TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
PART I: TAXATION IN GENERAL
CHAPTER I – GENERAL PRINCIPLES OF TAXATION
I. TAXATION
1. DEFINITION OF TAXATION (71 Am Jur 2nd 342)
- Act of levying a tax
- Process by which the sovereign, through its law-making body,
raises income to defray the necessary expenses of the
government
- Merely a way of apportioning the cost of government among
those who in some measure are privileged to enjoy its benefits
and, therefore, must bear its burdens
2. NATURE OF INTERNAL REVENUE LAWS (in the absence of
constitutional restrictions)
a. Inherent – an incident or attribute thereof, being essential to the
existence of every government
b. Unlimited –
c. Plenary – unqualified, absolute
d. Supreme -
Hilado v. CIR
Petitioner's contention that during the last war and as a consequence of
enemy occupation in the Philippines "there was no taxable year" within the
meaning of our internal revenue laws because during that period they were
unenforceable, is without merit. It is well known that our internal revenue
laws are not political in nature and as such were continued in force during
the period of enemy occupation and in effect were actually enforced by the
occupation government. As a matter of fact, income tax returns were filed
during that period and income tax payment were effected and considered
valid and legal. Such tax laws are deemed to be the laws of the occupied
territory and not of the occupying enemy.
Furthermore, it is a legal maxim, that excepting that of a political nature,
“Law once established continues until changed by some competent
legislative power. It is not changed merely by change of sovereignty.”
3. SCOPE OF TAXATION (in the absence of constitutional
restrictions)
- Provide funds or property with which to promote the general
welfare and protection of its citizens
- May also be exercised to attain various social and economic (non-
revenue) objectives
a. Sec. 28, Art. VI, 1987 Constitution
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas, tonnage and
wharfage dues and other duties or imposts within the framework of
the national development program of the Government.
Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes shall be
exempt from taxation.
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
b. 71 Am Jur 2nd 394-395
c. 71 Am Jur 2nd 397-398
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- “In the absence of constitutional restrictions, and subject to the
will of the legislative bodies and discretion of the authorities
which exercise it, the power of taxation is regarded as unlimited,
plenary and supreme, the principal check upon its abuse resting
in the responsibility of the members of the legislature to their
constituents. Although the power may be exercised even to the
point of destroying the commercial or use value of the thing
taxed, it has been said, on the other hand, that even in the
absence of constitutional restrictions, such exercise must rest
upon justice.”
- “Personal property belonging to a foreign sovereign and
temporarily located in a particular country is not subject to state
taxation in that country.”
- “…a sovereign state has inherent power to determine the
subjects of taxation for general or particular public purposes,
and may take appropriate changes in the selections and
classifications of the properties made subject to or exempted
from taxation.”
Chamber of Real Estate and Builders’ Association (CREBA) v.
Romulo, Amataong and Parayno
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. The exercise of taxing power derives its source
from the very existence of the State whose social contract with its citizens
obliges it to promote public interest and the common good. 33
Taxation is an inherent attribute of sovereignty. 34 It is a power that is purely
legislative.35 Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate),
coverage (subjects) and situs (place) of taxation. 36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on
persons or things within its jurisdiction. In other words, the legislature
wields the power to define what tax shall be imposed, why it should be
imposed, how much tax shall be imposed, against whom (or what) it shall be
imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check
against its abuse is to be found only in the responsibility of the legislature
(which imposes the tax) to its constituency who are to pay it. 37 Nevertheless,
it is circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no]
person shall be deprived of life, liberty or property without due process of
law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property. 40 But in the same
case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a
need for proof of such persuasive character.43
The equal protection clause under the Constitution means that "no person or
class of persons shall be deprived of the same protection of laws which is
enjoyed by other persons or other classes in the same place and in like
circumstances." Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of
the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be
germane to the purpose of the law; (3) not be limited to existing conditions
only and (4) apply equally to all members of the same class.
The taxing power has the authority to make reasonable classifications for
purposes of taxation. Inequalities which result from a singling out of one
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
particular class for taxation, or exemption, infringe no constitutional
limitation. The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Sison v. Ancheta
It is, of course, to be admitted that for all its plenitude 'the power to tax is
not unconfined. There are restrictions. The Constitution sets forth such limits
. Adversely affecting as it does properly rights, both the due process and
equal protection clauses may properly be invoked, all petitioner does, to
invalidate in appropriate cases a revenue measure. if it were otherwise,
there would -be truth to the 1803 dictum of Chief Justice Marshall that "the
power to tax involves the power to destroy." Justice Frankfurter could
rightfully conclude: "The web of unreality spun from Marshall's famous
dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." So it is in the
Philippines.
He alleges arbitrariness. A mere allegation, as here. does not suffice. There
must be a factual foundation of such unconstitutional taint.
It is undoubted that the due process clause may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An obvious
example is where it can be shown to amount to the confiscation of property.
That would be a clear abuse of power. It then becomes the duty of this
Court to say that such an arbitrary act amounted to the exercise of an
authority not conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is beyond
the jurisdiction of the state, or is not for a public purpose, or, in case of a
retroactive statute is so harsh and unreasonable, it is subject to attack on
due process grounds.
Now for equal protection. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons
must be treated in the same manner, the conditions not being different,
both in the privileges conferred and the liabilities imposed.
Petitioner likewise invoked the kindred concept of uniformity. According to
the Constitution: "The rule of taxation shag be uniform and equitable." 24
This requirement is met according to Justice Laurel in Philippine Trust
Company v. Yatco, decided in 1940, when the tax "operates with the same
force and effect in every place where the subject may be found. " 26 He
likewise added: "The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable." The problem of
classification did not present itself in that case. It did not arise until nine
years later, when the Supreme Court held: "Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation.
Taxpayers may be classified into different categories. To repeat, it. is
enough that the classification must rest upon substantial distinctions that
make real differences. In the case of the gross income taxation embodied in
Batas Pambansa Blg. 135, the, discernible basis of classification is the
susceptibility of the income to the application of generalized rules removing
all deductible items for all taxpayers within the class and fixing a set of
reduced tax rates to be applied to all of them.
Sarasola v. Trinidad
SEC. 1578. Injunction not available to restrain collection of tax. — No court
shall have authority to grant an injunction to restrain the collection of any
internal-revenue tax.
The reason for what superficially seems to be a harsh ruling goes back to the
fundamental conception of the nature of taxation. It is but a truism to
restate that taxation is an attribute of sovereignty. It is the strongest of all
the powers of government. It involves, as Chief Justice Marshall in his
historical statement said, the power to destroy. "The right of taxation where
it exists," "is necessarily unlimited in its nature. It carriers with it inherently
the power to embarrass and destroy."  method of exaction by those in the seat of power.
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"It is upon taxation that the several states chiefly rely to obtain the means
to carry on their respective governments, and it is of the utmost importance
to all of them that the modes adopted to enforce the taxes levied should be
interfered with as little as possible. Any delay in the proceedings of the
officers, upon whom the duty is devolved of collecting the taxes, may
derange the operations of government, and thereby cause serious detriment
to the public."
4. UNDERLYING THEORY AND BASIS
1) Existence of Government
 The existence of government is a necessity;
 it cannot continue without means to pay its expenses; and for
those means it has the right to compel all citizens and
property within its limits to contribute. (71 Am Jur 2d 346)
 the general levy of taxes is understood to mean that the
taxpayer will receive a general benefit from the government;
 it promises nothing to the person taxed
2) Reciprocal Duties of State and Inhabitants
 BASIS: reciprocal duties of protection and support between
the State and its inhabitants
 In return for his contribution, the taxpayer receives the
general advantages and protection which the government
affords the taxpayer and his property (BENEFITS-
RECEIVED PRINCIPLE)
 One is compensation or consideration;
 For the other, protection for support and support for
protection
3) Public Purpose Requirement for Lawful Taxation
 It does not mean that only those who are able to and do pay
taxes can enjoy the privileges and protection given to a citizen
by the government
 Both are enjoyed as well as by those who do not, because
they are not able to pay taxes (71 Am Jur. 2d 346-347);
 Protection in the enjoyment of his rights is a duty owed by the
State to every citizen
 From the contribution received, the government renders no
special or commensurate benefit to any particular property or
person
 The only benefit to which the taxpayer is entitled is that
derived from his enjoyment of the privileges of living in an
organized society established and safeguarded by the
devotion of taxes to public purposes
 A person, therefore, cannot object to or resist payment of
taxes solely because no personal benefit to him can be
pointed out as arising from the tax or he is benefited less than
others who pay the same or smaller amount of tax
CIR v. Algue, Inc.
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself.
It is said that taxes are what we pay for civilization society. Without taxes,
the government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of
one's hard earned income to the taxing authorities, every person who is able
to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary
TAXATION I PREPARED BY:
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5. PRINCIPLES OF A SOUND TAX SYSTEM Diaz and Timbol v. Secretary of Finance and the Commissioner
of Internal Revenue
1) Fiscal Adequacy
 The sources of revenue should be sufficient to meet the Administrative feasibility is one of the canons of a sound tax system. It
demands of public expenditure simply means that the tax system should be capable of being effectively
 That the revenues should be elastic or capable of expending administered and enforced with the least inconvenience to the taxpayer.
or contracting annually in response to variations in public Non-observance of the canon, however, will not render a tax imposition
expenditures invalid "except to the extent that specific constitutional or statutory
limitations are impaired."34 Thus, even if the imposition of VAT on tollway
 Alternatives:
operations may seem burdensome to implement, it is not necessarily invalid
 To incur the risk of a series of deficits or surplus due to
unless some aspect of it is shown to violate any law or the Constitution.
inelastic revenues
 To adjust the amount of public expenditures to fit the flow
of funds probably by curtailing certain activities so that 6. COMPARISON WITH POLICE POWER AND EMINENT DOMAIN
the budget may be balanced  Power of EMINENT DOMAIN
 The power of the State or those to whom the power has been
2) Equality or Theoretical Justice delegated to take private property for public use upon paying to
 that the tax burden should be distributed in proportion to the the owner a just compensation to be ascertained according to
taxpayer’s ability to pay law
 that similarly situated taxpayers should pay equal taxes, while 1) Existence of public use or benefit for the taking
those who have more should pay more 2) Payment of just compensation
 contribution of each person towards the expense of the 3) Observance of due process in the taking
government should be so apportioned such that he would feel  POLICE POWER
neither more nor less inconvenienced from his share of the  Referred to as the power of the State to enact such laws in
payment than every other person experiences from his relation to persons and property as may promote public health,
 taxation should be uniform and equitable public morals, public safety, and the general prosperity and
welfare of its inhabitants
3) Administrative Feasibility
 Tax laws should be capable of convenient, just and effective a. Similarities and Distinctions (71 Am Jur 2nd 395-397)
administration or enforcement at a reasonable cost TAXATION POLICE POWER
- Both distinct, co-existent powers of State
 Each tax in the system should be clear and plain to the
- Exercise for the promotion of
taxpayer, capable of uniform enforcement by government
the public welfare by means of
officials - Exercised for the purpose of
regulation of dangerous or
raising revenue
potentially dangerous business,
Abakada Guro Partylist Officers v. Ermita
occupations, or activities
- Not subject to constitutional
The expenses of government, having for their object the interest of all, - Subject to certain designated
restrictions applicable to taxing
should be borne by everyone, and the more man enjoys the advantages of constitutional limitations
power
society, the more he ought to hold himself honored in contributing to those  The power of taxation and the police power are both distinct, co-
expenses. existent powers of a State
 An exaction which is invalid as an exercise of the taxing power may
The principle of fiscal adequacy simply means that sources of revenues must
not be upheld as an exercise of police power where it is clear that
be adequate to meet government expenditures and their variations.
the legislative body imposing it did not intend it as such
 An exaction which would be invalid as an exercise of the taxing
The power of the State to make reasonable and natural classifications for the
power may be upheld as a regulatory measure where the primary
purposes of taxation has long been established. Whether it relates to the
purpose of the legislature in imposing it was the regulation of some
subject of taxation, the kind of property, the rates to be levied, or the
calling or activity which is potentially adverse UNLESS of course the
amounts to be raised, the methods of assessment, valuation and collection,
legislature in imposing such an exaction, acts in an arbitrary and
the State’s power is entitled to presumption of validity. As a rule, the
unreasonable manner
judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.
TAXATION EMINENT DOMAIN
- Both originated out of political necessity
The equal protection clause does not require the universal application of the
- Both should be exercised for public purpose
laws on all persons or things without distinction. This might in fact
- Requires compensation for
sometimes result in unequal protection. What the clause requires is equality
- No compensation private property taken for
among equals as determined according to a valid classification. By
public use
classification is meant the grouping of persons or things similar to each
other in certain particulars and different from all others in these same
Similarities
particulars.
POWER OF EMINENT POLICE POWER OF
B. Uniformity and Equitability of Taxation DOMAIN POWER TAXATION
 they all rest upon necessity because there can be no effective
Article VI, Section 28(1) of the Constitution reads: The rule of taxation shall government without them
be uniform and equitable. The Congress shall evolve a progressive system of  they all underlie and exist independently of the Constitution
taxation. although the conditions for their exercise may be prescribed by
the Constitution and by law
Uniformity in taxation means that all taxable articles or kinds of property of
 they are ways by which the State interferes with private rights
the same class shall be taxed at the same rate. Different articles may be
and property
taxed at different amounts provided that the rate is uniform on the same
 they are legislative in nature and character, although the actual
class everywhere with all people at all times.
exercise of the powers is given to the executive authorities,

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national or local expenses

 they all presuppose an equivalent compensation received, directly of police
or indirectly, by the persons affected by the exercise of these surveillanc
powers by the government e and
inspection,
Distinctions/Differences examinatio
POWER OF n or
POLICE POWER OF
EMINENT regulation
POWER TAXATION
DOMAIN as nearly
Authority - may be granted as the
- exercised only by the
which to public service same can
government or its political
exercises companies/priv be
subdivisions
the power ate entities estimated
- The use of - also inferior to
- property
property is the impairment - subject to
regime is
“regulated” prohibition so certain
- Property is taken for
As to for the that the constitution
taken for public the support - relatively
purpose purpose of government al
use or benefit of the free from
promoting cannot limitations
governmen constitution
the general As to expropriate including
t al
welfare; Relationship property which the
- there is no limitations;
to the under a prohibition
such - superior to
- there is a Constitution contract it had against the
transfer; - money the
transfer of the previously impairment
- at most, contributed impairment
right to bound itself to of the
As to there is becomes provisions
property purchase from obligation
effect restraint on part of the other of
whether it be
the public contracting contracts
ownership or a
injurious funds party
lesser right
use of
property Limitations:
- operates on an  the exercise of these fundamental powers is subject at all times to
entity or the limitations and requirements of the Constitution and may in
As to
individual as - operates upon a community proper cases be annulled by the courts of justice
persons
the owner of a or a class of individuals
affected
particular Gerochi, et. al., v. DOE, et. al
property
- the person The power to tax is an incident of sovereignty and is unlimited in its range,
affected acknowledging in its very nature no limits, so that security against its abuse
receives no - assumed is to be found only in the responsibility of the legislature which imposes the
direct and that the tax on the constituency that is to pay it. It is based on the principle that
immediate individual taxes are the lifeblood of the government, and their prompt and certain
benefit but receives availability is an imperious need. Thus, the theory behind the exercise of the
only such the power to tax emanates from necessity; without taxes, government cannot
as may equivalent fulfill its mandate of promoting the general welfare and well-being of the
As to - receives the people.
arise from of the tax
benefits market value of
the in the form
received the property On the other hand, police power is the power of the state to promote public
maintenanc of benefits
taken from him welfare by restraining and regulating the use of liberty and property. The
e of a and
justification is found in the Latin maxims salus populi est suprema lex (the
healthy protection
welfare of the people is the supreme law) and sic utere tuo ut alienum non
economic he receives
laedas  (so use your property as not to injure the property of others). As an
standard of from the
inherent attribute of sovereignty which virtually extends to all public needs,
society governmen police power grants a wide panoply of instruments through which the State,
- damage t as parens patriae, gives effect to a host of its regulatory powers. We have
without held that the power to "regulate" means the power to protect, foster,
injury promote, preserve, and control, with due regard for the interests, first and
As to - there is no - amount - there is foremost, of the public, then of the utility and of its patrons.
Amount of amount imposed generally
Imposition imposed but should not no limit on The conservative and pivotal distinction between these two powers rests in
rather the be more the amount the purpose for which the charge is made. If generation of revenue is the
owner is paid than of tax that primary purpose and regulation is merely incidental, the imposition is a tax;
the market sufficient to may be but if regulation is the primary purpose, the fact that revenue is incidentally
value of the cover the imposed raised does not make the imposition a tax.
property taken cost of the
license and From the aforementioned purposes, it can be gleaned that the assailed
the Universal Charge is not a tax, but an exaction in the exercise of the State's
necessary police power. Public welfare is surely promoted.

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All that is required for the valid exercise of this power of subordinate
legislation is that the regulation be germane to the objects and purposes of
the law and that the regulation be not in contradiction to, but in conformity
with, the standards prescribed by the law. These requirements are
denominated as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions
when it leaves the legislature such that when it reaches the delegate, the
only thing he will have to do is to enforce it. The second test mandates
adequate guidelines or limitations in the law to determine the boundaries of
the delegate's authority and prevent the delegation from running riot
Matalin Coconut Co., Inc. v. Mun. Council of Malabang
We agree with the finding of the trial court that the amount collected under
the ordinance in question partakes of the nature of a tax, although
denominated as "police inspection fee" since its undeniable purpose is to
raise revenue.
However, the tax imposed under the ordinance can be stricken down on
another ground. According to Section 2 of the abovementioned Act, the tax
levied must be "for public purposes, just and uniform" (Emphasis supplied.)
As correctly held by the trial court, the so-called "police inspection fee"
levied by the ordinance is "unjust and unreasonable."
As correctly held by the trial court, the so-called “police inspection fee”
levied by the ordinance is “unjust and unreasonable”
... It has been proven that the only service rendered by the Municipality of
Malabang, by way of inspection, is for the policeman to verify from the
driver of the trucks of the petitioner passing by at the police checkpoint
the number of bags loaded per trip which are to be shipped out of the
municipality based on the trip tickets for the purpose of computing the
total amount of tax to be collect (sic) and for no other purpose. The
pretention of respondents that the police, aside from counting the number
of bags shipped out, is also inspecting the cassava flour starch contained
in the bags to find out if the said cassava flour starch is fit for human
consumption could not be given credence by the Court because, aside
from the fact that said purpose is not so stated in the ordinance in
question, the policemen of said municipality are not competent to
determine if the cassava flour starch are fit for human consumption.
Lutz v. Araneta
The basic defect in the plaintiff's position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted
in full), will show that the tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of
the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in
fields and factories; that it is a great source of the state's wealth, is one of
the important sources of foreign exchange needed by our government, and
is thus pivotal in the plans of a regime committed to a policy of currency
stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to
find that the general welfare demanded that the sugar industry should be
stabilized in turn.
7. STAGES OR ASPECTS OF TAXATION
a. Levy
- Determination of the persons, property, or excises to be
taxed, the sum(s) to be raised, the due date thereof and the
time and manner of levying and collecting taxes
- Refers to “taxation”
b. Collection
- Consists of the manner of enforcement of the obligation on
the part of those who are taxed
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- Referred to as “tax administration”
II. TAXES
1. DEFINITION
- Enforced proportional and pecuniary contributions from persons
and property levied by the law-making body of the State having
jurisdiction over the subject of the burden for the support of the
government and all public needs
- a burden, charge, exaction, imposition, or contribution, assessed
in accordance with some reasonable rule of apportionment by
authority of a sovereign state upon the persons or property within
its jurisdiction…
Republic v. Philippine Rabbit Bus Lines, Inc.
A tax refers to a financial obligation imposed by a state on persons, whether
natural or juridical, within its jurisdiction, for property owned, income
earned, business or profession engaged in, or any such activity analogous in
character for raising the necessary revenues to take care of the
responsibilities of government.7 An often-quoted definition is that of Cooley:
"Taxes are the enforced proportional contributions from persons and
property levied by the state by virtue of its sovereignty for the support of
government and for all public needs."8
As distinguished from other pecuniary burdens, the differentiating factor is
that the purpose to be subserved is the raising of revenue. A tax then is
neither a penalty that must be satisfied or a liability arising from contract.  A
regulatory fee, unlike a tax, it has not for its object the raising of revenue
but looks rather to the enactment of specific measures that govern the
relations not only as between individuals but also as between private parties
and the political society.
It is not held liable for a tax but for a registration fee. It therefore cannot
make use of a backpay certificate to meet such an obligation.
2. ESSENTIAL CHARACTERISTICS OF TAXES
a. It is enforced contribution
 It is not a voluntary payment or donation;
 It is not dependent on the will or contractual assent, express
or implied, of the person taxed
 Taxes are not contracts but positive acts of the government
b. It is proportionate in character
 Based on the taxpayer’s ability to pay
c. It is generally payable in money
 Tax is a pecuniary burden;
 An exaction to be discharged alone in the form of money
which must be in legal tender, UNLESS qualified by law
d. It is levied on persons or property
 A tax may also be imposed on acts, transactions, rights or
privileges
e. It is levied by the State which has jurisdiction over the
persons or property
 The persons, property, or service to be taxed must be subject
to the jurisdiction of the taxing State
f. It is levied by the law-making body of the State
- The power to tax is a legislative power which under the
Constitution only Congress can exercise through the
enactment of laws
- The obligation to pay taxes is a statutory liability
g. It is levied for public purpose(s)
- Taxation involves, and a tax constitutes, a burden to provide
income for public purpose(s)
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3. TAXES DISTINGUISHED FROM: to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. 18 We find no cogent reason to deviate
a. Debts from the aforementioned distinction.
TAX DEBT
We have consistently ruled that there can be no off-setting of taxes against
- Based upon juridical tie,
the claims that the taxpayer may have against the government. A person
created by law, contracts, or
cannot refuse to pay a tax on the ground that the government owes him an
quasi-delicts between parties amount equal to or greater than the tax being collected. The collection of a
for their private interest or tax cannot await the results of a lawsuit against the government.
resulting from their own acts
or omissions . . . a taxpayer may not offset taxes due from the claims that he may have
- Based on contracts, express against the government. Taxes cannot be the subject of compensation
- Based on law
or implied because the government and taxpayer are not mutually creditors and
- Generally, cannot be debtors of each other and a claim for taxes is not such a debt, demand,
- Assignable contract or judgment as is allowed to be set-off.
assigned
- Generally, payable in money - May be paid in kind
Taxes are the lifeblood of the government and so should be collected without
- Generally not subject to set- - May be subject to set-off or
unnecessary hindrance.
off or compensation compensation
- Imprisonment is a sanction We cannot allow Philex to refuse the payment of its tax liabilities on the
- No imprisonment for non-
for non-payment of tax ground that it has a pending claim for refund or credit against the
payment of debt
EXCEPT poll tax government which has not yet been granted. It must be noted that a
- Governed by the special - Governed by the ordinary distinguishing feature of a tax is that it is compulsory rather than a matter of
prescriptive periods provided periods of prescription (Civil bargain. 25 Hence, a tax does not depend upon the consent of the
in the Tax Code Code) taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the
- Imposed by a either the defense that it still has a pending claim for refund or credit, this would
- Imposed by the
Government or a private adversely affect the government revenue system. A taxpayer cannot refuse
State/Government to pay his taxes when they fall due simply because he has a claim against
individual or entity
- Draws interest when it is so the government or that the collection of the tax is contingent on the result of
- Does not draw interest the lawsuit it filed against the government. 
stipulated or when there is
EXCEPT only when delinquent
default
b. License Fees
TAX LICENSE/PERMIT FEE
Francia v. IAC
- A charge imposed under the
police power for the purposes
By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished.
of regulation
- Enforced contribution
- Legal compensation or
We have consistently ruled that there can be no off-setting of taxes against assessed by sovereign
reward of an officer for
the claims that the taxpayer may have against the government. A person authority to defray public
specific purposes
cannot refuse to pay a tax on the ground that the government owes him an expenses
amount equal to or greater than the tax being collected. The collection of a - Imposed for revenue - Imposed for regulation
tax cannot await the results of a lawsuit against the government. - Exercise of the taxing - Exercise of the police
power power
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court - Amount is limited to the
ruled that Internal Revenue Taxes can not be the subject of set-off or - Generally, no limit in the
necessary expenses of
compensation. We stated that: amount of tax to be paid
inspection and regulation
A claim for taxes is not such a debt, demand, contract or judgment as is
- Imposed also on persons and - Imposed on the right to
allowed to be set-off under the statutes of set-off, which are construed
property exercise privilege
uniformly, in the light of public policy, to exclude the remedy in an action
- Non-payment does not
or any indebtedness of the state or municipality to one who is liable to the - Non-payment makes the act
state or municipality for taxes. Neither are they a proper subject of necessarily make the act or
or business illegal
recoupment since they do not arise out of the contract or transaction sued business illegal
on. ... (80 C.J.S., 7374). "The general rule based on grounds of public
policy is well-settled that no set-off admissible against demands for taxes Progressive Dev. Corp v. QC
levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts It is now settled that Republic Act No. 2264 confers upon local governments
between the party and party but grow out of duty to, and are the positive broad taxing authority extending to almost "everything, excepting those
acts of the government to the making and enforcing of which, the personal which are mentioned therein," provided that the tax levied is "for public
consent of individual taxpayers is not required. ..." purposes, just and uniform," does not transgress any constitutional provision
and is not repugnant to a controlling statute. Both the Local Autonomy Act
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) and the Charter of respondent clearly show that respondent is authorized to
where we stated that: "... internal revenue taxes can not be the subject of fix the license fee collectible from and regulate the business of petitioner as
compensation: Reason: government and taxpayer are not mutually creditors operator of a privately-owned public market.
and debtors of each other' under Article 1278 of the Civil Code and a "claim
for taxes is not such a debt, demand, contract or judgment as is allowed to The term "tax" frequently applies to all kinds of exactions of monies which
be set-off." become public funds. It is often loosely used to include levies for revenue as
well as levies for regulatory purposes such that license fees are frequently
Philex Mining Corp. CIR, CA, CTA called taxes although license fee is a legal concept distinguishable
from  tax: the former is imposed in the exercise of police power primarily for
Taxes cannot be subject to compensation for the simple reason that the purposes of regulation, while the latter is imposed under the taxing power
government and the taxpayer are not creditors and debtors of each primarily for purposes of raising revenues. Thus, if the generating of revenue
other. There is a material distinction between a tax and debt. Debts are due is the primary purpose and regulation is merely incidental, the imposition is

Page 6
TAXATION I PREPARED BY:
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a tax; but if regulation is the primary purpose, the fact that incidentally least in most states) be made a personal liability of the person assessed; (3)
revenue is also obtained does not make the imposition a tax.  a special assessment is based wholly on benefits; and (4) a special
assessment is exceptional both as to time and locality. The imposition of a
To be considered a license fee, the imposition questioned must relate to an charge on all property, real and personal, in a prescribed area, is a tax and
occupation or activity that so engages the public interest in health, morals, not an assessment, although the purpose is to make a local improvement on
safety and development as to require regulation for the protection and a street or highway. A charge imposed only on property owners benefited is
promotion of such public interest; the imposition must also bear a a special assessment rather than a tax notwithstanding the statute calls it a
reasonable relation to the probable expenses of regulation, taking into tax.
account not only the costs of direct regulation but also its incidental
consequences as well. When an activity, occupation or profession is of such
a character that inspection or supervision by public officials is reasonably d. Tolls
necessary for the safeguarding and furtherance of public health, morals and TAX TOLL
safety, or the general welfare, the legislature may provide that such - Sum of money for the use of
inspection or supervision or other form of regulation shall be carried out at something, generally applied
the expense of the persons engaged in such occupation or performing such to the consideration which is
activity, and that no one shall engage in the occupation or carry out the paid for the use of a road,
activity until a fee or charge sufficient to cover the cost of the inspection or bridge of the like, of a public
supervision has been paid. Accordingly, a charge of a fixed sum which bears nature
no relation at all to the cost of inspection and regulation may be held to be a - Demand of sovereignty - Demand of proprietorship
tax rather than an exercise of the police power.  - Paid for the support of the
- Paid for the use of
government / public
The "Farmers' Market and Shopping Center" being a public market in the' another’s property
purpose
sense of a market open to and inviting the patronage of the general public,
- Amount depends on the
even though privately owned, petitioner's operation thereof required a
- Generally, no limit as to cost of construction or
license issued by the respondent City, the issuance of which, applying the
standards set forth above, was done principally in the exercise of the amount imposed maintenance of the public
respondent's police power. The operation of a privately owned market is, as improvements used
correctly noted by the Solicitor General, equivalent to or quite the same as - Imposed by the
- Imposed only by the
the operation of a government-owned market; both are established for the government OR private
government
rendition of service to the general public, which warrants close supervision individuals OR entities
and control by the respondent City, for the protection of the health of the
public by insuring, e.g., the maintenance of sanitary and hygienic conditions i. 71 AM Jur 2nd 351
in the market, compliance of all food stuffs sold therein with applicable food  The view has been expressed, however, that the taking of
and drug and related standards, for the prevention of fraud and imposition tolls is only another method of taxing the public for the cost of
upon the buying public, and so forth. the construction and repair of the improvement for the use of
which the toll is charged
c. Special Assessments (now special levies under the 1991
LGC) Diaz and Timbol v. The Secretary of Finance, et. al
TAX SPECIAL ASSESSMENT
Tollways serve as alternatives to regular public highways that meander
- An enforced proportional
through populated areas and branch out to local roads. Traffic in the regular
contribution from owners of
public highways is for this reason slow-moving. In consideration for
lands especially or peculiarly
constructing tollways at their expense, the operators are allowed to collect
benefited by public
government-approved fees from motorists using the tollways until such
improvements operators could fully recover their expenses and earn reasonable returns
- Imposed on persons, from their investments.
- Levied only on land
property, and excise
- Not a personal liability of the
When a tollway operator takes a toll fee from a motorist, the fee is in effect
- Personal liability of the person assessed
for the latter’s use of the tollway facilities over which the operator enjoys
person assessed - His liability is limited only to
private proprietary rights12 that its contract and the law recognize.
the land involved
- Based on necessity as well as
- Based wholly on benefits What the government seeks to tax here are fees collected from tollways that
on benefits received
- Exceptional both as time and are constructed, maintained, and operated by private tollway operators at
- General application their own expense under the build, operate, and transfer scheme that the
place
government has adopted for expressways. Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway
Apostolic Prefect v. Treasurer of Baguio
operators.

It is a well-established tax rule that the special contributions that are

created and collected to amortize extraordinary expenses that cause works,
such as the drainage and sewerage system, that benefit the inhabitants in a
special way, is not a tax in its sense legal.
While the word "tax" in its broad meaning, includes both general taxes and
special assessments, and in a general sense a tax is an assessment, and an
assessment is a tax, yet there is a recognized distinction between them in
that assessment is confined to local impositions upon property for the
payment of the cost of public improvements in its immediate vicinity and
levied with reference to special benefits to the property assessed. The
differences between a special assessment and a tax are that (1) a special
assessment can be levied only on land; (2) a special assessment cannot (at
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to
assure them a reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not government exactions
that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by
either the government or private individuals or entities, as an attribute of
ownership.

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TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax. In indirect taxation, a distinction
is made between the liability for the tax and burden of the tax. The seller
who is liable for the VAT may shift or pass on the amount of VAT it paid on
goods, properties or services to the buyer. In such a case, what is
transferred is not the seller’s liability but merely the burden of the VAT.
Thus, the seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the former
is added to the selling price. Once shifted, the VAT ceases to be a tax and
simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the Code,  VAT is
imposed on any person who, in the course of trade or business, sells or
renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a "user’s tax." VAT is assessed against the tollway
operator’s gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not
make the latter directly liable for the VAT. The shifted VAT burden simply
becomes part of the toll fees that one has to pay in order to use the
tollways.
e. Penalties
TAX PENALTY
- Any sanction imposed as a
punishment for violations of
law or acts deemed injurious
- Generally intended to raise
- Designed to regulate conduct
revenue
- Imposed by the government
- Imposed only by the
OR private individuals OR
government
entities
NDC v. CIR
The petitioner argues that the Japanese shipbuilders were not subject to tax
under the above provision because all the related activities — the signing of
the contract, the construction of the vessels, the payment of the stipulated
price, and their delivery to the NDC — were done in Tokyo. 8 The law,
however, does not speak of activity but of "source," which in this case is the
NDC. This is a domestic and resident corporation with principal offices in
Manila.
It is quite apparent, under the terms of the law, that the Government's right
to levy and collect income tax on interest received by foreign corporations
not engaged in trade or business within the Philippines is not planted upon
the condition that 'the activity or labor — and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies:
'Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed. The
residence of the obligor who pays the interest rather than the physical
location of the securities, bonds or notes or the place of payment, is the
determining factor of the source of interest income.
The law is clear. Our plain duty is to apply it as written. The residence of the
obligor which paid the interest under consideration, petitioner herein, is Calle
Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized
and existing under the laws of the Philippines, it is a domestic corporation,
resident of the Philippines.
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PREPARED BY:
SHANON GACA
CIR v. La Flor Dela Isabela, Inc.
Under the existing withholding tax system, the withholding agent retains a
portion of the amount received by the income earner. In turn, the said
amount is credited to the total income tax payable in transactions covered
by the EWT. On the other hand, in cases of income payments subject to
WTC and Final Withholding Tax, the amount withheld is already the entire
tax to be paid for the particular source of income. Thus, it can readily be
seen that the payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts as the government's agent
for the collection of the tax in order to ensure its payment.
It is, therefore, indisputable that the withholding agent is merely a tax
collector and not a taxpayer, as elucidated by this Court in the case of
Commissioner of Internal Revenue v. Court of Appeals, to wit:
In the operation of the withholding tax system, the withholding agent is
the payor, a separate entity acting no more than an agent of the
government for the collection of the tax in order to ensure its payments;
the payer is the taxpayer — he is the person subject to tax imposed by
law; and the payee is the taxing authority. In other words, the withholding
agent is merely a tax collector, not a taxpayer. Under the withholding
system, however, the agent-payor becomes a payee by fiction of law. His
(agent) liability is direct and independent from the taxpayer, because the
income tax is still imposed on and due from the latter. The agent is not
liable for the tax as no wealth flowed into him — he earned no income.
The Tax Code only makes the agent personally liable for the tax arising
from the breach of its legal duty to withhold as distinguished from its duty
to pay tax since:
"the government's cause of action against the withholding agent is not
for the collection of income tax, but for the enforcement of the
withholding provision of Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the taxpayer."
Based on the foregoing, the liability of the withholding agent is independent
from that of the taxpayer. The former cannot be made liable for the tax due
because it is the latter who earned the income subject to withholding tax.
The withholding agent is liable only insofar as he failed to perform his duty
to withhold the tax and remit the same to the government. The liability for
the tax, however, remains with the taxpayer because the gain was realized
and received by him.
It is true that withholding tax is a method of collecting tax in advance22 and
that a withholding tax on income necessarily implies that the amount of tax
withheld comes from the income earned by the taxpayer/payee.23
Nonetheless, the Court does not agree with the CIR that withholding tax
assessments are merely an imposition of a penalty on the withholding agent,
and thus, outside the coverage of Section 203 of the NIRC.
It was never meant to mean that withholding taxes do not fall within the
definition of internal revenue taxes, especially considering that income taxes
are the ones withheld by the withholding agent. Withholding taxes do not
cease to become income taxes just because it is collected and paid by the
withholding agent.
The liability of the withholding agent is distinct and separate from the tax
liability of the income earner. It is premised on its duty to withhold the taxes
paid to the payee. Should the withholding agent fail to deduct the required
amount from its payment to the payee, it is liable for deficiency taxes and
applicable penalties.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms "liable for tax" and "subject to
tax" both connote legal obligation or duty to pay a tax. It is very difficult,
indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.
TAXATION I PREPARED BY:
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON SHANON GACA

Thus, withholding tax assessments such as EWT and WTC clearly
contemplate deficiency internal revenue taxes. Their aim is to collect unpaid
income taxes and not merely to impose a penalty on the withholding agent
for its failure to comply with its statutory duty.
f. Custom Duties
TAX CUSTOM DUTIES
- Taxes imposed on goods
exported from or imported
into a country
III. CLASSIFICATION OF TAXES
1. AS TO SUBJECT MATTER
a. 71 Am Jur 2nd 357-361
 Taxes of a specified amount imposed upon each person
performing a certain act or engaging in certain business or
profession are not, however, poll taxes
b. Capitation or Poll Taxes
- Tax of a fixed amount imposed on persons residing within a
specified territory, whether citizens or not, without regard to
their property or the occupation or business in which they
may be engaged
- E.g. community tax
c. Property Taxes
- Tax imposed on property, whether real or personal, in
proportion either to its value, or in accordance with some
other reasonable methods of apportionment
- Obligation to pay the tax is absolute and unavoidable and is
not based upon the voluntary action of the person assessed
- E.g. real estate tax
d. Excise or License Taxes
- Any tax which does not fall within the classification of a poll
tax or a property tax
- Charge imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation,
profession, or business
- Obligation to pay this tax is based on the voluntary action of
the person taxed in performing the act or engaging in the
activity which is subject to the excise
- E.g. income tax; value-added tax; estate/donor’s tax
2. AS TO INCIDENCE OR BURDEN
a. 71 Am Jur 2nd 354
b. Direct Taxes
- Tax which is demanded or exacted from the very person who
also shoulders the burden of the tax
- Tax for which the taxpayer is directly or primarily liable or
which he cannot shift to another
- E.g. corporation & individual income tax; community tax;
donor’s tax; estate tax
c. Indirect Taxes
- Tax which is demanded from, or are paid by, one person in
the expectation and intention that he shall indemnify himself
at the expense of another by passing on the burden to the
latter, falling finally upon the ultimate purchaser or consumer
- Tax imposed upon goods before they reach the consumer who
ultimately pays for it not as tax but as part of the purchase
price of goods sold or services rendered
- E.g. VAT; percentage taxes; customs duties; excise taxes on
certain specific goods
3. AS TO DETERMINATION OF AMOUNT
a. 71 Am Jur 2nd 355
b. Specific Taxes (Sec. 129, NIRC)
- Excise taxes imposed and based on weight or volume capacity
or any other physical unit of measurement
- Tax of a fixed amount imposed by the head or number, or by
some standard of weight or measurement;
- Requires no assessment (valuation) other than a listing or
classification of the objects to be taxed
- e.g. taxes on distilled spirits, wines and fermented liquors
(based on alcohol content)
c. Ad Valorem Taxes (Se. 129, NIRC)
- Excise tax imposed and based on selling price or other
specified value of the good or service performed
- Tax of a fixed proportion of the value of the property with
respect to which the tax is assessed;
- Requires the intervention of assessors or appraisers to
estimate the value of such property before the amount due
from each taxpayer can be determined
- E.g. real property taxes; customs duties
4. AS TO PURPOSE
a. 71 Am Jur 2nd 355-356
b. General or Fiscal
- Tax imposed for the general purposes of the government
- To raise revenues for governmental needs
- E.g. income taxes; VAT
c. Special, Regulatory or Sumptuary
- Tax imposed for special purposes
- To achieve some social or economic ends irrespective of
whether revenue is actually raised or not
- E.g. educational fund tax under Real Property Taxation
5. AS TO SCOPE
a. National Taxes
- Tax imposed by the National Government
- E.g. national internal revenue taxes; customs duties
b. Local Taxes
- Tax imposed by the Local Government Units
- E.g. real estate tax; professional tax
6. AS TO GRADUATION OR RATE
a. Progressive
- Tax the rate of which increases as the tax base or bracket
increases
- E.g. income tax; estate tax; donor’s tax
b. Regressive
- Tax the rate of which decreases as the tax base or bracket
increases
c. Mixed
- Tax rates are partly progressive and partly regressive
d. Proportionate
- Tax based on a fixed percentage of the amount of the
property, receipts, or other basis to be taxed
- The rate of the tax remains constant for all levels of the tax
base or any given income level
- Also called “uniform or flat tax”
- E.g. real estate tax; VAT; other percentage taxes
IV. DOCTRINES IN TAXATION
1. PROSPECTIVITY OF TAX LAWS
Hydro Resources v. CA
It is a cardinal rule that laws shall have no retroactive effect, unless the
contrary is provided. (Art. 4, Civil Code) Except for a statement providing for

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TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
its immediate execution, Executive Order No. 860 does not provide for its
retroactivity. Moreover, the Deputy Minister of Finance in his 1st
Indorsement to the Central Bank dated March 26, 1983 which was
reproduced by the Central Bank Governor in a circular letter to all authorized
agent banks, clarified that letters of credit opened prior to the effectivity of
E.O. 860 are not subject to the provisions thereof. Consequently, the
importations in question which arrived in 1977 and 1978 are not subject to
the 3% additional ad valorem duty, the same being imposed only on those
whose letter of credit were opened after the promulgation of Executive Order
860.
2. IMPRESCRIPTIBILITY OF TAXES
CIR v. Ayala Securities Corporation
The Court is persuaded by the fundamental principle invoked by petitioner
that limitations upon the right of the government to assess and collect taxes
will not be presumed in the absence of clear legislation to the contrary and
that where the government has not by express statutory provision provided
a limitation upon its right to assess unpaid taxes, such right is
imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under
reconsideration that the right to assess and collect the assessment in
question had prescribed after five years, and instead rules that there is no
such time limit on the right of the Commissioner of Internal Revenue to
assess the 25% tax on unreasonably accumulated surplus provided in
section 25 of the Tax Code, since there is no express statutory provision
limiting such right or providing for its prescription. The underlying purpose of
the additional tax in question on a corporation's improperly accumulated
profits or surplus is as set forth in the text of section 25 of the Tax Code
itself 1 to avoid the situation where a corporation unduly retains its surplus
instead of declaring and paving dividends to its shareholders or members
who would then have to pay the income tax due on such dividends received
by them.
3. DOUBLE TAXATION
a. Definition and Nature
1. In its Strict Sense
 Direct duplicate taxation or direct double taxation
a) Taxing twice by the same subject or property
b) By the same taxing authority
c) Within the same jurisdiction or taxing district
d) For the same purpose
e) In the same year (or taxing period)
f) Some of the property in the territory
2. In its Broad Sense
 Indirect duplicate taxation or indirect double taxation
 Taxation other than direct duplicate
 Extends to all cases in which there is a burden of two or more
pecuniary impositions
a) A tax on a mortgage as personal property when the
mortgaged property is also taxed at its full value as real
estate
b) A tax upon a corporation for its property and upon its
shareholders for their shares
c) A tax upon a corporation for its capital stock as a whole and
upon the shareholders for their shares
d) A tax upon depositors in a bank for their deposits and a tax
upon the bank for the property in which such deposits are
invested
e) An excise tax upon certain use of property and a property tax
upon the same property
f) A tax upon the same property imposed by two different states
Constitutionality of Double Taxation
1. General Rule
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PREPARED BY:
SHANON GACA
 Our Constitution does not prohibit double taxation; hence, it may
not be invoked as a defense against the validity of a tax law
2. Exception
 while not forbidden, is something not favored
 such taxation should, whenever possible, be avoided and
prevented
 doubts as to whether double taxation has been imposed should
be resolved in favor of the taxpayer
 where double taxation occurs, the taxpayer may seek relief under
the uniformity rule or the equal protection guarantee
Villanueva v. City of Iloilo
The tax imposed by the ordinance in question does not possess the
aforestated attributes. It is not a tax on the land on which the tenement
houses are erected, although both land and tenement houses may belong to
the same owner. The tax is not a fixed proportion of the assessed value of
the tenement houses, and does not require the intervention of assessors or
appraisers. It is not payable at a designated time or date, and is not
enforceable against the tenement houses either by sale or distraint. Clearly,
therefore, the tax in question is not a real estate tax.
While it is true that the plaintiffs-appellees are taxable under the aforesaid
provisions of the National Internal Revenue Code as real estate dealers, and
still taxable under the ordinance in question, the argument against double
taxation may not be invoked. The same tax may be imposed by the national
government as well as by the local government. There is nothing inherently
obnoxious in the exaction of license fees or taxes with respect to the same
occupation, calling or activity by both the State and a political subdivision
thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they
are paying the real estate taxes and the tenement tax imposed by the
ordinance in question, is also devoid of merit. It is a well-settled rule that a
license tax may be levied upon a business or occupation although the land or
property used in connection therewith is subject to property tax. The State
may collect an ad valorem tax on property used in a calling, and at the same
time impose a license tax on that calling, the imposition of the latter kind of
tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or prohibited
sense the same property must be taxed twice when it should be taxed but
once; both taxes must be imposed on the same property or subject-
matter, for the same purpose, by the same State, Government, or taxing
authority, within the same jurisdiction or taxing district, during the same
taxing period, and they must be the same kind or character of tax." 23 It
has been shown that a real estate tax and the tenement tax imposed by
the ordinance, although imposed by the sametaxing authority, are not of
the same kind or character.
At all events, there is no constitutional prohibition against double taxation in
the Philippines.24 It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated, such as the
requirement that taxes must be uniform."
Punsalan v. Mun. Board of Manila
The argument against double taxation may not be invoked where one tax is
imposed by the state and the other is imposed by the city (1 Cooley on
Taxation, 4th ed., p. 492), it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or taxes be
exacted with respect to the same occupation, calling or activity by both the
state and the political subdivisions thereof.
The City of Manila, et. al. v. Coca-Cola Bottlers Philippines, Inc.
Double taxation means taxing the same property twice when it should be
taxed only once; that is, "taxing the same person twice by the same
jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed
twice, when it should be but once. Otherwise described as "direct duplicate
taxation," the two taxes must be imposed on the same subject matter, for
the same purpose, by the same taxing authority, within the same
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jurisdiction, during the same taxing period; and the taxes must be of the
same kind or character.18
Using the aforementioned test, the Court finds that there is indeed double
taxation if respondent is subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter – the privilege of doing business in the City of Manila;
(2) for the same purpose – to make persons conducting business within the
City of Manila contribute to city revenues; (3) by the same taxing authority
– petitioner City of Manila; (4) within the same taxing jurisdiction – within
the territorial jurisdiction of the City of Manila; (5) for the same taxing
periods – per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business.
4. DOCTRINE OF EQUITABLE RECOUPMENT
US v. Dalm
The refund or recovery of a tax erroneously paid may be allowed to be
used as payment for unsettled tax liabilities even if already barred by
prescription if both taxes arise from the same transaction in which the
overpayment and underpayment is due. – NOT ALLOWED IN OUR
JURISDICTION
"If the claim for income tax deficiency had been the subject of a suit,
any counterdemand for recoupment of the overpayment of estate tax
could have been asserted by way of defense, and credit obtained
notwithstanding the statute of limitations had barred an independent
suit against the Government therefor. This is because recoupment is in
the nature of a defense arising out of some feature of the transaction
upon which the plaintiff's action is grounded. Such a defense is never
barred by the statute of limitations so long as the main action itself is
timely."
It is true that our precedents allowing recoupment pertain to cases
where a single transaction is subjected to inconsistent taxation, but the
reason the statute of limitations is not a bar in those cases is that the
court has uncontested jurisdiction to adjudicate one of the taxes in
question.
5. METHODS OF AVOIDING THE OCCURRENCE OF DOUBLE
TAXATION
a. Tax Treaty – international agreements/convention entered into
by two countries for the avoidance of double taxation and to
prevent fiscal evasion between two States
Deutsche Bank AG Manila Branch v. CIR
Our Constitution provides for adherence to the general principles of
international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of
the contracting parties and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." Tax conventions are drafter with a
view towards the elimination of international juridical double taxation. The
apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and
dynamic economies.
Simply put, tax treaties are entered into to minimize, if not eliminate
the harshness of international juridical double taxation, which is why
they are also known as double tax treaty or double tax agreements.
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b. Tax Credit
 an amount of money that taxpayers are permitted to subtract
from the income taxes that they owe
 more favorable than tax deductions or exemptions because they
actually reduce the tax due, not just the amount of taxable
income.
CIR v. Lednicky
Much stress is laid on the thesis that if the respondent taxpayers are
not allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income
tax, they would be subjected to double taxation. What respondents fail
to observe is that double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental
entity. In the present case, while the taxpayers would have to pay two
taxes on the same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income was
earned and where the taxpayer is domiciled, and the United States,
where that income was not earned and where the taxpayer did not
reside, it is indisputable that justice and equity demand that the tax on
the income should accrue to the benefit of the Philippines. Any relief
from the alleged double taxation should come from the United States,
and not from the Philippines, since the former's right to burden the
taxpayer is solely predicated on his citizenship, without contributing to
the production of the wealth that is being taxed.
6. TAXPAYER’S SUIT
a. Nature and Concept
Land Bank v. Cacayuran
It is hornbook principle that a taxpayer is allowed to sue where there is a
claim that public funds are illegally disbursed, or that public money is being
deflected to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law. A person
suing as a taxpayer, however, must show that the act complained of directly
involves the illegal disbursement of public funds derived from taxation. In
other words, for a taxpayer’s suit to prosper, two requisites must be met
namely, (1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed; and (2) the petitioner is directly affected by the
alleged act.
First, although the construction of the APC would be primarily sourced from
the proceeds of the Subject Loans, which Land Bank insists are not
taxpayer’s money, there is no denying that public funds derived from
taxation are bound to be expended as the Municipality assigned a portion of
its IRA as a security for the foregoing loans. Needless to state, the
Municipality’s IRA, which serves as the local government unit’s just share in
the national taxes, is in the nature of public funds derived from taxation.
Second, as a resident-taxpayer of the Municipality, Cacayuran is directly
affected by the conversion of the Agoo Plaza which was funded by the
proceeds of the Subject Loans. It is well-settled that public plazas are
properties for public use and therefore, belongs to the public dominion. As
such, it can be used by anybody and no one can exercise over it the rights of
a private owner. In this light, Cacayuran had a direct interest in ensuring
that the Agoo Plaza would not be exploited for commercial purposes through
the APC’s construction. In Mamba v. Lara, it has been held that a taxpayer
need not be a party to the contract to challenge its validity; as long as taxes
are involved, people have a right to question contracts entered into by the
government.
b. As Distinguished from a Citizen’s Suit
Biraogo v. The Philippine Truth Commission
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Like almost all powers conferred by the Constitution, the power of judicial
review is subject to limitations, to wit: (1) there must be an actual case or
controversy calling for the exercise of judicial power; (2) the person
challenging the act must have the standing to question the validity of the
subject act or issuance; otherwise stated, he must have a personal and
substantial interest in the case such that he has sustained, or will sustain,
direct injury as a result of its enforcement; (3) the question of
constitutionality must be raised at the earliest opportunity; and (4) the issue
of constitutionality must be the very lis mota of the case.
any personal and direct injury attributable to the implementation of
Executive Order No. 1. Nowhere in his petition is an assertion of a clear right
that may justify his clamor for the Court to exercise judicial power and to
wield the axe over presidential issuances in defense of the Constitution. The
case of David v. Arroyo explained the deep-seated rules on locus standi.
Thus:
Locus standi is defined as "a right of appearance in a court of justice on a
given question."
Case law in most jurisdictions now allows both "citizen" and "taxpayer"
standing in public actions. The distinction was first laid down in Beauchamp
v. Silk, where it was held that the plaintiff in a taxpayer’s suit is in a
different category from the plaintiff in a citizen’s suit. In the former, the
plaintiff is affected by the expenditure of public funds, while in the latter, he
is but the mere instrument of the public concern. As held by the New York
Supreme Court in People ex rel Case v. Collins: "In matter of mere public
right, however…the people are the real parties…It is at least the right, if not
the duty, of every citizen to interfere and see that a public offence be
properly pursued and punished, and that a public grievance be remedied."
United State Supreme Court laid down the more stringent "direct
injury" test in Ex Parte Levitt, later reaffirmed in Tileston v. Ullman. The
same Court ruled that for a private individual to invoke the judicial power to
determine the validity of an executive or legislative action, he must show
that he has sustained a direct injury as a result of that action, and it is not
sufficient that he has a general interest common to all members of the
public.
Thus, in Coconut Oil Refiners Association, Inc. v. Torres, the Court held that
in cases of paramount importance where serious constitutional questions are
involved, the standing requirements may be relaxed and a suit may be
allowed to prosper even where there is no direct injury to the party claiming
the right of judicial review.
Concept of the Equal Protection Clause
It, however, does not require the universal application of the laws to all
persons or things without distinction. What it simply requires is equality
among equals as determined according to a valid classification. Indeed, the
equal protection clause permits classification. Such classification, however,
to be valid must pass the test of reasonableness. The test has four
requisites: (1) The classification rests on substantial distinctions; (2) It is
germane to the purpose of the law; (3) It is not limited to existing conditions
only; and (4) It applies equally to all members of the same class.81
"Superficial differences do not make for a valid classification."
For a classification to meet the requirements of constitutionality, it must
include or embrace all persons who naturally belong to the class.83 "The
classification will be regarded as invalid if all the members of the class are
not similarly treated, both as to rights conferred and obligations imposed. It
is not necessary that the classification be made with absolute symmetry, in
the sense that the members of the class should possess the same
characteristics in equal degree. Substantial similarity will suffice; and as long
as this is achieved, all those covered by the classification are to be treated
equally. The mere fact that an individual belonging to a class differs from the
other members, as long as that class is substantially distinguishable from all
others, does not justify the non-application of the law to him."84
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c. Requisites of a Taxpayer’s Suit Challenging the
Constitutionality of a Tax Measure or Act of a Taxing
Authority;
Concept of locus standi, Doctrine of Transcendental
Importance and Ripeness for Judicial Determination
Lozano v. Nograles
An aspect of the "case-or-controversy" requirement is the requisite of
"ripeness." Another approach is the evaluation of the twofold aspect of
ripeness: first, the fitness of the issues for judicial decision; and second, the
hardship to the parties entailed by withholding court consideration. In our
jurisdiction, the issue of ripeness is generally treated in terms of actual
injury to the plaintiff. Hence, a question is ripe for adjudication when the act
being challenged has had a direct adverse effect on the individual
challenging it.
In the present case, the fitness of petitioners’ case for the exercise of
judicial review is grossly lacking. In the first place, petitioners have not
sufficiently proven any adverse injury or hardship from the act complained
of. In the second place, House Resolution No. 1109 only resolved that the
House of Representatives shall convene at a future time for the purpose of
proposing amendments or revisions to the Constitution. No actual
convention has yet transpired and no rules of procedure have yet been
adopted.
Yet another requisite rooted in the very nature of judicial power is locus
standi or standing to sue. Thus, generally, a party will be allowed to litigate
only when he can demonstrate that (1) he has personally suffered some
actual or threatened injury because of the allegedly illegal conduct of the
government; (2) the injury is fairly traceable to the challenged action; and
(3) the injury is likely to be redressed by the remedy being sought. In the
cases at bar, petitioners have not shown the elemental injury in fact that
would endow them with the standing to sue. Locus standi requires a
personal stake in the outcome of a controversy for significant reasons.
Neither can the lack of locus standi be cured by the claim of petitioners that
they are instituting the cases at bar as taxpayers and concerned citizens. A
taxpayer’s suit requires that the act complained of directly involves the
illegal disbursement of public funds derived from taxation. It is undisputed
that there has been no allocation or disbursement of public funds in this case
as of yet. To be sure, standing as a citizen has been upheld by this Court in
cases where a petitioner is able to craft an issue of transcendental
importance or when paramount public interest is involved.
CHAPTER II – LIMITATION UPON THE POWER OF TAXATION
I. INHERENT LIMITATIONS
 those which restrict the power although they are not embodied in the
Constitution
 innate, constitutional
 must be for public purpose
1. PUBLIC PURPOSE
 A purpose affecting the inhabitants of the State or taxing district
as a community and not merely as individuals
 Public money can only be spent for the same purpose
 It is not necessary that the tax be for the use of the whole
inhabitants
 Although private individuals are directly benefited, the tax would
still be valid provided such benefit is only incidental
 Not only persons individually affected but also taxpayers have
sufficient interest of preventing the illegal expenditures of money
raised by taxation
 Financing of educational activities and programs; Promotion of
science; Erection and maintenance of roads, bridges, and piers;
Aid for victims of a public calamity; Relief for the poor and the
unemployed and to provide for unemployment benefits; Payment
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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
of pensions and bonuses for services rendered by public officers
or employees
Pascual v. Sec. of Public Works
As regards the legal feasibility of appropriating public funds for a public
purpose, the principle according to Ruling Case Law, is this:
It is a general rule that  the legislature is without power to appropriate
public revenue for anything but a public purpose. . . . It is the essential
character of the direct object of the expenditure which must determine its
validity as justifying a tax, and not the magnitude of the interest to be
affected nor the degree to which the general advantage of the community,
and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the
promotion of private interest and the prosperity of private enterprises or
business, does not justify their aid by the use public money.
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for
public purposes only, discussed supra sec. 14, money raised by taxation can
be expended only for public purposes and not for the advantage of private
individuals.
In the determination of the degree of interest essential to give the requisite
standing to attack the constitutionality of a statute, the general rule is that
not only persons individually affected, but also  taxpayers, have sufficient
interest in preventing the illegal expenditure of moneys raised by taxation
and may therefore question the constitutionality of statutes requiring
expenditure of public moneys.
2. TAXING POWER IS INHERENTLY LEGISLATIVE
a. In General – Delegata potestas non potest delegari
b. EXCEPTIONS
i. Local Government Units
 The power to create municipal corporations for purposes of
local self-government carries with it, by necessary implication,
the power to confer the power to tax on such local
governments
 Municipal corporations are merely instrumentalities of the
State for the better administration of the government in
respect to matters of local concern
 Each local government unit is now expressly given the power
to create its own sources of revenue and to levy taxes,
subject to such limitations as may be provided by law
Quezon City, et. al. v. Bayantel
While the system of local government taxation has changed with the onset
of the 1987 Constitution, the power of local government units to tax is still
limited. As we explained in Mactan Cebu International Airport Authority: 10
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer
merely be virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution. Under the
latter, the exercise of the power may be subject to such guidelines and
limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy.
Clearly then, while a new slant on the subject of local taxation now prevails
in the sense that the former doctrine of local government units’ delegated
power to tax had been effectively modified with Article X, Section 5 of the
1987 Constitution now in place, the basic doctrine on local taxation remains
essentially the same. For as the Court stressed in Mactan, "the power to tax
is [still] primarily vested in the Congress."
Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
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revenue. They no longer have to wait for a statutory grant of these powers.
The power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must be "consistent with the
basic policy of local autonomy." The important legal effect of Section 5 is
thus to reverse the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on municipal
fiscal powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a
public purpose, uniform within a locality, must not be confiscatory, and must
be within the jurisdiction of the local unit to pass.
Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means
that in interpreting statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations. (Emphasis supplied.)
ii. Delegation to President (Section 28(2)), Art. VI, 1987
Constitution
The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions as
it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues and other duties or imposts within the
framework of the national development program of the
Government.
 Since the delegation is constitutionally authorized, there can be
no ground for legal objection
iii. Administrative Rate Fixing
 The powers which are not Legislative
a. The power to value property for purposes of taxation
pursuant to fixed rules
b. The power to assess and collect the taxes
c. The power to perform any of the innumerable details of
computation, appraisement, and adjustment, and the
delegation of such details
 Reason for the Exemption
a) To levy a tax upon public property would render necessary
new taxes on other public property for the payment of the
tax so laid and thus, the government would be taxing itself
to raise money to pay over to itself
b) Rests upon fundamental principles of government, being
necessary in order that the functions of government shall
not be unduly impeded
c) Merely to reduce the amount of money that has to be
handled by the government in the course of its operations
 Entities Exempted
 Government entities which the government immediately and
directly exercise its sovereign powers
 AFP
 GOCCs performing proprietary functions are generally subject
to tax in the absence of tax exemption provisions in their
charters or the special laws creating them
 Tests of Delegation (applies to the power to promulgate
administrative regulations)
1. COMPLETENESS test. This means that the law must be
complete in all its terms and conditions when it leaves the
legislature so that when it reaches the delegate, it will have
nothing to do but to enforce it.
2. SUFFICIENT STANDARD test.  The law must offer a
sufficient standard to specify the limits of the delegate’s
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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
authority, announce the legislative policy and specify the
conditions under which it is to be implemented.
Smith Bell & Co. v. CIR
iii.
The first clause of Section 134 states so in plain language. The sole object of
the sub-enumeration that follows is in turn unmistakably to prescribe the
amount of the tax specifically to be paid for each type of wine and/or
imitation wine so classified and described. The section therefore clearly and
indubitably discloses the legislative will, leaving to the officers charged with
implementation and execution thereof no more than the administrative
function of determining whether a particular kind of wine or imitation wine
falls in one class or another. In the performance of this function, the internal
revenue officers are demonstrably guided by the sound established practices
and technology of the wine industry, an industry as aged and widely
dispersed as one can care to know.
In the case at bar, the Commissioner had the petitioner's wine examined
and analyzed. The petitioner, on the other hand, does not appear to have
made a similar effort. On the bases of the test thus made and the
authoritative and published work on the subject of wines, the Commissioner
ordered the corresponding deficiency assessment to be issued. Having
chosen to engage in the wine trading business, the petitioner is duty bound
to know the kinds of wine it deals in, particularly insofar as such knowledge
may be relevant to the proper appreciation of its tax liabilities, and cannot
take comfort in its pretended ignorance of what sparkling wine is.
3. TERRITORIALITY or SITUS OF TAXATION
Factors to Consider:
1. Citizenship
 If you’re a US citizen, even if you’re not residing there, US will
still tax you for you are still entitled to protection from them
2. Domicile
 If you’re a resident of that State even if not a citizen, then you
can still be subject to tax by that State
3. Source
a. Meaning and Scope of Limitation
1. Reason for the Rule
 A state may not tax property lying outside its borders or lay an
exercise or privilege tax upon the exercise or enjoyment of a
right or privilege derived from the laws of another State and
therein exercised and enjoyed
 REASON:
 That tax laws do not operate beyond a country’s territorial
limits
 Property which is wholly and exclusively within the jurisdiction
of another State receives none of the protection for which a
tax is supposed to be a compensation
2. Where Privity of Relationship Exists
 A person may be taxed where there is between him and the
taxing State, a privity of relationship justifying the levy
b. Situs of Taxation
i. Meaning
 Place of taxation
 The State where the subject to be taxed has a situs may
rightfully levy and collect the tax;
 The situs is necessarily in the State which has jurisdiction or
which exercises dominion over the subject in question
ii. Determination of Situs/Factors in Determining Suits
 Taxable situs will depend upon various factors including
 the nature of the tax; and
 the subject matter thereof (which may be person, property,
act, or activity);
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 the possible protection and benefit that may accrue both to
the government and the taxpayer;
 the residence or the citizenship of the taxpayer; and
 source of income
Situs of Subjects of Taxation
1) Persons (Section 157-158, 1991 LGC)
 Poll tax may properly be levied upon persons who are
inhabitants or residents of the State
SECTION 157. Individuals Liable to Community Tax. – Every
inhabitant of the Philippines eighteen (18) years of age or over who
has been regularly employed on a wage or salary basis for at least
thirty (30) consecutive working days during any calendar year, or
who is engaged in business or occupation, or who owns real property
with an aggregate assessed value of One thousand pesos
(P1,000.00) or more, or who is required by law to file an income tax
return shall pay an annual additional tax of Five pesos (P5.00) and
an annual additional tax of One peso (P1.00) for every One thousand
pesos (P1,000.00) of income regardless of whether from business,
exercise of profession or from property which in no case shall exceed
Five thousand pesos (P5,000.00).
In the case of husband and wife, the additional tax herein imposed
shall be based upon the total property owned by them and the total
gross receipts or earnings derived by them.
SECTION 158. Juridical Persons Liable to Community Tax. – Every
corporation no matter how created or organized, whether domestic
or resident foreign, engaged in or doing business in the Philippines
shall pay an annual community tax of Five hundred pesos (P500.00)
and an annual additional tax, which, in no case, shall exceed Ten
thousand pesos (P10,000.00) in accordance with the following
schedule:
(1) For every Five thousand pesos (P5,000.00) worth of real
property in the Philippines owned by it during the preceding year
based on the valuation used for the payment of real property tax
under existing laws, found in the assessment rolls of the city or
municipality where the real property is situated – Two pesos
(P2.00); and
(2) For every Five thousand pesos (P5,000.00) of gross receipts or
earnings derived by it from its business in the Philippines during
the preceding year – Two pesos (P2.00).
The dividends received by a corporation from another corporation
however shall, for the purpose of the additional tax, be considered
as part of the gross receipts or earnings of said corporation.
a) Community Tax – Individuals and Corporate
2) Lex Situs or Lex Rei Sitae – Real Property (Section
42(A)(5)) and (C)(5), NIRC)
 Real estate is subject to taxation in the State in which it is
located whether the owner is a resident or non-resident, and
is taxable only there
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(5) Sale of Real Property. – Gains, profits and income from the
sale of real property located in the Philippines
(C) Gross Income from Sources without the Philippines. – The
following items of gross income shall be treated as income from
sources without the Philippines:
(5) Gains, profits and income from the sale of real property
located without the Philippines.
3) Mobilia Sequuntur Personam – Personal Property
(Section 42 (A)(6) and (E), NIRC)
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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
 Tangible Personal Property
 It is taxable in the State where it has actual situs – where it
is physically located – although the owner resides in another
jurisdiction
 Intangible Personal Property
 E.g. credit, bills receivable, bank deposits, bonds,
promissory notes, mortgage loans, judgments and
corporate stocks
 Does not admit of actual location
 The situs for purposes of property taxation is the domicile of
the owner
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(6) Sale of Personal Property. – Gains, profits and income from the
sale of personal property, as determined in Subsection (E) of this
Section.
(E) Income from Sources Partly Within and Partly Without the
Philippines. – Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and (C) of
this Section, shall be allocated or apportioned to sources within or
without the Philippines, under the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of the
Commissioner. Where items of gross income are separately allocated
to sources within the Philippines, there shall be deducted (for the
purpose of computing the taxable income therefrom) the expenses,
losses and other deductions properly apportioned or allocated
thereto and a ratable part of other expenses, losses or other
deductions which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall be included in
full as taxable income from sources within the Philippines. In the
case of gross income derived from sources partly within and partly
without the Philippines, the taxable income may first be computed
by deducting the expenses, losses or other deductions apportioned
or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or
classes of gross income; and the portion of such taxable income
attributable to sources within the Philippines may be determined by
processes or formulas of general apportionment prescribed by the
Secretary of Finance. Gains, profits and income from the sale of
personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in
part) by the taxpayer without and sold within the Philippines, shall
be treated as derived partly from sources within and partly from
sources without the Philippines.
Gains, profits and income derived from the purchase of personal
property within and its sale without the Philippines, or from the
purchase of personal property without and its sale within the
Philippines shall be treated as derived entirely from sources within
the country in which sold: Provided, however, That gain from the
sale of shares of stock in a domestic corporation shall be treated as
derived entirely from sources within the Philippines regardless of
where the said shares are sold. The transfer by a non-resident alien
or a foreign corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in its book
unless: (1) the transferor has filed with the Commissioner a bond
conditioned upon the future payment by him of any income tax that
may be due on the gains derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any, imposed in this
Title and due on the gain realized from such sale or transfer have
been paid. It shall be the duty of the transferor and the corporation
the shares of which are sold or transferred, to advise the transferee
of this requirement.
4) Income
 May properly be exacted from persons who are residents or
citizens in the taxing jurisdiction and even from those who are
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neither residents nor citizens provided the income is derived
from sources within the taxing State
a) Interests (Section 42(A)(1) and (C)(1), NIRC)
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(1) Interests. – Interests derived from sources within the
Philippines, and interests on bonds, notes or other interest-
bearing obligation of residents, corporate or otherwise;
(C) Gross Income from Sources without the Philippines. – The
following items of gross income shall be treated as income from
sources without the Philippines:
(1) Interests other than those derived from sources within the
Philippines as provided in paragraph (1) of Subsection (A) of this
Section;
b) Dividends (Section 42(A)(2) and (C)(2), NIRC)
 Where the domestic company paying the dividend is located
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(2) Dividends. – The amount received as dividends:
(a) From a domestic corporation; and
(b) From a foreign corporation, unless less than fifty percent
(50%) of the gross income of such foreign corporation for the
three-year period ending with the close of its taxable year
preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence) was
derived from sources within the Philippines as determined
under the provisions of this Section; but only in an amount
which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all
sources.
(C) Gross Income from Sources without the Philippines. – The
following items of gross income shall be treated as income from
sources without the Philippines:
(2) Dividends other than those derived from sources within the
Philippines as provided in paragraph (2) of Subsection (A) of this
Section;
Manila Gas v. Collector
The approved doctrine is that no state may tax anything not within its
jurisdiction without violating the due process clause of the constitution. The
taxing power of a state does not extend beyond its territorial limits, but
within such it may tax persons, property, income, or business. If an interest
in property is taxed, the situs of either the property or interest must be
found within the state. If an income is taxed, the recipient thereof must
have a domicile within the state or the property or business out of which the
income issues must be situated within the state so that the income may be
said to have a situs therein. Personal property may be separated from its
owner, and he may be taxed on its account at the place where the property
is although it is not the place of his own domicile and even though he is not
a citizen or resident of the state which imposes the tax.
In the judgment of the majority of the court, the question should be
answered in the affirmative. The Manila Gas Corporation operates its
business entirely within the Philippines. Its earnings, therefore come from
local sources. The place of material delivery of the interest to the foreign
corporations paid out of the revenue of the domestic corporation is of no
particular moment. The place of payment even if conceded to be outside of
tho country cannot alter the fact that the income was derived from the
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Philippines. The word "source" conveys only one idea, that of origin, and the
origin of the income was the Philippines.
c) Services (Section 42(A)(3) and (C)(3), NIRC)
 where the services was rendered
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(3) Services. – Compensation for labor or personal services
performed in the Philippines;
(C) Gross Income from Sources without the Philippines. – The
following items of gross income shall be treated as income from
sources without the Philippines:
(3) Compensation for labor or personal services performed
without the Philippines;
CIR v. Baier-Nickel
Pursuant to the foregoing provisions of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the income’s "source." In construing the meaning of "source" in
Section 25 of the NIRC, resort must be had on the origin of the provision.
If the income is from labor the place where the labor is done should be
decisive; if it is done in this country, the income should be from "sources
within the United States." If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the
income should be from "sources within the United States." If the income is
from the sale of capital assets, the place where the sale is made should be
likewise decisive.
Thus, if income is to be taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which the income issues
or is derived must be situated within the jurisdiction so that the source of
the income may be said to have a situs in this country.
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.17
The source of an income is the property, activity or service that produced
the income. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines.
With respect to rendition of labor or personal service, as in the instant case,
it is the place where the labor or service was performed that determines the
source of the income. There is therefore no merit in petitioner’s
interpretation which equates source of income in labor or personal service
with the residence of the payor or the place of payment of the income.
CIR v. Marubeni Corporation
A contractor's tax is a tax imposed upon the privilege of engaging in
business.45 It is generally in the nature of an excise tax on the exercise of a
privilege of selling services or labor rather than a sale on products; 46 and is
directly collectible from the person exercising the privilege. 47 Being an excise
tax, it can be levied by the taxing authority only when the acts, privileges or
business are done or performed within the jurisdiction of said
authority.48 Like property taxes, it cannot be imposed on an occupation or
privilege outside the taxing district.49
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All the materials and equipment transported to the Philippines were
inspected and tested in Japan prior to shipment in accordance with the
terms of the contracts. 66 The inspection was made by representatives of
respondent corporation, of NDC and Philphos. NDC, in fact, contracted the
services of a private consultancy firm to verify the correctness of the tests
on the machines and equipment67 while Philphos sent a representative to
Japan to inspect the storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen
Portion I were all paid by respondent in Japan. Between Marubeni and the
two Philippine corporations, payments for all materials and equipment under
Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan.
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of
testing and commissioning, coordination." of the two projects involved two
taxing jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were completed
within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two
sets of ship unloader and loader, the boats and mobile equipment for the
NDC project and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished products when
shipped to the Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures, electrical
and instrumental apparatus, these were not finished products when shipped
to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment
under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines and
are therefore not subject to contractor's tax.
d) Rentals and Royalties (Section (42(A)(4) and (C)(4),
NIRC)
 Where the property or rent is used
 Royalty is when you uses a particular copyright or
tradename
(A) Gross Income From Sources Within the Philippines. – The
following items of gross income shall be treated as gross income
from sources within the Philippines:
(4) Rentals and Royalties. – Rentals and royalties from property
located in the Philippines or from any interest in such property,
including rentals or royalties for-
(a) The use of or the right or privilege to use in the Philippines
any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
(b) The use of, or the right to use in the Philippines any
industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial
knowledge or information;
(d) The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of enabling the
application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);
(e) The supply of services by a non-resident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non-
resident person;
(f) Technical advice, assistance or services rendered in
connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture,
project or scheme; and
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(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television;
and
(iii) Tapes for use in connection with radio broadcasting.
(C) Gross Income from Sources without the Philippines. – The
following items of gross income shall be treated as income from
sources without the Philippines:
(4) Rentals or royalties from property located without the
Philippines or from any interest in such property including
rentals or royalties for the use of or for the privilege of using
without the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises
and other like properties;
5) Business, Occupation, Transaction
 Where the business or occupation is exercised
 The power to levy an excise tax depends upon the place
where the business is done, or the occupation is engaged in,
or the transaction took place
Manila Electric Company v. Yatco
In epitome, then, the whole question involved in this appeal is whether or
not the disputed tax is one imposed by the Commonwealth of the Philippines
upon a contract beyond its jurisdiction. We are of the opinion and so hold
that where the insured against also within the Philippines, the risk insured
against also within the Philippines, and certain incidents of the contract are
to be attended to in the Philippines, such as, payment of dividends when
received in cash, sending of an unjuster into the Philippines in case of
dispute, or making of proof of loss, the Commonwealth of the Philippines has
the power to impose the tax upon the insured, regardless of whether the
contract is executed in a foreign country and with a foreign corporation.
Under such circumstances, substantial elements of the contract may be said
to be so situated in the Philippines as to give its government the power to
tax. And, even if it be assumed that the tax imposed upon the insured will
ultimately be passed on the insurer, thus constituting an indirect tax upon
the foreign corporation, it would still be valid, because the foreign
corporation, by the stipulations of its contract, has subjected itself to the
taxing jurisdiction of the Philippines. After all, Commonwealth of the
Philippines, by protecting the properties insured, benefits the foreign
corporation, and it is but reasonable that the latter should pay a just
contribution therefor. It would certainly be a discrimination against domestic
corporations to hold the tax valid when the policy is given by them and
invalid when issued by foreign corporations.
6) Transfer of Property by Death or Gift
 The transmission of property from a donor to done or from a
decedent to his heirs may be subject to taxation in the State
where the transferor is (was) a citizen or resident, or where
the property is located
Wells Fargo Bank v. Col
Originally, the settled law in the United States is that intangibles have only
one situs for the purpose of inheritance tax, and that such situs is in the
domicile of the decedent at the time of his death. But this rule has, of late,
been relaxed. An examination of the adjudged cases will disclose that the
relaxation of the original rule rests on either of two fundamental
considerations: (1) upon the recognition of the inherent power of each
government to tax persons, properties and rights within its jurisdiction and
enjoying, thus, the protection of its laws; and (2) upon the principle that as
o intangibles, a single location in space is hardly possible, considering the
multiple, distinct relationships which may be entered into with respect
thereto.
In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled therein. And besides, the
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certificates of stock have remained in this country up to the time when the
deceased died in California, and they were in possession of one Syrena
McKee, secretary of the Benguet Consolidated Mining Company, to whom
they have been delivered and indorsed in blank. This indorsement gave
Syrena McKee the right to vote the certificates at the general meetings of
the stockholders, to collect dividends, and dispose of the shares in the
manner she may deem fit, without prejudice to her liability to the owner for
violation of instructions. For all practical purposes, then, Syrena McKee had
the legal title to the certificates of stock held in trust for the true owner
thereof. In other words, the owner residing in California has extended here
her activities with respect to her intangibles so as to avail herself of the
protection and benefit of the Philippine laws. Accordingly, the jurisdiction of
the Philippine Government to tax must be upheld.
7) Multiple Situs of Taxation
 Effect
 Due to the variance in the concept of “domicile” for tax
purposes, and considering the multiple distinct
relationships that may arise with respect to intangible
personal property and the use to which the property may
have been devoted, all of which may receive the
protection of the laws of jurisdiction other than the
domicile of the owner thereto, the same income or
intangible may be subject to taxation in several taxing
jurisdictions
 Remedy
 The taxing jurisdiction may
 Provide for exemptions or allowance of deduction or
tax credit for foreign taxes
 Enter into treaties with other states
3. INTERNATIONAL COMITY (Sec. 30, Tax Code)
 An equal has no power over an equal
 When you are sovereign then you are not subject of another
sovereign
 The property of a foreign State or government may not be
taxed by another for the following grounds:
1) The sovereign equality among States under international
law by virtue of which one State cannot exercise its
sovereign powers over another
2) The usage among States that when one enters the territory
of another, there is an implied understanding that the
former does not intend to degrade its dignity by placing
itself under the jurisdiction of the latter
3) The rule of international law that a foreign government may
not be sued without its consent so that it is useless to
assess the tax since anyway it cannot be collected
II. CONSTITUTIONAL LIMITATIONS
1. DUE PROCESS CLAUSE
a) Section 1, Art. III, 1987 Constitution
Section 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the
equal protection of the laws.
APPLICATION TO TAXATION
1) A tax which is imposed for a private purpose or which is beyond
the jurisdiction of the government to levy and collect offends
due process of law
2) If a tax law is judicially declared invalid, any tax levied under it
cannot be enforced;
If the tax has already been paid, it should be refunded to the
taxpayer in accordance with the general principle that no one
shall unjustly enrich himself at the expense of another
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3) A taxpayer may not be deprived of his property for non-
payment of taxes without giving notice to him as required by
law of his tax liability as well as of the sale at public auction
4) A tax law which denies a taxpayer a fair opportunity to assert
his substantial rights before a competent tribunal is invalid as
violative of the same constitutional guarantee
Com. of Customs v. CTA & Campos Rueda Co.
In the corresponding Import Entries, Respondent Company quoted the prices
of the imported merchandise as declared in the consular invoices and as
required by Section 201. Reasonable doubt regarding the declarations was
not shown to have existed such that recourse to reports from commercial
attaches or other information became necessary. Neither was there
compliance with the requirement in Section 201 regarding publication of the
fists of dutiable values of imported articles from time to time. The re-
appraisal made by the Bureau of Customs was based on "Alert Notices"
received from Finance Attaches abroad, which, however, were not disclosed,
neither to Respondent Company nor to respondent Court.
Under these circumstances, the re-appraisal made by respondent is clearly
not in accordance with the provisions of Section 201 of the Tariff and
Customs Code.
While it is true that appraisers of the Bureau of Customs are given ample
leeway in determining the correct customs duties under Section 1405 of the
Tariff and Customs Code,1 Section 201 of the same Code, which prescribes
the criteria for the determination of the dutiable values of imported articles,
has not been complied with. What is more, administrative proceedings are
not exempt from the operation of due process requirements one of which is
that a finding by an administrative tribunal should be supported by
substantial evidence presented at the hearing or at least contained in the
records or disclosed to the parties affected. In this case the "Alert Notices"
on which petitioner based its re-appraisal were not disclosed during the
proceedings before the Bureau of Customs nor presented in evidence before
respondent Court. The re-appraisal made by petitioner, therefore, can be
faulted with arbitrariness in disregard of the standard of due process to
which all governmental action should conform to impress upon it the stamp
of validity.
2. EQUAL PROTECTION CLAUSE
a) Section 1, Art. III, 1987 Constitution
Section 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the
equal protection of the laws.
APPLICATION:
 Where the statute or ordinance in question applies alike to all
persons, firms, or corporations placed in similar situation, or
differently to persons, firms, or corporations belonging to different
classes provided all those belonging to one class are treated alike,
there is no infringement
NO VIOLATION OF THE PROTECTION:
1) Where those with different amounts of incomes are made to pay
different rates for taxes
2) Where compensation income is subject to a lower tax rate than
business and professional income because recipients of the
former are not entitled to make deductions for income tax
purposes as there are practically no overhead expenses
VIOLATION OF THE PROTECTION
1) Where an ordinance imposes a property tax on motor vehicles
using the streets of Manila, such tax being payable only by the
owners residing in Manila, because owners of vehicles residing
outside who also use the streets are not made to share the
corresponding burden
Ormoc Sugar Co. v. Treasurer of Ormoc City
The Constitution in the bill of rights provides: ". . . nor shall any person be
denied the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs.
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PREPARED BY:
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Salas, 5 We ruled that the equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the
subject of legislation, and a classification is reasonable where (1) it is based
on substantial distinctions which make real differences; (2) these are
germane to the purpose of the law; (3) the classification applies not only to
present conditions but also to future conditions which are substantially
identical to those of the present; (4) the classification applies only to those
who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance
does not meet them, for it taxes only centrifugal sugar produced and
exported by the Ormoc Sugar Company, Inc. and none other. At the time of
the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true,
was the only sugar central in the city of Ormoc. Still, the classification, to be
reasonable, should be in terms applicable to future conditions as well. The
taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central, of the same class as plaintiff, for the
coverage of the tax.
3. RULE OF TAXATION SHALL BE UNIFORM AND EQUITABLE
a) Section 28(1), Art. VI, 1987 Constitution
The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
 Uniform: that taxable articles or properties of the same class
shall be taxed at the same rate
APPLICATION:
1) Where residential houses, regardless of their assessed value,
are considered for purposes of taxation as belonging to one
class are made subject to the same rate but different amount
of tax depending on their value
 Equity: that such apportionment be more or less just in the light
of the taxpayer’s ability to shoulder the tax burden
 Progressive: that tax laws shall place emphasis on direct rather
than indirect taxation, with ability to pay as their principal
criterion
British American Tobacco v. Camacho and Parayno
These contentions are without merit and a rehash of petitioner’s previous
arguments before this Court. As held in the assailed Decision, the instant
case neither involves a suspect classification nor impinges on a fundamental
right. Consequently, the rational basis test was properly applied to gauge
the constitutionality of the assailed law in the face of an equal protection
challenge. It has been held that "in the areas of social and economic policy,
a statutory classification that neither proceeds along suspect lines nor
infringes constitutional rights must be upheld against equal protection
challenge if there is any reasonably conceivable state of facts that could
provide a rational basis for the classification." 3 Under the rational basis test,
it is sufficient that the legislative classification is rationally related to
achieving some legitimate State interest. As the Court ruled in the assailed
Decision, viz:
A legislative classification that is reasonable does not offend the
constitutional guaranty of the equal protection of the laws. The
classification is considered valid and reasonable provided that: (1) it rests
on substantial distinctions; (2) it is germane to the purpose of the law; (3)
it applies, all things being equal, to both present and future conditions;
and (4) it applies equally to all those belonging to the same class.
The first, third and fourth requisites are satisfied. The classification freeze
provision was inserted in the law for reasons of practicality and expediency.
That is, since a new brand was not yet in existence at the time of the
passage of RA 8240, then Congress needed a uniform mechanism to fix the
tax bracket of a new brand.
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In Churchill v. Concepcion, 4 we explained that a tax "is uniform when it
operates with the same force and effect in every place where the subject of
it is found."5 It does not signify an intrinsic but simply a geographical
uniformity.6 A levy of tax is not unconstitutional because it is not intrinsically
equal and uniform in its operation. 7 The uniformity rule does not prohibit
classification for purposes of taxation. 8 As ruled in Tan v. Del Rosario, Jr.:9
Uniformity of taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities (citations omitted). Uniformity
does not forfend classification as long as: (1) the standards that are used
therefor are substantial and not arbitrary, (2) the categorization is germane
to achieve the legislative purpose, (3) the law applies, all things being equal,
to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class.
4. NON-IMPAIRMENT OF CONTRACTS
a) Section 10, Art. III, 1987 Constitution;
Section 10. No law impairing the obligation of contracts shall be
passed.
 Obligation of a contract is impaired when its terms or conditions
are changed by law or by a party without the consent of the
other, thereby weakening the position or rights of the latter
b) Section 11, Art. XII, 1987 Constitution
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body
of any public utility enterprise shall be limited to their proportionate
share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines.
Imus Electric Co. v. CTA and CIR
In upholding the applicability of Section 259 of the Tax Code as amended,
this Court speaking through present Chief Justice Roberto Concepcion, held:
At the outset, it should be noted that the status of petitioner's municipal
franchises as property and property right is dependent upon or qualified by
the nature and limitations of the authority under which said franchises
were granted by the municipal corporations concerned. To the extent that
Section 259 of our National Internal Revenue Code is inconsistent with the
rate of taxes fixed in said municipal franchises - and the theory that
Section 259 as applied to petitioner herein is unconstitutional, necessarily
implies such inconsistency - it is obvious that, for all intents and purposes,
said legal provision alters the pertinent provisions of said franchises. In
effecting such alteration, our legislative department has merely exercised,
however, a power expressly reserved thereto by said franchises, and has
acted, therefore, in conformity therewith, not in violation of the provisions
thereof or to the detriment of the rights thereby vested in petitioner
herein. ..."
As regards the imposition of 25% surcharge, however, in Connell Bros. Co.
vs. Collector of Internal Revenue,3this Court ruled that the surcharge may be
dispensed with where the taxpayers' delay to pay the tax was in good faith
due to misunderstanding of revenue regulations applicable. Petitioner herein
was in such good faith in its delay in payment of the tax. It is clear that it
should not be made to pay the 25% surcharge.
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Phil Rural Electric Cooperatives Association, Inc., et. al. v. DILG
and DOF
It is ingrained in jurisprudence that the constitutional prohibition on the
impairment of the obligation of contracts does not prohibit every change in
existing laws. To fall within the prohibition, the change must not only impair
the obligation of the existing contract, but the impairment must be
substantial.
A law which changes the terms of a legal contract between parties, either in
the time or mode of performance, or imposes new conditions, or dispenses
with those expressed, or authorizes for its satisfaction something different
from that provided in its terms, is law which impairs the obligation of a
contract and is therefore null and void.
Moreover, to constitute impairment, the law must affect a change in the
rights of the parties with reference to each other and not with respect to
non-parties.
5. NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
a) Section 20, Art. III, 1987 Constitution
Section 20. No person shall be imprisoned for debt or non-
payment of a poll tax.
6. PROHIBITION AGAINST TAXATION OF REAL PROPERTY OF
CHARITABLE INSTITUTIONS, CHURCHES, PARSONAGES OR
CONVENTS, MOSQUES AND NON-PROFIT CEMETERIES
a) Section 28(3), Art. VI, 1987 Constitution
Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes shall be
exempt from taxation.
 It is the use of the use of the property and not ownership
Abra Valley College, Inc. v. Aquino
Otherwise stated, the use of the school building or lot for commercial
purposes is neither contemplated by law, nor by jurisprudence. Thus, while
the use of the second floor of the main building in the case at bar for
residential purposes of the Director and his family, may find justification
under the concept of incidental use, which is complimentary to the main or
primary purpose—educational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.
Under the 1935 Constitution, the trial court correctly arrived at the
conclusion that the school building as well as the lot where it is built, should
be taxed, not because the second floor of the same is being used by the
Director and his family for residential purposes, but because the first floor
thereof is being used for commercial purposes. However, since only a
portion is used for purposes of commerce, it is only fair that half of the
assessed tax be returned to the school involved.
Lung Center v. QC
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the
nature of the actual work performed, the character of the services rendered,
the indefiniteness of the beneficiaries, and the use and occupation of the
properties.11
In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or
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otherwise lessening the burden of government. 12 It may be applied to almost
anything that tend to promote the well-doing and well-being of social man.
It embraces the improvement and promotion of the happiness of man. 13 The
word "charitable" is not restricted to relief of the poor or sick. 14 The test of a
charity and a charitable organization are in law the same. The test whether
an enterprise is charitable or not is whether it exists to carry out a purpose
reorganized in law as charitable or whether it is maintained for gain, profit,
or private advantage.
As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from
paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons managing or operating
the institution. 18 In Congregational Sunday School, etc. v. Board of
Review,19 the State Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and consequent
exemption from taxation, by reason of the fact that those recipients of its
benefits who are able to pay are required to do so, where no profit is made
by the institution and the amounts so received are applied in furthering its
charitable purposes, and those benefits are refused to none on account of
inability to pay therefor. The fundamental ground upon which all exemptions
in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon
the state to care for and advance the interests of its citizens. 20
Even as we find that the petitioner is a charitable institution, we hold, anent
the second issue, that those portions of its real property that are leased to
private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively."40 If real property is used for one or more commercial purposes,
it is not exclusively used for the exempted purposes but is subject to
taxation.41 The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the
Constitutions and the law.42 Solely is synonymous with exclusively. 43
What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes. 44
7. PROHIBITION AGAINST TAXATION OF NON-STOCK NON-
PROFIT EDUCATIONAL INSTITUTIONS
a) Section 4(3), Art. XIV, 1987 Constitution
All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
b) Section 30(H), NIRC
Section 30. Exemptions from Tax on Corporations. – The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
(H) A nonstock and nonprofit educational institution;
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PREPARED BY:
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CIR v. CA & YMCA
In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section 27 of
the NIRC which mandates that the income of exempt organizations (such as
the YMCA) from any of their properties, real or personal, be subject to the
tax imposed by the same Code. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it conducts for profit,
is taxable. The phrase "any of their activities conducted for profit" does not
qualify the word "properties."
". . . what is exempted is not the institution itself . . .; those exempted from
real estate taxes are lands, buildings and improvements actually, directly
and exclusively used for religious, charitable or educational purposes." 
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that
"[t]he tax exemption covers property taxes only." 35 Indeed, the income tax
exemption claimed by private respondent finds no basis in Article VI, Section
26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Character, claiming that the YMCA "is a non-stock, non-profit educational
institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its
properties and income." We reiterate that private respondent is exempt from
the payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the
payment of income tax.
Is the YMCA an educational institution within the purview of Article XIV,
Section 4, par. 3 of the Constitution? We rule that it is not. It is settled that
the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational
establishment" Therefore, the private respondent cannot be deemed one of
the educational institutions covered by the constitutional provision under
consideration.
CIR v. CA, CTA and Ateneo De Manila University
After reviewing the records of this case, we find no evidence that Ateneo's
Institute of Philippine Culture ever sold its services for a fee to anyone or
was ever engaged in a business apart from and independently of the
academic purposes of the university.
Moreover, the Court of Tax Appeals accurately and correctly declared that
the "  funds received by the Ateneo de Manila University are technically not a
fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of Section
123 of the National Internal Revenue Code providing for the exemption of
such gifts to an educational institution.
So, why is it that Ateneo continues to operate and conduct researches
through its Institute of Philippine Culture when it undisputedly loses not an
insignificant amount in the process? The plain and simple answer is that
private respondent is not a contractor selling its services for a fee but an
academic institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service.
CIR v. DLSU
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and
exclusive use of their assets, revenues and income 78 for educational
purposes.
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
Further, a plain reading of the Constitution would show that Article XIV,
Section 4 (3) does not require that the revenues and income must have also
been sourced from educational activities or activities related to the purposes
of an educational institution. The phrase all revenues is unqualified by any
reference to the source of revenues. Thus, so long as the revenues and
income are used actually, directly and exclusively for educational purposes,
then said revenues and income shall be exempt from taxes and duties. 81
Thus, when a non-stock, non-profit educational institution proves that it
uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On the other
hand, when it also shows that it uses its assets in the form of real property
for educational purposes, it shall be exempted from RPT.
To be clear, proving the actual use of the taxable item will result in an
exemption, but the specific tax from which the entity shall be exempted
from shall depend on whether the item is an item of revenue or asset.
To illustrate, if a university leases a portion of its school building to a
bookstore or cafeteria, the leased portion is not actually, directly and
exclusively  used for educational purposes, even if the bookstore or canteen
caters only to university students, faculty and staff.
In concrete terms, the lease of a portion of a school building for commercial
purposes, removes such asset  from the property tax exemption granted
under the Constitution. 91 There is no exemption because the asset
is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not  incidental to and reasonably
necessary for the accomplishment of the main purpose of a university, which
is to educate its students.
However, if the university actually, directly and exclusively uses for
educational purposes the revenues earned from the lease of its school
building, such revenues shall be exempt from taxes and duties. The tax
exemption no longer hinges on the use of the asset from which the revenues
were earned, but on the actual, direct and exclusive use of the revenues for
educational purposes.
The crucial point of inquiry then is on the use of the assets or on the use of
the revenues.  These are two things that must be viewed and treated
separately. But so long as the assets or  revenues are used actually, directly
and exclusively for educational purposes,  they are exempt from duties and
taxes.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions, unlike the exemption that may be availed of by
proprietary educational institutions, is not subject to limitations imposed by
law.
That the Constitution treats non-stock, non-profit educational institutions
differently from proprietary educational institutions cannot be doubted. As
discussed, the privilege granted to the former is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be
subject to limitations imposed by law.
La Sallian Educational Innovators Foundation Inc. v. CIR
No less than the 1987 Constitution expressly exempt all revenues and assets
of non-stock, non-profit educational institutions from taxes provided that
they are actually, directly and exclusively used for educational purposes, to
wit:
Section 4.(1) The State recognizes the complementary roles of public and
private institutions in the educational system and shall exercise reasonable
supervision and regulation of all educational institutions.
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.
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PREPARED BY:
SHANON GACA
Petitioner Foundation has presented adequate legal and factual basis to
prove that it remains as a tax exempt entity under Article XIV, Section 4,
Paragraph 3 of the 1987 Constitution.
Based on jurisprudence and tax rulings, a taxpayer shall be granted with this
tax exemption after proving that: (1) it falls under the classification of non-
stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively for
educational purposes.
8. PASSAGE OF TAX BILLS
a) Section 24, Art. VI, 1987 Constitution
Section 24. All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and
private bills, shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments.
Tolentino v. Secretary of Finance
This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which
Art. VI, §24 of the present Constitution was derived. It explains why the
word "exclusively" was added to the American text from which the framers
of the Philippine Constitution borrowed and why the phrase "as on other
Bills" was not copied. Considering the defeat of the proposal, the power of
the Senate to propose amendments must be understood to be full, plenary
and complete "as on other Bills." Thus, because revenue bills are required to
originate exclusively in the House of Representatives, the Senate cannot
enact revenue measures of its own without such bills. After a revenue bill is
passed and sent over to it by the House, however, the Senate certainly can
pass its own version on the same subject matter. This follows from the
coequality of the two chambers of Congress.
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this power,
the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill.
In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff
bills, bills authorizing increase of the public debt, bills of local application,
and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an
entirely new bill as a substitute measure. As petitioner Tolentino states in a
high school text, a committee to which a bill is referred may do any of the
following:
(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be known
as a committee bill; or (4) to make no report at all.
Abakada Guro Party List Officers v. Ermita
Under the provisions of both the Rules of the House of Representatives and
Senate Rules, the Bicameral Conference Committee is mandated to settle
the differences between the disagreeing provisions in the House bill and the
Senate bill. The term "settle" is synonymous to "reconcile" and
"harmonize." 25 To reconcile or harmonize disagreeing provisions, the
Bicameral Conference Committee may then (a) adopt the specific provisions
of either the House bill or Senate bill, (b) decide that neither provisions in
the House bill or the provisions in the Senate bill would be carried into the
final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference
Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent
that is wholly foreign to the subject embraced by the original provisions.
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
Thus, all the changes or modifications made by the Bicameral Conference
Committee were germane to subjects of the provisions referred to it for
reconciliation. Such being the case, the Court does not see any grave abuse
of discretion amounting to lack or excess of jurisdiction committed by the
Bicameral Conference Committee.
9. GRANTING OF TAX EXEMPTION
a) Section 28(4), Art. VI, 1987 Constitution
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
John Hay Peoples Alternative Coalition, et. al. v. Lim, et. al
While the grant of economic incentives may be essential to the creation and
success of SEZs, free trade zones and the like, the grant thereof to the John
Hay SEZ cannot be sustained. The incentives under R.A. No. 7227
are exclusive only to the Subic SEZ, hence, the extension of the same to
the John Hay SEZ finds no support therein. Neither does the same grant of
privileges to the John Hay SEZ find support in the other laws specified under
Section 3 of Proclamation No. 420, which laws were already extant before
the issuance of the proclamation or the enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax
exemption. It is the legislature, unless limited by a provision of the state
constitution, that has full power to exempt any person or corporation or
class of property from taxation, its power to exempt being as broad as its
power to tax.42 Other than Congress, the Constitution may itself provide for
specific tax exemptions, 43 or local governments may pass ordinances on
exemption only from local taxes.44
Contrary to public respondents' suggestions, the claimed statutory
exemption of the John Hay SEZ from taxation should be manifest and
unmistakable from the language of the law on which it is based; it must be
expressly granted in a statute stated in a language too clear to be
mistaken.46 Tax exemption cannot be implied as it must be categorically and
unmistakably expressed.47
10. VETO POWER OF THE PRESIDENT
a) Section 27(2), Art. VI, 1987 Constitution
The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object.
11. JUDICIAL POWER TO REVIEW LEGALITY OF TAX
a) Section 5(2)(b), Art. VIII, 1987 Constitution
Section 5. The Supreme Court shall have the following powers:
Review, revise, reverse, modify, or affirm on appeal or certiorari,
as the law or the Rules of Court may provide, final judgments and
orders of lower courts in:
All cases involving the legality of any tax, impost, assessment,
or toll, or any penalty imposed in relation thereto.
CHAPTER III – EXEMPTIONS FROM TAXATION
I. IN GENERAL
1. DEFINITION
 The grant of immunity to particular persons or corporation or to
persons or corporations of a particular class from a tax which
persons and corporations generally within the same state or
taxing district are obliged to pay
 An immunity or privilege
 A freedom from a financial charge or burden to which others are
subjected
2. KINDS OF EXEMPTION
a) Express
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PREPARED BY:
SHANON GACA
 When certain persons, property or transactions are, by express
provision, exempted from all or certain taxes, either entirely or
in part
 May be made by provisions of the Constitution, statutes,
treaties, ordinances, franchises, or contracts
b) Implied or by Omission
 Occurs when a tax is levied on certain classes of persons,
properties, or transactions without mentioning the other classes
 Every tax statute, in a very real sense, makes exemptions since
all those not mentioned are deemed exempted
 omission may be either accidental or intentional
 exemptions are NOT presumed;
 BUT when public property is involved, exemption is the RULE,
and taxation, the EXCEPTION
c) Contractual
3. NATURE OF POWER TO GRANT TAX EXEMPTION
a. An exemption from taxation is a mere personal privilege of
the grantee
 being personal in nature, a tax exemption cannot be assigned
or transferred by the person to whom it is granted without the
consent of the legislature
b. It is generally revocable by the government unless the
exemption is founded on a contract which is protected
from impairment
 contract must contain all the essential elements of other
contract
 an exemption provided for in a franchise may be repealed or
amended pursuant to the Constitution
c. It implies a waiver on the part of the Government of its
right to collect what otherwise would be due to it, and, in
this sense, is prejudicial thereto
 exists only by virtue of an express grant and must be strictly
construed
d. It is not necessarily discriminatory so long as the
exemption has a reasonable foundation or rational basis
 where, however, no valid distinction exists, the exemption may
be challenged as violative of the equal protection guarantee or
the uniformity rule
4. CONSTITUTIONAL EXEMPTION
Section 28(3), Art. VI. Charitable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
Section 4(3), Art. XIV. All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided
by law.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
5. LEGISLATIVE GRANT OF EXEMPTION
CIR v. Botelho Shipping Corp.
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
CIR v. CTA, GCL Retirement Plan
PAGCOR v. BIR
Association of Non-Profit Clubs, Inc. (ANPC) v. BIR
6. EXEMPTION CREATED BY TREATY
7. EXEMPTION OF GOVERNMENT AND GOVERNMENT AGENCIES
a) Section 27(C), NIRC
Section 27. Rates of Income Tax on Domestic Corporations. –
(C) Government-owned or -Controlled Corporations, Agencies or
Instrumentalities.– The provisions of existing special or general
laws to the contrary notwithstanding, all corporations, agencies,
or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the
Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the local water districts (LWD) shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in a similar
business, industry, or activity.
b) Section 30(I), NIRC
Section 30. Exemptions from Tax on Corporations. – The following
organizations shall not be taxed under this Title in respect to
income received by them as such:
(I) Government educational institution;
c) Section 32(B)(7)(b), NIRC
Section 32. Gross Income. –
(B) Exclusions from Gross Income. – The following items shall not
be included in gross income and shall be exempt from taxation
under this Title:
(7) Miscellaneous Items. –
(b) Income Derived by the Government or its Political
Subdivisions. – Income derived from any public utility or from
the exercise of any essential governmental function accruing
to the Government of the Philippines or to any political
subdivision
thereof.
Philippine Ports Authority v. City of Iloilo
Philippine Fisheries Development Authority v. CA
City of Pasig v. Republic of the Philippines represented by PCGG
II. COMPROMISE, ABATEMENT AND TAX AMNESTY
1. COMPROMISE (Section 204(A), NIRC)
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PREPARED BY:
SHANON GACA
Section 204. Authority of the Commissioner to Compromise, Abate,
and Refund or Credit Taxes. – The Commissioner may –
(A) Compromise the payment of any internal revenue tax, when:
(1) A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
The compromise settlement of any tax liability shall be subject to the
following minimum amounts:
For cases of financial incapacity, a minimum compromise rate
equivalent to ten percent (10%) of the basic assessed tax; and
For other cases, a minimum compromise rate equivalent to forty
percent (40%) of the basic assessed tax.
Where the basic tax involved exceeds One million pesos
(PhP1,000.000) or where the settlement offered is less than the
prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy Commissioners.
KEPCO Philippines Corporation v. Commissioner of Internal
Revenue
a) RR 30-2002 as amended by RR 8-04
b) Case which may be Compromised
SEC. 2. CASES WHICH MAY BE COMPROMISED. - The following
cases may, upon taxpayer’s compliance with the basis set forth
under Section 3 of these Regulations, be the subject matter of
compromise settlement, viz:
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final
Assessment Notice to the taxpayer which are still pending in the
Regional Offices, Revenue District Offices, Legal Service, Large
Taxpayer Service (LTS), Collection Service, Enforcement Service
and other offices in the National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or
those involving criminal tax fraud.
c) Cases which may NOT be Compromised
EXCEPTIONS:
1. Withholding tax cases, unless the applicant-taxpayer invokes
provisions of law that cast doubt on the taxpayer’s obligation to
withhold;
2. Criminal tax fraud cases confirmed as such by the
Commissioner of Internal Revenue or his duly authorized
representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved schedule of installment
payments;
5. Cases where final reports of reinvestigation or reconsideration
have been issued resulting to reduction in the original assessment
and the taxpayer is agreeable to such decision by signing the
required agreement form for the purpose. On the other hand,
other protested cases shall be handled by the Regional Evaluation
Board (REB) or the National Evaluation Board (NEB) on a case to
case basis;
6. Cases which become final and executory after final judgment of
a court, where compromise is requested on the ground of
doubtful validity of the assessment; and
7. Estate tax cases where compromise is requested on the ground
of financial incapacity of the taxpayer.
d) Basis for Acceptance of Compromise Settlement
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
SEC. 3. BASIS FOR ACCEPTANCE OF
COMPROMISE SETTLEMENT. - The Commissioner may compromise
the payment of any internal revenue tax on the following grounds:
1. Doubtful validity of the assessment. - The offer to compromise
a delinquent account or disputed assessment under these
Regulations on the ground of reasonable doubt as to the validity
of the assessment may be accepted when it is shown that:
(a) The delinquent account or disputed assessment is one
resulting from a jeopardy assessment (For this purpose,
“jeopardy assessment” shall refer to a tax assessment which
was assessed without the benefit of complete or partial audit by
an authorized revenue officer, who has reason to believe that
the assessment and collection of a deficiency tax will be
jeopardized by delay because of the taxpayer’s failure to comply
with the audit and investigation requirements to present his
books of accounts and/or pertinent records, or to substantiate
all or any of the deductions, exemptions, or credits claimed in
his return);
(b) The assessment seems to be arbitrary in nature, appearing
to be based on presumptions and there is reason to believe that
it is lacking in legal and/or factual basis; or
2. ABATEMENT (Section 204(B), NIRC)
(c) The taxpayer failed to file an administrative protest on
account of the alleged failure to receive notice of assessment
and there is reason to believe that the assessment is lacking in
legal and/or factual basis; or
(d) The taxpayer failed to file a request for reinvestigation/
reconsideration within 30 days from receipt of final assessment
notice and there is reason to believe that the assessment is
lacking in legal and/or factual basis; or
(e) The taxpayer failed to elevate to the Court of Tax Appeals
(CTA) an adverse decision of the Commissioner, or his
authorized representative, in some cases, within 30 days from
receipt thereof and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or
(f) The assessments were issued on or after January 1, 1998,
where the demand notice allegedly failed to comply with the
formalities prescribed under Sec. 228 of the National Internal
Revenue Code of 1997; or
(g) Assessments made based on the “Best Evidence Obtainable
Rule” and there is reason to believe that the same can be
disputed by sufficient and competent evidence; or
(h) The assessment was issued within the prescriptive period for
assessment as extended by the taxpayer’s execution of Waiver
of the Statute of Limitations the validity or authenticity of which
is being questioned or at issue and there is strong reason to
believe and evidence to prove that it is not authentic; or
(i) The assessment is based on an issue where a court of
competent jurisdiction made an adverse decision against the
Bureau, but for which the Supreme Court has not decided upon
with finality.
e) Delegation of Power to Compromise (Section 7(c), NIRC)
Section 7. Authority of the Commissioner to Delegate Power. – The
Commissioner may delegate the powers vested in him under the
pertinent provisions of this Code to any or such subordinate officials
with the rank equivalent to a division chief or higher, subject to
such limitations and restrictions as may be imposed under rules and
regulations to be promulgated by the Secretary of Finance, upon
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PREPARED BY:
SHANON GACA
recommendation of the Commissioner: Provided, however, That the
following powers of the Commissioner shall not be delegated:
(a) The power to recommend the promulgation of rules and
regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse,
revoke or modify any existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204(A) and
(B) of this Code, any tax liability: Provided, however, That
assessments issued by the regional offices involving basic
deficiency taxes of five hundred thousand pesos (P500,000) or
less, and minor criminal violations, as may be determined by
rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, discovered
by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the
Regional Director as Chairman, the Assistant Regional Director,
the heads of the Legal, Assessment and Collection Divisions and
the Revenue District Officer having jurisdiction over the taxpayer,
as members; and
(d) The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced
or kept.
Section 204. Authority of the Commissioner to Compromise, Abate,
and Refund or Credit Taxes. – The Commissioner may –
(B) Abate or cancel a tax liability, when:
(1) The tax or any portion thereof appears to be unjustly or
excessively assessed; or
(2) The administration and collection costs involved do not justify
the collection of the amount due.
All criminal violations may be compromised except: (a) those already
filed in court, or (b) those involving fraud.
Qatar Airways Company with Limited Liability v. Commissioner
of Internal Revenue
a) RR 13-01: When May Penalties be Abated or Cancelled
SEC. 2. INSTANCES WHEN THE PENALTIES AND/OR
INTEREST IMPOSED ON THE TAXPAYER MAY BE ABATED OR
CANCELLED ON THE GROUND THAT THE IMPOSITION
THEREOF IS UNJUST OR EXCESSIVE.–
2.1. When the filing of the return/payment of the tax is made at
the wrong venue;
2.2. When taxpayer’s mistake in payment of his tax is due to
erroneous written official advice of a revenue officer;
2.3. When taxpayer fails to file the return and pay the tax on time
due to substantial losses from prolonged labor dispute, force
majeure, legitimate business reverses such as in the following
instances, provided, however, that the abatement shall only cover
the surcharge and the compromise penalty and not the interest
imposed under Section 249 of the Code:
2.3.1. Labor strike for more than six (6) months which has
caused the temporary shutdown of business;
2.3.2. Public turmoil;
2.3.3. Natural calamity such as lightning, earthquake, storm,
flood and the like;
2.3.4. Armed conflicts such as war or insurgency;
2.3.5. Substantial losses sustained due to fire, robbery, theft,
embezzlement;
2.3.6. Continuous heavy losses incurred by the taxpayer for the
last two (2) years;
2.3.7. Liquidity problem of the taxpayer for the last three (3)
years; or
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2.3.8. Such other instances which the Commissioner may deem
analogous to the enumeration above.
2.4. When the assessment is brought about or the result of
taxpayer’s non-compliance with the law due to a difficult
interpretation of said law;
2.5. When taxpayer fails to file the return and pay the correct tax
on time due to circumstances beyond his control, provided,
however, that abatement shall cover only the surcharge and the
compromise penalty and not the interest;
2.6. Late payment of the tax under meritorious circumstances
such as those provided hereunder:
2.6.1. One day late filing and remittance due to failure to beat
bank cut-off time;
2.6.2. Use of wrong tax form but correct amount of tax was
remitted;
2.6.3. Filing an amended return under meritorious
circumstances, provided, however, that abatement shall cover
only the penalties and not the interest;
2.6.4. Surcharge erroneously imposed;
2.6.5. Late filing of return due to unresolved issue on
classification/valuation of real property (for capital gains tax
cases, etc.);
2.6.6. Offsetting of taxes of the same kind, i.e., overpayment in
one quarter/month is offset against underpayment in another
quarter/month;
2.6.7. Automatic offsetting of overpayment of one kind of
withholding tax against the underpayment of another kind;
2.6.8. Late remittance of withholding tax on compensation of
expatriates for services rendered in the Philippines pending the
issuance by the Securities and Exchange Commission of the
license to the Philippine branch office or subsidiary, provided,
however, that the abatement shall only cover the surcharge
and the compromise penalty and not the interest;
2.6.9. Wrong use of Tax Credit Certificate (TCC) where Tax
Debit Memo (TDM) was not properly applied for; and
2.6.10. Such other instances which the Commissioner may
deem analogous to the enumeration above.
2.7. Other cases similar or synonymous thereto.
SEC. 3. INSTANCES WHEN THE TAX LIABILITIES, PENALTIES
AND/OR INTEREST IMPOSED ON TAXPAYER MAY BE ABATED
OR CANCELLED ON THE GROUND THAT THE
ADMINISTRATION AND COLLECTION COSTS ARE MORE THAN
THE AMOUNT SOUGHT TO BE COLLECTED. – When the
administrative and collection costs, including cost of litigation, are
much more than the amount that may be collected from the
taxpayer, the assessment maybe reduced through abatement, or
entirely cancelled pursuant to Section 204(B) of the Code. The
instances that may fall under this category are the following:
3.1. Abatement of penalties on assessment confirmed by lower
court but appealed by the taxpayer to a higher court;
3.2. Abatement of penalties on withholding tax assessment under
meritorious circumstances;
3.3. Abatement of penalties on delayed installment payment
under meritorious circumstances;
3.4. Abatement of penalties on assessment reduced after
reinvestigation but taxpayer is still contesting reduced
assessment; and
3.5. Such other instances which the Commissioner may deem
analogous to the enumeration above.
For items 3.1 to 3.4 above, the abatement of the surcharge and
compromise penalty shall be allowed only upon written application
by the taxpayer signifying his willingness to pay the basic tax and
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PREPARED BY:
SHANON GACA
interest or basic tax only, whichever is applicable under the
prevailing circumstance.
3. DEFINITION AND SAMPLE TAX AMNESTY PROGRAM (RA
9480)
 TAX AMNESTY
 A general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of tax
evasion or violation of a revenue or tax law
 never favored nor presumed in law
Philippine Banking Corporation v. CIR
CS Garment, Inc. v. Commissioner of Internal Revenue
4. VOLUNTARY ASSESSMENT PROGRAM/LAST PRIORITY IN
AUDIT
CIR v. Gonzales
III. ESCAPE FROM TAXATION
1. SHIFTING OF TAX BURDEN
 the transfer or passing on of the burden of a tax by the original
payer or the one on whom the tax was assessed or imposed to
another or someone else
 e.g., indirect tax
 what is transferred is NOT the payment of the tax or liability for
the tax BUT merely the burden of the tax
 once shifted, the tax ceases to be tax and simply becomes part of
the price or cost that the buyer must pay
 seller still remains directly and legally liable for the payment of
the tax
2. TAX AVOIDANCE v. TAX EVASION
 TAX AVOIDANCE (ALLOWED)
 often called tax planning; tax minimization
 the use by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income, in
order to avoid or reduce tax liability
 the taxpayer uses tax saving device or means sanctioned or
allowed by law
 NOT punishable by law
EXAMPLE:
The term may be extended to include situations where a person
refrains from engaging in some activity or enjoying some privilege
in order to avoid the incidental taxation or to lower his tax
bracket for a taxable year
 TAX EVASION (LIABLE)
 also known as tax dodging
 the use by the taxpayer of illegal or fraudulent means to defeat
or lessen the payment of a tax
 punishable by law, subjecting the taxpayer to civil and criminal
liabilities
EXAMPLES:
Deliberate failure to report taxable income or property
Deliberate reduction of income that has been received
TAXATION I PREPARED BY:
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON SHANON GACA

FACTORS in Tax Evasion: revenue taxes, and the manner in which their lists and records of
1. The end to be achieved taxable persons and taxable objects shall be made and kept;
 the payment of less than that known by the taxpayer to be
legally due, or in paying no tax when it is shown that a tax (b) The forms of labels, brands or marks to be required on goods
is due subject to an excise tax, and the manner in which the labelling,
2. An accompanying state of mind branding or marking shall be effected;
 which is described as being evil, in bad faith, willful, or
(c) The conditions under which and the manner in which goods
deliberate and NOT accidental
intended for export, which if not exported would be subject to an
3. A course of action (or failure of action) which is
excise tax, shall be labelled, branded or marked;
unlawful
(d) The conditions to be observed by revenue officers respecting
TAX AVOIDANCE TAX EVASION
the institutions and conduct of legal actions and proceedings;
Covers escape accomplished by
Should be applied to the escape
legal procedure or means which (e) The conditions under which goods intended for storage in
from taxation accomplished by
may be contrary to the intent of bonded warehouses shall be conveyed thither, their manner of
breaking the letter of the tax law
the sponsors of the tax law BUT storage and the method of keeping the entries and records in
– deliberate omission to report a
nevertheless do not violate the connection therewith, also the books to be kept by Revenue
taxable item
letter of the law Inspectors and the reports to be made by them in connection with
Tax avoider sidesteps it Tax evader breaks the law
their supervision of such houses;

(f) The conditions under which denatured alcohol may be

CIR v. The Estate of Benigno P. Toda removed and dealt in, the character and quantity of the
denaturing material to be used, the manner in which the process
of denaturing shall be effected, so as to render the alcohol
suitably denatured and unfit for oral intake, the bonds to be
BIR v. Court of Appeals
given, the books and records to be kept, the entries to be made
therein, the reports to be made to the Commissioner, and the
signs to be displayed in the business ort by the person for whom
such denaturing is done or by whom, such alcohol is dealt in;

CHAPTER IV – SOURCES AND CONSTRUCTION OF TAX LAWS (g) The manner in which revenue shall be collected and paid, the
instrument, document or object to which revenue stamps shall be
I. SOURCES OF TAX LAWS affixed, the mode of cancellation of the same, the manner in
which the proper books, records, invoices and other papers shall
1. STATUTES be kept and entries therein made by the person subject to the
a) Existing Tax Laws tax, as well as the manner in which licenses and stamps shall be
i. National – National Internal Revenue Code of 1997 as amended gathered up and returned after serving their purposes;
ii. Local – Book II, 1991 Local Government Code
iii. Tariff and Customs Code (h) The conditions to be observed by revenue officers respecting
iv. BCDA Law the enforcement of Title III imposing a tax on estate of a
v. PEZA Law decedent, and other transfers mortis causa, as well as on gifts
vi. Omnibus Investment Law and such other rules and regulations which the Commissioner
may consider suitable for the enforcement of the said Title III;
2. REVENUE REGULATIONS
 the formal interpretation of the provisions of the Tax Code and (i) The manner in which tax returns, information and reports shall
other laws by the Secretary of Finance upon the recommendation be prepared and reported and the tax collected and paid, as well
of the CIR as the conditions under which evidence of payment shall be
 has the force and effect of law as long as it complies with the furnished the taxpayer, and the preparation and publication of tax
publication requirements statistics;

(j) The manner in which internal revenue taxes, such as income

a) Authority to Promulgate (Section 244, NIRC)
Section 244. Authority of Secretary of Finance to Promulgate Rules
and Regulations. – The Secretary of Finance, upon recommendation
of the Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of this
Code.
b) Specific Provisions to be Contained in RR (Section 245,
NIRC)
Section 245. Specific Provisions to be Contained in Rules and
Regulations. – The rules and regulations of the Bureau of Internal
Revenue shall, among other things, contain provisions specifying,
prescribing or defining:
(a) The time and manner in which Revenue Regional Directors
shall canvass their respective Revenue Regions for the purpose of
discovering persons and property liable to national internal
tax, including withholding tax, estate and donor’s taxes, value-
added tax, other percentage taxes, excise taxes, and
documentary stamp taxes shall be paid through the collection
officers of the Bureau of Internal Revenue or through duly
authorized agent banks which are hereby deputized to receive
payments of such taxes and the returns, papers and statements
that may be filed by the taxpayers in connection with the
payment of the tax: Provided, however, That notwithstanding the
other provisions of this Code prescribing the place of filing of
returns and payment of taxes, the Commissioner may, by rules
and regulations, require that the tax returns, papers and
statements and taxes of large taxpayers be filed and paid,
respectively, through collection officers or through duly
authorized agent banks: Provided, further, That the
Commissioner can exercise this power within six (6) years from
the approval of Republic Act No. 7646 or the completion of its
comprehensive computerization program, whichever comes

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earlier: Provided, finally, That separate venues for the Luzon,
Visayas, and Mindanao areas may be designated for the filing of
tax returns and payment of taxes by said large taxpayers.
For purposes of this Section, ‘large taxpayer’ means a taxpayer who
satisfies any of the following criteria:
(1) Value-Added Tax (VAT) – Business establishment with VAT
paid or payable of at least One hundred thousand pesos
(PhP100,000) for any quarter of the preceding taxable year;
(2) Excise Tax – Business establishment with excise tax paid or
payable of at least One million pesos (PhP1,000,000) for the
preceding taxable year;
(3) Corporate Income Tax – Business establishment with annual
income tax paid or payable of at least One million pesos
(PhP1,000,000) for the preceding taxable year; and
(4) Withholding Tax – Business establishment with withholding
tax payment or remittance of at least One million pesos
(PhP1,000,000) for the preceding taxable year.
Provided, however, That the Secretary of Finance, upon
recommendation of the Commissioner, may modify or add to the
above criteria for determining a large taxpayer after considering
such factors as inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Section 248 of this Code shall be
imposed on any violation of the rules and regulations issued by the
Secretary of Finance, upon recommendation of the Commissioner,
prescribing the place of filing of returns and payments of taxes by
large taxpayers.
c) Powers and Duties of the BIR (Section 2, NIRC)
Section 2. Powers and Duties of the Bureau of Internal Revenue. –
The Bureau of Internal Revenue shall be under the supervision and
control of the Department of Finance and its powers and duties
shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of
all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the
Court of Tax Appeals and the ordinary courts. The Bureau shall give
effect to and administer the supervisory and police powers
conferred to it by this Code or other laws.
d) Force and Effect of RR (Art. 7, Civil Code)
Article 7. Laws are repealed only by subsequent ones, and their
violation or non-observance shall not be excused by disuse, or
custom or practice to the contrary.
When the courts declared a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.
Administrative or executive acts, orders and regulations shall be
valid only when they are not contrary to the laws or the
Constitution. (5a)
BPI Leasing Corp. v. CA and CIR
Commissioner of Internal Revenue v. Michel Lhuillier Pawnshop,
Inc.
3. BIR ISSUANCES (BIR REVENUE ADMINISTRATIVE ORDER
(RAO) NO. 2-2001)
a) BIR Rulings
 less general interpretations of tax laws at the administrative
level which are issued by tax officials in the performance of
their assessment functions
i. Rulings of First Impression
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PREPARED BY:
SHANON GACA
 first time of the BIR to rule on such issue
ii. Rulings with Establish Precedents
iii. Power of CIR to Interpret Tax Laws (Section 4, NIRC)
Section 4. Power of the Commissioner to Interpret Tax Laws and
to Decide Tax Cases. – The power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance. The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner,
subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.
iv. Non-Retroactivity of Rulings (Section 246, NIRC)
Section 246. Non- Retroactivity of Rulings. – Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of
the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers, except in the
following cases:
(a) Where the taxpayer deliberately misstates or omits material
facts from his return or any document required of him by the
Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
CIR v. Burroughs Ltd.
CIR v. Philippine Health Care Providers, Inc.
v. Exceptions
PBCOM v. CIR
b) Revenue Memorandum Rulings (RMR)
c) Revenue Travel Assignment Orders (RTAO)
d) Revenue Special Orders (RSO)
e) Revenue Memorandum Circulars (RMC)
 merely interprets a pre-existing law
 such interpretation or construction is NOT binding upon the
courts
f) Revenue Memorandum Orders (RMO)
g) Revenue Audit Memorandum Orders (RAMO)
h) Revenue Delegation of Authority Orders (RDAO)
i) Revenue Administrative Orders (RAO)
4. OPINIONS OF THE SECRETARY OF JUSTICE
 rulings in the form of “opinions” on tax questions are also given
by the Secretary of Justice who is the chief legal officer of the
government
 these rulings or opinions take on the character of substantive
rules and are generally binding and effective if not otherwise
contrary to law and the Constitution
5. LEGISLATIVE MATERIALS
6. COURT DECISION
 Supreme Court is the tribunal of last resort or final appeal
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 binding on all subordinate courts and have the force and effect of
law
 they form part of the legal system of the Philippines Rodriguez, Inc. v. Collector
 decisions of the CTA are still appealable to the Supreme Court by
a petition for review on certiorari

Wonder Mechanical Engineering v. CTA

II. CONSTRUCTION AND INTERPRETATION OF TAX LAWS,

EXEMPTIONS AND REFUNDS
Republic Flour Mills v. CIR
1. GENERAL RULES OF CONSTRUCTION OF TAX LAWS
a) Legislative Intent Must be Considered
 good faith of the taxpayer is not sufficient justification for
exemption from the payment of surcharges imposed by the law 3. CONSTRUCTION OF TAX REFUNDS
for failing to pay tax within the period required
b) Where there is Doubt Resins, Inc. v. Auditor Gen.
 tax statutes are construed strictly against the
government
 construed liberally in favor of the taxpayer
Kepco Philippines Corp. v. CIR
 taxes, being burdens, they are not to be presumed beyond what
the statute expressly and clearly declares
c) Where Language is Plain
 rules of strict construction as against the government is not 4. TAX RULES AND REGULATIONS
applicable where the language of the tax statute is plain and 5. PENAL PROVISIONS OF TAX LAWS
there is not doubt as to the legislative intent 6. NON-RETROACTIVE APPLICATION
d) Where Taxpayer Claims Exemption
 exemption provisions are construed strictly NOT against
the government BUT against the one who asserts the
claim of exemption
 tax exemption can only be given effect when the grant of the
PART II: INCOME TAX
law is clear
CHAPTER I – GENERAL PRINCIPLES
 any doubt is reserved in favor of taxation
e) Where there is Conflict with Other Laws I. OVERVIEW OF INCOME TAXATION
 NIRC is a special law that primarily governs national internal
revenue taxes 1. WHAT IS INCOME TAX?
 being a special law, it prevails over a general law  direct tax imposed on actual or presumed income – gross or net –
realized by a taxpayer during a given taxable year
Luzon Stevedoring v. Trinidad  a tax on the net income or the entire income received or realized
in one taxable year
 gain derived from capital, from labor, or from both combined,
provided it be understood to include profit gained through a sale
Philippine Health Care Providers, Inc. v. CIR or conversion of capital assets

Fisher v. Trinidad

2. CONSTRUCTION OF TAX EXEMPTIONS

a) General Rule
 exemptions are not favored and are construed by the most
strict right or law against the taxpayer
 a taxpayer claiming a tax exemption must point to a specific
provision of law conferring on the taxpayer, in clear and plain
terms, exemption from a common burden
 any doubt is resolved against the taxpayer
 taxation is the RULE, and exemption, the EXCEPTION
b) Exceptions
i. when the law itself expressly provides for a liberal construction,
that is, in case of doubt, it shall be resolved in favor of
exemption
ii. when the exemption is in favor of the government itself or its
agencies, or of religious, charitable and educational institutions
because the general rule is that they are exempt from tax
iii. if there is an express mention or if the taxpayer falls within the
purview of the exemption by clear legislative intent, the rule on
strict construction does not apply
2. PHILIPPINE INCOME TAX LAW
a) Citizen of the Philippines residing therein: taxable on all
income derived from sources within and without the Philippines
b) Non-resident Citizen: taxable only on income derived from
sources within the Philippines
c) Individual Citizen of the Philippines who is working abroad
and deriving income from abroad as an overseas contract
worker: taxable only on income from sources within the
Philippines
d) Alien individual, whether a resident or not of the Philippines:
taxable only on income derived from sources within the
Philippines
e) Domestic Corporation: taxable on all income derived from
sources within and without the Philippines
f) Foreign Corporation, whether engaged or not in trade or
business in the Philippines: taxable on income derived from
sources within the Philippines

City of Iloilo v. SMART 3. INCOME TAX SYSTEMS

a) Global Tax System

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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
 total allowable deductions are deducted from the total gross
income (regardless of type) to arrive at the net taxable income
and subjected to a uniform tax rate
 gross compensation is aggregated (globalized) with the income
from business, trade, or profession or other sources to arrive at
the taxable income (after allowable exemptions) which taxable
aggregate income is then subjected to one set of progressive,
graduated tax rates in the case of individuals
 employees, self-employed, and professional and those with
mixed income are all subjected to the same tax rates
 in the case of corporations, the taxable income is subject to a
flat tax rate
b) Schedular Tax System
 system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of
the taxpayer
 applicable income tax rates depend on the classification of the
income and tax base could be either gross or net income
 a separate tax return or computation is required for each type
of income
c) Semi-Schedular or Semi-Global Tax System
 all compensation, business and professional income, capital
gains and other income not subject to final tax are added to
arrive at gross income and after deducting allowable
deductions, the taxable income is subjected to tax rate
 other passive income are subject to applicable tax rates
d) Progressive System
 tax rate increases as the taxable amount increases
e) Regressive System
 tax the rate of which decreases as the tax base or bracket
increases
4. FEATURES OF PHILIPPINE INCOME TAXATION
a) Direct
 the tax burden is borne by the income recipient upon whom the
tax is imposed
b) Progressive
 tax rate increases as the tax base increases
 ability to pay principle
c) Comprehensive
 adopting the citizenship, residence and source principles
d) Semi-Schedular or Semi-Global
 certain passive income are taxed at a certain rate while
compensation and business income are taxed at graduated rate
e) American Origin
5. CRITERIA IN IMPOSING INCOME TAX
a) Citizenship Principle
 citizen of the Philippines residing in the Philippines is
taxable on all income derived from sources within and without
the Philippines
 while a non-resident citizen is taxable only on income derived
from sources within the Philippines
b) Residence Principle
 all income derived by persons residing in the Philippines,
whether citizens or aliens, whether domestic or foreign
corporations, shall be subject to income tax on the income
derived from sources within the Philippines
c) Source Principle
 all income derived from sources within the Philippines shall be
subject to income tax
II. GENERAL PRINCIPLES OF INCOME TAXATION
(Section 23, Tax Code)
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PREPARED BY:
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1. RESIDENT FILIPINO CITIZEN
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines;
2. NON-RESIDENT FILIPINO CITIZEN
(B) A non-resident citizen is taxable only on income derived from
sources within the Philippines;
3. OVERSEAS FILIPINO CONTRACT WORKER OR SEAMAN
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker is
taxable only on income derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of
the complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
4. RESIDENT OR NON-RESIDENT ALIEN INDIVIDUAL
(D) An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines;
5. DOMESTIC CORPORATION
(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines;
6. FOREIGN CORPORATION
(F) A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines.
CHAPTER II – CLASSIFICAITON OF INCOME TAXPAYERS
I. SCOPE OF INCOME TAXATION
1. DEFINITION OF A TAXPAYER (Section 22(N), NIRC)
(N) The term ‘taxpayer’ means any person subject to tax imposed by
this Title.
2. DEFINITION OF A PERSON (Section 22(A), NIRC)
(A) The term ‘person’ means an individual, a trust, estate or
corporation
3. WHO IS A “PERSON LIABLE TO TAX”
CIR v. Procter & Gamble
Silkair (Singapore) PTE. Ltd. v. CIR
II. INDIVIDUAL TAXPAYERS
1. CITIZENS
a) Resident Citizens (Sections 1 and 2, Art. IV, 1987
Constitution)
Section 1. The following are citizens of the Philippines:
Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino mothers, who
elect Philippine Citizenship upon reaching the age of majority; and
Those who are naturalized in the accordance with law.
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Section 2. Natural-born citizens are those who are citizens of the
Philippines from birth without having to perform any act to acquire
or perfect their Philippine citizenship. Those who elect Philippine
citizenship in accordance with paragraph (3), Section 1 hereof shall
be deemed natural-born citizens.
b) Non-Resident Citizens (Section 22(E), NIRC)
(E) The term ‘non-resident citizen’ means:
(1) A citizen of the Philippines who establishes to the satisfaction
of the Commissioner the fact of his physical presence abroad with
a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
(4) A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in
which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show
his intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the case
may be for purposes of this Section.
2. ALIEN
a) Resident Alien (Section 22(F), NIRC)
(F) The term ‘resident alien’ means an individual whose residence is
within the Philippines and who is not a citizen thereof.
b) Section 5, last par., Revenue Regulations No. 2
c) Non-Resident Alien (Section 22(G), NIRC)
(G) The term ‘non-resident alien’ means an individual whose
residence is not within the Philippines and who is not a citizen
thereof.
i. Engaged in Trade or Business (Section 25(A), NIRC)
Section 25. Tax on Non-resident Alien Individual. –
(A) Non-resident Alien Engaged in Trade or Business Within the
Philippines. –
(1) In General. – A non-resident alien individual engaged in
trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all
sources within the Philippines. A non-resident alien individual
who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a ‘non-resident
alien doing business in the Philippines’. Section 22(G) of this
Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarters of
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association, Interests, Royalties, Prizes, and
Other Winnings. – Cash and/or property dividends from a
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domestic corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a regional
operating headquarter of multinational company, or the share
of a non-resident alien individual in the distributable net
income after tax of a partnership (except a general
professional partnership) of which he is a partner, or the
share of a non-resident alien individual in the net income after
tax of an association, a joint account, or a joint venture
taxable as a corporation of which he is a member or a co-
venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (PhP10,000)
or less which shall be subject to tax under Subsection (B)(1)
of Section 24); and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount
thereof: Provided, however, That royalties on books as well as
other literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on the
total amount thereof: Provided, further, That cinematographic
films and similar works shall be subject to the tax provided
under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from
the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit
or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years .... . 5%;
Three (3) years to less than four (4) years ..12%; and
Less than three (3) years .............................20%.
(3) Capital Gains. – Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not
traded through the local stock exchange, and real properties
shall be subject to the tax prescribed under Subsections (C)
and (D) of Section 24.
ii. NOT Engaged in Trade or Business (Section 25(B), NIRC)
(B) Non-resident Alien Individual Not Engaged in Trade or
Business Within the Philippines. – There shall be levied, collected
and paid for each taxable year upon the entire income received
from all sources within the Philippines by every non-resident alien
individual not engaged in trade or business within the Philippines
as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or
casual gains, profits, and income, and capital gains, a tax equal to
twenty-five percent (25%) of such income. Capital gains realized
by a non-resident alien individual not engaged in trade or
business in the Philippines from the sale of shares of stock in any
domestic corporation and real property shall be subject to the
income tax prescribed under Subsections (C) and (D) of Section
24.
3. ESTATES AND TRUSTS
a) Definition of Estates & Trusts (Arts. 1440 – 1457, Civil
Code)
Article 1440. A person who establishes a trust is called the trustor;
one in whom confidence is reposed as regards property for the
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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
benefit of another person is known as the trustee; and the person
for whose benefit the trust has been created is referred to as the
beneficiary.
Article 1441. Trusts are either express or implied. Express trusts
are created by the intention of the trustor or of the parties. Implied
trusts come into being by operation of law.
Article 1442. The principles of the general law of trusts, insofar as
they are not in conflict with this Code, the Code of Commerce, the
Rules of Court and special laws are hereby adopted.
EXPRESS TRUSTS
Article 1443. No express trusts concerning an immovable or any
interest therein may be proved by parol evidence.
Article 1444. No particular words are required for the creation of an
express trust, it being sufficient that a trust is clearly intended.
Article 1445. No trust shall fail because the trustee appointed
b) Application of Tax (Section 60, NIRC)
declines the designation, unless the contrary should appear in the
instrument constituting the trust.
Article 1446. Acceptance by the beneficiary is necessary.
Nevertheless, if the trust imposes no onerous condition upon the
beneficiary, his acceptance shall be presumed, if there is no proof
to the contrary.
IMPLIED TRUSTS
Article 1447. The enumeration of the following cases of implied
trust does not exclude others established by the general law of
trust, but the limitation laid down in article 1442 shall be applicable.
Article 1448. There is an implied trust when property is sold, and
the legal estate is granted to one party but the price is paid by
another for the purpose of having the beneficial interest of the
property. The former is the trustee, while the latter is the
beneficiary. However, if the person to whom the title is conveyed is
a child, legitimate or illegitimate, of the one paying the price of the
sale, no trust is implied by law, it being disputably presumed that
there is a gift in favor of the child.
Article 1449. There is also an implied trust when a donation is made
to a person but it appears that although the legal estate is
transmitted to the donee, he nevertheless is either to have no
beneficial interest or only a part thereof.
Article 1450. If the price of a sale of property is loaned or paid by
one person for the benefit of another and the conveyance is made
to the lender or payor to secure the payment of the debt, a trust
arises by operation of law in favor of the person to whom the
money is loaned or for whom its is paid. The latter may redeem the
property and compel a conveyance thereof to him.
Article 1451. When land passes by succession to any person and he
causes the legal title to be put in the name of another, a trust is
established by implication of law for the benefit of the true owner.
Article 1452. If two or more persons agree to purchase property
and by common consent the legal title is taken in the name of one
of them for the benefit of all, a trust is created by force of law in
favor of the others in proportion to the interest of each.
Article 1453. When property is conveyed to a person in reliance
upon his declared intention to hold it for, or transfer it to another or
the grantor, there is an implied trust in favor of the person whose
benefit is contemplated.
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Article 1454. If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor
toward the grantee, a trust by virtue of law is established. If the
fulfillment of the obligation is offered by the grantor when it
becomes due, he may demand the reconveyance of the property to
him.
Article 1455. When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property
and causes the conveyance to be made to him or to a third person,
a trust is established by operation of law in favor of the person to
whom the funds belong.
Article 1456. If property is acquired through mistake or fraud, the
person obtaining it is, by force of law, considered a trustee of an
implied trust for the benefit of the person from whom the property
comes.
Article 1457. An implied trust may be proved by oral evidence.
Section 60. Imposition of Tax. –
(A) Application of Tax. – The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind of
property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the
terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary
to the beneficiaries, and income collected by a guardian of an
infant which is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the
period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated.
(B) Exception. – The tax imposed by this Title shall not apply to
employee’s trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or all of
his employees (1) if contributions are made to the trust by such
employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and (2) if
under the trust instrument it is impossible, at any time prior to
the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the
taxable year or thereafter) used for, or diverted to, purposes
other than for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or
distribute shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed
by such employee or distributee.
(C) Computation and Payment. –
(1) In General. – The tax shall be computed upon the taxable
income of the estate or trust and shall be paid by the fiduciary,
except as provided in Section 63 (relating to revocable trusts) and
Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. – Where, in the
case of two or more trusts, the creator of the trust in each instance
is the same person, and the beneficiary in each instance is the
same, the taxable income of all the trusts shall be consolidated and
the tax provided in this Section computed on such consolidated
income, and such proportion of said tax shall be assessed and
collected from each trustee which the taxable income of the trust
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PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
administered by him bears to the consolidated income of the
several trusts.
CIR v. Visayan Electric
CIR v. CA, CTA, GCL Retirement Plan
III. CORPORATIONS
1. DEFINITION OF A CORPORATION (Section 22(B), NIRC)
(B) The term ‘corporation’ shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas
en participacion), associations, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a
service contract with the Government.
a) One Person Corporation (Section 116, RA 11232)
Section 116. One Person Corporation. - A One Person Corporation is
a corporation with a single stockholder: Provided, That only a
natural person, trust, or an estate may form a One Person
Corporation.
Banks and quasi-banks, preneed, trust, insurance, public and
publicly-listed companies, and non-chartered government-owned
and -controlled corporations may not incorporate as ONe Person
Corporations: Provided, further, That a natural person who is
licensed to exercise a profession may not organize as a One Person
Corporation for the purpose of exercising such profession except as
otherwise provided under special laws.
b) Partnerships and Joint Ventures (Arts. 1767 – 1769, Civil
Code)
Article 1767. By the contract of partnership two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the exercise
of a profession. (1665a)
Article 1768. The partnership has a juridical personality separate
and distinct from that of each of the partners, even in case of
failure to comply with the requirements of article 1772, first
paragraph. (n)
Article 1769. In determining whether a partnership exists, these
rules shall apply:
(1) Except as provided by article 1825, persons who are not
partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a
partnership, whether such-co-owners or co-possessors do or do
not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the
returns are derived;
(4) The receipt by a person of a share of the profits of a business
is prima facie evidence that he is a partner in the business, but no
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such inference shall be drawn if such profits were received in
payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased
partner;
(d) As interest on a loan, though the amount of payment vary
with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business
or other property by installments or otherwise. (n)
Lorenzo Ona v. CIR
Evangelista v. Collector
Afisco Insurance Corp. v. CIR
c) Co-ownership (Art. 484, Civil Code)
Article 484. There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons.
In default of contracts, or of special provisions, co-ownership shall
be governed by the provisions of this Title. (392)
Pascual v. CIR
2. DOMESTIC CORPORATION (Section 22(C), NIRC)
(C) The term ‘domestic,’ when applied to a corporation, means
created or organized in the Philippines or under its laws.
a) Proprietary Educational Institutions and Hospitals (Section
27(B), NIRC)
Section 27. Rates of Income Tax on Domestic Corporations. –
(B) Proprietary Educational Institutions and Hospitals. –
Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this
Subsection, the term ‘unrelated trade, business or other activity’
means any trade, business or other activity, the conduct of which
is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function. A ‘proprietary educational institution’ is any private
school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
Commissioner v. St. Luke’s Medical Center
b) Government-owned or -Controlled Corporation (Section
27(C), NIRC)
TAXATION I PREPARED BY:
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(C) Government-owned or -Controlled Corporations, Agencies or (4) Offshore Banking Units. – The provisions of any law to the
Instrumentalities.– The provisions of existing special or general contrary notwithstanding, income derived by offshore banking
laws to the contrary notwithstanding, all corporations, agencies, or units authorized by the Bangko Sentral ng Pilipinas (BSP), from
instrumentalities owned or controlled by the Government, except foreign currency transactions with non-residents, other offshore
the Government Service Insurance System (GSIS), the Social banking units, local commercial banks, including branches of
Security System (SSS), the Philippine Health Insurance Corporation foreign banks that may be authorized by the Bangko Sentral ng
(PHIC), and the local water districts (LWD) shall pay such rate of Pilipinas (BSP) to transact business with offshore banking units
tax upon their taxable income as are imposed by this Section upon shall be exempt from all taxes except net income from such
corporations or associations engaged in a similar business, industry, transactions as may be specified by the Secretary of Finance,
or activity. upon recommendation of the Monetary Board, which shall be
subject to the regular income tax payable by banks: Provided,
3. FOREIGN CORPORATION (Section 22(D), NIRC) however, That any interest income derived from foreign
(D) The term ‘foreign’ when applied to a corporation, means a currency loans granted to residents other than offshore banking
corporation which is not domestic. units or local commercial banks, including local branches of
foreign banks that may be authorized by the BSP to transact
4. RESIDENT FOREIGN CORPORATION (Section 22(H), NIRC)
business with offshore banking units, shall be subject only to a
(H) The term ‘resident foreign corporation’ applies to a foreign
final tax at the rate of ten percent (10%).
corporation engaged in trade or business within the Philippines.
Any income of non-residents, whether individuals or
a) International Air Carrier (Section 28(A)(3)(a), NIRC) corporations, from transactions with said offshore banking units
Section 28. Rates of Income Tax on Foreign Corporations. – shall be exempt from income tax.
(A) Tax on Resident Foreign Corporations. –
d) Regional or Area Headquarters and Regional Operating
(3) International Carrier11. – An international carrier doing
Headquarters of Multinational Companies (Section 28(A)
business in the Philippines shall pay a tax of two and one-half
(6), NIRC)
percent (21/2 %) on its ‘Gross Philippine Billings’ as defined
Section 28. Rates of Income Tax on Foreign Corporations. –
hereunder:
(A) Tax on Resident Foreign Corporations. –
(a) International Air Carrier. – ‘Gross Philippine Billings’ refers
(6) Regional or Area Headquarters and Regional Operating
to the amount of gross revenue derived from carriage of
Headquarters of Multinational Companies. –
persons, excess baggage, cargo, and mail originating from the
(a) Regional or area headquarters as defined in Section
Philippines in a continuous and uninterrupted flight,
22(DD) shall not be subject to income tax.
irrespective of the place of sale or issue and the place of
(b) Regional operating headquarters as defined in Section
payment of the ticket or passage document: Provided, That
22(EE) shall pay a tax of ten percent (10%) of their taxable
tickets revalidated, exchanged and/or indorsed to another
income.
international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the e) Subsidiary v. Branch of a Foreign Corporation
Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of SUBSIDIARY BRANCH
passenger takes place at any port outside the Philippines on Same rate
another airline, only the aliquot portion of the cost of the - Taxed on Global - Taxed on Philippine
ticket corresponding to the leg flown from the Philippines to INCOME TAX Income Income
the point of transshipment shall form part of Gross Philippine - Domestic - Resident Foreign
Billings. Corporation Corporation
30%
DIVIDENDS /
b) International Shipping (Section 28(A)(3)(b), NIRC) Applicable Tax 15% BPRT
BRANCH PROFITS
Section 28. Rates of Income Tax on Foreign Corporations. – Treaty
(A) Tax on Resident Foreign Corporations. – SOURCE OF Generally latest RE Effectively connected
(3) International Carrier11. – An international carrier doing DIVIDENDS / unless specifically with the conduct of
business in the Philippines shall pay a tax of two and one-half PROFITS stated trade or business
percent (21/2 %) on its ‘Gross Philippine Billings’ as defined RE or
hereunder: ACCUMULATED RE before 1988 NOT
Subject to BPRT
(b) International Shipping. – ‘Gross Philippine Billings’ means PROFITS BEFORE subject to FWT
gross revenue whether for passenger, cargo or mail 1988
originating from the Philippines up to final destination, LEGAL Separate and Head and branch
regardless of the place of sale or payments of the passage or PERSONALITY distinct single entity
freight documents. ALLOCATION OF
Provided, That international carriers doing business in the OVERHEAD No allocation Can allocate
Philippines may avail of a preferential rate or exemption from EXPENSE
PERMANENT
the tax herein imposed on their gross revenue derived from No PE PE
ESTABLISHMENT
the carriage of persons and their excess baggage on the basis
STOCKHOLDERS’
of an applicable tax treaty or international agreement to which Limited to Capital Head Office liable
LIABILITY
the Philippines is a signatory or on the basis of reciprocity
such that an international carrier, whose home country grants
income tax exemption to Philippine carriers, shall likewise be 5. NON-RESIDENT CORPORATION (Section 22(I), NIRC)
exempt from the tax imposed under this provision. (I) The term ‘non-resident foreign corporation’ applies to a foreign
corporation not engaged in trade or business within the Philippines.
c) Offshore Banking Units (Section 28(A)(4), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. – a) Non-Resident Cinematographic Film Owner, Lessor or
(A) Tax on Resident Foreign Corporations. – Distributor (Section 28(B)(2), NIRC)

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Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(2) Non-resident Cinematographic Film Owner, Lessor or
Distributor. – A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent (25%) of its
gross income from all sources within the Philippines.
b) Non-Resident Owner or Lessor of Vessels Chartered by
Philippine Nationals (Section 28(B)(3), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(3) Non-resident Owner or Lessor of Vessels Chartered by
Philippine Nationals. – A non-resident owner or lessor of vessels
shall be subject to a tax of four and one-half percent (4 1/2%)
of gross rentals, lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
c) Non-Resident Owner or Lessor of Aircraft, Machineries and
Other Equipment (Section 28(B)(4), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(4) Non-resident Owner or Lessor of Aircraft, Machineries and
Other Equipment. – Rentals, charters and other fees derived by
a non-resident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.
IV. GENERAL PROFESSIONAL PARTNERSHIP
(Section 22(B), NIRC)
(B) xxx ‘General professional partnerships’ are partnerships formed by
persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business.
Tan v. Del Rosario
CHAPTER III – TAX BASE & TAX RATES
I. INDIVIDUALS
1. RESIDENT CITIZENS & RESIDENT ALIENS (Section 24)
a) Taxable Income
Section 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines. –
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
sources within and without the Philippines by every individual
citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 1 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including
overseas contract workers referred to in Subsection (C) of
Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
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SHANON GACA
sources within the Philippines by an individual alien who is a
resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. – The tax shall
be computed in accordance with and at the rates established in
the following schedule:
(a) Tax Schedule Effective January 1, 2018 until December 31,
2022:
Not over PhP250,000.......... 0%
Over PhP250,000 but not over PhP400,000........... 20% of the excess
over PhP250,000
Over PhP400,000 but not over PhP800,000........... PhP30,000 + 25%
of the excess over PhP400,000
Over PhP800,000 but not over PhP2,000,000........ PhP130,000 + 30%
of the excess over PhP800,000
Over PhP2,000,000 but not over PhP8,000,000........ PhP490,000 +
32% of the excess over PhP2,000,000
Over PhP8,000,000............. PhP2,410,000 + 35% of the excess over
PhP8,000,000
Tax Schedule Effective January 1, 2023 and onwards:
Not over PhP250,000...........0%
Over PhP250,000 but not over PhP400,000...........15% of the excess
over PhP250,000
Over PhP400,000 but not over PhP800,000............PhP22,500 + 20%
of the excess over PhP400,000
Over PhP800,000 but not over PhP2,000,000.........PhP102,500 + 25%
of the excess over PhP800,000
Over PhP2,000,000 but not over PhP8,000,000.........PhP402,500 +
30% of the excess over PhP2,000,000
Over PhP8,000,000..............PhP2,202,500 + 35% of the excess over
PhP8,000,000
For married individuals, the husband and wife, subject to the
provision of Section 51 (D) hereof, shall compute separately
their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be
definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be
divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined in Section
22(HH) of this Code shall be exempt from the payment of
income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, nightshift differential and hazard pay
received by such minimum wage earners shall likewise be
exempt from income tax.
b) Purely Self-Employed Individuals and/or Professionals
(Section 24(A)(2)(b), TRAIN)
Section 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines. –
(2) Rates of Tax on Taxable Income of Individuals. – The tax
shall be computed in accordance with and at the rates
established in the following schedule:
(b) Rate of Tax on Income of Purely Self-employed Individuals
and/ or Professionals Whose Gross Sales or Gross Receipts
and Other Non-operating Income Does Not Exceed the Value-
added Tax (VAT) Threshold as Provided in Section 109(BB).—
Self-employed individuals and/or professionals shall have the
option to avail of an eight percent (8%) tax on gross sales or
gross receipts and other non-operating income in excess of
Two hundred fifty thousand pesos (PhP250,000) in lieu of the
graduated income tax rates under Subsection (A) (2)(a) of
this Section and the percentage tax under Section 116 of this
Code.
c) Mixed Income Earners (Section 24(A)(2)(c), TRAIN)
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Section 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines. –
(2) Rates of Tax on Taxable Income of Individuals. – The tax
shall be computed in accordance with and at the rates
established in the following schedule:
(c) Rate of Tax for Mixed Income Earners. – Taxpayers
earning both compensation income and income from business
or practice of profession shall be subject to the following
taxes:
(1) All Income from Compensation – The rates prescribed
under Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession –
(a) If Total Gross Sales and/or Gross Receipts and Other
Non-operating Income Do Not Exceed the VAT Threshold
as Provided in Section 109(BB) of this Code – The rates
prescribed under Subsection (A) (2)(a) of this Section on
taxable income, or eight percent (8%) income tax based
on gross sales or gross receipts and other nonoperating
income in lieu of the graduated income tax rates under
Subsection (A)(2)(a) of this Section and the percentage
tax under Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and Other
Non-operating Income Exceeds the VAT Threshold as
Provided in Section 109(BB) of this Code. – The rates
prescribed under Subsection (A)(2)(a) of this Section.
d) Revenue Regulations No. 8-2018 (PDF too long hakhak)
e) Passive Income
i. Interest (Section 24(B)(1); Section 27(D)(3); Section
28(A)(7)(b))
Section 24. Income Tax Rates. –
(B) Rate of Tax on Certain Passive Income. –
(1) Interests, Royalties, Prizes, and Other Winnings. – A final
tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest from any currency bank deposit
and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and
musical compositions, which shall be imposed a final tax of
ten percent (10%); prizes (except prizes amounting to Ten
thousand pesos (PhP10,000) or less which shall be subject to
tax under Subsection (A) of Section 24; and other winnings
(except winnings amounting to Ten thousand pesos
(PhP10,000) or less from Philippine Charity Sweepstakes and
Lotto which shall be exempt), derived from sources within the
Philippines: Provided, however, That interest income received
by an individual taxpayer (except a non-resident individual)
from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the
rate of fifteen percent (15%) of such interest income:
Provided, further, That interest income from long-term deposit
or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng Pilipinas (BSP)
shall be exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years ..... 5%;
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Three (3) years to less than (4) years ........ 12%; and
Less than three (3) years ........................... 20%.
x x x x x x x x
Section 27. Rates of Income Tax on Domestic Corporations.
–
(D) Rates of Tax on Certain Passive Incomes. –
(3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. – Income derived by a depository
bank under the expanded foreign currency deposit system
from foreign currency transactions with non-residents,
offshore banking units in the Philippines, local commercial
banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units
and other depository banks under the expanded foreign
currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified
by the Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore
banking units in the Philippines or other depository banks
under the expanded system, shall be subject to a final tax at
the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
x x x x x x x x
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(b) Income Derived under the Expanded Foreign Currency
Deposit System. – Income derived by a depository bank
under the expanded foreign currency deposit system from
foreign currency transactions with non-residents, offshore
banking units in the Philippines, local commercial banks
including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and
other depository banks under the expanded foreign currency
deposit system shall be exempt from all taxes, except net
income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository
banks under said expanded system to residents other than
depository banks under the expanded system shall be
subject to a final tax at the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
ii. Royalties, Prizes and Other Winnings (Section 24(B)(1))
Section 24. Income Tax Rates. –
(B) Rate of Tax on Certain Passive Income. –
(1) Interests, Royalties, Prizes, and Other Winnings. – A final
tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest from any currency bank deposit
and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements;
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
royalties, except on books, as well as other literary works and
musical compositions, which shall be imposed a final tax of
ten percent (10%); prizes (except prizes amounting to Ten
thousand pesos (PhP10,000) or less which shall be subject to
tax under Subsection (A) of Section 24; and other winnings
(except winnings amounting to Ten thousand pesos
(PhP10,000) or less from Philippine Charity Sweepstakes and
Lotto which shall be exempt), derived from sources within the
Philippines: Provided, however, That interest income received
by an individual taxpayer (except a non-resident individual)
from a depository bank under the expanded foreign currency
deposit system shall be subject to a final income tax at the
rate of fifteen percent (15%) of such interest income:
Provided, further, That interest income from long-term deposit
or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng Pilipinas (BSP)
shall be exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years ..... 5%;
Three (3) years to less than (4) years ........ 12%; and
Less than three (3) years ........................... 20%.
iii. Dividends (Section 24(B)(2))
Section 24. Income Tax Rates. –
(B) Rate of Tax on Certain Passive Income. –
(2) Cash and/or Property Dividends. – A final tax at the rate
of ten percent (10%) shall be imposed upon the cash and/or
property dividends actually or constructively received by an
individual from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional
operating headquarters of multinational companies, or on the
share of an individual in the distributable net income after tax
of a partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the
net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which
he is a member or co-venturer.
f) Capital Gains on Shares of Stocks (Section 24(C))
Section 24. Income Tax Rates. –
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. – The provisions of Section 39(B)
notwithstanding, a final tax at the rate of fifteen percent (15%) is
hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange.
g) Capital Gains on Real Property (Section 24(D)(1))
Section 24. Income Tax Rates. –
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
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property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
-controlled corporations shall be determined either under
Section 24(A) or under this Subsection, at the option of the
taxpayer.
i. EXCEPTION: Sale of Principal Residence (Section 24(D)
(2); Read RR No. 13-99 as amended by RR 14-00)
(2) Exception. – The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital gains tax
imposed under this Subsection: Provided, That the historical cost
or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired:
Provided, further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the date of
sale or disposition through a prescribed return of his intention to
avail of the tax exemption herein mentioned: Provided, still
further, That the said tax exemption can only be availed of once
every ten (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or disposition
shall be subject to capital gains tax. For this purpose, the gross
selling price or fair market value at the time of sale, whichever is
higher, shall be multiplied by a fraction which the unutilized
amount bears to the gross selling price in order to determine the
taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.
x x x x x x x x
REVENUE REGULATIONS NO. 14-2000 issued December 29,
2000 amends Sections 3(2), 3 and 6 of RR No. 13-99 relative to
the sale, exchange or disposition by a natural person of his
"principal residence".
The residential address shown in the latest income tax return filed
by the vendor/transferor immediately preceding the date of sale
of said real property shall be treated, for purposes of these
Regulations, as a conclusive presumption about his true
residential address, the certification of the Barangay Chairman, or
Building Administrator (in case of condominium unit), to the
contrary notwithstanding, in accordance with the doctrine of
admission against interest or the principle of estoppel.
The seller/transferor's compliance with the preliminary conditions
for exemption from the 6% capital gains tax under Sec. 3(1) and
(2) of the Regulations will be sufficient basis for the RDO to
approve and issue the Certificate Authorizing Registration (CAR)
or Tax Clearance Certificate (TCC) of the principal residence sold,
exchanged or disposed by the aforesaid taxpayer. Said CAR or
TCC shall state that the said sale, exchange or disposition of the
taxpayer's principal residence is exempt from capital gains tax
pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to
compliance with the post-reporting requirements imposed under
Sec. 3(3) of the Regulations.
1) What is a Principal Residence (Section 2.1, RR 13-99 as
amended by RR 14-00)
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
(2) “Principal Residence” — shall refer to the dwelling house,
including the land on which it is situated, where the husband
and wife or an unmarried individual, whether or not qualified as
head of family, and members of his family reside. Actual
occupancy of such principal residence shall not be considered
interrupted or abandoned by reason of the individual’s
temporary absence therefrom due to travel or studies or work
abroad or such other similar circumstances. Such principal
residence must be characterized by permanency in that it must
be the dwelling house to which, whenever absent, the said
individual intends to return.
2) Conditions for Exemption (Section 3, RR 13-99 as
amended by RR 14-00)
SECTION 3. Conditions of Exemption. — The general provisions
of the Code to the contrary notwithstanding, capital gains
presumed to have been realized from the sale, exchange or
disposition by a natural person of his principal residence shall
not be imposed with income tax, including the six percent (6%)
capital gains tax, subject to the following conditions:
(1) Sworn Declaration Requirement. — He shall submit a
Sworn Declaration (ANNEX A hereof) of his intent to avail of
the tax exemption herein provided which shall be filed with
the aforementioned Revenue District Office (RDO) having
jurisdiction over the location of the principal residence within
thirty (30) days from the date of its sale, exchange or
disposition, inclusive of the following:
(a) Duly Accomplished Capital Gains Tax Return (BIR Form
No. 1706);
(b) Proof of payment of documentary stamp tax on
conveyance of real property;
(c) A sworn statement from the Barangay Chairman that his
principal residence is located within the jurisdiction of that
Barangay and has been his residence as of the date of sale,
exchange or disposition thereof;
(d) A duplicate original copy of the Deed of Conveyance of
his Principal Residence;
(e) Photocopy of the Transfer Certificate of Title (TCT) or
Condominium Certificate of Title (CCT), in case of a
condominium unit (covering the principal residence sold,
exchanged or disposed); and
(f) Latest Tax Declaration of the said principal residence
(land and improvement).
(2) Post Reporting Requirement. — The proceeds from the
sale, exchange or disposition of his principal residence must
be fully utilized in acquiring or constructing his new principal
residence within eighteen (18) calendar months from date of
its sale, exchange or disposition. In order to show proof that
positive action was undertaken to utilize the proceeds for the
acquisition or construction of his new principal residence
within the 18-month reglementary period, he shall submit to
the RDO concerned, within thirty (30) days from the lapse of
the said period, the following documents:
(a) A sworn statement that the total proceeds from the sale
of his old principal residence has been actually utilized in the
acquisition or construction of his new principal residence or,
if the construction of his new principal residence is still in
progress, a sworn statement that such amount shall be fully
utilized to procure the necessary materials and pay for the
cost of labor and other expenses for the construction
thereof;
(b) A certified statement from his architect or engineer, or
both, showing the cost of materials and labor for the
construction of his new principal residence;
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(c) A certified copy of the Building Permit issued by the
Office of the Building Official of the City or Municipality
where his new principal residence shall be constructed, as
well as photocopies of documents (e.g. building specification
plan, construction plans, construction cost estimates)
submitted with his application for said permit;
(d) In case his new principal residence is acquired by
purchase, a duplicate original copy of the Deed of Absolute
Sale covering the purchase of his new principal residence.
(3) The tax exemption herein granted may be availed of only
once every ten (10) years;
(4) The historical cost or adjusted basis of his old principal
residence sold, exchanged or disposed shall be carried over to
the cost basis of his new principal residence; and
(5) If there is no full utilization of the proceeds of sale,
exchange or disposition of his old principal residence for the
acquisition or construction of his new principal residence, he
shall be liable for deficiency capital gains tax which shall be
computed in accordance with Sec. (4) hereof . Accordingly,
only a fractional part (which the utilized amount bears to the
gross selling price) of the historical cost of the old principal
residence sold shall be carried over to the cost basis of the
new principal residence.
3) Consequence if Requisites are Not Met (Section 5, RR
13-99 as amended by RR 14-00)
2. NON-RESIDENT ALIENS
a) Engaged in Trade or Business
i. Taxable Income (Section 25(A)(1))
Section 25. Tax on Non-resident Alien Individual. –
(A) Non-resident Alien Engaged in Trade or Business Within the
Philippines. –
(1) In General. – A non-resident alien individual engaged in
trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all
sources within the Philippines. A non-resident alien individual
who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a ‘non-resident
alien doing business in the Philippines’. Section 22(G) of this
Code notwithstanding.
ii. Passive Income (Section 25(A)(2); Section 27(D)(3) last
paragraph)
Section 25. Tax on Non-resident Alien Individual. –
(A) Non-resident Alien Engaged in Trade or Business Within the
Philippines. –
(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarters of
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association, Interests, Royalties, Prizes, and
Other Winnings. – Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a regional
operating headquarter of multinational company, or the share
of a non-resident alien individual in the distributable net
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
income after tax of a partnership (except a general
professional partnership) of which he is a partner, or the
share of a non-resident alien individual in the net income after
tax of an association, a joint account, or a joint venture
taxable as a corporation of which he is a member or a co-
venturer; interests; royalties (in any form); and prizes
(except prizes amounting to Ten thousand pesos (PhP10,000)
or less which shall be subject to tax under Subsection (B)(1)
of Section 24); and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount
thereof: Provided, however, That royalties on books as well as
other literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on the
total amount thereof: Provided, further, That cinematographic
films and similar works shall be subject to the tax provided
under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from
the tax imposed under this Subsection: Provided, finally, that
should the holder of the certificate pre-terminate the deposit
or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the
long-term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years .... . 5%;
Three (3) years to less than four (4) years ..12%; and
Less than three (3) years .............................20%.
x x x x x x x x
Section 27. Rates of Income Tax on Domestic Corporations.
– Provided, further, That the Commissioner shall have been duly
(D) Rates of Tax on Certain Passive Incomes. –
(3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. – Income derived by a depository
bank under the expanded foreign currency deposit system
from foreign currency transactions with non-residents,
offshore banking units in the Philippines, local commercial
banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units
and other depository banks under the expanded foreign
currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified
by the Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore
banking units in the Philippines or other depository banks
under the expanded system, shall be subject to a final tax at
the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks
under the expanded system shall be exempt from
income tax.
iii. Capital Gains on Sale of Shares of Stock (Section 24(C))
Section 24. Income Tax Rates. –
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. – The provisions of Section 39(B)
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PREPARED BY:
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notwithstanding, a final tax at the rate of fifteen percent (15%)
is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.
iv. Capital Gains on Sale of Real Property (Section 24(D)(1)
& (2))
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on the
gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher,
is hereby imposed upon capital gains presumed to have been
realized from the sale, exchange, or other disposition of real
property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional
sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
-controlled corporations shall be determined either under
Section 24(A) or under this Subsection, at the option of the
taxpayer.
(2) Exception. – The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of
which is fully utilized in acquiring or constructing a new principal
residence within eighteen (18) calendar months from the date
of sale or disposition, shall be exempt from the capital gains tax
imposed under this Subsection: Provided, That the historical
cost or adjusted basis of the real property sold or disposed shall
be carried over to the new principal residence built or acquired:
notified by the taxpayer within thirty (30) days from the date
of sale or disposition through a prescribed return of his intention
to avail of the tax exemption herein mentioned: Provided, still
further, That the said tax exemption can only be availed of once
every ten (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the portion of
the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this
purpose, the gross selling price or fair market value at the time
of sale, whichever is higher, shall be multiplied by a fraction
which the unutilized amount bears to the gross selling price in
order to determine the taxable portion and the tax prescribed
under paragraph (1) of this Subsection shall be imposed
thereon.
b) NOT Engaged in Trade or Business
i. All Income (Section 25(B))
Section 25. Tax on Non-resident Alien Individual. –
(B) Non-resident Alien Individual Not Engaged in Trade or
Business Within the Philippines. – There shall be levied,
collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every non-
resident alien individual not engaged in trade or business within
the Philippines as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income, and
capital gains, a tax equal to twenty-five percent (25%) of such
income. Capital gains realized by a non-resident alien individual
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
not engaged in trade or business in the Philippines from the sale
of shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections
(C) and (D) of Section 24.
ii. Capital Gains on Sale of Shares of Stock (Section 24(C) in
relation to Section 25(B))
Section 24. Income Tax Rates. –
(C) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. – The provisions of Section 39(B)
notwithstanding, a final tax at the rate of fifteen percent (15%)
is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.
iii. Capital Gains on Sale of Real Property (Section 25(B))
Section 25. Tax on Non-resident Alien Individual. –
(B) Non-resident Alien Individual Not Engaged in Trade or
Business Within the Philippines. – There shall be levied,
collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every non-
resident alien individual not engaged in trade or business within
the Philippines as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income, and
capital gains, a tax equal to twenty-five percent (25%) of such
income. Capital gains realized by a non-resident alien individual
not engaged in trade or business in the Philippines from the sale
of shares of stock in any domestic corporation and real property
shall be subject to the income tax prescribed under Subsections
(C) and (D) of Section 24.
c) Special Aliens (Section 25(F) in relation to Section 25(C)
and President’s Veto: Section 4 of RR 8-2018)
Section 25. Tax on Non-resident Alien Individual. –
(F) The preferential tax treatment provided in Subsections (C),
3. MINIMUM WAGE EARNERS (MWE)
(D), and (E) of this Section shall not be applicable to regional
a) Definition (Section 22(HH)
headquarters (RHQs), regional operating headquarters (ROHQs),
offshore banking units (OBUs) or petroleum service contractors
and subcontractors registering with the Securities and Exchange
Commission (SEC) after January 1, 2018: Provided, however,
That existing RHQs/ROHQs, OBUs or petroleum service
contractors and subcontractors presently availing of preferential
tax rates for qualified employees shall continue to be entitled to
avail of the preferential tax rate for present and future qualified
employees.
x x x x x x x x
Section 25. Tax on Non-resident Alien Individual. –
(C) Alien Individual Employed by Regional or Area Headquarters
and Regional Operating Headquarters of Multinational Companies.
– There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual
employed by regional or area headquarters and regional
operating headquarters established in the Philippines by
multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as
honoraria and allowances, from such regional or area
headquarters and regional operating headquarters, a tax equal to
fifteen percent (15%) of such gross income: Provided, however,
That the same tax treatment shall apply to Filipinos employed and
occupying the same position as those of aliens employed by these
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PREPARED BY:
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multinational companies. For purposes of this Chapter, the term
‘multinational company’ means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices
in the Asia-Pacific Region and other foreign markets.
x x x x x x x x
II. DIRECT VETO
By the power vested in me by Article VJ, Section 27(2) of the
Constitution, which provides that ·'rhe President shall have the
power to veto any particular item or items in an appropriation.
revenue, or tariff bill," I hereby register the following line item
vetoes to this Law:
A. Reduced income tax rate of employees of Regional Headquarters
(RHQs), Regional Operating Headquarters (ROHQs), Offshore
Banking Units (OBUs), and Petroleum Service Contractors and
Subcontractors.
I am constrained to veto the proviso under Section 6(F) of the
enrolled bill that effectively maintains the special tax rate of 15% of
gross income for the aforementioned employees, to wit:
"PROVIDED, HOWEVER, THAT EXISTING RHQs/ROHQs, OBUs OR
PETROLEUM SERVICE CONTRACTORS AND SUBCONTRACTORS
PRESENTLY AVAILING OF PREFERENTIAL TAX RATES FOR
QUALIFIED EMPLOYEES SHALL CONTINUE TO BE ENTITLED TO
AVAIL OF THE PREFERENTIAL TAX RATE FOR PRESENT AND
FUTURE QUALIFIED EMPLOYEES."
i. Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies
ii. Alien Individual Employed by Offshore Banking Units
iii. Alien Individual Employed by Petroleum Service
Contractor and Subcontractor
(HH) The term ‘minimum wage earner’ shall refer to a worker in the
private sector paid the statutory minimum wage, or to an employee
in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where
he/she is assigned.
b) Taxation (Section 24(A)(2)(a) last paragraph, TRAIN; RR
8-2018)
Section 24. Income Tax Rates. –
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines. –
(2) Rates of Tax on Taxable Income of Individuals. – The tax
shall be computed in accordance with and at the rates
established in the following schedule:
Provided, That minimum wage earners as defined in Section
22(HH) of this Code shall be exempt from the payment of
income tax on their taxable income: Provided, further, That
the holiday pay, overtime pay, nightshift differential and
hazard pay received by such minimum wage earners shall
likewise be exempt from income tax.
c) Coverage of Exemption (Section 3(B), last par. RR 8-2018)
SECTION 3. INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT
ALIEN OF THE PHILIPPINES. - In general, the income tax on the
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
individual's taxable income shall be computed based on the
following schedules as provided under Sec. 24(A)(2)(a) of the Tax
Code, as amended:
Minimum wage earners shall be exempt from the payment of
income tax based on their statutory minimum wage rates. The
holiday pay, overtime pay, night shift differential pay and hazard
pay received by such earner are likewise exempt.
4. MEMBERS OF GENERAL PROFESSIONAL PARTNERSHIP
(Section 26, NIRC; Sec. 3(C), RR 8-2018)
Section 26. Tax Liability of Members of General Professional
Partnerships. – A general professional partnership as such shall not
be subject to the income tax imposed under this Chapter. Persons
engaging in business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual
capacities.
For purposes of computing the distributive share of the partners, the
net income of the partnership shall be computed in the same manner
as a corporation.
Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
x x x x x x x x
SECTION 3. INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT
ALIEN OF THE PHILIPPINES. - In general, the income tax on the
individual's taxable income shall be computed based on the following
schedules as provided under Sec. 24(A)(2)(a) of the Tax Code, as
amended:
(C) Self-Employed Individuals Earning Income Purely from Self-
Employment or Practice of Profession. - Individuals earning income
purely from self-employment and/or practice of profession whose
gross sales/receipts and other non-operating income does not exceed
the value-added tax (VAT) threshold as provided under Section 109
(BB) of the Tax Code, as amended, shall have the option to avail of:
I. The graduated rates under Section 24(A)(2)(a) of the Tax Code,
as amended; OR
2. An eight percent (8%) tax on gross sales or receipts and other
non operating income in excess of two hundred fifty thousand pesos
(P250,000.00) in lieu of the graduated income tax rates under
Section 24(A) and the percentage tax under Section 116 all under
the Tax Code, as amended.
Unless the taxpayer signifies the intention to elect the 8% income tax
rate in the 1st Quarter Percentage and/or Income Tax Return, or on
the initial quarter return of the taxable year after the commencement
of a new business/practice of profession, the taxpayer shall be
considered as having availed of the graduated rates under Section
24(A)(2)(a) of the Tax Code, as amended. Such election shall be
irrevocable and no amendment of option shall be made for the said
taxable year.
The option to be taxed at 8% income tax rate is not available to a
VAT-registered taxpayer, regardless of the amount of gross
sales/receipts, and to a taxpayer who is subject to Other Percentage
Taxes under Title V of the Tax Code, as amended, except those
subject under Section 116 of the same Title. Likewise, partners of a
General Professional Partnership (GPP) by virtue of their distributive
share from GPP which is already net of cost and expenses cannot
avail of the 8% income tax rate option.
A taxpayer who signifies the intention to avail of the 8% income tax
rate option, and is conclusively qualified for said option at the end of
the taxable year [annual gross sales/receipts and other non-operating
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PREPARED BY:
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income did not exceed the VAT threshold (P3,000,000.00)]. shall
compute the final annual income tax due based on the actual annual
gross sales/receipts and other non-operating income. The said
income tax due shall be in lieu of the graduated rates of income tax
and the percentage tax under Sec. 116 of the Tax Code, as amended.
The Financial Statements (FS) is not required to be attached in filing
the final income tax return. However, existing rules and regulations
on bookkeeping and invoicing/receipting shall still apply.
A taxpayer shall automatically be subject to the graduated rates
under Section 24(A)(2)(a) of the Tax Code, as amended, even if the
flat 8% income tax rate option is initially selected, when taxpayer's
gross sales/receipts and other non-operating income exceeded the
VAT threshold during the taxable year. In such case, his income tax
shall be computed under the graduated income tax rates and shall be
allowed a tax credit for the previous quarter/s income tax payment/s
under the 8% income tax rate option.
In addition, a taxpayer subject to the graduated income tax rates
(either selected this as the income tax regime, or failed to signify
chosen intention or failed to qualify to be taxed at the 8% income tax
rate) is also subject to the applicable business tax, if any. Subject to
the provisions of Section 8 of these Regulations, an FS shall be
required as an attachment to the annual income tax return even if
the gross sales/receipts and other non-operating income is les_s than
the VAT threshold. However, the annual income tax return of a
taxpayer with gross sales/receipts and other non-operating income of
more than the said VAT threshold shall be accompanied by an audited
FS.
Taxable income for individuals earning income from self-
employment/practice of profession shall be the net income, if
taxpayer opted to be taxed at graduated rates or has failed to signify
the chosen option. However, if the option availed is the 8% income
tax rate, the taxable base is the gross sales/receipts and other non-
operating income.
II. CORPORATIONS
1. DOMESTIC CORPORATIONS
a) In General (Section 27(A))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(A) In General. – Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation,
as defined in Section 22(B) of this Code and taxable under this
Title as a corporation, organized in, or existing under the laws of
the Philippines: Provided, That effective January 1, 2009, the rate
of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year
shall be deemed to have been earned and spent equally for each
month of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation
of the Secretary of Finance, may, effective January 1, 2000, allow
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
corporations the option to be taxed at fifteen percent (15%) of
gross income as defined herein, after the following conditions
have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National
Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to
total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available
only to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation
shall be irrevocable for three (3) consecutive taxable years during
which the corporation is qualified under the scheme.
c) Passive Income
For purposes of this Section, the term ‘gross income’ derived from
business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold. ‘Cost of goods
sold’ shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location
and use.
For a trading or merchandising concern, ‘cost of goods sold’ shall
include the invoice cost of the goods sold, plus import duties,
freight in transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in transit.
For a manufacturing concern, ‘cost of goods manufactured and
sold’ shall include all costs of production of finished goods, such
as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring
the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, ‘gross
income’ means gross receipts less sales returns, allowances and
discounts.
b) Special Corporations
i. Proprietary Educational Institutions and Hospitals
(Section 27(B))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(B) Proprietary Educational Institutions and Hospitals. –
Proprietary educational institutions and hospitals which are non-
profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this
Subsection, the term ‘unrelated trade, business or other activity’
means any trade, business or other activity, the conduct of which
is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function. A ‘proprietary educational institution’ is any private
school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations.
1) What is Proprietary?
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ii. Government Owned or Controlled Corporations (Section
27(C))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(C) Government-owned or -Controlled Corporations, Agencies or
Instrumentalities.– The provisions of existing special or general
laws to the contrary notwithstanding, all corporations, agencies,
or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the
Social Security System (SSS), the Philippine Health Insurance
Corporation (PHIC), and the local water districts (LWD) shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in a similar
business, industry, or activity.
i. Interest and Royalties (Section 27(D)(1); Section 28(A)
(7)(b))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(D) Rates of Tax on Certain Passive Incomes. –
(1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. – A final tax at the rate
of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived
by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to
a final income tax at the rate of fifteen percent (15%) of such
interest income.
x x x x x x x x
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(b) Income Derived under the Expanded Foreign Currency
Deposit System. – Income derived by a depository bank
under the expanded foreign currency deposit system from
foreign currency transactions with non-residents, offshore
banking units in the Philippines, local commercial banks
including branches of foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and
other depository banks under the expanded foreign currency
deposit system shall be exempt from all taxes, except net
income from such transactions as may be specified by the
Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository
banks under said expanded system to residents other than
depository banks under the expanded system shall be
subject to a final tax at the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
ii. Dividends (Section 27(D)(4))
Section 27. Rates of Income Tax on Domestic Corporations.
– upon recommendation by the Monetary Board to be subject to
(D) Rates of Tax on Certain Passive Incomes. –
(4) Intercorporate Dividends. – Dividends received by a
domestic corporation from another domestic corporation shall
not be subject to tax.
d) Capital Gains
i. Sale of Real Property Classified as Capital Asset (Section
27(D)(5))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(D) Rates of Tax on Certain Passive Incomes. –
(5) Capital Gains Realized from the Sale, Exchange or
Disposition of Lands and/or Buildings. – A final tax of six
percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of
lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets,
based on the gross selling price or fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, of such lands and/or buildings.
ii. Sale of Shares of Stock NOT Traded in the Stock
Exchange (Section 27(D)(2))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(D) Rates of Tax on Certain Passive Incomes. –
(2) Capital Gains from the Sale of Shares of Stock Not Traded
in the Stock Exchange. – A final tax at the rate of fifteen
percent (15%) shall be imposed on net capital gains realized
during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except
shares sold or disposed of through the stock exchange.
iii. Sale of Shares of Stock Traded in the Stock Exchange
(Section 127(A))
Section 127. Tax on Sale, Barter or Exchange of Shares of
Stock Listed and Traded through the Local Stock Exchange
or through Initial Public Offering. –
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange. – There shall be
levied, assessed and collected on every sale, barter, exchange
or other disposition of shares of stock listed and traded through
the local stock exchange other than the sale by a dealer in
securities, a tax at the rate of six-tenths of one percent (6⁄10 of
1%) of the gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed
which shall be paid by the seller or transferor.
e) Expanded Foreign Currency Deposit System (Section 27(D)
(3))
Section 27. Rates of Income Tax on Domestic Corporations.
– incurred to produce the merchandise to bring them to their
(D) Rates of Tax on Certain Passive Incomes. –
(3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. – Income derived by a depository
bank under the expanded foreign currency deposit system from
foreign currency transactions with non-residents, offshore
banking units in the Philippines, local commercial banks,
including branches of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units and other depository
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PREPARED BY:
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banks under the expanded foreign currency deposit system
shall be exempt from all taxes, except net income from such
transactions as may be specified by the Secretary of Finance,
the regular income tax payable by banks: Provided, however,
That interest income from foreign currency loans granted by
such depository banks under said expanded system to residents
other than offshore banking units in the Philippines or other
depository banks under the expanded system, shall be subject
to a final tax at the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under the
expanded system shall be exempt from income tax.
f) Minimum Corporate Income Tax (MCIT)
i. Tax Rate and Base (Section 27(E)(1))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(E) Minimum Corporate Income Tax on Domestic Corporations.
–
(1) Imposition of Tax. – A minimum corporate income tax of
two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such
corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
ii. Carry Forward Excess Minimum Tax (Section 27(E)(2))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(E) Minimum Corporate Income Tax on Domestic Corporations.
–
(2) Carry Forward of Excess Minimum Tax. – Any excess of
the minimum corporate income tax over the normal income
tax as computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax
for the three (3) immediately succeeding taxable years.
iii. Gross Income; Cost of Goods Sold; Cost of Goods
Manufactures and Sold; Cost of Services (Section 27(E)
(4))
Section 27. Rates of Income Tax on Domestic Corporations.
–
(E) Minimum Corporate Income Tax on Domestic Corporations.
–
(4) Gross Income Defined. – For purposes of applying the
minimum corporate income tax provided under Subsection (E)
hereof, the term ‘gross income’ shall mean gross sales less
sales returns, discounts and allowances and cost of goods
sold.
‘Cost of goods sold’ shall include all business expenses directly
present location and use.
For a trading or merchandising concern, ‘cost of goods sold’
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold including insurance while the
goods are in transit.
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
For a manufacturing concern, ‘cost of goods manufactured
and sold’ shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
In the case of taxpayers engaged in the sale of service, ‘gross
income’ means gross receipts less sales returns, allowances,
discounts and cost of services. ‘Cost of services’ shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies;
Provided, however, That in the case of banks, ‘cost of
services’ shall include interest expense.
Chamber of Real Estate and Builders’ Association (CREBA), Inc.
v. Romula
The Manila Banking Corporation v. CIR
2. RESIDENT FOREIGN CORPORATIONS
a) In General (Section 28(A)(1))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(1) In General. – Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month
of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be
granted the option to be taxed at fifteen percent (15%) on
gross income under the same conditions, as provided in Section
27(A).
b) Minimum Corporate Income Tax on Resident Foreign
Corporations (Section 28(A)(2))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(2) Minimum Corporate Income Tax on Resident Foreign
Corporations. – A minimum corporate income tax of two percent
(2%) of gross income, as prescribed under Section 27(E) of this
Code, shall be imposed, under the same conditions, on a
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resident foreign corporation taxable under paragraph (1) of this
Subsection.
c) Branch Profits Remittance Tax (BPRT) (Section 28(A)(5))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(5) Tax on Branch Profits Remittances. – any profit remitted by
a branch to its head office shall be subject to a tax of fifteen
percent (15%) which shall be based on the total profits applied
or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered
with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections
57 and 58 of this Code: Provided, That interests, dividends,
rents, royalties, including remuneration for technical services,
salaries, wages, premiums, annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign corporation
during each taxable year from all sources within the Philippines
shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in
the Philippines.
d) Special Foreign Corporations
i. International Carriers (Section 28(A)(3)(a))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(3) International Carrier. – An international carrier doing
business in the Philippines shall pay a tax of two and one-half
percent (21/2 %) on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. – ‘Gross Philippine Billings’
refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo, and mail originating
from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document: Provided,
That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port
or point in the Philippines: Provided, further, That for a
flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part
of Gross Philippine Billings.
ii. International Shipping (Section 28(A)(3)(b))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(3) International Carrier. – An international carrier doing
business in the Philippines shall pay a tax of two and one-half
percent (21/2 %) on its ‘Gross Philippine Billings’ as defined
hereunder:
(b) International Shipping. – ‘Gross Philippine Billings’
means gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage
or freight documents.
Provided, That international carriers doing business in the
Philippines may avail of a preferential rate or exemption
from the tax herein imposed on their gross revenue derived
from the carriage of persons and their excess baggage on
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
the basis of an applicable tax treaty or international
agreement to which the Philippines is a signatory or on the
basis of reciprocity such that an international carrier, whose
home country grants income tax exemption to Philippine
carriers, shall likewise be exempt from the tax imposed
under this provision.
iii. Offshore Banking Units (Section 28(A)(4))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(4) Offshore Banking Units. – The provisions of any law to the
contrary notwithstanding, income derived by offshore banking
units authorized by the Bangko Sentral ng Pilipinas (BSP),
from foreign currency transactions with non-residents, other
offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
offshore banking units shall be exempt from all taxes except
net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary
Board, which shall be subject to the regular income tax
payable by banks: Provided, however, That any interest
income derived from foreign currency loans granted to
residents other than offshore banking units or local
commercial banks, including local branches of foreign banks
that may be authorized by the BSP to transact business with
offshore banking units, shall be subject only to a final tax at
the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with said offshore banking
units shall be exempt from income tax.
iv. Regional or Area Headquarters and Regional Operating
Headquarters (Section 28(A)(6))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(6) Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. –
(a) Regional or area headquarters as defined in Section
22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
e) Passive Income
i. Interest and Royalties (Section 28(A)(7)(a))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(a) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. – Interest from any currency
bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate
of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7
1/2%) of such interest income.
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ii. Dividends (Section 28(A)(7)(d))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(d) Intercorporate Dividends. – Dividends received by a
resident foreign corporation from a domestic corporation
liable to tax under this Code shall not be subject to tax
under this Title.
f) Capital Gains
i. Sale of Real Property Classified as a Capital Asset
(Section 28(A)(1))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(1) In General. – Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws
of any foreign country, engaged in trade or business within
the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard
to the specific date when sales, purchases and other
transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally
for each month of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by
the new rate within the fiscal year by the taxable income of
the corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall
be granted the option to be taxed at fifteen percent (15%) on
gross income under the same conditions, as provided in
Section 27(A).
ii. Sale of Shares of Stock NOT Traded in the Stock
Exchange (Section 28(A)(7)(c) in relation to Section
27(D)(2))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(c) Capital Gains from Sale of Shares of Stock Not Traded in
the Stock Exchange. – A final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the
stock exchange:
Not over PhP100,000 ................................... 5%
On any amount in excess of PhP100,000 .... 10%
x x x x x x x x
Section 27. Rates of Income Tax on Domestic Corporations.
–
(D) Rates of Tax on Certain Passive Incomes. –
(2) Capital Gains from the Sale of Shares of Stock Not Traded
in the Stock Exchange. – A final tax at the rate of fifteen
percent (15%) shall be imposed on net capital gains realized
TAXATION I
PRIMARY REFERENCE: ATTY. ZARATE’S SYLLABUS/DE LEON
during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except
shares sold or disposed of through the stock exchange.
iii. Sale of Shares of Stock Traded in the Stock Exchange
(Section 127(A))
Section 127. Tax on Sale, Barter or Exchange of Shares of
Stock Listed and Traded through the Local Stock Exchange
or through Initial Public Offering. –
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
and Traded through the Local Stock Exchange. – There shall be
levied, assessed and collected on every sale, barter, exchange
or other disposition of shares of stock listed and traded through
the local stock exchange other than the sale by a dealer in
securities, a tax at the rate of six-tenths of one percent (6⁄10 of
1%) of the gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed
which shall be paid by the seller or transferor.
g) Income Derived Under the Expanded Foreign Currency
Deposit System (Section 28(A)(7)(b))
Section 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. –
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. –
(b) Income Derived under the Expanded Foreign Currency
Deposit System. – Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with non-residents, offshore banking units
in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng
Pilipinas (BSP) to transact business with foreign currency
deposit system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from
all taxes, except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the regular income tax
payable by banks: Provided, however, That interest income
from foreign currency loans granted by such depository banks
under said expanded system to residents other than depository
banks under the expanded system shall be subject to a final tax
at the rate of ten percent (10%).
Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under the
expanded system shall be exempt from income tax.
h) Branch Profit Remittance Tax
Marubeni Corp v. Commissioner
Bank of America NT & SA v. CA & CIR
3. NON-RESIDENT FOREIGN CORPORATIONS
a) In General (Section 28(B)(1))
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(1) In General. – Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%) of
the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends,
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rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax
under subparagraph 5(c): Provided, That effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
b) Special Non-Resident Foreign Corporations
i. Non-Resident Cinematographic Film Owner, Lessor or
Distributor (Section 28(B)(2), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(2) Non-resident Cinematographic Film Owner, Lessor or
Distributor. – A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent (25%) of its
gross income from all sources within the Philippines.
ii. Non-Resident Owner or Lessor of Vessels Chartered by
Philippine Nationals (Section 28(B)(3), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(3) Non-resident Owner or Lessor of Vessels Chartered by
Philippine Nationals. – A non-resident owner or lessor of
vessels shall be subject to a tax of four and one-half percent
(4 1/2%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by
the Maritime Industry Authority.
iii. Non-Resident Owner or Lessor of Aircraft, Machineries
and Other Equipment (Section 28(B)(4), NIRC)
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(4) Non-resident Owner or Lessor of Aircraft, Machineries and
Other Equipment. – Rentals, charters and other fees derived
by a non-resident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.
c) Passive Income
i. Interest on Foreign Loans (Section 28(B)(5)(a))
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(5) Tax on Certain Incomes Received by a Non-resident
Foreign Corporation. –
(a) Interest on Foreign Loans. – A final withholding tax at
the rate of twenty percent (20%) is hereby imposed on the
amount of interest on foreign loans contracted on or after
August 1, 1986;
ii. Dividends (Section 28(B)(5)(b))
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(5) Tax on Certain Incomes Received by a Non-resident
Foreign Corporation. –
(b) Intercorporate Dividends. – A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on the
amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid as
provided in Section 57(A) of this Code, subject to the
condition that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against the tax
due from the non-resident foreign corporation taxes deemed
to have been paid in the Philippines equivalent to twenty
percent (20%), which represents the difference between the
TAXATION I PREPARED BY:
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regular income tax of thirty-five percent (35%) and the

fifteen percent (15%) tax on dividends as provided in this
subparagraph: Provided, That effective January 1, 2009, the a) Definition and Tax Rate (Section 29(A) and (B)(1))
credit against the tax due shall be equivalent to fifteen
Section 29. Imposition of Improperly Accumulated Earnings
percent (15%), which represents the difference between the
Tax. –
regular income tax of thirty percent (30%) and the fifteen
(A) In General. – In addition to other taxes imposed by this Title,
percent (15%) tax on dividends;
there is hereby imposed for each taxable year on the improperly
accumulated taxable income of each corporation described in
Commissioner v. Procter & Gamble
Subsection B hereof, an improperly accumulated earnings tax
equal to ten percent (10%) of the improperly accumulated
taxable income.
Commissioner v. Wander Phils.
b) Corporations Subject to IAET (Section 29(B)(1))

Section 29. Imposition of Improperly Accumulated Earnings

d) Capital Gains
i. Sale of Real Property Classified as Capital Asset (Section
28(B)(1))
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(1) In General. – Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax
under subparagraph 5(c): Provided, That effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
ii. Sale of Shares of Stock NOT Traded in the Stock
Exchange (Section 28(B)(5)(c))
Section 28. Rates of Income Tax on Foreign Corporations. –
(B) Tax on Non-resident Foreign Corporation. –
(5) Tax on Certain Incomes Received by a Non-resident
Foreign Corporation. –
(c) Capital Gains from Sale of Shares of Stock not Traded in
the Stock Exchange. – A final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the
stock exchange:
Not over PhP100,000 ................................. 5%
On any amount in excess of PhP100,000..... 10%
iii. Sale of Shares of Stock Traded in the Stock Exchange
(Section 127(A))
Tax. –
(B) Tax on Corporations Subject to Improperly Accumulated
Earnings Tax. –
(1) In General. – The improperly accumulated earnings tax
imposed in the preceding Section shall apply to every
corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders
of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
c) Exceptions (Section 29(B)(2))
Section 29. Imposition of Improperly Accumulated Earnings
Tax. –
(B) Tax on Corporations Subject to Improperly Accumulated
Earnings Tax. –
(2) Exceptions. – The improperly accumulated earnings tax as
provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
d) Evidence of Purpose to Avoid Income Tax (Section 29(C))
Section 29. Imposition of Improperly Accumulated Earnings
Tax. –
(C) Evidence of Purpose to Avoid Income Tax. –
(1) Prima Facie Evidence. – The fact that any corporation is a
mere holding company or investment company shall be prima
facie evidence of a purpose to avoid the tax upon its
shareholders or members.
(2) Evidence Determinative of Purpose. – The fact that the
earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear
preponderance of evidence, shall prove to the contrary.

Section 127. Tax on Sale, Barter or Exchange of Shares of e) Improperly Accumulated Taxable Income (Section 29(D))
Stock Listed and Traded through the Local Stock Exchange
Section 29. Imposition of Improperly Accumulated Earnings
or through Initial Public Offering. –
Tax. –
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed
(D) Improperly Accumulated Taxable Income. – For purposes of
and Traded through the Local Stock Exchange. – There shall be
this Section, the term ‘improperly accumulated taxable income’
levied, assessed and collected on every sale, barter, exchange
means taxable income adjusted by:
or other disposition of shares of stock listed and traded through
(1) Income exempt from tax;
the local stock exchange other than the sale by a dealer in
(2) Income excluded from gross income;
securities, a tax at the rate of six-tenths of one percent (6⁄10 of
(3) Income subject to final tax; and
1%) of the gross selling price or gross value in money of the
(4) The amount of net operating loss carry-over deducted;
shares of stock sold, bartered, exchanged or otherwise disposed
And reduced by the sum of:
which shall be paid by the seller or transferor.
(1) Dividends actually or constructively paid; and
4. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) (2) Income tax paid for the taxable year.
(Repealed by CREATE)

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Provided, however, That for corporations using the calendar year James v. US
basis, the accumulated earnings tax shall not apply on improperly
accumulated income as of December 31, 1997. In the case of
corporations adopting the fiscal year accounting period, the
improperly accumulated income not subject to this tax, shall be 4) Income from Whatever Source
reckoned, as of the end of the month comprising the twelve (12)-
month period of fiscal year 1997-1998.

5. EXEMPTION FROM TAX ON CORPORATION Gutierrez v. Collector

a) Educational
Jesus Sacred Heart College v. Collector of Internal Revenue
a. Forgiveness of Indebtedness (Section 50, RR No. 2)

Farmers & Merchants Bank v. CIR

b) Cooperatives
Dumaguete Cathedral Credit Cooperative (DCCCO) v. CIR

ii. Actual v. Constructive Receipt

Limpan Investment Corp. v. CIR

CHAPTER IV – INCOME

I. TAXABLE INCOME
c) Recognition of Income
d) Methods of Accounting
1. DEFINITION (Section 31, NIRC)
i. Cash Method v. Accrual Method
2. SECTIONS 36 – 38, RR No. 2
ii. Installment Payment v. Deferred Payment v. Percentage
3. DIFFERENCE BETWEEN CAPITAL AND INCOME
of Completion

Madrigal v. Rafferty
e) Income is NOT Exempt

4. REQUISITES FOR INCOME TO BE TAXABLE II. GROSS INCOME

a) Existence of Income
b) Realization of Income 1. DEFINITION (Section 32(A), NIRC)
i. Tests in Determining Income / Doctrines on 2. GROSS INCOME v. NET INCOME v. TAXABLE INCOME
Determination of Taxable Income 3. CLASSIFICATION OF INCOME SUBJECT TO TAX
1) Realization Test a) Compensation Income
i. Definition (Section 2.78.1 (A), RR 2-98; Read RR 8-2018)
ii. Backwages
iii. Exception: Minimum Wage Earners (Section 24(A), NIRC)
Eisner v. Macomber
iv. Fringe Benefits (Section 33(A), NIRC)
1) Definition and Inclusions (Section 33(B), NIRC)
2) Rate (Section 33(A), NIRC)
3) Tax Base (Section 33(A), NIRC)
Fisher v. Trinidad
4) Exceptions (Section 33(C), NIRC)
a. Exempt Under Special Laws
b. Contributions of Employers to Retirement, Insurance
2) Doctrine of Command or Control of Income and Hospitalization Benefit Plans
c. Benefits to Rank & File Employees
d. De Minimis Benefits (Section 2.78.1(A)(3), RR 2-98,
as amended by RR 11-2018)
Helvering v. Horst

Collector v. Henderson
3) Claim of Right Doctrine or Doctrine of Ownership

CIR v. Castaneda
Commissioner v. Javier

b) Income from the Exercise of Profession

Commissioner v. Wilcox c) Income from Business (Sections 43 – 47, Revenue
Regulations No. 2)

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iv. Rental Income

1) Lease of Personal Property
Bureau of Internal Revenue v. First E-Bank Tower Condominium 2) Lease of Real Property
Corp. a. Leasehold Improvements by Lessee
b. Advance Rent
f) Annuities, Proceeds from Life Insurance or Other Type of
Insurance
d) Income Derived from Dealings in Property
g) Prizes and Winnings
i. Types of Properties
h) Pensions, Retirement Benefits, or Separation Pay
1) Ordinary Assets (Section 39(A)(1), NIRC)
i) Partner’s Distributive Share in a General Professional
2) Capital Assets (Section 39(A)(1), NIRC)
Partnership (Section 26)
j) Income from Whatever Source
i. Forgiveness of Debt
ii. Types of Income from Dealings in Property ii. Recovery of Accounts Previously Written Off
1) Ordinary Income and Loss (Section 22(Z), NIRC) iii. Receipt of Refund or Credit
2) Capital Gains and Loss
a. Net Capital Gain (Section 39(A)(2), NIRC)
b. Net Capital Loss (Section 39(A)(3), NIRC)
4. EXCLUSIONS FROM GROSS INCOME
3) Holding Period (Section 39(B), NIRC)
a) In General (Section 32(B), NIRC)
4) Limitation on Capital Losses (Section 39(C), NIRC)
b) 13th Month Pay and Other Benefits (Section 32(B)(7)(e),
5) Net Loss Carry Over (Section 39(D), NIRC)
NIRC)
c) Section 2.78.1(B)(11), RR 11-2018)

iii. Computation of Gain or Loss

1) General (Section 40(A), NIRC)
2) Basis for Determining Gain or Loss (Section 40(B),
NIRC)
3) Exchange of Property
a. General Rule (Section 40(C)(1), NIRC)
b. Exceptions: No Gain or Loss in Certain Exchanges of
Properties (Section 40(C)(2), NIRC)
Commissioner of Internal Revenue v. Filinvest Development
Corporation
CIR v. CA & Castaneda
5. SOURCE RULES
a) Interests (Section 42(A)(1) and (C)(1), NIRC)
b) Dividends (Section 42(A)(2) and (C)(2), NIRC)
c) Services (Section 42(A)(3) and (C)(3), NIRC)
d) Rentals and Royalties (Section 42(A)(4) and (C)(4), NIRC)
e) Sale of Real Property (Section 42(A)(5) and (C)(5), NIRC)
f) Sale of Personal Property (Section 42(E) in relation to
Section 42(A)(6), NIRC)
g) Sale of Shares of Stock of Corporation

Commissioner of Internal Revenue v. Lucio Co, et. al.

CHAPTER V – DEDUCTIONS
e) Passive Income
i. Interest from Deposits, Deposit Substitutes, Trust Funds, I. CONDITIONS FOR DEDUCTIBILITY OF BUSINESS EXPENSES
and Similar Arrangements
ii. Dividends
1) Distribution of Dividends (Section 73, NIRC)
a. Liquidating Dividend
b. Cash Dividend
c. Stock Dividend
d. Property Dividend

Wise & Co., Inc., et. al. v. Meer

CIR v. CA, CTA & ANSCOR

Eisner v. Macomber

iii. Royalties

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