INCOME TAXATION

I. INTRODUCTION
a. Income tax systems

1. Global Tax System – (prevailing until 1981 with maximum rate of 70% applied on net income of individuals)
 the total allowable deductions as well as the personal and additional exemptions in case of individuals,
or
 the total allowable deductions in case of corporations
are deducted from the gross income (sum of all items of taxable income, profit and gain) to arrive at the
net taxable income subject to the graduated income tax rates ranging from 3 to 70% in case of
individuals, or the two tiered income tax rates of 25-35% in the case of corporations
 all items of gross income, deductions, and personal and additional exemptions, if any, were declared in
one income tax return, and one set of tax rates were applied on the net taxable income.
 Formula : p.3
 Congress believes that the global tax system will ensure that the burden of taxation is distributed in
accordance with the tax payers ability to pay and is in keeping with the mandate that Congress shall
evolve a progressive system of taxation.

2. Schedular tax system: adopted by virtue of BP 135 – there are different types of incomes that are subjet to
different sets of graduated or flat income tax rates.
 The applicable tax rates will depend on the classification of the taxable income and the basis could be
gross income (without deductions) or net income (gross income – allowable deductions)
 Separate income tax return or capital gains tax return whichever is applicable is filed by the recipient of
income for the particular types of incomes received,
 but no income tax return is filed by the recipient of passive income subject to final withholding tax
because the withholding agent is primarily responsible for the filing of the withholding tax return and the
payment of final tax to the BIR on such income.
 Several ways of imposing final income tax on certain incomes subject to final withholding tax
o A. Tax base is consideration of fair market value at the time of sale, whichever is higher
o B. Tax base is net capital gain (gross selling price or FMV, whichever is higher, less cost or
adjusted basis)
o C. Tax base is gross income (without any deduction’)

3. Semi scheduler or semi global system: all compensation income, business or professional income, capital
gain, passive income, and other income not subject to final tax are added together to arrive at the gross
income, and after deducting the sum of allowable deductions from business or professional income, capital
gain and passive income, and other income not subject to final tax, in the case of a corporation, as well as
personal and additional exemptions, in the case of individual taxpayer, the taxable income (gross less
allowable deductions and exemptions) is subjected to one set of graduated tax rates (if an individual) or
normal corporate income tax rate (corporation.)
 With respect to the above incomes not subject to final withholding tax, the computation of income tax is
“global”
 However passive investment incomes subject to final tax and capital gains from sale or transfer of
shares of stock of a domestic corporation and real properties remain subject to different sets of tax
rates and covered by different tax returns.
 On july 1 1986 the Ph thru EO 37 adopted the semi schedular or semi global tax system and reduced
the range of graduated tax rates applied on the net taxable income of self employed and professionals
from 5 – 60 to 0 – 35% but increased the preferential tax rates on capital gains and passive investment
incomes.
 On Jan 1 1988 the Congress enacted RA 8424 which introduced some structural and administrative
reforms; this law retains the semi schedular or semi global features of the existing tax system with

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 some refinements. The number of tax brackets was reduced from ten to six, tax rates were made in
multiples of five , and the max rate of tax was reduced by 1% every year.

B. FEATURES OF THE PHILIPPINE INCOME TAX LAW (Income tax is a . . . )

1. Direct Tax: income is a direct tax because the tax burden is borne by the income of the recipient upon
whom the tax is imposed. It is a tax demanded from the very person who it is intended or desired; while
indirect tax is a tax demanded in the first instance from one person in the expectation /intention that he
can shift the burden to someone else.

2. Progressive tax: the tax base increases as the tax rate increases; it is founded on the ability to pay
principle

3. Comprehensive : by adopting the citizenship principle, the residence principle, and the source
principle. Any one of the 3 principles is enough to justify the imposition of income tax on the income of a
resident citizen and domestic corp that are taxed on a world wide income.

4. the Ph follows the semi schedular or semi global system of income taxation; although certain passive
investment incomes, capital gains on sale of shares of stock of domestic corps and RPT located in Ph
and other incomes are subject to final taxes at preferential tax rates.

C. CRITERIA IN IMPOSING PH INCOME TAX

1. Citizenship principle: a citizen of the PH is subject ot Ph income tax

(a) on his worldwide income if he resides in the phils or
(b) only his Ph source income if he qualifies as a non resident citizen; hence his foreign source income
shall be exempt from Philippine income tax

2. Residence or Domicile principle : an alien is subject to Ph income tax because of his residence in the PH;
but only his income from sources within the Ph is taxable, if source is outside PH – exempt.

3. Source principle: an alien is subject to Ph income tax because he derives income from sources within the
Ph. Thus a non resident alien NRA or a Non resident foreign corp is liable only to pay Ph income tax on
income from sources within the Ph (ex: dividend, interest , rent or royalty)
(mamalateo) Importance of knowing the type or character of income

 the ph has adopted the semi global or semi schedular tax system: under this tax system, compensation
income, business /professional income, capital gains, passive investment income and other income not
subhect to final income tax are added together to arrive at the amount of gross income of an individual,
and after deducting the allowable deductions from business/professional income, capital gains and
passive investment income ,.and other income not subject to final income tax as well as personal and
additional exemptions, the graduated income tax rates ranging from 5% to 32% are applied on the
resulting net taxable income to arrive at the income tax due and payable.
 The passive investment incomes are generally subject to final withholding tax; hence, the income
recipient does not file a tax return covering such passive investment incomes, although the withholding
agent/payor of income is held responsible under the law to deduct, withhold and remit the final income
tax thereon to the BIR.
 Capital assets subject to the final capital gains tax such as shares of stock of a domestic corporation
and real property , except when sold or transferred by a dealer in securities or real estate dealer are
covered by the capital gains tax return, hence, not included in the taxable income of the taxpayer which
is subject to the graduated income tax rates (if indiv) or fixed rate (30%) if a corp/
 Type of character of income is necessary:
◦ To determine whether the income is considered as active business or professional income, or
capital gain or passive income not subject to final tax at preferential rates or other income subject to
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 the graduated income tax rates (if ind) or normal corporate income tax if a corp, for which
deductions for gross income is allowed , or a passive income or capital gain subject to final tax or
compensation income for which no deductions for gross income are authorized
◦ To know the particular scheduar income tax system that will apply to the income - whether income
is subject to gross or net income tax, or whether it is liable to final or creditable withholding tax
◦ To evaluate legal ways to recover investments of a the investor
◦ To determine the period such income must be reported for income tax purposes(cash method or
accrual). However advance rentals are required to be reported for tax purposes in the year of
receipt , although the lessor regularly computes his income based on the accrual method
◦ To use the proper income tax return and file it within the time specified by law or the regulations and
pay the correct type of income tax due

D. Types of Philippine Income tax p.9

 when a person sells real property classified as capital asset located in the Ph and pays 6% capital
gains tax, he will no longer have to declare his gain from such sale and pay the ordinary income tax
based on his net taxable income during the year! Only one type of income tax shall be paid on the
transaction.
 the BIR considers the 3% tax paid to the national government out of the 5% final tax imposed under RA
7916 on enterprises registered with the PEZA and under RA 7227 on enterprises registered with
Freeport zones like Subic Bay metropolitan authority, clark devt authority etc, as income tax creditable

E. TAXABLE PERIOD

1. Calendar Year

SEC22 (P) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar
year, upon the basis of which the net income is computed under this Title.

2. Fiscal Year

SEC 22 (Q) The term "fiscal year" means an accounting period of twelve (12) months ending on the last day of
any month other than December.

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has
been so employed, or if the method employed does not clearly reflect the income, the computation shall be
made in accordance with such method as in the opinion of the

Commissioner clearly reflects the income.

If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the
taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the
taxable income shall be computed on the basis of the calendar year. cralaw

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different
period.
In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable
period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly
includible in respect of such period or a prior period.

SEC. 46. Change of Accounting Period.

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If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from
calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the
Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section
47.

3. Short Period

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. -
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an
individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year
to calendar year, a separate final or adjustment return shall be made for the period between the close of the
last fiscal year for which return was made and the following December 31.
If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the
period between the close of the last calendar year for which return was made and the date designated as the
close of the fiscal year.

If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made
for the period between the close of the former fiscal year and the date designated as the close of the new fiscal
year.

(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under
Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final
or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be
computed on the basis of the period for which separate final or adjustment return is made.

II. CONCEPT OF INCOME

A. Income tax defined.

INCOME TAX : has been defined as a tax on all yearly profits arising from property, professions, trades or as a
tax in a person’s income, emoluments, profits and the like (Fisher vs Trinidad)

Income tax is a direct tax on actual or presumed income (gross or net) of taxpayers during the taxable year. A
final income tax may also be imposed in certain one time transactions like the sale of real property classified as
capital asset.

The general rule is that income tax applies only when income, profit, or gain is realized or received 39B
Except when real property classified as a capital asset is sold by a taxpayer in which case the law presumes
that there is a capital gain realized from the sale, and the basis for computing the 6% capital gains tax is the
gross SP or FMV as determine by the Commissioner whichever is higher 24D(1)
Also when list of shares of stocks of a domestic corporation are traded in local stock exchange, the law
imposes 1/2 of 1% tax which is based on the GSP without deducting costs.

Capital asset: the real property classified as a capital asset must not be a principal residence of an individual
taxpayer, because it is exempt from income tax upon satisfaction of certain conditions

CASES:
MADRIGAL v. RAFFERTY (1918)
FACTS:
 Vicente Madrigal and Susana Paterno were legally married prior to Jan 1, 1914. The marriage was
contracted under the law concerning conjugal partnerships (sociedad de gananciales)
 Madrigal filed a sworn declaration with the CIR his total net income for year 1914 (around P296k).
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 Subsequently, he submitted a claim that the P296k did not represent his income but was in fact the
income of the conjugal partnership and that in assessing the additional income tax provided by the
Income Tax Law, the income declared by Madrigal should be divided into two equal parts, ½
considered the income of Madrigal and the other 1/2 of his wife.
 The Atty-General agreed with Madrigal. However, the revenue officers were unsatisfied, they forward
the opinion to the US Treasury Dept. The US Commissioner of Internal Revenue (from the US
Treasury) reversed the Atty-Gen.
 Madrigal paid under protest, and since the CIR decided against Madrigal’s claim, Madrigal filed an
action in the CFI:  alleged to have been wrongfully collected by the CIR under the provisions of the
Income Tax Law.
o He claims: if the income tax for the year 1914 had been correctly computed, what was payable
by each would have been around P2,921 so together, P5,842 instead of P9,668
 Answer of CIR: Explanation of the assessment.
o The income of the spouses was made up of 3 items: (1) P362,407, the profits made by Madrigal
in his coal and shipping business; (2) P4,086, the profits made by the wife in her embroidery
business; (3) P16,687, the profits made by Madrigal in a pawnshop.
o These total to P383,181 (the gross income of the spouses). General deductions were claimed in
the sum of P86,879.
o The resulting net income was P296,302. For the purpose of assessing the normal tax of 1%,
there were allowed specific deductions: (1) P16,687, the tax which was to be paid at source,
and (2) P8,000, the specific exemption granted to the spouses.
o The remainder, P271,614, was the sum upon which the normal tax of 1% was assessed. The
normal tax thus arrived at was P2,716.

ISSUES/HELD: Should the additional income tax be divided into 2 equal parts because of the existing conjugal
partnership? --- NO, wife only has an inchoate right to the conjugal partnership

RATIO:

CIR argument: the taxes imposed by the Income Tax Law are taxes upon income tax and NOT upon capital
and property; that the fact that Madrigal was a married man, and his marriage contracted under conjugal
partnership, has no bearing on income considered as income, and that distinction must be drawn between the
ordinary form of commercial partnership and the conjugal partnership of spouses

SC first discusses the history of the Income Tax Law in the Phils:
 The Income Tax Law of the US, extended to the Phil Islands, is the result of an effect of the legislators
to put into statutory form this canon of taxation and of social reform. The aim was to mitigate the evils
arising from inequalities of wealth by a progressive scheme of taxation, which places the burden
on those best able to pay. With these exceptions, the income tax is supposed to reach the earnings of
the entire non-governmental property of the country. Such is the background of the Income Tax Law.
 The Income Tax Law was drafted by the US Congress. Being a law of American origin and being
peculiarly intricate in its provisions, the authoritative decision of the official who is charged with
enforcing it has peculiar force for the Phils.(referring to the US Treasury Dept)
 It is a well-settled rule that great weight should be given to the construction placed upon a revenue
law, whose meaning is doubtful, by the department charged with its execution. (referring to the US
Treasury Dept; see last part of digest)

SC then discusses the test to contrast “income” with “property/capital” (I think because later the SC will apply
this distinction to answer the interest of the wife in the conjugal partnership)
 The essential difference is that capital is a fund; income is a flow.
 A fund of property existing at an instant of time is called capital. A flow of services rendered by that
capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to
such fund through a period of time is called an income.

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  Capital is wealth, while income is the service of wealth.
 “Property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit.”
(Georgia SC)

Then the SC looked into the regulation governing returns by the spouses and the law governing conjugal
partnership:
 Regulation of the US Treasury Dept for spouses living together:
o Each person of lawful age having a net income of $3,000. or over, shall make a return; that from
the net income shown there shall be deducted $3,000 where the person making the return is a
single person, or married and not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that where the husband and wife both
make returns (they live together), the amount of deduction shall not exceed $4,000.
o The husband, as the head and legal representative of the household and general custodian of
its income, should make and render the return of the aggregate income of himself and wife
o If the aggregate net income of both exceeds $4,000, an annual return of their combined
incomes must be made, although neither one separately has an income of $3,000 per annum.
They are jointly and separately liable for such return and for the payment of the tax.

 Civil Code (conjugal partnership provisions)

o Prior to the liquidation of the conjugal property, the interest of the wife is an interest inchoate,
a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen
into title until there appears that there are assets in the community as a result of the liquidation
and settlement.

Applying the Civil Code in this case, the wife has an inchoate right in the property of her husband during
the life of the conjugal partnership.
 She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as
income after such income has become capital. (I think this is the reason why SC distinguished
between income and capital. Wife has interest in the property acquired after it has already become
capital, and not income)
 The wife has NO absolute right to 1/2 the income of the conjugal partnership. And so, she cannot make
a separate return in order to receive the benefit of the exemption which would arise by reason of the
additional tax.
 As she has no estate and income, entirely distinct from her husband's property, the income cannot
properly be considered the separate income of the wife for the purposes of the additional tax.

Re: ordinary partnership distinguished from conjugal partnership

 The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership.
 The husband and wife are only entitled to the exemption of P8,000 specifically granted by the law.
 The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially
defeated by reliance on Civil Code provisions dealing with the conjugal partnership and having no
application to the Income Tax Law.

Petition denied (judgment affirmed)

-----others-----

Re: decision of the US Treasury Dept (The correspondence between the Atty General and the US Treasurey
Dept Acting Commissioner was quoted.)
 After narrating the facts, the commissioner said that the application for refund was properly
rejected.
 The separate estate of a married woman within the contemplation of the Income Tax Law is that which
belongs to her solely and separate from her husband, and over which her husband has no right in
equity. It may consist of lands or chattels.
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  The only occasion for a wife making a return is where she has income from a separate estate in excess
of $3,000, but together they have an income in excess of $4,000. In this case, either the husband or
wife may make the return but not both.
 In all instances the income of husband and wife whether from separate estates or not, is taken as a
whole for the purpose of the normal tax.
 While the incomes are added together for the purpose of the normal tax, they are taken separately for
the purpose of the additional tax.
In this case, however, the wife has no separate income within the contemplation of the Income Tax Law.

FISHER v TRINIDAD (Collector of Internal Revenue)1

Oct. 30, 1922
Johnson

In 1919, Philippine American Drug Company was organized. Fisher was a stockholder.
 The company, as a result of its business for the year, declared a “stock dividend” and Fisher’s
proportionate share was P24, 800.
 In March 1920, the Collector demanded and Fisher paid under protest, the sum of P889.91 as income
tax on said stock dividend.
 Fisher filed an action to recover the amount paid. The collector demurred; demurrer was sustained by
the lower court so Fisher appealed.
Fisher cited and relied on US SC decisions that “stock dividends” were capital and not an “income” and not
subject to the income tax law.

Issue: WON “stock dividends” are income and taxable as such under Sec 25 of Act 2833. – NO. What is
taxable is income of the corporation – not an increase in the value of capital assets. If the holder of the
stock dividend is required to pay an income tax on the same, the result would be that he has paid a tax upon
an income which he never received. Such a conclusion is absolutely contradictory to the idea of an income. An
income subject to taxation under the law must be an actual income and not a promised or prospective
income.

Ratio:
1. Collector Trinidad argues: The US statute providing for tax upon stock dividends is different from the
Philippines and the US SC decisions should not be followed in interpreting the statute in force here.

Chapter 463, sec 2 of the US act of Act no 2833, sec 25

Congress
The term "dividends" as used in this title The term "dividends" as used in this Law shall
shall be held to mean any distribution made be held to mean any distribution made or
or ordered to be made by a corporation… ordered to be made by a corporation… out of
which stock dividend shall be considered its earnings or profits accrued since March
income, to the amount of its cash value. first, nineteen hundred and thirteen, and
payable to its shareholders, whether in cash or
in stock of the corporation, …Stock dividend
shall be considered income, to the amount of

1 DISSENT JOHNS: The Legislature had the power to define the meaning of the words, did define them, and it is the duty of the courts to follow and adopt the meaning and definition of
the words given to them in the legislative act.
As pointed out in the opinion of Mr. Justice Street, the constitutional limitations upon the legislative power for taxation purposes, which exist in the United States, does not exist in
the Philippine Islands. There is no organic law here similar to the provisions of the Constitution of the United States which require direct taxes on property to be levied in a
specific way, in other words, the restrictions and limitations placed on the power to levy an income tax under the Constitution of the United States do not exist in the Philippine
Islands. Hence, it must follow that the authorities cited in the majority opinion are not in point the instant case. They are founded upon different language, different organic powers,
different conditions, and the different meaning of the same words as defined in the different legislative acts. The Philippine Legislature had a legal right to define the meaning of the words
"dividend" and "income," and it expressly says "Stock dividend shall be considered income, to the amount of the earnings or profits distributed." In the instant case, the earnings and
profits of the corporation were distributed among the existing stockholders of the company upon a pro rata basis, and they were made exclusively out of "distributed earnings and profits."
The declaring of the dividend was a matter in the sole discretion of the stockholders, but when such a dividend is made from and out of "earnings or profits distributed," it then
becomes and is an income within the meaning of Act No. 2833, and should be subject to an income tax.

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 the earnings or profits distributed.

The writer of the law of the Philippines must have had before him the statute of the US. No important argument
can be based upon the slight difference in the wording.

2. Trinidad argues: There are no constitutional limitations upon the power of the Philippine Legislature such as
exist in the US

HELD: Yes the legislature may provide for the payment of an income tax, but it cannot under the guise of an
income tax, collect a tax on property which is not an “income”.
 A statute expressly adopted for one purpose cannot, without amendment, be applied to another
purpose which is entirely distinct and different

What are “stock dividends”?

Stock dividends represent undistributed increase in the capital of corporation or firms for a particular
period. They are used to show the increased interest or proportional share in the capital of each stockholder.
 The inventory of the property of the corporation for a particular period shows an increase in its capital,
the stock issued shows the increase in actual capital, or property, or assets of the corporation.
ILLUSTRATION:
A and B form a corporation to open a drugstore. Each contributes P1000 as assets invested in drugs to
be sold in the store. They are issued P1000 shares of stock each. At the end of the year, the inventory
of the assets showed that it had P4000. This was all used to buy new supplies and neither stockholder
received a centavo. They agree to increase the capital issued and for that purpose, issue additional
stock in the form of “stock dividends” of P1000 each, which represents the actual increase of the
shares or interest in the business.

Income, defined
New Standard Dictionary: the amount of money coming to a person or corporation within a specified time
whether as payment for services, interest or profit from investment
Webster’s: the receipts, salary; especially, the annual receipts of a private person or corporation from property
Black’s Law Dictionary: the return in money from one's business, labor, or capital invested; gains, profit or
private revenue." "An income tax is a tax on the yearly profits arising from property, professions, trades, and
offices."

Stock dividends not income

When a corporation issues “stock dividends”, it shows that the company’s profits have been capitalized,
instead of distributed to the stockholders. The stockholder has received nothing out of the company’s assets
for his separate use and benefit.
 The stockholder by virtue of the stock dividend received nothing that answers the definition of an
income.
 The stock dividend is nothing but a representation of his increased interest in the capital of the
corporation.
Distinction between extraordinary cash dividend and stock dividends

Extraordinary Cash dividend Stock Dividend

Disbursement of the accumulated earnings,
the corporation at once parts with all interest
therein
absolute property of the stockholders
INCOME
No disbursement; corporation does not part
with anything to stockholders
Property of the corporation
CAPITAL/ ASSET

Income received as dividends is taxable as an income but an income from "dividends" is a very
different thing from receipt of a "stock dividend."

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The Legislature, when it provided for an "income tax," intended to tax only the "income" of corporations,
firms or individuals, as that term is generally used in its common acceptation; that is that the income means
money received, coming to a person or corporation for services, interest, or profit from investments.
 We do not believe that the Legislature intended that a mere increase in the value of the capital or
assets of a corporation, firm, or individual, should be taxed as "income." Such property can be reached
under the ordinary from of taxation. Lower court judgment reversed.

B. WHEN IS INCOME TAXABLE

Mamalateo: Income, gain, or profit is subject to income tax when the following conditions are present

1. There is income, gain or profit

2. The income , gain or profit is received or realized during the taxable year and
3. The income, gain or profit is not exempt from income tax.

1. Existence of income: applies only when there is income gain or profit.

 Income – means all wealth that flows into the taxpayer other than as a mere return of capital.
 an amount of money coming to a person or copr within a specified time whether as payment fr services,
interest, profit from investment
 unless otherwise specified, it means cash or its equivalent; also the fruit of one’s labor

2. Realization of income: (de leon) Income is realized from the sale, exchange, or other disposition of real
property.

 income is realized from the sale, exchange or other disposition of real property
 as a general rule, mere increase in the value of property is not income but merely an unrealized
increase in capital
 for the same reason, a decrease in the value of the property is not normally allowable as a deductible
loss.
 No income is derived nor a loss incurred until after the actual sale or disposition of the property in
excess of its cost
 Limpan: Income is received not only when it is actually handed to a person but also when it is merely
constructively received by him.
 If the taxpayer follows the Accrual method: income shall be recognized in the year when the service is
rendered or earned, (evidenced by the billing statement) not at the year of receipt of payment.
“All events test” : accrual of income and expense is permitted when this is met; this principle does not demand
that the amount of income or liability be known absolutely, it only requires that a taxpayer has at its disposal
the information necessary to compute the amount with reasonably accuracy(less than an exact or completely
accurate amount)

a. Test of Realization

cases: Fisher: An income subject to taxation under the law must be an actual income and not a
promised or prospective income.

b. Actual vs constructive receipt

cases:
LIMPAN INVESTMENT CORPORATION, petitioner,  vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents REYES, J.B.L., J.:

Petitioner, a domestic corporation is engaged in the business of leasing real properties.

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  Its principal stockholders are the spouses Isabelo P. Lim and Purificacion Ceñiza de Lim, who own and
control ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is
the same Isabelo P. Lim.
 It owns real properties - several lots and buildings.
 Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums
of P657.00 and P2,220.00.
 Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and they discovered that petitioner had
underdeclared its rental incomes by P20,199.00 and P81,690.00 during these taxable years and
had claimed excessive depreciation of its buildings . CIR issued demand for payment of deficiency
income tax and surcharge:
PET ASKED FOR RECONSIDERATION, DENIED.
 hence, the corporation filed its petition for review before the Tax Appeals courtI
 disclaimed having received or collected the amount of P20,199.00, as unreported rental income for
1956 , reasoning out that 'the previous owners of the leased building has (have) to collect part of the
total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00" (par. 11,
petition).
 denied having received P81,690.00, as unreported rental income for 1957, or any part thereof,
explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax
return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain
tenants, did not turn the same over to petitioner corporation in said year but did so only in 1959;
 Petitioner likewise allegedthat the rates of depreciation of its buildings in the above assessment are
unfair
 Sole witness was its Secretary-Treasurer, Vicente G. Solis, who admitted that it had omitted to
report the sum of P12,100.00 as rental income in its 1956 tax return and also the sum of
P29,350.00 as rental income in its 1957 tax return.
 However, with respect to the difference between this omitted income (P12,100.00) and the sum
(P20,199.00) found by respondent Commissioner as undeclared in 1956, petitioner corporationtried to
establish that it did not collect or receive the same because, in view of the refusal of some
tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former
owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation, on the other,
had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the value
of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may
collect from the tenants.
 And, with respect to the difference between the admittedly undeclared sum of P29,350.00 and that
found by respondent Commissioner as unreported rental income, (P81,690.00) in 1957, petitioner
corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected part
thereof and may have reported the same in his own personal income tax return; that same
Isabelo P. Lim collected P13,500.00, which he turned over to petitioner in 1959 only;
 that a certain tenant (Go Tong deposited in court his rentals (P10,800.00), over which the corporation
had no actual or constructive control and which were withdrawn only in 1958; and that a sub-tenant
paid P4,200.00 which ought not be declared as rental income in 1957
 some of its buildings are old and out of style; hence, they are entitled to higher rates of depreciation
than those adopted by respondent in his assessment.
BIR:

10
  Plaridel M. Mingoa, one of the BIR examiners who personally conducted the investigation of the 1956
and 1957 income tax returns testified that he personally interviewed the tenants of petitioner and
found that these tenants had been regularly paying their rentals to the collectors of either
petitioner or its president, Isabelo P. Lim, but these payments were not declared in the corresponding
returns; and that in applying rates of depreciation to petitioner's buildings, he adopted Bulletin "F" of the
U.S. Federal Internal Revenue Service.
Tax court upheld BIR.
CONTENTIONS OF CORP:
I. The respondent Court erred in holding that the petitioner had an unreported rental income of
P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the petitioner had an unreported rental income of
P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00 claimed by
petitioner for the years 1956 and 1957 was excessive.
ISSUE: WON CORP IS LIABLE FOR THE TAXES IMPOSED. YES.
 Petitioner having admitted that it had undeclared more than one-half (1/2) of the amount (P12,100.00
out of P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and
more than one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same
examiners as unreported rental income for the year 1957, it was incumbent upon it to establish the
remainder of its pretensions by clear and convincing evidence, that in the case is lacking.
 With respect to the balance, which petitioner denied having unreported in the disputed tax returns,
the excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and
only later transferred or disposed of the ownership of the buildings existing thereon to petitioner
corporation, so as to justify the alleged verbal agreement whereby they would turn over to
petitioner corporation six percent (6%) of the value of its properties to be applied to the rentals
of the land and in exchange for whatever rentals they may collect from the tenants who refused
to recognize the new owner or vendee of the buildings, is not only unusual but uncorroborated by
the alleged transferors, or by any document or unbiased evidence. Hence, the first assigned error is
without merit.
 As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining
unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo
P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax
return submitted in court to establish that the rental income which he allegedly collected and received in
1957 were reported therein.
 The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to
the refusal of petitioner to accept the same, and was not the fault of its tenants; hence,
petitioner is deemed to have constructively received such rentals in 1957. The payment by the
sub-tenant in 1957 should have been reported as rental income in said year, since it is income just the
same regardless of its source.
 On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed
when not shown to be arbitrary or in abuse of discretion and petitioner has not shown any arbitrariness
or abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive
depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance
with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as having
strong persuasive effect in this jurisdiction, for having been the result of scientific studies and
observation for a long period in the United States, after whose Income Tax Law ours is patterned.
11
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,  vs. LEONOR DE LA RAMA, ET AL., respondents-
appellees.
ZALDIVAR, J.:
The estate of the late Esteban de la Rama was the subject of Special Proceedings IN CFI ILOILO.
 The executor-administrator, Eliseo Hervas, filed income tax returns of the estate corresponding to the
taxable year 1950, declaring a net income of P22,796.59; P3,919.00 was assessed and was paid by
the estate as income tax.
 BIR later claimed that it had found out that there had been received by the estate in 1950 from the
De la Rama Steamship Company, Inc. cash dividends amounting to P86,800.00, which amount
was not declared in the ITR
 THUS BIR made an assessment as deficiency income tax against the estate in the sum of P56,032.50
of which amount P37,355.00 was the deficiency and P18,677.50 was the 50% surcharge.
 CIR WROTE to Mrs. Lourdes de la Rama-Osmeña informing her of the deficiency income tax and
asking payment
 COUNSEL WROTE TO Collector acknowledging receipt of the assessment but contended that Lourdes
de la Rama-Osmeña had no authority to represent the estate, and that the assessment should be sent
to Leonor de la Rama who was pointed to by said counsel as the administratrix of the estate of her late
father.
 Deputy Collector sent a letter to Leonor de la Rama as administratrix of the estate, asking payment.
UNPAID, HE wrote another letter to Mrs. Lourdes de la Rama-Osmeña demanding, through her, upon
the heirs, the payment of the deficiency income tax within the period of thirty days from receipt
thereof.
 The counsel of Lourdes de la Rama-Osmeñainsisted that the letter should be sent to Leonor de la
Rama.
 The Deputy Commissioner of Internal Revenue wrote to Leonor de la Rama demanding, through her as
administratrix, upon the heirs of Esteban de la Rama, the payment of P56,032.50, as deficiency income
tax +SURCHARGE
 unpaid, Republic of the Philippines filed with CFI MANILA a complaint against the heirs of Esteban
de la Rama, seeking to collect from each heir his/her proportionate share in the income tax
liability of the estate.
DEFENSES:
(1) that no cash dividends of P86,800.00 had been paid to the estate;
(2) that the administration of the estate had been extended by the probate court precisely for the purpose of
collecting said dividends;
(3) that Leonor dela Rama had never been administratrix of the estate;
(4) that the executor of the estate, Eliseo Hervas, had never been given notice of the assessment, and
consequently the assessment had never become final; and
(5) that the collection of the alleged deficiency income tax had prescribed. Fausto F. Gonzales, Jr., one of the
defendants, not having filed an answer, was declared in default.
LC: dividends of P86,800.00 declared by the De la Rama Steamship Co. in favor of the late Esteban de la
Rama were applied to the obligation of the estate to the company declaring the dividends; that Leonor de la
Rama was not the administratrix of the estate, but it was the late Eliseo Hervas who was the executor-
administrator; that the administration of the estate was extended for the purpose of recovering for the
estate said dividends from the De la Rama Steamship Co., Inc.; and that the question of whether the
deceased Esteban de la Rama was a debtor to the Hijos de I. de la Rama, which was also indebted to the De
12
la Rama Steamship Co., Inc., was not a settled one. DISMISSED COMPLAINT.

REPUBLIC BEFORE SC CONTENDS CA ERRED in not holding that the income was constructively
received by the estate of the late Esteban de la Rama; (3) in not holding that the heirs and legatees of the
late Esteban de la Rama were liable for the payment of the deficiency income tax;(5) in not holding that the
service of the notice of assessment on Lourdes de la Rama-Osmeña and Leonor de la Rama was proper and
valid;
 argues that the deficiency income tax in this case was assessed in the sum of P86,800.00
representing cash dividends declared in ]1950 by the De la Rama Steamship Co., Inc. in favor of
the late Esteban de la Rama and was applied as payment of the latter's account with the former. The
application of payment appears in the books of said creditor company
 The plaintiff-appellant maintains that this crediting of accounts in the books of the company constituted
a constructive receipt by the estate or the heirs of Esteban de la Rama of the dividends, and this
dividend was an income of the estate and was, therefore, taxable.

Issue: WON the estate is liable for deficiency tax.

WON the said application of the dividends to the personal accounts of the deceased Esteban de la Rama
constituted constructive payment to, and hence, constructively received by, the estate or the heirs.

(If the debts to which the dividends were applied really existed, and were legally demandable and chargeable
against the deceased, there was constructive receipt of the dividends; if there were no such debts, then
there was no constructive receipt.)
HELD: There is no proof that the income in question had been received; it was not actually delivered unto the
Estate since it was retained by the De la Rama Steamship Co., Inc.; which applied said dividends to certain
accounts receivable due from the deceased. If income has not been received, no income tax can be assessed
thereon. Inasmuch as, the income was not received either by the estate, or by the heirs, neither the estate nor
the heir can be liable for the payment of income tax therefor.
 The first debt had been contested by the executor-administrator of the estate. It does not even appear
that the De la Rama Steamship Co., Inc. had ever filed a claim against the estate in connection with
that indebtedness.
 The existence and the validity of the debt is in dispute, and there was no proof adduced to show it!
 The second debt to which the dividends were partly applied were accounts "due from Hijos de I. de la
Rama, Inc."
◦ The alleged debtor here was an entity separate and distinct from the deceased.
◦ If that was so, its debts could not be charged against the deceased, even if the deceased was the
principal owner thereof, in the absence of proof of substitution of debtor.
◦ There is no evidence that the late Esteban de la Rama substituted the "Hijos de I. de la
Rama" as debtor to the De la Rama Steamship Co., Inc.; nor was there evidence that the estate
of the late Esteban de la Rama owned the "Hijos de I. de la Rama, Inc.," this fact being, as
found by the lower court, not a settled question because the same was denied by the administrator.
 Under the National Internal Revenue Code, income tax is assessed on income that has been received.
◦ Thus, Section 21 of the Code requires that the income must be received by an individual before a
tax can be levied thereon. Sec. 21. Rates of tax on citizens or residents.—There shall be levied,
collected, and paid annually upon the entire net income received in the preceding taxable year from
all sources by every individual, a citizen or resident of the Philippines, . . .
◦ Section 56 also requires receipt of income by an estate before an income tax can be assessed
thereon. It provides:Sec. 56. Imposition of tax.—(a) Application of tax.—The taxes imposed by this
13
 Title upon individuals shall apply to the income of estates or of any kind of property held in trust,
including — xxx xxx           xxx           xxx (3) Income received by estates of deceased persons
during the period of administration or settlement of the estate; . . .
 The trial court, therefore, did not err when it held in its decision that:
◦ if truly there had been such indebtedness owing from the deceased unto said De la Rama
Steamship Co., Inc., the Court will agree with plaintiff that the offsetting of the dividends
against such indebtedness amounted to constructive delivery; but here has not been
presented any proof to that effect, i.e., that there was such an indebtedness due from deceased;
◦ on the contrary what the evidence shows is that the former administrator of the Estate had
challenged the validity of said indebtedness, thus there is no clear showing that income in the form
of said dividends had really been received, which is the verb used in Section 21 of the Internal
Revenue Code, by the Estate whether actually or constructively;
◦ it is not even the Estate that is being sued but the heirs themselves, who admittedly had not
received any of said dividends themselves; the fiction of transfer of ownership by succession
from the death of the decedent will have to give way to actual fact that the dividends have not been
adjudicated at all to the heirs up to now at least so far as the evidence shows.
CONTENTION: Appellant cites the case of Herbert v. Commissioner of Internal Revenue, 81 F. (2d) 912 as
authority that the crediting of dividends against accounts constitutes payment and constructive receipt of the
dividends.
Held: The citation of authority misses the point in issue. In that case the existence of the indebtedness of Leon
S. Herbert to the corporation that declared the dividends and against which indebtedness the dividends were
applied, was never put in issue, and was admitted. In the instant case, the existence of the obligations has
been disputed and, as the trial court found, has not been proved!
It having been shown in the instant case that there was no basis for the assessment of the income tax, the
assessment itself and the sending of notices regarding the assessment would neither have basis, and so that
assessment and the notices produced no legal effect that would warrant the collection of the tax.
CONTENTION: the assessment had become final, because the decision of CIR was sent in a letter dated
February 11, 1960 and addressed to the heirs of the late Esteban de la Rama, through Leonor de la Rama as
administratrix of the estate, and was not disputed or contested by way of appeal within thirty days from
receipt thereof to the Court of Tax Appeals.

HELD: Untenable. . The notice of assessment, therefore, should have been sent to the administrator. In this
case, notice was first sent to Lourdes de la Rama-Osmeña on February 29, 1956, and later to Leonor de la
Rama on November 27, 1956, neither of whom had authority to represent the estate.
The estate was still under the administration of Eliseo Hervas as regards the collection of said dividends. The
tax must be collected from the estate of the deceased, and it is the administrator who is under
obligation to pay such claim (Estate of Claude E. Haygood.)

CONTENTION: lower court could not take cognizance of the defense that the assessment was erroneous, this
being a matter that is within the exclusive jurisdiction of the Court of Tax Appeals.

HELD: no merit. According to Republic Act 1125, the Court of Tax Appeals has exclusive jurisdiction to review
by appeal decisions of the Collector of Internal Revenue in cases involving disputed assessments, and the
disputed assessment must be appealed by the person adversely affected by the decision within thirty days
after the receipt of the decision. In the instant case, the person adversely affected should have been the
administrator of the estate, and the notice of the assessment should have been sent to him. The administrator
had not received the notice of assessment, and he could not appeal the assessment to the Court of Tax
Appeals within 30 days from notice. Hence the assessment did not fall within the exclusive jurisdiction of the
14
Court of Tax Appeals. AFFIRMED.

3. RECOGNITION OF INCOME:
 if the accrual method is followed – the income shall be recognized in the year when the service is
earned or rendered, not on the year if receipt of payment.

4. METHODS OF ACCOUNTING REVENUES AND EXPENSES

The rule is that a taxpayer may use any one method of accounting mentioned (p335) but not a
combination of two or more methods of accounting for each type of business during the taxable year.

a. Cash vs accrual
Cash method: method of accounting whereby all items of gross income received during the year shall be
accounted for in such taxable year and that only expenses actually paid shall be claimed as deductions during
the year.
 Here, income is realized upon actual or constructive receipt of its cash or its equivalent, and expenses
are deductible only upon actual payment thereof, regardless of the taxable year when the service is
performed or the expense is incurred.

Accrual method: method of accounting for income in the period it is earned, regardless of whether it has been
received or not. In the same manner, expenses are accounted for in the period they are incurred and not in
the period they are paid.
 Here net income is being measured by the excess of the income earned during the period over the
expenses incurred during the same period
 The income being earned and the expenses that have incurred are to be reported during the year ,
although they have not been collected or paid.
 In the succeeding year of receipt or payment, no additional income or expenses shall be reported by
the tax payer

NIRC Section 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's
annual accounting period (fiscal year or calendar year, (as the case may be) in accordance with the
method of accounting regularly employed in keeping the books of such taxpayer,
 but if no such method of accounting has been so employed, or if the method employed does not
clearly reflect the income, the computation shall be made in accordance with such method as in
the opinion of the Commissioner clearly reflects the income.
 If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if
the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed on the basis of the calendar year.

Section 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly accounted for as of a
different period.
In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable
period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly
includible in respect of such period or a prior period.

Section 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be
taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of
accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be

15
allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the
date of his death if not otherwise properly allowable in respect of such period or a prior period.

REVENUE REGULATIONS NO 2 SECTIONS 51 – 53

b. Installment vs deferred payment vs percentage of completion in long term contracts

Installment method: a method considered appropriate when the collections of the proceeds of the sales and
incomes extend over relatively long periods of time and there is strong possibility that full collection will not be
made; as customers make instalment payments, the seller recognizes profit on sale in proportion to the cash
collected during the year.

Percentage of completion method: applicable in case of a building, installation or construction contract

covering a period in excess of 1 year, whereby gross income derived from such contract may be reported on
the basis of percentage completion. In determining the percentage of completion of a contract, one of the
following methods may be used:
a. Costs incurred under the contract as of the end of the tax year are compared with the estimate total
to be performed; or
b. The work performed on the contract as of the end of the tax year is compared with the estimated
work to be performed.

In such a case, the return should be accompanied by a certificate of architect or engineer showing the
percentage of completion during the taxable year of the entire work performed under the contract

There should be deducted from gross income all expenditures made during the taxable year on account of the
contract, account being taken of the materials and supplies on hand at the beginning and end of the taxable
year for use in connection with the work under the contract but not yet so applied.

Long term contracts are no longer allowed to be reported based on the completed method basis beginning Jan
1 1998 pursuant to RA 8424, hence all long term contracts must be reported using the percentage of
completion method
 However, the completed contract method of income recognition may still be used, provided that the
same is strictly applied for long term construction contract -
o entered into and started prior to 1988;
o the project was previously reported and recorded under the completed method basis
o the project was not completed in 1998
o the allowable deductions already incurred in relation to the project were not yet claimed and
recognized in 1998 or for the duration of the project

Section 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable year that
proportion of the installment payments actually received in that year, which the gross profit realized or to
be realized when payment is completed, bears to the total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case

 (1) of a casual sale or other casual disposition of personal property (other than property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year), for a price exceeding One thousand pesos (P1,000), or
 (2) of a sale or other disposition of real property, if in either case the initial payments do not
exceed twenty-five percent (25%) of the selling price,
16
  the income may, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner above
prescribed in this Section.
 As used in this Section, the term 'initial payments' means the payments received in cash or
property other than evidences of indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made.

[note – under 49 B deferred payment sales of property include

◦ (a) agreements of purchase and sale which contemplate that a conveyance is not to be made at the
outset bu only after all or substantial portion of the selling price has been paid, and
◦ (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage
or other lien as to deferred payments. Such sales under a or b fall into two classes:
▪ Sales of property on installment plan = sales in which the payments received in cash or property
other than evidences of indebtedness of the purchaser during the taxable year in which the sale
is made do not exceed 25% of the selling price or
▪ Deferred payment sales = not on installment plan = sales in which the payments received in
cash or property other than evidence of indebtedness of the purchaser during the taxable year
in which the sale is made exceed 25% of the selling price.
 In which case the obligations of the purchaser received by the vendor are to be considered
as the equivalent of cash

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of
real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under
Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects
for any taxable year to report his taxable income on the installment basis, then in computing his income
for the year of change or any subsequent year, amounts actually received during any such year on
account of sales or other dispositions of property made in any prior year shall not be excluded.

Section 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for tax
purposes in the manner as provided in this Section.
 As used herein, the term 'long-term contracts' means building, installation or construction contracts
covering a period in excess of one (1) year.
 Persons whose gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion.
 The return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under contract.
 There should be deducted from such gross income all expenditures made during the taxable year on
account of the contract, account being taken of the material and supplies on hand at the beginning and
end of the taxable period for use in connection with the work under the contract but not yet so applied.
 If upon completion of a contract, it is found that the taxable net income arising thereunder has not been
clearly reflected for any year or years, the Commissioner may permit or require an amended return.

Section 44. RR 2

c. Distinction between tax accounting and financial accounting.

Financial Accounting: Financial accounting is mostly known as accrual-based accounting. Under the accrual
method, companies record sales revenues and purchase expenses when they are earned and incurred,
regardless of whether cash from sales has been collected and cash for purchases has been paid. To
determine a sale or purchase transaction date for recording, companies need to ascertain the completeness of
17
a sale or purchase. Unfinished delivery of goods or services and partially receiving from a purchase don't
account for an earned revenue and incurred expense. Recording doesn't take place until the completion of the
sale or purchase orders.

Tax Accounting: Tax accounting often is referred to as cash-based accounting, and thus focuses primarily
on actual cash receipts and cash payments, rather than their related sale or purchase transactions.
Companies don't record a sale or purchase transaction at the time of the transaction until cash is received or
paid later. Small businesses with annual sales of $5 million or less may elect to use the tax accounting to help
them better manage their cash positions, which hold more significance to a small business's survival than a
larger company.

C. TESTS IN DETERMINING INCOME

1. Realization test - there is no taxabale income until there is a separtion from capital of something of
exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of
income.

fisher vs trinidad, it was held that stock dividends are not income subject to income tax.

Stock dividends:
A 'stock dividend' shows that the company's accumulated profits have been capitalized, instead of distributed
to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer.

The essential and controlling fact is that the stockholder has received nothing out of the company's assets
for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever
accretions and accumulations have resulted from employment of his money and that of the other stockholders
in the business of the company, still remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and
not to form, he has recived nothing that answers the definition of income within the meaning of the Sixteenth
Amendment.

Does the increase of value of the stockholder’s interest in the company make him richer under the definition of
income?
-enrichment through increase in value of capital investment is not income in any proper meaning of the term

Difference between cash and stock dividends

An actual cash dividend, with a real option to the stockholder either to keep the money for his own or
to reinvest it in new shares, would be as far removed as possible from a
true stock dividend, such as the one we have under consideration, where nothing of value is taken from the
company's assets and transferred to the individual ownership of the several stockholders and thereby
subjected to their disposal.

Can the tax really be on the undivided profits of the company?

-this would be taxation on property & would require apportionment under the provisions of the Constitution
-the tax on the undivided profit would be a tax on capital, not income
-a stockholder has no individual share in accumulated profits, nor in any particular part of the assets of the
corporation, prior to dividend declared

Eisner:

18
2. Claim of right doctrine/ doctrine of ownerhship , command or control - a taxable gain is conditioned
upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation
to return or repay that which would otherwise constitute a gain. To collect tax would give the government an
unjustified preference as to the part of the money that rightfully belongs to the victim.

3. Economic benefit test / Doctrine of Proprietary interest - (equivalent of cash doctrine?) any economic
benefit that increases the networth of the tax payer whatever may have been the mode by which it is effected
is taxable.
Thus in stock options, the difference between the fair market value of the shares at the time the option is
exercised and the option price constitutes additional compensation income to the employee at the time of the
exercise (not upon the grant or vesting of the right)

4. Severance test

III. Kinds of taxpayers

A. Individual taxpayers

1. Citizens - classified into citizens of the Philippines and aliens

- citizens are classified into resident citizens and non resident citizens
- aliens are classified into resident aliens and non resident aliens
- non resident aliens are classified as resident aliens engaged, or not engaged in trade or business in
the Ph

A 4.1 1987 Const, the following are considered as citizens

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

- it is possible for a citizen to have dual states (resident and non resident ) during a calendar year for income
tax purposes. He may be treated as a resident citizen and at the same time a non resident citizen during the
same taxable year, if at the beginning of the year he derives compensation and/or business/professional
income, and sometime later during the same year, he departs from the Ph as an immigrant or a qualified non
resident or vice versa.

a. Resident Citizens RC

Section 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this
Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without
the Philippines;

Section 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without
the Philippines be every individual citizen of the Philippines residing therein;

b. Non resident citizens NRC

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Section 22 (E) The term 'nonresident citizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.

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

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

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

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

Section 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this
Code:
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income derived from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a
member of the complement of a vessel engaged exclusively in international trade shall be treated as an
overseas contract worker;

Section 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed: xx

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C) of Section 23 hereof; xx

2. Aliens

a. Resident Alien RA

Sec 22 (F) The term 'resident alien' means an individual whose residence is within the Philippines and who is
not a citizen thereof.

He is taxed in the same manner as resident citizens, except that only his income fro Ph sources is taxable in
the Ph begininng Jan 1 1988. His income from foreign sources is not liable to Ph income tax; hence up to
December 31, 1997 a resident alien was subject to income tax on his worldwide income.
In view thereof, the distinction between a resident alien and a non resident alien engaged in trade or business
in the PH was “effetively removed by RA 8424. Thus the significance of the term resident with respect to aliens
had been eliminated and the only material issue for NRA is whether or not they are considered as engaged in
trade or business in the PH.

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b. Non Resident Aliens NRA

i. NRA engaged in trade or business in the PH

180 day test:

 if the aggregate period of his stay in the Ph is more than 180 days during any calendar year he shall be
deemed a NRA doing business in the Ph, sec 22 (G) of the tax code notwithstanding. As such he is
taxed on his income from sources within the PH (after deducting personal and additional exemption if
any ) at the graduated income tax rates (5% to 32%) , while his passive investment incomes shall
generally be subject to 20% final tax.
 If the aggregate period of stay of the NRA in the PH does not exceed 180 days during any calendar
year, he shall be deemed a NRA not engaged in business in the PH. As such he is taced on his
compensation income, business or professional income, capital gain, passive investment income, and
other income from sources within the PH at the flat rate of 25%, but capital gains from sale or exchange
of shares of stocks in a domestic corporation and real property shall b e subject to capital gains tax or
stock transactions tax, as the case may be.

Section 25. Tax on Nonresident Alien Individual. - (A) Nonresident Alien Engaged in trade or Business Within
the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject
to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income
received from all sources within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this
Code notwithstanding
 The phrase “engaged in trade or business within the Ph” includes the performance of personal
services within the PH. Whether a NRA has an office or place of business however implies a place
for the regular transaction of business and does not include a place where casual or incidental
transactions might be or are effected.
◦ Neither the beneficiary nor the grantor of a trust , whether recovable or irrevocable, is deemed
to be engaged in trade or business in the PH or to have an office or place of business therein,
merely because the trustee is engaged in trade or business in the Ph or has an office or place
of business therein.

ii. NRA not engaged in trade or businss in the PH

Section 25. Tax on Nonresident Alien Individual. -

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

c. Special class of individual employees

i. Aliens employed by RHQs, ROHQs of Multinational Companies

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

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

Section 25. Tax on Nonresident Alien Individual. -

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

ii. Aliens employed by OBU’s (offshore banking units established in the Ph)

Section 25. Tax on Nonresident Alien Individual. -

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

iii. Aliens employed by petroleum service contractors, subcontractors

Section 25. Tax on Nonresident Alien Individual. -

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is
a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign
service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines
shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor:
Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same
position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed
under this Code.

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MAMALATEO: Kind of taxpayer in the transactions is not important when:

1) the transaction involves the sale of shares of stocks of a domestic corporation , whether listed and traded in
local stock exchange or unlisted or listed but not traded in a local stock exchange. In this case, it does not
matter who the seller of the shares is because either the transaction is subject to the 1% of stock transaction or
5% or 10% capital gains tax on net capital gain, whether the seller is an individiual, citizen or alien, or a
corporation , domestic or foreign and

2) where the real property sold is a capital asset located in the Ph, that is subject to the 6% capital gains.

IMPT:
- only residents and domestic corporations are taxable on their worldwide income
- other types of individual and corporate tax payers are taxable only on income derived from sources within the
Ph
R - within and without PH
NR - only on income derived from sources within PH
Alien - WON resident - only on income derived from sources within PH

Domestic corp - taxable on all its income from sources within and without PH
Foreign Corp - whether resident or nont resident = only on income derived from sources within PH

COMPENSATION INCOME, BUSINESS INCOME, PROFESSIONAL INCOME, PASSIVE INVSTMENT

INCOME, OTHER INCOME NOT SUBJECT TO FINAL TAX -
---> income tax due is a function of the taxpayer’ status

CAPITAL GAINS SUBJECT TO FINAL TAX

---> is the seller or transferor a dealer in securities or dealer in real estate?
---> if not - the transaction becomes subject to the final capitals tax at preferential rates

PASSIVE INVESTMENT INCOME SUBJECT TO FINAL TAX

---> who is the taxpayer?
---> the tax rate applicable on the income depends on the tax status of the recipient of the income
---> ex: royalty is subject to 20% FWT when paid to a domestic corp

3. Estates and Trusts

Estate: created by operation of law, when an individual dies, leaving properties to his compulsory or other heirs
Trusts: a trust is a legal arrangement whereby the owner of the property (trustor) transfers ownership to a
person (trustee) who is to hold and control the property accdg to owner’s instructions, for the benefit of the
designated persons (beneficiary). Legal title to the trust property is vested in the trustee, while equitable title
belongs to the beneficiary.

Taxable estates and trusts are taxed in the same manner and basis as an individual. However it is entitled only
to personal exemption equivalent to a single indiviual in the amount of P20000 (50k raised to 50000 effectively
July 6 2008)

The taxable income of estates and trusts shall include:

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income acccumulated or held for future distribution under the terms of the will/trust

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2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected
by a guardian of an infant which is to be held or distributed as the court may direct

3. Income received by the estate of deceased persons during the period of administration or settlement of
the estatel and

4. Income which in the discretion of the fiduciary may be either distributed to the beneficiaries or
accumulated.

The above income shall be taxable to the fiduciary, if the trust instrument is irrevocable, or
taxable to the grantor, if the trust instrument is revocable

When revocable: where at any time the power to revest in the grantor title to any part of the corpus of the
trust is vested
(a) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the
diposition of such part of the corpus or income therefrom or
(b) in any person not having a substantial or adverse interest in the disposition of such part of the corpus or
income therefrom, the income of such part of the trust.

If trust is an employee’s trust which forms part of an employer’s pension, stock or profit sharing plan that
complies with 60 (B) of the tax code, income would be exempt from income tax.

The taxable income of the estate or trust shall be computed in the same manner and same basis as an
individual except that:
a. In computing the taxable income of the estate or turst, the
Amount of the income collected by the guardian of an infant which is to be held or distributed as the court
may direct
Shall be allowed a deduction from gross income
But the amount so deducted shall be included in computing the taxable income of the beneficiaries,
whether distributed to them or not.

B. in the case of income received by the estates of deceased person during the period of administration or
settlement of the estate, and in case of income which in the discretion if the fiduciary may be either distributed
to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable
income the amount of the income of the estate or trust for its taxable year, which is properly paid or credited
during such year to any legatee, heir or beneficiary, but the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heir or beneficiary.

c. In the case of trust administered in a foreign country, the deductions mentioned above shall not be allowed.
Provided, that the amount of any income included in the return of said trust shall not be included in computing
the income of the beneficiaries.

4. Co - ownerships

 the co-owners report their share of the income from the property owned in common by them in their ITR
for the year
 Income of coownerships is not subject to income tax
 And the coownership is not considered as a separate taxable entity or a corporation as defined in sec
22 B,
 In a co ownership arising from death of a decedent the court said that such co ownerhsip is
automaticallly terminated upon the partition of and distribution of the properties of the estate and an
unregistered partnerhsip is created when the heir invested the common properties and income and
placed them under a single management.
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  However, the co ownership is not converted into a partnership where the transactions of the coowners
intended to liquidate the coownership are few or isolated, and the element of habituality is not present.
 The intention of the coowners to establish a partnership should also be considered.
 Examples: Co ownership due to death of decedent - before the partition and distribution of the estate
of the deceased, all the income thereof does belong commonly to all the heirs. Should the coowners
invest the income of the coownership after the ej partition of the estate, they would constitute
themselves into a partnershhip which is subject to income tax as a corporation.
◦ The coownership of inherited properties is automatically converted into an unregistered partnership
the moment the said common properties and /or incomes derived therefrom are used as a common
fund with the intent to produce profits for the heirs in proportion to their shares.
◦ From the moment of partition, the heirs are entitled to their shares ; accordingly he becomes liable
individually for all taxes;
◦ if after such partition, he allows his shares to be held in common with the intent of making profit
thereby, that is an unregistered partnership.
◦
 Isolated transactiuons of unimproved properties: the character of habituality peculiar to business
transactions for the purpose of gain must be present to consider them as an unregistered partnership.
Where the transactions are isolated, the case only gives rise to coownership. There must be a clear
intent to from a partnership, the existence of a juridical personality different from the individual partners.
 No community of interests where parties severally retain title - here they have no common stock capital,
no community of interests as principal proprietors in the business itself from which the proceeds are
derived.

5. General Professional Partnerships - not taxable

Section 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership
as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for income tax only in their separate and individual
capacities.1avvphil.ñet

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

Each partner shall report as gross income his distributive share, actually or constructively received, in the net
income of the partnership.
A general professional partnership is a partnership formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engagin in any trade or business.
 Not considered a taxable entity for income tax purposes. The partners themselves, not the partnsrshp
are liable for the payment of income tax in their individual capacity
 The GPP is no more than a mere mechanism or flow through entity in the generation of income
 Since the GPP is exempt from income tax, the professional fees paid to it are thus exempt from the
expanded withholding tax
 The net profit distributed to the partners is deemed to have been constructively received by the partner
in the same taxable year in which such parnership net income was earned and shall be taxed to them
in their individual capacity whether ACTUALLY distributed or not at the graduated rates of 5 - 32%.
 Thus the principle of constructive receipt of income or profit is being applied to undistributed profits of
taxable partnerships but the subsequent payment of such tax paid profit in another year should no
longer be liable to income tax..
B. CORPORATIONS

1. Domestic Corporation

Sec 22 (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not
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include general professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract with the Government. 'General
professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or business.

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

Test in determining residence of corporations: the law of incorporation test

A corporation is considered domestic when it is organized or created in accordance with or under the laws
of the Ph or as a foreign corporation if it is organized and or created in accodance with the laws of a foreign
country
 A corporation registered with the SEC which is managed and controlled by foreigners is a domestic
corp
 A corporation established by Filipino citizens under the laws of a foreign country will be treated as a
foreign corp and the branch set up in the PH is a resident foreign corp
 A domestic corpo is taxable on all income derived from sources within and without the PH,
 while a foreign corp is taxable only on income derived from sources within the PH

2. Taxable partnership or business partnership

except for
GPP’s and
an unincorporated joint venture or consortium engaged in construction or
energy projects under 22B, which in reality is also a partnership,
the tax Code mandates that every other type of business partnership is subject to income tax in the
same manner and in the same rate as a corporation.

The tax code attempts to place on similar footing a business partnership and an ordinary corporation by
imposing a 10% tax on dividends until they are actually distributed to the individual partners.
 There seems to be an unintended benefit granted to parnters of a business partnership who would be
taxed 10% only on the partnership profits actually distributed during the year
Compared with to the partners of a GPP who would be taxed on their entire share of the GPP whether
distributed or not
 However note that the business partnership net income is subject to 30% regular corporate income tax
 While the net income of GPP is exempt from income tax.

3. JOINT VENTURE (JV)

to constitute a JV , each party to the venture must make a contribution not necessarily of capital but by way of
services, skill, knowledge, material or money , profits must be shared among the parties; there must be a joint
proprietary interest and right of mutual control over the subject matter; and usually there is a single business
transaction.

a. Exempt JV / consortium - an unincorporated joint venture engaged in construction or energy related project.
The term joint venture or consortium in 22B that is no considered as a separate taxable entity means an
unincorporated entity formed by 2 or more persons for the purpose of undertaking
a construction project or engaging in petroleum and other energy operations with operating contract with the
government.

Since it is not considered a separate taxable entity, the net income or loss of the joint venture or consortium is
taken up and reported by the co venturers or consortium members in accordance with their participation in the
project as set forth in their agreement.
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The 2 elements - unincorporated entity and for the purpose of undertaking construction or energy related
project - must be present to be considered as a non taxable entity.

FOREIGN JOINT VENTURE NOT SELLING SERVICES IN THE PH: A jv or cons formed among non resident
FC’s in connection with a local project in the Ph is not subject to Ph income tax where said foreign JV or
consortium does not sell goods nor perform any service in the PH. (rule is anchored on the fact that a foreign
corp is taxable only on income from sources within the Ph.) Accdly no withholding tax is required to be
deducted and withheld by the PH payor from income payments to the foreign JV.

Where after the construction period, the JV parnters engaged in the business of leasing the building floors or
portions thereof separately owned by them. The tax exemption of the JV is valid only up to the completion
of the construction project and does not extend to the sale or lease of the developed condo floors or units
to customers after the completion of the project.

B. Taxable JV
a domestic corp jointly owned by individuals and by two or more existing domestic corporations and/or
foreign corps that is incorporated or duly regisitered with the SEC is a taxable corp, even if it is engaged in the
business of the construction or energy related activity.
If the unincorporated JV or cons (or unregistered partnership) is engaged in any other line of business
than construction or energy related activity with operating contract with the gov = also taxable. Its income and
expenses mus be reported by it during the taxable year.

4. Foreign Corporations

a. Resident foreign corporation

Sec 22. Definitions: (H) The term "resident foreign corporation" applies to a foreign corporation engaged in
trade or business within the Philippines.
 Thus the term resident is used to describe a corporation organized under the laws of a foreign country
which does business in the Philippines. A foreign corporation cannot acquire “residence” because it is
formed under the laws of a foreign country.
 Example: a Phil branch of a foreign corporation
 But for income tax purposes only the income of the Philippine branch from sources within the Phils is
subject to Philippine income tax and the income from sources outside the Philippines are exempt from
Philippine income tax.
 p.55 dividend paid by a domestic corporation to a resident foreign corporation is not subject to income
tax. If

There are 2 types of resident foreign corporations:

1) Those exempt from income tax because they are not engaged in trade or business in the Phils
2) Those that are subject to income tax at
a. 10% preferential tax rate or
b. 30% corporate income tax rate at 2% minimum corporate income tax, whichever is higher

First category: regional or area headquarters pursuant to EO 226 as am by RA 8756 , representative offices,
and regional warehouses of multinational corporations in the Ph.
 They are exempt because they are supposed not to engage in trade or business in the Philippines and
thus do not derive income from sources within the Ph.

Second category: Ph branches of foreign corporations engaged in trade or business in the Ph, the regional
operating headquarters of multinational corps in the PH are authorized to sell various services to their affiliates
subsidiaries or branches within the Asia Pacific region and their net taxable income from sources within the Ph
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are subject to the 10% preferential income tax.
All other types of Ph branches of foreign corporations are subject to 30% corporate income tax based in
their net taxable income from sources within the pH starting Jan 2009, unless the 2%minimum corporate
income tax that is computed at 2% of their gross income from sources within the PH is higher than the normal
corporate income tax.

RE: ph branch is an extension of the foreign head office – the general rule is that the head office of a foreign
corporation is the same juridical entity as its branch in the Ph following the single entity concept.
The income from sourices within the Ph of the foreign head office shall thus be taxable to the Philippine
branch.
But when the head office of a foreign corporation independently and directly invested in a domestic
corporation without the funds passing through its Ph branch, the taxpayer with respect to the tax on dividend
income would be the foreign corporation itself and the income shall be subject to the tax similarly imposed on
non resident foreign corporations.

b. Non resident foreign corporation

(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business
within the Philippines.
 but deriving income from sources within the Philippines
 thus the term non resident means not engaged in trade or business in the Philippines
 except as otherwise provided, gross income from sources within the Ph paid to a non resident foreign
corporation shall be subject to the 30% final corporate income tax that must be withheld by the Ph taxpayer
of the income remitted to the BIR.
 Foreigners owning condo units and leasing these out to others and deriving income therefrom fall under
the status of NON RESIDENT FOREING CORPORATIONS doing business in the Ph
 These investors can hire the services of a fiduciary who will file their income tax returns which shall
indicate only rental income representing income realized from the lease of their condo units
 The TIN of the fiduciary shall suffice to effect the withholding of the income tax from the remittance of rental
income to the foreign investors

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