable year from all sources within and without the Philippines by every individual citizen
of the Philippines residing therein, the tax shall be NIT. Sabi ng batas, lahat daw ng income
other than income under (B), (C), (D) ay NIT. Kasi ang sabi naman sa (B) Amount of interest
from any currency bank deposit and yield from trust funds down to blah blah blah derived
from sources within the Philippines. Lahat ng interes on bank deposits na nasa letrang (B)
derived from sources within shall be subject to FWT. In relation to Sec. 24, lahat ng income
na wala sa (B) ang tax ay NIT.
Si Lumbera has a peso account in a US Bank. I earned interest (P100).

- Basis? Sec. 24 (A)(1)(a) and (B)(1).
Lumbera has a dollar account in a US Bank. Kumita ng interest USD100.
- Income? Yes.
Lumbera has a time deposit in a US Bank. 10 years ang term. I did not pre-terminate. On the 10th year,
I received interest income, USD150.

‘Pag sa Pilipinas, exempt. Kapag sa ibang bansa, NIT.
Nagpreterminate ako on the 4th year.

Nagpreterminate ako on the 3rd year.

Nagpreterminate ako on the 2nd year.
42
TAXATION LAWS I
Nagpreterminate ako on the 1st year.
Whether nagpreterminate or hindi, basta kumita ako, subject to NIT, and never to FWT.
Pero ‘pag sa Pilipinas, iba ang rule. Kapag hindi ako nagpreterminate sa loob ng 5 taon, exempt.
Kapag nagpreterminate on the 4th, 5%. Kapag nagpreterminate on the 3rd, 12%. Kapag
nagpreterminate prior to the 3-year period, back to 20% ang tax, final tax naman.
Royalties
Si Lumbera gumawa ng libro, sinulat ko, publish ng NB, kumita ako ng royalties.
- Income? Yes.
- What rate? 10%.
Si Lumbera, the same book was published in the USA and sold therein. I received royalties from the
sale of the books in the USA.
- Income? Yes.
o Why?
 Because according to Sec. 24 (B)(no.1), royalties to be subject to FWT should
be derived from PH sources. If not derived from PH sources, the tax is under
Sec. 24 (A)(1)(a). ‘Pag wala sa (B), nasa (A). That is the reason why we
cannot impose FWT because we cannot compel “Hey Obama, come on, be
our withholding agent.” We cannot do that. In the same manner that we are
not expected to be withholding agents for and in behalf foreign countries for
their citizens deriving their income here in the PH.
Prizes
Si Lumbera nanalo sa lotto, P150M.
- Income? Yes.
- Subject to tax? No, it is exempt from tax.
PCSO and Lotto winnings are exempt from tax.
Si Lumbera nagpunta sa US, RC, nanalo ako sa lotto sa US.
- Income? Yes.
43
TAXATION LAWS I
What if in the US, it is exempt from tax, do we exempt?
- No.
o Because it should be subject to tax here in the Philippines, NIT.
o Why not FWT?
 FWT is from the Philippines, lotto winnings are exempt.
Lumbera won in the raffle, P9,999.99.
- Income? Yes.
o Sec. 24(B)(1) Except prizes amounting to P10K or less which shall be subject to tax
under Subsection (A) of Section 24. Sabi ng batas, shall be subject to tax under
Subsection A of Section 24. The correct tax is NIT. Not exempt. It is subject to NIT.
Not exempt. Walang sinabi ang batas na exempt.
Nanalo ako raffle P150K, Pilipinas, nagparaffle dyan sa labas ng UST.

- Anong rate? 20%.
o Nakasulat sa batas. Prizes, (except when the amount is 10K or less in which case the
tax shall be under Subsection (A), Section 24. Ibig sabihin, ang ibang prizes ay nasa
latrang B, kapag more than 10K, ang tax ay FWT, 20%.
Si Lumbera ay RC, I went to the US. Nagparaffle doon ang mga Pilipino, nanalo ako P9,999.99.

o It cannot be subjected to FWT because the prizes and winnings are derived from
sources outside the PH. Therefore, wala sa (B), nasa (A).
Nanalo sa ibang bansa P150K, kanina P9,999.99.

Kung ‘yung P9,999.99 ay NIT, lalo na ‘yung P150K.
Nanalo ako sa jueteng P9,999.99.

Nanalo ako sa jueteng P150K.
44
TAXATION LAWS I

- What rate? 20%.
1. Kapag ang sagot ay P9,999.99, (below 10,000.00) = NIT.
2. Kapag more than P10,000.00 = FWT, 20%.
3. Kapag sa labas ng bansa, whether below or more than P10,000.00 = NIT.
Does the law make any distinction?
No. The law does not make any distinction whether the prizes or the winnings are derived from
legal or illegal sources.
RULE:
1. Prizes and Winnings in the PH below P10K = NIT

2. More than P10K = FWT, 20%.
3. Outside the PH, below P10K or more than P10K = always NIT.
Lumbera is a RC tumanggap ako ng dividends (Tubo or kita ng stockholder ang pinag-uusapan),

P100K from a DC.

- What rate? 10%.
Si Lumbera is a RC, tumanggap ng P100K from a foreign corporation, nasa labas ng bansa.
- Within or without? Within (Sec. 42).

o Income tax is always dependent on the source.
Ang fina-final withholding tax lang sa letter (B) ay kapag galing sa DC. Kung wala sa (B), nasa
(A).
Paano kung ang tinaggap na dividends ay property dividends, stock dividends. Stock dividends na
P100K, inissue ni DC.

Cash and/or property dividends. Pareho lang ang rule. Cash and/or property dividends.
Si Lumbera tumanggap ng P100K, cash and or property dividends from a FC.
- What if the exception to the rule applies. How much is within, how much is without?
P25,000.00 within, P75,000.00 without.
- Subject to tax? Yes to both.
- What kind of tax? NIT for both. Not in (B), therefore under (A).
45
TAXATION LAWS I
‘Pag ang nag-issue ng dividends ay domestic sources, ‘yun ay subject to FWT. Dito sa
example natin, derived from foreign sources dahil ang nag-issue ay FC. Kaya lang ang P25K
ay within at ang P75K ay without. Pero since ang nag-issue ay FC, wala sa (B), nasa (A).
Capital Gains on Sale of Shares of Stock
‘Yung shares ko ay ibinenta mo. What are the kinds of assets:
1. Ordinary Assets
2. Capital Assets
What are the possible assets:
1. Real property – (eg) lupain at building

2. Tangible personal property – (eg) lahat ng nakasabit sa’yo
3. Intangible personal property – (eg) shares of stock, PN, credits, debentures
When do we say that these assets are capital or ordinary? Because in tax, there are only 2 kinds of
assets: ordinary and capital.
What are the capital assets under the code, as defined in the code?
- Ang nakalista ay ordinary at ang wala sa listahan ay capital.
Ordinary Assets:
1. Stock in trade of the taxpayer

- Kung may tindahan ka ng relo, ang mga relo ay ordinary. ‘Yung mga relong hindi
nakatinda na nasa bodega mo, ‘yun ay capital.
- Kung ikaw ay may tindahan ng tapsilog, lahat ng tapsilog ay stocks in trade mo,
ordinary assets. ‘Yung tapsilog na niluto mo sa bahay mo, capital.
2. Other property of a kind which would properly be included in the inventory of the taxpayer
on hand at the close of the taxable year
- Tindahan ng relo. ‘nung nag-imbentaryo ka, ‘yung mga relo na kasama sa
imbentaryo ay ordinary. Kung hindi nakalista na hindi parte ng imbentaryo mo,
‘yung nasa bodega pa at hindi nakalista, capital.
- Sa tapsilugan, ‘yung mga nagamit na tapsilog mula January to December, lahat ng
nakalista sa imbentaryo mo, ordinary. ‘Yung mga tapsilog na hindi mo binilang,
capital.
This is important when we go to valuation of assets, income tax has a different effect on
ordinary ang capital assets.
3. Or property held by the taxpayer primarily held for sale to customers in the ordinary course
of his trade or business
- Real estate developer ako, ito ‘yung lote, sinubdivide ko. The assets, all real property
are held by me for sale to customers. Ordinary or capital? Ordinary.
- Ang business ko ay parlor, ito ‘yung building, ito ‘yung lupa, ito ‘yung building. Ito
‘yung distinction niyan eh, ito ‘yung lupa, may bahay. Binebenta ko bawat bahay.
‘Yung bahay at lupa ordinary or capital? Real estate developer ako. Ordinary.
- May parlor ako at tapsilugan, may lupa. Ibinenta mo si building at lupa. Ordinary or
capital? Is the property originally held by me for sale to customers? No. Therefore
what is it? Capital, because not primarily held for sale/lease to customers.
46
TAXATION LAWS I
-
Meron akong apartment buildings, 1, 2, 3, 4, 5. Pinaparentahan ko. What kind of
asset do I have? Ordinary or capital? Ordinary. Because properties are primarily
held for lease. If I sell the apartment units to 1, 2, 3, 4, 5, ordinary or capital?
- Meron akong rent a car business, 100 ang kotse ko. Ordinary or capital? Ordinary
because asset is primarily held for lease to customers.
- Meron akong car dealership, nakaparada, anong klaseng asset ang mga kotse?
Ordinary or capital? Ordinary, because the asset is held primarily for sale to
customers.
- Kotse sa bahay ko. Ordinary or capital? Capital.
- Bahay ko na tinitirahan? Capital, not ordinary because the asset is not held by me
primarily for sale/lease to customers.
4. Property used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34.
- Property which is used in trade or business and which is subject to depreciation
o Subdivision, lahat ng lote ay ordinary because the lote is primarily held for
sale to customers.
o Apartment units for rent are ordinary assets because they are primarily held
for lease to customers.
o Parlor, lupa, at building. Anong tawag natin sa lupa at building? Ordinary or
capital? Ordinary (under no. 4) Under no. 4, that asset not primarily held for
sale/lease to customers, but because the asset is used in trade or business,
and is subject to depreciation, the land and the building will be considered
as ordinary asset.
o Ang business car dealership, lahat ng kotse ay ordinary because they are
primarily held for sale to customers. Meron naman akong rent a car, lahat ng
kotse ay ordinary because they are primarily held for lease to customers.
o Ang business ko ay parlor, bumili ako ng kotse for service to customers,
anong tawag sa kotse? Ordinary o capital? Hindi siya for sale or for lease.
Ordinary, because under no. 4, Ginagamit sa trade or budiness, subject to
depreciation.
5. Real property used in trade or business.
- Kung ang real property mo ginagamit sa trade or business, hindi subject sa
depreciation (eg. Lupa lang), walang depreciation. Real property, not subject to
depreciation, used in trade or business.
o Lupa
o real property ay tangke na nasa ilalim ng lote sa isang gasoline station. That
it isreal property. Ordinary or capital? Ordinary, under no. 5.
You have to determine 1st whether property is ordinary or capital, kasi iba ‘yung effect, at iba
‘yung tax consequences.
Capital Gains on Sale of Shares of Stocks
Requisites:
1. Shares of stocks
2. capital assets
3. sold
4. not traded
47
TAXATION LAWS I
What will be the tax?
- FWT.
Anong rate?
1. If the gains realized is not more thatn 100,000.00 = 5%

2. If it is in excess of P100,000.00 = 10%.
I am a stockholder in the shares of stock in a DC, SanMig Corp. Ang binili ko na shares of stock ay P1M.
‘Yung P1M ‘nung binili ko, ang FMV ngayon ay P800K. Ibinenta ko gayon ng P900K. Tubo o lugi? Tubo,
P100K (P900K-P800K).
- Anong klaseng asset? Capital.
‘Pag sinabing tubo o lugi, hindi niyo pinag-uusapan ang selling price (P1M), habang nasa iyo ay
kumikita ka ng dividends o nalulugi ka dahil walang dividends. When you’re just holding on to
any asset, any appreciation in value or depreciation in value will have no tax effect; appreciation
in value is not a gain and depreciation in value is not a loss. Anything that you gain while you
are using it is, nagbenefit ka. That is why it is not even income because you have not realized it.
The only time that you will only realize a gain or suffer a loss is kapag binenta mo na. When you
sell the asset, the basis of the income is not the purchase price but on the FMV at the time of sale
vs. consideration of the sale. And when you transfer it by deed of sale, or assignment, or any
form of transfer as long as there is transfer of ownership, then that is the time you will say you
have realized a gain or I have incurred a loss.
While holding on, no gain no loss na marerecognize or marerealize.
You realized a gain of P100K.
- Are the shares of stock ordinary or capital? Capital.
If the sale is not traded through the local tax exchange.
- What kind of tax do we impose? FWT.

- What rate? 5%.
Paano kung binenta natin ng P1.2M kumita ng P300K.
- What will be the rate of tax? 1st P100K is 5% and in excess of P100K will be 10%.
What if traded, I sell traded to the local exchange, sold at P900K and FMV is P800K, realized a gain of
P100K.
- What kind of tax? Percentage tax of ½ of 1% of the gross selling price. (Sec. 127 of NIRC)
How much will be the tax? ½ of 1% of what? P900K. Regardless of tubo of P100K.
1. If it is not traded, it is 5% on the P100K.

2. If it is traded, it is ½ of 1% of P900K.
48
TAXATION LAWS I
Si X binili niya ng P1M worth P800K ngayon, ibinenta niya ng P800K. Lugi. Not traded to the local
stock exchange.
- May tax? Wala. Bakit? There is no realized income. Therefore no income tax.
What if he sells it at P300K, traded through the local stock exchange
- What tax? Percantage tax of ½ of 1% of P300K. So may tax. P1,500.00.

1. If not traded, the tax is on the gains.
2. If you have loss, no tax.
If traded, the tax is on the gross selling price. Whether you have a gain or loss, the tax is always
½ of 1% of gross selling price.
49
TAXATION LAWS I
CORPORATE TAXPAYERS
DOMESTIC CORPORATION
Kinds of tax and tax rates paid by a DC
- Lahat ng kinikita nila ay galing sa trade or business. Walang korporasyon ang tinayo para
walang gawin. It’s always engaging in business activity, trade or business. So, lahat ng
korporasyon, lahat ng kinikita nila within and without shall be subject to NIT.
- If you know this one, balikan natin ‘yung passive income of a DC. ‘Di ba sa individuals, ang
passive income sa individuals ay apat: (1) interest on bank deposits; (2) prices and
winnings; (3) royalties; and (4) dividends.’Yang apat na ‘yan, pagdating sa korporasyon ay
iba.
1. Interest on bank deposits
- Same rules apply.

a. Interest on any currency bank deposit from the Philippines = FWT of 20%.
b. Interest on any bank deposit foreign currency = 7 1/2 %
2. Long-term deposit
- If there is a long term deposit na hindi napreterminate for a period of 5 years, exempt pa rin
‘yan. Pareho lang ‘yan. FWT pa rin.
50
TAXATION LAWS I
3. Prizes and Winnings
- Exemption from PCSO and Lotto Winnings will not apply to them.
o Why?
 Eh korporasyon sila eh, ang number 1 requirement na nananalo sa ay tao.
Kaya hindi nag-aapply sa kanila ‘yan.
- Other prizes and winnings, and awards
o Hindi pwedeng manalo ang koprporasyon sa raffle. Sigurado.
- They can win awards. (eg. The greenest parlor in Metro Manila).
o What happens if there is a financial aspect ot eh award?
o Mayroong trophy or plaque na binigay sa korporasyon, per may P5,000.00 na kasama.
Anong gagawin sa P5,000.00 na kasama? Anong treatment doon?
 It will be treated as part of ordinary income subject to NIT. Lahat ng prizes
and awards, received or realized, by a DC shall be subject to NIT. Because the
assumption is, they won the award pursuant to the trade or business that
they have. That is why ‘pag tiningnan niyo ‘yung NIRC, wala kayong makikita
dyan na prizes and winnings and awards sa passive income ng isang DC.
Wala ‘yun. But it doesn’t mean na if nanalo sila, they are exempted. Ang ibig
sabihin ‘nun, ‘pag wala sa (B), nasa (A). Kaya ang tax ay NIT.
 Kapag tao ka, nandun ka sa column (B), kapag korporasyon ka, nandun ka sa
column (A). And any award received whether within or outside the
Philippines shall be treated as ordinary income of the coporation and
therefore subject to NIT. Ang NIT rate dito ay 30%.
4. Royalties
- With respect to royalties, naturalmente, ang korporasyon maaaring magkaroon ng royalties

- The literary and musical compositions will never apply to them. Not applicable ‘yan sa
kanila. Kaya ang royalties nila will forever be subject to tax for 20%. Hindi mag-aapply si
10%.
5. Intercorporate Dividends
- With respect to dividends, the dividends are covered by a different kind of tax. We call it
Intercorporate dividends tax.
- Ang intercorporate dividends tax ay, kapag ang nag-issue ay DC at ang recipient ay tao, tao
ang taxpayer.
Exam:
X donated P500,000.00 to the following institutions and discuss the tax consequences.
 Nammix up niyo ‘yung income as such and donation as income. Magkaiba

‘yun.
a. Income as such – income by way of operations
51
TAXATION LAWS I
b. Donation – tinanggap mo ng wala kang ginagawa
Kapag ang nag-issue ay DC, to another DC
- It’s called intercorporate dividends and the same shall be exempt from tax. Ang
pinag-uusapan, sino ang tumanggap, hindi kung saan galing lang. Pakabilang side. Si
DC na tumanggap shall be exempt from tax.
- If the recipient is a person, it falls under (B).
o DC (issued) to DC (recipient) = exempt
Kapag ang nag-issue ay RFC at ang tumanggap ay DC? Anong tax treatment?
- Is it income? Yes.
o DC will be subject to tax because ang sabi natin, the only dividends exempt from
tax are dividends issued by a DC in favor of another DC.
o RFC (issued) to DC (recipient) = NIT
Kapag ang nag-issue ay NRFC at ang tumanggap ay DC.
- Income? Yes.
- Within or Without? Within.
- What kind of tax? NIT. Wala sa (B), (C), (D), nasa (A).
o NRFC (issued) to DC (recipient) = NIT
What if the exception to the rule applies? (eg. P35,000.00 is within and P65,000.00 is
without).
- Whether the GR applies or the XPN to the rule, P35,000.00 and P65,000.00 will still
be subject to tax.
6. Capital gains on sale of shares of stocks.
- Consistent. It’s the same. Walang pinagbabago ‘yan. Itong letter (C), all the way down will
still be the same.
- Capital Assets not traded through the local stock market and you realized, if the gains that
does not exceed P100,000.00, the rate of tax will be 5% and if in excess of P100,000.00 is
10%.
7. Capital Gains tax on sale of real property.
52
TAXATION LAWS I
- Meron din ‘yan. But this is limited to real properties which are not directly used by the
corporation in its management and operations.
- However the exemption from the 6% CGT will not apply.
o The exemption from the 6% CGT applies only if the taxpayer is an individual
taxpayer but never if the taxpayer is a corporate taxpayer.
Bar Examination Question 2016:
Sale – Lease Back Agreement. Binenta ko sa’yo, pero ang kondisyon rerentahan ko ang ibinenta ko
sa’yo and after some period, pwede ko nang bilhin ang property. Binenta ko sa’yo ‘to pero binenta ko
pero rerentahan ko, ako ang magrerenta. Therefore, ako pa rin ang titira. Binayaran mo ako ng
selling price, binayaran kita ng rentals. After a certain period of time, I will have the right to exercise
to buy it back. ‘Nung binenta ko sa’yo, anong binenta ko?
- Kapag binenta ko sa’yo ordinary asset, NIT. Kapag bineneta ko sa’yo capital asset, CGT.
- Eh nagbabayad ako ng renta sa’yo, sino na ang may-ari? Ikaw na ‘di ba? Hindi na ako.
Siguradong nagbabayad ako gn rentals.
- Can I claim it as a deductible expense? Kasi may expense na ako eh. ‘Di ba kumita ako ng
salapi ‘nung binenta mo sa’kin. Hindi naman porket kumita ako, ang ibig sabihin ‘yung sarili
kong kinita ‘yun ang ibabayad ko. Habang nagrerenta ako sa’yo, bayad ako kada buwan,
anong tax effect ‘nun sa’kin? Ikaw may income ka at ako may deductible expense kung ako’y
engaged sa trade or business.
8. Minimum Corporate Income Tax (MCIT)
- This represents 2% of your income and imposed beginning of 4 th year following the
commencement of your operations. Provided that 2% on the gross is higher than the NIT.
- History:
o Prior to this new law, ang nadiscover ng legislature na base sa database ng SEC at
BIR, bakit ang mga corporation, may net loss? Net loss, meaning mas maraming
ginagastos kaysa kita. Siyempre. ‘pag marami kang gastos at ito ‘yung kita mo, minus
gastos sa operations, negative ka. At ‘pag negative ang income mo, negative, multiply
mo ‘yan sa 1000, 0 tax. Ang napansin ng gobyerno, bakit ang daming korporasyon na
0 ang tax. They looked at the records, most of the coporations are declaring net loss
but malaki ang revenue, against the gastos, nawawala. Pinasa nila ‘yang batas na
‘yan (NIRC). Beginning the 4th year following the commencement of the
corporation’s operations. If the 3% on the gross is higher than the NIT which is 30%,
hindi pwedeng lugi ng lugi ang gobyerno. Kaya dapat, mangongolekta ako ng MCIT.
- Example:
o Let us say, counting starts from the date of incorporation regardless of WON the
corporation actually started the operations. So incorporation year ang pinag-uusapan.
Kung hindi ka nag-operations during that year, problema niyo ‘yan. Basta ‘yan ay
counted na.
o 2016: Incorporated and start operations for a parlor.
53
TAXATION LAWS I
 Income: P5,000,000.00.
 Operating costs, deductions, ang allowable deductions provided for by law:
P6,000,000.00 (normal na kapag nagsisismula ka ng business, naglalabas ka
ng pera, gastos ka ng gastos. Konti pa lang ang kita mo. Normal ‘yan. That’s
natural.)
 So lugi ka ng P1,000,000.00. Dahil lugi ka ng P1,000,000.00 multiply mo sa
30% NIT, 0 tax. Lugi ka, lugi gobyerno sa’yo, wala akong koleksyon.
o 2017:
 Income: P5,000,000.00.
 Expenses: P5,800,000.00.
 Nag-improve ang operations mo kasi lumiit ‘yung expense mo. Negative pa rin
ng P800,000.00. Lugi ka, lugi nanaman ang gobyerno. Pero may kinikita ka
dyan kaya lang ‘yung kita mo kinakain ng puhunan.
o 2018:
 Income: 5,200,000.00
 Expenses: P5,600.000.00
 Lugi ng P400,000.00. Lugi ka nanaman, lugi nanaman ako. Gross income ang
pinag-uusapan dito ah? (Remember sa business, kung gusto mong malaki ang
kita mo, malaki rin dapat ang puhunan mo. Directly proportional ‘yan sa
kanya eh.)
o 2019:
 Income: P6,000,000.00
 Expenses: P6,100,000.00.
 Lugi ka nanaman ng P100,000.00, lugi nanaman ang gobyerno.
o 2020:
 Income: P6,500,000.00
 Expenses: P6,700,000.00
 Lugi nanaman ng P200,000.00, lugi nanaman ang gobyerno.
o Sabi ng batas, “Hindi pwede ‘yan. Ayaw ko na. Hindi na ako papayag. If you want na
kayo malugi, kayo na lang malugi forever. Pero ako mangongolekta na. I have given
you sufficient time to recover but if you have not recovered beginning the 4 th year
from the commencement of your operation, hindi pwedeng kayo ay lugi at ako ay
lugi nanaman. Kailangan ako may kikitain na.”
o Ano ang kikitain ng gobyerno?
 2% of P6.500,000.00, P130,000.00. P130,000.00 vs. 0 NIT.
o Ano ang higher?
 P130,000.00. Hanggang sa dulo.
o Kailangan bang lugi?
 No, hindi kailangang lugi. Pwedeng may tinubo ka. So P6,500,000.00 tapos
ang OPEX mo at lahat ng deductions ay P6,400,000.00. So kumita ka ng
P100,000.00. Net income multiply mo ng 30%, P30,000.00. P30,000.00 vs.
P130,000.00 (2% of P6,500,000.00), whichever is higher, ‘yun ang
babayaran mo sa gobyerno = MCIT.
54
TAXATION LAWS I
o Paano kung sa susunod na taon kumita ka?

 Walang problema, kikita rin naman ang gobyerno. This is really the story.
Kung sa susunod na taon, mataas ang NIT mo, may kita pa rin ang gobyerno.
Kung sa susunod na taon, mas mataas si 2% mo (MCIT) , may kita pa rin ang
gobyerno mo.
- This concept of MCIT applies also to corporations under rehabilitation.
o So kapag ang korporasyon ay under rehabilitation, bibilangin ang beginning the 4 th
year following the commencement of its operations, ‘dun sa date na inapprove ang
rehabilitation. Kapag nag-incorporate ka, you start from the year of incorporation.
When the corporation is under rehabilitation, then you start counting from the year
the rehabilitation was approved by the court or by the SEC.
- Henceforth kapag ikaw ay lugi, kapag mas mababa ang 2% mo kaysa NIT ng 30%, ‘yan ang
bayaran mo sa’kin. Kung sa susunod na taon, mas mataas ‘yung NIT kaysa MCIT, NIT ang
bayaran mo sa’kin. Lugi o tubo kayo, ang gobyerno may kinikita.
9. Improperly Accumulated Earnings Tax (IAET)
- MCIT and IAET are what I refer to as “Bawi-bawi sa Gobyerno.” Ibig sabihin, sa tax kasi
hindi pwedeng nalulugi ang gobyerno, kasi walang pera. So dapat lagi akong may kinikita.
Tingnan niyo sa MCIT, kayo lugi, babawian ko pa rin kayo by way of MCIT.
- This is representing 10% of the earnings retained by the corporation beyond the reasonable
business needs. Ano ‘yung dividends? Profits distributed as dividends. Under the
corporation code, all income should be distributed, meron lang dapat percentage na
kailangan iretain. Bawal na ‘yung tubo, kailangan niya idistribute in the form of dividends to
stockholders. When profits are distributed in favor of stockholders, then according to the
law, the stockholders-taxpayers shall be subject to FWT of 10%.
- Example:
o If the corporation XYZ is a DC, does not issue dividends and retain earnings beyond its
reasonable business means (eg. Natapos ang December 2016, ang kanyang net profits
ay P5,000,000.00. Ang tawag sa net profits na ‘yan ay surplus, sobra. For the year
2017, you do the budgeting, lalagyan mo ‘yung expenses mo ng peso value. At ‘yung
peso values na ‘yan kukunin ‘dun sa surplus, appropriated surplus.
 Ibig sabihin ‘nung appropriated surplus, may pinaglalaanan ka, may
pinaggastusan. Kapag unappropriated surplus, ‘yan ‘yung wala kang
pinaglalaanan, at ito ay must to be distributed. At kapag ito dinistribute ‘yan,
kumikita ang gobyerno because ang distribution niyan ay dividends.
 Kaya ang gobyerno ay kumikita ng 10% tax if distributed. If the corporation
refuses to distribute and retain their earnings beyond their reasonable
business needs, the government loses the 10% and therefore the
government will recover the same 10% from the corporation whihch did not
issue the dividends. Kaya ang tawag dyan “bawi-bawi.” Ang gobyerno hindi
pwedeng lugi lagi, kailangan may kita. Kung ayaw ng korporasyon na mag-
issue ng dividends, fine. The government loses 10% from the stockholders
55
TAXATION LAWS I
but the government will recover from the corporation, the same 10% the
government lost, and that is what you refer to as Improperly Accumulated
Earnings Tax.
IAET not applied if:
1. Of course, IAET is not applied if the corporation is a bank. Because they are supposed to
retain earnings and surplus. Otherwise, if the depositors decided to withdraw, ay walang
pera.
2. It does not apply also to insurance company. Because the risk insured against happens,
kailangan mong bayaran ang mga insured.
3. It does not apply to the government.
NOTE: If a corporation, a holding company is established, it gives rise to an assumption that the
corporate taxpayer is avoiding the payment of 10% FWT on the supposed dividends (profits
supposed to have been distributed as dividends). There is a disputable presumption created if a
holding company is established by the corporation that the corporation is avoiding the 10% FWT
due or supposed to be paid by the stockholder-taxpayer.
RESIDENT FOREIGN CORPORATION
- They are subject to tax only from income derived from Philippines sources. So, all income
from the Philippines of a RFC shall be subject to 30% NIT.
1. Passive Income
- Passive income, meaning royalties, interest on bank desposits, shall also be subject to FWT
provided that they are derived from Philippines sources.
2. Intercorporate Dividends
- When it comes to intercorporate dividends (issuing is a DC in favor of RFC), the same shall
be exempt.
3. Prizes and Winnings
- It falls in (A) not in (B). Ang nandito lang sa korporasyon ay royalties and interest on bank
desposits, which are passive income subject to passive income tax. But the royalties will
never be applicable to literary ang musical composition because hindi naman sila capable
‘nun.
4. CGT on sale of shares of stocks not traded through the local stock exchange and in a DC
- Subject to FWT of same rate.
56
TAXATION LAWS I
5. Capital gains on sale of real property
- None. Why? Because they are not allowed to own real properties in the Philippines.
6. MCIT
- Limited to the income derived from Philippines sources. You will only consider the income
earned in the Philippines and expenses incurred in the Philippines.
7. IAET
- Not applicable.
o Because the physical set-up of their business ay hindi pwede mag-apply. RFC sa
Pilipinas, ibig sabihin may branch or may agent. Ito ‘yung branch sa Piipinas na
tinatawag na RFC. Meron siyang principal place of business sa US, nasa labas ng
bansa. Nagtayo sa Pilipinas ng branch. Ang tinatax lang natin ay ang kinikita dito.
Ang lahat ng kinita sa Pilipinas ay income within. Therefore, ang kita sa Pilipinas ay
subject to NIT 30% . Ang kita na ito ay ibabato niya ‘yan sa main office, ireremit. Ano
ang currency ang irremit? Foreign currency, hindi pwedeng peso dahil ito universal.
So pinapalitan ‘yan sa Bangko at dadaan ng BSP. Hindi basta nagreremit, because
BSP controls the remittance outward. ‘Yung inward, walang problema because our
foreign currency reserve will increase pero ‘yung palabas kinokontrol dahil we have
to maintain to a certain level the foreign currency reserves. ‘Pag niremit, may tax
ulit, branch profit remittance tax (BPRT). ‘Yung kinita sa Pilipinas, tinax ng 30%, ang
tinatax doon ay ang the right to receive and realize income from within the
Philippines. When the branch remits it to the principal place of business, the branch
applies for the amount to be remitted. Normally, the amount applied for is not the
same with the amount approved for remittance, it is lesser. Sabi ng batas, regardless
of the amount actually approved and actually remitted, whatever the amount is
applied for remittance, shall be subject to BPRT of 15%. The amount applied for, not
the amount actually remitted.
o Kung ang inapplyan mo ay USD5,000,000.00, at ang inapprove lang ay
USD3,000,000.00 the 15% is imposed on the USD5,000,000.00 applied for. Kung
inapprove ay USD5,000,00.00, walang problema. Pero normally the amount actually
remitted or approved is normally lower than the amount applied for because
binabalanse ng BSP ‘yan among all, may limit ang foreign remittances to protect the
foreign reserves ng Pilipinas.
o Ang kita binato doon sa FC, wala tayong jurisdiction. Pwede ba nating tawagin, “Hoy,
magkano ang suma total ng lahat ng kinita niyo sa buong mundo? Ibigay mo nga
sa’min.” That is not covered by our jurisdiction. We cannot force them to distribute
dividends. Remember that territorial ang tax. The rule that if there are earnings
57
TAXATION LAWS I
retained beyond the reasonable business needs cannot be applied to this one. Hindi
naman natin pwedeng sabihin na, “Hoy, nagreretain ka ng earnings ha? Ibalik mo
sa’yong mga taxholders.” Hindi pwede because that is beyond our jurisdiction. And
that is the reason why ‘yung IAET ay hindi mag-aapply sa RFC. It will never apply.
Because we do not have jurisidiction over the entire income in the principal place of
the foreign corporation.
o Neither can we apply the rule that if the coporation’s main office retains earnings
beyond reasonable business means, it should distribute the profits in the form of
dividends. Pasalamat tayo kung mag-issue ng dividends. But if not, we cannot force
it. Therefore hindi natin pwede itax si korporasyon.
o Can we tax the RFC for the earnings retained beyond the reasonable means by the
branch? No way. Because that is not the earnings of the entire coroporation. So hindi
natin pwede sabihin na, “Hoy, ‘yung kinita ng branch idistribute mo sa stockholders
mo dito ah?” Hindi pwede, because binabalik ‘yan sa principal place of business niya.
That is the reason why it does not apply to a RFC.
NON-RESIDENT FOREIGN CORPORATIONS
- The corporation is taxed on the gross and the rate is 30%.
1. All income from within and all passive income such as interest on bank deposits, royalties
- Subject to 30% FWT. Bakit final tax? Wala ‘yan dito. Lahat ng kinikita dito, ito-tong agad.
Bakit? Walang pag-asang magbayad kapag nakaalis. Kapag wala ‘yan dito at hindi natin iti-
nong agad, tapos ang usapaang, libre na. Paano mo hahabulin? Idemanda mo. Paano mo
idedemanda ang outside of our jurisdiction? Sasabihin ‘nun, “Okay I will not set foot in your
country. You cannot force me.”
2. CGT on shares of stock not traded through the local stock exchange
- Same rules
3. Capital gains on sale of real property
- Not applicable. Because FC are not allowed to own real properties in the Philippines.
- If the issuing corporation is a DC and the recipient of the dividends is a NRFC, it will not be
exempt. It will be subject to FWT of 15%.
4. MCIT
- Not applicable. Because wala namang 2% of the gross income if higher than the GIT. On the
gross na ‘yan eh, naka-tong na ‘yan eh. The tax is assured to be collected. Therefore, without
deductions on the gross, the tax is collected. Therefore, MCIT does not apply.
5. IAET
58
TAXATION LAWS I
- Not applicable. ‘Yung RFC nga hindi pwede eh, ito pa kaya.
6. BPRT
- Not applicable. If you have a branch, you already are a RFC.

- Kapag nagregister ang NRFC sa BIR, hahanapan sila ng address. Kung may address sila sa
Pilipinas, RFC sila. Not required to register.
NOTE: In corporate taxpayers, do not forget Sec. 30 of NIRC. What are the corporations which are
not subject to tax for income as such provided however that income of whatever kind and character
from real or personal property or from an activity conducted for profit, regardless of disposition,
shall no longer be subject to tax.
Exam: ‘Nung nagdonate si X sa various institutions. Ang pinag-uusapan dito ay income realized by
them in actual operations. ‘Yung donations kasi hindi siya actual operations ng isang korporasyon.
‘Yun ay tinatanggap. Para kang tao na walang ginagawa at dumating ang regalo sa’yo vs.
nagtatrabaho ka at nagpapakahirap magturo. ‘Yung income as such ay ‘yung pagtuturo. Pero ‘yung
donasyon ay hindi income as such ‘yun. Why? Because ‘yung tinatawag na income as such under
Section 30 ay income realized by the corporate taxpayer pursuant to the primary purpose for
which each one of them is created. Ang donasyon, aprang passive income. Ang tanong ‘dun ay, ‘nung
nagbigay ba ‘yun ay income? ‘yun ba ay subject to income tax?
ITEMS OF INCLUSIONS (Section 32 of NIRC)
Gross Income
According to Section 32, par. A, Gross Income is defined as all items of income from whatever
source derived such as but not limited to the following:
a. Compensation for services rendered including fees, commissions, and other similar items
b. Gains derived from dealings in property
c. Gross income from exercise of profession or trade or business
d. Dividends
e. Interest
f. Rentals
g. Royalties
h. Annuities
i. Prices and Winnings
j. Pensions
k. Partner’s distributive share in a general professional partnership
A. Compensation for services rendered including fees, commissions, and other similar items
a. Compensation – If you render service and you get paid for that, and there is employer-
employee relationship (EER)
59
TAXATION LAWS I
b. Gross Income from exercise of Profession – If you are receiving income because you
rendered services, without EER, you call your income, gross income from exercise of
profession, under (G).
But both are part of your gross income.
De Minimis Benefits Other Benefits

Kinds of OP,HoP,
Basic Pay w/in w/out w/in w/out
EEs HaP, NSD
limits limits limits limits
Compensation
M&S N/A Exempt Exempt FBT
(NIT)
Compensation
R&F NIT Exempt Exempt NIT
(NIT)
Statutory
Stop being
Minimum
a MWE and
MWE Wage Exempt Exempt Exempt
become
(Exempt from
R&F
NIT)
Sa compensation, let us first go to kinds of employees: (Read law on Minimum wage earners)
1. Minimum wage earners (MWE)

2. Rank-and-file (R&F)
3. Managerial and Supervisory employees (M&S)
All of them will receive basic pay. The terms used for “basic pay” are as follows:
1. Managerial/Supervisory Employees - Compensation

2. Rank and File Employees - Compensation
3. Minimum wage earners – Statutory Minimum Wage
Among the 3, for the basic pay that they are going to receive, the statutory minimum wage will be
exempt from tax. It is exempt from payment of income tax.
1. Managerial/Supervisory Employee
o Compensation received for 1 year taxed with NIT computed from January to
December.
2. Rank and File Employee
o Compensation taxed with NIT.
3. Minimum Wage Earner
o Statutory Minimum Wage exempt from tax.
60
TAXATION LAWS I
Overtime pay (OT), Holiday pay (HoP), Hazard pay(HaP), and Night Shift Differential (NSD)
1. M&S – not applicable

2. R&F – taxed with NIT
3. MWE – exempt
DE MINIMIS BENEFITS (DMB)
- These are privileges of small value given by ER to EE to boost the morale, to make them stay
in the company. Pero ‘yan may limit.
- Example:
o If employee has unused vacation leave credits and the same is converted to tax, 10
days or less in a year, then the amount that you receive is income but within limit of de
minimis, not subject to tax, it is exempt.
 Imaginine niyo nasa private sector tayo sa Pilipinas. Nagttrabaho ka, you
have earned 15 VL, kinonvert into cash. ‘Yung 10 araw, shall be exempt from
tax, you call it de minimis benefits.
o If sick leave, kahit isang araw lang kinonvert to cash, that is taxable, subject to tax.\
 Kapag sick leave, kahit 1 araw lang converted into cash, that will be subject
to tax.
o Government Sector: VL at SL, ‘pag nagretire ang nanay at tatay mo, (sa private
companies, pinamimigay para hindi burdensome sa ER) inaaccumulate. Minsan
kapag nagretire ka ang vacation leave credits mo, 700 days. Kapag nagretire ka,
icconvert ‘yun sa cash based on your last salary. Ang tanong natin, sa government
sector ba, ‘yun ba ay de minimis? Oo, lahat ng ‘yun de minimis. Therefore, exempt
from payment of tax.
1. Clothing allowance (P5,000.00/yr.)

2. Laundry allowance (P300.00/mo.)
3. Rice Allowance(P1,500.00/mo.)
4. Medical Allowance for dependents (P125.00/mo.). Swerte ka na nga ‘yung dependent mo
binigyan.
NOTE: Kung hindi binigay ng ER ang DMB, hindi pwedeng pwersahin ang ER. That is if the ER
gives them. But if the ER does not give them to you, these rules will not apply because you are
not receiveing DMB.
5. Medical allowance for EE (P10,000.00/yr.)

6. Achievement Awards (P10,000.00/yr.)
7. Gifts during Christmas (P5,000.00/yr.)
8. Daily meal allowance
o kapag ikaw naman ay nag-overtime, your employer gives you meal allowance
during OT, may limit (Not exceeding 25% of your basic pay), during OT lang ito.
61
TAXATION LAWS I
NOTE: If the benefit is given and within the limits, everything will be exempt. Even if received
by a managerial, rank and file, or a minimum wage earner. Lahat nang ‘yan exempted. Dapat
alamin niyo kung ano at magkano. Otherwise hindi niyo malalaman kung exempted o hindi. Kasi
may limit ang sinasabi ng batas.
9. Bonuses pursuant to productivity scheme approved by ER (P10,000.00/yr)
TOTAL: P63,100.00 + VL.
o Kasi ‘yung VL hindi natin kaya ipredict ang amount, depende ‘yun sa’yo kung
masipag ka o hindi. Kapag masipag ka pumasok, hindi mo ginagamit ang VL, pero
kung tamad ka, nagagamit mo ang VL mo. Total amount of DMB is P63,100.00 if
given by the ER. Assuming that everything else is provided by the ER, the total
amount is P63,100.00 plus your accumulate VL converted into cash.
o Ang laking retrieve nito sa EE, kasi exempted na agad ‘yan. But this is pertaining to 1
year. P63,100.00/yr.
Example:
Paano kung sobra sa amount ang binigay? Halimbawa binigyan kita ng 1 sakong bigas worth
P5,000.00 kasi Japanese rice pala. Paano gagawin natin sa sobra? Magkano ang sobra kada buwan?
P3,500.00, x 12 = P42,000.00. Sobra ka sa isang taon ng P1,500.00 x 12 = P18,000.00 lang ang limit
kada taon. Magkano ang sobra mo? P42,000.00 – P18,000.00 = P24,000.00. You have an excess of
P24,000.00. What will happen to the excess?
- ‘Yung P18,000.00, that is not subject to tax because that is within limits.
Binigyan ko kayo ng medical allowance, P100,000.00, magkano ang sobra? P90,000.00. Binigyan ko
kayo ng clothing allowance sa P50,000.00, magkano ang sobra? P40,000.00. What happens to the
excess? What do we do with the excess?
- The excess would be taxable. But what kind of tax do we pay for the excess? How we impose
tax on the excess?
“OTHER BENEFITS”
- Meron tayong tinatawag na “Other Benefits.” May limit nanaman, P82,000.00, exempt ‘yan,
items of exclusions (Sec. 32, par. B, 13th month pay and other benefits)
- ‘Yung other benefits ng isang empleyado, other than the basic pay, OT, HP, NSD, and all of
these things that you received, ang tawag natin doon ay “other benefits.”
- ‘Yung sobra sa DMB, tatawid. Kapag tumawid, kasama ang ibang benefits, kunin mo si
P82,000.00, at ‘yung P82,000.00, exempt.
In excess of P82,000.00:
62
TAXATION LAWS I
1. M&S – subject to Fringe Benefit Tax (FBT) subject to the rate of 32% based on the grossed-
up monetary value.
2. R&F – subject to NIT. Sa isang taon, kukunin mo ‘yung DMB na exempt, kukunin mo ‘yung
P82,000.00.
o Lahat ng sobra, taxable. Anong klaseng tax, NIT.
3. MWE – stop being a MWE under the law and will now be treated as R&F.
o In which case, your statutory minimum wage will be subject to NIT. Your OT, HP, HP,
and NSD, will also be subject to NIT. Your DMB within limits will be exempt. But
since you have an excess from P82,000.00, ‘yung excess will be subject to NIT.
Minsan kasi ‘yung mga ER, para matulungan ang mga EE, passwelduhiun kita
minimum wage, pero ang allowances mo malaki pa sa kinikita mong basic pay. Hindi
uubra ‘yun. Sigurado, when you exceed P82,000.00 as far as other benefits is
concerned, kalimutan natin ang pagiging minimum wage earner mo. This is a
safeguard. Malamang-lamang ‘yan kung walang ganyan na provision, lahat ng
empleyado, passwelduhin ko ng minimum wage. Wala namang pakialam ang
empleyado eh. Basta ang importante, magkano ang kanyang naiuuwi sa dulo ng
buwan.
o So, para makaiwas sa tax, imminimum wage earner kita. Payag ka? Oo. ‘Wag ka mag-
alala, pa-kotse kita, pa-bahay kita.
o These are privileges, and therefore will fall under the bracket of other benefits. If
you were a minimum wage earner, and you have benefits, other benefits other than
those that you are receiving, and the same exceeds P82,000.00. Your minimum wage
will be subject to NIT. Your OT, HP, HP, and NSD will also be subject to NIT. But the
DMB within limits will still be exempt, and the P82,000.00 within limits will still be
exempt. But you will not be considered as a statutory minimum wage earner.
o Kung ikaw ay minimum wage earner, you are receiving within the limits. Everything
is exempt. Minimum wage in Manila: Basic pay is P476.00 (plus COLA of P15.00) =
P491.00. Kung ikaw ay basic minimum wage earner, may parlor ka sa gilid, what
will be the tax treatment? Ang tawag sa’yo ay mixed income earner. Ang
classification na sa’yo ng batas ay mixed income earner, or self-employed. You have
income both from compensation and a business. Therefore, this will not apply to
you. How does the law classify you? RC engaged in trade or business. Your income in
compensation for services rendered pursuant to EER plus income from business will
be combined together. But still, both, will be subject to NIT. That is why you stop
being classified as a minimum wage earner if you have a business on the side. If you
engage in trade or business or you have income other than the statutory minimum
wage.
o Minimum wage earner kita sa opisina ko. Eh nagpaparenta ka pala ng apartments.
Ang sweldo mo ay P491.00 lang sa isang araw. You’re not considered as a minimum
wage earner for the purposes of taxation. But under the Labor Code, you are
considered a minimum wage earner, definitely. But for purposes of tax, no more.
Because your income, both from employment and trade or business will be
combined, and will be subjected to tax, subject to NIT.
63
TAXATION LAWS I
Empleyado ka, while employed, ano ang pwede mong matanggap?
1. Basic Pay
2. Overtime Pay, Holiday Pay, Hazard Pay, Night Shift Differential
3. Bonuses (13th Month Pay, 14th-20th Month Pay, Productivity Pay, Quarterly Bonus,
Christmas Bonus)
4. Allowances (Representation, Meal, Clothing, Gasoline, Housing, Rice, Manicure, Pedicure,
Parlor)
5. Equipment (Cellphone, Laptop, Camera, Tablet)
6. Vehicle (Car, Tricycle, Helicopter)
7. Scholarships
Anong tax treatment ng bawat item na ‘yan?
After post-employment:
1. Retirement - Retirement Pay

2. Resignation
3. Dismissal -
a. With cause: None (pwedeng makatanggap if illegally dismissed = Nominal Damages na
P30,000.00)
b. Without Cause: Reinstatement, Backwages, Moral and Exemplary Damages, Attorney’s
Fees, and Costs of Suit
i. If reinstatement is not possible = Separation Pay
ii. If died: It depends.
 If death is considered in the retirement plan as a form of retirement, then
you will be given retirement benefits.
4. Installation of Labor Saving Device (Redundancy and Retrenchment) - Separation Pay
Ito ba? Paano ba ang tax treatment niyan? Are these income?
a. RC – can be an employee in the PH

b. NRC – cannot be an employee in PH
c. RA – can be an employee in PH
d. NRAETB – cannot be an employee in PH
o Xpn: employed in off-shore banking units, or multinational companies, or petroleum
service contractors, these are NRANETB and yet, they are treated as EEs in the
Philippines. They may be employed and they may be receiving all these benefits.
BASIC PAY
- If you look at basic pay, if the EE is a rank and file or supervisory/managerial, whatever
type of EE, compensation ‘yan subject to NIT.
- If the EE were a statutory minimum wage earner, exempt ‘yung basic pay.
64
TAXATION LAWS I
OVERTIME PAY, HOLIDAY PAY, HAZARD PAY, and NIGHT SHIFT DIFFERENTIAL
- The same will be subject to tax and will be available only if the EE were a rank and file. But if
it is a statutory minimum wage earner, the same will be exempt.
BONUSES (13th month pay, 14th month pay, 20th month pay, productivity pay, quarterly bonus,
Christmas bonus, profit-sharing)
- Are these income? Yes

- Are they subject to tax? Yes
- Anong klaseng tax? Dito siya babagsak sa “Other Benefits”
1. M&S: exceeds P82,000.00, then the excess shall be subject to fringe benefit tax. But the
P82,000.00 shall be exempt from tax.
2. R&F: P82,000.00 of these bonuses will be exempt from tax but the excess shall be subject to
NIT.
3. MWE: kapag binigyan ka niyan, lalagpas ng P82,000.00 dahil ‘yan ay salary-based.
o Example:
 Let us say P12,700.00/mo ang basic pay depende kung 26 days (with
Saturdays) o 22 days (without Saturdays) pumapasok in a month. Kung ‘yan
ay tinanggap ng minimum wage earner, siguradong lalagpas ‘yan ng
P82,000.00 kasi ‘yan ay basic monthly salary mo. P82,000.00 will be exempt
but since nag-exceed ng P82,000.00, ‘yung minimum wage na siya subject to
tax. ‘Yung OT, HP, HP, at NSD subject to NIT niya pero ang DMB still exempt
and the excess will be subject to NIT.
ALLOWANCES
- Lahat ng allowances na ‘yan, magffall sa “Other Benefits”

1. M&S: If these allowances exceed P82,000.00, the excess will be subject to fringe benefit tax.
2. R&F: NIT
3. MWE: If nag-exceed ng P82,000.00, the minimum wage will be subject to tax. The OP, HP,
HP, and NSD will be subject to tax. And the excess of P82,000.00 will be subject to NIT also.
EQUIPMENT
- If the equipment is furnished by the ER not being necessary in the trade and business of the
ER
o  income
- If the equipment is furnished by the ER because they are necessary in the trade and
business of the ER
o  income;  tax
- All of these equipment will not be treated as income if furnished for the benefit of the ER or
convenience of the ER, or is necessary in the trade or business of the ER.
VEHICLE
65
TAXATION LAWS I
Binigyan kita ng kotse dahil ‘yung parlor ko, 24 hrs. ang operation. Nagsservices ka sa mga customers
natin. Kapag pinagsservice kita, alangan namang sariling kotse mo ang gamitin mo. Binigyan kita ng
kotse, gamitin mo sa trade or business natin.
- When you’re furnished that car, you did not receive income, any, at all. Why? Because the
car is necessary in the trade or business of the ER and therefore, no income from your end.
Pero kung ‘yung aking janitor binigyan ko ng kotse, ibang usapang ‘yun.
- Income ‘yung from his point of view. Why? Because the car is not necessary in the trade or
business of the ER.
SCHOLARSHIP
- If the scholarship is granted by the ER to the EE for purposes of education necessary in the
trade or business of the ER
o  income
- If the scholarship is granted by the ER to the EE not for purposes of education necessary in
the trade or business of the ER
o  income
Pero kung halimbawa ‘yung aking headcutter pinag-aral ko ng Law,
- That’s income from his end.
Pero kung ‘yung headcutter ko na pinagttraining ko, like typical trainings and seminars paid for by
the ER, and related to the trade or business of the ER,
- Those are all not considered as income. Why? Wala kang kinita, wala kang benefit. Because
the reason why binabayaran ko lahat ng trainings or seminars mo is for the benefit of my
business. And that is why there is no income from your end.
POST-EMPLOYMENT
All retirement benefits are income. All retirement benefits are subject to NIT except for the
following retirement benefits:
1. SSS;
2. GSIS;
3. US Veteran’s Act; and
4. Private Retirment Plan
o Retirement Benefits pursuant to a retirement plan maintained by the ER.
a. EE is atleast 50 years of age;
b. has rendered continuous service of 10 years;
c. that the retirement plan is approved by the BIR; and
d. no part of the fund is used for other benefit of the EEs.
66
TAXATION LAWS I
5. If there is no retirement plan maintained by the ER, the retirement benefits shall be exempt
from tax provided that:
a. the EE is atleast 60 years of age, and
b. has rendered continuous service for 20 years with the same ER.
NOTE: In nos. 4 & 5, either of the 2, the EE should retire only once. So kung ikaw ay nagretire na, at
ni-re-hire ka, at magrretire ka nanaman sa pangalawang beses, ‘yung pangalawang beses ay taxable.
In both instances under nos. 4 & 5, the requirement is that the EE should retire only once so that the
retirement benefits will be exempt. Kasi may posibliidad eh.
Example:
You started working with ER A at 25 years old, may private retirement plan. Now you’re 50
years old, you have rendered continuous service for 10 years. So qualified ka. Exempted ‘yung
retirement pay mo. Then ni-re-hire ka ng 50 years old tapos nagretire ka ng 60 years old. So
you have rendered another 10 years of continuous service to the same ER. The 2 nd time that
you retire, the retirement benefits shall be subject to tax, hindi na siya maeexempt.
Mahirap ‘yun kapag walang private retirement plan, 60 years of age and has rendered
continuous service for 20 years. Mahirap ‘yun icomply on the 2 nd time to retire. But in the 1st
one, there is a private retirement plan, madali siyang icomply if you started early and you
rendered service for 10 years, and now you’re 50 years old.
Kapag nagstart ka ng employment ng 40 years old, you can retire at 50 years old and 10 years
of service. Tax exempt. And then you were re-hired 51 years old to 60 years old, that’s another
10 years. You will retire again by that time. The 2nd one will already be subject to tax.
DISMISSAL FROM SERVICE
If you’re dismissed without cause and you were reinstated, you will receive salary as a reinstated
EE.

- What kind of tax? That’s compensation subject to NIT.
Backwages?
- Income? Yes.
- Why? Eh sweldo mo ‘yun ‘nung ikaw ay nagttrabaho na hindi ka nakapagtrabaho dahil ikaw
ay nadismiss kaya ‘yan ay subject to NIT.
Moral Damages and Exemplary Damages in Labor Cases are
- Income? Yes.
67
TAXATION LAWS I

In case reinstatement is not possible, the ER will pay you separation pay. This time, the separation
pay will be exempt from tax. Why? Because this is for a cause beyond the control of the EE.
NOTE: The maximum level if the net income is over P500,000.00, the tax shall be P125,000.00 +
32% of excess over P500,000.00. If you notice, the FBT rate is also 32%, except ‘yung computation
niyan is separate. ‘yung ine-FBT mo is 32% din ang rate. Comparing it with your 32% NIT, ang suma
total pareho rin. If you are a managerial EE, P500,000.00 divided by 12, magkano ang monthly pay
‘nun? P41,000.00/mo lang ‘yun. ‘yung P41,000.00 is not much. Pero ang industry rate ng
managerial EEs, minimum of P300,000.00/mo that’s P3,600,000.00/yr. Pero pagdating dit sa
“Other Benefits” mo, whether you tax it at 32% FBT or NIT, nakamaximum ka pa rin. Ginogross-up
mo lang siya, pabaligtad lang siya.
NOTE: Ang ER nagbabayad ng FBT kasi ang ER ay withholding agent. Withheld kasi ‘yan. The BT is a
withheld tax. It is the ER who pays to the BIR. Creditable withholding tax ‘yun. Para rin siyang
compensation mo.
2 Kinds of Withholding Tax:
1. Expanded Withholding Tax (EWT)

2. Creditable Withholding Tax
Parehas lang ito, dinidistinguish lang. Kapag sa compensation income, creditable. Kapag sa ibang
klaseng income, expanded.
Example:
Ang lessee, nagbabayad sa lessor. Kapag binayad sa lessor, si lessee nagttong, agn tawag ni
lessee sa tong na ‘yun ay EWT. Parehong creditable. Iba lang ang pangalan para madistnguish
ang withholding tong from compensation and withholding tong from other kinds of income.
The system is the same. Kapag sinabing EWT, we know already that it is not income from
compensation.
INSTALLATION OF LABOR SAVING DEVICE, REDUNDANCY, and RETRENCHEMENT
- Under the Labor Code, the EE is entitled to receive separation pay, whatever amount you
receive from separation pay, these are income on your end but not subject to tax because
these are causes beyond the control of the EE.
- If you die while employed, any amount that your heirs will receive, that is not subject to tax
because that is for a cause beyond the control of the EE. Walang EE ang gustong mamatay.
- Sa tax, lahat ng benefits na ‘yan income. Unless furnished for the convenience of the ER or is
necessary in the trade or business of the ER. None of them will be considered as income. But
if not furnished for the convenience of the ER or necessary in the business of the ER,
everything else will be income and you have to just consider the table.
68
TAXATION LAWS I
- ‘Yang table na ito at lahat nang ‘yan, nandun lang sa “Compensation” under Section 32 (A) at
‘yung “Compensation”, nandun lang sa letter (A).
ITEMS OF GROSS INCOME:
- Such as but not limited to the following. Whether from legal or illegal sources. Whether in
cash or in kind.
- The list is not exclusive.
a. Gross Income from trade or business: (A)
b. Gross Income from exercise of profession: (A)
c. Gains derived from dealings in property: (C) or (A), (D) or (A)
o Because if the property is located outside the Philippines, the taxpayer is a RC, the
property located outside the Philippines shall be taxed under letter (A)
o If the shares of stocks are in a foreign corporation, and they are sold and not traded,
under letter (A).
d. Dividend: (B) or (A) or exempt
e. Interest:
1. Interest on loans: (A), income from business or operations
2. Interest on bank deposits: (B) or (A), if outside
f. Rentals: (A)
o If the property is outside the Philippines: No tax, if the taxpayer is an alien or a NRC,
or FC
g. Royalties: (B) or (A)
h. Pensions or Annuities :
1. Annuities: (A), wala sa (B), (C), (D)
2. Pensions: (A)
i. Prizes and Winnings: (B) or (A) or exempt
j. Partner’s Distributive Share in the General Professional Partnership: (A)
o Before that a GPP is exempt from tax but the GCP is subject to tax just like an
ordinary corporation. But whether GCP or GPP, if the profits are already divided and
the shares are distributed, the partners will be subject to tax.
This entire discussion is just under letter “C”, and this is just under (A)
69
TAXATION LAWS I
ITEMS OF EXCLUSION
- are items of income but the law does not include them in the computation of the gross
income of the taxpayer
- they are income, but they are not subject to tax because the law specifically excludes them
from the computation of the gross income, as distinguished from exempted by law, which
are items of income which are not subject to tax because they are exempted by law (eg.
PCSO and lotto winnings, interests on bank deposits not pre-terminated for a period of 5
years)
NOTE: The effects are the same – no tax.
What are the items of exclusion?
1. Proceeds of Life Insurance Policy - Sec. 32 (B)(1)

- Proceeds of life insurance policy received by the insured or various heirs/beneficiaries,
provided that if there is payable interest, the interest shall be included.
NOTE: Life insurance – pertains to an individual
Example:
X (individual) takes an insurance policy. While living, he pays a premium in the

amount of P5, 000 per year. He designates his spouse, W, as the beneficiary. The policy
provisions provide that the proceeds1 will be P1M, and then the payment of 10% interest on
the P1M if the insured survives the term and a return of premium (ROP) 2. Now, X died. The
proceeds of the policy, the 10% interest, and the ROP will go to W.
1Proceeds of the policy - the coverage of the insurance policy

2Sometimes when the insured lived beyond the paying period, we have return of premium (ROP) which
depends on the policy provisions.
70
TAXATION LAWS I
NOTE: This problem involves both questions of income tax and estate tax. When a
person dies, there is always estate tax involved.
INCOME TAX SIDE:
Proceeds of P1M – excluded, no tax

10% interest – included, subject to tax of NIT
ROP – excluded, it is not income as it is just a return of capital, but it is not
covered by Sec. 32 (B)(2) because the ROP here is received by the
insured.
ESTATE TAX SIDE: Sec. 85 (F) – “the following are included in the computation of
the gross estate of the deceased”
NOTE:
Included in the estate tax – subject to estate tax

Excluded in the estate tax – not subject to estate tax
Proceeds of P1M –
Sec. 85 provides that when it comes to proceeds of life insurance

policy
1. If the designated beneficiary is his estate, is himself, is his administrator
or executor, designation is revocable or irrevocable – include in the
gross estate, thus, subject to estate tax
REASONS:
Revocable designation – included because the designated beneficiary
has interest, which the deceased could have changed prior to his
death, thus he has control.
Irrevocable designation – there is still control because all of them
will still benefits therefrom.
2. If the designated beneficiary is any person other than the four above
mentioned, and the designation is:
a. Revocable – include in the gross estate
REASON: While it is true that no one can benefit other than the
four, the deceased could have revoked and changed the
beneficiary prior to death, which he did not. But, still the right to
revoke the beneficiary is present.
b. Irrevocable – exclude in the gross estate
71
TAXATION LAWS I
REASON: Whether or not he is dead, he does not have any

control at all, both being irrevocable and will not benefit therein,
because he designated a beneficiary other than the four
mentioned.
NOTE: When a person dies, everything is included in his gross estate. But,
the controlling factor is that at the time of death, whether or not you have an
interest or control over that property. If the answer is yes, then it is
included.
NOTE: Estate tax planning – kumuha ka ng life insurance, na gusto mong

ipamana sa iyong anak ang coverage. Huwag mong gawing
executor/administrator ang anak mo at ang designation ay irrevocable, at
kapag ikaw ay namatay, walang income at estate tax. This is a legal way of
doing it.
2. Return of Premium – Sec. 32(B)(2)

- Pertains to property insurance and the property is not exposed to the risk.
- However, insurance policies, even if they are not property insurance, when you survived the
payment period, you are allowed to claim return of premium.
Example:
You insured your house for P1M. Premium paid is P10, 000. The property is not
exposed to risk at all. The ROP is excluded because that is just a return of your
payment/capital.
3. Gifts, Bequests, and Devises – Sec. 32(B)(3)

- General term for mortis causa transfers (testamentary and intestate succession) and inter
vivos transfers.
o Mortis Causa Transfers – somebody died, thus there are income tax and estate tax
components
o Inter Vivos Transfers – there are income tax and donor’s tax components
Example:
You inherited a house (mortis causa – succession). The value of the house at the time of
your parents’ death is P10M3. The house is being leased; rental fee is P1M per month.
1) The house with a value of P10M
INCOME TAX SIDE:

Is it income? – Yes
Within or without? – It depends where the property may be found
Subject to tax? – No, excluded; therefore, no income tax
3 Fair market value at the time of the mortis causa transfer.
72
TAXATION LAWS I
ESTATE TAX SIDE:

Subject to estate tax? – Yes, under Sec. 85 (definition of gross estate)
Gross estate – is the value of all the properties, whether real
or personal, tangible or intangible, wherever situated, provided that
in case of a non-resident alien (NRA) decedent, only those properties
located in the Philippines shall form part of the gross estate.
NOTE: Sec. 85 (A) – decedent’s interest (your interest over
the properties at the time of your death)
2) Rental fee of P1M
INCOME TAX SIDE:

Is it income? – Yes
The law expressly provides that if the property inherited is
received as a gift, bequest or devise is realizing income, that income
shall form part of the gross income, and subject to tax.
Subject to tax? – Yes, NIT (Wala sa B, C, D)
ESTATE TAX SIDE:

Included in the gross estate? – No, because you already deceased.
The rental fees now belong to your heirs. Therefore, it is
excluded from the computation of your gross estate.
 What happens if, in the meantime, there is no settlement of estate upon death? But there
is testamentary succession.
Example:
Your father says that the house worth of P10M will be given to you, but there is still
pending settlement of estate.
Is there an income on your side? – None yet

Rental income of P1M of the property forming part of the estate – from the time of
death until it is settled, that is an income taxpayer, treated as an individual.
Thus, the rental income of the properties covering the estate will be
considered as an income taxpayer, and therefore, the income of the estate
prior to settlement will be treated as subject to NIT.
What if it is an inter vivos transfer?
Is it income (house worth of P10M)? – Yes

Subject to income tax? – No, because gifts, bequests, and devises are items of
exclusion from the computation of the gross income of the recipient-donee
Subject to donor’s tax? – Yes, because under Sec. 99, rates of tax cover all transfers
gratuitously made during lifetime with donating intent.
Is the rental fee of P1M income? – Yes

Subject to income tax? – Yes, included
73
TAXATION LAWS I
APPLICATION:
You give a house to the following:
1. Government
Income? – Yes
a. Mortis causa to the government

Subject to income tax? – No, excluded
Subject to estate tax? – No, because it is transfer for public use
b. Inter vivos to the government
Subject to donor’s tax? – No
2. Charitable and religious institutions

a. Mortis causa
Income? – Yes
Subject to estate tax? – No, provided not more than 30% is used for
administration purposes.
b. Inter vivos
Income? – Yes
4. Income exempt from treaty – Sec. 32(B)(5)

- Treaties from part of the law of the land
5. Compensation for injuries/sickness – Sec. 32(B)(4)
Examples:
1) Si X (employee), naputol ang kamay sa trabaho. Si employee ay hihingi ng
reimbursement unang-una sa employer, SSS, PhilHealth, ECC.
a. You have been reimbursed (paid) for actual expenses (hospitalization and
medical expenses) – excluded, kasi pinalitan lang ang ginastos mo (not even
income).
b. You have not been reimbursed (paid), that is why you filed a suit. The court
awarded you actual damages, moral damages, exemplary damages, attorney’s
fees and costs of suit.
i. Actual damages – excluded, as that will be a reimbursement for your
actual injuries sustained
NOTE: result of the incident itself
ii. Moral and exemplary damages – included, because the law provides “all
other kinds of damages; thus, subject to NIT
NOTE: not the actual injury sustained; result of the incident
iii. Attorney’s fees – excluded, it is not even income; it is just a return of
whatever expense you incurred
iv. Costs of suit – excluded, the assumption here is that whatever was
awarded to you is your actual expense
74
TAXATION LAWS I
NOTE: If the award of costs of suit is more than what you actually
incurred as expense, then the excess will be form part of your gross
income, thus, subject to NIT
2) Naputol ang kamay mo, hindi ka makapagtrabaho for 6 months

a. Reimbursement for your loss of earning capacity (nominal damages)
Income? – Yes
Subject to tax? – Yes, included
3) Damage to property (eg. Car – bungguan)

a. Repair for damage worth P50,000
Income? – No
Subject to income tax? – No, because you just reimburse for your actual loss
sustained; therefore, no income at all.
NOTE: While this provision covers only compensation for injuries/sickness, this
does not mean that all other incidents that cover reimbursement for your
damage are included in the gross income and subject to income tax.
BASIC RULE: If you were damaged, and you were reimbursed for the damage,
then whatever you receive is not even income, because that is only
compensation for the injuries sustained.
b. Reimbursed by insurance (Comprehensive Insurance)

Income? – No
Subject to income tax? – No, same reason as the repairs above
6. Retirement Benefits - Sec. 32(B)(6)

a. Government Sector – all retirement benefits are income but excluded, thus, no tax. Even
if the accumulated leave credits were converted into cash, which form part of the
retirement benefits, those are not subject to income tax, as they are excluded by law.
b. Private Sector
1) There is private retirement plan maintained by the employer in accordance with the
provisions of the Labor Code – may be contributory or not
i. Non-contributory Retirement Plan – non-contributory meaning it is not the
employees who contribute. It is only the employer who contributes. And if you
retire, the retirement benefits will be taken from the fund, which does not
form part of the money of the employer.
Requirements to be excluded from gross income:

1. Employee must at least be 50 years of age at the time of retirement
2. Has rendered continuous service with the same employer for 10 years
3. That the private retirement plan approved by the BIR
4. That no part of the fund is used by the employer or any purpose other than
for the benefit of the employee
5. If the employee retires once
2) No private retirement plan maintained by the employer

Requirements to be excluded from gross income:
75
TAXATION LAWS I
1. Employee must be at least 60 years of age

2. Has rendered continuous service for 20 years
3. If the employee retires once
As to the requirement of “employee retires once”

Example:
There is a private retirement plan. Employee rendered continuous
service for 25 years. Upon reaching 50 years of age, he can now retire.
Everything he will get from the retirement plan will be excluded and not
subject to income tax.
Since he was still young, the employer rehired him. He was still 51
years of age. After 10 years, he is already 60 years of age, and he retires again.
The retirement benefits obtained from this second retirement are no longer
excluded, thus taxable
7. Miscellaneous Items – Sec. 32(B)(7)

a. Income derived by foreign government from investments in the Philippines
REASON: International Comity – unwritten rule among all nations not to tax each other
b. Income derived by the government or its political subdivisions
i. From the exercise of governmental functions – excluded
ii. From the exercise of proprietary functions – included, subject to tax
c. Prizes and awards
o Sports competitions sanctioned by the Philippine Sports Commission
Example:
Kay Heidelin, libre lang ang medalya, because that is the prize from a sports
competition sanctioned by the PSC.
Dumating ng Pilipinas, pinangakuan ng mga Senador/Kongreso na bibigayan
siya ng incentives.
Income? – Yes
Subject to income tax? – Yes, included
d. Prizes and awards
o Pursuant to various purposes: religious, charitable, scientific, educational, artistic,
literary, or civic achievement
o Provided that the winner did not actively participate to join the contest and the
winner is not required to render future service. Because if the winner is required to
render future service, that is an advance of the salary, and therefore, everything will
be subject to income tax.
Example:
Pia Wurtzbach nanalo ng Miss Universe. She is subject to tax because she is not
covered by this provision.
e. 13th month pay and other benefits
Other benefits:
i. RA 6686 – GSIS Law
ii. PD 851 – 13th Month Pay (covered)
iii. PD 851 – 13th Month Pay (not covered)
iv. Other benefits such as productivity incentives and Christmas bonus
TOTAL AMOUNT OF EXCLUSION PER YEAR: P82, 000, beginning January 1,

2015; prior to January 1, 2015, the amount is P30,000.
76
TAXATION LAWS I
IN EXCESS OF P82,000 – it will be treated as “Other Benefits”

1. Managerial/Supervisorial Employee – subject to fringe benefit tax at the
rate of 32% based on the gross-up monetary value.
2. Rank-and-file – NIT
3. Minimum Wage Earner – the minimum wage, the holiday pay, hazard pay,
OT pay, NSD pay, and the excess of P82, 000 will be subject to NIT, as he is
treated as a rank-and-file employee
REVIEW OF CONCEPTS
RULES:
1. If the income is subject to FWT, it is no longer subject to deductions because it is taxed at

source and not included in the computation of the gross income.
2. If the income is subject to CWT/EWT, it is still allowed to claim deductions because it is still
included in the computation of gross income.
Examples:
1. Compensation (RC)
a. Within the Philippines – NIT
b. Without the Philippes (naggupit sa US) – NIT
2. Lotto winnings
a. Philippines – Exempt
b. US – NIT
3. Interest on bank deposits
a. Philippines – FWT
b. US – NIT
4. Inheritance
a. Philippines – Excluded
b. US – Excluded
5. Shabu earnings
a. Philippines – NIT
b. US (cocaine earnings) – NIT
6. Sale of house and lot
a. Philippines – CGT
b. US – NIT
7. Royalties
a. Philippines – FWT
77
TAXATION LAWS I
b. US – NIT
NOTE: For those income subject to Philippines’ withholding tax system, habang tinatanggap,
merong CWT.
ITEMS OF DEDUCTIONS
- Applicable only if the income is subject to NIT
Gross Income – Allowable Deductions = Taxable Net Income
Taxable Net Income x %4 = Tax due, less tax credit, if any
Tax due – CWT/EWT (if any) = NIT

APPLICABILITY (please refer to the table):
1. RC (A) - √ deductions
2. NRC (A) - √ deductions
3. RA (A) - √ deductions
4. NRA ETB (A) - √ deductions
5. NRA NETB, who is subject to gross income tax – not allowed to claim deductions
REASON: He is taxed on the gross
NOTE: As far as those B (passive income), C (CGT on sales of shares of stocks), and D (CGT
on sales of real property) are concerned, regardless of any kind of taxpayer, those types of
income are taxed at source. The taxes here are FWT. Meaning, once you received the
income, the tong is withheld and remitted to the BIR. So if the income is subject to FWT, the
concept of deductions is not applicable.
6. DC (A) - √ deductions
7. RFC (A) - √ deductions
NOTE: For the rest of the income of DC and RFC, which is subject to FWT, the concept of
deductions will not apply.
8. NRFC – not allowed to claim deductions

REASON: The tax due is on the gross, and that is final tax.
ITEMS OF DEDUCTION (Sec. 35 of NIRC)
What are the items of deductions?
I. Individual
A. Compensation Income Earner – the tax is NIT

He can claim only the following deductions:
1. Personal exemption (PE)
4 Rates provided by law [Sec. 24 (A)(2)]
78
TAXATION LAWS I
2. Additional exemption (AE)

3. Premiums on health and hospitalization insurance (PHHI) – Sec. 34 (M)
B. Business Income or Business and Compensation Income – the tax is NIT

He can claim only the following deductions:
3. Optional Standard Deduction (OSD)
OR:
3. Itemized deduction (ID) – Sec. 34
C. Estate and Trusts

Their deduction: P20, 000 to be deducted from the income of the estate or trust
II. Corporation
It can claim only the following deductions:
1. Optional Standard Deduction (OSD); OR
2. Itemized Deduction – Sec. 34
Items of deductions
1. Personal Exemption (PE)

o P50, 000, regardless of status
NOTE: The basic assumption in deductions is that you have items of income; otherwise, the
concept of deductions will not apply.
A. Individual taxpayers entitled to PE

a. RC – √
b. NRC – √, if and only if they have income from within the Philippines
c. RA – X
d. NRA ETB – √, Sec. 35(D)
 Subject to reciprocity rule – we will allow a personal exemption in the
amount of P50,000 to a NRA ETB, provided that the candidate which is a
citizen allows the same privilege to Filipino citizens, subject to Philippine
laws.
 Kung sa ibang bansa, ang personal exemption na binibigay sa mga Pilipino
ay P80, 000, ang entitlement laman ng NRA ETB sa Pilipinas ay P50, 000.
Kung sa ibang bansa ay P10, 000 lang, hindi natin bibigyan ng P50,000,
hanggang P10,000 ka lang sa Pilipinas.
e. NRA NETB – X, because they are taxed on the gross
REASON why between RA and a NRA ETB, it is the latter one, which is entitled to
claim personal exemption: There is a possibility that the RA is not earning income in
the Philippines. On the other hand, the NRA ETB is definitely earning income from
the Philippines, thus there will be a tax collection from him. Because of the income
he generates in the Philippines, the Philippines, which receives income in the form
79
TAXATION LAWS I
of tax, then he will be given the privilege. But, if the country where you are a citizen
of, provides for personal exemption only, then you will be entitled to the privilege; if
the other country does not provide, then you will not be entitled to such. Assuming
that the other country gives to a Filipino there, the limit is P50,000 only. If the other
country gives to a Filipino P20,000 only, then he is not entitled to a personal
exemption of P50,000 in the Philippines, but in the amount of P20,000 only. If the
other country gives an mount higher than P50,000, then the limit is P50,000 only.
RULES:
a. Single – no problem
b. It cannot be waived/transferred in favor of another person.
2. Additional Exemption (AE)

o P25,000 per dependent
Qualified dependents for purposes of claiming AE:
a. Children who are not married, not more than 21 years of age, not gainfully employed,
and not living with and dependent for chief upon the parent claiming the additional
exemption
b. PWD child or children, regardless of age, who are incapable of self-support by reason of
physical or mental disability; related by blood
c. Foster child (under the Foster Child Act of 2012) – children, who are under the
supervision of the DSWD, not related by blood, and under your care for 12 months
d. PWD ACT of 2016 – PWD within the 4th degree of relationship by consanguinity,
regardless of age, not gainfully employed and dependent for chief support upon the
taxpayer
e. PWD within the 4th degree of relationship by affinity, not gainfully employed dependent
for chief support upon the taxpayer
NOTE: For letters d and e, it is not necessary that they living with the taxpayer.
NOTE: Senior citizens are no longer qualified.
NOTE: “Dependent for chief support” – the parent provides for the basic needs of the child.
It does not mean, especially for those who are legally separated and those who have
children but without a spouse, that the other parent is not supporting the child. There is
joint support. What is important is that the parent claiming for AE supports the child and
provides for his basic needs, not necessarily to the exclusion of the other parent.
NOTE: If in case of legal separation or annulment of marriage wherein the court awards the
custody, then normally we follow the parent to whom the custody of the child was awarded.
NOTE: “Living with” – substantially, nakatira sa’yo without prejudice to the child visiting
the other parent.
NOTE: For PWDs under letters d and f, the requirement are that they must not be gainfully
employed and dependent for chief support upon the parent. That same premise is
80
TAXATION LAWS I
applicable to letter b. The assumption there is that the PWD child is not capable of
supporting himself, therefore, not gainfully employed.
“Maximum of four (4)” is per pair.
Examples:
1. Boyfriend and girlfriend (in a relationship)

BF – PE of P50,000
GF – PE of P50,000
2. BF/GF, not married, have 1 child. The child lives with the GF and dependent upon here
for chief support, without prejudice to the BF supporting the child and to the child
visiting the BF.
BF – PE of P50,000; AE: O
GF – PE of P50,000; AE of P25,000
3. BF/GF, not married, have 4 children. The 3 children live with the GF and the other child
lives with the BF.
BF – PE of P50,000; AE of P25,000
GF – PE of P50,000 ; AE of P75,000
4. BF/GF, not married, have 5 children. The 4 children live with the GF and the other child
lives with the BF.
BF – PE of P50,000; AE: 0
GF – PE of P50,000 ; AE of P100,000
5. BF/GF, not married, have 8 children. The 4 children live with the GF and the other
children live with the BF.
BF – PE of P50,000; AE: 0
GF – PE of P50,000 ; AE of P100,000
6. In the case of Dolphy, 10 babae inanakan niya, lahat panganay, tig-iisa. Lahat ng bata
nasa mga nanay.
Dolphy – PE of P50,000; AE: 0
Mother – PE of P50,000; AE of P25,000
7. 2 anak sa mga babae, bawat isa. Ang mga panganay na anak ay nasa mga nanay, ang
bunso, lahat nakay Dolphy, thus 10 anak ang nasa kanya.
Dolphy – PE of P50,000; AE of P75,000
Mother – PE of P50,000; AE of P25,000
NOTE: Hindi kailangan na sa 3 anak na pinili ni Dolphy, ang isa sa kanila ay anak ng
isang nanay.
8. Married couple
NOTE: It is the husband who claims additional exemption, on the assumption that he
has income from the Philippines.
81
TAXATION LAWS I
Husband and wife working in the Philippines, they have 4 children.

Husband – PE of P50,000; AE of P100,000
Wife – PE of P50,000; AE: 0
RULES:
a. The only time that the waiver is allowed is if married.
b. There is no need for waiver, in the case of married spouses, if the husband
has no income. Thus, it is the wife who is entitled to AE of P25,000,
maximum of 4 children.
c. If the husband is a NRC (ie. OFW), whose income is purely from outside of
the Philippines, there is nothing to waive. Thus, it is the wife who is entitled
to AE of P25,000, maximum of 4 children.
REASON for the difference of entitlement of AE in numbers 7 and 8: If we allow

Dolphy to get the 4, in the amount of P100,000, in the situation that they are not
married, we are favoring more a relationship that is not married than that married,
which is in violation of our concept that marriage is an inviolable social institution.
9. Wife has a previous marriage with 4 children. She is now a widow. Husband has a
previous marriage with 5 children. He is now a widower. The wife and husband got
married, and they also have 2 children. These 11 children are living with the wife and
the husband.
Husband – PE of P50,000; AE of P100,000
NOTE: The husband and wife have only 2 common children. The husband can claim
AE for his own 2 children, but not the 2 children of his wife in here previous
marriage. Children must be related by blood to the taxpayer.
Wife – PE of P50,000; AE: 0
Question: Can the husband waive in favor of the wife? Yes, only as far as their 2
common children are concerned. Because he cannot waive the AE of his illegitimate
children in favor of his wife, as they are not related to the wife by blood.
10. If the husband died, the wife is now single again.

Wife – PE of P50,000; AE of P100,000 (2 common children and 2 illegitimate children)
3. Optional Standard Deduction (OSD)

o Applicable to both individual and corporate taxpayers
o 40% of gross sales/gross receipts
o Available only if engaged in trade or business (business income)
Optional Standard Deduction (OSD) Itemized Deduction (ID)

- No need for receipts/supporting - There is need for receipts/supporting
documents documents to prove that you have
incurred expenses; otherwise, it will be
disallowed.
82
TAXATION LAWS I
Examples: BIR authorized receipts, contracts (in

writing)
4. Itemized Deduction (ID) – Sec. 34
Requisites of ID:
a. It must be necessary in trade or business.
o It means that it is incurred in the kind of trade or business you are engaged in.
o This is particular to the type of your business.
Examples:
Parlor in the mountains, no electricity – you cannot claim payment for electricity as
deduction
Parlor in the city, with electricity – can claim for deduction
Parlor claiming payment for vinegar as deduction – not allowed
Restaurant claiming payment for vinegar as deduction – allowed
b. It must be actually paid or incurred.

o Accrual basis/accounting method – the term is “incurred”
o Cash bas – the term is “paid”
c. It must be reasonable in amount.

o It is dependent on your business.
Examples:
Parlor with a place of 1 sq. m. and only for 1 customer, with 1 light bulb, without
aircon. You are claiming for an ID of electricity for P20,000 a month.
That is not reasonable.
Parlor in España with place of 100 sq. m. and you are claiming an ID of electricity for
P20,000 a month.
That is not reasonable.
Question: How does the BIR determine the reasonableness of amount?

The BIR has standards and they are aware. But, for purposes of BIR Audit, the BIR
has the power to do every year the tax mapping of establishments within its jurisdiction,
meaning, they do the visit and look into the nature of the business.
NOTE: All the gross income must be for period of 12 months (calendar year/fiscal year).
The allowable deductions must also be for the same 12-month period. So all the
expenses incurred prior to this year for which you are computing or after this year,
cannot be claimed as deduction in the year that you are computing for your taxable
income and tax due. The gross income (revenue side) and allowable deductions
(expense side) must be for the same 12-month period.
NOTE: If you forgot the expenses last year, then that will have no effect because we self-
assessed/self-declared our taxes. So, if you failed to claim any deduction which you
should have been entitled in the past, it will have no effect upon the taxpayer. There is
also no refund allowed. What you should have done is to file an amended return to
83
TAXATION LAWS I
correct it. But if you did not file any amended return, then you can no longer claim
deductions.
Itemized deductions – Sec. 34
Mnemonics: E-I-T-L-B-D-C-P-R
a. Expenses
b. Interests
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Charitable Contributions
h. Premiums on Health and Hospitalization Insurance
i. Research and Development
NOTE: In the income tax system, when you have income, you spend. When you
spend, you create income for others, so on and so forth.
Illustration:
NOTE: Not because it is taxable, it is deductible. Not because it is not taxable, it is not
deductible.
X (employer of a parlor) Y (employee) – Compensation Income Earnr

I. Expenses (Business Expenses)
- Reasonable allowance for expenses in
relation to the trade or business of the
taxpayer
A. Reasonable allowance for salaries and

wages
1. Basic pay to Y 1. Basic pay from X
On the part of X (deductibility) –  On the part of Y (taxability) – income
deduction within; NIT
EXCEPT:
a. Minimum Wage Earner – no tax; no
deduction
b. Managerial/supervisorial employee
– no tax; no deduction
c. Rank and file – no tax; no deduction
Deductions on the part of Y – PE, AE,
PHHI
2. De Minimis Benefit to Y (within the 2. De Minimis Benefit from X (within the

limits limits)
On the part of X –  deduction On the part of Y – income with; but not
subject to tax (all kinds of employees)
84
TAXATION LAWS I
3. Fringe benefits to Y 3. Fringe benefits from X

On the part of X –  deduction, as long as On the part of Y – income within
reasonable in amount a. Managerial/supervisorial employee
– FBT 32% based on the grossed-up
Additional requirement before X can monetary value
claim this as reasonable business b. Minimum Wage Earner - exceeds
expenses: X should prove that he P82,000, subject to NIT
withheld all the withholding taxes and c. Rank and file – exceeds P82,000,
due and all WT had been remitted to the subject to NIT
BIR.
B. Reasonable allowance for utilities

1. X has a parlor PLDT, MERALCO, MWSS 1. Y has a house and pays PLDT, MERALCO,
and Internet MWSS and Internet
On the part of X –  deduction, because On the part of these corporations –
he is entitled to PE, AE, ID (individual) or income; NIT of 30% and deductions of
PE, AE, ID/OSD (corporation) OSD or ID
On the part of Y –  deduction, because

he is entitled only to PE, AE and PHHI
2. X rents a parlor (building and lot) from A 2. Y rents a house from A for P10,000 per
for P15,000 per month month
On the part of A – income within; NIT On the part of A – income within; NIT
On the part of X –  deduction, because On the part of Y –  deduction, because
that is considered as reasonable he is entitled only to PE, AE and PHHI
allowance for rentals (business expense)
3. X tells A that he wants to buy the building 3. Y tells A that he wants to buy the house
and the lot, but he does not have money and the lot, but he does not have money
yet. So they agreed on a “rent to own” yet. So they agreed on a “rent to own”
basis for an amount of P50,000 per basis for an amount of P40,000 per
month. month.
On the part of A – income; NIT On the part of A – income; NIT because it
On the part of X –  deduction is an ordinary asset from the point of
Rule: In reasonable allowance for view of A as it is used for trade or
rentals, for it to be deductible, the business
lessee should not acquire any Subject to VAT? Yes.
interest other than as a mere Rules:
possessor; otherwise, you are VATable transaction – if the
actually incurring a capital properties are held by the taxpayer
expenditure ordinarily for sale/lease to
customers (part of his stocks in
trade) and he sells it
Not VATable transaction – if the
properties are held by the taxpayer
not ordinarily for sale/lease to
customers and he sells it
85
TAXATION LAWS I
On the part of Y –  deduction, because it

is not PE, AE, PHHI
4. X, instead of buying it from A under a 4. Y, instead of buying it from A under a

rent-to-own agreement, a straight sale rent-to-own agreement, a straight sale
paying the amount of P4M paying in the amount of P2M
On the part of A – income; NIT, because On the part of A – income; NIT, because
what is sold is an ordinary asset what is sold is an ordinary asset
On the part of Y –  deduction, because it On the part of Y –  deduction, because it
is in the nature of a capital expenditure is not PE, AE, PHHI
Capital Expenditure – an expense

incurred in purchasing an ordinary asset
or in extending the beneficial or
economic life of an existing asset or in
making good an already existing asset
(ie. Major repairs)
When he incurred a capital expense and

purchased a ordinary asset, the reason
why it is not allowed as a deduction is
that the cash (Peso) is equal to asset. But
whatever is the form, in lieu of the
business expense, you can claim
depreciation of the asset as a deduction.
Depreciation – the value of the property

diminishes due to ordinary wear and
tear
2 modes of deducting depreciation

expense
a. Straight line method – deducted
only once (not allowed in the
Philippines)
b. Distributive Method – you will
divide it by the number of life
span/years of life of the asset
Reasonable years of depreciation:

Tangible Personal Property – 5 yrs
Real Property – 15-25 yrs
5. In the contract of lease (straight lease), 5. In the contract of lease (straight lease),
all major improvement introduced by X to all major improvement introduced by Y to
the building and lot will belong to A after the building and lot will belong to A after
the end of the contract, and the minor the end of the contract, and the minor
improvements will be removed by X. improvements will be removed by Y.
Minor repairs in the amount of P20,000, Minor repairs in the amount of P20,000
86
TAXATION LAWS I
and major repairs in the amount of P500, and major repairs in the amount of P500,
000. 000.
On the part of A – no income, because it On the part of A – no income, because it
did not flow into his wealth or increase did not flow into his wealth or increase
his net worth, even if the contract ended. his net worth, even if the contract ended.
There will only be income if A sold his There will only be income if A sold his
house and lot. The repairs are but mere house and lot. The repairs are but mere
appreciation of value of the property. appreciation of value of the property.
On the part of A –  deduction for major On the part of Y –  deduction, because
and minor repairs and  deduction for the repairs are not PE, AE, PHHI
depreciation, because he did not incur
the expense In the same problem, Y introduced minor
On the part of X –  deduction for minor repairs in the house of A. Can A claim
repairs, because the repairs are business expense and depreciation as
necessary in trade or business, actually deduction? No, because he did not incur
paid or incurred, and reasonable in the expense and the asset, respectively.
amount.
On the part of X –  deduction for major
repairs, because that is capital
expenditure and  deduction for
depreciation, as he incurred the expense
C. Legal and Illegal Expenses

Rules:
Illegitimate expenses, whether the
business is legal or illegal – not
allowed as a deductible business
expense
Legitimate expenses, whether the
business is legal or illegal – allowed as
a deductible business expense
1. X needs a barangay business permit. Nag- 1. Y, nahuli ng police. Nag-bribe ng P200

bribe ng P1,000 kay B kay B.
On the part of B – income within; NIT On the part of B – income within; NIT
On the part of X –  deduction because it On the part of Y –  deduction because it
is an illegitimate expense in a legitimate is not PE, AE, PHHI and it is illegal
business
2. Selling of shabu. X is the manufacturer. He 2. Selling of shabu. Y is a pusher and earns

pays Y a salary of P100,000 as pusher. salary in the amount of P100,000
On the part of X –  deduction because it everyday.
is an legitimate expense in a illegitimate On the part of Y – income; NIT and 
business deduction because he is entitled to PE,
AE, PHHI
D. Other Expenses
1. X bought a pair of gold scissors worth 1. Y bought a pair of gold scissors worth
P100, 000, used in his parlor P50, 000, used in his house
87
TAXATION LAWS I
On the part of seller – income; NIT On the part of seller – income; NIT
On the part of X –  deduction for On the part of Y –  deduction for
business expense because it is a capital business expense and depreciation,
expenditure (tangible personal because he is only entitle to claim PE, AE,
property) but in lieu thereof,  PHHI
deduction for depreciation
E. Marketing Expenses
1. X spent P25, 000 for signage NO MARKETING EXPENSES
On the part of X –  deduction because
it is a marketing expenditure to maintain
the sale, it becomes an asset, therefore, it
is considered a goodwill
2. X spent P5, 000 for flyers and leaflets for

discounts
On the part of X –  deduction because
these are marketing and promotional
expenses for the purpose of increasing
the sales
II. Interest on loans incurred by

taxpayer
1. X obtained a loan from C, in the amount of 1. Y obtained a loan from C, in the amount of
P100,000 with an interest of 10% pa for P100,000 with an interest of 10% pa for
the materials in his parlor. his vacation in Hongkong. Y paid C
On the part of C – income of P10,000 P110,000
(return of capital: P100,000); NIT On the part of C – income of P10,000
On the part of X –  deduction, but not (return of capital: P100,000); NIT
absolute on the P10,000 On the part of X –  deduction because
Except: Tax arbitrage rule – the interest he is not allowed
expense on the part of the taxpayer as a
deduction will be further reduced in an
amount equivalent to 33% of any
interest income from bank deposits of
the taxpayer
Example:
2. X’s interest on loan incurred by him 2. Y obtained a loan from C in the amount of
(expense side) is P10,000, while his P100,000.00 with interest of 10% but
interest on bank deposits (revenue) is such interest was already deducted from
P3,000. the loan obtained. In effect, only
33% of P3,000 = P990 P90,000.00 was extended.
P10,000 – P990 = P8,110 (the only On the part of Y -  a deduction because
amount that will be deducted) it is not PE, AE, PHHI
3. X obtained a loan from C in the amount of
88
TAXATION LAWS I
P100,000.00 with interest of 10% but

such interest was already deducted from
the loan obtained. In effect, only
P90,000.00 was extended.
On the part of X - When interest is paid
in advance, on the part of X when X
borrowed from C, X is allowed to claim
the deduction of 10,000.00 interest
expense only after full payment of the
debt. He will be allowed only to claim the
interest expense as a deduction after full
payment of the interest expense.
III. Bad Debts

1. X borrowed from C, amount of 1. Y borrowed from C, amount of
P100,000.00 with interest of 10%. X did P100,000.00 with interest of 10%. Y did
not pay or failed to pay C. C is the not pay or failed to pay C. C is the
taxpayer. taxpayer.
On the part of C – effect on C is called On the part of C – effect on C is called
“bad debts.” C can claim bad debt from X “bad debts.” C can claim bad debt from Y
in the amount of P110,000.00. in the amount of P110,000.00.
Requisites of a Bad Debt:

a. It must be determined to be
worthless or completely charged-
off;
b. Financial status of the debtor (X or
Y) show the incapacity to pay the
credit;
c. Proof of efforts to collect;
d. Despite efforts to collect, it cannot
be paid because of financial status of
debtor;
e. No need for insolvency proceedings
on the part of X and Y so that C can
claim bad debt.
As compared with Interest Expense:

Kapag bad debts, buong utang na hindi
nabayaran (P110,000.00) provided that
the indebtedness is determined to be
completely charged off or worthless, that
there is proof of efforts to collect, and
despite efforts to collect hindi
mabayaran because the financial status
of the debtor shows incapacity to pay the
loan. No need for insolvency proceedings
on the part of X and Y so that C can claim
bad debt.
89
TAXATION LAWS I
2. C claimed in 2012 a bad debt of 2. C claimed in 2012 a bad debt of

P110,000.00. Such was deducted and P110,000.00. Such was deducted and
approved by BIR, in effect C was benefited. approved by BIR, in effect C was benefited.
In 2020, X went to C offering to pay the In 2020, Y went to C offering to pay the
P110,000.00 because it is now solvent. P110,000.00 because it is now solvent.
On the part of C – Tax Benefit Rule On the part of C – Tax Benefit Rule
Tax Benefit Rule:

It is the effect when subsequent payment
of the bad debt was made when the
creditor has previously claimed the bad
debt as a deduction.
C, who was previously allowed to claim C, who was previously allowed to claim
P110,000.00 as a deduction is now P110,000.00 as a deduction is now
benefited by the subsequent payment. benefited by the subsequent payment.
Therefore C will be required to declare Therefore C will be required to declare
P110,000.00 as part of his gross income in P110,000.00 as part of his gross income in
the year of recovery up to the extent of the year of recovery up to the extent of
any tax benefit when he was previously any tax benefit when he was previously
allowed to claim P110,000.00 as a allowed to claim P110,000.00 as a
deduction. deduction.
When to declare – 2020 When to declare – 2020
IV. Depreciation (refer to illustration in

Expenses)
V. Taxes
1. Y rented from A a house. Agreement in the 1. X rented from A a parlor. Agreement in
contract of lease: “X will shoulder the RPT the contract of lease: “Y will shoulder the
while the contract of lease was ongoing RPT while the contract of lease was
which should have been shouldered by the ongoing which should have been
owner A.“ shouldered by the owner A.“
On the part of A –  Income;  On the part of A –  Income; 
deduction, because he did not incur deduction, because he did not incur
expense expense
On the part of X -  deduction, because it On the part of X -  deduction, he is only
is necessary in his trade or business allowed to claim PE, AE, and PHHI.
forming part of the contract of lease.
2. RPT paid by X was excessive. X asked for 2. RPT paid by Y was excessive. Y asked for
the refund of P1,000.00. Refund pertained the refund of P1,000.00. Refund pertained
to A. to A.
On the part of A -  income because it On the part of A -  income because it
was not A who was paying for the RPT in was not A who was paying for the RPT in
the first place.  income if A paid for the the first place.  income if A paid for the
RPT dahil isinauli lang and kanyang RPT dahil isinauli lang and kanyang
puhunan. puhunan.
90
TAXATION LAWS I
3. Gintong gunting was imported by X. X 3. Gintong gunting was imported by Y. Y

paid for tariffs, customs, and duties in the paid for tariffs, customs, and duties in the
amount of P10,000.00. amount of P10,000.00.
On the part of X -  deductible On the part of Y -  deductible because
he is only allowed PE, AE, and PHHI.
4. X claimed for refund which was approved
and refunded to him. 4. P2,000.00 was refunded to Y.
On the part of X -  income. Tax Benefit On the part of Y -  income because it is
Rule applies. When X claimed just a return of capital.
P10,000.00 as tax expense, and
subsequently the tax is refunded,
according to the Tax Benefit Rule, X will
be required to declare P2,000.00 as part
of his gross income in the year of
recovery up to the extent of tax benefit
he received when he claimed P10,000.00
as a deduction similar to bad debts.
Tax Benefit Rule in Taxes:

a. X claimed for a deduction and was
subsequently refunded to him that
is why he is benefited. When it was
refunded, government said “I-
declare mo ‘yan as part of your
gross income kasi previously
inallow kita to claim as deduction.”
b. Ang allowed lang na iclaim as
deductions for taxes ay taxes
incurred in connection with trade or
business. Percentage tax, donor’s
tax, and capital gains taxes, are taxes
which are consequences of your
transactions, but not taxes incurred
in connection with your trade or
business.
5. It would have been different if A was the

one who paid the RPT, Tax Benefit Rule
will apply. Kung si A ang nabgayad ng
RPT dito at dito, ‘di ba si A can claim tax
as a deduction because A is engaged in
the leasing business eh so pwede niya
iclaim ‘yan. Then subsequently nirefund
sa kanya, Tax Benefit Rule will apply
doon sa RPT.
VI. Losses
Requisites:
a. The loss must be incurred in
91
TAXATION LAWS I
connection with trade or business;

b. It is characterized by suddenness
(biglaang pagkawala);
c. The loss must have arisen out of
theft, robbery, embezzlement, or
any natural calamity (floord,
earthquake, fire, storm); and
d. Not compensated by insurance.
1. Gintong gunting bought by X for 1. Gintong gunting bought by Y for

P100,000.00. P50,000.00.
On the part of X - because this is a capital On the part of Y -  a business expense;
expenditure  claim as depreciation expense because
only allowed to claim PE, AE, and PHHI
2. Mr. N stole gintong gunting from X. ‘Value 2. Mr. N stole gintong gunting from Y. ‘Value
of the gintong gunting when it was stolen of the gintong gunting when it was stolen
was P25,000.00. was P20,000.00.
On the part of N -  income because On the part of N -  income because
income is anything that flows into the income is anything that flows into the
wealth of the taxpayer other than mere wealth of the taxpayer other than mere
return of capital, whether from legal or return of capital, whether from legal or
illegal sources. illegal sources.
On the part of X -  deductible. The On the part of Y -  deductible because
value of the property subject of the only allowed to claim PE, AE, and PHHI.
casualty loss which is P25,000.00 (at the
time of loss), would be the deduction
that can be claimed. If compensated by
insurance, it is as if X did not incur any
loss and therefore he will not be allowed
to claim “L” (loss) as a deduction. It must
be ascertained as unrecoverable and
proof must be presented (eg. Certificate
from Bureau of Fire).
3. Theft happened in 2012. In 2020, N 3. Theft happened in 2012. In 2020, N

returned the gintong gunting but its value returned the gintong gunting but its value
amounted only to P3,000.00. amounted only to P3,000.00.
On the part of X – Tax Benefit Rule On the part of Y -  deductible, because
applies. X will have to declare P3,000.00 that’s just the return of the gintong
(the value of the property at the time of gunting less the ginto.
recovery) as part of the gross income of
X.
Application of Tax Benefit Rule:

a. Bad Debts subsequently refunded
b. Taxes subsequently refunded
c. Casualty Loss subsequently
recovered
92
TAXATION LAWS I
VII. Charitable Contributions

1. X gave P100,000.00 each to various 1. X gave P100,000.00 each to various
institutions: charitable institutions, institutions: charitable institutions,
religious institutions, NSNPEI, and PEI. religious institutions, NSNPEI, and PEI.
On the part of the institutions:  income; On the part of Y -  deductible, because
 subject to tax because gifts, bequest, that is not PE, AE, or PHHI. No effect
and devises are items of exclusion. even if such are priority projects of the
On the part of X – government because they are only
Government: allowed to claim PE, AE, and PHHI.
a. For public purpose; and
b. Priority projects of the Government
Charitable Institutions, Religious
Institutions, and Non-Stock Non-Profit
Educational Institutions:
a. 10% of taxable income prior to
deduction will apply if X is an
individual and 5% will apply if X is a
corporation.
b. 10% or 5% of the taxable income
without the benefit of this
deduction.
c. 10% or 5% not of P100,000.00.
2. If X earned P3,000,000.00 in one year

(gross income) less allowable deductions
of EITLBDPR of P1,000,000.00, the
taxable net income without the benefit of
this deduction is P2,000,000.00.
If X is a person, apply 10% -
P200,000.00.
Allowable deduction - P100,000.00 dahil
mas mababa ang sa taxable net income
prior to this deduction.
3. Gross income is P500,000.00 and

EITLBDPR is P400,000.00.
Taxable net income without the benefit
of this deduction? P100,000.00 x 10% =
P10,000.00 lang ang pwedeng ideduct.
Out of P100,000.00 donated in favor of
these institutions, ang pwede niya lang
iclaim na deduction ay P10,000.00.
Ang may tax benefit lang siya ay
P10,000.00. ‘yung P90,000.00 ibinigay
niya ng kusang-loob nang walang
hinihinging kapalit na wala siyang iniisip
na mababawasan ang kanyang buwis
dahil siya ay nagbigay.
93
TAXATION LAWS I
“Without the benefit of this deduction”

Rationale: When you give out in favor of
these institutions which are favored by
the government because they are tax
exempt, nagiging katulong kasi sila ng
gobyerno sa social issues at concerns.
Kaya ‘yan ay binigyan ng tax exemptions
ng gobyerno because of the benefit or
help they extend to the government na
dapat ang gobyerno ang nagspend. Itong
mga institusyong ito ay nagbibigay ng
serbisyo na dapat ang gobyerno ang
nagpprovide (social services). So dahil
ito ay nagbibigay ng serbisyo sa ating
komunidad, sabi ng gobyerno sa Sec. 30,
“Ieexempt ko kayo sa tax.” So that is one
benefit to them. So ikaw naman, kapag
nagbigay ka sa kanila, you are also
contributing part of your income from
business to the social causes of the
government that is why the government
recognizes your volunteerism doon sa
causes ng gobyerno kaya ang kapalit
noon ay ‘yung deduction. Pero hindi
pwedeng lahat ay iclaim mo as
deduction. Sabi ng gobyerno, “Oo,
nirerecognize namin ‘yung pagiging
mabait mo at pagtulong sa gobyerno.
Pero hindi lahat, may hangganan. Ang
hangganan ay 10% (kung ikaw ay tao)
ng iyong taxable net income without the
benefit of this deduction. Otherwise,
gagawin ‘yan ng lahat ng tao at ng
korporasyon na magdonate para
maavoid ang tax. Eh nakatulong ka nga
sa gobyerno, nawalan naman ng kita ang
gobyerno dahil wala ka namang tax na
babayaran. Hindi pwede. Balansehin
natin, we recongnize the help you are
extending to us by giving you the tax
benefit but only up to 10% or 5% of the
taxable net income prior to this
deduction. Not 10% of your gift, but the
taxable net income. Because ang
assumption doon ay dito ko kinuha
‘yung donasyon ko kaya ‘yan dapat ang
basis, ‘yung business ko. Hindi rin
naman pwede na lahat iddeduct ninyo
94
TAXATION LAWS I
dahil mawawalan ako ng kita. If I allow

you to claim P100,000.00 regardless of
tao or korporasyon, ang laking
mababawas sa kita ng gobyerno in the
form of tax collection. So we need a
balance. I’ll give you the benefit in
recognition of the help you extend to the
government but it cannot be in full. But if
you give in favor of the government, you
are also helping me shoulder my
expenses, it is but proper that I give you
100% deduction.’Di ba kapag nagbigay
ka sa gobyerno priority projects, 100%
deduction. Pero kapag sa iba may limit.
Pero kapag sa PEI, wala ka nang
deduction.
Rules:
a. Government – full (public
purpose/priority projects)
b. CI, RI, NSNPEI – limited
c. PEI – none
VIII. Premiums on Health and

Hospitalization Insurance
1. X, as an employer, obtained a life 1. Y took a life insurance insuring his own
insurance insunring the life of Y. life. P5,000.00 was paid for premium.
P5,000.00 was paid for premium. Proceeds, P1,000,000.00 plus 10%
Proceeds, P1,000,000.00 plus 10% interest. Y dies.
interest. Y dies. On the part of Y -  deduction because
On the part of X -  deduction. (Sec. 36, premiums on health and/or
par. A, no. 4). X, (employer) insuring the hospitalization insurance ang allowed.
life of his employee where directly or
indirectly the beneficiary is the
employer or his business, never allowed
as a deduction from business income of
X.
2. Y dies and proceeds go to X. 2. Y dies, proceeds go to the beneficiaries of

On the part of X -  income; excluded; Y.
10% interest included and NIT will be On the part of the beneficiaries - 
imposed. income; excluded (Sec. 32, par. B, no. 1);
10% interest included (Sec. 32, par. B,
no. 1) and NIT will be imposed.
3. Y obtained an accident insurance and 3. Y obtained an accident insurance and

paid P10,000.00 for health card. paid P10,000.00 for health card.
On the part of Y -  deductible only to On the part of Y -  deductible but only
the extent of P2,400.00 per year and up to the extent of P2,400.00 and
95
TAXATION LAWS I
provided that the gross annual income of provided that the gross annual income of
X does not exceed P250,000.00. Y does not exceed P250,000.00.
4. Naaksidente at naputol ang kamay, 4. Naaksidente at naputol ang kamay,

nireimburse ng P100,000.00 si X nireimburse ng P50,000.00 si Y
On the part of X -  income because that’s On the part of Y -  income because that’s
just for the putol na kamay just a reimbursement for the putol na
kamay
5. Nagdemanda dahil ayaw bayaran ang 5. Nagdemanda dahil ayaw bayaran ang
insurance. Nag-award P100,000.00 plus insurance. Nag-award P50,000.00 plus
moral damages, exemplary damages, moral damages, exemplary damages,
attornery’s fees, costs of suit. attornery’s fees, costs of suit.
On the part of X -  income; subject to On the part of Y -  income; subject to
tax; NIT. As to attorney’s fees and costs tax; NIT. As to attorney’s fees and costs
of suit not in excess of actual expense -  of suit not in excess of actual expense - 
income; no tax. income; no tax.
IX. Research and Development

1. Si X nagpagawa ng feasibility study, 1. Si Y nagpagawa ng feasibility study,
paano mababawasan ang kuryente binayaran si N. Kung paano mababwasan
binayaran ng P5,000.00. ang kuryente ng bahay na nirerentahan
On the part of X -  income.  niya kay A. Binayaran niya ng P5,000.00.
deductible because not PE, AE, or PHHI. On the part of Y -  income; subject to
tax; NIT.  deductible because not PE,
AE, or PHHI.
2. Si X nagpagawa ng feasibility study 2. Nagpagawa ng feasibility study si Y kung

paano magiging balut ang itlog ng pugo. paano magiging balut ang itlog ng pugo.
Bayad P2,000.00. On the part of Y -  income; subject to
On the part of Y -  income.  deductible tax; NIT.  deductible because not PE,
because not related to the trade or AE, or PHHI.
business of X.
Basic Requirements of EITLBDCPR:
1. Necessary or related in trade or business;

2. Actually paid or incurred; and
3. Reasonable in amount.
ITEMS OF EXPENSES NOT ALLOWED AS DEDUCTIONS (Sec. 36 of NIRC)
1. Personal, living , and family expenses;

o Bakit? Binigyan ko na kayo ng P50,000.00 at P35,000.00 bawat anak ninyo which is
supposed to cover personal, living, and family expenses.
o Ex. Renta, tubig, kuryente, bawang, sibuyas, suka, ulam, sapatos, t-shirt.
2. Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate;
96
TAXATION LAWS I
3. Any amount expended in restoring property in making goof the exhaustion thereof for
which an allowance is or has been made; and
o 2 and 3 Expenses for Major Repairs in making in an already existing asset.
o In the nature of capital expenditures but in lieu thereof you may clam (if engaged in
trade or business), depreciation expense
o Nos. 2 and 3 of Sec. 36, par. A pertains to repairs which are capital expenditures
4. Premium paid on the life insurance taken by the employer over the life of his employee
whether directly or indirectly the beneficiary is himself or his business.
NOTE: Among individual and corporate taxpayers, only a RC and DC are subject to tax for income
within or without. Lahat ng income nila na within and without na nasa bag ko kanina, entitled to
deductions. But if you are a NRC, you are subject to tax only if for income within. If NRC, RA,
NRAETB, and RFC,
 RC and DC (within and without) = all deductions applicable (EITLBDCPR)

 NRC, RA, NRAETB, and RFC (subject to NIT from income derived from Philippines sources),
assumption is that they may have income from outside = allowable deductions are only
those directly pertaining to income derived from Philippines sources. Any expense not
directly attributable to income derived from Philippine sources will never be allowed as a
deduction.
o If you cannot directly attribute, meaning hindi mo talaga siya masabi na ang expense ay
doon lang galing sa Pilipinas, the law allows allocation. In proportion to the income
derived from Philippine sources.
o Lahat lang ng nandito ang taxable. Kaya ‘yung expense side niya, lahat ng ginastos mo
lang din sa Pilipinas. But there are expenses that we cannot directly attribute in full. Agn
ginagawa ng BIR, they allow allocation. In proportion to the income derived from
Philippine sources.
o If NRC has no income from within, no deductions will be allowed from income outside
Philippine sources.
97

Tax Transcription Complete Lumbera PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax Transcription Complete Lumbera PDF

Uploaded by

Copyright:

Available Formats

TAXATION LAWS I

ATTY. RIZALINA LUMBERA

I. NATIONAL INTERNAL REVENUE CODE (NIRC)

NIRC is supplemented by various BIR issuances in the form of:

These are only specific to the BIR.

NIRC is supplemented by revenue regulations issued by BIR pursuant to the power of

II. LOCAL GOVERNMENT CODE OF 1991 (LGC)

- We use this in Administration Law and Public Corporation

III. TARIFF AND CUSTOMS CODE (TCC)

AGENCIES IMPLEMETING TAX LAWS

1. BUREAU OF INTERNAL REVENUE (Under the Department of Finance)

For the LGC:

1. Local Sanggunian, from barangay, to municipality, to city, to province

For the TCC:

In such agencies, we have additional government units involved in tax:

1. DOF (under BIR and BOC)

What is the most important purpose of levying of tax?

Taxes are enforced proportional contributions.

It must be a sound tax system (FAT)

Progressive System of Tax

- Depends on the capacity of taxpayer to pay

CONSTITUTIONAL AND INHERENT LIMITATIONS

1. Due Process Clause (Art. III, Sec. 1)

- Taxes are properties of taxpayers; these are our money.

2. Equal Protection Clause (Art. III, Sec. 1)

- Does it allow classification among taxpayers?

When is there a valid classification?

1. Classification is germane to the purpose of the law

These are the requirements of the Equal Protection Clause.

When is there a valid classification among taxpayers?

3. Non-Impairment Clause (Art. III, Sec. 10)

No law impairing the obligation of contracts shall be passed.

1. Unilateral – non-impairment clause can never be applied because tax

= ABSOLUTE MAJORITY (50% +1 OF BOTH HOUSES) VOTING SEPARATELY

- Product: LGC of 1991

The Supreme Court shall have the following powers:

No person shall be imprisoned for non-payment of debt or poll tax.

 Poll Tax – residence tax (cedula)

9. Institutions not subject to tax (Art. VI, Sec. 28, no. 3)

x x x (3) Charitable institutions, churches and parsonages or covenants appurtenant thereto,

Institutions covered by the Constitution:

a. Charitable Institutions, includes charitable hospitals (CI)

Charitable Institutions vs. Proprietary Hospitals and Proprietary Educational Institutions

There is a need for Tax Exemption Certificate (TEC) issued.

Charitable institutions, churches and parsonages or covenants appurtenant thereto,

Ano ang meron sa CI/RI para maexempt sila?

- Must be incorporated as a NSNPI.

What are the usual characteristics of NSNPI?

1. It is governed or managed by Board of Trustees (BOT), no Board of Directors.

Is the exemption automatic?

1. Operational Test – institution is actually operating pursuant to the primary purpose in

2. Organizational Test – institution must actually be organized as a NSNPI.

CI ADE Charitable Exempt from

Anong klaseng tax exempt?

“Actually, directly, and exclusively used”

Here is a home for the aged:

Kitchen Recreational Area

Office Parking Lot Garden

All portions of CI are exempt from payment of RPT

1. Constitution: Art. VI, Sec. 28, no. 3

‘Yung NIRC ba inaapply natin ‘pag RPT

- Hindi, kasi National Internal Revenue Code.

Kitchen Recreational Area