Corporate Income Tax

1. Corporations
a. Differentiate a Domestic Corporation from a Foreign Corporation.
A domestic corporation is one created or organized in the Philippines or under its laws and is
liable for its income from sources within and without. A foreign corporation, on the other hand, is
one organized or formed under the laws of a foreign country, even if owned wholly by Filipino
citizens or Philippine nationals.

b. Differentiate a foreign corporation and a non –resident foreign corporation.

A resident foreign corporation is a foreign corporation engaged in trade or business within the
Philippines, whereas, 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.

c. How are domestic corporations, foreign corporations and a non –resident foreign corporations
taxed?
Taxes imposed on Domestic corporations and resident foreign corporations:
1. Normal corporate income tax (NCIT)
- 30% of taxable income from all sources within and without the Philippines
2. Minimum corporate income tax (MCIT)
- 2% of gross income, if MCIT applies
3. Gross income tax (Optional corporate income tax)
- 15% of gross income, if qualified
4. Improperly Accumulated Earnings Tax
- 10% of improperly accumulated earnings
5. Final tax on passive income

Taxes imposed on a Non-Resident Foreign Corporation:

1. NCIT – 30% on gross income from sources within the Philippines (NIRC, Sec. 28 [B])
2. Non-resident Cinematographic Film owner, lessor or distributor – 25% of its gross income from
all sources within the Philippines
3. Non-resident owner or lessor of vessels chartered by Philippine nationals – 4.5% of gross
rentals, lease, or charter fees
4. Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of gross
rentals or fees
5. Interest on foreign loans – 20% of interest
6. Intercorporate Dividends – 15% of dividends received from Domestic Corporation
7. Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange – 5-10% of capital
gains

d. Discuss the cases:

i. Evangelista v. Collector, 102 Phil. 140;
Facts: The petitioners pooled their monies and bought 24 lots. The petitioners had the
rented or leased the properties bought. The properties have been under the management
of their brother, with full power to lease, to collect rents, to issue receipts, to bring suits,
to sign letters and contracts, and to indorse and deposit notes and checks. The CIR
demanded the payment of tax on corporations on the rental income realized by the
petitioners.

Issue: Whether or not petitioners are subject to the tax on corporations

Ruling: Yes. The petitioners, having formed a partnership, is subject to tax on

corporations. The essential elements of a partnership pursuant to the Article 1767 of the
Civil Code are: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties. The first element
is present in the case at bar because petitioners have agreed to and did contribute money
 and property to a common fund. The fact that the petitioners acquired 24 lots and having
them leased also strongly indicates that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves.

ii. Ona v. Commissioner, G.R. No. L-19342, 25 May 1972;

Facts: Julia Buñales died leaving her surviving spouse, Lorenzo and their five minor
children as heirs. Lorenzo was appointed administrator. The partition was approved by
the Court, but no attempt was made to divide the properties and they remained under the
management of Lorenzo who used said properties in business by leasing or selling them
and investing the income derived in real properties and securities. CIR decided that
petitioners formed an unregistered partnership and therefore, subject to the corporate
income tax.

Issue: Whether the petitioners are liable for the deficiency corporate income tax.

Ruling: Yes. If after partition, an heir allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit in proportion
to his share, for tax purposes, an unregistered partnership is formed which is subject to a
corporate income tax.

iii. Pascual and Dragon v. Commissioner, 166 SCRA 560;

Facts: Pascual and Dragon bought two parcels of land in 1965, and another three parcels
of land in 1966. Later in 1968, petitioners sold the first two parcels of land, while the
three parcels of land were sold in 1970. Petitioners then realized a net profit of
P165,224.70 for the sale made in 1968 and P60,000 for 1970. They were assessed and
required to pay deficiency corporate income taxes for allegedly formed an unregistered
partnership or joint venture taxable as corporation.

Issue: Whether the petitioners formed an unregistered partnership liable for the
deficiency corporate income tax liability assessed.

Ruling: No, the petitioners did not form an unregistered partnership liable for deficiency
corporate income tax. There is no evidence that the petitioners entered into an agreement
to contribute money, property or industry to a common fund, and that they intended to
divide the profits among themselves. The two isolated transactions whereby they
purchased properties and sold the same few years thereafter did not make them partners.
There must be clear intent to form a partnership, the existence of a juridical personality
distinct from the partners and the freedom of each partner to transfer the whole property.

iv. Obillos v. Commissioner, 139 SCRA 436;

Facts: Jose Obillos Sr. bought two lots and transferred his rights to his four children for
them to build their residences. The titles issued showed the siblings as co-owners of the
lots. After more than a year, the children sold the lots. The CIR assessed the siblings for
corporate income tax on the total profit in addition to the individual income tax on their
shares. The Commissioner claimed that the siblings had formed an unregistered
partnership or joint venture within the meaning of the tax code.

Issue: Whether the siblings are liable for corporate income tax as an unregistered
partnership

Ruling: No. The siblings are co-owners and not partners, because they had no intention
of forming a partnership. The original purpose was to divide the lots for residential
purposes. The division of the profit was merely incidental to the dissolution of the co-
ownership.
 Co-ownerships who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation within the purview of
the income tax law.

v. Afisco Insurance Corporation v. Court of Appeals, 302 SCRA 1

Facts: Pursuant to reinsurance treaties, 41 local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company. The ceding companies share in the business ceded to the pool and
in the expenses according to a Rules of Distribution annexed to the Pool Agreement. The
pool of insurers was assessed by the CIR deficiency corporate taxes.

Issue: Whether or not the insurance pool is a partnership or association subject to tax as a
corporation.

Ruling: Yes, the insurance pool is an informal partnership which is taxable as a

corporation. Although the pool itself is not a reinsurer and does not issue any insurance
policy, its work is indispensable, beneficial and economically useful to the business of
the ceding companies, because without it they would not have received their premiums.
Profit motive or business is, therefore, the primordial reason for the pool’s formation.

2. Domestic Corporations
a. What is Normal Corporate Income Tax and how do we compute for it?
b. X Company has the following business income and expenses
From Philippine Sources Gross Income Expenses
From business 450,000.00 290,000.00
Dividends from domestic corporation 80,000.00
From other countries
South Korea 180,000.00 80,000.00
Australia 75,000.00 25,000.00
 What is the income tax due if X Company is a domestic corporation?
 What is the income tax due if X Company is a resident foreign corporation?
Resident Foreign
Domestic Corporation Corporation
From Philippine Sources
From business 450,000.00 450,000.00
From Other Countries
South Korea 180,000.00
Australia 75,000.00  
Total Gross Income 705,000.00 450,000.00
Less: Expenses
From Philippine Sources
From business 290,000.00 290,000.00
From Other Countries
South Korea 80,000.00
Australia 25,000.00  
Taxable Income 310,000.00 160,000.00
Multiply by corporate income tax
rate 30% 30%
Tax due 93,000.00 48,000.00

c. Discuss the following:

i. What is Minimum Corporate Income Tax
A minimum corporate income tax (MCIT) of two percent of the gross income as of the
end of the taxable year is imposed upon any domestic corporation on the fourth taxable
 year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.

ii. how do we compute for it

The MCIT is equal to 2% of the gross income of the corporation at the end of the taxable
quarter, except income exempt from income tax and income subject to final withholding
tax.

iii. What is its purpose and nature

The imposition of the MCIT is designed to forestall the prevailing practice of
corporations of over claiming deductions in order to reduce their income tax payments.

The MCIT is equal to 2% of the gross income of the corporation at the end of the taxable
quarter, except income exempt from income tax and income subject to final withholding
tax.

Being a minimum income tax, a corporation should pay the MCIT whenever its normal
corporate income tax (NCIT) is lower than the MCIT, or when the firm reports a net loss
in its tax return. Conversely, the NCIT is paid when it is higher than the MCIT.

Therefore, the taxable due for the taxable year will be NCIT (30% of taxable income)or
MCIT (2% of gross income), whichever is higher.

iv. What is the coverage.

The MCIT covers domestic and resident foreign corporations which are subject to the
30% (effective Januray 1, 2009) normal corporate income tax; hence, corporations which
are subject to special corporate taxes do not fall within the coverage of the MCIT.

v. How many years and excess of MCIT be carried over

The excess shall be credited against the NCIT due for the three immediately succeeding
taxable years.

vi. Chamber of Real Estate and Builders’ Association, Inc. v. Romulo, G.R. No. 160756, 09
March 2010
Facts: Chamber of Real Estate and Builders’ Associations, Inc. assailed the validity of
the imposition of minimum corporate income tax (MCIT) on corporations on sales of real
properties classified as ordinary assets. It claims that the MCIT is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation
of property without due process of law. Petitioner also asserts that the imposition of the
MCIT violates the due process clause because the government collects income tax even
when the net income has not yet been determined.

Issue: Whether or not the imposition of the MCIT on domestic corporations is

unconstitutional.

Ruling: No. An income tax is arbitrary and confiscatory if it taxes capital because capital
is not income. It is income, not capital, which is subject to income tax. However, the
MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at
by deducting the capital spent by a corporation in the sale of its goods other direct
expenses from gross sales. Clearly, the capital is not being taxed. Therefore, MCIT is
constitutional.

vii. Commissioner of Internal Revenue V. Philippine Airlines, Inc. (PAL), G.R. No. 179259,
25 September 2013
 Facts: The CIR assessed the Philippine Airlines, Inc. deficiency Minimum Corporate
Income Tax covering the fiscal year ending 31 March 2000. PAL protested the deficiency
MCIT arguing that it is exempt from, or is not subject to, the 2% MCIT by virtue of its
charter PD 1590. Under PD 1590 PAL is liable only for either the basic corporate income
tax based on its annual net taxable income, or the 2% franchise tax based on gross
revenue, whichever is lower. The “in lieu of all other taxes” clause PAL’s legislative
franchise exempts it from all taxes necessary in the conduct of its business covered by the
franchise, except the tax on its real property for which PAL is expressly made payable.

Issue: Whether or not liable for the 2% MCIT deficiency for the fiscal year ending 31
March 2000.

Ruling: No. Although both are income taxes, the MCIT is different from the basic
corporate income tax, not just in the rates, but also in the bases for their computation. Not
being covered by 1590, which makes PAL liable only for basic corporate income tax,
then MCIT is included in “all other taxes” from which PAL is exempted.

viii. Manila Banking Corporation v. Commissioner, 499 SCRA 782

Facts: The Manila Banking Corporation was registered with the BIR in 1961. However,
in 1987, it was found insolvent by the Monetary Board of the BSP and was placed under
receivership. On June 23, 1999, the BSP issued to it a Certificate of Authority to Operate
as a thrift bank. On January 21, 1999, it registered with the BIR. Then it filed with the
SEC its Articles of Incorporation which was approved on June 22, 1999.

Meanwhile, R.A. No. 8424 became effective on January 1, 1998 and introduced the
imposition of the minimum corporate income tax (MCIT) on domestic and resident
foreign corporations. Revenue Regulations No. 9-98 allows a four-year period from the
time the corporations were registered with the BIR during which the MCIT should not be
imposed.

Issue: Whether or not on whether The Manila Banking Corporation is entitled to the
four-year grace period reckoned from 1999.

Ruling: Yes. Under Revenue Regulations No. 4-95, the date of commencement of
operations of thrift banks, such as the petitioner, is the date the particular thrift bank was
registered with the SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board of the BSP, whichever comes later.
Therefore, it is entitled to a grace period of four years counted from June 23, 1999 when
it was authorized by the BSP to operate as a thrift bank.

d. A Corporation has been operating since January 2014. Data pertinent to his operations are as
follows:
2016 2017 2018

Gross sales 3,080,000 4,100,000 5,200,000

Sales returns 80,000 100,000 200,000
Cost of sales 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000
 Compute tax based in normal corporate income tax (2016-2018)
 Compute MCIT
2016 2017 2018
Gross sales 3,080,000.00 4,100,000.00 5,200,000.00
Less: Sales returns 80,000.00 100,000.00 200,000.00
Net Sales 3,000,000.00 4,000,000.00 5,000,000.00
 Cost of sales 1,500,000.00 2,000,000.00 2,500,000.00
Gross Income 1,500,000.00 2,000,000.00 2,500,000.00
Less: Operating Expenses 1,450,000.00 1,900,000.00 2,100,000.00
Tax base 50,000.00 100,000.00 400,000.00
MCIT - 40,000.00 50,000.00
NCIT 15,000.00 30,000.00 120,000.00
Excess of MCIT over NCIT   10,000.00  
Tax due 15,000.00 30,000.00 120,000.00

 Determine the tax due and payable

e. What is Gross Income Tax and how is it computed
Gross income tax is an optional corporate income tax. It is 15% of gross income, if the corporation
is qualified.

f. Summarize Capital Gains tax paid by a corporation

1. Capital gains on sale of shares DC RFC NRFC

Of stock not traded in the local
stock exchange
Net capital gains:
Not over P100,000
Excess of P100,000 5%
10%

2. Percentage tax on sale of

shares of stock traded in the
local stock exchange. Based 0.6% 0.6% 0.6%
on selling price.

3. Capital gains on sale or

exchange or disposition of 6% of Selling 6% of Selling 30% final
lands and / or buildings Price or FMV, Price or FMV, Withholding
located in the Philippines whichever is whichever is tax
higher. higher.

4. Net Capital gains on sales or

Exchange or disposition of
Lands and / or buildings 30% Not taxable Not taxable
located outside the
Philippines

g. Summarize Passive Income and the consequent tax rates

Summary rules on the tax treatment of NRC RA NRA-ETB NRA –NETB
certain passive income as applied to
individuals RC
Sources Of Income Within and Within Within Within Within
without
NATURE OF INCOME TAX RATE
INTEREST
On interest on currency bank deposits, yield or 20% 20% 20% 20% 25%
other monetary benefits from deposit
substitutes, trust funds and similar arrangements
XPN:
If the depositor has an employee trust fund or
accredited retirement plan, such interest income,
yield or other monetary benefit is exempt from
final withholding tax.
Interest income under the Expanded Foreign 15% Exempt 15% Exempt Exempt
Currency Deposit System
NOTE: If the loan is granted by a foreign
government, or an international or regional
financing institution established by government,
the interest income of the lender shall not be
subject to the final withholding tax.
Interest Income from long-term deposit or investment in the Held for: Exempt
form of savings, common or individual trust funds, deposit 5 years or more – exempt
substitutes, investment management accounts and other 4 years to less than 5 years – 5%
investments evidenced by certificates in such form prescribed 3 years to less than 4 years – 12%
by the BSP (RR. 14-2012) Less than 3 years – 20%
DIVIDEND
Dividend from a DC or from a joint stock 10% 10% 10% 20% 20%
company, insurance or mutual fund company
and regional operating headquarters of a
multinational company; or on the share of an
individual in the distributable net income after
tax of partnership (except that of a GPP) of
which he is a partner, or on the share of an
individual in the net income after tax of an
association, a joint account or joint venture or
consortium taxable as a corporation of which he
is a member of co-venturer
ROYALTY INCOME
Royalties on books, literary works and musical 10% 10% 10% 10% 10%
composition
Other royalties (e.g. patents and franchises) 20% 20% 20% 20% 25%
PRIZES AND WINNINGS
Prizes exceeding ₱10,000 20% 20% 20% 20% 25%
Winnings 20% 20% 20% 20% 25%

3. Private Educational Institution and Non-Profit Hospital

a. What are Domestic Private Educational Institutions and Hospitals and how are they taxed

Private Educational Institutions are schools maintained and administered by private individuals or
groups with an issued permit to operate from the Department of Education or the Commission on
Higher Education, or the Technical Education and Skills Development Authority, as the case may
be, in accordance with existing laws and regulations.

A nonprofit hospital is one which is operated for charitable and social welfare purposes and is
exempt from income tax under Section 30 (E) and (G) of the NIRC.

Both are taxed at a preferential rate of 10% on their taxable income, except on certain passive
incomes which are subject to final tax.

b. Are all educational institutions subject to tax? Can these institutions be exempt?
No, not all educational institutions subject to tax. All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.

c. What is the Predominance Test

Predominance test means that If the gross income from unrelated trade/business/other activity
exceeds 50% of the total gross income from all sources, the entire taxable income of the
proprietary educational institution shall be subject to the regular corporate tax rate of 30%.

d. From the case, Commissioner of Internal Revenue v. St. Luke’s Medical Center, G.R. No. 195909
and 195960, 26 September 2012, define “proprietary” and “non-profit”.
"Proprietary" means private, following the definition of a "proprietary educational institution" as
"any private school maintained and administered by private individuals or groups" with a
government permit.
 "Non-profit" means no net income or asset accrues to or benefits any member or specific person,
with all the net income or asset devoted to the institution's purposes and all its activities conducted
not for profit.

e. Discuss the cases of

i. Commissioner v. St. Luke’s Medical Center, Inc., G.R. No. 203514, 13 February 2017;
Facts: St. Luke's Medical Center, Inc. was assessed for deficiency income tax. SLMC
protested claiming that as a non-stock, non-profit charitable and social welfare
organization under Section 30 of the Tax Code, it is exempt from paying income tax. It
also argued that earning a profit by a charitable, benevolent hospital or educational
institution does not result in the withdrawal of its tax-exempt privilege.

Issue: The issue of whether SLMC is liable for income tax.

Ruling: Yes. SLMC is not 'operated exclusively’ for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. Section 30 the NIRC
requires that an institution be 'operated exclusively' for charitable or social welfare
purposes to be completely exempt from income tax. An institution tmder Section 30(E) or
(G) does not lose its tax exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential to 10%
rate pursuant to Section 27(B).

ii. Commissioner v. De La Salle University, G.R. No. 196596, 9 November 2019

Facts: DLSU, a non-stock, non-profit educational institution, protested BIR’s assessment
for deficiency taxes on its rental earnings from restaurants, canteens and bookstores
operating within the campus. DLSU based its protest on Article XIV, Section 4(3) of the
Constitution which provides that “All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.” The CTA En Banc found that DLSU was able to
prove that a portion of the assessed rental income was used actually, directly and
exclusively for educational purposes.

Issue: Whether or not DLSU's income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.

Ruling: Yes, the income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes.

4. Government Owned and Controlled Corporations

a. How are Government Owned and Controlled Corporations taxed?
GOCCs perform proprietary functions; hence they are subject to taxation. However, certain
corporations have been granted exemption, to wit:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
____

b. What is the case of PAGCOR v. BIR, G.R. No. 172087, 15 March 2011?
Facts: PAGCOR was given exemption from the payment of any type of tax, except a franchise tax
of 5% of the gross revenue pursuant to P.D. No. 1067-B. Subsequently, P.D. No. 1399 was issued
expanding the scope of PAGCOR’s exemption. To consolidate the laws pertaining to the franchise
and powers of PAGCOR, P.D. No. 1869 was issued. PAGCOR’s tax exemption was removed in
 June 1984 through P.D. No. 1931, but was later restored by Letter of Instruction No. 1430. This
exemption was also retained in the National Internal Revenue Code of 1997.

However with the enactment of an amendatory law, R.A. No. 9337, it amended section 27 of the
NIRC by excluding PAGCOR from the enumeration of GOCC’s that are exempt from the
payment of corporate income tax. PAGCOR argues that such omission is unconstitutional , as it is
violative of its to equal protection of the law.

Issue: Whether or not PAGCOR is liable for corporate income tax .

Ruling: Yes. PAGCOR is not exempt from payment of corporate income tax

Taxation is the rule and exemption is the exception. The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed. PAGCOR
failed to prove that it is still exempt from the payment of corporate income tax, considering that
Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of
1997 by omitting PAGCOR from the exemption.

c. Is the PCSO exempt from income tax?

No. The TRAIn Law (Tax Reform for Acceleration and Inclusion) removed the exemption of
PCSO.

d. Is the PAGCOR exempt from income tax

PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from
the list of GOCCs that are exempt from the payment of the income tax. RA No. 9337 withdrew
PAGCOR's exemption from corporate income tax on its income derived from other related
services previously granted.

e. What government organizations are exempt from income tax?

The following government organizations are exempt from income tax:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local Water District (LWD) (R.A. 10026 amending Section 27 [c] of NIRC)

5. Resident Foreign Corporations

a. In the definition of Resident Foreign Corporations, what is the meaning of “doing business”, as
discussed in the case of Commissioner of Internal Revenue v. Atlas Consolidated Mining and
Development Corporation, G.R. No. 104151, 10 March 1995
"Doing business" conveys the idea of business being done, not from time to time, but all the time.

b. Discuss the cases of:

i. British Traders Insurance Co., Ltd. v. Commissioner of Internal Revenue, 13 SCRA 719;
Facts: British Traders' insurance Co., Ltd., a Hongkong corporation engaged in business
in the Philippines, Union Insurance Society of Canton, Ltd. and North Pacific Insurance
Company, Ltd., entered into worldwide reinsurance treaties. By virtue of such
reinsurance treaties, the Philippine office of British Traders' Insurance Co., Ltd. ceded to
foreign reinsurers not doing business in the Philippines the reinsurance premiums
corresponding to insurances originally underwritten in the Philippines.

Issue: Whether or not reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax.

Ruling: Yes. The reinsurance transactions and/or activities in question were to be

performed in the Philippines. Therefore, the situs of the source of the reinsurance
premiums is the Philippines. The income tax law does not require as a condition the
 conduct of business in the Philippines in order that foreign corporations may be taxed on
their income. It is sufficient that such income is derived from an activity within the
Philippines.

ii. South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665
Facts: South African Airways, a foreign corporation, is an internal air carrier having no
landing rights in the Philippines. It has a general sales agent in the Philippines, Aerotel
Limited Corporation. Aerotel sells passage documents for compensation or commission
for petitioner’s off-line flights for the carriage of passengers and cargo between ports or
points outside the territorial jurisdiction of the Philippines.

Issue: Whether or not the South African Airways is a resident foreign corporation
engaged in trade or business in the Philippines.

Ruling: Yes. Off-line air carriers having general sales agents in the Philippines are
engaged in or doing business in the Philippines and that their income from sales of
passage documents here is income from within the Philippines.

c. Can MCIT be applied to RFCs?

Yes, the MCIT covers domestic and resident foreign corporations which are subject to the 30%
normal corporate income tax.

d. What are International Carriers? How are they taxed? Define Gross Billings
An international carrier refers to foreign airline corporation doing business in the Philippines
which has landing rights in any Philippine port to perform international air transportation services
or flight operations anywhere in the world.

They shall be taxed at 2.5% on their Gross Philippine Billings (GPB) unless it is subject to
preferential rate or exempt from tax on the basis of applicable tax treaty/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 carries, shall likewise be
exempt from income tax imposed under the NIRC.

“Gross Philippine Billings” refers to the amount of gross revenue realized 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(

e. Discuss the case of

i. South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665;
Facts: South African Airways, a foreign corporation, is an internal air carrier having no
landing rights in the Philippines. Petitioner has a general sales agent in the Philippines,
Aerotel Limited Corporation. Aerotel sells passage documents for compensation or
commission for petitioner’s off-line flights for the carriage of passengers and cargo
between ports or points outside the territorial jurisdiction of the Philippines. It is not
licensed to do business in the Philippines.

Issue: Whether or not the income derived by South African Airways from the sales of
passage documents in the Philippines is subject to tax.

Ruling: Yes. If an international air carrier maintains flights to and from the Philippines,
it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international
air carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of such
income.
 Off-line air carriers having general sales agents in the Philippines are engaged in or doing
business in the Philippines and that their income from sales of passage documents here is
income from within the Philippines. Thus, the offline air carrier liable for the 32% tax on
its taxable income.

ii. United Airlines, Inc. v. Commissioner of Internal Revenue, 631 SCRA 567;
Facts: United Airlines, Inc., a foreign corporation, is engaged in the international airline
business. Upon cessation of its passenger flights in and out of the Philippines beginning
February 21, 1998, United Airlines, Inc. appointed an independent general sales agent in
the Philippines -- Aerotel Ltd. Corp.

United Airlines claimed for income tax refund pertaining to income taxes paid on gross
passenger and cargo revenues for the taxable years 1999 to 2001. It argued that since it
no longer operated passenger flights originating from the Philippines beginning February
21, 1998, its passenger revenue for 1999, 2000 and 2001 cannot be considered as income
from sources within the Philippines, and hence should not be subject to Philippine
income tax. Since the Bureau of Internal Revenue (BIR) erroneously imposed and
collected income tax in 1999 based on petitioner’s gross passenger revenue, as beginning
1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is
entitled to a refund of such erroneously collected income tax.

Issue: Whether the petitioner is entitled to a refund of the amount paid as income tax on
its passenger revenues in 1999.

Ruling: No. Although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC which
imposes two and one-half percent on its Gross Philippine Billings, United Airlines is
liable for corporate income tax under Sec. 28(A)(1) for income earned from activities in
the Philippines through its sales agent. Therefore, the correctness of the return filed by
United Airlines is put in doubt and as such, the prayer for a refund cannot be granted.

iii. CIR v. BOAC, G.R. No. L-65773-74, 30 April 1987

Facts: BOAC, a foreign corporation, is engaged in the international airline business. It
operates air transportation service and sells transportation tickets over the routes of the
other airline members. BOAC had no landing rights for traffic purposes in the
Philippines. Consequently, it did not carry passengers or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales
agent in the Philippines, which was responsible for selling BOAC tickets covering
passengers and cargoes.

Issue: Whether or not the revenue derived by BOAC from sales of tickets in the
Philippines constitute income of BOAC from Philippine sources and, accordingly,
taxable.

Ruling: Yes. The sale of tickets in the Philippines is the activity that produces the
income. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. The test of taxability is the source; and
the source of an income is that activity which produced the income.

f. What are offshore banking units

An offshore banking unit is a branch, subsidiary or affiliate or a foreign banking corporation
located in an Offshore Financial Center which is duly authorized by the BSP to transact offshore
banking business in the Philippines. OBUs are allowed to provide all traditional banking services
 to non-residents in any currency other than Philippine national currency. OBUs are forbidden to
make any transactions in Philippine Peso. Banking transactions to residents are omitted and
restricted.

g. Discuss the case of RCBC v. CIR, G.R. No. 170257, 7 September 2011
Facts: RCBC is a corporation engaged in general banking operations. RCBC was assessed for
deficiency FCDU onshore tax. It protested contending that because the onshore tax was collected
in the form of a final withholding tax, it was the borrower, constituted by law as the withholding
agent, that was primarily liable for the remittance of the said tax.

Issue: Whether RCBC, as payee-bank, can be held liable for deficiency onshore tax, which is
mandated by law to be collected at source in the form of a final withholding tax.

Ruling: Yes. While the payor-borrower can be held accountable for its negligence in performing
its duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the one
which earned income on the transaction, remains liable for the payment of tax as the taxpayer
shares the responsibility of making certain that the tax is properly withheld by the withholding
agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-
borrower as the withholding agent.

h. How are employees from Regional Area Headquarters and Regional Operating Headquarters of
Multinational Companies taxed?
Employees of Regional Area Headquarters and Regional Operating Headquarters of Multinational
Companies registered with the Securities and Exchange Commission before January 1, 2018are
entitled to the 15% preferential income tax rate on their gross compensation income from sources
within the Philippines.

The same tax treatment shall apply to Filipinos employed and

occupying the same position as those of aliens employed by the entities
mentioned above, regardless of whether or not there is an alien
executive occupying the same position. Filipino employees employed
by Regional Headquarters or Regional Operating Headquarters
governed by E.O. No. 226, as amended by R.A. No. 8756, may choose
to be taxed either at the 15% preferential tax rate on their gross
income or at the graduated tax rate.

However, preferential income tax rate of 15% to Nonresident Alien Individuals shall not be
applicable to regional headquarters (RHQs), regional operating headquarters (ROHQs), offshore
banking units (OBUs), or petroleum service contractors and subcontractors registering with the
Securities and Exchange Commission (SEC) after January 1, 2018;

i. Branch profit remittance. Discuss the following cases:

i. Bank of America NT & SA v. Court of Appeals, 234 SCRA 302
Facts: Petitioner Bank of America NT & SA is a foreign corporation duly licensed to
engage in business in the Philippines with Philippine branch office at Manila. It paid 15%
branch profit remittance tax on profit from its regular banking unit operations and on
profit from its foreign currency deposit unit operations. The tax was based on net profits
after income tax without deducting the amount corresponding to the 15% tax.

Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion of
the payment which corresponds to the 15% branch profit remittance tax, on the ground
that the tax should have been computed on the basis of profits actually remitted not on the
amount before profit remittance tax.

Issue: Whether or not the petitioner is entitled to refund.

 Ruling: Yes. The Tax Code provides that any profit remitted abroad by a branch to its
head office shall be subject to a tax of fifteen per cent. The law specifies its own tax base
to be on the "profit remitted abroad." There is nothing equivocal or uncertain about the
language of the provision. The tax is imposed on the amount sent abroad, and the law
(then in force) calls for nothing further.

ii. Commissioner v. Marubeni, 177 SCRA 500;

Facts: Marubeni, resident foreign corporation was assessed for deficiency income on
branch profit remittance, contractor’s and commercial taxes. On September 26, 1986,
Marubeni filed petitions for review with the Court of Tax Appeals questioning the
assessments.

On August 2, 1986, EO 41 declaring a tax amnesty for unpaid income taxes for 1981-
1985, and that taxpayers who wished to avail this should do so on or before Oct 31, 1986.
Marubeni filed its tax amnesty return on Oct 30, 1986. CIR claims, however, that
Marubeni is disqualified from availing the amnesties because the it falls under the
exception in Section 4 (b) of E.O. No. 41 which It excepts from income tax amnesty
those taxpayers with income tax cases already filed in court as of its effectivity.

Issue: Whether or not respondent is liable to pay deficiency tax on branch profit
remittance.

Ruling: No, Marubeni is not liable to pay the deficiency tax on branch profit remittance.
When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet
been filed in court. Respondent corporation did not fall under the said exception in
Section 4 (b), hence, Marubeni successfully availed of the tax amnesty under the EO.
Branch Profit Remittance tax is covered by the tax amnesty issuance, as it is a tax on
income.

iii. Marubeni v. Commissioner, G.R. No. 76573, 14 September 1989;

Facts: Atlantic Gulf and Pacific Co. of Manila (AG&P) paid cash dividend to Marubeni
Corporation. AG&P directly remitted the cash dividends to petitioner’s head office in
Tokyo, Japan, net of the 10% final dividend tax and of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final withholding tax of
10%. Maruben filed a claim for refund or tax credit representing alleged overpayment of
branch profit remittance tax withheld by AG&P.

The CIR denied the claim stating that while it is true that the dividends remitted were not
subject to the 15% profit remittance tax as they were not income earned by a Philippine
Branch of Marubeni Corporation of Japan; and neither is it subject to the 10%
intercorporate dividend tax, Marubeni, being a non-resident stockholder, and
nevertheless, the dividend income is subject to the 25% tax pursuant to Article 10 (2) (b)
of the Tax Treaty between the Philippines and Japan. The amount refundable offsets the
liability, hence, nothing is left to be refunded. The CA affirmed the decision of the CIR.

Issue: Whether or not Marubeni is entitled to refund.

Ruling: Yes, Marubeni is entitled to refund. The CIR erred in automatically imposing the
25% rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. To simply
add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the
dividends received, the tax base upon which the 15% branch profit remittance tax is
imposed is the profit actually remitted abroad.
 The dividends if remitted abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code. Marubeni,
being a non-resident foreign corporation is only subject to discounted rate of 15% on
dividends received from a domestic corporation under Section 24 (b) (1) (iii) of the Tax
Code. Also, the dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax imposed under the Tax Code.

iv. Deutsche Bank AG Manila v. Commissioner, 704 SCRA 216

Facts: Deutsche Bank AG Manila withheld and remitted to the CIR the 15% branch
profit remittance tax (BPRT) on its regular banking unit net income remitted to Deutsche
Bank Germany for 2002 and prior taxable years. Believing that it made an overpayment
of the BPRT, petitioner filed a claim for refund or issuance of its tax credit certificate. It
also requested from the International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty.

The claim for a refund was denied on the ground that the application for a tax treaty relief
was not filed with ITAD prior to the payment of BPRT and actual remittance of its
branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision mandated under Revenue
Memorandum Order No. 1-2000.

Issue: Whether or not Deutsche Bank AG Manila is entitled to a refund for the
overpayment of BPRT.

Ruling: Yes. Under Section 28(A)(5) of the NIRC, any profit remitted to its head office
shall be subject to a tax of 15% based on the total profits applied for or earmarked for
remittance without any deduction of the tax component. However, petitioner invoked the
RP-Germany Tax Treaty, which provides that where a resident of the Germany has a
branch in the Philippines, the branch may be subjected to the BPRT withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the
profits remitted by that branch to the head office. The obligation to comply with a tax
treaty must take precedence over the objective of RMO No. 1-2000.

6. Nonresident Foreign Corporations

a. Define Nonresident Foreign Corporations
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.

b. What is tax credit rule as discussed in Commissioner of Internal Revenue v. Procter and Gamble
PMC, G.R. No. 66835, 15 April 1988
On dividends received from by a nonresident foreign corporation from a domestic corporation
liable, the tax shall be 15% of the dividends received subject to the condition that the country in
which the nonresident foreign corporation is domiciled shall allow a credit against the tax due
from the nonresident foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on corporations
and the tax (15%) on dividends.

c. How are Nonresident Foreign Corporations taxed

Except as otherwise provided for in the Tax Code, gross income from sources within the
Philippines paid to a non-resident foreign corporation, shall be subject to the 30% final corporate
income tax that must be withheld by the Philippine payor of the income and remitted to the BIR.

7. Improperly Accumulated Earnings Tax

a. What is Improperly Accumulated Earnings Tax
Improperly Accumulated Earnings Tax is one which is imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings and as a form of deterrent to the avoidance
 of tax upon shareholders who are supposed to pay dividends tax on the earning distributed to them by
the corporation. If the earnings and profits were distributed, the shareholders would be liable for tax on
dividends.

b. What does is the rationale of this tax basing on the case of Basilan Estates, Inc. v. CIR, 21 SCRA
17
The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of surplus is essentially a penalty
tax designed to compel corporations to distribute earnings so that the said earnings by
shareholders could, in turn, be taxed.

c. What is Immediacy test or Reasonable needs of the business as discussed in The Manila Wine
Merchants, Inc. v. The Commissioner Of Internal Revenue, G.R. No. L-26145, 20 February 1984
The “Immediacy Test” which construed the words “reasonable needs of the business” to mean the
immediate needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was not for the
reasonable needs of the business, and the penalty tax would apply.

8. Tax Exempt Corporations

a. What are tax exempt corporations?
The following are tax exempt corporations:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members
such as a fraternal organization operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part
of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
 (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of sales,
less the necessary selling expenses on the basis of the quantity of produce finished by them.

b. Discuss the cases of:

i. Collector v. Sinco Educational Institution, 100 Phil. 127;
Facts: V. G. Sinco Educational Institution, a non-stock educational institution, brought
an action for the refund of the income taxes paid for the years 1950 and 1951. Invoking
section 27 (e) of the National Internal Revenue Code, the corporation claimed that it is
exempt from the payment of the income tax because it is organized and maintained
exclusively for the educational purposes and no part of its net income inures to the
benefit of any private individual. The CIR, on the other hand, the argued that part of the
net income accumulated by the corporation inured to the benefit of V. G. Sinco, president
and founder of the corporation, and therefore it is not entitled to the exemption prescribed
by the law.

Sinco clarified that he acted as president of the Foundation College and as chairman of its
Board of Directors and served as its teacher for a time. The accountant of the college
suggested that a certain amount be set aside as his salary for purposes of orderly and
practical accounting.

Issue: Whether or not V. G. Sinco Educational Institution is entitled to exemption under

section 27 (e) of the National Internal Revenue Code.

Ruling: Yes. Part of its income went to the payment of its teachers or professors and to
the other expenses of the college incident to an educational institution but none of the
income has ever been channeled to the benefit of any individual stockholder. Whatever
payment is made to those who work for a school or college as a remuneration for their
services is not considered as distribution of profit. Thus, the corporation properly invoked
Section 27 (e) of the National Internal Revenue Code.

ii. Manila Gas Corporation v. Collector, 62 Phil. 895;

Facts: Manila Gas Corporation is a corporation organized under the laws of the
Philippine Islands. Under its franchise, Manila Gas is subject to a tax of 2.5% of its gross
receipts during the preceding year and such payment shall be in lieu of all taxes, except
taxes on its real estate, buildings, plant, machinery, and other personal property.
Dividends were paid by Manila Gas to Islands Gas and Electric Company in the capacity
of stockholders upon which withholding income taxes were paid. Neither of these
corporations is resident in the Philippines. An action was brought against the CIR to
recover the withholding income taxes paid by Manila Gas. Manila Gas contends that the
dividends paid by it to Islands Gas and Electric Company were not subject to tax because
to impose a tax on such dividends would be to do so on the corporation, in violation of
the terms of its franchise.

Issue: Whether or not that the dividends paid by the Manila Gas were subject to income
tax in the hands of its stockholders.
Ruling: Yes, the dividends paid by the Manila Gas were subject to income tax.

Ruling: A corporation has a personality distinct from that of its stockholders, enabling
the taxing power to reach the stockholders when they receive dividends from the
corporation. Dividends of a domestic corporation, which are paid and delivered in cash to
foreign corporations as stockholders, are subject to tax, the exemption clause in the
charter of the corporation notwithstanding.
iii. Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, 14 October
1998;
Facts: YMCA is a non-stock, non-profit institution, which conducts various programs
and activities that are beneficial to the public, especially the young people, pursuant to its
religious, educational and charitable objectives. YMCA was assessed for deficiency taxes
on its rental income derived leasing out a portion of its premises to small shop owners
from parking fees collected from non-members.

Issue: Whether or not the rental income of YMCA is taxable.

Ruling: Yes, the rental income of the YMCA from its real estate is subject to tax.
Section 27 of the NIRC provides for the exemption from income tax of civic league or
organization not organized for profit but operated exclusively for the promotion of social
welfare and club organized and operated exclusively for pleasure, recreation, and other
non-profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member to which YMCA belongs. However, the last paragraph of
the provision also states that the income of whatever kind and character of the foregoing
organization from any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject
to the tax imposed under the Code.

Leasing out its properties to non-members is an activity for profit, not incidental and
reasonably necessary to the pursuit of the objectives of the association and therefore, falls
under the last paragraph of section 27 of the Tax Code and any income derived therefrom
shall be taxable.

iv. Association of Non-Profit Clubs, Inc. (ANPC), herein represented by its authorized
representative, Ms. Felicidad M. Del Rosario Vs. Bureau of Internal Revenue (BIR),
herein represented by Hon. Commissioner Kim S. Jacinto-Henares, G.R. No. 228539, 26
June 2019;
Facts: Association of Non-Profit Clubs, Inc. (ANPC) questioned the validity of RMC
No. 35-2012 arguing that BIR acted beyond its rule-making authority in interpreting that
payments of membership fees, assessment dues, and service fees are considered as
income subject to income tax, as well as a sale of service that is subject to VAT.

The BIR justified the interpretation based on the provision in the 1977 Tax Code which
granted income tax exemption to such recreational clubs was omitted in the current list of
tax exempt. Hence, the income of recreational clubs from whatever source, including
membership fees, assessment dues, rental income, and service fees are subject to income
tax.

Issue: Whether or not RMC No. 35-2012 is valid.

Ruling: RMC No. 35-2012 is not valid.

While correctly that the omission recreational clubs from the list of exempt organizations
under the 1977 Tax Code subjects the income of recreational clubs from whatever
source" to tax, RMC No. 35-2012 erroneously interpreted that membership fees and
assessment dues are sources of income of recreational clubs from which income tax
liability may accrue.

Membership fees, assessment dues, and other fees of similar nature only constitute
contributions to or replenishment of the funds for the maintenance and operations of the
facilities offered by recreational clubs to their exclusive members. These fees cannot be
classified as "the income of recreational clubs from whatever source" that are "subject to
 income tax." Instead, they only form part of capital from which no income tax may be
collected or imposed.

v. Lung Center of the Philippines v. Quezon City, 433 SCRA 119;

Facts: Lung Center of the Philippines is a non-stock and non-profit hospital. Under the
statute creating it, Lung Center was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The It owns a parcel of land where the hospital is erected. A space at the
ground floor of the hospital is being leased to private parties. Almost one-half on the left
side of the building is vacant and idle, while a big portion on the right side, at the is being
leased for commercial purposes to a private enterprise.

Lung Center was assessed for real property taxes on the land and the hospital building.
The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes.
Lung Center contends that it is a charitable institution and, as such, is exempt from real
property taxes as provided in Section 28, paragraph 3 of the 1987 Constitution.
Issue: Whether or not the real properties of Lung Center are exempt from real property
taxes.

Ruling: The portions of the land occupied by the hospital and portions of the hospital
used for its patients are exempt from real property taxes. However, the portions of the
land leased to private entities and those parts of the hospital leased to private individuals
are not exempt from real property taxes these are not actually, directly and exclusively
used for charitable purposes.

Section 28(3), Article VI of the 1987 Philippine Constitution provides that charitable
institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and
exclusively used for religious, charitable or educational purposes shall be exempt from
taxation.

vi. Commissioner of Internal Revenue v. St. Luke’s Medical Center, G.R. No. 195909 and
195960, 26 September 2012;
Facts: St. Luke's Medical Center, Inc. is a hospital organized as a non-stock and non-
profit corporation. BIR assessed St. Luke's deficiency taxes comprised of deficiency
income tax arising from the failure of St. Luke's to prove that part of its income in 1998
came from charitable activities.

The BIR contended that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St.
Luke's. According to the BIR, Section 27(B), introduced in 1997 is a new provision
intended to amend the exemption on non-profit hospitals that were previously categorized
as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code."

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its income tax exemption.

Issue: Whether or not St. Luke's is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.

Ruling: St. Luke’s is liable for preferential tax rate of 10% only on the income from its
for-profit activities.
 St. Luke's did not operate exclusively for charitable or social welfare purposes insofar as
its revenues from paying patients are concerned. Section 30(E) and (G) of the NIRC
requires that an institution be "operated exclusively" for charitable or social welfare
purposes to be completely exempt from income tax. An institution under Section 30(E) or
(G) does not lose its tax exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential 10%
rate pursuant to Section 27(B).

vii. Abra Valley College, Inc. v. Aquino, 162 SCRA 106;

Facts: Abra Valley College, Inc., an educational institution, filed a complaint to annul
Notice of Seizure and the Notice of Sale of its lot and building for nonpayment of real
estate taxes and penalties. Abra Valley contended that such real properties are exempted
from real property taxes in accordance with Section 22, paragraph 3, Article VI, of the
then 1935 Philippine Constitution, which expressly grants exemption from realty taxes
for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or educational
purposes.” The trial court disagreed because of the use of the second floor by the Director
of petitioner school for residential purposes.

Issue: Whether or not the building where the Director resides is considered as used
exclusively for educational purposes.

Ruling: Yes. The exemption in favor of property used exclusively for charitable or
educational purposes is not limited to property actually indispensable therefor but extends
to facilities which are incidental to and reasonably necessary for the accomplishment of
said purposes.

The use the main building for residential purposes of the Director and his family, may
find justification under the concept of incidental use, which is complementary to the main
or primary purpose of Abra Valley— educational.

viii. Commissioner v. De La Salle University, G.R. No. 196596, 9 November 2019;

Facts: DLSU, a non-stock, non-profit educational institution, protested BIR’s assessment
for deficiency taxes on its rental earnings from restaurants, canteens and bookstores
operating within the campus. DLSU based its protest on Article XIV, Section 4(3) of the
Constitution which provides that “All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.” The CTA En Banc found that DLSU was able to
prove that a portion of the assessed rental income was used actually, directly and
exclusively for educational purposes. The rental income had been used to pay the loan it
obtained to build the university's Physical Education. The CIR contended that Article
XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the
Tax Code, which states among others, that the income of whatever kind and character of
[a non-stock and non-profit educational institution] from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed by the Code.

Issue: Whether or not DLSU's income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.

Ruling: Yes, the income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes.
The last paragraph of Section 30 of the Tax Code is without force and effect with respect
to non-stock, non-profit educational institutions, provided, that the non-stock, non-profit
 educational institutions prove that its assets and revenues are used actually, directly and
exclusively for educational purposes.

The tax-exemption constitutionally-granted to non-stock, non-profit educational

institutions, is not subject to limitations imposed by law.
Article XIV, Section 4 (3) does not require that the revenues and income must have also
been sourced from educational activities or activities related to the purposes of an
educational institution.

ix. Henares v. St. Paul College of Makati, G.R. No. 215383, 8 March 2017
Facts: St. Paul College of Makati, which is non-stock, non-profit education institution
filed a Civil Action to Declare Unconstitutional BIR RMO No. 20-2013 for allegedly
imposing a prerequisite to the enjoyment by non-stock, non-profit educational institutions
of the privilege of tax exemption under Sec. 4(3) of Article XIV of the Constitution.
RMO No. 20-2013 requires the submission an application for tax exemption to the BIR
subject to approval by CIR in the form of a Tax Exemption Ruling (TER) which is valid
for a period of three years and subject to renewal. According to SPCM, this prerequisite
makes failure to file an annual information return a ground for a non-stock, nonprofit
educational institution to "automatically lose its income tax-exempt status."

Issue: Whether or not RMO20-2013 imposes a prerequisite before a nonstock, non-profit

educational institution may avail of the tax exemption under Section 4(3), Article XIV of
the Constitution.

Ruling: The Supreme Court denied the petition on the ground of mootness. With the
issuance of RMO No. 44-2016 which clarified that non-stock, nonprofit educational
institutions are excluded from the coverage of RMO No. 20-2013. Consequently, a
supervening event has transpired that rendered the petition moot and academic. RMO No.
44-2016 reiterated that the constitutional exemption gives the non-stock, non-profit
educational institutions a distinct character. And for the constitutional exemption to be
enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two
requisites: (1) The school must be non-stock and non-profit; and (2) The income is
actually, directly and exclusively used for educational purposes. There are no other
conditions and limitations.