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TAXATION LAW

MARVIN PATRICIO CAÑERO

INCOME TAX
Attorney-at-Law
Certified Public Accountant
Law Professor and Bar Reviewer in Taxation
Former Revenue Attorney – Bureau of Internal Revenue

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FEATURES OF THE PHILIPPINE INCOME TAX LAW INCOME TAX SYSTEM:

1. Global Tax System - All income received by the taxpayer are grouped
1. Direct tax together, without any distinction as to the type or nature of the
income, and after deducting therefrom expenses and other allowable
2. Adopts a comprehensive tax situs deductions, are subjected to tax at a fixed rate.

3. Individual income tax system is mainly progressive in nature
4. Adopts a semi-global tax system
2. Schedular Tax System - Various types/items of income are classified
accordingly and are accorded different tax treatments, in accordance
with schedules characterized by graduated tax rates.
3. Semi-schedular or Semi-global Tax System

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KINDS OF TAXPAYERS:

A. Individual 2. Aliens
1. Citizens
a. Resident Citizens (RC) a. Resident Aliens(RA)
b. Non-Resident Citizens (NRC)
i. physically present abroad with definite intention to reside b. Non-Resident Aliens
ii. residing abroad either as an immigrant or for employment a) Engaged in trade or business (NRA-ETB)
on a permanent basis b) Not engaged in trade or business(NRA-NETB)
iii. works and derives income from abroad and employment
requires to be physically present abroad
üNOTE: aggregate period of more than one 180 days
iv. NRC who arrives at any time during the taxable year to
reside permanently in the Phils. with respect to income
from abroad until the date arrival in the Phils.
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B. Corporations

BAR: Pierre de Savigny, a Frenchman, arrived in the Philippines on
January 1, 2010 and continued to live and engage in business in the
Philippines. He went on a tour of Southeast Asia from August 1 to
November 5, 2010. He returned to the Philippines on November 6,
2010 and stayed until April 15, 2011 when he returned to France. He
earned during his stay in the Philippines a gross income of P3 million
from his investments in the country.
ü Includes: Partnerships, no matter how created or organized; joint-
stock companies; joint accounts (cuentas en participacion);
associations; insurance companies
ü Excludes: (a) General professional partnerships; (b) JVA or
consortium - construction projects or petroleum, coal, geothermal
and other energy operations

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BAR: XXX Company which owns a three-hectare land in Antipolo entered
into a JVA with YYY Company for the development of said parcel of land.
XXX Company as owner of the land contributed the land to the Joint
Venture and YYY Company agreed to develop the same into a residential
subdivision and construct residential houses thereon. They agreed that
they would divide the lots between them. Does the JVA create a separate
taxable entity?
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Kinds of Corporations:
1. Domestic Corporations
2. Foreign Corporations
a) Resident Foreign Corporation (RFC)
b) Non-Resident Foreign Corporation (NRFC)
ü“Doing" or "engaging in" or "transacting" business implies
continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and
object of the business organization (CIR vs. BOAC; Air Canada vs. BIR)
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JVA for Construction Projects:
a. should involve joining or pooling of resources by licensed local
contractors; that is, licensed as general contractor by the PCAB
b. these local contractors are engaged in construction business;
c. the JVA itself must likewise be duly licensed as such PCAB and
DTI ( Sec. 3. RR No. 10-2012)
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QUESTION: Chungchang Air, a foreign corporation organized and
existing under the laws of China, was granted an authority to operate as
an offline carrier by the CivilAeronautics Board of the Philippines. It does
not have flights originating from or coming to the Philippines and does
not operate any airplane in the Philippines. It engaged the services of
ABC Corporation as its general sales agent in the Philippines which sells
passage documents in the Philippines. For income tax purposes, is
Chungchang Air a resident or a non-resident foreign corporation ?
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BAR: Aplets Corporation is registered under the laws of the Virgin
Islands. It has extensive operations in Southeast Asia. In the Philippines,
its products are imported and sold at a mark-up by its exclusive
distributor, Kim's Trading, Inc.
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GENERAL PRINCIPLES OF INCOME TAXATION
ØResident Citizens and Domestic Corporations are taxable on their
income derived from sources within and without the Philippines.
ØAll other kinds of taxpayers are taxable only on their income derived
from sources within the Philippines.
ØAn overseas contract worker is taxable only on income derived from
sources within the Philippines.
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C. General Partnerships
Øtreated and taxed in the same manner as a taxable corporation
ØNOTE: General professional partnership is not a taxable entity
D. Estates and Trusts
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BAR: Patrick is a successful businessman in the United States
and he is a sole proprietor of a supermarket which has a gross
sales of $10 million and an annual income of $3 million. He
went to the Philippines on a visit and, in a party, he saw Atty.
Agaton who boasts of being a tax expert. Patrick asks Atty.
Agaton: if he (Patrick) decides to reacquire his Philippine
citizenship under RA 9225, establish residence in this country,
and open a supermarket in Makati City, will the BIR tax him on
the income he earns from his U.S. business? If you were Atty.
Agaton, what advice will you give Patrick? (5%)
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TAXABLE PERIOD: CONCEPT OF INCOME

1. Calendar Period –starting on January 1 and ending on December 31 Ø all wealth which flows into the taxpayer other than as a mere return of
capital. It includes the forms of income specifically described as gains
and profits, including gains derived from the sale or other disposition
2. Fiscal Period - starts on the 1st day of any month other than January of capital assets. (Sec. 36 of RR No. 02-40)
and ends 12 months thereafter
CAPITAL INCOME
Ø a fund of property existing at an instant Ø A flow of services rendered by the
3. Short Period - less than 12 months; change of accounting period of time capital or any other benefit rendered
a) From fiscal to calendar year – between the close of the last fiscal by a fund of capital in relation to such
fund through a period of time
year and the following December 31; or
b) From calendar to fiscal year –between the close of the last Ø capital is wealth Ø service of wealth
calendar year and the date designated as the close of the fiscal Ø not subject to income tax Ø subject to income tax
year.
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Association of Non-Profit Clubs, Inc. vs. BIR ( 2019) REQUISITES FOR TAXABILITY OF INCOME:

Øincome that recreational clubs derive "from whatever source” is now

subject to income tax 1. There is an income, gain or profit;

ØMembership fees, assessment dues, and the like 2. The income, gain or profit is received (actually or constructively)
or realized during the taxable year;
a) collections from members as an inherent consequence of their
membership 3. The income, gain or profit is not exempt from income tax. (CIR VS.
CA, GR NO. 108576, JANUARY 20, 1999 )
b) intended for the maintenance, preservation, and upkeep of the
clubs' general operations and facilities

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Tests to Determine Whether Income is Earned for Tax Purposes:
1. Realization Test
Ø There is no taxable income until there is a separation from
capital of something of exchangeable value, thereby supplying
the realization or transmutation which would result in the
receipt of income (Eisner vs. Mancober, 252 U.S. 189).
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2. Claim of Right Doctrine (Doctrine of Ownership, Command or
Control)
Øtaxable gain is conditioned upon the presence of a claim of right to
the alleged gain and the absence of a definite unconditional
obligation to return or repay that which would otherwise
constitute a gain.
üCommissioner vs. Javier
üCIR vs. Tours Specialist, Inc.,
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BAR : X purchased a parcel of land in Makati City in 1970 at a
consideration of P1 Million. In 2011, the land, which remained
undeveloped and idle had a fair market value of P20 Million and assessed
value of P10 Million. Y, another Filipino citizen, offered to buy the same
for P20 Million. Is X liable for income tax in 2011 based on the offer to
buy by Y?
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BAR: Mr. Lajojo is a big-time swindler. In one year he was able to earn
P100 Million from his swindling activities. When the CIR discovered his
income from swindling, the CIR assessed him a deficiency income tax for
such income. The lawyer of Mr. Lajojo protested the assessment on the
ground that Mr. Lajojo’s receipts from his swindling did not constitute
income because he was under obligation to return the amount he had
swindled, hence, his receipt from swindling was similar to a loan, which
is not income.
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3. Economic Benefit Test / Doctrine of Proprietary Interest
ØAny economic benefit to the employee that increases his net
worth, whatever may have been the mode by which it is effected,
is taxable.
4. Severance Test
ØIncome is not deemed realized until the fruit has been plucked
from the tree. Income is recognized when there is separation of
something which is of exchangeable value (Eisner vs. Macomber,
252 US 189).
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Sale of Tickets in the Philippines by an Offline International Carrier:
ØThe source of an income is the property, activity or service that
produced the income; thus, the sale of tickets is the activity that
produces the income.
[CIR vs. British Overseas Airways Corp., et al., (1987); CIR vs. Air India,
et al., (1988)]
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SOURCE RULES (SEC. 42, NIRC):
• Interests – residence of the debtor
• Dividends– residence of th e corpor ation paying dividends, su bject
to the 50% source in case of foreign corporation
• Services - place of performance of the service
• Rentals and royalties – loc ation of th e property or int erest in s uch
property
• Sale of Real Property – location of the real property
• Sale of Personal Property
Øpartly within and partly without (produce)
Øplace of sale (purchase)
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BAR: Pacific, Inc. is engaged in overseas shipping. It time chartered one
of its ships to a Japanese company on a five- year term. The charter was
consummated through the efforts of Kamino Moto, a Tokyo based
broker. The negotiation took place in Tokyo. The agreement calls for
Pacific, Inc. to pay Kamino Moto $50,000.00. Your opinion is sought
whether Pacific, Inc. should withhold the tax before sending the
compensation of Kamino Moto.
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NDC vs. CIR, 151 SCRA 472

BAR: Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a
nonresident citizen.
ØThe residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of a) If the goods were produced from Ms. B's factory in the
payment is the determining factor of the source of interest income. Philippines, is Ms. B's income from the sale to Ms. C taxable in the
Philippines? Explain.
b) If Ms. B is an alien individual and the goods were produced in her
factory in China, is Ms. B's income from the sale of the goods to
Ms. C taxable in the Philippines? Explain.

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GROSS INCOME:

BAR: A Co., a Phil. corporation, has an executive (P) who is a Filipino

citizen. A Co. has a subsidiary in HK (HK Co.) and will assign P for an
indefinite period to work full time for HK Co. P will bring his family to
reside in HK and will lease out his residence in the Phil.. The salary of P GROSS INCOME PHP XXX
will be shouldered 50% by A Co. while the other 50% plus housing, cost Less: ALLOWABLE DEDUCTIONS XXX
of living and educational allowances of P's dependents will be shouldered TAXABLE INCOME PHPXXX
by HK Co. A Co. will credit the 50% of P's salary to P's Philippine bank
account. P will sign the contract of employment in the Phil. P will also be
receiving rental income for the lease of his Phil. residence.

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Income subject to final tax:
Ø refers to an income wherein the tax due is fully collected through the
withholding tax system.
Øthe payor of the income withholds the tax and remits it to the
government as a final settlement of the income tax due on said
income.
Ø recipient is no longer required to include the item of income
subjected to "final tax" as part of his gross income in his income tax
returns.
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Courage vs. CIR, 2018 Employer’s Convenience Rule:
ØWithholding tax on compensation applies to the Government of the Phils.,
including its agencies, instrumentalities, and political subdivisions.
ØWithholding shall be made by the officer or employee having control of the
payments or by any officer or employee duly de signated for such purpose.
(Sec. 82, NIRC). Thus, the persons required to withhold are the respective
Treasurers of LGUs, Treasurers of GOCCs, and the Chief Accountant or any
person hol ding similar position and performing simila r function in national
government offices.
ØGovernor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of
Office in agencies, GOCCs, and other government offices, are not officials
designated to withhold taxes.
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COMPENSATION INCOME:
Ø all remuneration for services performed by an employee for his
employer, under an employer-employee relation, whether paid in
cash or in kind ( Sec. 2.78.1(A), RR 2-98)
Ø Except remuneration for:
a) agricultural labor paid entirely in products of the farm where the
labor is performed;
b) domestic service in a private home
c) casual labor not in the course of the employer's trade or
business,
d) services by a citizen or resident of the Philippines for a foreign
government or an international organization [Section 78(A),
NIRC].
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Ø BAR: PRT Corp. purchased a residential house and lot with a
swimming pool in an upscale subdivision and required the
company president to stay there without paying rent; it reasoned
out that the company president must maintain a certain image and
be able to entertain guests at the house to promote the company's
business. The company president declared that because they are
childless, he and his wife could very well live in a smaller house.
Ø Board and lodging furnished employees in addition to their cash
compensation is held to be supplied for the convenience of the
employer and the value thereof is not required to be reported in
such employees' income tax returns.” (Henderzon vs. Collector, 1
SCRA 649L-12954, February 28, 1961)
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Special Treatment of Fringe Benefits:
Øgood, service, or other benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employees) such as, but not limited to the
enumeration under Sec. 33 (B) of the NIRC.
ØFringe Benefit shall be subject to FRINGE BENEFIT TAX ( 35%) which
shall be treated as final income tax on the employee that shall be
withheld and paid by the employer.
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BAR: X was hired by Y to watch over Y’s fishponds with a salary of Php
10,000.00. To enable him to perform his duties well, he was also
provided a small hut, which he could use as his residence in the middle
of the fishponds. Is the fair market value of the use of the small hut by X
a "fringe benefit" subject to Fringe Benefit Tax? Explain your answer.
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Exceptions:
a. FB required or necessary to the business of employer or for the
convenience or advantage of employer;
b. FB that is not taxable under Sec. 32 (B) – Exclusions from Gross
Income
c. FBs which are authorized and exempted under special laws, such
as the 13th month Pay and Other Benefits with the ceiling of
90,000
d. Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans;
e. FB given to Rank and File Employees
f. De minimis benefits
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DE MINIMIS BENEFITS
Ø facilities or privileges furnished or offered by an employer to his
employees, provided such facilities or privileges are of relatively
small value and are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment, or efficiency
of his employees [Section 2.79(D)(3)(d), RR 2-98, as amended].
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List of De Minimis Benefits:
1. Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year;
2. Monetized value of vacation and sick leave credits paid to
government officials and employees;
3. Medical cash allowance to dependents of employees, not exceeding
P1,500 per employee per semester or P250 per month;
4. Rice subsidy of P2,000 of 1 sack of 50 kg. rice per month
amounting to not more than P2,00;
5. Uniform and clothing allowance not exceeding P6,000 per annum;
6. Actual medical assistance not exceeding P10,000 per annum;
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Taxation of De Minimis Benefits:
a. All other benefits given by employers, which are not included in the
enumeration, shall not be considered as “de minimis” benefits,
b. The amount of ‘de minimis’ benefits conforming to the prescribed
ceiling shall not be considered in determining the P90,000.00 ceiling of
‘other benefits’ excluded from gross income under Section 32(b)(7)(e)
of the tax Code;
c. The excess of the ‘de minimis’ benefits over their respective ceilings
shall be considered as part of ‘other benefits’ and the employee
receiving it will be subject to tax only on the excess over the 90,000
ceiling
d. De minimis benefits shall constitute as deductible expense of employer
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7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards with an annual monetary value
not exceeding P10,000
9. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night/graveyard shift
not exceeding 25% of the basic minimum wage on a per region
basis; and
11. Benefits received by an employee by virtue of a CBA and
productivity incentive scheme provided that the total annual
monetary value received from both CBA and productivity incentive
scheme combined do not exceed P10,000 per employee, per
taxable year.
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BAR: Mapagbigay Corporation grants all its employees (rank and file,
supervisors, and managers) 5% discount of the purchase price of its
products. During an audit investigation, the BIR assessed the company
the corresponding tax on the amount equivalent to the courtesy
discount received by all the employees, contending that the courtesy
discount is considered as additional compensation for the rank and
file employees and additional fringe benefit for the supervisors and
managers. In its defense, the company argues that the discount given
to the rank and file employees is a de minimis benefit and not subject
to tax. As to its managerial employees, it contends that the discount is
nothing more than a privilege and its availment is restricted. Is the BIR
assessment correct?
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Soriano, et al vs. SOF and CIR, ( 2017)
ØRA 9504 is explicit as to the coverage of exemption: the wages
that are not in excess of the SMW, including the corresponding
holiday, overtime, night differential and hazard pays. In other
words, what the legislature is exempting is the MWE’s minimum
wage and other forms of statutory compensation like holiday,
overtime, night differential and hazard pays. These are not
bonuses or other benefits; these are wages.
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BAR : In January 1970, Juan Gonzales bought one hectare of
agricultural land in Laguna for P100,000. This property has a current
fair market value of P10 million in view of the construction of a
concrete road traversing the property. Juan Gonzales agreed to
exchange his agricultural lot in Laguna for a one-half hectare
residential property located in Batangas, with a fair market value of
P10 million, owned by Alpha Corporation, a domestic corporation
engaged in the purchase and sale of real property. Alpha Corporation
acquired the property in 2007 for P9 million.
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GAINS DERIVED FROM DEALINGS IN PROPERTIES:
Negative Definition of Capital Asset:
1. Stock in trade or other properties included in the inventory of
the taxpayer;
2. Property held primarily for sale to customers in the ordinary
course of business;
3. Property used in trade or business and subject to depreciation;
4. Real property used in trade or business [Sec. 39(A)(1), NIRC].
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Ordinary Gains & Losses (Ordinary Asset)
Ø Ordinary income - any gain from the sale or exchange of property
which is not a capital asset
Ø Ordinary loss - any loss from the sale or exchange of property
which is not a capital asset [Sec.22 (Z), NIRC]
Ø The general rules of income taxation apply to both gain and loss.
• Individual – graduated rates
• Corporation – 30% RCIT
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Capital Gains Tax ( CGT)

CGT on Shares of Stocks:
1. Shares of Stock in a Domestic Corporation
ØListed and Traded: final tax of 6/10 of 1% GSP Øequity investment is a capital, not ordinary, asset of the investor the
ØNot listed and traded: final tax of 15% of the Net Capital Gain sale or exchange of which results in either a capital gain or a capital
loss. Shares of stock, like the other securities defined in Section
22(T) of the NIRC, would be ordinary assets only to a dealer in
2. Real Property located in the Philippines securities or a person engaged in the purchase and sale of, or an active
Ø6% CGT on the presumed gain (SP or FMV) trader (for his own account) in securities (China Bank vs. CA, GR No.
ØException: sale or disposition of principal residence 125508, 19 July 2000)

3. Other Capital Asset

ØSubject to ordinary income tax but with special rules
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CIR vs. JERRY OCIER, 2018

CGT on Real Property
ØThe taxpayer is liable to pay capital gains taxes for the sale, barter,
exchange or other disposition of shares of stock in a domestic ØFor corporation, the final tax is imposed on the gain presumed
corporation except if the sale or disposition is through the stock to have been realized on the sale, exchange or disposition of
exchange. For this purpose, the term disposition includes any act of lands and/or buildings which are not actually used in the
disposing, transferring or parting with, or alienation of, or giving up of business of a corporation and are treated as capital assets.
property to another. [Section 27(D)(5), NIRC; SMI-ED vs. CIR]

Øincludes pacto de retro sales and other forms of conditional

sales like extra-judicial foreclosure sale, execution sale,
expropriation;

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(Supreme Transliner, Inc. vs. BPI family Savings Bank, 2011

Republic vs. Spouses Bunsay, 2019
ØIn case the right of redemption is exercised before the expiration of
ØCGT, being a tax on passive income, is imposed by NIRC on the the statutory period in a foreclosure sale, no capital gains tax shall
seller as a consequence of the latter’s presumed income from the be imposed as there was no actual transfer of title from the owner-
sale or exchange of real property. mortgagor to the foreclosing mortgagee.

ØIn case of transfer of property by expropriation, the expropriating Ø However, if no redemption was made within the redemption
authority should shoulder the CGT, other taxes and fees as part of period, the title over the property is transferred from owner-
the just compensation due to the affected owner of the property. mortgagor to the mortgagee; accordingly, the latter is liable to pay
capital gains tax on the foreclosure sale.

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Sale or Disposition of Principal Residence Other Capital Assets:

1. 6% CGT shall be deposited in an escrow account; 1. Individual taxpayer

2. proceeds fully utilized within 18 mos. from sale; ØHolding period
3. historical cost or adjusted basis shall be carried over to the new ØCapital losses are allowed only to extent of the capital gains
principal residence; ØNet Capital Loss Carry-Over is ALLOWED.
4. CIR has been duly notified within 30 days from sale or
disposition; 2. Corporate taxpayer
5. can only be availed of once every 10 years; ØNo holding period
6. if there is no full utilization, only the portion of the gain presumed ØSame
to have been realized from the sale or disposition shall be subject ØNet Capital Loss Carry-Over NOT ALLOWED
to CGT.

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TAX-FREE EXCHANGE - SEC. 40(C)(2)

Ø No gain or loss shall be recognized if property is transferred to a

BAR: In March 2009, Tonette, who is fond of jewelries, bought a
diamond ring for P750,000.00, a bracelet for P250,000.00, a necklace
for P500,000.00, and a brooch for P500,000.00. Tonette derives
income from the exercise of her profession as a licensed CPA. In
October 2009, Tonette sold her diamond ring, bracelet, and necklace
for only P1.25 million incurring a loss of P250,000.00. She used the
P1.25 million to buy a solo diamond ring in November 2009 which
she sold for P1.5 million in September 2010. Tonette had no other
transaction in jewelry in 2010.
corporation by a person, in exchange for stock in such a corporation
1. Transferee is a corporation;
2. Transferee exchanges its shares of stocks for property/ties of the
transferor;
3. Transfer is made by a person, acting alone or together with others
not exceeding four persons; and,
4. As a result of the exchange, the transferor, alone or together with
others, not exceeding four, gains control of the transferee.

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CIR vs. Filinvest Development Corporation, 2011 CIR vs. Lucio Co, et al, GR No. 241424, 26 Feb 2020, J. Caguioa
Ø Capital Structure of FLI:
STOCKHOLDER % OF SHARES PRIOR % OF SHARES AFTER
TO EXCHANGE EXCHANGE
FDC 67.42% 61.03%
FAI 0 9.96%
OTHERS 32.58% 29.01%
TOTAL 100% 100%

Ø Control means ownership of stocks in a corporation possessing at least

51% of the total voting power of classes of stocks entitled to vote;

Ø The law would apply even when the exchangor already ha s control of
the corporation at the time of the exchange.
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INTEREST INCOME ROYALTY INCOME

Ø20% final tax on interest from any currency bank deposit
Ø15% final tax on interest income received by an individual taxpayer
( except non-resident individual) from a depositary bank under the
EFCDS
Øsubject to the ordinary income tax at the rate prescribed for
individuals and corporation if it is an active income
Øsubject to final withholding tax if it is a passive income

ØInterest income from long-term deposit or investment

üexempt from the tax
ü in case of pre-termination, a final tax shall be imposed on the
entire income at 5%-12%-20%
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DIVIDEND INCOME
Tax Sparing Rule:
1. Cash and Property Dividend From Domestic Corporation
ØDividends from DC received by NRFC is subject 15% final tax,
Ø10% final tax (10%- citizen or RA) subject to the condition that the country in which the NRFC is
domiciled allows a credit on taxes deemed to have been paid in
Ø20% final tax (NRA-ETB) the Philippines
Ø25% GIT (NRA-NETB)
ØExempt: Inter-Corporate Dividend ( by DC and RFC) ØOtherwise, 30%
ØTax Sparing Rule

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CIR vs. United Distribution Management, Inc., 2019

2. Cash and Property Dividend From Foreign Corporation

ü Requisites for payment to be considered as dividend:
1) The concerned corporation must have earnings or profit;
2) Such corporate earnings or profits must be set aside, declared
and ordered by the directors to be paid to the stockholders on
demand or at a fixed time; and,
3) The distribution of such corporate earnings or profits is in
money or in property.
Ø Part of the GI and thus subject to the graduated tax rates if
received by RC, (Sec. 24, 25A1)
Ø Part of the GI and thus subject to 30% income tax if received by
a Domestic Corporation (Sec. 32A)
Ø Not taxable if received by NRC, RA, NRA, RFC and NRFC

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4. Liquidating Dividends
3. Stock Dividend
Øgain realized or loss sustained is taxable income or deductible loss [Sec.
ØAs a rule, stock dividend is not subject to tax because it does not 73(A), NIRC]
constitute income (Sec. 73B, 1997 NIRC).
Øany gain or loss on the part of the stockholder is subject to tax, while on
ØEXPN: if a corporation cancels or redeems stock dividend at such time the part of the liquidating corporation, no tax is imposed on its receipt of
and in such manner as to make the distribution and cancellation or the shares surrendered or transfer of assets to the stockholder because
redemption essentially equivalent to the distribution of a taxable said transaction is not treated as a sale. ( Fernando vs. Spouses Lim, 2008)
dividend.
Øit is not a sale for purposes of the imposition of capital gains tax (CIR vs.
Premium Leisure Corp., 2019)

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PRIZES AND OTHER WINNINGS

• Prizes and Awards in religious, charitable, etc. achivements
a) in recognition of religious, charitable, scientific, educational,
a) Prizes artistic, literary, or civic achievement;
i. 10,000 or less – part of GI subject to the graduated rates for b) recipient was selected without any action on his part to enter the
individuals contest or proceeding; and
ii. more than 10,000 c) recipient is not required to render substantial future services as a
Ø20% FWT - RC, NRC,RA and NRA-ETB condition to receiving the prize or award. [Sec. 32(B)(7)(c), NIRC].
Ø25% FWT – NRA-NETB
iii. Part of the GI of the Corporation, regardless of the amount • Prizes and Awards in Sports Competition
Øgranted to athletes in local and international sports competitions and
b) Winnings - 20% (except except winnings amounting to P10,000.00 tournaments whether held in the Phils. or abroad and sanctioned by
or less from PCSO and Lotto which shall be exempt) their national sports associations [Sec. 32(B)(7)(d), NIRC].

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Partner’s Distributive Share in a General Professional Partnership

BAR: Jose Miranda, a young artist and designer, received a prize of
P100,000.00 for winning in the on-the-spot peace poster contest sponsored
by a local Lions Club. Shall the reward beincluded in the gross income of the
recipient for tax purposes? Explain.
Ø Partners shall be liable for income tax in their separate and individual
capacities.
Ø Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership.

Ø For purposes of computing the distributive share of the partners, the

net income of the partnership shall be computed in the same manner as
a corporation. (Sec. 26, NIRC)

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INCOME FROM WHATEVER SOURCE:
ØGains arising from expropriation of property
ØIncome derived from illegal sources
Øincrease in the net worth if unreported and not explained by the
taxpayer
ØThe condonation of indebtedness for a consideration
ØRecovered damages representing recoveries of lost profits
CAN ERO LAW
EXCLUSIONS FROM GROSS INCOME:
Øthey represent return of capital or are not income;
Ø subject to another kind of internal revenue tax;
Øexpressly exempt form income tax under the law.
CAN ERO LAW
12/1/20
BAR: X borrowed from Y P100,000.00, payable in five (5) equal monthly
installments. Before the first installment became due, X rendered general
cleaning services in the entire office building of Y, and as compensation
therefor, Y cancelled the indebtedness of X up to the amount of
P75,000.00. X claims that the cancellation of his indebtedness cannot be
considered as gain on his part which must be subject to income tax,
because according to him, he did not actually receive payment from Y for
the general cleaning services.
CAN ERO LAW
1. Life Insurance
BAR: Noel Santos is a very bright computer science graduate. He was
hired by Hewlett Packard. To entice him to accept the offer of
employment, he was offered the arrangement that part of his
compensation would be an insurance policy with a face value of P20
Million. The parents of Noel are made the beneficiaries of the
insurance policy.
2. Amount Received by the Insured as Return of Premium
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4. Compensation for Personal Injuries or Sickness

3. Gifts, Bequest and Devices
BAR: Spouses Jose San Pedro and Clara San Pedro, both Filipino
citizens, are the owners of a residential house and lot in Quezon City.
After the recent wedding of their son, Mario, to Maria, the spouses
donated said real property to them. At the time of donation, the real
property has a fair market value of P2 million.(A) Are Mario and
Maria subject to income tax for the value of the real property
donated to them? Explain.
5. Income Exempt Under Treaty
BAR: Antonia Santos, 30 years old, gainfully employed, is the sister of
Eduardo Santos. She died in an airplane crash. Edgardo is a lawyer
and he negotiated with the Airline Company and insurance company
and they were able to agree to a total settlement ofP10 Million. This is
what Antonia would have earned as somebody who was gainfully
employed. Edgardo was her only heir. Should Edgardo report the P10
Million as his income being Antonia’s only heir?

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6. Retirement Benefits under RA 7641:

8. Benefits Received on Account of Involuntary Separation
1. absence of a retirement plan or agreement;
2. age of sixty (60) years or more, but not beyond sixty-five (65) years,
which is declared as the compulsory retirement age; Øbecause of death, sickness or other physical disability or for any cause
3. served at least five (5) years in the said establishment. beyond the control of the said official or employee. [Sec. 32(B)(6)(b),
NIRC].
7. Retirement Benefits under RA 4917 :
1. there is reasonable private benefit plan maintained by the Øseparation of the employee must not be asked for, initiated by him, or
employer; of his own making or choice
2. retiring official or employee has been in the service of the same
employer for at least ten (10) years;
3. not less than fifty years of age at the time of his retirement;
4. availed of by an official or employee only once.
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BAR: The Board of Directors of Sumo Corporation, a company primarily
engaged in the business of marketing and distributing pest control
products, approved the partial cessation of its commercial operations,
resulting in the separation of 32 regular employees. Only half of the
affected employees were notified of the board resolution. Rule on the
taxability of the separation pay and indemnity that will be received by the
affected employees as the result of their separation from service. Explain
your answer.
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9. Retirement benefits from foreign government agencies
BAR: Z is a Filipino immigr ant livin g in the Uni ted States for more than 10 years. H e
is retir ed and h e c ame b ack to th e Philippin es as a b alikbayan . Every tim e he com es
back to th e Philippin es, h e stays h ere for abou t a month . He regul arly receives a
pension from his former employer in the United States, amoun tin g to US$1,000 a
month. While i n th e Philippin es, wi th his pension pay from his form er em ployer, h e
purchas ed thr ee con dominium units in Makati which he is r en ting ou t for P15,000 a
month each. Does th e US$1,000 p ension become taxabl e bec aus e he is no w residin g
in the Philippines? Reason briefly.
10. Benefits from United States Veterans Administration, SSS, GSIS.
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12/1/20
BAR: X worked for a manufacturing firm. Due to business reverses the
firm offered voluntary redundancy program in order to reduce overhead
expenses. Under the program an employee who offered to resign would
be given separation pay equivalent to his three month’s basic salary for
every year of service. X accepted the offer and received P400.000.00 as
separation pay under the program. After all the employees who accepted
the offer were paid, the firm found its overhead still excessive. Hence it
adopted another redundancy program. Various unprofitable departments
were closed. As a result, Y was separated from the service. He also
received P400.000.00 as separation pay.
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11. 13thMonth Pay and Other Benefits
Ø the exclusion shall not exceed 90,000.00
Ø other benefits received in excess of the ceiling amount shall be
considered as part of the employee’s compensation income subject
to income tax
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ALLOWABLE DEDUCTIONS:
GROSS INCOME:
Ø Tax deductions are items or amounts which the law allows to be
deducted from gross income in order to arrive at the taxable income; it
reduces the income that is subject to tax in order to arrive at taxable
GROSS INCOME PHP XXX income
Less: ALLOWABLE DEDUCTIONS XXX
TAXABLE INCOME PHPXXX Ø Tax credit generally refers to an amount that is "subtracted directly
from one's total tax liability; it reduces the tax due, including —
whenever applicable — the income tax that is determined after
applying the corresponding tax rates to taxable income. (CIR vs. Central
Luzon Drug Corporation)

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ITEMIZED DEDUCTIONS:

1. Trade, Business or Professional Expense “Ordinary and Necessary”

a. ordinary and necessary; Ø To be considered ordinary, expense must be reasonable in amount.

b. paid or incurred during the taxable year; [CIR vs. General Foods (Phils.), Inc.; C. M. Hoskins & Co., Inc. vs. CIR]
c. paid or incurred in carrying on the trade or business of the
taxpayer; Ø A capital outlay is not deductible but depreciable, except, if the TP
d. supported by receipts; is a non-profit proprietary educational institution which may elect
e. if subject to withholding tax, proof of payment to the BIR must be either to deduct the capital expense or depreciate it [Sec. 34(A),
shown [Sec. 34(K)]. NIRC].

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BAR: MFC incurred substantial advertising expenses in order to protect
its brand franchise for one of its line products. In its income tax return,
MFC included the advertising expense as deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct?
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Ø expenses relating to recapitalization and reorganization of
corporation, cost of obtaining stock subscription, promotion
expenses, and commission or fees paid for the sale of stock
reorganization are capital expenditures;
Ø litigation expenses incurred in defense or protection of title are capital
in nature and not deductible.
(Atlas Consolidated Mining &Devt. Corp. vs. CIR)
CAN ERO LAW
12/1/20
BAR: Gold and Silver Corporation gave extra 14th month bonus to all its
official and employees in the total amount of P75 Million. When it filed
its corporate income tax return the following year, the corporation
declared a net operating loss. When the income tax return of the
corporation was reviewed by the BIR the followingyear, it disallowed as
item of deduction the P75 Million bonus the corporation gave its officials
and employees on the ground of unreasonableness. The corporation
claimed that the bonus is an ordinary and necessary expense that should
be allowed. If you were the BIR Commissioner, how will you resolve the
issue?
CAN ERO LAW
All Events Test:
ØA test applied in the realization of income and expense by an accrual-
basis taxpayer. The test requires:
a. the fixing of a right to the income or liability to pay; and,
b. the availability of reasonably accurate determination of such
income or liability (CIR v. Isabela Cultural Corporation, 2007)
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Pilmico-Mauri Foods Corp. vs. CIR, 2016

QUESTION: The CIR issued an assessment for deficiency withholding tax
on compensation for the taxable years 1996 and 1997 against XXX. The
assessment arose from XXX’s failure to withhold taxes on the bonuses
accruing to his officers and employees during taxable years 1996 and ØIn addition, not only must the taxpayer meet the business test, he
1997. The bonuses were accrued or recorded as deductible expense in must substantially prove by evidence or records the deductions
XXX’s books of accounts but were not distributed to the officers and claimed under the law, otherwise, the same will be disallowed. The
employees in 1996 and 1997. Thus, XXX (who is using the accrual mere allegation of the taxpayer that an item of expense is ordinary
method of accounting) contended that the bonus accruals in 1996 and and necessary does not justify its deduction.
1997 were not yet subject to withholding tax because these bonuses
were actually distributed only in the succeeding years of their accrual
(i.e., in 1997 and 1998) when the amounts were finally determined. Is
the contention of XXX tenable?

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Amount to be Deducted (Tax Arbitrage)

2. Interest Expense
ØIn general, the amount of interest expense paid or incurred
a. There must be an indebtedness; ØAs a limitation, the amount shall be reduced by 33% of interest
b. The indebtedness must be that of the taxpayer; income earned which had been subjected to final withholding tax.
c. There should be an interest expense paid or incurred upon such
10 MILLON
indebtedness [Sec. 34(B)(1), NIRC];
d. The indebtedness must be connected with the taxpayer's trade, INCOME (10%)
EXPENSE (10%)
business or exercise of profession [Sec. 34(B)(1), NIRC]; 10% of 10M = 1M 10% of 10M = 1M
e. The interest expense must have been paid or incurred during the
taxable year;
f. The interest must be legally due; TAX BENEFIT FINAL TAX LIABILITY
g. The interest arrangement must not be between related 1M X 30% = 300K 1M X 20% = 200K

taxpayers[Sec. 34(B)(2)(b) in relation to Sec. 36, all of the NIRC] NET BENEFIT:
300K-200K = 100K
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Tax Benefit Rule:

3. Taxes

a. in connection with taxpayer’s business;

Ø Taxes allowed as deductions, when refunded or credited, shall be
b. paid or incurred during the taxable year;
included as part of gross income in theyear of receipt to the extent
c. tax must be imposed by law on, and payable by taxpayer (direct of the income tax benefit of said deduction [34(C)(1), NIRC] There
tax); is no income tax benefit where the recovery would not affect the
d. For NRAETB and RFC, taxes paid or incurred are allowed as taxpayer’s non-liability or the amount of his liability for income
deductions only if and to the extent that they are connected from
tax.
income within the Philippines [Sec. 34(C)(2), NIRC]

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4. Ordinary Losses
BAR: A is a travelling salesman working full time for Nu Skin Products.
a. Actually sustained during the taxable year He receives a monthly salary plus 3% commission on his sales in a
b. Connected with the trade, business or profession Southern province where he is based. He regularly uses his own car to
c. Evidenced by a closed and completed transaction maximize his visits even to far flung areas. One fine day a group of
militants seized his car. He was notified the following day by the police
d. Not compensated for by insurance that the marines and the militants had a bloody encounter and his car
e. Not claimed as a deduction for estate tax purposes was completely destroyed after a grenade hit it. A wants to file a claim
f. Notice of loss filed with the BIR within 45days from the date of for casualty loss.
discovery of the casualty or robbery, theft or embezzlement.

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Net Operating Loss Carry-Over (NOLCO)

NOLCO Requirements:
Ø Excess of deductions over gross income of the business for any
taxable year, a. The taxpayer was not exempt from income tax in the year of
Ø Additional deductible item from gross income similar to other such net operating loss;
allowable deductions. b. The loss was not incurred in a taxable year during the taxpayer
Ø Can be carried over for the next 3 consecutive years was exempt from income tax; and
immediately following the year of the loss (5 years for mines, c. There has been no substantial change in the ownership of the
other that oil and gas well) business or enterprise. [S34(D)(3),NIRC]
Ø NOLCO for 2020 and 2021 can be the next 5 consecutive years
immediately following the year of the loss even after the
expiration of RA 11494 ( RR 25-2020)
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NOLCO
Øexcess of deductions over gross
income for any taxable year
ØAdditional deductible item from
gross income similar to other
allowable deductions.
ØHolding period is not applicable
ØCan be carried over in the next 3
consecutive years immediately
following the year of such loss
NCLCO
5. Bad Debts
ØLoss from sale or exchange of
capital asset a. Existing indebtedness which is valid and legally demandable;
ØCapital losses are allowed only to b. Connected with the TP's trade, business or practice of
extent of the capital gains; profession
ØHolding period is applicable in c. Must not be between related parties;
case of individual taxpayer d. Actually ascertained to be worthless and uncollectible
Øtreated in the succeeding year as e. Actually charged off in the books of accounts
a deduction as short-term capital
loss from the net capital gains in
case of individual taxpayer

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Tax Benefit Rule:

ØQUESTION: On 8 May 1999, X loaned 10 Million Pesos to Y. After 6. Depreciation Expense

more than fifteen (15) years, X has not heard anything from Y and
the 10 Million Pesos remains unpaid. X claimed the 10 Million a. The allowance for depreciation must be reasonable;
Pesos as bad debt and deducted it from his gross income for b. It must be for property use or employment in trade or business
taxable year 2015. On March 5, 2017, Y suddenly appeared and or out of its not being used temporarily during the year;
paid the 10 Million Pesos indebtedness. c. The allowance must be charged off within the taxable year (Sec.
113, Rev. Regs. No. 2)
ØThe recovery of bad debts previously allowed as deductions in the
precedingyears 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 [Sec 34 (E), NIRC].

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7. Depletion of Oil and Gas Wells and Mines 8. Charitable & Other Contributions

ØOnly mining entities owning economic interest in mineral deposits a. The contribution or gift must be actually paid;
are allowed to deduct allowance for depletion ;
ØThe reasonable allowance of deduction for depletion is computed b. It must be given to the organizations specified in the Tax Code
under the cost- depletion method;
ØSec. 34(G) (1) of the NIRC expressly provided that "when the
c. The net income of the institution must not inure to the benefit of
allowances shall equal the capital invested, no further allowances
any private stockholder or individual.
shall be made;"

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ORDINARY CONTRIBUTION SPECIAL CONTRIBUTION

BAR: Dr. Taimtim is an alumnus of the College of Medicine of Universal
University (UU), a privately- owned center for learning which grants ØGovernment for non-priority Ø Government for priority
yearly dividends to its stockholders. UU has a famous chapel located activities; accredited domestic activities; foreign or
within the campus. Wanting to give back to the chapel and help defray corporation or associations; NGO international organizations;
the costs of its maintenance, Dr. Taimtim donated P50,000.00 to the accredited NGO (organization
and operation; non-inurement
caretakers of the chapel which was evidenced by an acknowledgment ØSubject to limitations: rule; utilization; administrative
receipt. In computing his net taxable income, can Dr. Taimtim use his üNot exceeding 10% of TI expense limitation; distribution
donation to the chapel as an allowable deduction from his gross income? before contribution for of assets upon dissolution)
individual taxpayers
ünot exceeding 5% of TI before
contribution for corporate Ø No limitation as to the amount
taxpayers of deduction

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Donation during the National Emergency ( RA 11469) 9. Research and Development

1. Made during the period of the state of national emergency and for the sole
and exclusive purpose of combating Covid-19 1. Revenue Expenditure (deduction during the taxable year)
a) it must paid or incurred during the taxable year;
2. Donations of cash, critical or neede d healt h care equipment or suppl ies, b) ordinary and necessary expenses in connection with trade
relief goods, and use of property, whether real or personal business or profession; and
c) not chargeable to capital account.
3. Donees:
a) Government (regardless if covered by annual priority plan) 2. Deferred Expense (ratably distributed over a period of not less
b) Accredited NGOs than 60 months)
c) Private hospitals and/or NGOs ( even if non-accredited)
a) paid or incurred in connection with trade, business, or profession;
d) Local private corporations, civic organizations, and/ or international
organizations : (a)distribute/transfer donation to, and/ or (b) partne r b) not treated as expense; and
with, accredited NGOs and/or government c) chargeable to capital account but not chargeable to property
subject to depreciation or depletion.
4. Submission of documentary requirements
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28

OPTIONAL STANDARD DEDUCTION:
ØIn lieu of the deductions allowed under Section 34 (A) to (J) and
(M) of the NIRC; not exceeding 40% of gross sales or receipts for
individual and of gross income for corporations
üBAR : Ernesto, a Filipino citizen and a practicing lawyer, filed his
income tax return for 2007 claiming optional standard deductions.
Realizing that he has enough documents to substantiate his
profession-connected expenses, he now plans to file an amended
income tax return for 2007, in order to claim itemized deductions,
since no audit has been commenced by the BIR on the return he
previously filed. Will Ernesto be allowed to amend his return? Why
or why not?
CAN ERO LAW
INCOME TAX ON INDIVIDUAL TAXPAYERS
1. Resident Citizens, Non-Resident Citizens and Resident Aliens
a) Purely compensation income earner
i. Taxed based on the new graduated income tax rates (5%-
35%);
ii. Taxable income is the gross compensation income less non-
taxable income/benefits.
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12/1/20
ITEMS NOT DEDUCTIBLE:
1. Bribes, Kickbacks and Other Similar Payments – not deductible as
business expense [S34(A)(1)(c), NIRC]
2. Specific items under Section 36 of the NIRC.
a. Personal, living or family expenses;
b. capital expenditures
c. Premiums paid on any life insurance policy when the taxpayer is
directly or indirectly a beneficiary under such policy. [Sec. 36]
d. Losses from sales or exchanges of property between related
taxpayers. [Sec. 36]
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b) Purely Self-Employed Individuals and/ orProfessionals
üX is a lawyer engaged in the practice of his profession and owns a
laundry business. For 2018, his gross receipt in his business is 1
Million and his gross receipt for the practice of his profession is 1.5
Million. How is his income tax liability computed?
a) graduated income tax rates (GITR) based on taxable net income
and pay percentage tax; OR
b) 8% tax on gross sales or gross receipts and other non-operating
income in excess of ₱250,000 in lieu of the GITR and the
percentage tax
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Individuals Not Qualified to Avail of the 8% GIT :
a. Purely compensation income earners;
b. VAT registered TPs, regardless of the amount of GS/GR and other NOI;
c. Non-VAT TPs whose GS/GR and other NOI exceeded the 3M VAT
threshold;
d. TPs who are subject to Other Percentage Tax except those under Sec.
116 of the Tax Code;
e. Partners of GPP since their distributive share in the GPP is already net
of cost and expenses;
f. Individual enjoying tax exemption such as those registered under
BMBEs, since TPs are not allowed to avail of double or multiple tax
exemptions under different laws, unless otherwise provided by law.
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c) Mixed Income Earners
üX, a lawyer, is an employee of ABC Corp. and receives annual
compensation of 2.4 M; he also operates a laundry business and the
gross receipt for 2018 is 1.5M.
a. Compensation income shall be subject to the GITR based on TNI ;
b. Income from Business or Practice of Profession –
1. GS/GR and other NOI Does Not Exceed the VAT Threshold
i. GITR based on TNI and pay percentage tax; OR
ii. 8% GIT in lieu of the GITR and percentage tax (250K
reduction is no longer allowed)
CAN ERO LAW
12/1/20
üX owns and operates a laundry business; he has no other source of
income; he availed of the 8% GIT regime. For the 1st and 2nd quarters,
his gross receipts are 1 Million and 1.5 Million, respectively;
accordingly, he paid the 8% GIT in his Quarterly ITRs; for 3rd and 4th
quarters, his gross sales are 1.5 M and 2M, respectively.
a) GITR based on Taxable Income
b) He shall be allowed an income tax credit of quarterly payments
initially made under the 8% income tax option
c) Liable to pay business taxes in addition to income tax: (i) update
registration from non-VAT to VAT taxpayer and pay VAT; (ii)
percentage tax from the beginning of the year until he is liable to
VAT.
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2. If the GS/GS and other NOI Exceeds the VAT Threshold
i. GITR based on TNI
ii. Compensation income and business/profession income shall be
combined and the applicable tax rate under the GITR shall be
applied.
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d. Passive Income of RC, NRC and RA

1. Royalties, in general– 20%

2. Royalties from books, literary works and musical composition – 6. Prizes ( except prizes amounting to 10K or less which is subject to
10% the graduated rates ) – 20%
3. Interest from currency bank deposits and yield and other
monetary benefit– 20% 7. Winnings ( except winnings from PCSO and Lotto amounting to 10K
or less) – 20%
4. Interest from depository bank under the EFCD system (except
non-resident) – 15% 8. Dividends - 10%
5. Proceeds of pre-terminated long term deposit or investment 9. GCT on sale of shares of stock not traded in the LSE - 15%
based on the remaining maturity of the investment: 4-5=5%; 3- 10. CGT on sale of real property classified as capital asset– 6%
4=12%; less than 3=20%

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2. Non-Resident Aliens Engaged in Trade or Business ( NRA-ETB) 3. Non-Resident Aliens Not Engaged in Trade or Business ( NRA-
NETB)
a) Income tax in the same manner as RC, NRC and RA on taxable
income received from all sources within the Philippines. a) 25% GIT
b) CGT on sale of shares of stock not traded in the LSE
c) CGT on sale real property located in the Phils.
b) Passive Income
i. Interest, Royalties, Prizes & Other Winnings and Dividends
ii. CGT on sale of shares of stock not traded in the LSE
iii. CGT on sale real property located in the Phils. treated as capital
asset

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4. Income Tax Rates of Special Aliens under Secs. 25(C),(D) and(E) of
the Tax Code
Ø The preferential tax treatment shall no longer be applicable,
without prejudice to the application of preferential tax rates under
existing international tax treaties. Thus, the said employees shall
now be subject to the graduated income tax rates ( RR 8-2018)
5. Minimum Wage Earners
Ø exempt from the payment of income tax based on the statutory
minimum wage rates.
Ø exemption includes holiday pay, overtime pay, night shift
differential pay and hazard pay
Ø For those whose basic pay is more than the SMW but does not
exceed P250,000, are other income like holiday pay, OT, NDP,
hazard pay & others also tax exempt?

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INCOME TAX ON CORPORATIONS

1. Domestic Corporations
c) Minimum Corporate Income Tax
a) Regular Corporate Income Tax (RCIT)
Ø 30% of the TNI from all sources Ø2% of the gross income
Øbeginning on the 4TH taxable year immediately following the year of
b) Optional Corporate Income Tax (OCIT) commencement of business operation;
Ø 15% of the Gross Income; Øwhen the minimum income tax is greater than the RCIT
Ø available only to firms whose ratio of cost of sales to gross sales ØCarry Forward of Excess Minimum Tax
or receipts from all sources does not exceed 55%; ØRelief from the MCIT Under Certain Conditions
Ø shall be irrevocable for 3 consecutive taxable years during
which the corporation is qualified under the scheme;

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d. Taxation of Passive Income of Domestic Corporations

BAR: KKK Corp. secured its Certificate of Incorporation from the
Securities and Exchange Commission on June 3, 2013. It commenced i. Interest from Deposits and Yield or any other Monetary Benefit
business operations on August 12, 2013. In April 2014, Ms. J, an from Deposit Substitutes and from Trust Funds and Similar
employee of KKK Corp. in charge of preparing the annual income tax Arrangements, and Royalties - 20%
return of the corporation for 2013, got confused on whether she should ii. Interest income derived from a depository bank under the
prepare payment for the regular corporate income tax or the minimum expanded foreign currency deposit system - 15%
corporate income tax. iii. Capital Gains from the Sale of Shares of Stock Not Traded in the
Stock Exchange - 15%
iv. Intercorporate Dividends – EXEMPT
v. Capital Gains Realized from the Sale, Exchange or Disposition of
Lands and/or Buildings – 6%

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e. Improperly Accumulated Earnings Tax:

Evidence of purpose to avoid income tax:
Ø10% tax on profits of a corporation that are permitted to accumulate
instead of being distributed by a corporation to its shareholders for the a. The fact that any corporation is a mere holding company or
purpose of avoiding the income tax with respect to its shareholders or investment company;
the shareholders of another corporation ( Sec. 29, NIRC)
b. The fact that the earnings or profits of a corporation are permitted
Ø to discourage tax avoidance through corporate surplus accumulation; to accumulate beyond the reasonable needs of the business.
to compel corporations to distribute earnings to shareholders so that
could be taxed (Cyanamid Phils. Vs. CIR, 2000) üImmediacy Test” - the immediate needs of the business

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PROPRIETARY EDUCATIONAL INSTITUTIONS AND HOSPITALS
BAR: In 2009, Spratz, Inc.’s net profit before tax was P35 million while its
operating expenses was P31 million. In 2010, its net profit before tax was
P40 million and its operating expenses was P38 million. It did not declare
dividends for 2009 and 2010. And it has no proposed capital
expenditures for 2011 and the immediate future. May Spratz be subject
to the improperly accumulated tax on its retained profits for 2009 and
2010?
CAN ERO LAW
GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCCs)
Bloombery Resort vs. BIR,10 Aug 2016
ütaxable as any other corporation except: GSIS, SSS, PHIC and LWD
üPAGCOR v. BIR, 10 December 2014
ØPAGCOR's tax privilege of paying 5% franchise tax in lieu of all other
taxes with respect to its income from gaming operations is not
repealed or amended by R.A. No. 9337;
ØPAGCOR's income from gaming operations is subject to the 5%
franchise tax only; and
ØPAGCOR's income from other related services is subject to corporate
income tax only.
CAN ERO LAW
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ü“Proprietary” which are “non-profit”
Ø“Proprietary” means private;
Ø“Non-profit” means no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities
conducted not for profit.
ü10% of TI except Passive Income; subject to the predominance rule
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Øall contractees and licensees of PAGCOR, upon payment of the 5%
franchise tax, shall likewise be exempted from all other taxes,
including corporate income tax realized from the operation of
casinos.
ØConsidering that PAGCOR is subject to corporate income tax for
"other related services", we find it logical that its contractees and
licensees shall likewise pay corporate income tax for income derived
from such "related services."
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Foreign Currency Deposit System
a) EXEMPT – income derived by a depository bank from foreign
currency transactions with non-residents OBU
b) 10% - interest income from foreign currency loans by depository
banks to residents other than OBU or other depository banks
under the expanded system
c) EXEMPT- Income of non-residents from transactions with
depository banks under the expanded system shall be exempt
from income tax.
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Tax on Passive Income of RFC:
a) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes and from Trust Funds and Similar
Arrangements, and Royalties - 20%
b) Interest income derived from a depository bank under the
expanded foreign currency deposit system - 15%
c) Capital Gains from the Sale of Shares of Stock Not Traded in the
Stock Exchange - 15%
d) Intercorporate Dividends – EXEMPT
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2. Resident Foreign Corporations (RFC)
a) 30% RCIT based on Taxable Income
b) 15% OCIT based on Gross Income
c) 2% MCIT
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Tax on Branch Profits Remittances
Øprofit remitted by a branch to its head office
Ø15% of the total profits applied or earmarked for remittance
without any deduction for the tax component thereof
BAR: AB Corporation, which was organized in 2000 and existing
under the laws of the Phils., set up in 2010 a branch office in China.
During the year, the bank management decided not to include the P20
Million net income of the China Branch in the annual Phil. income tax
return filed with the BIR, which showed a net taxable income of P30
Million, because the China Branch is treated as a foreign corporation
and is taxed only on income from sources within the Phils., and since
the loan and other business transactions were done in China, these
incomes are not taxable in the Phils.
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Special Resident Foreign Corporations

1) International Carrier 3. Non-Resident Foreign Corporation (NRFC)
Ø(1) 2.5% GPB Tax; (2) preferential rate or exemption under (a) tax treaty
or international agreement or (b) reciprocity a) 30% GIT from all sources within the Philippines
b) Special Non-Resident Foreign Corporations
2) Offshore Banking Units c) Passive Income
ØEXEMPT - income derived from foreign currency transactions with i. 20% final tax on interest on foreign loans.
nonresidents, other OBUs, local commercial banks, and branches of
foreign banks authorized to transact with OBUs ii. 15% CGT on sale of shares of stock not traded in the LSE
Ø 10% final income tax - interest income from foreign currency loans iii. 15% income tax on dividend from domestic corporation,
granted to residents other than OBUs, local commercial banks, and subject to the Tax Sparing Rule
branches of foreign banks authorized to transact with OBUs

3) RAHQs are exempt from income tax while ROHQs are subject to 10%
income tax CAN ERO LAW CAN ERO LAW

EXEMPT CORPORATIONS AND ASSOCIATIONS ( SEC. 30, NIRC)

CIR vs. ST. LUKE’S MEDICAL CENTER, INC., , 2012 & 2017
ünon-stock, non-profit entity
ØEven if the charitable institution must be "organized and operated
üorganized and operated for the purposes under Section 30 of the NIRC, exclusively" for charitable purposes, it is nevertheless allowed to
and that its income is derived pursuant thereto: engage in "activities conducted for profit" without losing its tax exempt
a) Organizational Test - constitutive documents must show that its status for its not-for-profit activities.
primary purpose/s of incorporation fall under Section 30 of the
NIRC.
ØThe only consequence is that the "income of whatever kind and
b) Operational Test- the regular activities must be exclusively devoted character" of a charitable institution "from any of its activities
to the accomplishment of the purposes specified in Section 30 of conducted for profit, regardless of the disposition made of such
the NIRC. income, shall be subject to tax."
üIncome tax exemption covers only the income derived in furtherance of
the purposes for which it was organized
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Non-Stock, Non-Profit Educational Institutions

BAR: A group of p hilan thropists organized a non-stock, no n-profit

Ø The last paragraph of Sec. 30 of the Tax Code is without force and
hospital for ch aritable purpos es to provide medical services to t he
effect with respect to non-stock, non-profit educational
poor. The hospital also acc ept ed p aying p atients although non e of its institutions, provided, that the non-stock, non-profit educational
income accru ed to any private individual; all inco me were plow ed institutions prove that its assets and revenues are used actually,
back for th e hospit al's use and not mor e th an 30% of its funds w ere directly and exclusively for educational purposes. The tax-exemption
used for ad ministrative purpos es. Is th e hospital sub jec t to t ax on its constitutionally-granted to non-stock, non profit educational
income? If it is, at what rate? institutions, is not subject to limitations imposed by law. (CIR VS.
DLSU).

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INCOME TAX ON PARTNERSHIPS

(1) General Partnerships

ØTaxable as corporation [Sec 27(A) in relation to Sec. 22(B), NIRC] BAR: A and B, co-owners, bought 3 parcels of land in one transaction
and bought 2 more parcels of land in another. They decided to sell the 3
ØFinal Tax on share of the partners in the distributable net income of parcels to C and the 2 parcels to D. They realized a net profit gain and
a partnership [Sec 24(B)] paid CGT. CIR assessed them for deficiency corporate income tax. Is
the co-ownership taxable as a corporation?
ØUnregistered partnerships are included in the concept of
“corporations”

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(2) General Professional Partnerships

BAR: A group of insurance companies in the Philippines decided to
form a pool and entered into a reinsurance treaty with a non-
resident reinsurance company. Is such a pool subject to corporate axes
and withholding taxes on dividends paid to the non-resident
reinsurance company?
Ønot subject to income tax
ØPartners shall be liable for income tax in their separate and
individual capacities
Øeach partner shall report as gross income his distributive share
Øthe net income of the GPP shall be computed in the same manner as
a corporation to compute the distributive share of the partners

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INCOME TAX ON ESTATES

(1) Estate Under Judicial Settlement:

a) During the Pendency of the Settlement BAR: A and B inherited properties. They did not partition the same
ØAs a rule, taxable in the same manner as individuals. and instead invested them to a common fund and divide the profits
ØDistribution of income to the heirs therefrom. Should they be classified as an unregistered partnership
ØNo such distribution subject to corporate income tax?

b) Termination of the judicial settlement

Ø Unregistered partnership
ØCo-ownership

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INCOME TAX ON TRUSTS:

(2) Estate not under judicial settlement 1. Trust itself, through the trustee or fiduciary, is liable for the income
tax;
Øno tax personality;
2. The amount of income to be distributed to the beneficiary is a
Øpending the extrajudicial settlement: deduction from the gross income of the trust but must bereported as
a. Unregistered partnership income of the beneficiary (Sec.61(A),NIRC)
b. Co-ownership
3. Income of the trust
Ødistributed to the beneficiaries –beneficiaries
Øaccumulated or held for future distribution –trustee or fiduciary. (
Regs. No. 2)

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INDIVIDUAL INCOME TAX RETURNS

Who are required to file?

BAR: Johnny transferred a valuable 10-door commercial apartment to a
designated trustee, Miriam, naming in the trust instrument Santino, a) Resident Filipino Citizen;
Johnny's 10-year old son, as the sole beneficiary. The trusteeis instructed
to distribute the yearly rentals amounting to P720,000.00. The trustee b) Non-Resident Filipino Citizen on income from within the Phils.
consults you if she has to pay the annual income tax on the rentals
received from the commercial apartment.
c) Resident Alien on income from within the Phils.

d) Non- Resident Alien engaged in trade or business or in the

exercise of profession in the Phils.

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Substituted Filing of ITR by Employees

Who are not required to file?
Ønot be required to file an annual income tax return
1. Individual whose gross income does not exceed 250,000.00,
except citizens and aliens engaged in business/practice of Øcertificate of withholding filed by the employer, duly stamped
profession; ‘received’ by the BIR, shall be tantamount to the substituted filing of
2. Individual entitled to substituted filing; income tax returns by an employees:
3. Individual whose sole income has been subjected to final a) purely compensation income
withholding income tax; b) one employer during the taxable year.
4. Minimum wage earner c) amount of tax due equals the amount of tax withheld
d) employee's spouse also complies with all 3 conditions
stated above.
e) employer files the annual information return.
f) employer issues BIR Form 2316
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Annual ITR or Final Adjustment Return for Individuals (1701) Quarterly ITR for Individuals (1701Q)

Øon or before the 15th day of April of each year covering income for a) every individual subject to income tax who is receiving self-
the preceding taxable year. employment income

Ømaximum of 4 pages in paper form or electronic form: b) Filing and Payment:

a. Personal profile and information; Ø On or before May 15 for the 1st Quarter
b. Total gross sales, receipts or income, except income subject to Ø On or before August 15 for the 2nd Quarter
final tax Ø on or before November 15 for the 3rd Quarter
c. Allowable deductions;
d. Taxable income
e. Income tax due and payable.
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CORPORATE INCOME TAX RETURNS
a) Every corporation subject to the tax, except foreign corporations not
engaged in trade or business in the Philippines ( Sec. 52, NIRC)
b) Quarterly ITR (1702Q) - on or before the 60th day following the close
of each of the 3 quarters of the taxable year
c) Final or Adjustment ITR/Annual ITR (1702) – (i) on or before the 15th
day of April; or (ii) or on before 15th the 4th month following the close
of the fiscal year
d) Corporation contemplating dissolution or reorganization - within 30
days after the adoption of the resolution or plan for dissolution or
liquidation (involuntary dissolution) or for reorganization.
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WITHHOLDING TAX
Ø Withholding tax is not a tax but simply a manner or system by which
income taxes may be collected when the income is paid or received. It
is in the nature of an advance payment by the taxpayer on the annual
tax which may be due at the end of the taxable year. ( De leon, page
612)
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CAPITAL GAINS TAX RETURNS
1. CGT Return on Onerous Transfer of Real Property (1706)
Ø within 30 days following the sale, exchange or disposition
2. Onerous Transfer of Shares of Stocks not traded through LSE
a) CGT Return (1707)
Ø within 30 days after each sale, barter, exchange or disposition
b) Annual CGT Return (1707A)
Ø covers all transactions of the preceding taxable year
Ø (i) on or before April 15 of each year for individuals; (ii) on or
before the 15th day of the 4th month of the close of the taxable
year for corporate taxpayers
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Purposes of the Withholding Tax System
a) to provide the taxpayer a convenient manner to meet his probable
income tax liability
b) to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding
returns
c) to improve the government’s cash flow
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Kinds of Withholding Taxes

Liability to Withhold:
1. Final Withholding Tax
ØThe payee is the taxpayer, the person on whom the tax is imposed,
while the payor, a separate entity, acts no more than an agent of the Ø constituted as a full and final payment of the income tax due
government for the collection of the tax in order to ensure its Ø liability for payment of the tax rests primarily on the payor as a
payment. withholding agent
ØThe withholding agent is personally liable for the payment of the Ø the payee is not required to file an income tax return for the
withholding tax. particular income.
ØThe withholding agent is directly and independently liable for the
correct amount of the tax that should be withheld.

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Types of Creditable Withholding Tax

2. Creditable Withholding Tax 1. Expanded Withholding Tax on Certain Income Payments

Ø intended to equal or at least approximate the tax due of the payee Øprescribed on certain income payments and is creditable against the
on said income income tax due of the payee for the taxable quarter/year in which
the particular income was earned
Ø income recipient is still required to file an income tax return to
report the income and/or pay the difference between the tax
withheld and the tax due on the income.

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2. Withholding Tax on Compensation Income

ØEvery employer making payment of wages shall deduct and

withhold, except MWEs
Ø Employer is the withholding agent and shall be liable for the
withholding tax
ØEmployer’s liability stays even if the employee subsequently pays THANK YOU!
the tax:
a) penalties and/or additions to the tax for failure to deduct and
withhold
b) withholding tax unless he can show that the tax has been paid
by the employee

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