03 Chap 03 05 Mamalateo 2019 Tax Book

PART II
INCOME AND WilHHOLDING TAXES

CHAPTER III
INTRODUCTION
"Income tax" is defined as a tax on all yearly 1 profits arising

from property, professions, trades, or offices, or as a tax on a person's
income, emoluments, profits, and the like.2 Income tax is a direct tax
on actual or presumed3 income (gross or net) of a taxpayer received,
accrued, or realized during the taxable year, which the law does not
expressly exempt from taxation.
There are different types of income taxes under Title II
(Income Tax) of the 2005 Tax Code. These include:
1. Personal income tax on individuals (Secs. 24-25, NIRC);
2. Regular corporate income tax (RCIT) on corporations
(Sec. 27[AJ, NIRC);
3. Minimum corporate income tax (MCIT) on corporations
(Sec. 27[EJ, NIRC);
4. Capital gains tax (CGT) on sale of shares of stocks of a
domestic corporation by any person [individual (citizen
or alien) or corporation (domestic or foreign)], who is
1
The basis for computing income tax shall be the taxpayer's annual accounting
period (calendar year or fiscal year) in accordance with the method of accounting
regularly employed in keeping the books of such taxpayer (&c. 43, NIRC).
2
Fisher v. Trinidad, 43 Phil. 973 (1922].
&Generally, there must be an actual income, gain, or profit. However, in sale of
real property located in the Philippines classified as capital asset, the seller who is an
individual (citizen or alien) or a domestic corporation (and not a foreign corporation)
is subject to the six percent (6%) capital gains tax, based on the actual consideration
or fair market value, whichever is higher, regardless of whether or not the seller
makes a profit or incurs a loss from the sale (See Secs. 24, 25, 27, and 28, NIRC).
94
INCOME ANO WTTHHOLDINO TAXES 96
In trod ucti on
n;t a dealer in securities (Secs. 24[CJ, 25[A}[3], 27[DJ

f.1, and 28[A][c], NIRC) and capital gains tax on sale
of real _p_ro~erty classified as a capital asset located in
the Phil_1pp1nes by any person (other than a foreign
corporation) who is not a real estate dealer, developer, or
lessor (Secs. 24[DJ, 25[AJ[3], and 27[DJ[5], NIR C);
5. Tax on passive investment income such as interest,
dividend, and royalty (Secs. 24[BJ[1}~[2}; 25[AJ[2]; 27{D]
{lj and [3]-[4], NIRC);
6. Fringe Benefits Tax (FBT) (Sec. 33, NIRC);
7. Branch Profit Remit tance Tax (BPRT) on Philippine
branches of foreign corporations operating in the
Philippine customs territory (Sec. 27, NIR C);
8. Tax on Improperly Accumulated Earnings Tax (IAET) of
corporations (Sec. 29, NIRC); and
9. Final Withholding Income Tax (FWT) on certain income
from sources within th e Philippines payable to r esident
(e.g., interest on bank deposits) or non-resident per sons
(e.g., interest on foreign loans or management fees paid
to non-resident foreign corporations), or to certain special
per sons (e.g., OBU, ROHQ, PEZA- or SBMA-registered
enterprises).
A taxable transaction shall be subject to only one kind
of income tax. For example, sale of real property located in the
Philippines, which is classified as a capital asset, by a domestic
corporation shall only be subject to the six percent capital gains tax.
Such gain from sale shall not be included in the gross income, which
is considered in determining the net income subj ect to the regular
or minimum corporate income tax. On the other hand, real property
classified as an ordin ary asset is subject only to the ordinary income
tax under the global tax system, whether the seller is an individual
or a corporation.
l
Income Tax Systems
Bar Question (1997)
1. Global Tax System. - Under the global tax system,
the total allowable deductions as well as personal and
additional exemptions, in the case of qualified individuals
or the total allowable deductions only, in the case of
96 REVIEWER ON TAXATION
corporations, are deducted from the gross income (i.e., sum

of all items of taxable income, profit and gain) to arrive at
the net taxable income subject to the graduated income
tax rates, in the case of individuals, or to the corporate
income tax rate, in the case of corporations. It did not
matter whether the income received by the taxpayer is
classified as compensation income (e.g., salaries received
by employees), business or professional income (e.g.,
gain from sale of inventories received by businessmen;
professional fees of lawyers and accountants; talent fees
of actors and actresses), passive investment income (e.g.,
interest, royalty, or dividend), capital gain (e.g., gain
realized from the sale of shares of stocks of a domestic
corporation), or other income (e.g., raffie prize). All items
of gross income, deductions, and personal and additional
exemptions, if any, are reported in one income tax return
(BIR Form 1701 [individual] or 1702 [corporation]) to
be filed at least annually, and the applicable tax rate is
applied on the tax base (net taxable income). The pure
global tax system was enforced in the Philippines from
1913 up to December 31, 1981, with maximum graduated
tax rate of 70% being applied on net income of individuals.
The formula for computing income tax under the
global tax system shall be as follows:
Gross sales XXX
Less: Sales discounts XXX
Sales returns and allowances XXX XXX
Net sales XXX
Less: Cost of goods sold or services XXX

Gross income XXX
Less: Deductions XXX
Personal and additional
exemptions (for individual)' XXX XXX
Net taxable income XXX
Income tax due XXX
Less: Creditable withholding tax XXX
4
Secs. 35 and 79(D) have been repealed by R.A. 10963 (TRAIN).
I NCOME AND WITHHOLDING T AXES 97
Introduction
Special creditable income tax6 XXX

Quarterly income tax paid
Tax still due and demandable
The special creditable income tax may arise by

virtue of a special tax credit allowed under a special
law. Thus, the Supreme Court declared: "Preliminarily,
R.A. 7 432 is a piece of social legislation aimed to grant
benefits and privileges to senior citizens. Among the
highlights of this Act is the grant of sales discounts on
the sale of medicines by establishments covered by the
law (such as transportation services, hotels, and similar
lodging establishments, restaurants, and r ecreation
centers, and medicines) to senior citizens, provided
that private establishments may claim the cost as tax
credit. The foregoing proviso specifically allows the 20%
senior citizens "discount to be claimed by the private
establishment as a tax credit and not merely as a tax
deduction from gross sales or gross income." In Bicolandia,
we construed the term "cost" as "referring to the amount
of the 20% discount extended by a private establishment
to senior citizens in their purchase of medicines." "We
reiterated this ruling in the 2008 case of Cagayan Valley
Drug by holding that petitioner therein is entitled to the
tax credit for the full 20% sales discounts it extended to
qualified senior citizens. This holds true despite the fact
that petitioner suffered a net loss for that taxable year.
We finally affirmed in M.E. Holding that the tax credit
should be equivalent to the actual 20% sales discount
granted to qualified senior citizens." However, the Court
clarified that R.A. 7432 has undergone two amendments.
The first was in 2003 by R.A. 9257, and the second, by
R.A. 9994 in 2010. The court str essed that "the 20% sales
discount granted by establishments to qualified senior
citizens is™ treated as tax deduction and not as tax
credit" (Mercury Drug Corporation v. CTR, G.R. No.
164050, July 20, 2011).
2. Schedular Tax System. - Under the schedular tax
system, different types of incomes are subject to different
6
Five percent tax credit of a qualified contributor under R.A. 9606 (PERA).
98 RIM!WER ON TAXATION
sets of graduated or flat income tax rates. The applicable ta.x

rate(s) will depend on the classification of the taxable income
(e.g., compensation income, capital gain, passive income,
or other income) and the tax base could be gross income
(without deductions) or net income (i.e., gross income le88
allowable deductions). Separate regular income tax return
or capital gains tax return, whichever is applicable, is filed
by the recipient of income for appropriate types of income
received within the p rescribed dates (e.g., 30 days from date
of sale), but no income tax return is filed by the recipient
of passive income subject to final withholding tax because
the withhold ing agent is made primarily responsible for
the filing of the withholding tax return and the payment of
income tax to the BIR on such passive income of the investor
or depositor. The pure schedular tax system 6 was applied
in the Philippines from January 1, 1982 to December 31,
1985.
There are several ways of imposing final income tax
on certain incomes subject to final withholding tax. The
three general categories of income subject to the schedular
tax system are:
a. Tax base is consideration or fair market value at the
time of sale, whichever is higher.
No deduction for cost and expenses are allowed.
Example:
Sale of real property classified as capital
asset '900,000
Fair market value of real property 800,000
Income tax due: P900,000 x 6% P54,000
60n January l , 1982, B.P. Blg. 135 adoptt-"Cl the schedular true system. Gross
compensation income (net of personal and additional exemptions) was subject to the
graduated tax rates ranging from zero percent to 35%; business and professional
incomes were subject to graduated tax rates ranging from five percent to 60% on net
taxable income; capital gains from sale of shares of stocks of domestic corporations
and real property located in the Philippines as well as passive investment incomes
were subject to final withholding taxes at varying rates.
INCOME AND Wl'rl-lHOL.DlNO TAXES 99
Introduction
b. Tax base is net capital iain <i.e.. aoss sellioi urice

less cost or adjusted basis).
Example:
Sale of unlisted shares of stocks
of ABC Corp. Pl0,000
Cost P5,000
Income tax due:
Selling price Pl 0,000
Less: Cost P5,000
Gain P5,000
Multiplied by: X 16%
Capital gains tax P.1.6.Q
c. Tax base is gross income (without any deduction)
Examples:
Gross interest income on bank peso
deposit Pl,000
Multiplied by: x 20%
Final withholding tax P-2.Q.Q
Gross dividend income from domestic P50,000
corp. r eceived by r esident citizen
Multiplied by: x 10%
Final withholding tax P5.0QO
3. Semi-Schedular or Semi-Global Tax System.
Effective January 1, 2008, th e semi-sch edular or semi-
global tax system was adopted under R.A. 8424. Under
th e semi-schedular or semi-global tax system,7 the
compensation income, business ·o r professional income,
7
Effective J anuary 1, 1986, E.O. 37 adopted the semi-global or semi-schedular
t.a.x system by reducing the graduated rates on business and professional income from
~0% to 35% and by increasing the preferential tax rates on capital gains and passive
Ulvestment incomes. R.A. 8424 (1998) retained the semi-global or semi-schedular to.x
8
Ystem by introducing some structural and administrative reforms and by reducing
the tax rates on corporations by one percent every year from 35% to 32%. The same
tax system was maintained under R.A. 9337 effective November 1, 2005, but the
corporate tax rate was increased to 35% and it will be reduced to 30% effectiv
J anuary 1, 2009. e
>
capital gain, and passive income, and other income !!Qt

subject to final withholding income tax under
Section 57(A) of the 1997 Tax Code, are added together
to arrive at the gross income, and after deducting the sum
of allowable deductions from business or professional
income, capital gain, passive income, and other income
not subject to final tax, in the case of corporations, as
well as personal and additional exemptions, in the case of
individual taxpayers, the taxable income (i.e., gross income
less allowable deductions and exemptions) is subjected to
one set of graduated tax rates (if an individual) or regular
corporate income tax rate (if a corporation). With respect
to the above incomes not subject to final withholding tax,
the computation of income tax is "global."
However, passive investm.e nt income subject to final
withholding tax and capital gains from the sale or transfer
of shares of stocks of a domestic corporation and of real
properties classified as capital assets located within the
Philippines remain subject to different sets of tax rates
and covered by different tax returns. The schedular tax
system applies to the compensation income, capital gains,
passive investment income, and other income subj ect to
final income tax at preferential tax rates.
To summarize, either (a) the global tax system
(e.g., taxpayer with compensation income not subject to
final withholding tax, or business or professional income,
or mixed income - compensation and business or
professional income), or (b) the schedular tax system
(e.g., taxpayer with compensation, capital gains, passive
income, or other income subject to final withholding tax),
or (c) both the global and schedular tax systems,
may be applied, depending on t he nature of the income
realized by the taxpayer during the year.
Bar Question (1994)

Distinguish "schedular treatment" from "global treatment" as
used in income taxation.
Suggested answer:
Under a schedular system, the various types/items of income
(e.g., compensation; business/professional income) are classified
I NCOME AND WITHHOLDING TAXES 101
Introduction
accordingly and are accorded different tax treatments, in accordance

with schedules characterized by graduated tax rates. Since these
types of income are treated separately, the allowable deductions shall
likewise vary for each type of income.
Under the global system, all income received by the taxpayer
are grouped together, without any distinction as to the type or
nature of the income, and after deducting therefrom expenses and
other allowable deductions, are subjected to tax at a graduated or
fixed rate.
Bar Question (1997)

(a) Discuss the meaning of the global and schedular systems
of taxation.
(b) To which system would you say that the method of taxation
under the National Internal Revenue Code belongs?
Suggested answer:
(a) A global system of taxation is one where the taxpayer is
required to lump up all items of income earned during a
taxable period and pay tax under a single set of income tax
rates on these different items of income.
A schedular system of taxation provides for a
different tax treatment of different types of income so that
a separate tax return is required to be filed for each type
of income and the tax is computed on a per return or per
schedule basis.
(b) The current method of taxation under the Tax Code belongs
to a system which is partly schedular and partly global.
Features of the Income Tax Law

Bar Question (1996, 1994)
1. Income tax is a "direct tax" because the tax burden
is borne by the income recipient upon whom the tax is
imposed. It is a tax demanded from the very person who
it is intended or desired, should pay it, while "indirect
tax" is a tax demanded in the first instance from one
person in the expectation and intention that he can shift
the burden to someone else (CIR v. Tours Specialist
Inc., 183 SCRA 402 {1990]). s,
102 REVIEWER ON TAXATJON
2. Income tax is a progressive tax) since the tax base

increases as the tax rate increases. It is founded on
the ability to pay principle and is consistent with the
Constitutional provision that "Congress shall evolve a
progressive system of taxation" (Sec. 28{1], Art. IIL 1987
Constitution).
3. The Philippines has adopted the most comprehensive
system of imposing income tax by adopting the
citizenship principle, the residence principle, and the
source principle. Any one of the three principles is enough
to justify the imposition of income tax on the income of
a resident citizen and domestic corporation that are
taxed on worldwide income. Other types of taxpayers
(individual or corporation) are taxed only on their income
from sources within the Philippines beginning January 1,
1998, following the "territoriality principle."
4. The Philippines follows the semi-schedular or semi-
global system of income taxation, although certain
passive investment incomes and capital gains from sale
of capital assets, namely: (a) shares of stock of domestic
corporations; and (b) real property are subject to final
taxes at preferential tax rates.
5. The Philippine income tax law is a law of American origin.
Thus, the authoritative decision of the American official
charged with enforcing the U.S. Internal Revenue Code
has peculiar force and persuasive effect for the Philippines.
Great weight should be given to the construction placed
upon a revenue law, whose meaning is doubtful, by the
department charged with its execution.
Bar Question (1996)

(1) What are the basic features of the present "income tax
system?"
Suggested answer:
Our present income tax system can be said to have the following
basic features:
a. It has adopted a comprehensive tax situs by using the
nationality, residence, and source rules. This makes
citizens and resident aliens taxable on their income derived
INCOME AND WITHHOLDING TAXES 103
I ntroduction
from all sources while non-resident aliens are taxed only

on their income derived from within the Philippines.
Domestic corporations are also taxed on universal income
while foreign corporatwns are taxed only on income from
within.
[NOTE: If the same question is asked today, the answer
should be: Resident citizens and domestic corporations are
subject to tax on their worldwide income, while the other
types of taxpayers (whether individual or corporation) are
taxed only from sources within the Philipp ines beginning
January 1, 1998 under R.A. 8424.)
b. The individual income tax system is mainly progressive
in nature in that it provides graduated rates of income
tax. Corporations in general are taxed at a flat rate of
35% on net income. [NOTE: The corporate tax rate was
reduced to 34% in 1998, 33% in 1999, and 32% beginning
January 1, 2000 under R.A. 8424. The corporate tax rate
was increased to 35% effective November 1, 2005 and was
reduced to 30%, starting January 1, 2009, under R.A.
9337 starting November 1, 2005.]
c. It has retained more schedular than global features with
respect to individual taxpayers but has maintained a more
global treatment on corporations.
Direct Tax distinguished from Indirect Tax

Direct truces are those that are exacted from the very person
who, it is intended or desir ed, should pay them; they are impositions
for which a taxpayer is directly liable on the transaction or business
he is engaged in.
On the other hand, indirect taxes are those that are demanded,
in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift th e burden to someone
else. Stated elsewise, indirect taxes are taxes wher ein the liability
for the payment of the tax falls on one person but the burden thereof
can be shifted or passed on to another per son , such as when the tax
is imposed upon goods before reaching the consumer who ultimately
pays for it. When the seller passes on the tax to his buyer, he, in effect
shifts the tax burden, not the liability to pay it, to the purchaser a~
part of the purchase price of goods sold or services rendered (CIR v.
Philippine Long D i8tance Telephone Compa ny, 478 SCRA 61
{20051).
104 RIMll!WER ON TAXA'l'lON
Bar Question (1994)

Distinguish a direct tax from an indirect tax.
Suggested answer:
A "direct tax" is one in which the taxpayer who pays the tax
is directly liable therefor; that iB, the burden of paying the tax falls
directly on the person paying the tax. The impact and incidence of
taxation remain with the person upon whom the tax was imposed.
An "indirect tax'' is one paid by a person who is not directly
liable therefor, and who may therefore shift or pass on the tax to
another person or entity, which ultimately assumes the tax burden
(Maceda v. Macaraig, 197 SCRA 771 [1991]). In this case, the
impact of taxation is with the taxable seller of goods or service, while
the incidence of taxation rests with the final consumer.
Criteria In Imposing Income Tax

I. Citizenship Principle. - A citizen of the Philippines
is subject to Philippine income tax (a) on his worldwide
income from within and without the Philippines, if he
resides in the Philippines, or (b) only on his income from
sources within the Philippines, if he qualifies as a non-
resident citizen; hence, the income of a non-resident
citizen from ·sources outside the Philippines shall be
exempt from Philippine income tax.
2. Residence Principle. - An alien was subject to
Philippine income tax on his worldwide income because
of hie residence in the Philippines. This principle was
copied from the United States income tax law. but was
discarded in R.A. 8424 (1998) in view of the complexity
in tax administration it brings. Thus, an alien (whether
resident or non-resident) is now liable to pay Philippine
income tax only on his income from sources within the
Philippines and is exempt from tax on his income from
sources outside the Philippines.
3. Source Principle. - An alien or foreign corporation
is subject to Philippine income tax because he derives
income from sourees within the Philippines. Thus, a non·
resident alien or non-resident foreign corporation is liable
to pay Philippine income tax on his income from sources
INCOME AND WTTHHOLDJNO TAXES 106
Int roduction
within the Philippines, such as dividend, interest, rent,

or royalty> despite the fact that he has not set foot in the
Philippines.
When is Income taxable

Income, gain, or profit is subject to income tax, when the
following requisites are present:
a. The money or property received is income, gain, or profit
(and not return of capital);
b. The income, gain, or profit is received (actually or
constructively), accrued, or realized during the taxable
year; and
c. The income, gain, or profit is not exempt from income tax
under the Constitution, treaty>or statute.
Return or recovery of capital is not s ubject to income
tax. Thus, payment of loan principal is exempt from income tax.
Only the interest earned on the loan is subject to income tax. Also,
cost of sales of manufacturers and dealers of goods or properties>
which represents return of capital, is not subject to income tax.
The income, gain, or profit is taxable to the person who
earns the income, who is generally the recipient thereof.
In the case of fringe benefits paid to a supervisory or managerial
employee, the person taxed is the employee, but the employer is
required under the law to assume the payment of the fringe benefit
tax in behalf of said employee. Such employer is, however, allowed
to claim as business expense deduction the grossed-up monetary
value, consisting of the value of the fringe benefits and the FBT paid
thereon.
CHAPTER IV
KINDS OF TAXPAYERS
Kinds of Taxpayers
A. Individuals
1. Citizens
a. Resident citizens
b. Non-resident citizens
2. Aliens
a. Resident aliens
b. Non-resident aliens
1. Engaged in trade or business in the Philippines
u. Not engaged in trade or business in the
Philippines
3. Estates and trusts
a. Revocable trust
b. Irrevocable trust
B. Corporations
1. Domestic corporations
2. Foreign corporations
a. Resident foreign corporation
b. Non-resident foreign corporation
3. Partnerships I
a. Taxable partnership
b. Exempt partnership
I
1. General professional partnership ~l
,'
106
107
l NC'OME AND W 1THHOLDING TAXES
Kinds of Taxpayers
ll. J oint venture or consortium undertaking

construction activity, or engaged in petroleum
operations with operating contract with the
government .
Citizens
One tax status v. dual tax status of individuals. -
Generally, a citizen has only one tax status during the calendar year,
either as a resident citizen or a non-resident citizen. However, it is
possible for a citizen to have dual status (resident and non-resident)
during a calendar year for income tax purposes. He m ay be treated
as a resident cit izen and at th e same a non-resident citizen during
the same taxable year, if at the beginning of the year, h e derives
compensation a nd/or business or professional income, and sometime
later during the same year, he departs from the Philippines as an
immigrant, permanent worker, or a qualified non-resident citizen,
or vice versa. Where such citizen qualifies as a non-resident upon
leaving the country (e.g., immigrant and permanent worker), the
income from sources outside the Philippines from the time h e
depar ts from the Philippines is exempt from tax, while the income
from sources within the Philippines shall remain subject to income
tax. In the case of overseas contract worker, he becomes a qualified
non-resident citizen only if he stays outside the Philippines for more
than 183 days during the calendar year.
Citizen v. alien individual employees of foreign embassies
and international organizations in the Philippines. -
Resident citizens who work for a foreign embassy or for an aid
agency of foreign governments/international organization in the
Philippines (e.g., JICA, GIZ, AUSAID, CIDA, Ford Foundation, Asia
Foundation, etc.) are still subject to Philippine income tax because
resident citizens are taxed on worldwide income, unless there is a
law th at expressly grants such tax exemption.
In the case of Filipino citizens-employees of the Asian
Development Bank (ADB), Section 45(b), Article XII of the Agreement
provide that only officers and staff of ADB who are not Philippine
nationals sh all be exempt from Philippine income tax. Exemption of
Philippine nationals is "subject to the power of the Government
of the Philippines to ta~ it~ n_a~ionals" (RMC 31-2013, April
1,2, 201~)- Ho"'.ever, th~ ahen 1nd1~11dual employees of said foreign
embassies or mt~:°a~1on~l organizations in the Philippines are
exempt from Phihpp1ne income tax based on the international
108 R EVIEWER ON TAXATION
agreements enter ed into by the Philippines with said international

organizations or under the Vienna Convention .
It is settled that the compensation income of the Filipino
employees of the ADB are subject to tax and that the Commissioner
of Internal Revenue did not abuse his discretion in issuing RMC
No. 31-2013. However, Filipino employees of ADB were granted
by the CTA their claim for refund of alleged erroneously and
illegally paid income tax for taxable year 2012 on the ground
that the retroactive application 1 of RMC 31-201 3 prior to 2013
runs counter to the principles of fair play and substantial justice
(Calderon v. CIR, C.T.A. Case No. 9090, March 27, 2018).
Resident citizens working for the ADB are taxable on their income
from all sources, including those derived from the ADB, pursuant to
prevailing Tax Code provisions and treaties obligations between the
Philippine Government and the ADB, not merely on the basis of the
clarificatory provisions of RMC No. 31-2013 as to the taxability of
the compensation received by Filipino employees of the ADB.
Bar Question (2016)

Patrick is a successful businessman in the United States and
he is a sole proprietor of a supermarket which has a gross sales
of $10 million and an annual income of $3 million. He went to the
Philippines on a visit and, in a party, saw Atty. Agaton who boasts of
being a tax expert. Patrick asks Atty. Agaton: if he (Patrick) decides
to reacquire his Philippine citizenship under R.A. 9225, establish
residence in this country, and open a supermarket in Makati City,
will the BIB tax him on the income he earns from his U.S. business?
If you were Atty. Agaton, what advice will you give Patrick?
Suggested answer:
I will advise Patrick that once he re-acquires his Philippine
citizenship and establishes his residence in this country, his income
tax classification would then be a 'resident citizen. ' A resident citizen
is taxable on all his income, whether derived within or without the
Philippines; accordingly, the income he earns from his business
abroad will now be subject to the Philippine income tax (Sec. 23,
NIRC).
1
Sec. 246, NIRC.
INCOME AND WITHHOLDING TAXES
109
Kinds of Taxpayers
Bar Question (2015)

Mr. A, a citizen and resident of the Philippines, is a professional
boxer. In a professional boxing match held in 2013, he won prize
money in United States (US) dollars equivalent to P300,000,000.
a) Is the prize money paid to and received by Mr. A in the
US taxable in the Philippines? Why?
Suggested answer:
a) Yes. Under the Tax Code, the income within and without
of a resident citizen is taxable. Since Mr. A is a resident
Filipino citizen, his income worldwide is taxable in the
Philippines (Sec. 23[A], NIRC).
Bar Question (1997)

Juan, a Filipino citizen, has immigrated to the United States
in 1997, where he is now a permanent resident. He owns certain
income-earning property in the Philippines from which he continues
to derive substantial income. He also receives income from his
employment in the United States on which the US income tax is
paid.
On which of the above income is the taxable, if at all in the
Philippines, and how, in general terms, would such income or
incomes be taxed?
Suggested answer:
Juan will be taxed on both his income from the Philippines
and from the United States because his being a citizen makes him
taxable on all income wherever derived. For the income he derives
from his property in the Philippines, Juan shall be taxed on his net
income under the Simplified Net Income Taxation Scheme (SNITS)
whereby he shall be considered as a self-employed individual. His
income as employee in the United States, on the other hand, shall be
taxed in accordance with the schedular graduated rates of 1 %, 2%,
and 3%, based on the adjusted gross income derived by non-resident
citizens from all sources without the Philippines during each taxable
year. [NOTE: Beginning 1998, business and professional income of
resident citizens and income from foreign sources of non-resident
citizens have been modified or repealed by R.A. 8424. Under this
new law, income from sources within the Philippines of a non-
llO REVIEWER ON TAXATION
-
resident citizen remains subject to Philippine income tax, but his
income from sources outside the Philippines is exempt.]
Bar Question (2011)

Federico, a Filipino citizen, migrated to the United States some
six years ago and got a permanent resident status or green card.
Should he pay his Philippine income tax on the gains he derived
from the sale in the New York Stock Exchange of shares of stock in
PLDT, a Philippine corporate whose shares are listed thereat?
Suggested answer:
Yes. The 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 (Sec.
42[EJ, NIRC). By this provision of law, the gain, if any, from the
sale of shares of stocks of a domestic corporation by any person shall
always be treated for income tax purposes as income from sources
within the Philippines.
Bar Question (1998)

From what sources of income are the following persons/
corporations taxable by the Philippine government?
1. Citizen of the Philippines residing therein;
2. Non-resident citizen;
3. An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract
worker;
4. An alien individual, whether a resident or not of the
Philippines;
5. A domestic corporation.
Suggested answer:
1. A citizen of the Philippines residing therein is taxable on
all income derived from sources within and without the
Philippines.
2. A non-resident citizen is taxable only on income derived
from sources within the Philippines.
lNCOME AND WmraoLDl NG TAXES 111
Kinds of Taxpayers
3. An individual citizen of the Philippines who is working

and deriving income from abroad as an overseas contract
worker is taxable only on income from sources within the
Philippines.
4. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources
within the Philippines.
5. A domestic corporation is taxable on all income derived
from sources within and without the Philippines (Sec. 23,
NIRC).
Bar Question (1994)

Four Catholic parishes hired the services of Frank Binatra, a
foreign non-resident entertainer , to perform for four nights at the
Folk Arts Theatre. Binatra was paid P200,000 a night. The parishes
earned Pl,000,000, which they used for the support of the orphans
in the city. Who are liable to pay taxes?
Suggested answer:
The following are liable to pay income taxes:
a. The four Catholic parishes because the income received
by them, not being income earned as such in the
t performance of their religious functions and duties, is
taxable income under the last paragraph of Section 26,
in relation to Section 26(e) of the Tax Code. In promoting
and operating the Binatra Show, they engaged in an
activity conducted for profit.
b. The income of Frank Binatra, a non-resident alien under
our law, is taxable at the rate of 30% (now 25%) final
withholding tax based on the gross income from the show.
Mr. Binatra is not engaged in any trade or business in the
Philippines.
Resident citizen v. non-resident citizen. - It is important
to know whether a citizen is a resident or nonresident of the
~hilippines because he is (a) taxable on his worldwide income, if he
1s treated as a resident citizen, and (b) taxable only on his income
from sources within the Philippines and exempt on his income from
s?':11'ces outside the Philippines, if he qualifies as a nonresident
citizen (Sec. 23, NIRC).
112 REVTEWER ON TAXATION
Engaged in trade or business or exercise of profession

v. salaried employee. - It is important to determine whether
or not a resident citizen is engaged in trade or business or in the
exercise of his profession, since he is entitled to deduct certain items
of deductions from his busin ess or professional income, capital gain,
passive income, and other income not subject to final tax. However,
no deductions are allowed (a) from his gross compensation income,
although personal and additional exemptions, if any, and premiums
on insurance where the gross family income does not exceed
P250,000 during the year, may be deducted therefrom [NOTE:
The allowance for personal and additional exemptions
and premium payments on health and/or hospitalization
insurance as allowable deductions of individuals were
repealed by R.A. 10963 (TRAIN) effective January 1, 2018},
and (b) from capital gains and passive incomes subject to final tax
at preferential rates [NOTE: The tax rates of certain capital
gains and passive incomes were amended by R.A. 10963
(TRAIN) effective January 1, 2018 as will be discussed in other
Chapters]. If a resident citizen derives nonbusiness or professional
income, he receives either compensation income (because there is
employer-employee relationship between him and his employer), or
he derives passive investment income, or he realizes capital gain
from the sale or transfer of shares of stock of a domestic corporation
or from sale of real property.
Types of non-resident citizens. - There are three types
of non-resident citizens, namely: (1) immigrants; (2) employees of
a foreign entity on a permanent basis; and (3) overseas contract
workers (Sec. 22[E], NIRC).
The definition under Section 22(E) of the NIRC was culled from
Section 2 of Revenue Regulations No. 01-79 dated January 8, 1979
enumerating who are considered as non-resident citizens or one
who establishes to the satisfaction of the Commissioner of Internal
Revenue the fact of his physical presence abroad with the definite
intention to reside therein which shall include any Filipino who
leaves the country during the taxable year as:
1. Immigrant - one who leaves the Philippines to reside
abroad as an immigrant for which a foreign visa as such
has been secured.
2. Permanent employee - one who leaves the Philippines
to reside abroad for employment on a more or less
permanent basis.
lNC'l)Mi ANt> WtTHH OI..OtNO T AXE.'! 113
Kinds of 'l'axpayers
S. Contract worker - one who leaves the Philippines on

account of a contract of employm.ent which is renewed
from time to time within or during the taxable year under
such circumstances as to require him to be physically
present abroad most of the time during the taxable year.
To be considered physically present abroad most of the
time during the taxable year, a contract worker must
have been outside the Philippines for not less than 183
days during such taxable year.
Immigrants and employees of a foreign entity on a permanent
basis are treated as non-resident citizens from the time they depart
from the Philippines. However, contract workers must be physically
present abroad "most of the time'' during the calendar year to qualify
as non-resident citizens. The phrase ''most of the time" means
at least 183 days during the calendar year. His presence abroad,
however, need not be continuous (Sec. 24, NIRC).
Overseas Contract Worker (OCW)/Seaman - Filipino
citizens employed in foreign countries, commonly referred to
as OFWs, who are physically present in a foreign country as a
consequence of their employment thereat. Their salaries and wages
are paid by an employe1· abroad and are not borne by any entity or
person in the Philippines. To be considered as an OCW or OFW,
they must be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas
Employment Certificate (OEC) (Rev. Regs. No. 1-2011; Sec. 23[CJ,
NIRC).
Bar Question (2016)

Ms. C, a resident citizen, bought ready-to-wear goods from Ms.
B, a nonresident citizen.
a) If the goods were produced from Ms. B's factory in the
Philippines, is Ms. B's income from the sale to Ms. C
taxable in the Philippines? Explain.
Suggested answer:
a) Yes, the income of Ms. B from the sale of ready-to-wear
goods to_ Ms. C is t~able. A non-resident citizen is taxable
only on income derived from sources within the Philippin
(Sec. 23[BJ, NIRC). In line with the source rule of inc es
. . h d ome
taxation, since t e goo s are produced and sold within the
Philippines, Ms. B's Philippine-sourced income is taxable

in the Philippines.
Bar Question (2002)

Mr. Sebastian is a Filipino seaman employed by a Norwegian
company which is engaged exclusively in international shipping. He
and his wife, who manages their business, filed a joint income tax
return for 1997 on March 15, 1998. After an audit of the return, the
BIR issued on April 20, 2001 a deficiency income tax assessment for
the sum of P250,000, inclusive of interest and penalty. For failure of
Mr. and Mrs. Sebastian to pay the tax within the period stated in the
notice of assessment, the BIR issued on August 19, 2001 warrants of
distraint and levy to enforce collection of the tax.
a. What is the rule of income taxation with respect to Mr.
Sebastian's income in 1997 as a seaman on board the
Norwegian vessel engaged in international shipping?
Explain your answer.
b. If you are the lawyer of Mr. and Mrs. Sebastian, what
possible defense or defenses will you raise in behalf of
your clients against the action of the BIR in enforcing
collection of the tax by the summary remedies of warrants
of distraint and levy? Explain your answer.
Suggested answer:
a. The 1997 income of Mr. Sebastian as a seaman is consi-
dered as income of a non-resident citizen derived from
without the Philippines. The total gross income, in U.S.
dollars (or if in other foreign currency, its dollar equivalent)
from without the Philippines shall be declared by him for
income tax purposes using a separate income tax return
which will not include his income from business derived
within the Philippines (to be covered by another return).
He is entitled to deduct from his dollar gross income a
personal exemption of $4,500 and foreign national income
taxes paid to arrive at his adjusted income during the
year. His adjusted income will be subject to the graduated
tax rates of 1% to 3% (Sec. 21[b], Tax Code of 1986 {P.D.
1158, as amended by P.D. 19941). [NOTE: The above
provision was amended already by R.A. 8424 (Tax
Code of 1997) effective January 1, 1998. Income
Kinds of Taxpayers
from foreign sources of non-resident citizens is

exempt from income tax.]
b. I will raise the defense of prescription. The right of the
BIR to assess prescribes after three years counted from
the last day prescribed by law for the filing of the income
tax return, when the said return is filed on time. The last
day for filing the 1997 income tax return is April 15, 1998.
Since the assessment was issued only on April 20, 2001,
the BIR's right to assess has already prescribed.
Aliens
Alien individuals are classified into resident alien and
nonresident alien. Non-resident aliens are further classified into
engaged or not engaged in trade or business in the Philippines. The
Philippines exercises limited taxation rights over income of aliens
derived from the economic activities done within the Philippines. The
"country of source" exercises its taxing rights due to the territorial
link on the income.
Definit ion of nresidence. ,, - The 1997 Tax Code does not
define "residence, " but the regulations provide r elevant guidelines on
this matter. Thus, an alien actually present in the Philippines who is
not a mere transient or sojourner is a resident of the Philippines for
income tax purposes. Whether he is a transient or not is determined
by his intentions with regards to the length and nature of his stay.
A mere floating intention, indefinite as to time to return to another
country, is not sufficient to constitute him a transient. If he lives
in the Philippines and has no definite intention a s to his stay,
he is a resident. One who comes to the Philippines for a de.finite
purpose, which in its natur e may be promptly accomplished, is a
transient. But if his purpose is of such a nature that an extended
stay may be necessary for its accomplishment, and to that end the
alien makes his home t emporarily in the Philippines, he becomes
a resident, though it may be his intention at all times to return to
his domicile abroad when the purpose for which he came has been
consummated or abandoned (Sec. 5, Rev. R egs. No. 2, February
10, 1940). A r_e~id~nt alien loses his re~idence status if he actually
leav~s the Philippmes and abandons his residency thereof without
any intention of returning (Sec. 6, Rev. Regs. No. 2).
Wha_t _th~ law :equires for an ~en to be considered as a resident
of the Philippines 1s merely physical or bodily presence in a given
place for a period of time, not the intention to make it a permanent

place of abode (Garrison v. Court of Appeals and Republic, 187
SCRA 525 [1990]).
Resident Alien. - An alien (or one who is not a citizen of
the Philippines) may be considered a resident of the Philippines for
income tax purposes if he: (1) is not a mere transient or sojourner·
and (2) has no definite intention as to his stay or his purpose i~
of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home
temporarily in the Philippines.
There is an intention on the part of the alien to stay in the
Philippines indefinitely given the fact that: a) he invested in the
Philippines and served as the President of the company; b) he
acquired real property and is actually present most of the time in
the Philippines; and c) he registered as a taxpayer with the BIR.
All of these circumstances show that he is not a mere transient or
sojourner (BIR Ruling No. 401-2016, November 21, 2016).
Non-resident Alien Engaged in Trade or Business in
the Philippines. - If the aggregate period of his stay in the
Philippines is more than 180 days during any calendar year, he shall
be deemed a "non-resident alien doing business in the Philippines,"
Section 22(G) of the 1997 Tax Code notwithstanding. As such, an
alien engaged in trade or business in the Philippines is taxed on
his income from sources within the Philippines at the graduated
income tax rates of zero percent to 35% (formerly 5%-32%), while
his passive investment incomes shall generally be subject to 20%
final tax (Sec. 25[BJ, NIRC).
Bar Question (2015)

Ms. C. a resident citizen, bought ready-to-wear goods from Ms.
B, a nonresident citizen.
b) If Ms. Bis an alien individual and the goods were produced
in h er factory in China, is Ms. B's income from the sale of
the goods to Ms. C taxable in the Philippines? Explain.
Suggested answer:
(b) Yes, but only a proportionate part of the income. Gains,
profits, and income from the sale of personal property
produced by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources
117
I NCOME AND W rrHHOLDlNO T AXF.S
Kinds of Taxpayers
within and partly from sources without the Philippines

(Sec. 42/EJ, NIRC).
[NOTE: The problem does not indicate where the
sale took place. The suggested answers in a and b above
assume that the sale took place in the Philippines.
A nonresident alien is to be truced by the Philippine
government only on her income derived from an activity
conducted in the Philippines such as the sale of goods
irrespective where produced.]
Bar Question (2011)

Alain Descartes, a French citizen permanently residing in the
Philippines, received several items of income during the taxable
year, such as consultancy fees received for designing a computer
program and installing the same in the Shanghai facility of a Chinese
firm; interests from his deposits in a local bank of foreign currency
earned abroad converted to Philippine pesos; dividends received
from an American corporation which derived 60% of its annual gross
receipts from Philippine sources for the past seven years; and gains
derived from the sale of his condominium unit located in Taguig City
to another resident alien.
Which item of income is not subject to Philippine income tax?
Suggested answer:
The consultancy fees are not subject to Philippine income tax.
Being an alien, he is subject to income tax only on income from sources
within the Philippines (Sec. 23/D], NIRC). Since the consultancy fees
are received by him for designing a computer program and installing
the same in China, the same shall be treated as income from sources
outside the Philippines (Sec. 42[c][3}, NIRC).
Bar Question (1991)

N~wtex lnternati?nal (~hils.),_ Inc. is an American firm duly
authorized to engage in business in the Philippines as a branch
of~ce. In its activity of acting as a buying agent for foreign buyers of
shrrts and dresses abroad and performing liaison work between its
home office and the Filipino garment manufacturers and exporter
Newt~x does not generate any income. To finance its office expena:~
here.• its head office abroad regularly remits to it the needed am t
To O ·t · d . oun .
versee 1 s operations an manage its office here, which had been
llR
in operation for two yE>ars. the ht~A.d offic<~ assigned three foreign
per sonn('l.
Are the thl't:\e foreign personnel subject to Philippine income
tax?
Suggested answer:
The three foreign personnd are subject to tax on the income that
they receive for service.'I rendered in the Philippines. Nonresident
aliens are subject to tax on income from sources within the Philippines.
Income is deemed derived from sources within the country when it is
earned for services rendered in the Philippines (Sec. 23, in relation to
Sec. 42, NIRC).
Bar Question (2000)

Mr. Cortez is a non-resident alien based in Hong Kong. During
the calendar year 1999, he came to the Philippines several times
and stayed in the country for an aggregated period of more than
180 days. How will Mr. Cortez be taxed on his income derived from
sources within the Philippines and from abroad?
Suggested answer:
Mr. Cortez, being a non-resident alien individual who has
stayed for an aggregate period of more than 180 days during the
calendar year 1999, shall for that taxable year be deemed to be a non-
resident alien doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject to an income
tax in the same manner as a resident citizen on taxable income re-
ceived from all sources within the Philippines (Sec. 25[A][l}, NIRC).
Thus, he is allowed to avail of the itemized deductions
including the personal and additional exemptions, but subject to
the rule on reciprocity on the personal exemptions (Sec. 34[AJ to [J]
and [M} in relation to Sec. 25[A}[l}, and Sec. 35[DJ, NIRC). [NOTE:
The allowance for personal and additional exemptions were
repealed by R.A. 10963 (TRAIN)]
Non-resident Alien Not Engaged in Trade or Business
in the Philippines. - If the aggregate period of the non-resident
alien's stay in the Philippines does not exceed 180 days during any
calendar year, he shall be deemed a "non-resident alien not doing
business in the Philippines." As such, his compensation income,
business or professional income, capital gain, passive investment
119
INCOME AND WtTHHOLDTNG TAX.ES
Kinds of Taxpayers
income, and other income from sources within the Philippines is

taxed at the flat rate of 25%, but capital gains from sale or exchange
of shares of stocks in a domestic corporation and from real property
located in the Philippines shall be subject to capital gains tax or
stock transaction tax, as the case may be (Sec. 25/BJ, NIRC). He also
has no legal duty to file an income tax return under the NIRC.
Employees entitled to preferential tax rates. - Certain
alien individuals who ar e employed in the Philippines are entitled
to the 15% preferential income tax rate on their gross compensation
income from sources within the Philippines. These employees
entitled to the preferential tax rate are the alien individuals
employed by:
a. Regional or area headquarters and regional operating
h eadquarters of multinational companies 1n the
Philippines (Sec. 25[CJ, NIRC);
b. Offshore banking units established in the Philippines
(Sec. 25/DJ, NIRC); and
c. Foreign service-contractor or sub-contractor engaged
in petroleum operations in the Philippines (Sec. 25[E},
NIRC).
It does not matter whether the alien starts to work in the
Philippines at the start or end of the year. The only qualification
provided for in the law relates to the entity that employs him in
the Philippines. Moreover, the aggregate period of stay in the
Philippines of the alien employee of the regional or area h eadquarters
and the foreign service contractor or sub-contractor will not create
a permanent establishment in the Philippines for its foreign head
office, even if he exceeds the 180-day rule provided for in the 1997
Tax Code, or the 183-day threshold prescribed in the tax treaty.
Filipino employees of multinational corporations. - The
same preferential tax treatment granted to alien individuals shall
apply to Filipinos employed and occupying the same position as
those of aliens employed by the entities mentioned above, regard-
less of whether or not there is an alien executive occupying the same
Position. Filipino employees employed by Regional Headqua rters or
Regional Operating Headquarters governed by E.O. 226, as amend-
ed ?Y R.A. 8756, may choose to be truced either a t the 15% prefer-
ential tax rate on their gross income or at the graduated tax rates
(Sec. 2.57. l[SJ[DJ, Rev. R egs. No. 2-98, April 17, 1998, as amended
by Rev. Regs. No. 6-2001). The preferent ial tax treatment granted to
120 REVIEWBR ON 't'AXATION
alien employees of the above entities must necessarily be extended

to their Filipino counterparts in order to put them at par with each
other. Alien employees of representative offices of multinational
companies in the Philippines who were subject to the 15% preferen.
tial tax rate on their gross income, pursuant to Revenue Regulations
No. 2-98, were deleted from the list of alien employees entitled to the
reduced tax rate beginning January 1, 2002.
The above rules in Revenue Regulations No. 2-98, as amended
in Revenue Regulations No. 6-2001, have been modified by Revenue
Regulations No. 11-2010 on October 26, 2010. Thus, Filipinos
employed by ROH Qs or RH Qs in a managerial or technical position
shall have the option to be taxed at either 15% of their gross income
or at the regular income tax rate on taxable compensation income
in accordance with Section 24 of the Tax Code, if the employer is
governed by Book III of E.O. 226, as amended by R.A. 8756. All other
employees are considered as regular employees who are subject to
the regular income tax rate on their taxable compensation income.
To be entitled to the preferential rate of 15%, the Filipino must meet
all of the following requirements:
a. Position and Function Test. - The employee must
occupy a managerial position or technical position AND
must actually be exercising such managerial or technical
functions pertaining to said position;
b. Compensation Threshold Test. - In order to be
considered a managerial or technical employee for income
tax purposes, the employee must have received, or is due
to receive under a contract of employment, a gross annual
taxable compensation of at least P975,000 (whether or
not this is actually received); provided, that a change in
compensation as a consequence of which, such employee
subsequently receiving less than the compensation
threshold stated in this section shall, for the calendar
year when the change becomes effective, result in the
employee being subject to the regular income tax rate;
and
c. Eulruivity Test. -The Filipino managerial or technical
employee must be exclusively working for the RHQ or
ROHQ as a regular employee and not just a consultant or
contractual personnel. Exclusivity means having just one
employer at a time (Rev. Regs. No. 11-2010, October 26,
2010).
Kinds of Taxpayers
The President exercised his veto power under Section 27(2),

Article VI of the 1987 Constitution relative to the entitlement by
Filipino employees occupying the same position as aliens employed by
Regional Headquarters (RHQ) or Regional Operating Headquarters
(ROHQ)11 to the same tax treatment on the gross income received by
such aliens employed by these multinational companies under R.A.
10963 (TRAIN).
In addition thereto, the President also vetoed the entitlement by
Filipino employees occupying the same position as aliens employed
by Offshore Banking Units (OBU)3 and Petroleum Service Contractor
and Subcontractor4 to the same tax treatment on the gross income
received by such aliens employed by OBUs and Petroleum Service
Contractors and Subcontractors under R.A. 10963 (TRAIN).
Effective January 1, 2018, all Filipinos employed by
RHQs, ROHQs, OBUs, and Petroleum Service Contractors and .~;,.
Subcontractors formerly enjoying preferential tax treatment prior \
to 2018 are now subject to regular income tax rates under Section
24(A)(2)(a) of the NIRC. 5
Estates and Trusts

An estate is cr eated by operation of law, when an individual
dies, leaving properties to his compulsory or other heirs, while a
trust is a legal arrangement whereby the owner of property (the
trustor) transfers ownership to a person (the trustee) who is to hold
and control t he property pursuant to the owner's instructions, for
the benefit of a designated person(s) (the beneficiaries). Legal title
to the trust property is vested in the trustee, while equitable title
belongs to the beneficiaries.
If the trust were an employee's trust, which forms part of an
employer's pension, stock, or profit-sharing plan that complies with
the requirements of tax exemption under Section 60(B) of the 1997
Tax Code, as implemented by Revenue Regulations No. 1-68, as
amended, its income would be exempt from income tax. Since said
provision grants tax exemption, the requirements of Section 60(B)
2
Sec. 24(C), NIRC.
3
Sec. 24(D), NIRC.
•sec. 24(E), NIBC.
6
Sec. 6, R.A. No. 10963; Sec. 4(C), Rev. Regs. No. 8-2018; Tax Advisory dated
January 31, 2018.
are mandatory and should be strictly construed (CIR v. Visayan

Electric Co., 23 SCRA 71 5 /1968]).
Taxable estates and trusts are taxed in the same manner and
on the same basis as in th e case of an individual, except that: (a) the
amount of income for the year wh ich is to be distributed currently
by the fiduciary to the beneficiaries, and the amount of the income
collected by a guardian of an infant wh ich is to be held or distributed
as the court may direct, sh all be allowed as deduction in computing
taxable income of the est at e or tr ust, but the amount so allowed
as deduction shall be included in computing the taxable income
of the beneficiaries, whether distributed to them or not; (b) in the
case of income received by estates of deceased persons during the
period of administration or settlement of th e estate, and in the case
of income which , in the discretion of t he fiduciary, may be either
distributed to th e beneficiary or accumulat ed, there shall be allowed
as an additional deduction in computin g the taxable income of the
estate or trust th e amount of the income of the estate or trust for its
taxable year , wh ich is properly paid or credited during such year
to any legatee, heir, or beneficiary, but the amount so allowed as
a deduction shall be included in computing the taxable income of
the legatee, h eir, or beneficiary (Sec. 61, NIR C). However, they are
entitled only t o personal exemption equivalent to a single individual
in the amount of P20,0006 (Sec. 62, NIRC). The income of a trust
will be taxed to the truster, wher e the t rust executed by him is
revocable (Sec. 63, NIRC), and the income of the trust is taxable to
the trustee, where th e trust is irrevocable (Secs. 60-61, NIRC).
Bar Question (2009)

Johnny transferred a valuable 10-door commercial apartment
to a designated trustee, Miriam, naming in the trust instrument
Santino, Johnny's 10-year old son, as the sole beneficiary. The
trustee is instructed to distribute th e yearly rentals amounting to
P720,000. The trustee consults you if she has to pay the annual
income tax on the rentals received from the commercial apartment.
(a) What advice will you give the trustee? (b) Will your advice be the
6Tbe amount of personal exemption of an individual has been increased to

P'50,000 under R.A. 9504 starting in July 2008. However, the allowance for personal
exemption was repealed by R.A. 10963 (TRAIN) starting January 1, 2018. Considering
that an estate or trust is taxed like an individual, it is believed that the same amount
of personal exemption granted to individuals must also be extended to taxable estates
or trusts.
JHCOME AND WrffllfOU)INO TAXIS 123
Kinda of Taxpayers
same, if the trustee is directed to accumulate the rental income and

distribute the same only when the beneficiary reaches the age of
majority? Why or why not?
Suggested answers:
a. It depends. Where the trust document transferring the
property is revocable, the rental income shall be included
in computing the taxable income of the grantor (&c.
63, NIRC). On the other hand, if the trust document
is irrevocable and the donor's tax on the value of the
transferred property was duly paid by the grantor at the
time of the creation of the trust (Secs. 98-99, NIRC), the
rental income shall be reported by the trustee in the income
tax return to be filed by her. Income tax shall apply to the
income of the property held in trust, including income
which is to be distributed currently by the fiduciary to the
beneficiary (Sec. 60, NIRC). However, the taxable income
of the trust shall be computed by allowing as deduction
the amount of the income of the trust for the taxable year
which is to be distributed currently by the fiduciary to the
beneficiary, but the amou,nt so allowed a.c; a deduction
shall be included in computing the taxable income of the
beneficiary, whether distributed to them or not (Sec. 61/AJ,
NIRC).
b. No, my advice will be different if the trustee is directed
to accumulate the rental income and distribute the same
only when the beneficiary reaches the age of majority.
Income tax shall also apply to income accumulated or
held for future distribution under the terms of the trust
document. However, the trustee is allowed as an additional
deduction in computing the taxable income of the trust
the amount of the income in the trust for the taxable year,
which is properly paid or credited during such year to
any beneficiary, but the amount so allowed as deduction
shall be included in computing the taxable income of the
beneficiary (Sec. 61[BJ, NIRC).
Co-ownership
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons. For income tax
purposes, the individual co-owners in a co-ownership report their
124 REVlEWER ON TAXATION
share of the income from the property owned in common by them in

their individual tax returns for the year, and the co-ownership is not
considered as a separate taxable entity or a corporation as defined
in Section 22(B) of the 1997 Tax Code. In a co-ownership arising
from the death of a decedent, the court clearly established that
such co-ownership is automatically terminated upon the partition
and distribution of the properties of the estate and an unregistered
partnership is created when the heirs invested the common
properties and income and placed them under a single management.
However, the co-ownership is not converted into a partnership
where the transactions of the co-owners intended to liquidate the co-
ownership are few or isolated, and the element of habituality is not
present. The intention of the co-owners to establish a partnership
should also be considered.
Co-ownership Due to Death of a Decedent

1. Before partit ion of property. - In general, co-
ownerships ar e not treated as separate taxable entities.
The income of a co-owner ship ar ising from the death of a
decedent is not subject to income tax, if the activities of the
co-owners are limited to the preservation of the property
and the collection of the income therefrom. In which case,
each co-owner is taxed individually on his distributive
share. Before the partition and distribution of the estate
of t he deceased, all the income thereof belongs commonly
to all t he heirs.
2. After partition of property. - Should the co-owners
invest the income of the co-ownership in any income--
producing properties after the extrajudicial partition of
the estate, they would be constituting themselves into an
unregistered partnership which is consequently subject
to income tax as a corpor ation. The co-ownership of
inherited properties is automatically converted into an
unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are
used as a common fund with intent to produce pro.fits for
the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or approved
by the court in the corresponding testate or intestate
proceeding. From the moment of such partition, the heirs
are already entitled to their respective definite shares
l!-o'C'OME AND WrmHOU>fNG T .~'(E.S 125
Kinds of Taxpayers
of the estate and the income thereof. for each of them to

manage and dispose of the property as exclusively his own
without the intervention of the other heirs. Accordingly,
the heir becomes liable individually for all taxes in
connection with his co-heirs. If after such partition, he
allows his shares to be held in common with his co-heirs
under a single management to be used with the intent of
making profit thereby in proportion to his share, there
can be no doubt that. even if no document or instrument
were executed for the purpose, at least an unregistered
partnership is formed for tax purposes (Ona v. CIR, 45
SCRA 74 [1972]).
Bar Question (1997)

Mr. Santos died intestate in 1989 leaving his spouse and five
children as the only heirs. The estate consisted of a family home and
a four-door apartment which was being rented to tenants. Within the
year, an extrajudicial settlement of the estate was executed from the
heirs, each of them receiving his/her due share. The surviving spouse
assumed administration of the property. Each year, the net income
from the rental property was distributed to all, proportionately, on
which they paid respectively, the corresponding income tax.
In 1994, the income tax retuxns of the h eirs were examined
and deficiency income tax assessments were issued against each of
them for the years 1989 to 1993, inclusive, as having entered into an
unregistered partnership. Were the assessments justified?
Suggested answer:
Yes. the assessments were justified because for income tax
purposes, the co-ownership of inherited property is automatically
converted into an unregistered partnership from the moment the said
properties are used as a common fund with intent to produce profits
for the heirs in proportion to their shares in the inheritance.
From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the income
thereof, for each of them to manage and dispose of as exclusively their
own. without the intervention of the other heirs, and accordingly, he
becomes liable individually for all taxes in connection therewith. Jf
at:,er such partition, he allows his shares to be held in common with
his co-heirs under a single management to be used with the intent
of making profit thereby in proportion to his share, there can be no
126 R~EWER ON TAXATlON
doubt that, euen if no document or instrument were executed for the

purpose. for tax purposes, at least, an unreRi,stered partnership i3
formed (Lorenzo Ona, et al. v. CIR, 45 SCRA 74 [1972/).
Isolated transactions of unimproved properties. - The
petitioners bought two parcels of land in 1965. They did not sell the
same nor make any improvements thereon. In 1966, they bought
three more parcels of land from one seller. In 1968, they sold the
two par cels at a profit after which they did n ot make any additional
or n ew purchase. In 1970, they sold the remaining parcels also at 8
profit. It was held that there was no adequate basis to support the
proposition that they thereby formed an unregistered partnership.
The character of habituality peculiar to business transactions for
the purpose of gain must be present to consider them so. Where
the transactions are isolated, in the absence of other circumstances
showing a contrary intention, the case can only give rise to co-
ownership. The sharing of the profits in a common property does not
of itself establish a partnership that is but a consequence of a joint
or common right or interest in the property. There must be a clear
intent to form a partnership. the existence of a juridical personality
different from the individual partners, and the freedom of each
party to transfer or assign the whole property (Pascual v. CIR,
166 SCRA 560 [19881).
Bar Question (1994)

Noel Langit and his brother, J ovy, bought a parcel of land
which they registered in their names as pro indiviso owners (Parcel
A). Subsequently, they formed a partnership, duly registered with
Securities and Exchange Commission, which bought another parcel
of land (Parcel B). Both parcels of land were sold, realizing a net
profit of Pl,000,000 for Parcel A and P500,000 for Parcel B.
1) The BIR claims that the sale of Parcel A should be truced
as a sale by an unregistered partnership. Is the BIR
correct?
2) The BIR also claims that the sale of Parcel B should be
taxed as a sale by a corporation. Is the BIR correct?
Suggested answer:
1) The BIR is not correct, since there is no showing that
the acquisition of the property by Noel and Jovy Langit
as pro indiviso owners, and prior to the formation of
lNt'OMfll AN\l W rrHHOLOIN<l 'l'i\."<F.S
127
Kinds of Tflxpayers
the part,-iership. wa.s used, intended for use, or bears

any relation. whatsoever to the pursuit or conduct of the
partnership business. The sale of Parcel A shall therefore
not be treated as a sale by an unregistered partnership,
but an ordinary sale of a capital asset, and hence will
be subject to the five percent (now six percent) capital
gai n.s tax and documentary stamp tax on transfers of real
property, said taxes to be borne equally by the co-owners.
2) The BIR is correct, since a "corporation" as deemed under
Section 20(a) [now Sec. 22(b)] of the Tax Code includes
partnerships, no matter how created or organized,
except general professional partnerships. The business
partnership, in the instant case, shall therefore be taxed in
the same manner as a corporation on the sale of Parcel B.
The sale shall thus be subject to the creditable withholding
tax under Revenue Regulations No. 1-90, as amended by
12-94 [now Rev. Regs. No. 2-98, as amended], on the sale
of Parcel B, and the partnership shall report the gain
realized from the sale when it files its income tax return.
Transfer of property from father to children. - After
completing payment on two lots, the father transferred his rights
to his four children to enable them to build their residences. After
having held the two lots for more than a year, they sold them at a
profit. They treated the profit as a capital gain and paid income tax
on one-half thereof. The court ruled that there was no partnership.
To regard them as having a taxable partnership would r esult in
oppressive taxation and obliterate the distinction between a co-
ownership and a partnership. The children had no intention of
forming a partners hip. The transaction was isolated. Their original
purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but
to resell the same to dissolve the co-ownership. The division of the
pro.fit was '!1ere1y incidental to the dissolution of the co-ownership,
which was m the nature of things a temporary s tate. The sharing of
gross returns does not of itself establish a joint partnership whether
?r not t~e persons sharing them have a joint or common right or
mtere_st m the property from which the returns are derived. There
m~s~ instead be an unmistakable intention to form that partnershi
or Jomt venture (Obillos, Jr. v. CIR, 139 SCRA 436 [19851) . p
Bar Question (1991)

Roberto Ruiz and Conrado Cruz bought three parcels of land
from Rodrigo Sabado on 4 May 1976. Then on July 8, 1977, they
bought two parcels of land from Miguel Sanchez. In 1988, they sold
the first three parcels of land to Central Realty, Inc. In 1989, they
sold the two parcels to Jose Guerrero. Ruiz and Cruz realized a net
profit of Pl00,000 for the sale in 1988 and P150,000 for the sale in
1989. The corresponding capital gains taxes were individually paid
by Ruiz and Cruz.
On September 20, 1990, however, Ruiz and Cruz received a
letter from the Commissioner of Internal Revenue assessing them
deficiency corporate income taxes for the years 1988 and 1989
because, according to the Commissioner, during said years they, as
co-owners in the real estate transactions, formed an unregistered
partnership or joint venture taxable as a corporation and that the
unregistered partnership was subject to corporate income tax, as
distinguished fro1n profits derived from the partnership by them,
which is subject to individual income tax.
Are Robert Ruiz and Conrado Cruz liable for deficiency
corporate income tax?
Suggested answer:
Roberto Ruiz and Conrado Cruz are not liable for corporate
income tax. Evidently abandoning the Gatchalian ruling, the
Supreme Court in a recent ruling in Pascual v. Court of Tax
Appeals (G.R. No. 78133, October 18, 1988) held that isolated
transactions by two or more persons do not warrant their being
considered as an unregistered partnership. They will instead be
considered as mere co-owners; no corporate income tax is due on mere
co-ownerships. It was, therefore, correct foT Ruiz and Cruz to merely
pay their individual income tax liabilities on the gain from sale of
real estate transactions.
General Professional Partnerships (GPP)

A "general professional partnership" is a partnership
formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in
any trade or business (Sec. 22/BJ, NIRC). To qualify as such exempt
entity, the GPP must not derive any active business income (e.g.,
rental income), but may receive interest income on bank deposits
and from dividend income.
129
Kinde of Taxpayers
GPP is l1!U a taxable entity for income tax purposes. -

A general professional partnership is not con sidered as a taxable
entity for income tax purposes. The partners themselves, not the
partnership (although it is still obligated to file an income tax retur~),
are liable for the payment of income tax in their individual capacity
computed on their respective distributive sh ares of the partnership
profit. In the determination of the tax liability, a partner does so
as an individual, and there is no choice on the matter. In fine, the
general professional partnership is deemed to be no more than a
mere mechanism or a flow-through entity in the generation
of income by, and the ultimate mechanism distribution of such
income to, respectively, each of the individual partners (Tan v. Del
Rosario, 237 SCRA 324 [1994)).
Share of partners in partnership profit is deemed
distributed to the partners in the year profit is earned. - The
net profit of a gen eral professional partnership is distributed to
the partners composing the partnership in accordance with their
agreement. The sh are of an individual partner in t he net pro.fit of a
general professional partnership is deemed to have been actually or
constructively received by the partner in the same taxable year in
which such partnership net income was earned, and sh all be taxed
to them in their individual capacity, whether actually distributed or
not, at the graduated rates of income tax ranging from zero p ercent
to 35% (formerly 5% - 32%) (Sec. 26, NIRC) [NOTE: The graduated
rates of income tax of individuals are now from 0% to 35¾, as
amended by R.A. 10963 (TRAIN) effective January 1, 1998.J.
Thus, the principle of constructive receipt of income or profit is being
applied to undistributed profits of general professional partnerships.
The payment of such tax-paid profits by the GPP to the partner s in
another year should no longer be liable to income tax.
Bar Question (2014)
. A, B, and C, all lawyers, formed a partnership called ABC Law
Firm so that they can practice their profession as lawyers. For the
year 2012, ABC Law Firm received earnings and paid expenses
among which are as follows: '
Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received fr?m a religious society in reco · .
of the exemplary service of ABC Law Firm grution
130 R EVJEWER ON TAXATION
(3) Gains derived from sale of excess computers and laptops

Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with
clients
(A) What are the items in the above-mentioned earning
which should be included in the computation of ABC
Law Firm's gross income? Explain.
(B) What are the items in the above-mentioned
payments which may be considered as deductions
from the gross income of ABC Law Firm? Explain.
(C) If ABC Law Firm earns net income in 2012, what,
if any, is the tax consequence on the part of ABC
Law Firm insofar as the payment of income tax is
concerned? What, if any, is the tax consequence
on the part of A, B, and C as individual partners,
insofar as the payment of income tax is concerned?
Suggested answer:
(A) The three items of earning should be included in the
computation of ABC Law Firm's gross income. The
professional/legal fees from various clients in included as
part of gross income being in the nature of compensation
for services (Sec. 32/A][l}, NIRC). The cash prize from a
religious society in recognition of its exemplary services
is also included there being no law providing for its
exclusion. This is not a prize in recognition of any of the
achievements enumerated under the law, hence, should
form part of gross income (Sec. 32[BJ[7][c], NIRC).
(B) The law firm being formed as a general professional
partnership is entitled to the same deductions as allowed
to corporations (Sec. 26, NIRC). Hence, the three items of
deductions mentioned in the problem are all deductible,
they being in the nature of ordinary and necessary expenses
incurred in the practice of profession (Sec. 34[AJ, NIRC).
131
Kinds of Taxpayers
ALTERNATNE ANSWER: The law firm being

formed as a general professional partnership is entitled
to the same deductions as allowed to corporations (Section
26, NIRC). Hence, the three items of deductions mentioned
in the problem are all deductible, they being in the nature
of ordinary and necessary expenses incurred in the
practice of profession (Sec. 34[AJ, NIRC). However, the
amount deductible for representation expenses incurred
by a taxpayer engaged in sale of services, including a law
firm, is subject to a ceiling of one percent of net revenue
(R.R. No. 10-2002).
(C) The net income having been earned by the law firm,
which is formed and qualifies as a general professional
partnership, is not subject to income tax because the
earner is devoid of any income tax personality. Each
partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership. The partnership is merely treated for income
tax purposes as a pass-through entity so that its net income
is not taxable at the level of the partnership but said net ·. \
income should be attributed to the partners, whether or not
distributed to them, and they are liable to pay the income
tax based on their respective taxable income as individual
taxpayers (Sec. 26, NIRC).
Bar Question (1995)

Five years ago, Marquez, Peneyra, Jayme, Posadas, and
Manguiat, all lawyers, formed a partnership which they named
Marquez and Peneyra Law Offices. The Commissioner of Internal
Revenue thereafter issued Revenue Regulation[s] No. 2-93
implementing R.A. 7496, known as the Simplified Net Income
Taxation Scheme (SNITS). Revenue Regulation[s] No. 2-93 provides
in part:
"Sec. 6. General Professional Partnership. - The general

professional partnership and the partners are covered by R.A.
7~96. Thus, in determining profit of the partnership, only the
direct costs mentioned in said law are to be deducted from
partners~p in~o~e ..~so, the ex~~ns~s paid or incurred by
partners 1n their individual capac1t1es 1n the practice of th ·
profession which are not reimbursed or paid by the partners~:
12
182 REVTEWER ON TAXATION
but are not considered as direct costs are not deductible from
his gross income.''
(1) Marquez and Peneyra Law Offices filed a taxpayer's suit
alleging that Revenue Regulations No. 2-93 violates
the principle of uniformity in taxation because general
professional partnerships are now subject to payment
of income tax and that there is a difference in the tax
treatment between individuals engaged in the practice
of their respective professions and partners in general
professional partnerships. Is this contention correct?
Explain.
(2) Is Revenue Regulations No. 2~93 now considered as having
adopted a gross income method instead of retaining the
net income taxation scheme? Explain.
Suggested answer:
(1) The contention is not correct. Gerieral professional
partnerships remain to be a nontaxable entity. The
partriers comprising the same are taxable and they are
obligated to report as income their share in the income of
the general professional partnership during the taxable
year, whether distributed or not. The Simplified Net
Income Tax System (SNITS) treats professionals as one
class of taxpayers so that they shall be treated alike,
irrespective of whether they practice their profession alone
or in association with other professionals under a general
professwnal partriership. What are taxed differently are
individuals and corporations. All individuals similarly
situated are taxed alike under the regulations. Therefore,
the principle of uniformity in taxation is not violated. On
the contrary, all the requirements of a valid regulation
have been compl~d with (Tan v. del Rosario, G.R. No.
109189, October 9, 1994).
(2) No. Rev. Reg,. No. 2- 93, implementing R.A. 7496, has
in.deed significantly reduced the items of deduction by
limiting it ta direct costs and expenses, or 40% of gross
ncei.pts maximum deduction in cases where the direct
costs are difficult to determin.e. The allowance of the
limited deductwn.s, however, is still in consonance with the
net in.come taxation. scheme rather than the gross income
INC'OME ANO WTTHHOLPJNQ TAXES 133
Kinds of Taxpayers
method. While it is true that not all the expenses of earning

the income might be allowed, this can well be justified
by the fact that deductions are not matters of right but
are matters of legislative grace. [NOTE: R.A. 8424 (Tax
Reform Act of 1997) r epealed R.A. 7496 in 1998.)
Domestic Corporations and Foreign Corporations

The term "domestic," when applied to a corporation means
created or organized in the Philippines or under its laws (Sec. 22[CJ,
NIRC), while the term "foreign," when applied to a corporation,
means a corporation which is not domestic (Sec. 22[DJ, NIRC).
The branches of a domestic corporation, whether located in the
Philippines or abroad, are merely extensions of the local head office.
Accordingly, their incomes in the Philippines and abroad of the
head office and foreign branches are to be reported by the Philippine
head office in its corporate income tax return, and the branch profits
remitted by its foreign branches to the Philippine head office shall
no longer be subject to the branch profit remittance tax because
(a) the income of the foreign branch had already been subjected
to Philippine income tax, and (b) the branch profit remittance tax
applies only to Philippine branches of foreign corporations operating
in the Philippines operating in the customs territory and exempts
from the tax profits remitted by the Philippine branch operating in
special economic zones to their head offices abroad.
A "resident foreign corporation" is a foreign corporation
engaged in trade or business within the Philippines (Sec. 22[HJ,
NIRC), and a ''non-resident foreign corporation" is a foreign
corporation not engaged in trade or business within the Philippines
(Sec. 22[IJ, NIRC).
Bar Question (2012)

Anchor Banking Corporation, which was organized in 2000
and existing under the laws of the Philippines and owned by the Sy
Family of Makati City, set up in 2010 a branch office in Shanghai
City, China, to take advantage of the presence of many Filipino
workers in that area and its booming economy. During the year,
~he bank management decided not to include the P20 million net
mcome of the Shanghai Branch in the annual Philippine income tax
return filed with the BIR, which showed a net taxable income of
P30 million, because the Shanghai Branch is treated as a foreign
corporation and is taxed only on income from sources within the
f
·. ,:
184 R.tcvt~WltK ON TAXA'l'ION
Philippines, and since the loan and other business. transact~o_ns ~ere
done in Shanghai, these incomes are not taxable 1n the Ph1hppmes.
a. Is the bank correct in excluding the net income of its
Shan ghai Branch in the computation of its annual
corporate income tax for 2010? Explain your answer.
b. Should the Shanghai Branch of Anchor Bank remit profit
to its Head Office in the Philippines in 2011, is the branch
liable to the 15% branch profit remittance tax imposed
under Section 28(A)(5) of the 1997 Tax Code? Explain
your answer.
Suggested answers:
a. No. A domestic corporation is taxable on all income
derived from sources within and without the Philippines
(Sec. 23, NIRC). The income of the foreign branch and
that of the Head Office will be summed up for income tax
purposes, following the "single entity" concept and will all
be included in the gross income of the domestic corporation
t in the annual Philippine income tax return.
:-.
b. No. The branch profit remittance tax is imposed only
on remittance by branches of foreign corporation in the
Philippines to their Head Office abroad . It is the outbound
.. branch profits that is subject to the tax, not the inbound
profits (Sec. 28[A][5], NIRC).
·- Test in determining Status of Corporations

Following the above provisions, it can be said that the
Philippines adopted the "law of incorporation test" under which
a .corporation is considered (a) as a domestic corporation, if it is
organized or created in accordance with or under the laws of the ,.-.,,.,
Philippines, or (b) as a foreign corporation, if it is organized or

created in accordance with or under the laws of a foreign country.
Corollary, a domestic corporation may be formed or organized by
foreigners under the Revised Philippine Corporation Code, provided
that it is organized under the laws of the Philippines. On the other
hand, a corporation established by Filipino citizens under the laws
of a foreign country will be treated as a foreign corporation, and the
branch that such foreign corporation sets up in the Philippines is a
resident foreign corpo~ation. In other words, the nationality of the
owners of the corporation has no bearing in ascertaining the status
or residence of corporations, for income tax purposes.
Kinds of Taxpayers
Doing Business
The term "doing business" implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of commercial
gain or for the purpose of business organization. In order that a
foreign corporation may be regarded as doing business within a
State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character (CIR v. British
Overseas Airways Corporation, 149 SCRA 395 [19871) .
Partnerships
Except for a general professional partnership and an
unincorporated joint venture or consortium engaged in construction
or energy-related projects, which in reality are also partnerships,
Section 22(B) of the 1997 Tax Code con siders any other type of
partnership (described here as ''business partnership") as a
corporation subject to income tax. Indeed, Section 24(B) of the 1997
Tax Code places a business partnership and an ordinary corporation
on a similar footing, by imposing the 10% dividend tax on the cash
and/or property dividends actually or constructively received by an
individual stockholder of a corporation, or in the distributable net
income after tax of a partnership of which he is a partner, except a
general professional partnership, received by a partner. The term
"after-tax net profit" means the net profit of the partnership
computed in accordance with generally accepted principles of
accounting, less the corporate income tax imposed in Section 27
of the Tax Code (Sec. 2, Rev. Regs. No. 2-84, January 16, 1984).
Section 73(D) of the 1997 Tax Code, however, provides that "the
taxable income declared by a partn ership for a taxable year which
is subject to tax under Section 27(A) of this Code, after deducting
the corporate income tax imposed therein, shall be deemed to have
been actually or constructively received by the partners in the same
taxable year and shall be taxed to them in their individual capacity,
whether actually distributed or not."
Bar Question (2013)

XYZ Law Offices, a law partnership in the Philippines and a
VAT-registered taxpayer, received a query by e-mail from Gainsburg
Corporation, a corporation organized under the laws of Delaware,
136 R EVIEWER ON T AXATION
USA but the e-mail came from California, where Gainsburg has
an office. Gainsburg has no office in the Philippines and does no
business in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed
Gainsburg $1,000 for the opinion. Gainsburg remitted its payment
through Citibank, which converted the remitted $1,000 to pesos and
deposited the converted amount in the XYZ Law Offices account.
What are the tax implications of the payment to XYZ Law Offices in
terms of VAT and income taxes?
Suggested answers:
·- The payment to XYZ Law Offices by Gainsburg Corporation is

subject to income tax and VAT in the Philippines. For income tax
purposes. the compensation for services is part of the gross income of
the law partnership. From its total gross income within and without,
it has to compute its net income in the same manner as a corporation.
The net income of the partnership, whether distributed or not, will
be declared by the partners based on their agreement as part of
their gross income who are to pay the income tax thereon in their
individual capacity (Sec. 26, NIRC).
For VAT purposes, the transaction is a zero-rated sale of services,
where the output tax is zero percent and XYZ is entitled to claim as
refund or tax credit certificate the input taxes attributable to the zero-
rated sale, if the same is not utilized by the partnership. The services
were rendered to a non-resident person, engaged in business outside
the Philippines, which services are paid for in foreign currency
inwardly remitted through the banking system, thereby making the
sale of services subject to tax at zero-rated (Sec. 108[Bj[2}, NIRC).
Joint Ventures
Elements of joint venture. - To constitute a ~5oint
venture," certain factors are essential. Thus, each party to the
venture m~st mak_e a contribution, not necessarily of capital, but by
way of services, skill, knowledge, material, or money; profits must be
share_d among the parties; there must be a joint proprietary interest
and right of mutual control over the subject matter of the enterprise;
and usually, there is a single business transaction (BIR Ruling No.
317-92).
. . Exempt joint venture or consortium is an unincorporated

Joint venture or consortium engaged in
· construction
· ac t i·vi'*"'
"J
INCOME ANO W1n1HOT,OTN(l TAXJ~S
187
Kinds <>f Taxpayers
or energy-related project. - The term "Joint venture or

consortium, ''referred to in Section 22(B) of the 1997 Tax Code that is
not considered as a separ ate taxable entity, means an ynincorporated
entity formed by two (2) or more persons (individuals, partnerships,
or corporations) for the purpose of undertaking a construction
project (P.D. 929, May 4, 1976), or engaging in petroleum and other
energy operations with operating contract with the government.
The term "joint venture" was clarified by the Secretary of Finance
when he issued Revenue Regulations No. 10-2012 on June 1,
2012. In said Regulation, the joint venture that is not taxable as a
corporation must comply with the following requisites: (a) the joint
venture or consortium is fo1·med for the purpose of undertaking
construction activity; (b) it involves jointing or pooling of resources
by licensed local contractors; i.e., licensed as a general contractor
by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry; (c) the local contractors are
engaged in construction business; and (d) the joint venture itself is
licensed as such by PCAB. If all the above requisites are not met,
the joint venture becomes liable to the corporate income tax. Each
member of the joint venture not taxable as a corporation shall report
and pay taxes on their respective shares to the joint venture profit.
Since it is not considered as a separate taxable entity, the net income
or loss of the joint venture or consortium is taken up and reported
by the co-venturers or consortium me1nbers in accordance with their
participation in the project as set forth in their agreement. The
two (2) elements - unincorporated entity (or entity not registered
with the Securities and Exchange Commission) and for the purpose
of undertaking construction or energy-related project - must be
present in order that the joint venture or consortium may not be
considered as a separate taxable entity.
Tax-exempt joint venture shall nQ.t include those who are mere
suppliers of goods, services, or capital to a construction project.
Joint Venture (JV) involving foreign contractors may be

treated as non-taxable corporation only if:
1. Member foreign contractor is covered by a special license
as contractor by PCAB; and
2. Construction project is certified by the appropriate
Tendering Agency (government office) that the project
is a foreign-financed/internationally-funded project and
that international bidding is allowed under the Bilateral
138 R i-:vn:wER ON TAXATION
Agreement entered into by and between the Philippine

government and the foreign/international financing
institution. purs uant to the rules and r egulations of R.A.
4566 (Contractor's License Law).
Each member of joint venture not taxable as corporation shall
report and pay taxes on their respective shares to the joint venture
profit.
All licensed local contractors must enroll to BIR's eFPS at the
RDO where local contractors ar e registered as taxpayers.
Foreign joint venture or consortium that does not sell
g oods nor p erform services in the Philippines. - A joint venture
or consortium formed among non-resident for eign corpo·r ations in
connection with a local project in the Philippines is not subject to
Philippine income tax, where said foreign joint ven ture or consortium
does not sell goods nor perform any service in th e Philippines. This
rule is anchored on the fact that a for eign corporation is taxable
only on income from sources within the Ph ilippines (BIR Ruling No.
23-95). Accordingly, no withholding tax is required to be deducted
and withheld by the Philippine payor from income payments from
foreign sources made to the foreign joint venture or consortium.
Exempt joint venture or consortium may become taxable
partnership. -An exempt joint ventur e or consortium undertaking
a construction of office tower project m ay subsequently become
subject to income tax as a separate joint venture or consortium,
where after the constr uction period, th e joint venture partners
engaged in the business of leasing the building floor s or portions
thereof separately owned by them (BIR R uling No. 317-92, October
28, 1992). The tax exemption of t he joint venture granted under the
-- law is valid only up to the completion of the construction project
and does not extend to the subsequent sale or lease of the developed
condominium floors or units to customers.
BIR Rulings prior to Revenue Regulations No. 10-2012:

Corporation does not include joint venture undertaking
construction act ivity; allocation of floors, units, or lots is a
m ere return of capital. - The joint ventures described above
are not subject to the corporate income tax un der Section 27 of the
1997 Tax Code, since the term "corporation', does not include a
joint venture or consortium formed for the purpose of undertaking
construction projects pursuant to Section 22(B) of t he 1997 Tax
139
INCOME AND WITHHOLDlNG TAXES
Kinds of Taxpayers
Code. Accordingly, the memorandum of agreement, joint venture

agreement, or exclusive development and marketing agreeme~t
between or among the contracting parties, as the case may be, ~ll
not give rise to a taxable joint venture, and the allocation of specific
floors or units or subdivision lots in the project is not a taxable event
and is not subject to income tax and expanded withholding tax,
because the allocation is a mere return of the capital that each party
has contributed to the project.
Transfer of land to joint venture is similar to capital
contribution; distribution of developed lots/units is merely an
act of partitioning commonly owned property. - Joint venture
agreements for the construction and development of real property
may or may not be treated as a separate taxable unit, depending
on whether or not a separate taxable entity is established by the
joint venture partners. If the parties did not form nor register
a separate entity and merely agreed to pool their resources to
a common fund, no separate taxable unit is created. In this case,
each joint venture partner has to account for his respective share
in the net revenue earned from the joint venture project separate
from other joint venture partners. Hence, the partners may file
separate income tax returns for its net revenue for the project less
its respective proportionate share in the joint venture expenses. The
contribution of land to the joint venture is not a taxable event that
'!
7
will give rise to capital gains tax on sale or transfer of land. Such
transfer is similar to a capital contribution that does not give rise
to income tax. The distribution of developed lots/units is merely
an act of partitioning the commonly owned property. It is nothing
more than an act of terminating the co-ownership by making each
partner a specific owner of the identifiable lot or unit. At this stage,
no taxable sum has yet been realized by the joint venture partners.
That act of allocation or assigning portions of the developed lots to
each member of the joint venture cannot be treated as a taxable
event. The same is true despite the fact that the shares allocated to
or received by the partners may not necessarily correspond to the lot
area originally contributed by them to the joint venture. Hence the
tit~g of the land back to the joint venture partners is not subject
to income tax, expanded withholding tax, and value added tax (BIR
Ruling DA-165-03-18-99).
Sale of developed fl,oor, unit, or lot is subject to income
tax. - Should the corporate landowner or developer sell any of the
flo?rs or portions of the floors allocated to them to third parties, the
gam that may be realized by them from such sale will be subject to
the regular corporate income tax and to th e expanded withholding

tax under Revenue Regulations No. 6-85 (now Rev. Regs. No. 2- 98),
as amended (BIR Ruling No. 274-92, September 30, 1992). This rule
applies even if the sale takes place befor e or during the construction
period.
Taxable Joint Ventures

There are two instances when a joint venture becomes a
taxable entity. First, a domestic corporation jointly owned by
individuals and by two or more existing domestic corporations and/
or foreign corporations that is incorporated under the laws of th e
Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or
licensed by the Securities and Exchange Commission (e.g. , Marubeni
Corporation - Philippine Branch) is a taxable corporation, even if it
is engaged in the business of construction or energy-related activity.
Second, if the unincorporated joint venture or consortium (or
unregistered partnership) is engaged in any other line of business
than construction or energy-related activity with operating contract
with the government, the same will also be treated as a taxable
corporation. The income and expenses of the taxable joint venture
must be reported by it during the taxable year.
Examples of taxable partnerships include: (a) joint emergency
operations of two bus companies (Collector v. Batangas
Transportation Co., 102 Phil. 822 [1958]) ; (b) leasing of 24
properties by three sisters to various tenants under common
management for 15 years (Evangelista v. Collector, 102 Phil. 140
[19571); (c) leasing by father and son of lot and building to tenants
under administration by a building administrator (Reyes v. CIR, 24
SCRA 198 [1968]); (d) Insurance pool or clearing h ouse, composed
of 41 non-life insurance corporations, for the purpose of allocating
and distributing the risks (AFISCO Insurance Corporation v.
Court of Appeals, G.R. No. L-112675, January 25, 1999).
Resident Foreign Corporation

A ''resident foreign corporation" is a foreign corporation
engaged in trade or business within the Philippines (Sec. 22[HJ,
NIRC). Thus, the adjective "resident" in the term "resident
foreign corporation" is mer ely used to describe a corporation
organized under the laws of a foreign country, which is engaged in
trade or business in the Philippines.
Kinds of Taxpayers
Philippine branch of a foreign corporation is merely an

extension of the foreign head office
A good example of a resident foreign corporation is the
Philippine branch of a foreign corporation duly licensed by the
Securities and Exchange Commission. The Philippine branch is
merely an extension of the foreign head office (i.e., non-resident
foreign corporation); hence, it does not have nor issue Philippine
shares of stocks, unlike that of a domestic corporation. There is only
one foreign single entity. The foreign head office and the Philippine
branch are one and the same entity. However , for income tax
purposes, only the income of the Philippine branch from sources
within the Philippines is subject to income tax, and the income of
the Philippine branch as well as that of the foreign head office from
sources outside the Philippines are exempt from the Philippine
income tax. Corollary, the gross income from sources within the
Philippines of the foreign head office is subject to the final income
tax that must be withheld and remitted to the BIR by the Philippine
payor, unless such income of the foreign head office is attributed and
thus taxed to the Philippine branch.
Bar Question (1999)

HK Co. is a Hong Kong company, which has a duly licensed
Philippine branch engaged in trading activities in the Philippines.
HK Co. also invested directly in 40% of the shares of stock of A Co.,
a Philippine corporation. These shares are booked in the Head Office
of HK Co. and are not reflected as a ssets of the Philippine branch. In -
1998, A Co. declared dividends to its stockholders. Before remitting
the dividends to HK Co., A Co. seeks your advice as to whether it
will subject the remittance to withholding tax. No need to discuss
withholding tax rates, if applicable. Focus your discussion on what
is the issue.
Suggested answer:
I will advise A Co. to withhold and remit the withholding tax
on the dividends. While the general rule is that a foreign corporation
is the same juridical entity as its branch office in the Philippines,
when, however, the corporation transacts business in the Philippines
directly and independently of its branch, the taxpayer would be the
foreign corporation itself and subject to the dividend tax similarly
imposed on non-resident foreign corporation. The dividends
attributable to the Home Office would not qualify as dividends
142 REVlEWRll ON T AXA'l'lON
earned by a resident foreign corporation, which is exempt from tax

(Marubeni Corporation v. CIR, G.R. No. 76573, September 14,
1989).
Bar Question (2012)

Foster Corporation (FC) is a Singapore-based foreign
corporation engaged in constr uction and installation projects. In
2010, Global Oil Corporation (GOC), a domestic corporation engaged
in the refinery of petroleum p1·oducts, awarded an anti-pollution
project to Foster Corporation, whereby FC shall design, supply
machinery and equipment, and install an anti-pollution device for
GOC's refinery in the Philippines, provided that the installation
part of the project may be sub-contracted to a local construction
company. Pursuant to the contract, the design and supply contracts
were done in Singapore by FC, while the installation works were
sub-contracted by FC with Philippine Con struction Corporation
' - (PCC), a domestic corporation. The project with a total cost of PlOO
million was completed in 2011 at the following cost components:
(design - P20 million; machinery and equipment - P50 million; and
installation - P30 million). Assume that the project was 40% complete
in 2010 and 100% complete in 2011, based on the certificates issued
by the architects and engineer s working on th e project. GOC paid
FC as follows: P60 million in 2010 and P40 million in 2011, and FC
paid PCC in foreign currency through a Philippine bank as follows:
PlO million in 2010 and P20 million in 2011.
a. • Is FC liable to Philippine income tax, and if so, how much
revenue sha ll be reported by it in 2010 and in 2011?
Explain your answer.
b. Is PCC, which adopted the percentage of completion
method of reporting income a nd expenses, liable to value
added tax in 2010 and in 2011? Explain your answer.
Suggested answers:
a. No. FC is not liable to Philippine income tax. The
revenues from the design and supply contracts, having
been all done in Singapore, are income from without the
Philippines; hence, not taxable to a foreign corporatio~
in the Philippines (Sec. 42, NIRC; CIR v. Marubeni
Corporation, G.R. No. 137377, December 18, 200J).
With respect to the installation works which was sub-
contracted by FC to PCC, a domestic corporation, it is
INCOME ANO WITHHOLDINO TAXF',S 143
lGnds of Taxpayers
PCC (not FC) that does the work in the Philippines that
should report the income thereon.
b. Yes. PCC is liable to VAT as seller of services done in the
Philippines for a fee. Ho wever, the sale of services to FC
is subject to VAT at zero percent. Services rend ered by a
VAT-registered local contractor to a non-resident foreign
corporation who is outside the Philippines, paid for in
foreign currency inwardly remitted through the Philippine
banking system are zero-rated sales of services (Sec. 1OB[BJ
[2], N IRC).
Types of Resident Foreign Corporations

Under the 1997 Tax Code, ther e are two gener al types of
resident foreign corporations:
1. Those tha t do not derive any income from sources within
the Philippines because they are not engaged in tr ade or
business and thus exempt from income tax; and
2. Those that are en gaged in trade or business in th e
Philippines and thus subject to income tax at:
a. Preferential tax rate under the Tax Code or special
law like R.A. 7916 (PEZA law) and other special
economic zone laws, and R.A. 7227 (BCDA law), as
amended, or
b. Normal corporate income tax rate or minimum
corporate income tax rate, whichever is high er.
Under the first category are the (a) r egion al or area
headquarters (RHQ) established in the Philippin es pursuant t o the
provisions of E.O. 226, as a mended by R.A. 8756, (b) representative
offices, and (c) regional warehouses of multination al corporations
in the Philippines. They ar e exempt from income tax because they
are not engaged in trade or business in the Philippin es. They do
not derive income fro m sources within the Philippines an d are
merely cost centers. The regional or area headqu arters (RHQ) is
exempt from income tax only if the amounts received by it do not
include fees or compen sation for services rendered. The foreign
operating companies give such a mounts only as reimbursemen t
of their shares in the allocat ed expenses of the r egional or area
headquart ers. There should also be no excess of amount received
from the operating companies for the cost of operating the regional
.
,.
or area headquarters as its costs will be shared among t~e operating

companies and should not result in any income (BIR Ruling No. 047-
2001, September 28, 2001).
Under the second category are branches engaged in trade or
business in the Philippines. These branches entitled to preferential
tax rates include:
1. The Regional Operating Headquarters (ROHQ) of
multinational corporations in the Philippines are
authorized to sell various services (excluding goods) in
the Philippines to their affiliates, subsidiaries or branches
within the Asia-Pacific Region and th ey are taxed at 10%
on their net income from sources within t he Philippines.
Income for services rendered abroad are exempt from
Philippine income tax (Sec. 28[AJ[6], N IRC);
2. Offshore Banking Units (OBU) and Foreign Currency
Deposit Units (FCDU) of Philippine branches of foreign
banks are taxed at 10% on their gross interest income
on foreign currency loans to residents, other than OBU/
FCDUs or local commercial banks, including local
.J' branches of foreign banks authorized by BSP to transact
business with OBU/FCDUs. However, income derived by
OBU/FCDU authorized by BSP from foreign currency
transactions with non-residents, ot her OBU/FCDUs, local
commercial banks, including branches of foreign banks in
the Philippines authorized by BSP to transact business
with OBU/FCDU shall be exempt from all taxes, except
net income from such transactions (Sec. 28[AJ[4}, NIRC);
3. International air carriers (whether online or offline), and
international shipping lines are taxed on t heir Gross
Philippine Billings (GPB) at 2.5%. For international
- air carriers, GPB refers to the amount of gross revenue

derived from carriage of persons, excess luggage, 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 for a flight which originates
from the Philippines, but transshipment of passenger
t~~s place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket
co~responding to the leg flown from the Philippines to the
pomt of transshipment shall form part of GPB.
145
INCOME AND WITHHOLDING T AXI!:$
Kinds of Taxpayers
On March 27, 2013, R.A. 10378 was enacted by

Congress and signed by the President in order to promote
tourism in the country. Section 23(A)(3) of the new law
provides "that international air 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 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."
However, they remain liable to the three percent
percentage (common carrier's) tax on their quarterly
gross receipts derived from the transport of cargo from
the Philippines to another country. Section 109(8) of the
2005 Tax Code was amended by including "transport of ''
passengers by international carriers" among the exempt
transactions from VAT (RMC 40-2013, May 2, 2013; Rev.
Regs. No. 15-2013, September 20, 2013).
For international shipping lines, GPB means
gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination
(whether there is transshipment of cargoes taking place
outside the Philippines in another foreign vessel) (Sec.
28[AJ[2}, NIRC);
4. Foreign service-contractors and sub-contractors engaged
in petroleum operations in the Philippines (P.D. 187, as
amended); and
5. Registered enterprises with PEZA, SBMA, CDA, CJHDA,
and oth er special zones and Freeport zones (RA. 7916
and 7227). Service enterprises accredited with the above
zone authorities, like banks, janitorial services, security
agencies, and the like, are not entitled to the tax incentives
under said laws, but are subject to the ordinary taxes
provided for in the 1997 Tax Code.
All other types of Philippine branches of foreign
corporations are subject to the 30% corporate income tax
based on their net taxable income from sources within
the Philippines, unless the minimum corporate income
tax that is computed at two percent of their gross income

from sources within the Philippines is higher than the
normal corporate income tax.
A "non-resident foreign corporation" is a foreign
corporation not engaged in trade or business within the
Philippines but deriving income from sources within the
Philippines (Sec. 22[I], NIRC). Thus, the term ''non-
resident" means and is synonymous to "not engaged in
trade or business in the Philippines." Except as otherwise
provided for in the Tax Code or special law, gross income
from sources within the Philippines paid to a non-
resident foreign corporation, shall be subject to the 30%
final corporate income tax, which must be withheld by the
Philippine payor of the income.
Bar Question (2011)

Aplets Corporation is registered under the laws of the British
Virgin Islands. It has extensive operations in Southeast Asia. In the
Philippines, its products are imported and sold at a mark-up by its
exclusive distributor, Kim's Trading, Inc. The BIR compiled a record
of all the imports of Kim from Aplets and imposed a tax on Aplets'
net income derived from its exports to Kim. Is the BIR correct?
Suggested answer:
No. Aplets Corporation is a non-resident foreign corporation
not engaged in trade or business in the Philippines (Sec. 22[1], NIRC)
and its source of income is from outside the Philippines. As a foreign
corporation, it is subject to Philippine income tax only on income
from sources within the Philippines (Sec. 23[FJ, NIRC). Gains, profits
and income from the sale of personal property outside the Philippines
shall be treated as income from sources outside the Philippines (Sec.
42, NIRC).
Non-resident Foreign Corporation

A "non-resident foreign corporation'' is a foreign corporation
not engaged in trade or business within the Philippines (Sec. 22[IJ,
NIRC). Section 24 of the Tax Code subjects foreign corporations to
tax on their income from sources within the Philippines. The word
"sources" has been interpreted as the activity, property or service
giving rise to the income. The r einsurance premiums were income
Kinds of Taxpayers
created from the undertaking of the foreign reinsurance companies

to reinsure Philippine Guaranty Co., Inc. against liability for loss
under original insurances. Such undertaking, as explained above,
took place in the Philippines. These insurance premiums therefore
came from sources within the Philippines and, hence, are subject to
corporate income tax.
The foreign insurer's place of business should not be confused
with their place of activity. Business implies continuity and
progression of transactions while activity may consist of only a single
transaction. An activity may occur outside the place of business.
Section 24 of the Tax Code does not require a foreign corporation to
engage in business in the Philippines in subjecting its income to tax.
It suffices that the activity creating the income is performed or done
in the Philippines. What is controlling, therefore, is not the place
of business but the place of activity that created an income (The
Philippine Guaranty Co., Inc. v. CIR, G.R. No. L-22074, April
30, 1965, citing Imperial v. Collector of Internal Revenue, G.R.
No. L-7924, September 30, 1955).
CHAPTERV
GROSS INCOME
"Gross income" means income, gain, or profit subject to tax.

It includes compensation for personal and professional services,
business income, profits, and income derived from any source
whatever (whether legal or illegal), unless exempt from tax under
the Constitution, tax treaty, or statute. The preceding definition is
used for purposes of computing the normal corporate income tax.
The term "gross income," for purposes of computing the minimum
corporate income tax, shall include all items of income, gain, or
profit, except exempt income and income subject to final tax (Sec.
27[E}[4}, NIRC). Revenue Regulations No. 9-98, however, expanded
the definition of "gross income," by including "other or miscellaneous
income" of the corporation such as gain from nonrecurring sale of
equipment.
"Net income" means gross income less statutory deductions
and exemptions (Sec. 36, Rev. Regs. No. 2). It is referred to as "taxable
income" under Section 31 of the 1997 Tax Code. Net income must
be computed with respect to a fixed taxable period. That taxable
period is twelve months ending December 31st of every year, except
in the case of a corporation filing returns on a fiscal year basis, in
which case net income will be computed on the basis of such fiscal
year. Items of income and of expenditures, which, as gross income
and deductions, are elements in the computation of net income need
not be in the form of cash. It is sufficient that such items rr:ay be
appraised in terms of money (Sec. 37, Rev. Regs. No. 2).
Bar Question (1995)

(1) What is "gross income" for purposes of the income tax?
(2) How does "income" differ from "capital?" Explain.
Suggested answer:
(1) Gro!s in~ome means all income from whatever source

derived, including (but not limited to) compensation for
148
I NCOME ANO WI'l'HHOLDING TAXES 149
Gross Income
services, including fees, commissions, and similar items;

gross income from business; gains derived from dealings
in property; interest; rents; royalties; dividends; annuities;
prizes and winnings; pensions; and partner's distributive
share of the gross income of general professional
partnership (Sec. 28, NIRC).
(2) Income differs from capital in that income is any wealth
which flows into the taxpayer other than a return of
capital, while capital constitutes the investment which
is the source of income. Therefore, capital is fund, while
income is the flow. Capital is wealth, while income is
the service of wealth. Capital is the tree, while income is
the fruit (Madrigal v. Rafferty, 38 Phil. 414 [1918)).
Income is liable to income tax, while capital or return of
capital is exempt from tax.
Bar Question (1995)
Mr. Francisco borrowed Pl0,000 from his friend, Mr. Gutierrez,
payable in one year without interest. When the loan became due,
Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable
to pay because of business reverses. Mr. Gutierrez took pity on Mr.
Francisco and condoned the loan. Mr. Francisco was solvent at the
time he borrowed the Pl0,000 and at the time the loan was condoned.
Did Mr. Francisco derive any income from the cancellation or
condonation of his indebtedness? Explain.
Suggested answer:
No, Mr. Francisco did not derive any income from the
cancellation or condonation of his indebtedness. Since it is obvious
that the creditor merely desired to benefit the debtor in view of the
absence of consideration for the cancellation, the amount of the debt
is considered as a gift from the creditor to the debtor and need not
be included in the latter's gross income. The gift may, however, be
subject to donor's tax at 30%, since Mr. Francisco and Mr. Gutierrez
are not members of the family.
To Whom Income Is Taxable

Income from sale of goods or properties is taxable to the
?wner-seller of the goods or properties, including rights thereto, but
income from sale of services is taxable to the person who renders
150 REVIEWER ON T,\XATION
the services. In the case of fringe benefits tax, the tax is imposed on
the employee who receives the fringe benefits paid by the employer
on account of the employer-employee relationship, although the tax
is assumed and paid by the employer to the BIR. The fringe benefit
tax cannot be imposed on the employer that paid the fringe benefits
because it is the payor of the expense; otherwise, income tax can be
said to be imposed not on the income, but on expense. In the case of
branch profit remittance tax, the tax is imposed on the branch profit
remitted by the Philippine branch to its foreign head office, although
the tax is paid by the Philippine branch to the BIR.
Dividends are prima facie the income of the record-owner of
the stock and are taxable to such owner. But where the record-
owner has sold the stock under an escrow agreement under which
title is to be retained by him, the dividends received by such owner
and applied in reduction of the purchase price are not taxable to him
(Moore v. Commissioner, 124 F[2d] 991).
Ownership of building by an individual makes the assessment
against the corporation improper (Mercy's, Inc. v. CIR, CTA Case
No. 895, May 11, 1982).
Final tax on interest income from loans to resident
borrowers is a direct liability of FCDU. -The 10% final tax on
interest income of a foreign currency deposit unit from loans extended
to resident clients is a direct liability of the FCDU. Although the
payor-borrower is the one constituted by law to withhold and remit
the 10% tax, the laws and jurisprudence do not absolve the FCDU
from payment of the tax, if the payor-borrower fails to perform its
duty as withholding agent. Corollary, the withholding agent may
also be assessed deficiency withholding tax as a penalty for failure to
fulfill its obligation to withhold as required by law. This is different
from the FCDU's liability to the tax (RCBC v. CIR, G.R. No.
170257, September 7, 2011). By the clear import of Section 28(A)(7)
(b) of the NIRC of 1997, income derived by a depository bank under
the foreign currency deposit system units from foreign currency
transactions with local commercial banks shall be subject to a final
tax of 10% (ING Bank N. V. - Manila Branch v. CIR, CTA EB
(]_ase No. 450~ M_a_rch 25, 2009). The law and jurisprudence do not
dispense the hab1hty of the taxpayer with respect to the payment of
the 10% final tax on onshore income if the withholding agent fails
to deduct and remit the same to the BIR. After all it is the taxpayer
who earns the income (ING Bank, N. V. Manil~ Branch v. CIR,
CTA EB Case No. 52, April 5, 2005).
Gross Income
Where legal title over the Fund is transferred to the

trustee, the income of the Fund shall accrue to the trustee,
not to the trustor. - In a trust, one person has an equitable
ownership in the property, while another person owns the legal
title to such property. The equitable ownership of the former
entitles h im to the performance of certain duties and the exercise
of certain powers by the latter. A person who establishes a trust is
the trustor. One in whom confidence is reposed as regards property
for the benefit of another is the trustee. The person for whose
benefit the trust is created is the beneficiary.
The DBP Board of Governors' (now Board of Directors)
Resolution No. 794 and the Agreement executed by former DBP
Chairman and th e trustees of the Plan created an express trust,
specifically, an employees' trust . An employees' trust is a trust
maintained by an employer to provide retirement, pension , or oth er
benefits to its employees. It is a separate taxable entity establish ed
for the exclusive benefit of the employees. Resolution No. 794 shows
that DBP intended to establish a trust fund to cover the retirement
benefit s of certain employees u nder R.A. 1616. The principal and
income of the Fund would be separate and distinct from the funds of
DBP. Fur ther, the DBP, as th e trustor , vested in the trustees of the
Fund legal title over the Fund as well as control over the investment
of the money and assets of the Fund. The powers and duties granted
to the trustees of the Fund under the Agreement were plainly more
than just administrative. The trustees received and collected any
income and profit derived from the Fund, and they maintained
separate books of account for this purpose. The principal and income
of the Fund will not revert to DBP even if the trust is subsequently
modified or terminated. The Agreement states that the principal and
income must be used to satisfy all of the liabilities to the beneficiary
officials and employees under the Gratuity Plan. The beneficiaries
or cestui que trust of the Fund are the DBP officials and employees
who will retire under C.A. 186, a s amended by R.A. 1616 (DBP v.
Commission on Audit, G.R. No. 144516, February 11, 2004).
Source Rules
The source rules to determine whether income shall be treated
as income from within or outside the Philippines can be found in
Section 42 of the 1997 Tax Code. There are different.source rules for
different types of income. The following incomes are considered as
income from sources within the Philippines:
R &VlKWF.R ON 'l'AXA'rlON
1. Interests: Residence of the debtor or obligor. - If the

obligor or debtor (corporation or otherwise) is a resident of
the Philippines, the interest income is treated as income
from within the Philippines. It does not matter whether
the loan agreement is signed in the Philippines or abroad
or the loan proceeds will be used in a project inside or
outside the country.
2. Dividends: Residence of the corporation paying
divid end. - Dividends received from a domestic
corpo1·ation or from a foreign corpor ation are treated as
income from sources within the Philippines, unless less
than 50% of t he gross income o'f the foreign corporation
for the three-year period preceding t he declaration of
such dividends was derived from sources within the
Philippines, in which case, only the amount which bears
the same ratio to such dividends as the gross income
of t he corporation for such period derived from sources
- within the Philippines bears to its gross income from all

sources shall be treated as income from sources within
the Philippines.
3. Services: Place of performance of the service. - If
the service is performed in the Philippines, the income is
treated as from sources within the Philippines.
Gross income from sources within the Philippines includes
compensation for labor or personal services performed within the
Philippines, regardless of the residence of the payor, of the place in
which the contract for service was made, or of the place of payment. If
a specific amount is paid for labor or personal services performed in
the Philippines, such amount shall be included in the gross income.
If there is no accurate allocation or segregation of compensation
for labor or personal services performed in the Philippines, the
amount to be included in t he gross income shall be determined
on apportionment of time basis; i.e., there shall be included in the
gross income an amount which bears the same relation to the total
compensation as the number of days of performance of the labor or
services within the Philippines bears to the total number of days
of performance of labor or services for which the payment is made.
Wages received for services rendered inside the territorial limits of
the Philippines and wages of an alien seaman earned on a coastwise
vessel are to be regarded as from sources within the Philippines
(Sec. 155, Rev. Regs. No. 2).
Gross Income
A non-resident alien is taxed only on her commission

income for services rendered in the Philippines. - Baier-
Nickel, a non-resident German, is the President of Jubanitex, Inc.,
a domestic corporation engaged in manufacturing, marketing,
acquiring, importing, exporting, and selling embroidered textile
products. Through its General Manager, the corporation en gaged
the services of Baier -Nickel as commission agent, who will r eceive
10% sales commission on all sales actually concluded and collected
through her efforts. In 1995, Baier-Nickel r eceived commission
income, which Jubanitex withheld 10% and remitted to the BIR.
Baier-Nickel filed her income tax r eturn on October 17, 1997 and
on April 14, 1998, sh e filed a claim for refund, contending that h er
commission income is not taxable in the Philippines becau se it was
compensation for h er services r endered in Germany.
Non-resident aliens, whether or not engaged in trade or
business, are subject to Philippine income tax on their income
received from all sources within the Philippines. The underlying
theory is that the consideration for taxation is protection of life and
property and that the income rightly to be levied upon to defray
the burdens of the Government is that income which is created by
activities and property protected by the Government or obtained by
persons enjoying that protection. The important factor, therefor e,
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 (CIR v. Baier-Nickel, G.R. No.
156305, February 17, 2003).
In this case, however, the appointment letter of Baier-Nickel, as
agent of Jubanitex, stipulated that th e activity or the service which
would entitle her to 10% commission income, are sales actually
concluded and collect ed through her efforts. What she presented as
evidence to prove t hat sh e performed income-producing activities
abroad were copies of documents she allegedly faxed to Jubanitex'
and bearing instructions as to the sizes of, or designs and fabrics to
be used in the finished products as well as samples of sales orders
purportedly relayed to h er by clients. However, these documents
do not show whether the instruction s or orders faxed ripened into
concluded or collected sales in Germany. At the very least , these
Pieces of evidence show that while Baier-Nickel was in Germany,
she sent instructions/orders to Jubanitex. Thus, claim for refund
Was denied (Commissioner v. Baier-Nickel, G.R. No. 153793,
August 29, 2006).
Income from turnkey contract with onshore and offshore

portions. - 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 the mobile equipment for the NDC project and the
ammonia storage tanks and refrigeration units were made and
completed in Japan. They wer e already finished products when
shipped to the Philippines. The other construction supplies listed
under the Offshore Portion such as steel sheets, pipes and structures,
and electrical and instrument apparatus were not finished products
when shipped to the Philippines. They, however, were likewise
fabricated and manufactur ed by the sub-contractors in Japan. All
services for the design, fabrication, engineering, and manufacture
of the materials and equipment under Japanese Portion Yen I were
made and completed in Japan. These services were rendered outside
the taxing jurisdiction . of the Philippines and are therefore not
subject to tax on the part of a foreign corporation (CIR v. Ma rubeni
-- Corporation, G.R. No. 137377, December 18, 2001).
Bar Question (2014)

Triple Star, a domestic corporation, entered into a Management
Service Contract with Single Star, a non-resident foreign corporation
with no property in the Philippines. Under the contract, Single
Star shall provide managerial services for Triple Star's Hong Kong
branch. All said services shall be performed in Hong Kong. Is the
compensation for the services of Single Star taxable as income from
sources within the Philippines? Explain.
Suggested answer:
• I
No. The compensation for services rendered by Single Star

ts an income derived from sources without the Philippines. To
be considered as income from within, the labor or service must be
- performed within the Philippines (Sec. 42[Al[3} and Sec. 42[CJ[3},
NIRC). Since all the services required to be performed by Single Star,
a non-resident foreign corporation, is to be performed in Hong Kong,
the entire income is from sources without.
Bar Ques tion (1994)

Bates Advertising Company is a non-resident corporation duly
organized and existing under the laws of Singapore. It is not doing
I NCOME AND Wl'rHHOLDING TAXES 155
Gross Income
business and has no office in the Philippines. Pilipinas Garment,

Inc., a domestic corporation, retained the services of Bates to do
all the advertising of its products abroad. For said services, Bates'
fees are paid through outward remittances. Are the fees received by
Bates subject to any withholding tax?
Suggested answer:
The fees paid to Bates Advertising Company, a non-resident
foreign corporation, are not subject to withholding tax, since they
are not subject to Philippine income tax. They are exempt because
they do not constitute income from Philippine sources, the same being
compensation for labor or personal services performed outside the
Philippines (Sec. 36[cj[3] and Sec. 25[b][l], NIRC).
International shipping line. - In the case of an
international shipping line, "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 (Sec. 28[AJ
{3][b], NIRC).
International air carrier. - In the case of an international
air carrier, its Gross Philippine Billings (GPB) shall be subject to
income tax. The term "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.
Tickets revalidated, exchanged, and/or indorsed to another
international airline form part of the Gross Philippine Billings, if
the passenger boards a place in a port or point in the Philippines.
However , for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside th e
l·
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 sh all form part" of Gross Philippine
Billings (Sec. 28[AJ[3J[a], NIRC, as implemented by Rev. Regs. No.
15-2002). This n ew regulation removes the uncer tainty as to the
amount of GPB an inter national air carrier shall declare for income
tax purposes.
Beginning 2013, an international air carrier may be entitled
to the preferential income tax rate under the tax treaty or even
exempt from Philippine income tax, subject to rules on reciprocity
11\(,\
r
,,
1
I'
,,.
on rf'v(m\.lllA from trAnAport of pflAR<:mgars from the Philippines to a

fo:rt'ign port. (R.A. 10,178, Marr.h 27. 2013).
Driti~h OvorS(lftS Airways Corporation (BOAC) is an offline
int~rn1,tionu.l Afr carrier. Sinct~ it was not granted a Certificate of
Public Convcmience and Necessity to operate in the Philippines, it
did not carry passengers and/or cargo to and from the Philippines,
although during the period covered by the assessment, it maintained
a gen(~rnl sales agent in the Philippines not of a temporary character,
which was re.!1ponsible for selling BOAC tickets covering passengers
and cargoes. The Court ru led that 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. In BOAC's case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency.
The situs of the source of payments is the Philippines. The flow of
wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In
r.~ ·:. consideration for such protection, the flow of wealth should share
the burden of supporting the government. A transportation ticket
is not a mere piece of paper. When issued by a common carrier, it
• constitutes the contract between the ticket-holder and the carrier .
t The test of taxability is the source, and the source of income is that
activity which produced the income. The word "source" conveys one
essential idea, that of origin, and the origin of the income is the
Philippines (CIR v. British Overseas Airways Corporation, 149
SCRA 395 [19871).
Bar Question (1994)

Caledonia Aircargo is an off-line international carrier without
any flight operations in the Philippines. It has, however, a liaison
office in the Philippines which is duly licensed with the Securities
and Exchange Commission, established for the purpose of providing
passenger and flight information, reservation, and ticketing services.
. ke. t~e ~evenues of Caledonia Aircargo from tickets reserved
by its Pluhpp1ne office subject to tax?
Suggested answer:
" . T~e ~ev_enues in t_he Philippines of Caledonia Aircargo as an

offline airline from ticket reservation services are taxable income
'
157
Gross Income
from "whatever source" under Section 28(a) of the Tax Code. This cas_e
is analogous to Commissioner v. BOAC (G.R. Nos. 65773- 74, April
30, J987), where the Supreme Court ruled that the income received
in the Philippines from the sale of tickets by an "offiine" airline is
taxable as income from whatever source.

An international airline with no landing rights in the
Philippines sold tickets in the Philippines for air transportation. Is
income derived from such sales of tickets considered taxable income
of the said international air carrier from Philippine sources under
the Tax Code? Explain.
Suggested answer:
No. While the tickets are sold here by the international airline,
this is for carriage of persons, excess baggage, cargo, and mail not
originating from the Philippines, because the airline has no landing
rights in the Philippines. The income from the sale of tickets is
actually the gross revenue derived from the carriage of persons,
excess baggage, cargo, and mail and these revenues are considered
as income from Philippine sources only if the fiight originates from
the Philippines in a continuous and uninterrupted fiight, irrespective
of the place of payment of the ticket or passage document (Sec. 28[AJ
[3J[a], NIRC). Accordingly, the income mentioned is not derived from
Philippine sources.
Bar Question (1993)

Pacific, Inc. is engaged in overseas shipping. It time chartered
one of its ships to a Japanese company on a five-year term. The
charter was consummated through the efforts of Kamino Moto,
a Tokyo-based broker. The negotiation took place in Tokyo. The
agreement calls for Pacific, Inc. to pay Kamino Moto $50,000. Your
opinion is sought whether Pacific, Inc. should withhold the tax
before sending the compensation of Kamino Moto.
Suggested answer:
The compensation of Kamino Moto is not subject to withholding
tax. Compensation for labor or personal services performed outside
the Philippines are considered as income from sources without the
Philippines (Sec. 36[c][3] and [a][3], NIRC). Kamino Moto's effort in
consummating the Charter is a form of labor or services.
168 REvlEWER ON TAXAnON
Considering further that Kamino Moto is a Tokyo-based broker,

presumably a non-resident foreign corp<>ration. it is taxable only on
income within the Philippines.
4. Rentals and royalties: Location or use of the prop~rty
or interest in such property. - If the property or
interest is located or used in the Philippines, the gain
or income is treated as income from sources within the
Philippines.
Bar Question (2010)

ABC, a domestic corporation, entered into a software license
agreement with XYZ, a non·resident foreign corporation based in
- the U.S. Under the agreement which the parties forged in the U.S.,
XYZ granted ABC the right to use a computer system program
and to avail of technical know-how relative to s uch program. In
consideration for such rights, ABC agreed to pay five percent of
the revenues it receives from customers who will use and apply
the program in the Philippines. Discuss the tax implications of the
transaction.
Suggested answer:
The royalty received by XYZ from ABC will be subject to
Philippine income tax, because the source of the royalty income is
from the Philippines. Rentals and ro_yalties from property located
in the Philippines or from any interest in such property, including
rentals or royalties therefrom shall be treated as income from sources
within the Philippines (Sec. 42[AJ[4J, NIRC). Considering that XYZ
is a non-resident foreign corporation, such royalty income is subject
to the 30% final withholding income tax under Section 29(B) of the
Tax Code, such tax to be withheld by ABC and paid in the same
manner as provided in Section 58 of the Tax Code. XYZ does not have
to file a Philippine income tax return on the royalty income. For VAT
purposes, ABC must withhold and assume the payment of the 12%
VAT on the royalty income, which input tax can be credited against
ABC's output tax for the taxable period.
5. Sale of real property: Location of real property. - If
the real property sold is located within the Philippines,
the gain is considered as income from the Philippines.
6. Sale of personal property:
A. Income from the sale of personal property (i.e., goods)
by the producer or manufacturer depends upon two
INCOME M'D WITHHOLDING TAXES
159
Gross Income
factors: (1) the place where the sale of such personal

property occurs; and (2) the place where such
personal property was produced or manufactured.
The following are the source rules with respect to
such sale of goods:
a. Personal property produced (in whole or in part)
by the taxpayer within the Philippines and sold
within the Philippines, or produced (in whole or
in part) by the tax.payer without the Philippines
and sold without the Philippines - Any gain,
profit, or income from the sale of goods by the
producer or manufacturer shall be treated as
derived entirely within the Philippines, or
entirely without the Philippines.
b. Personal property produced (in whole or in
part) by the taxpayer within the Philippines
and sold without the Philippines, or produced
(in whole or in part) by the taxpayer without
and sold within the Philippines - Any gain,
profit or income from the sale of goods by the
producer or manufacturer shall be treated as
derived partly from sources within and partly
from sources without the Philippines.
B. The source rule regarding the income from the
purchase and sale of personal property.(i.e., trading):
Purchase of personal property within and
its sale without the Philippines. or purchase of
personal property without and its sale within the
Philippines - Any gain, profit or income derived
from the purchase and sale of personal property
(i.e., trading) shall be treated as derived entirely
from sources within the place/country where the
personal property is sold. Accordingly, if the goods
are shipped in a foreign port under "Free-on-Board
(FOB) shipping point" arrangement, title to the
goods is transferred at the foreign port and any gain
from the sale of such goods to a Philippine importer
shall be treated as income from sources outside the
Philippines.
C. The source rule regarding the income from the sale

of shares of stock in a domestic corporation:
Shares of stock in a domestic corporation -
Gain, profit, or income is treated as derived entirely
from sources within the Philippines, regardless of
where the said shares are sold. Thus, a non-resident
alien who owns shares of stocks of a domestic
corporation acquired through a foreign stock
exchange is still liable to the Philippine income tax
even if such shares are sold also through a foreign
stock exchange.
Bar Question (2015)

Ms. C, a resident citizen, bought ready-to-wear goods from Ms.
B, a non-resident citizen.
b) If Ms.Bis an alien individual and the goods were produced
in her factory in China, is Ms. B's income from the sale of
the goods to Ms. C taxable in the Philippines? Explain.
Suggested answer:
b) Yes, but only a proportionate part of the income. Gains,
profits, and income from the sale of personal property
produced 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
(Sec. 42[EJ, NIRC).
Note: The problem does not indicate where the
sale took place. The suggested answers in a and b above
assume that the sale took place in the Philippines. A non-
resident alien is to be taxed by the Philippine government
only on her income derived from an activity conducted in
the Philippines such as the sale of goods irrespective where
produced.
Enumeration of source rules above is not exclusive;
reinsurance premiums paid to a foreign corporation is income
from sources within the Philippines. - Reinsurance premiums
remitte~ by a domestic insurance company to foreign reinsurance
comparues are considered income of the latter derived from sources
within th~ Philippines. Since Section 53 (now Sec. 57) of the Ta~
Code subJects to withholding tax various specified income, among
Gross Income
them, premiums, the generic connotation of each and every word

or phrase composing the enumeration in subsection (b) is income.
Perforce, the word &'premiums" which is neither qualified nor
defined by the law itself, should mean income and should include
all premiums constituting income, whether they are insurance or
reinsurance premiums. Section 24 (now Sec. 28) of the Tax Code
does not require a foreign corporation to be engaged in business
in the Philippines, in order for its income from sources within the
Philippines to be taxable. It subjects foreign corporations not doing
business in the Philippines to tax for income from sources within
the Philippines. If by source of income is meant the business of
the taxpayer, foreign corporations not engaged in business in the
Philippines would be exempt from taxation on their income from
sources within the Philippines. Section 37 (now Sec. 42) of the
Tax Code is not an all-inclusive enumeration; it provides that "the
following items of gross income shall be treated as gross income
from sources within the Philippines." It does not state or imply t hat
an income not listed therein is necessarily from sources outside the
Philippines (A lexander Howden & Co., Ltd. v. Collecto r, G.R.
No. L-19392, April 14, 1965). 1
Definition of Income
"Income" means an amount of money coming to a person or
corporation within a specified time, whether as payment for services,
interest, or profit from investment . Unless oth erwise specified,
income means cash or its equivalent (Conwi v. CTA and CIR, 213
SCRA 83 {1992]) . Income is a flow of service rendered by capital
by the payment of money from it or any other benefit rendered by
a fund of capital in relation to such fund through a period of time
(Madrigal v. Rafferty, 38 Phil. 414 [1918]). Income covers gain
derived from capital, from labor, or from both combined, provided it
he understood to include profit gained through a sale or conversion
of capital a ssets (Fis her v. Trinidad, 43 Phil. 973 /1922]).
Income includes earnings, lawfully or unlawfully acquired, without
consensual recognition, express or implied, of an obligation to repay
and without restriction as to their disposition (James v. U.S., 366
U.S. 2 13). Thus, income from illegal drug and gambling activities is
taxable as well.
Income may include: (a) increase in inventory at the end of the
~able year ; however, mere increase in the value of property is not
lllcome but increase in capital; (b) transfer of appreciated property
162 REVIEWER ON T,\XATJON
to employee for services rendered; and (c) just compensation paid by

government for property acquired by expropriation.
Expropriation is deemed complete only upon full payment of
just compensation to petitioner and ownership over the expropriated
land property shall pass from the owner. The expropriation of
lands consists of two stages: (1) determination of the authority of
the government to exercise the power of eminent domain and the
propriety of its exercise in the context of the facts involved in the
suit; and (2) determination by the court of the just compensation
for the property sought to be taken with the assistance of not more
than three (3) commissioners. It is only upon the completion of
these two stages that expropriation is said to have been completed.
Moreover, it is only upon payment of just compensation that title
over the property passes to the government (Philippines v. Salem
.... Investment Corporation, et al., G.R. No.137569, June 23, 2000) .
The payment of the provisional value as a prerequisite to the issuance
of a writ of possession differs from the payment of just compensation
for the expropriated property. While the provisional value is based
on the current relevant zonal valuation, just compensation is based
on the prevailing fair market value of the property. Provisional
value refers to the preliminary or provisional determination of the
value of the property. It serves a double-purpose of pre-payment if
the property is fully expropriated, and of an indemnity for damages
if the proceedings are dismissed. It is not a final determination of
just compensation and may not necessarily be equivalent to the
prevailing fair maxket value of the property. Just compensation, on
the other hand, is the final determination of the fair market value of
the property (Capitol Steel Corporation v. Phividec Industrial
Authority, G.R. No. 169453, December 6, 2006). The transfer of
- property through expropriation proceedings and the payment of

just compensation are necessary elements of "sale" or "exchange"
for purposes of Sections 24(D) a nd 56(A)(3) of the N IRC of 1997,
as amended. Hence, both elements must be present in order to be
considered "sale" and be subjected to the imposition of capital gains
tax (Capitol Steel Corporation v. CIR, CTA Case No. 9240,
October 26, 2017).
The following are not income: (a) deposit of property that does
not increase net worth of taxpayer (e.g., the increase in asset has a
corresponding increase in liability); (b) increase in net worth is due
to correction of errors in book entries; (c) voluntary assessments by a
corporation paid by its shareholders under Revenue Regulations No.
2; (d) security deposit paid to a lessor until it is applied in payment
•
INCOME A."ffi WITHHOLDING T A.x.&S 163
Gross Income
of accrued rent; (e) contributions by lot owners for the memorial

park care fund; (f) loan proceeds received by the borrower; and (g)
offsetting of a receivable account from a debtor against the payable
account involving th e same debtor. 1
Recognition of revenue when offsetting concurrent obliga-

tions
While offsetting, as a mode of extinguishment of an obligation,
may take place between parties who are debtor and cr editor of each
other is allowed under the Civil Code, th e practice of offsetting due
to/due from and/or payable/receivable transactions of taxpayers
and consequently the accounting and recording of the same and its
related transactions in the books of the parties is strictly prohibited
for taxation purposes. The accrued receivables or payables arising
from sale or lease of goods or properties or the performance of
service, shall be recognized at gross for income and value-added
tax or percentage tax purposes. Thus, for certain transactions with
"netting arrangement" or those providing for net settlement of cash
flows, t he rules are as follows: (1) if the agreement provides for the
first party to give discount to the second party but in reality the
discount is disguised service fee, such discount shall not be allowed
as deduction from the gross selling price but shall be considered as
revenue on the part of payor of the income payment notwithstanding
the "netting'' arrangement between the payor and the payee; (2) in the
telecommunications industry, the interconnection share of TELCO
1 should for m part of reported gross revenue of TELCO 2 but with
the simultaneous r ecognition of the corresponding interconnection
fee expense and setting-up of the liability for th e same amount due
by TELCO 2 to TEL CO 1; and (3) between a bank which extended
a loan to its depositor who also maintains a deposit account with
the same bank, th e bank should recognize the income earned from
the loan extended to its depositor without offsetting the interest
expense due to such depositor on the deposit account maintained
with the bank (RMC No. 61-2016).
Bar Questio n (1991)

X owns a half-hectar e property in Bacoor , Cavite which in
1980 was expropriated by the national government, through the
Department of Public Works and Highways. After ten years, X
1
See CIR v. ANSI Agricultural Products, Inc., C'l'A EB Case No. 1340, Janu-
ary 30, 2017.
was paid P2,000,000 as just compensation plu~ six percent ann~al

interest by the DPWH but minus the withholding tax. Is the action
of DPWH proper? Reasons.
Suggested answer:
No, the action of DPWH is not proper. In the case of Province
of Tayabas v. Perez (66 Phil. 467 [19311), "just compensation"
was defined as "the just and complete equivalent of the loss which
the owner of a thing expropriated has to suffer by reason of the
expropriation."
Further, in BIR R uling No. 61-91, ~'just compensation" was
defined as that which is paid by the Government equivalent to the
value of the property at the time of its taking. It is the fair and full
equivalent for the indemnity.
Based on the foregoing it is clear, therefore, that the amount
received after 10 years as just compensation is not in any way a profit,
gain, or income on the part of X, in the same vein, the six percent
annual interest paid by DPWH is not income. The same partakes
of the nature of a penalty or indemnity due and accruing to X for
having been deprived of the use and benefit by not being paid of the
fair market value of the property since its taking 10 years ago. Hence,
the DPWH should not have withheld taxes.
Bar Question (2012)

Mr. Jose Castillo is a resident Filipino citizen. He purchased a
parcel of land in Makati City in 1970 at a consideration of P l million. l
In 2011, the land, which remained undeveloped and idle, had a fair f
market value of P20 million. Mr. Antonio Ayala, another Filipino
citizen, is very much interested in the property and he offered to
buy the same for P20 million. (a) Is Mr. Castillo liable for income
tax in 2011 based on the offer to buy by Mr. Ayala? (b) Should Mr.
Cast~~o agree to sell the land in 2012 for P20 million, subject to the
cond1t10n as stated in the Deed of Sale that the buyer shall assume
the capital gains tax thereon, how much is the Income tax due on
t he transaction and when must the tax return be filed and the tax be
paid by the taxpayer?
Suggested answers:
a. Mr. Castillo is not liable for income tax in 201 J because no
income is realized by him during that year. Tax liability
for income tax attaches only if there is a gain realized
INCOME AND WITHHOLDING T AXES 165
Gross Income
resulting from a closed and completed transaction

(Madrigal v. Rafferty, G.R. No. L-12287, August 7,
1918).
b. He shall be liable to pay the six percent capital gains tax
based on the gross selling price of the property of P20
million plus the capital gains tax assumed by the buyer
(following the doctrine of constructive receipt of income).
He should file the return within 30 days from the date
of sale and pay the tax as he files the return (Sec. 24[DJ,
NJRC).
Bar Question (2000)

a) What is meant by taxable income?
Suggested answer:
"Taxable income" means the pertinent items of gross income
specified in the Tax Code, less the deductions and/ or personal and
additional exemptions, if any, authorized for such types of income by
the Tax Code or other special laws (Sec. 31, NIRC).
Bar Question (1991)

ABC Computer Corp. purchased some years ago Membership
Certificate No. 7 from the Calabar Golf Club., Inc. for P300,000. In
4 September 1985, it transferred the same to Mr. John Johnson, its
American computer consultant, to enable him to avail of the facilities
of the Club during his stay here. The consultancy agreement expired
two (2) years later in the meantime, the value of the Club share
appreciated and what was purchased by the corporation at P300,000,
commanded a market value of P800,000 in 1987. Before he returned
home a few days after h is tenure ended, Mr. Johnson transferred the
subject sh are to Mr. Robert James, the new consultant of the firm
and the newly designated playing representative, under a Deed of
Declaration of Trust and Assignment of Shares, wherein the former
acknowledged the absolute ownership of ABC Computer Corp. over
the share, that the assignment was without any consideration and
that the sh ar e was placed in his name because the Club required it
to be done.
1) Is the assignment/transfer of the shares from Johnson to
James subject to income tax?
166 R EVJEWER ON TAXATION
Sugge sted answer:

The assignment or transfer of shares from Johnson to James is
not subject to income tax. There had been no real change of ownership
that took place. There having been no actual sale or exchange, no
income tax incidence can be said to have occurred. I n addition, there
was really no income realized or received considering that in the
Deed of Declaration of Trust and Assignment of Shares, the absolute
ownership of ABC Computer Corporation was explicitly recognized.
2) Is the said assignment a gift and, therefore, subject to gift

tax?
Suggested answer:
The assignment can neither be held to be a gift. To be considered
a gift within the context of the NIRC, there must be a transfer of
ownership or a quantifiable interest. More importantly, the transfer of
the membership certificate was merely a designation of the consultant
to be the "play ing representative" of ABC Computer Corporation in
the Calabar Golf Club.
Bar Question (1996)

X, a multinational corporation doing business in the Philippines
don at ed 100 shares of stock of said corporation to Mr. Y, its resident
manager in the Philippines.
(1) What is the tax liability, if any, of X corporation?
(2) Assuming the shares of stocks were given to Mr. Yin
consideration of his services to the corporation what are
t he tax implications? Explain.
Suggested answer:
(1) Foreign corporations effecting a donation are subject to
donor's tax only if the property donated is located in the
Philippines. Accordingly, donation of a foreign corporation
of its own shares of stocks in favor of resident employees is
not subject to donor's tax (BIR R uling No. 018-87, January
26, 1987). However, if 85% of the business of the foreign
corporation is located in the Philippines or the shares
donated have acquired business situs in the Philippines
the donation may be taxed in the Philippines subject to the
rule of reciprocity.
INCOME AND W!THHOLDJNG TAXES 167
Gross Income
(2) If the shares of stocks were given to Mr. Yin consideration

of his services to the corporation, the same shall constitute
taxable compensation income to the recipient because it is
a compensation for services rendered under an employer-
employee relationship, hence, subject to income tax.
The par value or stated value of the shares issued also constitutes
deductible expense to the corporation, provided it is subjected to
withholding tax on wages.
Distinctions between Capital and Income

The essen tial differ ences between capital and income are as
follows:
1. Capital is a fund, while income is a flow;
2. A fund of property existing at an inst a nt of time is called
capital , while a flow of services render ed by that capital
by th e payment of money from it or any other benefit
render ed by a fund of capital in relation to such fund
t hrough a period of time is called income;
3. Capital is wealth, while income is the service of wealth;
4. Capit al is the tree, while income is the fruit; labor is a
tree, income the fruit; property is a tree, income the fruit
(Madrigal v. Rafferty, supra) ;
5. Return or recovery of capital is not subject to income tax,
while income is subject to income tax.
Tests in determining Income

a. Realiz ation test. - There is no taxable income until
there is a separation from capital of something of
exchangeable value, thereby supplying the realization
or transmutation which would result in the receipt of
income (Eisner v. Macomber·, 252 U.S. 189). Thus,
stock dividends are not income subject to income tax
on the part of the stockholder, becaus~ he_ merely holds
more shares representing the same equity interest in th e
corporation that declared th e stock dividends (Fisher v.
Trinidad, supra). However, the interest which were also
deducted as interest expense from t he corporation's gross
income, were constructively received by the president
168 REVIEWER ON TAXAT!ON
and stockholder of the payor corporation and, therefore,

includible in his gross income (Spouses Araneta v. CIR,
CTA CASE No. 1699, November 6, 1970).
b. Claim of right doctrine. -A taxable gain is conditioned
upon the presence of a claim of right to the alleged gain
and the absence of a definite uncondition al obligation to
return or repay that which would otherwise constitute
a gain. To collect a tax would give the government an
unjustified preference as to the part of the money that
rightfully and completely belongs to th e victim. The
embezzler's title is void (Commissioner v. Wilcox, 286
U.S. 417, 424).
On May 27, 1977, Dolores Ventosa requested the
transfer of $1,000 from the First Nation al Bank, West
Virginia to Victoria Javier in Manila through the Pruden-
tial Bank. Accordingly, the First National Bank request-
ed the Mellon Bank to effect the transfer. Unfortunately,
the wire sent by Mellon Bank to Manufacturers Hanover
Bank, a correspondent bank of Prudential Bank, indi-
cated the amount transferred as "$1,000,000" instea d of
$1,000. Hence, Manufacturers Hanover Bank transferred
one million dollars less bank charges to Prudential Bank
for the account of Victoria Javier. On June 3, 1977, Javier
opened a new dollar account (No. 343) in the Prudential
Bank and deposited $999,943.70. Immediately thereaf-
ter, Victoria Javier and her husband, Melchor Javier, Jr.,
made withdrawals from the account, deposited them in
several banks only to withdraw them later in an apparent
plan to conceal, launder, and dissipate the erroneously
sent amount. Spouses Melchor and Victoria Javier filed
their consolidated income tax return for the year with the
notation "The taxpayer was the recipient of some money
from abroad which he presumed to be a gift but turned
out to be an 'error' and is now subject of litigation," but
they did not declare it as income. The court ruled that
the amount received is income subject to tax, but th e tax
return filed cannot be considered as fraudulent because
petitioner literally "laid his cards on the table" for respon-
dent to examine. Error or mistake of fact or law is not
fraud (CIR v. Javier, 199 SCRA 824 {1991]).
INCOME AND WJTHHOLDrNO TAXES
169
Gross Income
c. Income from whatever source. - All income not

expressly excluded or exempted from the class of taxable
income, irrespective of the voluntary or involuntary action
of the taxpayer in producing th e income, and regardless of
the source of income, is taxable (Gutierrez v. CTA and
Collector, 101 Phil. 713 [19571). Thus, passive income
from debt instruments that do not qualify as deposit
substitutes subject to 20% final withholding tax under the
1997 National Internal Revenue Code are subject to the
r egular income tax (Banco de Oro v. Republic of the
Philippines, G.R. No. 198756, January 13, 2015) .
d. Economic benefit test. - Any economic benefit to the
employee that increases his net worth (i.e., total assets
less total liabilities); whatever may have been the mode
by which it is effected, is taxable. Thus, in stock options,
the difference between the fair market value of the
shares at the time the option is exercised and the option
price constitutes additional compensation income to the
employee at the time of exercise (not upon the grant or
vesting of the right) (Commissioner v. Smith, 324 US
177).
All of the above tests are followed in the Philippines
for purposes of determining whether income is received
by the taxpayer or not during the year.
Significance of Knowing the Type or Character of Income

In general, it is important to know the types of income realized
by the taxpayer , since the Philippines has adopted the semi-global
or semi-schedular tax system. Under this tax system, compensation
income, business and professional income, capital gains, passive
income, and other income not subject to final income tax, are added
together to arrive at the amount of gross income of an individual,
and after deducting the allowable deductions from business and
professional income, capital gains, passive income, and other income
not subject to final income tax, the graduated income tax rates
ranging from zero percent to 35% (formerly 5%- 32%) are applied on
the resulting net taxable income to arrive at the income tax due and
payable.
The passive investment income are generally subject to the
final withholding tax; hence, the income recipient does not file a
tax. return covering such passive investment incomes, although the
170 R EVIEWER ON TAXA110N
withholding agent-payor of income is held responsible under the law

to deduct, withhold. and remit the final income tax thereon to the
BIR.
Capital assets subject to the final capital gains tax such as
shares of stock of a domestic corporation and real property located
in the Philippines, except when sold or transferred by a dealer in
securities or real estate dealer, are covered by the capital gains tax
return; hence, not included in the taxable income of the individual
taxpayer subject to the global tax system and the graduated income
tax rates.
The rules for individuals discussed above also apply to a cor-
poration, except that the corporation does not receive compensation
income.
......
•"?
Compensation Income
In general, the term "compensation,, means all remuneration
for services performed by an employee for his employer under an
employer-employee relationship (See Sec. 2. 78.3, Reu. Regs. No.
2-98, as amended), unless specifically excluded by the Tax Code. In
determining the existence of an employer-employee relationship,
the elements that are generally considered are: (a) the selection and
engagement of the employee: (b) the payment of wages; (c) the power
of dismissal; and (d) the employer's power to control the employee
i with respect to the means and methods by which the work is to
> be accomplished. It is the so-called "control test" that is the most
important element (Brotherhood Labor Unity Movement of the
•' Philippines v. Zamora, G.R. No. L-48645, January 7, 1987).
fI Under the control test, an employer-employee relationship exists
where the person for whom the services are performed reserves the
right to control not only the end achieved, but also the manner and
means used to achieve that end (DOLE D.O. No. 147-15; David v.
Macasio, G.R. No. 1954661, July 2, 2014).
Who Is an employee?
For taxation purposes, a director is considered an employee
under Section 5 of Revenue Regulations No. 12-86, to wit: "An
individual, performing services for a corporation, whether as an
officer and director or merely as a director whose duties are confined
to attendance at and participation in the meetings of the Board of
Directors, is an employee." The non-inclusion of the names of some
of petitioner's directors in the company's Alpha List for 1997 does
INCOMF. ANO WtTHHOLOINO TAXES 171
Gross Income
not ipso facto create a presumption that they are not employees
of the corporation, because the imposition of withholding tax on
compensation hinges upon the nature of work performed by such
individuals in the company. Moreover, Section 2.57.2.A(9) of Rev.
Regs. No. 2-98 cannot be applied to t his case as the latter is a later
regulation, while the accounting books examined were for t he year
1997 (First Lepanto Taisho Insurance Corporation v. CIR, G.R.
No. 197117,April 10, 2013). [NOTE: Beginning 1998, a director who
is not an official or employee of a corporation is NOT an employee of
said corporation; hence, the applicable expanded withholding tax to
be deducted from such income shall be 5%, if gross income is P3M or
less, or JO% if gross income exceeds P3M (fo rmerly 10%/ 15%), which
is creditable against his ordinary income tax liability for the year,
provided it is evidenced by BIR Form 2307. However, said director's
fee is taxed also under the global tax system].
The term "employee" r efers to any individual who is the
recipient of wages and includes an officer, employee or elected
official of the government or any political subdivision, agency or
instrumentality thereof. It includes also an officer of a corporation.
Thus, a juridical entity t hat performs services to another person is
not an employee of the latter. Accordingly, the proper withholding
tax on such income payment is the expanded withholding tax (not
withholding tax on compen sation income). To create an employer-
employee relationship, the person that performs the service to
another must be an individual.
The term ''compensation income" means all r emuneration
for services performed by an individual employee for his employer,
including the cash value of all remuneration paid in any medium other
than cash. There are various types of taxable compensation income,
such as salaries, wages, bonus, r emuneration, honorarium, benefits,
and allowances (including representation and transportation
allowance (RATA), personal emergency relief allowance (PERA),
longevity pay, subsistence allowance, hazard pay, annuities,
pensions, etc. Additional compensation allowance (ACA) given to
government employees pursuant to E.0. 219 shall n ot be subject
to withholding tax pending its formal integration into the basic
pay. While its nature shall continue to be that of compensation, it
shall be treated as part of the "other benefits" which are excluded
from compensation income, provided that the total amount does
not exceed P90,000 (formerly P82,000) (BIR R uling No. 034-2002,
August 16, 2002 modified BIR Ruling No. 179-99, November 22,
1999). BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000
'
November 20, 2000 exempt benefits and allowances such a s longevity

pay, subsistence allowance, and hazard pay granted to uniformed
policemen and jail guards under R .A. 6975 (DILG Act of 1990).
However, if the recipient is an AFP personnel, all remunerations
(monetary and non-monetary) are taxable, except allowances for
quarters, clothing and subsistence which are exempt from income
tax pursuant to RMC 15-87 (BIR Ruling No. 143-96, December 24,
1996).
Compensation Income of Philippine Nationals and Aliens

Employed by Foreign Governments and International Orga-
nizations in the Philippines
Section 23 of the Tax Code lays down the general principles
in taxing citizens and alien individuals. Resident citizens are
taxed on worldwide income, while resident aliens are taxed only
.~
i'~~
on their Philippine-source income. As an exception to the general
rule, most international agreements which grant withholding tax
immunity to foreign governments/embassies/diplomatic missions
and international organizations also provide exemption to their
officials and employees who are foreign nationals and/or non-
Philippine residents from paying income taxes on their salaries and
other emoluments.
Since th e withholding tax is merely a method of collection of
income tax, the exemption from withholding taxes on compensation
income of foreign governments/embassies/diplomatic missions and
international organizations does not equate to the exemption from
.lt paying the income tax itself by the recipients of said income.
••
Foreign Embassies and Diplomatic Missions
.•··
~ Articles 34 and 37, Vienna Convention on Diplomatic Relations,
exempts: (a) diplomatic agents who are not nationals or permanent
residents of the Philippines; (b) members of family of diplomatic
agent forming part of his/her household who are not Philippine
nationals; (c) members of administrative and technical staff of
the mission plus members of their families who are not Philippine
nationals or permanent residents of the Philippines; (d) members
of service staff of the mission who are not Philippine nationals or
permanent residents of the Philippines; and (e) private servants
of members of the mission who are not Philippine nationals or
permanent residents of the Philippines. The applicable rules are as
follows:
INCOME AND WrrHHOLDlNG TAXES 173
Gross Income
Aid Agencies of Foreign Governments

JICA: Only JICA resident representatives and his/her staff
who were "dispatched from Japan" shall not be subject to
Philippine income tax .
GIZ (Germany): Only German specialist of German construction
and consulting firms shall be exempt.
AUSAID: Salaries and other remuneration paid by the
Government ofAustralia or by Australian personnel, firms,
instit utions, or organizations to any per son performing
work under t he Memorandum shall be exempt.
CIDA: Only Canadian personnel who derive income from
Canadian aid funds as provided under a subsidiary
agreement shall be exempt.
Advisory Committee on Voluntary Foreign Aid-USA

••
CARE: Only CARE employees who are not Philippine nationals
are exempt.
FPPI or PLAN: Only non-Filipino staff members of the PLAN
who receive salaries and stipends in US dollars shall be
exempt.
Aid Agencies
Ford Foundation, Rockefeller Foundation, Agricultural
Development Council, and Asia Foundation: Only non-
Filipino staff members thereof who receive salaries and
stipends in US dollars shall be exempt.
IRRI (P.D. 728 and R.A. 3538)
Catholic Relief Services - NCWC and Tools for Freedom
Foundation (R.A. 4481)
Asian Development Bank (ADB) - Section 45(b), Article
XII of the Agreement between ADB and RP: Only officers and
staff of ADB who are not Philippine nationals shall be exempt
from Philippine income tax (because exemption is "subject to the
power of the Government to tax its nationals." Any exemption
from Philippine income tax must be granted under duly r ecognized
international agreement s or particular provisions of existing
law. Affected individuals (of foreign embassies a nd international
organizations) who were not granted such exemption must file their
income tax returns and pay the tax due thereon on or before the 15th
day of April following the close of the taxable year (RMC 31-2013,
April 12, 2013). [NOTE: See Section 78(A), NJRC on services to
international organizations].
Statutory Minimum Wage

Compensation income falling within the mea ning of "statutory
minimum wage',2 (SMW) under R.A. 9504, effective July 6, 2008,
as implemented by Revenue Regulations No. 10-2008 dated July 8,
2008, shall be exempt from income tax and withholding tax. Holiday
pay, over time pay, night shift differ ential pay, and hazard pay
earned by a Minimum Wage Earner (MWE) shall likewise be covered
by the above exemption. However, RR 10-2008 further provided that
an employee who r eceives/earns additional compensation such as
commission s, honoraria, fringe benefits, benefits in excess of the
allowable st atut ory amount off>30,000 (now P90,000, as a mended by
R.A. 10963 [TRAIN]), taxable allowances and other t axable income
other than the SMW, holiday pay, overtime pay, hazard pay and night
shift differential pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from income
tax and withholding tax. The Supreme Court declared as null and
void Sections 1 and 3 of RR 10-2008 which added a r equirement not
found in the law by effectively declaring that a MWE who receives/
{:.
earns additional compensation, taxable allowa nces and other
taxable income other than the SMW, holiday pay, overtime pay,
hazard pay, and night shift differential pay is no longer entitled to
the exemption provided under R.A. 9504. Nowhere in the pr ovisions
of R.A. 9504 would one find the qualifications prescribed by the
assailed provisions of RR 10-2008. The provisions of the law are
clear and precise; they leave no room for interpretation - they do
not provide or r equire any other qualification a s to who are MWEs
(Soriano v. Secretary of Finance, G.R. No. 184450, January
24, 2017).
Hazard pay shall mean the amount paid by the employer to
MWEs who wer e actually assigned to danger or st rife-torn areas,
2
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Em·
ployment Statistics of DOLE. The RTWPB of each region shall determine the wage
rates in the different regions based on established criteria and shall be the basis of
exemption from income tax for this purpose.
I NCOME AND WITHHOLDING T AXES 175
Gross Income
disease-infested places, or in distressed or isolated stations and

camps, which expose them to grea t danger of contagion or peril to
life. Any hazard pay paid to MWEs which does not satisfy the above
criteria is deemed subj ect to income tax a nd withholding tax. 3
When an award of backwages is made, there is an acceptance
that the employee was illegally or unjustly dismissed, and the
backwages are the salaries h e was s upposed to h ave earned h a d
he not bee n dismissed. It is as though h e was not separated from
employment, and as though he actually rendered service (Escareal
v. CTA, et al., CA-GR SP No. 41989, Sep tember 30, 1998). In
this connection, RMC 39-2012 dated August 3, 2012 provides that
''the employee should report as income and pay the corresponding
income taxes by allocating or spreading his back wages. allowances,
and benefits through the years from his separation up to the final
decision of the court awarding the backwages. The said back wages,
allowances, and benefits are subject to withholding tax on wages.
However, when the judgment awarded in a labor dispute is enforced
through garnishment of debt s due to t he employer or other credits
to which the employer is entitled, the person owning such debts or
having in possession or control of such credits (e.g., banks or other
financial institutions) would normally release and pay the entire
garnished amount to the employee. As a result, employers who are
mandated to withholding taxes on wages pursuant to Section 79 of
the Tax Code, a s implemented by Revenue Regulations No. 2-98,
cannot withhold the appropriate tax due thereon. In this regard, the
"employer" also refers to the person having control of the payment of
the compensation in cases where the services are or were performed
for a person who does not exercise such control. Thus, the person
owning or having possession or control of t h e credit sh a ll withhold
the required tax.
Backwages, Allowances, and Benefits Awarded in Labor

Dispute
Backwages, allowances, and benefits awarded in a labor
dispute constitute remuneration for services that would have been
performed by the employee in the year when actually r eceived
or during the period of his dis missal from the service which was'
subsequently ruled to be illegal.
3 See Sec. 1, Rev. R.egs. No. 10-2008, July 8, 2008.

176 REVIEWER ON T AXATION
The employee should report as income and pay the corresponding

income taxes by allocating or spreading: his backwages, allowances
and benefits thru the years from his separation up to the final
decision of the court awarding the backwages.
The backwages, allowances, and benefits are subiect to
withholding tax on wages.
However, when the judgment awarded in a labor dispute
is enforced thru garnishment of debts or having in possession or
control of such credits (e.g., banks or other financial institutions)
would normally release and pay the entire garnished amount to the
employee. As a result, employers who are mandated to withhold
taxes on wages cannot withhold the appropriate tax due thereon.
In order to ensure the collection of the appropriate withholding
..
,.,--
tax on wages, garnishees of a judgment award in a labor dispute
are constituted as withholding agents with the duty to withhold tax
on wages equivalent to five percent of the portion of the judgment
award, representing the taxable backwages, allowances, and benefits
(RMC 39-2012, August 3, 2012).
Items Not Included as Compensation Income

Compensation shall not include remuneration paid: (a) for
agricultural labor paid entirely in products of the farm where the
labor is performed; or (b) for domestic service in a private home;
or (c) for casual labor not in the course of the employer's trade or
business; or (d) for services by a citizen or resident of the Philippines
for a foreign government or an international organization, provided
that the remuneration received for services performed during more
than one-half of any payroll period of not more than 31 consecutive
days do not constitute wages (Sec. 78/AJ, NIRC).
As a general rule, the income recipient is the person liable
to pay the income tax. In order to improve the collection of income
on the compensation income of employees, the State requires the
employer to withhold the tax upon payment of the compensation
income, such that at the end of the calendar year, the employee
needs only to file a tax return and no tax is paid, because his total
withholding tax during the year is equal to his income tax liability.
[Beginning 2002, qualified employees need not .file their
income tax returns and the employer may .file a substituted ';
return for its employees.]

I NCOME AND WITHHOLDING TAXE.S 177
Gross Income
Bar Question (2015)

Indicate whether each of the following individuals is required
or not required to file an income tax return:
(d) Resident citizen who falls under the classification of
m1n1mum wage earners.
Suggested answer:
(d) Not required. Under the law, all minimum wage earners
in the private and public sector shall be exempt from
payment of income tax (Sec. 5l{Aj[2j[d], NIRC in relation
to R.A. 9504).
Bar Question (1996)

Xis employed as a driver of a corporate lawyer and he receives
a mont hly salary of P5,000 with free board and lodging with an
equivalent value of Pl,500.
(1) What will be the basis of X's income tax? Why?
(2) Will your answer in question (1) be the same if X's
employer is an obstetrician? Why?
Suggested answer:
(1) The basis of X 's income tax would depend on whether
his employer is an employee or a practicing corporate
lawyer. If his employer is an employee, the basis of X's
income tax is P6,500 equivalen_t to the total of the basic
sa lary and the value of the board and lodging. This is
so because the employer has no place of business where
the free board and lodging may be given. On the other
hand, if the corporate lawyer is a practicing lawyer (self-
employed), X should be taxed only on P5,000, provided
that the free board and lodging is given in the business
premises of the lawyer and for his convenience, and that
the free lodging was given to X as a condition for his
employ ment.
(2) If the employer is an obstetrician who is self-employed,
the basis of his income will only be P5, 000, if it is proven
that the free board and lodging is given within the
business premises of said employer for his convenience
178 REVJEWf:R ON TAXATION
and that the free lodging is required to be accepted by

X as condition for employment. Otherwise, X would be
taxed on P6,500.
Bar Question (1999)

A Co., a Philippine corporation, has an executive (P) who is a
Filipino citizen. A Co. has a s ubsidiary in Hong Kong [HK Co.] and
will assign P for an indefinite period to work full time for HK Co. P
will bring his family to reside in HK and will lease out his residence
in the Philippines. The salary of P will be shouldered 50% by A Co.
while the other 50% plus housing, cost of living and educational
allowances of P's dependents will be shouldered by HK Co. A Co.
will credit the 50% of P's salary to P's Philippine bank account. P
will sign the contract of employment in the Philippines. P will also
be receiving rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to the
Philippine income tax?
Suggested answer:
The salaries and allowances received by P are not subject to
Philippine income tax. P qualifies as a non-resident citizen because
he leaves the Philippines for employment requiring him to be t
physically present abroad most of the time during the taxable year .r
'
(Sec. 22/EJ, NIRC). A non-resident citizen is taxable only on income l
derived from Philippine sources (Sec. 23, NIRC). The salaries and t
allowances received from being employed abroad are incomes from t
witlwut because these are compensation for services rendered outside
of the Philippines (Sec. 42, NIRC).
However, P is taxable on rental income for the lease of his
Philippine residence because this is an income derived from within,
the leased property being located in the Philippines (Sec. 42, NJRC).
Bar Question (2004)

Citing Section 10, Article VIII of th e 1987 Constitution, which
provides that salaries of judges shall be fixed by law and that during
their continuance in office their salary shall not be decreased, a judge
of MM Regional Trial Court questioned the deduction of withholding
taxes from his salary since it results into a net deduction of his pay.
Is t he contention of the judge correct? Reason briefly.
l N('OMF. i\Nn W1 THIIOL01Nn T AXES 179
CtroRR lncome
Suggested answer:
No. The con.l<'nlion is inrorrnrt. The salaries of judges are not
tax-exempt and their taxability is not contrary to the provisions of
Section 10, Article VIII of the Constitution on the non-diminution
of the salaries of the judiciary during their continuance in office.
The clear intent of the Constitutional Commission that framed the
Constitution is to subject their salaries to tax as in the case of all
taxpayers. Hence, the deduction of withholding taxes, being a manner
of collecting the income tax on their salary, is not a diminution
contemplated by the fundamental law (Nitafan, et al. v. CIR, 152
SCRA 284 [19871).
Fringe Benefits
To ensure that fringe benefits are subjected to income tax,
Section 33 of R.A. 8424, which imposes a fringe benefits tax on the
fringe benefits received by supervisory and managerial employees,
was enacted. The law mandates that the employer shall assume
the fringe benefits tax imposed on the t axable fringe benefits of
the managerial or supervisory employee, but allows the employer
to deduct such fringe benefit tax as a business expense, when the
grossed-up monetary value (composed of the value of the fringe
benefits and FBT) is authorized as a business deduction. In other
words, the FBT on the fringe benefits of the employees, assumed by
the employer, loses its character as an income tax in the hands of the
employer. However, the fringe benefits of rank-and-file employees
are treated as part of his compensation income subject to income
tax and withholding tax on compensation income, which must be
withheld and deducted by his employer from the compensation
income of the employee.
Fringe benefits received by employees, except rank-and-file
employees, including those in Special Economic Zones and Freeport
zones, are subject to the 35% normal fringe benefits tax (effective
January 1, 2018), or 25% on the fringe benefits received by non-
resident aliens not engaged in trade or business in the Philippines,
or 15% imposed on the fringe benefits received by an alit•n individual
employed by a regional or area headquarters, regiot1al operating
headquarters, offshore banking units, or foreign petroleum service
contractors or sub-contractors, or any of their Filipino individual
employees who are employed and occupying same positions as those
held by the alien employees (BIR Ruling No. 04-2000, January 5
2000). '
180 RF.VlEWF.R ON TAXATION
As a general rule, thc1 income recipient is the person liable to

pay the income tax." In order to improve the collection of income
on the compensation income of employees, the State requires the
employer to withhold the tax upon payment of the compensation
income, such that at the end of th e calendar year, the employee
needs only to file a tax return and no tax is paid, because his total
withholding tax during the year is equal to his income tax liability.~
It had been observed by government, however , that many of the
fringe benefits paid by the employer to his employees are not being
subjected to income tax and withholding tax on compensation.
To plug this loophole, R.A. 8424,6 which imposes a fringe benefits
tax on the fringe benefits received by supervisory and managerial
employees, was enacted in 1997 to take effect on the first day of the
following year. The law mandates that the employer shall assume
the fringe benefits tax imposed on the taxable fringe benefits of the
managerial or supervisor y employee, but allows the employer to
deduct such fringe benefit tax as a business expense from its gross
income.
However, the fringe benefits of rank-and-file employees are
treated as part of his compensation income subj ect to income tax and
withholding tax on compensation income, which must be withheld
and deducted by his employer from the compensation income of
the employee. Due to the different tax treatment of fringe benefits ....
received by supervisory and managerial employees, on one hand,
and those received by rank-and-file employees, on the other hand,
some say that the law is anti-poor and contravenes the fundamental
principle that the income tax shall be imposed based on the
taxpayer's ability to pay. This is also the reason why supervisory
and managerial employees want to treat the amounts paid to them
..'
I by their employers as fringe benefits, while the employer wants to
consider the same payments as compensation income.
- Fringe benefits received by employees, except rank-and-file

employees, in Special Economic Zones and Freeport zones are
su bject to the 35% normal fringe benefits tax (effective January 1,
2018), or 25% on the fringe benefits received by non-resident aliens
4
While the FBT is mandated to be assumed by the employer, it is still a tax
imposed on the income (fringe benefits) of the employee.
11
Beginning calendar year 2002, qualified employees need not file their income
tax returns and the employer may file a substituted return for the employees.
6
FBT imposed in R.A. 8424 was implemented by Rev. Regs. No. 3-98.
INCOME AND WITRHOLOlNG TAXES 181
Gross Income
not engaged in trade or business in the Philippines, or 15% imposed

on the fringe benefits received by an alien individual employed by
a regional or area headquarters, regional operating headquarters,
offshore banking units, or foreign petroleum ser vice contractors or
sub-contractors, or a ny of their Filipino individual employees who
are employed and occupying same positions as those h eld by the
alien employees. 7
Housing assistance granted by a PEZA-registered corporation
to its expatriate employees who are directors or managers are
considered as fringe benefits subject to the fringe benefits tax. 8 The
amount of rent subsidized by the company in behalf of its expatriate
employee shall be treated as fringe benefit subject to the fringe
benefits tax. However , where the amount of the lease is higher than
the fringe benefit allowable, the excess shall be treated as income
subject to income tax and withholding tax.9
The fringe benefits tax is imposed on 50% of the grossed-up
monetary value of the leased motor vehicle. Thus, only 10% (50%
less 40%) of the monthly car rental is subject to the fringe benefits
tax of the firm en gaged in the lease of cars and other vehicles for
use of its salesmen , executives, and other employees, since the 40%
share of said personnel on th e monthly rental h as already been
taxed as compensation income. 10
Fringe benefits of Pl8,000, which Philippine Long Distance
Telephone Company granted per r ank-and-file employee of the
company labor union in the form of education assistance in its
recently concluded Collective Bargaining Agreement, are exempt
from the fringe benefits tax on the part of the recipients. 11
Overtime meal allowance furnished by a domestic corporation
to its rank-and-file and supervisory, professional, and technical
employees pursuant to its Collective Bargaining Agreement is not
subject to fringe benefits tax. 12
7
BIR Ruling No. 04-2000, January 5, 2000.
8
BIR Ruling No. 208-99, December 28, 1999.
9
BIR Ruling No. 025-2001, June 13, 2001.
10
BIR Ruling No. 009-2000, January 4, 2000.
u BIR Ruling No. 057-98, May 21, 1998.
12
BIR Ruling No. 061-99, May 5, 1999.
182 RP:Vl gwF.R ON 'f'AXA'l'ION
De min/mis benefits
There are certain frin ge benefits denominated as "de minimis
benefits'''~ that are exempt from income tax and withholding tax,
even if r eceived by rank-and-file employees and supervisory or
managerial employees. These include:
• Monetized unused vacation leave credits of private
employees not exceeding 10 days;
• Monetized value of vacation and sick leave credits paid to
government employees;
• Medical cash allowance to dependents of employees, not
exceeding Pl ,500 per employee per semester or P250 per
month;
Rice subsidy of P2,000 or one sack of 50 kg rice per month
amounting to not more than P2,000;
Uniform and clothing allowance not exceeding P6,000 per
annum;
Actual medicine assistance (e.g., medical allowance to
cover medical and h ealthcare n eeds, annual medical/
executive check-up, maternity assistance, and routine
consultations, not exceeding Pl0,000 per annum);
Laundry allowance not exceeding P300 per month;
Employees achievement awards (e.g., for length of
service or safety achievement, which must be in the form
of tan gible personal property other than cash or gift
certificate, with an annual monetar y value not exceeding
Pl0,000 received by employee under an established
written plan which does not dis criminate in favor of
highly paid employees);
• Gifts given dur ing Christm as a nd major anniversary
celebrations n ot exceeding P5,000 per employee per
annum;
Daily meal allowance for overtime work and night/
graveyard shift not exceeding 25% of basic minimum
13
See Sec. 1, Rev. Regs. No. 10-2008, J uly 8, 2008; Rev. Regs. No. 02-98, as
amended by Rev. Regs. Nos. 06-11, 01-15, and Sec. 6, Rev. Regs. No. 11-18.
Gross Income
wage on a per region basis (Rev. Regs. No. 5-2011, March

16, 2011).
• Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive
schemes provided that the total annual monetary value
received from both CBA and productivity incentive
schemes combined do not exceed Pl0,000 per employee
per taxable year (Rev. Regs. No. 2- 98, as amended).
The amount of "de minimis" benefits conforming to the ceiling

herein prescribed shall not be considered in determining the P30,000
ceiling of "other benefits" excluded from gross income under Section
32(b)(7)(e) [Exclusions] of the Tax Code. However, if the employer
pays more than the ceiling prescribed by these regulations, the
excess shall be taxable to the employee receiving the benefits only
if such excess is beyond the P90,000 (formerly P82,000) ceiling. Any
amount given by the employer as benefits to its employees, whether
classified as de minimis benefits or fringe benefits, shall constitute
as deductible expense upon such employer. MWEs receiving 'other
benefits' exceeding the P90,000 (formerly P82,000) limit shall be
taxable on the excess benefits, as well as on his salaries, wages, and
allowances, just like an employee receiving compensation income
beyond the SMW. 14
Where compensation is paid in property other than money, the
employer shall make necessary arrangements to ensure that the
amount of the tax required to be withheld is available for payment
to the BIR.
The prevailing judicial opinion is to the effect that generally,
the value to the employee of living quarters and meals furnished
in addition to salary constitutes income subject to tax. However,
where the quarters and meals are furnished for the convenience of
the employer, the ratable value of the same need not be added to the
salary or cash compensation of the employee for income tax purposes
(Collector v. Henderson, 1 SCRA 649 [19611). The value of the
meals is not taxable to the employee, if the meals are provided by
the employer for a substantial non-compensatory business purpose
(generally when employee is required to be on duty during the meal
14
Sec. 1, Rev. Regs. No. 10-2008, July 8, 2008; R.A. No. 10653, Rev. Regs. No.
3-2015.
period).111 Lodging is excluded only if the employee must accept the

lodging on the employer's business premises as a condition of his
employment. 1e
Stock Option Plans

A corporation grants options to its employees to buy its shares
of stock at P150 per share. The employees exercised the options at
the time the shares of stock were selling at the stock exchange at
P200 per share. There is additional compensation income of P50 per
share at the exercise date17 (Commissioner v. Smith, 824 U.S.
177).
In BIR Ruling No. 119-2012, February 22, 2012, it was ruled
the.t any income derived by the employees from their exercise of
stock options is considered as compensation income subject to
incon1e tax and withholding tax. In said ruling, stock options were
granted by the domestic corporations as part of compensation plan,
and under the plan, the employees were giv~n the right to buy a
specified number of shares of a foreign corporation up to a specified
time/period from the grant date, at a fixed price, regardless of the
stock's future market price.
The following rules shall now be followed for stock option plans:
1. Any income or gain derived from stock option plans
granted to managerial or supervisory employees, which
qualifies as fringe benefits, is subject to FBT imposed
under Section 33 of the Tax Code.
2. The additional compensation of the taxable fringe benefit
is the difference of the book value/fair market value of the
shares, whichever is higher, at the time of exercise of the
stock option and the price fixed on the grant date.
3. The option has value only if, at the time of the exercise,
the stock is worth more than the price fixed on the grant
date.
4. The additional compensation or taxable fringe benefit
arises whether the shares of stocks involved are that of a
domestic or foreign corporation.
1&Sec. 119- l(a), U.S. !RC.

16Sec. 119, U.S. IRC.
17BIR Ruling No. 135-97, December 11, 1997.
INCOME AND WITHHOLDTNO TAXES 186
Gross Income
5. If the shares to be used at the exercise of the stock options

come from the unissued shares of stock of the issuing
corporation, the original issuance of said shares is subject
to DST.
6. When the employee subsequently sells or dispose of the
sh ares of stocks, the tax treatment sh all be as follows:
a. If the shares involved are shares of stock in a domestic
corporation not traded in the local stock exchange,
the gain, if any, is subj ect to capital gains tax. The
sale or transfer of the said shar es is subject to DST,
upon execution of the deed transferring ownership
or rights thereto, or upon delivery, assignment, or
endorsement of such shares in favor of another.
b. If the shares involved are sh ares of stock listed
and traded through the local stock exchange, the
transaction is subject to the stock transaction tax.
c. If the shares involved are shares of stock in a
foreign corporation, the gain, if any, is subject to the
ordinary income tax or regular corporate income tax
(RMC 88-2012, December 28, 2012).
Bar Question (2016)

Mapagbigay Corporation grants all its employees (rank-and-
file, supervisors, and managers) five percent discount of the purchase
price of its products. During an audit investigation, the BIR assessed
the company the corresponding tax on the amount equivalent to the
courtesy discount received by all the employees, contending that
the courtesy discount is considered as additional compensation for
the rank-and-file employees and additional fringe benefit for the
supervisors and managers. In its defense, the company argues that
the discount given to the rank-and-file employees is a de minimis
benefit and not subject to tax. As to its managerial employees, it
contends that the discount is nothing more than a privilege and its
availment is restricted. Is the BIR assessment correct? Explain.
Suggested answer:
No. The courtesy discounts given to rank-and-file employees
are considered as "de minimis benefits" falling under the category of
ot_her facilities and privileges furnished or offered by an employer to
his employees which are of relatively small value intended to promote
REVIEWER ON TAXATION
186
the health, goodwill, contentment, or efficiency of the employee. These

benefits are not considered as compensation subject to income tax
and consequently to the withholding tax (Sec. 2. 78.1 of Rev. Regs. No.
10-2008). If these "de minimis benefits" are furnished to supervisors
and managers, the same are also exempt from the fringe benefits tax
(Rev. Regs. No. 3-98; Sec. 33, NIRC).
Alternative Answer:
Yes, the BIR assessment is correct. De minimis are benefits of
relatively small values provided by the employers to the employee on
top of the basic compensation intended for the general welfare of the
employees. It is considered exempt from income tax on compensation
as well as from fringe benefit tax, provided it does not exceed P 10,000
per employee per taxable year.
[NOTE: Refer to the above list of de minimis benefits under Sec.
1, Rev. Regs. No. 10-2008, Rev. Regs. No. 02-98, as amended by Rev.
Regs. Nos. 05-11, 01-15, and Sec. 6, Rev. Regs. No. 11- 18.}
Tb,is list is exclusive and anything that is given which is not on
the list, shall not be considered de minimis. The five percent discount
of purchase price of its products, not being in this enumeration, is
subject to tax as well as to withholding tax on compensation.
Bar Question (2015)

What are de minimis benefits and how are these taxed? Give
t hree examples of de minimis benefits.
Suggeste d answer:
De minimis benefits are facilities and privileges furnished or
offered by an employer to his employees, which are not considered as
compensation subject to income tax and consequently to withholding
tax, if such facilities or privileges are of relatively small value and are
offered or furnished by the employer merely as means of promoting
the health, goodwill, contentment, or efficiently of his employees. If
received by rank-and -file employees they are exempt fro m income
tax on wages; if received by supervisory or managerial employees,
they are exempt from the fringe benefits tax (Rev. Regs. No. 2-98, as
amended by Rev. Regs. No. 8-2000).
[NOTE: Refer to the above list of de minimis benefits under
Sec. 1, Rev. Regs. No. 10-2008, Rev. Regs. No. 02-98, as amended by
Rev. Regs. Nos. 05-11, 01-15, and Sec. 6, Rev. Regs. No. 11-18.)
I Nl 'OM I( ANII Wt 'rlllllll ,l>INH ·r. . xll'.l4 1~7
Ormui l nmnll•

Which oft.he following lt-1 nn <~xrlut4inn from l{l'Ot4M inc·omP?
(A) Salaries and wages
(B) Cash dividends
(C) Liquidating dividend~ aftor diRsolution of a corporati.on
(D) De minim is henefitH
(E) Embezzled money
Suggested answe r:
(D) De minimis benefits (Section 33 fCH4); Rev. Regs. No.
3-98)
De minimis benefits are non-taxable fringe ben efits. They a.re
not to be reported in the income tax return because they a re tax
exempt. They are also exempt from the imposition of th e fringe
benefits tax.
Bar Question (2003)
A "fringe benefit" is defined as being any good, service or
other benefit furnished or granted in cash or in kind by an employer
to an individual employee. Would it be the employer or the employee
who is legally required to pay an income tax on it? Explain.
Suggested answer:
It is the employer who is legally required to pay an income tax
on the fringe benefit paid to supervisory or managerial employee. Th&
frin.ue benefit tax is imposed as a final withholding income tax on the
fringe benefits of the employee. but the legal obligation to remit the
tax is placed on the employer. such that if the tax is not paid. the legal
recourse of the BIR is to go after the employer. Any amount or value
received by the employee as a fringe benefit is considered tax-paid, or
net of the income tax due thereon. The person who is legally required
to pay is that person who, in case of non-payment, can be legally
demanded to pay the tax. Howeuer, fringe benefit paid to a rank-
and-file employee is taxable to said employee, which the employer is
required to deduct the corresponding withholding tax, unless it is
considered as de minimis benefit exempt from income tax.
Bar Question (1996)
(1) Mr. Adrian is an executive of a big business corporation.
Aside from his salary, his employer provides him with
· g benefits: free use of a residential house

the £OlloWin · · d
to an exclusive subdivision, free use of a hmous1ne a~
membership in a country club where he can entertam
customers of the corporation.
Which of these benefits, if any, must Mr. Adrian
report as income? Explain.
(2) Capt. Canute is a member of the Armed Forces of the
Philippines. Aside from his pay as captain, the government
gives him free uniforms, free living quarters in whatever
military camp he is assigned, and free meals inside the
camp.
Are these benefits income to Capt. Canuto? Explain.
(3) Mr. Infante was hit by a wayward bus while on his way
to work. He survived but had to pay P400,000 for his
hospitalization. He was unable to work for six months
which meant that he did not receive his u sual salary of
Pl0,000 a month or a total of P60,000. He sued the bus
company and was able to obtain a final judgment awarding
him P400,000 as reimbursement for his hospitalization,
P60,000 for the salaries h e failed to receive while
hospitalized, P200,000 as moral damages for his pain and
suffering, and Pl00,000 as exemplary damages. He was
able to collect in full from the judgment.
How much income did he realize when h e collected
on the judgment? Explain.
Suggested answer:
(1) Mr. Adrian must report the imputed rental value of the
house and limousine as income. If the rental value exceeds
I
the personal needs of Mr. Adrian because he is expected to
' I
provide accommodation in said house for company guests
or the car is used partly for business purpose, then Mr.
Adrian is entitled only to a ratable rental value of the
house and limousine as exclusion from gross income and
onl? ~ reasonable amount should be reported as income.
This i~ because the free housing and use of the limousine
are given partly for the convenience and benefit of the
employer (Henderson v. Collector, 1 SCRA 548 {1961]),
( 2) No, th~ fr~e uniforms, free living quarters and the free
meals inside the camp are not income to Capt. Canuto
INCOME AND WnHHOLDJNG TAXES 189
Gross Income
because these are facilities or privileges furnished by

the employer for the employer's convenience which are
necessary incidents to proper performance of the military
personnel's duties.
(3) None. The _P200,000 moral and exemplary damages are
compensation for injuries sustained by Mr. Infante. The
P400, 000 reimbursement for hospitalization expenses and
the P60, 000 for salaries he failed to receive are amounts
of any damages received whether by suit or agreement on
account of such injuries. Section 28(b)(5) of the Tax Code
specifically excludes these amounts from the gross income
of the injured individual (Sec. 28[b], NIRC and Sec. 63,
Rev. Regs. No. 2).
Trade or Business Income or Professional Income

There is no specific criterion as to what constit utes "doing'' or
"engaging in" or "tra n sacting" business . Each case must be judged
in the light of its peculiar environmental circumstances. The term
implies a continuity of commercial dealings and arrangements,
and contemplates, t o that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and
in progressive pr osecution of, commercial gain or for t h e purpose
and object of th e business or ganization (CIR v. British Overseas
Airways Corporation, 149 SCRA 395 [19871).
X Corporation rendered technical services through its "work
engineers" to PNB, DBP and SSS in the constr uction of their
buildings. The "work en gineers" acted as overseer s of X Corporation,
rendering their profession al services as e mployees of th e corporation.
In this case, X Corporation is a contractor and not an employee of ·-
the contractees. The employer-employee relationship exists only
where the person rendering employment services is an individual
and not a corpor ation. Moreover, t he tru e test in determining the
relationship between the parties is that if he r enders service in the
course of an independent occupation, representing the will of his
employer only as to the result of his work and not as to the means and
tnethods by which the work is to be accomplished, he is a contractor
(Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803 [1922); CIR v.
Engineering Equipment and Supply Co., 64 S CRA 597 [19751).
A firm which leases its neon signs and billboards cannot be
considered itself as a media company, like a newspaper or a radio
broadcasting company. Neon signs and billboards are pr imarily
dt~~lt{lWO for ndV\'rti~inJi(. (t. performs advertiRing services. It is,
thl-'rt1ft >1't'. nn ind t>pl'l10l•nt contractor (Advertising Associates v.
Court of Apptals, 183 SCRA I 1984./) .
G1'088 income from busiliess. - 1.n the case of manufactur ing,
nwrdrnndh;inlo{. or mining busint'ss. ''gross income" means the total
~Rh•s. IN~s t.ht' eost of ({oo<ls sold, plus any income from investments
nnd from indchmlnl or outs idl~ operations or sources. In determining
thti gross ineonw. $ttbtractions should not be made for depreciation,
dtlplt3tion. selling expenses or losses. or for items not ordinarily used
in computing the cost of goods sold (Sec. 43, Rev. Regs. No. 2). In
the cRSP of selk~rs of ser vices, their gross income is computed by
ded\tcting all direct costs a nd expenses as prescribed in Revenue
Memorandum Circular Nos. 4-2003 and 30 -2008 dated April 1, 2008.
Lease of ,·eal property. - "Gross income" means all income
derived from whatever source, including rents (Sec. 32[AJ[5}, NIRC).
Rental income is treated as business income to which the lessor may
claim allowable deductions under Section 34 of the 1997 Tax Code.
If the lessor is a citizen , resident alien, or non-resident alien
engaged in trade or business in the Philippines, his net taxable :·f
'
income shall be subject to the gr aduated income tax rates provided
for in Section 24 of the 1997 Tax Code, and if the lessors are husband
and wife, they shall compute separately their individual income tax
based on their respective taxable income. However, 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 (Sec. 24{A}, NIRC).
If the lessor is a non-resident alien not engaged in trade or 1
business in the Philippines, the rental income from real property
located in the Philippines shall be subject to 25% final withholding
t
tax (Sec. 25/BJ, NIRC), unless a lower rate is imposed pursuant to
an effective tax treaty, such tax to be withheld and remitted by the
lessee in the Philippines to the BIR within the prescribed dates
(Secs. 57 and 58, NIRC).
If the lessor is a domestic corporation or a resident foreign
corporation, its net taxable income sh all be subject to the 32% (now
30%) normal corporate income tax, or its gross income will be subject
to the two percent (2%) minimum corporate income tax whichever
if
~s higher (S~c. 27/AJ ~nd Sec. 28/A], NIRC). However, the lessor
1s a non-resident foreign corporation, the gross r ental income from
191
Gross Income
real property located in the Philippines shall be subject to the 32%

(now 30%) corporate income tax (Sec. 28{B], NIRC), such tax to be
withheld and remitted by the lessee in the Philippines to the BIR
within the prescribed dates.
Bar Question (2012)

Spouses Pablo Gonzales and Teresita Gonzales, both resident
citizens, acquired during their marriage a residential house and
lot located in Makati City, which is being leased to a tenant for a
monthly rental of Pl00,000. Mr. Pablo Gonzales is the President
of PG Corporation and he receives P50,000 salary per month. The
spouses have only one minor child. In late June 2010, he was
immediately brought to the hospital because of a heart attack and he
was pronounced dead on June 30, 2010. With no liabilities, the estate
of the late Pablo Gonzales was settled extra-judicially in early 2011.
(a) Is Mr. Gonzales required to file income tax return for 2010? If so,
how much income must he declare for the year? How much personal
and additional exemption is he entitled to? (b) Is Mrs. Gonzales
required to file income tax return for 2010? If so, how much income
must she declare for the year and how much personal exemption is
she entitled to? (c) Is the Estate of the late Pablo Gonzales required
to file income tax return for 2010? If so, how much income must it
declare for the yeai- and how much personal exemption is it entitled 'I
to? /' j
J
Suggested answers:
a. Yes, Mr. Pablo Gonzales is required to file income tax
return and pay income tax on the following incomes for
2010: P300,000 - rental income (Pl00,00012 x 6 months),
and P300,000 (P50,000x 6 months) -salary, from January
to June 30. Only 50% of the rental is to be reported by him
because the leased property is a property of the conjugal
partnership of gains belonging to the spouses. He will be
entitled to personal exemption of P50,000 and additional
personal exemption of P25,000 for one minor child. If the
taxpayer dies during the taxable year, his estate may still
claim the personal and additional exemptions for himself
and his dependent as if he died at the close of such year
(Sec. 35, NIRC).
b. Yes, Mrs. Teresita Gonzales is required to file her income
tax return and pay income tax on P600,000 (P50,000 x 12
months), rental income for the year (January to December
192 Rtl:Vllt WltR ON TAXATION
2010). If any income of the spouses 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 them for the purpose of determining their
respective taxable income (Sec. 24{AJ, NIRC). Since the
deceased husband already claimed the additional personal
exemption for the minor child, Mrs. Gonzales could no
longer claim the same additional personal exemption (Sec.
35[BJ, NIRC).
c. Yes, the Estate of the late Pablo Gonzales (through his
Administrator or Executor) is also required to file its
income tax return and pay tax, if applicable. Income tax
imposed by Title II upon individuals shall apply to the
income of estates, including income received by estates
of deceased persons during the period of administration
or settlement of the estate (Sec. 60, NIRC), and the estate
of a decedent (which shall have its own TIN) shall be
entitled to personal exemption of P20,000 (Sec. 61, NIRC).
It is believed, however, that since the personal exemption
of individuals has been increased to P50, 000 under R.A.
9504 (social legislation) in 2008, the same amount of
P50, 000 shall also be extended to estates and trusts. The
rental income to be reported by the estate shall be P300,000
(Pl00,000/2 x 6 months (from July 1 to December 31,
2010).
[NOTE: The allowance for personal and additional exemptions

as an allowable deduction of individuals were repealed by R.A.
10963 (TRAIN) effective January 1, 2018.]
Bar Question (1995)

Mr. Domingo owns a vacant parcel of land. He leases the land
to Mr. Enriquez for ten years at a rental of t-12,000 per year. The
condition is that Mr. Enriquez will erect a building on the land
which will become the property of Mr. Domingo at the end of the
lease without compensation or reimbursement whatsoever for the
value of the building.
Mr. Enriquez erects the building. Upon completion, the building
had a fair market value of Pl million. At the end of the lease, the
building is worth only P900,000 due to depreciation.
INCOME AND WITHHOLDlNG TAXES 193
Gross Income
Will Mr. Domingo have income when the lease expires and
becomes the owner of the building with a fair market value of
P900,000? How much income must he report on the building?
Explain.
Suggested answer:
When a building is erected by a lessee in the leased premises in
pursuance of an agreement with the lessor that the building becomes
the property of the lessor at the end of the lease, the lessor has the
option to report income as follows:
a. The lessor may report as income the market value of the
building at the time when such building is completed; or
b. The lessor may spread over the life of the lease the estimated
depreciated value of such building at the termination of
the lease and report as income for each year of the lease an
aliquot part thereof (Sec. 49, Reu. Regs. No. 2).
Sales or exchanges of real property. - Exchanges of real

property classified as capital assets by individuals are subject to
the capital gain s tax based on the fair market value of the real
property (BIR Ruling No. 037, February 10, 1988). So is a deed of
reconveyance with assumption of mortgage (BIR Ruling No. 298,
July 6, 1988).
Pursuant to Section 6(E) of the NIBC, the gross selling price or
current market value of the property subj ect of the sale, exchange,
or other disposition, whichever is higher, shall be used as basis of
the 6% capital gains tax. The application of a comparative sale or
any other tax base shall not be used as basis for the imposition of
the capital gains tax (RMC No. 27-2017, March 29, 2017). Thus,
in mortgage foreclosure sales, the amount of loan secured by the
mortgage is not considered as basis in computing the capital gains
tax (BIR Ruling No. 455, September 16, 1988); the basis, for income
tax purposes, is t he highest bid price.
Section 24(D)(l) of the 1997 Tax Code is comprehensive enough
to cover not only voluntary sales but also involuntary sales, like
execution sale and expropriation sale (BIR Ruling No. 091 , May 2,
1989). The transfer of property through expropriation proceedings
and the payment of just compensation are necessary elements of
"sale" or "exchange" for purposes of Sections 24(D) and 56(A)(3) of the
NIRC of 1997, as amended. Hence, both elements must be present
194 RIMKWl(R ON 1'AXATION
in order to bo ronsider{\d ",u,Je" and be subjected to the imposition of

capital gainM tAx (Capitol S te~l Corporation v. CIR, CTA Case
No. 9140, October 16. 2011). Th<? condemnor's title relates back to
the dRt~ on which the petition under the Eminent Domain Act, or
the commissioner's report under the Local Improvement Act, is filed
(Aaoclatlon of Small Landowners ln the Phlls., Inc., et al. v.
s~creta ry of A6rarian Reform, G.R. No. 78742, July 14, 1989).
In case of expropriation by the government, the actual consideration
mav be used as basis in determining the capital gains tax (BIR
R,,iing No. 175. September 30, 1990). The just compensation paid
by the government to the seller/owner of property is the equivalent
for t.he value of the property at the time of its taking (not at the time
of payment). It is the fair and full equivalent for the loss sustained
by the transferor that is the measure of indemnity. Such being
the case. the amount approved by the Court as fair compensation
must be used as the tax base for computing the gains derived out of
such transaction. The forced character of the disposition of the real
property provides the justification for the above-stated treatment of
gain arising from t he expropriation sale (BIR Ruling No. 061, April
11, 1991).
Professional Income
"Professional income" refers to t he fees received by a
professional from the practice of his profession, provided that
there is no employer -employee relationship between him and
his clients. The existence or absence of the e mployer-employee
relationship determines whether the income shall be treated as
compeDBation income or professional fee. This fact is material for
purposes of taxation because there is no deduction allowed against
,. compensation income, whereas allowable deductions may be
made from profesaionel income. Thus, a lawyer may practice his
profession as a legal officer of a private corporation, but for income
tax purposes, the compensation income he receives is subject to
the graduawd income tax rates without deductions (except for his
personal and additional exemptions) because of the existence of
employer-employee relationship.
Capital Assets
For tax purposes, there are three general types of capital
assets. These are: (a) shares of stock of a domestic corporation; (b)
real property (of individuals) or land/or building (of corporations);
INCOME AND WTTHHOLDJNG TAXES 195
Gross Income
and (c) other types of assets, including shares of stock of a foreign

corporation . The rules provided for in the 1997 Tax Code are
summarized below.
l. Shares of stock of a domestic corporation

"Shares of stock" shall include shares of stock of a
corpor ation, warrants, and/or options to purchase shares of stock,
as well as units of participation in a partnership (except general
professional partnerships, joint stock companies, joint accounts,
joint ventures taxable as corporation s, associations, and recreation
or amusement clubs (such as golf, polo, or similar clubs), and mutual
fund certificates (Sec. 22/L}, N IRC).
"Dealer in securities" means a merch ant of stocks or
securities, whether an individual, partnership, or corporation, with
an established place of business, regularly engaged in the purchase
of securities and the resale thereof to customers. It means any
person who buys and sells securities for his/her own account in the
ordinary course of business (Sec. 3. 4, SRC).
The rules on sale or exchange of shares of stock of a dom estic
corporation are:
a. If the seller or transferor is a dealer in securities, the
sh ares of stock (whether listed and traded in the local
stock exchange, listed but not traded in t he local stock
exchange, or not listed) shall be treated as ordinary assets
and the ordinary gain, if any, from th e sale or transfer
thereof shall be subject to the graduated income tax rates
[zero percent to 35% (formerly 5%-32%)], in the case
of individual seller or transferor, or to the 30% normal
corporate income tax, in the case of corporate seller or
transferor.
b. If the seller or transferor is not a dealer in securities,
the shares of stock are regarded as capital assets. There
is a need to determine if t he shares of stock are listed and
traded in a local stock exchange.
Investor in sh ares of stock in a mutual fund company, in
connection with the gains realized by said investor upon redemption
of said shares of stock in a mutual fund company (Sec. 32[BJ[6}{h],
NIRc, Rev. Regs. No. 6-2008, April 22, 2008).
l) If the shares of stock are listed and traded in the local
stock exchange, the transaction is exempt from income ta,~,
regardless of the nature of business of the s~ll:r or transfer?r

{indiyidual or corporation), except when 1t 1s a dealer 1n
securities. Income taxes covered by the exemption are capital
gains taxes from the sales of shares of stock by citizens, res~dent
aliens domestic corporations, resident and non-resident
foreig~ corporations, and regular income tax on gains derived
from sales of shares of stock (Sec. 10, Rev. Regs. No. 3-95).
However, it is subject to the 6/10 of 1 % stock transaction
tax 18 (formerly 1/2 of 1%) imposed in Section 127(A) of th e 1997
Tax Code, based on the gross selling price or gross value in
money of the shares of stock sold or transferred. The selling
price of the shares of stock sh a ll be the fair market value of the
shares of stocks transferred or exchanged (based on the listed
price on the date of sale or closest to it) and not the fair market
value of the property received in exchange (Sec. 6[a], Rev. Regs.
No. 2-82). The provisions of Revenue Regulations No. 2-82
were amended in 2008 as follows: "In determining the selling
price, the following rules shall apply: (a) in cash sale, selling
price shall be the total consideration per deed of sale; (b) if
total consideration consists partly in money and partly in kind,
the selling price shall be the sum of money and the FMV of the
property received; (c) in case of exchange, selling price shall be
the FMV of the property received; and (d) in case FMV of the
shares sold or exchanged is greater than the amount of money
and/or the FMV of the property received, the excess of the FMV
~·
i of the shares sold or exchanged over the amount of money and
the FMV of the property, if any, received as consideration shall
be deemed a gift subject to donor's tax under Section 100 of
the Tax Code" (Rev. Regs. No. 6-2008, April 22, 2008).
The fair market value of the sh are of stock sold shall
be: (a) in the case of list ed sh ares which were sold or exch anged
outside of the trading system and/or facilities of the local stock
• -. 41- !
' r exchange, the closing price on the day when the shares are
. i
sold or exchanged. When no sale is made on th e day when the
bsted shares are sold or exch a nged, the closing price on the
day nearest to the date of sale or exchange of the shares shall
be the FMV; (b) in case of shares of stock not listed in the local
stock exchange, the book value of th e shares of stock as shown
in the financial statements duly certified by an independent
18
See Sec. 39, R.A. No. 10963 (TRAIN), Rev. Regs. No. 9-2018, February 26,
2018.
197
I NCOME AND W r'l'HHOLDINO T AXES
Gross Income
CPA nearest to the date of sale (Rev. Regs. No. 6-2008, April
22, 2008) .
The Fair Market Value (FMV) of shares of stock sold,
in the case of shares of stock not listed and traded in the local
stock exchange, shall be the value of the shares of stock at
the time of sale. In determining the value of the shares, the
Adjusted Net Asset Method shall be used whereby all assets
and liabilities are adjusted to fair market values. The net of
adjusted asset minus the liability values is the indicated value
of the equity. For purposes of this section, the appraised value
of real property at the time of sale shall be the higher of (1) the
FMV as determined by the CIR; or (2) the FMV as shown in
the schedule of values fixed by the Provincial or City Assessor;
or (3) the FMV as determined by independent Appraiser (Rev.
' •.
: ~~ Regs. No. 6-2013, April 11, 2013 amended Rev. Regs. No.
j
6-2008, April 22, 2008).
The stockbroker who effected the sale has the duty to
collect the tax from the seller upon issuance of the confirmation
of sale, issue the corresponding official receipt thereof and remit
the same to the Revenue District Office wherein the Philippine
Stock Exchange is located within five banking days from the
date of collection.thereof.
,.I .
l
i
I
Rules for publicly listed shares whose public ownership

fall below the mandatory MPO level
'
}' All publicly listed companies are required, at all times,
to maintain a minimum percentage of ownership (MPO) of
listed securities held by the public (or "public float") of the
higher rate of 10% of the publicly listed companies' issued and
outstanding shares, exclusive of any treasury shares, or at
such percentage as may be prescribed by the Securities and
Exchange Commission (SEC) or the Philippine Stock Exchange
(PSE). Publicly listed companies which are non-compliant with
the MPO as of December 31, 2011 and those whose public
ownership levels subsequently fall below the abovementioned
MPO at any time prior to December 31, 2012 may be allowed
up to December 31, 2012 to comply with the MPO; otherwise
the noncompliant listed company shall be assessed as follows:'
A. For transactions up to December 31, 2012
under the Amended MPO Rule - A stock transaction tax
at the rate of 6/10 of one percent (effective January 1, 2018) of
the gross selling price or gross value in money of the shares of

stock under Section 127(A) of the Tax Code;
B. For transactions after December 31, 2012 - A
final tax of 15%19 (formerly at either 5%/10%) on the net capital
gain imposed under Sections 24 and 25, and a final tax at
either 5%/10% on the net capital gain under Section 28 of the
Tax Code, as amended.
The above taxes shall not apply to the following:
a. Dealers in securities, provided that they shall not be
subject to VAT on their gross receipts and income tax
from their sale or exchange of securities;
b. Investors in shares of stock in a mutual fund company
in connection with the gains realized by said investors
upon redemption of said shares of stock in a mutual fund
company pursuant to Section 32(B)(7)(h) of the Tax Code;
c. Persons who are exempt under existing investment
incentives and other special laws (Rev. Regs. No. 16-2012,
December 7, 2012).
2) If the shares of stock are not listed, or they are listed but
not traded, in the local stock exchange, the net capital
gains realized during the year, if any, shall be subject to the
final capital gains tax equivalent to five percent of the net
capital gains not exceeding Pl00,000, and 10%, on any amount
in excess of P 100,000, such tax to be paid within 30 days from
the date of sale (Sec. 28[Aj[7J[c] and Sec. 28[BJ[5][c], NIRC). An
annual capital gains tax return must be filed by the taxpayer,
covering all his stock transactions during the calendar year, not
lat er than the 15th day of the fourth month following the close
of the taxable year (Sec. 7, Rev. Regs. No. 2-82, March 29, 1982;
see Sec. 52/D}, NIRC). The effect of this provision requiring the
filing of annual tax return is to allow the taxpayer to claim
the lower rate of five percent only on the first Pl00,000 gross
sales. Take note that it does not matter who is the seller or
transferor (whether h e is an individual (citizen or alien) or a
corporation (domestic or foreign), provided he/it is not a dealer
in securities. [NOTE: Sec. 24/CJ, Sec. 25[AJ[3], Sec. 25[B],
19
See Sec. 3(E), Rev. Regs. No. 8-2018; Sec. 24[C], Sec. 25[A][3], Sec. 25[B],
and Sec. 27[D][2], NIRC, as a.mended by R.A. No. 10963 (TRAIN), effective January
1, 2018.
199
Gross Income
and Sec. 27[DJ[2), NIRC were already amended by R.A.

10963 (TRAIN), effective January 1, 2018. Net capital
gains shall be subject to a final capital gains tax of 15%]
The capital gain from the sale of listed shares over
the counter or outside of the local stock exchange shall
be subject to the 5%/10%20 capital gains tax, since the law
requires that the listed shares must be traded in the local stock
exchange. What is controlling is whether or not the shares of
stock are traded in the local stock exchange (Del Rosario v.
CI~ CTA Case No. 4796, December 1, 1994). However, the
capital loss from the sale of listed shares outside of the local
stock exchange can be deducted from the capital gain from
another sale of unlisted shares, or listed shares but traded
outside of the local stock exchange because the tax base is net
capital gain (capital gains less capital losses).
The transfer by Compagnie Financiere Sucres et Denrees
..'
._,
of its eight percent equity interest in the Makati Shangri-La
Hotel to Kerry Holdings Ltd. is subject to the capital gains
tax; hence, the claim for refund is denied. The capital gains
tax return, which petitioner filed with the BIR, showed that it
had a net gain. A tax on the profit of sale on net capital gain is
the very essence of the capital gains tax law. To hold otherwise
will ineluctably deprive the government of its due and unduly
set free from tax liability persons who profited from said
transactions (Compagnie Financiere Sucres et Denrees v.
Cl~ G.R. No. 133834, August 28, 2006).
',,
,·
An equity investment is a capital, not ordinary, asset of the
investor the sale or exchange of which results in either a capital gain
or a capital loss. The gain or the loss is ordinary when the property
sold or exchanged is not a capital asset. Shares of stock, like the
''
l
other securities defined in Section 20(t) of the NIRC, would be
ordinary assets only to a dealer in securities or a person engaged in
the purchase and sale of, or an active trader (for his own account) in,
securities. In the hands, however, of another who holds the shares
of stock by way of an investment, the shares to him would be capital
assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of capital
20gec. 24[C], Sec. 25[A][3], Sec. 25[B], and Sec. 27[D][2], NIRC were already
amended by R.A. No. 10963 (TRAIN), effective January 1, 2018. Net capital gains
shall he subject to a final capital gains tax of 15%.
200 REVIEWER ON TAXA'I'lON
assets. Section 29(d)(4)(B) of the NIRC. - Provides that the loss

sustained by the holder of the securities, which are capital assets
(to him), is to be treated as a capital loss as if incurred from a sale
or exchange transaction. A capital gain or a capital loss normally
r equires the concurrence of two conditions for it to result: (1) there
is a sale or exchange; and (2) the thing sold or exchanged is a capital
asset. When securities become worthless, there is strictly no sale or
exchange but the law deems the loss anyway to be "a loss from the
sale or exchange of capital assets." A similar kind of treatment is
given by the NIRC on the retirement of certificates of indebtedness
with interest coupons or in registered form, short sales, and options
to buy or sell property where no sale or exchange strictly exists.
In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital
gain and loss provisions of the code. Capital losses are allowed to be
deducted only to the extent of capital gains, i.e., gains derived from
the sale or exchange of capital assets, and not from any other income
of the taxpayer. In the case at bar, First CBC Capital (Asia), Ltd.,
the investee corporation, is a subsidiary corporation of petitioner ~-
bank whose shares in said investee corporation are not intended
for purchase or sale but as an investment. Unquestionably then,
any loss therefrom would be a capital loss, not an ordinary loss, to
the investor (China Banking Corporation v. Court of Appeals,
G.R. No. 125508, July 19, 2000).
Bar Question (2008)

John McDonald, a U.S. citizen residing in Makati City,
bought shares of stocks of a domestic corporation whose shares are
listed and traded in the Philippine Stock Exchange, at the price of
Php2 million. Yesterday, he sold the shares of stocks through his
favorite Makati stockbroker at a gain of P200,000.
Is John McDonald subject to Philippine income tax on the sale
of his shares through his stockbroker? Explain. '.
l I
' If John McDonald directly sold the shares to his best friend,
; I
who is another U.S. citizen residing in Makati, at a gain of P200,000,
is he liable to Philippine income tax? If so, what is the tax base and
rate?
Suggested answers:
a. No, John McDonald is exempt from Philippine income
tax on the gain arising from his sale of shares of stocks
INCOME AND W111-1HOLDINO T AXES 201
Gross Income
of a domestic corporation that are listed and traded in

the Philippine Stock Exchange by express provision of
law (Sec. 24[c], NIRC, as amended by B .P. 221, May 25,
1982). He is, however, subject to the stock transaction
tax equivalent to one-half of one percent (1 12 of 1 %)
(now 6/ 10 of 1% under the R.A. 10963 [TRAIN] effective
January 1, 2018) of the gross selling price or gross value
in money of the shares of stock sold or exchanged (Sec.
127[AJ, NIRC), which tax shall be withheld and remitted
by the stockbroker who effected the sale to the BIR within
five banking days from the date of collection thereof (Sec.
127[C][l}, NIRC).
b. Yes, J ohn McDonald will be subject to Philippine income
tax on the P200, 000 gain arising from his direct sale
of the listed shares of stocks of a domestic corporation
to his friend residing in Makati. An alien individual,
whether or not a resident of the Philippines, is taxable on
income derived from sources within the Philippines (Sec.
23{DJ, NmC). 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 (Sec. 42[EJ, N m C). A fi,rtal tax
at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the
sale of shares of stock in a domestic corporation, except
shares sold or disposed of through the stock exchange:
Not over Pl00,000 5%
On any amount in excess of Pl00,000 10%
(Sec. 24[c], NIRC)
[NOTE: net capital gains now subject to 15% capital
gains tax under Sec. 24[CJ, NIRC. as amended by RA.
10963 (TRAIN), effective January 1, 2018)
2. Real property
i; Since the Tax Code does not define the term "real property,»
the definition of "immovable property" in Article 415, Civil Code
of the Philippines shall be applied. The rules on the sale or exchange
of real property located in the Philippines are summarized below:
a. If the seller or transferor is a real estate dealer, the real
property sold is an ordinary asset, and the ordinary gain,
202 REVJEWER ON TAXA'l'lON
if any, is subject to the graduated income tax rates of zero

percent to 35% (formerly 5%-32%) (if an individual who
is a citizen, or a resident or nonresident alien engaged in.
trade or business in the Philippines, or 25% final tax if a
nonresident alien not engaged in trade or business in the
Philippines), or to the 30% normal corporate income tax (if
a domestic corporation or a resident foreign corporation)
(Sec. 24/A J, Sec. 25/AJ[l} and {BJ, and Sec. 27[A}, Sec.
28{A]{l] and [B}{l], NIRC), unless the sale is exempt from
income tax because it is a socialized housing (i.e., gross
selling price of a residential house and lot is not more
than P450,000)21 under R.A. 7279 (Urban Development
and Housing Act) or an economic housing under E.O.
223 (Investment Incentives Act), as validated in a ruling
issued by the BIR. The buyer must withhold the proper
expanded withholding tax on the transaction and remit
the same to the BIR within the period prescribed in
Revenue Regulations No. 2-98, as amended. Non-resident
foreign corporations are taxed on their gross income from
sources within the Philippines, including gain from sale
of real property at 30%, effective November 1, 2005.
A "real estate dealer" includes any person engaged
in the business of buying, developing, selling, exchanging
real properties as principal, and holding himself out as a
full or part-time dealer in real estate (Sec. 4.106-1, Rev.
Regs. No. 7-95, as amended).
l b. If the seller or transferor is not a real estate dealer,
l•
'.·. determine whether the real property sold or transferred
.. is (a) used in the taxpayer's trade, business, or profession,
,,
>
or (b) treated as fixed asset used in his trade, business,
or profession, subject to depreciation. If the answer in
.... either of the two cases above is in the affirmative, the
real property shall be treated as ordinary asset, and
the gain, if any, from the sale or transfer thereof shall
~!
il be subject to the graduated income tax rates (zero
!i j percent to 35% [formerly 5%-32%]), if an individual, or
, !I to the normal corporate income tax rate of 30% based on
I ! net taxable income, and expanded withholding tax, as
' l
;' '; discussed in the preceding paragraph. On the other hand,
' I 21 See RMC No. 35-2014.

lNr oMr-: AND WT'l'HH01.01No TAxres 203
Gross Income
if the answer is in the negative, the real property sha ll

be treated as capital asset, and the gain, if any, by a
citizen, alien (resident or non-resident.), estate and trust,
and domestic corporation and partnership shall be subject
to the final capital gains tax of six percent based on the
gross selling price or fair market value of the property
at the time of sale, whichever is higher (Sec. 24/D], Sec.
25[A){3] and [BJ, S ec. 27{D}[5], NIRC). It is to be noted
that foreign corporations (whether resident or non-
resident) are not entitled to the preferential tax rates on
their gain from sale of 1·eal property classified as capital
asset because there is no similar express provision as that
granted to domestic corporations. Therefore, regardless
of classification, net taxable income from the sale of
real property realized by a resident foreign corporation
shall be subject to the normal corporate income tax and
expanded withholding tax. However, if the seller is a non-
resident foreign corporation, the gain from sale shall be
taxed at 30% (Sec. 4{e] and [fl, Rev. Regs. No. 7-2003). The
real property referred to here could be a condominium
unit which foreigners are allowed to own subject to
certain conditions under the Condominium Act (P.D. 957,
t as amended by R.A. 4726).
.~
~ ..
' '
,,.
::-.
Deed of Exchange
Deed of Exchange executed by the parties voluntarily and
without any financial consideration, involving real properties,
would subject either party (a) to the capital gains tax, based on the
fair market value or consideration, whichever is higher, or (b) to
the ordinary income tax or regular corporate income tax, depending
on the nature of the assets exchanged. In this case, there are two
taxable transactions.
Transfer of interest on real property shall be governed by the

following rules:
1. If upon completion of payment of the purchase price of
real property but before the execution of the Deed of Sale,
the buyer assigns his right to another for a consideration,
the assignment is a separate sale of real property;
hence, subject to the expanded withholding tax or final
withholding tax, as the case may be, and to DST on the
same basis.
2. If the sale of interest on real property (property was

purchased under a Contract To Sell but sold by the
original buyer before it was fully paid) it is taxable on the
part of the seller based on the realized gain (i.e., selling
price less the cost or adjusted basis) (Rev. Regs. No. 17-
2003, March 31, 2003).
Rules on non-redemption of property sold during involuntary

sales
Revenue Regulations No. 9-2012 implements Sections 24(D)
(1), 27(D)(5), 57, 106, and 196 of the Tax Code, and Revenue
Regulations No. 2-98, as amended, and Revenue Regulations No.
16-2005, as amended, on non-redemption of property sold during
involuntary sales; and revokes and amends all contrary issuances
and rulings.
If property is sold during involuntary sales, the SELLER shall
be subject to (a) income tax, which could either be:
Capital gains tax, if property is a capital asset; or
Ordinary income tax or regular corporate income
tax, if property is an ordinary asset, regardless of the
type of proceedings and personality of mortgagees/
selling persons; (b) VAT (if ordinary asset), and (c)
DST.
• Above taxes shall be due counted from the date
the right to redeem the property of the buyer bas
expired.
• Buyer who is deemed to have withheld the capital gains
tax (CGT) or creditable withholding tax (CWT) due
from the sale shall file CGT and remit the tax within 30
days, or file CWT return and remit the regular corporate
income tax (RCIT) within 10 days from date of expiration
of redemption period, except for the month of December,
which may be filed not later than January 15 of the
following year.
• I If property sold is subject to VAT, it shall be paid
by the owner/mortgagor within 20 or 25 days of
' I the following month when the right of redemption
expires.
lNC,OME AND WITHHOLDING TAXES 205
Gross Income
DST shall be paid within five days after the close of

the month after the lapse of the redemption period.
The CGT/CWTNAT and DST shall be based on whichever is
hi&her of the consideration (bid price of the highest bidder) or the
fair market value or the zonal value as determined in accordance
with Section 6(E) of the Tax Code.
Al1 regulations, rulings, or orders inconsistent with Revenue
Regulations No. 9-2012 are hereby revoked, repealed, or amended.
Real property located outside the Philippines

The gain fron1 the sale or other disposition of real property not
located in the Philippines, regardless of classification, by resident
citizens and domestic corpor ations sh all be subject to the graduated
income tax (if a resident citizen) or normal corporate income tax (if
a domestic corporation), since they are taxed on worldwide income.
Such income is exempt from income tax in the case of non-resident
citizens, alien individuals, and foreign corpora tions because they
are taxed only on income from sources within th e Philippines (Sec.
23, NIRC).
Bar Question (2009)

Melissa inherited from h er fat her a 300-sq.m. lot. At the time
of her father's death on March 14, 1995, t h e property was valued at
,720,000. On February 28, 1996, to defray the cost of the medical
expenses of her sick son, sh e sold t h e lot for 1>600,000 on cash basis.
The prevailing market value of the property at the time of sale was
P3,000 per sq.m. (a) Is Melissa liable to pay capital gains tax on the
transaction? If so, how much and why? If not, why not? (b) Is Melissa
liable to pay VAT on the sale of the property? If so, how much and
why? If not, why n ot'?
Suggested answers:
a. Melissa is liable to pay the 6% capital gains tax based on
the gross selling price (,.600,000) or fair market value at
the time of sale (I-900,000 = P3,000 x 300 sq.m.), whichever
is higher. The capital gains tax is I-54,000 (P900,000 x
6%). Although Melissa actually incurred a loss in the sale
of the real property, this loss is disregarded for income tax
purposes because &ction 24(D) of the Tax Code presumes
that the seller realizes a gain from the sale of such real
property classified as a capital asset and it i"':poses _the tax
on the higher amount between the gross selling price and
the fair market value. The real property is a capital asset,
since it is not used in the trade or business of Melissa (Sec.
39[AJ, NIRC).
b. No. Melissa is exempt from VAT on the sale of the real
property classified as a capital asset. To be subject to VAT,
the real property must be classified as an ordinary asset,
the seller must be engaged in the real estate business, and
the amount of gross sales must have exceeded P 1. 5 million.
In this case, all the above requisites are not present.
Bar Question (2005)

Josel agreed to sell his condominium unit to Jess for P2.5
million. At the time of the sale, the property had a zonal value of
P2 million. Upon the advice of a tax consultant, the parties agreed
to execute two deeds of sale, one indicating the zonal value of P2
million as the selling price and the other, showing the true selling
price of P2.5 million. The tax consultant filed the capital gains tax
return, using the deed of sale showing the zonal value of P2 million
as the selling price. Discuss the tax implications and consequences ..
of the action taken by the parties. ,.
Suggested answer:
The capital gains tax due on the sale shall be based on the
actual selling price of P2. 5 million, which is higher than the .zonal
value of the property (Sec. 24[D}[l}, NIRC). The documentary stamp
tax on the conveyance of real property shall likewise be based on
the higher value (Sec. 196, NIRC). Accordingly, a deficiency capital
gains tax and documentary stamp tax are due from Josel plus the
50% surcharge imposable on a fraudulent return.
Both Jose[ and his tax consultant are criminally liable for tax
evasion. Here, it is clear that the three requisite factors to constitute
tax evasion are present, viz.: (1) the end to be achieved, which is
the payment of less than that known by them to be legally due; (2)
an ac~ompanying state of mind, which is evil, in bad faith, willful,
or 1eli~erate and not merely accidental; and (3) a course of action,
which is unlawful (CIR v. Estate of Benigno P . Toda, Jr., 438
SCRA 290 [20041).
l NcoMtt ANnWn mm1.mNn 'J'Ax11:.. 207
Grosa lnr.omo
Bar Question (1998)

J mm PRnalo won n da mage suit for 1>500,000 flgainst tJuana
Tiilo. Pima.lo got. a writ of t~xecution and made a levy on the lot
of Talo. The lot was sold at public auction where Panalo was the
highest bidder for P500,000. Panalo refused to pay any capital gains
tax on his purchase of said lot. Your opinion.
Suggested answer:
The capital gains tax from sales of real property is payable by
the seller (Sec. 21[e] in relation to Sec. 49[a][4] of the NIRC). Hence,
Panalo cannot refuse to pay the capital gains tax on his purchase of
said lot, because he is treated as the statutory seller.
Bar Question (2008)

Pedro Manalo, a Filipino citizen residing in Makati City, owns a
vacation house and lot in San Francisco, California, U.S.A., which he
acquired in 2000 for Pl5,000,000. On January 10, 2006, he sold said
real property to Juan Mayaman, another Filipino citizen residing
in Quezon City, for P20,000,000. On February 9, 2006, Manalo filed
the capital gains tax return and paid Pl,200,000 representing six
percent capital gains tax. Since Manalo did not derive any ordinary
income, no income tax return was filed by him for 2006. After the
tax audit conducted in 2007, the BIR officer assessed Manalo for
deficiency income tax computed as follows: P5,000,000 (f>20,000,000
less P15,000,000) x 35% = Pl, 750,000, without the capital gains tax
paid being allowed as tax credit. Manalo consulted a real estate
broker who said that the Pl,200,000 capital gains tax should be
credited from the Pl, 750,000 deficiency income tax.
a. Is the BIR officer's tax assessment correct? Explain.
b. If you were hired by Manalo as his tax consultant, what
advice would you give him to protect his interest? Explain.
Suggested answers:
a. A resident citizen like Pedro Manalo is taxable on all
income derived from sources within and without the
Philippines (Sec. 23[A}, NIRC). Gains, profits, and
income from the sale of real property located without
the Philippines are considered as incomes from sources
without the Philippines (Sec. 42[CJ[5], NIRC).
,
208 R~VIEWl\lR ON T AXA'l'lON
The vacation house and lot in California, USA is a

capital asset, since it is not used in the taxr:a?er's trad~ or
business (Sec. 39/A]{l], NIRC). However, it ts not subJect
to the six percent capital gains tax und~r Section 2 4(D)(J)
of the Tax Code, since the real property is not located in the
Philippines. Said preferential rate of income tax applies
only when the seller is a resident citizen and the real property
is classified as a capital asset located in the Philippines.
Accordingly, the gain of P5 million (I-20 million less 1-15
million) shall be included in the taxable income of Pedro
Manalo for 2006 subject to the graduated income tax rates
of five percent to 32% (Sec. 24[A}[J], NIRC). It is, therefore,
erroneous for the BIR to apply the corporate income tax
rate of 35% on the taxable income of Pedro Manalo, a
resident citizen. [NOTE: The graduated income tax
rates for individual taxpayers are now 0%- 35%, as
amended by R.A. 10963 (TRAIN), effective January
1, 2018)
b. The amount of Pl,200,000 (6% times P15 million),
representing capital gains tax erroneously paid by Pedro
Manalo, may be credited against the ordinary income tax
due on the taxable income for 2006, since capital gains
tax is another form of income tax under Title II of the
Tax Code. If the BIR official insists on not allowing such
tax credit of capital gains tax erroneously paid against
ordinary income tax due for the year, I would advise my
client to file a written claim for tax credit or refund for the
capital gains tax erroneously paid with the BIR within
two (2) years from the date of payment (Secs. 204[c] and
229, NIRC).
Other capital assets

All other capital assets, except shares of stocks of a domestic
corporation and real property located in the Philippines, shall be
subject to income tax at the graduated income tax rates (if seller is
an individual) or at 30% regular corporate income tax (if seller is a
?orporation). Examples are motor vehicles and jewelries not used
m the taxpayer's trade or business, shares of stocks of a foreign
corporation, _and investments in short-term commercial papers that
are not considered as deposit substitutes .
. "Holding _P~riod" . of the property classified as other
capital asset is material for individual taxpayers only. -
Gross Income
Only 50% of long-term capital gains are recognized as subject to

income tax, if derived by an individual taxpayer, while 100% of the
capital gains are subject to tax if derived by an individual taxpayer
from short-term capital asset transactions. A capital gain is treated
as (a) long-term if the asset sold or exchanged is held for more than
12 months, or (b) short-term if the asset sold or exchanged is held
for 12 months or less (Sec. 39[BJ, NIRC). In the case of corporate
taxpayers, the holding period is not material and the capital gain or
capital loss is recognized in full.
Capital losses can be offset only against and to the
extent of capital gains. - Capital losses cannot be deducted
from ordinary gains or income. This principle applies to all types
of taxpayers (corporate or otherwise). Capital losses are deductible
only to the extent of capital gains.
Bar Question (2012)

Mr. Pedro Aguirre, a resident citizen, is woi-lring for a large
real estate development company in the country and in 2010,
he was promoted to Vice-President of the company. With more
responsibilities comes higher pay. In 2011, he decided to buy a new
car worth P2 million and he traded-in his old car with a market
value of P800,000, and paid the difference of Pl.2 million to the car
company. The old car, which was bought three years ago by the
father of Mr. Pedro Aguirre at a price of P700,000, was donated
by him and registered in the name of his son. The corresponding
donor's tax thereon was duly paid by the father. (a) How much is the
cost basis of the old car to Mr. Aguirre? (b) What is the nature of the
old car - capital asset or ordinary asset? (c) Is Mr. Aguirre liable to
pay income tax on the gain from the sale of his old car?
Suggested answers:
a. P700,000. The basis of the property in the hands of the
donee-son is the carry-over basis, the same basis as if it
would be in the hands of the donor-father (Sec. 40{Bj{3],
NIRC).
b. The old car is a capital asset. It is a property held by
the taxpayer (whether or not connected with his trade or
business), but is not stock in trade or other property of a
kind which would properly be included in the inventory of
the taxpayer, if on hand at the close of the year, or property
held primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade or

business of a character subject to depreciation, or real
property used in trade or business of the taxpayer (Sec.
39[AJ, NIRC).
c. Yes, he is liable to income tax on his capital gain of
Pl00,000 (PB00,000 less P700,000), but only 50% of the
taxable gain shall be recognized and subject to income ta."C,
considering that the holding period of the old car is more
than one year (Sec. 39, NIRC).
Passive Investment Income

Interest income
In general, interests received or credited to the account of the
depositor or investor are included in their gross income, unless they
are (a) exempt from tax, or (b) subject to final tax at preferential rate
under the 1997 Tax Code or under the applicable tax treaty.
Interest means the amount which a depository bank may
; pay on savings and time deposits in accordance with the rates
'•,
authorized by the Bangko Sentral ng Pilipinas (Rev. Regs. No. 12-
80, as amended).
Interest income has to be examined closely to determine whether
it is taxable in the Philippines, and if so, what kind of income tax
and what rate of tax shall apply to it. The rules on interest income
under the Philippine 1997 Tax Code are summarized as follows:
'i a. Income interest from Philippine currency deposits
:-': and deposit substitutes. - Gross interest income from
Philippine currency bank deposits and yield or any other
>
monetary benefit from deposit substitutes and from trust
• funds and similar arrangements are subject to the 20%
final withholding tax, of all depositors, except when the
depositor is a non-resident alien not engaged in trade or
• business in the Philippines, where such interest income
shall be subject to the higher 25% tax rate pursuant to
Section 25(B) of the Tax Code. However, if the depositor
is an employee trust fund or accredited retirement plan,
such interest income, yield or other monetary benefit is
exempt from the final withholding tax (CIR v. Court of
Appeals and GCL Retirement Plan, 207 SCRA 487
{19921) .
211
I NCOME AND WITHHOLDING TAXES
Gross Income
The term ''deposit substitutes,, shall mean a_n

alternative form of obtaining funds from the pu bhc
(the term "public', means borrowing from 20 or more
individual or corporate lenders at any one time), other
than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purchasing ~f
receivables and other obligations, or financin g their
own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to,
bankers' acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements
entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificate
of assignment or participation and similar instruments
with recourse. However, debt instruments issued for
inter-bank call loans with maturity of not more
than five days to cover deficiency in reserves against
deposit liabilities, including those between or among
banks and quasi-banks shall not be considered as deposit
substitute debt instrument s (Sec. 22[¥], NIRC).
Implementing Section 22(Y) of the Tax Code,
the Secretary of Finance promulgated Revenue
Regulations No. 14-2012 on November 7, 2012. The
rules are summarized below:
A. Interest derived fro.m currency bank deposit
and yield or any other monetary benefit from deposit
substitute, trust fund, and other similar arrangements:
L Interest income is subject to 20% Final Withholding
Tax (FWT), if received by citizens, resident aliens
non-resident aliens engaged in t rade or business in'
the Philippines, domestic corporation, and resident
foreign corporation;
2. Interest income is subject to 25% FWT, if received b
a non-res1"dent a lien not engaged in trade or busine y
. t h e Phil"
1n .
1pp1nes; ss
3. Interest income is subject to 30% FWT, if received b

a non-resident foreign corporation, unless it i f y
. 1oan, wh 1c
£ore1gn ' h.1s su bJect
. to 20% FWT· s rom
'
212 REVIEWER ON TAXATfON
4. Interest income derived from an instrument that

does not qualify as a deposit substitute is subject to
the 20% Creditable Withholding Tax (CWT).
B. Interest derived from iovernment debt inst11,1-
ments and securities:
1. The debt instrument will be treat ed as a deposit
substitute, regardless of the number of investors,
at the time of its issuance by the government (e.g.,
Bureau of Treasury, Bangko Sentral ng Pilipinas,
etc.);
2. The interest income is subject to 20% FWT, unless
the investor is (a) an alien individual not engaged
in trade or business in the Philippines, which is
taxed at 25% FWT, or (b) a non-resident foreign
corpor ation, which is taxed at 30% FWT, payable
upon the issuance of the deposit substitute.
C. Interest derived from long-term (maturity
period of at least five years) deposits or investment
r
certificates:
1. Interest income in the form of savings, common
or individual trust funds, deposit substitutes,
investment management accounts, and other
investments/certificates shall be exempt from
income tax, if made a citizen, resident alien, or non-
resident alien engaged in trade or business in the
Philippines, under certain condition s;
2. Interest income derived by a corporation on long-
term deposits or investments is taxable at 20%
FWT. The exemption from income tax is granted
only on interest income of individual deposits or
investments.
D. Interest derived from a depository bank under
the expanded foreign currency deposit system/OBU:
1. Apply 15% FWT (formerly 7.5%), if interest income is
received by either a resident citizen resident alien,
non-resident alien engaged in trade' or business in
the Philippines, or domestic corporation, and 7.5%
FWT if received by a resident foreign corporation
[NOTE: The final withholding tax rate under
INCOME ANU Wt'l'HHOLOlNG T AXES 213
Gross Income
Sec. 24(B)(l), Sec. 25(A)(l), and Sec. 27(D)(J),

NIRC were amended by R.A. 10963 (TRAIN),
effective January 1, 2018];
2. Interest income is exempt is received by non-
r esidents (individuals or corporations);
3. Joint bank accounts of resident and non-resident
citizen shall be 50% exempt (on the part of the
non-resident citizen) and 50% taxable at 15%
FWT (formerly 7.5%) (on the part of th e r esident
depositor).
Revenue Memorandum Circular (RMC) Nos. 77-2012

(November 23, 2012), 81-2012 (December 11, 2012), and 84-
2012 (December 26, 2012) clarified Revenue Regulations No.
14-2012 (November 7, 2012) as follows:
1. For zero-coupon instruments and securities issued by the
government, the 20% FWT is payable upon the original
issuance of th e debt instrument.
2. For interest-bearing instruments and securities issued by
the government, the 20% FWT is payable upon payment
of t h e interest (RMC 77-2012, November 23, 2012).
3. Interest income received by banks from payors belonging
to th e Top 20,000 Corporations22 strictly arising from
individual loans obtained from banks that are not
securitized, assigned or participated out remains to be
subject to Cr editable Withholding Tax (CWT) at the rate
of two percent. Corollarily, interest income paid by banks
designated as Top 20,000 Corporations strictly arising
from loans made to such banks that are not securitized or
participated out remains to be subj ect to CWT at the rate
of two percent (Section 5 7{BJ, NIRC, in relation to
income pay ments made by Top Withholding Agents
(TWA) under Section 2.57.2 [M] and [WJ, Rev. Regs.
2
2The Top Withholding Age nts ('IWA) may include any of the following:
(1) Large Taxpayer under Rev. Regs. No. 1-98; (2) Top 20,000 Corporation under
Rev. Regs. No. 6-2009; (3) Top 5,000 Individuals under Rev. Regs. No. 6-2009; or
(4) Taxpayers identified and included as medium taxpayers and those under the
Taxpayer Account Management Program (TAMP) under Sec. 2.57.2, Rev. Regs. No.
2-98, as amended by Rev. Regs. No. 11-2018.
214 R1wi1cWER ON TAXA'MON
No. 2-98, as amended by Rev. ll.egs. No. 11-2018). The

20% Ji""WT and CWT imposed under the 1997 Tax Code
and existing regulations cover interest arising from or
paid out of debt securities (RMC 84-2012, December 21,
2012).
"Yield" shall mean the difference between the
amount the lender/investor loaned/placed and the amount
he received upon maturity of the deposit substitute/debt
instruments which shall in no case be lower than the interest
rate prevailing a t the time of the issuance or renewal of
said debt instruments. Yield shall be synonymous with the
interest rate of return earned by a. debt security held to
maturity (Rev. Regs. No. 12-80, amended).
"Other trust arrangements" means on yield/
income, not previously subjected to a final tax, pertaining
to all and other trust and similar arrangements, whether
covered by a trust indenture/agreement or by an
investment/portfolio management agreement or any other
similar document involving the investment/management
of funds (Rev. Regs. No. 13-78, as amended by Sec. 1, Rev.
Regs. No. 16-81, July 24, 1981; Rev. Regs. No. 2-98).
b. Interest income on foreign currency deposits.

Gross interest income from foreign currency deposits with
an Offshore Banking Unit (OBU) or Foreign Currency
Deposit Unit (FCDU) in the Philippines is subject to the
final withholding tax· of 7.5%28 (BIR Ruling No. 103-99,
l
July 13, 1999). However, interest income from foreign
~.
·,
currency transactions of a bank shall be subject to 10%
final withholding tax. If the foreign currency deposit is
with a bank located outside the Philippines, the interest
income is subject to the graduated income tax rates (if the
depositor is a resident citizen) or the normal corporate
income tax rate of 30% (if the depositor is a domestic
corporation). Take note that interest income on foreign
currency deposits with a bank located outside the
!! . Philippines by a non-resident citizen, alien individual,
and foreign corporation is exempt from income tax,
!
•'
23
The final withholding tax rate is now 15% under Sec. 24(B)(l), Sec. 25(A)(l),
and Sec. 27(D)(l), NIRC, as amended by R.A. No. 10963 (TRAIN), effective JanuarY
1, 2018.
INCOME AND WrTHHOLDTNG TAXl:S 215
Gross Income
pursuant to the express provisions of Section 28(A)(4) for

OBU and Section 27(D)(3} for FCDU, both of the 1997 Tax
Code. [NOTE: The final withholding tax rate was
amended by R.A 10963 (TRAIN), effective January
1, 2018.J
The tax base upon which the appropriate withholding
tax rate shall be applied by the bank on interest income
from foreign currency denominated loans extended to
resident borrowers is the total amount of the interest
income to be paid, without grossing up thereto the
corresponding withholding tax due thereon, whether the
borrower assumes to pay the tax or not (BIR Ruling No.
046-96, April 2, 1996). The obvious purpose of the ruling
is to avoid endless ''pyramiding."
c. Interest income from traditional loans by local
banks and other creditors. - Interest income derived
from loans and other transactions, other than those
enumerated above, is subject to the graduated income
tax rates (if the creditor is an individual) or the normal
corporate tax rate (if the creditor is a corporation) and no
creditable withholding tax is required to be made, except
in the case of (a) non-resident alien not engaged in trade
or business in the Philippines where the rate applicable
is 25% final tax, and (b) non-resident foreign corporation
where the rate applicable is 20% final tax (Rev. Regs. No.
4-75).
d. Discounts are treated in the same manner as
interest income. - Discount revenues in financing
or factoring arrangements and in the issuance of long-
term instruments and bonds are treated for income tax
purposes in the same manner as interest income. Once
one recognizes the identity of the present value and
the future value formulations, it becomes unnecessary
to distinguish between discount rates and interest
rates. Indeed, in most areas of financial practice, we
dispense with the distinction and simply refer to the two
collectively as the "yield.'' Although the term interest
rate is o~en ~sed to decide the _rate used to take monies
forward m time, there really 1s no difference betwee
a discount rate and an interest rate, and practitio n
. ld" 1n
often use the t erm "yie . of either.
. 11eu . ners
The amount of discount at which Treasury Bills are

originally sold by the Republic of the Philippines i~
considered as inter est (Sec. 1, Rev. Regs. No. 3-82, April
3, 1982).
e. Interest income from long-term deposits or invest-
ments of individuals is exempt. - Inter est income
from long-term deposit or deposit substitutes, investment
management accounts and other investments evidenced
by certificates in such form prescribed by the Bangko Sen-
tral ng Pilipinas received by a citizen, resident alien, and
non-resident alien engaged in trade or business in the
....... Philippines, shall be exempt from income tax. However,
should the holder of the certificate pre-terminate the de-
posit or investment before the fifth year, a final tax shall
be imposed on the entire income and shall be deducted
'· 1
,,'
and withheld by the depository bank from the proceeds of
~- the long-term deposit or investment certificate based on
i-' the remaining maturity thereof:
1·
Four years to less than five years 5%;

• Three years to less than four years 12%;
Less than three years 20% ;
(Sec. 24[BJ[l] and Sec. 25[AJ[2], NIRC).

This tax exemption is not extended to a non-resident
alien not engaged in trade or business in the Philippines,
- and Revenue Regulations No. 2-98 used ''holding period"
for purposes of determining the applicable withholding
tax rate in case of pre-termination.
f. Interest income from long-term deposits or invest-
ments of corporations is taxable. - The preferential
tax treatment accorded to individuals is not extended to
c?rporations as no similar provision can be found in Sec-
t10ns 27 and 28 of the Tax Code.
g. Interest income on traditional loans is not subject
to final or creditable withholding tax. _ Interest
bayments . for. lo~ns . and other borrowings granted
. Y . fi_nanc1al 1nstitut1ons, ordinary corporations, and
m_d1vidu~ls are not subject to the final or expanded
withholding tax, unless made by a Top Withholding .
Agent (rWA) which may include any of the following: (1)
217
lNcOME AND WrrHHOLDINO TAXES
Gross Income
Large Taxpayer under Rev. Regs. No. 1-98; (2) Top 20,000
Corporation under Rev. Regs. No. 6-2009; (3) Top 5,000
Individuals under Rev. Regs. No. 6-2009; or (4) Taxpayers
identified and included as medium taxpayers and those
under the Taxpayer Account Management Program
(TAMP). 24
h. Interest on foreign loans. - Interest on foreign loans
extended by non-resident foreign corporations is subject
to the 20% final withholding tax, unless a lower rate of
tax is imposed under an existing tax treaty. If the loan
is granted by a foreign government or by a financial
institution owned, controlled or enjoying refinancing from
the foreign government, or an international or r egional
financing institution established by governments, the
interest income of the lender shall not be subject to the
final withholding tax (Sec. 32{BJ[7}[a], NIRC).
Bar Question (2008)

In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino
contract worker in Hong Kong, opened peso and dollar deposits at
the Philippine branch of the Hong Kong Bank in Manila. During the
year, the bank paid interest income of Pl0,000 on the peso deposit
and $1,000 on the dollar deposit. The bank withheld final income
tax equivalent to 20% of the entire interest income and remitted the
same to BIR.
a. Are the interest incomes on the bank deposits of Mr. &
Mrs. Renato Garcia subject to income tax? Explain.
b. Is the bank correct in withholding the 20% final tax on
the entire interest income? Explain.
Suggested answers:
a. The interest income on the foreign currency deposit of
Renato Garcia, a non-resident citizen, with the FCDU of
HK Bank in Makati is exempt from Philippine income tax
by express provision of law (Sec. 24[BJ in relation to Sec.
28[AJ{7J[b], NIRC). His interest income on peso deposit
with HK Bank in Makati will be subject to the 20% final
248ee Sec. 2.57.2, Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 11-2018·
BIR Ruling No. 043-96, March 25, 1996. '
withholding tax (Sec. 24[BJ[l}, NIRC in relation to Secs.

23[BJ and 57[A), NIRC).
The interest income on the foreign currency deposit
of Mrs. Garcia, a resident citizen, with the FCDU of HK
Bank in Makati is subject to the 15% (formerly 7. 5%) final
withholding tax (Sec. 24[B][l}, NIRC), while her interest
income on the peso deposit with the bank will be subject to
the 20% final withholding tax.
b. No, as discussed above, the 20% final withholding tax
applies only on the interest income on peso deposits. Since
20% FWT is higher than the 15% (formerly 7. 5%) FWT on
interest income on foreign currency deposit of Mrs. Garcia,
she can file a written claim for refund or tax credit for the
excess tax paid, and Renato Garcia can also file a written
claim for refund or tax credit for the 20% FWT erroneously
deducted and remitted to the BIR on his interest income on
foreign currency deposit which is exempt from income tax.
[NOTE: The final withholding tax rate is now 15% under Sec.
24(B)(l), Sec. 25(A)(l), and Sec. 27(D)(l), NIRC, as amended by R.A.
10963 (TRAIN), effective J anuary 1, 2018.]
Dividend Income
Dividends comprise any distribution whether in cash or
other property in the ordinary course of business, even though
extraordinary in amount made by a domestic corporation, joint
stock company, partnership, joint account, association, or insurance
company to the shareholders or members out of its earnings or
profits (Sec. 250, Rev. Regs. No. 2). A d ivid end is defined as a
corporate profit set aside, declared, and ordered by the directors to
be paid to the stockholders on demand or at a fixed time. Until the
cash or property dividend is declared, the corporate profits belong
to the corporation and not to t h e stockholders, and are liable for the
payment of the debts of the corporation (Fisher v. Tr in idad, 43 .
1
P hil. 9 73 {19221).
In general, dividends are included in the gross income of the
stockholder, unless they are exempt from tax or subject to final
tax at preferential rate under the 1997 Tax Code. Cash dividend
and property dividend are subject to income tax, whereas stock
dividend is generally exempt from income tax. However , any type
of dividend must come from the unappropriated retained earnings
INCOME AND WITHHOLDING T AXES
219
Gross Income
of the corporation, unless it is a liquidating dividend which is

not a true dividend in the true sen se. ~Property dividend" is a
dividend payable in property, which may be investments in shares
of stocks of another corporation, or real property, or some oth er
property owned by th e corporation, paying the dividend. Property
dividend is different from stock dividend in that th e shares of stock
declared as property dividend by a corporation are shares of stock
of another corporation to which the corporation paying the dividend
has investments and is shown as assets in its balance sh eet. On t he
other hand, "stock dividend" is a dividend payable in the shares of
stock of the corporation declaring such stock dividend. The issuance
of the stock dividend will increase the number of shares issued and
outstanding of the corporation that declared the stock dividend. A
stock dividend, when declared, is merely a certificate of stock which
evidences the interest of the stockholder in the increased capital of
the corporation. A stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only from
retained earnings. However, a "liquidating dividend," although
so-called dividend, is not truly dividend as contemplated under the
income tax law.
Distinctions between Cash Dividend and Stock Dividend

Dividend is a corporate profit set aside (from Retained
Earnings), declared and ordered by the directors to be paid to the
stockholders on demand or at a fixed time. A stock dividend is a
dividend payable in reserve or increase of additional stock of the
corporation. A cash dividend is disbursement to the stockholder
of the accumulated earnings, and the corporation parts :irrevocably
with all interest therein. A stock dividend involves no disbursement,
and the corporation parts with nothing to the stockholders who
receive, not an actual dividend but a certificate of stock. When cash
dividend is declared and paid to the stockholders and such cash
becomes the absolute property of the stockholders and cannot be
reached by creditor s of the corporation in the absence of fraud. A
stock dividend, however, still being the property of the corporation
and not of the stockholder, may be reach ed by an execution
against the corporation and may be sold as a part of the corporate
P:operty (Fisher v. Trinidad, 43 Phil. 973 [1922]). Dividend is
distinguished from "profits, " for profits in the h ands of a corporation
do not become dividends until they have been set apart, or at lea t
declared, as dividends and transferred to the separate property ~f
the stockholders (Hyatt v. Alen, 56 N. Y. 553).
220 R EVJEWER ON T AXATION
Stock dividends
Stock dividends are generally exempt from tax. - A stock
dividend, which represents the transfer of surplus to capital account,
is not subject to income tax. However, a dividend in stock may
constitute taxable income to the recipients thereof, notwithstanding
the fact that the officers or directors of the corporation choose to
call such distribution as a stock dividend. The distinction between
a stock dividend which does not, and one which does, constitute
income taxable to the shareholder is the distinction between a
stock dividend which works no change in the corporate entity, the
same interest in the same corporation being represented after the
distribution by more shares of precisely the same character, and a
stock dividend where there either has been a change of corporate
identity or a change in the interest of the shareholders after the
distribution is essentially different from his former interest. A stock
dividend constitutes income if it gives the shareholder an interest
different from that which his former stock.holdings represented. A
stock dividend does not constitute income if the new shares confer no
different rights or interests than did the old - t he new certificates
plus the old representing the same proportionate interest in the net
assets of the corporation, paying the stock dividend, as did the old
(Sec. 252, Rev. Regs. No. 2). However, the receipt of tax-free stock
dividends by the stockholder will reduce his cost or adjusted basis of
the stocks in determining the gain or loss upon the subsequent sale
or transfer thereof.
Subsequent cancellation or redemption of stock
dividends is essentially equivalent to the declaration of
cash dividend. - In a loose sense, stock dividends issued by
the corporation, are considered unrealized gain, and cannot be
subjected to income tax until that gain has been realized. Before
the realization, stock dividends are nothing but a representation
of an interest in the corporate properties. As capital, it is not yet
subject to income. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to
make the distribution or cancellation, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount
so distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a distribution
of earnings or profits. This process of issuance-redemption amounts
I
to a distribution of taxable cash dividends, which was just delayed
so as to escape the tax (CIR v. Court of Appeals, CTA and A.
Soriano Corporation, 301 SCRA 152 [19991).
Gross Income
Bar Question (2003)

On January 3, 1998, X, a Filipino citizen residing in the
Philippines, purchased 100 shares in the capital stock of Y
Corporation, a domestic company. On January 3, 2000, Y Corporation
declared, out of the profits of the company earned after January
1, 1998, a 100% stock dividends on all stockholders of record as of
December 31, 1999 as a result of which X holding in Y Corporation
became 200 shares. Are the stock dividends received by X subject to
income tax? Explain.
Suggested answer:
No. Stock dividends are not realized income. Accordingly, the
different provisions of the Tax Code, imposing a tax on dividend
income covers cash and property dividends only, making stock
dividends exempt from income tax. However, if the distribution of
stock dividends in the equivalent of cash or property dividend, as
when the distribution results to a change in ownership interest of the
shareholders, the stock dividends will be subject to income tax (Sec.
24[BJ[2]; Sec. 25[AJ and [BJ; Sec. 28{BJ[5][b], NIRC).
''
Rules on Taxation of Dividends
The applicable rules with respect to dividend income under the
Philippine 1997 Tax Code are as follows:
Dividend is paid by a domestic corporation

Recipient is a citizen or resident alien
Up to December 31, 1997, cash dividend or property dividend
paid by a domestic corporation was exempt from income tax pursuant
to the provisions of the 1977 Tax Code, as amended.
Beginning January 1, 1998, cash dividend or property dividend
paid by a domestic corporation or a joint stock company, insurance
or mutual fund company, 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 t ax of an association, joint
account, or joint venture or consortium taxable as a corporation of
which he is a member or co-venturer, out of its earnings or profits in
1998 or succeeding years, is generally subject to the following final
withholding tax rates:
6% - beginning January 1, 1998; or

8% - beginning January 1, 1999; or
10% - beginning January 1, 2000.
However, the tax on dividends shall apply only on income

earned on or after January 1, 1998. Income forming part of retained
earnings as of December 31, 1997 shall not, even if declared or
distributed on or after January 1, 1998, be subject to this tax (Sec.
24[BJ[2}, NIRC).
The appropriate tax rate to be deducted and withheld on the
cash dividend by the paying corporation shall be the rate prescribed
in the year of receipt of such dividend (not the rate in the year of
declaration of such dividend) (BIR Ruling No. 134-99, August 25,
. -.... 1999).
Recipient is a non-resident alien engaged in trade or business in the

Philippines
Cash and/or property dividends shall be subject to 20% final
withholding tax (Sec. 25[AJ[2], NIRC).
Recipient is a non-resident alien not engaged in trade or business in

the Philippines
Cash and/or property dividends shall be subject to the final
withholding tax rate of 25% (Sec. 25[B], NIRC).
Bar Question (2015)

BBB, Inc., a domestic corporation, enjoyed a particularly
profitable year in 2014. lnJune 2015, its Board of Directors approved
the distribution of cash dividends to its stockholders. BBB, Inc. has
individual and corporate stockholders. What is the tax treatment
of the cash dividends received from BBB, Inc. by the following
stockholders:
a) A resident citizen
b) Non-resident alien engaged in trade or business
c) Non-r esident alien not engaged in trade or business
d) Domestic corporation
e) Non-resident foreign corporation
INCOME AND WITHHOLDING T AXES 223
Gross Income
Suggested answers:
a) A final withholding tax of 10% shall be imposed upon
cash dividends actually or constructively received by a
resident citizen from BBB, Inc. (Sec. 24[b][2], NIRC).
b) A final withholding tax of 20% shall be imposed upon
cash dividends actually or constructively received by a !
non-resident alien engaged in trade or business from BBB,
Inc. (Sec. 25[a][2], NIRC).
c) A final withholding tax of 25% of the entire income received
from all sources within the Philippines, including the cash
I
l
dividends received from BBB, Inc. (Sec. 25[b}, NIRC).
d) Dividends received by a domestic corporation from
another domestic corporation, such as BBB, Inc., shall not
be subject to tax (Sec. 27[d][4], NIRC).
e) Dividends received by a non-resident foreign corporation
fro m a domestic corporation are generally subject to an
income tax of 30% to be withheld at source (Sec. 28[b]
{l}, NIRC). However, a final withholding tax of 15% is
imposed on the amount of cash dividends received from a
domestic corporation like BBB, Inc. if the tax sparing rule
applies (Sec. 28[BJ[5J[b], NIRC). Pursuant to this rule, the
lower rate of tax would apply if the country in which the
non-resident foreign corporation is domiciled would allow
as tax credit against the tax due from it, taxes deemed
paid in the Philippines of 15% representing the difference
between the regular income tax and the preferential rate.
Bar Question (2010)

In 2009, Caruso, a resident Filipino citizen, received dividend
income from a U.S.-based corporation which owns a chain of Filipino
restaurants in the West Coast, USA. The dividend remitted to
Caruso is subject to U.S. withholding tax with respect to a non-
resident alien like Caruso. (a) What will be your advice to Caruso in
order to lessen the impact of possible double taxation on the same
income? (b) Would your answer in (a) be the same, if Caruso became
a U.S. immigrant in 2008 and had become a non-r esident Filipino
citizen? Explain the difference in treatment for Philippine income
tax purposes.
224 REVIEWER ON TAXATlON
Su ggested answers:
a. In order to lessen the impact of double taxation on the same
income, I would advise Caruso to credit the U.S. income
tax on the dividend paid to the U.S. Federal Government
against the Philippine income tax to be paid to the
Philippine Government. This privilege is, however, subject
to limitation as to amount and proof of tax payment made
to the U.S. government must be attached to the Philippine
income tax return.
b. If Caruso became an immigrant in 2008 and thus became
a non-resident Filipino citizen, such dividend income
received from a U.S. corporation will be treated as a
foreign-source income, exempt from the Philippine income
- tax. A non-resident Filipino citizen is taxed only on income

from sources within the Philippines (Sec. 23/B], NIRC),
and dividends received from a foreign corporation whose
gross income for the three-year period w<w derived from
sources outside the Philippines (Sec. 42[BJ, NIRC).
Bar Que stion (2001)

What do you think is the reason why cash dividends, when
received by a resident citizen or alien from a domestic corporation,
are taxed only at the final tax of 10% and not at the progressive tax
rate schedule under Section 24(A) of the Tax Code? Explain your
answer.
Suggested answe r:
The reason for imposing final withholding tax (rather than the
progressive tax schedule) on cash dividends received by a resident
-- citizen or alien from a domestic corporation is to ensure the collection
of income tax on said income. If we subject the dividend to the
progressive tax rate, which can only be done through the filing of
income tax returns, there is no assurance that the taxpayer will declare
the income, especially when there are other items of gross income
earned during the year. It would be extremely difficult for the BIR to
monitor compliance considering the huge number of stockholders. By
shifting the responsibility to remit the tax to the corporation, it is very
easy to check compliance because there are fewer withholding agents
compared to the number of income recipients.
Likewise, the imposition of a final withholding tax will make the
tax available to the government at an earlier time. Finally, the fin.at
I NCOME AND WrrHHOLDrNO TAXES 225
Grose Income
withholding tax will be a sure reuenue to the gouernment unlike when

the dividend is treated as a returnable income where the recipient
thereof who is in a tax loss position is gfoen the chance to of/set such
loss against dividend income thereby depriving the gouernment of the
tax on said dividend income.
Recipient Is a domestic corporatJon or a resident foreign corporation

Dividends received by a domestic corporation or resident
foreign corporation from a domestic corporation (inter-corporate
dividend) shall not be subject to tax (Sec. 27[D]{4] and Sec. 28[AJ[7]
[d], NIRC).
Dividend exclusion h as always been a dominant feature of
corporate income tax. It is a device for reducing extra or double
taxation of distributed earnings. Since a corporation cannot deduct
from its gross income the amount of dividends distributed to its -
corporation-shareholders during the taxable year, any distributed '
~
earnings are necessarily taxed twice; initially at t he corporate level
when they are included in the corporation's taxable income, and
again, at the corporation-shareholder level when they are received
as dividend. Thus, without exclusion, the successive taxation of the
dividend as it passes from corporation to corporation would result in
repeated taxation·of the same income and would leave very little for
the ultimate individual shareholder. At the same time, the decision
to tax a part of such dividends reflects the policy of discouraging
complicated corporate structures as well as corporate divisions in the
form of parent-subsidiary arrangements adopted to achieve a lower
effective corporate income tax rate (Filipinas Life Assurance Co.
v. CTA and CIR, 21 SCRA 622 [19671).
Recipient is a non-resident foreiim cor_poration

Dividends received by a non-resident foreign corporation from
a domestic corporation is subject to the 15% final withholding tax,
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 20% for 1997,
19% for 1998, 18% for 1999, and 17% for 2000 and thereafter, which
represents the difference between the regular income tax of 35% in
1997, 34% in 1998, 33% in 1999, and 32% in 2000 and thereafter
and the 15% tax on dividends a s provided for in t his paragraph (Sec.
28[B]f5][b]. N IRC; P.D. 69 and Sec. 2, Rev. R egs. No. 4- 76). With the
226 tb:v1Kw11:R oN TAXAT!t\N
increase in the corporate income tax rAte to 85% under R.A. 9337,
effective November 1, 2005, the tax due which is deemed paid to the
Philippine government shall be 20% of the dividend, and dToctive
January 1, 2009, the tax due which is deemed paid Ahal! he 15%.
A tax sparing credit is a credit granted by the residence
country for foreign taxes that for some reasons were not actually
paid to the source country but that would have been paid under the
country's normal tax rules. The usual reason for the tax not being
paid is that the source country has provided a tax holiday or other
tax incentive to foreign investors as an encouragement to invest or
conduct business in the country. In the absence of tax sparing. the
actual beneficiary of a tax incentive provided by a source country to
attract foreign investment may be the residence country rather than
the foreign investor. This result occurs whenever the reduction in
source-country tax is replaced by an increase in residence-country
tax.
In theleadingcaseofCJR v. Procter& Gamble PMC(l60SCRA
560), the court ruled that the preferential 15% tax on dividend
paid to a non-resident foreign corporation is inapplicable because
of the failure of the claimant t.o show the actual amount credit ed
by the U.S. government, lo present the U.S. income tax returns
of PGMC-USA, and t.o submit a duly authenticated document
evidencing the tax credit of the 20% differential. Upon motion
for reconsideration, the Supreme Court in an en bane resolution
reversed the earlier decision of the court. It pronounced that the
15% preferential tax rate was applicable to the case at bar, because
it was established that the Philippine Tax Code only requires
that the U .S. shall "allow" Procter & Gamble USA "deemed paid"
the tax credit equivalent to 20%. Clearly, the "deemed paid" tax
credit which must be allowed by U.S. law to P&G USA js the same
"deemed paid" tax credit that Philippine law allows to a Philippine
corporation with a wholly- or majority-owned subsidiary in the
U.S. The "deemedpaid"tax credit allowed in Section 902, U.S. Tax
Code, is no more a credit for "phantom taxes" than is the "deemed
paid'' tax credit granted in Section 30(C)(8) (now Sec. 28lBH5J[bl,
NIRC). The legal question should be distinguished from questions
of administrative implementation arising after the legal question
has been answered (CIR v. Procter & Gamble PMC, 204 SCRA
377 /1991)).
The fact that Switzerland does not imposf:' any tax on th~
dividends received from a domestic corporation should b~ l'OOHidt>r·t~
INCOME AND W ITHHOLDING TAXES 227
Gross Income
as full satisfaction of the condition that the 20% differential is deemed

credited by the Swiss government (as against the Commissioner's
contention that the tax-sparing credit should apply only if the foreign
country allows a foreign tax credit). The court observed that to deny
private respondent the privilege to withhold only 15% provided for
under P .D. 369 would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations'
interest and discourage them from investing capital in our country
(CIR v. Wander Philippines, Inc., 160 SCRA 573 [1988]).
Bar Question (1994)

What are disguised dividends in income· taxation? Give an
example.
Suggested answer:
Disguised dividends are those income payments made by a
domestic corporation, which is a subsidiary of a non-resident foreign
corporation, to the latter ostensibly for services rendered by the latter
to the former, but which payments are disproportionately larger than
the actual value of the services rendered. In such case, the amount
over and above the true value of the service rendered shall be treated
as a dividend, and shall be subjected to the corresponding tax of 35%
on Philippine sourced gross income, or such other preferential rate as
may be provided under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing
agreement.
Royalty Income
Royalty is a valuable property that can be developed and
sold on a regular basis for a consideration; in which case, any gain
derived therefrom is considered as an active business income subject
to the normal corporate income tax (BIR Ruling No. 57-2000; RMC
77-2003). Where a person pays royalty to another for the use of its
intellectual property, such royalty is a passive income of the owner
thereof subject to final withholding tax.
The rules on royalty as a passive income under the Philippine
1997 Tax Code are summarized hereunder:
228 R1tvn::w&R ON TAXATlON
a. Royalty paid by a Domestic Corporation

Recipient is a citizen or a resident alien, or a non· resident alien
engaged in trade or business in the Philippines. or a domestic
corporation, or a resident foreiirn corporation
Royalty income from sources within the Philippines is subject
to 20% final withholding (income) tax, except royalty on books, other
literary works and musical compositions received by individuals
cited above which is subject to 10% final tax (Sec. 24/BJ[l] and Sec.
25[AJ[2], NIRC).
Recipient is a non·resident alien not engaged in trade or business in

the Philippines
to 25% final withholding (income) tax, unless a lower tax rate is
allowed under an existing tax treaty (Sec. 25/BJ, NIRC).
Recipient is a non· resident foreign corporation

to the 30% final withholding tax, unless a lower tax rate is allowed
under an existing tax treaty (Sec. 28/BJ[l}, NIRC).
Bar Question (2002)

The MKB-Phils is a BOI-registered domestic corporation
licensed by the MKB of the United Kingdom to distribute, support,
and use in the Philippines its computer software systems, including
basic and related materials for banks. The MKB-Phils provides
consultancy and technical services, incidental thereto by entering
into licensing agreements with banks. Under such agreements, the
MKB-Phils will not acquire any proprietary rights in the licensed
systems. The MKB-Phils pays royalty to the MKB-UK, net of 15%
withholding tax prescribed by the RP-UK Tax Treaty.
Is the income of the MKB-Phils under the licensing agreement
with banks considered royalty subject to 20% final withholding tax?
Why? If not, what kind of tax will its income be subject to? Explain.
Suggested answer:
Yes. The income of MKB-Phils under the licensing agreement
I
(
I
with banks shall be considered as royalty subject to 20% final
withholding tax. The term royalty is broad enough to include
technical advice, assistance, or services rendered in connection with
Gross Income
technical management or administration of any scientific, industrial,

or commercial undertaking, venture, project, or scheme (Sec. 42{4][f],
NIRC). Accordingly, the consultancy and technical services rendered
by MKB-Phils which are incidental to the distribution, support and
use of the computer systems of MKB-UK are taxable as royalty.
Taxation of royalty under the Philippines-U.S. Tax
Treaty. - The Philippines-U.S. Tax Treaty provides that royalty
paid by a r esident of the Philippines to a corporation domiciled in the
U.S. shall be as follows: (a) 25%, in all other cases; (b) 15%, if paid by
a BOI -registered enterprise engaged in preferred areas of activities;
and (c) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind, paid under similar circumstances to a
resident of a third State.
The phrase "paid under similar circumstances" under the
most-favored nation clause in the Philippines-U.S. Tax Treaty has
been construed a s referring to the manner of payment of taxes or
circumstances that are tax-related, and not to the subject matter of
the tax (royalty). The entitlement of 10% rate by U .S. firms despite the
absence of a matching credit (20% on royalties under RP-Germany
Tax Treaty) would derogate from the design behind the most-favored
nation clause to grant equality of international treatment, since the
tax burden laid upon the income of the investor is not the same in
the two countries. The similarity in the circumstances of payment
of taxes is a condition for the enjoyment of the most-favored nation
treatment precisely to underscore the need for equality of treatment.
The concessional rate of 10% provided for in the RP-Germany Tax
Treaty should apply only-if the taxes imposed upon royalties in the
RP-U.S. Tax Treaty and in the RP-Germany Tax Treaty are paid
under similar circumstances. The two tax treaties do not contain
similar provisions on tax crediting. The tax treaty with Germany
expressly allows crediting against German income and corporation
tax of 20% of the gross amount of royalties (deemed) paid under
the law of the Philippines. On the other hand, the tax treaty with
the U.S. does not provide for similar crediting of 20% of the gross
amount of royalties paid (CIR v. S. C. Johnson & Sons, G.R. No.
127105, June 25, 1999; Wrigley Philippines v. CIR, CTA Case
No. 7138, July 26, 2007).
Treatment of royalty under the Philippines-China Tax
Treaty. - Under the Philippines-China Tax Treaty effective
January 1, 2002, the t ax on royalties shall not exceed:
1. 15% of the gross amount of royalties arising from the use
of, or the right to use, any copyright of literary, artistic, or
scientific work, including cinematographic films or tapes

for television or broadcasting, or
2. 10% of the gross amount of royalties arising from the use
of, or the right to use, any patent, trade mark, design or
model, plan, secret for1nula or process, or from the use of,
or t he right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial,
commercial, or scientific exper ience.
Considering that the treaty with China does not contain a
"matching credit" provision similar to that found in the treaty with
Germany, the tax on royalty payments to residents of China can
be considered paid under similar circumstances to a resident of
the United States and the most-favored-nation clause in t he RP-
U.S. Tax Treaty shall apply (RMC No. 46-2002, September 2, 2002).
Accordingly, the preferential 10% rate of tax may again be availed
of by U.S. corporations under the most-favored nation clause in the
Philippines-U.S. Tax Treaty, in relation to the Philippines-China
Tax Treaty,. effective January 1, 2002.
b. Royalty paid by a Foreign Corporation

Recipient is a resident citizen and a domestic corporation
The royalty paid by a foreign corporation to a resident citizen
and a domestic corporation is subject to tax at the graduated rates of
tax ranging from zero percent to 35% (formerly 5%- 32%) (in the case
of r esident citizens) or at 30% (in the case of domestic corporations),
because they are liable to income tax on worldwide income.
Recipient is a non-resident citizen, an alien, and a foreign corporation
Since they are liable to Philippine income tax only on income,
the source of which is from the Philippines, they are exempt from
income on the royalties received from a foreign corporation whose
property or interest is not located or used in the Philippines.
Rental Income
Rental income on the lease of personal property located in the
Philippines and paid to a non-resident taxpayer shall be taxed as
follows:
Gross Income
Non-Resident Corp. Non-Resident Alien

Vessel 4.5% 25%
Aircraft, machineries, and
other equipment 7.5% 25%
Other assets 30.0% 25%
Bar Question (1993)

X is employed as secuTity guard of Excel Supermarket, Inc. X
lives in a room within the compound of Excel but he is not charged
any rent. The rental value of the room is P300.00 a month. X wants
your opinion on whether BIR can tax the value of the free use of his
room.
Suggested answer:
The rental value of the room is not taxable. Section 2.2 of the
Revenue Audit Memorandum Order No. 1-87 provides that if the
lodging is furnished in the business premises of the employer and
the employee is required to accept such lodging as a condition of his
employment, then the value of said lodging will be not taxable. It is
merely for the convenience, comfort, and pleasure of the employer.
Other Income
Income from any source whatever
The phrase "income from any source whatever" is broad
enough to cover gains contemplated here. These words disclose a
legislative policy to include all income not expressly exempted
within the class of taxable income under our laws, irrespective of
the voluntary or involuntary action of the taxpayer in producing the
gains (Gutierrez v. CTA and Collector, 101 Phil. 713 /19571).
Any economic benefit to the employee, whatever may
have been the mode by which it is implemented, is income
subject to tax. Thus, in stock options, the difference between the
fair market value of the shares at the time the option is exercised
and the option price constitutes additional compensation income
to the employee (Commissioner v. Smith, 324 U.S. 177). A stock
option is a right, but not an obligation, to purchase (call option) or
sell (put option) a specified number of shares at a fixed price before
or at a certain date in the future.
The principle underlying the taxability of an increase in the net

worth of a taxpayer rests on the theory that such an increase in
net worth, if unreported and not explained by the taxpayer,
comes from income derived from a taxable source. In this
case, the increase in net worth was not the result of the receipt by
it of taxable income. It was merely the outcome of the correction of
an error in the entry in its books relating to its indebtedness to the
insurance company. The income tax law imposes a tax on income;
it does not tax any or every increase in net worth whether or not
derived from income (Fernandez Hermanos, Inc. v. CIR, CTA
Case 787, June 10, 1963).
Prizes and Awards

Prizes (except prizes amounting to Pl0,000 or less which shall
be subject to the graduated income tax rates for individual taxpayers)
and other winnings (except winnings amounting to Pl0,000 or less
from Philippine Charity Sweepstakes Office and lotto winnings
which shall be exempt) shall be subject to 20% final withholding tax,
if received by a citizen, resident alien or non-resident alien engaged
in trade or business in the Philippines [NOTE: This is pursuant to
Section 24(B)(l), as amended by R.A. 10963 (TRAIN), effective
January 1, 2018]. However, if the recipient is a non-resident alien
not engaged in trade or business in the Philippines, the prizes and
other winnings shall be subject to 25% final withholding tax. And if
the recipient is a corporation (domestic or foreign), the prizes and
other winnings are added to the corporation's operating income and
the net income is subject to 30% corporate income tax.
However, prizes and awards made primarily in recognition
of religious, charitable, scientific, educational, artistic, literary, or
civic achievement are excluded from gross income only if (a) the
recipient was selected without any action on his part to enter the
contest or proceeding; and (b) the recipient is not required to render
substantial future services as a condition to receiving the prize or
award (Sec. 32[BJ[7)[c}, NIRC). Moreover, all prizes and awards
granted to athletes in local and international sports competitions
and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations are also excluded
from gross income (Sec. 32[BJ{7]{d}, NIRC).
The grand prize of the Philippine Centennial Commemorative
100,000 PISO National Raffle Draw of one Jaguar Daimler is subject
to the 20% final withholding tax, despite the fact that the raffle
Gross Income
draw is a government-sponsored project (BIR Ruling No. 005-2001,

February 15, 2001).
Bar Question (2015)

Mr. A, a citizen and resident of the Philippines, is a professional
boxer. In a professional boxing match held in 2013, he won prize
money in United States (US) dollars equivalent to P300,000,000.
b) May Mr. A's prize money qualify as an exclusion from his
gross income? Why?
Suggested answer:
b) No. Under the law, all prizes and awards granted to
athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad
and sanctioned by their national sports associations
are excluded from gross income. The exclusion find
application only to amateur athletes where the prize
was given in an event sanctioned by the appropriate
national sports association affiliated with the Philippine
Olympic Committee and not to professional athletes like
Mr. A. Therefore, the prize money would not qualify as
an exclusion from Mr. A's gross income (Sec. 32[BJ[7J[d],
NIRC).
Bar Question (1996)

Onyoc, an amateur boxer, won in a boxing competition
sponsored by the Gold Cup Boxing Council, a sports association duly
accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the amount
received by Onyoc and donor's tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corpo1·ation refuse to pay.
Decide.
Suggested answer:
The prize will n.ot constitute a taxable income to Onyoc; hence,
the BIR is n.ot correct in imposing the income tax. R.A. 7549explicitly
provides that ''All prizes and awards granted to athletes in local
and international sports tournaments and competitions held in the
Philippines or abroad and sanctioned by their respective national
sports associations shall be exempt from income tax."
Neither is the BIR correct in collecting the donor's tax from

Ayala Land Corporation. The law is clear when it categorically
stated that the donor of said prizes and awards shall be exempt from
the payment of the donor's tax.
Bar Question (1993)

Evelyn is a graduate student of U.P. In January 1991, she
won the Palanca Award for an outstanding short story sh e wrote.
The award was P25,000 in cash. In F ebruary, 1991, sh e was also
named Most Valuable Player of the Varsity volleyball team and
she was given a trophy plus Pl0,000. Finally, in March 1991, she
received a Fellowship Award from the University of California to
pursue a mast er's degree in American literature. The fellowship is
for $10,000 plus free board and lodging for two semesters. Should
Evelyn include these awards and fellowship in her gross income?
Reasons.
Suggested answer:
Gross income includes prizes and winnings (Sec. 27, NIRC),
except those stated in Section 28B(8)(E) of the NIRC, to wit:
"(E) Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or civil
achievement but only if:
i. The recipient was selected without any action on his part
to enter the contest or proceeding; and
u;. The recipient is not required to render substantial future
services as a condition to receiving the prize or award."
The first award granted to Evelyn was a Palanca award.
This kind of award requires submission of literary works. Hence,
this is included in the gross income because it fails to meet the
legal requisites provided for in the afore-quoted provisions of law
sp ecifically item (i).
The second award granted to E velyn was the Most Valuable
Player Award. In this kind of award, Evelyn did not file any
application to enter into any contest. The award was given to her in
recognition for her outstanding performance in the field of sports.
However, the recognition in the field of sports is not among those
stated in the afore-quoted provision of law. Thus, the award granted
to her does not fall under the afore-quoted provision of law.
I N<:OMl1: /\NO Wt'l'llllOl,nlN<l TAXl~R
Gross Income
The last award granted to her was the Fellowship Award. This
requires a lso .-,u.bmissfon. of app lication to qualif.y for such award.
Hence, it fails to meet the necessary requisites of the afore.quoted
provision of law specifically item (1).
Bar Question (1998)

l s the prize of one million pesos awarded by the R eader's
Digest subject to withholding of final tax? Who is r esponsible for
withholding the tax? What are the liabilities for failure to withhold
such tax?
Suggested answer:
It d epends. If the prize is considered as winnings derived from
sources within the Philippines, it is subject to withholding of final tax
(Sec. 24{BJ in relation to Sec. 57{A}, NIRC). If derived from sources
without the Philippines, it is not subject to withholding of final tax
because the Philippine tax law and regulations could not reach out to
foreign jurisdictions.
The tax shall be withheld by the Reader's Digest or local agent
who has control over the payment of the prize.
Any person required to withhold or who willfully fails to
withhold, shall, in addition to the other penalties provided under the
Code, be liable upon conviction to a penalty equal to the total amount
I
of tax not withheld (Sec. 251, NIRC). In case of failure to withhold
the tax or in the case of under withholding, the deficiency tax shall
be collected from the payer /withholding agent (1st par., Sec. 2.S7[AJ,
Rev. R egs. No. 2-98).
Any person required under the Tax Code or by rules and
regulations to withhold taxes at the time or times required by law or
rules and regulations shall, in addition to other penalties provided
by law, upon conviction be punished by a fine of not less than Ten
thousand p esos (Pl 0,000) and suffer imprisonment of not less than
one year but not more than 10 years (1st par., Sec. 255, NIRC).
Bar Question (2000)

Jose Miranda, a young artist and designer, received a prize
of Pl00,000 for winn~g in the on-the-spot peace poster contest
spons?red by a local Li?n_s Club . Shall the reward be included in the
gross income of the rec1p1ent for tax purposes? Explain.
286 RJtVIF.WF.:R ON TAXA'MOl'I
Suggested ans wer:

No. It is not includable in the gross income of the recipient
because the same is subject to a final tax of 20%, the amount thereof
being in excess of PJ0,000 (Sec. 24[B][l], NIRC). The prize constitutes
a taxable income because it was made primarily in recognition of
artistic achievement which he won due to an action on his part to
enter the contest (Sec. 32[B}[7}[c], NIRC). Since it is an on-the-spot
contest, it is evident that he must have joined the contest in order to
earn the prize or award.
Bar Question (1995)

Mr. Lajojo is a big-time swindler. In one year he was able to earn
Pl Million from his swindling activities. When the Commissioner
of Internal Revenue discovered his income from swindling, the
r Commissioner assessed him a deficiency income tax for such income.

The lawyer of Mr. Lajojo protested the assessment on the
following grounds:
' (1) The income tax applies only to legal income, not to illegal
mcome;
(2) Mr. Lajojo's receipts from his swindling did not constitute
income because he was under obligation to return the
amount he had swindled, hence, his receipt from swindling
was similar to a loan, which is not income, because for
every peso borrowed he has a corresponding liability to
pay one peso; and
(3) If he has to pay the deficiency income tax assessment,
there will be hardly anything left to return to the victims
of the swindling.
How will you rule on each of the three grounds for the protest?
Explain.
Suggested answer:
(1) The contention that the income tax applies to legal income
and not to illegal income is not correct. Section 28(a) of the
Tax Code includes within the purview of gross income all
income from whatever source derived. Hence, the illegality
of the income will not preclude the imposition of the income
tax thereon.
237
Gross Income
(2) 11ie contention that the receipts from his swindling did
not constitute income because of his obligation to return
the amount swindled is likewise not correct. When a
taxpayer acquires earnings, lawfully or unlawfully,
without the consensual recognition, express or implied, of
an obligation to repay and without restriction as to their
disposition, he has received taxable income, even though
it may still be claimed that he is not entitled to retain
the money, and even though he may still be adjudged to
restore its equivalent (James v. U.S., 366 US 213, 1961).
To treat the embezzled funds not as taxable income would
perpetuate injustice by relieving embezzlers of the duty of
paying income taxes on the money they enrich themselves
with through embezzlement, while honest people pay their
taxes on every conceivable type of income.
(3) The deficiency income tax assessment is a direct tax
imposed on the owner which is an excise on the privilege
to earn an income. It will not necessarily be paid out of the
same income that was subjected to the tax. Mr. Lajojo 's i I
liability to pay the tax is based on his having realized a

taxable income from his swindling activities and will not
affect his obligation to make restitution. Payment of the
tax is a civil obligation imposed by law while restitution is
a civil liability arising from a crime.
Bar Question (2014)

Mr. Gipit borrowed from Mr. Maunawain Pl00,000, payable in
five equal monthly installments. Before the first installment became
due, Mr. Gipit rendered cleaning services in the entire office building
of Mr. Maunawain, and as compensation therefor, Mr. Maunawain
cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.
Mr. Gipit claims that the cancellation of his indebtedness cannot
be considered as gain on his part which must be subject to income
tax, because according to him, he did not actually receive payment
from Mr. Maunawain for the general cleaning services. Is Mr. Gipit
correct? Explain.
Suggested answer:
. No. The cancellati~n of the indebtedness of up to P75,000 is
intended as a compe.nsatwn for the general cleaning services re d d
by J.Y1.r.
11..r: a·ipit.
. Compensatwn. ,or
+.
services in whatever form n ·d
ere·
part of gross income (Sec. 32/A}, NIRC). pai is
Bar Question (1995)

Mr. Osorio, a bank executive, while playing golf with Mr.
Perez, a manufacturing firm executive, mentioned to the latter that
his (Osorio) bank had just opened a business relationship with a
big foreign Importer of goods which Perez' company manufactures.
Perez requested Osorio to introduce him to this foreign Importer
and put in a good word for him (Perez), which Osorio did. As a
result, Perez was able to make a profitable business deal with the
foreign importer.
In gratitude, Perez, in behalf of his manufacturing firm, sent
Osorio an expensive car as a gift. Osorio called Perez and told
him that there was really no obligation on the part of Perez or his
company to give such an expensive gift. But Perez insisted that
Osorio keep the car. The company of Perez deducted the cost of the
car as a business expense.
The Commissioner of Internal Revenue included the fair
market value of the car as income of Osorio who protested that the
car was a gift and therefore excluded from income.
Who is correct, the Commissioner or Osorio? Explain.
Suggested answer:
The Commissioner is correct. The car, having been given to Mr.
Osorio in consideration of having introduced Mr. Perez to a foreign
importer which resulted in a profitable business deal, is considered
to be a compensation for services rendered. The transfer is not a gift
because it is not made out of a detached or disinterested generosity
but for a benefit accruing to Mr. Perez. The fact that the company of
Mr. Perez takes a business deduction for the payment indicates that
it was considered as a pay rather than a gift. Hence, the fair market
value of the car is includible in the gross income pursuant to Section
28(a)(l) of the Tax Code (See 1974 Federal Tax Handbook, p. 145).
A payment though voluntary, if it is in return for services rendered,
or proceeds from the constraining force of any moral or legal duty
or a benefit to the payor is anticipated, is a taxable income to the
payee even if characterized as a ''gift" by the payor (Commissioner
v. Duberstein, 363 U.S. 278).
Bar Question (1997)

An insolvent company had an outstanding obligation of
Pl00,000 from a creditor. Since it could not pay the debt, the creditor
I NCOME AND W ITHHOLDING TAXES 239
Gross Income
agreed to accept payment through dacion en pago a property which

had a market value of P30,000. In the dacion en pago document, the
balance of the debt was condoned.
(a) What is the tax effect on the discharge of the unpaid
balance of the obligation on the debtor corporation?
(b) Insofar as the creditor is con cerned, how is he affected
tax-wise as a con sequence of the transaction?
Suggested answer:
(a) The condonation of the unpaid balance of the obligation
has the effect of a donation made on the part of the creditor.
It is obvious that the creditor merely desires to benefit the
debtor and without any consideration therefore cancels
the debt, the amount of the debt cancelled is a gift from
the creditor to the debtor and need not be included in the
latter's gross income (Sec. 50, Rev. Regs. No. 2).
(b) For the difference of P70,000, the creditor shall be subject
to donor's tax at the applicable rates provided for under
the National I nternal Revenue Code.
Bar Question (1995)

Mr. Francisco borrowed Pl0,000 from his friend, Mr. Gutierrez,
payable in one year without interest. When the loan became due,
Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable
to pay because of business reverses. Mr. Gutierrez took pity on Mr.
Francisco and condoned the loan. Mr. Francisco was solvent at the
time he borrowed the Pl0,000 and at the time the loan was condoned.
Did Mr. Francisco derive any income from the cancellat ion or
condonation of his indebtedness? Explain.
Suggested answer:
No. Mr. Francisco did · not derive any income from the
cancellation or condonation of his indebtedness. Since it is obvious
that the creditor merely desired to benefit the debtor in view of the
absence of consideration for the cancellation, the amount of the debt
is considered as a gift from the creditor to the debtor and need not be
included in the latter's gross income.
Bar Question (1997)

During the year, a domestic corporation derived the following
items of revenue: (a) gross 1·eceipts from a trading business; (b)
interests from money placements in the banks; (c) dividends from
its stock investments in domestic corporations; (d) gains from stock
transactions through the Philippine Stock Exchange; (e) proceeds
under an insurance policy in the loss of goods.
In preparing the corporate income tax return, what should be
the tax treatment on each of the above items?
Suggested answer:
The gross receipts from trading business is includible as an item
of income in the corporate income tax return and subject to corporate
income tax rate based on net income. The other items of revenue will
not be included in the corporate income tax return. The interest from
money market placements is subject to a final withholding tax of
20%; dividends from domestic corporations are exempt from income
tax; and gains from stock transactions with the Philippine Stock
Exchange are subject to transaction tax which is in lieu of the income
tax. The proceeds under an insurance policy on the loss of goods is not
an item of income but merely a return of capital; hence, not taxable.
Bar Question (2002)

XYZ Foundation is a non-stock, non-pro.fit association duly
organized for religious, charitable, and social welfare purposes.
Last January 3, 2000, it sold a portion of its lot used for religious
purposes and utilized the entire proceeds for the construction of a
building to house its free Day and Night Care Center for children
of single parents. In order to subsidize the expenses of the Day and
Night Care Center and to support its religious, charitable, and social
welfare projects, the Foundation leased the 300-square meter area
of the second and third floors of the building for use as a boarding
house. The Foundation also operates a canteen and a gift shop
within the premises, all the income from which is used actually,
directly, and exclusively for the purposes for which the Foundation
was organized.
a. Considering the constitutional provision granting tax
exemption to non-stock corporations, such as those formed
exclusively for religious, charitable, or social welfare
purposes, explain the meaning of the last paragraph
..
INCOME AND WrrHHOLDTNG T AXF.S 241
Gross Income
of said Section 30 of the 1997 Tax Code, which states

that "[I]ncome of whatever kind and character of the
foregoing organizations from any of their properties, real
or person al, or from any of th eir activities conducted for
profit, r egardless of the disposition made of such income
shall be subject to tax imposed under this Code."
b. Is the income derived by XYZ Foundation from the sale of
a portion of its lot, rentals from its boarding house, and
the operation of its canteen and gift shop subject to tax?
Explain.
Suggested answer:
a. The exemption contemplated in the Constitution covers
real estate tax on real properties actually, directly,
and exclusively used for religious, charitable, or social
welfare purposes. It does not cover exemption from the
imposition of income tax, which is within the context of
Section 30 of the Tax Code. As a rule, non-stock, non-
profit corporations organized for religious, charitable, or f
social welfare purposes are exempt from income tax on
their income received by them as such. However, if these
religious, charitable, or social welfare corporations derive
income from their properties or any of their activities
conducted for profit, the income tax shall be imposed
on said items of income, irrespective of their disposition
(Sec. 30, NIRC; CIR v. YMCA, G.R. No. 124043,
I
October 14, 1998; CIR v. St. Luke's Medical Center,
Inc., G.R. Nos. 195909 and 195960, September 26,
2012).
b. Yes. The income derived from the sale of lot and rentals
from its boarding house are considered as income from
properties which are subject to tax. Likewise, the incomes
from the operation of the canteen and gift shop are income
from its activities conducted for profit, which are subject to
tax. The income tax attaches irrespective of the disposition
of these incomes.
Bar Question (2005)

Explain briefly whether the following items are taxable or non-
taxable: (a) income fromjueteng; (b) gain arising from expropriation
of property; (c) t axes paid and subsequently refunded; (d) recovery
242 REVJEWER ON TAXATION
of bad debts previously charged off; and (e) gain on the sale of a car
used for personal purposes.
Suggested answer:
a. It is taxable. The law imposes a tax on 'income from any
source whatever,' which means that it includes income
whether legal or illegal (Sec. 32{AJ, NIRC).
b. Taxable. There is a material gain, not excluded by law,
realized out of a closed and completed transaction. Gains
from dealings in property are part of gross income (Sec.
32[AJ{3], NIRC).
c. It depends. Taxes paid which are allowed as a deduction
from gross income are taxable when subsequently refunded
but only to the extent of the income tax benefit of said
deduction (Sec. 34[C][l], NJRC). It follows that taxes paid
which are not allowed as deduction from gross income,
i.e., income tax, donor's tax, and estate tax, are not taxable
when refunded.
d. Recovery of bad debts previously charged off is taxable
to the extent of income tax benefit of said deduction (Sec.
34[E}[l}, NJRC).
e. Gain on the sale of a car used for personal purposes is
taxable. This is a gain derived from dealings in property
which is part of the taxpayer's gross income (Sec. 32/A]
[3], NmC). There is a material gain, not excluded by law,
realized out of a closed and completed transaction. !
I
Bar Question (2005) I'
State with r easons the tax treatment of the following in the \·
1
preparation of annual income tax returns: l
l
a. Proceeds oflife insurance r eceived by a child as irrevocable
beneficiary; .,
>
b. 13th month pay and de minimis benefits;

c. J?ividends received by a domestic corporation from
{1) anot~er domestic corporation; and (ii) a foreign
corporat10n;
d. Interest on deposits with (i) BPI Family Bank; and (ii) a
local offshore banking unit of a foreign bank;
I NCOME AND W l'l'I-JHOLDTNG TAXES 243
Gross Income
e. Income realized from sale of (i) capital assets, and (ii)

ordinary a sset s.
Suggested answer:
a. The proceeds of life insurance received by a child as
irrevocable beneficiary are not to be reported in the
annual income tax return, because they are excluded from
gross income. This kind of receipt does not fall within
the definition of income - 'any wealth which flows into
the taxpayer other than a mere return of capital." Since
insurance is compensatory in nature, the receipt is merely
considered as a return of capital (Sec. 32[B]{l}, NIRC;
Fisher v. Trinidad, 43 Phil. 73 [19221).
b. 13th month pay is excluded from gross income for income
tax purposes to the extent of P30,000 (now P90,000 under
R.A. 10962 [TRAIN], effective January 1, 2018). Any
excess will be included in the gross income as part of gross
compensation income (Sec. 32[BJ[7][e], NIRC).
De minimis benefits are non-taxable fringe benefits.
They are not to be reported in the income tax return
because they are tax exempt. They are also exempt from
the imposition of the fringe benefits tax (Sec. 33[C], NIRC).
c. Dividends received by a domestic corporation from another
domestic corporation are not subject to income tax; hence,
should not be declared in the income tax return (Sec. 27[DJ
{4], NIRC).
Dividends received by a domestic corporation from
a foreign corporation are subject to income tax and shall
form part of the gross income. There is no law exempting
this type of dividend from income tax (Sec. 32[7], NIRC).
d. Interest on deposit with BPI Family Bank is a passive
income subject to a final withholding tax rate of 20%;
the interest on deposit with a local offshore banking unit
of a foreign bank is a passive income subject to a final
withholding tax rate of 7. 5% (now 15% under R.A.
10962 [TRAIN], effective January 1, 2018) (Sec. 24[BJ
{l], NIRC). Both interest incomes are not to be declared as
part of gross income in the income tax return.
e. (i) Generally, income realized from the sale of capital
assets are not to be reported in the income tax return
'
as they are already subject to final taxes (capital

gains tax on real property located in the Philippines
and shares of stocks of a domestic corporation). What
are to be reported in the annual income tax return
are the capital gains derived from the disposition
of capital assets other than real property located
in the Philippines or shares of stocks in domestic
corporations which are not subject to final taxes.
(ii) Income realized from the sale of ordinary assets is
taxable and the said income shall be declared in the
annual income tax return. The income constitutes
either income derived from the conduct of trade or
business or a gain derived from dealings in property
(Sec. 32[AJ[2] and [3], NIRC) .
.... -----....

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PART II

INCOME AND WilHHOLDING TAXES

"Income tax" is defined as a tax on all yearly 1 profits arising

n;t a dealer in securities (Secs. 24[CJ, 25[A}[3], 27[DJ

corporations, are deducted from the gross income (i.e., sum

Less: Sales discounts XXX

Sales returns and allowances XXX XXX

Net sales XXX

Less: Cost of goods sold or services XXX

Special creditable income tax6 XXX

The special creditable income tax may arise by

sets of graduated or flat income tax rates. The applicable ta.x

b. Tax base is net capital iain <i.e.. aoss sellioi urice

capital gain, and passive income, and other income !!Qt

Bar Question (1994)

accordingly and are accorded different tax treatments, in accordance

Bar Question (1997)

Features of the Income Tax Law

2. Income tax is a progressive tax) since the tax base

Bar Question (1996)

from all sources while non-resident aliens are taxed only

Direct Tax distinguished from Indirect Tax

Bar Question (1994)

Criteria In Imposing Income Tax

within the Philippines, such as dividend, interest, rent,

When is Income taxable

ll. J oint venture or consortium undertaking

agreements enter ed into by the Philippines with said international

Bar Question (2016)

Bar Question (2015)

Bar Question (1997)

Bar Question (2011)

Bar Question (1998)

3. An individual citizen of the Philippines who is working

Bar Question (1994)

Engaged in trade or business or exercise of profession

S. Contract worker - one who leaves the Philippines on

Bar Question (2016)

Philippines, Ms. B's Philippine-sourced income is taxable

Bar Question (2002)

from foreign sources of non-resident citizens is

place for a period of time, not the intention to make it a permanent

Bar Question (2015)

within and partly from sources without the Philippines

Bar Question (2011)

Bar Question (1991)

Bar Question (2000)

income, and other income from sources within the Philippines is

alien employees of the above entities must necessarily be extended

The President exercised his veto power under Section 27(2),

Subcontractors formerly enjoying preferential tax treatment prior \

Estates and Trusts

are mandatory and should be strictly construed (CIR v. Visayan

Bar Question (2009)

6Tbe amount of personal exemption of an individual has been increased to

same, if the trustee is directed to accumulate the rental income and

share of the income from the property owned in common by them in

Co-ownership Due to Death of a Decedent

of the estate and the income thereof. for each of them to

Bar Question (1997)

doubt that, euen if no document or instrument were executed for the

Bar Question (1994)

the part,-iership. wa.s used, intended for use, or bears

Bar Question (1991)