TAXATION I

INCOME TAXATION

A. Income Tax Systems

1. Global – 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 a tax at a fixed rate.
2. Schedular – the various types/items of income (e.g, compensation, business income, income from profession) are classified accordingly and are
accorded different tax treatments, in accordance with schedules characterized by graduated tax rates.
3. Semi-schedular or semi-global - partly global or partly schedular in features.

The Philippine Income Tax System: is primarily schedular for individuals and primarily global for corporations

CHARACTERISTICS OF PHILIPPINE INCOME TAX:

1. National tax as to taxing authority
2. General tax as to purpose
3. Excise as to subject matter
4. Progressive as to rate
5. Direct tax as to incidence

B. Definition of Income
1. Income vs. Capital

"Capital" has been delineated as a "fund" or "wealth," as opposed to "income" being "the flow of services rendered by capital" or the
"service of wealth" (ANPC vs. BIR)

Definition of Income:
a. "the receipt, salary; especially, the annual receipts of a private person or a corporation from property." (Webster's International Dictionary)
b. "income" in the federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical, or economic
sense. (146 Northwestern Reporter, 812, Bouvier)
c. "An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue." (Black’s Law Dictionary)

FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee. (G.R. No. L-
17518; October 30, 1922) – appellant Fisher is a stockholder of Philippine American Drug Company. PADC declared stock dividends for which appellee
demanded the payment of income tax. Appellant paid under protest and filed for recovery of sum of money before the trial court arguing that stock
dividends are merely capital and not income based on numerous US Supreme Court cases, which was dismissed when appellee filed a demurrer.

ISSUE: WON stock dividends constitute income that are subject to income tax?

HELD: No. It is further argued by the appellee that there are no constitutional limitations upon the power of the Philippine Legislature such as exist
in the United States, and in support of that contention, he cites a number of decisions. There is no question that the Philippine Legislature may
provide for the payment of an income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an
"income." The Philippine Legislature cannot impose a tax upon "property" under a law which provides for a tax upon "income" only.
The Philippine Legislature has no power to provide a tax upon "automobiles" only, and under that law collect a tax upon a carreton or bull cart.
Constitutional limitations, that is to say, a statute expressly adopted for one purpose cannot, without amendment, be applied to another purpose which
is entirely distinct and different. A statute providing for an income tax cannot be construed to cover property which is not, in fact income.
The Legislature cannot, by a statutory declaration, change the real nature of a tax which it imposes. A law which imposes an important tax on rice
only cannot be construed to an impose an importation tax on corn.

It is true that the statute in question provides for an income tax and contains a further provision that "stock dividends" shall be
considered income and are therefore subject to income tax provided for in said law. If "stock dividends" are not "income" then the law
permits a tax upon something not within the purpose and intent of the law.

It becomes necessary in this connection to ascertain what is an "income in order that we may be able to determine whether "stock dividends" are
"income" in the sense that the word is used in the statute. Perhaps it would be more logical to determine first what are "stock dividends" in order that
we may more clearly understand their relation to "income." Generally speaking, stock dividends represent undistributed increase in the capital
of corporations or firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased interest or
proportional shares in the capital of each stockholder. In other words, the inventory of the property of the corporation, etc., for particular
period shows an increase in its capital, so that the stock theretofore issued does not show the real value of the stockholder's interest, and additional
stock is issued showing the increase in the actual capital, or property, or assets of the corporation, etc.

The New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to a person or corporation within a
specified time whether as payment or corporation within a specified time whether as payment for services, interest, or profit from
investment." Webster's International Dictionary defines an income as "the receipt, salary; especially, the annual receipts of a private
person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in the federal constitution and income tax act, is
used in its common or ordinary meaning and not in its technical, or economic sense. (146 Northwestern Reporter, 812) Mr. Black, in his law dictionary,
says "An income is the return in money from one's business, labor, or capital invested; gains, profit or private revenue." "An income
tax is a tax on the yearly profits arising from property , professions, trades, and offices."

For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a liability, in form, to the
stockholders, equivalent to the aggregate par value of their stock, evidenced by a "capital stock account." If profits have been made
by the corporation during a particular period and not divided, they create additional bookkeeping liabilities under the head of "profit and
loss," "undivided profits," "surplus account," etc., or the like. None of these, however, gives to the stockholders as a body, much less
to any one of them, either a claim against the going concern or corporation, for any particular sum of money, or a right to any
particular portion of the asset, or any shares sells or until the directors conclude that dividends shall be made a part of the company's
assets segregated from the common fund for that purpose. The dividend normally is payable in money and when so paid, then only
does the stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from the capital that
he has invested. Until that, is done the increased assets belong to the corporation and not to the individual stockholders.

When a corporation or company issues "stock dividends" it shows that the company's accumulated profits have been capitalized, instead of
distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. Far
from being a realization of profits of the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock
has been transferred from surplus to assets, and no longer is available for actual distribution. The essential and controlling fact is that the stockholder
has received nothing out of the company's assets for his separate use and benefit; on the contrary, every dollar of his original investment, together
with whatever accretions and accumulations resulting from employment of his money and that of the other stockholders in the business of the company,
still remains the property of the company, and subject to business risks which may result in wiping out of the entire investment. Having regard to the
very truth of the matter, to substance and not to form, the stockholder by virtue of the stock dividend has in fact received nothing that answers the
definition of an "income." (Eisner vs. Macomber, 252 U.S., 189, 209, 211.)

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock dividends declared, as in the
present case. The one is a disbursement to the stockholder of accumulated earnings, and the corporation at once parts irrevocably with all
interest thereon. The other involves no disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an
actual dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as by investment of accumulated profits
has been added to the original capital. They are not income to him, but represent additions to the source of his income, namely, his
invested capital. (DeKoven vs. Alsop, 205, Ill., 309; 63 L.R.A. 587). Such a person is in the same position, so far as his income is concerned, as the
owner of young domestic animal, one year old at the beginning of the year, which is worth P50 and, which, at the end of the year, and by reason of
its growth, is worth P100. The value of his property has increased, but has had an income during the year? It is true that he had taxable property at
the beginning of the year of the value of P50, and the same taxable property at another period, of the value of P100, but he has had no income in the
common acceptation of that word. The increase in the value of the property should be taken account of on the tax duplicate for the purposes of
ordinary taxation, but not as income for he has had none.

The question whether stock dividends are income, or capital, or assets has frequently come before the courts in another form — in cases of inheritance.
A is a stockholder in a large corporation. He dies leaving a will by the terms of which he give to B during his lifetime the "income" from said stock,
with a further provision that C shall, at B's death, become the owner of his share in the corporation. During B's life the corporation issues a stock
dividend. Does the stock dividend belong to B as an income, or does it finally belong to C as a part of his share in the capital or assets of the corporation,
which had been left to him as a remainder by A? While there has been some difference of opinion on that question, we believe that a great weight of
authorities hold that the stock dividend is capital or assets belonging to C and not an income belonging to B. In the case of D'Ooge vs. Leeds (176
Mass., 558, 560) it was held that stock dividends in such cases were regarded as capital and not as income (Gibbons vs. Mahon, 136 U.S.,
549.)

In the case of Gibbson vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a corporation, and the interest of its members or
stockholders in the property of the corporation, is familiar and well settled. The ownership of that property is in the corporation, and not in the holders
of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by
the corporation, during its existence, under its charter, and to a like proportion of the property remaining, upon the termination or dissolution of the
corporation, after payment of its debts." (Minot vs. Paine, 99 Mass., 101; Greeff vs. Equitable Life Assurance Society, 160 N. Y., 19.) In the case of
Dekoven vs. Alsop (205 Ill ,309, 63 L. R. A. 587) Mr. Justice Wilkin said: "A dividend 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 dividend is declared, these corporate profits
belong to the corporation, not to the stockholders, and are liable for corporate indebtedness.

If the ownership of the property represented by a stock dividend is still in the corporation and to in the holder of such stock, then it is difficult to
understand how it can be regarded as income to the stockholder and not as a part of the capital or assets of the corporation. (Gibbsons vs.
Mahon, supra.) the stockholder has received nothing but a representation of an interest in the property of the corporation and, as a
matter of fact, he may never receive anything, depending upon the final outcome of the business of the corporation. The entire assets
of the corporation may be consumed by mismanagement, or eaten up by debts and obligations, in which case the holder of the stock dividend will
never have received an income from his investment in the corporation. A corporation may be solvent and prosperous today and issue stock dividends
in representation of its increased assets, and tomorrow be absolutely insolvent by reason of changes in business conditions, and in such a case the
stockholder would have received nothing from his investment. In such a case, if the holder of the stock dividend is required to pay an income tax on
the same, the result would be that he has paid a tax upon an income which he never received. Such a conclusion is absolutely contradictory to the
idea of an income. An income subject to taxation under the law must be an actual income and not a promised or prospective income.

The appellee argues that there is nothing in section 25 of Act No 2833 which contravenes the provisions of the Jones Law. That may be admitted. He
further argues that the Act of Congress (U.S. Revenue Act of 1918) expressly authorized the Philippine Legislatures to provide for an income tax. That
fact may also be admitted. But a careful reading of that Act will show that, while it permitted a tax upon income, the same provided that income shall
include gains, profits, and income derived from salaries, wages, or compensation for personal services, as well as from interest, rent, dividends,
securities, etc. The appellee emphasizes the "income from dividends." Of course, income received as dividends is taxable as an income but an
income from "dividends" is a very different thing from receipt of a "stock dividend." One is an actual receipt of profits; the other is a
receipt of a representation of the increased value of the assets of corporation.

Having reached the conclusion, supported by the great weight of the authority, that "stock dividends" are not "income," the same cannot be
taxes under that provision of Act No. 2833 which provides for a tax upon income. Under the guise of an income tax, property which is not an
income cannot be taxed. When the assets of a corporation have increased so as to justify the issuance of a stock dividend, the increase of the
assets should be taken account of the Government in the ordinary tax duplicates for the purposes of assessment and collection of an additional tax.
For all of the foregoing reasons, we are of the opinion, and so decide, that the judgment of the lower court should be revoked, and without any finding
as to costs, it is so ordered

ASSOCIATION OF NON-PROFIT CLUBS, INC. (ANPC), HEREIN REPRESENTED BY ITS AUTHORIZED REPRESENTATIVE, MS. FELICIDAD
M. DEL ROSARIO, Petitioner, vs. BUREAU OF INTERNAL REVENUE (BIR), HEREIN REPRESENTED BY HON. COMMISSIONER KIM S.
JACINTO-HENARES, Respondent. (G.R. No. 228539, June 26, 2019) – Respondent BIR Commissioner issued RMC No. 35-2012 which clarifies that
recreational clubs are subject to income tax and VAT.

On the income tax, respondent justified the same that the intentional omission of recreational clubs in the list of exempt corporations would mean that
they are subject to income tax on their income, including but not limited to, membership fees, assessment dues, rental income, and services fees.

Petitioner ANPC filed for declaratory relief before the RTC of Makati which was denied and the validity of the RMC was upheld.

ISSUE: WON RMC No. 35-2012 is valid and that the fees collected by recreational clubs are subject to income tax?

HELD: No. Indeed, applying the doctrine of casus omissus pro omisso habendus est (meaning, a person, object or thing omitted from an enumeration
must be held to have been omitted intentionally) , the fact that the 1997 NIRC omitted recreational clubs from the list of exempt organizations under
the 1977 Tax Code evinces the deliberate intent of Congress to remove the tax income exemption previously accorded to these clubs. As such, the
income that recreational clubs derive "from whatever source" is now subject to income tax under the provisions of the 1997 NIRC.

However, notwithstanding the correctness of the above-interpretation, RMC No. 35-2012 erroneously foisted a sweeping interpretation that
membership fees and assessment dues are sources of income of recreational clubs from which income tax liability may accrue, viz.:

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
corporations under the [1997 NIRC], as amended. Hence, the income of recreational clubs from whatever source, including but not limited
to membership fees, assessment dues, rental income, and service fees [is] subject to income tax. (Emphases and underscoring supplied)

The distinction between "capital" and "income" is well-settled in our jurisprudence. As held in the early case of Madrigal v. Rafferty:
• "capital" has been delineated as a "fund" or "wealth," as opposed to
• "income" being "the flow of services rendered by capital" or the "service of wealth"

Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that 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 is called income. Capital is wealth,
while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that
property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga.,
93.) A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (Emphases and underscoring
supplied)

In Conwi v. Court of Tax Appeals, the Court elucidated that "income may be defined as 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 otherwise specified, it means cash or its equivalent.
Income can also be thought of as a flow of the fruits of one's labor.”

As correctly argued by ANPC, membership fees, assessment dues, and other fees of similar nature only constitute contributions to
and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive
members. They represent funds "held in trust" by these clubs to defray their operating and general costs and hence, only constitute
infusion of capital.

Case law provides that in order to constitute "income," there must be realized "gain." Clearly, because of the nature of membership fees and assessment
dues as funds inherently dedicated for the maintenance, preservation, and upkeep of the clubs' general operations and facilities, nothing is to be
gained from their collection. This stands in contrast to the fees received by recreational clubs coming from their income-generating facilities, such as
bars, restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment, services, and other
accommodations: In these latter examples, regardless of the purpose of the fees' eventual use, gain is already realized from the moment they are
collected because capital maintenance, preservation, or upkeep is not their pre-determined purpose. As such, recreational clubs are generally free to
use these fees for whatever purpose they desire and thus, considered as unencumbered "fruits" coming from a business transaction.

Further, given these recreational clubs' non-profit nature, membership fees and assessment dues cannot be considered as funds that would represent
these clubs' interest or profit from any investment. In fact, these fees are paid by the clubs' members without any expectation of any yield or gain
(unlike in stock subscriptions), but only for the above-stated purposes and in order to retain their membership therein.

In fine, for as long as these membership fees, assessment dues, and the like are treated as collections by recreational clubs from
their members as an inherent consequence of their membership, and are, by nature, intended for the maintenance, preservation,
and upkeep of the clubs' general operations and facilities, then 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.

It is a well-enshrined principle in our jurisdiction that the State cannot impose a tax on capital as it constitutes an unconstitutional
confiscation of property. As the Court held in Chamber of Real Estate and Builders' Associations, Inc. v. Romulo:

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process
of law." In Sison, Jr. v. Ancheta [215 Phil. 582 (1984)], we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also explained that we
will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness
by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.

xxxx
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it.is income,
not capital, which is subject to income tax. x x x. (Emphases supplied)

2. When is income taxable?

a. Realization Test

All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and
deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different
period.

For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income
except an accrual method.

A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without
restriction.

On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such
appreciation through sale or conversion of the property. (Sec. 38, RR No. 2-40, dated Feb. 10, 1940)

MANILA MANDARIN HOTELS, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent. (C.T.A. CASE NO. 5046.
March 24, 1997) – Petitioner was assessed by the BIR for the following, among others a percentage tax on deposits received from clients.

ISSUE: WON the security deposit given by hotel guests constitute income upon receipt subject to percentage tax?

HELD: No. This Court disagrees with the respondent in the assessment of the deficiency percentage tax, primarily because the deposits made by
petitioner's hotel clients should not be treated as part of its gross income.

Under the realization principle, revenue is generally recognized when both of the following conditions are met:
(a) the earning process is complete or virtually complete, and
(b) an exchange has taken place.

This principle requires that revenue must be earned before it is recorded. Thus, the amounts received in advance are not treated as revenue
of the period in which they are received but as revenue of the future period or periods in which they are earned. These amounts are carried as
unearned revenue, that is, liabilities to transfer goods or render services in the future — until the earning process is complete. (Compilation of
Statements of Financial Accounting Standards No. 1-22, pp. 41-42).

As explained by the witness Ms. Fernando, its collection is in the nature of a security deposit to ensure that the other party will perform
his end of the contract. It is only upon the use of the reserved facilities or the default of the reserving guest to cancel the reservation on time
that the deposit is clearly convertible to revenues. Since the deposits are payment for future services it cannot be treated as part of its
gross income until the earning process is complete.

From the above discussion, We find that the deficiency percentage tax assessment is erroneous and should be therefore be cancelled.

Compare with BIR Ruling No. 049-98 dated Feb. 10, 1998

In BIR Ruling No 049-98, the Federation of Filipino-Chinese Chambers of Commerce & Industry Inc. requested clarification regarding the tax
treatment of advance rentals and security deposits in lease contracts.

The BIR held that:

1. Advance Payment – or prepaid rental is taxable to the lessor in the year when received, even though the lessor is on the accrual or
cash method of accounting. On the part of the lessee, such prepaid rental is treated as capital expenditure and he cannot deduct in the year of
payment the full amount of the prepaid rent as business expense but must spread them over the entire remaining term of the lease. This is true
even if there is a stipulation that the advance rental is to be applied or credited as rentals for the last two years of the contract.
2. Security Deposit – is an advance payment received by the lessor from the lessee, as security for the lessee's performance of his obligations
under the lease. It is not income to the Lessor when received, as the lessor is required to return this deposit at the end of the lease period
upon fulfillment of all the obligations of the lessee. In this respect, a security deposit is somewhat analogous to a loan and the lessor has no
income and the lessee no deduction when the deposit is made with the lessor, and the lessor has no deduction and the lessee no income when
it is repaid. This rule applies even when the lessor has the right to commingle and use the security deposit for his own purposes without interest
during the term of the lease . . . ." (Morten's, Chapter 12 pp. 165-166)

And in BIR Ruling No. 144-88 dated April 18, 1988, this Office ruled as follows:

"In reply, please be informed that if the advance payment made pursuant to a Lease Contract is in the nature of a security deposit for the
faithful performance of certain obligation of the lessee, the lessor realizes no taxable income in the year the advance payment is received.
However, if the advance payment is a security deposit and the conditions which make the security deposit the property of the lessor
occur; then the lessor realizes a taxable income to the extent of the security deposit and the lessee is entitled to a deduction to that
same extent. (Estate of George E. Baker, 13 BTA 562 in BIR Ruling No. 011-69 dated October 3, 1969)".

In short, the answer to the question of whether or not the amount of security deposit will be declared as income on the part of the lessor and
correspondingly deductible expense on the part of lessee will depend on the nature of said security deposit.

b. Claim of Right Doctrine

 This doctrine provides that if a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he
has received income even though one may claim he is not entitled to the money.

Should it later appear that the taxpayer was not entitled to keep the money, the taxpayer would be entitled to a deduction in
the year of repayment. (North American Oil Consolidated v. Burnet cited in BIR Ruling No. [C-168] 519-08 dated Dec. 12, 2008)

BIR Ruling No. (C-168) 519-08 dated December 12, 2008 – Luzon Hydro Corporation (LHC) entered into an agreement (Turnkey Contract)
with Transfield Philippines, Inc. (Contractor) for the design, construction, installation, completion, testing and commissioning of a power station (the
Project) on a turnkey basis. Due to the delay in construction, the Contractor was made to pay liquidated damages which may be collected from the
letters of credit as stipulated in the Turnkey Contract. The Contractor protested the claim for liquidated damages and an arbitral award was rendered
in favor of it and LHC was ordered to pay US$24.533M, which was reported as income.

LHC protested the award and the the same was ordered vacated by the Court of Appeals. Before the issues could be finally settled, LHC and the
Contractor entered into a settlement to avoid a drawn out legal battle and avoid further litigation expenses. LHC agreed to return US14M part of the
liquidated damages.

ISSUE: WON the return of the US$14M liquidated damages may be claimed as a deduction for income tax purposes?

HELD: Yes. Generally, the tax treatment of the return of previously-recognized income is dependent on the tax treatment of the income previously
reported. If the taxpayer received an income and reported the same as part of taxable gross income, but later on was made to return
the said income, the taxpayer is allowed a deduction for the amount returned against the gross income. The deduction must be made
at the time of the return. This treatment follows the rationale behind allowing sales return as a deduction from gross sales not only for income tax
but also for value-added tax ("VAT") purposes.

In Maurice P. O'Meara v. Commissioner of Internal Revenue, the Tax Court of the United States ruled, citing the Commissioner's own ruling, held
that a taxpayer, having properly reported royalties from property as income received in cash in 1937, and being required by an adverse court decree
to make restitution, was entitled in a deduction for the amount repaid in cash in 1941 to the extent of the net royalties previously reported as taxable
income notwithstanding that the inclusion of royalty income in earlier year created no tax burden.

This ruling followed the doctrine laid down in North American Oil Consolidated v. Burnet, where the US Supreme Court enunciated the so-called
"claim-of-right" doctrine. This doctrine provides that if a taxpayer receives earnings under a claim of right and without restriction
as to its disposition, he has received income even though one may claim he is not entitled to the money. Should it later appear that
the taxpayer was not entitled to keep the money, the taxpayer would be entitled to a deduction in the year of repayment.

Moreover, even if the return of US$14.0 million is viewed as an out-of-court settlement rather than as a return of liquidated damages, it is still allowed
as a deduction. A judgment based on a compromise agreement is a judgment on the merits. It is similar to a payment pursuant to a judgment and
has the effect and authority of res judicata. Under Section 76 of the Income Tax Regulations, "judgments or other binding judicial adjudication,
on account of damages for patent infringement, personal injuries, or other cause are deductible from gross income when the claim
is so adjudicated or paid, unless taken under other methods or accounting which clearly reflect the correct deduction, less any
amount of such damages as may have been compensated for by insurance or otherwise. . . ."

Furthermore, in BIR Ruling No. DA-400-2004 dated July 22, 2004, the BIR held that a taxpayer may claim as deductions from its gross income
payments made under a court-approved compromise agreement for the full and final settlement of the Arbitration Case and the
Court Case which the parties filed against each other.

In LHC's case, the litigation which gave rise to the payment of US$14.0 million arose from the delay in the construction of the Project, which is central
to the business operations of LHC. Hence, there should be no question that the settlement amount arose from LHC's business activities.

Accordingly, whether viewed as a return of previously reported income or as a settlement payment under a compromise agreement, the US$14.0
million is deductible from the taxable gross income of LHC in 2008 for income tax purposes.

MANILA ELECTRIC COMPANY, petitioner vs. CIR, respondent (CTA Case No. 7242 dated December 6, 2010) – Petitioner MERALCO filed a claim
for refund for taxable years 1994-1998 and 2000-2001 with respondent CIR (of which only the amount for 2001 was granted). The claim is due to
the alleged overpayment of income taxes arising from the Supreme Court cases which ordered MERALCO to refund over billed charges to its customers
for their electric consumption for the years 1994 up to Dec. 2003 which became final and executory on May 5, 2003. Due to inaction, MERALCO
appealed to the CTA via petition for review.

Respondent CIR avers that the claim for refund cannot be granted since it has been 2 years from PAYMENT and should not be counted from the
time the SC decision became final and executory.

ISSUE: WON MERALCO can claim a refund of excess income tax paid in relation to the refund it was mandated to make?

HELD: Yes. But we rule pro hac vice that MERALCO's right to recover its excess income tax payments for the taxable years 1994-1998 and 2000 has
not prescribed. MERALCO is entitled to its claim for a tax refund or credit for the taxable years 1994-1998 and 2000 due to the special circumstance
in the instant case, pursuant to section 229 of the 1997 NIRC. The two (2)-year prescriptive period should commence to run on May 5, 2003, the
date the Supreme Court's Decision in G.R. Nos. 141314 and 141369 became final and executory. It is only at that time that the right to claim for a
tax refund or credit becomes determinable and the basis for the excessive or erroneous payment arises.

In G.R. Nos. 141314 & 141369, the Supreme Court, in its desire to be an infallible advocate of truth for the protection of the general populace,
ordered MERALCO to refund the amount it overcharged the public when it found out that MERALCO used a higher rate in billing the public, which
evidently resulted into excessive income tax payments. It is therefore apparent that MERALCO cannot be faulted for seeking a claim for refund for
the tax excessively paid to and collected by respondent CIR.
MERALCO aptly relied in the case of CIR vs. Philippine American Life Insurance Co., where the Supreme Court ruled that "The prescriptive period of
two (2) years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment
return is accomplished, regardless of any supervening cause that may arise thereafter." This is so because at that point, it can already be determined
whether there has been an overpayment by the taxpayer.

In the instant case, it is clear that MERALCO's right to claim for a tax refund for the taxable years 1994-1998 and 2000 cannot yet be ascertained or
determined at the filing of the final adjustment return. Hence, the two (2)-year period should not yet commence to run.

We are aware that equity is available only in the absence of law and not as its replacement. Indisputably, at the time MERALCO filed its final
adjustment return and paid the income tax thereon, the amount being claimed for refund cannot be said to be "excessively and wrongfully collected".
It was only on May 5, 2003, that the income tax payments for the taxable years 1994-1998 and 2000 being claimed for refund were determined as
"excessively and wrongfully collected".

As the Supreme Court renders justice to the general populace when it ordered MERALCO in G.R. Nos. 141314 & 141369, to refund the amount it
overcharged the public when it found out that MERALCO used a higher rate in billing the public, it is only but equitable that the excessive income
taxes collected by respondent CIR thereon be returned to MERALCO. Otherwise, taxpayers would be reluctant in paying their taxes. Considering the
government's vigilance in collecting taxes, at least, the same standard shall be given to the taxpayers in refunding excess income tax payments.

Dissenting Opinion: (J. Castaneda)

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. In accrual method,
amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.

[Sec. 44 and 45 of the NIRC] dictate that once a taxpayer receives items of gross income, the same shall be recognized as income in
the taxable year of receipt unless the taxpayer is using another method of accounting allowed by law. Correspondingly, deductions are allowed
from the time the obligation to pay or accrue arises

In the instant case, when Meralco received the provisional increase imposed upon its consumers, it unqualifiedly asserted its right over the amount
and voluntarily reported the same as income. The provisional increase was undeniably treated as income thereby forming part of Meralco's taxable
income in the year of receipt.

Consequently, it is only proper that the subsequent repayments of the portion of provisional increase considered as overcharges be
treated as deduction from its income in the year the obligation to pay or accrue arises. Meralco may claim the repayments as deduction
as long as it meets the statutory test of deductibility under Section 34 of the NIRC of 1997 which allows deductions from gross income "all ordinary
and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The conditions for the deductibility of a
business expense

Thus, the relief available to Meralco is to claim repayments as deduction from income in the year the obligation to repay arises.

In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as its own under the claim of right that the payments
are made absolutely and not contingently, such amounts are included in the taxpayer's income, even though the right to the income has not been
perfected at that time. It does not matter that the taxpayer's title to the property is in dispute and that the property may later be recovered from
the taxpayer.

In American jurisprudence, the claim-of-right doctrine was applied in several cases involving public utilities. In the case of Brooklyn Union Gas Co. v.
Comm., 62 F2d 505 (CCA2 1933), a taxpayer, a utility company, in the course of rate dispute, had certain funds made available to it by an interlocutory
order of court, subject to the taxpayer's posting of a security bond or securities of equal value. The taxpayer preferred not to take the funds on such
conditions, and instead took them at the conclusion of litigation two years later. The taxpayer realized income in the earlier year under the claim-of-
right rule, because the taxpayer had the power to secure the release of the funds, that is, there remained no effective restriction upon the taxpayer's
dominion over them.

Under this doctrine, if the taxpayer who has included amounts in income pursuant to the claim-of-right doctrine subsequently repays
those amounts, the taxpayer may be entitled to a deduction in the year of repayment. However, to be entitled to a deduction, the
taxpayer must meet the requirements of a statutory provision entitling him or her to a deduction. For instance, it must qualify as
a trade or business expense . . ., or as a loss.

In the case of S. Lowenstein & Son, Inc. v. Comm., it was ruled that the taxpayer's renunciation in a subsequent year of income received
under claim of right does not defeat the earlier inclusion, but enables only the deduction in that subsequent year.

In this case, the claim-of-right doctrine finds application to Meralco when it recognized a bona fide claim over the amounts received out of its
overcharged rate. Consistent with the recognition of income and deduction under the NIRC of 1997, Meralco's remedy is to claim the repayments as
deduction from its income instead of filing a refund considering that this is not a case of an erroneously paid tax.

Even assuming, there is no other relief available to Meralco except to file a refund of its overpaid taxes, Section 229 of the NIRC of 1997 will apply.
Existing jurisprudence will show that Section 229 applies not only to erroneously paid taxes but also to overpaid taxes citing the cases of Collector
of Internal Revenue vs. Prieto and Accra Investments Corporation vs. Court of Appeals, where the Supreme Court used the two (2)-year prescriptive
period even when the issue involved was overpayment of taxes.

Nonetheless, if we are to apply Section 229 to the present case, the claim would still fail on account of prescription. Section 229 is very emphatic on
the requirement that the claim for refund must be filed within two (2) years from the date of payment in all cases in view of the use of the phrase
"regardless of any supervening cause" that may arise after payment.
MANILA ELECTRIC COMPANY vs. CIR, (CTA Case No. 7242 dated April 15, 2011) – This resolves the Motion for Reconsideration filed by the
CIR.

ISSUE: WON the claim of right doctrine would still result in undue enrichment of the government?

HELD: Yes. Suffice it to say that there is basis as to petitioner's allegation that the suggestion of claiming the repayments as deduction instead of
tax refund (pertaining to the excess income tax payments) would still unduly enrich the government at the expense of the taxpayer in relation to the
"claim of right doctrine", primarily used as a criterion for determining what constituted "gross income". Said doctrine originated in an American
jurisprudence way back in 1932, specifically, in the case of North American Oil Consolidated v. Burnet.

In the leading case of the "claim of right doctrine", North American Oil was involved in a dispute over the year in which income, earned on property
held by a receiver during a title dispute between the taxpayer and the government, was to be taxed. The possibilities were 1916, the year in which
the income was earned; 1917, the year in which the district court ruled in favor of the taxpayer and the money was paid to the taxpayer; or 1922,
the year the litigation was finally terminated in the taxpayer's favor. In an opinion by Justice Brandeis of the US Supreme Court, 1917 was the year
that the income must be reported and this set forth the claim of right doctrine as follows:

"If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to
return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its
equivalent. If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been
entitled to a deduction from the profits of 1922, not from those of any earlier year."

However, aware of the inequities related to this doctrine, the need to mitigate the same becomes imperative. Thus, the US Congress enacted section
1341 of the 1954 Code to alleviate some of the inequities felt existed in this area. If a taxpayer is entitled to a deduction only in the year of
repayment, it may face an inequity and a deduction in the year of repayment, often will not reduce the taxpayer's tax liability by
the same amount paid as a result of the initial receipt of income.

Also, an application of claim of right doctrine prohibits a taxpayer to amend prior-year's return. Obviously, if a taxpayer were simply
able to amend the prior-year's return, the claim-of-right doctrine would be unnecessary. Concomitantly, this so-called "claim of right doctrine"
particularly the deduction of repayments, evolved into a procedure created by a statutory law in the US for the computation of tax
where the taxpayer restores a substantial amount of income previously reported under the claim of right.

While the Philippine tax laws were based on the federal tax laws of the United States, and pursuant to established rules of statutory construction,
the Decisions of American Courts construing the Federal Tax Code are entitled to great weight in the interpretation of our own tax laws, the instant
case however does not warrant its application.

Apparently, our lawmakers did not adopt Section 1341 of the US Internal Revenue Code. A perusal of Commonwealth Act No. 466, "An
Act to Revise, Amend and Codify the Internal Revenue Laws of the Philippines" (1939), Presidential Decree No. 1158 "Decree to Consolidate and
Codify All the Internal Revenue Laws of the Philippines" (1977), and Republic Act No. 8424 "An Act Amending the National Internal Revenue Code,
as Amended, and for Other Purposes (1997), reveals that there is no provision similar to section 1341 of the US Internal Revenue Code. Our
lawmakers did not enact a statute pertaining to claim of right situation. Hence, our lawmakers appear to see it fit not to adopt the procedure of
deducting those repayments previously claimed as income.

Hence, the said doctrine may come into play only in determining whether the treatment of an item of income should be influenced
by the fact that the right to receive or keep it is in dispute, but the full application of the said doctrine especially the deduction of those
repayments previously claimed and taxed as income in different taxable years should not be given effect. Therefore, the taxpayer cannot fully
rely on claim of right doctrine and deduct those repayments previously claimed and taxed as income. Under the United States Tax
Code, the United States legislature specifically addressed the inequities that arise under the "claim of right" and Sec. 1341 was enacted with respect
to the deductions thereto. In our jurisdiction, an item is deductible only if specifically allowed by our Tax Code. Unfortunately, our Tax Code did not
provide that repayments previously claimed and taxed as income under the claim of right situation, is specifically deductible in the year of repayments.

In view of the inequities related to this so-called "claim of right doctrine" as well as the fact that our legislature did not adopt nor enact a statute
regarding the deductibility of repayment under the claim of right situation similar to Section 1341 of the US Internal Revenue Code, it is in our best
interest not to fully adopt the same in our jurisdiction. If it were the intent of the legislature to have a deduction based on claim of right
situation, a similar provision of Section 1341 of the US Internal Revenue Code would have been expressly provided either in the "NIRC of 1977",
"NIRC of 1997" or in any amendments made thereon but there is none. Inevitably, neither should we adopt the deductibility of repayments under
the claim of right situation since our legislature intentionally did not adopt the same.

Dissenting Opinion: (J. Castaneda)

Under Sections 44 and 45 of the 1997 NIRC, the period of recognition of income shall be in the taxable year of receipt unless the taxpayer is using
another method of accounting allowed by law. Correspondingly, deductions are allowed from the time the obligation to pay or accrue arises.

In the claim-of-right doctrine, if a taxpayer receives money or other property and treats it as its own under the claim of right that the payments are
made absolutely and not contingently, such amounts are included in the taxpayer's income, even though the right to the income has not been
perfected at that time. It does not matter that the taxpayer's title to the property is in dispute and that the property may later be recovered from
the taxpayer.

In American jurisprudence, the claim-of-right doctrine was applied in several cases involving public utilities one of which is the case of Brooklyn Union
Gas Co. v. Comm., 62 F2d 505 (CCA2 1933). Under this doctrine, if the taxpayer who has included amounts in income pursuant to the
claim-of-right doctrine subsequently repays those amounts, the taxpayer may be entitled to a deduction in the year of repayment.
However, to be entitled to a deduction, the taxpayer must meet the requirements of a statutory provision entitling him or her to a
deduction. For instance, it must qualify as a trade or business expense . . ., or as a loss.
In the case of S. Lowenstein & Son, Inc. v. Comm., 21 TC 648, affd 222 F2d 919 (CA6 1955), it was ruled that the taxpayer's renunciation in
a subsequent year of income received under claim of right does not defeat the earlier inclusion, but enables only the deduction in
that subsequent year.

Evidently, these American cases have persuasive effect in our jurisdiction, because Philippine income tax law is patterned after its US counterpart.
In fact, in our jurisprudence particularly in the case of Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal
Revenue, the Court of Tax Appeals (CTA) ruled that gains are taxable in the year during which they are realized.

In this case, by virtue of the claim-of-right doctrine and consistent with the recognition of income and deduction under the NIRC of 1997, Meralco
recognized a bona fide claim over the amounts received out of its overcharged rate. Hence, its remedy is to claim the repayments as deduction from
its income from the time the obligation to pay or accrue arises.

Granting without conceding that the claim-of-right doctrine does not apply, then petitioner should NOT have recognized the overcharges as income
from the time it filed its annual ITRs. American jurisprudence, having persuasive effect in our jurisdiction, dictates that in order to avoid the
application of the claim-of-right doctrine, a taxpayer must in the year of receipt at least establish its obligation to repay the amount
received and make provision for repayment. Establishment of a merely contingent obligation to repay will not suffice. In this case, Meralco
unconditionally recognized the overcharges as income from the time it filed its annual ITRs. It already claimed a right over an income knowing fully
well the uncertainty and possible reversal of its case before the Supreme Court. When it took the risk of imposing higher rates to its consumers, it
also assumed the risk of paying excess income taxes. Hence, this is not a special circumstance worthy of the relaxation of the rules on prescriptive
period.

c. All events test

The accrual of income and expense is permitted when the all-events test has been met, which requires:
i. Fixing of a right to income or liability to pay; and
ii. The availability of the reasonable accurate determination of such income or liability

CIR, Petitioner, vs. ISABELA CULTURAL CORPORATION, Respondent. (G.R. No. 172231; February 12, 2007) – The BIR assessed respondent
ICC for deficiency income tax resulting from the disallowance of professional and security services claimed as deduction.

Receiving a final notice before seizure, ICC brought the case to the CTA which held that the case was premature but eventually was remanded by
the CA, holding the final notice as a final decision appealable to the CTA, which was eventually sustained by the SC.

The CTA cancelled and set aside the assessment claiming that the deductions were properly claimed in the year 1986 when the bills demanding
payment were sent to ICC even if some of the services were rendered in 1984 or 1985. The CA affirmed the CTA.

ISSUE: WON ICC should have claimed the expenses at the time the services were rendered and the amount could have been reasonably determined
even if not yet exact as there was no billing received yet?

HELD: Yes. The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid
for legal and auditing services, are:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.

The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code
(NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or
‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. In the instant case,
the accounting method used by ICC is the accrual method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year.

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in opposition to actual receipt
or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed,
where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer
must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires:
(1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with
reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much
as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with
 "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate
amount.

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at
the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual of an item of income or deduction.

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes
of the nature of a tax exemption, then it must also be strictly construed.

In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to
the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel
since the 1960’s. From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The
failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions
cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could
have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could
have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal
consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an
expense or income. However, ICC failed to discharge this burden. As to when the firm’s performance of its services in connection with the 1984 tax
problems were completed, or whether ICC exercised reasonable diligence to inquire about the amount of its liability, or whether it does or does not
possess the information necessary to compute the amount of said liability with reasonable accuracy, are questions of fact which ICC never established.
It simply relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from
being charged with knowledge of the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as
expense deductions in 1986. This is so because ICC failed to present evidence showing that even with only "reasonable accuracy," as the standard
to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for
the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the
said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in 1986 and could therefore be properly claimed
as deductions for the said year.

d. Accounting Periods and Methods – correlate with recognition of income and expense
1. Sec. 43-50 of the NIRC

Accounting Periods:
Individuals – the accounting period shall be calendar year or that which is a 12 month period that ends in December 31.

Corporations – the accounting period can either be calendar or fiscal year, the latter being an accounting period of 12 months ending on the last
day of the month other than December.

Computation of Taxable Income:

a. General Rule: The taxable income shall be computed based on the taxpayer’s annual accounting period
b. Exception: if no such method is employed or the method does not clearly reflect the income, the computation shall be made in accordance with
such method as in the opinion of the Commissioner clearly reflects the income. (Sec. 43, NIRC)

Recognition of items of Gross Income: The amount of all items of gross income shall be included in the gross income for the taxable year in
which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted
for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in
which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior
period. (Sec. 46, NIRC)

Accrual Method: income is recognized when earned (when goods are sold or services are rendered), not when payment is received.
Cash Method: income is recognized when payment is received, not when it was earned.

Recognition of Deductions and Credits: The deductions shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred',
dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income, the
deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable
period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period
or a prior period. (Sec. 45, NIRC)

Accrual Method: expense or deductions shall be recognized when incurred (when the goods were purchased or the services were rendered) and not
when paid.
Cash Method: expense or deductions are recognized upon payment not when incurred.
 Accounting for Long-term Contracts.

'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year.

Recognition of income: Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of
percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of
completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures
made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the
taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the
taxable [net] income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended
return. (Sec. 48, NIRC)

Installment Basis. –
a. Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom
in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized
when payment is completed, bears to the total contract price.
b. Sales of Realty and Casual Sales of Personality. - In the case of
i. A casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or
ii. A sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the
selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be returned on the basis and in the manner above prescribed in this Section.

Initial payments means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable
period in which the sale or other disposition is made.

c. Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as
capital asset, and is otherwise qualified to report the gain therefrom in installment as provided above may pay the capital gains tax in
installments.

Allocation of Income and Deductions. - In the case of two or more organizations, trades or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that
such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of
any such organization, trade or business.

2. Change in Accounting Period

If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from
one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting
period, subject to the filing of a Final or Adjustment Return for a Period of Less than 12 Months. (Sec. 46, NIRC)

Final or Adjustment Returns for a Period of Less than Twelve (12) Months.
a. Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of
the Commissioner, changes the basis of computing net income:
i. from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal
year for which return was made and the following December 31.
ii. from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last
calendar year for which return was made and the date designated as the close of the fiscal year.
iii. rom one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the
former fiscal year and the date designated as the close of the new fiscal year.
b. Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made on account of a change in the accounting
period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be
computed on the basis of the period for which separate final or adjustment return is made.

e. Individual Income Taxation

1. Kinds of Individuals (Sec. 22)

a. Resident Citizens

A citizen of the Philippines residing therein. Under Sec. 1, Art. IV of the 1987 Constitution, the following are citizens of the Philippines.

(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship upon reaching the age of majority; and
(4) Those who are naturalized in accordance with law.

b. Resident Aliens

i. An alien who lives in the Philippines with no definite intention as to his stay (floating intention);
ii. One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his
home temporarily in the Philippines;
 iii. An alien who has acquired residence in the Philippines and retains his status as such until he abandons the same and actually departs
from the Philippines. (Sec. 5 of RR No. 2-40)

c. Non-resident citizens

i. A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein – to the satisfaction of the
Commissioner of Internal Revenue.

ii. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.

This includes Overseas Contract Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit.
For purposes of income tax, a seaman is considered an OCW.

iii. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.

“Most of the time” meaning at least 183 days. (Sec. 2 of RR No. 1-79)

A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year with respect to his income derived
from sources abroad until the date of his arrival in the Philippines. (Sec. 22[E] of the Tax Code)

BIR Ruling No. 033-00 dated September 5, 2000 – Technoserve International Co., Inc., in some instances sends its employees to its main client
and parent company, JGC Corporation, having its principal office at Yokohama, Japan under a Secondment Agreement. Employees stationed in JGC
will stay there for a certain period of time without losing the status of employment with TIC; the client provides for the accommodation, transportation,
meal and site allowances and other necessities while on overseas assignment; the salaries, which are stated in US dollar, are being paid here in the
Philippines by TIC converted to pesos.

The manhour spent by the overseas’ assignees are billed to the client and the client remits the payment and TIC converts the same to pesos, that
in effect, the salaries are paid by JGC through TIC.

ISSUE: WON the employees assigned in JGC for at least 183 days would qualify as non-resident citizens taxable only on their income earned within
the Philippines?

HELD: Yes. Section 23(C) of the Tax Code of 1997 which took effect on January 1, 1998, provides as follows:
"(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract workers is taxable only
on income from sources within the Philippines. . . " (Emphasis supplied)

Corollary thereto, Section 22(E)(3) of the same Code provides one of the definitions of the term 'non-resident citizen' of the Philippines, viz.:
"(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year."

Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sources income for being a non-resident citizen or for being an
overseas contract worker (OCW). All your employees whose services are rendered abroad for being seconded or assigned overseas for at least 183
days may fall under the first category and are therefore exempt from payment of Philippine income tax. In this connection, the phrase "most of
the time" which is used in determining when a citizen's physical presence abroad will qualify him as non-resident, shall mean that
the said citizen shall have stayed abroad for at least 183 days in a taxable year. (Sec(2) (c), Rev. Regs. 1-79)

The same exemption applies to an overseas contract worker but as such worker, the time spent abroad is not material for tax
exemption purposes. All that is required is for the worker's employment contract to pass through and be registered with the Philippine Overseas
Employment Agency (POEA).

[TIC] may, therefore, recognize the income tax exemption of [its] employees assigned abroad based on either of the foregoing premises.

d. Non-resident alien engaged in trade or business

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines.

A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred
eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. (Sec. 25[A][1], NIRC)

BIR Ruling No. DA-056-05 dated February 16, 2005 – Punongbayan and Araullo sought clarification of the application of the 180 day period to
aliens so as to consider them as engaged in trade or business in the Philippines and be subject to the graduated rates of income tax.

ISSUE: WON the determination of 180 days is on a per calendar year basis?

HELD: No. Section 25(A)(1) of the Tax Code of 1997 provides that a non-resident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all
sources within the Philippines. A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year shall be deemed a "non-resident alien doing business in the Philippines, Section
22(G) of the said Code notwithstanding (emphasis supplied)
It is significant to note that the law uses the phrase “any calendar year” purposes of computing the 180 day period within which a non-resident alien
individual may be considered as engaged in trade or business in the Philippines and therefore subject to the tax at the graduated rates of 5% to
32%. Thus, in applying the aforesaid provision, all the months in a calendar year covered by the period of assignment of the non-resident
alien individual should be considered in evaluating if he exceeded the 180 day period in any calendar year. Accordingly, when an
expatriate's stay in the Philippines exceeds the 180-day period during any calendar year he becomes a non-resident alien doing business in the
Philippines for the entire duration of his Philippine assignment.

SUCH BEING THE CASE, this Office holds that the phrase "any calendar year" in the aforesaid Section of the Tax Code should be interpreted to mean
that when an expatriate stays in the Philippines for more than 180 days in any calendar year, he would already be taxed at the graduated rates of
5% to 32% not only during the year that he exceeds the 180-day period, but also during the other years of assignment, even if such
stay did not exceed 180 days.

e. Non-resident aliens not engaged in trade or business

There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every
nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains,
profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income.

Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the capital gains tax applicable to individuals. (Sec. 25[B], NIRC)

f. Aliens employed by RAHs, ROHQs, OBUs and PSCSs

i. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies – 15% of gross income
received from such establishment. Provided, that the same tax treatment shall apply to Filipinos employed and occupying the same position
as those of aliens employed by these multinational companies. (Sec. 25[C], NIRC)

ii. Offshore Banking Units (OBUs) – 15% of gross income therefrom. Provided, that the same treatment shall apply to Filipinos
employed and occupying the same position as those aliens employed by these OBUs. (Sec. 25[D], NIRC)

iii. Petroleum Service Contractor and Subcontractor – 15% of the salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances received from such contractor or subcontractor with the same preferential
treatment for Filipino employees therein. (Sec. 25[E], NIRC)

Any other income from all sources within the Philippines by the above alien employees shall be subject to the pertinent income tax, as the case
may be, imposed under the Tax Code.

Multinational Companies means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the
Asia-Pacific Region and other foreign markets.

Requirements: for a Filipino employed by an ROHQ/AHQ/RHQs to qualify for the 15% preferential tax rate, the following requisites must be
present:
a. The employee must be performing a managerial or technical position;
b. The gross compensation, exclusive of fringe benefits subject to FBT, must be at least P975,000.
c. The employee must be exclusively working for the RHQ or ROHQ as a regular employee and not just a consultant or contractual
personnel. (RR No. 11-10)

Ineffective Veto: The TRAIN added a Subsection (F) to Section 25 providing that entities registered January 1, 2018 onwards can no longer
avail of the preferential tax rate of 15% for its qualified employees. Such subsection likewise provided that “PROVIDED, HOWEVER, THAT
EXISTING RHQS/ROHQS, OBUS OR PETROLEUM SERVICE CONTRACTORS AND SUBCONTRACTORS PRESENTLY AVAILING OF PREFERENTIAL
TAX RATES FOR QUALIFIED EMPLOYEES SHALL CONTINUE TO BE ENTITLED TO AVAIL OF THE PREFERENTIAL TAX RATE FOR PRESENT AND
FUTURE QUALIFIED EMPLOYEES.”

The President vetoed only the part of the provision in capital letters above and declared that such employees are subject to the regular income
tax rates.

However, if you read the provisions, as amended, the tax code effectively still has the 15% preferential tax rate (provided under Sec. 25 (C to
E) untouched but limiting its availment to entities already availing of the same prior to the TRAIN, as included by Subsection F (the non-vetoed
portion).

However still, the BIR, under RR No. 8-2018 and eventually RR No. 11-2018, deemed the veto a valid removal of the preferential rate, thus
treating special aliens and their Filipino counterparts as subject to the graduated rates.

Taxability under RR No. 8-2018 dated Jan. 25, 2018: the preferential income tax rate under subection (C), (D) and (E) of Sec. 25 shall
no longer be applicable without prejudice to the application of preferential tax rates under existing international tax treaties, if warranted. Thus,
all concerned employees of RHQs or AHQs and ROHQs of Multinational Companies, OBUs and Petroleum Service Contractors/Subcontractors
shall be subject to the regular income tax rate for individuals.

g. Others
i. Minimum Wage Earners
 The term “minimum wage earner” shall refer to a worker in the private sector paid the statutory minimum wage or to an employee in
the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is
assigned. (Sec. 22[HH], NIRC)

The following income earned by a Minimum wage earner are exempt from income tax:
1) The Statutory Minimum Wage
2) Holiday Pay
3) Overtime Pay
4) Night Shift Differential Pay
5) Hazard Pay. (RR No. 8-2018)

However, income other than those mentioned are subject to income tax. (Q/A 11 of RMC NO. 50-2018) An example will be service charge.
However, despite receipt of income not exempted, the above-enumerated income will still be considered as exempt. (Q/A 12 of RMC No.
50-2018).

‘Statutory Minimum Wage’ (SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board (RTWPB), as
defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of
each region shall determine the wage rates in the different regions based on established criteria.

Hazard pay shall mean the amount paid by the employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to great danger or contagion or peril to life. Any hazard
paid to MWEs which does not satisfy the above criteria is deemed subject to income tax and consequently, withholding tax on the said
hazard pay.

Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱90,000.00, taxable allowances, and other taxable income given to an MWE by the same employer other than those which are expressly
exempt from income tax shall be subject to withholding tax using the withholding tax table.

MWEs receiving other income from other sources in addition to compensation income, such as income from other concurrent
employers, from the conduct of trade, business, or practice of profession, except income subject to final tax, are subject to income tax
only to the extent of income other than SMW, holiday pay, overtime pay, night shift differential pay, and hazard pay earned during the
taxable year. (Sec. 2.78.1[B][13] of RR No. 11-2018)

Determination of whether a government employee is considered a MWE: The government entity/employer must be aware of the
Statutory Minimum Wage (SMW) prescribed for a particular geographical region by the NWPC of the DOLE. The copy of the wage matrix
they provide the Bureau is circularized every time there are changes in the SMW. If the wage of the employee is equal or below the said
prescribed SMW for a particular region, then the employee working within the same region is considered a MWE. (Q/A 10 of RMC No. 50-
2018)

Basic pay is more than SMW: the employee is no longer considered an MWE since his basic pay is more than the SMW. Thus, the
amount of basic pay, OT pay, holiday pay, NDP pay and hazard pay shall be subject to income tax and consequently, to the withholding
tax on compensation. (Q/A 13 of RMC No. 50-2018)

ILLUSTRATION: Mr. X is employed by ABC Corporation. He received the SMW for 2018 the total amount of ₱100,000 and 13th month pay
amounting to ₱75,000. In the same year, he also received overtime pay of ₱40,000 and nightshift differential of ₱25,000. He also received
commission income from the same employer of ₱20,000, thus, total income received amounted to ₱260,000. How much is his income tax
due, if any?

Answer: P0, computed as follows:

Total Income Received P260,000

Less: Income Exempt
SMW P100,000
13th month pay (not exceeding P90,000) 75,000
Night shift differential 25,000
Overtime pay 40,000 (240,000)
Taxable Income – Commission P 20,000

Income Tax Due (not in excess of P250,000) -

1. Mr. X’s SMW, overtime pay and night shift differential are exempt from income tax.
2. Likewise, the 13th month pay not in excess of P90,000 is also exempt from income tax.
3. The taxable income is only P20,000, representing the commission received. However, since it did not exceed the P250,000, it is not
subject to any income tax based on the graduated rates table.

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH SHARYN M. DE CASTRO and CRIS P.
TENORIO, Petitioners, vs. SOF and the CIR, Respondents. (G.R. No. 184450; January 24, 2017) – RA No. 9504 granted income tax
exemption for Minimum Wage Earners. Respondent SOF and CIR then issued RR No. 10-2008 which imposed a condition on the availment
of exemption by MWEs, specifically that in the event they receive other benefits in excess of P30,000 they can no longer avail themselves of
that exemption. Moreover, the questioned RR likewise provides that the applicability of the exemption shall be from July 6, 2008 onwards
only.

Petitioner Senator Francis Escudero, the TMAP and Ernesto Ebro questions the above condition.
Petitioners Senator Manuel Roxas, Trade Union Congress of the Philippines as well as above petitioners alleges that the effectivity of the
exemption should be for the full year.

ISSUE: WON the exemption for MWEs should apply to the entire taxable year of 2008 even if the law became effective only in July 6, 2008?

HELD: Yes. As in the case of the adjusted personal and additional exemptions, the MWE exemption should apply to the entire taxable year
2008, and not only from 6 July 2008 onwards. We see no reason why Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate the plight of the working class, especially the low-income
earners. In concrete terms, the exemption translates to a ₱34 per day benefit, as pointed out by Senator Escudero in his sponsorship
speech.

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer. Therefore, RR 10-2008 cannot
declare the income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by him for the
rest of that year to be tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable income would then cease to be
determined on a yearly basis.

ISSUE: WON Sec. 1 and 3 of RR No. 10-2008, which provides that MWEs receiving other benefits in excess of the P30,000 limit is no longer
entitled to the exemption, is inconsistent with the law?

HELD: Yes. Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that an MWE who receives other
benefits in excess of the statutory limit of ₱30,000 is no longer entitled to the exemption provided by R.A. 9504.

The BIR added a requirement not found in the law.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she must be one who is paid the statutory
minimum wage if he/she works in the private sector, or not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned, if he/she is a government employee. Thus, one is either an MWE or he/she is not. Simply put, MWE is the status
acquired upon passing the litmus test - whether one receives wages not exceeding the prescribed minimum wage.

The minimum wage referred to in the definition has itself a clear and definite meaning. The law explicitly refers to the rate fixed by the
Regional Tripartite Wage and Productivity Board, which is a creation of the Labor Code. The Labor Code clearly describes wages and Minimum
Wage under Title II of the Labor Code. Specifically, Article 97 defines "wage" as follows:

(f) "Wage" paid to any employee shall mean the remuneration or earnings, however designated, capable of being expressed in terms of
money, whether fixed or ascertained on a time, task, piece, or commission basis, or other method of calculating the same, which is payable
by an employer to an employee under a written or unwritten contract of employment for work done or to be done, or for services rendered
or to be rendered and includes the fair and reasonable value, as determined by the Secretary of Labor and Employment, of board, lodging,
or other facilities customarily furnished by the employer to the employee. "Fair and reasonable value" shall not include any profit to the
employer, or to any person affiliated with the employer.

While the Labor Code's definition of "wage" appears to encompass any payments of any designation that an employer pays his or her
employees, the concept of minimum wage is distinct. "Minimum wage" is wage mandated; one that employers may not freely
choose on their own to designate in any which way.

These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by R.A. 9504 is that which is referred to in the
Labor Code. It is distinct and different from other payments including allowances, honoraria, commissions, allowances or
benefits that an employer may pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A. 9504 are all mandated by law and
are based on this minimum wage. Additional compensation in the form of overtime pay is mandated for work beyond the normal hours
based on the employee's regular wage. Those working between ten o'clock in the evening and six o'clock in the morning are required to be
paid a night shift differential based on their regular wage. Holiday/premium pay is mandated whether one works on regular holidays or on
one's scheduled rest days and special holidays. In all of these cases, additional compensation is mandated, and computed based on the
employee's regular wage.

R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of the minimum wage as
determined by the wage boards, including the corresponding holiday, overtime, night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an employee receives - the amount afforded to the
lowest paid employees by the mandate of law. In a way, the legislature grants to these lowest paid employees additional income by no
longer demanding from them a contribution for the operations of government. This is the essence of R.A. 9504 as a social legislation. The
government, by way of the tax exemption, affords increased purchasing power to this sector of the working class.

This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas.

The increased purchasing power is estimated at about ₱9,500 a year. RR 10-2008, however, takes this away. In declaring that once an MWE
receives other forms of taxable income like commissions, honoraria, and fringe benefits in excess of the non-taxable statutory amount of
₱30,000, RR 10-2008 declared that the MWE immediately becomes ineligible for tax exemption; and otherwise non-taxable minimum wage,
along with the other taxable incomes of the MWE, becomes taxable again.

Respondents acknowledge that R.A.9504 is a social legislation meant for social justice, but they insist that it is too generous, and that
consideration must be given to the fiscal position and financial capability of the government. While they acknowledge that the intent of the
income tax exemption of MWEs is to free low-income earners from the burden of taxation, respondents, in the guise of clarification, proceed
to redefine which incomes may or may not be granted exemption. These respondents cannot do without encroaching on purely legislative
prerogatives.

It becomes evident that the exemption on benefits granted by law in 1994 are now extended to wages of the least paid workers under R.A.
9504. Benefits not beyond ₱30,000 were exempted; wages not beyond the SMW are now exempted as well. Conversely, benefits in excess
of ₱30,000 are subject to tax and now, wages in excess of the SMW are still subject to tax.

What the legislature is exempting is the MWE's minimum wage and other forms statutory compensation like holiday pay, overtime pay, night
shift differential pay, and hazard pay. These are not bonuses or other benefits; these are wages. Respondents seek to frustrate this
exemption granted by the legislature.

In respondents' view, anyone receiving 13th month pay and other benefits in excess of ₱30,000 cannot be an MWE. They seek to impose
their own definition of "MWE" by arguing thus:

It should be noted that the intent of the income tax exemption of MWEs is to free the low-income earner from the burden of tax. R.A. No.
9504 and R.R. No. 10-2008 define who are the low-income earners. Someone who earns beyond the incomes and benefits above-enumerated
is definitely not a low-income earner.

We do not agree.

As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent on whether compensation-related
benefits exceeding the ₱30,000 threshold would make an MWE lose exemption. R.A. 9504 has given definite criteria for
what constitutes an MWE, and R.R. 10-2008 cannot change this.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements provided by law. To do so
constitutes lawmaking, which is generally reserved for Congress. In CIR v. Fortune Tobacco, we applied the plain meaning rule when the
Commissioner of Internal Revenue ventured into unauthorized administrative lawmaking.

We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not warranted when the language of the law is
plain and clear.

The deliberations of the Senate reflect its understanding of the outworking of this MWE exemption in relation to the treatment of benefits,
both those for the ₱30,000 threshold and the de minimis benefits:

Senator Defensor Santiago. Thank you. Next question: How about employees who are only receiving a minimum wage as base pay, but
are earning significant amounts of income from sales, commissions which may be even higher than their base pay? Is their entire income
from commissions also tax-free? Because strictly speaking, they are minimum wage earners. For purposes of ascertaining entitlement
to tax exemption, is the basis only the base pay or should it be the aggregate compensation that is being received, that is, inclusive of
commissions, for example?

Senator Escudero. Mr. President, what is included would be only the base pay and, if any, the hazard pay, holiday pay, overtime pay and
night shift differential received by a minimum wage earner. As far as commissions are concerned, only to the extent of ₱30,000
would be exempted. Anything in excess of ₱30,000 would already be taxable if it is being received by way of
commissions. Add to that de minimis benefits being received by an employee, such as rice subsidy or clothing allowance or transportation
allowance would also be exempted; but they are exempted already under the existing law.

Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear. (Emphases supplied)

Given the foregoing, the treatment of bonuses and other benefits that an employee receives from the employer in excess of
the ₱30,000 ceiling cannot but be the same as the prevailing treatment prior to R.A. 9504 - anything in excess of ₱30,000
is taxable; no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by
R.A. 9504.

ii. Graduated Rates of Income Tax

Graduated Income Tax Rate for Individuals (sometimes referred to as basic income tax or schedular income tax or regular income
tax of individuals)

Under Section 24(A)(2) of the National Internal Revenue Code, the tax shall be computed in accordance with and at the rates established
in the following schedule:

January 1, 2018 to December 31, 2022:

But Not Of Excess

Over Over Tax Plus Over
- 250,000 -
250,000 400,000 - 20% 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000
 Effective January 1, 2023 and onwards:

But Not Of Excess

Over Over Tax Plus Over
- 250,000 -
250,000 400,000 - 15% 250,000
400,000 800,000 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,5000 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000

The above rates shall apply to:

1) Purely compensation income earners
2) Mixed income earners as regards their compensation income
3) Those earning income from business or practice of profession whose sales/receipts and other income EXCEEDS P3,000,000
4) Those earning income from business or practice of profession whose sales/receipts and other income DOES NOT exceed P3,000,000
and the taxpayer opted to avail of the graduated income tax rates or opted to avail of optional VAT registration.
5) Those who failed to signify that they are availing the 8% flat rate in their 1st quarter income tax return.
6) Those who are not allowed to avail the 8% flat rate of income tax.

iii. Optional 8% Flat Rate of Income Tax

Self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts
and other non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax rates and
the 3% Other Percentage Tax under Sec. 116. (Sec. 24[A][2][b], NIRC, as amended by RA No. 10963)

The 8% Income Tax Rate: this income tax rate applies ONLY to income from business or practice of profession where the gross sales
or receipts, including non-operating income, do not exceed P3,000,000 and only beginning the 2018 taxable year.

Rules applicable to the 8% income tax rate:

1) The tax base shall be the gross sales/receipts including other non-operating income, unlike the graduated rates which are based on
taxable income.

Returnable Deposits: In general, all deposits received are included in the definition of Gross Receipts under Section 2(g) of RR No. 8-
2018. However, returnable deposits held in trust and recorded as liability (e.g., security deposit) are excluded. (Q&A No. 26, RMC No.
50-2018)

2) For those earning purely from business or practice of profession, the tax base shall be that in excess of P250,000

ILLUSTRATION: Ms. X operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross sales
amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00 and incurred costs and expenses
of P300,000 and P100,000, respectively. How much is her tax due using the 8% tax rate?

Answer: P68,000, computed as follows:

Gross Sales – convenience store P800,000

Gross Sales – bookkeeping services 300,000
Total Sales/Receipts P1,100,000
Less: Non-taxable portion (250,000)
Taxable Income P850,000
Tax Rate 8%
Income Tax Due P68,000

1. Ms. X’s gross sales/receipts from business and practice of profession did not exceed P3,000,000. Thus, she can avail of the
8% income tax rate.
2. The tax base is the gross sales/receipts. Thus, cost of sales, expenses or even the optional standard deduction is not allowed
as a deduction.
3. Since she is earning purely from such business and practice of profession, the first P250,000 is considered non-taxable.

3) if the taxpayer is a mixed-income earner, i.e., he earns compensation income too, the first P250,000 treated as non-taxable is not
applicable

ILLUSTRATION: In the above illustration, Mx. X likewise earned P1,000,000 from employment with XYZ Company for which
P180,000 was tax withheld and remitted to the BIR. How much is her income tax due and payable?

Answer: P278,000 and P98,0000 computed as follows:

On her business income and income from the practice of profession:

Gross Sales – convenience store P800,000

Gross Sales – bookkeeping services 300,000
Total Sales/Receipts P1,100,000
Tax Rate 8%
Income Tax Due P88,000
 On her compensation income:

Compensation Income P1,000,000

Tax on the first P800,000 P130,000

On the excess (P1,000,000 – 800,000) * 30% 60,000
Income Tax Due P190,000

Total Income Tax Liability:

Income Tax on income from self-employment P88,000
Income Tax on compensation income 190,000
Total Income Tax Due P278,000
Tax Withheld (180,000)
Income Tax Still Payable P98,000

1. Ms. X’s gross sales/receipts from business and practice of profession did not exceed P3,000,000. Thus, she can avail of the
8% income tax rate applicable only to such income.
2. The tax base is the gross sales/receipts. Thus, costs, expenses or even the optional standard deduction is not allowed as a
deduction.
3. Income from compensation is always subject to the graduated rates.
4. Since she is a mixed-income earner there is no first P250,000 considered non-taxable as to her business income and income
from the practice of profession, since this amount (the non-taxable P250,000) has already been considered in the graduated
rates.
5. Note that Ms. X will not qualify for substituted filing since she has income other than compensation. Thus, she would need to
file her individual income tax return using BIR Form No. 1701.

If the compensation income is less than P250,000, the excess of the P250,000 over the actual compensation income is NOT
DEDUCTIBLE against the gross sales/receipts from practice of profession or from business. (Sec. 3[D], RR No. 8-2018)

4) The 8% income tax shall be in lieu of the percentage tax under Sec. 116. Accordingly, the taxpayer shall not be subject to the 3%
other percentage tax on his gross sales/receipts.
5) Availment of the 8% income tax rate shall be made on the 1st quarter Income Tax Return or on the initial quarter return of the taxable
year after the commencement of a new business or practice of profession. Such election shall be irrevocable, and no amendment of
option shall be made for the said taxable year. Accordingly, the taxpayer shall compute for the final annual income tax due using such
rate.
6) Otherwise if the taxpayer failed to make such election, the taxpayer shall be considered to have availed of the graduated rates.

In the above illustration, if Ms. X failed to signify her intention to be subjected to the 8% income tax rate, she shall be subject
to the graduated tax and her income tax liability shall be computed as follows:

Total Sales/Receipts P1,100,000

Less: Cost of Sales (300,000)
Gross Income 800,000
Less: Operating Expenses (100,000)
Taxable Income P700,000

Income Tax Due

On the first P400,000 P30,000
On the excess (P700,00 – 400,000) * 25% 75,000
Income Tax Due P105,000

Aside from being subjected to the graduated tax rates, Ms. X shall likewise be liable for 3% percentage tax on her gross
sales/receipts.

7) The Financial Statements (FS) is not required to be attached to the final income tax return. However, existing rules and regulations
on bookkeeping and invoicing/receipting shall still apply.
8) If the taxpayer’s gross sales/receipts and other non-operating income exceeds P3,000,000, he/she shall be automatically subjected
to the graduated rates. In such case, his/her income tax shall be computed under the graduated income tax rates and shall be allowed
a tax credit for the previous quarter/s income tax payment/s under the 8% income tax rate option.

ILLUSTRATION: Mr. ABC earned P3,000,000 on his practice of profession for the first three quarters of 2018 for which he filed
quarterly income tax returns and availed of the 8% income tax rate, and on the fourth quarter, he earned P3,500,000. For the
taxable year, he incurred cost of sales and operating expenses amounting to P3,000,000 and P1,440,000, respectively. How much
is his tax due and tax still payable for taxable year 2018?

Answer: P509,200 and P289,200, computed as follows:

Total Sales P6,500,000

Less: Cost of Sales (3,000,000)
Gross Income 3,500,000
Less: Operating Expenses (1,440,000)
Taxable Income P2,060,000
 Income Tax Due
Tax Due based on graduated rates P509,200
Less: 8% Income Tax paid for the first three quarters
(P3,000,000 – P250,000) * 8% (220,000)
Income Tax Payable P289,200

Since the gross receipts exceeded the P3,000,000 threshold, Mr. ABC shall automatically be subject to the graduated rates. However,
he can claim the 8% income tax paid for the first three quarters as tax credits.

In addition, Mr. ABC shall be liable to business taxes, as follows:

1. Percentage Tax – on the gross sales/receipts upto P3,000,000
2. VAT – on gross sales/receipts after exceeding the P3,000,000 threshold.

However, there shall be no penalties for the percentage taxes if timely paid on the due date immediately following the month/quarter
when the taxpayer ceased to be a non-VAT taxpayer.

9) The following are not allowed to avail of the 8% flat rate of income tax:
1. Purely compensation income earners.
2. VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income.
3. Non-VAT taxpayers whose gross sales/receipts exceed P3,000,000 VAT threshold.
4. Taxpayers who are subject to percentage taxes other than the 3% OPT under Sec. 116 (e.g., those subject to common carrier’s
tax, amusement tax, gross receipts tax, etc.)
5. Partners of GPPs as to their share in the net income thereof (note, however, that they can still claim the 8% flat rate of income
tax as to their own business income, provided the gross sales/receipts thereof do not exceed P3,000,000). This is because their
share is already net of applicable costs and expenses; and
6. Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprises (BMBEs),
etc., since taxpayers are not allowed to avail of double or multiple tax exemptions under different laws unless specifically provided
by law. (Q&A 16, RMC No. 50-2018)