TAXATION LAW REVIEW NOTES (FINALS part)
Justice Japar B. Dimaampao
SBCA-SOL 4S 2017-2018
Table of Contents
Income Taxation - March 17, 2018
Gross Income And Capital Transaction -
March 24, 2018
Corporate Income Taxation - April 14, 2018
Allowable Deduction And Special Topics -
April 21, 2018
Allowable Deductions (Continuation) And
Value Added Tax - April 28, 2018
March 17, 2018
INCOME TAXATION
Recitation:
1. Chapter 1 was asked one time in the bar exam. The
question, state and explain briefly the salient features of
our present income tax system. 10pts. just like that. We
have 6, then explain this briefly.
Answer:
The following are the present salient features of our Income
Taxation:
1. Schedular System of Taxation - one that classifies
income. It provides different tax rules. It impose different
tax rates.
2. Global System of Taxation - one that generally provides
for uniform rules. It imposes uniform tax rate. It does not
generally classify income.
3. Net Income Taxation System - A system of taxation
where the tax base is Taxable Income and deductions and
exemptions are allowed.
4. Gross Income Taxation System - A system of taxation
where the tax base is gross income and no deductions and
exemption are allowed.
5. Creditable withholding tax system - where a withholding
agent withhold income and such will be included in the
taxpayer's gross compensation income and may be
claimed as a tax credit or may be deducted from the
income tax due or payable.
6. Final withholding tax system - where a withholding agent
withhold income and is not included in the taxpayer's gross
income and which constitute as a final and full settlement
of tax liability.
2. Can you briefly discuss this very technical method, we
have discussed this last week, creditable withholding tax
system and final withholding tax system? Check your book
(See page 2 of Basic Approach to Income Taxation)
Answer:
In Creditable Withholding Tax System (CWTS) and
Final Withholding Tax System (FWTS) the common feature
is that there is a withholding agent who withholds the tax
and remit the same to the BIR.
In CWTS the tax withheld is included in the gross
income of the taxpayer whereas in FWTS the tax withheld
is not included in the gross income of the taxpayer.
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What is the effect of CWTS and FWTS?
In CWTS the tax will not constitute as the full and
final settlement of tax liability of the taxpayer contrary to
FWTS where the tax withheld constitute as the final and full
Page settlement of tax liability.
1 In CWTS the tax withheld can be claimed as a tax
credit or may be deducted from the income tax due or
5 payable on the other hand in FWTS the tax withheld
13 cannot be claimed as a tax credit for it constitute as the
final and full settlement of tax liability.
16 In CWTS the taxpayer must report the income
received as part of his gross income and hence must file
21 an Income Tax Return (ITR) whereas in FWTS if the source of
income is subject to final tax no need to file an ITR.
Why final (referring to FWTS) because it is a complete
payment of tax liability.
3. Explain Schedular tax treatment, global tax treatment,
gross income taxation, net income taxation.
Schedular Tax System is a system of taxation which
imposes taxes on income of individual taxpayers. The
income tax treatment classifies income, it imposes
different tax rules or treatment and imposes different tax
rates on different categories of income.
Global Tax System is a system of taxation which
imposes taxes on income of corporate taxpayers. The
income tax treat generally does not classify income, it
generally provides uniform tax rules and tax rates.
Gross Income Taxation is a tax system which no
deductions and exemptions are allowed and the tax base
is gross income. Net Income Taxation is a tax system which
allows deductions and exemption and the tax base is
Taxable Income.
4. Last Saturday I wrote down all income that is subject to
final tax and it was previously asked in the bar exam. What
are the 7 common items of income subject to final tax?
You should know it by now.
Apply what we just said. This does not need to be reported
because?
Answer:
It constitute as final and full settlement of tax liability.
Answer for income subject to final tax: (see p. 54 of Basic
Approach to Income Taxation)
1. Dividend received from domestic corporation by
individual or non-resident foreign corporation.
*Supposed it is received by a corporate taxpayer, by
another domestic corporation? Subject to final Tax? What
is the tax treatment there?
Answer:
No not subject to final tax. The tax treatment is it is tax
exempt.
*Supposed it is received by a resident foreign corporation?
What is the tax treatment? It is not subject to final tax.
Answer:
The tax treatment is it is tax exempt.

When you are asked for the tax treatment the answer
should be taxable or tax exempt.
2. Interest Income from bank deposit.
*Interest income on loans is it subject to final tax?
Answer: No.
Not all interest income are subject to final tax.
*Interest income on bonds is it subject to final tax?
Answer: No.
3. Royalties
4. Prizes
*What is the Condition?
Answer: Amounting to more than Php. 10,000
5. Winnings
*What are those exempt winnings?
Answer: sweepstakes and lotto
6. Partner's share from net income after tax of business
partnership, joint account, joint venture or consortium.
*When the income is from the share of a partner from the
income of general professional partnership is it subject to
final withholding tax? What is the tax treatment of the that
share of a professional partner from the income from the
general professional partnership?
Answer: No it is not subject to final withholding tax. The tax
treatment is it is taxable subject to progressive rates and
therefore must be reported.
*What about the share of a business partner from the net
income after tax of a business partnership? What is the tax
treatment?
Answer: It is taxable and is subject to final tax.
7. Capital Gains from sale of shares of stock not traded in
stock exchange
*When is such gain subject to final tax?
Answer: When it is not traded in stock exchange.
*What it the tax base?
Answer: Net Capital Gain
*When is such gain transaction subject to percentage tax?
Answer: When it is traded in stock exchange.
*What is the tax base?
Answer: Gross Selling Price
Memorize this income subject to final tax. It is for your own
good.
5. These are the requisites of taxable income. If you say it
is not taxable you point out the requisite that is absent. (see
p. 8 - 11 of Basic Approach to Income Taxation)
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1. There must be a profit or gain
2. The gain must be realized or received
3. The gain must not be excluded by law (tax
code), special law or treaty from taxation
Please refer to P. 24 to 25 of your book. Try to memorize
those 10 items there. They are exempt by virtue of special
law. One or two of them will come out in the bar exams.
The following are exempt by virtue of special law: (p. 24 -
25 of Basic Approach to Income Taxation)
1. Prizes received in charity, horse racing sweepstakes from
the PCSO (R.A. 1169)
2. Salaries and stipend in dollars received by non-filipino
citizen serving as staff of International rice research institute
( R.A. 2707)
3. Salaries and stipend in dollars received by non-filipino
citizen serving as staff of Ford foundation grants (R.A. 3538)
4. Salaries and stipend in dollars received by non-filipino
citizen serving as staff of Agricultural Department of the
Southeast Asian Fisheries Development Center (P.D. 246)
5. Salaries and stipend in dollars received by non-filipino
citizen serving as staff of Population Council of New York
(P.D. 246)
6. Income from bonds and securities for sale in the
international market (P.D. 81)
7. Income from bonds and securities issued by EPZA (P.D.
66)
8. Income derived from the installment sales of houses to
their employees and workers or to low-income groups in
housing projects or income derived from rentals thereof
(P.D. 745 and 1217 -- Housing Program of the government)
9. Officers and staff of Asian Development Bank (ADB),
experts and consultants performing missions for the Bank
shall be exempt from Philippine Income Tax ( Art. XII, Sec.
45, Government Agreement with ADB)
10. Award given by Ramon Magsaysay Award Foundation
(RMAF) are exempt from the payment of income tax (R.A.
2062)
Lets focus on those exempt in the NIRC. I do not do this to
my bar lecture but I will do this to your class. You must
know that there are 57 items of income that is exempt.
1. Sec. 32 (b), you will find 19 items.
2. Sec. 24 and 25, there 5 items that are exempt from
income tax.
3. Sec. 27 and 28, 4 items. Provisions on corporate income
taxation.
4. Sec. 33 (b), 10 items. Clarified by RR 3-98. I mentioned in
your book in pp. 35 -36.
5. Sec. 33 (1), (2), (3) there 3 items.
6. Sec. 33 (c) (4), 6 items.
7. Pp. 33 - 35 of Basic Approach to Income Tax, De Minimis
Benefit, 11 items memorize this. In the last 3 years there are
always questions on de minimis benefit.
8. Sec. 40 (c) , pp. 179 - 180 there are 4 items of tax exempt
sales or exchanges "no gain no loss recognized".
10. Sec. 73 (b) stock dividend.
*If you can memorize this you are better than tax
professors.
6. Let us now focus on Sec. 32 (b) because among these it
is the most favorite. 19 exclusions from gross income.
Answers: (see pp. 15 - 24 of Basic Approach of Income
Taxation)
The following are exclusions under the NIRC:
1. Proceeds from life insurance
2. Amounts received as return of premium
3. Gifts, bequests and devises
*In civil law parlance these are donations inter vivos and
mortis causa.
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits received by officials and employees
of private firms, individuals or corporations. Retirement
benefits paid to employees who have reached the age of
60 or more but not beyond 65 years with at least 5 years of
creditable service under RA 7641
7. Separation benefits due to death, sickness or other
physical disability or for ANY CAUSES BEYOND THE
CONTROL of said official or employee.
8.Social Security benefits ,retirement gratuities received by
resident or non-resident citizens or resident aliens from
foreign government agencies and other private or publics
institutions. Pensions received by retirees from foreign
sources.
9. Benefits received from US Veterans Administration (RA
360) by veterans residing in the Philippines
10. Payment of benefits under the SSS under RA 8282
11. Benefits received from GSIS under RA 8291
*Miscellaneous Items there are 8.
12. Income Received by foreign governments from their
investments in the Philippines
13. Income derived by the government of the Philippines
or any of its political subdivision from any public utility of
from the exercise of any essential governmental function
*Must be derived from the exercise of any ESSENTIAL
GOVERNMENT FUNCTION.
14. Prizes and awards received in recognition of religious
charitable , scientific, educational, artistic, literary or civic
achievement.
*It must be answered by "received in recognition of..."
15. Prizes and awards in sports competition granted to
athletes whether held in the Philippines or abroad and
sanctioned by their national sports associations
16. 13th-month pay and other benefits
*The exempt amount now is 90,000. (train law)
17. GSIS, SSS, Medicare and other contributions
18. Gains from sale or exchange of retirement of bonds,
debentures or other certificate of indebtedness with a
maturity of more than 5 years,
19. Gains from redemption of shares in Mutual Fund
Company
7. Next question, can you tell us why it does not constitute
as income?
Answer:
1. Proceeds of life insurance - it is an indemnity rather than
as a gain or profit.
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*In the bar exam the prennial sub-question is "does that
form part of the gross estate"?
Answer: It depends. You mark section 85. It depends upon
the beneficiary designated. Excluded under two cases,
included under two cases.
Excluded in two cases:
It shall not form part of the gross estate:
1. If third person is irrevocably designated as
beneficiary,
2. If it partakes as a proceeds of group insurance.
Included in two cases:
It forms part of the gross estate:
1. If third person is revocably designated as
beneficiary;
2. The beneficiary is the estate, executor or
administrator is designated as beneficiary, revocable or
irrevocable.
2. Amount received as a return of premium - it is a return of
capital
3. Gifts, bequest and devises - it is not a product of capital
nor industry
4. Compensation for injuries or sickness - it is not a
gain/profit adds nothing to the individual
5. Income exempt under treaty - it adheres to the generally
accepted principles of international law.
6. Income received by foreign governments from their
investment in the Philippines - it is to lessen the burden of
foreign loans in as much as the interest of these loans are,
by contractual agreement, borne by the domestic
borrowers
7. Income derived by the government of the Philippines or
any of its political subdivision from any public utility of from
the exercise of any essential government function - it is in
recognition of the principle of exemption from taxation of
government agencies and entities.
8. What are the possible implications of donation inter
vivos?
Answer:
1. Donation is subject to donor's tax.
2. The Donee is subject to donor's tax.
3. The recipient of such donation not subject to income tax.
[sec. 32(b) item (3)]
9. What is the possible implications of donation mortis
causa?
Answer:
1. It is subject to estate tax
2. The heirs are not subject to inheritance tax
3. The heirs are not subject to income tax [sec. 32 (b) item
(3)]
10. Let us go to compensation for injuries or illness. This is
the perennial bar questions: The amounts granted by the
court representing moral damages and exemplary
damages, are these amounts subject to tax?
Answer:
No, it is not taxable because it does not qualify as income.
The requisite of taxable income that is absent here is that
there is no gain or profit to speak of.
11. What about the amount representing exemplary
damages?
Answer:
No, it is not taxable because it does not qualify as income.
12. What are the grounds for recovery of Moral Damages?
There are 9. You are supposed to know them.
Answer:
Under Art. 2217 of the New Civil Code.
1. Physical suffering
2. Mental Anxiety
3. Freight
4. Serious Anxiety
5. Besmirched reputation
6. Wounded Feelings
7. Moral Shock
8. Social Humiliation
9. Similar Injury.
* Do not make your answers long.
13. What are the requisites for exemption under the law (RA
7641)? This is an amendment in the labor code -- RA 7641.
The retirement benefits paid to the employees who have
reached the age of 60 or more but not beyond 65 years
with at least 5 years of cedited service.
14. What are the requisites for exclusion of retirement
benefits under the tax code?
Answer:
a. Reasonable private plan maintained by the employer
duly approved by the BIR for exclusive benefit of the
members - employees
b. Retiring official or employee who has rendered at least
10 years of service
c. At least 50 years of age at the time of the retirement
d. The benefit of exclusion shall be availed of only once
15. He retired from his first employment, assuming all 4
requisites are present to exempt, he subsequently got
employed and after rendering service for 3 years he retired
from such employment and he received again a
retirement benefit. Is that second retirement benefit
taxable?
Answer: Yes it is taxable because under the requisite of
exemption such benefit exclusion it must be availed of
only once. (it applies to private employees)
16. When is separation pay tax exempt?
Answer: If the separation pay is due because it is beyond
the control of said offical or employee.
17. If the employee receive separation pay as a result of
voluntary resignation is it taxable?
Answer: Yes because it is within the control of said
employee.
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18. What is the Zialcita Doctrine or the judicially recognized
cause of beyond the control of the employee or official?
Answer: Compulsory Retirement
19. What are those payments that may comprise
compulsory retirement?
Answer: Lump Sum Credits -- Terminal leave pay
20. How do you distinguish separation pay from retirement
benefits?
Answer:
In separation pay you the exemption hold
regardless of age and length of service, in retirement
benefits the retiring employee must be at least 50 years of
age render 10 years of service.
In separation pay the law does not require that
the exclusion be enjoyed once, in retirement benefits the
exclusion must only be availed once.
In separation pay it must be because of causes
beyond the control of the employees, in retirement
benefits there is no such requisite.
In separation pay there is no private plan to be
maintained by the employer, in retirement benefits there
must be a reasonable retirement plan.
21. The case of Commisioner vs Mitsubishi Metal Corp. has
not been asked in the bar exam. It is a potential bar
question. Read original case. (see p. 22 of Basic Approach
to Income Taxation)
In this case the exemption for income received by foreign
government from their investment in the Philippines, to be
exempt, the creditor must be the foreign government or
financing institution owned, controlled and established by
it.
22. There are 3 exempt recipient of such income received
by foreign government from their investment in the
Philippine?
1. Foreign Government
2. Financial Institution controlled or financed by the foreign
government
3. Regional or International financing institutions
established by the foreign government.
23. How do you distinguish the 2 exempt prizes and
rewards in par. C & D?
Answer:
In Par. C it must be received in recognition of
religious, charitable, scientific, educational, artistic, literary
or civic achievement; in Par. D it must be from a sport
competition granted to athletes in local or international
sport competitions.
In Par. C there must be no action on his part to
enter the contest or proceeding; in Par. D there is no such
prohibition.
In Par. C it must be an unconditional receipt of
such prize; in Par. D. there is no such requirement.
In Par C there is no requirement of accreditation,
in Par. D the national sport association must be accredited
by the Philippine Olympic Committee.
24. Let us go to transactions involving gains from sale or
exchange of retirement of bonds, debentures or other
certificate of indebtedness, what are the gains that are
exempt? There are 3.
Answer:
1. Gain derived from the sale of these bonds, debentures
or other certificate of indebtedness
2. Gain derived from the exchange of these bonds,
debentures or other certificate of indebtedness
3. Gain derived from retirement
*Interest Income on bonds having a term of more than 5
years is tax exempt?
Answer: Not exempt.
25. When is gain derived from redemption of shares
exempt?
Answer: If it is from Mutual fund company.
26. Let us go to sec. 24 and 25. There are 5 exempt items
there.
Answer:
1. Interest income received by the individual taxpayer
from a depository bank under expanded foreign currency
deposit system provided that the individual depositor is
non -resident individual.
2. Winnings from sweepstakes and lotto
3. Prizes amounting to Php. 10,000 or less
4. Interest income from long-term deposit
5. Investments in the form of savings, common or individual
trust funds, deposit substitutes, investment management
accounts and other investments evidence by certificates
in such form prescribed by BSP.
27. The 6% Capital Gains tax is a perennial question and
may be avoided upon the concurrence of 5 requisites.
Answer:
1. The subject of sale must be real property classified as
capital asset.
2. The proceeds of the sale must be fully utilized in
acquiring or constructing a new principal residence
3. BIR should be notified of the intention to avail of the
exemption within 30 days from the date of sale or
disposition
4. Acquisition or construction of new principal residence
must be made within 18 months from the date of sale or
disposition
5. The Tax exemption can only be availed of once every
10 years.
March 24, 2018
GROSS INCOME AND CAPITAL TRANSACTION
Q: Let’s start at Sec. 32 (A) of NIRC. That was the first
question in the bar exam. Now you underscore the phrase
“Whatever source derived”. Thus has been subject of Bar
question. What do you understand by that phrase
“Derived from whatever source? What does it imply?
A: It implies that the source is immaterial including but not
limited to the following items:
Q: What is this connotes?
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A: It connotes that the enumerations are not exclusive. It
means that these are not only the sources of income that
is subject to tax.
Q: So on pages 6 to 7 on your book, I mentioned 7 items
and 5 came out in the bar exams. There are sources of
income not mentioned in Sec. 32(A). Yet, these are still
taxable. Other than these 11 items mentioned in Sec. 32
(A), there are other items of income which will fall under
the phrase “Income which ever derived from whatever
source.” What are these?
A: Under the Tax Code, however, income derived from
whatever source forms part of the taxpayer’s income. This
includes the following:
(1) Treasure found or punitive damages representing
profits lost (Actually this composes into two parts:
Treasure found and lost profits which makes an 8-
item enumeration.
(2) Amount received by mistake when the free
disposal be applied by the control test
(3) Cancellation of the taxpayer’s indebtedness
when the debtor renders in consideration of
services
(4) Payment of usurious interest
(5) Illegal gains
(6) Tax refund
(7) Bad debt recovery
Q: BAR 2013: When does amount obtain or received by
mistake constitutes taxable income in Javier v. CA (199
SCRA 824)? What is the general rule and exception to the
rule and apply the Control tests?
A: The general rule, it is not taxable because under Art.
2154 of the Civil Code provides that “If something is
received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return
it arises. (Solutio indebiti).” There is an obligation of the
receiver to return the undue payment. That is why, it is not
taxable.
However, it is taxable if you apply the Control Test.
According to an American jurisprudence, Helvering v.
Horst (311 US 112), Control Test is the power to procure the
payment of income and enjoy the benefit thereof.
Q: Javier v. CA (199 SCRA 824) – the Melon Bank case - He
was supposed to receive $1,000 but by mistake he
received $1 million. He spent his excess in banks and
properties here and in abroad. Is there subject to tax?
A: Yes, by applying the Control Test, he used the excess
payment received by mistake in his own benefit.
Q: PROBABLE BAR QUESTION: in the case of North
American Consolidated v. Burnet (286 US 417), Supposed
it was received under trust. Is such received under such
amount in trust subject to taxable income?
A: As a general rule, No, it is not taxable because there is
no flow of wealth or income on his part which he does not
own but in trust. Therefore, there was no income.
Q: When will it amount to taxable income?
A: It will amount to taxable income when there is a
realization of income or there is a flow of wealth of income.
Q: When will that arise in relation to the case above?
A: In this case of North American Consolidated v. Burnet
(286 US 417), It has been held that if a taxpayer receives
earnings under a claim of right without restrictions as to its
deposition, he received income even though it may still be
claimed that he is not entitled to retain the money and
even though he may still be adjudged liable to restore its
equivalent. This is an exception to the rule that income
received through mistake is not taxable as its receipt is
offset by liability to the party making the excessive
payment. (2015 Book, p.6)
Q: Bar Question: What are the basis that such illegal gains
are taxable?
A: These are taxable. In Rutkin v. US (343 US 130), illegally
acquired income constitutes realized gain called as a
“Claim of right doctrine.”
Q: Bar 2015: When does Cancellation of the taxpayer’s
indebtedness amounts to taxable income?
A: It tantamount to taxable income when if the
cancellation, forgiveness or renunciation of an obligation
amounts to taxable income in the nature of compensation
income in the following situtation:
 the creditor is the employer and the debtor is the
employee.
 there is an employer-employee existing
relationship between them
 That in consideration of services rendered.
Q: what are the other two tax implications found in the
book?
A:
(1) Taxable Compensation Income: It was given by
the employer from the obligation of the employee
in consideration for the services rendered.
(2) Taxable Donation: It will be amount to taxable
donation when the employer asks the creditor to
cancel, forgives or renounce the debt of the
employee and more so, no consideration was
given by the employee. (Bar 2001).
(3) Taxable Capital Transaction: It will amount to
taxable capital transaction when the creditor is a
corporation and the debtor is a stockholder.
Under Sec. 50 of RR-2, it is in effect of an indirect
dividend.
“SECTION 50 of RR-2. Forgiveness of indebtedness. — The
cancellation and forgiveness of indebtedness may
amount to a payment of income, to a gift, or to a capital
transaction, dependent upon the circumstances. If, for
example, an individual performs services for a creditor,
who, in consideration thereof cancels the debt, income to
that amount is realized by the debtor as compensation for
his services. If, however, a creditor merely desires to benefit
a debtor and without any consideration therefor cancels
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the debt, the amount of the debt is a gift from the creditor
to the debtor and need not be included in the latter's gross
income. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the effect
of the payment of a dividend.”
Q: Is such indirect dividend mentioned above subject to
Regular graduated rates or Final income tax?
A: No, Sec. 24 and 25 of NIRC mentioned therein cash or
property dividend however, in this case, it is not in the
nature of cash nor property dividend and therefore, it is not
subject to Final Income tax. Subject to regular graduated
rates.
Q: When will such tax refund resolve to taxable income?
A: It is taxable by applying Tax Benefit Rule. In other words,
the recipient must receive tax benefit. Tax Refund is
subject to taxed if such recipient receives such tax
benefits.
Q: What is Tax Benefit Rule? And what is tax benefit?
A: It applies to two cases: Tax Refunds and Recovery of
Bad Debts written of. So if tax refund, it is subject to tax if
the receiver receives tax benefit. Tax Benefit refers to
expenses that are refer to tax refund which taxes are paid
then subsequently refunded and loss or bad debt, Bad
debt claimed as deduction subsequently recovered. That
is the Philippine Jurisprudence. It is a rule that Tax refund or
recovery of bad debt written-off resolves to tax savings. It
is a rule that recognizes that taxability of Tax refund or
recovery of bad debt written-off provided that on the
condition that such tax refund or bad debts are actually
claimed as deduction in previous or preceding or prior
taxable year.
To summarize, the following are the conditions on the tax
benefit rule:
(1) The tax refunded or Bad debt recovered must and
was a deductible tax.
(2) It must be actually claimed as a deduction in the
previous or preceding or prior taxable year.
Tax Benefit rule is a rule which limits the recognition of
income from the recovery of an expense or loss properly
deducted in a prior taxable year to the amount of the
deduction that generated a tax savings. Under this rule, if
an amount deducted from gross income in a prior taxable
year is recovered in a later year, the recovery is income in
the last year. (Tennessee Carolina Transportation Inc. v.
CIR, 6, 586 F 2nd 378, 379).
Q: What are the Four (4) non-deductible taxes where you
can find it in sec. 34(C)?
A: These are the following
(1) Donor’s Tax
(2) Estate tax
(3) Income Tax
(4) Special Assessment
There you will find the tax benefit rule and shall be included
part of gross income in Sec. 32(A) in the year of receipt to
the extent of income tax benefit offset. This is precisely the
tax benefit rule.
Q: Sec. 34 (D) what are the two conditions of which bad
debts recovered as taxable income?
A: These conditions are as follows:
(1) Requisites of deductibility of bad debt expense
are met then it is deductible
(2) When it is subsequently recovered.
Q: what are the requisites for the deductibility of Bad debts
expense?
A: The requisites are as follows:
(1) Ascertained to be worthless
(2) It must arise from a valid and existing obligation
(3) Charged for against the books of the taxpayer
(4) It must be uncollectible in the near future
(5) It must related to taxpayer’s trade or business
When these requisites are present, the amount is
deductible and when if it is subsequently recovered.
Q: Can you think a situation under which creditor-Taxpayer
may possibly recovered that?
A: When the debtor financial position is improved such as
when the bank grant a loan to a depositor who was
subsequently declared a bankrupt and the bank
recovered such loan.
Q: Potential Bar Question: In Item 1 of Sec. 32 (A), what is
that?
A: Compensation Income.
Q: A while ago, we stated the rule that cancellation,
forgiveness or renunciation of an obligation may amount
to taxable compensation income if it is cancelled or
renounced in consideration of the services rendered by
the employee. What is your basis under the tax code?
There is a cash received normally in cash. The argument of
the employee is not taxable. Is his argument tenable? It is
not. What is that provision tells in Sec. 32(A)(1) in such a
rule?
A: “in whatever form paid”
Q: What is the test in determine whether income is
compensation or not?
A: it must be one and payment must be paid under in an
Employer-employee relationship.
Q: Bar Question: Aside from the cancellation, forgiveness
or renunciation of an obligation as taxable compensation
income, what is that other form of compensation income?
A: No cash receive is in the form of payment of life
insurance premium.
This must be distinguish. Part of compensation income or
subject to final tax. Before, that was rendered as part of
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compensation income. No qualification. But in Sec.
33(B)(10), you really need to qualify.
Q: Let’s formulate this probable bar question. State the tax
treatment of life insurance premiums paid by the employer
on the life insurance policy of the employee.
A: Consider whether the employee is rank and file,
managerial or supervisory employee.
Situation#1: The Employee is Managerial or supervisory
employee and the beneficiary is the heirs, family, executor
or administrator of the estate of the Employee
The Employer can deduct the amount of the premiums
paid as a form of business expense under Sec. 34A(i) and
the Life insurance Premium is subject to Final Tax on fringe
benefit
Situation#2: The Employee is Rank-and-File employee and
the beneficiary is the heirs, family, executor or
administrator of the estate of the Employee
The Employer can deduct the amount of the premiums
paid as a form of business expense under Sec. 34A(i) and
the Life insurance Premium is considered a Compensation
Income subject to the progressive rate of 20-35% of the
employee's income tax.
Situation#3: The beneficiary is the employer regardless of
nature of an employee
The Employer cannot claim it as deductions or expenses
because the insurance proceeds are but a mere return of
capital under Sec. 36A(4) and Life insurance premium is
not taxable to the employee since there was no benefit
received by the EE or his family.
Q: These is a possible question on distinction. The rule
before was compensation income and fringe benefits
were treated under the same tax treatment. But in the light
of Sec. 33, we can now develop 5 or 6 distinctions. Give
the distinctions between Compensation income and
fringe benefit.
A: The distinction between compensation income Sec.
32(A) and fringe benefit Sec. 33 are as
(1) As to Tax rate, Compensation Income are taxed
by progressive rates. Whereas, Fringe Benefits are
taxed by Final income tax.
(2) As to tax base, Compensation income is taxed
based on total amount actually or constructively
received by the employee. On the other hand,
Fringe Benefit, the final income tax is based on
grossed-up monetary value.
(3) As to taxpayer’s covered, Compensation income
is covered by rank-and-file employees as well as
managerial and supervisory employees. While
Fringe Benefits only applies to managerial
employees as well as supervisory employees.
(4) As to the method of collection/system of
collection. Compensation income, it is subject to
creditable withholding tax. On the contrary, Fringe
 Benefits, it is the final withholding tax subject final
income tax.
(5) As to whether or not the income will be reported
(Reporting), Compensation income, it is required
for the employee to file an ITR for he or she
received compensation income for the entire
year. Meanwhile, Fringe Benefit, it is no longer be
required because the final income tax is already
made which constitutes its final income tax.
(6) As to the application of substituted filling of
Income Tax return (ITR), Compensation income,
the substituted filing only applies to taxpayers who
are purely compensation income earners. In
contrast to Fringe Benefit, such rule on substituted
filing is not anymore included simply because he
tax on fringe benefits being subject to final
withholding tax. The final tax constitutes full
settlement. Hence, it is no longer required to be
reported under the tax code.
Q: Before, as asked at the bar, taxable compensation
income. The rule was changed by the TRAIN Law. What is
now the tax base the basis for the 20-35% progressive
rates? It is no longer taxable compensation income.
A: Gross compensation income because personal and
additional exemptions are no longer available in the TRAIN
Law.
Q: Gains derived from buildings and property. What do
you understand with that? What is its source?
A: It is derived from sales, exchanges or barters (Dealings)
The tax code does not define Sales. The tax code does not
define the meaning of exchange. This brings us to the
definition of sales under art. 1458 of the civil code which
provides “ARTICLE 1458. By the contract of sale one of the
contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its
equivalent. A contract of sale may be absolute or
conditional.” As regards to exchange, “ARTICLE 1638. By
the contract of barter or exchange one of the parties
binds himself to give one thing in consideration of the
other's promise to give another thing.” In a sale there two
parts there. The buyer and seller.
Q: Who may be the possible recipient to that deal? The
buyer or the seller?
A: the seller.
Q: What about lease? Is that included?
A: No.
Q: Bar 2010. The word property is exchange to what in sec.
39 and then Sec. 40?
A: Asset
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Q: There are four (4) exempt gains from exchanges of
property, shares of stocks and securities?
A: These are Tax exempt sales or exchanges and
considered “no gain, no loss recognized” under Sec.
40(C)(2)
(1) Property for Stock: Between corporations which
are parties to the merger or consolidation.
(2) Stock for Stock: Between a stockholder of a
corporation party to a merger or consolidation
and the other party corporation.
(3) Securities for securities or stock: Between a
security holder of a corporation party to the
merger or consolidation and the other
corporation.
(4) Property for stock: Transfer or exchange of
property for stock resulting in acquisition of
corporate control.
Q: What is the formal which in the language of the court in
the case ___ as form of tax avoidance.
A: This is a transfer of property for stock. One person
including others not exceeding four exempt property for
stock as a result thereof these person/s acquired
corporate control.
Q: Treating on capital asset. Sec. 39(A)(1). What are
ordinary assets? Capital Asset? Distinguish Ordinary asset
with Capital Asset? Distinguish Ordinary gain from Capital
Gain?
A: Ordinary assets are defined by enumeration. Capital
assets are defined by exclusion.
The NIRC (Sec. 39) defines capital assets by exclusion.
There is no concrete definition. The term “Capital Asset”
means property held by taxpayer (Whether or not
connected with his trade or business), but does not include
the following (These are ordinary assets).
(1) Stock in trade: Stock in trade of the taxpayer or
other property of a kind which would properly be
included in the inventory if on hand at the close of
the taxable year (raw materials, work in process,
finished goods, supplies);
(2) Inventoriable assets
(3) Property primarily held for sale to customers in
ordinary course of trade or business: Example is
real estate.
(4) Depreciable property used in business: Property
used in trade or business of a character which is
subject to the allowance for depreciation.
Examples are machineries and furniture and
fixtures
(5) Real property used in trade or business of the
taxpayer.
Q: Explain inventoriable assets?
A: In cost accounting, these are parting of the finished
goods, raw materials and work in process.
Q: what are the common dominant relationship of these
five Enumeration?
A: they are used in trade or business. The enumeration is
exclusive. What is not ordinary asset or not included in the
5 enumerations is considered and classified as capital
asset.
Q: What are Capital Assets?
A: Capital Assets are not ordinary assets means property
held by the taxpayer whether or not connected with trade
or business except other than the following:…
Q: “Whether or not connected with trade or busniess.”
What does it imply?
A: It implies that capital assets may include properties
which are held by the tax payer in connection with trade
or business.
Q: Not considered as ordinary capital though they are
held or used in connection in trade or business. In Balance
sheet, recall on section on assets. Assets may either
tangible or intangible assets. What are the two intangible
assets held by the taxpayer which may be found in the
balance sheet held by the taxpayer held in connection
with his trade or business? And if these are sold in a profit,
then it is treated as a capital gain.
A: (1) Accounts receivables from transaction and (2) gain
or business goodwill. These are not mentioned in the 5.
Q: Distinguished Ordinary gain from Capital gain?
A: Ordinary gain derives from the same sales or exchanges
of the following assets (the 5 enumeration). On the other
hand, capital gains derived from sales or exchanges of
properties held by the taxpayer held in connection with his
trade or business except the following 5.
Q: Why do you have to know whether the subject of sale
is ordinary or capital?
A: because different tax treatment applies to each
transactions. If it were capital, the gain derived therefrom
the sale, the subject of which is the special rules. Every time
these rules are passed are killer attacks. Sec. 39(B)(C) and
(D). They are the Holding period rule, loss limitation rule and
the net capital loss carry over.
Q: What are the three special rules on
Transactions?
A: These are (1) The Holding period rule; (2) Loss limitation
Rule and (3) Net Capital Loss/Carry over.
Q: Explain Holding Period Rule? What is the holding period?
When will it be subject to capital gains tax? When it is liable
for 100% or 50%?
A: 100% of Percentage of gain or loss recognized if the
asset was held for not more than 12 months and 50% of
such if the asset was held for more than 12 months. The
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Holding period is the length of time the asset was held by
the taxpayer. It covers the period from the date of
acquisition of the assets to the date of sale. In computing
the period, the day on which the property was acquired is
excluded, the day on which it was disposed of is included.
Q: The law on sec. 39(B) does not say what year but 12
months. What is the difference? Seek the law in Art. 13
again.
A: In the New Civil Code, 1 year is consist of 365 days, 1
month consists of 30 days.
Q: Short term capital gain and long-term capital gain.
Explain.
A: In short term capital gain that is a gain derived from the
sale or exchange or disposition of capital asset if the
property sold within the period of not more than 12 months
and then it is taxable for 100%. Meanwhile in Long-term
Capital gains, it is a gain derived from the sale, exchange
or disposition of capital asset that was held more than 12
months. Thus, the latter is a form of tax avoidance.
Q: To whom taxpayers do this rule apply?
A: it only applies to individual taxpayers because it is clear
under sec. 39(B) of NIRC states “other than corporate
taxpayers.” In the case of corporate taxpayers, it is
considered always 100%.
Q: Explain Capital loss limitation Rule?
A: The capital loss is deductible only from Capital gains. It
applies to individual or corporation taxpayers except not
Banks and trust companies.
Q: BAR 20003: what is the rationale to the rule that Capital
loss is not deductible to ordinary gain?
A: Capital loss is not deductible from ordinary gain
because it is not derived in connection with the trade or
business of the taxpayer.
Note: do not answer like this “It cannot claim deduction
from ordinary gain because it is deductible to capital
gain.” If I were your examiner, I will give you a zero.
Q: You have mentioned the principle of Matching of costs
against revenues? What is that principle n economics.
Capital A: It dictates that the expenses or costs, which may be
deducted from the Revenue, must be paid or incurred in
connection with the production of such income or
revenue. It means that it is connected with the business or
trade.
TAPSI notes 2007: Under Sec. 34, there's a rule on matching
cost against revenue. This principle states that ―Only
ordinary and necessary expenses (business connected
expenses) are deductible from Gross income or Ordinary
income. These non-business connected expenses cannot
be considered as deductible items. Capital loss is non-
business connected expenses as it arises or can be
sustained only from capital transactions. If we allow capital
loss as a deduction from ordinary income, it will violate this
rule that only ordinary and necessary expenses are
deductible from Gross income as required by the Principle
of Matching cost against revenues
Q: Is that capital loss paid or incurred in connection with
the trade or business of the taxpayer?
A: No.
Settled rules:
(a) Ordinary loss is deductible from ordinary gain.
(b) Capital loss is deductible from capital gain.
(c) Capital loss is not deductible from ordinary gain;
(d) Ordinary loss is deductible from capital gain
Q: Question of J. Vitug: I did not state the reason there why
Ordinary loss is deductible from capital gain. What must be
the basis for such rule? Why is it that? Let’s try to analyze.
What does the principle of matching of cost against
revenue imply?
A: (No answer given by J.D. in class)
TAPSI notes 2007:
Q: Can you deduct ordinary loss from capital gain?
A: YES, the NIRC provides no prohibition against it.
Q: Net capital loss/Carry over, what should be carry over?
A: The capital loss. It must be arise from capital transaction
involving capital assets. The capital loss may be carried
over on the succeeding year which may be deducted
from the capital gain.
Q: how much is the amount that should be carried over?
A: Up to the extent of net income during the year, not to
exceed.
Q: what do you mean by net capital loss?
A: It is the excess of capital loss over capital gain.
Q: Example the capital gain amounts to ₱150,000, how
much must be the capital loss that it will resolve to net
capital loss?
A: It must be more than ₱150,000.00. So, ₱170,000 of
capital loss resolve to have a net capital loss of ₱20,000.00.
Q: How do you distinguish net capital loss-carry over from
net operating loss carry over? Return to Sec. 34(D)(3).
A: The following distinctions are here as follow:
(1) As to Transaction covered
Net capital loss-carry over, it must involve capital asset.
While Net operating loss carry over, it must covered
ordinary transactions and therefore involve ordinary asset.
(2) As to taxpayer covered
Net capital loss-carry over applies to individual taxpayers
other than corporate taxpayers. Whereas Net operating
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loss carry over applies to individual and corporate
taxpayers. The law makes no distinction.
(3) As to the number of years (Period)
Net capital loss-carry over for one year. In contrast to Net
operating loss carry over for three years or 5 years, as the
case may be.
Q: One of the Bar question there is the 6% of capital gains
tax. Well, this applies. Supposed that the subject of sale is
a real property not used in trade or business. Is these
special rules applicable?
A: No, you apply Sec. 34 (D) (1) the 6%.
Q: Sale of shares of stock. Sold and traded in local stock
exchange. You will find that in Sec. 24,25,27,28. Are these
special rules applicable?
A: No, the special rules applies only is now 15% final tax
based on net capital gain.
Q: what do you mean by net capital gain? Sec. 39(A)(2)
A: Net capital gain refers to the excess of capital gain over
capital loss.
Fringe Benefits
Q: It was asked several times in the bar. In addition to
exclusions to Sec. 33(B), I mentioned ten exempt fringe
benefits. Pursuant to RR-3-98, there are ten items there in
Sec. 33 (B). On Item 1- Housing benefits, may be exempt
under four (4) cases. What are these four exempt housing
benefits?
A: Housing units, it is exempt by applying the convenience
of the employer.
(1) Within the business premises of the employer. A
housing unit which is situated inside the business
premises;
(2) A housing unit which is situated outside at most 50
meters from the perimeter of the business
premises;
(3) Temporary housing for an employee for 3 months
or less;
(4) Military housing units. Housing privilege of military
officials of the AFP located inside or near the
military camps.
Q: Do you know the rationale for Military housing units?
A: It is said in the revenue regulation. The rationale is that
The military officials of the Armed Forces of the Philippines
were provided housing units so that they should be readily
concord of such exigency of military service in the case at
bar.
Note: Sec. 2.33 (B)(1)(f) of RR-3-98 provides "Housing
privilege of military officials of the Armed Forces of the
Philippines (AFP) consisting of officials of the Philippine
Army, Philippine Navy and Philippine Air Force shall not be
treated as taxable fringe benefit in accordance with the
existing doctrine that the State shall provide its soldiers with
necessary quarters which are within or accessible from the
military camp so that they can be readily on call to meet
the exigencies of their military service"
Q: Now go to Item 7 – What is that travelling expenses?
Board and travel. Acquired the rule on convenience.
Acquired to the nature and necessary to the fact of
employer’s business.
A: These are business conventions or meetings that implies
a valid commitment of the employer.
TAPSI Notes 2007:
Expenses for Foreign Travel
Exempt If:
1. Required by the nature of the employer’s trade,
business or exercise of profession;
2. Paid or incurred in connection with the business
conventions, mtgs or seminars abroad;
3. All expenses are substantiated by receipts or
documents
4. there must be an official communication coming
from the business associates abroad;
Tax treatment of the cost of airline ticket:
Economy class- Exempt
Business class- Exempt
1st class tickets--- are exempted only up to 70%
5. Allowance exempt only up to $300.00
Q: on Item 9 – There two there. Educational Benefits, is it
exempt?
A: Yes, Scholarship granted to the employee in the
condition that the employee must remain to the
employment of the employer as an expression of
gratitude.
Q: What about the benefit for scholarship grant given to
the dependent?
A: the dependent must have passed the competitive
exam conducted by the employer.
TAPSI Notes 2007:
EDUCATIONAL BENEFIT – for the employee or his
dependent
EXEMPT in 2 CASES:
1. Scholarship grant to managerial or supervisory
employees – there must be a written agreement
that the employee shall remain in the employ of
the employer for a certain period of time, and
such a scholarship is required by the nature of the
employer’s business.
2. Scholarship grant to the dependent/s of an
employee – the dependent must have passed the
competitive exam conducted by the employer.
Q: Then go to the last, “Premiums” – there are three.
A: Premiums paid on life or non-life insurance on (1) SSS, (2)
GSIS and (3) Group Insurance Policy.
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Sec. 33 (C) Fringe Benefits Not Taxable. — The following
fringe benefits are not taxable under this Section:
(1) Fringe benefits which are authorized and exempted
from tax under special laws;
(2) Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans;
(3) Benefits given to the rank and file employees, whether
granted under a collective bargaining agreement or not;
and
(4) De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
Q: What is the new deminis benefits? That used to be 10
items but in RR-1-2015 it is now 11
A: Collective Bargaining agreement benefits and benefits
derived from productivity incentive schemes not
exceeding ₱10,000.00 per annum.
Q: what are the characteristics and features of fringe
benefits? What and why are they exempt?
A: The Characteristics are as follows:
(1) Purpose: to promote contentment, health,
efficiency and goodwill.
(2) they are relatively small value
Q: Enumerate the 11 deminis benefits:
(1) Monetized unused vacation leave credits of
provate employees not exceeding ten (10) days
during the year;
(2) Monetized value of leave credits paid to
government officials and employees;
(3) Medical cash allowance to dependents of
employees not exceeding ₱750.00 per employee
per semester or ₱125.00 per month.
(4) Rice subsidy of ₱1,500.00 or one (1) sack of 50-kg.
rice per month amounting to not more than
₱1,500; (BAR 2007)
(5) Uniform and clothing allowance not exceeding
₱5,000.00 per annum
(6) Actual medical assistance, e.g., medical
allowance to cover medical and health care
needs, annual medical/executive checkup,
maternity assistance, and routine consultations,
not exceeding ₱10,000.00 per annum.
(7) Laundry allowance not exceeding ₱300.00 per
month.
(8) Employee achievement awards, e.g., for length of
service or safety achievement, which must be in
the form of tangible personal property other than
cash or gift certificate, with an annual monetary
value not exceeding ₱10,000.00 received by the
employee under an established written plan
which does not discriminate in favor of highly paid
employees.
(9) Gifts given during Christmas and major
anniversary celebrations not exceeding ₱5,000.00
per employee per annum.
(10) Daily meal allowance for overtime and night/
graveyard shift work not exceeding twenty-five
(25%) of the basic minimum wage.
 (11) Collective Bargaining agreement benefits and
benefits derived from productivity incentive A: follows:
schemes not exceeding ₱10,000.00 per annum. (1) Sec. 27 – ““Intercorporate Dividends – Dividends
received by a domestic corporation from a
Q: what are those ₱5,000? domestic corporation liable to tax under this Code
shall not be subject under this title.
A: There are three
(1) Uniform and clothing allowance (2) 28(A)(7)(d) – “Intercorporate Dividends –
(2) Christmas bonus Dividends received by a resident foreign
(3) Major anniversary celebrations corporation from a domestic corporation liable to
tax under this Code shall not be subject under this
Q: What are those ₱10,000? title.

A: There are three (3) 73(B) – Stock dividend. “A stock dividend

(1) Actual medical assistance
(2) Employee achievement awards
(3) Collective Bargaining agreement benefits and
benefits derived from productivity incentive
schemes
Q: BAR QUESTION: State the rules on the receipt of
monetized or commutation unused value of vacation or
sick leave credits?
A: The rules are here as follows
(1) If the employee is a Government Employees or officials,
his commutation or monetized value of vacation pay is Tax
exempt and Sick leave is tax exempt. These makes no
distinction
(2) If the employee is a Private Employees or officials, his
commutation or monetized value of vacation leave is
exempt up to 10 days and sick leave if unused is taxable.
representing the transfer of surplus to capital
account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to
make the distribution and cancelation or
redemption, in whole or in part, essentially
equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as
taxable income to the extent that it represents a
distribution of earnings or profits.
Q: If the recipient is individual stockholder, is the dividend
received exempt?
A: No, it is subject to final tax
Q: There are two tax exempt, intercorporate dividends.
What are these two? P. 53

Q: What are the four (4) purposes that these benefits will A: There are:
be granted? (1) Sec. 27(D)(4) – ““Intercorporate Dividends –
Dividends received by a domestic corporation
A: 4 purposes here as follows: (CHEG) it to promote from a domestic corporation liable to tax under
(1) Contentment this Code shall not be subject under this title.
(2) Health
(3) Efficiency (2) 28(A)(7)(d) – “Intercorporate Dividends –
(4) Goodwill Dividends received by a resident foreign
corporation from a domestic corporation liable to
Interest Income tax under this Code shall not be subject under this
Q: What are those interest income that are exempt? title.

A: These are the following: Sec. 24 and 25 Q: Is Stock dividend taxable or exempt?
(1) Interest income from bank deposit on the
expanded foreign currency deposit system A: It is exempt.
received by non-resident individual
(depositor/recipient). Pp 51-52 mentioned exception to the rule. You must master
(2) Interest income from long-term deposit or them because I would ask them again and you must read
investment certificate is exempt under RMC 18- the decided case CIR v. ANSCOR (31 SCRA 152). I might
2011 ask that

Q: Supposed the depositor is a corporate taxpayer, it has
a long-term (₱10 million) deposit or more than 5years. Is it
(interest income) Tax exempt?
A: No, it is only apply to individual Tasxayers.
Dividend Income
Q: Instances where dividend income shall be subject to
tax?
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Q: What if it is received by non-resident foreign
corporation? Tax exempt or taxable?
A: Subject to 15% final tax under Sec. 28(B)(5)(b)
On page 53 regarding that 3 years and 50%, you make a
note there that sec. 42(A)(2)(b) and you analyzed that. If
it is receive from foreign corporation, (Analyze it again!) it
does not categorically state the receiver. The recipient
can be either an individual or corporate. That is income
“within” on those two conditions:
(1) This foreign corporation must have at least 50% of
the world income coming from the Philippines. If it
is less than, then it is an income without.
(2) It must be with the 3 preceding years.
April 14, 2018
CORPORATE INCOME TAXATION
The source is Section 22b of the tax code. What are those
considered Corporate taxpayers?
 Business partnership
 Joint stock companies
 Joint accounts, associations or
companies
 There was no taxable unregistered partnership.
They divided the profits based on GROSS RETURNS.
What are the 2 test pointed out by the SC?
1. There is contribution to a common fund
2. There is intention to divide the profits among
themselves.
In Obillos case, was there a taxable unregistered
partnership?
 No. The heirs had no intention to divide the
partnership among themselves.
How do the partnership divide the profits?
insurance
 Based on gross profits.

What about General Professional Partnership? In Affisco case, there was a taxable unregistered
partnership.
 Tax Exempt. (Sec. 22b)
 Yes. Pool of insurers is taxable as unregistered
What are tax-exempt under 22b? partnership

1.Joint Construction Venture What is the doctrine laid down in Evangelista case?

2. General professional partnership  the creation of common fund by the two sisters
without being registered for the purpose of
3. Joint Venture for engaging in Petroleum, coal,
engaging in series of transactions for profit is a
geothermal and other energy operations pursuant to a
taxable partnership
consortium agreement with the government
These are 8 rules in corporate Income taxation.
In you book. I mentioned 6 cases, four of them came out
in the bar exams. Evangelista, Rallos, Pascual and Dragon, 1. MCIT
Obillos , Afisco, Ona. The favorite of justice Vitug is the Ona 2. Branch Profit Remittance Taxes
case. What is the Ona doctrine? 3. Tax Sparing credit Rule
4. IAET
 As a rule, coownership is tax exempt. It becomes 5. Offline international airline
taxable if it is converted into an unregistered
6. Taxation of Regional HQ of multinational
partnership.
corporations
When does a co-ownership becomes a taxable 7.
partnership? 8.

 If shares are held under single management for Minimum Corporate Income Tax
profit making MCIT applies to 2 corporations:
In Civil law, what is the purpose of Co-ownership?
1. Domestic Corporation
 For common enjoyment 2. Resident Foreign Corporation

Heirs inherited certain properties from the deceased, is it What Is the purpose of MCIT?
taxable?  To prevent corporations from overstating their
 No. no partnership formed or organized. allowable deductions.

What is that factual circumstance that give rise to the Why is Non Resident Foreign Corporation not subject to
existence of partnership? MCIT?

 They authorized one of them to administer the  Because they are taxed based on their gross
properties and allowed … (inaudible) income. The rate is 30%.

As a rule, why is co- ownership not taxable? Rules Included in the bar:

 It is for common enjoyment  Please read Air Canada vs. CIR. Sec. 28e1 applies
to offline international airline. Resident Foreign
Potential bar question, Pascual & Dragon? Corporation includes offline international airlines.
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 What is this word international (not sure) where the  Constitutional. MCIT is not a tax on capital. The
rate is 2.5% based on gross Philippine Billings? MCIT is imposed on gross income which is arrived
Taxation of Regional HQ of multinational at by deducting the capital spent by a
corporations, Branch profits remittance tax and corporation in the sale of its goods, i.e., the cost of
last the Tax credit sparing rule. goods and other direct expenses from gross
sales. Clearly, the capital is not being taxed.
Branch Profit Remittance Taxes.
When is a Foreign Corporation considered engaged in
There are 3 Significant Cases. Taxsparing Credit Rule is the trade or business?
most technical of them all. It is about intercorporate
dividend. Now tell us the recipient and the source. The  “doing business” means a continuity of
recipient is a Non resident Foreign Corporation and the commercial dealings and arrangements, and
source is a domestic corporation. contemplates, to that extent, the performance of
acts or works or the exercise of some of the
What are the distinction between minimum corporate
functions normally incident to, and in progressive
income tax and regular corporate income tax?
prosecution of, the purpose and object of its
MCIT RCIT organization. –(Mentholatum vs Mangaliman)
Tax rate is 2% 30% What is substance test?
Tax base is GROSS income TAXABLE income
Applies to Domestic and ALL  whether the foreign corporation is continuing the
Resident Foreign body or substance of the business or enterprise for
Corporation only which it was organized or whether it has
It may result to tax credit. It may not result to tax substantially retired from it and turned it over to
credit another.
CREBA vs. ROMULO
What is the BOAC case all about? (landmark case on
 Theory of FAVORABLE BUSINESS CLIMATE resident foreign corporation) Is an offline airline subject to
o -Domestic corporations owe their tax even if it has no landing rights?
corporate existence and their privilege to
do business to the government. They also  Yes! Based on the protection theory.
benefit from the efforts of the government
READ SOUTH AFRICAN AIRWAYS AND AIR CANADA, BOAC.
to improve the financial market and to
IT MAY COME OUT IN OUR FINAL EXAMS. THERE IS NEW
ensure a favorable business climate. It is
JURISPRUDENCE THERE.
therefore fair for the government to
require them to make a reasonable Offline International Airlines are taxed as resident foreign
contribution to the public expenses. (MCIT corporation therefore you apply the corporate rate of 30%
case) based taxable income.In the BOAC Case the theory is the
protection theory.
Key words that JD will look for
*corporate existence- favorable What is PACTA SUNT SERVANDA?
business climate- reasonable
contribution*  It is an international law recognized principle that
mandates that International agreements must be
What is the prevailing in MCIT as to filing of income tax complied in good faith their contractual
return? obligations.
 QUARTERLY. Which rate applies? The NIRC rate? Or the rate under the
agreement?
This may be suspended under special or evitable
circumstances. What are these 3?  Rate under the agreement must prevail.
When a corporation suffers losses on account of: International carrier defines Philippines Gross Billings. The
definition has been modified. What is the determinative
a. prolonged labor dispute, or test of such Philippines Gross Billings?
b. force majeure, or
c. legitimate business reverses  Before, it’s the place of payment, it’s now the
origin.

State the tax treatment of offline international airlines,

CREBA claims that this 2% is a tax on capital and violates International airlines that has landing rights in the
due process. Is it unconstitutional? Philippines.

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 Offline International
International Airlines with
Airlines Landing Rights in
the Philippines
Tax base Taxable income gross Philippine
billings
Tax rate 30% 2.5%
What is the tax treatment of income derived by offshore
banking transactions?
 10% FINAL TAX
What are those profits that may be subject to these Branch
Profit Remittance Tax?
 They are gains, profits… that precisely is the
MARUBENI CASE. It was asked twice already in the
bar exams.
Issue in MARUBENI case: What constitutes profits subject to
branch remittance tax of 15%?
 Pursuant to Section 24 (b) (2) of the Tax Code, as
amended, only profits remitted abroad by a
branch office to its head office which are
effectively connected with its trade or business in
the Philippines are subject to the 15% profit
remittance tax.
 To be effectively connected it is not necessary
that the income be derived from the actual
operation of taxpayer-corporation's trade or
business; it is sufficient that the income arises from
the business activity in which the corporation is
engaged. For example, if a resident foreign
corporation is engaged in the buying and selling
of machineries in the Philippines and invests in
some shares of stock on which dividends are
subsequently received, the dividends thus earned
are not considered 'effectively connected' with its
trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
A direct investment by the mother company in japan, is
that income derived from the direct investment considered
branch remittance profit?
 No. read marubeni case
Before the tax base is actually remitted, is the rule the
same?
 No. That has been amended. (applied earmarked
or in the multiple choice look for that--- check
tapsi) disregard word actually.
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Before, exempt profits include those profit remitted
branches on Export Processing Zones what is
Now the new rule?
 EPZA is now Philippine Economic Zone Authority
What is the purpose of branch profit remittance tax? Why
does the lower it to 15 % where we could tax it at 30%.?
Corporation that established branch here are subsidiary
corporations. In so far as the corporate rate is concerned
should we treat them alike?
 that’s why 15% In the new case. DEUTSCHE BANK
AG MANILA BRANCH v. CIR. Applied in this case is
PACTA SUNT SERVANDA. The tax treaty prevailed
over the 15%.
How do you apply pacta sunt servanda here? The was this
rp-germany agreement. 15% was imposed in that. The next
student will answer that.
What’s the purpose of MCIT?
 Bank of America vs. CA
Multinational Corporations May or may not be subject of
income tax. When is it subject to corporate income tax of
10%? When is it exempt?
 Regional or area headquarters of multinational
companies are exempt from income tax while
regional operating headquarters of multinational
companies are subject to 10% tax on net taxable
income.
Lets go back to domestic Corporation, Sec. 27 C. before
the train these are the 4 exempt GOCC they are GSIS,SSS,
PHIC AND PCSO. Under train law PCSO is not exempt
anymore.
What about PAGCOR? Exempt or not from Corporate
income tax?
 It depends. Read presidential decree 1869 sec 13
and 14. That will answer that.
Tax Sparing credit Rule
CIR v. P&G. you must be able to explain the word tax credit
and word sparing. In this case it is a tax sale. What kind of
income is subject to that 15 %.?
 Taxable dividend income by a domestic
corporation from a nonresident foreign
corporation. The purpose is encourage foreign
investments by reducing the rate from 30 to 15%.
What is tax credit?
 P&G CASE VS. WANDER CASE (ACTUAL GRANT)
There was tax refund filed as there is erroneous imposition
of income tax before of 30%. Does a withholding agent of
a foreign corporation have legal personality to file a claim the accumulation of the earnings and profits, the
for refund? accumulation was not for the reasonable needs
of the business, and the penalty tax would apply.
 YES. (CYANAMID v. CA)
IAET landmark cases:

 Tax rate- 10% ST.LUKES st. lukes is not exempt charitable hospital.
 Tax base- improperly accumulated earnings CASE 4 requisites of tax exemption. The requisite
that it must be organized and operated
What’s the purpose? exclusively for charitable purposes is
lacking. Apply 10% preferential rate
 Sound corporate practice dictates that earnings
or profits that are not reserved must be distributed. YMCA rent income is subject to corporate
CASE income tax.
What kind of imposition?
– CONSTRUED THE LAST PARAGRAPH SEC
 is this 10% form of penalty 30 (memorize)
DE LA Yes. DLSU is tax exempt.
Exceptions: SALLE
UNIVERSITY The Court then significantly laid down the
1. Loan agreement CASE requisites for availing the tax exemption
2. under Article XIV, Section 4 (3), namely: (1)
3. the taxpayer falls under the
4. classification non-stock, non-profit
5. educational institution; and (2)
the income it seeks to be exempted from
As to imprescriptibly of taxes, national… vs mulberry? taxation is used actually, directly and
Is this applicable to improperly accumulated tax? exclusively for educational purposes
What is the rule?

 The rule does not apply to Improperly April 21, 2018

accumulated earning because … ALLOWABLE DEDUCTION

What are the jurisprudential rulings in the case of PAGCOR

vs. CIR (744 SCRA 712), which is a most probable question
If you read sec 29 “ every/each corporation”. Does this
in the bar? Is PAGCOR subject to corporate income tax?
apply to ALL corporations?
 It depends. PAGCOR may be exempt or it may be
 NO. Only DOMESTIC CORPORATIONS.
taxable.
Why is it closely held corporation are covered?  It is taxable as regards the income derived from
“other related operations” which includes, but is
 not limited to:
What are the characteristics of close corporation? a) Income from licensed private casinos covered
by authorities to operate issued to private
1. Not more than 20 operators;
2. Not listed b) Income from traditional bingo, electronic bingo
and other bingo variations covered by authorities
to operate issued to private operators;
What corporations are not subject to IAET?
c) Income from private internet casino gaming,
 Publicly held corporations internet sports betting and private mobile gaming
operations;
d) Income from private poker operations;
e) Income from junket operations;
Immediacy test
f) Income from SM demo units; and
 To determine the reasonable needs of the g) Income from other necessary and related
business in order to justify an accumulation of services, shows and entertainment.
earnings, the Courts of the United States have  PAGCOR is exempt for its income derived from its
invented the so-called Immediacy Test which operations and licensing of gambling casinos,
construed the words reasonable needs of the gaming clubs and other similar recreation or
business to mean the immediate needs of the amusement places, gaming pools, includes,
business, and it was generally held that if the among others:
corporation did not prove an immediate need for
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 a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
d) Income from mobile bingo operations
operated by it, with agents on commission basis.
Provided, however, that the agents’ commission
income shall be subject to regular income tax,
and consequently, to withholding tax under
existing regulations.
What are the jurisprudential rulings in the case of Air
Canada (778 SCRA 121)?
 The first case discussed there is the BOAC case,
which was already asked thrice in the bar exams.
Then, South African Airways, which was asked in
2016. It’s really a favorite bar question.
 Three sentences, one-liner jurisprudence:
o [1] An offline international airline is taxed
as resident foreign corporation under
Section 28 (A) (1) of the Tax Code. [2]
Applicable tax rate is 1 ½% according to
the Philippine-Canada Tax Treaty [3]
Applicable tax base is taxable income,
which is gross Philippine billings.
 The principle of pacta sunt servanda is applied in
this case. It is a recognized principle in
international law wherein agreements entered
into by states must be observed and complied
with in good faith
 The facts of the problem clearly show that offline
international airline derived income from the sale
of passage documents here in the Philippines. Is
such offline international airline entitled to claim
deduction?
o Yes. Because the applicable tax base is
taxable income. An offline international
airline is taxed as resident foreign
corporation under Section 28 (A) (1) of
the Tax Code. Usually, an RFC is subject to
the corporate income tax rate of 30% but
Air Canada is not subject to such rate
because of the Philippine-Canada Tax
Treaty.
 How do we tax such an income derived by Air
Canada from such sale of airline tickets or
passage documents here in the Philippines? Do
you apply the rate under the Philippine-Canada
Tax Treaty? [YES]
 Justice Leonen failed to mention why is it that
offline international airline, one who has no
landing rights, can still be taxed. Did I not tell you
last week the reason why? This can be answered
in the BOAC case. That is the Protection Theory, it
is in Chapter 2 of your book. Explain and apply
Protection Theory in this case:
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o In BOAC's case, the sale of tickets in the
Philippines is the activity that produces
the income. The tickets exchanged hands
here and payments for fares were also
made here in Philippine currency. The site
of the source of payments is the
Philippines. The flow of wealth proceeded
from, and occurred within, Philippine
territory, enjoying the protection
accorded by the Philippine government.
In consideration of such protection, the
flow of wealth should share the burden of
supporting the government.
o Therefore, we can tax an offline
international airline although it has no
landing rights.
Allowable deductions. What are the guiding principles or
settled rules on allowable deductions? Is the principle of
strictissimi juris applicable?
 Yes, the principle of strictissimi juris is applicable
because it squarely applies to exemptions and
allowable deductions partake of the nature of a
tax exemption. The principle of strictissimi juris holds
that exemptions must be strictly construed against
the taxpayer/person claiming an exemption and
liberally construed in favor of the State. The effect
of exemption is that the government may no
longer collect taxes from such exempted items
while the effect of allowable deductions is that it
reduces the taxable income, therefore, inevitably,
it lessens the taxpayer’s tax liability.
Cohan Principle (you can check it in the Appendix of the
book). It is a rule in allowable deductions where when the
taxpayer incurred expenses but could not substantiate the
same because he could not provide receipts, the BIR may
allow (has discretion to allow) deductions up to 50% of the
claimed deductions.
Guiding principles in the Atlas Consolidated Mining Case.
Since deductions are disfavored by the government
(because it reduces the taxpayers’ tax liability which
eventually lessens the tax collection by the government),
the one claiming deduction must prove (1) that there is a
law allowing such deduction, and (2) that he is entitled to
such deduction. In what way? By proving the requisites for
deductibility.
Statutory Test. The case of Pilmico-Mauri Foods Corp. vs.
CIR (802 SCRA 619) is the most recent case on allowable
deductions. If you go over these allowable deductions,
particularly business expenses, the Supreme Court pointed
out 3 significant requisites for deductions: (1) it must be 10. Pension trust
ordinary and necessary, (2) it must be paid or incurred in
carrying on the business or it must be a business-
connected expense, and (3) it must be paid or incurred
Of these 10, which is a new allowable deduction?
during the taxable year.
 Research and Development Expenses
 It was non-deductible before because is used to
Allowable deductions under Section 34 as amended by be treated as a capital expenditure. Now,
the TRAIN Law may either be itemized deductions or although it is treated as a capital expenditure, it is
optional standard deductions. Now, this is a possible nonetheless allowed as a deduction.
question for distinction. How do you distinguish itemized  The rule is CAPEX is non-deductible. In accounting
deductions from optional standard deductions? parlance, it should be amortized, spread out over
Itemized Optional a reasonable period. What are the exceptions to
Deductions Standard the rule?
Deductions
As to There must be Requires no
compliance documents and documents nor J. Dimaampao: Of the 10 Allowable Deductions, which
with receipts to receipts among them is a new one? There is that deduction, which
substantiation substantiate and was nondeductible before, because it should be treated
rule prove those as capital expenditure. Now it is, though it partakes of a
claimed capital expenditure an allowable deduction, what is that?
deductions The rule is that capital expenditure is nondeductible, in
As to rate Charitable Rate is 40% of accounting parlance, it is spread out over a reasonable
Contributions – 5% the gross period of time. What are the exceptions to the rule?
or 10% income or gross
All others, no rate receipts/sales Student: Research and Development Expenditure.

J. Dimaampao: So that partakes of an exception. It can

Is it advisable to avail of itemized deductions or optional be claimed its in your book, by a private educational
standard deductions? institution, so if it has an estimated useful life of more than
one year, expansion of educational facilities, the
 It depends upon the circumstances of the case. construction of a school building, or library. That’s a
 If the taxpayer does not have receipts, choose privilege granted only to private educational institutions.
OSD. If the taxpayer has receipts and can prove So, remember those exceptions. There’s another one. Its
100% of the deductions, choose itemized there in the item of depletion, regarding the volume of
deductions. operation. There are 10 itemized deduction. So here is a
bird’s eye view. What are the common requisites for
deduction? What are the common requisites of
deductibility?
Jurisprudential rulings of the Supreme Court on allowable
deductions? Student: The common requisites of deduction/
deductibility are (2P-R-O-I-S-E):
o Isabela Cultural Corporation
o PICOP Case 1. The expense must be ordinary and necessary.
o PRC Case 2. The expenses must be incurred in trade or business
o CIR vs Algue carried on by the taxpayer.
3. The expenses must be substantiated by proof.
4. The expenses must be reasonable.
5. The expenses must be paid or incurred during the
What are the 10 allowable deductions? taxable year.
1. Business expense 6. Expenses must not be against public policy, public
moral, or law.
2. Interest expense
7. If subject to withholding tax, proof of payment to
3. Taxes
BIR must be shown.
4. Losses
5. Bad Debts J. Dimaampao: You mentioned the requisite of “It must be
6. Depreciation paid or incurred in connection of the business of the
7. Depletion of oil and gases wells and mines taxpayer or exercise of his profession.” This has been
8. Charitable and other contribution relaxed in one of the 10 allowable deductions. What is
9. Research and development that? So, what again are the 10 allowable deductions.

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Student: Charitable and Other Contributions. The following trade or business in the Philippines. (Esso Standard Eastern,
are the 10 allowable deductions: (2B-I-L-T & 2D-R-E-C) Inc. vs CIR 175 SCRA 149)

1. Business Expenses J. Dimaampao: Now why are bribe moneys not

2. Interest Expenses deductible?
3. Taxes
4. Losses Student: Because it’s illegal payments.
5. Bad Debts
J. Dimaampao: Why are illegal payments nondeductible?
6. Depreciation
Are illegal gains taxable? Yes, because its an income
7. Depletion
derived from whatever source, but illegal expenses/
8. Charitable and Other Contributions
payment are nondeductible due to the requisite that such
9. Research & Development Expenditure
expenses are not business connected. This case came out
10. Employer’s Contribution to Pension Trust
during the bar exam, the case of CIR vs General Foods 401
J. Dimaampao: One of this 10 has no connection of the SCRA 545. This case is about the deductibility of Advertising
requisite “The expenses must be paid or incurred during Expense. So, what are the jurisprudential rulings of the
the taxable year.” In effect you can’t carry over the court. What are the 2 kinds of Advertising Expenses.
expense. What may be the exception to the rule.
Student: The 2 kinds of Advertising Expenses are:
Student: Net Operating Loss Carry Over.
1. Advertising to stimulate the current sale of
J. Dimaampao: So how do you understand/ determine merchandise or use of services; and
that? Ordinary Gain- Ordinary Loss. So that’s an exception 2. Advertising designed to stimulate the future sale of
to such a rule. In your book which was asked in the Bar merchandise or use of services.
Exam, there is such jurisprudence applying such a rule, that
J. Dimaampao: Which of these two is deductible?
an expense which partakes partly of a nature of a
provisional expense, the case of CIR vs Isabela Cultural Student: The advertising expense paid or incurred to
Corp. The all events test. So, let’s discuss this very significant stimulate the current sale of merchandise or use of
ruling. What is the all events test? What are the requisites services.
for the application of this test? In that case it applies such
rule that expenses paid must be claimed as such in the J. Dimaampao: How about the other kind? Is it deductible
year it was paid or incurred. It rejected the argument that or nondeductible?
Isabela did not receive any billing statement in 1985,
Student: As a rule, it should be capitalized hence it should
hence they claimed it in 1986 when they received such a
be amortized because it partakes of a nature of a capital
bill. SC applied the all events test. So, what are these
expenditure. Therefore it should be amortized over a
events? Explain.
reasonable period of time.
Student: The all events test requires that the liability be
J. Dimaampao: Now what are these examples of capital
fixed, and the amount of such liability be determined with
expenditures mentioned in your book if you read it
reasonable accuracy. The amount of liability does not
carefully.
have to be determined exactly; it must be determined
with reasonable accuracy (something less than an exact Student: Advertising expenses paid or incurred to promote
or complete accurate amount). (CIR vs Isabela) sale of capital stock for acquisition of additional capital.
Efforts to establish reputation or Goodwill. Protection of
J. Dimaampao: Does it require the actual or accurate
Brand Franchise analogous to maintenance of goodwill or
amount?
title to one’s property.
Student: No.
J. Dimaampao: What is the rule on arbitrage interest? The
J. Dimaampao: What it only requires is reasonable amount purpose of the law is to avoid the so called back to back
or reasonable certainty. Now this is a probable bar exam transaction.
question in your bar exam. Accurate or complete amount
Student: Arbitrage rule on deductible interest- The
is not required, only a reasonable amount of the expense
percentage by which the taxpayer’s otherwise allowable
incurred. That case of Esso Standard vs CIR 175 SCRA 149,
deduction for interest expense shall be reduced by 33% of
that’s another probable bar question. We have explained
the interest income earned subjected to final tax.
so many tests, here, it’s a test of production.
J. Dimaampao: It’s called arbitrage because it is the law
Student: The (margin)fees were paid not in the production
which imposes such reduction. The rule is that capital
of income, but in the disposition of said income after it has
expenditure should be amortized over a reasonable
already been earned. Hence it is an expense properly
period of time. So what is that capital expenditure which
attributable to the head office and not in carrying on of its
can now be claimed as a deduction? Research &
Development Expenditure. Now, there’s another one, with
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that of private proprietary educational institutions. So in
interest, there is likewise an exception, an interest which
partakes of a nature of a capital expenditure. RA 8424,
provides such.
Student: Interest Expense incurred for the purchase of
capital assets with useful life of more than one year.
J. Dimaampao: Yes, that’s the one, such as equipment. It
can now be claimed as a deduction either through
allowance for depreciation or deducted in full. It is another
exception to the rule that capital expenditure should be
amortized over a reasonable period of time. Now let’s go
to taxes and Bad Debts. So before we go to that we must
first discuss the Tax Benefit Rule. You can check that in 34
(c) and 34 (e). So Tax Refund, when does tax refund
amount or result to taxable income. When will recovery of
bad debt debt written off result to taxable income.
Student: Under the tax benefit rule, receipt of tax refund
will result to a taxable income when the period in which
such tax was incurred and claimed as a deduction it
reduced the taxpayer’s income, hence giving rise to a tax
benefit.
J. Dimaampao: So you must know all those deductible
taxes. So what are all those deductible taxes? And what
are those deductible taxes.
Student: The following are the nondeductible taxes:
1. Philippine Income Tax, except Fringe Benefit
Taxes;
2. Income, war profit, and excess profit taxes
imposed by the authority of any foreign country
provided the taxpayer chooses to take a tax
credit (if a taxpayer is qualified to take a tax credit
for income, war profits and excess profit taxes
accrued to a foreign country such taxes, when not
taken as tax credit may be claimed as deduction
from gross income;
3. Estate and Donor’s Tax
4. Special Assessment Tax (Real Property Tax);
5. Taxes paid for commodity not connected with the
taxpayer’s business:
 No deductions are allowed for
amount representing: (1) interest;
(2) surcharges; and (3) fines or
penalties incident
delinquency (Par. 2 Sec. 80, RR
No. 2)
The following are the deductible taxes;
1. Percentage Taxes
2. Documentary Stamp Tax
3. Local Business Taxes
J. Dimaampao: I forgot to ask you this, still on interest. The
case of Picop vs CA 250 SCR 434. I am referring to the
theoretical interest. Is that deductible?
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Student: No. Theoretical interest is not deductible as it is
merely computed or calculated. It does not arise from
interest bearing obligation. (Picop vs CA 250 SCR 434)
Hence, it also failed to comply with the requisite of “The
expenses must be paid or incurred during the taxable
year.”
J. Dimaampao: Is interest on capital (preferred stock)
deductible?
Student: No. The rule is absolute under RMC No. 17-71 it is
nondeductible
J. Dimaampao: When is recovery of bad debt taxable?
When is there tax benefit?
Student: Recovery of bad debt is taxable when in the year
the bad debts are written off, the taxpayer’s taxable
income has been reduced, hence giving rise to a tax
benefit (through tax savings). Thus, to that extent (of
reduction) will bad debts recovered be taxable.
J. Dimaampao: Suppose you incur a Net Loss of P 100, 000
in 2015, Bad Debts Declared worthless and noncollectible,
P 15,000. In 2016, this P 15,000 was recovered due to the
improvement of the debtor’s financial condition. Is that P
15,000 deductible?
Student: No. because in the writing off the bad debt, there
was no tax benefit to the taxpayer because, he had
already incurred loss. Hence, whether or not the bad debt
was written off, there was no reduction of the taxpayer’s
taxable income because he no longer had a taxable
income to speak of.
J. Dimaampao: Read Sec. 4 of RR No. 5-99.
Student: Sec. 4. Tax Benefit Rule. The recovery of bad debts
previously allowed as deduction in the preceding year or
years shall be included as part of the taxpayer’s gross
income in the year of such recovery to the extent of the
income tax benefit of said deduction. Conversely, if the
said taxpayer did not benefit from the deduction of the
said bad debt written off because it did not result to any
reduction of his income tax in the year of such deduction
(i.e. where the result of his business operation was a net loss
even without deduction of the bad debts written off), then
his subsequent recovery thereof shall be treated as a mere
recovery or return of capital, hence, not treated as receipt
to
of realized taxable income.
J. Dimaampao: You have to state that in your answer.
There is no tax benefit, because it was mere recovery of
capital. Any volunteer for the subsequent items? I am
giving you an assignment. The Tax Benefit on the Sale and
Leaseback Transaction. This is based on American
jurisprudence. It’s in effect a pacto de retro sale. Because
here, the seller may retain the possession as a lessee. So
you really have to analyze that. So here the buyer
obtained a loan to buy the property. So if there’s a loan,
there will be an interest expense. Hence, you may claim
that interest expense as a deductible expense. So, as an
owner of the building, he can likewise claim an allowance
for depreciation from the building. The seller now is the
lessee, hence he can now claim rental expense. It’s there
in the latest edition of your book. I have explained that.
That’s an example of a really technical and shocker
question. Now you prepare for the Air Canada Case. For
those who wish to volunteer, next Saturday is your last
chance. I will focus on the VAT cases. Take note of these:
1. Philippine Refining Corp vs CIR 256 SCRA 267 – Landmark
case on Bad Debt expense (I will only ask on the sound
business judgment, factors that determine the
worthlessness, OSD-this can also be availed of of GPPs/
partners) (this was never asked in the past 30 years)
2. Then Estate and Trusts(this was never asked in the past
30 years) so just know when is it taxable, what kind of trust
is considered as a taxpayer. The P 20, 000 exemption has
already been deleted just like individuals, unfortunately
REX failed to delete it in the annotation, so when you buy
that book, you might like to delete that in the annotation.
3. Read Sec. 23 (source of income) in relation to Sec. 42
(situs of income)
4. Focus on National Development Corp. vs CIR 151 SCRA
472
5. Those who are required to file ITR and those who are
exempt.
6. VAT: In Sec. 105 I will ask you, what are the requisites for
the taxability of sale of goods and services, then in par. 3
I’ll ask you the meaning of incidental transaction-
Mindanao Geothermal Case
7. Take note those sale of goods and services and
importation subject to VAT
8. Regarding the sale of goods, let’s focus on the deemed
sale transaction. Memorize that. Its there in 106 (b)
8. Then in 107, importation you must know the transaction
value.
9. In 108, the case of Diaz vs Sec of Finance, Sm Cinema vs
CIR 613 SCRA 772
10. Read the landmark case Fort Bonifacio vs CIR-
Creditable Input Tax/ What is this Transitional Input Tax
11. Focus on 109
12. read those 11 new exemptions introduced by the
TRAIN Law.
13. there are 10 exempt sale of goods, there are 10 exempt
sale of service. There are 8 exempt importations and there
are 3 exempt lease of properties. So before the TRAIN Law
there are 31 exempt transactions.
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April 28, 2018
ALLOWABLE DEDUCTIONS (CONTINUATION)
and VALUE ADDED TAX
What are the requisites of deductibility of casualty losses?
Revenue Regulations No. 12-77 provides for the following
requisites for deductibility of casualty losses:
a.) Sworn declaration of loss must be filed with the BIR.
i. Nature of the event giving rise to loss and time of its
occurrence;
ii. Description of the damages property and its location;
iii. Items needed to compute the loss such as cost or
other basis of the property, depreciation allowed if any,
value of the property before and after the event, cost of
repair;
iv. Amount of insurance or other compensation
received or receivable.
b.) Filed through the nearest RDO within 45 days after the
date of the occurrence.
c.) Proof of the elements of the loss claimed, such as the
actual nature and occurrence of the event and the
amount of the loss.
i. Casualty loss - documentary proof of costs,
photograph showing extent of damage, condition or
value of the property after it was repaired, restored or
replaced.
ii. Robbery, theft, or embezzlement losses - amount of
loss. Police report is necessary although not conclusive
proof of the loss arising therefrom.
Keyword: NPA-NIDA  45-day notice, proof of loss,
affidavit containing the nature of the event, items for
computation, description of damages, and amount of
insurance
What are bad debts?
They are those debts due to the taxpayer actually
ascertained to be worthless and charged off within the
taxable year except those not connected with profession,
trade or business and those sustained in a transaction
entered into between parties mentioned under Section 36
(B) of the Code.
What are the requisites of deductibility of bad debts?
The requisites are:
1. Existence of a valid and subsisting debt (legal and
factual)
2. Debts must be actually ascertained to be worthless.
3. Debt must be charged off within the year of
worthlessness.
4. Debt arises from business or trade.
5. It does not arise from transactions between related
taxpayers.
The requisites in Section 34(E) are incomplete. Complete it
using the doctrine in PRC v. Commissioner, 256 SCRA 667.
6. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed
uncollectible even in the future. Furthermore, there are
steps outlined to be undertaken by the taxpayer to prove
that he exerted efforts to collect the debts: (1) sending of
statements of accounts; (2) sending of collection letters;
(3) giving the account to a lawyer for collection; and (4)
filing a collection case in court. (Philippine Refining Co. v.
Court of Appeals, G.R. No. 118794, [May 8, 1996], 326 PHIL
680-692)
How do you determine worthlessness? What is the sound
business judgment rule?
Note: It is not the same as the business judgment rule in
corporation law. Correlate the sound business judgment
rule with the deductibility of bad debts.
Worthlessness is not determined by an inflexible formula,
but upon the exercise of sound business judgment. Mere
uncertainty of collection or investigation that the debtor is
in an unsatisfactory financial condition and that the
collection of the debt is doubtful will not suffice. All
pertinent facts and evidence must be considered. The
burden of proof to show worthlessness of debt is on the
tacpayer.
What are the factors affecting the worthlessness of debts?
Note: Memorize.
They are:
1. improbability of success of judicial collection
2. statute of limitations
3. meager amount involved
4. injury of the debtor making it impossible for him to earn
a living
5. destruction by fire of original invoices evidencing the
indebtedness
6. bankruptcy or insolvency of the debtor
7. insufficiency of the collateral
8. death of the debtor leaving no assets
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Keyword: I SAID BID
What is the tax benefit rule?
It dictates that the recovery of bad debts previously
allowed as deduction in the preceding years shall be
included as part of the gross income in the year of
recovery to the extent of the income tax benefit of said
deduction. Under this rule, if an amount deducted from
the gross income in a prior taxable year is recovered in a
later year, the recovery is income in the last year.
What are arbitrage interests?
They refer to interests on simultaneous or back-to-back
transactions.
What is the arbitrage rule on interest expense?
The percentage by which the taxpayer’s otherwise
allowable deduction for interest expense shall be
reduced, has been increased from 38% to 42% of the
interest income subjected to final tax effective July 1, 2005.
It shall be reduced to 33% effective January 1, 2009.
What is the ruling of the Court in PICOP v. CA?*
*Probable bar question
On deductions of interest:
Interest payments on loans incurred by a taxpayer
(whether BOI-registered or not) are allowed by the NIRC as
deductions against the taxpayer's gross income. Thus, the
general rule is that interest expenses are deductible
against gross income and this certainly includes interest
paid under loans incurred in connection with the carrying
on of the business of the taxpayer. The Tax Code does not
prohibit the deduction of interest on a loan incurred for
acquiring machinery and equipment. Neither does it
compel the capitalization of interest payments on such a
loan. The 1977 Tax Code is simply silent on a taxpayer's right
to elect one or the other tax treatment of such interest
payments. Accordingly, the general rule that interest
payments on a legally demandable loan are deductible
from gross income must be applied. (Paper Industries
Corp. v. Court of Appeals, G.R. Nos. 106949-50, 106984-85,
[December 1, 1995], 321 PHIL 1-63)
On deductions of losses:
The CTA and the Court of Appeals allowed the offsetting
of RPPM's accumulated operating losses against Picop's
1977 gross income, basically because towards the end of
the taxable year 1977, upon the arrival of the effective
date of merger, only one (1) corporation, Picop,
remained. The losses suffered by RPPM's registered
operations and the gross income generated by Picop's
own registered operations now came under one and the
same corporate roof. We consider that this circumstance
relates much more to form than to substance. We do not
believe that the single purely technical factor is enough to
authorize and justify the deduction claimed
by Picop. Picop's claim for deduction is not only bereft of
statutory basis; it does violence to the legislative intent
which animates the tax incentive granted by Section 7 (c)
of R.A. No. 5186. In granting the extraordinary privilege and
incentive of a net operating loss carry-over to BOI-
registered pioneer enterprises, the legislature could not
have intended to require the Republic to forego tax
revenues in order to benefit a corporation which had run
no risks and suffered no losses, but had merely purchased
another's losses. We conclude that the deduction claimed
by Picop in the amount of P44,196,106.00 in its 1977
Income Tax Return must be disallowed. (Paper Industries
Corp. v. Court of Appeals, G.R. Nos. 106949-50, 106984-85,
[December 1, 1995], 321 PHIL 1-63)
What is an optional standard deduction?
Section 34(L) states that an individual subject to tax other
than a nonresident alien and nonresident foreign
corporation may elect a standard deduction in an
amount not exceeding ten percent (10%) of his gross
income, in lieu of the deductions allowed under the Tax
Code.
Can a general professional partnership avail of the
optional standard deduction?
Yes. General professional partnership and the partners
may avail of the OSD only once, either by the GPP or the
partners comprising the partnership.
What is the rate of OSD?
The rate of OSD is 40%
What is the base of OSD?
The base of OSD in case of corporate taxpayers is gross
income. In case of individual taxpayers, the base is gross
sales.
Under Section 36, what are the non-deductible items?
The following are the non-deductible items under Section
36:
1. Personal, living or family expenses. Reason for non-
deductibility: non-business expenses
2. Amounts paid out for new buildings or for permanent
improvements, or betterments made to increase the value
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of any property or estate, EXCEPT intangible drilling and
development costs incurred in petroleum operations
which are deductible under Section 34 (G) of the Tax
Code. Reason: capital expenditure
3. Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or
has been made. Reason: capital expenditure
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.
Reason: the taxpayer cannot have its cake and eat it, too.
It cannot enjoy both desirable but mutually exclusive
alternatives. There can be no double benefits in tax law.
5. losses from sales or exchanges of property between
related taxpayers. Reason: to prevent avoidance of
income tax by means of purported or simulated sale or
exchange; because the law presumes that the
transactions are devoid of free bargain between the seller
and the buyer
Under Section 36(A) item 4, what is the tax implication?
What is the tax consequence?
If the employee paid the premiums:
The premiums are subject to fringe benefits tax if the life
insurance policy covers the life of a managerial or
supervisory employee (Section 33 (B) item 10). In case of
rank and file employees, the premiums are subject to
regular income tax falling under the category of
compensation for services in whatever form paid (Section
32 (A) item 1).
If the employer paid the premiums:
It is a deductible expense if the beneficiary of the
insurance policy is the estate, executor/administrator or
heir (Section 34 (A) item 1a (i). It is non-deductible if the
employer is directly or indirectly the beneficiary of policy
(Section 36 (A) item 4).
Note: Learn to correlate provisions of the law.
What is the basis for deductibility of premiums where the
beneficiary of the policy is the estate,
executor/administrator or heir?
The basis is Section 34 (A) item 1a (i), which states that
there shall be allowed as deduction from gross income a
reasonable allowance for salaries, wages, and other forms
of compensation for personal services actually rendered.
The other items in Section 36 are personal expenses.
Expenses under Section 36 (A) items 2 and 3 and 36 (B) are
non-deductible capital expenses. What is the tax 7. Mining income Location of the mines
implication? 8. Farming income Place of farming activities
They are deductible from capital gains tax. 9. Gain on sale of Income within the
domestic stock Philippines
10. Interest Residence of the debtor

With regard to Section 42 (A) 1, which refers to interest

income, what is the tax situs? Know which taxpayer is taxable within and outside the
Philippines.
Note: Read NDC V. QC, 151 SCRA 472.
Resident Citizen and Domestic Corporation – within and
The tax situs is the residence of the debtor.
outside the Philippines

Non-resident Citizen, Resident Alien, Non-Resident Alien,

What are the sources of interest income? Resident Foreign Corporation and Non-resident Foreign
Corporation – within the Philippines only
The sources are loans, bonds, debentures, certificate of
indebtedness and the like.
Who among the taxpayers are required to file income tax
returns?*
Who are subject to tax on their interest income?
Note: Apply the process of exclusion
Resident Citizen, Non-resident Citizen and Resident Alien
All are required EXCEPT:

1. in case of a non-resident alien, not engaged in trade or

Is an employee who rendered services taxable? business

Note: Consider the kind of taxpayer and the tax situs.
Compensation income is taxed on the place of
performance of services. Thus, a resident citizen is taxable
whether or not the services are performed within or outside
the Philippines. On the other hand, a non-resident citizen is
taxable only for services performed within the Philippines.
Basis: Section 25 states that he is subject to final tax, which
is the final and full settlement of tax, upon all items of
income.
2. in case of a non-resident foreign corporation
Basis: Section 28 (B) 1 provides that all its income are
subject to final tax of 30%.

3. in case of minimum wage earners

In case of sale of goods, what is the tax situs?
Basis: The Tax Code provides for a threshold amount of
The tax situs is the place of sale. P250,000 for individual taxpayers. Thus, they are no longer
taxable if their income did not reach such amount.

What if the gain is derived from sale of goods abroad?

VALUE-ADDED TAX
It depends on the seller. A resident citizen is taxable on
gains derived from sale abroad. In case of a non-resident
citizen, he is not taxable for gains derived from sale of
goods abroad. Overview:

Sections 105-115 are the provisions on VAT.

Memorize the table to determine the source for different The important provisions are:
kinds of income.
105
Kinds of Income Source (Tax Situs)
106
1. Service or Place of performance of
compensation income service 107
2. Rent Location of property (real
or personal) 108
3. Royalties Place of use of intangibles
109
4. Merchandising Place of sale
5. Gain on sale of personal Place of sale 111
property
112
6. Gain on sale of real Location of property
property
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Note: Have mastery of the cases I assigned. I will ask one
or two of them. I will just modify the facts. Better read the
facts. Note: Of these eight, for purposes of the bar, it is the last
one which is the favorite bar question. That is why you must
read and focus on Section 109. Exclude the eleven
additional exemptions included in the Train Law.
VAT is a sales tax. It is a tax on sale or exchange of goods
and services, including lease. What are the transactions Note: Let us use the term “vatable.”
that are subject to VAT?

1. Sale of goods or properties (106)

We are talking here of tax, so you should know the tax rate
2. Sale of services (108) and the tax base. Discuss.

3. Barter or exchange of good or properties (106) The rates are 12% and 0%. For the first five transactions we
discussed, the tax rate is 12%. For the 6th and 7th
4. Lease of properties (108) transactions, the tax rate is 0%.
5. Importation of goods (107)

The tax base of 12%-rated transactions depends on

Section 106 and 108. In case of sale of goods or properties
What are the two kinds of VAT? (Section 110)
(including barter or exchange), the tax base is the gross
1. Input tax selling price or its equivalent (Section 106). In case of sale
of services, it is the gross receipts (Section 108).
2. Output tax

Note: Read the Ericsson Telecommunications case

How to determine whether or not VAT is payable? regarding direct double taxation.

If the output tax exceeds the input tax, VAT is payable.

If the input tax exceeds the output tax, there is creditable What is the tax base on importation?
input tax.
The law is silent. It is the transaction value. It is no longer the
ad valorem.
What are the sources of output tax? Basis: Section 701 of Customs Modernization and Tariff Act
Sale of goods, services and properties

Lease of properties What is the ruling in Kapatiran v. Tan?

The phrase "except customs brokers" is not meant to

discriminate against customs brokers. It was inserted in Sec.
What are the sources of input tax? 103(r) to complement the provisions of Sec. 102 of the
Vat is shifted to another. (Importation or purchase, as the Code, which makes the services of customs brokers
case may be) subject to the payment of the VAT and to distinguish
customs brokers from other professionals who are subject
to the payment of an occupation tax under the Local Tax
Code. With the insertion of the clarificatory phrase "except
There are eight transactions covered by the VAT provisions. customs brokers" in Sec. 103(r), a potential conflict
What are these? between the two sections, (Secs. 102 and 103), insofar as
customs brokers are concerned, is averted.
1. Sale of goods or properties

2. Sale of services
At any rate, the distinction of the customs brokers from the
3. Lease of properties
other professionals who are subject to occupation tax
4. Importation of goods under the Local Tax Code is based upon material
differences, in that the activities of customs brokers (like
5. Barter or exchange of goods or properties those of stock, real estate and immigration brokers)
partake more of a business, rather than a profession and
6. Zero rated sale of goods or properties. were thus subjected to the percentage tax under Sec. 174
of the National Internal Revenue Code prior to its
7. Zero rated sale of services
amendment by EO 273. EO 273 abolished the percentage
8. Exempt transactions tax and replaced it with the VAT. If the petitioner
Association did not protest the classification of customs
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brokers then, the Court sees no reason why it should protest
now.
What is the ruling in Tolentino v. Secretary of Finance?
Indeed, regressivity is not a negative standard for courts to
enforce. What Congress is required by the Constitution to
do is to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to give
priority to the enactment of laws for the enhancement of
human dignity and the reduction of social, economic and
political inequalities (Art. XIII, § 1), or for the promotion of
the right to "quality education" (Art. XIV, § 1). These
provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.
What is the ruling in Abakada v. Ermita?
The powers which Congress is prohibited from delegating
are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make
a complete law – complete as to the time when it shall
take effect and as to whom it shall be applicable – and to
determine the expediency of its enactment.
Nonetheless, the general rule barring delegation of
legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the President under
Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President
under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
The case before the Court is not a delegation of legislative
power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the
increase rate under the law is contingent. The legislature
has made the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12%
rate upon factual matters outside of the control of the
executive.
No discretion would be exercised by the President.
Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the
word “shall” connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is
inconsistent with the idea of discretion. Where the law is
clear and unambiguous, it must be taken to mean exactly
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what it says, and courts have no choice but to see to it that
the mandate is obeyed.
Thus, it is the ministerial duty of the President to immediately
impose the 12% rate upon the existence of any of the
conditions specified by Congress. This is a duty which
cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion
by the President does not come into play. It is a clear
directive to impose the 12% VAT rate when the specified
conditions are present. The time of taking into effect of the
12% VAT rate is based on the happening of a certain
specified contingency, or upon the ascertainment of
certain facts or conditions by a person or body other than
the legislature itself.
In sale of goods or properties, isolated transactions are not
vatable. Why?
They are not vatable because it lacks the requisite
regularity of transaction. Under Section 105, paragraph 3
of the NIRC, the following are the requisites of vatability:
(1) Regularity - the regular conduct or pursuit of an activity
(2) Profit – the transaction must be in pursuit of a
commercial or an economic activity
Is there an exception to the rule of regularity?
Yes. Section 105 also provides that “the rule of regularity,
to the contrary notwithstanding, services as defined in this
Code rendered in the Philippines by nonresident foreign
persons shall be considered as being course of trade or
business.”
Distinguish indirect tax from direct tax.
Indirect tax can be shifted from the transferor to the
transferee, or seller to buyer, or lessor to lessee. Direct tax
cannot be shifted to another.
In Section 105, paragraph 3, “incidental transactions” are
mentioned. The Mindanao II Geothermal case construed
that term. What did the Court rule?
Mindanao II’s sale of the Nissan Patrol is said to be an
isolated transaction. However, it does not follow that an
isolated transaction cannot be an incidental transaction
for purposes of VAT liability. Indeed, a reading of Section
105 of the 1997 Tax Code would show that a transaction
"in the course of trade or business" includes "transactions
incidental thereto."
Mindanao II’s business is to convert the steam supplied to
it by PNOC-EDC into electricity and to deliver the
electricity to NPC. In the course of its business, Mindanao II
bought and eventually sold a Nissan Patrol. Prior to the
sale, the Nissan Patrol was part of Mindanao II’s property,
plant, and equipment. Therefore, the sale of the Nissan
Patrol is an incidental transaction made in the course of
Mindanao II’s business which should be liable for VAT.
Note: The discussion of tax remedies in this case is partly
modified by the Train Law.
What are the zero-rated sales of goods or properties?
Under Section 106, the following sales by VAT-registered
persons shall be subject to zero percent (0%) rate:
(a) Export Sales. - The term "export sales" means:
(1) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of
the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of the
said buyer's goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
and
(5) Those considered export sales under Executive Order
No. 226, otherwise known as the Omnibus Investment
Code of 1987, and other special laws.
(b) Foreign Currency Denominated Sale. - The phrase
"foreign currency denominated sale" means sale to a
nonresident of goods, except those mentioned in Sections
149 and 150, assembled or manufactured in the Philippines
for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to
zero rate.
What are the deemed sale transactions?
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Under Section 106(B), the following transactions shall be
deemed sale:
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended for sale
or for use in the course of business;
(2) Distribution or transfer to: (a) Shareholders or investors
as share in the profits of the VAT-registered persons; or (b)
Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned; and
(4) Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation.
How do you explain the phrase “deemed sale”?
There is really no actual sale, but the transactions are
considered sale.
In Commissioner v. Acesite Hotel, the Court explained
such transactions by virtue of a special law. What did the
Court rule?
PAGCOR is a VAT-exempt entity. VAT exemption extends
to Acesite. While it was proper for PAGCOR not to pay the
10% VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction
by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the
1977 Tax Code, which provides that the “services rendered
to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to
zero (0%) rate.” The proviso in P.D. 1869, extending the
exemption to entities or individuals dealing with PAGCOR
in casino operations, is clearly to proscribe any indirect tax,
like VAT, that may be shifted to PAGCOR.
In Section 108, memorize the transactions that constitute
sale of services.
The phrase "sale or exchange of services" means the
performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including:
C 1. those performed or rendered by construction and
service contractors;
I 2. stock, real estate, commercial, customs and
immigration brokers;
L 3. lessors of property, whether personal or real;
W 4. warehousing services;
C 5. lessors or distributors of cinematographic films;
E 6. persons engaged in milling processing, manufacturing
or repacking goods for others;
P 7. proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
R 8. proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and
caterers;
D 9. dealers in securities;
I 10. lending investors;
T 11. transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire another domestic common carriers by
land, air and water relative to their transport of goods or
cargoes;
F 12. services of franchise grantees of telephone and
telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this
Code;
B 13. services of banks, non-bank financial intermediaries
and finance companies;
N 14. and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies; and
S 15. similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
Keyword: LBC RCPI WEST FIND
The transport of goods or cargoes may be by land, air or
water. Are all of these vatable?
No.
Which of these are not vatable?
1. Transportation of goods by international carriers
(exempt by R.A. No. 10378).
2. Domestic transport by land (exempt by way of omission).
Reason: Burdensome. If it is vatable, could you just imagine
the number of individuals who would file for credit or
refund of input tax?
What are the requisites of vatability of sale of services?
1. The service must be performed for others.
2. It must performed within the Philippines.
3. The service rendered must be for a fee, remuneration or
consideration.
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In Diaz v. Secretary of Finance, the Court ruled on the
application of Section 108. Is that vatable sale of services?
Is the tollway operator transaction, vatable or exempt?
It is vatable.
Does section 108 provide for that transaction?
Yes. It falls under services of franchise grantees of electric
utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees (except
those under Section 119 of this Code).
Is this one of the exempt grantees for franchise?
No.
What is that VAT exempt sale of service referred to in
Section 119?
They are subject to percentage tax. It does not mention
tollways.
What are the three reasons why tollway operators are
vatable?
1. The law imposes VAT on "all kinds of services" rendered
in the Philippines for a fee, including those specified in the
list. The enumeration of affected services is not exclusive.
By qualifying "services" with the words "all kinds," Congress
has given the term "services" an all-encompassing
meaning. Thus, every activity that can be imagined as a
form of "service" rendered for a fee should be deemed
included unless some provision of law especially excludes
it.
When a tollway operator takes a toll fee from a motorist,
the fee is in effect for the latter's use of the tollway facilities
over which the operator enjoys private proprietary rights
that its contract and the law recognize. In this sense, the
tollway operator is no different from the following service
providers under Section 108 who allow others to use their
properties or facilities for a fee.
2. Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties." This means that "services" to
be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that
require the use of human knowledge and skills.
3. Tollway operators are, owing to the nature and object
of their business, “franchise grantees” and they do not
belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual
incomes of less than P10 million and gas and water utilities)
that Section 119 spares from the payment of VAT. The word
"franchise" broadly covers government grants of a special
right to do an act or series of acts of public concern. The
construction, operation, and maintenance of toll facilities
on public improvements are activities of public
consequence that necessarily require a special grant of
authority from the state. Indeed, Congress granted special
franchise for the operation of tollways in the Philippines.
There is a lease of residential unit in the amount of P15,000.
Is this vatable or vat-exempt?
In case of lease of a residential unit with a monthly rental
not exceeding P15K, and the gross receipt of more than P3
million, it is vat-exempt, in which case you will disregard the
threshold amount of P3M, as provided.
In case of lease of a residential unit with a monthly rental
of more than P15K, and the gross receipt of less than P3
million, it is vat-exempt, in which case you will apply the
threshold amount.
Note: Correlate Section 109 (w & x), as amended. It may
be items q and v in some codal books.
In Commissioner v. SM Prime Holdings, the Court also ruled
on the application of Section 108. Is the sale of cinema
tickets vatable?
It is not vatable. It is not one of those considered as sale of
services. There is no lease but only showing or exhibition of
films.
The legislature never intended operators or proprietors of
cinema/theater houses to be covered by VAT. Historically,
the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been
considered as a form of entertainment subject to
amusement tax. Prior to the Local Tax Code, all forms of
amusement tax were imposed by the national
government.
When the Local Tax Code was enacted, amusement tax
on admission tickets from theaters, cinematographs,
concert halls, circuses and other places of amusements
were transferred to the local government. Under the NIRC
of 1977, the national government imposed amusement tax
only on proprietors, lessees or operators of cabarets, day
and night clubs, jai-alai and race tracks. The VAT law was
enacted to replace the tax on original and subsequent
sales tax and percentage tax on certain services.
When the VAT law was implemented, it exempted persons
subject to amusement tax under the NIRC from the
coverage of VAT. When the Local Tax Code was repealed
by the LGC of 1991, the local government continued to
impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places
of amusements. Amendments to the VAT law have been
consistent in exempting persons subject to amusement tax
under the NIRC from the coverage of VAT. Only lessors or
distributors of cinematographic films are included in the
coverage of VAT.
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These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax. This holds
true even in the case of cinema/theater operators taxed
under the LGC of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain
services. The mere fact that they are taxed by the local
government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power
to tax gross receipts derived by cinema/theater operators
or proprietor from admission tickets to the local
government, did not intend to treat cinema/theater
houses as a separate class. No distinction must, therefore,
be made between the places of amusement taxed by the
national government and those taxed by the local
government.
To hold otherwise would impose an unreasonable burden
on cinema/theater houses operators or proprietors, who
would be paying an additional 10% VAT on top of the 30%
amusement tax imposed by Section 140 of the LGC of
1991, or a total of 40% tax. Such imposition would result in
injustice, as persons taxed under the NIRC of 1997 would
be in a better position than those taxed under the LGC of
1991.
In the Fort Bonifacio case, the Court discussed the
transitional input tax. What is the ruling of the Court?
To give Section 105 a restrictive construction that
transitional input tax credit applies only when taxes were
previously paid on the properties in the beginning
inventory and there is a law imposing the tax which is
presumed to have been paid, is to impose conditions or
requisites to the application of the transitional tax input
credit which are not found in the law. The courts must not
read into the law what is not there. To do so will violate the
principle of separation of powers which prohibits this Court
from engaging in judicial legislation.
What is transitional input tax?
It is when you are not exempt but you have attained the
resold amount. There is in fact a transition.
What is the tax benefit?
It is exempt. One cannot claim for creditable input tax.
When can there be a claim or credit thereof?
You must register as a VAT-registered person.
What is the three-fold purpose of transitional input tax?
It serves to alleviate the impact of VAT on the taxpayer. It
operates to benefit newly VAT-registered persons. It is a
form of encouragement.
Note: Prior payment of taxes is not necessary to avail
transitional input tax. (Section 112, as amended)
What is the Aichi Doctrine?
An appeal to the Court of Tax Appeals must be made
within 30 days from the receipt of the adverse decision of
the Commissioner, even if it is filed beyond the 2-year
period for refund.
In Commissioner v. Team Sual Corporation (715 SCRA 478,
G.R. No. 194105, February 5, 2014), the Court discussed
about the VAT remedies in Section 112. What is the
jurisprudential ruling of the Court?
The pivotal question of whether the imminent lapse of the
two-year period under Section 112(A) of the NIRC justifies
the filing of a judicial claim with the CTA without awaiting
the lapse of the 120-day period given to the CIR to decide
the administrative claim for refund/tax credit had already
been settled by the Court. In Commissioner of Internal
Revenue v. Aichi Forging Company of Asia, Inc., the Court
held that: “However, notwithstanding the timely filing of
the administrative claim, we are constrained to deny
respondent's claim for tax refund/credit for having been
filed in violation of Section 112([C]) of the NIRC”
CIR before the lapse of the 120-day period; and (2) when
no decision is made after the 120-day period. In both
instances, the taxpayer has 30 days within which to file an
appeal with the CTA. As we see it then, the 120-day period
is crucial in filing an appeal with the CTA.
Further, in Commissioner of Internal Revenue v. San Roque
Power Corporation, the Court emphasized that the 120-
day period that is given to the CIR within which to decide
claims for refund/tax credit of unutilized input VAT is
mandatory and jurisdictional. The Court categorically held
that the taxpayer-claimant must wait for the 120-day
period to lapse, should there be no decision fully or
partially denying the claim, before a petition for review
may be filed with the CTA. Otherwise, the petition would
be rendered premature and without a cause of action.
Consequently, the CTA does not have the jurisdiction to
take cognizance of a petition for review filed by the
taxpayer-claimant should there be no decision by the CIR
on the claim for refund/tax credit or the 120-day period
had not yet lapsed.
Note: This is the case that has not been modified by the
Train Law.

Section 112([C]) of the NIRC clearly provides that the CIR

has "120 days, from the date of the submission of the
complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In
case of full or partial denial by the CIR, the taxpayer's
recourse is to file an appeal before the CTA within 30 days
from receipt of the decision of the CIR. However, if after
the 120-day period the CIR fails to act on the application
for tax refund/credit, the remedy of the taxpayer is to .
appeal the inaction of the CIR to CTA within 30 days. Thus,
the taxpayer must wait for the decision of the CIR or the
lapse of the 120-day period.

Section 112([A]) of the NIRC, on the other hand, states that

"any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two years after the close
of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales."
The phrase "within two (2) years x x x apply for the issuance
of a tax credit certificate or refund" refers to applications
for refund/credit filed with the CIR and not to appeals
made to the CTA. This is apparent in the first paragraph of
subsection (C) of the same provision, which states that the
CIR has "120 days from the submission of complete
documents in support of the application filed in
accordance with Subsections (A) and (B)" within which to
decide on the claim.

In fact, applying the two-year period to judicial claims

would render nugatory Section 112(C) of the NIRC, which
already provides for a specific period within which a
taxpayer should appeal the decision or inaction of the CIR.
The second paragraph of Section 112(C) of the NIRC
envisions two scenarios: (1) when a decision is issued by the

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