TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y.

2015-2016

line but they get to pay the income tax and this offsets the effect of
INCOME TAXATION – GENERAL OVERVIEW regressive taxes.
2. To mitigate the evils arising in the unequal distribution of income
INCOME TAX DEFINED and wealth.
This is redistribution of wealth. This follows ability to pay, those who earn
IN THE BROAD SENSE more are taxed more which will be used to benefit everyone.

IN THE BROAD SENSE

It is all wealth which flows into the taxpayer other than those that are SOURCES OF INCOME TAX LAWS
mere return of capital. It is return on capital or return above the capital
as opposed to return of capital. SOURCES OF INCOME TAX LAWS

Further Illustration: SOURCES OF INCOME TAX LAWS

If you sell a cup of coffee for P10, the 10 is not your total income. Since you have
to consider the cost of sale or your capital (such as your expenses for the cup, A. Constitution – the most supreme source of our tax laws
stirrer etc.). If you spent 5 pesos for your capital, only P5 is considered as income.

B. Legislation from Congress – National Internal Revenue Code and

Remember:
Sales – Cost of Sales = Income
Income - Allowable Deductions = Taxable Income
Layman’s understanding: If you invest in cars which will cost you 2M and
you sell it at 2.5M, 2M is cost of sales/capital, income is 500k.
IN THE BROAD SENSE
IN THE STRICT SENSE
It is the amount of money coming to the taxpayer for services performed
or an activity which he is engaged in or for an investment which he has
made including those do not have specific owners but comes in the
hands of a finder.
A tax on all yearly profits arising from property, professions, trades or
offices or a tax on person’s income, emoluments, profits, and the like.
It is also defined as a tax on income, whether gross or net, realizable in
one year. It is not exclusive to those that arise out of property,
profession, etc. since it also includes those you find by mere luck like
hidden treasures.
other special laws like the exemption granted to economic zones
Side note: these are subject to income tax on activities not exempted from
their grant since they can have the 5% rate in lieu of other taxes
C. Judicial decisions – As per the principle of stare decisis, SC
decisions form part of the law of the land.
D. Administrative rules and regulations – Those issued by BIR, and
other administrative agencies to interpret tax laws.
1. Revenue regulations – issued by Sec of Finance with
recommendation of the Commissioner of Internal Revenue
2.
Revenue memorandum orders, memorandum rulings, and
memorandum circulars – issued by BIR
Definition of terms in Title II
The definitions laid down in Title II, Chapter 1 are good for title II only
and you cannot use it for other titles. However, if there are no other
definitions provided in other titles, definitions in Title II may be used as a
supplement to understand other terms. These terms are discussed as
they are used in a particular Codal provision.

NATURE AND PURPOSE OF INCOME TAX GENERAL PRINCIPLES OF INCOME TAXATION

NATURE OF INCOME TAX GENERAL PRINCIPLES OF INCOME TAXATION
NATURE OF INCOME TAX GENERAL PRINCIPLES OF INCOME TAXATION
National tax As per Sir Amago’s interpretation of Sec 23 of the National Internal
The BIR has the authority to collect nationwide under RA 8424 or the Revenue Code.
National Internal Revenue Code.

Excise tax
Tax on the privilege or the right to earn something Taxpayer

Direct tax
Impact and incidence is on the taxpayer and tax cannot be shifted,
Individual Corporation
making it personal

General tax
Levied on all kinds of income; it is source blind. There is tax so long as Citizen Alien Foreign
there’s flow of wealth, increase in income, even if the source is illegal. Domestic
Within
Non- Non- Non- and
Purposes of IncomePURPOSES
tax OF INCOME TAX Resident
resident
Resident
resident Resident resident Without
Within
and
PURPOSES OF INCOME TAX Without

Fiscal purpose
To provide or raise revenue
Take note: Resident Citizens and Domestic Corporations are taxed for
Non-fiscal purpose income earned within and without the Philippines. All the rest are taxed
1. To offset sales and consumption of taxes which are regressive. only for income earned within the Philippines.
Application: The consumer gets the burden of tax because they cannot
transfer it. The wholesalers, manufacturers may shift the burden down the

1|U N I V E R S I T Y O F S A N C A R L O S
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
SYSTEMS OF INCOME TAXATION
SYSTEMS OF INCOME TAXATION
SCHEDULAR INCOME
Follows a schedule of tax rates, the tax code treats every category of
income earners individually.
The items are classified based on kind or category of income and this is
subject to different tax rates based on the income classification. When
one files their tax return, there are as many tax returns as there are tax
rates for several income types.
GLOBAL INCOME TAXATION
The taxpayer is required to lump all items of income and a
single/proportional/uniform income tax rate is imposed. Only one return
is filed.
SEMI-SCHEDULAR AND SEMI-GLOBAL
(Applicable in the Philippines)
There are several items of income which are lumped by kind and
subjected to a similar rate.
This is still just similar to following a schedular tax system because we
still classify them and then subject them to different tax rates and then
when all incomes are lumped such as business and compensation
income, we subject this lump to a uniform rate.
Therefore, it is schedular in the sense that we lump different items of
income per type or category and it is global in the sense that we subject
all the items in this lump to one tax rate
Passive incomes such as royalties, interests and dividends are however
subject to different tax rates. This cannot be lumped and so we follow a
schedular tax rate here
Passive incomes earned by non-stock, non-profit educational institutions
are either subject or not subject to tax. No definite SC decision yet. It
may be answered either way.
KINDS OF INCOME TAX METHODS
KINDS OF INCOME TAX METHODS
KINDS OF INCOME TAX METHODS
Gross income taxation
This is a system based on gross income, which doesn’t allow deductions
but allows exclusions.
Gross Income = Income – Exclusions (e.g. Capital)
Net income taxation
Net Income = Gross Income – Deductions
In the Philippines, net income taxation is used more. There are other
expenses which are not part of direct cost so you are given deductions
(indirect costs such as those you pay to your lawyers, etc).
This will allow deductions and encourage people to pay taxes. When
you follow gross income taxation, you might be overburdened by the
huge taxes you pay and you will feel disheartened. But this type of
taxation is still followed in the Philippines. MCIT follows gross income
taxation to curtail some evils.
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FEATURES OF OUR PRESENT INCOME TAXATION
COMPREHENSIVE TAX SITUS
FOLLOWS A COMPREHENSIVE TAX SITUS
Uses nationality, residence and source rules in determining where or
what income are considered taxable or not.
A lot of factors to account for prior to determining if the income is
taxable in the Philippines or not.
The general principles of income taxation discusses who are the
individuals taxable within and without, including those for the
corporation.
Illustration:
For individuals, resident-citizens are taxable within and without; Non-
resident, taxable sourced within.
Residency, citizenship, and source of income are factors considered to
determine how the person is taxed. The fact that there are several
factors to consider before taxing a person is the reason why the income
taxation system of the Philippines is comprehensive but corporation
have a fixed tax rate.
Semi-schedular or semi-global but mostly schedular.
INDIVIDUAL INCOME TAXATION
INDIVIDUAL INCOME TAXATION
Progressive
Proportional to income earned by individual. The income tax imposed is
proportional to the income earned by the individual. Progressive system
is much more clearly illustrated in individual than corporation.
Income increases, tax rate increases. In other words, it follows a
scheduler system. (Refer to Sec 24a ranges from 5-32%)
Modified Gross Income Taxation for Pure Compensation Earners
A modified gross income taxation is used for pure compensation earners
because deductions such as return of capital are not allowed. The
computation for gross income only have exclusions.
Normally, return of capital is deducted from gross income. BUT for pure
compensation earners, there is no return of capital since these
individuals do not have any capital to put in (you only use yourself as
your capital). The compensation pure compensation earners get are
taxable right away but subject to 50,000 pesos exemption as provided
by law which is considered the BASIC personal exemption and 25,000
pesos for every dependent.
Illustration:
30, 000/mo. income * 12 mos. = P360,000
P360,000 – 50,000 (personal exemption) = P310,000 (This amount is
now taxable)
TN: That is why it is modified because although you are not allowed
deductions, you are granted this exemption by law. Note also that only
pure compensation earners are subjected to modified gross income. The
rest, net income is used.
Net income taxation for taxpayers that derive income from
business, trade or professional income
For those who earn income through business, trade or business, they
follow the net income.
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
Illustration:
Sir Amago, an employee earns compensation income as his allowance
from the firm, but also earns business income from his practices as a
lawyer. At the end of the year, both types of income are subjected to
tax. But for the portion for the business income, he can deduct
electricity, rent, depreciation, etc. These expenses are allowed to be
deducted. I will add both incomes and whatever is the result, deduct
personal and basic exemption:
Compensation Income = Income A
Business Income (Business Income – Deductions (expenses) = Income B
Total Income = Income A + Income B
Income A + Income B – P50,000 (BPE) = Taxable income
Follows pay-as-you-file system
The moment you file your income tax return, you pay taxes due. Pay and
file to the bank. Those who go to BIR are those individuals or entities
that either those incurred a loss or do not pay any taxes at all. They
have correctly paid their taxes as they have estimated in their income
tax return.
If no tax to pay – go to BIR.
If you have tax to pay – go to authorized banks.
In some cases, Withholding System (Pay as you earn)
This is a way of collecting tax and is not another type of tax.
Compensation income earners are subjected to withholding tax. Persons
who are leasing out their properties—persons or corporations— earn net
income. They are subjected to income tax but there is withholding tax
required by them which is being withheld by the lessee. Lessees are
required to withhold equivalent to 5%.
CORPORATION INCOME TAX
CORPORATE INCOME TAX
Fixed rate of 30%
The progressive system still exists for Corporate Income taxation even
though the rate is fixed because the how much a corporation is taxed
still increases by the income it earns
Net Income for Corporate Income Taxation
Can deduct itemized deductions under Sec 34
SOURCES OF INCOME
SOURCES OF INCOME
SOURCES OF INCOME
A. Capital
B. Labor
C. Both labor and capital
D. Sale of property
Source definition
Source is the property, activity, or service that produces the income.
Presented in the form of capital, labor or dealings in property. (Discussed
in Bayer-Nickel Case)
Necessity of determining source of income
As defined in general principles of income taxation, there are individuals
or entities taxable only for income sourced within the Philippines while
some are within and without the country
Therefore, we need to know where the income is sourced to know where
the income can be taxed, here in the Philippines or abroad by another
taxing authority. If services are rendered in the Philippines by a non-
resident citizen, this is taxed by the Philippines
3|U N I V E R S I T Y O F S A N C A R L O S
Examples:
OFW- non-resident under Tax code. If you have a property leased in the
Philippines. It is taxable in the Philippines because property is located
here and the source is the property or to be strict, the activity of leasing
out is the source which is conducted here in the Philippines.
So, taxable because being a non-resident, taxable within but his
compensation while working abroad, not taxable here. Outside the
Philippines, so not taxable here.
TAXABILITY OF AN INCOME
TAXABILITY OF AN INCOME
HOW TO TELL IF INCOME IS TAXABLE
1. There is gain or profit
2. Accrual actually or constructively received
3. Income is not exempted by any treaty or law
TN: These three must be complied with before income can be said to be
taxable.
There is gain or profit
If you are in a better position than where you were originally or net
worth increases in value than what you used to have.
Clearly presented if there is investment, Invested 100 then got 400,
there is a 300 gain or profit. But, even if you do not have any investment
like you found a bar of gold in the street. It increased your net worth. No
investment so the entire value is considered an investment.
Accrual actually or constructively received
Actual – there is actual possession of the wealth
Constructive- no actual possession but already in your control.
Examples: Income deposited in a bank; shares of stock
Q. You own shares of stock. Purchased for P100. You look at stock
exchange, the value is P1,000. Is there gain or profit?
Yes since you are in a better position than before.
Q. Did it comply with the 2nd criteria of actual or constructive receipt?
No. It is complied only when you sell it.
You can only realize the profit in this case is when you separate it from
the capital. You can separate when you sell the shares, you can deduct
the cost and the remaining is the realized gain.
Buying stocks at 100 pesos per share, then when the right time comes
and the share increases to 1000 pesos per share, the only way you
realize profit is when you sell your shares and get the profit out of that
sale. In that sense, you get to control both capital and gain by physically
segregating them.
You can physically segregate income from capital whereas if not yet
sold, it is something inchoate. You do not own the amount (P1,000) yet
but you own the shares which could potentially be an income.
Q. When is income said to be realized?
1. If there is control of income
2. It is borne out of a completed transaction
TN: SALE IS NOT THE ONLY WAY TO EARN INCOME.
Other ways to earn income:
Contract of loan – Interest payment is the source of income. The
moment it is executed, deemed realized. When transaction is completed,
contract perfected, there is already control I the sense that if due and
demandable, can demand payment of interest.
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
Income is not exempted by any treaty or law
Not taxable income
NIRC provides for exclusion, and some exceptions.
All those income (sec 32B), while they are considered income under first
two criteria, cannot tax them.
TYPE OF TAX BASED ON TYPE OF INCOME GAINED
GENERAL CLASSIFICATIONS OF GAINS
GENERAL CLASSIFICATION OF GAINS
Two general classification of gains:
1. Capital gains – gain or income from sale or exchange of capital
assets
2. Ordinary gains – gains or income from sale or exchange of
properties or services which are not considered as capital assets
(categorized as ordinary assets)
Capital assets under tax code:
Sec 39 – (1) Capital Assets.
The term 'capital assets' means property held by the taxpayer (whether
or not connected with his trade or business), but does not include stock
in trade of the taxpayer or other 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, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or
real property used in trade or business of the taxpayer.
TN: This gives a negative definition: “but does not include…” - gives an
enumeration of what are ordinary assets. If does not fall under any,
considered capital assets. For you to answer the exam, MEMORIZE THE
ORDINARY ASSETS.
Capital assets are assets which are not used in business but does not
include enumerated ordinary assets. If not one of the ordinary assets, it
is capital asset (opposites define each other)
ORDINARY ASSETS
ORDINARY ASSETS
1) Stock in trade included in the inventory at the end of
taxable year
Example 1: Stock of sardines
You originally have 100 cans of sardines. Then you are left with 2
cans of sardines at the end of the year. What do you consider as
ordinary assets? 2 cans of sardines because they are the only
assets left in your possession.
If sold or eaten, it can no longer be called your asset. Your assets
are those which are included in your inventory at the end of a
taxable year.
TN: If land, cannot be stocked and cannot fall under the first
criterion. Instead it falls on the second one.
2) Properties primarily held for sale to customers in the
ordinary course of his trade or business.
Example 1: Sale of house and lot
You have 10 houses, and you sold the one in Cebu in Cristina
North but you are not engaged in real estate business.
4|U N I V E R S I T Y O F S A N C A R L O S
It will be considered capital because the asset is not primarily held
for sale and it is not in the ordinary course of business because
you are not engaged in real estate business.
Example 2: Shares of stocks.
Investment house, you ordinary sell securities. When you sell
shares of stock/securities, considered ordinary because these
securities are primarily held for sale in the ordinary course of
business.
If engaged in real estate instead and you sell condo units in Ayala
and you were able to sell, these will be considered ordinary. While
they are real property but because you are engaged in the
business, this is primary held in the ordinary course of your
business.
Ex: Securities.
Falls here. You may be able to stock the certificates, but not the
stock themselves.
3) Property used in trade or business subject to depreciation
– that is when there is a decline of value of property
because of passage of time or because of usage
Men don’t depreciate because we are not property. <3
Example of property that depreciates: cars, cellphones.
TN: Land does not depreciate, it ordinarily appreciates rather than
depreciate. Most personal properties depreciate however Rolex
watches and other luxury items does not.
Is it automatic that they are considered ordinary assets because
they don’t depreciate?
No. It must be one which is used in trade or business.
4) Real property used in trade or business
Example: Land even if not primarily held for sale.
If it is the building where your shipping business is located, still
ordinary assets because it is used in trade or business.
TAKE NOTE:
EVERYTHING USED IN TRADE OR BUSINESS FALLS UNDER ORDINARY
ASSETS. You just have to identify under which criteria it falls. Memorize
the 4 because it will help you identify WON capital or ordinary assets
If you earn income out of ordinary assets, you have ordinary gains. But if
you earn income with the conduct of business even without those
materials enumerated above, considered ordinary gain.
GR: Ordinary if in relation to earning an income not involving capital
asset
Examples of ordinary income
1) compensation income
2) Business income
3) Professional
4) Passive – as a rule are ordinary, unless used as capital
CAPITAL ASSETS
CAPITAL ASSETS
Three types of assets subject to capital gains:
1. Income from dealings in shares of stock of domestic corporation
whether or not through the stock exchange
2. Income from dealings in real property located in the Philippines and
3. Income from dealings in other capital assets other than (a) and (b).
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016

GROSS INCOME 5. Income Exempt under Treaty

6. Retirement Benefits, Pensions, Gratuities, etc.
GROSS INCOME 7. Miscellaneous Items.

GROSS INCOME PROCEEDS OF LIFE INSURANCE

Section 32. All income derived from whatever source, including, but not
limited to the following items:
(C-GGIRR-DAPPP)
1. Compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions, and similar
items
2. TN: While it is said in Labor Code that you can only pay in money however,
for income tax purposes, even if not in the form of money, considered
compensation subject to tax
3. Gross income derived from the conduct of trade or business or the
exercise of a profession
4. Gains derived from dealings in property
5. Interests
6. Rents
7. Royalties
8. Dividends
9. Annuities
10. Prizes and winnings
11. Pensions, and
12. Partner's distributive share from the net income of the general
professional partnership.
Complete the phrase because there are those not of the general
professional partnership because there could be trade partnership.
Section 32 defined and at the same time gave an enumeration. The list
is not exclusive because of the phrase “including (but not limited to)”.
Examples of those not enumerated but are excluded:
A debt being forgiven
Fats decided not to collect 1M debt of Feds. Is there income? Yes, there
is income but not subject to income tax because it will be considered a
donation. No consideration except for the love and affection. But if Fats
required Feds’ services, then it will be subject to income tax because it
will be considered as compensation or profession tax.
If a corporation extended a debt to one of its stockholders and then
decided to forgive the debt, it will be considered an income called
dividend income; a type of indirect dividend. If it is the other way
around, it will be considered an additional investment by the stockholder.
Bad debts which are not collected
Not paid for how many years so the creditor already considered it as a
deduction. BUT once the debtor decides to pay or is collected, it will now
be considered income under the tax benefit rule.
EXCLUSIONS
EXCLUSIONS FROM GROSS INCOME
PROCEEDS OF LIFE INSURANCE
The proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise, but
if such amounts are held by the insurer under an agreement to pay
interest thereon, the interest payments shall be included in gross
income.
TN: NOT TAXABLE BECAUSE IT IS AN INDEMNITY IN LIEU OF DEATH.
Traditional Example:
Kads secured a life insurance for the benefit of Marmie. Marmie was
designated as irrevocable beneficiary. If Kads dies, the life insurance will
pay his beneficiary 10K every month to Marmie. Is it taxable for income
tax purposes? No.
Whether or not revocable, it does not matter. Whoever is the
beneficiary, it does not matter. Still not subject to income tax.
TN: Life insurance is tradition it that you must die first before the
insurance is issued. (Unlike in an endowment fund – you pay then you
can get the investment if you outlive the insurance) Whatever the
proceeds of traditional life insurance – not subject to income tax.
Company Insuring Employee Example
If the company is the beneficiary = expenses (not taxable)
A company takes a life insurance for one of its employees because the
latter has been such a great guy that they love him. The company was
named as the beneficiary – it will be the only one benefitting from their
beloved employee’s death.
The amount paid for the life insurance is now treated as an EXPENSE
and the income that they get after the employee’s death is not taxable
because these are life insurance proceeds.
The company may deduct it as an expense on their part.
If estate of the employee is the beneficiary = compensation (taxable)
If the company makes the estate of the employee as the beneficiary, the
life insurance premium the company pays will now be treated as
COMPENSATION on the part of the employee and will be taxed yearly as
compensation.
Insurance premium – Taxable
Life insurance proceeds – Still not taxable since the law does not
distinguish who the beneficiary is.
TN: PROCEEDS OF LIFE INSURANCE ARE NEVER TAXABLE,
REGARDLESS OF THE BENEFICIARY.

EXCLUSIONS Q. What are the two instances when life insurance can be
Shall not be included in the gross income and shall be exempt from subject to tax?
taxation. Sec 32 b (1)
TN: The exclusions are exclusive because they construed strictly against
1. Insurer and insured agreed that the amount of the proceeds shall
the taxpayer while in favor of government.
be withheld by the insurer with the obligation to pay interest in the
(LAGCIRM) same – the interest is the one subject to tax.
Sec 32 (B)
Exclusions from Gross Income. — The following items shall not be Example:
included in gross income and shall be exempt from taxation under this On Jan. 9, 2016, you got life insurance proceeds in the amount of
Title: 1M but the insurance company will only pay you on Jan. 9, 2017.
1. Life Insurance During this supervening period, there is interest of 20% so that
2. Amount Received by Insured as Return of Premium when the time comes, you will get 1.2M by Jan 9, 2017. Only 1M
3. Gifts, Bequests, and Devises. will be excluded. The 200,000 will be subject to tax because this is
4. Compensation for Injuries or Sickness. the interest will be subject to tax.

5|U N I V E R S I T Y O F S A N C A R L O S
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
2. There is transfer of the insurance policy.
When one sells his insurance to another, the income that the
purchaser gains from the insurance is subject to tax. The income
derived from this is now taxable since the insured is now making a
business out of the insurance policy.
Illustrative Problem:
Mr. A is insured for a life insurance policy of 10 Million Pesos which
is due from payment for 10 years. From Year 1 to Year 4, Mr. A
paid for the premium for 4 Million pesos. On the 4th year, Mr. A sold
the Insurance Policy to Mr. B for 5 Million Pesos. From 4th year to
8th Year, Mr. B paid for the Insurance Premium in the amount of 4
million pesos.
On the 8th year, Mr. A dies which means Mr. B is happy since he can
get the money in the amount of 10 million pesos. (and Mr. B paid
only 9M – 5M for the sale and 4M for the premiums)
What is TAXABLE?
The Income the original beneficiary (Mr. A) got from transferring
his insurance AND the income the purchaser (Mr. B) gains from the
Insurance Policy.
MR. A’s Case:
When he was alive and when he transferred his life insurance policy
to B, he was able to obtain 1 million pesos as his income. This is so
since Mr. A paid 4 million pesos for the Premium and he sold it to
Mr. B for 5 million pesos. 4 million as the capital of Mr. A is
deducted from 5 million which was how much he got from the
transfer.
This 1 million is now Mr. A’s income which is CAPITAL INCOME from
Capital GAIN (sale of other personal property)
MR. B’s Case:
When Mr. A transferred the policy to MR. B, latter now became the
beneficiary or the one who will reserve the 10 million pesos when
MR. A dies. Mr. B gets the 10 million BUT that whole amount is NOT
taxable since Mr. B had to put in capital for the policy.
Mr. B paid 5 million for the transfer from Mr. A to him and he also
paid 4 Million for the payment of the premium until the 8th year
when Mr. A died. Therefore, Mr. B paid a total of 9 million pesos
which is his capital which will now be subtracted to 10 million pesos
which Mr. B earned from the Insurance Policy.
Now, Mr. B actually has 1 million pesos as has income and now
subject to tax.
INCOME =
Life Insurance Proceeds – (Purchase Price + Premiums Paid)
AMOUNT RECEIVED AS RETURN OF PREMIUM
AMOUNT RECEIVED AS RETURN OF PREMIUM
The amount received by the insured, as a return of premiums paid by
him under life insurance, endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract
Endowment funds/policy:
Life insurance that allows you to get proceeds if you do not die after a
particular period.
Example: If you are required to pay for 100k per year for 20 years (total
of 2 million pesos) and that you will receive 10M at the end of that year,
and then you outlive the policy after 20 years and you do not die, you
will get it.
You will have an income of 8M.
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This is because 10M (endowment) – 2M (how much you paid for 20
years) = 8 Million pesos.
The 2 million pesos is return of premium/capital and not subject to
tax. This will not fall under letter A because no one died here.
GIFT, BEQUESTS AND DEVISES
GIFTS, BEQUESTS, AND DEVISES
The value of property acquired by gift, bequest, devise, or descent:
Provided, however, that income from such property, as well as gift,
bequest, devise, or descent of income from any property, in cases of
transfers of divided interest, shall be included in gross income
.
There is already direct tax due to it. There is no income to speak of. The
right you are exercising here is not related to your right to earn income
but on some other rights.
Gifts etc is under will if you are granted by some decedent which takes
effect only if someone dies. You earned something but not because of
your right to earn income but someone else’s right to transfer property.
This act is taxable under estate tax, not income tax.
In the same way, if I am so generous to give you 1M. It increased your
net worth. It is because of my right to be generous not your right to
earn income. If you are given gifts, it will be subject to donor’s tax, not
income tax. The donor, not the donee, is subject to tax.
COMPENSATION FOR INJURIES OR SICKNESS
COMPENSATION FOR INJURIES OR SICKNESS
Amounts received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
Generally not taxable
Only damages in relation to physical injuries are exempted (moral
damages are not exempted). It contemplates accidents involving
vehicles, someone will be held liable.
Example: If there is a manhole na natagak ka, granting someone was
negligent, if ever you will receive damages in relation to the injury.
Damages in relation to physical injury is not subject to tax.
Other damages that you will get is a gray area. For example,
compensation for loss profit which forms parts of compensation income
but this is a gray area.
Sir’s opinion
Sir thinks that this should not be subject to tax because this was not
borne out of your services rendered. It is just compensation because I
was involved in an accident, forms part of physical injuries.
Other damages that you get is still taxable if not related to physical
injury. Example: In labor case, payment of backwages, atty’s fees, moral
damages, nominal damages will still be subject to tax because not
physical injury.
INCOME EXEMPT UNDER TREATY
INCOME EXEMPT UNDER TREATY
Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.
Most favoured nation clause which is one way of preventing or avoiding
international double taxation. It is an exclusion because both sovereign
states, being superior in their own right, entered into an agreement.
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
We follow the pacta sunt servanda that we have to be in good faith
whenever we deal with international personalities. So if we agreed that
no taxes will be paid so it is appropriate to exclude them from taxes.
RETIREMENT BENEFITS
RETIREMENT BENEFITS
Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer:
Provided,
That the retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years
of age at the time of his retirement:
Provided, further, that the benefits granted under this subparagraph
shall be availed of by an official or employee only once.
For purposes of this Subsection, the term ' reasonable private benefit
plan' means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his officials
or employees, wherein contributions are made by such employer for the
officials or employees, or both, for the purpose of distributing to such
officials and employees the earnings and principal of the fund thus
accumulated, and wherein it is provided in said plan that at no time shall
any part of the corpus or income of the fund be used for, or be diverted
to, any purpose other than for the exclusive benefit of the said officials
and employees.
Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee
from the service of the employer because of death, sickness or other
physical disability or for any cause beyond the control of the said official
or employee.
a. "The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to
reside permanently in the Philippines from foreign government
agencies and other institutions, private or public.
b. Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United States
administered by the United States Veterans Administration.
c. Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No.
8282.
d. Benefits received from the GSIS under Republic Act No. 8291,
including retirement gratuity received by government officials
and employees.
Retirement plans covered by this provision:
1. Retirement Pay Law
2. CBA Retirement Plan
3. Reasonable Private Benefit Plan
Retirement Pay Law
Under the new retirement law, persons who are 60 years who have
rendered service of 5 years, extendable until 65 years mandatory
retirement.
CBA Retirement Plan
Retirement Plan entered into by the employer and the labor union. May
provide different conditions, provided not more burdensome than the
Retirement Pay Law.
Reasonable Private Benefit Plan
Another retirement benefit plan which has more stringent requirements.
This becomes a separate fund of the company. The company cannot
7|U N I V E R S I T Y O F S A N C A R L O S
make use of it. In fact, there is an entity that may be set up just for this
– usually a bank.
Q. What are the requirements of a reasonable private benefit
plan?
1st Must be reasonable private benefit plan
2nd Reasonable private benefit plan is only in the form pension, gratuity,
stock bonus or profit sharing plan
A reasonable private benefit plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein contributions
are made by such for the purpose of distributing to such officials or
employees, or both, and employees the earnings and principal of the
fund thus accumulated, and wherein it is provided in said plan that at no
time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the
said officials and employees.
This becomes a separate fund of the company because the company
cannot make use of it. In fact, there is an entity that may be set up just
for this usually a bank which will manage this
3rd A contributory plan
There must also be a contribution on the part of the employer, or
employee, or both. No amount shall inure to the benefit of a particular
employee or official and such must be established for the common
benefit of the employees or officials
4th Reasonable private benefit plan must be approved by BIR,
Otherwise it will fall under the ordinary retirement law or RA 7641. The
company is not considered to have successfully set up a reasonable
private benefit plan.
5th It must also be availed of only once by the employee in his lifetime.
It is contained in the regulations, though not stated in the law. The
subsequent retirement benefits received from another private employer
is no longer exempt but subject to tax
6th The retiree official or employee must be at least 50 years of age, with
at least 10 years of service which is either continuous or not because the
law does not provide.
Illustration:
In one company, you can work there for 5 years, leave the company, go
back to the company, and work for another 5 years. You then now
comply with the requirement of 10 years of service.
IF Mr A is already 50 when he joined the company and stayed until he
was 60 (optional retirement age), his retirement benefit shall be
excluded if the private benefit plan is approved by BIR only if this is the
first time he will receive the benefit, because he complied with the age
requirement which is 50 years old, he was able to work for 10 years and
it was approved by BIR.
Effect of previous retirement plan obtained from the government
If same situation, prior to working in the private company, he already
received retirement benefit from the government which he
previously worked for, will he be exempt if he retires from the private
company at age 60? Yes, because the first one that was availed of was
given by the government and it will not be counted for purposes of the
exclusion.
These employees are not covered by the labor code but covered by the
Civil Service Law. It is not covered on the law on RA 7641 or new
retirement plan. The reasonable private plan benefit received is
considered as the first time for the application of this law. The
retirement benefit received from the government will not be counted for
purposes of the exclusion under NIRC, after all it is not private.
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
Separation pay
Amount received by an official or an employee or by his heirs from the
employer due to separation from service because of death, sickness, or
other physical disability or for any cause beyond the control of the
official or employee
Sec 32 b, 6
Social Security Benefits, retirement gratuities, pensions, and other similar
benefits received by resident or non-resident citizens or resident aliens
from foreign institutions, whether public or private, are not taxable.
 SSS benefits under RA 8282
 GSIS benefits under RA 8291
 US Veterans benefit
Benefit you receive from the United States Veterans Administration
Office, Philippine Veterans benefits are also exempted.
If you used to work in the US for 20 years and then you retire, come
back to the Philippines and you receive pension from US social security
services, will it be excluded?
Yes, under 32b6c. If you get benefit like pension, social security,
retirement, gratuity and from a foreign government, it is already
excluded.
General rule in fact is that everything for which you paid a contribution,
if there are benefits from them, it is always exempted. Pag-ibig,
Philihealth, GSIS, SSS are always exempted whenever you get benefits.
Illustration:
Mr. A
30 years ABC Company 5 years Separation Pay of P300K
35 years XYZ Company 10 years Retirement pay of 1M
45 years ABC Company 5 years Retirement pay of 2M
Will the following be subject to tax?
The separation pay will not be subject to tax as per (b).
No age requirement here. The requirement is only the reason for
separation WON it is for just or lawful causes.
It could fall under retrenchment, redundancy or other labor saving
devices. Here, the reason for separation is involuntary or beyond the
control of official or employee. It could also be that the reason for
termination is death, sickness, physical disability.
If it falls under any of these two, then your separation will not be
taxable. But if severance is because you tendered your resignation,
clearly it is taxable. That’s why some companies let you enroll in their
redundancy program if they like you, so not taxable.
The first retirement plan from XYZ is taxable because Mr. A is not yet 50.
The last retirement plan is not taxable
10 years of service (5 plus 5 years) in ABC Corp plus 50 years old
therefore complied with the requirements.
Let us assume that the retirement plan for XYZ is subject to CBA which
provides that you may retire at age 50 or after rendering 10 years of
service to the company, approved by BIR, this will not be taxable. The
retirement plan under ABC will now be taxable because it will now be the
second time that he availed of a retirement plan.
TN: IT IS IMPORTANT THAT YOU KNOW WHAT THE REQUISITES ARE.
MISCELLANEOUS ITEMS
MISCELLANEOUS ITEMS:
A. Income derived by Foreign Government
B. Income derived by the Government or its Political Subdivisions
C. Prize and Awards
8|U N I V E R S I T Y O F S A N C A R L O S
D. Prizes and awards in Sports Competition
E. 13th Month Pay and other Benefits
F. GSIS, SSS, Medicare and Other Contributions
G. Gains from the Sale of Bonds, Debentures or other Certificates of
Indebtedness
H. Gains from Redemption of Shares in Mutual Fund
INCOME DERIVED BY FOREIGN GOVERNMENT
Income derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on deposits in banks
in the Philippines by:
 Foreign governments,
 Financing institutions owned, controlled, or enjoying refinancing
From foreign governments, and
 International or regional financial institutions established by
foreign governments.
Example:
If South Korea has a deposit here for 2M and it earns 100k interest after
10 years, interest will not be subject to tax because it is exempted under
7a. Interest on deposits from foreign governments in banks in the
Philippines is excluded from taxes.
If US government invested in the shares of PLDT and PLDT decided to
declare dividends, it will not be subject to tax because it is an income
from investment in the Philippines of a foreign government of shares of
stocks of corporation in the Philippines.
Concrete Example
Atlas Mitsubishi (Non-resident foreign corp. from Japan) Bank of Japan
Atlas loaned from Mitsubishi 2M (non-resident foreign corporation) for
equipment to produce the product for Mitsubishi. (IOW, Mitsubishi is
client of Atlas). In turn, Mitsubishi loaned that money from Bank of
Japan, owned by government of Japan.
Q. Is the interest earned by Mitsubishi taxable?
There is interest payment by Atlas equivalent to 10% per year paid to
Mitsubishi, amounting to 200k every year. This interest is TAXABLE
because it is not considered an investment of foreign government in the
Philippines.
You need to make a distinction since it is not the bank of Japan but
Mitsubishi which invested in the Philippines. The loan is granted not to a
Philippine company but to Mitsubishi, a company of Japan, and is not
considered an investment of government of Japan.
Interest will go to Mitsubishi, not to bank of Japan. BUT if the bank of
Japan loaned it to Atlas, it is tax exempt. But because in this case it
passed through Mitsubishi before getting to Atlas, the interest earned by
Mitsubishi is taxable.
If Mitsubishi is a domestic corporation or even a resident foreign
corporation doing business in the Philippines, and it makes payment of
interest to the bank of Japan, then it would not have been taxable.
The Philippine has no jurisdiction to tax the bank of Japan. If we will
allow this, all companies will deal with foreign corporation so that
whatever income is not taxable.
It is a landmark case, CIR vs Mitsubishi Corporation GR 54908,
Jan. 22, 1990. Read this case. Naa daw sa Vitug na book.
Refinancing is when a government renews its loan.
Example: Bank of Japan loaned 2M to Atlas. Di gihapon kabayad si Atlas.
Nag reloan na sad si Atlas, nisugod ra pud si Bank of Japan.
International or regional financial institutions established by foreign
governments is reciprocal law.
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
They are not subject to tax here since the Philippines is not subject to
tax there as well. Income earned by Asian Development Banks are not
subject to tax because they are owned by foreign government.
INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL
SUBDIVISIONS
Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
There are 2 entities covered:
1. Government of the Philippines – refers to the National Government
2. Any political subdivision – cities, provinces, municipalities and
barangays. Any income earned by them in the exercise of
governmental function should not be subject to tax.
How about GOCCs?
Distinguish whether the GOCC is exercising a government or proprietary
function. It must be engaged in a commercial activity for it to be taxable.
Section 27c of the tax code provides that all corps, agencies, and
GOCCs, except SSS are taxable. As a rule, GOCCs are subject to tax.
The exclusion under 32b 7b only pertains to subdivisions of the
government. But must distinguish whether the GOCC is exercising a
government or proprietary function.
Section 27c states that “upon their taxable income as are imposed by
this Section upon corporations or associations engaged in a similar
business, industry, or activity.” Meaning, it must be a commercial
activity for it to be taxable.
Example:
SSS are not subject to tax but had it not been provided in Section 27c
that they are exempt, they would have been subject tax because they
are doing what other private corporations are doing.
The act of loaning will be subject to tax had you been a corporation,
even if a GOCC, is subject to tax. According to BIR, BSP may be
subjected to tax because its charter says that it can be subject to tax
after a certain period which already lapsed.
Side note: For Sir, it should not be the case. The act of loaning of BSP is
not commercial but governmental in essence because it needs to
maintain financial stability for the Philippines. Otherwise, all the banks
will close. Unlike for commercial banks which purpose is really for profit.
The fact that it is not taxable if it exercises governmental functions will
not fall under 32b7b because sec 32b7b only says of political subdivision,
so it (GOCC) will not fall under the exclusion.
Sec 32b 7(b) only pertains to GOCCs providing public utilities. But, for GOCCs in
general, you refer to Sec. 27c of Tax Code where it specifically enumerates who
are exempted from taxes. It’s different for political subdivisions (national
government, local government units, municipalities, cities, provinces and even
barangays) – they are exempted from taxes which are connected or related to
governmental taxes. If they will engage in proprietary functions, they will be
subject to tax. However, seldom does the BIR go after them. It may be taken
against them as a body after all if the government produces income, it will still go
to the government. It will just be turnaround of the money.
At best, for the GOCC’s to be exempted, it should fall under Sec 27c to
be exempted since it states that GOCC’s are taxed when performing
commercial function.
Refer to Section 27 for legal basis for exemption
That is why PAGCOR is not there, it is already subject to tax. We also learned that
PAGCOR is only subject to tax for activities not related to gaming operations. Its
franchise actually says that it is exempted.
Q. Are prizes and winnings similar?
There is a technical difference for taxation purposes:
9|U N I V E R S I T Y O F S A N C A R L O S
A. Prizes – When you do something in order to win, as in the case of a
tournament where you join and get a prize. (Taxable)
B. Winnings – When you don’t do anything, and no other involvement
other than the payment of a ticket to join a raffle as in the case of
lottery, or by mere luck you are granted a reward. (Not Taxable)
PRIZES AND AWARDS
Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if:
i. The recipient was selected without any action on his part to enter
the contest or proceeding; and
ii. The recipient is not required to render substantial future services as
a condition to receiving the prize or award.
Requisites of exemption:
1. It must be related to recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement.
2. No action in your part to enter in the contest or proceeding, you
never submitted any entry
3. Recipient is not required to render substantial future services as a
condition to receiving the prize or award.
Should Pia be exempted from taxes?
No. It satisfied the first condition because it is actually a civil
achievement. However, she had to join the contest herself. She is even
required to render future services for the entire duration of her reign.
How can she be exempted? Think about it. This might come out in the
next exam.
PRIZES AND AWARDS IN SPORTS COMPETITION
All prizes and awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or abroad
and sanctioned by their national sports associations.
TN: Exempted if award refers to tournaments or competitions held in the
Philippines or abroad.
Requisites:
1. Competition must be sanctioned by national sports association
2. Competition must be recognized by Philippine Olympic Committee
Exemptions are construed against the taxpayer. The last requisite is hard
to prove.
13TH MONTH PAY AND OTHER BENEFITS
Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos (P30,000) which
shall cover:
1. Benefits received by officials and employees of the national and
local government pursuant to Republic Act No. 6686;
2. Benefits received by employees pursuant to Presidential Decree
No. 851, as amended by Memorandum Order No. 28, dated
August 13, 1986;
3. Benefits received by officials and employees not covered by
Presidential Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; and
4. Other benefits such as productivity incentives and Christmas
bonus: Provided, further, That the ceiling of Thirty thousand
pesos (P30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering, among others, the effect on the
same of the inflation rate at the end of the taxable year.
P30k raised to P82k + P10k productivity incentive = P92k
Currently, the threshold for the amount exempted is raised from P30,
000 to P82,000 for 13th month pay and other benefits such as Christmas
bonus. There is also additional exemption for productivity incentive of
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016

10,000, for a total of as much as 92,000 for threshold for amount Indebtedness may be exempted from tax if the maturity date is
exempted. more than 5 years.

De minimis benefits Q. How can debts be subjected to tax in the first place?
These are small amounts of benefits granted to employees. They are Debts are not seen as debts but possible investments on the person who
tax-exempt to a certain effect. lends the money. Debts may be securitized which means it can be
covered by a certificate/evidence for which people can invest in. People
Example: are interested in investing in debts because it can be at an amount lower
Rice subsidy of P1500 per month is not subject to tax and not included in than the face value
withholding tax system. But if there is subsidy in excess of 1500, that
excess is part of the determination of the 82k threshold. Example
Mr. B’s Debt to Mr. A is 1 million and with a fixed interval payment of
If you have 2000 subsidy, the 500 is not automatically taxable since you 100k/mo. The maturity is for or a period of more than 5 years
have to consolidate at the end of the year. The (500 x 12 months) 6000
can be exempted if it does not exceed 82k including your 13th month Mr. A can make a security (debt obligation) and he can assign such right
pay. to someone else and he or she can readily collect the amount. But Mr. A
sold this security to Mr. C for 900,000. The difference of P100,000 is the
gain the other person will obtain.
Illustration:
If Mr. C sells it to someone for 1.1 Million, Mr. C earns 200,000. That
200,000 can be excluded from taxes granting the bond is good for 5
13th month pay
 100k (after computing for 13th month years, otherwise it is not exempted from taxes.
Given Facts: pay)
P1500 max rice subsidy Bonds are debt securities while shares of stocks are equity securities. It
per month Rice subsidy is this securitization of debt securities which caused the US Subprime
 2000 per month crisis because of lack of proper investigation and poor debt policy of
P5000 max clothing  Deduct 1500 since Deminimis allows up lenders.
allowance per year to 1500 exemption which makes the it
now 500 per month GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND
 To see if 500 per month is exempt from Gains realized by the investor upon redemption of shares of stock in a
Salary – 100k/month tax if it’s not in excess of the 82000 mutual fund company as defined in Section 22(BB) of this Code.
Rice subsidy – 2k/month allotted for 13th month pay and other
Clothing allowance – benefits, multiply by 12 since it will be Mutual fund – the public gets to be included in that fund.
10k/year computed at the end of the year
 6000 pesos for Rice Subsidy
There are businesses like PhilAm and most banks engage in
management of mutual fund because not everyone has the technical
Clothing
 10000 per year but 5000 pesos is allowed
know-how to trade in the capital market for shares, bonds.
to be exempt therefore 5000 pesos is left
for calculation People trust the professionals and the experts (banks, etc) to manage
their funds. Small investments are pooled together and then invested,
Total = 100,000 + 6,000 + 5,000 perhaps in the stock market.
111, 000 – 82000 = 29,000
P29,000 is the amount taxable Illustration:
38 people will invest 100,000 each which amounts to 3.8 Million.
Evidence of ownership of mutual funds is called shares represented by a
GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS certificate. At the end of a certain period, you decide to sell it back to the
GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of fund.
individuals.
If you sell your shares to the fund and you gain and earn income, that
When you look at your payroll, there will be deductions which are done income is tax exempt. This is done by the government to encourage
before computing the tax people to invest in mutual funds and save their money. Mutual fund
owners are protected because they are small time investors.

SSS Contributions – 1000 Salary 100k TAKE NOTE THAT IT HAS TO BE A MUTUAL FUND.
Philhealth – 500 Less 1.6k
HDMF – 100 Taxable 98.4k DEDUCTIONS
Total: P1,6000 (subjected to tax table)
DEDUCTIONS

GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER Matching principle:

CERTIFICATE OF INDEBTEDNESS
Gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness with a maturity of more
than five (5) years.
Debentures - used for bonds, backed by general credit of the issuer
rather than a particular assed, in short they are unsecured liabilities. This
is like a bank letting someone owe money without any collateral
Before income can be generated, you have to spend something for it.
You need to deduct your expenses from your income to arrive at your
net taxable income.
 Deductions represents something which you let go (outflow).
 Exemptions are actually income but only the law deems it not
subject to tax (inflow).

10 | U N I V E R S I T Y O F S A N C A R L O S
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016

Basic principles This is favorable to the taxpayer:

 If at end of the year, you gave birth to twins, you can claim 50k
1. There must be a legal principle allowing deductions as provided in additional exemption for the whole year even if the twins were born
Section 34 of the NIRC by 11:59:59 pm on December 31.

2. You must satisfy conditions in the law so that you can apply, that
deduction must be used or related to your trade or business.
Example:
Your business is leasing out of real properties. You went to collect rents from
your lessee. When you went out, your child with you wanted to buy the very
colourful balloons. Can you deduct the cost of balloons? No, it is not related
to conduct of trade or business. There could be other conditions;
3. STRICTLY construed against the taxpayers, it has the effect of
lessening the taxes that the government can collect;
 Even if the status changes at the beginning of the year, such as the
dependent becomes 22 by January, the dependent can still be
included in the deduction.
 Husband and wife can claim maximum of 4 children for both na!
Only one can claim the 4. Husband can claim 2, wife can claim the
other 2.
ITEMIZED DEDUCTIONS

4. Withholding tax must be strictly imposed when required under law. ITEMIZED DEDUCTIONS
Example: if you do not withhold employees’ compensation, you are not Section 34 A – 34 M
allowed by government to deduct the salaries from your gross income. If you
have 10M gross income with 1M salaries, di ka ka-minus sa 1M. Also, there is ExInTaLoBaChaRePenPreDepDep
a penalty equivalent to the amount not withheld by the employer.
SECTION 34. Deductions from Gross Income
A. Expenses
KINDS OF DEDUCTIONS B. Interest
KINDS OF DEDUCTIONS C. Taxes
D. Losses
INDIVIDUALS: PERSONAL AND ADDITIONAL EXEMPTIONS E. Bad Debts
F. Charitable Contributions
Basic personal exemption G. Research and Development
50K (presupposes that there is an income; granted to ALL individuals H. Pensions
who are earning income; granted on the account that you are a person, I. Premium Payments on Health and/or Hospitalization Insurance
to account for your living expenses) J. Depreciation
K. Depletion
Additional exemption
25K per child, maximum of 4 children (Dili senior citizen, dili mama ug TN: ONLY INDIVIDUALS/CORPORATIONS EARNING BUSINESS INCOME
papa) CAN DEDUCT THESE.
If purely compensation income earner, one cannot deduct these. However, to claim
all these deductions, official receipts are required to substantiate them, which is
Requirements: (All must be complied with) why most would instead opt for Optional Standard Deduction instead
1. Dependent child - legitimate, illegitimate, or legally adopted child
2. Must be chiefly supported by the taxpayer (probably more than OPTIONAL STANDARD DEDUCTIONS
50% support) In lieu of the itemized deductions, you can opt for an automatic 40%
3. Child must be living with the taxpayer Optional Standard Deduction. If your expenses does not reach 40% just
4. Must not be more than 21 years old opt for the OSD.
5. Unmarried
6. Must not be gainfully employed A. For individuals – OSD is based on gross sales or receipts for
Exception: Even if more than 21 years old but incapable of self-support, can
still be considered dependent when mentally incapacitated or with physical
Individuals
defect - something born with. B. For corporations – OSD is based gross income.

Physical disability - not something born with – out of accident. Physical OSD Formula:
disability is not covered under this law Gross sales (Basis for individual OSD)
Less Cost of sales
Change of status Gross income (Basis for corporate OSD)
TN: This is favorable to taxpayer
TN: NOT ALL CAN CLAIM: NON RESIDENT ALIENS CANNOT CLAIM.
Section 35, (C) Change of Status.-
If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the NON-DEDUCTIBLE ITEMS
corresponding additional exemption, as the case may be, in full for such NON-DEDUCTIBLE ITEMS
year.
SEC. 36. Items Not Deductible. -
If the taxpayer dies during the taxable year, his estate may still claim the (A) General Rule. - In computing net income, no deduction shall in any
personal and additional exemptions for himself and his dependent(s) as case be allowed in respect to -
if he died at the close of such year. (1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for permanent
If the spouse or any of the dependents dies or if any of such dependents improvements, or betterments made to increase the value of
marries, becomes twenty-one (21) years old or becomes gainfully any property or estate; This Subsection shall not apply to
employed during the taxable year, the taxpayer may still claim the same
intangible drilling and development costs incurred in petroleum
exemptions as if the spouse or any of the dependents died, or as if such operations which are deductible under Subsection (G) (1) of
dependents married, became twenty-one (21) years old or became Section 34 of this Code.
gainfully employed at the close of such year.

11 | U N I V E R S I T Y O F S A N C A R L O S
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016
(3) Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
made; or
(4) Premiums paid on any life insurance policy covering the life of
any officer or employee, or of any person financially interested
in any trade or business carried on by the taxpayer, individual
or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In computing
net income, no deductions shall in any case be allowed in respect of
losses from sales or exchanges of property directly or indirectly –
(1) Between members of a family.
For purposes of this paragraph, the family of an individual
shall include only his brothers and sisters (whether by the
whole or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by
or for the same individual if either one of such corporations,
with respect to the taxable year of the corporation preceding
the date of the sale of exchange was under the law applicable
to such taxable year, a personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with
respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
GENERAL RULE
Personal, living or family expenses
Cannot claim as it is not related to business. Accounted already on basic
personal exemption.
Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of
any property or estate
Can SM Corporation claim 1 billion as expense for its construction for
seaside? NO, but you can claim for depreciation until the cost has been
fully expended
EXEMPTION: Non-stock, non-profit educational institution.
May claim the entire cost building in one year, but it can account it as
depreciation per year. However, it will not matter since it is non-taxable
in the first place.
Amount expended in restoring
These are allowances to restore a property or making good the
exhaustion thereof for which an allowance has been made. For example,
a mining company digs out an entire mountain and then they have a
restoration cost to restore the property back to its original form.
You cannot claim this as a deduction because it is ought to be part of the
value of the property and then depreciated (depletion is the term for
depreciation in the mining business) later on.
Premiums paid on any life insurance policy
When the company depends so much on a key employee, and gets a life
insurance for him, but beneficiary is still the corporation, this is non-
deductible (the premiums paid – this is a return of capital).
12 | U N I V E R S I T Y O F S A N C A R L O S
LOSSES FROM SALES OR EXCHANGES OF PROPERTY
Between members of the family
Family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal
descendants.
Example, real property forming part of the exclusive property of the wife
worth 1M is sold to husband for 100K. The 900k loss cannot be claimed
by the wife because this is a transaction involving family.
TN: Auntie not included because they are collateral relatives. Cousin –
can deduct the loss.
Except in case of distribution in liquidation (corporation will
close business), between an individual and corporation, where
the shareholder is considered controlling shareholder –
controlling shareholder has more than 50% of the outstanding
shares is owned (DIRECTLY OR INDIRECTLY)
Illustration when Shareholder DIRECTLY owns the shares
Shareholders of Corporation X
A 51%
B 10%
C 10%
D 10%
E 19%
If Corporation X transacts with Shareholder A (who is a controlling
Shareholder), X cannot deduct its losses in the transaction because the
transaction involves a controlling shareholder
If Shareholder A transacts with Corporation X, A cannot deduct his loss
for the same reason.
REASON: there may be undue influence. Being a controlling shareholder,
latter may dictate the price of the transaction
Illustration when Shareholder INDIRECTLY owns share
Shareholder A is 50% owner of Corporation X. But Shareholder A owns
99.99% of Corporation Y. Corporation Y on the other hand, owns 20% of
Corporation X.
If Corporation X transacts with Shareholder A and Corporation X incurs a
loss, Corporation X CANNOT claim deduction because, INDIRECTLY,
Shareholder A holds an additional 20% aside from his DIRECT ownership
of 50% of Corporation X, through Corporation Y
THEREFORE: Shareholder A owns 50% of Corporation X. Corporation Y
owns 20% of Corporation X but Shareholder A owns 99.9% of
Corporation Y which means, Shareholder A owns the 20% of Corporation
X through corporation Y
Q. What IF Shareholder A owns 50% instead of 99.9% of Corporation Y?
Shareholder A will still own a TOTAL of 60% of Corporation X, 50% of
the 20% is equal to 10% (Shareholder A owns half of the Corporation Y
and therefore half of the 20% Shares of Corporation Y in Corporation X
Formula = 20 *. 5 (take the shares as a whole integer and multiply it by
how much percent the shareholder actually owns)
If Shareholder A owns, 75% then, 20% * .75 = 15%
This is the GRANDFATHER RULE
Looking into the shareholders (Shareholder A) of the Corporate
Stockholder (Corporation Y)
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016

Transaction could also be between corporation RESIDENT CITIZEN

Granting that more than 50% in value of the outstanding stock of EACH
corporation is owned directly or indirectly by or for the same individual. RESIDENT CITIZEN
If either one is a personal holding company OR foreign personal holding To be resident citizen, comply with the constitutional requirements:
company  Born into it or with it
 Naturalized
Holding Company is a company engaged merely for investment  Ask congress for a citizenship
purposes. Personal only one person holding corporation and the rest are
nominees. If two corporations owned by one person engage in the same Establish residence here, more or less similar with domicile. (animus
transaction for which a loss is incurred, that loss cannot be claimed as a revertendi). Residence for tax purpose requires physical presence here in
deduction the Philippines.

Illustration: A resident citizen is taxable for income within and without.

All other individuals are classified further.
Corporation X (Personal holding Corporation Y
Company) RESIDENT ALIEN
A – 99.99% A – 99.99%
B – 1 share F – 1 share RESIDENT ALIEN
C – 1 share G – 1 share You established residence here in Philippines, for as long as you
D – 1 share H – 1 share intended to make Philippines as your residence, or if you established
E – 1 share (cannot have I - share presence in Philippines for 1 year. No hard and fast rule for residence
corporation with less than 5 requirement
shareholders)
Non-resident alien:
Corp X entered into transaction with Corp Y, for 1M when it ought to be  Not engaged in trade or business (NETB)
3M. The 2 M cannot be deducted by Corporation C because one of the  Engaged in trade or business (ETB)
corp is a personal holding corp and under both corporation, these are
held by the same individual at the interest of more than 50% on each of However, the basis is just how long you stay here in the Philippines
the corp. But if not personal, then it will not fall under the nondeductible
item. SEC. 25. Tax on Nonresident Alien Individual-

Between grantor and fiduciary of any trust (A) Nonresident Alien Engaged in trade or Business Within the
Three parties to a trust: Philippines.
1. Grantor/trustor (1) In General. - A nonresident alien individual engaged in trade or
2. Trustee/fiduciary business in the Philippines shall be subject to an income tax in the same
3. Grantee/beneficiary manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
You cannot claim a loss in a related-party transaction between grantor alien individual who shall come to the Philippines and stay therein for an
and fiduciary. Trustor may influence trustee to incur loss aggregate period of more than one hundred eighty (180) days during
any calendar year shall be deemed a 'nonresident alien doing business in
Between fiduciary of a trust and fiduciary of another trust if the the Philippines'. Section 22 (G) of this Code notwithstanding.
same person is a grantor with respect to each trust
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Trust 1 Trust 2 Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the
A – trustor A - trustor
entire income received from all sources within the Philippines by every
B – Fiduciary X - Fiduciary
nonresident alien individual not engaged in trade or business within the
C - Beneficiary Y – Beneficiary
Philippines as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments,
If there is a transaction between B and X (fiduciary), they cannot claim a or other fixed or determinable annual or periodic or casual gains, profits,
loss because they have the same trustor A. and income, and capital gains, a tax equal to twenty-five percent (25%)
of such income.
Between fiduciary of a trust and a beneficiary of another trust 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
B transact to C, or X to Y, loss incurred, cannot claim loss. any domestic corporation and real property shall be subject to the
income tax prescribed under Subsections (C) and (D) of Section 24.
INCOME TAXATION FOR INDIVIDUALS
To classify whether as non-resident alien engaged in trade or
INDIVIDUAL TAXATION business
More than 180 days in the Philippines, regardless of the intention.
General principles of income taxation  Requirement is only on the basis on the number of days stay in
 A resident citizen are taxable for income within and without the country
 All other individual are taxable for income within  Computation of 180 days is 360/2 plus 1
 Classification
A. Resident Citizen To classify as non-resident alien NOT engaged in trade or
B. Non-resident Citizen business
C. NR Alien engaged in trade or business Stayed in the country for 180 days or less. This matters because there is
D. NR Alien not engaged in trade or business a different rate for ETB and NETB.
E. Special employees  ETB - base is net income. Rate applicable is the tax table - 5-32%
F. Estates and trusts  NETB - gross income. 25% flat rate

13 | U N I V E R S I T Y O F S A N C A R L O S
TAXATION LAW I l Atty. Amago l For the exclusive use of EH – 407 A.Y. 2015-2016

NON-RESIDENT CITIZEN 5. The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad
NON-RESIDENT CITIZEN or to return to and reside in the Philippines as the case may be
Section 22, (E) for purpose of this Section.
The term "non-resident 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.
 Write letter to commissioner
 Or photocopy passport and show when you leave

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.
 Immigrant
Immigrant visa, does not matter when he/she leaves, as long as
intended to be an immigrant

 Employment on Permanent Basis

Permanent employment – when there is no definite period, not
merely contractual
Ex: nurses, leave the country in the middle of the year, deemed non-
resident citizen

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.
 MOST OF THE TIME FOR TAXABLE YEAR = 183 days
 Higher because intention is for wider taxpayers taxable in the
Philippines
 183 days doesn’t need to be continuous as long as it is within
the year

Illustration
You are assigned to SG for a period of 2 yrs. You left the country
July 2, 2015. Reason is to earn income abroad. Employment
requires physical presence. Is it most of the year 2015 to be
considered a non-resident citizen.
 Count if reaches 183 days.
 July 2 to December 31 = 182 days; Resident Citizen for
2015
But if you left on July 1, you will be considered a Non-resident
citizen.

 For Jan 1 to Dec 2016, Non-resident Citizen in this case

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.

Same Illustration as above

Jan 1 to July 7, 2016 (end of the assignment to Singapore).
In this case:
 Previously classified as NRC
 Will reside permanently in the Philippines.

Therefore, this person is now a HYBRID Non-resident citizen

 Will be considered as Non-resident citizen up to July 2, 2017
 From Jul 7 to December 31, 2017, resident citizen
 Take note: Regardless of the date of arrival in the Phils for
as long as the intention of arrival is to reside permanently in
the Phils within the taxable year
 And will only apply if previously classified as NRC in the
previous taxable year.

14 | U N I V E R S I T Y O F S A N C A R L O S